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:
- Direct Tax
- Indirect 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 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|
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:
- 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.
- 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.
- 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
|Income from salary|
|Allowances Received(taxable allowances)||xxxx|
|Taxable Value for perquisite||xxxx|
|Less: Deduction under Section16|
|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|
|Amount of Capital gain||xxxxx|
|Less: amount exempt under section 54 and 54H||xxxxx|
|Income from Capital Gain (4)||XXXXX|
|Income from other sources|
|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|
|Tax and Surcharge||=====|
|Add: Education Cess||XXXXX|
|Less: Prepaid taxes|
|Tax Deducted at Source||xxxxx|
|Self Assessment tax||Xxxxx||XXXXX|
|Tax Liability / Refund||XXXXX|
Steps for Computation of Income-tax
- The first step for computation of income tax format is to ascertain the adjusted gross income.
- The second step is to compute federal taxable income and the consequent tax. This establishes itemized deductions, calculating the deductions and finally subtracting them.
- 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.