A Guide to Basic Concepts of Income Tax

Tax concepts simplify how taxes work in India and help manage taxes effectively. Whether you're an individual or a business, taxes play a big role in your finances. This blog explores the basic concepts of income tax and strategies for smart tax planning. Read on!

What is Income Tax?

Income tax is a form of direct taxes which each and every eligible citizen has to pay to the government. It is levied on an individual, business or any other taxable entity depending on their annual income.

The government collects these revenues and utilises them for the development of various sectors such as healthcare, education, infrastructure, agriculture, etc. The income tax for a financial year is calculated based on the applicable slab rate under which your total income falls.

Different types of Taxes

Primarily, taxes can be divided into two types:

• Direct Tax

Direct tax is the type of tax which is levied on the income and wealth generated by individuals or entities. The entire concept of direct taxation is governed under the Income Tax Act, 1961 by imposing various tax rates depending on the annual income.

As per the taxation laws, the exemptions and deductions must be taken into consideration before calculating the tax liability.

• Indirect Tax

Indirect tax is levied on goods and services. These taxes are not directly paid by the business owners; rather these liabilities are passed on to the ultimate consumers of the product or service. Some of the examples of indirect tax include GST, customs duty, etc.

This indirect tax is collected by the government from the sellers and business owners offering goods and services.

Recent Reforms in Taxes

In 2017, the Government of India initiated a revolutionary measure in how taxes are managed in India, by introducing the Goods and Services Tax (GST). Before GST, there were many different tax concepts from both the state and central governments, making the system confusing. Some people found ways to avoid paying taxes because of these confusing rules.

With the launch of Goods and Service Tax, more people were brought under the umbrella of indirect taxation and had to pay taxes. This not only made tax evasion harder but also removed unfair systems of multiple taxation and brought uniformity to the system.

Income Tax Deductions

The Income Tax Department of India encourages citizens to invest in certain types of financial instruments and make certain expenditures through various tax benefits. Upon investing in such schemes and instruments, you will be eligible to claim the deduction.

The most popular deduction is the deduction under Section 80C of the Income Tax Act. It allows claiming a maximum deduction of Rs. 1.5 Lakh on investments made in ELSS, PPF, payment towards life insurance premiums, SCSS, NSC, etc. Moreover, there are other sections such as Section 80CCD(1B), Section 80D, Section 80E, Section 80G, Section 80TTA, Section 80U and more.

Tax Deducted at Source

TDS or Tax Deducted at Source is a tax collection procedure implemented by the Government of India. Under this, the taxes are deducted by a person making certain payments and then the amount is remitted to the government.

The primary objective of TDS is to prevent tax evasion through the advance collection of taxes. TDS is applicable for a wide source of income such as salaries, commissions, rents, interest of fixed deposits, etc.

The person or company who makes the payment to the receiver after deducting the tax at a prescribed rate is known as the deductor. The person or company receiving the payment is known as a deductee.

Also Read - Tax Exemption & Its Various Categories

Tax Evasion Laws and Implications

Tax evasion laws are quite strict in India, and it is a punishable offence as per Section 276C of the Income Tax Act, 1961. In case a taxpayer is found making attempts to evade tax payments intentionally or hiding an annual income of more than Rs. 25 Lakh, he or she can be subject to imprisonment ranging from 6 months to 7 years, along with a hefty fine.

Tax evasion is the illegal activity of avoiding payments of tax by concealing information or through deliberate fraud. There are several categories of tax evasion in India, such as late filing of IT returns, not getting your books of accounts audited and tax evasion by concealing income. It can also include circumstances like not providing the PAN details or furnishing an incorrect PAN number.

Also Read - Professional Tax - Its Meaning, Slab Rates, and Compliance

To Conclude

Understanding the basics of tax concepts will help you make informed decisions minimising your tax burden and maximising savings. Whether it's taking advantage of tax-saving investments or staying informed about changes in tax laws, remember to be proactive with your tax planning.

Disclaimer

This blog provides informational content on tax benefits and rules based on the current provisions of the Income Tax Act of India, 1961. The interpretations are subject to change as per amendments made by the Government of India. Applicable rates of GST and cess will be as per the current regulations. Readers must seek professional advice for accurate and up-to-date information.
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