ver wondered what income tax is all about and where it eventually goes? Or rather, where is it supposed to go?

Join the club.

Let me begin with a quote by Kalidas, in which he eulogises King Dalip. I find it very apt to understand the concept of taxation:

'It was only for the good of his subjects that he collected taxes from them, just as the Sun draws moisture from the Earth to give it back a thousand fold.'

Ask people today for their view on taxes and nothing as profound will emerge. You would instead hear snide remarks about how income tax is enforced by the the government to lighten your pocket.

In case you think income tax is a recent phenomenon, let's correct your perception.

• Tax has been in existence for more than 2,500 years.
• People had to pay tax based on the profession they were in.
• Sages were the finance ministers who guided the kingdom's treasury.
• India has been a pioneer in developing a stable and rational tax system.
• Now comes the googly: the current tax laws are more or less similar to the ones that existed nearly 2,000 years ago (some things don't change, do they?).

What is Income Tax?

Income tax is a charge or levy collected by the government based on what you earn. Tax laws are broadly based on laws of equity. Which means the more you earn, the more you pay. Sounds fair, doesn't it?

For sheer convenience, income (or what you earn) has been categorised as follows:

1) Salary

2) House/ Property

3) Business and Profession

4) Capital Gains

Don't feel too thrilled in case your 'income' does not fit into any of the above categories. There is one more head for the leftovers. It's called:

5) Other Sources

Though the charge or levy on each of the heads is the same, certain special concessions are available for each category. An individual is supposed to includel his/ her income under all these heads when calculating his entire income.

Who has to pay tax?

Since tax is a charge on income, it includes everyone. All individuals, whether Indian or not, have to pay tax on income earned in India. This tax is the individual's contribution towards the development and well-being of the country.

What are the current tax rates?

Once a year, the parliament comes out with the nation's annual budget.

This budget is presented by the finance minister, approved and passed by Parliament and signed by the president. The budget fixes the income tax rates for the year.

Take a look at the current rates.

How is income tax calculated?

Let's assume Mr X earns an annual income of Rs 4,50,000.  

Now, let's take a look at Mr Y.

He earns an annual income of Rs 9,00,000, so he ends up paying a surcharge as well. 

Income	Tax rates	What it means for the tax payer
Rs 0 � Rs 50,000	No tax	--
Rs 50,001 � Rs 60,000	10 percent	Since no tax is levied up to Rs 50,000, tax in this case is calculated on Rs 10,000 (Rs 60,000 � Rs 50,000) (Rs 10,000 x 10 percent) = Rs 1,000
Rs 60,001 � Rs 1,50,000	20 percent	Since you have already paid tax on Rs 60,000, you now pay tax on Rs 90,000 (Rs 1,50,000 � Rs 60,000) (Rs 90,000 x 20 percent) = Rs 18,000
Above Rs 1,50,000	30 percent	You have already paid tax on Rs 1,50,000, so you now pay tax on Rs 7,50,000 (Rs 9,00,000 � Rs 1,50,000) (Rs 7,50,000 x 30 percent) = Rs 2,25,000
Total Tax		Rs 1,000 + Rs 18,000 + Rs 2,25,000 = Rs 2,44,000
Surcharge	10 percent	(Rs 2,44,000 x 10 percent) = Rs 24,400
Tax including surcharge		Rs 2,44,000 + Rs 24,400 = Rs 2,68,400
Education Cess	2 percent	(Rs 2,68,400 x 2 percent) = Rs 5,368
Total Tax Payable		Rs 2,73,768

Hey, cheer up! You won't end up paying that much if you invest smartly.

Look at instruments that offer a tax benefit. Sell your shares a year after buying them so you don't have to pay capital gains tax.

The government has given you options that can reduce the amount of tax you pay. Use them to your advantage.

Relax With Tax is a Mumbai-based personal tax & finance solutions provider.

Illustration: Dominic Xavier