What is Income Tax? Income tax is a type of direct tax the central government charges on the income earned during a financial year by the individuals and businesses. It is calculated based on the tax slabs defined by Income Tax Department.
What’s New in Income Tax
Budget 2023 Updates
- A tax rebate has been introduced in the New Tax Regime on income upto Rs 7 Lakhs. This implies that you do not have to pay tax if your taxable income is below 7 lakhs under new tax regime.
- The new tax slabs under the new tax regime will be:
Income Slabs Tax Rates up to Rs 3 lakh Nil Rs 3 lakh- Rs 6 lakh 5% Rs 6 lakh-Rs 9 lakh 10% Rs 9 lakh-Rs 12 lakh 15% Rs 12 lakh- Rs 15 lakh 20% Above Rs 15 lakh 30%
- The standard deduction of Rs 50,000 has been introduced under the new tax regime for salaried taxpayers.
- The highest surcharge under the new tax regime has been reduced to 25% from 37% for people earning more than Rs 5 crore. This move brings down their tax rate from 42.74% to 39%.
- The new IT regime will be the default tax regime. However, taxpayers can choose the old regime.
- Leave encashment for non-government employees has been increased to Rs 25 lakh from Rs 3 lakh.
- TDS rate reduced to 20% from 30% on withdrawal of EPF.
- 02 May 2022 – CBDT notifies form for filing the ‘Updated’ income tax returns
- 27 April 2022 – Form 26A, Form 27BA, Form 10BD & Form 10BE are available on the income tax portal.
- 20 April 2022 – Income Tax Portal announced that UDIN update functionality is enabled for Forms filed from June 2021 onwards.
Budget 2022 Updates
- New provision is introduced to allow taxpayers to update the past return and include omitted income by additional tax payment.
- Income from transfer of digital assets such as crypto to be taxed at 30%.
- The surcharge on the long-term capital gains (LTCG) has been capped at 15%
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What is Income Tax?
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.
Direct Taxes are broadly classified as :
- Income Tax – This is taxes an individual or a Hindu Undivided Family or any taxpayer other than companies, pay on the income received. The law prescribes the rate at which such income should be taxed
- Corporate Tax – This is the tax that companies pay on the profits they make from their businesses. Here again, a specific rate of tax for corporates has been prescribed by the income tax laws of India.
Who should pay Income Tax? – Types of Tax Payers
The Income tax Act has classified the types of taxpayers in various categories. Different tax rules apply for different types of taxpayers.
Taxpayers are categorized as below:
- Hindu Undivided Family (HUF)
- Association of Persons(AOP)
- Body of Individuals (BOI)
- Local Authority
- Artificial Judicial Person
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 – What are the 5 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 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 Income 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:
Tax to be paid
Up to Rs.2,50,000
Rs 2.5 lakhs - Rs 5 lakhs
5% of your taxable income
Rs 5 lakhs - Rs 10 lakhs
Rs 12,500+20% on income above Rs 5 lakh
Above 10 lakhs
Rs 1,12,500+30% on income above Rs 10 lakh
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 for FY 2022-23 (AY 2023-24) are:
New tax regime slab rates
Existing/old tax regime slab rates (FY 2022-23)
Up to Rs.2.5 lakh
Up to Rs.2.5 lakh
Rs 2.5 lakh to Rs 5 lakh
Rs 2.5 lakh to Rs 5 lakh
Rs 5 lakh to Rs 7.5 lakh
Rs 5 lakh to Rs 10 lakh
Rs 7.5 lakh to Rs 10 lakh
Income above Rs 10 lakh
Rs 10 lakh to Rs 12.5 lakh
Rs 12.5 lakh to Rs 15 lakh
Income above Rs 15 lakh
In Budget 2023, the income tax slabs under the new tax regime for FY 2023-24 (AY 2024-25) are revised as follows:
New tax regime FY 2023-24
New tax regime FY 2022-23
Income up to Rs 3 lakh
Up to Rs.2.5 lakh
Rs 3 lakh to Rs 6 lakh
Rs 2.5 lakh to Rs 5 lakh
Rs 6 lakh to Rs 9 lakh
Rs 5 lakh to Rs 7.5 lakh
Rs 9 lakh to Rs 12 lakh
Rs 7.5 lakh to Rs 10 lakh
Rs 12 lakh to Rs 15 lakh
Rs 10 lakh to Rs 12.5 lakh
Income above Rs 15 lakh
Rs 12.5 lakh to Rs 15 lakh
Income above Rs 15 lakh
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 Income 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.
The financial year is a one-year period that the taxpayers use for accounting and financial reporting purposes. It is the year in which the income is earned. According to the Income Tax Act, such a period begins from 1st April of the calendar year to 31st March of the next calendar year. It is abbreviated as “FY”. For example, for the financial year starting from 1st April 2022 and ending on 31st March 2023, it can be written as FY 2022-23.
The one year period from 1st April to 31st March starting immediately after the financial year is termed as assessment year. This period is called the assessment year because all the taxpayers have to evaluate their income earned in the financial year and pay taxes in this year. For example, for incomes earned during the FY 2022-23, the assessment year will be AY 2023-24.
The assessee is a person or a group who assesses his/her income and pays tax as per the Income Tax Act. The assessee can be an individual, a partnership firm, a company, an Association of Persons (AOP), trust, etc.
What is PAN?
PAN is an abbreviation for the Permanent Account Number. It is a unique 10-digit alphanumeric digit issued by the Income Tax Department to Indian taxpayers. All the tax-related transactions and information of a person are recorded against their unique permanent account number. When the person has to pay advance tax or self assessment tax, he/she needs to mention the PAN number. Also, where the person submits his PAN to certain entities like banks, mutual fund companies, etc. The financial information from such entities goes to the income tax department via PAN. This allows the taxman to link all tax-related activities with the department. Hence, just by putting a permanent account number the taxman can identify all your financial transactions.
What is TAN?
TAN is an abbreviation for Tax Deduction and Collection Account Number. It is a unique 10 digit alpha numeric digit allotted by the Income Tax Department of India. All persons responsible for deduction (TDS) or collection of tax (TCS) are reresponsible for obtaining TAN. It is compulsory to quote the TAN in TDS/TCS return, any TDS/TCS payment challan, and TDS/TCS certificates.
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 Payment
Tax Deducted at Source (TDS)
For specified payments, tax is deducted at source by the payer when making payment to the recipient of income. The recipient of income can claim the credit of the TDS amount by adjusting it with the final tax liability.
The taxpayer must pay tax in advance when his estimated income tax liability for the year exceeds Rs 10,000. The government has specified due dates for payment of advance tax installments.
It is the balance tax that the taxpayer has to pay on the assessed income. The self-assessment tax is calculated after reducing the advance tax and TDS from the total income tax calculated on the assessed income.
e-Payment of Taxes
The taxpayers can pay advance tax, self-assessment tax online from the NSDL website. However, the taxpayer should have a net banking facility with an authorised bank.
Filing your ITR
Filing of income tax return online has been made mandatory for all classes of taxpayers barring few exceptions :
- Taxpayers aged 80 and above need not filed return online
- Taxpayers having an income less than Rs 5 lakhs and not claiming a refund need not file return online
For the rest, online filing is mandatory. Do note that deadlines for filing of returns have also been prescribed. For most individual taxpayers, the due date for filing return of income is 31 July immediately following the concerned financial year. If you do not file on time, here are some disadvantage:
- You will be denied carry forward of losses (except house property loss) to future years
- Delay processing of refund claims if any
- Difficulty on getting home loans
- Levy of late filing fee upto Rs 10,000 under Section 234F
- Levy of interest under 234A if there are taxes due as on 31 July.
E-filing online is a more complete and better alternative to filing on the income tax website. Also it is for more than just e-filing your income tax return. Clear helps you claim all the deductions you’re eligible for and helps you invest. Once you file your return online, you either e-verify the same or take a print of the ITR V and send it to CPC, Bengaluru for processing of your return.
Read our detailed article on e-verification of return of income.
Here’s a guide to e-filing your first tax return on Clear.
Income Tax Return
The taxpayer shall file an income tax return every year via ITR forms prescribed by the income tax department. The government has prescribed seven ITR forms through which the taxpayer can file his income tax return. The taxpayer has to choose the appropriate ITR forms and file his income tax return.
Income Tax Forms List
The seven ITR forms are:
- ITR-1: Individuals (residents) having income from salary, one house property, other sources, agricultural income less than Rs 5,000 and with a total income of up to Rs 50 lakh
- ITR-2: Individuals/HUFs not having any business or profession under any proprietorship
- ITR-3: Individuals/HUFs having income from a proprietary business or profession
- ITR-4: Individuals/HUFs having presumptive income from business or profession
- ITR-5: Partnership firms or LLPs
- ITR-6: Companies
- ITR-7: Trusts
Documents Required for ITR Filing
Form 16, Form 26AS, Form 16A, proof of tax saving investments made, bank account details etc are some of the crucial details / documents that you need to be ready with before filing your return. Further the documents you are going to need to file your tax return are largely going to depend on your source of income. Here is our detailed article on documents you need for filing of your return of income.
How can I calculate my income tax?
Individuals should calculate income tax depending on the nature of income. The salaried individual can take the eligible exemptions available for various allowances received. Individuals/HUF can take a deduction under Sections 80C to 80U, deduct it from the gross total income, and calculate the income tax liability. Also, the total income tax liability should be adjusted by the taxes paid, such as advance tax, TDS, etc. Also, the taxpayer should apply the effect of rebate under Section 87A and relief under Section 89, Section 90, and Section 91 to arrive at the net amount of income tax payable.
Every income that your receive should form part of your income tax return. Of course, the law does provide for exemption of certain incomes eg. dividend income from an Indian company, LTCG on listed equity shares upto Rs 1 lakh in any financial year etc. Therefore, here is a quick guideline you can probably follow to compute taxes due on your income:
- List down all your income – be it salary, rental income, capital gains, interest income or profits from your business or profession
- Remove incomes that are exempt under law
- Claim all applicable deductions available under every source of income . eg claim standard deduction of Rs 50,000 from salary income, claim municipal taxes from rental income, claim business related expenses from your business turnover etc
- Claim all applicable exemptions under every head of income eg. amount reinvested in another house property can be claimed as exemption from capital gains income etc
- Claim applicable deductions from your total income eg the 80 deductions like 80C, 80D, 80TTA, 80TTB etc
- You will now arrive at your taxable income. Check the tax slab you fall under and accordingly arrive at your income tax payable.
The government keeps introducing and altering tax slabs, schemes and tax benefits, so it’s a good idea to keep up with the Budget.
What is computation of income?
The process of calculating taxable income after taking into account the income from all the five heads (salary, house property, capital gains, business or profession, and other sources), exemptions, deductions, rebate, set off of losses, etc., is called computation of income. After computation of income, the taxpayer can compute the income tax liability as per the Income Tax Act.
Rebate u/s 87A
Rebate under Section 87A allows taxpayers reduce their income tax liability. If you are a resident individual and the amount of your total income after reducing Chapter VI-A deductions (Section 80C, 80D, 80U, etc) does not exceed Rs 5 lakh in a financial year, you can claim a tax rebate up to Rs 12,500. This means, if your total tax payable is less than Rs 12,500, then you will not have to pay any tax.
In Budget 2023, a tax rebate on income of Rs 7 lakhs has been introduced under the new tax regime. Therefore, you do not have to pay tax if your taxable income is below 7 lakhs under the new tax regime.
The taxpayer shall electronically file the income tax return through the e-filing platform of the IT department. To file the income tax return, the taxpayer should first register himself at www.incometax.gov.in. Thereafter, the taxpayer can log in to the website and file his ITR. Also, there is no need to manually send the acknowledgement of the return to the income tax department. The income tax department now allows e-verification of the ITR in different ways, which completes the income tax return process.
What is ITR –V?
Form ITR-V is an income tax return verification form generated after the taxpayer submits files income tax return and submits it to the income tax department. The ITR-V should be e-verified or must be sent to CPC Bangalore at “Income Tax Department – CPC, Post Box No – 1, Electronic City Post Office, Bangalore – 560100, Karnataka” for verification. The ITR processing takes plae only if its verification is completed.
Did you e-file your Tax return for this year?
You can file your Income Tax Return on ClearTax. Even if you don’t know anything about taxes, we will take you step-by-step and help you e-file.Check ClearTax Income Tax E Filing.
Income Tax Saving Instruments
The taxpayer can save tax by tax planning. A taxpayer can do tax planning by investing in tax-saving instruments. It helps in reducing the income tax liability. Section 80C to 80U of the Income Tax Act allows a deduction for certain expenditures and investments from the total computed income. Some of the popular Section 80C investments are:
Popular Section 80C Investments
5-Year Tax Saving FD
Section 80C Benefit
Type of Investment
No Max Limit
Rs 1.5 lakh
No Max Limit
Rs 1.5 lakh
Rs 15 lakh
*ELSS and NSC have no upper investment limit. However, you get tax benefits under Section 80C only up to Rs 1.5 lakh per financial year.
Health Insurance and Medical Expense Deduction
Apart from the 80C deduction, a taxpayer can also take a tax benefit under Section 80D for health insurance premium and medical expenditure incurred for self, family and parents.
|Person insured||Maximum deduction Below 60 years||Maximum deduction 60 years or older|
|You, your spouse, your children||Rs. 25,000||Rs. 50,000|
|Your parents||Rs. 25,000||Rs. 50,000|
|Preventative health checkup||Rs. 5,000||Rs. 5,000|
|Maximum deduction (includes preventive health checkup)||Rs. 50,000||Rs. 1,00,000|
Education Loan Deduction
Under Section 80E, the taxpayer can claim a deduction for the interest paid on a loan taken for higher education. There is no limit to claim such a deduction in the income tax return.
Home Loan Deduction
Under Section 24, the taxpayer can claim a deduction for interest paid on a housing loan during the relevant financial year. The amount of deduction will depend upon whether the house is self-occupied or let out. The taxpayer can also claim a deduction of the principal amount of loan under Section 80C up to Rs 1.5 lakh.
|Deduction on||Maximum allowed (for self-occupied house property)||Maximum allowed (for property on rent)|
|Stamp duty and registration + principal||Rs. 1,50,000 within the overall limit of Section 80C||Rs. 1,50,000 within the overall limit of Section 80C|
|Deduction on home loan interest under Section 24||Rs. 2,00,000||No cap (but rental income must be shown in the income tax return) Further, maximum loss from house property capped at Rs 2 lakhs|
|Deduction for first-time homeowners under Section 80EE *certain conditions apply||Rs. 50,000||–|
Deduction for Interest Income
The taxpayer can also claim a deduction for interest on deposits from banks under Section 80TTA of the Income Tax Act. The individuals can claim up to Rs 10,000 deduction under the said section.
- 15th June 2023 – Due date for the first instalment of advance tax for the FY 2023-24
- 31st July 2023 – Income tax return filing for FY 2022-23 for individuals and entities not liable for tax audit and who have not entered into any international or specified domestic transaction
- 15th September 2023 – Due date for the second instalment of advance tax for the FY 2023-24
- 30th September 2023 – Submission of audit report (Section 44AB) for AY 2023-24 for taxpayers liable for audit under the Income Tax Act.
- 31st October 2023 – ITR filing for taxpayers requiring audit (not having international or specified domestic transactions).
- 31st October 2023 – Submission of audit report for AY 2023-24 for taxpayers having transfer pricing and specified domestic transactions
- 30th November 2023 – ITR filing for taxpayers requiring audit (not having international or specified domestic transactions).
- 15th December 2023 – Due date for the third instalment of advance tax for the FY 2023-24
- 31st December 2023 – Last date for filing a belated return or revised return for FY 2022-23.
Income Tax Law
Income Tax Act
The Income Tax Act includes all the provisions that govern the country’s taxation. Every year, the Finance Minister presents a budget in February. The Union Budget brings in various amendments to the Income Tax Act. The most recent Union Budget presented by the current Finance Minister included the introduction of a new tax regime.
Apart from the IT Act, the other components of the income tax law are income tax rules, circulars, notifications and case laws. All of these help in the implementation of income tax law and collection of taxes.
About Income Tax Department India
The income tax department is a government agency. The Act empowers the income tax department to collect direct tax on behalf of the Government of India. The Ministry of Finance manages the revenue functions of the Government of India. The finance ministry has given the task of administration of direct taxes like Income-tax, etc., to the Central Board of Direct Taxes (CBDT). The CBDT is one of the parts of the Department of Revenue in the Ministry of Finance. The CBDT administers the direct tax laws through the IT Department. Thus, The income tax department is a government agency that administers the Income-tax law under the control and supervision of the CBDT. The Income tax department has been given the power to collect direct tax on behalf of the Government of India.
Budget 2022 – All Income Tax Related Announcements
- New updated return: A new provision is introduced to allow taxpayers to update the return and include any omitted income on payment of additional tax. The updated return needs to be filed within two years from the end of the relevant assessment year.
- Surcharge: Corporate surcharge to be reduced from 12% to 7%.
- Startups: The eligible startups under Section 80-IAC benefits are now extended to the eligible startups incorporated until March 31, 2023.
- Alternate Minimum Tax: AMT to be reduced to 15% for co-operative societies.
- Crypto taxation: Income from transfer of digital assets such as crypto to be taxed at 30%. No deductions will be allowed except the cost of acquisition of digital assets. Loss on sale of digital assets cannot be set off against any other income. TDS at 1% will be levied if income is over the threshold. Gifting of digital assets will be taxable in the hands of the recipient.
- NPS: The Finance Ministry has proposed to increased the deduction limit of employers contribution to the National Pension Scheme (NPS) Tier-I account for state government employees from 10% to 14%.
- Section 80DDB: The parent/guardian of the differently-abled can take a tax deduction for payment to the insurance scheme that provides for the payment of the annuity or lump sumto the differently-abled dependant during the lifetime of the parent and guardians on attaining their age of sixty years or more, and the payment or deposit to such scheme has been discontinued.
- Eligible business deductions: Any surcharge and cess levied on income are not allowed as business expenditure.
- Losses set off rules: Brought forward loss cannot be set off against undisclosed income detected during any survey or search.
Income Tax – FAQs
When it is mandatory to file return of income?
Can i file return of income even if my income is below taxable limits?
What documents are to be enclosed along the return of income?
Should I disclose all my income in the return even if it is exempt?
Should I e-verify to get the IT refund?
Can I take Section 87A rebate from tax on long-term and short-term capital gains if there is no other income?
Can I file a return after completion of the assessment year?
What are the maximum exemption limit and slab rates applicable for Assessment Year 2023-24?
|Income Slab||Resident and non-resident individuals||Senior Citizens (Above 60 yrs but less than 80 yrs)||Super Senior Citizens (Above 80 yrs)|
|Upto Rs. 250,000||Nil||Nil||Nil|
|Rs. 250,001 – Rs. 300,000||5%||Nil||Nil|
|Rs. 300,001 – Rs. 500,000||5%||5%||Nil|
|Rs. 500,001 – Rs. 10,00,000||20%||20%||20%|
|Above Rs. 10,00,000||30%||30%||30%|