Taxes are mainly of two types, direct taxes, and indirect taxes.
Income Tax is a direct tax that is charged on an individual’s or entity’s income. The tax is calculated on the net taxable income of the entity based on the income slabs which are pre-defined by the IT Department.
What is Income Tax?
The concept of income tax first surfaced in the country in the year 1860.
Income tax is a tax charged on the annual income earned by an individual. The amount of tax paid will depend on how much money you earn as income over a financial year. Income tax is a preeminent source of income for the government. Money earned via income tax goes towards maintaining government bodies and infrastructural development.
Income tax for FY 2020-21 applies to all residents whose annual income exceeds Rs.2.5 lakh p.a. The highest amount of tax an individual could pay is 30% of their income plus cess at 4% if their income is more than Rs.10 lakh p.a.
Types of Income Tax Payers
The Income tax Act has classified the types of taxpayers into categories so as to apply different tax rates for different types of taxpayers.
Taxpayers are categorized as below:
- Hindu Undivided Families (HUFs)
- Artificial Judicial Persons
- Body of Individuals (BOIs)
- Association of Persons (AOPs)
- Partnership firms
- Local Authorities
Further, Individuals are broadly classified into residents and non-residents. Resident Individuals are further classified into below mentioned categories for tax purposes-
- Individuals less than 60 years of age
- Individuals aged more than 60 but less than 80 years
- Individuals aged more than 80 years
Types of Income / Heads of Income
Everyone who earns or gets an income in India is subject to income tax. For simpler classification, the Income tax department breaks down income into five main heads:
Income Tax Slabs
Each of these taxpayers is taxed differently under the Indian income tax laws. While firms and Indian companies have a fixed rate of tax calculated on their tax profits, the individual, HUF, AOP and BOI taxpayers are taxed based on the income slab they fall under.
The income tax slabs in India are different for regular, senior, and super senior citizens. Senior citizens are those who have completed 60 years of age and super senior citizens are persons equal to or over the age of 80 years.
Income Tax Slab Under New Tax Regime for FY 2020-21 & AY 2021-22
From the FY 2020-21, a new tax regime is available for individuals and HUFs with lower tax rates and zero deductions/exemptions. Individuals and HUF have the option to choose the new regime or continue with the old regime. The new tax regime is optional and the choice should be made at the time of filing the ITR.
The taxes are further subject to the 4% health and education cess
The rebate of up to Rs 12500 through section 87 A is available.
Existing Income Tax Slabs for FY 2020-21 (Alternative)
The old tax regime provides 3 slab rates for levy of income tax which are 5%, 20% tax rate, and 30% for different brackets of income. The individuals have been given the option to continue with this Old tax regime and they can claim deductions of allowances like Leave Travel Concession (LTC), House Rent Allowance (HRA), and certain other allowances. Additionally, deductions for tax-saving investments as per section 80C (LIC, PPF, NPS, etc) to 80U can be claimed. Standard deduction of Rs 50,000, the deduction for interest paid on the home loan.
Depending on the age of the individual, the three categories that resident individual taxpayers are divided into are mentioned below
- Individuals who are less than the age of 60 years old.
- Senior citizens who are above 60 years old and below 80 years of age.
- Super senior citizens who are above 80 years old.
Here is the income tax slab for individuals who are less than 60 years old: