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Income tax is a type of direct tax the central government charges on the income earned during a financial year by the individuals and businesses. It is calculated based on the tax slabs defined by Income Tax Department.

What is Income Tax?

Income tax is a type of tax levied by the central government on income earned by individuals and businesses during a fiscal year. Taxes are a source of income for the state. The government uses these incomes for infrastructure development, health care, education, subsidies to the farmers / agricultural sector, and other government welfare. scheme. There are two main types of taxes: direct tax and indirect tax. Taxes levied directly on income are called direct taxes. For example, income tax is a direct tax. The tax calculation is based on the income tax rate applied for the fiscal year.

ITR Filing usually takes between 1-3 working days. Team Clear can help you obtain ITR Filing faster in 3 easy steps.

Direct Taxes are broadly classified as :

Income Tax – This is taxes an individual or a Hindu Undivided Family or any taxpayer other than companies, pay on the income received. The law prescribes the rate at which such income should be taxed.

Corporate Tax – This is the tax that companies pay on the profits they make from their businesses. Here again, a specific rate of tax for corporates has been prescribed by the income tax laws of India.

Who should pay Income Tax?

The Income tax Act has classified the types of taxpayers in categories so as to apply different tax rates for different types of taxpayers.

Taxpayers are categorized as below: :

  • Individuals
  • Hindu Undivided Family (HUF)
  • Association of Persons(AOP)
  • Body of Individuals (BOI)
  • Firms
  • Companies

  • Further, Individuals are broadly classified into residents and non-residents.Resident individuals are liable to pay tax on their global income in India i.e. income earned in India and abroad. Whereas, those who qualify as Non-residents need to pay taxes only on income earned or accrued in India. The residential status has to be determined separately for tax purposes for every financial year on the basis of the individual tenor of stay in India.

    Resident Individuals are further classified into below mentioned categories for tax purposes-

  • Individuals less than 60 years of age
  • Individuals aged more than 60 but less than 80 years
  • Individuals aged more than 80 years
  • Types of Income / Heads of Income

    Everyone who earns or gets an income in India is subject to income tax.(Yes, be it a resident or a non-resident of India ).For simpler classification, the Income tax department breaks down income into five main heads:

    Head Of Income Nature Of Income Covered
    Income from Other Sources Income from savings bank account interest, fixed deposits, winning in lotteries is taxable under this head.
    Income from House Property Income earned from renting a house property is taxable under this head of income.
    Income from Capital Gains Surplus Income from sale of a capital asset such as mutual funds, shares, house property etc is taxable under this head of Income.
    Income from Business and Profession Profits earned by self employed individuals, businesses , freelancers or contractors & income earned by professionals like life insurance agents, chartered accountants, doctors and lawyers who have their own practice, tuition teachers are taxable under this head.
    Income from Salary Income earned from salary and pension is taxable under this head of income

    Taxpayers and Income Tax Slabs

    Each of these taxpayers is taxed differently under the Income Tax Act of India. Companies and Indian companies calculate a fixed tax rate based on taxable profits, while individuals, HUF, AOP, and BOI taxpayers are taxed based on the applicable income class. People's income is grouped into blocks called tax brackets or tax plates. And each tax plate has a different tax rate. As your income increases, so does the tax rate on your income. The 2020 budget introduces a "new tax system" for individuals and HUF taxpayers

    What is the Existing / Old Income Tax Regime?

    The old tax system provides three scale rates for collecting income tax: 5%, 20%, and 30% for different income groups. Individuals have the option to continue this legacy tax system and can claim deductions from benefits such as the Leave Travel Concession (LTC), House Rent Allowance (HRA) and other specific allowances. In addition, deductions may be charged for tax-saving investments under Section 80C (LIC, PPF, NPS, etc.) through the 80U. Standard deduction for Rs 50,000, deduction for interest paid on mortgages.
    Tax slab rates applicable for Individual taxpayer below 60 years for Old tax regime is as below:

    Income Range Tax Rate Tax To Be Paid
    Up to Rs.2,50,000 0 No tax
    Between Rs 2.5 lakhs and Rs 5 lakhs 5% 5% of your taxable income
    Between Rs 5 lakhs and Rs 10 lakhs 20% Rs 12,500+ 20% of income above Rs 5 lakhs
    Above 10 lakhs 30% Rs 1,12,500+ 30% of income above Rs 10 lakhs

    There are two other tax slabs for two other age groups: those who are 60 and older and those who are above 80.A word of note: People often misunderstand that if they earn let’s say Rs.12 lakhs, they will be paying a 30% tax on Rs.12 lakhs i.e Rs.3,60,000. That’s incorrect. A person earning 12 lakhs in the progressive tax system, will pay Rs.1,12,500+ Rs.60,000 = Rs. 1,72,500. Check out the income tax slabs for previous years and other age brackets.

    Income Tax Slabs Under New Tax Regime

    Beginning 2020-21, a new tax system with lower tax rates and zero deductions / exemptions will be available for individuals and HUF. For individuals and HUF, you can choose to choose the new system or continue with the old system. The new tax system is optional and must be selected when submitting the ITR. If the old system continues, taxpayers can claim the available deductions / tax exemptions. The income tax slabs under the new tax regime are:

    New regime slab rates Existing regime slab rates
    Income from Rs 2.5 lakh to Rs 5 lakh 5% Income from Rs 2.5 lakh to Rs 5 lakh 5%
    Income from Rs 5 lakh to Rs 7.5 lakh 10% Income from Rs 5 lakh to Rs 10 lakh 20%
    Income from Rs 7.5 lakh to Rs 10 lakh 15% Income above Rs 10 lakh 30%
    Income from Rs 10 lakh to Rs 12.5 lakh 20%
    Income from Rs 12.5 lakh to Rs 15 lakh 25%
    Income above Rs 15 lakh 30%
    Most of the deductions like deductions and exemptions are not allowed if the taxpayers opts for the New Tax regime. However he exemptions and deductions available under the new regime are:
  • Transport allowances in case of a specially-abled person.
  • Conveyance allowance received to meet the conveyance expenditure incurred as part of the employment.
  • Any compensation received to meet the cost of travel on tour or transfer.
  • Daily allowance received to meet the ordinary regular charges or expenditure you incur on account of absence from his regular place of duty.
  • Exceptions to the Income Tax Slab

    Please note that not all income is taxed at a fixed rate. The exception to this rule is capital gains income. Capital gains are taxed based on the wealth you own and the length of time you have it. The holding period determines whether the asset is long-term or short-term. The holding period used to determine the type of asset also varies from asset to asset. Below is an overview of the holding period, asset types, and tax rates for each.

    Type of capital asset Holding period Tax rate
    House Property Holding more than 24 months – Long Term
    Holding less than 24 months – Short Term
    20% Depends on slab rate
    Debt mutual funds Holding more than 36 months – Long Term
    Holding less than 36 months – Short Term
    20% Depends on slab rate
    Equity mutual funds Holding more than 12 months – Long Term
    Holding less than 12 months – Short Term
    Exempt (until 31 March 2018) Gains > Rs 1 lakh taxable @ 10% 15%
    Shares (STT paid) Holding more than 12 months – Long Term
    Holding less than 12 months – Short Term
    Exempt (until 31 March 2018)Gains > Rs 1 lakh taxable @ 10% 15%
    Shares (STT unpaid) Holding more than 12 months – Long Term
    Holding less than 12 months – Short Term
    20% As per Slab Rates
    FMPs Holding more than 36 months – Long Term
    Holding less than 36 months – Short Term
    20% Depends on slab rate