Understanding Income Tax in India

Income tax is a levy by the government on income earned by individuals or businesses in a financial year (FY), from April 1st to March 31st of the next year. It's a vital source of revenue used to endow public services and infrastructure development.

The Framework:

·       The Income Tax Act of 1961 establishes the legal structure for income tax in India.

·       The Income Tax Rules, formulated in 1962, supplement the Act by providing specific guidelines for its implementation.

Who Pays Income Tax?

Following individuals and entities have to pay income tax in India.

·       Individuals: Any resident Indian below 60 earning more than ₹2.5 lakh annually must pay income tax. Senior citizens (above 60) have a slightly higher exemption limit.

·       Entities: Various entities like Hindu Undivided Families (HUFs), companies, firms, local authorities, and artificial juridical persons also come under the tax net.

Tax Brackets and Rates:

·       Income tax is levied based on income slabs. Each slab has a different tax rate, with higher income brackets attracting a higher tax percentage. This ensures a progressive tax system where those earning more contribute proportionally.

·       Currently, the maximum income tax rate is 30%, with additional surcharges and cess applicable.

Understanding Key Terms:

·       Financial Year (FY): The period from April 1st to March 31st during which income is earned.

·       Assessment Year (AY): The year following the FY (April 1st to March 31st) when income earned in the previous FY is assessed for taxation.

·       PAN (Permanent Account Number): A unique 10-digit alphanumeric code assigned to taxpayers for tracking tax-related information.

·       Assessee: The person or entity responsible for calculating their income and paying taxes as per the Income Tax Act.

·       Resident vs. Non-Resident: Residents pay tax on income earned worldwide, while non-residents pay tax only on income that they have earned in India. Residency status is determined for each FY.

·       TAN (Tax Deduction and Collection Account Number): A 10-digit alphanumeric code assigned to entities responsible for deducting or collecting tax at source (TDS/TCS).

Taxable Income Heads:

Income tax applies to various income sources categorized under five main heads:

1.      Property Income: Income from renting property.

2.      Salary Income: Income from salaries, wages, and pensions.

3.      Business or Profession Income: Profits earned by businesses, self-employed individuals, professionals, and freelancers.

4.      Capital Gain Income: Profits earned from selling capital assets like stocks, mutual funds, or real estate.

5.      Income from Other Sources: Income from sources like interest on savings accounts, fixed deposits, and lottery winnings.

Filing Income Tax Returns:

Individuals and entities exceeding the tax exemption limit must file income tax returns electronically through the government's e-filing portal. The return should be filed by the due date specified for each assessment year.

By understanding these basics of income tax in India, you can ensure timely and accurate tax filing. Remember, the government website and tax professionals can provide further guidance on specific tax situations.