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Income Tax in India : Guide, IT Returns, E-filing Process 2019

Updated on Nov 28, 2019 – 10:40:48 AM

Taxes in India can be categorized as direct and indirect taxes. Direct tax is a tax you pay on your income directly to the government. Indirect tax is a tax that somebody else collects on your behalf and pays to the government eg restaurants, theatres and e-commerce websites recover taxes from you on goods you purchase or a service you avail. This tax is, in turn, passed down to the government. 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

Indirect taxes take many forms: service tax on restaurant bills and movie tickets, value-added tax or VAT on goods such as clothes and electronics. Goods and services tax, which has recently been introduced is a unified tax that has replaced all the indirect taxes that business owners have to deal with.

31 January 31 March 31 July Oct – Nov
Deadline to submit your investment proofs Deadline to make investments under Section 80C Last date to file your tax return Time to verify your tax return

Income Tax Basics

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 ). Also read our article on Income Tax for NRIs. Your income could be salary, pension or could be from a savings account that’s quietly accumulating a 4% interest. Even, winners of ‘Kaun Banega Crorepati’ have to pay tax on their prize money. For simpler classification, the Income Tax Department breaks down income into five heads:

Head of Income Nature of Income covered
Income from Salary Income from salary and pension are covered under here
Income from Other Sources Income from savings bank account interest, fixed deposits, winning KBC
Income from House Property This is rental income mostly
Income from Capital Gains Income from sale of a capital asset such as mutual funds, shares, house property
Income from Business and Profession This is when you are self-employed, work as a freelancer or contractor, or you run a business. Life insurance agents, chartered accountants, doctors and lawyers who have their own practice, tuition teachers

ITaxpayers and Income Tax Slabs

Taxpayers in India, for the purpose of income tax includes:

  • Individuals, Hindu Undivided Family (HUF), Association of Persons(AOP) and Body of Individuals (BOI)
  • Firms
  • Companies

Each of these taxpayers is taxed differently under the Indian income tax laws. While firms and Indian companies have a fixed rate of tax of 30% of 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. In India, we have four tax brackets each with an increasing tax rate.

  • Income earners of up to 2.5 lakhs
  • Income earners of between 2.5 lakhs and 5 lakhs
  • Income earners of between 5 lakhs and 10 lakhs
  • Those earning more than Rs 10 lakhs
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

This is the income tax slab for FY 2017-18 for taxpayers under 60 years. 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.

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.