Income Tax in India Last Updated : 21 Jul 2019

Income tax is the tax that you give from your income or profit directly to the Government of India. This particular amount is collected by the Indian Government through the direct tax route to finance infrastructural development and to pay the salaries of central and state government employees. The provisions and deductions associated with income tax are administered by the Income Tax Act, 1961.
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Income tax is only of the direct means of taxation like capital gains tax, securities transaction tax, etc., and there are many other indirect taxes that we pay like sales tax, VAT, Octroi, service tax, etc.

The income tax you pay every month or upon every contractual earning is what forms a large part of the revenue for the Government of India. These revenue functions are managed by the Ministry of Finance, which has delegated the responsibility to managing direct taxes (like income tax, wealth tax, etc.) to the Central Board of Direct Taxes (CBDT).

Who should pay Income Tax in India

The amount of tax that must be paid depends on the individual’s age and the income they make. The entities listed below are required to pay tax and file their income tax returns.

  • Artificial Judicial Persons
  • Corporate firms
  • Association of Persons (AOPs)
  • Hindu Undivided Families (HUFs)
  • Companies
  • Local Authorities
  • Body of Individuals (BOIs)

How To file ITR (Income Tax Return) online – eFile ITR?

With the due date for ITR filing just round the corner, here is all you need to know about how to file ITR online. Before you file your taxes, you will need your Form 16, provided by your employer, and any proof of investment. Using that you can compute the tax payable and refunds, if any, for the year. You can download the IT preparation software from the IT department’s website. Once you have all the documents ready, you can start the filing process.

Types of Income under the Tax Slab

Every individual, whether a non-resident or a resident, who earns a certain amount of income is entitled to pay tax. The income that is generated by the individual can be from the interest that is generated from a savings account, the pension that the individual receives, or the salary that he/she makes. The income earned can be divided into the following categories:

Type of Income Nature of the Income
Income that received via a salary The income that is received by the individual from a salary or from the pension they receive come under this category.
Income that is generated from other sources Interest that is generated from a savings bank account or from a fixed deposit.
Income that is made from capital gains Income that is generated from the sale of a house property, shares, or mutual funds.
Income that is generated from House Property Income that is received because of a rental income.
Income from Profession and Business Income that is generated by self-employed individuals, individuals that run a business, and individuals who work as freelancers and contractors. Tuition teachers, lawyers, and doctors who have their own practice, chartered accountants, and life insurance agents pay income tax under this category.

Types of Income Tax Slabs for FY 2019-20

The income earned individuals will determine the income tax slabs under which they fall. The lower the income, the lower the tax liability, and those who earn less than Rs.2.5 lakh p.a. are exempt from tax.

Depending on the age of the individual, the three categories that resident individual taxpayers are divided into are mentioned below:

  • Individuals who are less than the age of 60 years old.
  • Senior citizens who are above 60 years old and below 80 years of age.
  • Super senior citizens who are above 80 years old.

Important Dates to Remember when Paying Income Tax

The important dates to remember for individuals who fall under the bracket to pay Income Tax for the year(FY 2019-20 & AY 2020-21) is mentioned in the table below:

Important Due Dates The task that must be completed
Before January 31 Individuals must submit their proof of investment
Before March 31 It is deadline before which any investments under Section 80C of the Income Tax Act, 1961 must be made
Before 31 July Due date to file income tax return
Between October and November Tax returns must be verified by this time

Income Tax Payment

Taxes are collected by the government in three primary ways:

  1. Voluntary payment by taxpayers into designated banks, like advance tax and self-assessment tax.
  2. TDS(Taxes Deducted at Source) which is deducted from your monthly salary, before you receive it.
  3. TCS (Taxes Collected at Source).

Under the Department of Revenue of the Ministry of Finance, the Income Tax Department (IT Department) is responsible for monitoring the collection of Income Tax, Expenditure Tax, and various other Financial Acts that are passed every year in the Union Budget. The Central Board of Direct Taxes (CBDT) regulates the policy and planning of taxes. CBDT is also responsible for administering the direct tax laws through the IT Department. In addition to the collection of taxes, the IT department is also involved in prevention and detection of tax avoidance.

Income Tax calculation

Income tax calculation can be done either manually or by using an online income tax calculator. The income tax rate applicable to you will depend on the tax slab under which you fall. For salaried employees, income from salary includes the basic pay plus House Rent Allowance (HRA) plus Transport Allowance plus Special Allowance plus any other allowance. However, certain components of your salary are tax exempt, like Leave Travel Allowance (LTA), reimbursement of telephone bills, etc. In case HRA is part of your salary and you reside in a rented house, you are eligible to claim exemption on the HRA. Apart from these exemptions, there is a standard deduction of up to Rs.50,000.  

Income Tax Saving Investments

Declaring investments - From HRA, Life Insurance Premiums, National Savings Certificate, Leave Travel Allowance to Fixed Deposit (minimum of 5 years), ELSS Tax Saving Mutual Funds, and more, by ensuring that you have declared all your investments, you can achieve more deductions on tax. The following options can be considering for saving on income tax:

  1. Investment options

    • Mutual funds such as Equity Linked Savings Schemes (ELSS) can be claimed for tax deduction under Section 80C. Compare to fixed deposits and PPF’s, the ELSS offers shorter lock-in period and more benefits when it comes to making money.
    • Unit Linked Insurance Plans (ULIP) are insurance schemes that are linked to the market. The investment made under ULIP qualifies for tax deductions.
  2. Insurance

    • Life insurance and health insurance - The money paid towards life insurance and health insurance policies are considering for tax deductions under Section 80C
  3. Loans

    • When we take a loan for buying a house or for renovation purpose, we are eligible for tax deductions up to Rs.1.5 lakh for a financial year.

You can also consider the following options for reducing tax amount on your income:

  • Fixed Deposits (FD) - An FD with a lock-in period of five years can help you save on tax while earning the interest on the deposited amount.
  • National Saving Certificate (NSC) - The NSC offers a safe and reliable method of investing money. You can deposit as low as Rs.100 for a 5-10 year lock-in period. The investments made under NSC are eligible for tax deductions.
  • Provident Fund (PF) - You can also choose to invest more amount towards your PF account that will help you reduce your taxable amount.

Advance Tax

The calculation of tax liability before-hand and paying the taxes to the government accordingly is called advance tax. There are certain deadlines for the advance tax payments. These deadlines are listed below:

Due Date Advance Tax Payable
On or before 15th June 15% of advance tax
On or before 15th September 45% of advance tax
On or before 15th December 75% of advance tax
On or before 15th March 100% of advance tax

Calculation of advance tax:

  • Step – 1: An individual will be required to find his/her estimated total income by finding out the sum of all the invoices which have been received along with the future payments which he/she will be receiving till the end of the financial year, i.e. 31 March.
  • Step – 2: The direct expenses related to the business and the investments under Section 80C are to be deducted from the estimated total income to derive the total taxable income.
  • Step – 3: The next step is to determine the total tax liability for the financial year.
  • Step – 4: The TDS or tax deducted at source should be deducted from the total tax liability.
  • Step – 5: In case the amount of tax liability after deducting the TDS is more than Rs.10,000, the individual will be required to pay advance taxes on the basis on or before the due dates which are mentioned above.

Income Tax deductions

Deductions for your taxable amount are available under various sections of the Income Tax Act, 1961. Deductions will have to be mentioned in the relevant ITR form at the time of e-filing income tax returns.

Section 80C:

Deductions under this section are only available to individuals and HUF. This section allows for certain investments like NSC, etc. and expenditures to be exempt from taxation up to the amount of Rs.1.5 lakh

Section 80CCC:

Deductions under this section are on payments made to LIC or any other approved insurance company under an approved pension plan. The pension policy must be up to Rs.1.5 lakh and be taken for the individual himself out of the taxable income.

Section 80CCD:

Deductions under this section are for contributions to the New Pension Scheme by the assessee and the employer. The deduction is equal to the contribution, not exceeding 10% of his salary.

The total deduction available under Section 80C , 80CCC and 80CCD is Rs.1.5 lakh. However, contributions to the Notified Pension Scheme under Section 80CCD are not considered in the Rs.1.5 lakh limit.

Section 80D:

This is the section that deals with income tax deductions on health insurance premiums paid. In the case of individuals, the insurance policy can be taken to cover himself, spouse, dependent children – for up to Rs.15,000 and parents (whether dependent or not) – for up to Rs.15,000. An additional deduction of Rs.5,000 is applicable if the insured is a senior citizen. In the case of HUF, any member can be insured, and the general deduction will be for up to Rs.15,000 and an additional deduction of Rs.5,000.

A total of Rs.2.0 lakh can be claimed as deductions whether the assessee is an individual or a HUF.

Section 80DDB:

This section is for deductions on medical expenses that arise for treatment of a disease or ailment as specified in the rules (11DD) for the assessee, a family member or any member of a HUF.

Section 80E:

This section deals with the deductions that are applicable on the interest paid on education loans for an education in India.

Section 80EE:

This section deals with tax savings applicable to first time home-owners. Applies for individuals whose first home purchased has a value less than Rs.40 lakh and the loan taken for which is Rs.25 lakh or less.

Section 80RRB:

Deductions with respect to income by way of royalties or patents can be claimed under this section. Income tax can be saved on an amount up to Rs.3.0 lakh for patents registered under the Patents Act, 1970.

Section 80TTA:

This section deals with the tax savings that are applicable on interest earned in savings bank accounts, post office or co-operative societies. Individuals and HUFs can claim a deduction on an interest income of up to Rs.10,000.

Section 80U:

This section deals with the flat deduction on income tax that applies to disabled people, when they produce their disability certificate. Up to Rs.1.0 lakh can be non-taxed, depending on the severity of the disability.

Section 24:

This section deals with the interest paid on housing loans that is exempt from taxation. An amount of up to Rs.2.0 lakh can be claimed as deductions per year, and is in addition to the deductions under Sections 80C, 80CCF and 80D. This is only for self-occupied properties. Properties that have been rented out, 30% of rent received and municipal taxes paid are eligible for tax exemption.

Income Tax Rules

The legislature enacts the Income Tax Act, 1961, to administer and govern income tax in the country, but the Income Tax Rules, 1962, were created in order to help in the application and enforcement of the law constituted in the Act. Moreover, the Income Tax Rules can only be read in conjunction with the Income Tax Act. The Income Tax Rules are within the framework of the Income Tax Act are not allowed to override its provisions.

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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