#AD
During our school years, all we are ever taught about taxes is that we are obligated to pay them as law-abiding citizens of our country. While the sentence before this one is true, we also need to learn the method to calculate and pay these taxes. But the lack of education on the matter turns taxation into a “government mystery” that no one gives much thought to.
As a result of this ignorance, people end up paying a lot more taxes than necessary. This money could be saved and, ideally, invested to combat inflation. Speaking of investing, the beginning of investing can be confusing, which is where The Academy of Value Investing course on Quest by Finology can be helpful in understanding the basics of investing. Just like how today’s article will deal with the basics of taxation.
Taxation isn’t such a big deal as it’s made out to be either. Sure, it can get technical with deductions and tax planning, but learning is about small steps in the right direction. Not instant leaps to the end.
While a majority of the audience on this website has been educated in tax law in some capacity, the information covered is often a little too advanced. And let’s face it, it wouldn’t hurt to brush up on the basics a little, right? So, that’s what we will do today: revisit some taxation basics.
What is Income?
Income tax is a direct tax. This means that the person who bears the liability of tax is the same person who pays the tax. The liability of tax payment cannot be shifted, as is the case with GST, Excise & Service tax. With Income tax, as the name suggests, the tax burden is levied on the taxpayer’s (also called the assessee) income.
For income tax purposes, a person’s income includes the following sources of monetary inflow:
1. Income from Salary: Under this head, a salaried individual’s receipts from their employer are included as salary. The employer deducts TDS from the salary before the employee receives it. The employee’s in-hand salary is taxed on the basis of the tax slab their annual salary falls under.
2. Income from House Property: For monetary inflow to count as income from House Property, it must originate from a building or land the taxpayer owns. The nature of the income must be revenue in nature, which means that it should be recurring in nature and must not originate from the sale of the building or land in concern.
This means that rental income from land and buildings will count as income from house property for the person owning said property.
3. Profit or Gain from Business or Profession: Traditionally, a person can engage in three major forms of occupations. These three methods are service, profession and business. While the “salary” head of income covers the first method of occupation, this head covers the remaining two modes of occupation.
Under this head of taxation, income generated from a domestic business or profession is taxed at 25% if the annual turnover or gross receipts for either is less than ₹400 crore. If the annual turnover or gross receipts is more than ₹400 crore, the tax rate is increased to 30%.
4. Income from Capital Gain: This is the head deals with the receipts generated as the result of the sale of a capital asset. This means that the sale must not be a part of the taxpayer’s inventory of stock that they sell. The sale that generates income shall be differentiated from a regular sale of goods based on the recurrence of said sale. For example, the sale of a house shall be considered a capital gain for a person who owned the same house for residential purposes. If sold by a property dealer, the same house shall not fall under the purview of capital gains if the dealer regularly buys and sells buildings in the ordinary course of their business.
If the recipient of the capital gains holds their property for less than one year, the capital gains shall be considered short-term and taxed at a different rate than if the property was held for a period longer than 12 months. Different asset classes attract varied tax rates along with the variation in holding period.
5. Income from Other Sources: The miscellaneous basket under income tax law, this head contains any and all sources of income that the other heads did not.
For the intents and purposes of Income Tax, a “person” means an individual and other legal entities like body corporates, firms, HUF, and others.
What are Tax Slabs?
As mentioned above, income from salary is taxed on the basis of the slab that an individual’s annual income falls under. Under the older taxation system, the tax rate applicable changes based on the appropriate slab. Another factor that affects the applicable tax rate under the older system is the taxpayer’s age.
The latest tax regime removes the differentiation based on age and applies a flat tax rate to all age groups. The different tax rates are applied based on income. Following are two tables outlining the various tax slabs.
Older Tax Regime
| Tax Rate\Age | Less than 60 years | Greater than 60 years but less than 80 years (Senior Citizen) | Greater than 80 years (Super Senior Citizen) |
| Income Exempt from Taxation | Upto ₹2.5 lakh p.a. | Upto ₹3 lakh p.a. | Upto ₹5 lakh p.a. |
| 5% | ₹2.5 lakh to ₹5 lakh p.a. | ₹3 lakh to ₹5 lakh p.a. | Nil |
| 20% | ₹5 lakh to ₹10 lakh p.a. | ₹5 lakh to ₹10 lakh p.a. | ₹5 lakh to ₹10 lakh p.a. |
| 30% | Above ₹10 lakh p.a. | Above ₹10 lakh p.a. | Above ₹10 lakh p.a. |
New Tax Regime
| Income | Tax Rate |
| Upto ₹2.5 lakh p.a. | Nil |
| ₹2.5 lakh to ₹5 lakh p.a. | 5% |
| ₹5 lakh to ₹7.5 lakh p.a. | 10% |
| ₹7.5 lakh to ₹10 lakh p.a. | 15% |
| ₹10 lakh to ₹12.5 lakh p.a. | 20% |
| ₹12.5 lakh to ₹15 lakh p.a. | 25% |
| More than ₹15 lakh p.a. | 30% |
All taxpayers (except super senior citizens) falling under the 5% tax rate can claim a tax rebate of ₹12,500 u/s 87A of the Income Tax Act.
Different Types of Years in Tax
Whenever finance is involved, the calendar year seems to be rendered useless as the financial year might share the months with the calendar year, but the year’s beginning and the end are offset. Similarly, with taxation, the years are the same as the financial year, but for the sake of calculating a person’s income and delegating the tax liability, there are two years. These two years are called Previous Year and Assessment Year.
The Previous Year is the ongoing financial year when the assessee earns their income. The income earned during this period is the income on which tax is levied.
The Assessment Year is the financial year immediately following the Previous Year. During the Assessment Year, income earned during the Previous Year is considered to calculate an assessee’s tax liability. Assessees also file their income tax returns in the assessment year.
Conclusion
Taxes are an obligatory payment that every law-abiding citizen of a country must pay. This does not mean that people spend unnecessarily large amounts of money to cover their bases. Proper tax awareness is gatekept by the education system by limiting education about taxes to commercial streams of education. Due to this limitation, taxes are often shrouded by mystery and taxes are either seen as a government evil or people overspend on it.
Educate yourself irrespective of your field of education, you will earn, and thus need to pay taxes at some point of your life.
