The government of India directs the imposing of taxes on the income of individuals, companies, trusts, cooperative societies and HUFs (Hindu Undivided Families) in the country. This tax, known as the income tax in India, is levied by the Indian Income Tax Act introduced in the year 1961. According to the report of the Indian Income Tax Department, there were more than 35 million tax payers in the country in the financial year 2010 – 2011. The department of Income Tax of India is under the control and management of the Central Board for Direct Taxes (CBDT) which in turn is under the ministry of finance of the Government of India.
Income from Salary in India
According to the directives of the ministry of finance in India, all income that is received by an employee as salary from his/her employer is taxable following the rate assessed by the union budget released at the end of every financial year. Both revenue and capital incomes are chargeable on tax slabs brought out by the Union Budget Finance Act. The government of India notifies that an employer must compulsorily deduct tax from the income of an employee if his annual salary exceeds the exemption limit mentioned by the Income Tax Department. This tax is known as the TDS (Tax Deducted at Source).
Before the payment of income tax, an employee is given the Form 16 by his/her employer. The net income of the employee and the tax deductions on that income is mentioned in the Form 16. The other deductions provided from the salary of the employee are also mentioned in Form 16. The income tax is generally the lowest of all deductions from the salary of a working individual in India. Some other deductions are mentioned below:
Medical reimbursement – Amounts up to INR 15,000 annually. It may be tax free if medical bills are provided in support.
Transport allowance – The amount of up to INR 96,000 per year is tax free. No bill is to be submitted in support.
Tax exemption is obtained in the case of conveyance allowance.
Professional tax is imposed on employees based on their gross income. The professional taxes are imposed by the state government and are generally exempted from the income tax of an employee.
The house rent allowance is also deducted from net income tax payable every financial year.
Deductions on the Income Tax
Certain payments or investments are exempted from income tax deductions in India. They are categorized into different sections like:
Section 80C Deductions – Investments like Public Provident Fund, Life Insurance, National Pension Scheme, Equity Linked Savings Schemes, Fixed Deposits, tuition fees for children and housing loans fall under this section of the Income Tax Act. An amount up to INR 1,00,000 is deductible under this section.
Section 80CCF (investment in Infrastructure Bonds) – This deduction was introduced from April 2011. Under the section, a maximum investment of INR 20,000 in infrastructure bonds may be deducted from total income tax in addition to the total deductions allowed from Section 80C.
Section 80D (investment in Medical Insurance Premiums) – A total deduction of INR 35,000 is allowed through investments in health insurance like mediclaim policies. This investment includes payment of premium towards the health schemes for spouse, children and dependant parents, and also from any cheque paid by a proprietor firm. This deduction from income tax is applicable after all exemptions obtained from Section 80C.