Sources of Income Tax in India

Shreya Shrivastava|Symbiosis Law School, Hyderabad| 6th June 2020

Introduction

We all know Taxes in India are divided into two parts: Direct tax and Indirect Tax.Income Tax is a type of tax which comes under the Direct Tax, it is a type of tax which other than the companies, a Hindu undivided family, or an individual, or any taxpayer pay on the income which they receive. The rate for such has been prescribed by the law.

People who are earning in India are subject to income tax. Doesn’t matter if you are a resident of India (they have to pay tax on the income earned globally i.e. income which is earned abroad and income which is earned in India.) or a non-resident (they have to pay tax on the income which earned in India.) every Financial year the residential status is determined separately for computing the income and taxes.

 Income could be in any form be it a pension, salary, or savings account which is accumulating interest of 4%.

Sources of Income Tax

 Now, the Income Tax Department for simpler classifications divided Income into five heads:

1. Income coming from salary and pension.
2. Income coming from the rental which comes under House Party.
3. Income coming from the sale of capital gains or assets like shares, house property, mutual funds, etc. 
4. Income coming from a profession or a business which means when the person is self- employed, or is a contractor or working as a freelancer. Professionals like, Chartered Accountant, insurance agents, lawyers having their practice, doctors, and tuition teachers.
5. Other sources like fixed deposits, savings account, winning a prize all come under Income tax.

The head “Income from other sources” includes the income from the following types:

1. Gifts- any gift received which exceeds Rs. 50,000 in cheques, cash, demand draft, or is a specifies asset by HUF or an individual, the entire amount is taxable. Specified assets are such which are in kind of immovable property like a building, a land, or properties like shares, debentures, jewelry, paintings, archaeological collections, and bullion. If gifts are received at the time of marriage, or through inheritance, or by the will are not taxable.
2. Betting and Lottery- Section 115 BB of the Act says that if the income is earned by winning races, lotteries, crossword puzzles, gambling, card games, or betting then it shall attract 30% of the tax. The expenses which were incurred in getting such income is not exempted in computing the income.
3. Dividend Income- the company which pays the dividend distribution tax then normally the tax from dividend income is exempted. If the dividend amount received exceeds Rs. 10 lakhs, then the tax rate of 10% is chargeable. If an investment has been made under the shares of a foreign country, it will come under other sources, and the dividend will be taxable. Relief can be claimed under the Double Taxation Agreement (DTAA) if the taxes have been paid where the company is based. Section 91 of the Income Tax Act gives relief in cases where the country doesn’t have DTAA.
4. Income from Pension- after the death of an employer the dependent family members get the pension. Unmarried daughter, children, and spouse below the age of 25 years, and dependent parents comes under dependent family members. The pension if it is commuted then is tax-exempt, but if family members receive uncommuted pension then at the rate of 33.33 % it is taxable or Rs. 15,000, whichever is lower.

Income Taxpayers in India

If the annual income of any citizen of India is above Rs. 2.5 lakh and for senior citizens, above Rs. 3 lakhs, then the Income tax has to be paid. In addition to entities such as Body of Individuals (BOI), Hindu Undivided Family (HUF), Local authorities, Association of Persons (AOP), companies, corporate firms, Artificial Judicial Persons, and an individual also have to pay income tax which is fixed i.e. 30% of their profit. 

Looking at the Financial Year 2017-18, 6.84 crore citizens of India filed Income Tac Returns (ITRs) which resulted in a net collection of Rs. 9.95 lakh crore. According to the Central Board of Direct Taxes (CBDT), the collection was higher than the previous year by 17.1%.

Income Tax Slabs in India

Your annual income determines the income tax be paid. New reduced tax rates were introduced in Budget 2020 which will come into effect from the year 2020-21. In the following way, tax slab rates are categorized.

• Income less than Rs. 5 lakhs, the tax rate is exempted.
• Income between Rs. 5 lakhs and 7.5 lakhs, 10% tax will be charged.
• Income between Rs. 7.5 lakhs to 10 lakhs, 15% tax will be charged.
• Income between Rs. 10 lakhs to Rs. 12.5 lakhs, 20% tax will be charged.
• Income between Rs. 12.5 lakhs to 15 lakhs, 25% tax will be charged.
• Income above Rs.15 lakhs, 30% tax will be charged.

Taxpayers have been given option from Financial Year 2020-21, to choose between the existing tax system or the new regime. The rates have been reduced in the new regime and income slabs have been revised. The major change in the new regime is that the old tax regime will no longer be valid like deductions and exemptions. Taxpayers can opt for the system which is more beneficial to them by comparing their liabilities under the two systems.

Further, for the Financial year of 2019-20, taxpayers will be governed by the old tax system.

Tax Slabs Exceptions

Based on the tax slab, not all income can be taxed. Income from capital gains is an exception. Depending on the asset which is owned and for how long it has been owned, the tax is charged. The period of holding will determine whether the asset is a long term or a short-term asset. The nature of assets is different from the different assets which also determines the holding period.  

Conclusion

The Union budget of Financial Year 2017, where the Indian government reduced the tax rate from 10% to 5%, for the people earning between the amount of Rs. 2.5 lakhs to Rs. 5 lakhs. Furthermore, the budget of 2020, also saw a reduction of tax rates for other slabs. The aim behind such a step was to encourage a higher number of income earners to pay tax and to reduce the reduction to the liability of tax for a large percentage of the population of India and also to avoid any penalties if the return is not filed and tax is not paid.