Indian Income Tax

Income Tax In India

A tax that is applicable on income that has been generated from any source is termed as Income tax. The central board of direct tax (CBDT) is the governing body that takes care of the Indian Income tax. Income tax is imposed by the government on an individual, company, business, Hindu undivided families (HUFs), co-operative organization and trusts. The tax structure is different on different commodities and products. Indian income tax is regularized under income tax act 1961.

History of Income tax

In India Income tax comes into existence in the year 1860. Initially at the time when it was imposed it had taken almost five years to regularize and implement the income tax however income tax act lapsed in the year 1865. Again after a gap of so many years it again comes into force. Act of 1886 was again came into force it defines the full fledged law of income tax it includes the exemption in various agricultural professions, income tax rules on industries and corporation. In the year Act VII of 1918 was launched that reforms the income tax law in a new way. This new act scrutinized the new industries that come under income tax bracket. This new act tries to expand the horizon to generate large revenue for the country.

In the year 1922 another income tax act came into existence as a result of recommendation by the all India income tax committee. With this act a new clause was introduced under which unlike earlier where the collection of income tax in the current assessment year depends on the estimated collection of income tax of previous year. After the income tax act of 1922 there will be no important provision came however the income tax later on comes under the provision of finance act. Every assessment year the new tax structure is decided by the finance department of the country that is released with the union budget. The income tax act of 1922 existed till 1961 however government had handed over the income tax clause to the law commission to review and recast it in a logical way so that the tax amended in an easies way without changing the basic tax structure.

The income tax laws hold many industries and it has diversified clauses for different industries. There are various industries where government offers wavers in subsidies time to time. The present income tax act is same as of 1961 income tax act of India. As per the constitution of India every individual is bound to pay income tax for the progress of the nation. Any individual or an organization if earning any income in the country has to pay income tax. Although in the present day tax structure there is a different slab for man and women. As per Indian income tax law senior citizens are exempted from the regular income tax slab, similarly income generated through the agriculture is not subjected to the income tax. Any state that is affected by the natural calamity is also subjected to the income tax waver.

Tax Rates:

In this budget, the senior citizens are divided into two categories as senior citizen from 60 - 80 years of age and very senior citizens years of the age 80 and above.
The new tax slabs applicable from April 1, 2011 are as follows:

  • On all incomes up to Rs. 1,80,000 per year. (For women - Rs. 1,90,000, for senior citizens - Rs. 2,50,000 and for very senior citizens - Rs. 5,00,000 ), no Income Tax is applicable.
  • From Rs. 1,80,001 - Rs. 5,00,000 : 10% of amount ( For women - Rs. 1,90,001 to Rs. 5,00,000 and for senior citizens - Rs. 2,50,001 to Rs. 5,00,000)
  • From Rs. 5,00,001 to Rs. 8,00,000 : 20% of amount ( Same for women, senior citizens and very senior citizens)
  • Above Rs. 8,00,000 : 30% of amount ( Same for women, senior citizens and very senior citizens)
To know in detail about Tax Rates in India click here: Income Tax Rates

Income from Salary

Under this head, income received as salary under Employer-Employee relationship is taxed. If income exceeds minimum exemption limit, then Employers must withhold tax compulsorily as Tax Deducted at Source (TDS). The employees should also be provided with a Form 16 which shows the tax deductions and net paid income. Form 16 also contains any other deductions provided from salary as follows:

  • Medical reimbursement up to Rs. 15,000 per year is tax exempt provided bills are given
  • Conveyance allowance up to 9600 per year is tax free
  • Professional taxes which are usually a slabbed amount based on gross income are deductible from income tax.
  • House rent allowance: the minimum of the following is available as deduction
    • The actual HRA received
    • 50%/40 % (metro/non-metro) of 'salary'
    • Rent paid minus 10% of 'salary'

Income from House Property

Income from House property is calculated by considering the Annual Value. The annual value (for a let out property) will be maximum of the following:

  • HRA Rent received
  • Municipal Valuation
  • Fair Rent (as determined by the I-T department)

However if a house is not let out and not self-occupied, then annual value is assumed to have accrued to the owner. In case of a self occupied house, annual value is to be taken as NIL. But if there is more than one self occupied house then the annual value of the other house/s is taxable. From this, Municipal Tax paid is deducted to arrive at the Net Annual Value. From this Net Annual Value, the following are deducted:

  • 30% of Net value as repair cost - mandatory deduction
  • Interest paid or payable on a housing loan for the house

Income from Business or Profession:

Income arising from profits and gains of any Business or Profession; income derived by a Trade/ Professional/ similar Association by performing specific services for its members; any benefit from business whether convertible into money or not, incentives for exporters; any salary, interest, bonus, commission or remuneration received by Partner of a firm; any amount received under a Key man Insurance Policy which also covers Bonus; income from managing agency and speculative transactions; is taxable.

Income from Capital Gains

Under section 2(14) of the I.T. Act, 1961, Capital asset is defined as property of any kind held by an assessee such as real estate, equity shares, bonds, jewellery, paintings, art etc. but does not consist of items like stock-in-trade for businesses or for personal effects. Capital gains arise by transfer of such capital assets.

Long term and short term capital assets are considered for tax purposes. Long term assets are those assets which are held by a person for three years except in case of shares or mutual funds which becomes long term just after one year of holding. Sale of long term assets give rise to long term capital gains which are taxable as below:

  • As per Section 10(38) of Income Tax Act, 1961 long term capital gains on shares/securities/ mutual funds on which Securities Transaction Tax (STT) has been deducted and paid, no tax is payable. Higher capital gains taxes will apply only on those transactions where STT is not paid.
  • For other shares & securities, person has an option to either index costs to inflation and pay 20% of indexed gains, or pay 10% of non indexed gains.
  • For all other long term capital gains, indexation benefit is available and tax rate is 20%

Income from Other Sources

There are some specific incomes which are to be taxed under this category such as income by way of dividends, horse races, winning of bull races, winning of lotteries, amount received from key man insurance policy.

So as we can see the Indian Income Tax law is a subject which is filled with legal jargons and complexities that keep on changing every new financial year and the importance of this law in our routine life simply cannot be ignored. Whether it is filing of Income Returns on due dates or whether it's a financial investment decision to be taken, every where the Income Tax provisions play a major role in driving of the cost factor.

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