Income tax in India is a significant aspect of the country’s financial system, and understanding it can help individuals manage their finances more effectively. This guide aims to demystify the income tax structure in India, explaining the various slabs, deductions, and applicable taxes with examples to provide a clear understanding of how much income tax one might pay.
1. Overview of the Income Tax System in India
The income tax system in India is governed by the Income Tax Act of 1961. It mandates that any individual, Hindu Undivided Family (HUF), company, firm, association of persons (AOP), body of individuals (BOI), local authority, and any other artificial juridical person is liable to pay tax on their income.
2. Income Tax Slabs for Individuals
The income tax rates for individuals are categorized based on age and income. As of the fiscal year 2023-24, the tax slabs are as follows:
For Individuals Below 60 Years:
- Income up to ₹2,50,000: No tax
- Income from ₹2,50,001 to ₹5,00,000: No Tax (if Applicable Rebate u/s 87A)
- Income from ₹2,50,001 to ₹5,00,000: 5%
- Income from ₹5,00,001 to ₹10,00,000: 20%
- Income above ₹10,00,000: 30%
For Senior Citizens (60 to 80 years):
- Income up to ₹3,00,000: No tax
- Income from ₹3,00,001 to ₹5,00,000: No Tax (if Applicable Rebate u/s 87A)
- Income from ₹3,00,001 to ₹5,00,000: 5%
- Income from ₹5,00,001 to ₹10,00,000: 20%
- Income above ₹10,00,000: 30%
For Super Senior Citizens (above 80 years):
- Income up to ₹5,00,000: No tax
- Income from ₹5,00,001 to ₹10,00,000: 20%
- Income above ₹10,00,000: 30%
3. Deductions and Exemptions
To reduce the taxable income, individuals can avail of various deductions and exemptions under the Income Tax Act:
Section 80C:
The most popular section, 80C, allows deductions up to ₹1,50,000 for investments in:
- Public Provident Fund (PPF)
- Employee Provident Fund (EPF)
- National Savings Certificate (NSC)
- Life Insurance Premiums
- Equity Linked Savings Scheme (ELSS)
- Principal repayment on home loan
Section 80D:
Deductions under this section are for premiums paid for health insurance:
- Up to ₹25,000 for individuals below 60 years
- Up to ₹50,000 for senior citizens
Section 24(b):
Interest on home loan is deductible up to ₹2,00,000 per year for self-occupied property.
4. Calculating Income Tax with Examples
Let’s understand the calculation of income tax with some practical examples:
Example 1: Individual Below 60 Years
Income Details:
- Gross Income: ₹12,00,000
- Investment under Section 80C: ₹1,50,000
- Health Insurance Premium under Section 80D: ₹20,000
Taxable Income Calculation:
- Gross Income: ₹12,00,000
- Less: Deductions under Section 80C: ₹1,50,000
- Less: Deductions under Section 80D: ₹20,000
- Net Taxable Income: ₹12,00,000 – ₹1,50,000 – ₹20,000 = ₹10,30,000
Tax Computation:
- Income up to ₹2,50,000: Nil
- Income from ₹2,50,001 to ₹5,00,000 (₹2,50,000): 5% of ₹2,50,000 = ₹12,500
- Income from ₹5,00,001 to ₹10,00,000 (₹5,00,000): 20% of ₹5,00,000 = ₹1,00,000
- Income above ₹10,00,000 (₹30,000): 30% of ₹30,000 = ₹9,000
Total Tax Payable:
- ₹12,500 + ₹1,00,000 + ₹9,000 = ₹1,21,500
Tax After Rebate and Cess:
- Rebate under Section 87A (for income up to ₹5,00,000): ₹12,500 (Not applicable here as income exceeds ₹5,00,000)
- Health and Education Cess: 4% of ₹1,21,500 = ₹4,860
Total Tax Liability:
- ₹1,21,500 + ₹4,860 = ₹1,26,360
Example 2: Senior Citizen
Income Details:
- Gross Income: ₹8,00,000
- Investment under Section 80C: ₹1,50,000
- Health Insurance Premium under Section 80D: ₹30,000
Taxable Income Calculation:
- Gross Income: ₹8,00,000
- Less: Deductions under Section 80C: ₹1,50,000
- Less: Deductions under Section 80D: ₹30,000
- Net Taxable Income: ₹8,00,000 – ₹1,50,000 – ₹30,000 = ₹6,20,000
Tax Computation:
- Income up to ₹3,00,000: Nil
- Income from ₹3,00,001 to ₹5,00,000 (₹2,00,000): 5% of ₹2,00,000 = ₹10,000
- Income from ₹5,00,001 to ₹10,00,000 (₹1,20,000): 20% of ₹1,20,000 = ₹24,000
Total Tax Payable:
- ₹10,000 + ₹24,000 = ₹34,000
Tax After Rebate and Cess:
- Rebate under Section 87A (for income up to ₹5,00,000): ₹12,500 (Not applicable here as income exceeds ₹5,00,000)
- Health and Education Cess: 4% of ₹34,000 = ₹1,360
Total Tax Liability:
- ₹34,000 + ₹1,360 = ₹35,360
5. New Tax Regime vs. Old Tax Regime
The Finance Act 2020 introduced a new tax regime, offering lower tax rates but without most deductions and exemptions. Taxpayers can choose the old and new regimes.
New Tax Regime Slabs (FY 2023-24):
- Income up to ₹2,50,000: No tax
- Income from ₹2,50,001 to ₹5,00,000: 5%
- Income from ₹5,00,001 to ₹7,50,000: 10%
- Income from ₹7,50,001 to ₹10,00,000: 15%
- Income from ₹10,00,001 to ₹12,50,000: 20%
- Income from ₹12,50,001 to ₹15,00,000: 25%
- Income above ₹15,00,000: 30%
Example 3: Comparing Old and New Regime
Income Details:
- Gross Income: ₹10,00,000
- Investment under Section 80C: ₹1,50,000
- Health Insurance Premium under Section 80D: ₹20,000
Old Regime Taxable Income:
- ₹10,00,000 – ₹1,50,000 – ₹20,000 = ₹8,30,000
Old Regime Tax Computation:
- Income up to ₹2,50,000: Nil
- Income from ₹2,50,001 to ₹5,00,000 (₹2,50,000): 5% of ₹2,50,000 = ₹12,500
- Income from ₹5,00,001 to ₹10,00,000 (₹3,30,000): 20% of ₹3,30,000 = ₹66,000
Old Regime Total Tax Payable:
- ₹12,500 + ₹66,000 = ₹78,500
- Health and Education Cess: 4% of ₹78,500 = ₹3,140
- Total Tax Liability: ₹78,500 + ₹3,140 = ₹81,640
New Regime Tax Computation:
- Income up to ₹2,50,000: Nil
- Income from ₹2,50,001 to ₹5,00,000 (₹2,50,000): 5% of ₹2,50,000 = ₹12,500
- Income from ₹5,00,001 to ₹7,50,000 (₹2,50,000): 10% of ₹2,50,000 = ₹25,000
- Income from ₹7,50,001 to ₹10,00,000 (₹2,50,000): 15% of ₹2,50,000 = ₹37,500
New Regime Total Tax Payable:
- ₹12,500 + ₹25,000 + ₹37,500 = ₹75,000
- Health and Education Cess: 4% of ₹75,000 = ₹3,000
- Total Tax Liability: ₹75,000 + ₹3,000 = ₹78,000
Comparison:
- Old Regime: ₹81,640
- New Regime: ₹78,000
The new regime results in a lower tax liability in this case, but it depends on individual circumstances, including available deductions and exemptions.
6. Conclusion
Understanding the Indian income tax system is crucial for effective financial planning. By knowing the tax slabs, deductions, and exemptions, individuals can optimize their tax liabilities. The choice between the old and new tax regimes should be made after careful consideration of one’s financial situation. This guide, with its detailed examples, aims to provide clarity and assist in making informed decisions regarding income tax payments in India.