Brief Analysis of Income Tax & Its Working in India

Brief Analysis of Income Tax & It’s Working In India

Taxes are a major source of revenue for any government in a country. The taxes paid by us collectively helps the nation to grow, prosper and remain independent. Income Tax is a Direct Tax which is regulated and collected by Central Board of Direct Taxes, Income Tax Department, Government of India.

Before we understand, what is Income Tax and how does it work, one should not know what is direct tax. It is as follows:

Direct Income Tax

Direct Tax is a one on one tax. It is paid on the salary or wages of the individual directly to the government. Having stated that, the direct tax is paid only to the government and not to anybody else.

HOW DIRECT TAX WORKS

Categories of Direct Tax

Direct Tax can be broadly classified into two categories:
– Income Tax
– Corporate Tax
– Wealth Tax
– Real Estate Tax
– Capital Gains Tax

Income Tax: It is a tax imposed on individuals, Hindu Undivided Families, firms including LLPs, or any other taxpayers excluding companies. This tax is to be paid on the income received. The rate of taxes applicable are different for different category of taxpayers. Further, the taxpayers are required to file annual Tax Return and report their income to Tax Department.

Corporate Tax: Corporate Tax is a tax which is to be paid by the companies on the profit they make from their businesses. The rate of corporate taxes are prescribed by law from time to time. 

Wealth Tax: Wealth tax is a tax which is paid on the properties owned by the person. The taxation is dependent of the value of the property and is to be paid even if the property does not generate any income. Please note that the payment of wealth tax is exempted for assets like gold deposit bonds, house property etc that have been given on rent for more than 300 days and the house property is being owned for business or professional use.

Real Estate Tax: Real estate tax is an inheritance tax. It is paid on the value of the estate or money that the individual has left after his/her death.

Capital Gains Tax: The profit on sale of capital assets is know as capital gains. Therefore, capital gains tax is a tax which is levied on sale of capital assets. The capital assets could be investments in shares, mutual funds, jewelery etc.  Further, the capital gains are taxed on the basis of duration and type of capital asset.

How does Income Tax work?

Every income that is earned by anyone in India is subject to tax. If any income has been earned by an individual, whether he be a resident of India or a non resident, he will have to pay tax on income earned. It also to be noted that income can be from any legitimate source, for eg., salary, wages, income from quiz competitions including Kaun Banega Crorepati, income earned by professionals and many more.

Income Tax Rules

The legislature of India introduced the Income Tax Act, 1961, to govern and administer the tax. After the passing of the Act, the Tax Rules, 1962 were enforced in order to help in the enforcement and applicability of the law stated in the Act. Tax Rules are to be read with the Tax Act.

Who are the Taxpayers?

The income tax slab for taxpayers is passed by legislature from time to time. Apart from individuals and Hindu Undivided Families(HUFs), following entities are liable to pay Tax:
– Body of individuals
– Association of persons
– Local authorities
– Corporate firms
– Companies
– All Artificial Judicial Persons

Tax Calculator

One can do the computation of the tax either manually or by using an income tax calculator. The tax rate applicable for an individual depends on the tax slab under which they fall.

For calculation of Tax, the income from all the sources are calculated, which may include:
– Income from salary (income paid by the employer)
– Income from house property (rent income, interest paid on home loan)
– Income from capital gains (profit on sale of capital asset like shares, mutual funds, etc)
– Income from business/profession (including freelancing)
– Inc0me from any other sources (FD interest, saving account bank interest, etc)

For instance, for a salaried individual, the income from salary includes
Basic Income + House Rent Allowance (HRA) + Transportation Allowance + Special Allowance, if any.

Besides, the income earned being taxed, there are specific components of the salary which are tax exempted such as Leave Travel Allowance(LTA), reimbursement of telephone bills, water bills, etc. 

Apart from the above exemptions mentioned, the employees get a standard deduction of Rs. 50,000 (Rs. 40,000 till FY 2018-19) under the Old Tax Regime.

Also Read: Comparison of Exemptions & Deductions under Old & New Tax Regime

Illustration

Raju is a salaried employee and receives salary of Rs. 2,00,000 per month. Further, he receives following allowances:
HRA = Rs. 50,000
LTA = Rs. 10,000
Special Allowances = Rs. 20,000/month

Note:
Raju stays in Mumbai and pays a rent of 30,000 per month.
He has Savings Account Interest of Rs. 8,000

The calculation of gross total income of Raju under the Old and New Tax Regime are as follows:

Particulars

Amount (in Rs.)

Allowances/Exemptions

Taxable Amount (in Rs.) (Old Tax Regime)

Taxable Amount (in Rs.) (New Tax Regime)

Basic Salary

24,00,000

24,00,000

24,00,000

SavingsAccount Interest

8,000

8,000

HRA

6,00,000

1,20,000

4,80,000

6,00,000

LTA

10,000

8,000(bills received)

2,000

10,000

Special Allowances (taxable)

2,40,000

2,40,000

2,40,000

Standard Deduction

50,000

50,000

Gross total income from Salary

31,80,000

32,50,000

Now, the details of investments made by Raju are as follows:
– LIC = Rs. 70,000
– PPF = Rs. 50,000
– Tax Saving FD = Rs. 40,000
– Savings Account Interest = Rs. 12,000

He has also paid medical insurance of Rs. 10,000

The calculation of deductions under the Old and New Tax Regime are as follows:

Section

Particulars

Maximum Deduction (in Rs.)

Eligible Amount (in Rs.) (Old Tax Regime)

Eligible Amount (in Rs.) (New Tax Regime)

Section 80C

LIC = Rs. 70,000

PPF = Rs. 50,000

Tax Saving FDs = Rs. 40,000

1,50,000

1,50,000

Section 80D

Medical Insurance Policy

25,000 (self)

50,000 (parents)

10,000

Section 80TTA

Savings Account Interest

10,000

8,000


The Income Tax Calculation of Raju is as follows:

Particulars

Income Tax under Old Tax Regime

Income Tax under New Tax Regime

Gross Income from salary

31,72,000

32,50,000

Income from other sources

8,000

8,000

Gross Total Income (A)

31,80,000

32,58,000

Deductions

Section 80C

1,50,000

N/A

Section 80D

10,000

N/A

Section 80TTA

8,000

N/A

Total Deductions (B)

1,68,000

0

Gross Taxable Income (A+B)

30,12,000

32,58,000

Total Tax on above (including cess)

7,44,744

7,14,900


Income Tax Slabs (Old & New Tax Regime)
Frequently Asked Queries
As per the Income Tax Act, 1961 the Financial Year is the time which starts from 1st April and ends on 31st March of the next year (calendar). 

The income that is earned by the person within a year starting from 1st April to 31st March is taken into account for the calculation of income tax. 

 

The taxes are collected by Government of India through:
👉 Self assessment tax
👉 Advance tax
👉 Tax on the regular assessment
👉 Tax collected at source
👉 Tax deducted at source
👉 Attachment, and many more 

 

There are five heads of income:
👉 Income from salaries
👉 Income from house property
👉 Income from capital gains
👉 Income from gains/profits of business or profession
👉 Income from other sources

 

 

Leave a Comment

Your email address will not be published.