UNDERSTANDING INDIVIDUAL INCOME TAXATION UNDER THE INCOME TAX ACT, 1961

Introduction

The Income Tax Act, 1961 is the primary legislation governing income tax in India. It lays down the provisions and guidelines for the assessment and collection of income tax from individuals, including salaried employees, self-employed professionals, and business owners. Understanding the basics of individual income taxation under this Act is essential for taxpayers to fulfill their obligations and effectively manage their finances. This article aims to provide an overview of the key concepts and provisions related to individual income taxation in India.

Tax Residency and Scope

The Income Tax Act determines the tax liability of individuals based on their residential status. An individual can be classified as a resident or non-resident for taxation purposes. A resident is further categorized as a resident and ordinarily resident (ROR) or a resident but not ordinarily resident (RNOR), based on the number of days spent in India during a financial year. Non-resident individuals are only taxed on income earned or received in India.

Income Categories

Under the Income Tax Act, individual income is classified into five categories:

1. Income from Salaries: This includes all earnings, benefits, allowances, perquisites, and profits arising from employment.
2. Income from House Property: Income derived from owning or renting out residential or commercial properties falls under this category. Rental income, regardless of whether the property is occupied or vacant, is taxable.
3. Profits and Gains from Business or Profession: Individuals engaged in business, trade, or profession, including self-employed professionals, are required to report their income and expenses under this category.
4. Capital Gains: Capital gains arise from the sale of capital assets such as property, stocks, bonds, or mutual funds. Depending on the holding period of the asset, capital gains are classified as short-term or long-term and taxed accordingly.
5. Income from Other Sources: This category includes income from sources not covered under the previous categories, such as interest earned on savings accounts, fixed deposits, or income from winnings, lottery, etc.

Income Tax Slabs and Rates

The Income Tax Act prescribes different tax slabs and rates applicable to different income levels. These slabs are subject to change with each financial year’s Union Budget announcements. For instance, as of the knowledge cutoff in September 2021, the following tax slabs were applicable for individual taxpayers below the age of 60:

• Income up to ₹2.5 lakh: Nil tax
• Income between ₹2.5 lakh and ₹5 lakh: 5% tax
• Income between ₹5 lakh and ₹10 lakh: 20% tax
• Income above ₹10 lakh: 30% tax

Additional surcharges and health and education cess may apply.

Deductions and Exemptions

The Income Tax Act allows for various deductions and exemptions that can reduce an individual’s taxable income. Some commonly availed deductions include those under Section 80C (investments in specified instruments such as Employee Provident Fund, Public Provident Fund, etc.), Section 80D (health insurance premiums), and Section 24 (interest on home loans). Additionally, exemptions are provided for specific allowances such as house rent allowance (HRA) and leave travel allowance (LTA) subject to specified conditions.

Filing of Income Tax Returns

Individuals falling within the taxable income bracket are required to file their income tax returns annually. The due date for filing returns is generally July 31st of the assessment year (for example, July 31, 2023, for the financial year 2022-2023), though it may be extended in certain cases. Individuals with income exceeding specified limits, those with international income or foreign assets, or individuals subject to audit requirements have additional compliance obligations.

Conclusion

Understanding individual income taxation under the Income Tax Act, 1961 is crucial for individuals to meet their tax obligations and optimize their tax liability. It is advisable to consult with tax professionals or refer to the official website of the Income Tax Department for the most up-to-date information and any recent amendments to the Act. By staying informed and compliant with the provisions of the Act, taxpayers can ensure a smooth and transparent taxation process