Summary: The history of income tax in India dates back to ancient times, with references in Manusmriti and Arthashastra, where taxes were levied on traders, artisans, and farmers. Traders and artisans paid 20% of their income, while farmers paid a percentage of their production, depending on circumstances. Modern income tax began in 1860, when the British government introduced the Income Tax Act to recover losses from the 1857 revolt. Significant reforms followed in 1918, 1922, and 1961, with the latter establishing the current framework, dividing income into five heads. Over the years, income tax rates and slabs have been continuously revised. Major reforms occurred in 1974, 1985, and 1997, reducing tax rates and simplifying slabs. In 2010, earnings up to INR 1.6 lakhs were exempted, and by 2017, the exemption limit was raised to INR 2.5 lakhs. In 2020, a new tax regime was introduced, offering taxpayers a choice between the old system, with deductions, and a new, simplified regime with lower rates but no exemptions.
In simple terms, income tax means tax payable when income exceeds certain specified limits. The tax so paid is utilized by the Government towards infrastructural development; providing better education; providing healthcare; introducing various welfare scheme; etc.
With the help of current article, one can run through the history of income tax in ancient India; beginning of taxation in India and history of income tax slab rate in India.
Run through to the history of income tax in ancient India
Income tax has its base even in ancient India. Reference of levy of tax are available in Manusmriti and Arthasastra. Manusmriti is the oldest source of income tax provisions. Short briefing of Manusmriti and Arthasastra is tabulated hereunder –
| Particulars |
Details |
| Manusmriti |
- Traders/ merchants were liable to pay 20% of the income or 1/5th of their income;
- Artisans were liable to pay 20% of the income or 1/5th of their income;
- Farmers were liable to pay 1/6th or 1/8th or 1/10th of the value of total production depending on the circumstances.
|
| Arthasastra |
- Arthasastra is more prominent source of income tax laws and regulations in India;
- It covers public finance; financial law and financial administration in a more organized manner;
- Rich were made liable to pay higher taxes. Whereas, less privileged were made liable to pay lower taxes;
- Farmers were liable to pay 1/6th of the value of total production for land taxation.
|
Beginning of taxation in India
First time Income Tax Act was introduced in February 1860 by Sir James Wilson. Basically, it was introduced to cover huge losses incurred by the British government after military mutiny of 1857.
Thereafter, in the year 1918, a new Income Tax Act was passed. The said Act of 1918 was replaced by passing of a new Act in the year 1922. Finally, the Indian Income Tax Act, 1922 was replaced by the Income Tax Act, 1961 and the same was made effective from 1st April 1962.
Short briefing of the Income Tax Act is tabulated hereunder –
| Particulars |
Details |
| Income Tax Act, 1860 |
- Income Tax Act, 1860 was introduced for meeting up with the losses incurred as a consequence of mutiny;
- It was made applicable for the period of 5 years.
|
| Income Tax Act, 1918 |
- Income Tax Act, 1918 bought major revisions and reforms under Indian Tax System;
- Notably, receipts as well as deduction of non-reoccurring nature were incorporated in computation of taxable incomes.
|
| Income Tax Act, 1922 |
- Income Tax Act, 1922 become more comprehensive income tax law;
- It covered greater tax base within its ambit;
- Vide this tax reform, provisional authorities handed over tax administration responsibilities to central government.
|
| Income Tax Act, 1961 |
- Income Tax Act, 1961 classified the income under five income heads i.e. Salary Income; income from business or profession; house property income; capital gains and income from other sources.
|
History of income tax slab rate in India
| Year |
Relevant income tax slab |
| 1949-1950 |
- Tax rates were reduced for the first time by John Mathai on incomes up to INR 10,000 by quarter of an Anna in following two slabs –
1. In first slab – reduction was done from ‘one Anna’ to ‘nine pies’; and
2. In second slab – reduction was done from ‘two Anna’ to ‘one nine pies’.
|
| 1974-1975 |
- Maximum Income Tax Rate reduced from 97.75% to 75%;
- No income tax on individuals earning up to INR 6,000;
- Basic Income Tax rate of 70% was charged on income slab over INR 70,000;
- Uniform surcharge of 10% was charged for all levels;
- Wealth tax was increased considerably.
|
| 1985-1986 |
- Income tax slab reduced from 8 slabs to 4 slabs. Accordingly, 4 income tax slab rates were –
| Income Tax Slab |
Income Tax Rate |
| From INR 18,001 to INR 25,000 |
25% |
| From INR 25,001 to INR 50,000 |
30% |
| From INR 50,001 to INR 1 Lakh |
40% |
| Above INR 1 Lakhs |
50% |
- There was no income tax levied up to the earning of INR 18,000;
- Highest marginal income tax rate on personal incomes got reduced from 61.875% to 50%.
|
| 1992-1993 |
- Income tax slab reduced from 4 slabs to 3 slabs. Accordingly, 3 income tax slab rates were –
| Income Tax Slab |
Income Tax Rate |
| Income between INR 30,000 and INR 50,000 |
20% |
| Income between INR 50,000 and INR 1 Lakh |
30% |
| Above INR 1 Lakhs |
40% |
|
| 1994-1995 |
- Income tax slab rates were adjusted as under –
| Income Tax Slab |
Income Tax Rate |
| Income between INR 35,000 and INR 60,000 |
20% |
| Income between INR 60,000 and INR 1,20,000 |
30% |
| Above INR 1,20,000 |
40% |
|
| 1997-1998 |
- Income tax slab rates were reduced to 10%, 20% and 30% in following manner –
| Income Tax Slab |
Income Tax Rate |
| Income between INR 40,000 and INR 60,000 |
10% |
| Income between INR 60,000 and INR 1,50,000 |
20% |
| Above INR 1,50,000 |
30% |
- Standard deduction limit was increased to INR 20,000;
- No income tax leviable on employees drawing a salary of INR 75,000 per annum and also contributing 10% to the provident fund.
|
| 2005-2006 |
- Considerable changes in income tax slab rates were announced. No income tax was chargeable on earnings up to INR 1 Lakhs.
- Amended income tax slab rates were –
| Income Tax Slab |
Income Tax Rate |
| Income between INR 1,00,000 and INR 1,50,000 |
10% |
| Income between INR 1,50,000 and INR 2,50,000 |
20% |
| Above INR 2,50,000 |
30% |
|
| 2010-2011 |
- No income tax was chargeable on earnings up to INR 1,60,000.
- Amended income tax slab rates were –
| Income Tax Slab |
Income Tax Rate |
| Income between INR 1,60,000 and INR 5,00,000 |
10% |
| Income between INR 5,00,000 and INR 8,00,000 |
20% |
| Above INR 8,00,000 |
30% |
|
| 2012-2013 |
- No income tax was chargeable on earnings up to INR 2 Lakhs.
- Amended income tax slab rates were –
| Income Tax Slab |
Income Tax Rate |
| Income between INR 2,00,000 and INR 5,00,000 |
10% |
| Income between INR 5,00,000 and INR 10,00,000 |
20% |
| Above INR 10,00,000 |
30% |
|
| 2014-2015 |
- Wealth tax was abolished with effect from the Assessment Year 2016-2017;
- Instead of wealth tax, surcharge of 2% was levied on super rich taxpayers having taxable income above INR 2 Crores.
|
| 2017-2018 |
- No income tax was chargeable on earnings up to INR 2,50,000.
- Amended income tax slab rates were –
| Income Tax Slab |
Income Tax Rate |
| Income between INR 2,50,000 and INR 5,00,000 |
5% |
| Income between INR 5,00,000 and INR 10,00,000 |
20% |
| Above INR 10,00,000 |
30% |
- Rebate under section 87A of the Income Tax Act was reduced from INR 5,000, to INR 2,500 for taxpayers earning between INR 2,50,000 and INR 3,50,000.
|
| 2020-2021 |
- New tax regime was introduced. Notably, taxpayer were allowed to make a choice between new tax regime and an old tax regime.
- Income tax slab rates for both new tax regime and old tax regime are tabulated hereunder –
| Income Tax Slab |
Income Tax Rate
(Old Tax Regime) |
Income Tax Rate
(New Tax Regime) |
| Up to INR 2,50,000 |
NIL |
NIL |
| From INR 2,50,001 to INR 5,00,000 |
5% |
5% |
| From INR 5,00,001 to INR 7,50,000 |
20% |
10% |
| From INR 7,50,001 to INR 10,00,000 |
20% |
15% |
| From INR 10,00,001 to INR 12,50,000 |
30% |
20% |
| From INR 12,50,001 to INR 15,00,000 |
30% |
25% |
| Above INR 15,00,000 |
30% |
30% |
- Notably, deductions and exemptions were not available in new tax regime.
|
