Everything you need to know about India’s Income Tax structure

In India, income tax is a direct tax levied by the Central government. The tax structure in India follows an equitable model wherein everybody is taxed according to the income they draw. Additionally, the tax payable by an individual is dependent on their age. The government follows a progressive tax structure, which has different tax slabs with differing income tax rates, which ensures that everybody pays what they can afford.

The taxes payable by an individual depends not only on the amount of income they generate in the financial year, but also largely depends on their age. The Indian state has categorised resident individuals into three different age groups, on the basis of which the tax payable to the state is calculated. Different tax slabs have been decided for resident individuals aged below 60 years, for individuals aged between 60 to 80 years and those aged above 80 years.

Read on to learn about the income tax structure and the age groups that they apply to.

Aside from the total taxable income, all taxpayers must also pay a cesss of 4% on their total taxable income. This is known as the Health and Education cess. 

It is possible to reduce the total income on which taxes must be paid by investing in instruments that allow for tax deductions or even tax exemptions. Owing to the Section 80C of the Income Tax Act 1961, you are eligible for tax deductions if you invest in instruments such as the Equity Linked Saving Scheme (ELSS), Public Provident Fund (PPF), National Savings Certificates (NSC), fixed deposits with banks, post office deposits, and Senior Citizen Savings Scheme (SCSS). Several of these investment instruments also allow for tax exemptions, and it is essential that you mention these investments while filing your income tax returns. The total tax payable also takes into account the deductions available to a person, such as on payment of premiums for their life insurance or term insurance policies. To know more about Term Insurance, browse the website for various Term Plans offered by PNB MetLife.

Meanwhile, salaried taxpayers are expected to get further tax relief in the upcoming Union Budget 2020-21. The tax relief is supposed to be aimed specifically at the middle-class taxpayers. The existing tax slabs are expected to be updated and bring additional relief to taxpayers. 

While the tax exemption limit of Rs. 2.5 lakh is expected to stay unchanged, news reports suggest that those earning income between Rs. 2.5 lakh to Rs. 10 lakhs will now be taxed at a rate of 10% ^[1]. Taxpayers who earn an income between Rs. 10 lakhs to Rs. 20 lakhs are expected to avail a lower rate of taxation than the existing rate. Reports suggest that those earning incomes between Rs. 10 lakhs to Rs. 20 lakhs will be taxed at a rate of 20%. ^[2]

These changes, if implemented, will be in line with the New Direct Tax Code which was submitted to the Union Finance Ministry in August 2019. They are aimed primarily at furthering tax benefits for the salaried middle class. 

Currently, those earning an annual income between Rs. 2.5 lakh to Rs. 5 lakhs are taxed at 5%, while those earning between Rs. 5 lakhs to Rs. 10 lakhs are taxed at a rate of 20%. Taxpayers earning more than Rs. 10 lakhs are currently being taxed at 30%, which is why the expected changes will significantly reduce their tax burden. However, the people who earn annual incomes of Rs. 1 crore, Rs. 2 crore and Rs. 5 crore are subjected to a three-layered surcharge. This is expected to continue even with the new taxation measures coming into existence.

The income tax is levied on all earning individuals who fall under a taxable income bracket. The income tax is paid to the Government of India and is charged annually. However, there are several tax deductions and exemptions that you can claim to lower your tax liability. The Income Tax Calculator helps you ascertain your tax output for a financial year based on your taxable income. This can help you plan well and save tax using the tax-saving deductions and exemptions, if possible. 

¹Incometax rate may be cut in Budget: Report - Livemint." 4 Dec. 2019, https://www.livemint.com/budget/expectations/income-tax-rate-may-be-cut-in-budget-report-11575441227503.html. Accessed 12 Dec. 2019.

²Income tax rate may be cut in Budget: Report - Livemint." 4 Dec. 2019, https://www.livemint.com/budget/expectations/income-tax-rate-may-be-cut-in-budget-report-11575441227503.html. Accessed 12 Dec. 2019.