Taxes are one of the government's main sources of revenue. The government uses the revenue to build infrastructure, provide healthcare, educate the population, and provide subsidies to farmers and the agricultural sector, among other things. Individuals and corporations pay income tax, which is a sort of tax put on by the Central government on income received within a financial year. Direct taxes and indirect taxes are the two basic forms of taxes. Direct tax, for example, is a tax levied directly on earned income. Income tax is a form of direct taxation. The tax calculation is based on the income slab rates that were in effect at the time.
Direct Taxes are mainly categorizing as:
Income tax: This is a type of tax that an individual, a Hindu Undivided Family, or any other taxpayer, other than corporations, pays on their income. The rate at which such income should be taxed is set by legislation.
Corporate tax: This is a tax that corporations pay on the profits they make from their business. The income tax laws of India have established a specific rate of tax on corporations again here.
According to Income Tax Act, taxpayers need to be categorize in order to apply different tax rates.
The following are the categories of taxpayers:
2. Hindu Undivided Family (HUF)
3. Association of Persons (AOP)
4. Body of Individuals (BOI)
Individuals are of two groups: residents and non-residents. Individuals who live in India must pay tax on their global income, which includes money earned both in India and abroad. Non-residents, on the other hand, require to pay taxes on income earned in India. For tax purposes, estimation should be separately for each financial year on the length of stay in India. For tax purposes, resident individuals are further divided into the following categories:
1. Individuals under the age of 60 years
2. People who are over the age of 60years but under the age of 80 years
3. Individuals that are over the age of 80
Income tax applies to everyone who earns or receives money in India. (This applies to both Indian residents and non-residents.) The Income Tax Department divides income into five categories for ease of classification:
Under Indian income tax laws, each of the taxpayers is taxed differently. Individuals, HUF, AOP, and BOI taxpayers are taxed according to the income slab they fall into, whereas firms and Indian companies have a fixed rate of tax computed on their taxable profits. Tax brackets or tax slabs are categories of people's incomes. And the tax rate varies with every tax slab. With an increase in income, the rate at which income is taxed increases. Individuals and HUF taxpayers now have a "New tax system" under Budget 2020: For different income levels, the former tax regime provided three slab rates: 5%, 20%, and 30%. At present, individuals have the option of continuing to use the old tax system, which allows them to deduct allowances such as Leave Travel Concession (LTC), House Rent Allowance (HRA), and other allowances. Deductions for tax-saving investments under section 80C (LIC, PPF, NPS, etc.) can also be claimed under section 80U. Deduction for interest paid on a home loan is a standard deduction of Rs 50,000.
There are two additional tax brackets for people over the age of 60 and those over the age of 80. Many people believe that if they make Rs.12 lakhs, they will have to pay a 30% tax on that amount, or Rs.3,60,000. That's not correct. In a progressive tax system, a person earning 12 lakhs will pay Rs. 1,12,500 plus Rs. 60,000 = Rs. 1,72,500.
Individuals and HUFs will be able to benefit from a new tax regime with lower tax rates and zero deductions/exemptions beginning in FY 2020-21. Individuals and HUF have the choice of choosing between the new and old regimes. The new tax regime is optional, and you must choose between it and the old one when completing your ITR. If the old regime is maintained, the taxpayer will be able to make use of all applicable deductions and exemptions. The following are the income tax slabs under the new tax system:
Most deductions, such as deductions and exemptions, are not available to taxpayers who choose the New Tax regime. However, under the new regime, the following exemptions and deductions are available:
1. Allowances for transportation in the case of a specially-abled individual.
2. Conveyance allowance received to cover transportation costs incurred as part of the job.
3. Any compensation received to help pay the expense of a tour or transfer.
4. Daily stipend paid to cover routine normal costs or expenses incurred as a result of absence from the regular duty station.
It's important to remember that not all income can be taxed on a slab basis. This regulation does not apply to capital gains income. Capital gains are taxed based on the asset and the length of time you've owned it. The length of time an asset is held determines whether it is long or short term. The holding period used to identify the asset's type varies depending on the asset. Below is a quick rundown of holding periods, asset types, and tax rates for each of them.