Taxes are an essential part of life. Indeed, as Benjamin Franklin put it, “In this world, nothing is certain except death and taxes”. Taxes are a major source of government revenue and help not just fund the public system, but also create demand for the national currency. There are many forms of taxes, but arguably the one we are all most familiar with is Income Tax.
If you earn about a certain amount, you fall under one of many Income tax brackets that exist. According to the specificities of the bracket, you fall under, each of which we will explore further in this article, you are eligible to pay part of your earnings to the government, in return for the privileges you enjoy as a citizen of the country. In this article, we will take a look at an income tax guide in order to go about understanding income tax in India, the various income tax bands that exist, and certain other basic income tax knowledge.
The first thing to note is that income tax is not charged exclusively on a fixed income or salary that you own. There are a number of other assets that require you to pay tax, and knowing these is part of having some basic income tax knowledge. Let’s take a look at sources of income that are taxable.
For most, their salary is their primary source of funds. Subsequently, it will also account for the maximum percentage of their income tax payments. In India, we follow a progressive taxation system. Meaning, as your income increases, the percentage of tax you pay also increases (up to a certain amount, of course). This is done in order to ensure an equal distribution of the tax burden. As a result, there are a number of income tax bands that have different criteria, and the income tax guide for you will vary based on the band you fall under. To get some basic income tax knowledge lets take a look at some of these bands as of the latest updates.
According to the new income tax rates:
1. If you earn under 2.5 lakhs a year, your income is not taxable.
2. If you earn between 2.5 -3 lakhs or 3 – 5 lakhs you are taxed at a rate of 5%.
3. Those earning between 5 to 7 lakhs a year are required to pay a 10% tax on their income.
4. Those in the 8 lakh to 10 lakh band are required to pay 15% of their income as taxes.
5. If you earn between 10 to 12 lakh, you will be taxed at a rate of 20%,
6. Earners in the 12 to 15 lakh are taxed at 25 %.
7. Finally, those who earn above 15 lakhs are required to pay 30% of their income in taxes.
An important thing to note here is that these tax rates also come with a plethora of tax exemptions, so if you’re moving up in life and getting worried about having to pay more tax, no that, with some clever investing, you can drastically reduce the tax you have to pay and be more financially secure. This, in many ways, is also a core reason for the progressive taxation system and the tax exemptions available, as it incentivizes those with the means to do so, to invest in the economy.
Income from Property.
Those who own property and are making a profit on it, which in most cases is through renting and leases, are required to pay a percentage of their earnings as income tax. In the case of homes, since it is likely that you funded the purchase of your property through a home loan, it should be noted that interest paid on your home loan, up to Rs. 2 Lakhs are tax-deductible in any given assessment year. The principal portion, up to Rs. 1.5 Lakhs is also deductible provided you do not sell the house within 5 years of buying it.
Capital Gains Tax.
In a previous amendment, the government made long term capital gains taxable making it one of the most discussed tax-related topics. Capital gains tax is a tax paid on the profit you make from a transfer of any capital asset you possess. From selling your house to your jewellery or even returns gained from the sale of your stock investments, all such ‘transfers’ attract a capital gains tax.
Income from Business.
Even if you are not a salaried worker and are an entrepreneur running a business in India, the profits you make are also considered under the purview of the income tax department of India. Profits earned by owners of companies and businesses are also taxed. This tax generally brings self-employed workers such as freelancers under the tax blanket as well.
India has seen several game shows achieve great success in the country. However, some basic income tax knowledge would help you realise that even this prize money that is ‘won’ by contestants, is taxable. Any additional income you earn (if you happen to go on a game show) or on your fixed deposit or bank account interests, is taxable.
Paying income tax is a requirement for all citizens of the country that fall under the purview of the law and any given tax bracket. Hopefully, now that you have a basic income tax guide, hopefully enabling you to maneuver paying your income taxes successfully, ensuring you do not attract any financial penalties or worse yet, legal action against you.
This does not, however, mean that there is no means to save tax, it just has to be done through the right channels. Section 80C, among others, offers a number of tax-saving benefits. For example, one could invest in a PPF to ensure they pay tax on a lesser principal income and save that money as it collects interest. Premium payments on health insurance also offer tax returns and if you are a family with children, the sukanya samriddhi yojana is a government initiative that is aimed at incentivising you to set up an education fund for your daughter, which also offers tax benefits.
While paying taxes might be inconvenient, it is a necessary requirement, one that comes with a number of benefits that can be realised through understanding income tax in India and some smart financial planning.