We can classify the Taxes in India in Two categories –
Direct Tax
Indirect Tax
DIRECT TAX
Direct Tax is the tax levied by the Government on the Income of the Person during the Financial Year. The Government levied this tax on different types of the entity and the person has to deposit the Tax directly with the Government. This is popularly called as Income Tax.
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INDIRECT TAX
On the Other hand, Government levied various type of taxes which is levied on Sale of Various Products and Services which are popularly called as VAT, Sales Tax, Goods and Service Tax, Excise Duty, Service Tax, etc. These are collected by the other persons from the buyer of products and services and deposited with the Government. This type of taxes is known as Indirect Taxes.
ABOUT THE AUTHOR
The Author is MBA Finance practicing in Accounting and Taxation for more than 10 years. Has 35 years of experience in the field of Taxation, Accounting, and Finance. Have worked with various big corporate, handled various portfolio in Accounting, Direct and Indirect Taxation and Payroll Management
INCOME TAX DEFINED
Everyone who earns or gets an income in India is subject to income tax- whether he is a resident in India or not. The income can be earned by way of Salary, Business, Profession, Renting, Profit on sale of assets, Interest, etc.. Income Tax is even charged on the casual income like earning from Quiz Competition, Lottery, etc.
The Income Tax Department has distributed various types of income into the following five heads:
HEAD
TYPE OF INCOME COVERED
Income From Salary
The Amount received by an employee from his Employer for the performance of the Duty as part of the Employment Agreement. This also Covers the Pension received by the retired persons from the employer.
Income from House Property
The Income earned by renting of Property is covered under this heading. The property can be residential and/ or commercial
Capital Gain
The gain arising from the sale of Immovable Property and Securities are covered under this heading
Income from Business and Profession
This covers the income of all persons who are engaged in their own Business and also the persons who are rendering rendering the services to others and deriving income there from.
Income from Other Sources
The Income which cannot be classified under above four heads is covered here. This includes the Interest Income of all types, Dividend, etc.
TYPE OF TAXPAYERS
Tax Payers for the purpose of Income Tax can be divided into the following categories:
Individuals,
Hindu Undivided Family (HUF),
Association of Persons(AOP)
Body of Individuals (BOI)
Firms
Companies
Each of these taxpayers is taxed differently under the Indian income tax Act. While firms and Indian companies have a fixed rate of tax of the profits, the individual, HUF, AOP, and BOI taxpayers are taxed based on the income slab they fall under. The Income of Individual, HUF, AOP, and BOI are grouped into different blocks known as tax brackets or tax slabs. This tax slab has a different tax rate depending on the income.
Please Note only an individual can have income from any or all of the above HEADS while the other forms of a taxpayer can not have income from Salary.
FINANCIAL YEAR AND ASSESSMENT YEAR DEFINED
The Financial Year is the period for which the Income earned is subject to Tax. The Financial Year in India is April 1 to March 31 of the subsequent year i.e. the financial year for 2018-19 is from April 1, 2018, to March 31, 2019
Assessment Year is the year during which your income is assessed to Tax. This is the year subsequent to Financial Year i.e. assessment year for the financial year 2018-19 is 2019-20 and starts from April 1, 2019, to March 31, 2020.
Following are the Taxation Rates for the Financial Year ended March 31, 2019
For Individuals Male and Female below 60 Years of age:
Income Range Tax Slab Tax Amount
0 – 250000 NIL NIL
250000 – 500000 5% 5% of Income >250000
500000 – 1000000 20% 20% of Income > 500000 + 12500
More Than 1000000 30% 30% of Income > 100000+112500
Plus:
Surcharge: 10% of tax where total income exceeds Rs. 50 lakh
15% of tax where total income exceeds Rs. 1 crore
Health & Education cess: 4% of tax plus surcharge
For Individuals Male and Female between 60 Years and 80 Years of age:
Income Range Tax Slab Tax Amount
0 – 300000 NIL NIL
300000 – 500000 5% 5% of Income >300000
500000 – 1000000 20% 20% of Income > 500000 + 10000
More Than 1000000 30% 30% of Income > 100000+110000
Plus:
Surcharge: 10% of tax where total income exceeds Rs. 50 lakh
15% of tax where total income exceeds Rs. 1 crore
Health & Education cess: 4% of tax plus surcharge
For Individuals Male and Female above 80 Years of age:
Income Range Tax Slab Tax Amount
0 – 500000 NIL NIL
500000 – 1000000 20% 20% of Income > 500000
More Than 1000000 30% 30% of Income > 100000+100000
Plus:
Surcharge: 10% of tax where total income exceeds Rs. 50 lakh
15% of tax where total income exceeds Rs. 1 crore
Health & Education cess: 4% of tax plus surcharge
For HUF/AOP/BOI/Any other Artificial Juridical Person
Income Range Tax Slab Tax Amount
0 – 250000 NIL NIL
250000 – 500000 5% 5% of Income >250000
500000 – 1000000 20% 20% of Income > 500000 + 12500
More Than 1000000 30% 30% of Income > 100000+112500
Plus:
Surcharge: 10% of tax where total income exceeds Rs. 50 lakh
15% of tax where total income exceeds Rs. 1 crore
Health & Education cess: 4% of tax plus surcharge
Partnership Firms
Partnership Firms and LLPs (Limited Liability Partnerships) are to be taxed at a rate of 30%.
Plus:
Surcharge: 12% of tax where total income exceeds Rs. 1 Crore
Health & Education cess: 4% of tax plus surcharge
Local Authorities
Local Authorities are to be taxed at the rate of 30%.
Plus:
Surcharge: 12% of tax where total income exceeds Rs. 1 Crore
Health & Education cess: 4% of tax plus surcharge
Domestic Companies
Domestic Companies are to be taxed at a rate of 30%. However, the tax rate will be 25% if turnover or gross receipt of the company does not exceed Rs. 250 crores.
Plus:
Surcharge: 7% of tax where total income exceeds Rs. 1 Crore
12% of tax where total income exceeds Rs. 10 Crore
Health & Education cess: 4% of tax plus surcharge
LET US UNDERSTAND THE DIFFERENT TYPE OF HEADS OF INCOME AND HOW TO ARRIVE AT THE INCOME UNDER IT
SALARY
SALARY is earned by an individual where there is an employer-employee contract exists. The Employer pays the agreed amount to the employee for performing the assigned duties. While calculating the income the employee gets a deduction of Rs.40000/- called as a standard deduction from his salary. If the employee stays on rent then he can claim the deduction on the rent paid subject to the limitations imposed by the Act.
HOUSE PROPERTY
When a taxpayer earns the income by way of Renting of Property the Income Tax Act allows its deduction of the Municipal Taxes i.e. Property Tax paid and also a flat deduction of 30% of the Residual Income towards repair and maintenance of the Property.
CAPITAL GAIN
Again arising on transfer of the capital asset is charged to tax under the head “Capital Gains”. Income from capital gains is classified as “Short Term Capital Gains” and “Long Term Capital Gains”.
Profits or gains arising from the transfer of a capital asset are called “Capital Gains” and are charged to tax under the head “Capital Gains”.
Meaning of Capital Asset
A capital asset is defined to include:
(a) Any kind of property held by an assessee, whether or not connected with business or profession of the assessee.
(b) Any securities held by an FII which has invested in such securities in accordance with the regulations made under the SEBI Act, 1992
Following is the guideline to Nature of Asset, Period of Holding and Applicable Tax
|
Type of capital asset |
Period of Holding |
Type of Gain Long / Short |
Tax rate |
|
House Property |
More than 24 months |
Long |
20% of Gain – subject to Indexed Value |
|
House Property |
Less than 24 months |
Short |
As per the Tax Slab/ Bracket |
|
Debt mutual funds/ Fixed Maturity Plan |
Holding more than 36 months |
Long |
20% of Gain – subject to Indexed Value |
|
Debt mutual funds/ Fixed Maturity Plan |
Holding less than 36 months |
Short |
As per the Tax Slab/ Bracket |
|
Equity mutual funds |
Holding more than 12 months |
Long |
Exempt (until 31 March 2018) Gains > Rs 1 lakh taxable @ 10% |
|
Equity mutual funds |
Holding less than 12 months |
Short |
15% |
|
Shares (STT paid) |
Holding more than 12 months |
Long |
Exempt (until 31 March 2018) Gains > Rs 1 lakh taxable @ 10% |
|
Shares (STT paid) |
Holding less than 12 months |
Short |
15% |
|
Shares (STTnot paid) |
More than 24 months |
Long |
20% of Gain – subject to Indexed Value |
|
Shares (STTnot paid) |
Less than 24 months |
Short |
As per the Tax Slab/ Bracket |
INCOME FROM BUSINESS OR PROFESSION
The term “business” includes any type of trade is it trading, manufacturing, supplying of goods. The term “profession” implies all types of specialized skills and knowledge which can be acquired only after study and application. The term Profits and Gains means any excess amount generated after meeting all expenses of the business. This term should be understood to include losses also, so that in one sense ‘profit and gains’ represent plus income while ‘losses’ represent minus income.
The following types of income are chargeable to tax under the heads profits and gains of business or profession:-
Profits and gains of any business or profession
Any compensation or other payments due to or received by any person
Income derived by a trade, profession or similar association from specific services performed for its members
Profit on sale of import entitlement license, incentives by way of cash compensatory support and drawback of duty
The value of any benefit or perquisite, whether converted into money or not, arising from business
Any interest, salary, bonus, commission, or remuneration received by a partner of a firm, from such a firm
Any sum whether received or receivable in cash or kind, under an agreement for not carrying out any activity in relation to any business or not to share any know-how, patent, copyright, franchise, or any other business or commercial right of similar nature or technique likely to assist in the manufacture or processing of good
Income from speculative transactions.
Profits and gains of any other business are taxable unless such profits are subjected to the exemption.
General principals governing the computation of taxable income under the head “profits and gains of business or profession:-
Business or profession should be carried on by the assessee.
Income from business or profession is chargeable to tax under this head only if the business or profession is carried on by the assessee at any time during the previous year. This income is taxable during the following assessment year.
Profits and gains of different business or profession carried on by the assessee are clubbed together for the year and tax arrived at accordingly except in case of speculative business.
Taxable profit is the real profit accrued or arising in the accounting year.
The yield of income by a commercial asset is the profit of the business irrespective of the manner in which that asset is exploited by the owner of the business.
Any sum recovered by the assessee during the previous year, in respect of an amount of expenditure which was earlier allowed as a deduction, is taxable as business income of the year in which it is recovered.
INCOME FROM OTHER SOURCES
Income which cannot be classified under the above category is Classified under Income from Other Sources.
The broadly following type of incomes are covered under this head
Income from Dividend
Interest Income from Bank, Securities, etc.
Winning from Lotteries, crossword puzzle, quiz shows, races, etc.
Gifts Received.
Family Pension received by the Individual
DEDUCTIONS AVAILABLE FOR CALCULATING TAXABLE INCOME
In order to promote Savings, Higher Education, Security of Future, Medical Expenses, Promoting the new business, Research, and Development, Investment in Residential Property the Income Tax Act provides various exemption and deduction. Some of these are listed below :
Deduction of Housing Loan Interest under Section 24(1)- Rs.2,00,000/-
Section 80 C- Rs.1,50,000/- The amount paid towards Life Insurance, Tuition Fee, Provident Contribution, Housing Loan Repayment, Tax Savings Fixed Deposit with Bank, Equity Linked Savings Scheme of Mutual Fund, National Savings Certificate, Public Provident Fund, Senior Citizen Scheme deposit are covered under this head
Section 80 D – Subscription to Medical Insurance Policy – Rs.75000/-. Premium paid for Self, family and dependent parents
Section 80 E – Interest paid on Loan taken for Higher Education
Apart from the above deductions, various other deductions are available to the Individuals.
In order to promote the Research and Development the Income Tax Act provides various deductions to the Business.