Tax exemption – Overview
Tax exemption in India refers to the relief or immunity granted by the government on specific types of income, investments, or transactions, allowing individuals, businesses, or entities to reduce their taxable income. The purpose of tax exemption is to encourage certain activities, investments, or behaviours that contribute to economic growth, societal welfare, or other strategic objectives.
Who is eligible to pay tax in India
In India, the eligibility to pay income tax is determined by the individual's income and the specific tax slabs outlined by the Income Tax Department. The Income Tax Act, 1961, governs the taxation of income in India, and it categorises taxpayers into various groups based on their income levels. The following categories of individuals are generally eligible to pay income tax:
- Individuals: Individuals earning income from a salary, house property, business, or profession are liable to pay income tax.
- Hindu Undivided Families (HUFs): HUFs, which consist of a family of Hindu individuals and their descendants, are considered separate entities for tax purposes.
- Companies: Indian companies, both public and private, are subject to corporate income tax.
- Partnerships: Partnership firms and Limited Liability Partnerships (LLPs) are also liable to pay income tax.
- Association of Persons (AOP) and Body of Individuals (BOI): AOP and BOI are entities formed by a group of individuals or other entities that come together for a common purpose, and they are taxed accordingly.
- Trusts: Trusts, including charitable trusts, may be subject to income tax based on their income and purpose.
- Non-resident Indians (NRIs): NRIs are liable to pay income tax on income earned or accrued in India. The tax liability may vary based on their residential status.
- Foreign companies: Foreign companies operating in India are subject to taxation on income generated within the country.
- Cooperative societies: Cooperative societies, whether engaged in agriculture or non-agricultural activities, are liable to pay income tax on their income.
It is important to note that the income tax liability varies based on the income earned, and specific exemptions, deductions, and rebates are available to individuals and entities under different sections of the Income Tax Act. The government periodically revises income tax slabs and rates in the Union Budget, and taxpayers are expected to comply with the prevailing regulations.
Individuals are categorised into different age groups, such as individuals below 60 years, senior citizens (60 to 80 years), and super senior citizens (above 80 years), each with its own set of income tax slabs and exemptions.
Various tax exemptions
- TDS exemption: Tax Deducted at Source (TDS) exemption applies when the total income of an individual falls below the prescribed limit. TDS is deducted by the payer at the time of making specific payments like salary, rent, or professional fees.
- HRA exemption: House Rent Allowance (HRA) exemption is available for individuals who receive HRA as part of their salary. The exemption is calculated based on factors such as actual rent paid, salary, and the city of residence.
- Service tax exemption: Certain services in India are exempt from service tax. This includes services provided by governmental authorities, charitable organisations, and those falling under the negative list of services.
- Tax exemption on education loan: Interest paid on education loans is eligible for tax exemption under Section 80E of the Income Tax Act. This encourages individuals to pursue higher education without the financial burden.
- Tax exemption on car loan: Individuals can claim tax benefits on the interest paid on car loans under Section 24(b) of the Income Tax Act, subject to specific conditions.
- Tax exemption for ladies: Certain tax exemptions are available exclusively for women, including lower income tax rates and special deductions.
- LTA exemption: Leave Travel Allowance (LTA) exemption allows individuals to claim expenses incurred on travel during leave, subject to specific rules and conditions.
- Capital gains tax exemption: Exemptions on capital gains are available under various sections, such as Section 54 for exemption on the sale of a residential house property.
- Income tax exemption limit: The income tax exemption limit determines the threshold beyond which individuals are liable to pay income tax. The limit may vary based on factors such as age and income sources.
In conclusion, understanding tax exemption provisions in India is crucial for individuals and businesses to optimise their financial planning. Utilising the various exemptions available under different sections can lead to significant savings and a more efficient management of one's financial portfolio. However, it is advisable to seek professional advice to ensure accurate compliance with the tax laws and regulations.
