All you need to know about income tax

Income Tax in India

Income tax is a direct tax which you are supposed to pay to the Indian Government if you earn an income in India. Whether you are an Indian citizen or an NRI, any income generated in India is taxable as per the Indian Income Tax Act passed in 1961. Indian citizens pay income tax on their global income (income earned in India and abroad), while NRIs pay income tax in India only on the income they earn in India. Thus, if you earn an income, you make an income tax online payment on it.

Who pays income tax?

Income tax is payable by the following

Individuals
Hindu Undivided Families (HUFs)
Body of Individuals (BOI)
Association of Persons (AOP)
Companies
Firms

The term ‘income’, from the point of view of income tax calculation, consists of all types of incomes which you earn in a year. As per the income tax rules, five heads of incomes are recognised and your income is apportioned to each relevant head of income. The five heads in which income is segregated include the following

Heads of income

Income from salary
This is the most common and also the most popular head of income. If you are a salaried employee, the salary that you earn is categorised under the head income from salary.
Income from house property
If you have a house property and you rent it out, the rental income generated is called income from house property. The house property, in this context, can be a residential property or a commercial one.
Income from business or profession
If you have a self-proprietorship business or a profession, the income you earn from the business or profession is placed under the head income from business or profession.
Income from capital gains
Capital gains are incurred when you sell a capital asset at a profit. A capital asset is any type of property (except inventory and accounts receivable) which is owned by the tax payer. If the capital asset is sold at a price higher than at which it was acquired, a capital gain is incurred. The gain can be short term or long term depending on the period for which the capital asset was held before it was sold. Capital gains are added to your income and taxed depending on the type of gains incurred and the type of asset on which the gain is incurred. Alternatively, if the capital asset is sold at a price lower than at which it was purchased, a capital loss is incurred. This loss is used to reduce the taxable income and consequently the tax liability.
Income from other sources
Any other income that you earn in a year and which cannot be placed in any of the above-mentioned four heads is placed under the head ‘income from other sources’. Common examples include interest earned from savings account or fixed deposits, dividend earned from equity investments, gifts received, etc.

The total income which you earn in a financial year is segregated into these five heads. Thereafter, the total income is taxed as per the existing tax rates. Firms and companies have a flat tax rate of 30% on the profit which they earn. For other tax payers, i.e. individuals, HUFs, BOIs and AOPs, tax is charged on a progressive basis. This means that as the income increases, the tax rate increases. The tax rate is different for different levels of income and the rates are presented in a tax slab which can be changed by the Government from time to time. The existing tax slab is as follows

Tax slab

Income level	Applicable rate of tax
For the first INR 2.5 lakhs	Nil
INR 250,001 to INR 500,000	5% of the income exceeding INR 2.5 lakhs
INR 500,001 to INR 10,00,000	On the first INR 2.5 lakhs – nil + On the income between INR 250,001 to INR 500,000 – 5% + On the income exceeding INR 5 lakhs – 20%
INR 10,00,001 and above	On the first INR 2.5 lakhs – nil + On the income between INR 250,001 to INR 500,000 – 5% + On the income between INR 500,001 to INR 10,00,000 – 20% + On the income exceeding 10 lakhs – 30%

So, if you are earning an income of INR 7.5 lakhs, you wouldn’t be charged a flat tax of 20%. The tax would be calculated in a progressive manner in the following way

On the first INR 2.5 lakhs	Nil
On the next 2.5 lakhs	5% of 2.5 lakhs = INR 12,500
On the next 2.5 lakhs (income exceeding 5 lakhs)	20% of 2.5 lakhs = INR 50,000
Total tax payable	INR 62,500

Similarly, if you earn an income of INR 12 lakhs annually, the calculation would be as follows

On the first INR 2.5 lakhs	Nil
On the next 2.5 lakhs	5% of 2.5 lakhs = INR 12,500
On the next 5 lakhs	20% of 5 lakhs = INR 100,000
On the last 2 lakhs (income exceeding 10 lakhs)	30% of 2 lakhs = INR 60,000
Total tax payable	INR 172,500

There is also a new tax regime which has been introduced in the Union Budget 2020. This regime has a different tax slab and does not allow the deductions and exemptions available under the old regime. The income tax slabs under the new regime are as follows

Level of income	Tax payable
Up to INR 2.5 lakhs	Nil
INR 250,001 to INR 500,000	5% of income exceeding INR 2.5 lakhs. However, a rebate under Section 87A would be applicable and the tax liability would be nil
INR 500,001 to INR 750,000	INR 12,500 + 10% of the income exceeding INR 500,000
INR 750,001 to INR 10,00,000	INR 37,500 + 15% of the income exceeding INR 750,000
INR 10,00,001 to INR 12,50,000	INR 75,000 + 20% of the income exceeding INR 10,00,000
INR 12,50,001 to INR 15,00,000	INR 125,000 + 25% of the income exceeding INR 12,50,000
INR 15,00,001 and above	INR 187,500 + 30% of the income exceeding INR 15,00,000

However, as per the changes proposed in the Interim Budget, 2019, if your net taxable income is up to INR 5 lakhs, you wouldn’t have to pay any tax on your income. In such cases, therefore, there is a rebate and your tax liability becomes nil.

Before calculating your tax liability, there are some common terms related to tax which you should know about. These terms include the following –

Assesse – assesse is the individual or the tax payer whose income is subjected to income tax.
Assessment year – assessment year is the year in which the assesse’s income is being assessed and taxed.
Previous year – previous year is the year immediately preceding the assessment year in which the income has been generated. Previous year is also called a financial year which starts from 1st April and ends on 31st March. So, if you earn an income between 1st April 2018 and 31st March 2019, your previous year would be 2018-19 and the assessment year would be 2019-20.

Now that you know what is income tax, who pays it, the heads of income and the applicable tax rates you should know the various ways in which tax liability can be reduced. The Income Tax Act, 1961 provides various deductions and exemptions which help in lowering the taxable income which, in turn, lowers the tax liability. Let’s understand the deductions which are available

Chapter VI A of the Income Tax Act, 1961

Chapter VI A of the Income Tax Act lists down some very popular sections which allow deductions from your taxable income if you invest in specified avenues or incur expenses for specific reasons. Chapter VI A contains deductions under different sub-sections of Section 80. Here are the deductions which are available under the chapter

Section 80C – popular investments and expenses
The first and also the most important section under Chapter VI A is Section 80C. You can claim a deduction of up to INR 1.5 lakhs under this section if you invest or spend on the following
Life Insurance :
- The premium paid is tax-free U/S 80 C provided:
  - If the premium is not more than 10% of the sum assured and
  - The policy is held for a minimum of 2 years for endowment plans
  - In case of ULIPs, the minimum holding period is 5 years
Life Insurance has EEE taxation, i.e.
- Exemption during investment U/S 80C
- Maturity amount is tax-free U/S 10(10)D provided that the premium qualifies for a deduction under Section 80C
- In the case of ULIPs, however, the maturity benefit is tax-free only if the aggregate premium paid for all ULIPs in your name is up to INR 2.5 lakhs. The maturity proceeds will be taxable if the aggregate premium exceeds INR 2.5 lakhs. The tax would apply as per the rules of mutual funds taxation. If you have invested in debt funds, the returns earned would be taxed at 20% with indexation benefit. If you have invested in equity funds, returns up to INR 1 lakh would be tax-free. Returns exceeding INR 1 lakh, however, would be taxed at 10%
ELSS: Investment in tax saving mutual funds, i.e. Equity Linked Saving Schemes
- With a lock-in period of 3 years
- ELSS has EET taxation, i.e.
  - Exemption during investment U/S 80C
  - However, Capital Gains more than Rs 1 lakh p.a. is taxed at a flat rate of 10% irrespective of the Tax Slabs
Tuition Fees: Tuition fees payable for to a school, college or educational institution
- For up to two children
Home Loan: Home loan principal repayment is exempted from income tax U/S 80C provided that:
- The house property is not under construction.
- Once bought /constructed, the house property should not be sold within the next 5 years.
Registration charges and stamp duty paid when buying a house
Provident Fund: Investment in any provident fund, i.e. PPF and EPF schemes
- Have EEE taxation, i.e.
  - Exemption during investment U/S 80C
  - Maturity amount is tax-free
- Interest Rates for:
  - PPF varies yearly. Presently it is 7.1% p.a. for the quarter ending September 2022
  - EPF varies yearly. Presently it is 8.5% p.a.
- Tenure:
  - PPF can be invested for a tenure of 15 years, can be extended for a period of 5 years post maturity
  - EPF can be invested as long as one is employed. However, it can be transferred from one organization to another.
Bank Fixed Deposits:
- Investment in 5-year fixed deposit schemes of banks and post-offices
- TDS @ 10% would be deducted from Interest for interest earned more than INR 40,000 in a financial year. For senior citizens, this limit is enhanced to INR 50,000. Every year, the financial institution makes the TDS payment online on your behalf.
Investment in Senior Citizen Saving Scheme (SCSS) or Sukanya Samriddhi Yojana (SSY)
Investment in National Saving Certificates (NSCs)

The maximum aggregate deduction under all the eligible avenues listed above is limited to INR 1.5 lakhs.

Section 80CCC – premium paid towards a life insurance pension plan
Premium paid towards a life insurance pension plan is allowed as deduction under this section. However, the limit of this section is considered together with the limit allowed under Section 80C which is INR 1.5 lakhs. This means that the total deduction under Section 80C and 80CCC together would be allowed up to INR 1.5 lakhs.

Section 80CCD – investment in NPS
This section gives an additional deduction of INR 50,000 if you invest in the National Pension Scheme offered by the Central Government over-and-above the INR 1.5 lakhs limit of 80C. So, investment in NPS till INR 2 lakhs is tax-free.
Section 80CCG _ RGESS investments
Till financial year 2016-17, investments done in Rajiv Gandhi Equity Savings Scheme were allowed as a deduction under Section 80CCG. However, this section was removed from financial year 2017-18. However, if you have invested in the RGESS scheme before financial year 2017-18, you can claim a deduction under Section 80CCG. The deduction would be 50% of the amount invested subject to a maximum of INR 50,000. Moreover, your income should not exceed INR 12 lakhs to claim this deduction.
Section 80D – health insurance premiums
Section 80D exempts the premium paid towards a health insurance plan from tax liability. Premiums paid for self, family and dependent parents can be claimed as a deduction from your taxable income under this section. The limit of deduction available is as follows

If premium is paid for self only or self, spouse and dependent children	Up to INR 25,000
If you are a senior citizen and premium is paid for yourself only or yourself, spouse and dependent children	Up to INR 50,000
If premium is paid for self only or self, spouse and dependent children + Premium is also paid for dependent senior citizen parents	Up to INR 25,000 + Up to INR 50,000
If you are a senior citizen and premium is paid for yourself only or yourself, spouse and dependent children + Premium is also paid for dependent senior citizen parents	Up to INR 50,000 + Up to INR 50,000

So, you can save a maximum of INR 1 lakh of your taxable income by buying health insurance policies for your family and dependent parents. Moreover, a deduction of INR 5000 is also allowed under this section for preventive health check-ups. If you, your spouse, dependent children and dependent parents undergo preventive health check-ups in a financial year, you can claim a deduction of up to INR 5000 on the costs of such check-ups. However, this deduction is within the limit of deduction allowed on premiums paid towards health insurance policies. It is not over and above the deduction limits mentioned above but included therein. Moreover, the deduction is the maximum aggregate deduction which can be availed for preventive health check-ups of all family members, dependent parents included.

Section 80DD – Disability benefit for a family member

If you have a disabled family member (spouse, children, siblings and/or parents) and you incur expenses in treatment or maintenance of such family member you can claim a deduction under Section 80DD. The available limit of deduction is as follows –If disability is more than 40% but less than 80%	Fixed deduction of INR 75,000
If disability is more than 80%	Fixed deduction of INR 1.25 lakhs

Section 80DDB – Treatment of specified illnesses
If you suffer from an ailment listed under the provisions of this section, you get a deduction for the expenses incurred on treating such ailment. The limit is as follows

If your age is up to 60 years	Up to INR 40,000
If your age is between 61 and 80 years	Up to INR 60,000
If your age is above 80 years	Up to INR 80,000

Section 80E – Education Loan
This section allows you a tax deduction if you have availed an education loan for yourself, your children, spouse or legal ward and are paying an interest on it. The interest paid for the loan is allowed as a deduction from your taxable income. There is no limit to the amount of deduction which you can claim. The entire amount of interest paid is allowed as a deduction.
Section 80EE – Interest on home loan for first time home buyers
This section allows deduction on the interest paid on a home loan taken by a first time home buyer. If you are buying a house for the first time and are availing a home loan for the same, the interest paid on the loan would qualify for deduction under this section. The limit is up to INR 50,000. The deduction would, however, be available if the following conditions are met
- You should be a first-time owner of a house
- The cost of the house should be up to INR 50 lakhs
- The loan amount should be up to INR 35 lakhs
- The loan should be sanctioned between the financial year 2016-17
- You should have availed the loan from a financial institution
Section 80EEA – Interest on home loan for affordable housing
This new section was introduced in the Union Budget, allowing tax relief to home buyers who buy their first home under the affordable housing scheme.
Under this section, you can claim a deduction on the interest paid on the home loan availed for buying your first home. The limit of deduction available is INR 1.5 lakhs. To avail of this deduction, however, the following conditions should be met
- You should have availed of the home loan between 1st April 2019 and 31st March 2022
- You should be an individual taxpayer
- You should not be an owner of any other house property on the date the home loan is sanctioned
- You should avail of the home loan from a financial institution or a home finance company
- You should use the loan to buy a residential property
- The stamp duty value of the house should not be more than INR 45 lakhs
- You should not be eligible to avail of a deduction under Section 80EE
- The carpet area of the house should not be more than 60 square meters in metro cities. These cities include Mumbai, Delhi NCR, Bengaluru, Kolkata, Hyderabad and Chennai. For other cities, the carpet area should not be more than 90 square metres
- The housing project should be approved on or after 1st September 2019
- You can claim the deduction in addition to the deduction available under Section 24
Section 80EEB
Just like Section 80EEA, Section 80EEB was also introduced in the Union Budget. This section allows deduction on the interest paid for a loan that you avail for buying an electric vehicle.

The deduction limit is INR 1.5 lakhs, and you can avail of this deduction if the following conditions are met
- You buy an electric vehicle for your personal or commercial use
- The loan should be sourced from a bank or a non-banking financial company for the purpose of buying an electric bike or car
- The loan should be availed between 1st April 2019 and 31st March 2023
- Only individual taxpayers can claim this deduction
Section 80G – Donations
This section gives you tax relief on your charitable contributions. Donations that you make to recognised charitable institutions can be claimed as a deduction under this section. Some charities allow you 50% deduction while some allow you 100% deduction. However, the maximum donation which can be claimed as a deduction is limited to 10% of your gross total income.
Section 80GG – HRA deduction
If you are a salaried employee and have no HRA component in your salary structure, you can claim HRA deduction under this section. The amount of deduction which can be claimed as HRA exemption is lower of the following
- Rent paid which exceeds 10% of your total income
- INR 5000 per month
- 25% of your total income
  So, for instance, if your monthly salary is INR 20, 000 and you pay a rent of INR 8000 every month, the available deduction per month would be lower of the following

Rent paid – 10% of total income	INR (8000 – 2000) = INR 6000
INR 5000/month	INR 5000
25% of total income	25% of 20,000 = INR 5000

Thus, you can claim HRA deduction of INR 5000/month or INR 60,000 in a financial year.

Section 80GGB – Political contributions by a company
A company making contributions to political parties or electoral trusts can claim a deduction on their contributions under this section. Deduction is allowed for any type of contribution made other than cash contributions.
Section 80GGC – Political contribution by an individual
If you as an individual tax payer contribute to a political party or electoral trust, you can claim a deduction on your contributions under this section. Any type of contribution, other than cash, is allowed as a deduction.
Section 80RRB – Royalty
If you have registered a patent and receive a royalty for such registration, the royalty received can be claimed as a deduction from your taxable income. The amount of deduction would be lower of the royalty received or INR 3 lakhs. Moreover, the following conditions should be met to claim a deduction under this section
- You should be an Indian resident
- The patent should have been registered on or after 1st April 2003 under the Patents Act 1970
- A certificate should be furnished to the tax authorities which should be duly signed by the prescribed authorities
- You should be the patentee
Section 80TTA _ – Savings Account Interest
Interest earned on your savings account qualifies for deduction under this section. The maximum limit is up to INR 10, 000.
Section 80TTB _- Interest earned by senior citizens
If you are a senior citizen, you can claim deduction of up to INR 50,000 on the interest earned from your deposits. Deposits in this case would include savings account, fixed deposits and any other deposits held with banks and/or post offices. Moreover, as implemented by the Interim Budget 2019, the TDS limit on interest earned has been raised from INR 10,000 to INR 40,000
Section 80U – Disability benefit for the taxpayer

If you suffer from a disability or mental retardation, you can claim a deduction under this section. The amount of deduction is INR 75,000 which becomes INR 1.25 lakhs in case of severe disabilities.

Apart from these sections of Chapter VI A of the Income Tax Act, you can also claim a deduction for the home loan interest paid under Section 24. While the home loan principal amount is allowed as a deduction under Section 80C, the interest component is allowed as a deduction under Section 24. The maximum deduction limit is up to INR 2 lakhs which increases to INR 2.5 lakhs for first time home buyers due to the provisions of Section 80EE.

Furthermore, salaried individuals can also reduce their salary income by claiming a standard deduction. The new Interim Budget 2019 raised the standard deduction limit to INR 50,000 from the existing INR 40,000. So, from the financial year 2019-20, salaried employees can reduce their taxable income by INR 50,000 through standard deduction. These are few deduction it has a lot of other criteria. Please refer https://www.incometaxindia.gov.in/Pages/acts/income-tax-act.aspx

Now that you know the different deductions which a common tax-payer can avail to reduce the taxable income, here is a glimpse on how tax is calculated for a salaried employee and for a self-employed businessman

Illustration 1 – Mr. Sharma is a salaried employee earning INR 10 lakhs a year from salary income. He also earns interest from fixed deposits @ INR 20,000 every year and the interest from his savings account in the last financial year was INR 10,000. He has utilised Section 80C to the fullest and has also invested in a health plan for his family and parents the premiums for which are INR 12,000 and INR 15,000 respectively. He has also invested INR 30,000 in the NPS scheme.

Here’s how his taxable income and tax liability in Financial Year 2018-19 would be calculated

Income from salary		10,00,000
Less: Standard deduction		(40,000)
Net income from salary		9,60,000
Income from other sources: Fixed deposit interest Savings account interest	20,000 10,000	30,000
Gross total income		9,90,000
Less: Deductions under Section 80C	1,50,000
Less: Deductions under Section 80D: Health insurance premium paid for self and family Health insurance premium paid for dependent parents	12,000 15,000
Less: Deduction under Section 80CCD for investment in NPS	30,000
Less: Deduction under Section 80TTA for savings account interest	10,000
Total deductions available		(2,17,000)
Net taxable income		7,73,000

Calculation of tax liability

For the first INR 2.5 lakhs	Nil
For the next INR 2.5 lakhs	5% of 2.5 lakhs = INR 12,500
For the income exceeding INR 5 lakhs = INR 2.73 lakhs	20% of 2.73 lakhs = INR 54,600
Total tax liability	INR 67,100

If, however, Mr. Sharma chooses the new tax regime, no deductions would be allowed. In such a case, his tax liability would be calculated as follows

Income from salary	INR 10,00,000
Income from other sources: Fixed deposit interest Savings account interest	INR 30,000
Total taxable income	INR 10,30,000
Tax liability	INR 75,000 + 20% of the income exceeding INR 10,00,000 = INR 75,000 + 20% of 30,000 = INR 105,000

As you can see, Mr Sharma’s tax liability under the new regime is higher than the old one. As such, the old regime is better for him.

Illustration 2 – If Mr. Sharma had been a businessman, standard deduction would not have been available to him. If he had a business income of INR 10 lakhs along with the above details, here’s how his taxable income and tax liability would be calculated

Income from business		10,00,000
Income from other sources: Fixed deposit interest Savings account interest	20,000 10,000	30,000
Gross total income		10,30,000
Less: Deductions under Section 80C	1,50,000
Less: Deductions under Section 80D: Health insurance premium paid for self and family Health insurance premium paid for dependent parents	12,000 15,000
Less: Deduction under Section 80CCD for investment in NPS	30,000
Less: Deductions under Section 80TTA for savings account interest	10,000
Total deductions available		(2,17,000)
Net taxable income		8,13,000

Calculation of tax liability

For the first INR 2.5 lakhs	Nil
For the next INR 2.5 lakhs	5% of 2.5 lakhs = INR 12,500
For the income exceeding INR 5 lakhs = INR 3.13 lakhs	20% of 3.13 lakhs = INR 62,600
Total tax liability	INR 75,100

In the case of business too the tax liability would be the same under the new tax regime because standard deduction would not be allowed.

So, this is how income tax is determined and calculated. You can use the Income Tax Calculator tool by clicking here to understand your tax liability.

The next time you are wondering about your tax liability and income tax filing, calculate your tax yourself. Ensure that you take advantage of all the deductions and exemptions available to you so that you can lower your tax liability to the fullest and save your hard-earned money. You can also claim an income tax refund if you have paid a higher tax through TDS deductions. Also, do the ITR e-filing using the correct ITR to avoid any mistakes and penalties.