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INCOME TAX IN INDIA

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.

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