Income tax is a mandatory financial charge imposed by a government on an individual or entity’s earnings. Below is a comprehensive guide covering all aspects of income tax:
1. Definition of Income Tax
Income tax is a tax levied on the income of individuals, businesses, and other legal entities. Governments use the revenue from income tax to fund public services, infrastructure, and other national programs.
2. Scope of Income Tax
a. Applicability
Income tax applies to:
- Individuals: Salaried or self-employed individuals.
- Businesses: Companies, partnerships, and proprietorships.
- Others: Trusts, associations, and other entities.
b. Taxable Entities
- Residents: Taxed on their worldwide income.
- Non-residents: Taxed only on income earned within the jurisdiction.
3. Sources of Income
Income tax is generally charged on income from the following heads:
- Salary: Wages, bonuses, and perquisites from employment.
- Business/Profession: Profits or gains from business or professional activities.
- Capital Gains: Profits from the sale of assets like property or stocks.
- Income from House Property: Rental income from properties owned.
- Other Sources: Interest, dividends, lottery winnings, and more.
4. Computation of Income Tax
a. Gross Total Income
Sum of income from all heads.
b. Taxable Income
Taxable income = Gross Total Income – Deductions and Exemptions
c. Tax Rates
Income tax is usually progressive:
- Higher incomes are taxed at higher rates.
- Rates vary based on income levels and the applicable regime.
Example: India’s Tax Slabs for FY 2023-24 (New Regime)
- Up to ₹3,00,000: 0%
- ₹3,00,001 – ₹6,00,000: 5%
- ₹6,00,001 – ₹9,00,000: 10%
- ₹9,00,001 – ₹12,00,000: 15%
- ₹12,00,001 – ₹15,00,000: 20%
- Above ₹15,00,000: 30%
5. Deductions and Exemptions
a. Common Deductions
- Under Section 80C (India): Investments in PPF, EPF, NSC, etc.
- Under Section 80D: Medical insurance premiums.
- Home Loan Interest: Deductions for interest on housing loans.
- Education Loan Interest: Deduction for interest paid on education loans.
b. Exemptions
- House Rent Allowance (HRA)
- Leave Travel Allowance (LTA)
- Agricultural Income (subject to conditions)
6. Tax Filing Process
a. Steps
- Determine Gross Income: Aggregate all income.
- Claim Deductions and Exemptions: Reduce taxable income.
- Compute Tax Liability: Apply the relevant tax slab.
- Pay Taxes Due: After accounting for advance tax or TDS.
- File Tax Returns: Submit online or offline to the tax authority.
b. Forms
- Varies by country (e.g., Form 1040 in the U.S., ITR-1 to ITR-7 in India).
7. Advance Tax and TDS
a. Advance Tax
- Tax paid in installments during the year, applicable if tax liability exceeds a threshold.
b. Tax Deducted at Source (TDS)
- Employers and institutions deduct tax at the source of income.
8. Penalties and Interest
Failure to comply with tax laws can result in:
- Penalties: For non-filing or late filing.
- Interest Charges: For delayed payment of taxes.
9. Refunds
- Taxpayers can claim a refund for excess tax paid.
- Processed after filing returns and assessment by the tax authority.
10. Tax Compliance
a. Importance
- Avoid legal penalties.
- Ensure financial transparency.
b. Record Keeping
- Maintain receipts, invoices, and proofs for deductions and exemptions.
11. Specialized Income Tax Provisions
- Corporate Taxation: Separate rates and rules for businesses.
- International Taxation: Double Taxation Avoidance Agreements (DTAAs) for cross-border income.
- Special Exemptions: Varies by country for specific sectors (e.g., agriculture, start-ups).
12. Key Tax Authorities
- India: Income Tax Department under the Central Board of Direct Taxes (CBDT).
- USA: Internal Revenue Service (IRS).
- UK: HM Revenue & Customs (HMRC).
By – kartik.