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Legopedia

It’s all about the Income Tax in India

difference between direct and indirect tax

Introduction To Income Tax in India

Income tax is a type of tax that is levied by the government on the citizens within a particular jurisdiction. The citizens are liable to pay a specific portion of their income as tax directly to the Government. The payment of income tax was also prevalent in ancient India, pieces of evidence of which can be found in books and stories from that era. Income tax is a mandatory payment to the Government so that it can undertake its functions smoothly. Income tax is a major source of revenue generation for the Government. Within India, if an individual fails to pay his/her income tax within the stipulated time, they are penalized with an additional amount.

History of Income Tax:

The history of income tax can perhaps be traced back to the origin of the state. The social contract theory talks about the formation of a contract between the people and the sovereign to come together and create a secure and peaceful country.

In India, during the Vedic ages, the existence of income tax can be found in various sources of literature like the Srimad Bhagwadgeeta, Manu Smriti and Arthasashtra. However, the origin of the modern tax system in India can be attributed to Sir James Wilson (1860), who levied tax selectively on the royalty and the rich. This was soon modified, and 1940s saw the formulation of the Indian Revenue System. Following this, the Income Tax Act of 1961 was enacted in independent India, which presently governs the rules and regulations for payment of taxes in India.

Direct Tax vs Indirect Tax:

Direct tax is generally levied on the citizens by the government directly, and it is non-transferable. This means that the liability for payment of such tax cannot be shifted from one person to another. It is to be borne by the citizens of the nation themselves. However, the concept of indirect tax is quite the contrary. It is a type of tax collected by the Government which can be transferred from one individual or entity to another. Income tax is an example of direct tax, whereas, GST (goods and services tax) can be considered as a type of indirect tax.

Income Tax Act, 1961:

The provisions related to the payment and structure of income tax within the jurisdiction of India is outlined in the Income Tax Act of 1961. The taxation structure in India for the payment of income tax is progressive. A progressive tax structure indicates that there is an increase in the percentage of payment of tax with the rise in income. There have been numerous amendments on this act from 1961. The rates and slabs for income tax in India are of revenue in nature, which Government generally determines yearly through the Annual Budget.

Concept of Income tax returns :

Every individual with income above a specific limit, concerning his/her age, is liable to pay the direct tax to the Government of India. For this reason, an individual with any source of income is required to file his/her income tax return containing his/her financial position. Even for individuals or businesses with revenue or profit falling in the tax exemption slab, filing of income tax returns is not mandatory, but recommended.

Concept of ‘Assessment year’ and ‘Previous Year’:

The calculation and filing of income tax are done yearly, which begins from 1st April and ends on 31st March the following year. Assessment year refers to the period of one year where assessment is done for the previous year. The current financial year is the assessment year, whereas the year before that forms the previous year. In the assessment year, the tax is filed on the income of the last year.

Who are liable to pay the income tax in India?

Income tax in India is levied on a wide variety of individuals and entities. Any income in India is taxable when earned by persons or corporations. The taxpayers in India include:

  • Citizens above a certain income level
  • Senior citizens above a certain income level
  • Partnership firms
  • Limited Liability Partnerships
  • Co-operative Societies
  • Hindu Undivided Families
  • Corporate firms
  • Companies

Apart from these, any other association of persons or body of individuals incurring profit are also liable to pay income tax within India.

What are the various heads of income?

Section 14 of the Income Tax Act (1961) lists five major heads which are to be included in the calculation of the total income of an individual or a business entity.

  • Salaries (of individuals),
  • Income from house property,
  • Profits and gains of business or profession,
  • Capital gains (from assets), and
  • Income from other sources.

Current Tax Slabs applicable in India:

Citizens below the age of 60 with income less than Rs. 2.5 lakh annually are exempted from paying the income tax.

Income Tax Slabs

Income tax rates

Less than Rs. 2.5 lakh annually 0%
More than Rs 2.5 lakhs but less than Rs. 5 lakh annually 5%
More than Rs 5 lakhs but less than Rs. 10 lakh annually 20%
More than Rs 10 lakh annually 30%

Citizens above the age of 60 but below the age of 80 (senior citizens) with income, less than 3 lakh annually are exempted from paying the income tax

Income Tax Slabs

Income tax rates

Less than Rs. 3 lakh annually 0%
More than Rs 3 lakhs but less than Rs. 5 lakh annually 5%
More than Rs 5 lakhs but less than Rs. 10 lakh annually 20%
More than Rs 10 lakh annually 30%

Citizens above the age of 80 (super senior citizens) with an annual income of less than Rs. 5 lakhs annually are exempted from paying the income tax.

Income Tax Slabs

Income tax rates

Less than Rs. 5 lakh annually 0%
More than Rs 5 lakhs but less than Rs. 10 lakh annually 20%
More than Rs 10 lakh annually 30%

Conclusion

The payment of income tax is a major source of collection of revenue, which has been adopted by every country in the world. The revenue earned by the Government of India via the collection of income tax is used to undertake developmental projects including infrastructural improvements and allocation of subsidies for the welfare of the citizens. It is essential that every citizen with a taxable income pays his/her share of income tax for the formation of a more egalitarian society leading to a more progressive India.

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by prerna

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