Income Tax: Need|UPSC Notes

Income tax is an obligatory financial charge levied by the government to all individuals and entities. It is one of the most important sources of income for public welfare and growth. It is the amount paid by individuals and businesses in respect of their annual income and is a contribution towards the equal welfare of society. The general knowledge of it keeps one’s financial affairs in order and helps conduct oneself according to the law. The important concepts of it are:

• The slab rates of it are graded so that there will be progressive taxation.
• Some investments’ of it is tax-deductible to encourage savings and long-term financial security.
• Annually, every taxpayer who earns a certain amount is legally bound to submit his return of it.

GS Paper	GS Paper III
Topics for UPSC Prelims	Types of Taxes, Concepts: Tax Evasion, Tax Avoidance, Role of Income Tax in Government Revenue
Topics for UPSC Mains	Tax Reforms in India, Impact of Income Tax on Economy, GST and its Relation with Direct Taxes

What is Income Tax?

A direct tax is a form of tax imposed on the direct income earned by individuals, businesses, or other entities by governments. Income tax is calculated based on the total earnings for an individual or business within a given financial year. Included in sources of income are salaries, business profits, rental incomes, investments, among others.

Government uses income tax as one of its main sources of revenue for public services and infrastructure, healthcare and education, defense, and other welfare programs. Taxpayers are required to file their income tax returns each year, indicating their total incomes and paying the amount of tax they are supposed to pay according to their income bracket. The amount of tax is determined by the income level, age, and type of taxpayer – either individual, senior citizen, or even business entity.

Why is Income Tax Important?

Income tax is the highest source of government income. The collected amount is utilized for national development, defense, public health, and education. The amount paid for the sake of paying will support the growth of the country and all schemes offered by the government. Also, proper tax compliance increases a proper financial environment.

National Development

Income tax is very vital for the development of a nation, as it would raise plenty of money to spend on infrastructure, such as roads, bridges, and schools, accumulated as revenues and substantially used in maintaining public services like healthcare, education, defense, and law enforcement. If income tax was not there, the governments would be unable to spend on many projects needed for the general growth and progress of the country.

Social Equitability

Income tax promotes social justice. Individuals who earn more have to pay more in income tax for public benefit. Progressive income taxes promote society because high earners pay greater percentage their earnings. This money gets channeled to programs such as poverty reduction, health care, and education towards the welfare of citizens.

Economic Regulation

Income tax helps with the regulation of the economy, since governments can have instruments to apply fiscal policies that stabilize the economy. In a period of economic slowdown, governments can be in a position to continue using the tax revenue to give stimulus packages, improve employment, and increase public spending. In an economic boom time, higher tax rates can keep inflation in control, achieve harmony in the economy, and achieve growth that will be sustainable.

Financial Transparency

The compliance with income taxes promotes fiscal transparency. Investors and business persons can therefore note down the financial records clearly and accountably. Upon making a tax return, one is in a position to document his or her income, expenditure, and savings/investments. In this case, tax compliance encourages transparency in financial matters. 

Government Benefits

Income tax provides access to government services because most social security programs require one to have filed returns of income tax. The payment and filing of income tax enable an income taxpayer to access a wide range of governmental services such as subsidies, loans, and health benefits. Once again, the payment of income tax helps create a credit history, which is essential in transactions involving financing, such as loans and investments.

Income Tax Scales and Percentage

The various slabs have different rates applicable to a different range of income. The system is so designed that people at higher incomes are taxed a percentage of their earnings more than the ones in the lower-income level. In India, the slabs are changed every year in the Union Budget. All taxpayers fall under one of two categories-based on their age or residency status or their income. Here’s an overview of the current slabs of itax:

Individuals Below 60 Years (Including NRIs):

There are two tax regimes for the financial year: new tax regime and the old tax regime. The taxpayer decides which one to follow.

New Tax Regime (Voluntary Scheme):

• Income up to ₹2,50,000: Nil
• Income of ₹2,50,001 to ₹5,00,000: 5%
• Income of ₹5,00,001 to ₹7,50,000: 10%
• Income of ₹7,50,001 to ₹1,00,000: 15%
• Income of ₹1,00,001 to ₹1,25,000: 20%
• Income of ₹1,25,001 to ₹1,50,000: 25%
• Income above ₹1,50,000: 30%

Note: There are no exclusions or deductions in this plan.

Senior Tax Regime (With Deductions)

• Earnings between ₹2.5 lakh to ₹5 lakh : No tax
• Earnings between ₹2,50,001 to ₹5 lakh : 5%
• Earnings between ₹5,00,001 to ₹10 lakh : 20%
• Earnings above ₹10 lakh : 30%
• Note: Exclusions and deductions like Section 80C and 80D can be available.

Senior Citizens between 60-80 Years

• Earnings between ₹3 lakh and ₹5 lakh : No tax
• Earnings between ₹3,00,001 and ₹5 lakh : 5%
• ₹5,00,001 to ₹ 10 lakh: 20%
• Above ₹10 lakh: 30%

Super Senior Citizens (Above 80 Years)

• Up to ₹5 lakh: No tax
• ₹5,00,001 to ₹10 lakh: 20%
• Above ₹10 lakh: 30%

Surcharge and Cess

• Surcharge: This is applicable when the income exceeds ₹ 50 lakh. The range is from 10% to 37% based on the income.
• Health and Education Cess: The amount is 4% of the tax plus surcharge.

Benefits of Tax-Saving Investments

Tax-saving investments present an excellent method by which people could save taxable while at the same time earning financial security. There are various sections of the Tax Act that help to offer deduction through taxes-saving investments, thereby saving and planning finances for the future. Some financial instruments help to minimize liability towards tax. Some of the popular tax-saving investments include:

• Public Provident Fund (PPF): Provides long-term savings with tax benefits under Section 80C.
• National Pension Scheme (NPS): Deduction for retirement planning under Section 80CCD.
• Equity Linked Saving Scheme (ELSS): Tax saving mutual funds with lock-in period
• Compliance: One needs to be compliant with the tax to avoid hammering of penalties, law suits and further scrutiny by the department. This can be achieved by keeping all the financial records in detail and filing of tax returns on or before the due date ensures smooth tax management.

Conclusion

Proper revenue distribution is one of the essential functions of tax in the nation’s development. Basically, tax will support public welfare initiatives and ascertain fair shares for every individual. After all, a taxpayer must be well-informed about the slab rates for tax and the tax deductions available. A taxpayer should file returns in time to fulfill his fiscal obligation and help the country as a whole.

Income Tax UPSC Notes

1. Income tax is a direct tax imposed on the income of individuals, corporations, and various other entities. 2. The Indian Income Tax Act of 1961 is the primary legislation governing the assessment and collection of income tax. 3. The income is categorized into five heads: salary, house property, business or profession, capital gains, and other sources. 4. Taxpayers are classified into different categories based on income levels, with different tax rates and exemptions. 5. The government uses income tax as a significant source of revenue for public expenditure and welfare programs. 6. Deductions under sections like 80C, 80D, etc., reduce taxable income, encouraging savings and investments. 7. Income tax returns (ITR) must be filed annually, and non-compliance can result in penalties and legal consequences. 8. Recent reforms, such as the introduction of the new tax regime, aim to simplify the tax structure and provide more flexibility to taxpayers.

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