What is Income Tax
Income Tax refers to the tax you pay directly to the government depending on your income or profit (for companies/local authorities). The money collected by this direct tax route is used by the Government for infrastructural developments and, also, to pay the employees of central and state government bodies.
Taxes levied by the Government are of two types- Direct taxes and Indirect taxes. Indirect taxes are those that are levied on services and goods. Direct taxes, on the other hand, are levied on profits and income. For example, service tax is what you pay in a restaurant and is an indirect tax, whereas Income Tax that is deducted from your salary every month in the form of TDS, is an example of direct tax.
Income Tax Act of India, passed in 1961, governs the provisions for income tax as well as the various deductions that are applicable to it. However, since 1961, the law has been amended several times to take care of inflation and other socio-economic situations.
Income Tax Overview
Income Tax is undoubtedly the most important source of revenue for the Indian government. It is established as an inevitable imposition on the citizens in order to raise funds for fulfilling the development & defence needs of the country.
Taxes imposed on income, purchase, sale, and property help the government to run different government embodiment and machinery.
In India, the first Income Tax Act was introduced in 1860. It was implied by James Wilson to overcome heavy losses suffered by the British Government due to India’s freedom movement in 1857. The history of Income Tax in India is divided into 3 different periods:
- 1914 till date
Currently, the Income Tax Act 1961 is applicable in India. In 1956, the government referred the request to impose Income Tax Act. The Law Commission further submitted its report on the Income tax Act in 1958 and the same year, Chairman Shri Mahavir Tyagi, chaired the Direct Taxes Administration inquiry Commission.
The Income Tax Act, 1961 was introduced to the public. Since then, it has undergone amendments from time to time.
Types of Taxes in India
As per the Income Tax Act, there are 2 types of taxes in India:
- Direct Taxes
It is borne and paid directly by the individual on whom it is imposed such as, wealth tax, income tax, gift tax, etc. The taxpayer pays this tax directly to the government without any involvement of intermediary source.
- Indirect Taxes
If a tax is passed on by the taxpayer to the other person, it is an indirect tax e.g. sales tax, Value Added Tax (VAT) etc. This type of tax is paid indirectly to the Income tax department.
Who are the Tax Payers?
Any Indian citizen aged below 60 years is liable to pay income tax, if their income exceeds Rs 2.5 lakhs. If the individual is above 60 years of age and earns more than Rs 2.5 lakhs, he/she will have to pay taxes to the Government of India. Additionally, the following entities that generate income are liable to pay direct taxes:
- Hindu Undivided Family (HUF)
- Body Of Individuals (BOI)
- Association of Persons (AOP)
- Local Authorities
- Corporate firms
- All Artificial Juridical Persons
What are the Different Income Tax Slab Rates?
Income tax slab rates are defined on the basis of the earning of the taxpayers. Income tax slab rates are broadly categorized as follows:
For HUFs and Individuals (Male or Female) Below the Age of 60 Years Income Tax Slabs & Rates 2017-18
For Individuals (Male or Female) Above the Age of 60 Years:
For Individuals (Male or Female) Above the Age of 80 Years:
For Co-operative Societies:
For Domestic Companies:
The income tax rate applicable for Domestic Companies will be @ 30%.
For Foreign Companies:
For Local Authorities:
For local authorities, the tax rate is determined as at 30%.
**Income Tax Slab Rates for the assessment year 2018-19**
How is the Income Tax Collected?
There are primarily three ways in which the Income Taxes are collected by the Government:
- Taxes Deducted at Source (TDS)
- Taxes Collected at Source (TCS)
- Voluntary payment by tax payers into designated Banks
What are the different taxable Heads of Income?
Income taxes are levied depending on the source of Income. Following are the five main income heads from which taxes are deducted.
Taxable income that all employees receive from their employers is categorized under this head. As per section 192 of the Income Tax Act, the employer will withhold taxes if the employees do not come within the taxable bracket. All about tax deductions and the net paid income are detailed in Form 16 that must be provided by the employer to the employee.
- Income From Capital Gains
Capital gains taxation applies to earnings from the sale of capital assets held by the tax assessee. Capital assets refer to the properties such as buildings, lands, bonds, equities, debentures, jewelleries, etc. Taxes are levied on the income of the assessee when such properties are sold.
- Income From House Property
Income Tax is levied on house property, if the house is given out on rent by the owner. However, under this head, the property cannot be used for business or professional purposes.
- Income (Profits) From Business
As per section 30 to 43D of the Income Tax Act, the profits earned from businesses or by providing professional services are considered taxable as per applicable rates. This income head is also known as “Profits and Gains of Business or Profession”.
- Income From Other Sources
Income from any sources other than the four listed above is categorized under this head. Some specific income coming under this head is listed below:
- Lottery/horse race winnings
- Income from dividends
- Pension received after the pensioner’s death.
- Rental income (other than house properties)
- Gifts received
- Interest on government securities, debentures, and bonds.
What are Income Tax Returns?
Every individual, who has a source of income, regular or irregular, is legally required to file their income tax returns. Even if your income is below the taxable bracket, you should file your income tax returns. There are prescribed forms through which the income earned by a person and the income tax paid thereon are informed to the Income Tax Authority. The following table shows different forms prescribed for different classes of taxpayers.