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Basics Of Income Tax For Beginners

What is Income Tax?

Income Tax is a form of Tax imposed by the Government of a country on the income of its citizens, whether it has been generated by business(s) or individuals, inclusive of jobs and proprietorship. Such imposition on the Income of the citizens is a way for the Government to generate revenue and complete the cycle of cash flow by funding the same money for public services, governmental obligation fulfilment, disaster management, and even food rationing among the needy. Therefore, any earned money either by Individuals or by companies/businesses through any means (limited to legal means only) is subject to Tax in India. However, a place is always saved for certain exceptions. 

History of Income Tax in India

Income Tax in India roots its existence in ancient times, leaving its evidence in scriptures such as Manu Smriti and Arthshasthra. The detailed analysis given by Manu portrays the existence of a well-planned taxation system, which suggests the king levy taxes on its people according to their income and outflow. According to the sage Manu, the absenteeism of taxation is as harmful as exorbitant taxes, and the two extremes shall be avoided. It should be such that the payer doesn’t feel a pinch in paying. Moreover, the traders and craftspersons/artisans should pay 1/5th of the profits in silver or gold, and the agriculturists should pay 1/6th, 1/8th, and 1/10th of the production, varying as per circumstances. Additionally, Arthasastra defined each Tax to be specific and left no space for arbitrariness. Kautilya’s Arthasasrtra has also defined in inordinate detail the structure of tax administration in the Mauryan Realm. It is notable that the current tax system is quite similar to the taxation system in vogue about 2000+ years ago. It will be reasonable to assert the fact that Arthasastra and Manu Smriti were the first authoritative texts on taxation centuries before these legislations on Income Tax came into existence.

Income Tax Laws and its evolution

The Indian Income Tax Act of 1860

The Indian Income Tax Act of 1860 was introduced for the first time at India’s First Union Budget by then (Pre-independence) finance minister Sir James Wilson. This act was enforced to cover the damage caused to the (then) Government as a result of the Military Mutiny that took place in 1857. The act created four different income slabs to be taxed separately

1. Income from landed property;
2. Income from professions and trades;
3. Income from Securities;
4. Income from Salaries and pensions.

The Indian Income Tax Act of 1886

This act, with various amendments from time to time, remained in force up to 1918, when the Indian Income Tax Act of 1918 was passed. According to the new Act of 1886, income was further divided into four different schedules to be taxed separately:

1. Salaries, pensions or gratuities;
2. Net profits of companies;
3. Interests in the securities of the Government of India;
4. Other sources of income. 1918- A new income tax was passed.

The Indian Income Tax Act of 1918 rescinded the Indian Income Tax Act of 1886 with numerous vital changes.

The Indian Income Tax Act of 1922

Again, the act was replaced by another new act in 1922, which started the administrative journey of the Income-tax Department. For the first time, various income authorities were given a specific nomenclature. The Act of 1922 remained in force until the year 1961, as it had become quite complicated due to numerous amendments, and the need for a simplified text was felt, which gave rise to the Indian Income Tax Act of 1961.

The Indian Income Tax Act of 1961

 In 1956, the Government referred to the law commission the task of simplifying the Indian Income Tax Act of 1922 with a view to preventing the evasion of Tax. After consulting with the Ministry of Law, the Income Tax Act of 1961 came into existence and was brought into force on April 1 1962. Since 1962, many amendments of an extensive nature have taken place in the Income Tax Act, and at present, there are 23 Chapters, 14 Schedules, and 298 Sections that define five slabs of income.

(1) Income from Salary;

(2) Income from House Property;

(3) Income from Profits and Gains of Business or Profession;

(4) Income from Capital Gains;

(5) Income from Other Sources.

Important Terminologies in Income Tax

1. Previous Year: Any financial year starts from April 1 of year one and ends on March 31 of next year (ex-April 1, 2023- March 31, 2024). As per the Income Tax Act, the income earned in the current year is subject to Tax in the next year. The year in which income is earned is known as the previous year.
2. Assessment Year: The 12 month-period that comes immediately after the financial year is known as the Assessment Year. It is the duration from April 1 to March 31, during which revenue generated in the course of the fiscal year is subject to Tax. For Ex, the Assessment Year will be 2022-23 for revenue generated between April 1 2021, and March 31 2022.
3. Tax Deduction at Source [TDS]: TDS is a kind of Tax on an individual’s income in which a certain deduction is made on the salary/pay of an employee/payee by the employer/payer, which is then remitted to the Government as the Tax on that respective income/salary/pay of that employee/payee.
4. Standard Deduction: Standard deduction is the gross deduction allowed on the gross income of an individual. Earlier, the standard deduction of INR 40,000 was allowed for one gross income of an individual. However, after the amendment made in 2019, the limit of standard deduction has been extended to INR 50,000 available on gross total income. This tax benefit can be availed irrespective of the sum spent on Medical and Transport Allowance.
5. Tax Exemptions: Tax exemptions are those monetary exclusion that allows an individual to reduce tax liability on the gross income or reduce the taxable income.

Income Tax and Deductions

The deduction can be defined as a tax benefit that can be used to reduce one’s taxable income and is allowed by the Income Tax Department to diminish your Income, which ultimately condenses your tax liability. Section 80 of the Indian Income Tax Act allows the exercising of this practice (Section 80C to 80 U). These deductions are subject to a reduction from your gross income, which results in taxable income. Consequently, the higher the deduction, the lower the tax liability.

Section 80 C & deductions

Section 80 C of the Income Tax Act allows you to deduce your taxable income. According to this section, INR 1,50,000 from the gross income can be reduced in different manners. Commonly used speculation modes under section 80C are as follows –

• Public Provident Fund
• Employee Provident Fund
• Tax saving fixed deposit
• Equity-linked savings scheme
• Insurance premium

Who pays Income Tax?

Every person inclusive of artificial person [inclusive of Hindu Undivided Family (HUF), Body of Individual (BOI), Association of Persons (AOP), Companies, Corporate Firms, Local Authorities, All Artificial Juridical Person] is liable to pay taxes in India whether it includes domestic transactions or foreign transactions. However, an NRI is only liable to pay taxes on his/her generating out of Indian Assets, or salary received in India, and service provided in India, excluding income generated independent of any service, job, or property in relation to India. It is important to note that each of the taxpayers is taxed differently according to the Industry and income slabs.

Income Slab (in INR & Lakhs)	Assessment Year (2023-2024)			Assessment Year (2024-2025)
	< 60	60-80	>80	< 60	60-80	>80
<2.5 Lakhs	O %	o %	o %	o %	o %	o %
2.5 – 3 Lakhs	5 %	0 %	0 %	5 %	0 %	0 %
3 – 5 Lakhs	5 %	5 %	0 %	5 %	5 %	0 %
5 – 10 Lakhs	20 %	20 %	20 %	20 %	20 %	20 %
10 Lakhs <	30 %	30 %	30 %	30 %	30 %	30 %

To check the Newest Tax Regime (Income Slab) in detail, click here

Exceptions:

This wide array of Income Tax imposition does come with certain relaxations. In the following aspects, Tax does not apply –

1. If an individual is less than 60 years of age and earns up to INR 2,50,000 annually.
2. If an individual is a Senior Citizen [60 years or more than 60 years and less than 80 years of age] and earns up to INR 3,00,000 annually.
3. If an individual is a Super Senior Citizen [80 years or more than 80 years] and earns up to INR 5,00,000 annually.
4. Allowances [exhaustive list under section 10 of the Act 1962]
5. Agriculture Income
6. Trust/charitable organization

How to file an Income Tax Return?

Taxable Income

1. Salary: Salary, leave encashment (basically all the money you receive while rendering your job in the course of your employment agreement), Reimbursement/Allowances.
2. Capital gains: Income from gain or loss when you sell a capital asset
3. House Property: Income from house/building (owned/self-occupied/rented)
4. Business: Income/loss that arises as a result of carrying on a business or profession
5. Other Source: Residual head (includes your income from savings bank accounts/fixed deposits/family pension/gifts)

Documents Required to File ITR

Salary	Capital gains	House property	Business	Another source
Form 16/16A26ASrent receipt paid for HRApayslipsinvestments under Section 80C, 80E, 80D and 80G	mutual fund statement, ELSS statementsale/purchase of equity or debt fundspurchase/selling price of a house details of registration (if any house property is sold) Capital gains statement showing the sale of shares and stock trading	PAN card detailsco-owner detailsproperty addresshome loan interest certificate	mutual fund statement, ELSS statementsale/purchase of equity or debt fundspurchase/selling price of a house details of registration (if any house property is sold)Capital gains statement showing the sale of shares and stock trading	Bank FD detailsdetails of interest received from tax-saving or corporate bonds.

The right form to choose

The process to file ITR

ONLINE [To file the ITR form for individual and self-employed persons]

• Step 1- Visit the official website: e-filing portal.  
• Step 2- Log in to your account by entering details [PAN- password- Captcha code]. 
• Step 3- Select menu>e-file>Income Tax Return
• Step 4- fill in details: PAN, Assessment year, ITR Form Number, Filing type (Original/Revised), Submission mode (Prepare and Submit Online)
• Step 5- Proceed by clicking “Continue.” 
• Step 6- Read the directions and click on “Save Draft” to save the details 
• Step 7- Once completed, select the verification option as per your convenience. 
• Step 8- Select “Preview and Submit”. 
• Step 9- Verify the details filled
• Step 10- Submit ITR. 

Once verified, the filed ITR can be viewed through the respective account. 

OFFLINE [To file the ITR form for individual and self-employed persons]

To proceed with offline ITR, download the file from the website and fill out the form using Excel/Java utility tools using the following steps –

• Step 1: Visit the income tax filing website. 
• Step 2: Visit Downloads> Download IT Return Preparation Software
• Step 3: Download the utility ZIP file
• Step 4: Open the utility from the folder.
• Step 5: Fill in the details for the selected ITR form
• Step 6: Confirm every tab and calculate the Tax.
• Step 7: Produce and save XML file. 
• Step 8: Log in to the account.
• Step 9: Select menu>e-file>Income Tax Return
• Step 10: fill in details: PAN, Assessment year, ITR Form Number, Filing type (Original/Revised), Submission mode (Upload XML)
• Step 11: Select a verification method among the six available options. 
• Step 12:  Continue
• Step 13: Attach ITR XML Doc/file
• Step 14: Submit the ITR.

Conclusion

Income tax and its practices have paved quite a very long way, bringing its roots from 2300 years ago to the Vogue era of the present time. Irrespective of the changes, which are indeed a product of ever-evolving industries and their practices, it is a proven fact that the presence of Income Tax is indeed a fundamental pillar in embracing and pushing the world’s prospects in an upward spiral by expanding its economy.

However, both excessive and absence of Income Taxes will deprive a state of monetary gains and advancements in the material world. Therefore, it is quite important to maintain a balance between these two aspects in such a manner that the payer does not feel a pinch in paying taxes.

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