Income tax: Your complete guide to income tax laws in India

What is income tax?

Income tax is a direct tax that the government levies on the income of people and businesses during a financial year. Under the provisions of the Income Tax Act, 1961, the central government in India is mandated to levy and collect income tax from citizens and businesses. Income tax calculations for a particular financial year are based on the tax slabs defined by the Income-Tax Department.

Before we move forward, it is important to be clear about two things:

• What constitutes an income?
• What is the difference between direct and indirect tax?

See also: Know more about income tax on cooperative housing society

What is income?

Under India’s tax law, an income includes money earned as:

1. Income from salary: Money earned as salary or pension.
2. Income from business and profession: Profits earned by companies and professionals.
3. Income from capital gains: Profits earned from the sale of capital assets like property, mutual funds and shares.
4. Income from house property: Money earned from renting a house.
5. Income from other sources: Income earned from the savings account, fixed deposits, recurring deposits and winning lotteries.

 

Direct tax and indirect tax

Taxes are of two types:

• Direct tax: Direct tax is the tax imposed directly on your income.
• Indirect tax: Indirect tax is the tax you have to pay for the consumption of goods and services. It is not imposed on your income directly.

 

Income Tax Department

The Income Tax Department handles all operations related to income tax in India. It operates under the Central Board for Direct Taxes (CBDT). The official website of the Department helps you get every detail about income tax in India.

 

Income Tax Act

The Income Tax Act, 1961, sets the ground rules for taxation of income, including tax slabs, deductions and all related information.

 

Types of income taxpayers

Taxpayers have been classified into the following categories.

1. Individuals
2. Hindu Undivided Family (HUF)
3. Firms
4. Companies
5. Association of Persons (AOP)
6. Body of Individuals (BOI)
7. Artificial Judicial Persons

Individual taxpayers are further divided into two categories:

• Residents: Liable to pay income tax on income earned in India and abroad.
• Non-residents: Liable to pay income tax on income earned or accrued in India.

Resident individuals are further categorised for income tax rate determination:

• Individuals up to 60 years of age.
• Individuals aged over 60 years but below 80 years.
• Individuals aged over 80 years.

 

Income tax collection

Income tax is collected in the following manners:

• Voluntary payments such as advance tax and self-assessment tax.
• Taxes Deducted at Source (TDS).
• Taxes Collected at Source (TCS).

 

Income tax slab

The rate for income tax depends on the type of taxpayer. Income tax rates for individuals, HUFs, AOP and BOI are determined by tax slabs. Companies and firms pay a fixed tax rate based on income. The rate of tax increases with an increase in income.

 

New and old tax slabs

New tax slabs were introduced in Budget 2020-21. Taxpayers in India can choose to pay their income tax based on the new or old tax slabs.

 

New tax regime slab

Income	New tax regime slab
Up to Rs 2.50 lakhs	Nil
From Rs 2.50 lakhs to Rs 5 lakhs	5%
From Rs 5 lakhs to Rs 7.50 lakhs	10%
From Rs 7.50 lakhs to Rs 10 lakhs	15%
From Rs 10 lakhs to Rs 12.50 lakhs	20%
From Rs 12.50 lakhs to Rs 15 lakhs	25%
Above Rs 15 lakhs	30%

See also: Know all about income tax slab

 

Old income tax regime

The old tax regime continues to exist along with the new tax regime and offers only four tax slabs. Here, the tax slabs differ based on the age of the taxpayer.

 

Old income tax slab

Income tax slabs for individuals aged below 60 years and HUF

Income	Old tax regime slab
Up to Rs 2.50 lakhs	Nil
From Rs 2.50 lakhs to Rs 5 lakhs	5%
From Rs 5 lakhs to Rs 7.50 lakhs	20%
From Rs 7.50 lakhs to Rs 10 lakhs	20%
From Rs 10 lakhs to Rs 12.50 lakhs	30%
From Rs 12.50 lakhs to Rs 15 lakhs	30%
Above Rs 15 lakhs	30%

 

Income tax slabs for individuals aged 60-80 years

Income	Old tax regime slab
Up to Rs 3 lakhs	Nil
From Rs 3 lakhs to Rs 5 lakhs	5%
From Rs 5 lakhs to Rs 10 lakhs	20%
Over Rs 10 lakhs	30%

 

Income tax slabs for individuals aged over 80 years

Income	Old tax regime slab
Up to Rs 5 lakhs	Nil
From Rs 5 lakhs to Rs 10 lakhs	20%
Above Rs 10 lakhs	30%

 

New tax regime vs old tax regime

Income	Old tax regime			New tax regime
	Age up to 60 years	Age 60-80 years	Age over 80 years	All age groups
Up to Rs 2.50 lakhs	Nil	Nil	Nil	Nil
From Rs 2.50 lakhs to Rs 3 lakhs	5%	Nil	Nil	5%
From Rs 3 lakhs to Rs 5 lakhs	5%	5%	Nil	5%
From Rs 5 lakhs to Rs 7.50 lakhs	20%	20%	20%	10%
From Rs 7.50 lakhs to Rs 10 lakhs	20%	20%	20%	15%
From Rs 10 lakhs to Rs 12.50 lakhs	30%	30%	30%	20%
From Rs Rs 12.50 lakhs to Rs 15 lakhs	30%	30%	30%	25%
Above Rs 15 lakhs	30%	30%	30%	30%

 

Note that the government in India can change the income tax slabs during the Budget every year. In the Union Budget 2022 announced on February 1, no changes were made to the existing income tax slabs.

 

Capital gains

While all other incomes are taxed based on the tax slabs, capital gains are taxed differently. The holding period of the capital asset, decides the tax rate on this income. Mentioned below is the tax rate chart of capital gains:

Asset type	Holding period	Tax rate
House property	Long-term capital gains: Holding period of over 24 months	20%
	Short-term capital gains: Holding period of less than 24 months	According to the tax slab
Debt mutual fund	Long-term capital gains: Holding period of over 36 months	20%
	Short-term capital gains: Holding period of less than 36 months	According to the tax slab
Equity mutual fund	Long-term capital gains: Holding period of over 12 months	10.40% if the long-term gain exceeds Rs 1 lakh
	Short-term capital gains: Holding period of less than 12 months	15.60%
Shares (STT unpaid)	Long-term capital gains: Holding period of over 12 months	20%
	Short-term capital gains: Holding period of less than 12 months	According to the tax slab
Shares (STT paid)	Long-term capital gains: Holding period of over 12 months	10.40% if the long-term gain exceeds Rs 1 lakh
	Short-term capital gains: Holding period of less than 12 months	15.60%
FMPs	Long-term capital gains: Holding period of over 36 months	20%
	Short-term capital gains: Holding period of less than 36 months	According to the tax slab

 

Taxpayers in India must also familiarise themselves with the difference between financial year and assessment year to pay taxes and file ITR.

 

What is a financial year?

For income tax computation purposes, the Income Tax Department in India has categorised the period between April 1 of a year to March 31 of the next year, as a financial year or fiscal year. Therefore, the period falling between April 1, 2022, and March 31, 2023, would be a fiscal year, denoted as FY 2022-23.

 

What is an assessment year?

Income tax returns in India are filed the next year after the end of the financial year. This period is known as an assessment year. An assessment year also starts on April 1 and ends on March 31 of the next year.

 

How to calculate your income?

You should calculate all your income for the entire financial year to arrive at the final figure and decide your tax slab. However, not all your income is taxable. Apart from the basic exemption limit, the Tax Department also offers several deductions and rebates on your income. Your taxable income must be calculated by factoring in these deductions. Your final taxable income would be the one that you arrive at after clubbing incomes from salary, business or profession, house property, capital gains and other sources and factoring exemptions, deductions, rebates and set-off of losses.

See also: Know how to calculate income tax with an income tax calculator

 

Deductions available on income

Under various sections of the Income Tax Act, several deductions, exemptions and rebates are offered to taxpayers in India. Click here for a detailed look at the list.

 

List of tax saving instruments

• Life insurance
• Health insurance    
• ULIPs
• New pension scheme
• Equity-linked tax saving scheme (ELSS)  
• Public Provident Fund or PPF
• National Saving Certificates or NSC
• Infrastructure bonds
• Sukanya Samridhi Yojana
• Senior Citizen Saving Scheme
• Fixed deposit
• Home loan

 

List of main sections offering income tax deductions

• Section 80C
• Section 80CCC
• Section 80CCD
• Section 80D
• Section 80DDB
• Section 80E
• Section 80EE
• Section80EEA
• Section 80RRB
• Section 80TTA
• Section 80U
• Section 24

 

Income tax return or ITR

Filing of income tax return or ITR is mandatory if:

1. Your gross income is more than the basic exemption limit.
2. You want to claim a refund from the I-T Department.
3. You want to apply for a loan or visa.
4. The loss under an income head needs to be carried forward.
5. You have invested in foreign assets.
6. You are a business in the form of a company or firm, irrespective of your profit or loss.

See also: Know all about ITR

 

Anyone earning an income in India has to file their income tax return. However, the following taxpayers are not liable to file ITR:

• People exceeding 80 years of age.
• People with an income of less than Rs 5 lakhs.

 

Income tax e filing

You can file your ITR online through the Income-tax e filing facility of the Income Tax Department. Visit the official site – https://www.incometax.gov.in/iec/foportal/ – for income tax e filing.

 

Is income tax e filing necessary?

Income tax e filing is mandatory in some cases while it is optional in other cases.

Taxpayer type	Conditions	Manner of income tax filing
Individual or Hindu undivided family	1. Where accounts should be audited under section 44AB of the Act	1. Electronically, under digital signature
	2. A super senior citizen, whose age is 80 years or more, at any time in the previous year, who furnishes the return in ITR-1 or ITR-4	2. Electronically with digital signature or transmitting the data electronically in the return with electronic verification code or transmitting the data in the income tax return electronically and submitting the verification of the return in Form ITR-V or paper form
	3. In any other case	3. Electronically with digital signature or transmitting the data electronically in the return with electronic verification code or transmitting the data in the income tax return electronically and submitting the verification of the return in Form ITR-V
Company	In all cases	Electronically
Firm or limited liability partnership (LLP) or any person (other than persons mentioned above) who is required to file a return in Form ITR-5	1. Where accounts should be audited under Section 44AB​	1. Electronically
	2. In any other case	2. Electronically with digital signature or transmitting the data in the return electronically with electronic verification code or transmitting the data in the income tax return electronically and submitting the verification of the return in Form ITR-V

 

ITR forms: Which ITR form to use?

• ITR-1: For resident individuals with a total income of up to Rs 50 lakhs.
• ITR-2: For individuals/HUFs who do not have any business or profession under any proprietorship.
• ITR-3: For individuals/HUFs having income from a proprietary business or profession.
• ITR-4: For individuals/HUFs with income from business or profession.
• ITR-5: For partnership firms or LLPs.
• ITR-6: For companies.
• ITR-7: For trusts.

 

Documents required for income tax e filing

• Income tax login ID and password
• PAN card
• Aadhar card
• Bank statement/bank passbook
• Form 16
• Form 26AS
• Salary slips
• Statement related to home loan
• Tax-saving proofs
• Capital gains proof

See also: Your complete guide on Income tax e filing

 

ITR filing last date

The last date for filing ITR differs for different categories of taxpayers. The ITR filing due date for salaried individuals is usually July 31 of the assessment year. For businesses and companies, the last date for filing an ITR is October 31 of the assessment year.

See also: Know about ITR filing last date

Those required to file ITR under Section 139 of the I-T law are liable to pay interest on the due tax, if they miss the ITR filing last date. A late filing fee of Rs 5,000 is payable, if the ITR is filed after the due date. The I-T Department can also charge 50% of tax payable as a penalty. In serious grievances, one can be sent to jail for a period of up to three years.

 

FAQs

How much is tax-free income in India?

An annual income of up to Rs 2.5 lakhs is tax-free in India.

Why is income tax collected?

Income tax is collected by the government for revenue earning and nation-building purposes.

What type of tax is income tax?

Income tax is a direct tax.

What is a direct tax?

Tax levied directly on one's income is a direct tax. Income tax and corporate tax are examples of direct tax in India.

What is an indirect tax?

Tax levied on the consumption of goods and services is an indirect tax. An indirect tax is part of the pricing of goods or services. GST is an example of an indirect tax.

What is PAN?

PAN stands for Permanent Account Number, a 10-digit alphanumeric identity issued by the Income Tax Department to Indian taxpayers. For all financial transactions in India, including the filing of income tax, a PAN card is mandatory.

What is TAN?

TAN refers to Tax Deduction and Collection Account Number, a 10-digit alphanumeric identity card. TAN is required for TDS/TCS deduction and payment.

Do you have to pay taxes if you earn income in cash?

Income tax is applicable even if your income is earned in cash. The income tax rate will be 60% in case of an inexplicable flow of cash, along with a 25% surcharge and 6% penalty.