Different Types of Income tax in India
Filing an ITR can be pretty confusing, especially for someone who is doing it for the first time.
In this article, you will find some crucial information regarding income tax and answers to common questions such as what type of tax is income tax, types of assessment in income tax, types of income tax, types of income tax return, and many more.
What is Income Tax?
The government levies income taxes on both people and corporations based on the revenue they generate over a fiscal year. Taxes collected from citizens and companies are considered revenue sources for the government.
The rate and tax brackets on which each individual is assessed are determined by the Indian government.
Higher-income earners are subject to higher rates of taxation.
With the status of the economy in mind, the taxable income levels are occasionally adjusted. The government occasionally offers income tax refunds to help those with lesser incomes.
The government utilises these funds to finance its yearly initiatives for citizens, the economy, various social programs for farmers, children's education, defence, and multiple industries including the expanding healthcare industry.
Types of Taxes in India
The two main types of taxes are direct and indirect taxes.
People's earnings or profits are subject to direct taxation. Individuals or corporations pay this tax to the government directly every year.
For instance, a taxpayer could pay taxes to the government for personal property tax and other things.
The burden cannot be transferred to another person; it must be carried by the individual who is subject to the tax. The Central Board of Direct Taxes is responsible for overseeing and managing direct taxes (CBDT).
Government-imposed indirect taxes are placed on products and services.
For instance, sales tax, excise tax, and value-added tax. The Central Board of Indirect Taxes and Customs is responsible for overseeing and managing indirect taxes (CBIC). This amount is not paid directly to the government but is instead collected through services and products.
What Type of Tax is Income Tax?
An arising question that may come to mind is then what type of tax is income tax? Direct or indirect?
Income tax is a direct tax that is imposed on individuals' annual earnings or income.
The amount of income tax that must be paid is determined by the sum of the revenue that you bring in and will vary depending on one’s tax bracket.
What are the Different Types of Income Taxes in India?
Types of income taxes that an individual has to keep in mind are listed below:
-
Revenue from business/profession:
This is added to taxable income after necessary deductions have been adjusted. It comprises income from businesses and professions that people engage in their capacities.
-
Income from real estate:
A person who is subject to income tax assessment may be the owner of one or more real estate holdings. These residential residences might be occupied by the owner, rented out, or simply left empty.
-
Alternative sources of income:
This comprises revenues that are included in taxable income, such as interest on savings accounts, fixed deposits (FDs), family pensions, etc.
-
Lottery, gambling, sports betting, and other sources of income:
These are all included in total income but are not considered taxable income since they are taxed at separate rates.
-
Capital Gains tax:
Gains on capital assets, such as gold, real estate, shares, securities, mutual fund units, etc., can be sold for capital gains.
Gains on the sale of capital assets are divided into two categories: short-term capital gains and long-term capital gains, depending on the kind of capital assets and the length of ownership.
Despite being subject to income tax, capital gains are not included in taxable income because, except for short-term capital gains from the sale of debt funds, all other profits are subject to separate rates of taxation.
In addition to the income, individuals also have the option to save on their taxes by opting for certain deductions. However, this provision is available only for those who choose the old tax regime.
Difference between New and Old Tax Regime
| New Tax regime | Old tax regime | ||
|---|---|---|---|
|
From 0 and 3,00,000 |
Nil |
From 0 and 2,50,000 |
Nil |
|
From 3,00,001 and 6,00,000 |
5% |
From 2,50,001 and 10 Lakhs |
5% |
|
From 6,00,001 and 9,00,000 |
10% |
From 5,00,001 and 10,00,000 |
20% |
|
From 9,00,001 and 12,00,000 |
15% |
From Above 10,00,001 |
30% |
|
From 12,00,001 and 110 Lakhs |
20% |
||
|
From Above 15,00,001 |
30% |
|
Types of Income Tax Return
Every year, the taxpayer must use ITR forms provided by the income tax department to submit an income tax return.
There are 7 types of Income Tax returns. These are
ITR-1: Residents who earn a wage, have one primary residence, get income from other sources and receive less than 5,000 rupees in agricultural income.
ITR-2: Residents who do not operate a business or practice as a sole proprietorship.
ITR-3: Individuals/HUFs with income from a proprietary company or occupation
ITR-4: People/HUFs with alleged income from a business or profession
ITR-5: Partnership companies or LLPs
ITR-6: A company
ITR-7: The Trusts
To know more about this, click here.
Exceptions to Income Tax
According to the Income Tax Act, several forms of income produced in India are not subject to income tax. These earnings are referred to as tax-free earnings. Income tax is collected on all types of income except -
Agriculture earnings
The Income Tax Act's Section 10(1) exempts all agricultural income from taxes.
Agri-revenue of more than Rs. 5000 is included in the total income for both individuals and HUFs, nevertheless.
The addition is undertaken only to determine the slab rate which will be applied to the taxpayer's other income.
Other income in this sense refers to earnings from industries other than agriculture.
Consequently, agricultural income is not taxed, but disclosing agricultural income raises the aggregate tax rate on income.
Hindu Undivided Family's receipts
An individual who belongs to a HUF is not required to pay income tax on whatever receipts they receive.
The HUF, however, ought to have received a separate income tax assessment and payment.
Shares from an LLP or partnership firm
An assessor will not be subject to income tax on their portion of the partnership firm's total income if they are a partner in a partnership agreement or LLP that has received a separate income tax assessment.
Tax-Free income for NRIs
The Central Government has notified certain types of income as being free from income tax, such as interest income on bonds. Additionally, any premium that is related to the repayment of the specific bonds is free from taxation.
Gratuities
A government employee is not required to pay income tax on any gratuity they receive as a result of a death or retirement.
Employees in the private sector are free from tax on gratuities they receive upon retirement, accidental injury, or termination, up to a maximum of 10 lakh rupees.
Additional restrictions are imposed by the Income Tax Act, which governs the exemption.
For each year of service that has been completed, the limitations are set at half a month's wage, which is determined using the average income for the 10 months that preceded the period during which the gratuity is provided, or the amount of gratuity that was actually paid.
Money received from insurance
Any amount received under a Life Insurance Policy (LIP), under a Keyman Insurance Policy (KIP), or under an insurance policy for which the premium payable for any of the years during the term of the policy exceeds 10% of the actual capital sum assured, is fully exempt from tax.
Also, all proceeds received on the death of an insured person are fully exempt from income tax. Hence, money received from life insurance policies, whether from the LIC or any other private insurance company is exempt from income tax.
Money Received from Provident Fund
Any amount received from a government-recognized provident fund (PF), approved superannuation fund or PPF is fully exempt from income tax.
Conclusion
The yearly income and profits made by people and businesses are subject to income tax.
It is based on a person's or organization's net taxable income for the relevant financial/fiscal year, which runs from April 1 through March 31 of the following calendar year.
Types of Income Taxes in India Related FAQs
Income tax is a type of direct tax imposed on individuals, businesses, and other entities by the Indian government and it depends on the income earned by them in a particular financial year. Every individual, including salaried employees, self-employed professionals, and business owners is required to pay income tax in India if their income exceeds the basic exemption limit.
The income tax in India is calculated based on a slab system where different tax rates apply for different income slabs. These rates and corresponding slabs are revised every financial year during the annual budget. According to the new tax regime (2023-2024), it is:
Income | Tax rate applicable |
0-3 lakh INR | Nil |
3-6 lakh INR | 5% |
6-9 lakh INR | 10% |
9-12 lakh INR | 15% |
12-15 lakh INR | 20% |
Above 15 lakh INR | 30% |
The different modes of paying Income tax in India are -
- Online payment through the IT Department’s website
- Payment through authorized banks
- Payment through tax collection centers
- Payment through authorized ATMs.
TDS stands for tax deducted at source, and it is a system of collecting income tax in India. Under this system, the person making the payment - the employer or payer, deducts a certain percentage of tax at the time of payment and deposits it in the government’s books on behalf of the recipient. TDS is applicable to various types of payments, including salary, interest, rent, commission, and professional fees.
The documents required to file income tax returns in India are -
- Form 16 - It is issued by the employer and contains details of the salary, TDS, and other deductions.
- Form 26AS - It is the tax credit statement that contains the details of the TDS, advance tax, and self-assessment tax paid.
- Bank interests - These are required to show the interest earned on deposits and their financial transactions.
- Investment proofs - These contain the details of various investments made under tax-saving schemes like PPF, ELSS, and NPS.
It is mandatory to file income tax returns in India if the total income of the individual exceeds the basic exemption limit, which is INR 3.0 lakhs for the financial year 2023 - 2024. Failure to file income tax or tax evasion can lead to penalties and other legal consequences.
Yes, income tax returns can be filed after the due date, which is typically July 31st of the financial year. However, a penalty of INR 5000 is levied on the returns filed after the due date but before December 31st. If the income tax returns are filed after December 31st, a penalty of INR 10,000 is levied on the returns.
