It would be unreasonable to tax everyone in India at the same rate. That is because the country has wide economic and financial inequalities. So, India employs a graduated-rate taxation structure. Simply put, graduated-rate taxation means that people with higher incomes pay a higher percentage of their earnings in tax. For tax purposes, the government classifies people into tiers based on their income.
What Is Income Tax?
Under the Indian Income Tax Act of 1961, all residents of India must pay taxes on their income. So, if you earn any kind of income in India, you must report it to the government and pay tax on it. For NRIs, income tax is only charged on the income earned in India. Unlike Indian citizens, they do not have to pay taxes on their international earnings.
What Are Income Tax Slabs?
For easier and fairer taxation, Indian taxpayers come under many income brackets. A person making ₹5 lacs per year should not be subject to the same tax rate as one making ₹50 lacs per year. So, the government uses individuals’ incomes to divide them into different tax brackets. Higher earners are subject to greater rates of taxation.
Under the prior system, three tax brackets, ranging from 5% to 30%, existed. In the Union Budget for 2020, the Finance Minister proposed new tax brackets. Now, the new income tax slab in India includes six brackets.
Income Tax Slabs in India as Per the New and Old Tax Regime
Under the new system, the government has removed most of the exemptions and deductions that were available under the previous tax system.
Aside from the various income tax slabs in India, the previous regime also made classifications based on the type of taxpayer:
- Residents and non-residents under 60 years of age.
- Resident senior citizens between 60 and 80 years of age.
- Resident super senior citizens over 80 years of age.
As a result, the income tax bracket is also unique for each of these groups.
Taxation under the old system is optional.
New Tax Regime for FY22-23
|Income Slabs (Annual Income)
|Income Tax Slab Rates
|Up to ₹2.5 lacs
|More than ₹15 lacs
Under the new regime, both individuals and HUFs (Hindu Undivided Families) are subjected to the same tax rates and brackets. The same income tax brackets apply to those under 60 years, those between 60 and 80 years, and those above 80 years of age.
Old Tax Regime for FY22-23
|Tax Rates for Individuals and HUFs below 60 Years
|Tax Rates for Senior Citizens Aged 60-80 Years
|Tax Rates for Super Senior Citizens Over 80 Years
|Up to ₹2.5 lacs
|Above ₹10 lacs
Heads of Income
There are five major categories into which your annual revenue falls. All those incomes are subject to taxation at the current income tax rates in India. Here are those five divisions for types of income:
Income from Salary
This is by far the most familiar and popular source of income. Salary is included in the income from salary for all salaried employees.
Income from Home Property
When homeowners rent out one of their properties, the rent is considered as income from the house property. Under this division, a ‘home property’ can be either a residential or commercial building.
Income from Business or Profession
Incomes from businesses are further divided into
- Earnings from a sole proprietorship
- Earnings from a partnership
- Earnings from a corporation
Income from Capital Gains
You make a capital gain when you sell a capital asset for a higher value than what you paid for it. A capital asset is any property owned by the taxpayer (apart from inventories and accounts receivable).
The gain could be short-term or long-term, depending on how long you held the capital asset before selling it. This can dictate the income tax rate in India. Capital gains may be subject to further taxation depending on the nature of the gain and the type of asset.
On the other hand, a capital loss is when a capital asset sells for a lower value than what you originally paid. This loss is deducted from taxable income to lower overall tax liability.
Income from Other Sources
If your income does not fall under any of the above-mentioned categories, you can file your taxes under the ‘Income from Other Sources’ option. Some common examples of such incomes include a savings account or fixed deposit interest, stock dividends, a gift, etc.
The government assesses taxes paid by individuals, HUFs, BOIs, and AOPs at increasingly higher rates than those paid by corporations. As a result, the tax rate rises in tandem with one’s income. On the other hand, the corporate tax rate is a flat 30% of a company’s annual profit.
If you have any doubts about your tax obligations, the best course of action is to keep a thorough record of your finances. After that, you can find the income tax slab in India under which you fall. When doing your taxes electronically, use the right ITR form to avoid fines and delays.
Be sure to claim every deduction and exemption to minimise your tax bill and keep more hard-earned cash. Under TDS deductions, you may be eligible for a refund if you have paid more taxes than necessary.
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