As tax season is upon us in India, taxpayers need to be aware of the basic tax concepts when filling up their returns and make sure they are compliant with all requirements while also being efficient in their tax planning.
India’s tax system is intricate and multifaceted, encompassing various types of taxes imposed by both the central and state governments. Understanding the fundamental tax concepts is essential for every taxpayer in India to ensure compliance and optimise tax liability.
This article delves into the basic tax concepts in India, covering the different types of taxes, key terminologies, tax computation and significant tax benefits.
Types of Direct Taxes in India
Understanding the different types of taxes levied in India is the cornerstone of tax concepts upon which the entire tax system is built.
1. Direct Taxes
Direct taxes are those that are paid directly by individuals or organisations to the government. The main types of direct taxes in India include:
- Income Tax: Income tax is levied on the income earned by individuals, Hindu undivided families (HUFs), firms, limited liability partnerships and companies. The Income Tax Act of 1961 governs the collection, administration and assessment of income tax in India. Tax rates vary based on the taxpayer’s income slab and type of taxpayer, whether individual, senior citizen, company, etc.
- Corporate Tax: Corporate tax is imposed on the net income of companies. Domestic companies are taxed on their worldwide income, whereas foreign companies are taxed on income arising from India. The tax rates for domestic and foreign companies differ and are subject to changes through the Finance Act.
- Capital Gains Tax: Capital gains tax is levied on the profit earned from the sale of a capital asset. Capital assets include property, stocks, bonds and gold. Capital gains are classified into short-term and long-term, based on the holding period of the asset, with different tax rates applicable to each.
2. Indirect Taxes
Indirect taxes are collected by intermediaries, such as retailers, from the consumers and are then paid to the government. Key indirect taxes in India include:
- Goods and Services Tax (GST): GST is a comprehensive tax levied on the supply of goods and services. It is a destination-based tax, meaning it is collected from the point of consumption rather than the point of origin. GST has subsumed various indirect taxes like value-added tax, service tax, excise duty and others.
- Customs Duty: Customs duty is levied on goods imported into or exported out of India. The duty aims to protect domestic industries and regulate the movement of goods across borders. It includes basic customs duty, countervailing duty and anti-dumping duty.
- Excise Duty: Excise duty was a tax on the manufacture of goods within India, but it has largely been subsumed by GST. However, it is still applicable to certain products like alcohol, tobacco and petroleum.
Key Tax Concepts
- Assessment Year (AY) and Financial Year (FY): The financial year (FY) is the period from April 1 to March 31 in which income is earned — this constitutes a fundamental tax concept that taxpayers should keep in mind. The assessment year (AY) is the subsequent year in which this income is assessed and taxed. For instance, if income is earned in FY 2023-24, it will be assessed in AY 2024-25.
- Assessee: This refers to a person who is liable to pay tax or any other sum of money under the Income Tax Act. This includes individuals, HUFs, companies, firms, limited liability partnerships, local authorities and any artificial juridical person.
- Gross Total Income (GTI): Gross Total Income is the aggregate of income from all sources before deductions. It includes income from salaries, house property, profits and gains from business or profession, capital gains and other sources.
- Deductions: These are specific expenses or investments that can be subtracted from the GTI to arrive at the taxable income. Common deductions include those under Section 80C (investments in specified instruments), 80D (medical insurance premiums) and 24(b) (home loan interest).
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Tax Filing Process
1. PAN and Aadhaar
Permanent Account Number (PAN) is a unique identifier issued by the Income Tax Department and is mandatory for all taxpayers. Linking PAN with Aadhaar, a unique identification number, is also mandatory.
2. Filing Income Tax Returns (ITR)
Taxpayers must file their income tax returns annually. The due dates for filing are:
- For individuals and non-audit cases: 31st July of the AY
- For audit cases: 30th September of the AY
3. Types of ITR Forms
Different ITR forms apply to different taxpayers based on their income sources and categories:
- ITR-1 (Sahaj): For individuals with income up to ₹50 lakh from salary, one house property, and other sources.
- ITR-2: For individuals and HUFs not having income from business or profession.
- ITR-3: For individuals and HUFs having income from business or profession.
- ITR-4 (Sugam): For individuals, HUFs, and firms opting for the presumptive taxation scheme.
Income Tax Computation
1. Sources of Income
Depending on your status as an Indian resident, income is categorised into five heads:
- Income from Salaries: This includes wages, pensions, gratuity, and any other benefits received from employment.
- Income from House Property: Income from owning a property, whether rented out or self-occupied.
- Profits and Gains from Business or Profession: Income earned from any business or professional practice.
- Capital Gains: Profits from the sale of capital assets such as stocks, mutual funds and property.
- Income from Other Sources: Income that does not fall under the above categories, such as interest, dividends and winnings from lotteries.
2. Calculating Taxable Income
The steps involved are:
- Compute income under each head: Sum the income from all heads: Salaries, House Property, Business or Profession, Capital Gains, and Other Sources.
- Aggregate the incomes to get Gross Total Income (GTI): Add all the computed incomes from each head to arrive at GTI.
- Deduct the allowable deductions under Chapter VI-A: Deduct eligible deductions such as:
- Section 80C: Investments in PPF, EPF, NSC, ELSS, etc. (up to ₹1.5 lakh).
- Section 80D: Medical insurance premiums for self, family, and parents (up to ₹25,000 for self and family, ₹50,000 for senior citizens).
- Section 80E: Interest on education loan.
- Section 80G: Donations to specified relief funds and charitable institutions.
- Section 80TTA: Interest on savings account (up to ₹10,000).
- Arrive at the taxable income: The resultant figure after deductions is the taxable income.
Tax Concepts: Old Regime vs New Regime
The Indian government introduced a new tax regime in the Union Budget 2020, providing taxpayers with an alternative to the existing (old) tax regime and adding to the tax concepts we must be familiar with. Both regimes have their own set of benefits and drawbacks, making it crucial for taxpayers to understand the differences and choose the one that best suits their financial situation.
Overview of the Old Tax Regime
The old tax regime allows taxpayers to claim various exemptions and deductions, thereby reducing their taxable income. Some of the key features include:
- Standard Deduction: A flat deduction of ₹50,000 is available to salaried individuals and pensioners.
- Deductions under Section 80C: Investments up to ₹1.5 lakh in specified financial instruments such as Public Provident Fund (PPF), Employee Provident Fund (EPF), National Savings Certificate (NSC), Equity Linked Savings Scheme (ELSS), and life insurance premiums.
- Section 80D: Deductions for medical insurance premiums for self, family, and parents. The deduction limit is ₹25,000, which increases to ₹50,000 for senior citizens.
- Section 24(b): Deductions on interest paid on home loans. The limit is ₹2 lakh for self-occupied properties and the actual interest paid for rented properties.
- House Rent Allowance (HRA): Exemption on HRA received, subject to certain conditions.
- Leave Travel Allowance (LTA): Exemption on LTA received for travel expenses incurred within India.
Overview of the New Tax Regime
The new tax regime offers lower tax rates and now includes a standard deduction of ₹50,000 but does not allow most of the other exemptions and deductions available under the old regime. This simplified approach to tax concepts aims to reduce the complexity of tax compliance.
Comparison of Tax Rates Between Old And New Regime
| Income Slab (₹) | Old Regime (Individuals < 60 years) | Old Regime (Senior Citizens 60-80 years) | Old Regime (Super Senior Citizens > 80 years) | New Regime (All Individuals) |
|---|---|---|---|---|
| Up to 2.5 lakh | Nil | Nil | Nil | Nil |
| 2.5 lakh to 3 lakh | 5% | Nil | Nil | 5% |
| 3 lakh to 5 lakh | 5% | 5% | Nil | 5% |
| 5 lakh to 7.5 lakh | 20% | 20% | 20% | 10% |
| 7.5 lakh to 10 lakh | 20% | 20% | 20% | 15% |
| 10 lakh to 12.5 lakh | 30% | 30% | 30% | 20% |
| 12.5 lakh to 15 lakh | 30% | 30% | 30% | 25% |
| Above 15 lakh | 30% | 30% | 30% | 30% |
Key Differences Between the Old and New Tax Regimes
- Tax Rates:
- The new tax regime offers lower tax rates compared to the old regime but without most deductions and exemptions.
- The old regime has higher tax rates but allows taxpayers to reduce their taxable income through various deductions and exemptions.
- Deductions and Exemptions:
- Under the new tax regime, taxpayers cannot claim common exemptions and deductions such as Section 80C, 80D, HRA, and LTA, but the standard deduction of ₹50,000 is available.
- The old tax regime permits multiple exemptions and deductions, making it suitable for taxpayers with significant investments and eligible expenses.
- Simplicity:
- The new tax regime is simpler with straightforward tax calculations due to the absence of most deductions and exemptions.
- The old tax regime is more complex as it requires meticulous planning to maximise tax benefits through various exemptions and deductions.
When to Opt for the Old Tax Regime
The old tax regime may be more beneficial for taxpayers who have:
- Significant Investments: Individuals with substantial investments in tax-saving instruments under Section 80C, such as PPF, EPF, NSC, ELSS, and life insurance policies, may find the old regime more advantageous.
- High Deductible Expenses: Taxpayers with considerable medical insurance premiums, home loan interest payments, and educational expenses that qualify for deductions.
- Eligible Exemptions: Those who receive components like HRA and LTA in their salary structure and can claim exemptions under these heads.
When to Opt for the New Tax Regime
The new tax regime could be more suitable for taxpayers who:
- Minimal Investments: Individuals with minimal or no investments in tax-saving instruments may benefit from the lower tax rates under the new regime.
- Simpler Income Structure: Taxpayers with a straightforward income structure and fewer components that qualify for exemptions and deductions.
- Young Professionals: Young earners who have not yet started investing heavily in tax-saving instruments or taken on financial commitments like home loans.
Tax Planning and Compliance
1. Tax Planning Strategies
Effective tax planning involves making use of all available deductions and exemptions to minimise tax liability. This includes investing in tax-saving instruments, availing home loan benefits, and planning for retirement through contributions to the National Pension System (NPS).
2. Advance Tax
Advance tax is applicable if the estimated tax liability exceeds ₹10,000 in a financial year. It is paid in instalments throughout the year, with specific due dates for each instalment.
3. Tax Deducted at Source (TDS)
TDS is a mechanism where tax is deducted from the source of income and deposited with the government. It applies to salaries, interest, commission, rent, and other specified payments.
Penalties and Prosecution
1. Late Filing
Filing income tax returns after the due date attracts a late fee of up to ₹10,000. Additionally, interest under Section 234A is levied on the tax due.
2. Non-Payment of Tax
Failure to pay tax attracts interest under Sections 234B and 234C. The interest is 1% per month or part of the month on the unpaid tax amount.
3. Concealment of Income
Concealment or misreporting of income attracts severe penalties, ranging from 100% to 300% of the tax sought to be evaded.
Understanding the basic tax concepts in India is crucial for every taxpayer to ensure compliance and make informed financial decisions.
By familiarizing oneself with basic tax concepts, key terminologies, tax computation methods and available deductions, one can effectively manage their tax liabilities and avoid penalties.
Staying updated with the latest tax laws and regulations is equally important, as the tax landscape in India is dynamic and subject to frequent changes.
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