Income Tax Rules for Individuals

Income Tax Rules for Individuals – Types, Slabs and Purposes

Income Tax Rules for Individuals: The type of tax that the central government charges on the income earned during a financial year by individuals and businesses are known as Income tax. One of the main sources of revenue for the government is Taxes. The government utilises this revenue to develop healthcare, education, infrastructure, subsidy to the agriculture sector/farmer, and other government welfare schemes.

Taxes are mainly of two types of form, direct taxes and indirect forms of taxes. Direct tax is levied directly on the income earned; for example, Income tax is considered a direct tax. The tax calculation is made based on the income slab rates applicable during that specific financial year.

Who are the Taxpayers?

Any Indian citizen aged below 60 years, if their income exceeds Rs 2.5 lakhs, is liable to pay income tax. Any individual whose age is more than 60 years and who earns more than Rs 2.5 lakhs is considered to be liable to pay taxes to the Government of India.

Types of Income Taxpayers

According to India’s Income Tax Act, there are two types of taxes:

Direct Taxes: It is paid or borne directly by the individual on whom this tax is imposed such as, wealth tax, gift tax, income tax etc. The taxpayer, without any involvement of an intermediary source, pays this tax directly to the government.

Indirect Taxes: If a tax is passed on to the other person by the taxpayer, it is known as an indirect tax, e.g excise duty, value-added tax (VAT), customs duties, sales tax, etc. This kind of tax is paid indirectly to the Income-tax department.

The Income-tax Act has incorporated the types of taxpayers into categories so as to apply different tax rates for different models of taxpayers.

Taxpayers are Categorised like

  • Individuals,
  • Hindu Undivided Family (HUF),
  • Association of Persons (AOP),
  • Firms,
  • Companies, and
  • Body of Individuals (BOI)

Further, Individuals are broadly grouped into residents and non-residents. Resident people are liable to pay the tax on their global income, i.e. income earned in India as well as abroad.

At the same time, people who are qualified as Non-residents require to pay taxes only on income accrued or earned in India. For every financial year, the residential status has to be determined individually on the basis of the individual tenor of stay in India for tax purposes.

Resident Individuals are further categorised into the below-mentioned sections for tax purposes-

  • Individuals who are having age less than 60 years.
  • Individuals who are having age more than 60 but less than 80 years
  • Individuals who are having age more than 80 years

Income Tax Slabs/ Brackets

Under the Indian income tax laws, different taxes are charged to each of these taxpayers. While a fixed rate of tax calculated on their tax profits, the individual, HUF, BOI and AOP taxpayers are provided for Indian firms and companies and are taxed based on the income slab they fall under.

People’s incomes are classified into blocks called tax slabs or tax brackets. And a different tax rate is fixed for each tax slab. The rate of tax slab increases with an increase in income. For the Individuals and HUF taxpayers, a ‘New tax regime’ was introduced in Budget 2020.

What is the Existing / Old Tax Regime?

The three slab rates for levy of income tax which are provided by the old tax regime are 5%, 20% tax rate and 30% for different brackets of income. The individuals have been provided with the choice to continue with this Old tax regime.

They can demand deductions of allowances like House Rent Allowance (HRA), Leave Travel Concession (LTC), and several additional allowances. Additionally, as per section 80C (LIC, PPF, NPS etc.) to 80U deductions can be claimed for tax-saving investments.

For interest paid on a home loan, a standard deduction of Rs 50,000 is deducted from the total taxable amount.

There are two separate tax slabs for two other age groups:

Individuals who are 60 and older and the individual who is above 80.

New Tax Regime under Income Tax Slabs

From the Financial Year 2020-21, a new tax regime is available for individuals and HUFs with zero deductions/exemptions and lower tax rates. Individuals and HUF possess the choice to choose the new regime or proceed with the old regime. The new tax regime of the government is optional, and the decision should be executed at the time of filing the ITR. If the old regime is sustained, then all the exemptions/deductions as available can be availed by the taxpayer.

Most of the deductions, like exemptions and deductions, are not permitted if the taxpayers opt for the New Tax regime.

However, the exemptions and deductions possible under the new regime are:

In the case of a specially-abled person, their transport allowances.

A Conveyance allowance is provided as part of the employment to meet the incurred expenditure of conveyance.

Any compensation earned to suffice the cost of travel on tour or transfer.

Daily allowance obtained to meet the ordinary regular expenditure or charges one incur on account of absence from their regular place of duty.

Exceptions to the Tax Slab

One must keep in mind that not all income can be taxed on a slab basis. A proper exception to this rule is income from Capital gains. Capital gains are charged depending on the asset one own and how long one has had it. Whether an asset is long-term or short-term is usually determined by the holding period. For different assets, the holding period to determine the nature of the asset also varies.

Residents and Non-residents

The Levy of income tax of an individual in India is conditioned on the residential status of a taxpayer. Individuals must pay tax on their global income in India, i.e. income earned in India and abroad if the person qualifies as a resident in India. At the same time, an individual must pay taxes only on their Indian income if the person qualifies as Non-residents. For every financial year, the residential status must be determined separately for which income and taxes are computed.

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