Individual Income Tax Rates and Deductions in India

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Apr. 23 – Individual income tax (IIT) is the direct tax paid on personal income by an individual or a company to the central government. The Indian Income Tax department is governed by the Central Board for Direct Taxes (CBDT) and is part of the Department of Revenue under the Ministry of Finance. In this article, we discuss income source and residency, income tax payment, the definition of salary, income tax rates and tax deductions at source.

Income Source and Residency
Personal taxation in India depends on the income source and a person’s residential status, which is determined by the length of time spent in India. Residential statuses include: resident and ordinarily resident (ROR), resident but not ordinarily resident (RNOR) or non-resident (NR).

Under the Income Tax Act, an individual (non-Indian citizen or non-resident Indian) is said to be resident in India in any previous year, if he:

  • Is in India in that year for a period amounting to 182 days or more; or
  • Is in India for a period amounting to 60 days or more in that year, after having already been in India for a period amounting to 365 days or more within the preceding four years.

A person is said to be “not ordinarily resident” in India in any previous year if such person is an individual who has been a non-resident in India in nine out of the ten previous years preceding that year, or has during the seven previous years preceding that year been in India for a period of, or periods amounting in all to 729 days or less.

Salary income is liable for personal income tax in India if the services are rendered in India, regardless of where the salary is received. RORs are also taxed on other types of income worldwide, while RNORs and NRs are only taxed on other income when that income is received or accrues/arises in India.

Income Tax Payment
According to the Income Tax Act, it is the obligation of the employer to withhold personal income taxes from the salary paid to an employee and deposit these taxes with the Indian revenue authorities. This applies to Indian employers and foreign employers, for domestic and expatriate staff. Personal income tax is governed by the Central Board for Direct Taxes (CBDT), part of the Department of Revenue under the Ministry of Finance.

A Permanent Account Number (PAN) is a 10-digit alphanumeric code printed on an identification card for the reference of the Income Tax Department. Companies are required to obtain a PAN during the establishment process in order to file an income tax return, to manage any correspondence with the Income Tax Department, and to submit challans for tax payment.

Definition of Salary
Salary is defined by the Income Tax Act to include wages, pensions and annuities, gratuities, advance of salary, any fee, commission, perquisites (e.g. the value of rent on accommodation provided by the employer) or profits in lieu of or in addition to salary or wages, any encashment of leave salary, or any amount of credit to the provident fund of an employee to the extent that it is taxable.

Salary also generally includes what is known as a “dearness allowance”, which is a type of allowance provided for the higher cost of living in particular cities or states. While this allowance is most important for government employees, certain private companies also offer it at their own discretion.

For income to be treated as salary, the following conditions must be fulfilled:

  • There must be an employer-employee relationship between the payer and receiver of income;
  • Salary income must be real and there must an intention to pay and receive salary; and
  • Salary may be from more than one employer and may be received not just from the present employer but also from a prospective employer and in some cases even from a former employer, as is sometimes the case for pensions.

Salary can be charged in the year received or in the year earned, whichever is earlier, i.e. if the salary has been received first, then it will be taxable in the year of receipt.

Allowances are categories of expenditures in India that are not taxable, provided they match certain specifications and do not exceed a certain amount. They are given, among other things, for house rent, transport, medical care, meal coupons, leave-time travel and education. Other taxes that may apply to an individual include capital gains tax and wealth tax.

Income Tax Rates

Tax Deductions at Source
A tax deduction is a changeable amount that can be subtracted, or deducted, from an assessee’s gross income, lowering the amount of tax paid. All entities in India (including foreign representative offices and Indian setups like wholly owned subsidiaries) are required to make tax deductions at source on employees’ salaries on behalf of the Income Tax Department.

The payment and compliance schedule is as follows:

  • Payment: 7th of the next month; April 30 for the month of March
  • Quarterly returns: 15th of the next month from the end of the quarter
  • Issue of Certificate: 30th of the next month; for salaried certificates, by May 30

This article was extracted from the latest issue of the India Briefing Magazine, titled “India’s Taxes for Foreign-invested Entities.” In this issue, we provide an overview of India’s taxes on business, which includes a section on India’s double taxation avoidance agreements, and then discuss individual income tax rates and deductions. Finally, we discuss India’s tax reforms in 2013, including an article by Chandrahas Choudhury, New Delhi correspondent for Bloomberg View, “Can India Tax Itself to Prosperity?”

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