Income Tax: not an easy affair


Income Tax in India

Taxpayers are mostly dependant on deposit of income tax on Chartered Accountants and they have been confused in the process that whether their attempts to save tax fall under evasion of income tax or its avoidance of income tax. Needless to say, Chartered Accountants advise them to invest, buy or show expenses by which income tax can be avoided.

We as taxpayers are always averse to paying the income tax and look out for opportunities to save the money paid as tax.

With 6.63crores Income Tax Return (ITRs) filed, this year witnessed an increase of over 16 lakhs ITRs than the returns filed for the Assessment Year 2020-21. Income tax is a tax amount paid by every individual or entity based on their income earned during the fiscal year as per the Union Government's income tax slab. The Income Tax slabs tend to change over time based on the fluctuations in the inflation level.

The Government also ensures that individuals in lower-income brackets receive an income tax rebate. The main idea behind the income tax slab is to ensure that the country has progressive and fair tax structures.

What are cess and surcharge?

Cess and surcharge are the taxes levied by the Union Government to raise funds for government operations. Though they both are charged to add money to the revenue of the government, these are different in many aspects. A Health and Education cess of 4% is charged to health and education regardless of the income whereas, a surcharge of 10% is levied against those whose income falls between Rs 50 lakhs and Rs. 1 crore. 15% tax surcharge is levied on the income of Rs 1 crore annually. The maximum surcharge rate for capital gains under sections 111A, 112A and 115AD are limited to 15% regardless of the taxable amount.

CessSurcharge  
Cess rate is fixedThe surcharge rate varies according to the bracket into which the individuals fall.  
The cess on the surcharge and the total tax are calculated by the authorities.  A surcharge is only applied to the total tax amount.
Cess is only used for one purpose. It can't be used for anything else.  The surcharge can be used for whatever purpose the government sees fit.  
Cess is aimed at public welfare.  Surcharge aims to tax high earning individuals.  
Cess is levied on everyone.  Only higher income brackets face Surcharge.  
Cess is applicable on Income Tax for individuals below 60 years  A surcharge is applicable on Income Tax for individuals below 60 years

Taxable IncomeSurcharge Rate  
50 lakhs- 1Crore  10%
1 Crore – 2 Crore  15%
2 Crore – 5 Crore  25%
5 Crore – 10 Crore  37%
10 Crore & above37%  
Surcharge applicability for the financial year 2021-2022 and Assessment year 2022-2023

What is Income Tax Rebate?

In layman's terms, an income tax rebate is a tax refund. Section 87A of the Income Tax Act provides for a tax rebate of up to Rs. 12,500 for individuals with gross taxable incomes of up to Rs. 5 lakhs. Section 237-245 of the Income Tax Act also includes provisions for a tax rebate.

The Government of India also provides rebates for women under Section 87A of the Income Tax Act, 1961. Income tax slabs for the assessment years 2021-2022 and 2022-23 for women are the same as for men under both new and old tax regimes.

Senior citizens and Super Senior Citizens

A resident who is 60 years old or above but less than 80 years during the previous year is considered a Senior Citizen for Income Tax purposes whereas a Super Senior citizen is a resident who is 80 years or above at any time during the previous year.

Income Tax SlabsTax Rate  
Up to 3 lakhsNil  
3 lakhs – 5 lakhs5% of the total income + 4% cess  
5 lakhs- 10 lakhs  20% of the total income + ₹10,500+ 4% cess  
Above 10 lakhs30% of the total income + ₹1,10,000+ 4% cess
Income tax slab for Senior Citizen

Income Tax SlabTax Rate
Up to 5 lakhsNil  
5 lakhs- 10 lakhs  20% of total income + 4% cess
Above 10 lakhs30% of total income +₹1,00,000+ 4% cess
Income Tax Slab for Super Senior Citizen

Income Tax Return forms

ITR Form 1 (Sahaj) and ITR Form 4 (Sugam) are the most filed forms by small and medium taxpayers. Sahaj form is filed by any individual having income of up to 50lakh, income received from salary, one house property, other sources like interest etc. whereas, Sugam form is filed by individuals, HUFs and firms having total income up to 50lakh from business and profession.

ITR form 3 is preferred by the people having income as profits from business/profession. ITR form 5 is filed by LLPs, ITR form 6 is filed by Businesses and ITR form 7 is filed by trusts.

Income Tax Slab Rates in India

The tax slab system illustrates different tax rates prescribed for different income ranges. Such slabs are subject to change with each budget. Individual taxpayers are divided into three categories: individuals (under the age of 60), residents and non-residents, resident senior citizens (60 to 80 years of age), and resident super senior citizens (aged more than 80 years). The Indian Income Tax laws tax each taxpayer differently. The intriguing part is that individuals have been given the option of continuing with the old tax regime or paying tax under the new tax regime.

The new regime is introduced under section 115BAC giving taxpayers an option to pay lower taxes. Income Tax Slab Rates for the financial year 2021-22 (AY-2022-23) provide the option to the taxpayers to choose either-

  • To pay income tax at lower rates as per New Tax regime on the condition that they forgo certain permissible exemptions and deductions available under income tax, Or

Income Tax Slab New Regime FY 2021-22 (AY 2022-23)

Taxable IncomeIncome Tax Rates  
Up to ₹2.5 Lakh  Nil
₹2.5 Lakh – ₹5 Lakh5%  
₹5 Lakh - ₹7.5 Lakh  10%+ ₹12,500
₹7.5 Lakh - ₹10 Lakh  15%+ ₹37,500
₹10 Lakh - ₹12.50 Lakh  20%+ ₹75,000
₹12.5 Lakh - ₹15 Lakh  25%+ ₹1,25,000
More than ₹15 lakh30%+ ₹1,87,500  
Income Tax Slab- New Regime
  • To continue to pay taxes under the existing tax rates. The assessee can avail of rebates and exemptions by staying in the old regime and paying tax at the existing higher rate

Income Tax Slab old Regime FY 2020-21 (AY 2021-22)

Taxable IncomeIncome Tax Rates  
Up to ₹2.5 Lakh  Nil
₹2.5 Lakh – ₹5 Lakh5% of total income exceeding ₹2.5 Lakh  
₹5 Lakh – ₹10 Lakh20% of total income over and above ₹5 Lakh + ₹12,500)  
Above ₹10 Lakh30% of the total income over and above ₹10 Lakh + ₹1,12,500)  

Most of the deductions and exemptions are not allowed if the taxpayers opt for a new tax regime. Though, there are some which are available-

  • Any compensation received to meet the cost of travel on tour or transfer
  • Daily allowance received to meet ordinary regular charges or expenditures you incur on account of the absence of a regular place of duty
  • Transport allowance in case of specially-abled person
  • Conveyance allowance received to meet the conveyance expenditure incurred as part of the employment
  • Deduction for employer’s contribution to NPS account (Section 80CCD (2)).
  • Deduction for employer’s contribution to NPS account (Section 80CCD (2)).

The salaried taxpayer cannot change their choice anytime during the financial year. However, they can change their choice when filing the income tax return. That means a taxpayer can opt for a new tax regime in one year and choose the old one in another year.

Whereas the non-salaried taxpayer has to choose the new regime. Once the non-salaried taxpayer opts out of the new tax regime, they cannot opt-in again for the new tax regime in the future.

Certain announcements were made in Budget 2022.

  • On payment of additional tax, taxpayers will be able to update their returns and include any omitted income.
  • Corporate surcharge to be reduced from 12% to 7%
  • The eligible start-ups under Section 80 IAC benefits are now extended to be eligible start-ups incorporated until 31st March 2023
  • AMT to be reduced to 15% for co-operative society

How to save tax on salary?

To save taxes, make sure you have a proper tax management plan in place. The Income Tax Act allows citizens to save taxes through deductions/ exemptions under Section 80 of the Income Tax Act. The most popular section of the Income Tax Act of 1961, Section 80C, allows a maximum deduction of Rs 1.5 lakh per year from the total income of individuals and HUFs. It is important to note that Corporations, Partnership firms, and LLPs are not eligible for this benefit.

Deduction list under Section 80C

Investment OptionsAverage InterestLock-in period forRisk Factor
ELSS funds  12%-15%3 yearsHigh
NPS Scheme  8%-10%Till 60 years of ageHigh
ULIP  8%-10%  5 yearsMedium
Tax Saving FD  7%-8%5 yearsLow
PPF  7.10%5 yearsLow
Senior Citizen saving scheme  7.4%5 years + 3years extensionLow
National  6.8%5 yearsLow
Sukanya Samriddhi Yojna  8.4%Till 21 years of ageLow

Apart from this, there are other sub-sections which deal with other possible deductions. Section 80TTA (Deduction from gross total income for interest on Savings bank account), Section 80 GG (Deduction for house rent paid), Section 80 E (Deduction for interest on education loan for higher studies), Section 80EE (Deductions on home loan interest for first-time homeowners), Section 80D (Deduction for the premium paid for Medical Insurance). Deductions on Shares and Mutual funds, long term capital gains, Sale of Equity shares, Government Schemes, and Life Insurance policies.

Medical Insurance

Section 80D deals with Deduction for the premium paid for Medical Insurance. Taxpayers who have spent on medical treatments have to provide medical bills to make their expenses tax free. The maximum amount which can be claimed as a medical expense is Rs. 15,000 per year. Though, the deduction amount may vary for each section and depends on the type of insurance policy the taxpayer has purchased.

Home Loan

By way of a home loans, taxpayers can get huge savings which are allowed under Section 80C of the Income Tax Act. Section 24 of the said Act allows taxpayers to claim a deduction on the interest they have paid on home loans. The maximum amount that can be claimed is Rs 2,00,000 in certain cases, while there are some cases with no maximum limit. In the case of self-acquired property, you cannot claim a deduction on interest for a housing loan under the new tax regime.

Many government-mandated schemes such as PMAY (Pradhan Mantri Awas Yojana) and DDR (Delhi Development Authority) Housing scheme caters toward making housing affordable in India, while Section 80C and 24(b) diminish monetary liability through reduced tax burden.

Education Loan

Section 80E of the Income Tax Act deals with the deduction on the amount they have spent for paying the education loan interest. The section only allows individual taxpayers to claim the deductions. No maximum limit on the amount of deduction is prescribed.

Leave Travel Allowance (LTA)

LTA is an allowance provided to the employees by employers for travelling in India. Taxpayers can claim LTA 2 times in a period of 4years.

House Rent Allowance

Employees in India are entitled to House Rent Allowance (HRA), which is deducted from their pay. HRA allows people to save money on taxes as it can be claimed under the deductions section. Individuals who pay more than Rs.1 lakh in rent in a year must provide proof such as their PAN card, lease agreement, and so on. Furthermore, people cannot claim the entire HRA amount provided by their employer, but only the lowest of the following: The employer provided the actual HRA; 50% of the basic salary plus DA (if the employee is in Mumbai, Delhi, Chennai, or Kolkata). 40% of the basic salary plus DA (if the employee is in another city) and Actual house rent minus 10% of the basic salary plus DA.

Donations

Citizens of India can save money on taxes by claiming deductions for donations made for social or charitable purposes or contributions made to the National Relief Fund. Section 80G of the Income Tax Act allows them to claim such deductions. The Ministry of Finance lists the organisations to which taxpayers can donate, and whether deductions are allowed depends on the purpose for which the money was donated. People cannot claim tax deductions for in-kind contributions. Taxpayers can claim deductions of up to Rs.10,000 for cash donations and for amounts greater than Rs.10,000 they must donate using cheques.

- Upendara Mishra, Advocate

Member Executive of Supreme Court Bar Association