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Income Tax in India

There are two types of taxes in India – direct and indirect.

A direct tax is a tax you pay on your income directly to the government. Indirect tax is a tax that restaurants, theatres and e-commerce websites charge you on for goods or a service. This tax is, in turn, passed down to the government. 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.

Let us discuss the entire process of income tax in India.

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
Tax Slabs

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 5 lakhs
  • Income earners of between 5 lakhs and 10 lakhs
  • And those who make more than 10 lakhs per year
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
Capital gains are taxed depending on the asset you own and how long you’ve had it.
Type of capital asset Holding period Tax rate
House Property Holding more than 24 months
Holding less than 24 months
20%
Depends on slab rate
Debt mutual funds Holding more than 36 months
Holding less than 36 months
20%
Depends on slab rate
Equity mutual funds Holding more than 12 months
Holding less than 12 months
Exempt
15%
Shares (STT paid)

 

Shares (STT unpaid)

Holding more than 12 months
Holding less than 12 monthsHolding more than 12 months
Holding less than 12 months
Exempt
15% 

20%
As per Slab Rates

 

FMPs Holding more than 36 months
Holding less than 36 months
20%
Depends on slab rate
Indians living abroad or Indians earning foreign income are also taxed differently based on their residential status and their income in India.

If you are a NRI, only your income earned or accrued in India is taxable.
If you are resident Indian for that financial year, then your global income is taxable.
Check your residential status on ClearTax.

Calculating Income Tax

You’ll just need your payslip. The government provides plenty of tax benefits and credits that taxpayers you can take advantage of. Read our article on Section 80C to know more. The government keeps introducing and altering tax slabs, schemes and tax benefits, so it’s a good idea to keep up with the Budget.

Income Tax Calculator
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Filing your Income Tax Return
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  • Filing income tax return online: The process
    • E-file online at www.cleartax.in
      • ClearTax is a more complete and better alternative to filing on the income tax website — www.incometaxindiaefiling.com
      • ClearTax is for more than just e-filing your income tax return. ClearTax helps you claim all the deductions you’re eligible for and helps you invest.
    • Send ITR V or e-verify your tax return  
    • Get income tax refund
  • The deadline to e-file your income tax return is 31 July.
  • There’s income tax return form ranging from ITR 1 to ITR 7 for different types of income. Some income tax forms are longer than the others and they may need additional disclosures such balance sheet and a profit and loss statement.
Tax deductions
There are broad themes to what the government incentivizes. These are covered under Section 80 of the Income Tax Act. Here they are:
Home ownership
  • Stamp duty and Registration under Section 80C
  • Home loan principal and interest
  • First time homeowner benefit of Rs.50,000 under Section 80EE

Tax deduction on home purchase with a home loan in FY 2017-18

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)
Deduction for first-time homeowners under Section 80EE
*certain conditions apply
Rs.50,000
Home renting
  • House Rent Allowance or HRA (for salaried only)
    Given how many Indians move cities for work, this is a common allowance most salaried individuals can find in their payslips. If you are renting an apartment, be sure to claim this in your tax return.
  • Section 80GG (if you are renting and don’t get HRA)
    If you are not salaried, or you are still salaried, but don’t get HRA, then you can claim deduction for rent under Section 80GG. Learn more.
Health
  • Life insurance under Section 80C
  • Medical insurance under Section 80D
  • Preventative health checkups
  • Medical bills (for salaried only)

Tax Deductions for health insurance under Section 80D in FY 2017-18

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 preventative health checkup) Rs.50,000 Rs.1,00,000
Long-term savings

Employee provident fund (for salaried only)
Companies cut 12% of your basic salary and put it in a fund managed by EPFO. Public provident fund
Individuals can open a PPF account from a post office or a public sector bank like State Bank of India and ICICI Bank. Pension under Section 80CCD(1B)

Other investment avenues
Investment Risk Interest Guaranteed Returns Lock-in Period
ELSS funds Equity-related risk 12-15% expected No 3 years
NSC Risk-free 8.1% Yes 5 years
5-Year FDs Risk-free 7-9% expected Yes 5 years
FAQs on Tax Deduction
  • How to claim Tax Deductions?
    If you are salaried, the simplest way to claim tax deductions is through the investment declaration system. Investment declaration window typically open in the Dec-Feb period. Check with your employer for exact dates.
    You can claim tax deductions in your tax return directly if you’ve missed submitting your proofs, or if you are not salaried. Do note that only Section 80 related deductions can be availed.
  • How to pick an investment option under Section 80C?

    There are clearly many investment options that are available. Each one has a different tax impact, a different lock-in period and risk.

    Weigh them out and zero in on one that’s right for you.

    A word of advice: To maximize your returns, pick investments that are not taxable at the time of withdrawal and schemes where interest and dividends earned are also tax-exempt.

  • How to save tax other than Section 80C?
    Buy health insurance under Section 80D
    Buy or renew insurance policy for yourself and your members of the family (parents and dependent children) and seek tax deduction under Section 80D.You can save up to Rs. 25,000 if you bought an health insurance policy for you, your spouse, and dependent children. You can claim an additional Rs.30,000 when you pay health insurance premium for your parents and they are more than 60 years old.If you were to make full use of this deduction under Section 80D this year, you stand to save a maximum of Rs.55,000.

    Make a donation and claim deduction under 80G
    Donations to certain charitable organizations is tax-deductible either fully or 50%.

    Invest in a pension fund under Section 80CCD(1B)
    In order to ensure that working Indians have a retirement plan, the government incentivized investments into pension schemes in 2015.

    A contribution of up to Rs.50,000 towards NPS can be claimed as a deduction in addition to Rs. 1,50,000 under Section 80C. If you have already done your tax planning for FY 2017-18 and see that you have exhausted the Rs.1,50,000 limit, consider investing in NPS.

    Savings bank account interest under Section 80TTA
    Savings bank account interest of up to Rs.10,000 is tax-deductible under Section 80TTA.

Taxes in depth – Forms of taxes

The Government collects income tax from three channels:

  • TDS
  • Advance tax
  • Self Assessment tax
TDS
  • TDS exists to help government get tax throughout the year. There’s a prescribed table on how much tax deducted under what circumstances.
  • Your employer cuts TDS based on the information available to him about you. So if you’ve made investments, but have not declared or if you live in a rented house, but have not shared rent receipts, your finance department will have no choice but to deduct tax based on only thing they know – your CTC.
  • This is why the investment proofs deadline in your office is super important. Save yourself some headache and submit your investment proofs on time.
  • Banks don’t know if you’re working in a company or if income from fixed deposits is what you solely rely on. So they deduct a standard 10% tax before they give away the interest. Now if you fall in the 20% or 30% bracket, it’s on you to pay the remainder of the income tax. That’s why sometimes you may find yourself paying some tax at the time of filing a tax return.
  • Make sure banks have your PAN number. They deduct 20% tax if they don’t have your PAN in their records.
  • Anyone who’s receiving an income will have some percentage of tax withheld as prescribed by the government.
Advance Tax

Self-employed people must do the calculation themselves and pay the tax to the Government periodically every quarter.

The deadlines are:

Due Date Advance Tax Payable
On or before 15th June 15% of advance tax
On or before 15th September 45% of advance tax
On or before 15th December 75% of advance tax
On or before 15th March 100% of advance tax

To calculate your advance tax:

  • Add up all the invoices received and include future payments you will be receiving till March 31 to estimate your taxable income.
  • Deduct expenses directly related to your business, and any investments you have made under Section 80C in order to arrive at your taxable income.
  • Use the ClearTax calculator to find out your tax liability.
Self Assessment Tax

When you are filing a tax return and you find out that you need to pay additional tax, you’d be paying self assessment tax. Another way to think about this would be.

  • if you are paying tax for a financial year after the deadline has ended, you will pay self assessment tax.
  • if you are paying tax for a financial year during the financial year, you will pay advance tax.
Tax Glossary
Form 26AS

Form 26AS is a tax summary statement that contains all the tax payments you’ve made yourself (self-assessment tax/ advance tax) or tax someone deducted (TDS) on your behalf. You’re going to need this document when you are doing your income tax e-filing. Form 26AS can be downloaded from www.incometaxindiaefiling.com.

Form 16

If you need to know whether or not your company has given you some tax allowance like your offer letter says, or want to see how much tax has been deducted throughout the year, or need to see EPF contributions, wouldn’t it be easier if you could see them all in one place? That’s your Form 16.

Form 16 has:

  • a summary of all the tax deducted by each quarter
  • all the tax benefits and allowances you’ve availed as a salaried individual
  • Section 80C deductions you’ve claimed through your employer
  • and your taxable income after allowances and Section 80C deductions

This is a super important document for all salaried individuals. And having a Form 16 makes e-filing your income tax return very simple. You can upload your Form 16 and e-file your income tax return. No income tax login required.

Form 16A

Form 16A is very similar to a Form 16 in that it contains how much tax was deducted over what income. So how’s Form 16A different?

Form 16A will never be issued by an employer. They’re usually given to you by a bank that’s deducting TDS, or a company that’s deducted tax on your freelancing service.

Investment submission proof deadline

Depending on how large your company is, you might have two deadlines related to investment proofs. There’s one in the beginning of the year (April) that needs you to just declare how much money you’re planning to invest in Section 80C. This will give an indication on how much they need to deduct in TDS.

Again in the last quarter (roughly between December and February), you will be asked to submit investment proofs. This is when you need to submit all your rent receipts, medical bills (if you’re getting medical reimbursement), investments under Section 80C, 80D.

Learn more about Investment submission proof deadline

Assessment Year/ Financial Year

Financial Year runs between April 1 and March 31 of each year. Income tax is calculated for this period. Income tax returns are assessed the year after the financial year has finished. So that’s your Assessment Year. During the assessment year, taxpayers file their income tax return. Income tax return and refunds are processed by the I-T Department that year.

ITR-V

ITRV stands for Income Tax Return – Verification. After filing your tax return online, you must print and sign a 1-page document and send it to the Income Tax Department.

Challan 280

Challan 280 is the slip that you will use for online income tax payment.

Follow this guide to learn how to pay tax due.

This is the link to the Income Tax Department website. If you are a taxpayer, you’re going to need to use for:

  • Getting your tax credit statement Form 26AS
  • Getting your tax records for home loan or visa application
  • Verifying your income tax return after ITR submission