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Nature of Income Tax in India

There are two different types of taxes – direct and indirect taxes. The direct taxes need to be paid directly by the assessees based on their income. Indirect taxes are levied through the goods and services used by a customer and finally, the seller pays the tax to the government. Central and state governments carry out this task and sometimes local governments also become a part of it.

Income Tax – Overview

The nature of income tax categorizes it as a direct tax. Taxpayers are divided into several categories depending upon their stay in India in the last 10 years and their income. Accordingly, they are subject to tax-paying under various slabs.

Companies and firms are also subject to similar tax-paying depending upon the nature of their business operation in India. A new tax regime is introduced in 2020-21 and taxpayers can choose whichever income tax they prefer. ITR filing makes you eligible for tax deductions under several conditions be it ROR or resident of India. Know all about the tax system and be a smart payer.

Who are the taxpayers?

Indians who have a source of regular income are subject to income tax. Non-Resident Indians are also a taxpayer under the direct tax. The various category of people who come under this slab of taxpayers include

  • Indians
  • Non-Resident Indians (NRI)
  • Hindu Undivided Family (HUF)
  • Body of Individuals (BOI)
  • Association of Persons (AOP)
  • Firms
  • Companies

 

However, the rate at which each of these categories collects tax differ. Firms and companies are bound to pay 30% of their profit, and others pay an amount based on the amount of their income. They are divided into slabs and accordingly the central government levies the tax on them.

What does taxability depend on?

Wondering how the government decides your taxability? Well, for different sets of people, different taxability is defined.

For individuals:

  • The physical presence of individuals in India categorizes them as Resident or Non-resident Indians. If you stay more than 182 days in India in one financial year, you are categorized as an Indian resident.
  • If you Spent less than 365 days in 4 preceding years or less than 60 days in one financial year, you are called a Non-Resident Indian.
  • Those Indians who marked themselves under the NRI slab for 9 out of 10 preceding years are considered as RNOR (Resident but Not-Ordinarily Resident).
  • Those who stayed for less than 729 days in the country in the 7 preceding years are put under the category of ROR (Resident and Ordinarily Resident).

 

For companies:

  • It depends upon the presence of the company in the geographical boundary of India. Divided into two parts, it includes those companies incorporated in India and those who just execute their management in India.

 

For Firms/LLP:

  • LLP (Limited Liability Partnership) and firms are subject to pay taxes depending upon their physical presence in India. If they wholly manage and control their affairs in the country, they are treated as Indian firms. However, if they partly manage and control their business in the country, they come under NRI companies of the country.

 

Understanding Taxability

Understanding the nature of income tax can become a bit confusing to understand. Well, first of all, the system levies tax depending upon your stay in India in the past 10 years. Apart from this, residents and ordinary residents, ROR, are required to present all their worldwide income along with all the foreign assets (if any).

For instance, suppose you are an Indian national working in a foreign country like California. Here, you invested in an insurance policy company that has trust units in California. After all this, you want to make a move back to India in 2021. Now, are you wondering if you need to pay tax for this policy? Let’s understand.

In this case scenario, the capital gain from a policy will be subject to income tax if only

  • You qualified as ROR in the same year when the units of the particular California-based policy were sold, matured, and transferred.

 

However, you may also be eligible for some exemption if only-

  • The insurance policy was issued by you on 1st April 2012 or after it but it must not exceed 1st Feb 2021.
  • The payable premium on the insurance must not exceed 10% of the capital sum assured.

 

Income tax slabs

The financial year 2020-21 introduced a new income tax regime for all the HUFs and individuals of India. It has brought some changes in the nature of income tax in India. However, you can still opt for the old regime of income tax. The new regime has lower tax rates as compared to the older one. However, except in a few cases, you don’t have the right to tax deductions or exemptions, unlike the older regime. So, the choice remains yours whether you want to pay via the old or the new regime.

Old Tax Rate in India Tax Slab New Tax Rate in India
Not Applicable Up to INR 2,50,000 Not Applicable
5% INR 2,50,000 – INR 5,00,000 5%
20% INR 5,00,000 – INR 7,50,000 10%
20% INR 7,50,000 – INR 10,00,000 15%
30% INR 10,00,000 – INR  12,50,000 20%
30% INR 12,50,000 – INR 15,00,000 25%
30% INR 15,00,000 & above 30%

Exemptions allowed under Old Tax Regime

Old Tax Regime may sound a hit higher than the new one but you definitely can claim exemptions under it. You can make your choice and go with either one.  There are more than 70 ways of exempting your tax under the old regime. Some of the common exemptions and deductions include:

  • Leave travel allowance
  • House rent allowance
  • Food coupons or vouchers
  • Mobile and internet reimbursement
  • Uniform allowance
  • Company leased car
  • Saving account interest
  • Leave encashment
  • ELSS (Equity Linked Saving Scheme)
  • Employee provident fund
  • Life insurance premium
  • Public provident fund
  • Principal and interest component of home loan
  • Children tuition fees
  • Investment in NPS
  • Health insurance premium
  • Tuition fees for children

 

How to File ITR?

There are two ways of filing Income Tax Returns-

  • Offline
  1. In the offline method, you need to go to the income tax e-filing portal and download the particular form.
  2. Extract the file and fill the form.
  3. Now, generate and save the XML
  4. Log in to the e-filing portal
  5. Open the income tax return file under the e-file menu
  6. Following the further steps, upload the file.

 

  • Online
  1. Log in to the e-file portal and open the income tax return e-file
  2. Fill the form carefully
  3. Verify the details
  4. Submit the file

 

Is it mandatory to file an Income Tax Return?

Yes, all those who have a taxable income need to file ITR. You may be subject to a penalty if you do not file the ITR.

Conclusion

Being an aware citizen is very important to live a peaceful and balanced life. So, know all about the nature of income tax and do not delay filing ITR. Make sure you mention all your income and contribute towards nation-building.

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