Decoding Income Tax Slabs

Rahul recently got a great promotion with a sizeable raise. In his 4 years of being on the job, he didn’t have to worry about taxable income. He would diligently submit his investment documents in January, each year. Now, his C.A. informed him that his new salary might be taxable. Rahul knows he can rely on his C.A., but he is curious about how income-tax is computed. Let us help him understand financial terms he should be aware of.

Income Tax: As an Indian citizen, you’re expected to pay the government a part of your earnings, towards the country’s welfare and development. This contribution is called income tax.

Income Tax Slabs: In India, income tax slab is based on…

• Your Age
• Nature of Business
• Income Range

Why do you need to be aware of tax slabs in India? Because, the amount of tax (as a percentage of your income) you must pay (as a tax-payer), is determined by your tax slab. Tax slabs are also referred to as a tax brackets.

In India tax-payers are:

• Resident Individuals
• Non-Resident Individuals
• Hindu Undivided Families (HUF)
• Associations of People
• Firms
• Domestic and Foreign Companies

Rahul was wondering if these tax brackets change or remain the same? Yes, tax rates, and tax brackets in India, can change. These changes are introduced based on, proposals in the annual Union Budget every year. The income-tax system in India is progressive based on ‘ability to pay’. In this, there is an incremental increase in the tax percentage, as your income increases.

Financial Year and Assessment Year: It is important for Rahul to understand the difference between these two terms. For income-tax purposes, a Financial Year (F.Y.), is the year in which you earn income. An Assessment Year (A.Y.), follows a F.Y; your income earned in the F.Y., is evaluated and computed, for paying income tax. A financial year can be different from the calendar year. Like in India, the financial year begins on 1^st April and ends on 31^st March (of the next calendar year). So, if the financial year is 1^st April 2018 to 31^st March 2019, the assessment year is, 1^st April 2019 to 31^st March 2020.

Cess and Surcharge: Rahul kept seeing words like ‘Cess’ and ‘Surcharge’, here’s a summary of what they mean. The income-tax we pay, is utilised for pre-set purposes. Primarily welfare of lower-income and rural families is the focus. Under the current budget, taxpayers earning above Rs. 2.5 lakh per annum must pay an Education and Health Cess of 4%.

A Surcharge is what you pay—over and above your current income tax—to the central government. A surcharge makes taxation progressive, that is, those earning a higher income, pay more than those earning a lower income. Individuals with an income exceeding Rs. 50 lakh but less than Rs.1 crore currently pay a surcharge of 10% and those exceeding Rs. 1 crore pay 15% on the net income tax.

Income Tax Slab Rates for F.Y. 2018-19 (A.Y. 2019-20)

Tax slabs for F.Y. 2018-19 remain the same as the previous year. Other changes that have been incorporated are:

• The 3% Education Cess levied in F.Y.18 has been increased to 4% and is called the Health and Education Cess.
• A standard deduction of Rs.40,000 can be claimed for transportation and/or medical reimbursements from F.Y.18.

Here’s an overview of applicable income tax brackets based on types of tax payers.

Individual Tax Payers & HUF (below 60 years of age) for F.Y. 2018-19 – Part I

*Surcharge should not exceed the amount of income tax payable.

Senior Citizens (Over 60 years but below 80) for F.Y. 2018-19 – Part II

Super Senior Citizens (over 80 years) for F.Y. 2018-19 – Part III

Domestic Companies for FY 2018-19 – Part IV

Disclaimer: Kindly note, the income tax slabs and rates mentioned are relevant for F.Y. 2018-2019. These are subject to change based on future Union Budget proposals or Economic policy changes.