Income Tax Day: Learn its Inception, Significance and Ways to Save Tax!
The inception of Income tax in India dates back to the 19th century. Sir James Wilson, a Scottish businessman, economist, and Liberal politician, implemented income tax in India on July 24, 1860, to compensate for the British government's losses during the First War of Independence in 1857.
Since 2010, India has commemorated Income Tax Day on July 24. The income tax division decided to designate July 24 as the day for the yearly celebration to honour 150 years of this levy starting that year. The first income tax was imposed as an obligation in 1860, and on July 24 of that year, the taxing authority was established.
The Income Tax Act of 1860 went through a series of amendments. A new income tax was enacted in 1918 and was again replaced by a new statute enacted in 1922. With several modifications, this Act remained in effect until the assessment year 1961–1962.
After much deliberation with the Ministry of Law, the Income Tax Act of 1961 was finally passed. Beginning on April 1st, 1962, the Income Tax Act of 1961 went into effect. Since 1962, the Union Budget has made several significant revisions to the Income Tax Act every year.
An overview of Indian Income Tax
A tax on income imposed by the government upon individuals and corporations in a fiscal year is called an income tax. In addition, the government receives funding via taxes. The government uses these funds for various social programmes for the agricultural and farmer sectors, healthcare, education, and infrastructure development.
Direct taxes and indirect taxes are the two main categories of taxes. A direct tax is imposed directly on an individual's income; an example of a direct tax is the income tax. Taxes are computed based on the income slab rates in effect for that fiscal year.
What are the types of taxpayers in India?
Tax rates are applied differently for different types of taxpayers based on the categories listed in the Income-tax Act. The different categories of taxpayers are listed as Hindu Undivided Family, Individuals, Association of Individuals, and Body of Individuals Businesses Companies.
Individuals are further divided into residents and non-residents. Individuals must pay taxes on their worldwide income, including domestic and international money. Non-residents must pay taxes on their worldwide income. The only income earned in India is earned or accrued in India. For tax purposes, each financial year's residence status must be determined by the duration of each person's stay in India.
Types of Income of the taxpayers in India
Whether a resident or a non-resident of India, everybody who makes or creates an income in India is subject to income tax; the Income-tax department divides income into five primary headers for easier classification:
- Income from Other Sources - This heading includes taxable income from lottery winnings, interest from savings bank accounts, and income from fixed deposits.
- Revenue from House Property - This income category includes the income derived from renting out a house.
- Income from Capital Gains - This category of income taxes the excess profit on the sale of a capital asset, such as stocks, mutual funds, real estate, etc.
- Income from Business and Profession - Profits made by self-employed people, 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 practise, as well as tuition teachers, are taxable under this heading.
- Income from Salary - This category of income taxes earnings from salaries and pensions.
With this, we have learnt a fair share of India's income tax history and specifications. Let us now understand why there is a need to save taxes and the best way how we can do so.
Why is there a need to Save Tax?
Income tax becomes a necessary obligation to ensure that a nation's government runs appropriately and provides the resources its citizens require. Therefore, paying income taxes should be considered a responsibility instead of a burden.
Taxpayers must file their forms and pay their fair share of taxes each season. However, keep in mind that the Indian government has also established several options that permit investors to make their own decisions and significantly reduce their taxable revenues. As a taxpayer, we should be equally anxious about paying our fair share of income tax as we should be about paying it too little. As a result, we should always consider the elements and advantages of tax savings while filing our tax returns.
Some Tax Saving Schemes
|Unit Linked Insurance Plan (ULIP)|
|ELSS Mutual Funds|
|Public Provident Fund (PPF)|
|Sukanya Samridhi Yojana (SSY)|
|National Savings Certificate|
|Tax-savings fixed deposit.|
|Senior Citizen Savings Scheme|
|National Pension Scheme|
The Best Way to Save Tax: ELSS Mutual Funds
ELSS is a tax-saving mutual fund that primarily invests in equities and products with an equity component. It has a three-year lock-in term and is eligible for a tax credit under Section 80C up to Rs 1.5 lakh annually. It is quickly becoming a well-liked investment to reduce taxes. It enables you to combine tax reduction and wealth-building into a single investment.
Since ELSS is one of the few alternatives available under Section 80C that invests in equity securities, investors favour it.
How is ELSS the best option to Create Wealth and Reduce Taxes?
Under Section 80C, investments in ELSS are eligible for a tax deduction. The amount invested or Rs. 1,50,000, whichever is less, constitutes the maximum deduction permitted for a fiscal year. Please be aware that there is no maximum investment amount allowed in ELSS. However, the Section 80C tax deduction is only worth Rs. 1,50,00,000 each fiscal year.
The lock-in period for the ELSS is three years. If you are investing through a systematic investment plan (SIP) mode, the lock-in period for each SIP instalment is three years from the investment date.
ELSS and other Tax Schemes: Let us Comparison
A deduction from taxable income of up to Rs. 1,50,000 is allowed per fiscal year under Section 80C of the Income Tax Act. Some investment products, including ELSS mutual funds, are eligible for the deduction. As a result, investors frequently contrast ELSS with other investment options covered by Section 80C.
So let's contrast ELSS with a few other investment options that are Section 80C-deductible.
|Schemes||Lock-in period||Risk||Returns||Taxation on redemption/maturity|
|ELSS Mutual funds||3 years||High||High: Range of 10-15% p.a. over long-term||10% long-term capital gains (LTCG) tax on returns above Rs. 1 lakh in a year.|
|Public Provident Fund (PPF)||15 years||Low||Low to moderate: Range of 6-9% p.a.||Exempt from taxation|
|Bank fixed deposit||5 years||Low||Low: Range of 5-7% p.a.||Interest is taxable as per the income slab|
|National Pension Scheme (NPS)||Till age 60 years||Depends on the funds chosen for investment. High risk for equity funds and low risk for debt funds||High (10-15% p.a.) for equity funds over the long-term. Low (5-7% p.a.) for debt funds||Up to 60% corpus can be withdrawn tax-free. An annuity is taxable as per the income slab.|
|Unit Linked Insurance Plan (ULIP)||5 years||Depends on the funds chosen for investment. High risk for equity funds and low risk for debt funds||High (10-15% p.a.) for equity funds over long term. Low (5-7% p.a.) for debt funds||The death benefit is tax-free. Capital gains will be taxable if the aggregate premium exceeds Rs. 2.5 lakhs in any financial year. LTCG tax will be 10% on LTCG exceeding Rs. 1 lakh in a year|
How to Invest in ELSS?
The same procedures for investing in mutual funds apply to ELSS. Utilizing an Online Investment Services Account is the simplest method. You have two options for investing: as a flat payment or through a SIP (systematic investment plan). SIP ensures consistency and discipline while lowering capital risk. You can put as little as 500 Indian rupees in an ELSS fund. You are free to invest as much as you like, even though you may only claim a tax benefit of up to INR 1.5 lakh.
Many people prefer to invest in ELSS mutual funds to save on tax. People who started early have definitely benefited from investing in them. If you are also looking to invest in some of the good ELSS funds, then all you need to do is download the Glide Invest App, create an account in under 10 mins and start investing to save tax today!