Income Tax Concept: The Ultimate Guide to Concept of Taxation

Did you know? In FY 2020-21, income tax contributed over 50% of the total direct tax revenue, showcasing its pivotal role in India’s economy. 

Income tax in India is a significant fiscal component that makes for a major part of the government’s revenue.   It is essential for funding public services and infrastructure development. 

In India, your tax depends on how much money you make. This system is designed to consider the different financial situations of the country’s people, ensuring fairness for everyone. Understanding these tax concepts is essential for compliance, informed financial planning, and contributing to the nation’s growth.

If you have an income source in India, this guide on the basic income tax concepts is indispensable.

Income Tax Concepts: Introduction to the Basics

The concept of income tax in India is governed by the Income Tax Act of 1961. This Act lays down the rules and regulations about the income tax. 

The government of India levies taxes on the income earned by individuals, businesses, organizations, and other entities within a financial year. The financial year in India starts on April 1st and ends on March 31st of the following year.

Tax Concept: Basic Concepts of Income Tax

• Levy on Income: Income tax is levied on the income earned by individuals, HUFs, companies, and other entities during a financial year.
• Progressive Tax System: The tax rates increase with higher income levels, promoting a fair and equitable tax structure.
• Taxable Income – In tax concepts, taxable income is the percentage of income subject to taxation. The categories of taxable income include salaries, wages, profits, rental incomes, pensions, employment benefits, etc. 
• Tax Brackets/Slabs – The income tax rates differ for individuals and corporate earnings. The Central Government determines these tax slabs or brackets. The rate is planned and implemented based on annual income and income category.
• Annual Tax Filing: Taxpayers must file an annual income tax return, declaring earnings from various sources like salaries, business profits, capital gains, and property income.
• Tax Administration: The Central Board of Direct Taxes (CBDT) administers income tax laws in India.
• Revenue for Public Services: Collected tax funds fund public services, infrastructure, defense, and welfare schemes, aiding national development.

Concepts of Taxation: Deductions and Exemptions

, The Income Tax Act of 1961 provides for deductions and exemptions to promote savings and investments among taxpayers. For example, tax-free bonds are a great financial tool to reduce your tax liability. They reduce the tax rates or provide tax relief on the income tax payout. 

You can explore different tax-saving investment options to benefit from tax exemptions.

These can be claimed under different sections of the Act, the most popular being Section 80C, which includes investments in PPF, ELSS, life insurance premiums, NPS, etc. Other significant sections include 80D for health insurance premiums, 80E for interest in educational loans, and 80G for donations to charitable organizations.

Tax Concept: Who is Liable to Pay Income Tax in India?

The liability to pay income tax depends on your ‘Residential Status.’ This status can be broadly categorized as:

• Resident Indian
• Non-Resident Indian (NRI)
• Resident But Not Ordinarily Resident (RNOR)

Additionally, as per the basic concept of income tax in India, the tax slabs and rates will vary depending on which category of taxpayers you belong to:

• Individual
• Hindu Undivided Family (HUF)
• Companies
• Firms
• Other Entities

Income Tax Concepts: Heads of Income

• Income from Salary – It includes wages, pensions, allowances, and other benefits received from employment.
• Income from Business or Profession – Profits and losses a business or organization incurs are a part of this income category. 
• Income from House or Personal Property – Any rental or other income generated from a pre-owned property falls under this income category.
• Income from Capital Gains – Income from the sale of capital assets like shares, real estate, etc., is taxed under this head. The tax rate depends on the duration you hold the asset – short-term or long-term capital gains.
• Income from Other Resources – Any other source of income, like interest earnings, gifts, dividends, etc., is added to this income category. 

Income Tax Concepts: Tax Slabs and Rates for 2024

Your income is categorized into different slabs based on your salary, and each slab has a specific tax rate. These slabs and rates are subject to revision every financial year based on the Union Budget presented by the Finance Minister of India.

India follows a progressive concept of taxation on income. It means the higher your salary, the higher your taxable rate will be.

Below are the income tax slabs and rates for the financial year 2024-25 basis the Interim Budget announced on February 1st, 2024:

Tax Concept: Income Tax Slabs and Rates for 2024-25 – Old Regime

Income Slab (₹)	Tax Rate
Below 60 years
Up to 2,50,000	Nil
2,50,001 – 5,00,000	5%
5,00,001 – 10,00,000	20%
Above 10,00,000	30%
Senior Citizens (60 Years and Above, But Less than 80 Years)
Up to 3,00,000	Nil
3,00,001 – 5,00,000	5%
5,00,001 – 10,00,000	20%
Above 10,00,000	30%
Super Senior Citizen (80 Years and Above)
Up to 5,00,000	Nil
5,00,001 – 10,00,000	20%
Above 10,00,000	30%

Tax Slabs and Rates for 2024-25 – New Regime

The new tax regime offers lower tax rates but requires forgoing certain exemptions and deductions. It applies to all individuals regardless of their age.

Income Slab (₹)	Tax Rate
Up to 2,50,000	Nil
2,50,001 – 5,00,000	5%
5,00,001 – 7,50,000	10%
7,50,001 – 10,00,000	15%
10,00,001 – 12,50,000	20%
12,50,001 – 15,00,000	25%
Above 15,00,000	30%

Income Tax Concepts: Key Points

• The old tax regime offers exemptions and deductions, which can significantly reduce your taxable income.
• The new tax regime helps you enjoy lower rates, but you must forego most exemptions and deductions.
• The new tax regime will be the default choice. You must choose the old tax regimes each financial year to benefit from various deductions.
• Health and education cess at 4% applies to the tax payable under both regimes.

Which ITR Form Should You Choose?

The Income Tax Department has notified 7 types of Income Tax Return (ITR) forms for filing taxes in India. Choosing the correct ITR form in India depends on your income source and category:

• ITR-1 (Sahaj): For resident individuals with income up to ₹50 lakhs from salaries, one house property, and other sources like interest.
• ITR-2: For individuals and HUFs without income from business or profession, covering salary, multiple house properties, capital gains, and foreign income.
• ITR-3: For individuals and HUFs with income from a business or profession, including partners in firms but not conducting business through the firm.
• ITR-4 (Sugam): For resident individuals, HUFs, and firms with total income up to ₹50 lakhs and presumptive income under Sections 44AD, 44ADA, or 44AE.
• ITR-5: For firms, BOIs (Bodies of Individuals), AOPs (Association of Persons), LLPs (Limited Liability Partnerships), and AJP (Artificial Juridical Persons), excluding individuals, HUFs, and companies.
• ITR-6: Exclusively for companies that do not declare exemption as per Section 11, which includes income from property held for religious or charitable purposes.
• ITR-7: For companies or persons who need to file taxes as per sections 139(4A) mandatorily, 139(4B), 139(4C), and 139(4D), such as political parties, trusts, and educational institutions.

New Reforms in Income Tax in 2024

The government can amend the general tax concepts regarding tax exemptions, tax brackets, taxable income, etc. 

• The FM announced tax demands of up to ₹25,000 before 2010 and up to ₹10,000 between 2010 and 2015 will be withdrawn to enhance tax services.
• The Tax Department can adjust past tax claims against the current year’s tax refunds.
• The minimum income not subject to tax is now ₹7 lakhs under the new tax regime.
• Under the old tax system, individuals can use about 70 different tax breaks and deductions, depending on their investments and types of income.
• The surcharge rate for individual income taxpayers has been reduced to 25%. Additionally, a surcharge of 4% is added to health and education for individuals. 
• The surcharge rate for long-term capital gains or dividend income is limited to the upper limit of 15%.

Income Tax Concepts: Final Thoughts

Understanding the different tax concepts involved in income tax can help you plan your tax liabilities better. A basic concept of income tax is that taxable income is calculated by subtracting the various tax-saving deductions from your gross salary.  

These tax-saving options include long-term investment stocks and other investment options to build a robust financial portfolio for yourself. 

If you are new to financial and tax planning, a SEBI-registered investment advisory can help you make better investment decisions. 

FAQ on Concept of Taxation

What are the concepts of direct tax?

Direct taxes are levied directly on individuals or organizations and cannot be shifted to others. Key concepts include:

1. Taxpayer Liability: The taxpayer is directly responsible for payment.
2. Progressive Taxation: Tax rates increase with higher income or wealth.
3. Tax Base: Includes income, property, and wealth.
4. Tax Rate: The percentage levied on the tax base, which can be flat or progressive.
5. Deductions and Credits: Reduce taxable income or tax liability.
6. Filing and Payment: Regular tax return filing and payment are required.
7. Compliance and Enforcement: Authorities ensure compliance through audits and penalties.
8. Equity and Fairness: Aims for an equitable tax burden based on the ability to pay.
9. Economic Impact: Influences economic behavior and supports public services.
10. Legal Framework: Governed by specific laws and regulations.

What is the concept of tax planning?

The concept of tax planning involves the strategic analysis and arrangement of one’s financial affairs to minimize tax liability within the bounds of the law. Key aspects include:

1. Tax Efficiency: Structuring transactions to reduce the amount of taxable income.
2. Timing: Deciding when to make transactions to take advantage of favorable tax rates or deductions.
3. Deductions and Credits: Maximizing the use of available tax deductions and credits to lower taxable income.
4. Income Shifting: Allocating income among family members or business entities to take advantage of lower tax brackets.
5. Investment Choices: Selecting investments that offer tax benefits, such as tax-exempt bonds or retirement accounts.
6. Compliance: Ensuring all actions adhere to current tax laws and regulations.
7. Long-term Strategy: Planning for future tax implications of current financial decisions to achieve overall financial goals.

Effective tax planning helps individuals and businesses reduce their tax burden, improve financial stability, and achieve financial objectives.

What is the basic concept of tax?

The basic concept of tax involves the compulsory financial charge or levy imposed by a government on individuals, businesses, or other entities to fund public services and government obligations. Key elements include:

1. Revenue Generation: Taxes are primarily used to raise revenue for government spending on public goods and services such as infrastructure, education, and healthcare.
2. Compulsory Payment: Taxes are mandatory and legally enforceable, meaning individuals and entities must pay them according to the law.
3. Types of Taxes: There are various types of taxes, including direct taxes (e.g., income tax) and indirect taxes (e.g., sales tax).
4. Tax Base: The amount on which a tax is levied, such as income, property value, or sales price.
5. Tax Rate: The percentage at which the tax is applied to the tax base.
6. Equity and Fairness: Tax systems aim to distribute the tax burden fairly among taxpayers, often based on their ability to pay.
7. Economic Influence: Taxes can affect economic behavior, influencing spending, saving, and investment decisions.
8. Legal Framework: Taxes are governed by laws and regulations, which define tax rates, bases, exemptions, and compliance requirements.

Understanding these elements helps in comprehending how taxes function and their role in supporting governmental and societal needs.

What is income tax India basic concepts?

The basic concepts of income tax in India include:

1. Taxpayer: Any individual, Hindu Undivided Family (HUF), company, firm, association of persons (AOP), body of individuals (BOI), local authority, and any other artificial juridical person that earns income.
2. Income: Total earnings from various sources such as salary, house property, business or profession, capital gains, and other sources like interest and dividends.
3. Assessment Year (AY): The period of 12 months starting from April 1 to March 31 of the next year, in which the income of the previous year is assessed and taxed.
4. Previous Year (PY): The financial year in which the income is earned, which is taxed in the subsequent assessment year.
5. Tax Slabs: Different income brackets with corresponding tax rates, which can vary based on the taxpayer’s age and residential status.
6. Deductions and Exemptions: Specific reductions allowed from gross income under various sections of the Income Tax Act (e.g., Section 80C for investments in specified instruments, Section 10 for exemptions).
7. Filing of Returns: Annual submission of a statement of income and taxes paid to the Income Tax Department, detailing the income earned and the tax liability.
8. Advance Tax: Paying income tax in installments throughout the year if the total tax liability exceeds a certain amount.
9. Tax Deducted at Source (TDS): Tax collected at the source of income, which is deducted by the payer and remitted to the government on behalf of the payee.
10. Resident and Non-Resident Status: Determination of the taxpayer’s residential status, which affects the scope of taxable income in India.

These concepts form the foundation of the income tax system in India, helping taxpayers understand their obligations and compliance requirements.

What are the top reasons to file income tax on time?

To claim a timely tax refund.
To benefit from faster loan approvals, as ITR is a mandatory document of proof. 
To avoid heavy penalties and increased tax rates due to late filing.
To reduce the risk of unannounced income tax audits due to delayed ITR filing.
To carry forward your business losses to offset them in the future with the profits, reducing your subsequent tax liability.
Improve your credit score by complying with the government’s income tax rules.

Which documents do you need to file income tax returns?

PAN card
Aadhaar card
Form 16 part A & B, 16A, 16B, or 16C in case of non-salaried tax deductions
Annual Information Statement (AIS)

Bank account details 
List of investments and other assets under the capital gains category.

What are non-claimable tax deductions and exemptions under the new FY 2023-24 regime?

Professional tax 
Leave travel allowance 
House rent allowance 
Interest on a house loan for a self-occupied or vacant property
Entertainment allowance 
Any deduction under Section 80C, 80CCC, 80CCD, 80D, 80DD, 80DDB, 80E, 80G, etc.