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Income tax in India

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The government of India imposes an income tax on taxable income of individuals, Hindu Undivided Families(HUFs), companies (firms), co-operative societies and trusts. The Income Tax department is governed by the Central Board for Direct Taxes (CBDT) and is part of the Department of Revenue under the Ministry of Finance.

Individual Income Tax

Heads of Income

There are five heads of income that are taxable:

  1. Income from Salary
  2. Rental Income
  3. Income from Business and profession
  4. Capital Gains
  5. Income from other sources

Tax Rates

In India, Individual income tax is a progressive tax with three slabs.

  • No income tax is applicable on all income up to Rs. 100,000 per year. (Rs. 135,000 for women and Rs. 185,000 for senior citizens)
  • From 100,001 to 150,000 : 10% of amount greater than Rs. 100,000 (Lower limit Rs. 135,001 for women and n/a to senior citizens)
  • From 150,001 to 250,000 : 20% of amount greater than Rs. 150,000 + Rs. 5,000 (For women: Rs. 1500) (For senior citizens, the lower limit is Rs. 185,000)
  • Above 250,000 : 30% of amount greater than Rs. 250,000 + Rs. 25,000 (Rs. 21,500 for women and Rs. 13,000 for senior citizens)

Income from Salary

All income received as a salary is taxed under this head. This includes all monies paid by a company to its employees. Employers must withhold tax compulsorily, as Tax Deducted at Source (TDS), and provide their employees with a Form 16 which shows the tax deductions and net paid income. In addition, the Form 16 will contain any other deductions provided from salary such as:

  1. Medical reimbursement: Upto Rs. 15,000 per year is tax free if supported by bills. (Company pays Fringe Benefit Tax on this amount)
  2. Conveyance allowance: Upto Rs. 800 per month (Rs. 9,600 per year) is tax free if provided as conveyance allowance. No bills are required for this allowance.
  3. Professional taxes: Most states tax employment on a per-professional basis, usually a slabbed amount based on gross income. Such taxes paid are deductible from income tax.

Income from salary is net of the above deductions.

Capital Gains

Long term capital gains tax stands at 20% (for gold, real estate and such) with indexation benefits provided for inflation. All short term gains are clubbed with income in the year the gains occur. Long term is defined as 3 years for some assets (gold, real estate, for instance) and one year for others (Mutual funds, shares).

For sales of shares in recognised stock exchanges and mutual fund units, long term capital gains are not taxed at all. 10% income tax is applied on short term gains (less than 1 year of holding). To qualify for these lower taxes on sale of shares, a Securities Transaction Tax (STT) must have been paid on the sale transaction. STT has been applied on all stock market transactions since October 2004 but does not apply to off-market transactions and company buybacks; therefore, the higher capital gains taxes will apply to such transactions that do not include STT.

Stock options are only taxed at the time of exercise. For companies listed in Indian stock exchanges, the tax is calculated as regular capital gains with the rules above; purchase dates and prices are as per the time of grant. For companies abroad, the tax liability is 20% of such gains (since STT is not paid).

Income Exempt from Tax

Dividends

Dividends paid by Companies and Mutual Funds are exempt from tax. A 12% dividend distribution tax is paid by companies before distribution. Equity mutual funds (with more than 65% of assets invested in equities) do not pay a dividend distribution tax, through other funds do.

Other Exempt Income

The Indian Income tax act specifically exempts certain income from tax:

  • Money received from an Insurance company as proceeds of an insurance policy (by way of an insurance claim, or by maturity) is exempt.
  • Maturity proceeds of a Public Provident Fund (PPF) account.

Deductions

Section 80 C Deductions

Section 80C of the Income Tax Act allows certain investments and expenditure to be tax-exempt. The total limit under this section is Rs. 100,000 (Rs. 1 lakh) which can be any combination of the below:

  • Contribution to Provident Fund or Public Provident Fund
  • Payment of life insurance premium
  • Investment in pension Plans
  • Investment in Equity Linked Savings schemes (ELSS) of mutual funds
  • Investment in specified government infrastructure bonds
  • Investment in National Savings Certificates (interest of past NSCs is reinvested every year and can be added to the Section 80C limit)
  • Payments towards principal repayment of housing loans.
  • Payments towards education fees for children.

Interest on Housing Loans

Payment of interest on a housing loan up to Rs. 150,000 per year is exempt from tax. However, this is only applicable for a residence constructed within three financial years after the loan is taken.

Rent received

30% of rent received (or annual rental value) from an owned property is exempt from tax.-Sandeep

Surcharge

A 10% surcharge (tax on tax) is applicable for incomes above Rs. 10 lakh (Rs. 1 million). Deductions and rebates are provided for housing purchases, rent, long term savings and insurance.

Education Cess

All taxes in India are subject to an education cess, which is 2% of the total tax payable.

Corporate Income tax

For companies, income is taxed at a flat rate of 30% for Indian companies, with a 12% surcharge applied on the tax paid , . Foreign companies pay 40%..An education cess of 2% (on both the tax and the surcharge) are payable, yielding effective tax rates of 33.66% for domestic companies and 40.8% for foreign companies.

From 2005-06, electronic filing of company returns is mandatory.

References

  1. Taxable heads of income
  2. Income Tax Act, Tax rates for foreign companies
  3. Corporate taxpayers must file electronically, point 4 of IT circular.

External links

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