A Beginner’s Guide To Understanding Taxes In India
Attention all taxpayers in India! We are aware that taxes are crucial for the working of any economy. But what is your role in it as a taxpayer? Today, we'll dissect taxes and provide you with a rundown of everything you need to know.
Income tax covers everything from wages received as an employee to profits and revenues through a business or profession. With two tax regimes to pick from, it is critical to assess your alternatives to discover the greatest fit for your financial circumstances.
Don't worry, navigating the world of income tax does not have to be difficult. The Indian government is making it easier than ever to access and comprehend the tax system, thanks to recent innovations and changes such as the introduction of systems like the Goods and Services Tax Network (GSTN) and the Centralized Processing Center (CPC) for income tax returns has increased efficiency, transparency, and accessibility in tax-related procedures.
The Five Heads Of Income
Under the Income Tax Act of 1961, there are five heads of income that are taxed in India. These include income from salary, house property, profits and gains from business or profession, capital gains, and other sources. Let us take a closer look at each of these heads of income:
Income From Salary: This includes any money you earn as an employee, such as your salary, bonuses, and allowances.
Income From House Property: This includes any income you earn from your property, such as rental income or income from a vacant property you own. It also covers any income you get from a property that you are not using yourself.
Income From Profits And Gains from Business Or Profession: This includes any income you earn from running a business or practising a profession, such as a doctor, lawyer, or consultant.
Income From Capital Gains: This includes any profits you make from the sale of a capital asset, such as property, stocks, or mutual funds.
Income From Other Sources: This includes any income that does not fall under the other four heads of income, such as interest earned on bank deposits or winnings from lotteries.
Comparing The Old And New Tax Regimes
The old and the new tax regimes are the two options available to taxpayers in India. In Budget 2020, a new tax system was unveiled, and in Budget 2023, it underwent revisions. Compared to the previous tax system, it gives taxpayers reduced tax rates and a greater refund cap, but fewer exemptions and deductions. The previous tax code still allows taxpayers to deduct certain expenses, but it has higher tax rates and a smaller refund cap.
The Indian government has been attempting to simplify the income tax system and make it more effective and transparent in recent years. This includes extending the dates for submitting taxes, implementing anonymous assessments and appeals, and implementing COVID-19 relief measures. These changes are intended to increase taxpayers' access to and ease of use of the tax system.
Under the new regime, income between INR 5 lakh and INR 7.5 lakh would be taxed at 10%, while income between INR. 7.5 lakh to INR 10 lakh would be taxed at 15%. According to the experts, when total deductions are INR 1.5 lakhs or less, the new regime will be beneficial; when total deductions are more than INR 3.75 lakhs, the old regime will be beneficial; when total deductions are between INR 1.5 lakhs to INR 3.75 lakhs, it will depend on your income level.
Income Slab | Old Tax Regime | New Tax Regime (until 31st March 2023) | New Tax Regime (From 1st April 2023) |
| INR 0-2.5 lakh | - | - | - |
| INR 2.5 lakh - 3 lakh | 5% | 5% | - |
| INR 3 lakh - 5 lakh | 5% | 5% | 5% |
| INR 5 lakh - 6 lakh | 20% | 10% | 5% |
| INR 6 lakh - 7 lakh | 20% | 10% | 10% |
| INR 7 lakh - 9 lakh | 20% | 15% | 10% |
| INR 9 lakh - 10 lakh | 20% | 15% | 15% |
| INR 10 lakh - 12 lakh | 30% | 20% | 15% |
| INR 12 lakh - 12.5 lakh | 30% | 20% | 20% |
| INR 12.5 lakh - 15 lakh | 30% | 25% | 20% |
| INR 15 lakh or above | 30% | 30% | 30% |
The new regime does not allow for exemptions and deductions, except for the standard deduction of INR 50,000. Taxpayers will have an increased take-home salary under the new regime, and there is reduced compliance and paperwork.
On the other hand, the old tax regime allows for claiming deductions against various allowances and investments. Taxpayers with more long-term investments may find the old regime more lucrative
Which Tax Regime Is Better For Your Investments?
The old tax regime allows for claiming deductions against various allowances and investments. Some exemptions and deductions available under the old tax regime include:
- Standard deduction
- House rent allowance
- Section 80C investments
- Housing loan interest
- Medical insurance premium
- Education loan interest
- Leave travel allowance
- Savings bank interest
Taxpayers with more long-term investments may find the old regime more lucrative as they can claim deductions against these investments.
The new tax regime offers lower tax rates and simpler compliance. However, it does not allow for most exemptions and deductions available under the old regime. The new regime does allow for a standard deduction of INR 50,000. Taxpayers with fewer investments and deductions may find the new regime more beneficial.
Conclusion
It is essential for taxpayers to understand the different tax regimes available and evaluate their individual financial circumstances when determining the most suitable option. The Indian government's efforts to simplify the income tax system, provide online resources and calculators, and extend deadlines for tax submissions demonstrate their commitment to improving taxpayer accessibility and ease of use.
By recognizing the benefits of paying taxes and participating in a transparent and accountable tax system, individuals and businesses contribute to the greater good of society. Through their tax contributions, they play a crucial role in building a prosperous and equitable nation. Signup at Grip to stay informed about the financial updates that may affect your savings and wealth creation journey.
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