All about Income Tax in India
Apart from a few lucky tax-havens, taxes are an unavoidable part of life in most countries globally From salaried individuals to multinational conglomerates, everyone who earns legally has tax deducted at source for the most part. It is known as income tax and is usually deducted by the employer, client, or supplier before making the employee's final payment. These taxes are filed with the specific country's government in a certain window of every financial year. In India, the financial year starts from 1st April to 31st March, hence a separate window of a few months is specified every year. For 2021, the income tax returns filing window falls between 15th January and 15th April.
Why do we pay income tax in India?
Income taxes, as well as GST, is a major source of income for the Indian government and funds all kinds of public welfare and government projects, such as education, healthcare, infrastructure, defence, trade and much more. Another major source of expenditure by the Indian government is also funded through these taxes, is that of loan interest payments.
These loans are usually the ones taken from supranational organisations, such as the World Bank and IMF, for public development and humanitarian causes. As such, like any other loans, there is an interest payment to be made periodically, and depending on the loan, it can go into lakhs and crores.
As such, taxes form an important primary source for the Indian government, as, without them, they may not be able to pay these essential interest payments. It may also lead to further instalments of these loans being cancelled.
The expenses of the Indian government funded by income taxes, can be classified into non-recurring and recurring expenses. Recurring expenses are usually things like government employee salaries and so on, any expenses which recur every month at least. Non-recurring expenses are usually assets such as infrastructure, transport, public services facilities like hospitals, and so on.
This allocation of specific incomes and expenses of the government can be seen in greater detail in its union budget, it outlines its major sources of income, and how it plans to spend this income. Usually, the major sources of income or receipts for most governments are tax receipts, non-tax receipts, capital receipts (non-debt), and capital receipts (debt). Income tax will fall under tax receipts. The government plans its union budget every financial year, keeping all these different kinds of receipts in mind.
Income Tax applicability
Income tax is a kind of direct tax. On the other hand, GST is an example of an indirect tax. Income tax is levied upon salaried individuals, freelancers, professionals, Hindu Undivided Families, and so on. It is different from corporation tax, which is only levied on corporations, or businesses, whether local or multinational. The income tax has different slab rates, depending on the individual's income, and no income tax is levied up to a certain amount. This amount can vary every single year and currently stands at no income tax, up to 2.5 lakhs per annum.
Some countries and territories like Dubai, are tax-free, which means that their government has enough revenue opportunities from other activities, in order not to need more tax income from its residents. In cases like Dubai, this could be tourism, oil trade and other businesses.
However, most developing countries like India, still don't have as many opportunities available to generate income in other ways, and hence, have to turn to its residents for tax income. Government expenses can be classified into revenue expenses and capital expenses. Revenue expenses are usually recurring in nature, and are the ones most commonly funded by income taxes.
Capital expenses are long term asset expenditures, such as infrastructure, and may need heavy capital investment. In such cases, income taxes alone may not be sufficient, and a combination of income tax, and external loans taken from supranational organisations may be needed to fund these expenses.
Where do the funds go?
The expenses funded by income taxes alone can further be broken down into a few more categories. Namely, interest expenses, transport, defence, home affairs, pensions, transfers to UTs and states and so on. The exact proportions of expenditure on each of these different categories vary widely from year to year, depending on specific needs and circumstances. Sometimes, it may also be that a certain state or UT needs more support for a certain time until they can set up enough industries and income-generating streams to support themselves a little better.
It may also be that one particular year, certain states need more support due to natural calamities, such as Tamil Nadu, and Kerala due to floods and so on. In these cases, the government needs to constantly have a reserve fund, to be able to allocate more funds where needed, at very short notice. This reserve fund is constantly maintained and topped up as well through income taxes.
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Q. How do I know how much income tax I need to pay?
Ans: In India, as in most countries around the world, there are different slab rates for income taxes. It depends on the amount you earn, as the taxes levied, are a proportionate percentage of your total annual income. If you earn up to or below INR 2.5 lakhs per annum, you are exempt from paying income taxes.
•From INR 2.5 lakhs to 5 lakhs, you pay 5% of your total annual income.
•From INR 5 lakhs to 10 lakhs, you pay INR 12500, plus 20% of the total income exceeding INR 5 lakhs.
•Above INR 10 lakhs, you pay INR 112500, plus 30% of the total income exceeding INR 10 lakhs.
Q. How much income tax return or refunds am I eligible for?
Ans: It depends entirely on your personal savings and investment plans in place, as certain schemes, such as medical and life insurance, are eligible for exemption under section 80C of the Income Tax Act. Donations to charitable organisations and so on may also be exempt. An experienced financial or tax consultant can help guide you through the full list of exempt expenses and investments to maximise your income tax returns.
Q. How do I file my income taxes in India?
Ans: It has now become extremely easy to file your income taxes in India, ever since the government of India has launched its online tax filing portal. You can access it at www.incometaxindiaefiling.gov.in, and fill out all the relevant details. It makes for an extremely quick, smooth and stress-free filing procedure, and ensures you get your returns on time as well.
Q. What is the deadline for filing income tax in India for 2020?
Ans: Due to coronavirus, the income tax filing deadline in India has been extended to 31st December, keeping in mind the impact of the pandemic on individuals and companies. This move has been welcomed very enthusiastically by most people, as it has succeeded in easing some of the bureaucratic and paperwork burdens in an already uncertain and stressful time.
Q. What happens if I don't file my income taxes?
Ans: If you don't file your income taxes, you can be charged with a late fee of up to INR 10000, depending on your income. The income tax authorities can also launch prosecution against you, which could result in a minimum imprisonment of 3 years. Hence, it is recommended that you ensure to file your taxes diligently and on time every financial year.