The Indian income tax system works on a progressive structure, where different income ranges are taxed at different rates. This ensures that individuals with higher incomes contribute more to government revenue while those with lower incomes enjoy relief in the form of basic exemptions and rebates. For the Assessment Year 2021-22, taxpayers had the choice between the old tax regime with various deductions and exemptions, and the new simplified regime introduced under section 115BAC, which offers lower rates but removes most exemptions. Understanding these structures is important for individuals and Hindu Undivided Families (HUFs) to make informed financial decisions.
Old Tax Regime for Individuals Below 60 Years
For resident and non-resident individuals who are below 60 years of age, the old regime provided a standard slab system. The basic exemption limit was set at 2.5 lakh. Income up to this limit was not subject to any tax. Income between 2.5 lakh and 5 lakh was taxed at 5 percent, while the next slab of 5 lakh to 10 lakh attracted a tax rate of 20 percent. Income above 10 lakh was taxed at 30 percent. This progressive structure ensured that the burden increased only as income rose.
An example makes this clear. If a person earned 8 lakh in the financial year, the tax would be calculated as nil on the first 2.5 lakh, 12,500 on the next 2.5 lakh, and 60,000 on the 3 lakh falling into the 20 percent bracket. The total liability before cess and surcharge would thus be 72,500. Deductions under sections such as 80C, 80D, and 24(b) could further reduce this liability in the old regime.
Old Tax Regime for Resident Senior Citizens
Individuals who were residents of India and aged 60 years or more but less than 80 years enjoyed a higher basic exemption limit. For them, the first 3 lakh of income was completely exempt. The slab between 3 lakh and 5 lakh attracted a 5 percent rate, the slab between 5 lakh and 10 lakh attracted a 20 percent rate, and income above 10 lakh was taxed at 30 percent.
This relaxation acknowledged the financial needs of senior citizens and their reduced earning potential. For example, a resident senior citizen earning 6 lakh would pay no tax on the first 3 lakh, 10,000 on the next 2 lakh, and 20,000 on the remaining 1 lakh. The total liability before cess and surcharge would be 30,000, which is lower than what a younger individual with the same income would pay under identical circumstances.
Old Tax Regime for Resident Super Senior Citizens
For residents aged 80 years and above, the exemption was even higher. Income up to 5 lakh was completely exempt. Income from 5 lakh to 10 lakh was taxed at 20 percent, and income above 10 lakh at 30 percent. This special relaxation acknowledged the financial vulnerabilities faced by elderly individuals.
For instance, if a super senior citizen had an annual income of 9 lakh, no tax would be levied on the first 5 lakh. On the remaining 4 lakh, the tax rate of 20 percent would apply, leading to a tax liability of 80,000 before cess and surcharge. This was a substantial relief when compared to younger taxpayers.
Rebate Under Section 87A
The rebate under section 87A played an important role in providing relief to taxpayers with modest incomes. A resident individual with a total income not exceeding 5 lakh was entitled to a rebate equal to the full amount of income tax or 12,500, whichever was lower. This effectively meant that individuals earning up to 5 lakh paid zero tax under the old regime after availing the rebate. This provision was especially helpful to middle-class families and first-time earners.
Surcharge Under the Old Regime
In addition to the slab rates, high-income earners had to pay a surcharge on the income tax. If the total income exceeded 50 lakh, a surcharge of 10 percent of income tax was levied. For incomes above 1 crore, the surcharge increased to 15 percent. If the income crossed 2 crore, the surcharge was 25 percent, and for incomes above 5 crore, it reached 37 percent. This ensured that individuals with very high earnings contributed a greater share to the exchequer.
Health and Education Cess
Over and above the slab rates and surcharge, a 4 percent health and education cess was levied on the total income tax payable. This cess was specifically allocated to funding health and educational initiatives in the country. For example, if the total tax liability including surcharge came to 1 lakh, the cess would be 4,000, taking the total liability to 1,04,000.
Taxation of Hindu Undivided Families, AOP, BOI and Artificial Juridical Persons
Under the old regime, Hindu Undivided Families, Associations of Persons, Bodies of Individuals, and other artificial juridical persons were subject to the same slab rates as individuals below 60 years. This meant that the exemption limit was 2.5 lakh, followed by the 5 percent, 20 percent, and 30 percent slabs. The surcharge and cess provisions were identical as well.
This system ensured parity in taxation for entities that often function as family units or collective groups. For example, an HUF earning 12 lakh would be taxed just like an individual below 60, with liability distributed across slabs and subject to surcharge and cess wherever applicable.
New Tax Regime for Individuals and HUFs
The Finance Act 2020 introduced an optional regime under section 115BAC, effective from Assessment Year 2021-22. This regime offered lower slab rates but required individuals and HUFs to forego most exemptions and deductions such as those under section 80C, house rent allowance, leave travel concession, and others.
The slabs were structured as follows: income up to 2.5 lakh was exempt. From 2.5 lakh to 5 lakh, the rate was 5 percent. Income between 5 lakh and 7.5 lakh was taxed at 10 percent. Between 7.5 lakh and 10 lakh, the rate was 15 percent. Between 10 lakh and 12.5 lakh, the rate was 20 percent. Between 12.5 lakh and 15 lakh, the rate was 25 percent. Income above 15 lakh was taxed at 30 percent.
This structure offered a gradual increase in rates with smaller jumps, giving relief to individuals in the middle-income categories. For example, someone earning 9 lakh under the new regime would pay nil on the first 2.5 lakh, 12,500 on the next 2.5 lakh, 25,000 on the next 2.5 lakh, and 22,500 on the final 1.5 lakh, totaling 60,000 before cess. This was lower than the liability under the old regime for the same income, provided deductions were not significant.
Surcharge and Cess in the New Regime
The surcharge and cess under the new regime were the same as in the old regime. The surcharge increased progressively from 10 percent for incomes above 50 lakh to 37 percent for incomes above 5 crore. The health and education cess of 4 percent continued to apply on the total tax plus surcharge. This parity ensured that the only difference between the regimes was in the slab structure and the availability of exemptions.
Choosing Between Old and New Regimes
The choice between the old and new regimes depended largely on the individual’s income level and the deductions they could claim. For individuals with significant deductions under section 80C, health insurance under section 80D, or home loan interest under section 24(b), the old regime often remained beneficial. On the other hand, individuals without such deductions or with relatively straightforward salary structures found the new regime more attractive due to its lower rates.
For example, an individual earning 10 lakh with no major deductions might prefer the new regime, as the liability could be lower. However, someone with investments under section 80C, insurance premiums, and housing loan interest reducing their taxable income by 2 lakh or more might benefit more under the old regime.
Taxation of Partnership Firms and LLPs
Partnership firms, including Limited Liability Partnerships, were subject to a flat tax rate of 30 percent on their total income. Unlike individuals and HUFs, firms did not enjoy slab-based progressive rates. This meant that whether the profit was 5 lakh or 50 lakh, the applicable tax rate was the same. The logic behind this was the recognition of firms as distinct taxable entities separate from their partners.
A surcharge of 12 percent applied if the total income exceeded 1 crore. Over and above this, a 4 percent health and education cess was added to the tax plus surcharge. For example, if a partnership firm earned 1.5 crore, the base tax would be 45 lakh at 30 percent. A surcharge of 12 percent on this amount, equal to 5.4 lakh, would be added. The subtotal of 50.4 lakh would then attract a 4 percent cess of 2.016 lakh, bringing the final liability to 52.416 lakh.
This system ensured predictability for firms while also discouraging income concentration above 1 crore through surcharge. Importantly, while the firm paid tax at the entity level, the share of profits distributed to partners was exempt in their hands to avoid double taxation. However, any remuneration or interest paid to partners was taxable in the hands of partners and deductible for the firm, subject to prescribed limits.
Taxation of Domestic Companies
Domestic companies were taxed under multiple options depending on their size, turnover, and the conditions they opted for. Traditionally, companies paid a tax rate of 30 percent, but several concessions were introduced in recent years to enhance global competitiveness and stimulate the manufacturing sector.
General Tax Rate for Domestic Companies
For domestic companies with a turnover not exceeding 400 crore in the financial year 2017-18, the tax rate was reduced to 25 percent. This benefit recognized the need to support small and medium enterprises and encourage reinvestment. Other domestic companies continued to be taxed at 30 percent unless they opted for special provisions.
Section 115BA
Certain domestic companies engaged in manufacturing activities and meeting prescribed conditions could opt for taxation under section 115BA at 25 percent. This was subject to restrictions on claiming certain deductions and incentives. The provision was intended to provide clarity and encourage investment in manufacturing while simplifying compliance.
Section 115BAA
A major reform came with the introduction of section 115BAA, allowing domestic companies to pay tax at 22 percent if they forwent specified exemptions and deductions. This option was available without any turnover restrictions and was designed to create a globally competitive tax environment. Companies opting for this regime were not subject to Minimum Alternate Tax (MAT).
Section 115BAB
New domestic manufacturing companies incorporated on or after 1 October 2019 and commencing manufacturing before 31 March 2023 could opt for a concessional tax rate of 15 percent under section 115BAB. Like section 115BAA, they had to forego various deductions and incentives. This was one of the lowest corporate tax rates globally and aimed to position India as a preferred manufacturing hub.
Minimum Alternate Tax
Companies not opting for section 115BAA or section 115BAB were subject to Minimum Alternate Tax at 15 percent of book profits, ensuring that even companies with high accounting profits but low taxable income contributed to the tax base. This safeguard prevented aggressive tax planning through excessive use of exemptions.
Surcharge for Domestic Companies
The surcharge for domestic companies depended on income levels. If the income was between 1 crore and 10 crore, a surcharge of 7 percent of the tax was levied. For incomes above 10 crore, the surcharge rose to 12 percent. This surcharge, like in the case of individuals and firms, was applied on the tax amount before cess. The cess of 4 percent was levied on the aggregate of tax plus surcharge.
For instance, a company with taxable income of 12 crore under the regular 30 percent rate would have a base tax of 3.6 crore. A surcharge of 12 percent amounting to 43.2 lakh would be added, making the subtotal 4.032 crore. A 4 percent cess on this subtotal, equal to 16.128 lakh, would raise the total liability to approximately 4.048 crore.
Taxation of Foreign Companies
Foreign companies were subject to a higher rate of 40 percent on their income earned in India. This included income from business connections, permanent establishments, or sources situated in India. The surcharge for foreign companies was 2 percent if the income ranged between 1 crore and 10 crore, and 5 percent if the income exceeded 10 crore. The 4 percent health and education cess also applied on the total of tax and surcharge.
For example, a foreign company with an income of 15 crore in India would face a tax of 6 crore at 40 percent. A surcharge of 5 percent amounting to 30 lakh would be added. The subtotal of 6.3 crore would then attract a cess of 25.2 lakh, leading to a final liability of 6.3252 crore. This higher rate reflected India’s policy of taxing foreign entities more strictly while encouraging domestic production and investment.
Special Provisions for Dividend Taxation
For Assessment Year 2021-22, dividend distribution tax was abolished, and dividends became taxable in the hands of shareholders at applicable slab or corporate rates. Companies were required to withhold tax at source on dividends paid to residents and non-residents. This shifted the tax burden from companies to investors and aligned India with global practices.
Taxation of Co-operative Societies
Co-operative societies occupied a unique place in the Indian economy, serving as vehicles for collective welfare and community-based initiatives. The old regime prescribed progressive slab rates for these entities. Income up to 10,000 was taxed at 10 percent. Income between 10,001 and 20,000 was taxed at 20 percent. Income above 20,000 was taxed at 30 percent.
A surcharge of 12 percent applied if the total income exceeded 1 crore, and the 4 percent health and education cess was applicable on the aggregate of tax plus surcharge.
For instance, a co-operative society earning 25 lakh would face tax as follows: 1,000 on the first 10,000, 2,000 on the next 10,000, and 7.47 lakh at 30 percent on the remaining 24.98 lakh, leading to a total liability of 7.473 lakh before cess. The cess of 29,892 would make the final liability 7.502 lakh.
Section 115BAD for Co-operative Societies
To modernize co-operative taxation, a new optional regime was introduced under section 115BAD. Societies opting for this provision were taxed at a flat rate of 22 percent without claiming specified deductions and exemptions. A surcharge of 10 percent applied irrespective of income levels, followed by a 4 percent health and education cess.
This provision was designed to align co-operative taxation with corporate reforms like section 115BAA and to incentivize transparency and simplicity. For example, a society earning 50 lakh under section 115BAD would pay 11 lakh at 22 percent. A surcharge of 1.1 lakh would be added, followed by cess of 48,400, leading to a total liability of 12.2484 lakh.
Local Authorities
Local authorities such as municipalities, panchayats, and other civic bodies were generally taxed at 30 percent. The surcharge and cess provisions applicable to companies also extended to them, ensuring uniformity. Since their primary role was governance and welfare, many forms of income were exempt, but taxable income was subject to the standard corporate framework.
Taxation of Local Authorities
Local authorities include municipalities, panchayats, municipal corporations, and other similar entities that function as administrative units under state or central law. They earn revenue through property tax, fees, fines, and sometimes commercial activities. While much of their income from governance-related functions remains exempt, income from certain activities, such as renting out properties, providing specific services, or investments, falls within the ambit of taxation.
For AY 2021-22, local authorities were generally taxed at a flat rate of 30 percent on their taxable income. Unlike individuals or co-operative societies, no slab-based progressive rate applied. This flat rate system created consistency and aligned their taxation framework with that of domestic companies.
Surcharge on Local Authorities
Like firms and companies, surcharge was applicable on local authorities based on their income thresholds. If the income ranged between 1 crore and 10 crore, a surcharge of 7 percent was levied. If the income exceeded 10 crore, the surcharge increased to 12 percent. This provision ensured that large municipal or civic authorities with substantial commercial income contributed a fairer share to national revenue.
Health and Education Cess
A health and education cess of 4 percent was levied on the total of tax plus surcharge. This cess was earmarked for funding health and education projects across the country. Even for local authorities, which were grassroots governance bodies, the cess was compulsory, creating uniformity across taxpayers.
Importance of Surcharge in the Tax Framework
Surcharge, in essence, is an additional tax on higher-income taxpayers. It was introduced to create progressivity in the system and ensure that wealthier entities or individuals contributed a higher share to the national exchequer. For AY 2021-22, surcharge rates were carefully structured across categories.
For individuals under the old regime, surcharge began at 10 percent once income exceeded 50 lakh. It increased in slabs up to 37 percent for income beyond 5 crore. This steep surcharge targeted ultra-high-net-worth individuals. For firms and companies, surcharge rates were capped at 12 percent, while co-operative societies under section 115BAD faced a 10 percent surcharge uniformly.
The logic behind lower surcharge rates for firms and companies compared to individuals was to avoid discouraging entrepreneurship and corporate growth. At the same time, the higher surcharge for super-rich individuals reflected equity considerations.
Health and Education Cess Across Entities
The 4 percent health and education cess was uniform for all taxpayers, whether individual, firm, company, or co-operative society. This cess replaced earlier levies like the education cess and secondary and higher education cess. The proceeds were specifically allocated to health and education sectors, making it a targeted levy.
For instance, an individual with income of 12 lakh under the old regime would pay tax of 1.7 lakh (25,000 at 5 percent, 1 lakh at 20 percent, and 45,000 at 30 percent). The cess of 6,800 would then be added, making the final liability 1.768 lakh. This uniform approach simplified computations and ensured that all taxpayers, regardless of size, contributed toward essential public services.
Interplay Between Old and New Regimes
The Assessment Year 2021-22 marked the introduction of the new regime under section 115BAC for individuals and HUFs. This created dual pathways for computing liability. The old regime allowed deductions under sections like 80C, 80D, and 24(b), while the new regime offered lower slab rates but no deductions. The decision to opt between the two regimes was based on income structure, investments, and deductions available.
Surcharge and cess applied identically under both regimes, which meant that while the base tax differed, the final liability computation followed the same pattern. This neutrality in surcharge and cess application reduced confusion and allowed for easier comparisons between regimes.
Comparative Analysis of Taxation Across Entities
Individuals and HUFs
Individuals had the most complex structure due to age-based slabs, dual regimes, and varying surcharge rates. The rebate under section 87A provided relief for incomes up to 5 lakh, ensuring low-income taxpayers were protected. For higher incomes, surcharges created steep progressivity.
Firms and LLPs
Partnership firms and LLPs faced a flat rate of 30 percent, with surcharge at 12 percent for incomes above 1 crore. Their system was simpler, with no slab rates or age-based differences. Profit distribution to partners was exempt from tax in their hands, though remuneration and interest remained taxable.
Companies
Domestic companies had multiple options, ranging from 15 percent under section 115BAB for new manufacturing units to 30 percent for traditional structures. The surcharge ranged from 7 to 12 percent. Foreign companies, on the other hand, faced 40 percent base tax with surcharge up to 5 percent. This made corporate taxation diverse and policy-driven, encouraging specific sectors like manufacturing.
Co-operative Societies
Co-operative societies had slab rates under the old regime but could opt for a 22 percent concessional rate under section 115BAD. Their surcharge at 12 percent in the old regime and 10 percent under the new regime balanced progressivity with incentives.
Local Authorities
Local authorities were aligned with companies at a flat 30 percent, ensuring uniformity. Surcharge and cess applied in the same manner, creating consistency in administration.
Illustrative Tax Scenarios
To better understand the mechanics, let us consider some examples.
Example 1: Senior Citizen under Old Regime
A resident senior citizen aged 65 with taxable income of 8 lakh would pay nil on the first 3 lakh, 10,000 at 5 percent on the next 2 lakh, and 60,000 at 20 percent on the remaining 3 lakh. The total tax would be 70,000. Adding cess of 2,800 would give a final liability of 72,800.
Example 2: Domestic Company under Section 115BAA
A domestic company with income of 50 crore opting for section 115BAA would pay 22 percent, equaling 11 crore. A surcharge of 10 percent would apply, making it 12.1 crore. Adding 4 percent cess of 48.4 lakh would raise the total liability to 12.584 crore.
Example 3: Partnership Firm
A partnership firm with income of 2 crore would pay 60 lakh at 30 percent. A surcharge of 12 percent, equal to 7.2 lakh, would be added. The subtotal of 67.2 lakh would then attract a 4 percent cess of 2.688 lakh, giving a total liability of 69.888 lakh.
Example 4: Co-operative Society under Section 115BAD
A co-operative society with income of 10 crore opting for section 115BAD would pay 2.2 crore at 22 percent. A surcharge of 22 lakh would be added. The subtotal of 2.42 crore would then attract a cess of 9.68 lakh, making the final liability 2.42968 crore.
Example 5: Local Authority
A municipal authority with taxable income of 15 crore would pay 4.5 crore at 30 percent. A surcharge of 12 percent, equal to 54 lakh, would be added. The subtotal of 5.04 crore would attract a cess of 20.16 lakh, giving a final liability of 5.0616 crore.
Policy Objectives Behind Different Tax Rates
The varied structure of taxation across entities in AY 2021-22 was not arbitrary. Each rate and provision reflected a policy goal.
For individuals, progressive slabs ensured equity. For firms, simplicity and predictability were prioritized. For companies, concessional rates aimed at making India a competitive investment destination. For co-operative societies, dual regimes allowed flexibility. For local authorities, alignment with company rates maintained consistency. The surcharge targeted higher incomes, and the cess provided dedicated funding for health and education.
Evolution of Surcharge and Cess
Historically, surcharge and cess were introduced as temporary levies but eventually became permanent features. Initially, cess was earmarked only for education, but later health was included to meet growing needs. Surcharge rates have been revised frequently, especially for individuals, to reflect fiscal policy shifts and income distribution goals.
By AY 2021-22, the structure had evolved into a multi-layered system combining base tax, surcharge, and cess across entities. This evolution showed the balance between revenue collection, equity, and economic growth.
Conclusion
The framework of income tax slab rates for the Assessment Year 2021-22 represented one of the most structured and multi-dimensional approaches to taxation in India. By balancing progressive slabs for individuals, flat rates for business entities, concessional regimes for companies and co-operative societies, and uniform provisions for local authorities, the system aimed to accommodate a wide spectrum of taxpayers while ensuring fairness and efficiency.
For individuals and Hindu Undivided Families, the introduction of the new tax regime under section 115BAC provided a choice between traditional exemptions and simplified lower rates. This flexibility empowered taxpayers to decide based on their personal financial profiles. Senior citizens and super senior citizens enjoyed higher exemption limits, recognizing their specific needs, while rebates under section 87A offered relief for low-income taxpayers.
For firms and limited liability partnerships, the straightforward 30 percent rate with surcharge and cess ensured predictability, while companies were given a mix of concessional options to promote manufacturing and reduce the effective tax burden in competitive sectors. Co-operative societies too gained from the dual framework of slab-based rates and the new section 115BAD flat rate, reflecting the government’s intent to encourage community-driven enterprises. Local authorities, aligned with company taxation, maintained consistency in the structure, ensuring grassroots governance entities also contributed their share.
Surcharge and cess added critical dimensions to the tax system. Surcharge created higher contributions from wealthier individuals and large entities, ensuring progressivity in the structure. The health and education cess was uniform, highlighting the importance of targeted funding for essential national priorities. Together, they reinforced both equity and fiscal responsibility.
Overall, the tax system for AY 2021-22 was a careful blend of progressivity, flexibility, and sectoral incentives. It reflected not only the government’s revenue requirements but also its broader socio-economic goals, from supporting individuals at lower income levels to incentivizing corporate competitiveness and funding national development initiatives. The diverse provisions across different categories of taxpayers highlighted the complexity of balancing fairness, simplicity, and policy objectives in a large and diverse economy like India.