Income Tax in India : Basics, slabs and E-filing Process 2021
Budget 2020 update:
The income tax department had introduced an optional ‘New Tax Regime’ which offers concessional tax rates,however the taxpayer choosing this new regime above the old one will have to forgo most of the deductions and exemptions allowed under the ‘old/existing tax regime’
Budget 2021 update : A new section 194P is inserted which provides conditional exemption for ITR filing for senior citizens above 75 years of age with pension and interest income only.
In this article
- Income Tax Basics in India
- Types of taxpayers
- Types of Income / Heads of Income
- Income tax slab regime
- Exception to tax slabs
Income Tax Basics in India
Income tax is a type of tax that the central government charges on the income earned during a financial year by the individuals and businesses.Taxes are sources of revenue for the government.Government utilizes this revenue for developing infrastructure, providing healthcare,education,subsidy to the farmer/ agriculture sector and in other government welfare schemes. Taxes are mainly of two types,direct taxes and indirect form of taxes.Tax levied directly on the income earned is called as direct tax,for example Income tax is a direct tax.The tax calculation is based on the income slab rates applicable during that financial year.
Types of Income Tax payers
he Income tax Act has classified the types of taxpayers in categories so as to apply different tax rates for different types of taxpayers.
Taxpayers are categorized as below:
- Individuals, Hindu Undivided Family (HUF), Association of Persons(AOP) and Body of Individuals (BOI)
Further, Individuals are broadly classified into residents and non-residents.Resident individuals are liable to pay tax on their global income in India i.e. income earned in India and abroad. Whereas, those who qualify as Non-residents need to pay taxes only on income earned or accrued in India. The residential status has to be determined separately for tax purposes for every financial year on the basis of the individual tenor of stay in India.Resident Individuals are further classified into below mentioned categories for tax purposes-
- Individuals less than 60 years of age
- Individuals aged more than 60 but less than 80 years
- Individuals aged more than 80 years
Types of Income / Heads of Income
Everyone who earns or gets an income in India is subject to income tax.(Yes, be it a resident or a non-resident of India ).For simpler classification, the Income tax department breaks down income into five main heads:
|Head of Income||Nature of Income covered|
|Income from Other Sources||Income from savings bank account interest, fixed deposits, winning in lotteries is taxable under this head.|
|Income from House Property||Income earned from renting a house property is taxable under this head of income.|
|Income from Capital Gains||Surplus Income from sale of a capital asset such as mutual funds, shares, house property etc is taxable under this head of Income.|
|Income from Business and Profession||Profits earned by self employed individuals, businesses , freelancers or contractors & income earned by professionals like life insurance agents, chartered accountants, doctors and lawyers who have their own practice, tuition teachers are taxable under this head.|
|Income from Salary||Income earned from salary and pension is taxable under this head of income|
Taxpayers and income tax slabs
Each of these taxpayers is taxed differently under the Indian income tax laws. While firms and Indian companies have a fixed rate of tax calculated on their tax profits, the individual,HUF, AOP and BOI taxpayers are taxed based on the income slab they fall under. People’s incomes are grouped into blocks called tax brackets or tax slabs. And each tax slab has a different tax rate.Rate at which income is charged to tax increases with increase in income. Budget 2020 introduced a ‘New tax regime’ for the Individuals and HUF taxpayers :
What is the Existing / Old tax regime?
The old tax regime provides 3 slab rates for levy of income tax which are 5%, 20% tax rate and 30% for different brackets of income. The individuals have been given the option to continue with this Old tax regime and they can claim deductions of allowances like Leave Travel Concession (LTC), House Rent Allowance (HRA), and certain other allowances. Additionally, deductions for tax saving investments as per section 80C (LIC, PPF ,NPS etc) to 80U can be claimed. Standard deduction of Rs 50,000, deduction for interest paid on home loan.
Tax slab rates applicable for Individual taxpayer below 60 years for Old tax regime is as below:
|Income Range||Tax rate||Tax to be paid|
|Up to Rs.2,50,000||0||No tax|
|Between Rs 2.5 lakhs and Rs 5 lakhs||5%||5% of your taxable income|
|Between Rs 5 lakhs and Rs 10 lakhs||20%||Rs 12,500+ 20% of income above Rs 5 lakhs|
|Above 10 lakhs||30%||Rs 1,12,500+ 30% of income above Rs 10 lakhs|
There are two other tax slabs for two other age groups: those who are 60 and older and those who are above 80.A word of note: People often misunderstand that if they earn let’s say Rs.12 lakhs, they will be paying a 30% tax on Rs.12 lakhs i.e Rs.3,60,000. That’s incorrect. A person earning 12 lakhs in the progressive tax system, will pay Rs.1,12,500+ Rs.60,000 = Rs. 1,72,500. Check out the income tax slabs for previous years and other age brackets.
Income Tax Slabs under new tax regime
From the FY 2020-21, a new tax regime is available for individuals and HUFs with lower tax rates and zero deductions/exemptions. Individuals and HUF have the option to choose the new regime or continue with the old regime.The new tax regime is optional and the choice should be made at the time of filing the ITR. If the old regime is continued than all the deductions/exemptions as available can be availed by the taxpayer. The income tax slabs under the new tax regime are:
|New regime slab rates||Existing regime slab rates|
|Income from Rs 2.5 lakh to Rs 5 lakh||5%||Income from Rs 2.5 lakh to Rs 5 lakh||5%|
|Income from Rs 5 lakh to Rs 7.5 lakh||10%||Income from Rs 5 lakh to Rs 10 lakh||20%|
|Income from Rs 7.5 lakh to Rs 10 lakh||15%||Income above Rs 10 lakh||30%|
|Income from Rs 10 lakh to Rs 12.5 lakh||20%|
|Income from Rs 12.5 lakh to Rs 15 lakh||25%|
|Income above Rs 15 lakh||30%|
Most of the deductions like deductions and exemptions are not allowed if the taxpayers opts for the New Tax regime. However he exemptions and deductions available under the new regime are:
- Transport allowances in case of a specially-abled person.
- Conveyance allowance received to meet the conveyance expenditure incurred as part of the employment.
- Any compensation received to meet the cost of travel on tour or transfer.
- Daily allowance received to meet the ordinary regular charges or expenditure you incur on account of absence from his regular place of duty.
Exceptions to the Tax Slab
One must bear in mind that not all income can be taxed on slab basis. Capital gains income is an exception to this rule. Capital gains are taxed depending on the asset you own and how long you’ve had it. The holding period would determine if an asset is long term or short term. The holding period to determine nature of asset also differs for different assets. A quick glance of holding periods, nature of asset and the rate of tax for each of them is given below.
|Type of capital asset||Holding period||Tax rate|
|House Property||Holding more than 24 months – Long Term Holding less than 24 months – Short Term||20% Depends on slab rate|
|Debt mutual funds||Holding more than 36 months – Long Term Holding less than 36 months – Short Term||20% Depends on slab rate|
|Equity mutual funds||Holding more than 12 months – Long Term Holding less than 12 months – Short Term||Exempt (until 31 March 2018) Gains > Rs 1 lakh taxable @ 10% 15%|
|Shares (STT paid)||Holding more than 12 months – Long Term Holding less than 12 months – Short Term||Exempt (until 31 March 2018)Gains > Rs 1 lakh taxable @ 10% 15%|
|Shares (STT unpaid)||Holding more than 12 months – Long Term Holding less than 12 months – Short Term||20% As per Slab Rates|
|FMPs||Holding more than 36 months – Long Term Holding less than 36 months – Short Term||20% Depends on slab rate|
Residents and non residents:
Levy of income tax in India is dependent on the residential status of a taxpayer. Individuals who qualify as a resident in India must pay tax on their global income in India i.e. income earned in India and abroad. Whereas, those who qualify as Non-residents need to pay taxes only on their Indian income. The residential status has to be determined separately for every financial year for which income and taxes are computed.
Income Tax – FAQs
When it is mandatory to file return of income ?It is mandatory to file return of income for a company and a firm. However, individuals, HUF, AOP, BOI are mandatorily required to file return of income if the income exceed basis exemption limit of Rs 2.5 lakhs. This limit is different for senior citizens and super senior citizens.
Can i file return of income even if my income is below taxable limits ?Yes, you can file return of income voluntarily even if your income is less than basic exemption limit
What documents are to be enclosed along the return of income?There is no need to enclose any documents with the return of income. However, one should retain the documents to produce before any competent authority as and when required in future.
Should I disclose all my income in the return even if it is exempt?Yes. Income from every source including exempt income must be disclosed. The same can be shown under the Schedule EI.