Income Tax in India

About Income Tax in India
An income tax is levied by the government on the income given by people and corporations during a fiscal year. The government generates revenue through taxes. The government spends this money on infrastructure development, healthcare, education, farm subsidies, and other government welfare programs. Taxes are classified into two types, and they are - direct taxes and indirect taxes.

Direct tax, for example, is a tax levied directly on earned income. Income tax is a kind of direct tax. The tax calculation is according to the income slab rates that were in effect during that fiscal year.

Indirect tax is the tax levied on the consumption of goods and services (GST). It is not directly levied on the income of a person. Instead, he/she must pay the tax along with the price of goods or services bought by the seller.

Types of Income Based on Income Tax Criteria

Everyone in India who earns or receives an income is subject to income tax. (Yes, whether you are a resident or a non-resident of India.) For ease of classification, the Revenue Tax Department divides income into five major categories:

• ● Property Income:  Renting a residence is taxable under this kind of income.


• ● Salary Income:   Salary and pension income are taxable under this category of income.


• ● Business or Profession Income:   Profits made by self-employed persons, businesses, freelancers, or contractors, as well as income made by professionals such as life insurance agents, chartered accountants, doctors, and lawyers who have their own practice, and tuition teachers, are taxable under this heading.


• ● Capital Gain Income:   Surplus income from the sale of capital assets, such as mutual funds, stocks, or real estate, is taxable under this category of income.


• ● Income from Other Sources:  Under this heading, income from savings bank account interest, fixed deposits, and lottery winnings is taxable.

What is tax benefit under Income Tax?

A tax benefit is a deduction, credit, or other allowance that ultimately helps individuals or businesses reduce their tax liability.

Five types of tax benefits available to individuals:

• 1. Exemption:  One need not pay any tax on such income. Interest income on PPF and REC tax-free bonds is fully exempt from tax.


• 2. Deduction: Investments u/s 80C up to Rs 1,50,000, Mediclaim for self/parents’ u/s 80D, interest on loan for higher education of self/relative u/s 80E, donations made u/s 80G are deductible from the taxable income.


• 3. Rebate:  After income tax is computed, the actual tax payable is reduced, if a rebate is allowed on account of specific investment that was made.


• 4. Allowances: Paid in addition to salary, to meet specific expenses. Common allowances include DA, house rent, LTA, education, medical, transport etc..


• 5. Indexation: Used to adjust the purchase price of an investment to reflect the effect of inflation on it, indexation helps to lower long-term capital gains, which brings down the taxable income.

What is Three Taxable Transactions in Investments

• ● Investment of capital


• ● Growth or Interest payment


• ● Maturity value


• Investment of capital comes from your taxable income. So, for the most part, it is already taxable.

What is EEE, EET and ETE?

‘E’ in EEE, EET and ETE refers to ‘exempt’ status of the transaction, whereas ‘T’ stands for the ‘taxable’ status. So, here’s how EEE, EET and ETE define the tax status of various investment instruments:

• . EEE: Means all three transactions are tax-exempt in the instrument.
• . EET: Investment and accrued or paid interest is exempt, but maturity value is taxable.
• . ETE: Investment is eligible for an exemption, accrued or paid out interest is taxable and maturity value is exempt.

Thus, EEE stands for overall the best tax saving plans. EET investment would be the second-best investment option, as you get to postpone your tax liability till maturity.

EEE Investment Options

We have a few amazing investment options under EEE segment in India. Some of these investments are not the best investment schemes due to their tax- exempt status, but they offer a great many features too. Some of the prominent EEE investment options are:

• ● ULIP Schemes:  Unit Linked Investment Plans (ULIPs) are life Insurance Plans with a wide range of investment features. Some of the most unique ULIP features include multi-fund allocation, automated portfolio management, and goal safety.


• ● Public Provident Fund (PPF):  PPF is one of the safest investment options for long-term investors. The return on the PPF account is safe but linked to market rates. The Employee Provident Fund Organisation (EPFO) declares the rate of return on PPF investments at the beginning of the financial year.


• ● Equity Linked Savings Scheme (ELSS): Equity-linked savings schemes are one of the two ways you can save tax while investing in equity markets. Although, RGESS was also there offering tax saving. But the scheme only benefits the first-time equity investor. So, not opt for long term investors. ELSS, on the other hand, works for everyone, and you can invest over multiple years. So, if you plan to invest in equities while enjoying tax benefits, ELSS would be your go-to investment option. Every investment in ELSS scheme has a 36-month lock-in period.


• ● Guaranteed Savings Plan:  Guaranteed savings plans are another offering from life insurers in India. Guaranteed plans, as the name suggests, guarantee a minimum return on the investment. When it comes to protection benefits, these plans are very similar to ULIPs. For example, you can protect your goal value in guaranteed plans, where the insurer will invest the remaining premiums on your behalf in case of your untimely demise. While the returns are guaranteed, with insurance you can ensure that even the maturity value is guaranteed to your family. Thus, for important family goals like child’s education, these plans could be the best investment schemes.

EET Investment Options

EET investments are the second-best tax saving schemes, as you get to postpone your tax liabilities for a few years. Few of the popular investments under this segment are as follows:

• ● National Saving Certificates (NSC VIII-Issue): NSC also follows a fixed rate of return, which is declared at the beginning of every financial year. All the interest which accrues to the investment is reinvested in the scheme.
  For taxation, interest reinvestment also qualifies for the deduction. So, if you stay invested in the instrument nothing is taxed. But maturity value is taxable with all the gain added to your taxable income for tax estimate.


• ● Pension Schemes: You can claim deduction under 80C for investments of up to Rs. 1.5 lakhs in pension schemes. The deduction applies to both deferred annuity and immediate annuity schemes.
  The growth of your corpus is also not taxable. But the pension you receive is taxable at normal income tax slabs. However, pension plans also help you defer your tax liability, as there is no tax on the maturity value of the deferred annuity plan.

ETE Investment Options

ETE investments are a curious lot, as they are almost the same as ETT investment. However, since the interest has been taxed already, there is no need to tax the maturity value. Some of these investments are:

• ● Five-Year Tax Saving Deposit: You can invest in a tax-saving five-year fixed deposit with your bank or nearest post office branch. Both FDs will have accrued interest every year. The interest is taxable as income in the year it is credited to your FD.
  Banks are liable to deduct a 10% TDS on your FD’s interest every year. However, Post Offices can pay your interest without TDS. You should note here that Post Office FDs may ultimately result in higher maturity value due to higher reinvestment.

With plenty of EEE investments on the line and a Rs. 1.5 lakh limit on tax saving investment, you feel unnecessary to think of the other two sections. But you should know these investments as they are useful in one or the other way. Please Note: The proceeds received under the policy are exempt from taxes subject to conditions u/s 10(10D).