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A Quick Guide To Income Tax Act 1961 Of India

A Quick Guide To Income Tax Act 1961 Of India

Income Tax in India
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Income tax in India is a form of tax that is payed to the government based on one’s income/ profits. The tax collected by the government is then used for various public services, infrastructure development, defence spending and subsidies among other welfare purposes. While, it is mandatory to pay tax if you earn a certain amount of income every year, there are ways to reduce your tax burden and make use of tax saving plans.

The Income Tax Act of 1961 is a comprehensive statute that sets the rules and regulations that govern taxation in India. The Income Tax Act contains a total of 23 chapters and 298 sections according to the official website of the Income Tax Department of India.

Income Tax Act has few broad provisions which you may need to use in your regular filing of income tax. You have three stages of filing returns as an individual taxpayer:

  • Estimate Taxable Incomes under different sources (heads of income)
  • Estimate total income by deducting eligible deductions from gross total income or total taxable income
  • Pay the tax on total income

The budget of 2020 has added an option for tax estimation for individual taxpayers. While the old slab rates for income tax remain the same, you now have another slab option under section 115BAC. Let’s go step by step with the estimate of tax liability and slab rate regime:

Estimating Taxable Income

Income Tax Act, 1961 divides the incomes under following five heads for taxation:

  • Salary
  • Income from house property
  • Capital gains
  • Profit and gains from business or profession
  • Income from other sources.

Other sources will include all incomes which do not fall in any of the other four categories. Most prominent other incomes would be – interest on bank deposits, bond coupons, and gifts. Any money you receive from a life insurance company as taxable maturity benefit or claim amount is also added to other incomes.

The retirement benefits, however, you should count under salary when taxable. Income from house property will only include rental incomes. If you sell the house the gain or loss are treated as a capital gain.

After 2020 budget you have two options to estimate your taxes, old regime and the new regime. The old regime continues to allow the deductible allowances and deductions on savings. However, the new regime focuses on reducing the tax for those not participating in these schemes.

Type of Income Old Regime New regime
Salary Deductible Allowances including HRA Only travel allowance and reimbursements are deductible
Estimate income or loss from self-occupied house Self-occupied property is not included for income/loss calculation
House Property Loss from house property adjustable with other incomes Loss from house property cannot be adjusted from any other income or carried forward
Carry forward the unadjusted loss

Capital gain, business and profession income and income from other sources have not seen any changes in the new regime.

Deductions from Gross Total Income

Once you have estimated your taxable income, which is also your gross total income, under old regime you could claim certain deductions. These deductions were allowed under section 80C to 80U. Under the new regime, however, deductions from gross total income include only section 80CCD(2) and 80JJAA.

Section 80CCD(2) is the deduction on employer’s contribution to your NPS tier-I account, while 80JJAA applies to the income from business and profession.

How Much Difference between New & Old Regime?

The difference is not much if your income is above Rs 15 lakh a year. However, for lower incomes, you can have a huge difference, based on how much tax-saving investments you have committed. If you have not invested enough in the tax-saving schemes, using the new regime slabs will be useful in bringing your tax liabilities down.

If your taxable income is below Rs. 5 lakhs in 2020-21, you may not have to pay any tax.

Tax Slabs Under New Regime (effective for FY 2020-21)

New Tax Slab: Section 115B
Sl. No. Total income Margin Rate of tax Max Tax
1 Up to Rs. 2,50,000 2,50,000 Nil 0
2 From Rs. 2,50,001 to Rs. 5,00,000 2,50,000 5% 12,500
3 From Rs. 5,00,001 to Rs. 7,50,000 2,50,000 10% 25,000
4 From Rs. 7,50,001 to Rs. 10,00,000 2,50,000 15% 37,500
5 From Rs. 10,00,001 to Rs. 12,50,000 2,50,000 20% 50,000
6 From Rs. 12,50,001 to Rs. 15,00,000 2,50,000 25% 62,500
7 Above Rs. 15,00,000 30%

Under the new slabs, there are no distinctions based on age or gender of the taxpayer. Under old regime estimates the tax liability comes around Rs 2.3 lakhs due to the deductions from gross total income.

So, use the old tax regime if:

  • You are already investing to meet your Section 80C and 80D deductions
  • You have a running home loan on self-occupied property

Otherwise, switching to the new regime will reduce your tax liability.

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