India Personal Taxation

Personal Tax, popularly known as Income tax in India is an annual tax on income of individuals. The Indian Income Tax Act 1961 (Section 4) provides that in respect of the total income of the Previous Year of every person, income tax shall be charged for the corresponding Assessment Year at the rates laid down by the Finance Act (Annual Budget) for that Assessment Year. The authority to levy and collect tax on incomes of individuals lies with the Central Government.

Key Considerations

  • Tax treatment depends on the residence status
  • Residents are taxed on both their local and foreign sourced income such as dividends, interests, rents etc earned overseas. India has Double Taxation Avoidance Agreement with over 65 countries, under this an assesse can enjoy some relief on taxes payable on foreign sourced income
  • Foreign sourced income of Non-residents are not charged unless received in India
  • India gives unilateral tax credit to its residents in respect of foreign income even if there is no DTAA between India and the country concerned.
  • Capital gains are taxed in India Short-term capital gains are taxable at 30% and long-term capital gains at 20%. Subject to certain conditions, capital gains are exempted from tax if the sale proceeds are reinvested.
  • Tax Deduction is allowed when investments are made in certain specified tax saving instruments.
  • Dividends from Indian companies are not subjected to tax on the hands of shareholders and dividends can be repatriated , if dividend tax is paid by the Indian company
  • Withholding tax is applicable on payments such as dividends, interests, rents, fees paid to Non-Residents.

Personal Income Tax Rate

Individuals are taxed on a progressive basis under three slabs. The slabs for individual taxpayers for the year 2011-12 is as below

Slab of Income (Rs) Rate of Tax (%)
Upto 1,80,000 Nil
1,80,000 – 5,00,000 10
5,00,001-8,00,000 20
8,00,001 and above 30
  • Resident woman below the age of 60 years, the basic exemption limit is Rs 190,000
  • For senior citizens, individual of the age of 60 years or above but below 80 years, the basic exemption limit is Rs 250,000.
  • Individual of age of 80 years or above, the basic exemption limit is Rs 500,000

Note: No surcharge on income tax is now applicable in case of individual/Hindu Undivided Family(HUF). However, Education cess and higher education cess is leviable @ 2% and 1% respectively on the tax amount.

Residence & Scope of Taxation

Taxation of individuals is determined on the basis of his residential status in India. For tax purposes, an individual may be resident, nonresident or not ordinarily resident.

An Individual is said to be resident in India in any Previous Year if

  • he is in India for at least 182 days in that year or
  • has been in India for at least 365 days during the 4 years preceding that year in which he is in India for a period of at least 60 days. However, the period of 60 days referred above is increased to 182 days in case of Indian citizens residing abroad or leaving India for employment abroad.

All income, both from domestic and foreign sources, of the Previous Year, accruing or arising or received by him including incomes deemed to have accrued or arisen is charged.

Non- Resident
A person who does not meet the above criteria is a nonresident. All income accruing, arising or deemed to have accrued or arisen or received in India is subjected to tax. This excludes foreign income.

Resident but not Ordinarily Resident (RNOR)
A resident, who was not present in India for 730 days during the preceding seven years or who was non-resident in nine out of ten preceding years, is treated as not ordinarily resident.

All Income, from Indian sources, accruing or arising or deemed to have accrued or arisen or received in India is subjected to tax. Moreover, all income earned outside India will also be included if the same is derived from a business or profession controlled or set up in India.

Special Provision for Non-resident Indians (NRIs)
NRIs are not required to file a tax return if their income consists of only interest and dividends, provided taxes due on such income are deducted at source. It is possible for non-resident Indians to avail of these special provisions even after becoming residents by following certain procedures laid down by the Income Tax Act.

Special Exemptions for Expatriates Working in India
Irrespective of the residential status of an expatriate employee, the amount received by him as salary for services rendered in India shall be liable to tax in India being income accruing or arising in India, regardless of the place where the salary is actually received. However, there are certain exceptions to the rule as below:-

  • Remuneration of an employee of a foreign enterprise is exempt from tax if his stay in India is less than 90 days in aggregate during the financial year
  • Remuneration received by a foreign expatriate as an official of an embassy or high commission or consulate or trade representative of a foreign state is exempt on reciprocal basis
  • Remuneration from employment on a foreign ship provided the stay of the employee does not exceed 90 days in the financial year
  • Training stipends received from foreign government
  • Remuneration under co-operative technical assistance programme or technical assistance grants agreements

Note: An expatriate before leaving the territory of India is required to obtain a tax clearance certificate from a competent authority stating that he does not have any outstanding tax liability. Such a certificate is necessary in case the continuous presence in India exceeds 120 days.

Withholding Tax

Current rates for withholding tax for payment to non-residents are as follows

Interest 20%
Dividends (Domestic Companies) Nil
Royalties 20%
Technical services 10%
Any other services 30% of the income

Note: Applicable to Non-resident belonging to countries that are not party to DTAA with India. Rates will be competitive for DTAA partner countries.

Tax Computation

Gross Total Income
For the purpose of tax computation, total gross income is the aggregate of the income from various sources, after excluding qualifying exemptions, grouped under the following heads:

  • Salaries
  • Income from house/property
  • Capital gains
  • Profits and gains of business or profession
  • Income from other sources such as foreign  dividends, interests etc.,

Allowable Deductions
The Income Tax Act provides that on determination of the gross total income of an assessee, certain deductions may be allowed, to arrive at the total income chargeable. These deductions are detailed in chapter VIA of the Income Tax Act, include the following

  • Various Investments
  • Premium Paid for Annuity Plan
  • Investment in Long Term Infrastructure Bonds
  • Contribution to Pension Account
  • Medical Insurance expenses
  • Rehabilitation of Handicapped Dependent Relative expenses
  • Interest on Loan for Higher Studies
  • Various Donations
  • House Rent expenses
  • Medical Expenditure on Self or Dependent Relative

Tax payable is calculated on the total income chargeable

Rebates & Relief
The total income of an assessee is determined after deductions from the gross total income. It is on this total chargeable income, the tax payable is computed at the rates specified. The Income Tax Act further provides for rebate, in respect of certain qualifying investment expenses, from the tax payable. It should be noted that while the deduction reduces the gross total income, rebate is a reduction from the tax payable yielding the actual tax amount.

Payment of Tax

After calculating the income tax, tax can be paid through Online deposit or through nationalized banks.

Advance Tax Payment
Liability for payment of advance tax arises where the amount of tax payable by the assessee for the year is Rs. 10,000 or more. It can be paid in installments in the previous year. Deferred payment of tax will attract penal interest.

Filing of Income Tax Returns

Section 139(1) of the Income-tax Act, 1961 provides that every person whose total income during the Previous Year exceeded the maximum amount not chargeable to tax shall furnish a return of income.

Individuals are required to file income returns by 31 July of the Assessment Year. Where the accounts of the assesse must be audited, the due date for filing of return is 30 September of the Assessment year.

The Assessment Year is the year in which the salary earned in the Previous Year is taxable. Any financial year begins from 1st of April of every year and ends on 31st of March of the subsequent year.

The consequences of late submission range from penal interest, penalty, deprival of privilege for certain deduction, and in case of losses reported few losses cannot be carried forward.

Forms for Filing Personal Income Tax Returns

ITR-1 For Indian individuals Income Tax Return
ITR-2 For Individuals and HUfs not having income from business or profession
ITR-3 For Individuals/HUFs being partners in firms and not carrying out business or profession under proprietorship
ITR-4 For Individuals and HUFs having income from Proprietary business or profession

Documents Needed

  • Detailed calculation of taxable income and amount of tax payable / refundable.
  • Form No. 16 / 16A (original)- form from employer and form from payers who have deducted tax
  • Counterfoil of all the tax payments made during the year.
  • Copy of documents concerning sale of investments and properties.
  • Copy of bank statements.
  • Copy of proof for all the deductions and exemptions claimed in the return of income
  • PAN Card

The Forms can be submitted in the following manner:

(i)  Paper form

(ii) e-filing –

(iii) bar-coded paper return – a new initiative to speed up the return process. One has to use the return preparation software provided on efiling website to generate bar coded returns. The filing process is similar to that of a paper return.

An existing assessee must file his Income-Tax Return with the Assessing Officer who had previously assessed him or with the Assessing Officer where his case stands transferred. A new assessee should file the Return with the Assessing Officer having territorial jurisdiction over the area where he resides or his principal place of business is situated or with the Assessing Officer having special jurisdiction over specific assessees or classes of income.

When submitted at the counter in the concerned Range/Circle or sent by registered post, one copy of the acknowledgement form will to be returned by the official at the counter duly signed, stamped, numbered and dated confirming receipt. The acknowledgement is the confirmation of assessment and must be retained.

Whether it is electronic filing or physical filing, under the new procedure, individuals do not have to attach any documents or enclosures with the return of income. However the relevant documents must be preserved and produced if called for verification by the authorities.

If the Assessing Officer considers that it is necessary to ensure that the assessee has not understated his income, he shall serve a notice on the assessee and after obtaining required information, complete the assessment.

After assessment if there is excess tax paid by the assessee refunds will be made. If the refund due to the assessee is more than 10% of the tax payable by him, he shall be entitled to receive simple interest thereon at rate of 0.5% per month.

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