Income tax in India
Income tax in India is governed by Entry 82 of the Union List of the Seventh Schedule to the Constitution of India, empowering the central government to tax non-agricultural income; agricultural income is defined in Section 10 of the Income-tax Act, 1961. The income-tax law consists of the 1961 act, Income Tax Rules 1962, Notifications and Circulars issued by the Central Board of Direct Taxes, annual Finance Acts, and judicial pronouncements by the Supreme and high courts of India.
The government taxes certain income of individuals, Hindu Undivided Families, companies, firms, LLPs, associations, bodies, local authorities and any other juridical person. Personal tax depends on residential status. The CBDT administers the Income Tax Department, which is part of the Ministry of Finance's Department of Revenue. Income tax is a key source of government funding.
The Income Tax Department is the central government's largest revenue generator; the total tax revenue increased from in 1997–98 to in 2007–08. In 2018–19, direct tax collection reported by the CBDT was about 11.17 lakh crore.
History
Ancient times
Taxation has been a function of sovereign states since ancient times. The earliest archaeological evidence of taxation in India is found in Ashoka's pillar inscription at Lumbini. According to the inscription, tax relief was given to the people of Lumbini.In the Manusmriti, Manu says that the king has the sovereign power to levy and collect tax according to Shastra:
The Baudhayana sutras note that the king received one-sixth of the income from his subjects, in return for protection. According to Kautilya's Arthashastra, artha is not only wealth; a government's power depended on the strength of its treasury: "From the treasury comes the power of the government, and the earth, whose ornament is the treasury, is acquired by means of the treasury and army." Kalidasa's Raghuvamsha, eulogizing King Dilipa, says: "it was only for the good of his subjects that he collected taxes from them just as the sun draws moisture from the earth to give it back a thousand time."
19th and early 20th centuries
British rule in India became established during the 19th century. After the Mutiny of 1857, the British government faced an acute financial crisis. To fill the treasury, the first Income-tax Act was introduced in February 1860 by James Wilson income from landed property; ii) income from professions and trade; iii) income from securities, annuities and dividends, and iv) income from salaries and pensions. Agricultural income was taxable.A number of laws were enacted to streamline the income-tax laws; the Super-Rich Tax and a new Income-tax Act were passed in 1918. The Act of 1922 significantly changed the Act of 1918 by shifting income-tax administration from the provincial to the central government. Another notable feature of the act was that the rules would be outlined by annual Finance Acts instead of the act itself. A new Income-tax Act was passed in 1939.
Present day
The 1922 act was amended twenty-nine times between 1939 and 1956. A tax on capital gains was imposed in 1946, and the concept of capital gains has been amended a number of times. In 1956, Nicholas Kaldor was appointed to investigate the Indian tax system in light of the Second Five-Year Plan's revenue requirement. He submitted an extensive report for a coordinated tax system, and several taxation acts were enacted: the wealth-tax Act 1957, the Expenditure Tax Act, 1957, and the Gift Tax Act, 1958.The Direct Taxes Administration Enquiry Committee, under the chairmanship of Mahavir Tyagi, submitted its report on 30 November 1959 and its recommendations took shape in the Income-tax Act, 1961. The act, which became effective on 1 April 1962, replaced the Indian Income Tax Act, 1922. Current income-tax law is governed by the 1961 act, which has 298 sections and fourteen schedules.
The Direct Taxes Code Bill was sponsored in Parliament on 30 August 2010 by the finance minister to replace the Income Tax Act, 1961 and the Wealth Tax Act. The bill could not pass, however, and lapsed after revocation of the Wealth Tax Act in 2015.
Amnesty
In its income declaration scheme, 2016, the government of India allowed taxpayers to declare previously-undisclosed income and pay a one-time 45-percent tax. Declarations totaled 64,275, netting.New Tax Regime
The New Tax Regime was announced for individuals & HUF in Budget 2020 and became effective from financial year 2020-21. According to it, individuals can opt for reduced tax rates with no option for claiming exemptions & deductions. Currently, Indian taxpayers can choose between the old tax regime and the new tax regime.At the time of introduction, it had 7 different slabs. After three years from introduction, Indian Government reduced both the slab count & tax rates under New Tax Regime in Budget 2023, after reports of poor adoption to new tax regime by tax payers
Tax brackets
For the assessment year 2013–25, individuals earning up to were exempt from income tax. About one percent of the population, the upper class, falls under the 30-percent slab. It increased by an average of 22 percent from 2000 to 2010, encompassing 580,000 income-tax payers. The common man, who fall under the 10- and 20-percent slabs, grew by an average of seven percent annually to 2.78 million income-tax payers.Agricultural income
According to section 10 of the Act, agricultural income is tax-exempt. Section 2 defines agricultural income as:- Rent or revenue derived from land in India which is used for agricultural purposes
- Income derived from such land by agricultural operations, including the processing of agricultural produce, raised or received as rent-in-kind, for the market or for sale
- Income attributable to a farm house, subject to conditions
- Income derived from saplings or seedlings grown in a nursery
Mixed agricultural and business income
Income in the activities below is initially computed as business income, after permissible deductions. Thereafter, 40, 35 or 25 percent of the income is treated as business income and the rest is treated as agricultural income.| Income | Business income | Agricultural income |
| Growing and manufacturing tea in India | 40% | 60% |
| Sale of latex, latex-based crepe or brown crepe manufactured from field latex or coalgum obtained from rubber plants grown by a seller in India | 35% | 65% |
| Sale of coffee grown and cured by an Indian seller | 25% | 75% |
| Sale of coffee grown, cured, roasted and ground by an Indian seller | 40% | 60% |
Deductions
These are permissible deductions according to the Finance Act, 2015:- §80C – Up to 150,000:
- *Provident and Voluntary Provident Funds
- *Public Provident Fund
- *Life-insurance premiums
- *Equity-Linked Savings Scheme
- *Home-loan principal repayment
- *Stamp duty and registration fees for a home
- *Sukanya Samriddhi Account
- *National Savings Certificate
- *Infrastructure bonds
- §80CCC – Life Insurance Corporation annuity premiums up to 150,000
- §80CCD – Employee pension contributions, up to 10 percent of salary
- §80CCG – Rajiv Gandhi Equity Savings Scheme, 2013: 50 percent of investment or ₹25,000, up to 50,000
- §80D – Medical-insurance premium, up to 25,000 for self/family and up to 15,000 for parents ; premium cannot be paid in cash.
- §80DD – Expenses for medical treatment, training and rehabilitation of a permanently-disabled dependent, up to 75,000
- §80DDB – Medical expenses, up to 40,000
- §80E – Student-loan interest
- §80EE – Home-loan interest
- §80G – Charitable contributions
- §80GG – Rent minus 10 percent of income, up to 5,000 per month or 25 percent of income
- §80TTA – Interest on savings, up to 10,000
- §80TTB – Time deposit interest for senior citizens, up to 50,000
- 80U – Certified-disability deduction
- §87A – Rebate for individuals with income up to 5,00,000
- 80RRB – Certified royalties on a patent registered on or after 1 April 2003, up to 300,000
- §80QQB – Certified book royalties, up to 300,000
Due dates
The due date for a return is:- 31 October of the assessment year - Companies without international transactions, entities requiring auditing, or partners of an audited firm
- 30 November - Companies without international transactions
- 31 July – All other filers
Advance tax
The practice of paying taxes in advance rather than in a single sum at the end of the fiscal year is known as advance tax. These taxes, often known as the 'pay-as-you-earn' scheme, is paid on tax bills above ₹10,000 in installments instead of as a lump sum. The schedule of advance tax payment for individual and corporate taxpayers are:- On or before 15 June – 15 percent of advance tax liability
- On or before 15 September – 45 percent of advance tax liability
- On or before 15 December – 75 percent of advance tax liability
- On or before 15 March – 100 percent of advance tax liability
Amendments due to COVID-19
There was no change in the timeline for tax payment; however, if the deposit of Advance Tax is delayed, a reduced interest rate of 9 percent per annum, or 0.75 percent per month, will be applicable instead of the current rate of 12 percent per annum, or 1 percent, for payment of all taxes falling between 20 March 2020 and 30 June 2020.Tax deduction at source
Income tax is also paid by tax deduction at source :| Section | Payment | TDS threshold | TDS |
| 192 | Salary | Exemption limit | As specified in Part III of I Schedule |
| 193 | Interest on securities | Subject to provisions | 10% |
| 194A | Other interest | Banks – ₹50,000 ; 100,000. All other interest – ₹10,000 | 10% |
| 194B | Lottery winnings | ₹10,000 | 30% |
| 194BB | Horse-racing winnings | ₹10,000 | 30% |
| 194C | Payment to resident contractors | ₹30,000 ; ₹100,000 | 2% ; 1% otherwise |
| 194D | Insurance commission | ₹15,000 | 5%, 10% |
| 194DA | Life-insurance payment | ₹100,000 | 1% |
| 194E | Payment to non-resident sportsmen or sports association | Not applicable | 20% |
| 194EE | Payment of deposit under National Savings Scheme | ₹2,500 | 10% |
| 194F | Repurchase of unit by Mutual Fund or Unit Trust of India | Not applicable | 20% |
| 194G | Commission on sale of lottery tickets | ₹15,000 | 5% |
| 194H | Brokerage commission | ₹15,000 | 2% |
| 194-I | Rents | ₹180,000 | 2%, 10% |
| 194IA | Purchase of immovable property | ₹5,000,000 | 1% |
| 194IB | Rent by individual or HUF not liable to tax audit | ₹50,000 | 5% |
| 194J | Professional or technical services, royalties | ₹30,000 | 10% |
| 194LA | Compensation on acquisition of certain immovable property | ₹250,000 | 10% |
| 194LB | Interest paid by Infrastructure Development Fund under section 10 to non-resident or foreign company | – | 5% |
| 194LC | Interest paid by Indian company or business trust on money borrowed in foreign currency under a loan agreement or long-term bonds | – | 5% |
| 195 | Interest or other amounts paid to non-residents or a foreign company | As computed by assessing officer on application under §195 or 195 | Avoiding double taxation |
Corporate tax
The tax rate is 25 percent for domestic companies. For new companies incorporated after 1 October 2019 and beginning production before 31 March 2023, the tax rate is 15 percent. Both rates apply only if a company claims no exemptions or concessions.For foreign companies, the tax rate is 40 percent. Surcharges and cesses, including a four-percent health-and-education cess, are levied on the flat rate. Electronic filing is mandatory.
Surcharges
Non-corporate taxpayers pay a 10-percent surcharge on income between 5 million and 10 million. There is a 15-percent surcharge on income over 10 million. Domestic companies pay seven percent on taxable income between 10 million and 100 million, and 12 percent on income over 100 million. Foreign companies pay two percent on income between 10 million and 100 million, and five percent on income over 100 million.Tax returns
There are five primary types of income-tax returns:Normal return : Individuals with an income above ₹250,000, ₹300,000, or ₹500,000 must file a return. Due dates vary based on the category of the taxpayer.
Belated return : A return that was not filed within the original due date may be filed before the end of the relevant assessment year or before the completion of the assessment, whichever is earlier.
Revised return : If a taxpayer discovers an omission or a wrong statement in a normal or belated return, a revised return may be filed before the end of the assessment year.
Updated return : Introduced in the 2022 Union Budget, an ITR-U allows taxpayers to update their returns within 24 months from the end of the relevant assessment year. This is applicable regardless of whether a previous return was filed, provided it is used to disclose additional income and pay additional tax. It cannot be used to file a loss return or claim a higher refund.
Defective return : An assessing officer may flag a return as defective. Such defects must be rectified by the taxpayer within 15 days of notification, or within such further period as the officer may allow.
Finance Act, 2021
In the Finance Act, 2021, the government has introduced the following changes on the Income Tax Act, 1961:- Amendments for taxation of income arising from Firm/AOP/BOI;
- Increased tax Incentives for International Finance Service Centre;
- Denial of depreciation on Goodwill;
- Full value of consideration for computation of capital gains on slump sale to be at Fair Value;
- Enhancement of Limit for Tax Audit; and
- Definition of the word "Liable to Tax" is introduced.