Income tax was introduced in India by Sir James Wilson on July 24, 1860, to compensate the British government for the losses incurred during the First War of Independence in the year 1857. The Income Tax department marked Friday as the 160th Income Tax Day or Aaykar Diwas.
Income Tax day has been celebrated on July 24 in India since 2010. The income tax department decided to mark July 24 in 2010 as the day for the annual celebration to mark 150 years of this levy from that year onwards. Income tax was first levied as a duty in the year 1860 and the authority to levy that duty came into force on July 24 of that year.
Income Tax Basics in India
Income tax is a type of tax charged by the central government on the income earned during a financial year by businesses and individuals. Taxes are sources of revenue for the government. The government utilizes this revenue for developing infrastructure, education, providing healthcare, subsidies to the agriculture/farmer sector, and other government welfare schemes.
Taxes can be categorized into two types, direct taxes and indirect forms of taxes. Tax levied directly on the income earned is called a direct tax, for example, Income tax is a direct tax. The tax calculation is based on the income slab rates applicable during that financial year.
Types of Income Taxpayers
The Income-tax Act has listed the types of taxpayers in categories so as to apply different tax rates for different types of taxpayers.
Taxpayers are categorized as below:
- Individuals, Hindu Undivided Family, Association of Persons and Body of Individuals
Further, Individuals are broadly classified into residents and non-residents. Resident individuals are liable to pay tax on their global income in India i.e. income earned in India and abroad. Whereas, those who qualify as non-residents, need to pay taxes only on income earned or accrued in India. The residential status has to be set separately for tax purposes for every financial year on the basis of the individual tenor of stay in India. Resident Individuals are further classified into the below-mentioned categories for tax purposes-
- Individuals less than 60 years of age
- Individuals aged less than 80years but more than 60
- Individuals aged more than 80 years
Types of Income / Heads of Income
Everyone who earns or generates an income in India is subject to income tax be it a resident or a non-resident of India. For simpler classification, the Income-tax department breaks down income into five main heads:
Income from Other Sources – Income from fixed deposits, savings bank account interest, winning in lotteries is taxable under this head.
Income from House Property – Income earned from renting a house property is taxable under this head of income.
Income from Capital Gains – Surplus Income from the sale of a capital asset such as shares, mutual funds, house property, etc is taxable under this head of Income.
Income from Business and Profession – Profits earned by self-employed individuals, businesses, freelancers or contractors & income earned by professionals like life insurance agents, chartered accountants, doctors, and lawyers who have their own practice, tuition teachers are taxable under this head.
Income from Salary – Income earned from salary and pension is taxable under this head of income
Taxpayers and income tax slabs
Each of these taxpayers is taxed differently under the Indian income tax laws. While firms and Indian companies have a fixed rate of tax calculated on their tax profits, the individual, HUF, AOP, and BOI taxpayers are taxed based on the income slab they fall under. People’s incomes are grouped into blocks called tax brackets or tax slabs. And each tax slab has a different tax rate. The rate at which income is charged to tax increases with an increase in income.
Frequently Asked Questions
- When it is mandatory to file a return of income?
It is mandatory to file a return of income for a company and a firm. However, individuals, HUF, AOP, BOI are mandatorily required to file a return of income if the income exceeds the basic exemption limit of Rs 2.5 lakhs. This limit is different for senior citizens and super senior citizens.
- Can I file a return of income even if my income is below taxable limits?
Yes, you can file a return of income voluntarily even if your income is less than the basic exemption limit
- What documents are to be enclosed along with the return of income?
There is no need to enclose any documents with the return of income. However, one should retain the documents to produce before any competent authority as and when required in the future.
- Should I disclose all my income in the return even if it is exempt?
Yes. Income from every source including exempt income must be disclosed. The same can be shown under Schedule EI.