The government of India imposes an income tax on taxable income of individuals, Hindu Undivided Families (HUFs), companies, firms, co-operative societies and trusts (identified as body of individuals and association of persons) and any other artificial person. Levy of tax is separate on each of the persons. The levy is governed by the Indian Income Tax Act, 1961. The Indian Income Tax Department is governed by the Central Board for Direct Taxes (CBDT) and is part of the Department of Revenue under the Ministry of Finance, Govt. of India. There were 33 million income taxpayers in 2008.
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Every Person whose total income exceeds the maximum amount which is not chargeable to the income tax is an assesse, and shall be chargeable to the income tax at the rate or rates prescribed under the finance act for the relevant assessment year, shall be determined on basis of his residential status.
Income tax is a tax payable, at the rate enacted by the Union Budget (Finance Act) for every Assessment Year, on the Total Income earned in the Previous Year by every Person.
The chargeability is based on nature of income, i.e., whether it is revenue or capital. The rates of taxation of income are-:
Income Tax Rates/Slabs Rate (%)
for men:
→ Up to 1,80,000 = NIL ,
→ 1,80,001 – 5,00,000 = 10%,
→ 5,00,001 – 8,00,000 = 20%,
→ 8,00,001 upwards = 30%,
Up to 1,90,000 (for resident women)=0%
Up to 2,50,000 (for resident individual of 60 years or above)= 0,
Up to 5,00,000 (for very senior citizen of 80 years or above)= 0.
Education cess is applicable @ 3 per cent on income tax, surcharge = NA
The three residential status, viz.,
The total income of a person is divided into five heads, viz., taxable[3]:
All income received as salary under Employer-Employee relationship is taxed under this head. Employers must withhold tax compulsorily, if income exceeds minimum exemption limit, as Tax Deducted at Source (TDS), and provide their employees with a Form 16 which shows the tax deductions and net paid income. In addition, the Form 16 will contain any other deductions provided from salary such as:
Income from salary is the least of all the above deductions.
Income from House property is computed by taking into account what is called Annual Value of the property. The annual value (in the case of a let out property) is the maximum of the following:
If a house is not let out and not self-occupied, annual value is assumed to have accrued to the owner. Annual value in case of a self occupied house is to be taken as NIL. (However if there is more than one self occupied house then the annual value of the other house/s is taxable.) From this, deduct Municipal Tax paid and you get the Net Annual Value. From this Net Annual Value, deduct :
In the case of a self occupied house interest paid or payable is subject to a maximum limit of Rs,1,50,000 (if loan is taken on or after 1 April 1999 and construction is completed within 3 years) and Rs.30,000 (if the loan is taken before 1 April 1999). For all non self-occupied homes, all interest is deductible, with no upper limits.
The balance is added to taxable income.
An example .. An architect works out of home and co-ordinates work for his clients. All the following expenses would be deductible from his professional fees.
The income referred to in section 28, i.e, the incomes chargeable as "Income from Business or Profession" shall be computed in accordance with the provisions contained in sections 30 to 43D. However, there are few more sections under this Chapter, viz., Sections 44 to 44DA (except sections 44AA, 44AB & 44C), which contain the computation completely within itself. Section 44C is a disallowance provision in the case non-residents. Section 44AA deals with maintenance of books and section 44AB deals with audit of accounts.
In summary, the sections relating to computation of business income can be grouped as under: -
The computation of income under the head "Profits and Gains of Business or Profession" depends on the particulars and information available.[4]
If regular books of accounts are not maintained, then the computation would be as under: -
Income (including Deemed Incomes) chargeable as income under this head xxx Less: Expenses deductible (net of disallowances) under this head xxx Profits and Gains of Business or Profession xxx
However, if regular books of accounts have been maintained and Profit and Loss Account has been prepared, then the computation would be as under: -
Net Profit as per Profit and Loss Account xxx
Add : Inadmissible Expenses debited to Profit and Loss Account xxx
Deemed Incomes not credited to Profit and Loss Account xxx
xxx
Less: Deductible Expenses not debited to Profit and Loss Account xxx
Incomes chargeable under other heads credited to Profit & Loss A/c xxx
xxx
Profits and Gains of Business or Profession xxx
Transfer of capital assets results in capital gains. A Capital asset is defined under section 2(14) of the I.T. Act, 1961 as property of any kind held by an assessee such as real estate, equity shares, bonds, jewellery, paintings, art etc. but does not include some items like any stock-in-trade for businesses and personal effects. Transfer has been defined under section 2(47) to include sale, exchange, relinquishment of asset, extinguishment of rights in an asset, etc. Certain transactions are not regarded as 'Transfer' under section 47.
For tax purposes, there are two types of capital assets: Long term and short term. Long term asset is that which is held by a person for three years except in case of shares or mutual funds which becomes long term just after one year of holding. Sale of such long term assets gives rise to long term capital gains. There are different scheme of taxation of long term capital gains. These are:
All capital gains that are not long term are short term capital gains, which are taxed as such:
For companies abroad, the tax liability is 20% of such gains suitably indexed (since STT is not paid).
This is a residual head, under this head income which does not meet criteria to go to other heads is taxed. There are also some specific incomes which are to be taxed under this head.
While exemptions is on income some deduction in calculation of taxable income is allowed for certain payments.
Section 80C of the Income Tax Act [1] allows certain investments and expenditure to be deducted from total income upto the maximum of 1 lac. The total limit under this section is Rs. 100,000 ) which can be any combination of the below:
The investment can be from any source and not necessarily from income chargeable to tax.
From April, 1 2010, a maximum of Rs. 20,000 is deductible under section 80CCF provided that amount is invested in infrastructure bonds. This is in addition to the 100,000 deduction allowed under Section 80(C).
Health insurance, popularly known as Mediclaim Policies, provides a deduction of up to Rs. 35,000.00 (Rs. 15,000.00 for premium payments towards policies on self, spouse and children and (read as in addition to) Rs. 15,000.00 for premium payment towards non-senior citizen dependent parents or Rs. 20,000.00 for premium payment towards senior citizen dependent). This deduction is in addition to Rs. 1,00,000 savings under IT deductions clause 80C. For consideration under a senior citizen category, the incumbent's age should be 65 years during any part of the current fiscal, eg. for the fiscal year 2010-11, the incumbent should already be 65 as on March 31, 2011), This deduction is also applicable to the cheques paid by proprietor firm..
For self occupied properties, interest paid on a housing loan up to Rs 150,000 per year is exempt from tax.(Excluding Rs.1,00,000/p.a. u/s 80c Saving) However, this is only applicable for a residence constructed within three financial years after the loan is taken and also the loan if taken after April 1, 1999.
If the house is not occupied due to employment, the house will be considered self occupied.
For let out properties, the entire interest paid is deductible under section 24 of the Income Tax act. However, the rent is to be shown as income from such properties. 30% of rent received and municipal taxes paid are available for deduction of tax.
The losses from all properties shall be allowed to be adjusted against salary income at the source itself. Therefore, refund claims of T.D.S. deducted in excess, on this count, will no more be necessary.[5]
While the use of the above sections helps one to make savings for the long-term, one should look at this more as an investment-return opportunity. One should still file income tax return, even if one doesn't fall into the bracket of paying tax, if there are sources of income as defined by Income Tax rules. Except ELSS (Equity Linked Savings Scheme) and the NPS (National Pension Scheme), other schemes under 80C typically offer a relatively risk-free investment and guaranteed returns.
In India, Individual income tax is a progressive tax with three slabs. About 10 per cent of the population meets the minimum threshold of taxable income[6][7]
From April 1, 2011 new tax slabs apply, which are as follows:
Surcharge has been abolished for personal income tax in the financial year 2009-10.
A 7.5% surcharge (tax on tax) is applicable if the taxable income (taking into consideration all the deductions) is above Rs. 10 lakh (Rs. 1 million). The limit of 10 lacs was increased to Rs. 10 crore (Rs. 100 million) with effect from 1 June 2009
All taxes in India are subject to an education cess, which is 3% of the total tax payable. With effect from assessment year 2009-10, Secondary and Higher Secondary Education Cess of 1% is applicable on the subtotal of income tax. The education cess is mainly applicable on excise duty and service tax
From income tax year 2010-11, education cess would be 3% and no surcharge would be levied.
There are special rates prescribed for Firms, Corporates, Local Authorities & Co-operative Societies.[8]
The Income Tax Department has put on its website the list of income tax refunds of all salary tax payers which could not be sent to the concerned persons for want of correct address. (link to check refund)
Salary taxpayers who have not received refunds for assessment years 2003-04 to 2006-07 can click on the link below and query using the PAN number and assessment year whether any refund due to them has been returned undelivered. .[9]
For companies, income is taxed at a flat rate of 30% for Indian companies, with a 5% surcharge applied on the tax paid by companies with gross turnover over Rs. 1 crore (10 million). Foreign companies pay 40%.[10] An education cess of 3% (on both the tax and the surcharge) are payable, yielding effective tax rates of 32.5% for domestic companies and 41.2% for foreign companies. [11] From 2005-06, electronic filing of company returns is mandatory.[12]
The major number of penalties initiated every year as a ritual by I T Authorities is under section 271(1)(c)[13] which is for either concealment of income or for furnishing inaccurate particulars of income.
"If the Assessing Officer or the Commissioner (Appeals) or the Commissioner in the course of any proceedings under this Act, is satisfied that any person-
(b) has failed to comply with a notice under sub-section (1) of section 142 or sub-section (2) of section 143 or fails to comply with a direction issued under sub-section (2A) of section 142, or
(c) has concealed the particulars of his income or furnished inaccurate particulars of such income,
he may direct that such person shall pay by way of penalty,-
(ii) in the cases referred to in clause (b), in addition to any tax payable by him, a sum of ten thousand rupees for each such failure;
(iii) in the cases referred to in clause (c), in addition to any tax payable by him, a sum which shall not be less than, but which shall not exceed three times, the amount of tax sought to be evaded by reason of the concealment of particulars of his income or the furnishing of inaccurate particulars of such income.