Types, Importance and Calculation of Income Tax

Importance Of Income Tax: Income tax is the tax imposed by the government on the income of individuals or businesses. Income tax is the main source of government funding. The Income Tax Act was introduced to the public in 1961. Income tax is collected by the government to raise funds for the defence department and development of the country.

There are two types of taxes:

1. Direct Tax
2. Indirect Tax

Direct Tax 

Direct tax is the tax paid by a person directly to the government on their income and profit. Wealth tax, income tax, personal property tax, corporate tax, transfer tax, etc are examples of direct tax.

Indirect Tax 

Indirect tax is the tax imposed on goods and services by the government. Value-added tax(VAT), excise duty, sales tax, etc are examples of indirect tax.

Income Tax Calculation

Income Tax Slab Rates: Income tax slab rates are the rates based on the annual income of an individual or business and are progressive.

Income Tax Slab Rates for Individuals

Income slab	General category	Senior citizens(age 60yrs-80yrs)	Very senior citizens(above 80yrs)
Up to 2,50,000	Nil	Nil	Nil
2,50,001- 3,00,000	5%	Nil	Nil
3,00,001- 5,00,000	5%	5%	Nil
5,00,001- 10,00,000	20%	20%	20%
Above 10,00,000	30%	30%	30%

Income Tax Slab Rates for Businesses

For Cooperative Societies

Income tax slabs	Income tax rates
When income is within Rs.10,000	10% of the income
When income lies between Rs.10,000- 20,000	20% of the amount which exceeds 10,000
Above Rs. 20,000	30% of the amount which exceeds 20,000

For Firms And Domestic Companies

• The slabs rates are not applied in the case of firms and domestic companies.
• 30% tax is collected on the total income.
• If the total income of domestic companies exceeds Rs. 1 crore, a surcharge of 7% is imposed.
• If the total income of domestic companies exceeds Rs. 10 crores, a surcharge of 12% is imposed.
• For such entities, a 3% education Cess of tax plus surcharge is also charged.

How is Income Tax Collected?

Income tax is collected in three ways by the government:

1. Tax Deducted at Source(TDS) – It is the tax that is to be deducted on some expenses and payments made like the sale of a property.
2. Tax Collected at Source (TCS) – It is the tax payable by the seller which is to be collected by the buyer at the time of sale.
3. Voluntary payments by individuals into banks.

Calculation of Income Tax

Income tax can be calculated by two methods either computation of income tax format or by using an income tax calculator.

Computation of Income Tax Format

Computation of income tax format for the year ending

Particulars	Rs.	Rs.
Income from salary
Salary	xxxx
Allowances Received(taxable allowances)	xxxx
Taxable Value for perquisite	xxxx
	====
Gross salary	xxxxx
Less: Deduction under Section16
Professional tax	xxxxx
Entertainment allowance	Xxxxx
	====
Income from Salary (1)		XXXXX
Income from House Property
Adjusted net added value	xxxxx
Less: Deduction under Section24	xxxxx
	====
Income from House Property (2)		XXXXX
Profit and gains of Business and Profession

Net profit as per profit and loss account	xxxxx
Add: income which are debited to profit and loss account but not allowable as deductions	xxxxx
Less: expenditure which are not debited to profit and loss account but allowable as deductions	xxxxx
Less: income which are credited to profit and loss account but are exempted under section 10	xxxxx
Add: income which are not credited to profit and loss account but are taxable	xxxxx
	====
Profit and gains of Business and Profession (3)		XXXXX
Capital Gains
Amount of Capital gain	xxxxx
Less: amount exempt under section 54 and 54H	xxxxx
	====
Income from Capital Gain (4)		XXXXX
Income from other sources
Gross income	xxxxx
Less: deduction under section 57	xxxxx
	====
Income from other sources (5)		XXXXX
		======

Total income (1+2+3+4+5)		XXXXX
Less: adjustment on account of setoff and carried forwarder of losses		XXXXX
		=====
GROSS TOTAL INCOME		XXXXX
Less: deduction under 80C and 80U		XXXXX
		=====
Net income rounded-off nearest Rupee ten		XXXXX
Computation of Tax Liability
Tax on net income		XXXXX
Less: Rebate		XXXXX
		=====
Balance		XXXXX
Add: Surcharge		XXXXX
Tax and Surcharge		=====
Add: Education Cess		XXXXX
Less: Prepaid taxes
Tax Deducted at Source	xxxxx
Advance tax	xxxxx
Self Assessment tax	Xxxxx	XXXXX

		=====
Tax Liability / Refund		XXXXX

Steps for Computation of Income-tax

1. The first step for computation of income tax format is to ascertain the adjusted gross income.
2. The second step is to compute federal taxable income and the consequent tax. This establishes itemized deductions, calculating the deductions and finally subtracting them.
3. The last step is to carry out the computation of final tax and exemptions. In this final step, first, compute the exemptions which are not allowed, then ascertain gross income tax for the present financial year, and finally, exclude the credits according to the eligibility.

How to Select Tax Methods?

New tax regime; tax rates are lower than the old tax regime. For those who do not have tax-saving plans/investments, this is a better option for them by not paying rent or having any house loans or other tax-savings payments.

Old tax regime; can be used by those who have tax-saving plans/investments, pay rent, have housing loans, and so on.

Note: you can shift from an old regime to a new regime at any time during a financial year but shifting from the old regime to a new regime is not allowed by many employers.

Conclusion on Importance Of Income Tax

Income tax is important for the government for funding to carry out its necessary functions and duties. The computation of income tax format is lengthy but easier to use. For people who do not want to use the format or save time, the virtual income tax calculator is provided on many websites on the internet. Although the government needs to collect taxes, they also make various provisions to help citizens save income tax like providing term insurance plans.