Income Tax, Calculation, Slabs, Importance

Income Tax begins with the idea that a part of yearly earnings is paid to the government based on defined income slabs. Each slab specifies a range of income with a specific tax rate that allows tax to increase progressively as earnings rise. This system helps to maintain fairness to fund public services, infrastructure, and national development projects.

Income can come from salary, business, rent, capital gains, or other lawful sources. After applying allowed deductions, the remaining taxable income is matched with the correct slab to calculate the payable amount.

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Income Tax Overview

A first step in income tax is learning about the types of income and the authority responsible for its collection. Income tax is a direct tax collected by the Government of India from individuals and businesses based on their annual earnings. It applies only to Indian residents unless specified otherwise, and rules may differ for non-residents.

Unlike indirect taxes, which are added to goods and services, income tax is deducted from the earnings of the taxpayer. It is applied progressively through slabs. It means higher income is taxed at higher percentages. This system is updated each financial year, and tax is calculated for the previous year and filed during the assessment year in accordance with the Income Tax Act of India. This tax is calculated on total annual income after deductions and not on monthly income alone. Here is a brief overview of the income tax:

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Types of Income Tax

Income tax applies to different sources of income. It is divided into five main categories as defined by Indian law. This classification ensures each type of income is treated according to specific rules before calculating the income tax.

1. Salary: Income earned from employment, wages, pension, or payments related to other employment.

2. House Property: Income received from renting residential or commercial property.

3. Business or Profession: Earnings from trade, business operations, or professional services.

4. Capital Gains: Profit earned from selling assets such as stocks, property, or other investments.

5. Other Sources: Includes lawful income not included in the above categories, such as interest or winnings from lotteries.

Note: These income types are recognised under the Income Tax Act for calculating taxable income. Further, this categorisation is used for assessment and does not indicate tax rates. The tax rate is applied later according to slabs and applicable rules.

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How Income Tax is Calculated?

To calculate income tax, the first step is to add all income from the five categories to get the gross total income. Now, subtract the allowed deductions to find the taxable income.

Deductions are based on the tax regime chosen by the taxpayer. The old regime permitted many deductions, such as 80C, 80D, and others. The new regime allows fewer deductions, including NPS contributions and employer contributions.

Once taxable income is calculated, it is matched to the income tax slabs to calculate the tax. Only the portion of income within each slab is taxed at that slab rate. Additional charges, such as cess, may be added if applicable. It should also be noted that tax is calculated on the income in the previous year and filed in the assessment year, as per Indian tax regulations. Here are the basic steps to calculate income tax:

• Add total income from all five income heads

• Subtract deductions allowed under chosen tax regime

• Identify taxable income

• Match taxable income to the correct slab for calculation

• Apply the tax rate according to the slab

• Add applicable cess or surcharge as per government rules

Note: The above-specified steps are based on the Indian Income Tax Act guidelines. These steps may vary slightly on the basis of the updated regulations.

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Income Tax Slabs

India introduced two income tax regimes to give taxpayers a choice between lower tax rates with fewer deductions and higher tax rates with more deductions. Under both regimes, the higher income attracts higher tax rates.

Old Regime for Income Tax

The old regime is for those individuals who want to save tax through investments, exemptions, and deductions like 80C, 80D, or house rent allowance. Here are the details of old regime income tax slabs:

New Regime for Income Tax

The new regime in the income tax is for those who prefer simpler tax calculations with lower rates but limited deductions. Here is the information about new regime slabs for income tax calculations:

Note: These slabs apply to Indian residents and may vary based on age and assessment year. 

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Importance of Income Tax

Income tax plays an important role in funding various government activities. Revenue collected from taxes is used for public health, safety, education, infrastructure, transport, and digital services. It also supports disaster management, emergency response, and national projects. It should be kept in mind that income tax funds both visible services like roads and hospitals, and background systems like governance, digital platforms, and national planning. The following points can help people learn about the importance of income tax:

• It supports health services, public safety, and medical care

• Income tax funds infrastructure, roads, and public transport

• It helps maintain digital governance and civic systems

• It provides resources for emergency and disaster management

• It helps in maintaining sustainable national development