Income Tax: Understanding the Income Tax Laws in Detail

In India, apart from paying Goods and Services Tax (GST), you also need to pay the more important form of tax, known as income tax. This is applicable on your earned income; although there are various deductions and exemptions that you can avail on income tax, which can reduce you tax liability gradually, filing of income tax return every year is mandatory for all.  

Every individual and company are liable to pay this tax, and there are laws to ensure its proper implementation. Now, being a tax payer, you need to have a clear understanding of how the taxation system works and the benefits you can get from it. Read on to know more! 

What is income tax?

The amount of tax that is levied on the earnings of individuals and companies during a financial year is called income tax. It is paid directly to the Income Tax department and serves as a huge source of revenue for the government. These funds are generally used for developing infrastructure, conducting government welfare programs, education, healthcare, etc. 

Who pays income tax in India?

According to the Income Tax department, any individual, company, partnership, trust, AOP, etc., that generates income is liable to pay income tax. 

Individuals under 60 years of age, earning more than ₹2.5 lakh yearly is liable for taxation. People who belong to the 60-80 years and 80+ age groups must also pay taxes. However, their tax rates are based on which regime they choose to follow. 

Now, depending on the type of taxpayer, income tax will be calculated differently. For example, in case of Individual, HUF, BOI and AOP taxpayers, tax is calculated based on their current income tax slab. 

For businesses, there is a fixed tax percentage that applies to their taxable profits.

What is taxable income and how to calculate it?

The amount of income that is liable for taxation can be termed taxable income. In case of both individual and corporate taxpayers, it is less than their gross income. 

To calculate your taxable income, you can follow the steps given below:

Step 1: Calculate your gross salary by adding all the components and deducting the applicable exemptions

Step 2: Add any income that you may get from ‘Other sources’ like capital gains, interest deposits, income from rent, etc. The amount that comes is your gross total income. 

Step 3 - Subtract the standard and any other applicable deductions under Section 80 of the Income Tax Act.

Your taxable income amount is ready. You can now calculate the amount of payable income tax by looking at the applicable tax slab.   

Different sources of income as per the IT Act

As per the Income Tax Act, an individual’s income can be divided into the 5 following sources:

1. Income from salary
   The monthly salary that you receive from your employer falls under this section. It includes salary components like basic pay, DA, bonus, medical expenses, transportation costs, allowances, retirement benefits, etc.   
2. Income from business or profession
   Any profit that you earn from your business or profession is liable for taxation under this head. In this regard, the types of income applicable for taxation are:
3. • Profits earned in an assessment year
   • Gains from the sale of a certain license
   • Profits of a business on its income
   • Funds gained from the export of a government scheme
   • Benefits received by a business
   • Salary, profits or bonuses that an individual may receive in the event of a partnership with a firm 
4. Income from house property
   Any rental income that you receive from your house or property is taxable under the head income from house property. This is applicable to both residential and commercial properties. If you are the owner of more than one self-occupied house, only one is considered to be occupied and the rest rented out.   
5. Income from capital gains
   Profits that you earn from the transfer or sale of assets fall under this category and attract capital gain taxes. They can include assets like stocks, bonds, gold, real estate, mutual funds, etc. 
   These gains are further subdivided into long-term and short-term capital gains. When you sell your assets after holding them for 36 months or more, the profits will fall under long-term capital gains and have a flat taxation rate of 20%. 
   Alternatively, if you sell your holdings within 36 months from the date of purchase, the profits will fall under short-term capital gains and will be taxed at 15%. 
6. Income from other sources
   Any income that does not fall under the rest of the heads falls under this section. These can include income from card games, lotteries, gambling, bank deposits and more. 

Income tax slabs as per old and new regime

You can pay income tax in India by opting for either the old or new tax regime, as per your convenience. The tax slabs for both regimes have been discussed below as per the age of the taxpayer: 

For individuals aged below 60 years:

For individuals aged more than 60, but less than 80 years:

For individuals aged above 80 years:

Deductions and exemptions

Being a taxpayer in India, you are entitled to several income tax deductions and exemptions. Following are some of the tax benefits you can get on your salary: 

1. Standard deduction
   As per the Interim Budget 2019, as a salaried employee, you can avail a standard deduction of ₹50,000. 
2. House rent allowance
   The House rent Allowance (HRA) that you receive is partially or totally exempt from taxation. You can claim HRA exemption from the following, which is the lowest in amount:
3. • The total HRA amount that you receive from your employer
   • Rental payment of less than 10% of your basic pay + DA
   • 50% of your salary (Basic + DA) if you live in a metro city and 40% of your salary (Basic + DA) if you live in a non-metro city
4. Note: If you do not live in a rented property and continue to receive HRA benefits, that amount is liable for taxation. 
5. Food coupons
   Food coupons that you receive from your employer are taxable. However, there is an exemption of ₹50 per meal. 
6. Relocation allowance
   When your employer asks you to shift to a different location for business purposes, you are liable to receive relocation allowances. 
7. These funds help you cover several expenses like getting a new house, shifting your furniture, transporting your vehicle, etc. The tax exemptions available for expenses included in the relocation allowance are as follows:
8. • Packaging costs
   • The costs of packing and moving your furniture, irrespective of direct payment by your employer or reimbursement, is exempt from tax liabilities. 
   • Air/Train tickets
   • When you relocate from your current residence to your new place of employment, your employer covers the cost of your air or train tickets. This amount is totally exempted from tax.   
   • Accommodation expenses
   • After moving to your new work location, your employer may cover boarding, lodging and feeding expenses either directly or via reimbursements. They are also exempted from taxation.  
   • Car transportation and registration
   • If you want to take your car to your new work location, there are going to be transportation and registration charges. Under such circumstances, your employer will reimburse these expenses, and they are liable for exemption.    
9. Leave travel allowance (LTA)
   The leave travel allowance that you receive as a part of your salary is also subject to tax exemption. You can claim them two times in a block within a period of 4 years. If you do not use these exemptions in a certain block, you can carry it forward to the next one. 
10. Children allowances
    In case you receive an allowance for covering your children's educational expenses, it is exempted from taxation. The maximum tax benefit you can gain is ₹100/month or ₹1,200/annum for a maximum of 2 children. 

Apart from all these, you can opt for a number of allowable deductions under the Income Tax Act. They are as follows:

1. Section 80C
   To gain additional savings on your taxable income, you can invest in tax saving avenues available under Section 80C and claim a deduction of ₹1.5 lakh. Some of them are:
2. • Life insurance premiums
   • Employee Provident Fund (EPF)
   • Annuity/ Pension Schemes
   • NSC (National Saving  Certificate)
   • Equity Linked Savings Scheme (ELSS)
   • Principal amount of home loan payments
   • Contributions to PPF Account
   • Investments in Sukanya Samriddhi Account
   • Tax Saving Fixed Deposits
   • NSC (National Saving  Certificate)
   • Children’s tuition fees
3. Section 80D
   Under Section 80D of the Income Tax Act, you can claim tax benefits on medical expenses as well as premiums for medical insurance on behalf of yourself, dependant parents and family. Take a look at them below:
4. • ₹25,000 for medical insurance premiums that cover you and your family
   • ₹50,000 for medical insurance premiums covering senior citizen parents
   • Health check-up expenses of up to ₹5,000 
   • ₹50,000 worth of medical expenditure for senior citizens (individuals aged 60 or more) or for senior citizen parents (provided they do not have a mediclaim policy). 
5. Section 24
   As per Section 24 of the Income Tax Act, you can claim a tax deduction of up to ₹2 lakh for interest paid on a home loan in case you have a self-occupied property.  
6. Section 80E
   When pursuing higher studies in India or abroad, opting for an education loan is crucial. In this regard, you can claim tax benefits for the interest part of the education loan. However, there are certain conditions. The loan must be taken from a bank or financial institution, and it should be for funding higher education for yourself, your spouse or childrens’.    

Income tax calculation with example

Let’s take the help of an example to understand how income tax is calculated on your salary. 

Suppose Mr Singh has a basic salary of ₹1,00,000/month, HRA of ₹8,000, Special Allowance of ₹6,000 and LTA of ₹15,000/annum. 

His taxable income will be as follows:

Therefore, Mr Singh’s taxable income is ₹13,83,000 and falls under the Above ₹ 10,00,000 tax slab. His total taxable income as per the old as well as the new regime would be as follows:

How to File Income Tax Returns?

You can file income tax returns via both online and offline methods. 

To file income taxes online, follow the steps given below:

Step 1: Visit the official income tax filing website. 

Step 2: Enter your user ID (PAN), captcha and click on ‘Login’. 

Step 3: Press on the ‘e-File’ menu and select the 'Income Tax Return' link. 

Step 4: On the Income Tax Return Page, select the ‘Assessment Year’ and ‘ITR Form No’.  

Step 5: Set the 'Filing Type' as 'Original/Revised Return' and 'Submission Mode' as 'Prepare and Submit Online'. 

Step 6: Press ‘Continue’, and once you are redirected, fill in all the necessary fields. 

Step 7: In the 'Taxes Paid and Verification' tab, select the appropriate verification option. 

Step 8: Select the ‘Preview and Submit’ button to verify all the data and press ‘Submit’.

In case you want to follow the offline method, you can do the following:

Step 1: Visit the official e-filing portal and navigate to ‘Downloads’. 

Step 2: Click on ‘IT Return Preparation Software’ and then download, extract and open the utility. 

Step 3: Fill in all the necessary details, validate all tabs and calculate your tax. 

Step 4: Generate and fill the XML file and login to the e-filing portal. 

Step 5: Go to the ‘e-File’ menu and press on ‘Income Tax Return’ link. 

Step 6: On the IT Return Page, choose the appropriate 'Assessment Year' and 'ITR form Number'. 

Step 7: Choose 'Filing Type' as 'Original/Revised Return' and 'Submission Mode' as 'Upload XML'. 

Step 8: Select an IT Return verification option and press ‘Continue’. 

Step 9: Attach your XML file and submit your ITR. 

Role of PAN & TAN in IT returns

The Permanent Account Number (PAN) and Tax Deduction Account Number (TAN) play an important role when it comes to filing income tax returns. The PAN is a single number that contains all the tax-related information of an individual or company, whereas the TAN belongs to every individual who collects Tax Collected at Source (TCS) and Tax Deducted at Source (TDS). 

Implications of evading income tax

There are many individuals who utilise dubious methods to avoid income tax payment. In India, some of the penalties for evading taxes are as follows:

• For not filing tax returns, there is a penalty of ₹5,000.
• In case someone conceals their income, there is a penalty of 100% to 300% of the evaded amount.
• If an individual does not get his/her accounts audited, there can be a penalty of 0.5% of their sales turnover or ₹1.5 lakhs, whichever is greater.
• Individuals who do not have a TAN but collect TDS and TCS will face a penalty of ₹10,000. If they do not collect tax at source, the penalty will be the same as the non-deducted amount. For not filing TDS returns, the fine can range from ₹10,000 to ₹1,00,000.
• In case an individual does not pay tax as per their self-assessment, there may be a fine equal to the pending tax amount. 

It is the responsibility of every Indian citizen to pay their income tax on time. Now that you know how to file returns and calculate your taxable income, you can fulfil your tax duties without any hassles. However, before filing your taxes, it is always beneficial to take the help of a tax professional.