Income tax is the tax that individuals, Hindu Undivided Family (HUF) or any taxpayer other than companies, pay on the income they receive in a financial year. The tax rate depends on the quantum of earnings &ndash; actual and notional. The Government of India decides the rate of income tax as well as income tax slabs on which individuals are taxed. Taxable income slabs change from time-to-time, depending on the government&rsquo;s policies. The Government also provides income tax rebates and incentives to save taxes.

What is Income Tax?

Since financial year 2020-21, taxpayers have the choice to select from two tax slab rates &ndash; one is the old tax slab rate which is spread across 3 rates and a new slab rate which has 6 slabs. The choice of which slab they wish to go with is left with taxpayers, with the rider that those who shift from the old to the new rate, will need to forgo all tax deductions under various sections. Moreover, once a taxpayer moves from the old rate to the new one; they cannot go back to the old slab regime.

<table>
	<tbody>
		<tr>
			<td>
			Income Tax Slab
			</td>
			<td>
			Tax Rates As Per Old Regime
			</td>
			<td>
			Tax Rates As Per New Regime
			</td>
		</tr>
		<tr>
			<td>
			₹0 - ₹2,50,000
			</td>
			<td>
			Nil
			</td>
			<td>
			Nil
			</td>
		</tr>
		<tr>
			<td>
			₹2,50,001 - ₹ 5,00,000
			</td>
			<td>
			5%
			</td>
			<td>
			5%
			</td>
		</tr>
		<tr>
			<td>
			₹5,00,001 - ₹ 7,50,000
			</td>
			<td>
			₹12,500 + 20% of total income exceeding ₹5,00,000
			</td>
			<td>
			₹12,500 + 10% of total income exceeding ₹5,00,000
			</td>
		</tr>
		<tr>
			<td>
			₹7,50,001 - ₹ 10,00,000
			</td>
			<td>
			₹62,500 + 20% of total income exceeding ₹7,50,000
			</td>
			<td>
			₹37,500 + 15% of total income exceeding ₹7,50,000
			</td>
		</tr>
		<tr>
			<td>
			₹10,00,001 - ₹12,50,000
			</td>
			<td>
			₹1,12,500 + 30% of total income exceeding ₹10,00,000
			</td>
			<td>
			₹75,000 + 20% of total income exceeding ₹10,00,000
			</td>
		</tr>
		<tr>
			<td>
			₹12,50,001 - ₹15,00,000
			</td>
			<td>
			₹1,87,500 + 30% of total income exceeding ₹12,50,000
			</td>
			<td>
			₹1,25,000 + 25% of total income exceeding ₹12,50,000
			</td>
		</tr>
		<tr>
			<td>
			Above ₹ 15,00,000
			</td>
			<td>
			₹2,62,500 + 30% of total income exceeding ₹15,00,000
			</td>
			<td>
			₹1,87,500 + 30% of total income exceeding ₹15,00,000
			</td>
		</tr>
	</tbody>
</table>

The new tax regime was introduced for the financial year 2020-2021 with the option left for taxpayers to shift from the old regime to the new. The new regime offers six slab rates, but it does away with the differentiation between senior citizens and taxpayers in other age groups. Under the old tax regime the basic income threshold exempt from tax for senior citizens (aged 60 to 80 years) and super senior citizens (aged above 80 years) is ₹ 3 lakh and ₹ 5 lakh respectively.

What is the current income tax slab rate?

For the purpose of income tax, income falls under five different heads. Of the five heads, the first four heads are simple and easy to relate to; however, any source of income that doesn&rsquo;t fall under these heads is put under the head income from other hsources. Think of dividends, bonus or even winnings from a game show that will be treated as income under this head.

<table>
	<tbody>
		<tr>
			<td>
			Different income heads
			</td>
		</tr>
		<tr>
			<td>
			<ol>
				<li>
				Income from Salary
				</li>
				<li>
				Income from House Property
				</li>
				<li>
				Income from Profits and Gains of Business or Profession
				</li>
				<li>
				Income from Capital Gains
				</li>
				<li>
				Income from Other Sources
				</li>
			</ol>
			</td>
		</tr>
	</tbody>
</table>

Different sources of income

It is the tax levied at the time of purchase and sale of securities such as shares, bonds, debentures, equity-oriented mutual funds and so on which are issued either by companies or by the Government. The rate of STT depends on the type of security and if it is being bought or sold. For instance, while buying or selling a delivery-based equity share the purchaser and seller both pay 0.1% of share value as STT. However, in case of equity mutual funds; the buyer pays no STT, but the seller needs to pay STT 0.001% of the unit value. STT rates are fixed by the Government and may change from time-to-time with prior notice. The idea behind STT is to curb evasion of capital gains tax on profits earned by transecting in securities.

Securities Transaction Tax (STT)

Any net profit that an investor makes after selling a capital asset exceeding its purchase price is known as capital gains. Capital assets include building, land, house, vehicle, mutual funds, equity and debt investments and jewellery etc. The entire value earned from selling a capital asset is considered as taxable income and taxed accordingly. Capital gains are not applicable to an inherited property or gift as there is no sale in such cases and only a transfer of ownership. However, if the person who inherited the asset or received it as a gift decides to sell it, capital gains tax is applicable.

Capital Gains

Capital gain is the gain arising on transfer of capital assets. Capital gains fall under the category of income and hence taxed accordingly in the year in which the transfer of the capital asset takes place and is known as capital gains tax. Income from capital gains is classified as short term capital gains and long term capital gains based on the holding period of the capital asset.

Capital assets include any kind of property owned by an individual whether or not connected with business or profession such as immovable property, jewellery, bonds, stocks, mutual funds, patents, trademarks etc. At the same time, agricultural land, clothes and furniture held for personal use etc do not fall under the capital asset category. For instance if X bought 100 shares in a company in 2018 for Rs 10,000 and sold it in 2021 for Rs 14,000; then the capital gain on the capital asset (shares) would be Rs 4,000 and qualify to be taxed under the head capital gains tax.

Capital Gains Tax

Capital gains tax depends on the holding period of the capital assets and can be Long term Capital Gains Tax (LTCG) or Short term Capital Gains Tax (STCG). The holding period varies for different categories of capital assets, making short-term holdings from 1 to 3 years. The tax rate and the manner in which the gains are taxed also vary across capital assets.&nbsp;

<table>
	<tbody>
		<tr>
			<td>
			Capital Asset
			</td>
			<td colspan="2">
			Holding Period
			</td>
		</tr>
		<tr>
			<td>&nbsp;</td>
			<td>
			Short-term
			</td>
			<td>
			Long-term
			</td>
		</tr>
		<tr>
			<td>
			Immovable Property e.g. House property&nbsp;
			</td>
			<td>
			2 years or Less
			</td>
			<td>
			More than 2 years
			</td>
		</tr>
		<tr>
			<td>
			Movable Property e.g. Gold/Jewellery
			</td>
			<td>
			3 years or Less
			</td>
			<td>
			More than 3 years
			</td>
		</tr>
		<tr>
			<td>
			Listed Shares
			</td>
			<td>
			1 year or Less
			</td>
			<td>
			More than 1 year
			</td>
		</tr>
		<tr>
			<td>
			Unlisted Shares
			</td>
			<td>
			2 years or less
			</td>
			<td>
			More than 2 years
			</td>
		</tr>
		<tr>
			<td>
			Equity Oriented Mutual Funds
			</td>
			<td>
			1 year or Less
			</td>
			<td>
			More than 1 year
			</td>
		</tr>
		<tr>
			<td>
			Debt Oriented Mutual Fundss
			</td>
			<td>
			3 years or Less
			</td>
			<td>
			More than 3 years
			</td>
		</tr>
	</tbody>
</table>

Long-and Short-term capital gains

In case of taxation on short term capital gain; the tax is calculated by adding capital gain to the total income of the taxpayer and is taxed as per the individual&rsquo;s tax bracket. For instance, if X sells his property within two years of purchase and earns capital gains of Rs 6 lakh and falls in the 30% income tax slab, then on this gain, X will be liable to pat Rs 1.8 lakh as short term capital gains tax when filing income tax returns. Any cess and/or surcharge will get added to this figure as per prevailing tax laws.

Calculation of long-term capital gains tax factors in inflation through cost inflation index (CII), a factor that pares the cost of acquisition of the asset to the year in which it is sold when arriving at long-term capital gains. However, in case of equity mutual funds, the LTCG tax rate is 10% on LTCG exceeding Rs 1 lakh, which means if the gains are up to Rs 1 lakh, there is no tax on the LTCG in case of equity mutual funds.

However, in case of debt funds, it is 10% with indexation. So, if X purchased debt funds for Rs 50,000 in 2016-17 and sold it in 2020-21 for Rs 1 lakh, then the inflation adjusted cost of acquisition would be (301/264*50,000 = Rs 57,007), which makes the gain as Rs 42,993 (Rs 1 lakh &ndash; Rs 57,007) and not Rs 50,000. The LTCG tax on this would work to Rs 8,598 (20% with indexation). The calculation of STCG and LTCG varies across assets.

<table>
	<tbody>
		<tr>
			<td>
			Tax Type
			</td>
			<td>
			Condition
			</td>
			<td>
			Applicable Tax
			</td>
		</tr>
		<tr>
			<td>
			Long-term capital gains tax
			</td>
			<td>
			Except&nbsp;on sale of equity shares/ units of equity oriented fund
			</td>
			<td>
			20% (with or without indexation depending on the capital asset)&nbsp;
			</td>
		</tr>
		<tr>
			<td>
			Long-term capital gains tax
			</td>
			<td>
			On sale of Equity shares/ units of equity oriented fund
			</td>
			<td>
			10% over and above Rs 1 lakh
			</td>
		</tr>
		<tr>
			<td>
			Short-term capital gains tax
			</td>
			<td>
			When securities transaction tax is not applicable
			</td>
			<td>
			The short-term capital gain is added to your income tax return and the taxpayer is taxed according to his income tax slab.
			</td>
		</tr>
		<tr>
			<td>
			Short-term capital gains tax
			</td>
			<td>
			When securities transaction tax is applicable
			</td>
			<td>
			15%.
			</td>
		</tr>
		<tr>
			<td>
			Short-term capital gains tax (Debt-oriented MFs)
			</td>
			<td>
			When securities transaction tax is applicable
			</td>
			<td>
			As per the tax slab rate of the investor
			</td>
		</tr>
	</tbody>
</table>

Calculating capital gains tax

The price of goods increases over time and this impacts one&rsquo;s purchasing power. For instance, the value of something that was Rs 100 is most likely to go up after a year, due to the impact of inflation. The cost inflation index (CII) calculates the estimated rise in the cost of goods and assets year-by-year as a result of inflation. This index is fixed by the central government in its official gazette to measure inflation and is notified by the government every year.

CII is used to calculate long-term capital gains from sale of capital assets. This is done by adjusting the capital asset&rsquo;s cost price is adjusted with the effect of inflation using the cost inflation index number and is referred as indexation. In accounting practice, long term capital assets are recorded at their cost price in books, so, despite rising prices of assets, these capital assets are not valued again. So, at the time of sale of these assets, the profit or gain acquired from them remains high due to their high sale price in comparison to their purchase price.&nbsp;

When CII is applied for capital gain, the purchase price of assets is adjusted according to their sale price, leading to lower profits and lower tax amount on them. So, the value of Rs 100 in 2016-17 when the CII was 264, will work to Rs 114 in 2020-21 when the CII was 301 (301&divide;264) X 100).&nbsp;

&nbsp;

Example&nbsp;

<table>
	<tbody>
		<tr>
			<td>
			2016-17
			</td>
			<td>
			Invested Rs 10,000
			</td>
		</tr>
		<tr>
			<td>
			2020-21
			</td>
			<td>
			Sold at Rs 15,000
			</td>
		</tr>
		<tr>
			<td>
			Capital gains
			</td>
			<td>
			Rs 5,000 (Rs 15,000 &ndash; Rs 10,000)
			</td>
		</tr>
		<tr>
			<td>
			Value of investment adjusted to CII&nbsp;
			</td>
			<td>
			CII for 2016-17: 264

			CII for 2020-21: 301

			Adjusted to CII: Rs 11,401 (301&divide;264) X 10,000)
			</td>
		</tr>
		<tr>
			<td>
			Capital gains
			</td>
			<td>
			Rs 3,598 (Rs 15,000 &ndash; Rs 11,401)
			</td>
		</tr>
	</tbody>
</table>

Cost Inflation Index

The tax paid by corporate entities is known as corporate tax and it is levied on the income earned by the companies, whether domestic or foreign. The worldwide income of the companies registered in the country is taxed under corporate tax. Whereas in the case of foreign companies, only the income received or accrued in India is taxed under corporate taxation.

For corporate taxation; income of the business includes profits and gains from the business &amp; profession, capital gains, earnings from house property and earnings from other sources like interests etc. Currently companies with turnover up to Rs 250 crore have to pay corporate tax at 25% rate and companies with a turnover above Rs 250 crore have to pay corporate tax at 30% rate without any cess and/or surcharge.

Taxation

What is Income Tax?