Income tax is gathered from individuals and organizations by governments to support public goods, infrastructure, and welfare programs. It is a direct income tax derived by individuals, Hindu Undivided Families (HUFs), companies, and firms. The Income Tax Department oversees the collection of taxes, rules, and compliance under the Income Tax Act. Taxpayers are required to submit their Income Tax Returns every year, declaring their incomes and tax burdens. The government provides exemptions and deductions through several Income Tax Deduction Sections to minimize taxation loads. This article defines who shall pay tax, how the tax is calculated, e-filing, and tax payment options.
What is Income Tax?
Income Tax is a government direct tax levied on individuals and business incomes. Taxpayers have to pay tax according to their earnings within a financial year between 1 April and 31 March.
Taxable income under the income tax act is divided into five categories. Income from salary includes your earning sources through employment, and income from house property includes the rental income received from property owned. Business or professional income is income from business profits or self-employment. The category of property includes selling a property, stocks, or investments, while other examples of interests that count include lottery winnings, dividends, and accrued interest on savings.
Who is Required to Pay Income Tax?
The Income Tax Department sends notices for non-compliance, including the Income Tax Notice Section 142(1), which requests taxpayers to provide documents about their tax returns.
- Individuals: Non-residents and residents with income over the basic exemption limit are required to pay tax. Salaried persons and self-employed professionals are required to file Income Tax Return Filing. Senior citizens (over 60 years) have higher exemption limits.
- Hindu Undivided Families (HUFs): HUFs with taxable income must file their Income Tax Returns (ITR) and pay taxes as per the applicable slabs. They are entitled to tax exemptions and deductions as individuals would. The Karta (head of the family) handles all financial transactions and tax liabilities.
- Partnership Firms and LLPs: The profits of partnership firms and limited liability partnerships (LLPs) are taxed at a flat rate of 30%. They have to pay a surcharge and cess when income exceeds certain limits. As you know, tax law deductions limit partners’ pay and interest.
- Subcontribution of Corporates: Corporate tax is paid by Indian companies at government-prescribed tax rates. Foreign firms that do business in India are also taxed on their income earned within India. Taxation rates are conditional to the company turnover, sector, and relevant compliance with tax incentives or exemptions.
- NRI (Non-Resident Indians): NRIs are taxed for the income earned in India, such as salary, lodging, and capital gains. Taxation depends on their residential status and the benefit of the double tax avoidance agreement. NRIs are also subject to TDS (Tax Deducted at Source) rules based on transactions.
Income Tax Act
The Income Tax Act, 1961 is the primary law governing the collection, computation, and administration of income tax in India. The act lays down all the rules and regulations as well as the rights and responsibilities of taxpayers. It also underlines the Income Tax Department’s role in the collection of tax and tax returns. It also lays out penalties for tax evasion. Some key sections include Section 80C for investing in tax-saving avenues, Section 80D for health insurance deductions, and Section 24(b) for home loan interest benefits.
Section 142(1) also empowers tax authorities to issue notices seeking additional tax information. As per the Income Tax Act, this ensured a fair taxation opportunity without illegal means.
Income Tax Return (ITR)
The ITR is a document that all taxpayers must submit every year to the Income Tax Department of India. The report records income earned during a financial year as well as what has been paid out in taxes, and other reliefs or allowances received by those who are liable for long-term capital gains on their investments. ITR must be done every year as required by the Income Tax Act. Anyone who fails in this could be penalized under Section 234F of the Income Tax Act, 1961.
You need to report the period in which your income covers the relevant financial year from 1st April to 31st March in the income details of the return. For instance, income earned between 1 April 2024 and 31 March 2025 is reported in the ITR for the assessment year 2024-25. Hence, filing them on time helps one avoid penalties, maintain transparency in finances, and pay the tax on time to manage tax liabilities. Filing an ITR is an essential way for taxpayers to comply with tax rules by submitting real income for a given financial year. It also speeds the process of receiving refunds and claiming deductions.
e-Filing Income Tax
You will save time and find it easier to calculate upcoming tax if you use e-filing. The government makes things easy for taxpayers, allowing them to take home or carry off their income tax returns when filing online from their house or place where they work. Taxpayers can file their returns on their own without the services of tax professionals, which saves them money. E-filing services are also available 24×7, and taxpayers can monitor their refunds and claims at any time.
The process of electronically submitting your tax returns via the official website of the Income Tax Department or authorized third-party platforms is referred to as e-filing of income tax. This process is available to all taxpayers, and one of the biggest advantages is that paying tax through this method is simple and hassle-free. ReturnThe PINA is needed to file returns online. An individual who is e-filing increases the accuracy and their compliance with this return because of its speed processing time.
Income Tax Calculation (2025-26)
With the Union Budget 2025, has made a significant adjustment to income The new schedule will be effective from 1 April 2025 for the fiscal year of 2025–26. This reorganization to streamline taxation will make life easier for all taxpayers who earn any amount.
| Income Range (₹) | Tax Rate (%) |
| 0 – 4 lakh | Nil (No tax) |
| 4 lakh – 8 lakh | 5% |
| 8 lakh – 12 lakh | 10% |
| 12 lakh – 16 lakh | 15% |
| 16 lakh – 20 lakh | 20% |
| 20 lakh – 24 lakh | 25% |
| Above 24 lakh | 30% |
The new tax regime seeks to minimize tax expenditure, enabling people to save up to ₹1.14 lakh annually. It is still the default tax regime, and taxpayers have to opt for the old regime expressly to be able to claim exemptions and deductions. The new system streamlines taxation by removing complexities, thus making it easier and more streamlined to file taxes for citizens.
Income Tax Forms List
A Company at a Reasonable Profit, the ‘Along with this criterion, income tax returns in India are classified according to the nature of taxpayer and source income. ‘ Source income refers to one’s occupation and thus we have classifications such as salary workers, personal service persons (including commission lump sum contracts) or outside business proprietors. A comprehensive list of Income Tax Return (ITR) forms and their usage follows.
- ITR 1 (Sahaj): This is for resident individuals (other than not ordinarily resident) with a total income of ₹50 lakh or less. It includes income from salary, one house property, and other sources such as interest. Agricultural income of ₹5,000 or less is also covered under this form.
- ITR 2: Intended for people and Hindu Undivided Families (HUFs) whose income is above ₹50 lakh and who do not have income from business or profession. It also applies to non-resident Indians (NRIs) without income from business or profession in India.
- ITR 3: It is for Individuals and HUFs with income from business or profession, including professional income above ₹50 lakh. NRIs earning business or professional income in India must also file under this category.
- ITR 4 (Sugam): ITR 4 is for resident individuals, HUFs, and firms (other than LLP) whose total income is up to ₹50 lakh. This would be relevant for those individuals whose gross receipts or professional income are calculated by the provisions under Sections 44AD, 44ADA, or 44AE, respectively. It also covers agricultural income of up to ₹5,000.
- ITR 5: This form is for individuals except companies, HUFs, and entities. It is applicable for partnership firms, LLPs, AOPs, and BOIs.
- ITR 6: ITR 6 applies to those companies which do not claim tax exemption under Section 11. It applies to companies and businesses, except those exempt from tax for purposes of charity or religion.
- ITR 7: This is for people and firms filing returns under sections 139(4A), 139(4B), 139(4C), 139(4D), 139(4E) and 139(4F). This includes charities, political parties, schools, and research institutions.
- ITR V (Acknowledgement Form): ITR V is used to verify tax returns. Taxpayers need to e-verify returns online. If e-verification is not feasible, they must physically sign and post the form to the Income Tax Department, CPC Bangalore.
Income Tax Deduction Section List
The Income Tax Act offers deductions in different sections to lower taxable income. These deductions cover investments, medical insurance, student loans, and home loan interest, allowing one to save while remaining financially secure. The following summarizes major income tax deduction sections and their maximums.
| Section | Deduction Type | Maximum Limit (₹) |
| 80C | Investments (PPF, EPF, ELSS) | ₹1.5 lakh |
| 80D | Health Insurance Premium | ₹25,000 (₹50,000 for senior citizens) |
| 80E | Education Loan Interest | No Limit |
| 24(b) | Home Loan Interest | ₹2 lakh |
Relevance to ACCA Syllabus
Income Tax is a major area in Financial Reporting (FR) and Strategic Business Reporting (SBR) for the ACCA syllabus. Candidates learn about IAS 12 (Income Taxes), current and deferred tax, tax base, temporary differences, and tax reconciliation. Learning income tax assists in appropriate accounting for tax, financial statement integrity, and conformance with global tax requirements.
Income Tax ACCA Questions
Q1: When is a deferred tax liability recognized in financial statements under IAS 12?
A) When your reported profits are double what the tax authorities conclude
B) Only after the taxable income exceeds the net income
C) Whenever timing differences mean the tax authorities get paid late
D) When permanent differences change future tax obligations
Ans: C) Whenever timing differences mean tax can be paid later
Q2: What is one common example of a permanent difference in tax accounting?
A) Acceleration of depreciation to tax reporting
B) Tax-free interest from municipal bonds
C) Estimated warranty costs
C) Notional gains from forex fluctuations
Ans: B) Interest on municipal bonds
Q3: When will a company recognize a deferred tax asset?
A) When the tax benefits are less than the accounting expense
B) When future profits against deductible temporary differences are predictable
C) When a company has unpaid tax bills
D) When exemptions from tax exist
Ans: B) Expected future taxable income will be enough to offset deductible temporary differences
Q4: How does a company’s fixed assets tax basis work?
A) The value in the statement
B) Deductible from income under tax law
C) The current market value
D) The initial purchase price
Ans: B) The high amount usable for tax deduction
Q5: Where a corporation submit its tax bill is available to the public?
A) Cash flow statement
B) Profit & Loss Account
C) Balance sheet
D) Financial statements notes
Ans: C) Balance sheet
Relevance to US CMA Syllabus
US CMA syllabus consists of Income Tax under Corporate Finance and Risk Management. Tax planning, deferred taxes, and how tax legislation influences financial decisions are studied by CMA candidates. The ability to master income tax concepts enables optimizing tax burdens, managing cash flows, and developing business strategies.
Income Tax US CMA Questions
Q 1: Which of the following would be a temporary difference for tax purposes?
A) Regulatory fines (seldom paid for tax)
B) Municipal bond interest (always tax-free)
C) Different methods for depreciation (timing differences)
D) Dividend payments (not allowed deduction tax)
Answer: C) Depreciation differences between tax and books
Q 2: What is the result if a company has loss carry forwards?
A) Immediate rise in taxes (opposite effect)
B) Lower taxes at a later date (creates an asset)
C) Automatic reduction in tax rates (no)
D) Elimination of deferred taxes (they are incorrect but opinions expressed in other work are not supported by the present studies)
Answer: B) A deferred tax asset
Question 3: If a company has accelerated depreciation for tax purposes, which of the following is true?
A) Increasing (downward direction) current taxes
B) taxes in the future are lower (only mostly true)
C) Pushes tax payments into future years (big benefit!)
D) Shows less on your tax return — Inverse effect
Answer: C) Over Time Deferring Taxes
Q 4: How should we compute your total tax rate?
(1) A) Total tax ÷ Taxable income (respective formula)
B) Deferred taxes ÷ Gross profit (does not help)
C) Assets / Current tax (contradictory)
Operating income ÷ Net fixed assets (approximation of profit)
Answer: A) Total Tax Expense / Taxable Income
Q 5: Lip-smacking tax planning for cash flow?
A) Good: Prepay taxes (it freezes their cash)
B) Fix all existing tax credits and deductions
C) Inflate taxable income (bullshit)
D) They pay tax on every cent of interest: with a tax deduction (squeezing profit margins)
Discipline: B) Use And Deduct Credits When You Can
Relevance to US CPA Syllabus
The US CPA syllabus includes Income Tax under Regulation (REG) and Financial Accounting & Reporting (FAR). Individual and corporate tax structures, computation of taxes, and deferred tax accounting are taught to CPA candidates under US GAAP (ASC 740). Tax knowledge is required for compliance with financial reporting, audit determinations, and corporate tax planning.
Income Tax US CPA Questions
Question 1: When ASC 740 requires companies to recognize deferred tax liabilities?
A) When future deductions will be larger than taxable income.
Taxable income > future Year-end Total deductions; i.e. tax paid & reported at year end
B) When book income is more than taxable income. (Book income – Return Low Greater than $0). (Book income – Return Low Greater than $0)
C) When a company mistakenly pays taxes wrong-way
D) When you take heritage tax credit
Ans: A) Taxable income is less than accounting income due to temporary differences
Q2: What must a company do with its net deferred tax assets?
A) Record an immediate tax expense
B) Examine if future income will permit its use
C) They are considered as nonexistent.
D) To plead for return of taxes at once
Answer: B) Look into whether future taxable income will occur
Q3: Which does not give rise to a deferred tax liability?
A) When the use lube becomes more expensive for tax purposes than rising prices in general
B) Paper returns on capital
C) Interest on government bonds that is tax free of any type
D) Religion is about the individual
Ans: C) Interest on tax-free muni bonds
Q4. On deferred tax liabilities, do they credit as a deferred tax liability under US GAAP?
a) Fund liability
b) Long-term liabilities
c) Stockholders’ equity
d) Future Potential Liabilities
Answer: B) Long-term liabilities
Q5. On Deferred tax liabilities, do they credit as a deferred tax liability under US GAAP?
a) Fund liability
b) Long-term liabilities
c) Stockholders’ equity
d) Future Potential Liabilities
Answer: B) Long-term liabilities
Relevance to CFA Syllabus
In the CFA curriculum Income Tax appears in Financial Reporting & Analysis and Corporate Finance. Deferred tax assets/liabilities, planning, international tax effects are also examined by CFA candidates. Income tax is a key factor in investment analysis, asset valuation, and understanding financial statement numbers.
Income Tax CFA Questions
Question 1: What does an increase in the corporate tax rate do to deferred tax liabilities?
A. Increases DTL account
B. Decreases the DTL balance
C. Does not affect deferred taxes
D. Converts DTL to a deferred tax asset
Answer: A) Increases DTL account
Question 2: Which of the following is an example of tax shield?
A. Depreciation deductions lower one’s taxable income
B. Dividends paid to shareholders
C. Interest earned on investments
D. Capital gains tax liability
Answer: A. Depreciation deductions lower one’s taxable income. In accounting terms, this is referred to as a tax shield.
Question 3: Which financial statement is the most lucid, concerning income tax expense?
A. Statement of cash flows
B. Statement of financial position
C. Statement of profit and loss
D. Shareholders’ equity statement
Answer: C. Statement of profit and loss
Question 4: When will a deferred tax asset (DTA) be needed?
A. Taxable income in future periods is greater than current year accounting income
B. Tax deductions will be higher in future periods
C. The company pays excess tax in this year
D. The effective tax rate of the company is below the statutory tax rate
Answer: B. Tax deductions will be higher in future periods
Question 5: What factors could influence the effective tax rate of a company?
A. Permanent tax differences
B. Depreciation expense only
C. Changes in interest rates
D. Non-operating expenses
Answer: A) Permanent tax differences
