Basic Concepts of Taxation 

Basic Concepts 

Taxation is a fundamental aspect of financial management, impacting individuals and businesses alike. Understanding the basic concepts of taxation is essential for accurately computing your total income and fulfilling your tax obligations. This involves not only knowing what constitutes taxable income but also being aware of deductions, exemptions, and the various heads under which income is classified. In this guide, we'll explore the foundational concepts of taxation and walk you through the process of computing your total income, ensuring you have a clear understanding of how taxes are calculated and applied.

Tax Slabs and Section 115BAC for Individuals

Under the Income Tax regime, individuals can compute their total income based on specific tax slabs. The slabs determine the rate of tax applicable to different income levels. Section 115BAC of the Income Tax Act introduces an alternative tax regime with lower rates but without most deductions and exemptions. This "New Regime" offers taxpayers the option to choose between the traditional tax regime, which includes various deductions (like 80C), and this new simplified regime. Proper planning and understanding of these options can significantly impact the Net Payable or Assessable (NPoA) income for an individual.

Rates prescribed under section 115BAC of the Income-tax Act for default tax regime

Section 115BAC of the Income-tax Act, 1961 provides for concessional rates of tax to individuals/HUF/AoPs/BoIs and artificial juridical persons. Under this regime 
certain exemptions/deductions are, however, not available like Leave Travel Concession, interest on housing loan on self-occupied property, deductions under Chapter VI-A [other than section 80CCD(2), 80CCH(2) or section 80JJAA] etc. The rates given under section 115BAC are the default tax rates unless the assessee exercises an option to shift out of the said regime. The basic exemption limit under section 115BAC is ` 3,00,000. This means that no tax is payable by an assessee with total income of upto ` 3,00,000. The tax rates under section 115BAC is as follows -

Rates prescribed by the Annual Finance Act under the optional tax regime

Individuals/HUF/AoPs/BoIs and artificial juridical persons, who exercise the option to opt out of the default tax regime under section 115BAC, have to pay tax as per normal provisions of the Act. Under the normal provisions of the Act, the rates of tax are prescribed by the Annual Finance Act of the year. 
For individuals, HUF etc., the basic exemption limit is ` 2,50,000. This means that, as per the normal provisions of the Act, no tax is payable by individuals with total 
income of upto ` 2,50,000. Those individuals whose total income is more than` 2,50,000 but less than ` 5,00,000 have to pay tax on their total income in excess of ` 2,50,000@5%. Total income between ` 5,00,000 and ` 10,00,000 attracts tax @20%. The highest rate is 30%, which is attracted in respect of income in excess of 
` 10,00,000. The tax rates have to be applied on the total income to arrive at the income-tax liability.

However, resident individuals enjoy rebate under section 87A in both the tax regimeswhich are discussed later on in this chapter.For certain income (like Long Term Capital Gains, Lottery Income, Specified Short Term Capital Gains etc.), slab rates are not applicable under both the tax regimes. These incomes are taxable at special rates of taxation under both the tax regimes. These special rates are contained in the Income-tax Act, 1961 itself. 

Surcharge / Rebate under section 87A

Surcharge: Surcharge is an additional tax payable over and above the income-tax. Surcharge is levied as a percentage of income-tax, where total income exceeds` 50 lakhs. Rebate under section 87A: In order to provide tax relief to the individual tax payers, section 87A provides a rebate from the tax payable by an assessee, being an individual resident in India, whose total income does not exceed ` 7,00,000 underthe default tax regime under section 115BAC or ` 5,00,000 under the normal 
provisions of the Act if he opts out of the default tax regime. Under the default tax regime, an individual whose total income exceeds ` 7 lakhs marginally is also entitled to a rebate of the difference between tax on total income and the amount by which the total income exceeds ` 7 lakhs, when the former is greater than the latter. 

Health and education cess on income-tax

The income-tax, as increased by the surcharge or as reduced by the rebate under section 87A, if applicable, is to be further increased by an additional surcharge 
called health and education cess on income-tax @4% of income-tax plus surcharge, if applicable.

Alternate Minimum Tax (AMT)

The Income-tax Act, 1961 contains certain profit-linked and investment linked deductions under normal provisions of the Act to promote investment in various 
sectors. These tax benefits help to reduce the tax liability of the taxpayers who exercise the option to opt out of the default tax regime under section 115BAC and
become eligible to claim such deductions. In order to preserve the tax base vis-avis profit linked and investment linked deductions, the Income-tax Act, 1961 
provides for levy of alternate minimum tax. Section 115JC provides for minimum tax to be paid by the taxpayers on their total income without providing profit linked 
and investment linked deductions. However, the taxpayer can claim the tax credit of the excess tax paid over the regular income-tax payable. Individuals/HUF/AoPs/BoIs and artificial juridical persons paying tax under default tax regime under section 115BAC, are not liable to alternate minimum tax under section 115JC.