What is Income Tax? — Meaning & its Types

 

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Income tax is the taxes paid by individuals, corporations, and businesses on the income they make in a financial year. The rates and slabs for the taxes payable are as per the government guidelines issued from time to time. Before proceeding to file income tax returns, knowing what is income tax, its types, and ways to reduce the tax liability are aspects to be pondered about. 

This detailed guide on income tax can help you understand the income tax meaning, its history and its significance in the Indian context.

What is Income Tax?

Income tax is significant in a country's financial landscape. Now, what is income tax in India? Income tax is the tax paid on the income earned in a financial year by individuals or businesses. The Income Tax Act 1961 governs the income tax system in India. 

Every individual and business is expected to file an income tax return within the stipulated period wherein they report their income and claim refunds wherever applicable. Tax filing has been made simple with the online tax filing provision. You can visit the official website of the Income Tax Department or any verified third-party websites and file the return from the comfort of your home. 

The set of rules and regulations stipulated by the Government according to which the Income Tax Department levies, collects, and recovers taxes. The Income Tax Act 1961, which came into force on 1st April 1962, continues to date. 

There are 298 Sections, 23 chapters, and several provisions that cover the various aspects of taxation in India and define what is income tax in India.

History of Income Tax

After understanding what is income tax in India, it is also important to be aware of the history of income tax, i.e., when and by whom was it first introduced and more. 

Initially, levying taxes was one way of making up for the losses incurred by the Government due to the Military Mutiny of 1857. Sir James Wilson introduced taxes in 1860. Several modifications have been made to the concept ever since. 

In 1886, a special act, i.e., the Income Tax Act, was passed. This act remained for several years, with amendments from time to time. A fresh Income Tax Act was passed in 1981, which was then replaced by another act in 1922. This continued until a new act was passed yet again in the financial year 1960-61. 

The Income Tax Act 1961 was implemented from the 1st of April 1962. This act applied to the entire country, including Sikkim, Jammu, and Kashmir. However, the Union Budget has made several amendments to the Income Tax Act 1961, though it remains relevant to date. 

Who is Eligible to Pay Income Tax in India? 

Besides knowing the income tax meaning, it is important to also understand who can pay income tax in India.

Income-tax is to be paid by every person. The term ‘person’ as defined under the Income-tax Act includes natural as well as artificial person.

The following are “eligible person” to pay income tax in India:

• Individuals
• Firms
• Companies
• Artificial Judicial Person
• Association of Persons
• Body of Individuals
• Hindu Undivided Family (HUF)
• Companies

Determining Residential Status

Now that we know what is income tax, let us understand how income tax works. The scope of taxation as per the rules and regulations of the Income Tax Law differs from one individual to another. However, here are some broad guidelines:

For the purpose of Income Tax law an individual has to qualify himself upon the quantum of stay in India & decide whether he is a Resident or Non Resident.

Upon identification of residential status scope of taxation differs:

• The global income from wherever received is taxable if the individual is a Resident and Ordinarily Resident in India (ROR).
• In the case of Resident But Not Ordinarily Resident in India (RNOR), the earned income/accrued income or deemed to arise/accrue in India and income earned out of businesses operating from India and professions set up in India are all taxable.
• Income received/deemed to be received in India is also taxable. 
• Non-resident Indians have to pay tax only on the income earned/accrued or deemed to arise/accrue to be received in India.

The Types of Income Tax

For an in-depth perspective of what is income tax, one must also be aware of the types of income tax. Income tax is categorized into three types, and the tax payable varies based on which category the taxpayer falls under. 

A. Individual Income Tax

Individual income tax meaning implies that it is the tax levied on the annual income of individuals in a financial year. It is based on one’s resident status and their income source. The income tax rates assigned depend on the income bracket or the income earned by the taxpayer.

A new tax regime was introduced in 2021, which will be the default taxation mode if the taxpayers do not exercise their option between the old and the new tax regime. 

B. Business Income Tax

What is income tax in India for businesses? The tax levied on the annual income from businesses is the business income tax. The calculation of taxable income for businesses is categorised into the normal provision and the presumptive taxation. Under normal provisions, the taxable income is arrived at by deducting the expenses from total sales from the income from the sale of goods.

In presumptive taxation, the taxable income will be a percentage of the sales. This is applicable only for businesses where the turnover is over Rs. 2.00 crores as per the income tax rules.

C. State and Local Income Tax

The taxes imposed by the State Government, like taxes on agricultural income, state excise duty, stamp duty, land revenue tax, professional tax, etc., are State government taxes. Local bodies are permitted to collect taxes like property taxes and taxes for using various services like water, drainage supply, etc.

What are the types of Income to be charged under Income Tax Act?

Income to be charged for tax are basically divided under 5 Heads of Income by Income Tax Department namely:

1. Income from Salary

2. Income from House Property

3. Profits or Gains from Business or Profession

4. Income from capital Gains

5. Income from Other Sources

How to Calculate Income Tax?

The income tax calculation can be done manually or by using an online income tax calculator. The tax liability is decided based on the income slabs that apply to the individual. The steps to calculate income tax are:

• Calculate the gross annual income.
• Deduct the major exemptions provided on your salary like HRA, LTA, etc.
• Apply the standard deduction and the deductions eligible under Section 80.
• By subtracting all the eligible deductions and exemptions, you will arrive at the net taxable income.
• The tax will be payable on the net taxable income as per the applicable slab.

What is Income Tax Return?

Income Tax Return is a form to be submitted to the Income Tax Department of India. The tax return has all the information about an individual or business regarding the income and the tax payable on the income generated during a particular financial year, as well as the penalties to be paid as per Section 234F, if any. 

The information in the income tax return should pertain to the income from the 1st of April of a financial year till the 31st March of the next financial year. For instance, the income tax returns filed for FY 2023-24 should have information from the 1st of April 2023 till the 31st of March 2024. 

What is E-filing of Income Tax?

Submitting your income tax returns electronically is e-filing of income tax. This can be done through the official website of the Income Tax Department or verified third-party websites. All taxpayers can opt for e-filing of income tax. A PAN is mandatory for filing of tax returns. 

About Income Tax Department India

The Income Tax Department India or the IT Department is the government agency that undertakes the responsibility of collecting direct taxes for the government of India. It operates under the Department of Revenue of the Ministry of Finance. 

The Income Tax Department enforces various laws governing direct taxes, and among them, the Income Tax Act 1961 is the most important. Central Board for Direct Taxes is the apex body heading the Income Tax Department.

Income Tax Payment Details?

The taxpayer can pay direct taxes through the e-filing facility available on the official website of the Income Tax Department. For e-filing, the taxpayer should have a net banking account with an authorised bank. Besides this, the details required for income tax payment are PAN (Permanent Account Number) or TAN (Tax Deduction and Collection Number) for validation.

Income Tax Forms List

Along with the knowledge of what is income tax, you should also be aware of the various income tax forms applicable for different income types and the nature of employment. 

1. ITR 1

For resident individuals with income up to Rs. 50.00 lakhs from salary, one house property and other income sources like interest and agricultural income.

2. ITR 2

For individuals and HUFs with income above Rs. 50.00 lakhs from capital gains, income from abroad, assets abroad, directorship in a company, unlisted equity shares, crypto income (if reported as capital gains) and more than one house property.

3. ITR 3

This return is for individuals and HUFs who have income from profits or gains from business/profession and who are not eligible to file forms ITR 1, ITR 2, or ITR 4

4. ITR 4

For resident individuals and HUFs and Firms (other than LLP) having a total income up to Rs. 50.00 lakhs with income from profession/business computed under Sections 44AD, 44ADA, or 44AE, Income from Salary/Pension, one House Property, Other sources income such as bank interest, FD interest etc and agricultural income up to Rs. 5000/-.

5. ITR 5

For persons other than individuals, HUF, companies and the ones filing returns with ITR 7 form.

6. ITR 6

For Companies, not claiming tax exemption under Section 11.

7. ITR 7

Individuals and companies filing returns under Section 139(4A), Section 139(4B), Section 139(4C), Section 139 (4D), Section 139(4E), and Section 149(4F) should use ITR 7.

8. ITR V

This is the acknowledgement form for tax return verification. It has to be e-verified or signed and sent to the IT Department, Centralised Processing Centre (CPC), Bangalore.

Income Tax Rates

The Income Tax Rates for the FY 2023-24 and AY 2024-25 for the old as well as the new tax regime are given below:

For the Old Tax Regime

Slabs in Rs.	Individuals below 60 years	Senior Citizens between 60 and 80 years	Super Senior Citizens 80 years and above
Up to 2,50,000	Nil	Nil	Nil
2,50,001 to 3,00,000	5%	Nil	Nil
3,00,001 to 5,00,000	5%	5%	Nil
5,00,001 to 10,00,000	20%	20%	20%
Above 10,00,000	30%	30%	30%

For the New Tax Regime

Slabs in Rs.	Income Tax Rates
Up to 3,00,000	Nil
3,00,000 to 6,00,000	5%
6,00,00 to 9,00,000	10%
9,00,000 to 12,00,000	15%
12,00,000 to 15,00,000	20%
Above 15,00,000	30%

Tax Rebate u/s 87A

Under the old tax regime, a rebate u s 87A is provided if your taxable income does not exceed Rs.5.00 lacs in a financial year. You will be eligible for a tax rebate of Rs. 12500/- or the income tax liability, whichever is lower.

Under the new tax regime, the threshold limit to claim income tax rebate has been enhanced to Rs.7.00 lacs for the FY 2023-24 (AY 2024-25). A resident individual opting to file tax returns under the new tax regime can claim a rebate of Rs. 25000/-

Note this it is exclusively available to Resident individuals only.

Investment Options for Tax Saving

Knowing the income tax meaning, without the awareness of investment options for tax saving will only increase your tax burden. An array of tax-saving investment options are available that will not only reduce your tax burden but will also help in creating a corpus for your financial goals.

1. Fixed Deposits

Fixed deposits are low-risk investments for tenure of 5 years, which provide tax exemption under Section 80C of the Income Tax Act 1961 up to Rs. 1.50 lakhs.

2. Public Provident Fund (PPF)

PPF is a long-term retirement plan with returns after maturity, i.e., 15 years. The investment under PPF is eligible for tax benefits up to Rs.1.50 lakhs under Section 80C.

3. Unit-Linked Insurance Plans (ULIPs)

Unit-linked insurance plan is an insurance product that offers the dual benefit of savings and life cover. The premiums paid up to Rs.1.50 lakhs in a financial year are eligible for tax benefits under Section 80C. The maturity proceeds are eligible for tax benefits under Section 10(10D), subject to conditions.

4. National Savings Certificate

The National Savings Certificate is a government-backed savings scheme with a tax deduction of up to Rs. 1.50 lakhs in a financial year under Section 80C of the Income Tax Act 1961.

5. Senior Citizen Savings Scheme

The Senior Citizen Savings Scheme is for senior citizens above 60 years of age to generate regular income for post-retirement expenses. The investment in the scheme is eligible for tax deduction under Section 80C.

6. Life Insurance

Life insurance is an investment with guaranteed returns. It provides financial security for you and your family. The premiums paid are eligible for tax deduction under Section 80C.

7. Pension Plans

Pension plans are annuity plans for senior citizens and retirees to generate regular income by investing their retirement corpus. The investment qualifies for tax benefit under Section 80C.

8. Health Insurance or Mediclaim

Health insurance or Mediclaim covers the expenses incurred for treatment in case of any illness or accident. The cover includes hospitalization or any other health expenses. The premiums paid qualify for tax benefits under Section 80D.

9. New Pension Scheme

The NPS scheme is a government-backed scheme for employees of State and Central Government Departments, Private Sector, and Unorganized Sectors. The contribution made towards the scheme is eligible for tax benefits under Section 80CCD (1), 80CCD (1B), and Section 80CCD (2), subject to conditions.

10. Tax Saving Mutual Funds

Tax saving mutual funds or equity-linked mutual funds that invest in equity-related instruments. The investments under the plan qualify for tax benefits under Section 80C of the Income Tax Act 1961.

Income Tax Deduction List

Taxpayers are eligible for tax benefits under various Sections of the Income Tax Act 1961. The Income Tax Deduction list is as follows:

A. Section 80C

Deductions under Section 80C can be claimed by individuals and HUFs up to Rs. 1.50 lakhs.

B. Section 80G

Deductions under Section 80G for donations under certain relief funds and charities can be claimed besides the benefits under 80C to reduce the tax liability further.

C. Section 80CCC

Individuals are eligible for deduction under Section 80CCC.

D. Section 80CCD

Individuals are eligible for tax benefits under Section 80CCD. The overall deduction, including Section 80C, 80CCC and 80CCD (1), should not exceed Rs. 1.50 lakhs. Investments made by individuals under Atal Pension and NPS qualify for additional deduction up to Rs. 50000/- under Section 80CCD(IB). 

The employer's contribution under NPS is allowed as deduction while calculating employees’s total income provided contribution does not exceed 14% of basic plus DA in the case of Government Departments or 10% of the basic + DA in the case of any other employer under 80CCD(2).

1. Section 80D

Premiums paid by individuals or HUFs towards medical insurance, preventive health checkups and medical expenses qualify for maximum deduction under Section 80D up to Rs. 1.00 lakh in case assessees as well as his parents are senior citizens.

2. Section 80DDB

Medical expenses incurred for specific diseases by individuals and HUFs qualify for tax benefits under Section 80DDB up to Rs. 1.00 lakh for senior citizens and Rs. 40000/- for others.

3. Section 80E

Interest paid on education loans by individuals qualifies for deduction under Section 80E for eight assessment years.

4. Section 80EE

Interest paid on housing loans by individuals qualifies for tax deduction up to Rs. 50000/- under Section 80EE, subject to conditions.

5. 80RRB

The royalty and patents paid to individuals who are Indian Citizens or Foreign Citizens residing in India qualify for tax deduction under Section RRB up to the lower of Rs. 3.00 lakhs or the actual income received.

6. Section 80TTA

Interest earned on savings accounts by individuals and HUFs, except senior citizens, qualify for tax deductions up to Rs. 10000/-.

7. Section 80U

Individuals with normal disability are eligible for tax deductions up to Rs.75000/- and those with a severe disability up to Rs. 1.25 lakhs under Section 80U.

8. Section 24

Homeowners are eligible for tax deductions up to Rs. 2.00 lakhs/ 30,000 as the case may be under Section 24, if they are self-occupied.

Income Tax Benefit on Life Insurance

The income tax benefits on life insurance are

• Deduction up to Rs. 1.50 lakhs under Section 80C for premium paid towards life insurance policy
• For premiums paid towards health insurance under Section 80D
• Benefit on maturity/death benefit under Section 10(10D)

Conclusion

Understanding what is income tax and filing tax returns with accurate calculation of tax liability after accounting for deductions and exemptions before the stipulated period is mandatory. Seek expert advice for properly filing tax returns and availing of maximum benefits.

FAQs

1. What is income tax?

The tax the Government charges on the annual income in a financial year.

2. What percentage of income is taxed?

The percentage of income taxed depends on the slab rates applicable.

3. Why does the Government collect income tax?

The government collects income tax to carry out various welfare programs.

4. Why is income tax important?

Income Tax is vital to generate funds for welfare programmes that the Government undertakes from time to time.

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

It is mandatory to file income tax returns when the income exceeds the basic exemption limit determined by the Government.

6. Who is eligible to file income tax return?

Every person with a taxable income is liable to file income tax returns.

Related Articles:

• How to calculate income tax in India
• Income Tax Slabs FY 2023-24
• How to file ITR online?

ARN – ED/01/24/8436