When it comes to financial obligations, there are certain responsibilities that cannot be avoided, and paying taxes is one of them. Being informed about the applicable rates and understanding how to compute your liability is essential for proper financial planning. For the assessment year 2019-20, the Income-tax Act provides a detailed framework on how income is categorized, calculated, and taxed. This section provides an in-depth view of the tax structure, including applicable rates for different categories of taxpayers, and explains how to arrive at the final liability.
Overview of the Income Tax System in India
The income tax system in India is based on the principle that individuals and other entities must contribute a portion of their earnings to the government. These contributions are used for the development of infrastructure, welfare schemes, and the functioning of the country’s administrative machinery. Every year, the Union Budget announces changes to tax rates, exemptions, rebates, and other provisions, which are then incorporated into the law.
For individuals, income tax is charged on the total income earned during a financial year. The financial year runs from 1st April to 31st March of the following year. The income earned during this period is assessed in the next financial year, which is known as the assessment year.
Heads of Income Under the Income-tax Act
Under the Income-tax Act, income is classified into five major heads. This classification helps in determining the nature of income and the method of computation.
Salary
Salary income includes wages, pensions, gratuity, allowances, perquisites, and any other benefits received in connection with employment. It covers both monetary and non-monetary benefits provided by an employer.
Income from House Property
Income under this head is earned from letting out a building or land appurtenant to such a building. Even if the property is not actually rented but is deemed to be let out as per provisions of the law, it may be taxed under this category.
Profits and Gains of Business or Profession
This head covers income earned from any trade, commerce, manufacturing, or professional services. It includes both profits and losses arising from business activities. The computation under this head considers allowable business expenses and deductions.
Capital Gains
Capital gains refer to profits from the transfer of a capital asset, such as property, stocks, bonds, or other investments. Capital gains are further classified into short-term and long-term based on the period of holding.
Income from Other Sources
Any income that does not fit into the other four categories is taxed under this head. Examples include interest income, lottery winnings, dividends, and certain gifts.
Gross Total Income and Deductions
After computing the income under each head, the amounts are aggregated to arrive at the Gross Total Income (GTI). From this, specific deductions allowed under Chapter VI-A of the Income-tax Act are subtracted.
These deductions may be related to investments, savings, or expenses that qualify for tax benefits, such as contributions to provident funds, life insurance premiums, and certain donations. The result after these deductions is the Total Income, which forms the basis for calculating the tax liability.
Classification of Income for Tax Purposes
Total income is classified into two categories:
Normal Income
This includes all income taxed at the standard slab rates applicable to the taxpayer’s category. For individuals, these slab rates vary based on age and residential status.
Special Income
Certain types of income are taxed at rates different from the standard slabs. Examples include capital gains, lottery winnings, and specific investments that attract a fixed tax rate.
Income Tax Slabs for AY 2019-20
The tax structure for individuals in India is progressive, meaning the rate of tax increases with the level of income. For the assessment year 2019-20, the slab rates are determined based on the age of the individual taxpayer and their residential status. There are three main categories of individual taxpayers:
- Individuals below 60 years of age, Hindu Undivided Families (HUFs), Associations of Persons (AOPs), Bodies of Individuals (BOIs), and Artificial Juridical Persons (AJPs)
- Resident senior citizens aged 60 years or more but less than 80 years
- Resident super senior citizens aged 80 years or more
Individuals Below 60 Years of Age / HUF / AOP / BOI / AJP
For this category, the tax rates for AY 2019-20 are as follows:
- Up to ₹2,50,000: No tax payable
- ₹2,50,000 to ₹5,00,000: 5% of the amount exceeding ₹2,50,000
- ₹5,00,000 to ₹10,00,000: ₹12,500 plus 20% of the amount exceeding ₹5,00,000
- Above ₹10,00,000: ₹1,12,500 plus 30% of the amount exceeding ₹10,00,000
These rates apply only to normal income. Any special income is taxed at its respective rates.
Resident Senior Citizens (60 years or more but less than 80 years)
Senior citizens are provided a higher basic exemption limit:
- Up to ₹3,00,000: No tax payable
- ₹3,00,000 to ₹5,00,000: 5% of the amount exceeding ₹3,00,000
- ₹5,00,000 to ₹10,00,000: ₹10,000 plus 20% of the amount exceeding ₹5,00,000
- Above ₹10,00,000: ₹1,10,000 plus 30% of the amount exceeding ₹10,00,000
Resident Super Senior Citizens (80 years or more)
Super senior citizens benefit from an even higher basic exemption limit:
- Up to ₹5,00,000: No tax payable
- ₹5,00,000 to ₹10,00,000: 20% of the amount exceeding ₹5,00,000
- Above ₹10,00,000: ₹1,00,000 plus 30% of the amount exceeding ₹10,00,000
Rebate Under Section 87A
Section 87A provides relief to small taxpayers by offering a rebate on the income tax payable, subject to certain income limits.
- For AY 2020-21, resident individuals with taxable income up to ₹5,00,000 can claim a rebate equal to the lower of 100% of income tax payable or ₹12,500.
- For AY 2019-20, resident individuals with taxable income up to ₹3,50,000 can claim a rebate equal to the lower of 100% of income tax payable or ₹2,500.
This rebate is deducted from the total tax payable before adding surcharge and cess.
Surcharge on Income Tax
In addition to the tax rates mentioned, a surcharge is levied on taxpayers with higher incomes. For AY 2019-20:
- 10% surcharge is applicable if total income exceeds ₹50 lakh but does not exceed ₹1 crore.
- 15% surcharge is applicable if total income exceeds ₹1 crore.
The surcharge is calculated on the amount of income tax before adding cess.
Health and Education Cess
A health and education cess at the rate of 4% is applicable on the total income tax, including surcharge. This cess is used for funding government health and educational initiatives.
Computing the Income Tax Liability
Calculating tax liability involves several steps, each requiring careful attention to detail to ensure accuracy.
Step 1: Compute Net Total Income
Start by determining the income under each head, making adjustments for permissible losses. Add these amounts to get the Gross Total Income.
Step 2: Apply Deductions
Subtract eligible deductions under Chapter VI-A to arrive at the Total Income.
Step 3: Calculate Tax on Normal and Special Income
Apply slab rates to normal income and the relevant fixed rates to special income.
Step 4: Apply Rebate under Section 87A
If the taxpayer is eligible, reduce the tax liability by the rebate amount.
Step 5: Add Surcharge
If the income exceeds the specified thresholds, calculate and add the surcharge.
Step 6: Add Health and Education Cess
Apply the 4% cess on the total tax and surcharge.
Step 7: Adjust for Rebates and Foreign Tax Credit
Deduct any rebates under sections 86 and 89, and apply foreign tax credit under sections 90, 90A, or 91 if applicable.
Step 8: Add Interest
If tax payments have been delayed or short-paid, calculate interest under sections 234A, 234B, and 234C.
Step 9: Adjust for Prepaid Taxes
Deduct tax deducted at source (TDS), tax collected at source (TCS), advance tax paid, and self-assessment tax from the total liability.
Step 10: Arrive at Final Payable Amount or Refund
The final step is to determine whether there is tax payable or a refund due.
Taxable Entities Covered Under the Slab System
In India, income tax slabs apply not only to individual taxpayers but also to certain other categories of entities. For the slab-based system, the following entities are covered:
- Individual taxpayers, differentiated by age brackets (below 60 years, senior citizens, super senior citizens)
- Hindu Undivided Families (HUF)
- Association of Persons (AOP)
- Body of Individuals (BOI)
- Artificial Juridical Persons (AJP)
Each category has its own exemption limits and tax computation structure, which are aligned to ensure fairness and address differing financial circumstances.
Normal Income Versus Special Income
Income can be broadly divided into two segments for taxation purposes.
Normal Income
This includes the majority of income types, such as salary, business or professional earnings, rental income, and interest income. These are subject to the slab rates prescribed for the assessment year, based on the category of taxpayer.
Special Income
Certain types of income attract special rates that differ from slab rates. For example:
- Short-term capital gains on equity shares subject to Securities Transaction Tax (STT) are taxed at 15%.
- Long-term capital gains on certain securities exceeding the prescribed exemption limit are taxed at 10%.
- Winnings from lotteries, game shows, or similar sources are taxed at a flat rate of 30% without any deductions.
Taxpayers must calculate these separately and then add them to the liability on normal income.
Calculation Methodology for AY 2019-20
To correctly determine the tax payable, taxpayers should follow a logical computation process. A systematic approach ensures that no eligible deductions are missed and all applicable additions are accounted for.
Determining Gross Total Income
The first step involves calculating income under each head, adjusting for set-off and carry forward of losses as per the provisions of the law. This includes:
- Salary income after considering exemptions for allowances such as house rent allowance (HRA) or leave travel concession (LTC).
- Income from house property after permissible deductions for municipal taxes and standard deduction for repairs.
- Business or professional income net of allowable business expenses.
- Capital gains after indexation benefits (where applicable) and exemptions under specific sections.
- Income from other sources after deducting eligible expenses.
Applying Deductions
Once Gross Total Income is computed, deductions under Chapter VI-A are applied. Common deductions include:
- Section 80C: Investments in life insurance, provident fund, equity-linked savings schemes, tuition fees, etc., subject to the maximum limit.
- Section 80D: Health insurance premiums.
- Section 80E: Interest on education loans.
- Section 80G: Donations to specified funds and institutions.
- Section 80TTA/80TTB: Deduction on interest from savings accounts or fixed deposits for senior citizens.
These deductions reduce the taxable income and, therefore, the tax liability.
Calculating Tax on Normal Income
After deductions, apply the applicable slab rates to the normal income portion. For AY 2019-20, this means referring to the specific slab for your category.
Calculating Tax on Special Income
Special income is taxed separately at fixed rates. The total from this step is added to the liability from normal income.
Applying Rebate under Section 87A
If the taxpayer’s total income after deductions is within the specified threshold, the rebate is applied. For AY 2019-20, this threshold is ₹3,50,000 and the maximum rebate is ₹2,500.
Adding Surcharge
If the total income exceeds ₹50 lakh, a surcharge is applied at 10%. If the income exceeds ₹1 crore, the surcharge increases to 15%.
Adding Health and Education Cess
A 4% cess is levied on the total of income tax plus surcharge.
Adjusting for Other Rebates and Foreign Tax Credit
Other rebates (such as under sections 86 and 89) and foreign tax credit (sections 90, 90A, and 91) are then deducted from the liability.
Adding Interest for Delay or Default
Interest under sections 234A, 234B, and 234C is computed if there is a delay in filing the return, default in advance tax payments, or deferment of advance tax.
Deducting Prepaid Taxes
From the total liability, deduct taxes already paid in the form of TDS, TCS, advance tax, and self-assessment tax. This results in the final amount payable or refundable.
Understanding Key Tax Concepts for AY 2019-20
Certain core concepts are essential for understanding how the slab system operates and affects taxpayers.
Progressive Taxation
India follows a progressive taxation model, meaning the rate of tax increases as income increases. This system aims to distribute the tax burden more equitably.
Basic Exemption Limit
The basic exemption limit is the threshold below which no tax is payable. This limit is higher for senior citizens and super senior citizens to account for their reduced earning capacity.
Rebate under Section 87A
The rebate is an important provision for low-income taxpayers. It ensures that individuals earning up to a certain amount do not have to pay income tax or pay only a minimal amount.
Surcharge and Cess
While the slab rates cover most taxpayers, surcharge and cess provisions target higher-income categories and fund specific welfare programs.
Worked Example of Tax Computation for AY 2019-20
To illustrate the computation process, consider an individual aged 35 with the following details:
- Salary income: ₹7,20,000
- Interest from savings account: ₹15,000
- Investment under section 80C: ₹1,50,000
- Health insurance premium under section 80D: ₹25,000
Step-by-Step Calculation
- Gross Total Income
Salary income: ₹7,20,000
Interest income: ₹15,000
Gross Total Income: ₹7,35,000
- Deductions
Section 80C: ₹1,50,000
Section 80D: ₹25,000
Total deductions: ₹1,75,000
- Total Income
₹7,35,000 – ₹1,75,000 = ₹5,60,000
- Tax on Normal Income
-
-
- Up to ₹2,50,000: Nil
- ₹2,50,000 to ₹5,00,000: ₹12,500 (5% on ₹2,50,000)
- ₹5,00,000 to ₹5,60,000: ₹12,000 (20% on ₹60,000)
Total: ₹24,500
-
- Rebate under Section 87A
Not applicable as income exceeds ₹3,50,000
- Surcharge
Not applicable as income is below ₹50 lakh
- Cess
4% of ₹24,500 = ₹980
- Total Tax Liability
₹24,500 + ₹980 = ₹25,480
This final amount is compared to taxes already paid to determine whether the taxpayer has to pay the balance or is eligible for a refund.
Importance of Timely Filing and Payment
Paying taxes and filing returns within the stipulated deadlines is not just a legal requirement but also ensures that taxpayers avoid unnecessary penalties and interest. Filing within the due date also enables carry forward of certain losses, which can reduce future tax liabilities.
Compliance and Record-Keeping
Maintaining accurate records is critical for smooth tax computation and for handling any queries from the authorities. Documents such as Form 16, bank statements, investment proofs, and receipts for deductible expenses should be preserved for future reference.
Common Mistakes to Avoid in Tax Computation
- Ignoring income from all sources, especially bank interest or rental income.
- Failing to claim eligible deductions, thereby paying more tax than necessary.
- Missing deadlines for advance tax payments, resulting in interest charges.
- Misclassifying special income as normal income or vice versa.
- Not reconciling tax credits with Form 26AS before filing returns.
Role of Advance Tax and Self-Assessment Tax
Advance tax is payable in installments during the financial year if the total tax liability exceeds a specified limit. Self-assessment tax is paid after computing the final liability before filing the return. These payments help in reducing interest charges and keeping compliance in check.
Tax Deducted at Source (TDS) and Tax Collected at Source (TCS)
TDS is a mechanism where the payer deducts tax before making payments such as salary, rent, or professional fees. TCS applies to certain transactions like sale of scrap or specific goods. Both TDS and TCS are credited against the taxpayer’s final liability.
Comprehensive View of the Slab Structure
The slab system operates on the principle that different levels of income are taxed at different rates. Each slab rate applies only to the income within that slab range. As income increases, higher rates apply only to the incremental amount, not the entire income.
Slab Categories
The three main categories of individual taxpayers for AY 2019-20 are:
- Individuals below 60 years of age, including Hindu Undivided Families, Associations of Persons, Bodies of Individuals, and Artificial Juridical Persons.
- Resident senior citizens, aged 60 years or more but less than 80 years.
- Resident super senior citizens, aged 80 years or more.
These categories ensure a fair approach where elderly taxpayers receive higher exemption limits.
Comparative Analysis of Slab Benefits by Age
One of the distinct features of the Indian tax system is the higher exemption limit for senior and super senior citizens. For example, while individuals below 60 years have an exemption limit of ₹2,50,000, senior citizens enjoy ₹3,00,000, and super senior citizens enjoy ₹5,00,000.
This difference has a direct impact on the overall liability. For instance, a senior citizen earning ₹4,50,000 after deductions will pay significantly less tax than an individual below 60 earning the same amount.
Special Rates for Certain Incomes
Certain incomes are not subject to the slab rates but have fixed rates irrespective of the taxpayer’s category.
Capital Gains
- Short-term capital gains on equity shares subject to Securities Transaction Tax are taxed at 15%.
- Long-term capital gains exceeding ₹1,00,000 on certain securities are taxed at 10% without indexation benefits.
Winnings from Lotteries or Game Shows
These are taxed at a flat rate of 30% without allowing any deductions for expenses or allowances.
Casual Incomes
Other casual incomes like crossword puzzles, horse race winnings, or similar sources also attract fixed rates as specified.
Interaction of Normal and Special Income in Computation
When both normal and special income are present, they are computed separately. Tax on normal income is calculated using the applicable slab, and tax on special income is added to it. This combined figure forms the base for applying surcharge and cess.
Role of Deductions in Reducing Taxable Income
Deductions play a crucial role in tax planning. They directly reduce taxable income and thereby the tax payable.
Common Deductions under Chapter VI-A
- Section 80C: Maximum deduction of ₹1,50,000 for investments in specified schemes such as provident fund, life insurance, equity-linked savings schemes, and tuition fees.
- Section 80D: Deduction for health insurance premium for self, family, and parents, with higher limits for senior citizens.
- Section 80E: Deduction for interest on education loans with no monetary limit.
- Section 80G: Deduction for donations to eligible charitable institutions and funds.
- Section 80TTA: Deduction up to ₹10,000 on savings account interest for individuals and HUFs.
- Section 80TTB: Deduction up to ₹50,000 on interest for senior citizens.
Importance of Section 87A Rebate
The Section 87A rebate serves as a major relief for small taxpayers. For AY 2019-20, it is available to residents with total income up to ₹3,50,000, with the rebate amount capped at ₹2,500.
Impact on Tax Liability
This rebate ensures that taxpayers in this bracket pay minimal or no tax, especially when deductions are maximized.
Surcharge and Cess Impact on Higher Income Groups
For high-income earners, the surcharge significantly increases the effective tax rate.
- 10% surcharge on income exceeding ₹50 lakh but not exceeding ₹1 crore.
- 15% surcharge on income exceeding ₹1 crore.
The 4% health and education cess is then applied on the total of income tax plus surcharge, which further raises the final liability.
Illustration of High-Income Tax Computation
Consider an individual aged 45 earning ₹1.2 crore as total taxable income after deductions:
- Up to ₹2,50,000: Nil
- ₹2,50,000 to ₹5,00,000: 5% = ₹12,500
- ₹5,00,000 to ₹10,00,000: 20% on ₹5,00,000 = ₹1,00,000
- Above ₹10,00,000: 30% on ₹1,10,00,000 = ₹33,00,000
- Total tax before surcharge: ₹34,12,500
- Surcharge at 15%: ₹5,11,875
- Tax plus surcharge: ₹39,24,375
- Health and education cess at 4%: ₹1,56,975
- Final tax liability: ₹40,81,350
This example demonstrates how surcharge and cess can significantly increase the total liability for high-income taxpayers.
Significance of Advance Tax
Advance tax is a prepayment system to ensure that taxpayers pay tax in installments during the financial year if their liability exceeds ₹10,000. For individuals, it is typically payable in four installments in June, September, December, and March.
Failure to pay advance tax on time results in interest under sections 234B and 234C, which can add to the burden.
Role of TDS and Form 26AS
Tax Deducted at Source is a method where tax is collected at the time of payment. For example, employers deduct TDS from salaries, and banks deduct TDS from interest above certain limits.
Form 26AS is a consolidated statement that shows all taxes credited against a taxpayer’s PAN. It is essential to verify this form before filing returns to ensure that all deductions are accounted for.
Impact of Non-Compliance
Non-compliance can lead to penalties, interest, and even prosecution in certain cases.
Penalties
Penalties can be levied for late filing, underreporting, misreporting, or failure to maintain proper records.
Interest
Interest under sections 234A, 234B, and 234C is mandatory in cases of default or delay in payment.
Strategies for Tax Planning for AY 2019-20
Proper tax planning can minimize liability and ensure compliance.
Utilizing Maximum Deductions
Taxpayers should make full use of available deductions under various sections to reduce taxable income.
Investment Planning
Investments in eligible schemes before the end of the financial year can provide tax benefits while building long-term wealth.
Spreading Income
Where possible, income can be structured across family members to make use of lower slab rates.
Documentation for Claiming Deductions
To claim deductions, proper documentation is essential. This includes investment proofs, insurance receipts, donation certificates, and loan repayment statements.
Importance of Timely Return Filing
Filing the return within the due date not only avoids penalties but also allows carry forward of certain losses such as business losses or capital losses, which can be set off against future income.
Adjustments for Foreign Tax Credit
Taxpayers earning income abroad may be eligible for a foreign tax credit to avoid double taxation, provided they follow the procedures under sections 90, 90A, and 91.
Awareness of Agricultural Income Provisions
While agricultural income is exempt, it is considered for rate purposes when calculating tax on non-agricultural income, which can push the taxpayer into a higher slab.
Technology and E-Filing
The government has made it easier for taxpayers to file returns online through the e-filing portal. This system also enables faster processing of refunds and easier verification of records.
Common Myths About Taxation
- All agricultural income is always exempt: While it is exempt, it can affect slab rates for other income.
- Salary income automatically takes care of all tax liabilities: This is not always true if you have other income sources.
- Filing is not necessary if no tax is payable: Filing may still be mandatory based on income thresholds or for claiming refunds.
Conclusion
Understanding the income tax slabs and rates applicable for a particular assessment year is essential for accurate tax planning and compliance. The structure of income taxation in India for AY 2019-20 clearly categorizes taxpayers based on their age, with separate slabs for individuals, senior citizens, and super senior citizens. By determining gross total income, applying permissible deductions, and identifying applicable slab rates or special rates, taxpayers can arrive at their precise tax liability.
The provision for rebates, such as those under section 87A, along with surcharges and cess, further impacts the final payable amount. Accurate computation also involves accounting for pre-paid taxes like TDS, TCS, advance tax, and self-assessment tax, while adjusting for foreign tax credits or other applicable reliefs. A well-informed approach to these calculations not only ensures timely and correct payment but also helps in avoiding penalties and interest under the law.
In essence, awareness of the applicable income tax slabs, coupled with methodical tax computation, enables individuals to meet their obligations while optimizing savings within the framework of the law.