Introduction:
Income tax is a direct tax imposed by the government on individuals and businesses’ income. It is the primary source of revenue for the government, and its contributions make up a substantial portion of the national budget. Income tax is essential, as it finances the basic operations of the government, like healthcare, education, transportation, and infrastructure.
Are you interested in knowing more about income tax? Then keep reading, as this article offers an overview of income tax that will walk you through all the critical aspects and policies of income tax.
The History of Income Tax:
Taxation has been around since the beginning of civilization. It remained in its basic form until the British Government introduced the income tax during the colonial period. In 1860, James Wilson, the Finance Member of the first Viceregal Legislative Council, introduced the income tax act in India.
Initially, the tax rate was four percent on income above Rs. 500 (which is approximately Rs. 40,000 today). However, the tax collection was not extensive, and the government continued to levy tax through various other means like customs duty.
It wasn’t until World War II that income tax became an integral part of the Indian taxation system. The government needed funds for the war, and income tax was the most efficient way to raise money. So, in 1940, the Indian government passed the Income-tax Act, which laid the foundation for the modern income tax system in India.
Today, the Income-tax Act has undergone numerous changes and amendments to include new sources of income, tax exemption slabs, and new tax laws to keep up with the changing times.
Types of Income:
Income is broadly classified into five categories:
1. Salary Income: Income earned from employment and regular payment made by an employer to an employee.
2. Business Income: Income derived from businesses, including profits or gains.
3. Capital Gains: Income earned from the sale of capital assets, like property, stocks, or bonds.
4. House Property Income: Income earned from renting out a property.
5. Other Sources Income: Includes any other income sources that do not fall under the above-mentioned categories, like gifts received or winnings from gambling.
Taxation Slabs:
The Indian taxation system offers different tax slabs based on the total annual income. The minimum taxable income for the financial year 2021-22 was set at 2.5 lakhs. In addition, the government also offers different tax rebates and exemptions under various schemes.
Below is a detailed guide to the current income tax slabs for the financial year 2021-22:
1. Basic Exemption Limit for individuals and HUF – Rs. 2,50,000/-
2. For individuals aged between 60 to 80 years – Rs. 3,00,000/-
3. Senior citizens over the age of 80 years – Rs. 5,00,000/-
4. Income up to Rs. 5 Lakhs, no tax is payable
5. For income exceeding Rs. 5 lakhs up to Rs. 7.50 lakhs, the tax rate is 10%
6. For income exceeding Rs. 7.50 lakhs up to Rs. 10 lakhs, the tax rate is 15%
7. For income exceeding Rs. 10 Lakhs up to Rs. 12.50 Lakhs, the tax rate is 20%
8. For income exceeding Rs. 12.50 Lakhs up to Rs. 15 Lakhs, the tax rate is 25%
9. For income above Rs. 15 Lakhs, the tax rate is 30%.
10. A rebate of 25,000 is available for individuals whose taxable income is less than Rs. 5 lakhs.
11. A surcharge of 10% on tax is payable if the total income exceeds Rs. 50 lakhs but is less than Rs. 1 crore. For income above Rs. 1 crore, the surcharge will be 15%.
You can calculate your income tax by using online income tax calculators or consulting with a financial advisor.
Tax Deductions and Exemptions:
There are various tax deductions and exemptions offered by the government under different schemes and policies. Listed below are some common tax deductions and exemptions available for tax filers in India:
1. Section 80C: This is the most commonly used deduction by taxpayers. It offers a deduction of up to Rs. 1.5 lakh from the total taxable income. This includes investments in Provident Funds, Public Provident Fund, Equity-Linked Savings Scheme, National Savings Certificate, 5-year bank fixed deposit, Life Insurance Premiums, etc.
2. Section 80D: This section offers a tax exemption of up to Rs. 25,000 for medical insurance premiums paid for self, spouse, and dependent children. An additional deduction of up to Rs. 50,000 is available for senior citizens.
3. Section 80CCD (1B): This section allows an additional deduction of up to Rs. 50,000 for investment in the National Pension Scheme (NPS).
4. Section 80TTA: This section offers a deduction of up to Rs. 10,000 for interest earned on deposits held in savings accounts with banks.
5. Section 80E: This section offers a deduction on the interest paid on education loans taken for higher studies.
6. Section 80G: This section allows a tax deduction on donations made to charity and relief funds.
7. Housing Loan deduction under Section 24: This section offers a deduction of up to Rs. 2 lakhs for interest paid on a housing loan for a self-occupied property and Rs. 1.5 lakh for a rented house.
8. Leave Travel Allowance under Section 10(5): This section allows tax exemption for the amount spent on travelling within India.
It is essential to keep track of tax deductions and exemptions while filing income tax returns, as they can significantly reduce the total taxable income and the resulting tax liability.
Filing Income Tax Returns:
Every Indian citizen with an annual income of more than Rs. 2.5 lakhs is required to file their income tax returns. Filing taxes can be done in two ways – online and offline.
In the online method, you need to visit the Income Tax Department’s official website and file your returns using your PAN card details and other required information. In the offline method, you can visit any nearby tax centres and file your returns by submitting hard copies.
To make the process easier for taxpayers, the Income Tax Department has introduced various tools and services. These tools include online income tax calculators, digital signature certificates, and e-filing services, among others.
Late Filing and Penalties:
Failing to file income tax returns on time can result in penalties and surcharges. If you file your income tax return after the due date, you will be required to pay a penalty of up to Rs. 10,000. In addition, if you have unpaid taxes, a 1% monthly penalty will be levied until the tax payment is fully cleared.
Conclusion:
Income tax is a critical contributor to the government’s revenue and essential for the country’s development. Paying taxes on time makes us responsible citizens and ensures a better future for ourselves and our country.
Understanding the different types of income, tax slabs, deductions, and exemptions is crucial in reducing the total tax liability. With the help of online tools and resources, filing income tax returns has become more convenient than ever.
Make sure to keep up to date with the latest income tax policies and guidelines, as the government is continually making amendments to keep up with the changing economic and social conditions.
According the Sixteenth Amendment, the government may tax all individuals on all income they earn, no matter what the source of income is. Although the Amendment is still frequently challenged, the courts have determined that those cases are frivolous and allowed the Sixteenth Amendment to be upheld. All employed tax payers, and others that have a source of income, are required to pay federal income tax on the total amount of income. The source of the income is not considered and taxes are assessed on income minus allowable deductions.
Also, income taxes are required from other entities, such as businesses. There are corporate income taxes which are levied on all profits for each branch of a company for state income taxes. The total profit from all branches, is then subject to a federal corporate income tax. Profit is determined after subtracting all deductions and expenses from the total income of a company. For personal income taxes and corporate income taxes, the amount of taxes due can be determined according to tax brackets. Generally, personal income consists of all types of income received in a tax year.
Those incomes are totaled, no matter what the source of income is. Then, all allowable deductions are made, which results in a figure that places an individual taxpayer in a specific tax bracket. Corporate income taxes are similar except that they are taxed based on profit, not on income. Corporate income taxes are determined based on total income, minus all allowable deductions. Corporations are allowed to subtract all business related expenses, which then results in an amount that represents actual profit for that particular corporation.
The amount of profit, after all allowable deductions, including expenses, is that amount that a business will be responsible for paying corporate income taxes on. Personal income taxes and corporate income taxes are generally levied on a state and Federal level, but not always. Corporations that have branches in more than one state, generally must pay income taxes on profits on state to state basis. In other words, a corporate headquarters is not solely responsible to pay all corporate income taxes. States can levy corporate income taxes to each branch that has profits in that state. The total profit of all of the branches, would then incur the federal tax burden.
Income taxes must be filed by mid April. Although extensions are sometimes granted for extenuation circumstances, taxpayers can incur fines if they file their taxes late. Fines are generally assessed on tax payers that file late and owe taxes. If a taxpayer is due a refund from the government, they generally do not receive a fine for filing late. There are still many people that question if income taxes are in fact constitutional.
Although the Sixteenth Amendment was ratified, people still believe that income taxes constitute slavery. In other words, income taxes represent payments made to the government through forced labour. There are also those that claim that the Amendment was never actually ratified due to intervening factors. In any case, the courts have ruled these arguments as frivolous and have consistently upheld income taxes as constitutional. Individuals that avoid paying income taxes, are subject to large fines, loss of property, and possible imprisonment.
Personal Income Tax:
Each taxpayer must pay personal income tax on their total income. Total income can  be calculated using several factors. Income can include monies that are paid directly to an employee through an employer, as well as a variety of other sources. Taxpayers must pay a personal income tax to the federal government if they meet the minimum income threshold. That amount will be based on their total personal income, or their combined income with a spouse.
After all allowable deductions have been utilized, taxpayers can determine what their federal personal income tax will be, by finding their income on the tax bracket guideline. Taxpayers are not always required to pay state income taxes on personal income. Each state has different tax laws which require taxpayers to pay specific taxes. There are some states that have no tax on personal income while others calculate personal income tax in differing ways. Personal income tax can be assessed by using a flat percentage of income, or it can be assessed using a tax bracket, which charges individuals a percentage of their income based on how much they make.
Corporate Income Tax:
Corporate income taxes are a direct tax imposed on the profits of any business that operates in the United States. Even foreign owned companies that operate profitable branches in the United States, are subject to income tax in the United States. The profit of a company is determined after the business subtracts operating costs and expenses that are a direct result of running the company, from their income. Expenses can include supplies, advertising and rent.
Once the business has determined the full amount of expenses, they are subtracted from the income of that company. The amount left, is subject to a corporate income tax. Companies that have branches in more than one state, will also be subject to state corporate taxes, that will vary according to each state’s tax law.
Brackets:
Tax brackets are used to estimate the amount of income taxes due from an individual. However, one must also consider deductions and other factors that will effect their income tax rate. Taxpayers can figure out where they fall in a tax bracket, by adding all of their income together an locating that amount on the tax bracket. Next, taxpayers can determine what their total allowable deductions are for that year.
Once they have subtracted their allowable deductions for the year, they can locate the new number on the tax bracket. This helps taxpayers have a clear picture of how much money they save by utilizing all allowable deductions. A person may fall under a federal tax bracket that is different than their state’s tax bracket.
Income Types :
There are many types of income that levy income taxes. Federal tax laws take every type of income into account, no matter what the source of income was. In other words, Â federal income taxes apply to income derived from any source. The income may be any amount, great or small, and still qualify as income. All sources of income are totaled and then allowable deductions are subtracted from the amount.
The remaining amount is subject to federal income tax, based on tax brackets. Whereas, each state takes certain types of income into account based on state specific tax laws. There are some states that only tax certain types of income, such as interest payments received. In addition, there are some states that do not have any income taxes, no matter what type of income a person receives. In most states, certain types of income are exempt form income tax.
Filing Taxes:
Most citizens of the United States, are required to file their taxes every year. The deadline for taxes, in April, is expected to be adhered to or taxpayers may receive a penalty for filing late. While most people are required to pay federal income taxes, some people are not requited to pay income taxes in their state. Those determinations are made based on each state’s tax law. Federal income taxes allow for certain deductions, which can reduce a taxpayers income tax responsibility significantly. Each state will also make allowances for deductions based on the manner in which they charge personal income taxes.
Many people choose to use an accountant or a tax professional to file their taxes. There are many tax laws, that change frequently, and individuals that file their own taxes may miss important deductions which can end up costing them thousands of dollars. Individuals that find that they will not be able to file their taxes on time, can generally file for an extension which gives them additional time to file their taxes without penalty.
Modern Legal Interpretation of Income Taxes:
Today, many of the same challenges are utilized to protest the constitutionality of income taxes, that were used in the past. There are those that argue that the Sixteenth Amendment was never actually ratified. There are also those that argue that income taxes are a form of slavery. In addition, modern arguments against income taxes include the association of income taxes with a discouragement of citizens from taking part in alternative forms of income.
By increasing an individual’s salary, there is also a direct increase on their personal income tax burden. The same arguments can be used in reference to corporate income taxes.
History and Legality of Income Taxes:
On several occasions, income taxes have been introduced to citizens of the United States and then been repealed. This has occurred several times throughout history. At one time, income taxes were introduced in order to help fund the Civil War efforts. Then, the income taxes were replaced by taxes placed on specific items such as tobacco and alcohol. In addition, the government added tariffs, or taxes to items that were imported from other countries.
Eventually, the government reintroduced income taxes. The Pollock case allowed the Supreme Court to determine that income taxes were not allowed by the United States Constitution and therefore income taxes were declared unconstitutional. However, that decision was short lived. Shortly after the Pollock case, Congress ratified the Sixteenth Amendment which legalized income tax within the Constitution.
Ratification of Sixteenth Amendment:
Prior to the Sixteenth Amendment, the Supreme Court declared that income taxes were unconstitutional. Income taxes were seen as a direct tax which the constitution did not make allowances for. However, Congress ratified the Sixteenth Amendment which allowed for an income tax on all income, no mater what the source. There have been many challenges to the Sixteenth Amendment. In fact, many people claim that the Amendment was never properly ratified and therefore, does not apply.
In addition, there are those that challenge the Amendment based on the fact the it is contrary to other portions of the Constitution. Until those portions are repealed, the Amendment cannot be upheld, according to that argument. Another argument is that income taxes are part of a certain type of slavery which forces all  citizens to work in order to pay the government. However, these arguments, and others like it, have consistently been struck down by the Supreme Court.
