What is the Income Tax?
An income tax is a tax that governments impose on income generated by businesses and individuals within their jurisdiction. By law, taxpayers must file an income tax return annually to determine their tax obligations. Income taxes are a source of revenue for the government. They are used to fund public services, pay government obligations, and provide goods for citizens. Certain investments, like housing authority bonds, tend to be exempt from income taxes.
How Income Tax Works?
Most countries employ a progressive income tax system in which higher-income earners pay a higher tax rate compared to their lower-income counterparts.
In India, the Income Tax Department collects taxes and enforces tax law. The IT Department employs a complex set of rules and regulations regarding reportable and taxable income, deductions, credits, etc. The department collects taxes on all forms of income, such as wages, salaries, commissions, investments, and business earnings.
The personal income tax the government collects can help to pay for programs and services such as infrastructure, national security, schools, and roads.
What is the Income Tax Slab?
In India, the income tax is charged on the basis of income. This tax applies to the range of income, which is called the Income Tax Slab. The slabs of income tax keep changing from year to year. The Finance Minister announces the slab rates of Income Tax in the Union Budget each year. The Income Tax Slabs can be categorized into various slabs of Nil, 5%, 10%, 20%, and 30%
Surcharge (EC), Krishi Kalyan Cess, Swachh Bharat Cess, secondary and Health & Education Cess are also charged over and above the tax.
The income tax slab rate can be mainly bifurcated as under:
- By Gender
- Male; and
- By Age
- Resident; and
- Non-resident in India.
- For Hindu Undivided Family (HUF)/ Association Of Person (AOP)/ Body Of Individual (BOI)/ Artificial Judicial Person (AJP)
- On Non-individuals
- Partnership Firms or LLPs;
- Domestic Company;
- Foreign Company;
- Co-operative Societies; and
- Local Authorities.
Income Tax Slabs 2020 & Tax Rates in India for FY 2020-21 – Budget 2020 Revised IT Slabs (AY 2021-22).
Income tax is levied on individual taxpayers on the basis of a slab system where different tax rates have been prescribed for different slabs and such tax rates keep increasing with an increase in the income slab in India.
Existing tax regime:
There are three categories of individual taxpayers:
- Individuals (below the age of 60 years), which includes residents as well as non-residents
- Resident senior citizens (60 years and above but below the age of 80 years)
- Resident super senior citizens (above 80 years of age)
There are different slabs for each category of taxpayers.
Income Tax Slabs & Rates 2020-2021.
The Finance Minister introduced a new tax regime in Union Budget, 2020 wherein there is an option for individuals and HUF (Hindu Undivided Family) to pay taxes at lower rates without claiming deductions under various sections.
Lower tax rates
The Budget has proposed a New Tax Regime in addition to the existing, i.e. Old Tax Regime. However, the New Tax Regime is optional. To put it simply, the assessee can choose between the New Tax Regime and the Old Tax Regime depending on what is best suitable from a tax planning point of view.
Income-tax rates under the new tax regime v/s the old tax regime.
|Income slabs (Rs)||Tax Rate(Old Regime)||Tax Rate(New Regime – devoid of exemptions & deductions)|
|Up to 2.5 lakh||Nil||Nil|
|Above 15 lakh||30%||30%|
|Note: The above rates are subject to surcharge and cess, as applicable.|
New vs. Old – Which is better?
The New Tax Regime has proposed lower income-tax rates, for income segments up to Rs 15 lakh. But you need to remember that the proposed lower tax rates will be applicable only if you are willing to give up exemptions and deductions available under various provisions of the Income-tax Act, 1961.
This means that when you choose the New Tax Regime, you will have to forgo some exemptions [such as Leave Travel Allowance (LTA), House Rent Allowance (HRA), etc] and deductions available under chapter VI A of the Act that grant deductions under Section 80 [such as 80C, 80CCC, 80CCD, 80D, 80DD, 80E, 80EE, 80G, 80GG, 80GGA, 80GGC, etc].
Only the deduction under Section 80CCD(2) [i.e., employer’s contribution on account of an employee in a notified pension scheme] and Section 80JJAA [i.e. for new employment] can be claimed.
Even the Standard Deduction under Section 16 [which is currently Rs 50,000] available to salaried individuals and the deduction on home loan interest, under Section 24(b) will be disallowed. Around 70 exemptions and deductions have been removed in the New Tax Regime.
Old regime better option for high-income earners.
If your gross income is on the higher side (For Eg. Rs 10 lakh or above) and you are utilizing deductions under Section 80C, 80D, and 24(b) of the Income Tax Act, 1961, then you are better off under the older regime; it works in your favour from a tax planning standpoint. While for individuals in the middle-income group, earning a gross income of (say Rs 5 lakh); the new regime may prove advantageous.
That being said, if you are looking to fulfil your financial obligations, namely – wealth creation through investments in tax-saving instruments; paying premiums to address insurance needs (life and health); paying children’s tuition fees; paying Equated Monthly Instalments (EMIs) of an education loan; buying a house with a home loan; and so on, the older regime still works in the interest of your financial wellbeing.
Apart from changes in personal tax, the Budget also proposed some other changes that could impact you as an investor. Let us see what these are:
- Currently, companies have to pay Dividend Distribution Tax (DDT) of 15% plus surcharge and cess on dividend paid to investors. This means the dividend received by investors is after the deduction of taxes. In addition to this, if dividend income exceeds Rs 10 lakh in a year, investors have to pay an additional 10% tax. This leads to double taxation for investors. The Budget has proposed the abolishing of DDT and taxing the dividend payable to investors as per their applicable income-tax slab rates. This would benefit individual taxpayers, particularly those in the lower tax slabs.
- The deduction of up to Rs 1.50 lakh on interest paid on ‘affordable housing' loan — which was allowed for housing loans sanctioned on or before March 31, 2020 — is proposed to be extended for one more year, i.e. till March 31, 2021, for ‘first time home buyers’. This is a welcome step for new home buyers.
- As part of tax reforms, it is proposed to further ease the process of allotment of PAN (Permanent Account Number), by soon launching a system under which PAN shall be instantly allotted online based on Aadhaar without filling up a detailed application form.
- Also, as a part of tax reforms, it is proposed to amend the Income Tax Act to enable ‘faceless Appeal’ on the lines of ‘Faceless Assessment’.
- A ‘Vivad se Vishwas’ Scheme has been introduced to reduce the litigations in direct taxes. If your tax amount is disputed, you would be required to pay only the amount of the disputed taxes and will get a complete waiver of interest and penalty provided you pay by March 31, 2020. If paid under this Scheme after March 31, 2020, some additional amount will have to be paid. ‘Vivad se Vishwas' Scheme will remain open till June 30, 2020.
Points to remember while opting for the new tax regime:
- Option to be exercised on or before the due date of filing return of income for AY 2021-22
- In case a taxpayer has a business income and exercised the option, he/she can withdraw from the option only once. A business taxpayer withdrawing from the optional tax regime has to follow the regular income tax slabs.
From lower tax rates to reforms in tax assessment, the Union Budget 2020 proposed the above amendments to offer relief to all individual taxpayers. However, it is important to be aware of the conditions as they affect the income of various categories differently. In order to save taxes, make sure that you know your Tax-Slabs and review all investment plans accordingly.