Income Tax in India – Tax Guide, Types & ITR Filing

Income tax is a direct tax that a government imposes on the annual income and profits earned by individuals and entities. It is calculated on the net taxable income of a person or entity for the applicable financial/fiscal year, which starts from 1^st April of a year and ends on 31^st March of the next calendar year.

Who Needs to Pay Income Tax

Under existing rules of the IT Act, any individual/business with income irrespective of the amount earned is liable to file income tax returns. But, currently tax on income is payable only if the net taxable income for a fiscal exceeds Rs. 2.5 lakh. The following are the key types of individuals and entities who are liable to pay tax provided their net taxable income for the financial year exceeds the prescribed limit:

• Salaried individuals
• Self-employed individuals
• Self-employed professionals
• Hindu Undivided Family (HUF)
• Legally recognised artificial persons
• Body of Individuals (BOI)
• Association of Persons (AOP)
• Companies and corporate firms
• Local Authorities

 What are Income Tax Slab Rates

Income in India is taxable according to prescribed income tax slab rates that vary based on the net annual income of the tax assesse. The slab rates for taxation of income are progressive in nature i.e. the slab rate increases with the net annual income of the individual. The slab rates for tax on income are liable to be changed periodically and are announced as part of the Union Budget announcement. The income tax slab rates for the financial year 2024-2025 (AY 2025-2026) are as follows:

Income Tax Slab for Individuals for FY 2024-25 (AY 2025-26)

• General Category (Less than 60 years):

Old Tax Regime		New Tax Regime
Income Slab	Income Tax Rate	Income Slab	Income Tax Rate
Up to Rs. 2,50,000	Nil	0 – Rs. 3,00,000	Nil
Rs. 2,50,001 – Rs.  5,00,000	5% above Rs. 2,50,000	Rs. 3,00,000 – Rs.  7,00,000	5%
Rs. 5,00,001-Rs. 10,00,000	Rs. 12,500 + 20% above Rs.  5,00,000	Rs. 7,00,000 -Rs. 10,00,000	10%
Above Rs. 10,00,000	Rs. 1,12,500 + 30% above Rs.  10,00,000	Rs. 10,00,00 – Rs. 12,00,000	15%
		Rs. 12,00,000 – Rs. 15,00,000	20%
		Above Rs. 15,00,000	30%

• Senior Citizens (60 years and above but below 80 years):

Old Tax Regime		New Tax Regime
Income Slab	Income Tax Rate	Income Slab	Income Tax Rate
Up to Rs. 3,00,000	Nil	0 – Rs. 3,00,000	Nil
Rs. 3,00,001 – Rs.  5,00,000	5% above Rs. 3,00,000	Rs. 3,00,000 – Rs. 7,00,000	5%
Rs. 5,00,001-Rs. 10,00,000	Rs. 10,000 + 20% above Rs.  5,00,000	Rs. 7,00,000 -Rs. 10,00,000	10%
Above Rs. 10,00,000	Rs. 1,10,000 + 30% above Rs.  10,00,000	Rs. 10,00,00 – Rs. 12,00,000	15%
		Rs. 12,00,000 – Rs. 15,00,000	20%
		Above Rs. 15,00,000	30%

• Very senior citizens (80 years and above):

Old Tax Regime		New Tax Regime
Income Slab	Income Tax Rate	Income Slab	Income Tax Rate
Up to Rs. 5,00,000	Nil	0 – Rs. 3,00,000	Nil
Rs. 5,00,001 – Rs.  10,00,000	20% above Rs. 5,00,000	Rs. 3,00,000 – Rs. 7,00,000	5%
Above Rs. 10,00,000	Rs. 1,00,000 + 30% above Rs.  10,00,000	Rs. 7,00,000 -Rs. 10,00,000	10%
		Rs. 10,00,00 – Rs. 12,00,000	15%
		Rs. 12,00,000 – Rs. 15,00,000	20%
		Above Rs. 15,00,000	30%

Note:

• Between Rs. 50 Lakh to Rs. 1 Crore – A surcharge of 10% of the income tax has to be paid as well.
• Between Rs. 1 Crore to Rs. 2 Crore – A surcharge of 15% of the income tax has to be paid as well.
• Between Rs. 2 Crore to Rs. 5 Crore – A surcharge of 25% of the income tax has to be paid as well.
• Above Rs. 5 Crore – A surcharge of 37% (under old regime) and 25% (under new regime) of the income tax has to be paid.
• Maximum rate of surcharge on income from dividends or income under the provisions of Sections 111A, 112A and 115AD is 15%
• 4% of the income tax has to be paid as Health and Education Cess by all taxpayers irrespective of the slab they fall into.

Income Tax Slab for Businesses

Income Tax Slab for Domestic Companies

Condition	Income Tax Rate (excluding surcharge and cess)
Total Turnover or Gross Receipts during the previous year does not exceed Rs. 400 crores	25%
When opted for Section 115BA	25%
When opted for Section 115BAA	22%
When opted for Section 115BAB	15%
Any other Domestic Company	30%

Surcharge, Marginal Relief and Health & Education Cess

Surcharge:

• A surcharge of 7% is levied on domestic companies if their total taxable income exceeds Rs. 1 Crore.
• A surcharge of 12% is levied on domestic companies if their total taxable income exceeds Rs. 10 Crore.
• A surcharge of 10% is levied on domestic companies which have opted for taxability u/s 115BAA or Section 115BAB

Marginal Relief:

• Marginal relief is a relief from surcharge, provided in situations where the surcharge payable is more than additional income that makes the person liable to pay surcharge.
• In case of domestic companies, the amount payable as surcharge should not be more than the amount of income earned exceeding Rs. 1 crore and Rs. 10 crore respectively.

Health and Education Cess:

• Health and Education cess of 4% shall also be levied on the amount of income tax plus surcharge (in case any).

Income Tax Slab for Foreign Companies

Condition	Income Tax Rate
Royalty from an Indian concern or Government in pursuance of an agreement made with the Indian concern after 31st March 1961, but before 1st April 1976, or fees for rendering technical services in pursuance of an agreement made after 29th February 1964 but before 1st April 1976 and where such agreement has, in either case, been approved by the Central Government	50%
Any other income	40%

Surcharge, Marginal Relief and Health & Education Cess

Surcharge:

• A surcharge of 2% is levied on foreign companies if their total taxable income exceeds Rs. 1 Crore.
• A surcharge of 5% is levied on foreign companies if their total taxable income exceeds Rs. 10 Crore.

Marginal Relief:

• As stated above marginal relief is a relief from surcharge, provided in cases where the surcharge payable exceeds the additional income that makes the person liable to pay surcharge.
• In case of foreign companies, the amount payable as surcharge should not exceed the amount of income earned exceeding Rs. 1 crore and Rs. 10 crore respectively.

Health and Education Cess:

• Health and Education cess at 4% shall also be levied on the amount of income tax plus surcharge (in case any).

Filing Returns is Mandatory

• The Income Tax Department is responsible for activities related to the taxation process.
• At the end of the financial year, every tax payer has to declare his income to the IT Department in a form prescribed by the Govt. of India.
• It is mandatory for individuals and entities earning income in India to file a return, irrespective of the tax being deducted at source.
• This ITR (Income Tax Return) Form summarizes income earned in a particular financial year.
• The income can be from business, salary, pension, income from housing property, or even income from capital gains.

Avoiding Penalties

• By filing the ITR form (Income Tax Return form) you inform the government about your earnings and the tax paid on it.
• When you file the Income Tax Return, it is proof of the income on which you have paid the tax.
• As per the Income Tax Act, it is mandatory to file ITR every year.
• Not filing an ITR can have serious implications. The IT Department may consider you a tax defaulter.
• It can attract penalties from the Income Tax Department.
• If you have paid more tax than required, the excess amount paid by you will be refunded.

What are the Different Types of Taxable Income

Under existing rules of the Income Tax Act 1961, the following are the key types of income that are subject to taxation as per the applicable rates:

• Income from Salary
• Income from Capital Gains
• Income from House Property
• Income from Business
• Other income such as lottery and other legal gambling, dividend income, etc.

Advantages of Filing Income Tax Return (ITR)

Tax returns should be filed by an individual who has a taxable income. If you are below 60 years of age and have an income up to Rs. 2.5 lakh, you are exempted from paying income tax. It has been seen that many salaried individuals are under the impression that their employer has deducted tax at source and hence their liability is over. Filing IT returns and income tax payment are two separate obligations. Even if you do not have a tax liability, you should file your income tax returns. There are several advantages of filing tax returns:

• Facilitates easy processing of loans
• For VISA processing, return filing is mandatory
• Quick registration of immovable properties is possible
• A credit card will not be issued by the bank till an applicant files his returns regularly
• Filing income tax returns helps set up a record with the Income Tax Department

Filing Income Tax Returns

According to the Income Tax Act, it is mandatory to file income tax returns if:

• If your gross total income is over Rs. 2,50,000 in a financial year. This limit exceeds to Rs. 3,00,000 for senior citizens and Rs. 5,00,000 for citizens who are above 80 years.
• You exist as a company irrespective of whether you witness a loss or profit.
• You look forward to claiming an income tax refund.
• Filing income tax return is mandatory if you are a resident of India and you have assets outside India.
• If you receive income from a property held under a trust for religious and charitable purposes, a research association, a political party, educational institution, news agency, medical or educational institution.
• In case of NRIs, income earned in India is taxable.

E-filing Income Tax

• For the first time in the year 2006-2007, the e-filing facility was introduced by the Income Tax Department.
• The benefit of e-filing has been extended to all assessees
• It is mandatory for firms and companies which require statutory audit under section 44AB.
• At present, a significant section of tax payers are e-filing income tax returns.
• The income tax department hopes to bring all the returns online.
• You can e-file your income tax returns at https://incometaxindiaefiling.gov.in/.
• e-filing returns has several advantages, like you don’t have to perform paperwork and waste time sorting them out.
• With the click of a mouse, you can log in to the secured website and file income tax returns online.

Before you make your income tax payments you should have a working knowledge of how income tax is computed. This will not only give you an idea on how much you have to pay but also find out ways in which you can save tax. If you are aware of the income tax slabs, computing the tax amount is easy. The final tax which is payable is calculated by applying the tax rates which are in force and then by deducting the taxes which have been paid through TDS (tax deduction at source).

To save the maximum amount of tax, it is necessary that you examine the deductions which have been defined under the different sections of IT Act, 1961. Certain investment avenues such as National Savings Certificate and Public Provident Fund are eligible for deduction under section 80C of the IT Act 1961. However, most tax payers tend to ignore a range of investment avenues which are eligible for tax concessions. Here is a quick rundown on investments which qualify for deductions under different sections of the Income Tax Act:Under section 80C, the Income Tax deductions are allowed for the following:

1.  Tax Saving Mutual Fund
2. Tax Saving Fixed Deposit
3. National Savings Certificate
4. Repayment of the principal on a housing loan
5. Life insurance policy premium
6. Equity Oriented Mutual Funds
7. Contributions made to Employee Provident Fund
8. Under section 80C, the tax exemption limit is Rs. 1.5 lakh.

Deductions Allowed under Various Sections

A taxpayer can claim for additional deductions under various sections. Some of these are mentioned below:

• Under Section 80CCC, contributions to annuity plans such as LIC are considered for tax benefit up to Rs. 1.5 lakh.

• Interest on savings account is tax exempt up to Rs. 10,000 annually under Section 80TTA.
• Investment in Rajiv Gandhi Saving Scheme is eligible for deduction under Section 80CCG.
• Under Section 80D, if an individual makes a payment for medical insurance premium for his spouse, children or his own self, he can claim income tax deduction for the same for Rs. 25,000. For senior citizens, the limit has been extended to Rs. 30,000. Additionally, preventive health check-up costs till Rs. 5000 per family qualify for tax deductions.
• Under Section 80DD, if a family member of the tax payer is suffering from 40% disability, he can claim deductions for up to Rs. 75,000 for spending on medical treatments for disabled dependents.
• Under Section 80DDB, a person is allowed deductions if he pays an amount of Rs. 40,000 or more on treatment of specific diseases which includes malignant cancers, neurological diseases, chronic renal failure, haematological disorders and AIDS.
• If you have taken an education loan and you are repaying the interest, you will qualify for income tax deductions under Section 80E. However, deductions are not allowed for repayment of the principal amount of the education loan.
• Under Section 80G, 80GGA, 80GGB, 80GGC, if a person has made donations to an approved body during a financial year, he will qualify for deductions.
• A standard deduction of Rs. 50,000 has been introduced in Budget 2022 for the salaried class. This deduction is allowed irrespective of expenses incurred by the employee. The assessee does not have to submit actual bills to claim this deduction.

About Income Tax Rebate

A number of confusions arise when terms like income tax rebate, income tax exemption and income tax deduction are used. Although all these terms are beneficial to the tax payer, they have different meanings.

• Income tax rebate includes those items which can be claimed from the total tax payable.
• Tax deductions and tax exemptions are claimed from the income whereas in case of rebates, claims are made from the tax payable.
• You can claim an Income Tax rebate under section 87A when you file the income tax returns.
• A rebate will be available if the tax payer is a resident individual who has not crossed the 80 year mark and whose taxable income is Rs. 5,00,000 or less.
• Hindu undivided Families, companies, trusts, LLP, partnership firms and NRIs are not eligible for tax rebate.

Difference Between “Deduction” and “Exemption

• Both tax exemption and tax deduction are tax relief which are extended by the government to the tax payers.
• If an income is eligible for tax exemption, that particular income will not be liable for taxation.
• It means that the income is completely tax free and is not included when computing the total taxable income.
• In case of deductions, initially the income is included when the total income is computed.
• If you qualify as per the guidelines provided for a deduction, the income tax deduction will be available to you.
• In case of tax deduction, the income tax liability decreases by a specific amount for investing in a particular avenue.
• In case of deductions, a monetary ceiling may be specified whereas generally there is no limit on exemption.

Useful Income Tax Exemptions for the Salaried

As per the Income Tax Act, salaried employees are eligible for several income tax exemptions. It is necessary that the salaried employees intimate the employer that they are claiming these exemptions. While deducting the TDS, the employer would then compute the tax on the balance income. Let’s take a look at the tax deductions in details:

• Most employers give their employees a house rent allowance. As per the Income Tax Act, a portion of the HRA is exempted from tax.
• Some employers also give special allowance to the employees. A certain part of this amount is exempted from tax provided the vacation was within India.
• In most cases, employees are eligible for leaves when they serve an organization. When they do not claim these leaves, they can encash these leaves. The amount which is received as leave encashment can also be claimed as exemption.
• Up to a certain limit, tax exemption is also given on pensions.
• At times, some employees opt for a voluntary retirement (VRS) before the age of retirement. In such cases, the employer pays out an amount of money to the employee. This amount received by the employee in the event of VRS is exempted from tax.
• Several other allowances such as children education allowance and transport allowance are exempted from tax but only up to a certain limit.

An Insight Into Tax Planning

• As a tax payer, you should be aware of the tax planning strategies to minimize the tax payout.
• Tax planning is a way by which you take the full advantage of deductions, exemptions, reliefs and rebates while strictly following the law.
• With proper tax planning, you can reduce your tax liability and pay lesser tax.
• It is important that you focus on the sections in which you can save the most.
• For long, insurance has been a front-runner among instruments which are considered for tax saving.
• For young earners who lie in the age bracket of 23 to 30, it is a good idea to get life insurance and health insurance cover.
• As it is the starting phase of their career, it is the right time to start saving for the future.
• For tax planning, it is best to get in touch with a tax consultant.
• Tax consultants also known as tax advisers have an understanding of the regulations regarding individual and businesses taxes.

Tax Planning without the Help of a Consultant

• The prime objective of tax planning should be to reduce tax liability.
• It is every taxpayer’s wish that he has the ability to retain maximum part of his earnings.
• It would totally be in the interest of the assessee to plan his taxes well in advance, avail the exemptions and deductions.
• If you do the tax planning you, it can be both challenging and rewarding.
• You have the advantage of choosing a tax saving instrument which best suits your needs.
• At the same time it is challenging, as a wrong decision would mean that you are stuck with an unsuitable investment for 3 to 5 years, if not more.

Avoid Tax Evasion

One of the key problems in India is the painfully low numbers of tax payers which indicates that tax evasion takes place at a large scale. Tax evasion is termed as an illegal activity which includes not filing the income tax returns or misrepresenting the tax amount which needs to be paid.

If the Income tax authorities scrutinize and discover that you have deliberately tried to reduce the tax liability, you will be penalized. The penalty can go up to almost three times the amount which has been concealed. Hence, it is best to exercise precaution when filing the income tax return, because if a return is scrutinized for an anomaly, it will have serious financial implications.

FAQs

Q. What is the difference between TDS and income tax?