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Daunting. It's the first word that comes to most of our minds when anyone mentions Income Tax. And that's ok. Many adults, who helm a 20-member team or cook a 4-course meal, don't quite get what Income Tax is all about. This quick read should help you understand Income Tax.
Income Tax: It's a direct tax levied on an individual's income. The central government collects it as a form of revenue. Any such income generated by the government is used towards nation-building — better infrastructure, improvements in healthcare, taking care of the less fortunate, more educational facilities, subsidies, etc.
Taxes are broadly categorised into two:
*Direct (examples: Income Tax, Capital Gains Tax)
*Indirect (examples: Customs Duty, GST)
Here's the TL;DR version: You are taxed depending on how much money you make. Kind of a no-brainer: Someone who earns an 8-figure salary will not pay the same Income Tax amount as a newly appointed intern.
You will need to file an income tax return if your gross income exceeds ₹2,50,000 in a financial year. India follows a progressive tax structure — i.e. the percentage of tax levied will increase with increasing income. This tier-based income tax structure attempts to keep taxation fair to all.
There are two tax regimes in force. The New Tax Regime, announced during the 2020 Union Budget, offered more tax slabs but eradicated the deductions and exemptions that came with the Old Tax Regime.
Remember multiplication tables you learned in school? Think of this table below as just as essential to your adult existence. Knowing which slab you fall under will help you understand Income Tax better.
The income tax slabs as per the New Tax Regime, along with their tax rates, look like this.
INCOME TAX SLABS
TAX LIABILITY
up to ₹2,50,000
₹2,50,000 - ₹5,00,000 - 5%
₹5,00,000 - ₹7,50,000
10%
₹7,50,000 - ₹10,00,000
15%
₹10,00,000 - ₹12,50,000
20%
₹12,50,000 - ₹15,00,000
25%
>₹15,00,000
30%
The Income Tax slabs for Old Tax Regime, on the other hand, are as follows:
(i) For residents and non-residents 60 years old or less:
INCOME TAX SLAB
TAX LIABILITY
up to ₹2,50,000
-
₹2,50,000 - ₹5,00,000
5%
₹5,00,000 - ₹10,00,000
20%
>₹10,00,000
30%
(ii) For resident senior citizens (60-80 years)
INCOME TAX SLAB
TAX LIABILITY
up to ₹3,00,000
-
₹3,00,000 - ₹5,00,000
5%
₹5,00,000 - ₹10,00,000
20%
>₹10,00,000
30%
(iii) For resident super senior citizens (80+ years)
INCOME TAX SLAB
TAX LIABILITY
up to ₹5,00,000
-
₹5,00,000 - ₹10,00,000
20%
>₹10,00,000
30%
Now that we’re done with the hard part, let’s see how this can get better for you. Just because you’re supposed to pay 20% of your income as tax — doesn’t mean you do it. The government has ways of letting you not pay tax as long as you’re contributing to the economy in other ways. Here’s a quick look at what that means.
Tax deductions are legal claims that allow you to reduce the amount subject to tax. Taxable income is the gross income earned minus deductions. A Standard Deduction of ₹50,000 applies to everyone, irrespective of the tax slab you fall in.
Following are some of the allowed deductions-
Financial Year (FY): The year in which income is earned.
Assessment Year (AY): The year that follows a FY, a.k.a when the income tax return is filed.
1st April and 31st March mark the beginning and end of both FY and AY.
A good chunk of your income can help you save on tax. So pay close attention.
The Income Tax Act of 1961 lays out various tools that allow you to save tax.
Investments you can make within this section include:
o Life insurance premiums
o ELSS mutual funds
o Contribution towards Employee Provident Fund Scheme (EPF)
o Contribution to Public Provident Fund (PPF)
o ULIP contributions
o Subscription to Sukanya Samriddhi Account Scheme
o Term deposits with a 5-year lock-in period
o Subscription to National Savings Certificate
o Investment in bonds issued by NABARD
o Subscription to government bonds
o Deposits in Senior Citizen Savings Scheme Rules, 2004
If you pay a health insurance premium for yourself, your spouse or dependents are exempted from taxable income.
Persons covered
Exemption limit
Health check-up exemption
Total
Self + family
₹ 25,000
₹ 5,000
₹ 30,000
Self + family + parents
₹25000 + ₹25000 =
₹50000
₹ 5,000
₹ 55,000
Self + family + senior citizen parents
₹25000 + ₹50000 =
₹75000
₹ 5,000
₹ 80,000
Self (senior citizen) + family + senior citizen parents
₹50000 + ₹50000 =
₹150000
₹ 5,000
₹ 1,05,000
Donations made in cash up to ₹2,000 in a financial year are allowed for deduction. You can claim 50% to 100% of the donation amount made via cheque. Few places where donations can save on tax are:
o Clean Ganga Fund
o National Children’s Fund
o Swachh Bharat Kosh
o Fund for Technology Development and Application
o PM’s National Relief Fund
o National Sports Fund
o National Cultural Fund
o Jawaharlal Nehru Memorial Fund
o The Rajiv Gandhi foundation
o PM’s Drought Relief Fund
Now that we’ve covered the likes of insurance, here’s something else you can do to save tax. You can invest that money and earn returns — while also saving on tax.
Investing in Equity-Linked Savings Scheme (ELSS) mutual funds offers tax deductions under Section 80C and the prospect of wealth creation. ELSS mutual funds come with a 3-year lock-in period. Tax deductions up to ₹1,50,000 are allowed in a financial year, while there is no capping on the amount you can invest. The defining feature of an ELSS mutual fund is that the majority (65%) of your funds get allocated to equities or equity-linked securities.
Some of ELSS mutual funds are:
Hope this quick primer helped you better understand Income Tax, the various income tax slabs, and ways in which you can legally reduce your income tax payments!
FAQs
Taxes are of two types, direct and indirect. Direct taxes include individual income tax, capital gains tax, etc., and indirect taxes include customs duty, GST, etc.
Your income tax refund will be automatically calculated by filling out the Income Tax Returns (ITR) form.
Refunds are issued by the Centralised Processing Centre (CPC) within 20-45 days after processing your ITR.
The due date for filing ITR is the 31st of December of each financial year.
Select the option ‘Revised u/s 139(5)’ in the ‘return filed under’ column Of your ITR Form. You will additionally be required to input a few details of your original ITR, i.e., receipt number and date of filing the original ITR.
All citizens whose taxable income is ₹2,50,000 or above are required to pay income tax.
Common Income Tax Slabs were introduced in 2012-2013 for men and women.
Individuals whose income is less than ₹5,00,000, after claiming deductions under Sections 80C through 80U, can benefit from a tax rebate of up to ₹12,500 under Section 87A.
