Income Tax Guide - Understanding Taxation in India | Edelweiss Tokio
An Overview of The Income Tax Act Of 1961
In 1860, income tax was introduced in India for the first time by Sir James Wilson, the pre-independence finance minister of India. He enforced the Income Tax Act, 1860 to
cover up for the losses sustained by the government due to the military mutiny of 1857. From time to time, the act was replaced with different licence taxes. In 1886, a
separate Income Tax Act was passed, which was further amended by the Income Tax Act of 1918 and 1922. The Income Tax Act of 1922 became highly complicated due to
several changes. Hence, the Income Tax Act of 1961 was introduced on April 1, 1962.
Presently, the Income Tax Act of 1961 is applicable in India. Over the years, the act has undergone several changes, even those of far-reaching nature, as proposed by the
Union Budget every year. Currently, the act levies income tax under the following five heads:
- Income from Salary
- Income from House Property
- Income from Profits and Gains of Profession
- Income from Capital Gains
- Income from Other Sources
The Income Tax Act, 1961 was introduced for the sole purpose of governing and administering income tax in the country. However, in 1962, specific Income Tax Rules were
laid down to ensure proper enforcement and application of the Income Tax Act, 1961. The Income Tax Rules cannot overrule the provisions of the Income Tax Act and must
be read in combination with the act.
What Are the Different Types of Income Tax Levied in India?
Broadly, there are two kinds of taxes:
- Direct tax. And
- Indirect tax.
Direct Taxes are taxes levied directly on the person who is ultimately bearing the cost of the tax. Income Tax is the most prominent form of Direct Tax.
Indirect Tax are taxes that are levied indirectly on goods/ services such as Goods and Service Tax on production of goods, transport of goods, sales of goods and services etc. These taxes are levied on the person providing these goods/ services but are borne by the ultimate user of the goods and services. GST, Professional Tax, Customs Duty etc. are examples of Indirect taxes.
Within the purview of Income Tax (IT) which is a Direct Tax, there are certain terms to be understood with respect to taxation. Some of these are:
Long term Capital Gain Tax and Short-Term Capital Gain Tax
Assets are considered long term or short term on the basis of what they are and how long they are held.
Shares and securities of a company that are listed on a recognized stock exchange, mutual funds, units of equity oriented mutual funds and zero-coupon bonds are
considered long term when they are held for a period greater than 12 months.
Immovable property such as land, building, house etc. are considered long term when they are held for a period greater than 24 months.
Movable property such as jewellery and other assets are considered long term when they are held for a period greater than 36 months.
This distinction is important as the income tax rates applied to capital gains differ greatly.
Where short term capital gains are taxed at 15% or the rate of the individuals slab as applicable, long term capital gains are taxed at 10%/ 20%. Also, the long-term capital gains provides the option of indexation benefit, which is basically the cost of the asset adjusted for inflation so that only real gains are taxed.
What Is TDS: Tax Deducted At Source?
TDS means that the person who is responsible for making payments to you will deduct tax before paying you the balance amount. In this way, tax is deducted at the source of income itself. On deducting the tax, this amount has to be paid by the person deducting into the governments account within the stated time period and they will issue you a TDS certificate.
This TDS certificate is proof of the tax having been deducted from your income and the proof you need to claim the same as credit.
Examples of payments on which Tax is deducted at source is Salary, interest on fixed deposits in banks, other payments to vendors exceeding the limits specified etc.
TDS is applicable to various types of income, such as salary, interest, rent, commission, etc. It is the responsibility of the person making the payment to deduct TDS and deposit it with the government. The individual whose income is being taxed can then claim credit for the TDS that was paid by presenting a TDS certificate or Form 26AS.
Income Tax Slabs & Rates AY 2023-24 (FY 2022-23)
For Individuals Below 60 Years, NRIs and HUFs
|Annual Income||New Tax Slab||Old Tax Slab|
|Up to ₹2.5 lakhs||NIL||NIL|
|₹2.5 – ₹5 lakhs||5%||5%|
|₹5 – ₹7.5 lakhs||10%||20%|
|₹7.5 – ₹10 lakhs||15%||20%|
|₹10 – ₹12.5 lakhs||20%||30%|
|₹12.5 – ₹15 lakhs||25%||30%|
|Above ₹15 lakhs||30%||30%|
The new tax regime allows individuals and HUFs to pay lower taxes without claiming deductions under different sections. Unlike the old tax regime, the new tax regime
does not differentiate taxpayers into age groups.
Additionally, new tax regime has not replaced the old tax structure; it is an option available to the taxpayers.
India follows a progressive system of taxation. This basically means that the income tax rates are determined as per threshold amounts set by the government and for
lower amounts a lower rate of tax is levied and as the income slab goes higher the rate of tax levied is greater.
What is Applicable Under Income Tax For FY 2022-23?
- Interest accrued in Provident Fund account for contributions of more than Rs. 2.5 lakhs per financial year will become taxable.
- State Government employees can claim deduction up to 14% of their base salary plus dearness allowances for contributions towards National Pension Systems payments from their employers. This is line with the deductions available to Central Government employees.
- Gains accrued through transfer of virtual digital assets is taxed @ 30%. Further, no set off of losses will be available against the gains made.
- New provision is inserted to allow taxpayers to file updated ITR within two years from the end of applicable assessment year. This provision cannot be used for reporting additions losses or reducing tax liability.
- No extra tax incentive for affordable homebuyers from current financial year. Earlier, additional tax relief of 1.5 lakhs was available for interest paid on home loans taken by first home buyers owning a house costing up to 45 lakhs.
What Is Proposed Under Income Tax For FY 2023-24?
- New tax regime has been enhanced and made the default tax regime. However option is provided to taxpayers to opt for old tax regime (with deductions). Proposed slab rates under new tax regime (from 1st April, 2023) are as follows:
|Total Income||Rate of tax|
|Up to Rs. 3,00,000||Nil|
- Further to above, rebate has been increased from Rs. 12,500 to Rs. 25,000. Hence, an individual is not required to pay tax income tax under New Tax Regime where total income is upto Rs 7,00,000/-
- Reduction of highest rate of surcharge from 37% to 25% under New Tax Regime where income of such person exceeds Rs 5 crore.
- Introduction of standard deduction of Rs 50,000 under New Tax Regime
- No tax changes has been proposed for Old Tax Regime
- Limit of tax exemption on leave encashment has been increased from Rs. 3,00,000/- to Rs. 25,00,000/- on retirement for non-government employees
- Tax exemption on long term capital gains arising out of transfer of long-term residential property or capital asset has been restricted to Rs.10 crores. Earlier there was no such restriction and entire amount of capital gain being exempt if gains amount is invested in residential house property.
- TDS @ 20% capped on taxable component of withdrawal of accumulated balance due to an employee under Employees’ Provident Fund Scheme on non-furnishing of PAN. Earlier TDS was deducted at maximum marginal rate (MMR) upto 34.608%
Key Changes In Tax Proposal For Life Insurance Sector
- The current Budget proposes to amend section 10(10D) criteria, whereby it is proposed to tax proceeds received from non-ULIP policies issued on or after 1 April 2023, where aggregate premium for one or more policy exceeds Rs 500,000 in any year during the term of policy. The said income will taxed under income from other sources.
- Proceeds received on death will continue to be exempt.
- Non-ULIP policies issued prior to 1 April 2023 continue to be exempt (subject to satisfaction of section 10(10D) criteria).
Income Tax Calculator
A taxpayer can calculate their income tax manually or use an online income tax calculator. The rate of income tax is determined as per the annual income in the income
tax slab. For instance, for a salaried taxpayer, the income from salary is calculated by including:
- Basic income
- House rent allowance (HRA)
- Transportation allowance
- Special allowance
Further, salary components like leave travel allowance (LTA), telephone bills, etc., are exempt from taxes subject to conditions. The taxpayer can claim HRA deduction,
provided they live in rented accommodation.
Tax Exemptions Under Income Tax Act
Under Section 10(10D) of the Income Tax Act, any amount received under a life insurance plan is exempt from taxes. This is inclusive of bonus, interest, or any other grant received in the plan. However, this rule is not applicable for:
Sum received under Section 80DD (3)
Sum received under a Keyman Insurance Policy
Sum received other than death benefit under a life insurance plan issued on or after April 1, 2003, but before March 31, 2012. In this case, the premium payable in any of the policy years should not be more than 20% of the sum assured. For plans issued on or after April 01, 2012, the exemption is allowed on policies with premiums lower than 10% of the sum assured.
For ULIPs, the maturity payout will be tax-free if the total annual premium in the given fiscal year is under ₹2.5 lakhs.
Tax Benefits On Purchasing A Life Insurance Policy
Life insurance is a great investment because it protects you and your family as well as helps you save tax. As per the Income Tax Act, 1961, the premiums you pay
towards a life insurance policy are exempt from taxes up to ₹1.5 lakh under Section 80C. Taxation relief is allowed on life insurance policies purchased for self, spouse, or dependent children.
However, you must pay premiums against these policies from your income. Moreover, the total policy premiums must not exceed 10% or 20% of the sum assured for
policies purchased after April 1, 2012, and before April 1, 2012, respectively.
Life insurance policies purchased for a disabled family member are free from taxes under Section 80C, provided the premiums do not exceed 15% of the sum assured.
Payment of premium on life insurance policy not only gives insurance cover to a taxpayer but also offers certain tax benefits. Various life insurance plans offer tax benefits
under Section 80C of the Income Tax Act against the premiums paid including:
- Term Insurance Plans
- Unit Linked Insurance Plans
- Guaranteed Returns Income Plans
- Retirement Insurance Plans
Maturity proceeds and death benefits received from life insurance plans with maturity benefits are also exempt from taxes under Section 10(10D) if the premiums do not exceed 10% of the sum assured.
For ULIPs, the maturity payouts are tax-free under Section 10(10D) if the total annual premium in a financial year does not exceed ₹2.5 lakhs. If the total premium exceeds ₹2.5 lakhs, the maturity payouts will be considered as capital gains and taxed accordingly.
Our Plans That Help You Save Tax
Edelweiss offers various life insurance plans that help you save on taxes. These include:
Types of Income Tax Returns³
Income Tax Return is an income tax declaration which is filed by all taxpayers stating the income – sources of income, tax due and tax paid during the year. There are
seven ITR form types notified by the Income Tax Department – they are ITR 1Sahaj Form, ITR 2, ITR 3, ITR 4, ITR 5, ITR 6, and ITR 7. An Income taxpayer must know which
form they should fill in for filing their income tax returns. Form applicable dependents on the individual entity and their sources of income.
A simplistic guide is that:
ITR 1 form
- For individuals being a resident (other than not ordinarily resident) having total income up to Rs.50 lakh, having Income from Salaries, one house property, other sources
(Interest etc.), and agricultural income up to Rs. 5000.
- is used by all who would file ITR 1 but have income greater than 50 lakhs. Also people who have Income from capital gains, Income from house property, Hold
directorships in a company or hold unlisted equity assets, or foreign assets and/or have foreign income. Basically it is for Individuals and HUFs not having income from
profits and gains of business or profession.
- In case Individual has Income from Business / Profession or is a partner in a firm then ITR 3 must be filed.
- is for Individuals, HUFs and Firms (other than LLP) being a resident having total income upto Rs.50 lakh and having Presumptive income from business and profession and agricultural income upto Rs.5000.
- Is to be used by LLP’s, AOP’s and BOI’s.
- is to be used by Companies who are not claiming exemption under Section 11 .
- is to be used by Persons and companies who claim exemption under Sections 139 of the Income Tax Act, 1961.
There are no separate ITR form for housewife or senior citizens. The forms are the same and based on sources of income. You can look up your sources of income and
decide to file ITR for housewife, senior citizens or any other categories. You should file an income tax return³ if your income is above the exempt income tax limit, or you
have lottery winnings, or you wish to claim income tax refund on tax paid, to create a proper financial base which helps with obtaining loans and visa etc. and if the tax
payer is a company or firm then irrespective of profit or loss it is mandatory to file ITR.
By adhering to these rules you will find it easy to comply with the requirements of the income Tax Act, 1961 and build a good financial base for yourself. You will find
online income tax calculators to assist you and you may file ITR return online easily as well. There are detailed instructions on how to file income tax returns online for
salaried employees and non-salaried taxpayers.
Income Tax Filing are an important part of the government process. Not only would you be fulfilling your responsibility by you would create a solid base with your
declared income. In case you have missed filing your return you can get income tax extension and there are also instructions on how to file income tax returns³ for last 3
years if you would like to right an earlier wrong.
Filing your tax returns³ is a good idea and one to be embraced to get the income tax benefit. There is an income tax helpline available for various general tax issues as well
as other helplines for specific issues. You can click here to find the one that suits your query/question.
How To File ITR?
Income tax returns³ have to be filed by person whose annual income exceeds minimum
amount not subject to tax. Companies and firms have to file their income tax return³ without
fail and regardless of profits or losses incurred. Filing an income tax return³ is also necessary
even if you have no tax to pay but need to claim your tax refund for taxes deducted at source.
So how do you file your Income Tax Return³. You need to first create your computation of
Income Tax. You have to file your Income tax return³ online or by using Tax utilities. The
correct form as applicable should be use for filing returns.
All details have to be filled out in all the requisite columns of the forms. Be sure that all the
fields are filled out carefully. At the time of online filling, TDS section will get auto populated
and you will have to verify that it is correct.
Thereafter in case of online filing of ITR - you should check all details and if there is any tax
payable immediately pay the same and enter the details of tax paid. Your tax liability should
show as nil. Upload the digital signature if needed. And as a last step e verify your return filed.
What Is Classified As Tax Evasion?
Tax Evasion is covered under Chapter XXII of the Income Tax Act, 1961 and is considered a criminal offence. While filing the return of tax it is important to abide by the
intent as well as the letter of the law. There are several acts that are specifically mentioned in the Income tax Act that are considered offences and carry severe fines,
penalties as well as prosecution.
These offences may arise on failure to fulfill basic requirements – such as not filing return of income in a timely and honest manner, failure to pay taxes on time, failure to
pay tax deducted at source or tax collected at source on time, and such. Or maybe willful – such as a willful attempt to evade tax, failure to comply with notices, failure to
produce books of accounts, false statements in return, falsification of books, abetment in filing wrongful return etc.
What is important to know is that all such acts carry a heavy fine and penalty with the possibility of prosecution.
So whether it be a simple error or deliberate falsification – the returns if scrutinized would likely to result to applicability of provisions as mentioned in Sections 275A to
Section 280C of the Income Tax Act, 1961.
Income Tax Penalty
Penalties are payable under the Indian Income Tax Act, 1961 in certain cases. There is Penalty for late filing of income tax return³, penalty for late filing of TDS return, penalty for non-filing of return of income and also penalties payable for:
- Default in making the payment of taxes in full or in part. Maximum Penalty levied shall be equal to the amount of tax in arrears.
- In cases where income has been under reported – penalty may be to the extent of 50% of the income under reported and 200% if underreporting is wilful
- For failure to maintain books of accounts the penalty is 25,000/-.
- There are other penalties for taking payments in excess of prescribed amounts by ways other than bank transfer, bank draft or account payee cheque; for failure to furnish
- information when asked; for non-compliance with department notices, quoting wrong PAN or TAN, etc.
Income Tax FAQs
Fire Away Queries
Like teachers say, there are no silly questions
What is a financial year in the context of income tax calculations?
For tax calculations, the financial year begins on the 1st of April of a year and ends on the 31st of March of the next calendar year.
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Who should pay income tax?
An individual, group of persons or an artificial body who has received an income during the previous financial year should pay income tax. The Income Tax Department classifies taxpayers in these categories:
- HUF (Hindu Undivided Family)
- Association of Person (AOP)
- Body of Individuals (BOI)
- Local Authority
- Artificial Judicial Person
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What is PAN?
PAN stands for Permanent Account Number. This is a unique ten-digit code issued by the Income Tax Department for each taxpayer. The taxes paid, refunds received, or penalties are issued against the PAN.
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What is the tax exemption limit in India?
The Department of Income Tax in India does not levy any tax on individuals and other eligible entities with an annual income below ₹2.5 lakhs. Above the minimum threshold, there is a different tax rate charged per annual income slabs.
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What are the different heads under which income tax is levied in India?
Income under these five heads is taxed in India:
Income from house property
Gain or profits of profession or business
Income from other sources
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Income Tax benefits would be available as per the prevailing income tax laws, subject to fulfilment of conditions stipulated therein. Income Tax laws are subject to change from time to time.
Edelweiss Tokio Life Insurance Ltd. does not assume responsibility on tax implications mentioned anywhere in this document. Please consult your own tax consultant to know the tax benefits available to you. While every attempt has been made to provide the latest data included in this document at the time of its release, Edelweiss Tokio Life Insurance Ltd. is not responsible for any form of damages (including, but not restricted to, errors and omissions) connected with this content.
3 - As per provisions of Income Tax Act, 1961. Tax benefits are subject to changes in tax laws.
5 - If declared, Cash Bonus is a non-guaranteed bonus which may be payable based on the performance of the participating fund of the Company.
Source of Information:
The Linked Insurance Products do not offer any liquidity during the first five years of the contract. The policyholder will not be able to surrender/withdraw the monies invested in Linked Insurance Products completely or partially till the end of the fifth year.
Unit Linked Life Insurance products are different from the traditional insurance products and are subject to the risk factors. The various funds offered under this contract are the names of the funds and do not in any way indicate the quality of these plans, their future prospects and returns. Please know the associated risks and the applicable charges from your Personal Financial Advisor or the Intermediary or policy document of the Insurer. The premium paid in unit linked life insurance policies are subject to investment risk associated with capital markets and the unit price of the units may go up or down based on the performance of investment fund and factors influencing the capital market and the policyholder is responsible for his/her decisions.
For more details on risk factors and terms and conditions, please read sales brochure carefully before concluding a sale.