Income Tax for Beginners Basic Concepts

In order to truly develop a culture of tax payments in India, we as citizens must actively seek out knowledge regarding income taxes. Fortunately, the income tax rates in India have drastically changed for the better since their peak of over 90% in the early seventies – presently, those earning up to Rs 2.5lks annually are exempt from paying taxes. Nevertheless, the country still faces a vast apathy from taxpayers in terms of filing returns and incurring liabilities.

As IT systems get increasingly complex annually, the odds of being liable for punishments or warnings due to inaccurate filing, avoidance or concealment of data while filing ITRs are rising dramatically. Likewise, the Income Tax (IT) department is capable of retrieving all your bank account records, and inspecting capital market activity via exchanges since they are connected to your PAN. 

Furthermore, with AADHAR slowly becoming interconnected, it won’t be long before the IT department can send you a combined activity statement (income and expenditure), similar to what NSDL/CDSL produces for holdings registered across Demat accounts.

This client was sent a notification by the IT Department in 2015 regarding their omission to declare their trading activity on commodity exchanges during FY 2012/13. The notice includes a list of codes which can be viewed using this link.

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Investing and trading can be tricky for even Chartered Accountants, as many don’t comprehend the fundamentals of taxation. If you invest in stocks or mutual funds, filing returns is relatively straightforward. However, it may become complicated if you engage in intraday trading of stocks or financial derivatives such as futures and options.

What is income tax?

The Government of India imposes a tax on personal earnings, which is referred to as Income Tax. The legal framework for this levy is given in the Income-tax Act, 1961. In simpler terms, Income Tax is simply a portion of your income that you pay to the Indian Government.

Why should I pay tax?

India lacks the social security and free medical services of some developed countries, but this is due to the need for funds to be collected as taxes in order to meet various responsibilities. These responsibilities include government hospitals, education expenses, national defence needs and infrastructure development.

Who is supposed to pay income tax? 

Any individual, partnership or corporation that earns an income above the minimum slab defined by the government is liable to pay income-tax. This obligation applies to all entities, both natural and artificial (corporate).

Just 5 percent of the 1.3 billion-strong population file income tax returns and only 1.5 crore Indians (<1%) pay any taxes. This figure is drastically lower compared to developed economies like the U.S.A, where almost half of their population are taxpayers. 

The primary factor behind such a dismal number is due to many people simply not making enough money, however it cannot be denied that there also exists a lack of an established tax culture in India too.

Taxes must be paid annually, based on income earned during the financial year. In India, this period lasts from April 1st to March 31st and is defined either as a Financial Year (FY) or an Assessment Year (AY).

FY stands for financial year and is used to denote which year income was earned when filing taxes.

AY is used to denote the year in which you are supposed to file your taxes.

Income tax slabs in India

Every year, all individuals in India are required to pay taxes based on their total income, according to the specific tax slabs applicable to them. If you are employed, your employer takes care of tax deductions on your salary and provides you with a ‘Form 16’ as proof of the taxes paid. 

However, your employer may not be aware of all your additional sources of income, such as interest from banks, capital gains, rental income, and other earnings. It is your responsibility to include these additional incomes along with your Form 16, calculate any additional tax liability, and ensure timely filing of your income tax returns before the designated deadline.

The income tax slabs for individuals in India for the financial year 2021-2022 (assessment year 2022-2023) are as follows:

For individuals below 60 years of age:

• Up to INR 2,50,000: No income tax
• Between INR 2,50,001 and INR 5,00,000: 5% tax
• Between INR 5,00,001 and INR 10,00,000: 20% tax
• Above INR 10,00,000: 30% tax

For senior citizens (60 years to below 80 years):

• Up to INR 3,00,000: No income tax
• Between INR 3,00,001 and INR 5,00,000: 5% tax
• Between INR 5,00,001 and INR 10,00,000: 20% tax
• Above INR 10,00,000: 30% tax

For super senior citizens (80 years and above):

• Up to INR 5,00,000: No income tax
• Between INR 5,00,001 and INR 10,00,000: 20% tax
• Above INR 10,00,000: 30% tax

Additionally, a Health and Education Cess of 4% is applicable on the total tax amount.

It’s important to note that these tax slabs and rates may be subject to change. It’s advisable to refer to the latest income tax regulations and guidelines issued by the Indian government or consult with a tax professional for the most up-to-date information and accurate calculations.