Income tax is a type of direct tax which is paid by individuals or entities on the level of their earnings or gains during a financial year.
Income does not include only salary. Some other types of income also include in the income at time of calculation of tax. Types of taxable income in India are as follows:-
· Income from salary/pension– Basic salary, perquisites, taxable income, and profit in lieu of salary and pension received by the person who himself or herself has retired from the service. Income from salary and pension are included in the calculation of taxable income.
· Income from business / profession– Income from business / profession includes the actual and corporeal incomes from business and professions that individuals do in their personal capacity and it is added to taxable income after adjustment of the deductions allowed.
· Income from house property– Income from house property also included in calculation of taxable income. An income tax assessee can own one or more house properties which can be self occupied or rented out or even vacant.
· Income from other sources– Income from other sources includes interest from a savings account, fixed deposits, family pension etc. All these are included in taxable income.
· Income from lottery, betting, race horse etc– Income from lottery, betting, race of horses etc are included in the total income of a person. It is not included in taxable income because different rates of tax are applicable on these types of income.
· Capital gains– Capital gains are gains arise at the time of selling capital assets like house properties, stocks, gold, securities, mutual fund units etc. These gains are of two type’s short term capital gains and long term capital gains. Capital gains are the part of income but they are not added to taxable income.
Use of Income tax
According to estimation of tax and services, about 71 percent of the total revenues of government are collected from taxes and duties, 9 percent from non-tax revenues and the remaining of about 20 percent from borrowings and other liabilities. The revenues collected by the government in form of taxes are used in the various ways like paying share of taxes and duties of states, interest payments, expenses incurred on central sector schemes and schemes sponsored centrally, pension to retired employees of government, expenditure on defence, subsidies, transfers, expenses through finance commission etc.
Calculation of Income tax in India
Income tax in India is computed on the basis of rates of tax determined by the government for a Financial year. The government of India decides the income tax rate and income tax slabs on which an individual is taxed. The individual under higher income slabs are taxed at higher tax rate. These Income slabs are changed from time to time, keeping the level of prices in mind.
In year 2020, a new tax system which came into effect from April 1, 2020, gives an individual taxpayer the option (choice) to either continue with the existing tax regime or he can also opt for the new tax regime.
The person who have business income should think carefully about the tax regimes that they want to continue with the existing tax system or opt for new regime because if they opt for the new regime, they can switch back to the existing tax regime only once in his lifetime but the salaried individuals who have no business income, can choose between the existing and new tax regimes every financial year, according to their convenience.
Income tax slabs under the new tax regime of financial year 2020-2021 (Assessment year 2021-2022)
Income tax rate
Up to Rs 2.5 lakh
Between Rs.2,50,001 and Rs. 5 lakh
Between Rs.5,00,001 and Rs. 7.5 lakh
Between Rs. 7,50,001 and Rs. 10 lakh
Between Rs. 10,00,001 and Rs. 12.5 lakh
Between Rs. 12,50,001 and Rs. 15 lakh
Above Rs 15 lakh