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Income Tax in India: All You Need to Know

  • Highlights

  • If you earn an income in India, you may pay income tax

  • Taxation is governed by the Income Tax Act, 1961

  • The last date to file ITR for FY 18–19 is 31 August 2019

  • In case of excess payment, you can claim a tax refund

As per the Income Tax Act, 1961, the Government of India levies income tax on eligible individuals. Technically speaking, income tax rules apply to any person, even an NRI, earning an income in India. This form of direct tax is calculated based on the income tax slab you fall under, which in turn is dependent on your total income, be it from your salary, savings account or even a lottery. If you earn more than the exemption limit in one financial year, submitting information pertaining to your earnings to the income tax department is mandatory through an income tax return form. With the last date to file ITR for FY 18–19 extended to 31 August 2019, you have time on your hands to understand the nuances of income tax in India.

A Brief Introduction of Income Tax Act

Income Tax in India

Income tax, by definition, is a tax that a country levies on income generated by businesses and individuals. The concept of income tax first surfaced in the country in the year 1860.

At the time income tax served as a means to overcome financial deficits incurred due to the freedom movement.

At present, citizens pay taxes to the Income Tax Department of India in accordance to the rules and regulations written down in the Income Tax Act, 1961. Today, income tax, meaning a portion of your income that goes to the government, is a preeminent source of income for the government. Money earned via income tax goes towards maintaining government bodies and infrastructural development.

Types of Taxes in India

Taxes in India are broadly classified under two heads: Direct and Indirect. As a taxpayer you pay direct taxes directly to the government without involving any third-party. Direct taxes broadly comprise income tax and corporate tax. In both cases, the IT rules specify the rate at which you have to pay tax on your taxable income.

Indirect taxes, on the other hand, refer to taxes you indirectly pay to the Indian Government. An example of this is the goods and services tax you pay on a hotel reservation, a restaurant bill or when you purchase electronics.

Income Tax Rules

While the Income Tax Act of 1961 governs tax payments in the country, the income tax rules, 1962 aids in its enforcement. The income tax rules can be found on the Income Tax Department’s website. These rules work within the framework set by the income tax act and must be interpreted in light of it.

Who are the Taxpayers in India?

In India, taxpayers can be classified as individuals, Hindu Undivided Families (HUFs), Bodies of Individuals (BOIs), Associations of Persons (AOPs), firms and companies. However, not all individuals are taxed. For an individual to have to pay tax, he or she must have a taxable income that falls within an income tax slab. For instance, regular citizens earning up to Rs.2.5 lakh do not need to pay tax. The exemption limit for senior citizens and super senior citizens is Rs.3 lakh and Rs.5 lakh respectively. That said, the new income tax rules allow for a tax rebate of up to Rs.12,500 under Section 87A, thus enabling regular citizens with a net taxable income of up to Rs.5 lakh to have nil tax liability.

What are the Income Tax Slabs?

The income tax slabs in India are different for regular, senior and super senior citizens. Senior citizens are those who have completed 60 years of age and super senior citizens are persons equal to or over the age of 80 years.

Here are the income tax rates for three categories of taxpayers for FY 18–19, 19–20 and AY 19–20.

For Regular Citizens

  • Up to Rs.2,50,000: Nil

  • Rs.2,50,001 to Rs.5,00,000: 5%

  • Rs.5,00,001 to Rs.10,00,000: 20%

  • Rs.10,00,001 and above: 30%

For Senior Citizens

  • Up to Rs.3,00,000: Nil

  • Rs.3,00,001 to Rs.5,00,000: 5%

  • Rs.5,00,001 to Rs.10,00,000: 20%

  • Rs.10,00,001 and above: 30%

For Super Senior Citizens

  • Up to Rs.5,00,000: Nil

  • Rs.5,00,001 to Rs.10,00,000: 20%

  • Rs.10,00,001 and above: 30%

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Dates to Remember for Paying Income Tax

At the beginning of a financial year, you must remember a handful of dates related to income tax filing. Knowing these dates helps you file ITR on time, make investments that qualify for deductions, and leave you with enough time to verify your income tax details comfortably.

Dates Tasks that must be accomplished
31st January Date by which you must submit the proof of your investments
31st March Date by which you should make investments that qualify for a deduction under Section 80C
31st July Date by which you must file ITR. This year, the last date to file returns for FY 18–19 has been extended to 31 August 2019
Between October - November The time during which you must verify your ITR

What is Advance Tax?

Advance tax is the tax you pay on income accumulated from various sources. In India, earnings like salary, rent, business profits, capital gains, dividends, royalties, interest and income from other sources all classify as ‘income.’ Advance tax comes into play when your tax liability goes over Rs.10,000 for a given financial year. However, if you are a salaried individual, then you need not worry about advance tax payments. This is because your employer typically deducts tax at source (TDS) from your monthly salary and pays it to the government on your behalf. Knowing what is tax deducted at source and how it works will help you file your ITR.

Income Tax Deductions

Income tax deductions help you reduce your tax liability as they lower your net taxable income. For instance, if you invest in an ELSS mutual fund, you qualify for a deduction of up to Rs.1.5 lakh under Section 80C. This amount is then deducted from your gross income to give you your net taxable income.

The Income Tax Act allows you to claim deductions under a number of Sections when you make certain investments or expenditures. For instance, Section 80D allows you to claim up to Rs.15,000 for health insurance premiums, and Section 24B allows you to claim up to Rs.2 lakh on the basis of home loan interest repayment.

Income Tax Return

Income tax return is the mode via which you can file returns at the close of the financial year. Through this form you provide tax details such as your gross income, annual deductions, and net liability. Depending on your profile, you will have to choose the right one from the 7 ITR forms available. For instance, individuals earning less than Rs.50 lakh can use ITR-1, proprietors can use ITR-3 and those under the presumptive tax scheme can use ITR-4.

Filing Income Tax Return

Today,filing income tax returns must be done online. The process can be carried out at the webpage provided by the income tax department: www.incometaxindiaefiling.gov.in/. When filing income tax, Form 16 and 26AS play a big role as these give you details pertaining to TDS payments. As per a recent update, the last day to file ITR is 31 August 2019. After filing returns, you can check your ITR status online. If all is well, your account will reflect ‘ITR processed’ as the status.

Claiming Income Tax Refund

In case you have paid the government excess tax, you can claim an income tax refund online. To do so file your ITR and verify it. A refund is issued after your case is scrutinised by the Central Processing Team. You may check your income tax refund status online, at the e-filing website or the TIN NSDL portal.

Now that you know what is income tax as well as how to determine your liability, file ITR and claim refunds, submit your ITR well before 31 August, and undertake tax planning for the next financial year to be able to hold on to a greater portion of your income.

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