What is Income Tax?
Income tax is a type of tax that the government imposed on individuals and businesses on the income earned during a financial year. Taxes accumulated from individuals and businesses are considered sources of revenue for the government.
The government uses this revenue to provide healthcare, education, developing healthcare, subsidy to the farmer or agricultural sector, and several other government welfare schemes.
Taxes are of two different types; direct tax and indirect tax. Taxes charged on income earned is called direct tax. Income tax is an excellent example of direct tax.
On the other hand, an indirect tax is imposed by the government on a taxpayer for goods and services rendered.
When is Income Tax Applicable?
The income tax means amount deducted from any source of income, but there are certain exceptions because it is reduced from one month’s salary.
It is also deducted on the amount saved through retirement or savings plan for those who are getting monthly, quarterly or annual annuities.
Apart from these two sources of income, the Income Tax department breaches the income one receives additional three resources.
As per the rules of ITA, any income earned from renting owns property to a tenant will also be taxable. Apart from this, returns from mutual funds, real estate and other market-linked asset classes are also taxable.
The interest earned by a policyholder on specific instruments like recurring deposits or fixed deposits is also eligible for an income tax deduction.
However, income tax is also deductible if a person works as a business owner, employee or freelancer.
What is the meaning of Income Tax Exempt?
According to Section 80C and 80 D, income tax is not applicable for one who invests in life insurance, ULIP, term or medical insurance provided by the premiums should not exceed Rs 1.5 lakhs per year.
Firstly, as per section 10D, the amount received at the maturity period from these instruments is also free from taxation.
Secondly, if a person has taken a loan to fund their child’s education or buy a house, the interest paid on these loans is also tax-exempt.
The amount locked in for more than five years as a Fixed Deposit are also income tax exempt. The Public Provident Fund and National Savings Certificate are also tax-free instruments to consider.
Finally, if a person invests in mutual funds through ELSS (equity-linked savings schemes), they are also exempt from income tax as per section 80C.
However, all these tax exemptions must be filed in one’s annual income tax returns to receive these tax benefits.
How is Income Tax Paid?
Now we’ve understood the term “Income Tax,” there are three different ways in which salaried individuals pay income tax throughout the fiscal year.
1. Tax Deducted at Source (TDS) – It is a 10-20% deduction at each payout by your employer or bank on your rent, commission, salary and other payments.
2. Tax Collected at Source (TCS) – This tax is collected by the seller while selling specific items such as liquor, toll plaza, parking lot, jewellery (worth over five lakhs, two lakhs, etc.).
3. Advance tax payments – Any individual who is salaried and has an estimated tax liability of RS 10,000 or more must pay advance tax. This is done with the help of tax payment challans present at several bank branches and is authorized to do so by the Income Tax Department.
4. Self-Assessment – If a person’s 26AS form consists of errors, they can solve them by paying the remaining or missing taxes before filing returns from Income Tax.
Types of Income Tax Payers
The Income-tax Act has classified three different types of taxpayers into categories to apply different tax rates for different types of taxpayers. The different types of taxpayers are categorized as below:
- Individuals, Hindu Undivided Family (HUF), Association of Persons(AOP) and Body of Individuals (BOI)
- Firms
- Companies
Further, individuals are also classified into two types; resident and non-resident. Resident individuals have to pay tax based on their global income in India, i.e. income earned in India and abroad.
Non-residents need to pay tax only on income earned in India. The resident status has to be determined differently for tax purposes for every financial year based on the individual tenor of stay in India.
Resident individuals are further divided into three categories for tax purposes mentioned below;
- Individuals less than 60 years of age
- Individuals aged more than 60 but less than 80 years
- Individuals aged more than 80 years
What’s the Income Tax Slab for 2021?
To know whether a person is eligible to pay the tax and the percentage of their income to be taxed, they have to refer to the income tax slab rates for the current financial year.
The income tax slab groups a person’s annual income into brackets because it works primarily on a taxation system.
If the amount of income increases, the percentage is given in the income tax slab rate also increases. Budget 2020 released additional tax slabs for taxpayers to opt from FY 2021-2022. However, those looking to opt for taxes with the latest tax slabs will have to give up certain previous exemptions and deductions.
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FAQS
- What is meant by Tax Deducted at Source (TDS)?
- What is FPO?
- How many types of tax payers are there in Income Tax?
- What does the government do with the revenue generated from the Income Tax?
TDS is a 10-20% deduction at each payout by your employer or bank on your rent, commission, salary and other payments.
FPO abbreviated as Follow on Public Offer is a process in which an existing company listed on the stock exchange issue new shares to the existing shareholders or to the new investors.
There are three different types of taxpayers are categorized as below:
1) Individuals, Hindu Undivided Family (HUF), Association of Persons(AOP) and Body of Individuals (BOI)
2) Firms
3) Companies
The government uses this revenue to provide healthcare, education, developing healthcare, subsidy to the farmer or agricultural sector, and several other government welfare schemes.
