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Income Tax

What are taxes?

Have you heard about this term “Tax”? Have you ever paid any tax? Let’s learn more about taxes in this lesson. Tax is a compulsory contribution to state revenue, levied by the government on the worker’s income & business profit, or added to the cost of some goods, services & transactions.

WHAT IS DIRECT TAX?

In simple words, a direct tax is a tax that you directly pay to the authority imposing the tax. For instance, income tax is imposed by the government, and you pay it directly to the government. These taxes cannot be transferred to any other entity or person. There are several acts which govern direct taxes. 

In India, CBDT (Central Board of Direct Taxes) which is governed by the Department of Revenue is responsible for the administration of direct taxes. The department is also involved in planning and providing inputs to the government regarding the implementation of direct taxes.

WHAT IS INDIRECT TAX?

While direct taxes are imposed on income and profits, indirect taxes are levied on goods and services. A major difference between direct and indirect tax is the fact that while direct tax is directly paid to the government, there is generally an intermediary for collecting indirect taxes from the end-consumer. It is then the responsibility of the intermediary to pass on the received tax to the government. 

Unlike a direct tax, indirect taxes do not depend on the income of an individual. The tax rate is the same for everyone. The CBIC (Central Board of Indirect Taxes and Customs) is mostly responsible for handling indirect taxes in India. Just like CBDT, CBIC also works under the Department of Revenue.

Basis

Direct tax

Indirect Tax

Meaning

Tax levied on income or wealth of a person and is paid by the person (or his office) directly to the government.

Tax levied on Goods & Services 

Impact

Impact on one person & tax is imposed on his salary. 

Impact on various people. Imposed on sellers, but collected from buyers and paid by sellers to the government.

Burden

More the salary, more is the tax

Tax is flat for all the individuals, despite their income.

Tax benefit

Tax benefit is possible and easy

Tax benefit is difficult

Inflation

Helps to reduce the inflation.

Contributes to inflation.

Shiftability

Cannot be shifted to others

can be shifted to others

Examples

Income tax, Wealth Tax, capital gains, Securities

GST, Excise Duty

Why should we pay taxes?

  • Welfare Scheme

  • Helps build the Nation

  • Improved healthcare & education

Can you think of more reasons or benefits of paying tax? Write them here:-

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Income Tax Slabs:

Income Slab

Tax Slab Rates (FY 2020-21)

Rs. 0 – Rs. 2.5 lac

Nil

Rs. 2.5 lac – Rs. 5 lac

5%

Rs. 5 lac – Rs. 7.5 lac

10%

Rs. 7.5 lac – Rs. 10 lac

15%

Rs. 10 lac – 12.5 lac

20%

Rs. 12.5 lac – Rs. 15 lac

25%

> Rs. 15 lac

30%

Steps to Calculate Income Tax: 

  1. Identify income from all sources e.g. Salary, rent, interest etc. 

  2. Find your net taxable income (after deductions & exemptions)

Eg. If your Total salary is Rs. 7 lac but your gross salary comes out to be Rs. 6.5 lac. Tax is calculated on the gross salary. 

  1. Compute income tax based on tax slab

Let’s understand the various ways to save taxes:

80C: This component has a limit of 1.5 lakh every year. To claim these deductions you have to invest in EPF (Employee Provident Fund), PPF (Public Provident Fund), Housing Loan Principal Amount Repayment. 

Section 80C – Deductions on Investments

Section 80C is one of the most popular and favourite sections amongst the taxpayers as it allows to reduce taxable income by making tax saving investments or incurring eligible expenses. It allows a maximum deduction of Rs 1.5 lakh every year from the taxpayers total income. 

The benefit of this deduction can be availed by Individuals and HUFs. Companies, partnership firms, LLPs cannot avail the benefit of this deduction. 

Section 80C includes subsections , 80CCC, 80CCD (1) , 80CCD (1b) and 80CCD (2).

Section 80E : Interest on Education loan

80D: Health Insurance component

Deduction for the premium paid for Medical Insurance

You (as an individual or HUF) can claim a deduction of Rs.25,000 under section 80D on insurance for self, spouse and dependent children. An additional deduction for insurance of parents is available up to Rs 25,000, if they are less than 60 years of age. If the parents are aged above 60, the deduction amount is Rs 50,000, which has been increased in Budget 2018 from Rs 30,000.

In case, both taxpayer and parent(s) are 60 years or above, the maximum deduction available under this section is up to Rs.1 lakh.

Example: Rohan’s age is 65 and his father’s age is 90. In this case, the maximum deduction Rohan can claim under section 80D is Rs. 100,000. 

From FY 2015-16 a cumulative additional deduction of Rs. 5,000 is allowed for preventive health checks. 

Example Calculation of Income tax: 

Pranav is working in a bank and is earning 7,00,000 as his salary. He lives in a rented house with Rent of Rs. 75,000 (annual) and also has an EPF of Rs. 1,00,00 and medical insurance for his family of Rs. 10,000. Pranav also has an FD in the bank which yields him an interest of Rs. 25,000 (annual). Calculate his Income tax?

Answer: Let’s make a table for his financials to calculate the Net taxable Income

Total salary 

Rs. 7,00,000

HRA Exemption (Rent)

(-) Rs. 75,000 

Income from bank deposits (Fixed Deposit)

(+) Rs. 25,000

Gross Taxable Income 

Rs. 6,50,000

EPF (Section 80C)

(-) Rs. 1,00,000

Medical Insurance (Section 80D) 

(-) Rs. 10,000

Net taxable Income

Rs. 5,40,000

Explanation: 

Pranav has an income of Rs. 7,00,000 however he has used various tax saving measures denoted by (-) as they are subtracted by total salary and along with various other sources of income like FD interest denoted by (+). On calculation we get a net taxable income of 5,40,000. 

This net taxable income will be divided in three slabs as defined by the government. In the first slab of Rs. 2,50,000 there will be no income tax. The remaining amount (2,50,000) will fall in the next slab of 5% (12500) and at last the remaining amount (Rs. 40,000) will fall in the third slab with 10 % tax (Rs. 4000). 

So the total tax will be Rs. Rs. 12500 + Rs. 4000 = 16,500.

Division of taxable income in 3 slabs. 

Total: 5,40,000

Scan the QR Code to understand the basic usage of the government’s ITR website: 

Worksheet

Let’s Reflect!

  1. Are you able to grasp the concept of taxes? What are the two forms of taxes?

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  1.  Why do you think we need to pay taxes to the government? Is it a good thing?

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  1. Till what salary one is exempt from paying taxes in India?

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4. Will you follow the new tax regime or the old tax regime?

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5. Is it legal to save taxes? Why does the government want us to save taxes?

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6. Till what salary one is exempt from paying taxes?

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Quiz:

1) What does CBDT stand for?

a) Common Board of Direct Taxes

b) Central board of Direct Tools

c) Central Board of Direct Taxes

d) Critical Bureau of Direct Taxes

2) Which of the following is a direct Tax?

a) Income Tax

b) Custom Duty

c) Service Tax

d) Sales Tax

3) Which of the following is an Indirect Tax?

a) Income Tax

b) Property tax

c) Sales Tax

d) Wealth Tax

4)  CBIC & CBDT work under which department?

a) Department of Tax

b) Department of Revenue

c) Niti Aayog

d) Department of Commerce

5)Which of the following taxes is independent of your salary?

a) Indirect Tax

b) Direct Tax

c) Income Tax

d) None of the above