How Much Annual Income Is Tax Free

Introduction 

India has two broad categories of tax, mainly direct and indirect tax. Direct tax is a tax you pay on your income directly to the government. Indirect tax is a tax that somebody else collects on your behalf and pays to the government. Example, restaurants, theatres and e-commerce websites recover taxes from you on goods you purchase or a service you avail. This tax is, in turn, passed down to the government. Direct tax, in turn, covers Income tax and Corporate tax.

The Union Budget 2020 introduced new income tax slabs with reduced rates for those individuals who forego 70 different tax exemptions and deductions as part of a simplified tax regime. This new tax system is optional and will co-exist with the old one with three slabs and various exemptions and deductions available to the taxpayer. The new income tax slab has come into effect from April 1, 2020. 

What is the Income Tax?

Any individual who earns or gets an income in India is subject to income tax. This applies to residents as well as non-residents. Income could be from salary, pension or could be from a savings account that’s quietly accumulating a 4% interest. The Income Tax Department breaks down income into five heads:

1. Income from Salary - Income from salary and pension are covered under here

2. Income from Other Sources - Income from savings bank account interest, fixed deposits, winning KBC

3. Income from House Property - This covers rental income 

4. Income from Capital Gains - Income from the sale of a capital asset such as mutual funds, shares, house property

5. Income from Business and Profession - This is when you are self-employed, work as a freelancer or contractor, or you run a business. Life insurance agents, chartered accountants, doctors and lawyers who have their practice, tuition teachers

Additional Reading: What types of incomes are taxable in India?

Income Tax Slabs for Individuals 

For income tax, taxpayers in India include:

• Individuals, Hindu Undivided Family (HUF), Association of Persons (AOP) and Body of Individuals (BOI)

• Firms

• Companies

Each of these taxpayers is taxed differently under the Indian income tax laws. While firms and Indian companies have a fixed rate of tax of 30% of profits, the individual, HUF, AOP and BOI taxpayers are taxed based on the income slab they fall under. People’s incomes are grouped into blocks called tax brackets or tax slabs. And each tax slab has a different tax rate. 

 

• Income tax slabs for resident individual below 60 years of age 

 

Income tax slabs for a resident individual between 60 and 80 years of age (Senior Citizen) 

Income Tax Slabs	Tax Rate
Up to Rs. 3 lakhs	Nil
From Rs. 3,00,001 to Rs. 5,00,000	5% of the total income that is more than Rs. 3 lakhs + 4% cess
From Rs. 5,00,001 to Rs. 10,00,000	Rs. 10,000 + 20% of the total income that is more than Rs. 5 lakhs + 4% cess
From Rs. 10,00,001 and above	Rs. 1,10,000 + 30% of (Total income minus Rs. 10,00,000) + 4% cess

 

Income tax slabs for resident individual above 80 years of age (Super Senior Citizen) 

Income Tax Slabs	Tax Rate
Up to Rs. 5 lakhs	Nil
From Rs. 5,00,001 to Rs. 10,00,000	20% of the total income that is more than Rs. 5 lakhs + 4% cess
From Rs. 10,00,001 and above	Rs. 1,10,000 + 30% of (Total income minus Rs. 10,00,000) + 4% cess

 

Types of Taxable Income

Under existing rules of the Income Tax Act 1961, the following are the key types of income that are subject to taxation as per the applicable rates:

• Income from Salary

• Income from Capital Gains

• Income from House Property

• Income from Business

• Other income such as lottery and other legal gambling, dividend income, etc.

Additional Reading:  How Is Corporate Tax Calculated?

FAQs

1. When is it mandatory to file a return of income?

It is mandatory to file a return of income for a company and a firm. However, individuals, HUF, AOP, BOI are mandatorily required to file return of income if the income exceeds the basic exemption limit of Rs 2.5 lakhs. This limit is different for senior citizens and super senior citizens. 

2. Can I file a return of income even if my income is below taxable limits?

Yes, you can file return of income voluntarily even if your income is less than basic exemption limit

3. What is the maximum non-taxable income limit?

The maximum limit of non-taxable income for an individual is set at Rs 2.5 lakh. However, you can also get a rebate of Rs 2,500 under section 87A if you have a total income of less than Rs 3.5 lacs for FY 2018-19. From FY 2019-20 onwards, the rebate has been increased to Rs 12,500 for an income less than Rs 5 lakh. So, that means an individual earning less than 5 lakh will not be required to pay any income tax from FY 2019-20 onwards. If you have tax-saving investments under section 80C of up to Rs 1.5 lakh then you will not have to pay any taxes till Rs 6.5 lakhs

4. What documents are to be enclosed along with the return of income?

There is no need to enclose any documents with the return of income. However, one should retain the documents to produce before any competent authority as and when required in future.

5. Where should I invest to save income tax?

There are various instruments in which you can invest to save tax. Some of the most common options available to you include PPF, National Savings Certificate, National Pension System, ELSS schemes, etc.

End Note

Income tax is the annual direct tax on income which every individual, corporate firm, local authority or company is legally required to pay to the government if they fulfil certain criteria. This tax on income is calculated on the net taxable income of a person or entity for the applicable fiscal. In India, tax on income is applicable at incremental income tax slab rates i.e. lower income is taxed at a lower slab rate (including nil rate) and higher-income features a higher slab rate.