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Published On: Wed, Dec 26th, 2018

Tax Brackets: Rates, definitions and how to calculate

If you are an individual with a source of income in India, you must have surely heard of income tax.

The income tax levied by the government of India on individuals and companies, accounts for the largest source of the government’s credit input. It means that a large part of whatever the government is spending on (e.g. Infrastructure, defense and other public concerns) comes from the income tax paid by you!

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Income tax brackets or slabs are the parameters that help you to decide whether your income is taxable or not. These income tax brackets are formed according to the Income Tax Act 1961 and are applicable all over India.

So how do you know if your income is chargeable or not?

Read on to know more!

How is the income tax imposed?

The tax is imposed by the Government of India.  Income tax brackets and rates are imposed on the annual income of an individual or business.

Since the method of income for the people of India is quite diverse, it is not fair to impose the same rate of tax for all the income groups. That is why there are specific income tax brackets or slabs that help to levy taxes on the different groups of people.

The taxes payable by people are calculated in the financial year and are then paid during the assessment year.

Now, the Income Tax Act demands the income tax brackets to be revised each year. The adjustment takes place to directly reflect the proposed budgets for the year.

Changes in income tax brackets in the 2018 budget:

There have been no changes in the income tax brackets in the 2018 budget.

However, there was an increase in the education and health cess that forms a part of the income tax, from 3% to 4%. That is why there was an overall nominal hike in the existing tax rates.

Now that we know how the income tax imposition works, let us take a glance at the income tax brackets for the year 2018.

Calculating the income tax for the current year:

There are many factors that help to decide the amount of tax to be paid by an individual and which income tax bracket they belong to. Some of the most notable factors being the amount a person is earning, their type of income, the age of the individual etc.

In order to calculate which income tax bracket a person should belong to and the amount of tax a person should pay from their income, they need to declare their total earning. However, people can also enjoy tax exemption benefits from certain types of investments.

If a person chooses to invest some of their earnings into these schemes, then they will be eligible to avail the tax benefits under that scheme.

Tax brackets or slabs for the year 2018:

Now that we have discussed about how the income tax for a specific year is calculated, let’s take a look at the various income tax brackets for the year 2018.

By the income tax bracket rules, individual taxpayers can be divided into three categories, with one other category for domestic companies. They are:

  1. Hindu Undivided Family (HUF) and individuals who are less than 60 years of age.
  2. Senior citizens who are above 60 years of age but less than 80 years.
  3. Super senior citizens who are above the age of 80 years.
  4. Domestic companies.

Each of these categories has their individual income tax rates or income tax brackets.

Let us take a look at the income tax brackets for each of these categories separately.

HUF and resident individuals below the age of 60 years:

Before delving into the details of the income tax brackets 2018, we should know about the meaning of a resident individual.

According to the Income Tax Act 1961, a person will be considered to be the resident of India, only if they have spent more than 182 days in the country in the previous year.

The income tax rates for the resident individuals and HUF under the age of 60 years are:

  • For people with an annual income of less than 2.5 lakhs, there is no tax and no education/health cess.
  • For people belonging to the income slab of Rs. 2,50,001-5,00,000 per year, the tax rate is 5% of (total income minus Rs. 2,50,000) with a 3% cess.
  • For people in the income slab of Rs. 5,00,0001-10,00,000 per year, the income tax rate is 20% of the (income minus Rs. 5,00,000) with a 4% cess.
  • For people belonging to the income bracket of above Rs. 10 lakhs per year, the tax rate is 30% of the (total income minus Rs. 10,00,000) with a 4% cess.

Note: For people whose income is more than Rs. 50 lakhs but less than Rs. 1 crore, there is a 10% surcharge of income tax. Also, for people with an annual income of more than Rs. 1 crore, there is a surcharge of 15%.

Senior citizens who are above the age of 60 years but less than 80 years:

This category is also only for the resident individuals of India.

The income tax brackets for this category are:

  • People with an annual income of up to Rs. 3,00,000 are exempt from income tax, as well as health and education cess.
  • People belonging to the income group of Rs. 3,00,001- Rs. 5 lakh, are liable to pay an income tax of 5% of their  income and 3% cess on income tax.
  • People having an annual income of Rs. 5,00,001- Rs. 10 lakh, belong to the income tax bracket of 20% of their income  and additional 3% cess on income tax.
  • People having an annual income of above Rs. 10 Lakhs are liable to pay an income tax of 30% of their incomes  and an additional 4% cess on income tax amount.

Note: For people whose income is more than 50 lakhs but less than 1 crore, there is a 10% surcharge on the income tax amount. Additionally, for people with an income of more than Rs. 1 crore, there is a 15% surcharge on the income tax amount.

Super senior citizens above the age of 80 years:

For the residents of India who are above the age of 80 years, there is a different income tax bracket.

The income tax percentage that is applicable for them can be calculated as follows:

  • People with an annual income of Rs. 5,00,000 and less are exempt from paying income tax.
  • People with an annual income of Rs. 5,00,001- Rs. 10,00,000, belong to the income tax bracket of 20% of income  plus 4% Health and Education cess on income tax.
  • People with an annual income of Rs. 10,00,001 and above have an income tax rate of 30% of income  with a 4% cess on income tax.

Note: The surcharge rate of the above categories is also applicable to this category.

Income tax bracket for domestic companies:

The income tax bracket for domestic companies is calculated according to their gross turnover for the previous year.

There are two income tax brackets for the companies. These are:

  • For a gross turnover of less than Rs. 50 crores in the previous year, the income tax payable is 25% of the turnover.
  • If the company has a gross turnover of more than Rs. 50 crores, then income tax rate is 30% of the turnover.

Apart from these four categories there is also the additional income tax bracket for foreign companies.

Let’s take a look!

Income tax brackets for foreign companies:

There are three income tax brackets that are applicable for foreign companies. They are:

  • If a foreign company receives a payment from the Indian Government, in the form of royalties (according to an agreement by an Indian concern), then it belongs to an income tax bracket where a tax rate of 50% will be levied.
  • If a foreign company receives payment for any technical service, with an agreement to an Indian concern, it belongs to an income tax bracket where a 50% tax rate will be levied.
  • For any other income of the foreign companies, it will come under an income tax bracket where a tax rate of 40% will be levied.

Note: there is a surcharge of 2% of the amount of income tax if there is an income of greater than Rs. 1 crore. If there is an income greater than Rs. 10 crores, then 5% of the income tax is surcharged.

Few of the important highlights concerning income tax in the budget of 2018:

Even though there have been no significant changes in the income tax brackets in the 2018 budget, there are a few minor details that have been tweaked.

For instance:

  • For senior citizens, there is no tax deduction at source on the interest that is earned from FD worth up to Rs. 50,000.
  • The premium paid by senior citizens for medical insurance, up to Rs. 50,000 is exempt from taxes.
  • The previous allowances for transport and other miscellaneous items have been replaced by a Rs. 40,000 standard deduction.
  • The cess previously known as education cess, now renamed health and education cess has been increased from 3% to 4%.
  • The long term capital gains of more than Rs. 1 lakh are to be taxed at 10%.
  • The short term capital gain taxes remain unchanged at 15%.

Thus the tax bracket 2018 has remained very similar to the brackets of 2017 for all people.

Author: Muhammad Tahir

About the Author

- Outside contributors to the Dispatch are always welcome to offer their unique voices, contradictory opinions or presentation of information not included on the site.

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