Income tax is a tax imposed by the Government of India on the earnings of individuals and entities. The regulations regarding income tax are outlined in the Income-tax Act of 1961. The Ministry of Finance manages the revenue functions of the Indian government and has delegated the administration of direct taxes, including income tax, to the Central Board of Direct Taxes (CBDT), which is a part of the Department of Revenue in the Ministry of Finance.

The CBDT plays a crucial role in policy formulation, planning of direct taxes, and enforcement of direct tax laws through the Income-tax Department. Income tax is levied annually, with the tax year running from April 1st to March 31st of the following calendar year. This period is divided into two categories: the previous year and the assessment year.

The previous year refers to the year in which income is earned, while the assessment year is when the income is subjected to taxation. For example, income earned between April 1st, 2021, and March 31st, 2022, is considered income for the previous year 2021-22 and will be taxed in the subsequent assessment year 2022-23.

Income tax applies to all individuals and entities, including natural persons and artificial persons, as defined under section 2(3) of the Income-tax Act. The term 'person' encompasses various entities such as individuals, Hindu Undivided Families (HUFs), Associations of Persons (AOPs), Bodies of Individuals (BOIs), firms, LLPs, companies, local authorities, and any other artificial juridical persons not covered by the aforementioned categories.

In conclusion, income tax is a government-imposed tax on the earnings of individuals and entities in India. It is regulated by the Income-tax Act of 1961, administered by the Income-tax Department under the supervision of the CBDT. Income is assessed based on the previous year and taxed in the subsequent assessment year. The tax applies to both natural and artificial persons, encompassing a wide range of entities.

The Finance Act, which is passed annually by the Parliament, provides information on the applicable rates of Income-tax and corporate taxes. Additionally, individuals can utilize the free online tax calculator found at www.incometaxindia.gov.in to determine their tax liability.

Brief Tax Rate Charts for ready reference is given below: 

Tax Rates

1. In case of an Individual (resident or non-resident) or HUF or Association of Person or Body of Individual or any other artificial juridical person

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a. Surcharge : Surcharge is levied on the amount of income-tax at following rates if total income of an assessee exceeds specified limits:-

Note:

(1) The enhanced surcharge of 25% & 37%, as the case may be, is not levied, from income chargeable to tax under sections 111A, 112A and 115AD. Hence, the maximum rate of surcharge on tax payable on such incomes shall be 15%.

(2) From Assessment Year 2023-24 onwards:

o The maximum rate of surcharge on tax payable on dividend income or capital gain referred to in Section 112, shall be 15%.

o The surcharge rate for AOP with all members as a company, shall be capped at 15%.

However, marginal relief is available from surcharge in following manner-

  i.  in case where net income exceeds Rs. 50 lakh but doesn't exceed Rs. 1 Crore, the amount payable as income tax and surcharge shall not exceed the total amount payable as income tax on total income of Rs 50 Lakh by more than the amount of income that exceeds Rs 50 Lakhs.

 ii.  in case where net income exceeds Rs. 1 crore but doesn't exceed Rs. 2 crore, marginal relief shall be available from surcharge in such a manner that the amount payable as income tax and surcharge shall not exceed the total amount payable as income-tax on total income of Rs. 1 crore by more than the amount of income that exceeds Rs. 1 crore.

iii.  in case where net income exceeds Rs. 2 crore but doesn't exceed Rs. 5 crore, marginal relief shall be available from surcharge in such a manner that the amount payable as income tax and surcharge shall not exceed the total amount payable as income-tax on total income of Rs. 2 crore by more than the amount of income that exceeds Rs. 2 crore.

iv.  in case where net income exceeds Rs. 5 crore, marginal relief shall be available from surcharge in such a manner that the amount payable as income tax and surcharge shall not exceed the total amount payable as income-tax on total income of Rs. 5 crore by more than the amount of income that exceeds Rs. 5 crore.

b. Health and Education Cess : Health and Education Cess is levied at the rate of 4% on the amount of income-tax plus surcharge.

Note: A resident individual (whose net income does not exceed Rs. 5,00,000) can avail rebate under section 87A. It is deductible from income-tax before calculating education cess. The amount of rebate is 100 per cent of income-tax or Rs. 12,500, whichever is less.

1.1. Special tax Rate for Individual and HUFs

The Finance Act, 2020, has provided an option to Individuals and HUF for payment of taxes at the following reduced rates from Assessment Year 2021-22 and onwards:

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a. Surcharge : Surcharge is levied on the amount of income-tax at following rates if total income of an assessee exceeds specified limits:-

Note: The enhanced surcharge of 25% & 37%, as the case may be, is not levied, from income chargeable to tax under sections 111A, 112, 112A and 115AD. Hence, the maximum rate of surcharge on tax payable on such incomes shall be 15%.

However, marginal relief is available from surcharge in following manner-

  i.  in case where net income exceeds Rs. 50 lakh but doesn't exceed Rs. 1 Crore, the amount payable as income tax and surcharge shall not exceed the total amount payable as income tax on total income of Rs 50 Lakh by more than the amount of income that exceeds Rs 50 Lakhs.

 ii.  in case where net income exceeds Rs. 1 crore but doesn't exceed Rs. 2 crore, marginal relief shall be available from surcharge in such a manner that the amount payable as income tax and surcharge shall not exceed the total amount payable as income-tax on total income of Rs. 1 crore by more than the amount of income that exceeds Rs. 1 crore.

 iii.  in case where net income exceeds Rs. 2 crore but doesn't exceed Rs. 5 crore, marginal relief shall be available from surcharge in such a manner that the amount payable as income tax and surcharge shall not exceed the total amount payable as income-tax on total income of Rs. 2 crore by more than the amount of income that exceeds Rs. 2 crore.

iv.  in case where net income exceeds Rs. 5 crore, marginal relief shall be available from surcharge in such a manner that the amount payable as income tax and surcharge shall not exceed the total amount payable as income-tax on total income of Rs. 5 crore by more than the amount of income that exceeds Rs. 5 crore.

b. Health and Education Cess : Health and Education Cess is levied at the rate of 4% on the amount of income-tax plus surcharge.

Note 1: A resident individual (whose net income does not exceed Rs. 5,00,000) can avail rebate under section 87A. It is deductible from income-tax before calculating education cess. The amount of rebate is 100 per cent of income-tax or Rs. 12,500, whichever is less.

Note 2: The option to pay tax at lower rates shall be available only if the total income of assessee is computed without claiming specified exemptions or deductions:

2. Partnership Firm

For the Assessment Year 2023-24, a partnership firm (including LLP) is taxable at 30%.

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(a) Surcharge : The amount of income-tax shall be increased by a surcharge at the rate of 12% of such tax, where total income exceeds one crore rupees. However, the surcharge shall be subject to marginal relief (where income exceeds one crore rupees, the total amount payable as income-tax and surcharge shall not exceed total amount payable as income-tax on total income of one crore rupees by more than the amount of income that exceeds one crore rupees).

(b) Health and Education Cess : The amount of income-tax and the applicable surcharge, shall be further increased by health and education cess calculated at the rate of four percent of such income-tax and surcharge

3. Local Authority

For the Assessment Year 2022-23 & 2023-24, a local authority is taxable at 30%.

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(a)  Surcharge : The amount of income-tax shall be increased by a surcharge at the rate of 12% of such tax, where total income exceeds one crore rupees. However, the surcharge shall be subject to marginal relief (where income exceeds one crore rupees, the total amount payable as income-tax and surcharge shall not exceed total amount payable as income-tax on total income of one crore rupees by more than the amount of income that exceeds one crore rupees).

(b)  Health and Education Cess : The amount of income-tax and the applicable surcharge, shall be further increased by health and education cess calculated at the rate of four percent of such income-tax and surcharge.

4. Domestic Company

Income-tax rates applicable in case of domestic companies for assessment year 2022-23 and 2023-24 are as follows:

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(a) Surcharge : The amount of income-tax shall be increased by a surcharge at the rate of 7% of such tax, where total income exceeds one crore rupees but not exceeding ten crore rupees and at the rate of 12% of such tax, where total income exceeds ten crore rupees. The surcharge shall be subject to marginal relief, which shall be as under:

 (i)  Where income exceeds Rs. 1 crore but not exceeding Rs. 10 crore, the total amount payable as income-tax and surcharge shall not exceed total amount payable as income-tax on total income of Rs. 1 crore by more than the amount of income that exceeds Rs. 1 crore.

 (ii)  Where income exceeds Rs. 10 crore, the total amount payable as income-tax and surcharge shall not exceed total amount payable as income-tax on total income of Rs. 10 crore by more than the amount of income that exceeds Rs. 10 crore

(b) Health and Education Cess : The amount of income-tax and the applicable surcharge, shall be further increased by health and education cess calculated at the rate of four percent of such income-tax and surcharge.

4.1. Special Tax rates applicable to a domestic company

The special Income-tax rates applicable in case of domestic companies for assessment year 2022-23 and 2023-24 are as follows:

Surcharge : The rate of surcharge in case of a company opting for taxability under Section 115BAA or Section 115BAB shall be flat 10% irrespective of amount of total income.

Health and Education Cess: The amount of income-tax and the applicable surcharge, shall be further increased by health and education cess calculated at the rate of four percent of such income-tax and surcharge.

MAT : The domestic company who has opted for special taxation regime under Section 115BAA & 115BAB is exempted from provision of MAT. However, no exemption is available in case where section 115BA has been opted.

In that case, the provisions of Minimum Alternate Tax (MAT) applies, tax payable cannot be less than 15% (+HEC) of "Book profit" computed as per section 115JB. However, MAT is levied at the rate of 9% (plus surcharge and cess as applicable) in case of a company, being a unit of an International Financial Services Centre and deriving its income solely in convertible foreign exchange. For provisions relating to MAT refer tutorial on "MAT/AMT" in tutorial section.

5. Foreign Company

Assessment Year 2022-23 and Assessment Year 2023-24

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(a)  Surcharge: The amount of income-tax shall be increased by a surcharge at the rate of 2% of such tax, where total income exceeds one crore rupees but not exceeding ten crore rupees and at the rate of 5% of such tax, where total income exceeds ten crore rupees. However, the surcharge shall be subject to marginal relief, which shall be as under:

 (i)  Where income exceeds one crore rupees but not exceeding ten crore rupees, the total amount payable as income-tax and surcharge shall not exceed total amount payable as income-tax on total income of one crore rupees by more than the amount of income that exceeds one crore rupees.

 (ii)  Where income exceeds ten crore rupees, the total amount payable as income-tax and surcharge shall not exceed total amount payable as income-tax on total income of ten crore rupees by more than the amount of income that exceeds ten crore rupees.

(b)  Health and Education Cess : The amount of income-tax and the applicable surcharge, shall be further increased by health and education cess calculated at the rate of four percent of such income-tax and surcharge.

6. Co-operative Society

Assessment Year 2022-23 and Assessment Year 2023-24

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(a) Surcharge: The amount of income-tax shall be increased by a surcharge at the rate of 12% of such tax, where total income exceeds one crore rupees. However, the surcharge shall be subject to marginal relief (where income exceeds one crore rupees, the total amount payable as income-tax and surcharge shall not exceed total amount payable as income-tax on total income of one crore rupees by more than the amount of income that exceeds one crore rupees).

Note: From Assessment Year 2023-24 onwards, the rate of surcharge in the case of co-operative societies having income between 1 crore to 10 crores is reduced from 12% to 7%.

(b) Health and Education Cess: The amount of income-tax and the applicable surcharge, shall be further increased by health and education cess calculated at the rate of four percent of such income-tax and surcharge.

6.1. Special tax rates applicable to a Co-operative societies

Note:

The Finance Act, 2020 has inserted a new Section 115BAD in Income-tax Act to provide an option to the co-operative societies to get taxed at the rate of 22% plus 10% surcharge and 4% cess. The resident co-operative societies have an option to opt for taxation under newly Section 115BAD of the Act w.e.f. Assessment Year 2021-22. The option once exercised under this section cannot be subsequently withdrawn for the same or any other previous year.

If the new regime of Section 115BAD is opted by a co-operative society, its income shall be computed without providing for specified exemption, deduction or incentive available under the Act. The societies opting for this section have been kept out of the purview of Alternate Minimum Tax (AMT). Further, the provision relating to computation, carry forward and set-off of AMT credit shall not apply to these assessees.

The option to pay tax at lower rates shall be available only if the total income of co-operative society is computed without claiming specified exemptions or deductions

[As amended by Finance Act, 2022]

It states that for a resident person, their total income includes all the income they receive or earn in India during the year, as well as any income received outside India if it is derived from a business or profession set up in India.

For non-resident individuals, their total income includes all the income received in India during the year, whether it is received directly or on their behalf.

The explanations provided clarify that income earned outside India is not considered to be received in India solely because it is mentioned in an Indian balance sheet. It also states that once income is included in a person's total income based on it accruing or arising to them, it should not be included again based on it being received in India.

Income Deemed to Accrue or arise in India:

Here are the various types of income that are considered to be earned or generated in India. These incomes include:

Income earned directly or indirectly through a business connection in India,

or

from any property, asset,

or

source of income in India,

or

through the transfer of a capital asset located in India.

The explanation further clarifies certain scenarios:

If a business operates both in India and outside India, only the income reasonably attributable to its operations in India will be considered as income earned in India.

For non-residents, income from operations limited to purchasing goods in India for export is not considered as income earned in India.

Non-residents engaged in the business of running news agencies or publishing newspapers or journals will not be considered to earn income in India solely for collecting news and views in India for transmission outside India.

Certain categories of non-residents, such as individuals, firms, or companies without Indian citizenship or residency, are not considered to earn income in India if their operations are confined to shooting cinematograph films in India.

A foreign company engaged in diamond mining will not be considered to earn income in India if its activities are limited to displaying uncut and unassorted diamonds in a special zone notified by the Indian government.