Decoding Indian Income Tax Slabs

Summary

• Per the interim Budget 2019, taxable income of up to Rs. 5 lakh qualifies for a rebate of Rs 12,500. You can claim this rebate under Section 87A of the income tax Act.
• Income tax slab rates for the financial year 2018-19 remain the same.
• Health and Education Cess increased to 4 percent from 3 percent in the previous year.
• A standard deduction of Rs. 40,000 can be claimed for transportation and/or medical reimbursements from Financial Year 2018-19 onward.
• The Finance Ministry—in the Union Budget for 2018—announced the insertion of Section 80TTB. This will govern the tax benefits for senior citizens. We have covered the revised tax benefits later in this article.
• For domestic companies, the turnover limit for 25 percent income tax bracket in India was increased to Rs. 250 crore from Rs. 50 crore in the previous financial year (F.Y. 2017-18).

Introduction to Income Tax Slabs

As citizens of India, you need to responsibly contribute to the country’s welfare and development. This constitutes paying a part of earnings or profits, in the form of taxes. Resident individuals pay what is called–Income Tax, which came into existence under the Income Tax Act of 1961. Any changes in income tax regulations or policies are announced in the annual Union Budget. The income tax rate isn’t the same for all individuals. Let’s understand the meaning of an income tax slab, and an overview of income tax slabs in India.

Based on your age, nature of occupation, and range of income, you will be grouped into a tax slab. The amount of tax (as a percentage of your income) you must pay, is determined by the tax slab you fall under. In India tax payers are categorised as below:

• Resident individuals.
• Non-resident individuals.
• Hindu Undivided Families.
• Associations of people (including BOIs and Co-operative Societies).
• Firms (including LLP).
• Domestic and foreign companies.

Here is the definition of each taxpayer type:

Individuals: Individuals refer to single human beings, who pay taxes on their income. Taxable income is from various sources including, salary, interest, property rent, and/or professional fees.

Hindu Undivided Family (HUF): A HUF is defined under the Hindu personal law. It refers to a family descended from common ancestors. A HUF also includes wives of these descendants, and unmarried daughters. It is considered as a single entity, or person, and the income is charged according to individual tax rates.

Company: For tax purposes, a company is considered a separate legal entity. It is distinct from its shareholders, and can be either domestic or international. A company’s tax is computed at a flat rate. It is different from an individual taxpayer’s rate.

Firm: A firm refers to a partnership between two or more individuals. The partners agree to share profits from activities of a firm. It is liable to pay tax at a flat rate on its income. One thing to note, a firm and its partners are separate entities when it comes to tax computation.

LLP: A Limited Liability Partnership is similar to a partnership firm. The key difference between the two, is defined by legal liability. In a partnership firm, all the partners bear equal liability, for any legal claims. These legal claims can be against the firm itself, or any of its partners. Under an LLP, a partner’s liability is limited to his/her contribution in the LLP. For tax computation, there’s no difference between a partnership and an LLP.

Association of Persons: An Association of Persons, refers to two or more persons, coming together for an income-producing activity. Definition of a ‘person’ can be a company, and not limited to individual human beings. While a partnership firm needs formal written contract to operate; an Association of Persons can operate without one.

Body of Individuals: Body of Individuals is operated by single human beings. It does not include partnership firms or Associations. Also, tax is not computed separately for a Body of Individuals. Instead, the individuals involved, pay tax on their income according to individual income tax slab rates.

Co-operative Societies: Co-operative societies refer to a group of people who come together for meeting different financial objectives. Some examples are housing co-operative societies and consumer co-operative societies. By definition, a Co-operative Society is similar to an Association of Persons. However, tax rates of these two entities are different. Also, Co-operative Societies have more tax concessions than an Association of Persons.

Income tax rates are subject to change, based on proposals in the Union Budget every year. India has a progressive tax system based on ‘ability to pay’–the tax percentage increases with any increment in income. So, those with less income pay less, or no tax under such a system. The higher your income, the higher will be your tax rate.

To understand how tax is computed, we need to understand what a Financial Year and an Assessment Year is. The explanation below, will clarify any doubts especially when filing income tax returns.

Difference Between Financial Year and Assessment Year

In India, income tax is computed from April to March. For income tax purposes, a financial year (F.Y.) is the 12-month period during which you earn income. For example, any income earned from 1st April 2018 to 31st March 2019, is considered income earned in F.Y. 2018-19.

The assessment year is the year after a financial year. It is the 12-month period during which your income earned, for a financial year, is taxed. For example, income earned in F.Y. 2018-19, will be assessed during 1st April 2019 and 31st March 2020. To understand it better here is a table of financial year with its corresponding assessment year.

The paragraphs below give you a table summary of current tax rates for all types of taxpayers. You will even see tax rates of previous years.

Income Tax Slab Rates for F.Y. 2018-19 (A.Y. 2019-20)

Income tax slabs in India for F.Y. 2018-19 remain the same as the previous year (F.Y. 2017-18). Some changes that have been incorporated in F.Y. 2018-19 are:

• The 3 percent Education Cess levied in F.Y. 18 has been increased to 4 percent and is called the Health and Education Cess.
• A standard deduction of Rs. 40,000 can be claimed for transportation and/or medical reimbursements from F.Y. 18.

Income tax slab rates for Individual Taxpayers & HUF (below 60 years of age) for F.Y. 2018-19 – Part I

*Surcharge levied should not exceed the amount of income tax payable.

Income tax slabs in India for Senior Citizens (Over 60 years but below 80) for F.Y. 2018-19 – Part II

For senior citizens, the income tax exemption limit is up to Rs. 3 lakh, as per the F.Y. 2018-19 tax slabs.

Income tax slabs in India for Super Senior Citizens (over 80 years) for F.Y. 2018-19 – Part III

For Super Senior Citizens, total income up to Rs. 5 lakh is tax exempt for F.Y. 2018-19.

Income tax slab rates for Domestic Companies for F.Y. 2018-19 – Part IV

In the Union Budget for F.Y. 2018-19, the turn-over limit for 25 percent income tax bracket in India was increased to Rs. 250 crore from Rs. 50 crore in the previous year.

Income Tax Slabs in India Rates for Previous Years

Income Tax Bracket in India Rates for F.Y. 2017-18 (A.Y. 2018-19)

Income Tax Slabs in India for Individual Tax Payers & HUF (below 60 years of age) for F.Y. 2017-18 – Part I

In F.Y. 2017-18, the tax rate for income between Rs. 2.5 lakh and Rs. 5 lakh was reduced to 5 percent from 10 percent in F.Y. 2016-17. An additional surcharge of 10 percent was levied for those with total income exceeding Rs. 50 lakh but less than Rs. 1 crore.

Income Tax Slabs for Senior Citizens (over 60 years but under 80) for F.Y. 2017-18 – Part II

Income Tax Slabs for Super Senior Citizens (above 80 years of age) for F.Y. 2017-18 – Part III

Income Tax Slabs in India for Domestic Companies for F.Y. 2017-18 – Part IV

Income Tax Slabs for Individual Taxpayers & HUF (under 60 years of age) for F.Y. 2016-17 – Part I

Income Tax Slabs for Senior Citizens (over 60 but below 80 years) for F.Y. 2016-17 – Part II

IT Slabs for Domestic Companies for F.Y. 2016-17 – Part IV

Income Tax Slabs for Senior Citizens (over 80 years of age) for F.Y. 2016-17 – Part III

FAQs about Income Tax Slabs

WHAT IS A FINANCIAL YEAR?

It is a period of 12 months that is considered for all tax and accounting purposes. In many countries, the financial year differs from the calendar year. For example, In India, the financial year runs from 1st April of the current calendar year to 31st March of the following calendar year. So, Financial Year 2017-2018 would run from 1st April 2017 to 31st March 2018.

WHAT IS AN ASSESSMENT YEAR?

An assessment year follows the financial year beginning in April. After paying the taxes in the fiscal year, you file your tax returns in the assessment year, and they are examined for refund claims and other dues in the same assessment year. For example, for the income earned in Financial Year 2017-18, the Assessment year would be called A.Y. 2018-2019 beginning April 1st, 2018.

WHAT IS A CESS?

Cess is a temporary tax levied by the government to raise money from the taxpayers for specific policies. For example, taxpayers earning above Rs. 2.5 lakh per annum have to pay an Education and Health Cess of 4 percent. For super senior citizens, the Cess applies for income above Rs. 5 lakh.

WHAT IS A SURCHARGE?

It is the charges you pay over and above your current income tax bracket in India to the central government. The purpose of imposing a surcharge is to make the taxation progressive, that is, the wealthy individuals should pay more than those with lower incomes. Individuals with an income exceeding Rs. 50 lakh but less than Rs. 1 crore currently pay a surcharge of 10 percent and those exceeding Rs 1 crore pay 15 percent on the net income tax.

Tax benefits for senior citizens

Finance Minister Arun Jaitley announced a few key changes in the tax benefits for senior and super senior taxpayers in the 2018 Union Budget for F.Y. 2018-19.

1. Increase in the tax exemption limit

Section 80TTB was inserted to govern the tax benefits awarded to senior citizens. Under this, the exemption limit on the interest income earned on bank savings, FD and recurring deposits and post office deposits was increased to the tune of Rs. 50,000 from the earlier limit of Rs. 10,000. Interest income above Rs. 50,000 will be taxed according to applicable tax slabs.

2. No TDS on interest income

No TDS will be deducted for the income earned from the above sources for senior citizens by the bank. Thus, senior citizens will not have to furnish Form 15H to stop TDS from being deducted, if their total income is not taxable.

3. Higher deduction for health insurance premium

Tax deduction on health insurance premium increased to Rs. 50,000 from Rs. 30,000 earlier. The benefit will also apply to the taxpayer paying the premium on behalf of dependents who are senior citizens.

4. Tax deduction for medical expenditure increased to Rs. 1 Lakh

Under section 80DDB, the ceiling for deduction on medical expenditure for specific illnesses has been increased to Rs 1 lakh against the previous limits of Rs. 60,000 (for senior citizens) and Rs. 80,000 (for super senior citizens). The critical illnesses include neurological disorders, malignant cancer, AIDS, chronic renal failure, and haematological disorders. The prescriptions should be issued by qualified MDs and field experts. If the patient took the treatment in a government-run hospital, then the prescription from a full-time specialist will do. Also, this exemption is over and above the deduction of Rs. 1.5 lakh under Section 80C.

5. Rs. 40,000 standard deduction on pension income

Senior citizens can claim a standard deduction of Rs. 40,000 on their pension income.When you become eligible to pay income tax, it is important to be current with any changes. You need to follow the annual Union Budget, this helps not only in filing your returns, but also planning investments.