Introduction

Income tax is a subject which is perceived as something a commoner is not supposed to deal with. We often associate wealthy individuals with income tax, assuming it’s their duty to pay. However, in reality, every Indian citizen earning over ₹5 lakh per year must file and pay income tax.

According to a recent study, in India, only a little over 6 crore people paid income taxes in the financial year 2021-22 which makes up only a meagre 4.5% of the total population. In some countries like the US, it is nearly impossible to skip taxes. Citizens pay taxes without fail as they think of it as their fundamental duty to pay taxes.

Let us have a brief look at what exactly Income tax is and who should pay it.

What is Income Tax?

• A country or state can be regarded as a financial institution which is in a situation to look after the well-being of the citizens residing in that country. The state (or country) is responsible for developing and managing a large number of facilities provided for the public.

• These facilities are in the form of transportation, essential infrastructure development, education, health and so on. To manage all these facilities government at the helm of the state need money.

• This money enters the hand of the government prominently in two ways -Direct Tax, and Indirect TaxNo government can run smoothly unless its citizens pay taxes. India’s case isn’t different either!

We, being the citizens must pay taxes to the government to help it run the mechanism smoothly.

Who Should Pay?

Income tax is a direct tax paid to the government by the individuals and companies present in that country. As the name suggests, income tax is levied on individuals and companies based on the income they generate.

That being said, not everyone has to pay tax. The government has set a certain set of rules to govern the mechanism of income tax.

In India, if you are someone whose net income is less than 5 lakh rupees per annum you needn’t pay income tax! If your net income exceeds this limit then you will fall under some income tax slabs set by the government.

How to Calculate Net Taxable Income

Calculating your net income is super simple. All you have to do is to use the following easy formula to calculate your net taxable income.

Net taxable income = Gross income – Deductions

For example, if your gross income is 7 lakh per annum and your total deduction is 3 lakh rupees then your net taxable income is 4 lakh rupees! And you know that since your net income is less than 5 lakh rupees you don’t have to a single rupee to the government as income tax!

How Income tax is calculated?

Income tax is calculated in various slabs. Do check out the table below to know the rates for various slabs.

Upon checking this table some might be confused at some higher rates of interest such as 30% if your income is above 30%. In that case, the tax will amount to 3 lakh which is really a huge chunk of money for anyone.

But in such cases, you won’t be paying ₹3 lakh in taxes. No tax is calculated on the first ₹2.5 lakh. The next ₹2.5 lakh is taxed at just 5%, and the remaining amount is taxed at 20%.In total, you will just be paying less than 1.5 lakh rupees!

Is there any way to reduce Income tax?

• Obviously, there are several ways through which you can save on tax. The first thing is leveraging various deductions offered by the government. Everyone can avail of up to 50,000 rupees as a standard deduction.

• On top of that, expenses like house rent, medical costs, investments in mutual funds, and term insurance can be deducted before calculating the net taxable income.

• It is also evident that individuals pay much higher taxes than registered private limited companies as the tax calculated on the income of companies assumes the expenses of running the company as a deduction.

• No individual can avail of this exclusive benefit. No wonder people start companies if they really wanna get rich!