What is Income Tax?

An income tax is a tax levied on the financial income of persons, corporations or other legal entities. Tax rates levied on your income may be:

• Progressive: A progressive tax rate is charged based on how much you earn, which means that if you earn more you are taxed more.
  
  
• Flat: A flat tax rate charges the same rate no matter how much you earn.
  
  
• Regressive: The regressive tax rate charges you only up to a certain level of income, for example, the first ` 90,000 of your income.

In India, progressive income tax is levied on the income of individuals, Hindu Undivided Families (HUFs), companies (firms), co-operative societies and trusts. There are certain slabs on which income tax calculations are considered:

• If you earn up to ` 1,50,000* per year, then no income tax is charged.
  
  
• If you earn between ` 1,50,001–3,00,000 per year, the tax charged is 10% of the amount greater than ` 1,50,000..
  
  
• If you earn between ` 3,00,001–5,00,000 per year, the tax charged is 20% of the amount greater than ` 3,00,000 + ` 15000.
  
  
• If you earn above ` 5,00,000 per year, the tax charged is 30% of the amount greater than ` 5,00,000 + ` 55,000.

*The basic exemption limit for women is `180,000 and senior citizens is `225,000.

A surcharge of 10% is payable on tax for incomes exceeding ` 10 lakhs.

How to Save Tax?

You should always consider tax planning as a necessary exercise in your financial planning process. How much tax you can save depends on factors like risk appetite, investment objective and tenure of investment.

Section 88

Prior to the Finance Bill 2005, provisions for tax rebates fell under the gamut of Section 88. To claim tax benefits under this Section, you would have had to make investments of up to ` 1,00,000 in Public Provident Fund (PPF), National Savings Certificate (NSC), tax-saving funds (also referred to as Equity Linked Saving Schemes—ELSS) and infrastructure bonds. The problem with this Section was that there were caps on the amount you could invest in each tax-saving instrument and there was no flexibility in choosing the tax-saving instruments. Section 88 decided everything for you.

Enter Section 80C

In the Finance Bill 2005, Section 88 was scrapped and it gave way to the new Section 80C. Under this section, you can invest up to ` 1,00,000 in tax-saving instruments, but the biggest advantage is that you can make your own investment choices, i.e. you can decide how to spread your investment of ` 1,00,000 over PPF, NSC, ELSS and infrastructure bonds.

FAQs

What is PAN?

Permanent Account Number (PAN) is a ten-digit alphanumeric number, issued to you in the form of a laminated card, by the Income Tax Department. It is an important instrument for most financial transactions that take place these days.

Is it necessary to have a PAN?

It is necessary to have a PAN because you have to quote it on return of income or any correspondence with any income tax authority. It has also become compulsory to quote PAN in all documents pertaining to financial transactions notified from time-to-time by the Central Board of Direct Taxes.

Who can obtain a PAN?

If you are a taxpayer or a person who has to furnish a return of income you have to obtain a PAN. Even if you enter any financial transaction where quoting PAN is necessary, you must have a PAN.

Can more than one PAN be obtained?

You cannot obtain more than one PAN as it is against the law.

Where can I apply for a PAN?

In order to improve PAN related services, the Income Tax department has authorized UTI Investor Services Ltd (UTIISL) to set up and manage IT PAN Service Centres in all cities or towns where there is an Income Tax office and National Securities Depository Limited (NSDL) to dispense PAN services from Tax Identification Number (TIN) Facilitation Centres. If you live in a big city, UTIISL has set up more than one IT PAN Service Centre for your convenience. Likewise there are more than one TIN Facilitation Centres.

How can I apply for a PAN?

You can make an application for a PAN only by filling and submitting Form 49A. The form is available at all IT PAN Service Centres and TIN Facilitation Centres. You can even get the form online from the website of the Income Tax Department.