Income Tax

Income tax is a direct tax. It is the percentage of an individual’s income that is paid by him/her to the government. The tax is levied on the basis of the Income Tax Act, 1961. Hindu Undivided Families (HUFs), corporate firms, Association of Persons (AOPs), and companies are expected to pay income tax to the government for their earnings.

What is Income Tax?

The words ‘income tax’ are familiar to all, but if you are looking for an in-depth understanding of this term, you’ve come to the right place.

Income tax is a percentage of your income that is paid by you directly to the government. Income tax is imposed on your salary as well as other income sources. It is a form of direct tax. It is based on the Income Tax Act, 1961.

Income tax is the major source of revenue for the government in India. The tax that is collected is utilised for the development of infrastructure, payment of salaries to state and central government employees, funding of welfare schemes, etc. This is why it is very important that each citizen of India pays income tax to ensure the smooth functioning of the government and the country.

Who are the Income Tax Payers?

An Indian citizen below the age of 60 with an income that exceeds Rs.2.5 lakh is liable to pay income tax. For individuals above the age of 60, the taxable income is Rs.3 lakh and above. Other than individuals in these categories, the following are also eligible to pay tax in India:

  • Companies
  • Corporate firms
  • Association of Persons (AOP)
  • Body of Individuals (BOI)
  • Hindu Undivided Family (HUF)
  • Local authorities
  • All artificial juridical persons
Income Tax

Sources of Income on which Tax is Deducted

What are the sources of income on which tax is deducted?

Other than your salary from being employed, or from your business or profession, you may also be having income from other sources as well. This too should be included when calculating income tax. Your total income is the sum of all the income that is generated from the sources given below:

  • Income from salary: Money received in exchange for your services as per the agreement entered into with your employer. This will include leave encashment, allowances, etc.
  • Income from a business or profession: Income or loss that arises from conducting a business or profession.
  • Income from house property: Income from a house or a building that is owned and either rented out or self-occupied.
  • Income from capital gains: Income from the profit or loss from the sale of a capital asset.
  • Income from other sources: This income is the residual head. It includes income from gifts received, family pension, fixed deposits, savings bank accounts, etc.

Income Tax Deductions

Deductions are the amounts that reduce your tax liability by reducing your gross income. These are allowed by the Income Tax Department under Section 80 of the Income Tax Act. This includes Section 80C to Section 80U. The more deductions you have that are permissible under these sections, the lower will be the tax that you have to pay.

Taxable income = Gross income – Deductions

Income Tax
Income Tax

What are the Different Income Tax Slab Rates?

The different income tax slab rates are as follows:

Income Tax Rate FY 2019-20 (AY 2020-21) for individuals below the age of 60:

Taxable Income Tax Rate
Up to Rs.2.5 lakh Nil
Between Rs.2.5 lakh and Rs.5 lakh 5%
Between Rs.5 lakh and Rs.10 lakh 20%
Above Rs.10 lakh 30%

Income Tax Rate FY 2019-20 (AY 2020-21) for individuals between the age of 60 and 80:

Taxable Income Tax Rate
Up to Rs.3 lakh Nil
Between Rs.3 lakh and Rs.5 lakh 5%
Between Rs.5 lakh and Rs.10 lakh 20%
Above Rs.10 lakh 30%

Income Tax Rate FY 2019-20 (AY 2020-21) for individuals above 80 years of age:

Taxable Income Tax Rate
Up to Rs.5 lakh Nil
Between Rs.5 lakh and Rs.10 lakh 20%
Above Rs.10 lakh 30%

Surcharge and cess should also be paid in addition to the amount of income tax that is shown above for each of the tax slabs.

  • For total income that is between Rs.50 lakh and Rs.1 crore: Surcharge is 10% of the income tax
  • For total income that exceeds Rs.1 crore: Surcharge is 15% of the income tax
  • Health and Education Cess: 4% of income tax

How Is Income Tax Collected?

Income tax is collected in three different ways by the government:

  1. Taxes Deducted at Source (TDS)
  2. Taxes Collected (TCS)
  3. Voluntary payments into designated banks by the taxpayers

Income Tax Calculation

Income tax is always calculated on the annual income of the person. The annual financial cycle runs from April 1 to March 31 of the next calendar year. This is termed as previous year and assessment year.

  • Previous year: The year in which the income was earned. This always begins on April 1 of the current year and ends the next year on March 31.
  • Assessment year: The year in which income tax is charged.

Income Tax Payment

Income tax payments are made in the following ways:


TDS stands for tax deducted at source. The person making the payment deducts the tax from the source itself. The amount of tax to be deducted is determined by rules of the Income Tax Department. TDS is also determined by the income tax slab that you fall into. Fixed deposits also fall into the TDS category with banks deducting TDS if the deposit is earning interest. If the PAN card of the fixed deposit holder has been listed, then TDS is calculated at 10%. However, if the PAN card has not been listed, then TDS is deducted at 20%.

Advance Tax:

Advance tax is also called ‘pay-as-you-earn tax’. This is a form of income tax that is paid in advance instead of making a lump sum payment at the end of the assessment year. Advance tax is paid as per the schedule set by the Income Tax Department, in instalments.

Advance tax is to be paid by the following categories of taxpayers:

  • Businesses, freelancers, and salaried employees: In this category, advance tax is to be paid if the tax liability is Rs.10,000 or exceeds that in a financial year. Senior citizens who are older than 60 years and who do not run a business are exempt from advance tax.
  • Presumptive income for businesses: This is for taxpayers who have chosen the presumptive taxation scheme. The advance tax has to be paid on or before March 15 in a single instalment. If all taxes that are due are paid by March 31, it would be sufficient.
  • Presumptive income for professionals: This is for professionals who have chosen the presumptive income for professionals scheme which falls under Section 44ADA. These professionals would include physicians, surgeons, architects, lawyers, etc. The entire advance tax has to be paid by them before or on March 31 in a single instalment.

Self-Assessment Tax:

Self-assessment tax is a balance tax paid on the income that has been assessed. TDS and advance tax is also taken into consideration before the income tax returns are filed.

Self-assessment tax is paid for income from other sources (other than salary). This has to be paid before the filing of income tax returns. This means it has to be paid in the same assessment year. There is no fixed date or schedule for filing this tax. It can also be filed at a bank or online using the tax challan ITNS 280.

Income Tax Returns

Income tax returns are required to be filed by every individual who has any source of income, whether regular or irregular. Even if the income falls below the taxable income bracket, income tax returns should be filed.

Income Tax Return Filing:

Online filing of income tax returns (or e-filing) is mandatory for all taxpayers, with the exception of the two categories of taxpayers given below:

  • Taxpayers who are above 80 years of age
  • Taxpayers whose income is less than Rs.5 lakh and who are not claiming any refunds

For individual taxpayers, the due date for the filing of income tax returns is July 31 immediately following the relevant financial year.

ITR Forms:

There are specific ITR forms for different categories of taxpayers. It is important to file your returns in the right ITR form for your returns to be approved and accepted by the Income Tax Department. Here are the common ITR forms:

Income Tax Forms (ITR Forms) Category of taxpayer
ITR Form 1 A person who receives a salary or pension regularly as well as income from residential properties or other sources
ITR Form 2 For Hindu Undivided Families (HUFs) who have income from sources other than Profits that are gained from a profession and business
ITR Form 3 For Hindu Undivided Families with income that falls under Profits and Gains of Profession or Business
ITR Form 4S Called the SUGAM form. It is for individuals and Hindu Undivided Families who have opted for the SUGAM taxation scheme which falls under Section 44 AD/AE
ITR Form 4 For individuals and Hindu Undivided Families who are proprietors or professionals
ITR Form 5 For firms, LLPs, AOPs, BOIs, local authorities, and artificial judiciary persons
ITR Form 6 For companies that do not claim exceptions as per Section 11 of the Income Tax Act
ITR Form 7 For persons who have to file returns as per Sections 139 (4A), 139 (4D), 139 (4C), and 139 (4B)
ITR Form V This is provided for the acknowledgement of income tax returns filed

Documents Required for ITR Filing

The documents required for ITR filing may vary depending on the type of ITR form that you require. However, there are some crucial documents that are required for ITR filing. These are:

  • Bank account details
  • Proof of the tax-saving instruments that were made
  • Form 16
  • Form 16A
  • Form 26AS

Know more in a detailed list of documents required for ITR filing.

Income Tax Act

Income tax statutes in India is governed by the Income Tax Act 1961. It covers the administration, levy, recovery, and collection of income tax all over India. The Income Tax Act makes it possible for the Government of India to finance infrastructure development, welfare schemes, development of defense resources, payment of salaries to state and central government employees, as well as development of the country in general.

Income tax is collected at the end of every financial year, which is April to March. The parties who are liable to pay income tax in India are individuals, firms, companies, Hindu Undivided Families (HUFs), Association of Persons (AOP), local authorities, Body of Individuals (BOI), whose annual income falls into one of the income slabs that are prescribed in the Act.

Frequently Asked Questions

  1. What is Income Tax Return?
  2. Income tax returns are basically the documents that taxpayers file with the Income Tax Department. An ITR contains details regarding an individual’s income and the tax payable on the same.

  3. Who should file income tax returns?
  4. All individuals whose gross total income is more than Rs.2.5 lakh will have to file their income tax returns.

  5. How do I file my income tax returns?
  6. Income tax returns can be filed by one of the following ways:

    • By submitting it manually in paper form
    • By submitting it electronically using digital signature
    • By transmitting the information electronically and then furnishing the verification in Form ITR-V
    • By transmitting the information electronically under EVC (electronic verification code)
  7. What are the income tax slabs for individuals under 60 years of age?
  8. Here’s the slab rates for income-earning individuals in India:

    Income Tax Rate
    Up to Rs.2.5 lakh Nil
    Rs.2.5 lakh to Rs.5 lakh 5%
    Rs.5 lakh to Rs.10 lakh 20%
    Over Rs.10 lakh 30%

    A surcharge of 10% will be applicable in case an individual’s income is between Rs.50 lakh and Rs.1 crore, and 15% in case the income is more than Rs.1 crore. A cess of 3% is applicable as well on the tax plus surcharge.

  9. What is Cost to Company or CTC?
  10. The total amount spent by an employer to hire the services of an employee is called the Cost to Company or CTC. The CTC is inclusive of all the components present in a salary structure such as Basic Salary, Dearness Allowance (DA), House Rent Allowance (HRA), Travelling Allowances, Provident Fund contribution, Pension Fund contribution, Medical Allowances, etc.

  11. What is Basic Salary?
  12. The basic salary of an employee is one of the major components of his/her salary structure. This is the part of the salary which is entirely included in the Take Home Salary of the employee.

  13. What is Gross Salary?
  14. The Gross Salary of an employee is calculated after deducting the gratuity and the Employees’ Provident Fund (EPF) contribution from the Cost to Company (CTC) of the employee. The Gross Salary is calculated before the deduction of income tax and other deductions like overtime pay, bonus, holiday pay, etc.

  15. What is Take Home Salary or Net Salary?
  16. Net Salary is also known as the Take Home Salary and it is referred to the salary that is taken home by the employee, i.e. the salary that is credited to the employee’s account. The Net Salary is calculated after deducting the income tax and all other relevant deductions such as professional tax and provident fund contribution.

  17. What is taxable income and what is exempt income?
  18. The income on which income tax is levied is called taxable income. On the other hand, exempt incomes are the incomes which are prescribed in the Income Tax law to be exempted from tax.

News About Income Tax

  • Govt. allows IT dept and GSTN to share tax payer data

    The Income Tax Department of India has received approval from the government to share its tax payer data with the GSTN (Goods and Services Tax Network) in a bid to eliminate discrepancies in the information disclosed by business organisations. This will ensure additional scrutiny to businesses and make them share proper information with these organisations.

    If this move is implemented, direct and indirect tax authorities can easily cross check and verify the data shared by businesses. This will help them identify tax evaders and eliminate discrepancies. A formal system is expected to be implemented to facilitate data sharing between these authorities.

    If there are any mismatches in the information shared by businesses, these authorities can scrutinize their information and prevent tax evasion. This is considered to be a significant move that comes as a part of the government’s anti-evasion measures following the incorporation of the Goods and Services Tax.

    3 May 2019

  • Investors and directors in unlisted companies barred from filing ITR Sahaj and Sugam

    Directors as well as investors in unlisted companies have been barred from filing Income Tax Return (ITR) form Sahaj (ITR-1) and Sugam (ITR-4) by the Income Tax Department. This move has been taken to curb shell companies and control the spreading of black money. In the newly notified ITR forms for Assessment Year 2019-20 by the IT Department, the directors in both listed and unlisted companies will have to file their income tax returns in ITR-2 where they have to specify details such as name of the company, Directors Identification Number (DIN), equity holding, Permanent Account Number (PAN), etc. In a similar manner, even the investors in unlisted equity shares are required to provide details of such unlisted shares such as acquisition cost, date of purchase or sale, sale consideration at any time during the past year. Now, while Sahaj can only be filed by the resident individuals who have a total income of up to Rs.50 lakh from salaries, one house, other income sources, and agricultural income of up to Rs.5,000; Sugam can be filed by individuals, HUFs, and companies who have a total income of up to Rs.50 lakh under the presumptive income scheme from profession and business on condition that the assessee is not a director or an investor in an unlisted company.

    10 April 2019

  • New ITR forms for FY 2018-19 notified by CBDT

    Income tax return (ITR) forms for the last fiscal year 2018-19 has been notified by the Central Board of Direct Taxes (CBDT). The new forms include sections for more information about the tax payers. The new details that are required to be filled in the updated ITR forms include days or years of residency, unlisted shares holdings, and citing of PAN of the tenant in case of TDS filing. The new ITR-1 which is to be filed by resident individuals having total income of up to Rs.50 lakh from salary, a house property, and other sources like interest income, etc. have the option of Standard Deduction. A taxpayer can claim a maximum of Rs.40, 000 for FY 2018 -19 while filing his/her ITR. Moreover, individuals who have a house need to specify whether it is self-occupied, let-out or deemed to let-out. While previously taxpayers were only required to provide the income from other sources now they also have to give details of their income from other sources for the year. In ITR-2, individuals and HUFs who don't have income from profits and gains of business/profession need to provide details of their residency status along with specifying the number of days/years they were in India during the past year. Furthermore, individuals who are holding shares of an unlisted company are required to specify the company name, PAN, number of shares they hold/acquire, number of shares sold, etc. in the form.

    9 April 2019

  • Project Insight initiated by IT Department – new tax measures and GST structure come into effect

    The tax measures that were introduced in the interim Budget come into effect from April 1, 2019. These include tax rebates for income of up to Rs.5 lakh per year, capital gains for a second house as well as interest income, changes in notional rent, a higher standard deduction, etc. The real estate sector had a new GST structure imposed which would also come into effect from April 1, 2019. Project Insight has also been given the green light by the Income Tax Department who gave taxmen access to this tax tracker based on big data. Costing Rs.1000 crore to build, this tracker will help taxmen identify discrepancies between spending and income tax declarations by tracking activities of taxpayers on social networking sites.

    2 April 2019

  • Tax department to monitor social networking sites to track black money

    Project Insight, a Rs.1000-crore big data analytics project, will be used by the Income Tax Department to monitor social networking sites to identify people who may be evading taxes or manipulating tax figures to lessen their tax liabilities. This new project was launched on April 1, 2019. It works by tracking social media activities such as photographs and videos which gives a picture of a person’s expenditure patterns. If the declared income does not match the lifestyle that’s shown on social media, the IT officials will take note and follow up with appropriate action. Tax officials were given access to the software on March 15, 2019. A master file with key information about both corporates and individuals can be prepared with the help of Project Insight. New tax filers can also be monitored through this. The aim of the project is to encourage people to file their returns and pay taxes on time. With the integrated information management system and machine learning, the collection of documents and webpages will support the IT department to drastically cut down tax evasions in the country as it would also scrutinise tax returns based on specific criteria.

    2 April 2019

  • IT Department of India Offered Relief to 120 Startups From Angel Tax Net

    As per the announcement made by the Income Tax (IT) Department of India, 120 startups in India have been exempted from the tax levied on funds received from angel investors. The IT department recently intimated the startups regarding this new development under a scheme that was introduced in February 2019. The move was made to alleviate the tax problems faced by the new-age firms in the country, which were wrongly caught in an anti-evasion provision of the Income Tax Act, 1961.

    The intimation from the Central Board of Direct Taxes (CBDT) regarding the angel tax exemption for startups can prove to be helpful for companies which have already received tax notices for share premiums higher than their fair value. The startups will be able to submit the exemption certificates from the tax department at the stage of appeals to a higher authority within the tax department after all the assessments are done and the final tax demands have been issued. Approximately 150 companies applied for the tax benefits available for startups in the month of March 2019. However, only 120 firms have been considered eligible for this tax relief till now. According to the statements of an official, the rest of the applicant firms are expected to get the tag of a ‘startup’ once the errors in their applications are rectified.

    25 March 2019

  • What to do if you have received income tax scrutiny notice

    A scrutiny notice is sent to taxpayers by the Income Tax Department for verification of the income tax returns filed every year. This is sent with the aim of ensuring that the income is not understated nor has any excessive losses been computed or underpaid taxes. Scrutiny notices can be complete scrutiny or limited scrutiny. For complete scrutiny, the taxpayer can be asked to furnish a comprehensive list of documents which are required for a detailed audit of tax returns. For limited scrutiny notices, only details that are relevant to the query or transaction have to be submitted by the taxpayer. Cases for scrutiny are selected following a set of predetermined criteria. They are also selected using Computer Aided Scrutiny Selection (CASS). Income tax returns are selected for scrutiny within 6 months of the end of the financial year of the returns being filed. The notice has to be reviewed to ensure that it is within the prescribed timeframe and if not, the income tax office has to be informed. Details have to be verified as well such as the Permanent Account Number (PAN), name, financial year, the tax officer’s jurisdiction details. Documents have to be reviewed before being submitted. These should be submitted to the tax officer or uploaded online by the date assigned. If a personal appearance is requested, it has to be done by the taxpayer or an authorised representative failing which a penalty will be incurred.

    13 March 2019

  • Income Tax Department looking to vacate stay orders by tribunals

    The Income Tax Department (ITD) is stepping in in order to lift some of the stay orders that were obtained by some taxpayers from the appellate tribunals. A recent ruling of the Supreme Court has led the ITD to take this decision. In this ruling, the Supreme Court has ruled out that stay orders will not be extended for a period of more than 6 months whether it is a criminal case or a civil case. However, there will be certain exceptions.

    This has led the ITD to focus on the cases where the I-T Appellate Tribunal (ITAT) has extended the stay orders for more than 6 months. The decision is mainly aimed for shoring up the revenue before 31 March. If the stay is vacated within the next few weeks, the taxpayers will be coming under compulsion to pay up before the closing of the fiscal year.

    11 March 2019

  • Government willing to articulate tax rules to tax the MNCs

    The Indian government is planning to articulate rules to tax the multinational companies in India based on their volume of transactions and the number of customers that they have in India. However, the point of confusion in this matter was whether a company which is headquartered in India but collects a commission on a global deal should be domestically taxed with the commission amount or the value of the total deal. According to a ruling from a tax tribunal in the case of Fox International, which is a part of Star TV, multinational companies having a significant economic presence in India can be domestically taxed only the “attributable profits” of a multinational. The tax tribunal also stated that only the company's commissions will be taxed domestically and not their entire income. The focus of the ruling was on territorial interconnection for profit attribution and their taxation to Indian international companies with Indian business connection.

    4 March 2019

  • Startups facing Angel Tax woes might get relief

    The recent relaxation norms on Angel tax hasn't yet been applied to the startups who have already received notices from the Income Tax Department. However, startups who received notices regarding their valuation and source of funding might get relaxation. The Central Board of Direct Taxes (CBDT) plans to circulate a notification asking tax officers to accept valuation certificates submitted by the startups.

    Startups who received angel tax notices were challenged based on their valuation in funding rounds. Hike in valuations was questioned by tax officers even when the revenue was dipping down. Almost 2000 startups received notice as the revenue department considers capital in excess of the market value as 'other capital'. Such capitals are taxable at 30%. Numerous startups also received notices regarding unexplained credit.

    The CBDT plans to write to the principal commissioners advising them to seek clarification from the investors rather than startups in cases where the funding appears suspicious. For cases pertaining to valuation, the explanation provided by startups must be given weightage.

    1 March 2019

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