INCOME TAX

What is Income Tax?

Income tax refers to annual taxes levied by the federal government and most state
governments on individual and business income. By law, businesses and
individuals must file federal and state income tax returns every year to determine
whether they owe taxes. Governments use the taxes they collect to fund their
activities.
How Does Income Tax Work?
● Income tax is applied to both earned income (wages, salaries and
commission) and unearned income (dividends, interest and rents).
● The U.S. and many other countries employ a progressive income tax system
in which higher income earners pay a higher tax rate compared to their lower
earning counterparts. The intent of progressive systems is to distribute wealth
more evenly across a population.
● Here's an example of how a progressive tax is structured: Assume you are
single and report $80,000 in taxable income for the 2010 tax year (filing in
2011). In accordance with the federal tax rates defined for single filers in
2010, the first $8,350 of your income is taxed at 10%; the next $8,351 through
$33,950 of earnings are taxed at 15%; and the remaining $33,951 through
$80,000 of your earnings are taxed at 25%.
Why Does Income Tax Matter?
The payment of tax is beneficial on multiple levels including the development of
nation, betterment of infrastructure, the upliftment of the society, and even for
welfare activities for the nation.

Taxes are levied by governments on their citizens to generate income for

undertaking projects to boost the economy of the country and to raise the standard
of living of its citizens. The authority of the government to levy tax in India is
derived from the Constitution of India, which allocates the power to levy taxes to
the Central and State governments. All taxes levied within India need to be backed
by an accompanying law passed by the Parliament or the State Legislature.
Income Tax law in India
1. Income Tax Act, 1961: The Act contains the major provisions related to
Income Tax in India.
2. Income Tax Rules, 1962: Central Board of Direct Taxes (CBDT) is the body
which looks after the administration of Direct Tax. The CBDT is empowered to
make rules for carrying out the purpose of this Act.
3. Finance Act: Every year Finance Minister of Government of India presents the
budget to the parliament. Once the finance bill is approved by the parliament
and get the clearance from President of India, it became the Finance Act.
4. Circulars and Notifications: Sometimes the provisions of an act may need
clarification and that clarification usually in a form of circulars and notifications
which has been issued by the CBDT from time to time. It includes clarifying
the doubts regarding the scope and meaning of the provisions.
Types of Taxes
1. Direct Tax

Direct tax is tax that are to be paid directly to the government by the individual or legal entity. Direct taxes are overlooked

by the Central Board of Direct Taxes (CBDT). Direct taxes cannot be transferred to any other individual or legal entity.

2. Indirect tax

Taxes that are levied on services and products are called indirect tax. Indirect taxes are collected by the seller of the

service or product. The tax is added to the price of the products and services. It increases the price of the product or

service. There is only one indirect tax levied by the government currently. This is called GST or the Goods and Services

Tax.
Sub-Categories
Sub-categories of Direct Taxes Sub-categories of In-Direct Taxes
❖ Income tax ❖ GST
❖ Capital gains
❖ Securities transaction Tax
❖ Prerequisite Tax Other taxes
❖ Corporate tax
● Dividend distribution tax ❖ Property tax
● Fringe benefit tax
● Minimum Alternative Tax (MAT) ❖ Professional tax

❖ Entertainment tax

❖ Registration fees, stamp duty, transfer tax

❖ Education cess

❖ Entry tax

❖ Road tax and toll tax

 New Tax Slab 2020-2021
Income Tax Slab
Up to Rs.2.5 lakh
From Rs.2,50,001 to Rs.5,00,000
From Rs.5,00,001 to Rs.7,50,000
From Rs.7,50,001 to Rs.10,00,000
From Rs.10,00,001 to Rs.12,50,000
From Rs.12,50,001 to Rs.15,00,000
Income above Rs.15,00,001
Tax Rate
Nil
5% of the total income that is more than Rs.2.5 lakh + 4% cess
10% of the total income that is more than Rs.5 lakh + 4% cess
15% of the total income that is more than Rs.7.5 lakh + 4% cess
20% of the total income that is more than Rs.10 lakh + 4% cess
25% of the total income that is more than Rs.12.5 lakh + 4% cess
30% of the total income that is more than Rs.15 lakh + 4% cess