Income tax is a tax levied by the Government of India on the earnings of taxpayers. Depending on the amount of earnings in a year, the government charges a fixed percentage of tax on the gross income as per the prevailing income tax rates. This income can include salary from a full time, freelance, or part-time job, interest earned from shares or other investments, rent collected from a real estate asset, agricultural income, etc.
However, to make things favourable for the common citizen, the government also offers certain tax benefits and deductions. For instance, to reduce tax liability, people can use their life insurance premiums for a tax deduction or show the expenses incurred on a physically challenged dependent. All of these and more are special provisions that come under the purview of the Income Tax Act of 1961. Let’s first understand this act.
The Income Tax Act of 1961 was implemented in the country on April 1, 1962. This act primarily oversees the collection and administration of income tax by the government. There are a total of 23 chapters and 298 sections in the act. The government also uses unique income tax slabs and offers relevant tax benefits like exemptions and deductions to people from different professions and income groups under this act.
The tax is collected each year either at source in the form of Tax Deducted at Source (TDS) or advance tax or paid at the time of e-filing an income tax return (ITR). The government uses these funds to carry out developmental activities, such as making roads, ensuring rural development, covering the salaries of government employees, etc.
As mentioned above, the Government of India uses income tax slabs for every taxpayer. These are decided as per the income group that they come under. The lower the income, the lower is the percentage of tax paid. As taxpayers move up the ladder with a higher income, the tax percentage levied on their earnings also increases. Income tax slabs also differ as per the category of taxpayers. These categories can be divided as:
The income tax rate refers to the percentage that is charged on the income of an individual. This rate is decided by the government and announced each year in the annual budget. In the budget of 2020, a new tax regime was announced. However, the older regime was not entirely removed.
As per the new rules and regulations, people can choose between either of the two tax regimes. While the new regime offers lower income tax rates, it does not allow individuals to use the power of income tax deductions to lower their tax liability. However, if one continues using the older tax regime (higher of the two), they can use tax deductions while filing their tax return.
This table shows the difference in the old and new tax regime for each category of individuals:
Income tax slabs |
The old tax regime for resident individuals and Hindu Undivided Families (HUFs), and non-resident Indians under the age of 60 |
The old tax regime for resident individuals and HUFs between the ages of 60 and 80 |
The old tax regime for resident individuals and HUFs over the age of 80 |
The new tax regime for all categories |
| Below Rs.2.5 lakhs | No tax | No tax | No tax | No tax |
| From Rs.2.5 lakhs to Rs.3 lakhs | 5% | No tax | No tax | 5% |
| From Rs.3 lakhs to Rs.5 lakhs | 5% | 5% | No tax | 5% |
| From Rs.5 lakhs to Rs.7.5 lakhs | 20% | 20% | 20% | 10% |
| From Rs.7.5 lakhs to Rs.10 lakhs | 20% | 20% | 20% | 15% |
| From Rs.10 lakhs to Rs.12.5 lakhs | 30% | 30% | 30% | 20% |
| From Rs.12.5 lakhs to Rs.15 lakhs | 30% | 30% | 30% | 25% |
| Above Rs.15 lakhs | 30% | 30% | 30% | 30% |
Note: In additions to the above base tax rates, surcharge and Cess will be applicable. Please consult your tax consultants for more details.
Here’s a list of tax deductions and exemptions included in the new tax regime:
Here’s a list of tax deductions and exemptions not included in the new tax regime:
As stated above, the decision to choose between the old and new tax regime lies entirely on the taxpayers. Individual taxpayers can choose the new regime for one year and switch to the old one for the next year, as per their suitability. There is no restriction on the number of times they shift from one regime to another. However, they do need to inform their employer of their choice.
On April 13, 2020, the Central Board of Direct Taxation (CBDT) had also issued a notice for employers to get a signed declaration from their employees on the tax regime they wish to follow for a given year.
But the selection process differs for businesses. If a businessperson chooses to opt for the new tax regime and later switches to the old tax regime, they will not have the option to pick the new tax regime again. In such a case, they will have to stick to the old tax regime.
The decision can vary for each taxpayer. The gross income, category of taxpayers, number and value of tax deductions, etc. can play a crucial role here. Taxpayers need to assess the two options and select the one that results in a lower tax liability. This may seem like a lengthy and complicated process. However, it will help individuals to determine the suitable course of action.
Chartered accountants and other financial experts can also help taxpayers calculate their tax dues as per both regimes. Moreover, to make things easy, the income tax e-filing website offers an online calculator that can help people determine their tax dues as per the two tax regimes. However, business persons must be careful to pick the an ideal option, as they do not have the liberty to switch again.
Budget 2020 has made many changes to the tax filing and computation method. However, it also brings forth a choice for taxpayers. People can now choose how their taxes are calculated and filed. This can be of great assistance in making the right decision.
However, for people who do stick to the old income tax rates, it is essential to have adequate investments and savings, such as life insurance, unit-linked investment plans, etc. in order to claim tax benefits and deductions. PNB MetLife offers great insurance products for people of all age groups and needs. Not only do these help secure the future but also bring tax benefits for the present.
You can browse the website to learn more about Term Insurance Plans and the various Term plans offered by PNB MetLife.
The article is as per our understanding of the Income Tax Laws. Clients are advised to take consult your tax advisors before taking any final position.
The income tax is levied on all earning individuals who fall under a taxable income bracket. The income tax is paid to the Government of India and is charged annually. However, there are several tax deductions and exemptions that you can claim to lower your tax liability. The Income Tax Calculator helps you ascertain your tax output for a financial year based on your taxable income. This can help you plan well and save tax using the tax-saving deductions and exemptions, if possible.
Disclaimer:
The aforesaid article presents the view of an independent writer who is an expert on financial and insurance matters. PNB MetLife India Insurance Co. Ltd. doesn’t influence or support views of the writer of the article in any way. The article is informative in nature and PNB MetLife and/ or the writer of the article shall not be responsible for any direct/ indirect loss or liability or medical complications incurred by the reader for taking any decisions based on the contents and information given in article. Please consult your financial advisor/ insurance advisor/ health advisor before making any decision.
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