Individual Income Tax in India

Individual income tax (IIT) in India is based on resident-status and the source of the income. Under India’s individual tax regime, different tax rates are assigned to respective income brackets (tax slabs), which is the income earned by a taxable person.

Contributing Advisor

Divyansh Shrivastava

Assistant Manager, Corporate Accounting Services

The new income tax regime, which was introduced in 2021, is now made the default mode of taxation. Although the old tax regime will continue to be operational, the taxpayers will have to especially opt for it. It must be noted that no new changes have been made to the old income tax regime.

Taxpayers can opt for the new tax regime – where they pay income tax at lower rates but would have to forgo certain exemptions and deductions available to those taxpayers who paid taxes as per the existing tax regime.

Alternately, taxpayers could stick to the older tax regime and continue to avail respective exemptions and deductions.

New tax regime

The Indian income tax system imposes taxes on individual taxpayers based on their taxable income or profits earned. Taxpayers can choose to pay lower taxes by forgoing exemptions and deductions by opting for the new regime.

The 2023 budget extended the rebate for individuals subject to the new income tax regime for annual incomes up to INR 700,000, whereas those with incomes up to INR 500,000 previously paid no income tax under either the old or new schemes.

Moreover, the new income tax regime includes a standard deduction of INR 50,000, allowing salaried taxpayers to avail an upfront deduction of INR 50,000 from their total taxable income, which was previously only available under the old structure.

The government has also rationalized the tax slabs under the new income tax system, reducing the total number of taxable brackets to five.

Notes:

• For adopting New Regime, most of the deductions/exemptions such as section 80C, 80D, etc. are to be foregone. However, standard deduction of Rs. 50,000 against salary income is proposed to be allowed under New Regime. The aforesaid regime is optional. Accordingly, persons as mentioned above have the option to be taxed under either of the options. New Regime once exercised can be changed in subsequent years (not applicable for business income).
• Resident individuals having total income not exceeding Rs. 7,00,000 can avail rebate of 25,000 or actual tax liability whichever is lower.
• Rate of surcharge:
  • 25 percent where specified income* exceeds INR 20 million
  • 15 percent where total income exceeds INR 10 million but does not exceed INR 20 million
  • 10 percent where total income exceeds INR 5 million but does not exceed INR 10 million
  • In case of Association of Persons (AOP), consisting of only companies as its members, the rate of surcharge not to exceed 15 percent.

*Specified income – Total income excluding income by way of dividend on shares and short-term capital gains in case of listed equity shares, equity oriented mutual fund units, units of business trust and long-term capital gains.

Old tax regime

Under the old taxation system, the assessee can make use of deductions, exemptions, and other allowances to carefully organize their finances and reduce their tax burden.

The following expenses are deductible under the previous tax system:

• Public Provident Fund (PPF);
• Equity-Linked Savings Schemes (ELSS);
• Employees’ Provident Fund (EPF);
• life insurance premiums;
• Principal and interest payments on a mortgage;
• Health insurance premiums,
• Investments in NPS,
• Child tuition fees, and
• Interest on savings accounts.

The following items are exempt from this list:

• House Rent Allowance (HRA),
• Leave Travel Allowance (LTA),
• Reimbursement for mobile and internet,
• Food coupons or vouchers,
• Company-leased automobile,
• Standard deduction,
• Uniform allowance, and
• Leave encashment.

Notes:

• In case of a resident individual of the age of 60 years or above but below 80 years, the basic exemption limit is Rs. 3,00,000.
• In case of a resident individual of age of 80 years or above, the basic exemption limit is Rs 5,00,000.
• Rate of surcharge:

• 37 percent on base tax where specified income exceeds INR 50 million;
• 25 percent where specified income exceeds INR 20 million but does not exceed INR 50 million
• 15 percent where total income exceeds INR 10 million but does not exceed INR 20 million; and
• 10 percent where total income exceeds INR 5 million but does not exceed INR 10 million.
• In case of AOP, consisting of only companies as its members, the rate of surcharge not to exceed 15 percent.

• Health and Education cess at four percent on aggregate of base tax and surcharge.
• Resident individuals having total income not exceeding INR 500,000 can avail rebate of INR 12,500 or actual tax liability whichever is lower.

Taxation of individuals

The tax incidence on an individual is influenced by their residential status, which is determined by their actual presence in India according to the regulations outlined in the Income Tax Act.

Tax calculation

Total income tax is calculated in accordance with the tax rates and rules that stand on the first day of April of the assessment year.

Employment income includes all amounts, either in cash or in kind, that arise from an individual’s employment. Wages, pensions, bonuses, commissions, perquisites in lieu of salary, reimbursement for personal expenses, securities or sweat equity shares, contributions to superannuation funds, etc. are all included in employment income.

Obligations of the employee

Advance tax

Advance tax is a pay-as-you-earn system where taxpayers estimate their total income and tax payable for the year, and make advance tax payments at specified intervals during the financial year itself, as required by the Income-tax Act, 1961.

In such cases, although tax is deducted at source by the taxpayer in several cases, it may not cover the final tax amount that needs to be paid. Therefore, it's crucial for taxpayers to understand their obligation to pay advance tax and the consequences of non-payment or insufficient payment.

Who needs to pay advance tax?

Advance tax is payable during a financial year in every case where the amount of such tax payable by the taxpayer during that year is INR 10,000 or more.

Individuals not liable to pay advance tax

A resident senior citizen (an individual of the age of 60 years or above during the relevant financial year) not having any income from business or profession is not liable to pay advance tax.

While salaried taxpayers are also covered for payment of advance tax, they are generally not required to pay advance tax as their employers are obligated to deduct withholding tax or TDS on their salaries. However, such a salaried person would still be liable to make advance tax payment on income under other heads such as dividend income, interest income, rental income, shortfall of TDS for salary income, etc.

Due dates to pay advance tax

The due dates for payment of different instalments of advance tax for both corporate as well as non-corporate assessee for FY 2024 are as follows:

Filing annual tax return

As per India’s domestic tax law, every individual is required to file a tax return for the respective financial year (FY) with the Indian tax authorities by July 31 in the following financial year (assessment year or AY) if they meet specified conditions.

Documents for filing the Income Tax Return (ITR)

Following are the basic documents mandatory to file an ITR in India:

• PAN (Permanent Account Number);   
• Aadhar Number;
• Form 26AS;
• Bank Account Details;
• Challan of any advance tax or self-assessment tax (if paid during the year); and
• Details of the original return (if filing a revised return).

Income tax clearance

All individuals who are not domiciled in India / not a resident of India; who have come to India in connection with business, profession, or employment; and who have derived income from any source in India – are required to obtain an Income Tax Clearance Certificate from Indian tax authorities prior to exiting India. This puts on record that the non-resident has duly paid all taxes owed on income earned in India by means of employment or business – before leaving the country.

The non-domiciles may apply for an Income Tax Clearance Certificate (ITCC) by submitting an undertaking via Form 30A, which must be filed either by the employer or by the person from whom they have received the said income, as declared in the undertaking. Upon verification, the tax officials will issue an ITCC to the applicant via Form 30B.

e-Payment of Taxes

The taxpayers can pay advance tax, self-assessment tax online from the NSDL website. They should also have a net banking facility with an authorized bank.

Non-employment income

There are special tax rates for expatriates on income arising from non-employment sources that includes long and short-term capital gains earned on the disposal of capital assets situated in India, interests earned, and royalties payable by an Indian concern.

It should be noted that investments in shares by non-resident foreign nationals are governed by the Indian foreign direct investment policy.

Other taxes

There is also a health and education cess assessed at 4 percent of the income tax, and applicable surcharges will be levied if the annual income exceeds INR 5 million (US$67,196).

Double Taxation Avoidance Agreements

Most expatriates worry about “double taxation” – paying taxes to two different countries on the same income. A foreign taxpayer working in India may be able to reduce taxable income in their country of primary residence (and double taxation) under a double taxation avoidance agreement.

Quick facts about IIT

• The tax year, also referred to as the financial year, is from April 1 through March 31.
• The year in which income is paid known as the Previous Year or Financial Year and the year in which the income is reported is known as the Assessment Year.
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• An individual’s tax return must be filed by July 31 immediately following the end of the Financial Year.
• Employers are required to obtain a Permanent Account Number (PAN). The PAN is a unique identification number allotted by the Indian tax authorities. The PAN is required to be quoted on all correspondence with the tax authorities.
• Tax is withheld at source on a wide range of incomes, such professional fees, rent, interest, dividends, etc. at the time such income is credited to the account of the payee or at the time of payment, whichever is earlier. On salary, tax is deducted at the time of payment only.
• All employers are mandatorily required to deduct and deposit tax from an employee’s taxable income promptly.
• All employees are expected to report their incomes from other sources to the employer so that the same can be taken into account while reckoning taxable income.
• At the end of the Financial Year, the employer is required to issue Form 16 to the employee declaring the Income and Tax deducted and deposited.