Income Tax: deductions, income heads, old regime,new regime

What is INCOME TAX?

Income tax is one of the natural constituents of the financial systems in any country because it is a main source of government revenues. In India taxation is governed according to the Income Tax Act, 1961. Taxpayers are grouped into classes by their income earned, age, and kind of income received and there is provision made for each class. This article gives a snapshot view of how income tax works in India, covering deductions and previous as well as new tax system, and the five major categories of income.

Deductions Under Income Tax

Concessions are important as they enable individuals to fund their general expenses and investment outgoings whilst also supporting government initiatives by ensuring that its revenue losses are made up through the everyday living expenses of its citizens. Below are the significant deductions under the Income Tax Act:

Section 80C

• Permits a deduction of up to ₹1.5 lakh for investments in specific instruments, such as:
• Public Provident Fund (PPF)
• Employee Provident Fund (EPF)
• Life Insurance Premium
• National Savings Certificate is known as NSC.
• Tax-saving Fixed Deposits
• Equity Linked Savings Scheme (ELSS);

Section 80D

• Allows deductions for health insurance premiums:
• Resident individuals and families below the age of 60 years can get up to ₹25,000.
• Another ₹ 25000 for parents’ age less than 60 Years and ₹ 50000 if they are senior citizen.

Section 80E

• Offers a deduction for interest on education loan. This claim of deduction is made annually for the useful life of such property to a maximum of eight years or until the interest is paid.

Section 80G

• The next two items of the published accounts relate to the deductible expenditure incurred for donations to charitable organizations and relief funds. Gifts can be given with 50/100% GCM or without it and with or without any maximum allowable amount depending on the organization.

Section 24(b)

• Permits travelers to offset up to ₹ 2 lakhs for interest paid on home loans for one’s own place of residence.

Standard Deduction

• Salaried individuals can further avail a new flat standard deduction of ₹ 50,000 in lieu of transport allowance a medical reimbursement.

Section 80TTA and 80TTB

• 80TTA: Exemption of up to ₹ 10,000 on interest earned on the savings account.\
• 80TTB: Interest earned on deposits are fully exempt for senior citizens up to ₹ 50000.

Section 80CCD (1B)

• Additional exemption of ₹ 50000 for investment in National Pension Scheme (NPS).

Old Tax Regime vs. New Tax Regime

In the Union Budget of the 2020’s the new tax regime has been allowed under Section 115BAC It. For the first time in the history of income tax, the procedures provide the opportunity for the taxpayer to be put into a position where he or she can choose between the old style tax exemptions and deductions on the one hand, and the new tax rates which allow for 10 percent reduction in the rates of tax on the other.

Comparison of Tax Rates

Major Characteristics of the Old Regime

• Educational loan payback also fulfils deductions under Section 80C, 80D, 80E and others.
• Exemptions such as house rent allowance, leave travel allowance along with the standard deduction acceptable.
• Ideal for people who take advantage of most of the allowable deductions and exclusions.

Key Features of the New Regime

• Only exception to deductions/exemptions what is allowed is employer contributions towards NPS.
• Change in the process of computing for taxing.
• Higher tax exemptions offered to the taxpayers who have limited invest in these exempted securities.

Which One Should You Choose?

• Those individuals who invest more and more in tax-saving instruments or those who avail this or that kind of exemptions are likely to come under the older regime.
• Some people without many deductions and exemptions will be better off under the new regime.
• Taxpayers can compare their tax in either of the regimes in order to identify the better one to work with.

Heads of Income

Income tax in India is levied based on the five heads of income outlined in the Income Tax Act:

1. Income from Salary

This includes all monetary and non-monetary benefits received by an individual from an employer:

• Wages, allowances and incentives.
• Privileges such as company-owned accommodation, or personal automobiles.
• Exemptions under this head include HRA, LTA, & Gratuity.

2. Income from House Property

Taxed based on ownership of property:

• Self-occupied properties: Reduction of up to ₹2 lakh on interest on home loan.
• Let-out properties: Net annual value after subtraction of municipal taxes and other 30% standard deduction is chargeable.

3. Income derived by any individual from Business or Profession

Income earned through self-employment, businesses, or professional services:

• Subject to tax after having paid allowable expenses such as rent, depreciation, and employee’s salary.
• Measures of presumptive taxation are offered to it small business persons and self-employed professionals.

4. Income from Capital Gains

Profits from the sale of capital assets:

• Short-term capital gains (STCG): The gain on disposal of other depreciable assets which are sold in less than 36 months from the date that the particular asset was first put to use or 12 months where the assets are listed securities.
• Long-term capital gains (LTCG): Residents’ income derived from other assets other than those realized within a specified period and at favorable tax rates.

Exemptions to Section 54 and Section 54 F of the Income Tax Act where the excise of such deductions is subject to reinvestment in house properties.

5. Income from Other Sources

Covers income not classified under other heads:

• Interest on savings accounts and fixed deposit which also form part of the non-interest-bearing deposit.
• Lotteries or games of chance and dividends.
• Family pension, gifts and other miscellaneous income of the family.

Miscellaneous Considerations

• Rebate under Section 87A: Provided for anybody with taxable income up to ₹5 lakh, that offers a maximum rebate of ₹12,500.
• TDS (Tax Deducted at Source): Informs tax collection at source of income and is applicable to salaries, interest, rents and fees for professional services.
• Advance Tax: Applicable for taxpayers who estimate the tax liability of more than ₹ 10,000 in a particular financial year. Fees are payable in four tranches, and reimbursement is made incrementally.
• ITR Filing: Required for the person and companies depending on the specific revenue’s limits. Failure to file returns or filing them at the wrong time may warrant penalties.
• Penalty Provisions: Concerns include penalties for failing to pay tax, underpaying tax and other discrepancies when filing returns.

Conclusion

Income tax in India is structured to collect revenue but also encourages specific economic activities. Taxpayers need to know the available deductions and exemptions to optimize their tax liability. The new regime is flexible but requires careful evaluation of whether it suits the taxpayer’s needs. 

The five heads of income can be explored to better understand how the earnings are taxed and steps taken to maximize savings.

It will benefit both the government and taxpayers if tax compliance improves since it will boost economic growth and development. A well-informed approach to tax planning can greatly affect individual finances, thereby instilling a culture of financial responsibility and awareness.

FAQs

1. To whom does it apply to file an ITR?

Anyone who earns above the set limit of income by the government for such a fiscal year must file an ITR for the said fiscal year. It is important to note that the limits are dependent upon age, as well as the status of one’s residency.

2. What is the slabs of income tax for the existing basic exemption limit for individuals?

For the financial year 2023-24: Individuals under 60, ₹2,50,000, Senior citizens (60-80 years), ₹3,00,000, Super senior citizens (above 80 years), ₹5,00,000 during financial year 2023-24.

3. Explain the ITR forms briefly to correctly select the appropriate ITR form for the fiscal year.

The income tax return form (ITR) varies based on the kind and source of income.

• ITR-1 (Sahaj): It eliminates tax for those earning up to ₹50 lakh as a salary.
• ITR-2: One good example is appropriate to ponder for those with capital gains or a number of streams of income.
• ITR-3: Where aggregate income of assessed and HUF comprises, or consists, of income taxable under heads.
• ITR-4 (Sugam): In the event of presumptive taxation
• Even better, visit its website at Income Tax Department or consult a tax consultant.

4. What is TDS (Tax Deducted at Source)?

TDS stands for tax paid by the payer at the time of source of payment to the receiver like wages, rent, or interest. This has also prevented late payment of taxes to the government from arising in the course of the service delivery cycle.

5. What do you understand about the difference between the old tax regime and the new tax regime?

• Old tax regime: It offers deduction under 80C, 80D, etc. The rates are high compared to new tax regime.
• New Tax Regime: Hence tax rates are generally lower but there are hardly any exemptions allowed. This one the two are offered by the government for the use of the taxpayers on a yearly basis.

6. The point is that what deductions are allowed for under section 80C?

Section 80C allows deductions up to ₹1,50,000 on investments and expenses like:

• Provident Fund (EPF/PPF)
• Life Insurance Premium
• ELSS is defined as schemes that contain an equity-linked saving scheme with different components.
• Tuition fees for children

7. I would like to know about how to check my refund status?

The status of your refund can also be checked on the official Income Tax Department and this can be done on the website and the option for check can be found under a tab titled Refund/Demand Status.