As soon as we hear the term, "income tax," most of us get fearful and nervous. The nervousness arises from the fact that – not many of us are aware of what it is, how it is calculated, and the myriad regulations involved. A basic understanding of income taxes will not only make us responsible taxpayers but also helps us find the best ways to save taxes legally. Here, in this guide, we help you understand what income tax is without involving any complicated jargons.

What is income tax? 

As the term implies, it’s a tax levied by the government on the income earned by an individual. It's calculated for every financial year. To calculate the income tax, the various sources of income of an individual – salary, rent, business income, dividends, interest earned, etc. are clubbed together.  

In India, all Indian citizens, NRIs and citizens of other nationalities are required to pay income tax if they earn any income in India.

Why is income tax collected? 

The government of any country has many expenses like building roads, developing infrastructure, paying the salaries and pensions of government employees, paying for various benefits offered to the citizens and many more. For all these, the elected government requires money, and income tax is one of the many ways the government raises revenues.

The money collected from individuals is used for the development of the nation and various administrative tasks. When you pay income tax to the government, you enjoy multiple facilities like smooth roads, better public transportation, clean public parks, better hospitals, schools and more. Additionally, the government also uses the funds collected via income tax to take care of its economically backward citizens by offering them various benefits.

History of Income Tax in India 

The first income tax act of modern India was introduced during the British Era by James Wilson, the first Finance Minister of British India. The Act was passed on 24th July 1860. The Act collected tax on incomes from landed property, trade and professions, dividends, annuities and securities, salaries and pensions. It also collected tax on agricultural income.  

The law was amended multiple times in the years that followed. One notable amendment was the Income Tax Act of 1922 that shifted the power of collection from provincial governments to the Central Government. The present law of income tax was introduced in 1961 and was passed as the Income Tax Act of 1961. All income tax collections in India are based on this Act. However, note that the ITA of 1961 has been amended several times since its introduction to accommodate the changing economic situations in the country.

Who should pay income tax in India? 

All Indian citizens, NRIs and resident citizens of other nationalities who earn an income in India are required to pay income taxes in the country. Here is the list of entities who are liable to pay taxes in India:

  • Individuals

  • HUFs (Hindu Undivided Families)

  • Corporate Firms

  • Companies

  • BOIs (Body of Individuals) 

  • Local Authorities 

The amount of tax payable by an individual depends on the income he/she pays. It’s calculated as per the following tax slabs. 

What are the income tax slabs for FY 2019 – 20? 

The income tax slabs set by the government are as follows:

Income Tax Slabs and Rates for Individuals Aged 60 years or less

Income Tax Slab Income Tax Rate
Up to Rs. 2,50,000 NIL
Rs. 2,50,001 to Rs. 5,00,000 5% of total income above Rs. 2,50,000
Rs. 5,00,001 to Rs. 10,00,000 Rs. 12,500 + 20% of total income above Rs. 5,00,000
Above Rs. 10,00,000 Rs. 1,12,500 + 30% of total income above Rs. 10,00,000

 

Income Tax Slabs and Rates for Senior Citizens aged between 60 years and 80 years

Income Tax Slab Income Tax Rate
Up to Rs. 3,00,000 NIL
Rs. 3,00,000 to Rs. 5,00,000 NIL
Rs. 5,00,001 to Rs. 10,00,000 5%
Above Rs. 10,00,000 20%

 

Income Tax Slabs and Rates for Senior Citizens aged over 80 years

Income Tax Slab Income Tax Rate
Up to Rs. 5,00,000 NIL
Rs. 5,00,001 to Rs. 10,00,000 20%
Above Rs. 10,00,000 30%

*Note that a surcharge of 10% is applicable for individuals whose income exceeds Rs. Fifty lakhs but is lesser than Rs. 1 crore. The surcharge for individuals whose income is beyond Rs. 1 crore is 15%.

Tax Slabs under the New Tax Regime

The Union Budget of 2020 introduced a new tax regime. Individuals can opt for the new tax slabs from FY 2020 – 21 onwards. However, note that the new tax regime is not mandatory. It's up to the discretion of the taxpayer to choose either the old tax slabs or opt for the new tax slabs.

What is the new income tax slabs for FY 2020 – 21? 

Income Tax Slab Income Tax Rate
Up to Rs. 2,50,000 NIL
Rs. 2,50,001 to Rs. 5,00,000 5% (Tax rebate of Rs. 12,500 available under Section 87A)
Rs. 5,00,001 to Rs. 7,50,000 10%
Rs. 7,50,001 to Rs. 10,00,000 15%
Rs. 10,00,001 to Rs. 12,50,000 20%
Rs. 12,50,001 to Rs. 15,00,000 25%
Above Rs. 15,00,000 30%

*Note that individuals who opt for the new tax regime will have to give up various deductions and exemptions available under the old tax regime. 

Important Dates to Remember while Paying Income Tax

There are a few important dates that you have to keep track of while paying income tax every year. They are:

Due Dates The task to be Done
Before 31st January Individuals are required to submit proof of their investment for the previous year
Before 31st March Deadline for all investments under Section 80C for a fiscal year
Before 31st July The due date for filing income tax returns
October to November Period for verification of tax returns

 

How is income tax collected in India? 

In India, the government collects taxes in three ways:

  1. Voluntary tax payment – This is where individuals pay taxes on their own. It includes advance taxes and self-assessment taxes. 

  2. TDS (Tax Deducted at Source) – This is the tax deducted by your employer from your monthly salary before you receive it.

  3. TCS (Tax Collected at Source) 

Who is responsible for collecting income taxes in India? 

The Income Tax (IT) Department that falls under the Department of Revenue, which is monitored by the Ministry of Finance is responsible for the collection of income tax in India. The CBDT (Central Board of Direct Taxes) is responsible for planning and regulation of tax collection in India. Besides tax collection, the IT department is also responsible for preventing and detecting tax avoidance and other tax-related crimes. 

How can you pay income tax? 

The IT Department makes it easy for individuals to pay their income taxes by providing an online e-Payment facility. To use this option, taxpayers must have a dedicated internet banking account and PAN (Personal Account Number). The individual will then have to visit the Income Tax Department’s website, register/login to file the returns. 

EndNote

Be a Responsible Citizen and pay your Income Tax Dues on Time

This guide serves as a starting point for all your income tax queries. For further info, check out our other detailed income tax guides. If you have any questions, type them in the comments section below, and we'll get back to you.