Understanding the Income Tax Act of 1961
India's tax laws are expertly articulated in the Income Tax Act of 1961. This extensive legislation outlines the rules and regulations governing taxation. According to the official website of the Income Tax Department of India, the Act is divided into 23 chapters and encompasses 2986 sections.1
People in India are taxed according to their income. Income tax is paid by all individuals earning above a certain threshold. While it is mandated that people earning more than a certain amount in a year pay income tax, the Income Tax Act 1961 also allows a number of ways to minimize the amount you are required to pay.
In the Union Budget 2020, Finance Minister Shrimati Nirmala Sitaraman announced the introduction of the new tax regime. While the taxpayer has the freedom to choose either of the two regimes, various initiatives announced in Budgets 2023 and 2024 encourage adopting the new tax regime. Budget 2024 brought an increase in the standard deduction under the new tax regime, raising it to Rs. 75,000.5
What are the objectives of the Income Tax Act of 1961?
To understand the Income Tax Act 1961 better, it is important to understand its purpose. Listed below are some of its key objectives:
1. Funds for the country’s development
The main purpose of the Income Tax Act of 1961 is to generate revenue. The funds collected are used by the government to serve a variety of public purposes, from paying for the construction of new infrastructure to funding public initiatives meant to help those in need.
2. Brings stability to the economy
Another key objective of the Income Tax Act is to bring price stability to the economy. When the rules of direct taxes are laid out, they act as a measure to check and control spending and, thus, inflation.1
3. Brings a balance in wealth
The Indian taxation system is considered to be a progressive one7. Here, the wealthy pay a higher tax, while people with a modest income need to pay a lesser amount of tax. This structure not only promotes economic justice but also supports government initiatives aimed at funding public welfare programs.
4. Encourages savings
Under the Income Tax 1961, there are various sections and sub-sections that allow several tax benefits in the form of deductions/ exemptions. Some popular tax-saving schemes (under old tax regime) include the National Pension Scheme, Sukanya Samridhi Scheme, and Public Provident Fund.
Some important sections of the Income Tax Act 1961
The Income Tax Act of 1961 is quite comprehensive. Therefore, figuring out the taxation system might seem to be a little intimidating for many. Let us take a look at a simple explanation of some of the most important sections. Keep in mind that if you are opting for the new tax regime, then you may not qualify for this deduction.
Section
| Details
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|---|
Section 80C2
| Section 80C of the Income Tax Act is one of its most popular sections. Under this section, you can reduce your tax liability by up to Rs. 1.5 lakhs (under old tax regime). Individuals, as well as HUF (Hindu Undivided Family), can claim this deduction on a yearly basis.
Some examples include premiums paid towards life insurance policies, National Pension Scheme (NPS), Senior Citizen Saving Scheme (SCSS) and tax saving fixed deposits with 5-year tenure.
|
Section 80CCC
and
Section 80CCD(1)2
| Section 80CCC and Section 80CCD offer exemptions when you invest in a pension scheme (under old tax regime). You can claim a maximum deduction of ₹1.5 lakhs under Section 80C, 80CCC, and 80CCD(1) combined.
However, you can claim an extra Rs. 50,000 deduction under Section 80CCD(1B) for contributions towards the National Pension Scheme (NPS), bringing the total maximum deduction to ₹2 lakhs (under old tax regime).
|
Section 80D2
| Another popular section, section 80D, deals with the tax exemptions that you can get against the health insurance premiums that you pay. The exemption for individuals is Rs. 25,000 (under old tax regime). However, seniors can claim up to Rs. 50,000 (under old tax regime) against their premiums. If you and your parents are above 60 years of age, then the deductions can go up to Rs. 1 lakh.
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Section 80E3
| An individual who has taken an education loan for higher studies for self/ spouse/ children or for student for whom the individual is legal guardian can claim this deduction. Under Section 80E, the interest on your education loan can be deducted from your income, thus decreasing your taxability.
|
Section 80G4
| Individuals, companies, HUF, NRIs, and others can qualify for 50% to 100% of tax benefits under Section 80G. Under this section of the Income Tax Act 1961, donations made to specified charitable institutions and relief funds can be claimed by individuals opting for the Old Tax Regime.
Keep in mind that donations over Rs. 2000 should be made in modes other than cash to qualify4.
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Conclusion
Here’s hoping that understanding the Income Tax Act 1961 would have become a little simpler. If you still need more help, especially when calculating your taxable income, you can use online income tax calculators. The income tax calculator is a free online tool that allows you to understand your taxable income better. You can also get in touch with a tax advisor if you need some professional guidance.
FAQs
1. Who started the Income Tax Act 1961 in India8?
In India, income tax was introduced by Sir James Wilson in the year 1860. He was the first Finance Minister of the British Indian Government
2. What is the importance of the Income Tax Act 1961?
The Income Tax Act 1961 outlines the rules and regulations governing the country's tax system. Through this act, the government is able to implement its fiscal policy.
3. Who does not need to pay income tax?
As per the Income Tax Act 1961, an individual who earns less than Rs. 2.5 lakhs or is below the taxable income slab, does not have to pay an income tax9.
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