An income tax is a tax levied on the financial income of persons, corporations, or other legal entities. Various income tax systems exist, with varying degrees of tax incidence. Income taxation can be progressive, proportional, or regressive. When the tax is levied on the income of companies, it is often called a corporate tax, corporate income tax, or profit tax. Individual income taxes often tax the total income of the individual (with some deductions permitted), while corporate income taxes often tax net income (the difference between gross receipts, expenses, and additional write-offs).

The government of India imposes a progressive income tax on taxable income of individuals, Hindu Undivided Families(HUFs), companies (firms), co-operative societies and trusts. The Income Tax department is governed by the Central Board for Direct Taxes (CBDT) and is part of the Department of Revenue under the Ministry of Finance. The individual income tax is a progressive tax with three brackets. No income tax is applicable on income up to INR 110,000 per year. (INR 145,000 for women and INR 195,000 for senior citizens). The highest bracket is 30%, with a 10% surcharge (tax on tax) for incomes above Rs. 10 lakh (INR 1 million).All income taxes are subject to 3% education cess, applicable on the tax paid. Deductions and rebates are provided for housing purchases, rent, long term savings, and insurance. Business income is taxed at a flat rate of 33% for Indian companies and 40% for foreign companies.Dividends are income tax free to shareholders. Instead, companies are charged a 15% dividend distribution tax. Long term capital gains stands at 20% (for gold, real estate, etc.) with indexation benefits provided for inflation adjustments. For sales of shares in recognized stock exchanges, long term capital gains are not taxed, and short term gains are charged 10% tax (less than 1 year of holding). All other short term gains are clubbed with income in the year the gains occur.

The government of India imposes an income tax on taxable income of individuals, Hindu Undivided Families (HUFs), companies (firms), co-operative societies and trusts. The Income Tax department is governed by the Central Board for Direct Taxes (CBDT) and is part of the Department of Revenue under the Ministry of Finance.

All income received as a salary is taxed under this head. This includes all monies paid by a company to its employees. Employers must withhold tax compulsorily, as Tax Deducted at Source (TDS), and provide their employees with a Form 16 (this is not required from 2007)which shows the tax deductions and net paid income. In addition, the Form 16 will contain any other deductions provided from salary such as:

1. Medical reimbursement: Up to Rs. 15,000 per year is tax free if supported by bills. (Company pays Fringe Benefit Tax on this amount)
2. Conveyance allowance: Up to Rs. 1000 per month (Rs. 9,600 per year) is tax free if provided as conveyance allowance. No bills are required for this allowance.
3. Professional taxes: Most states tax employment on a per-professional basis, usually a slabbed amount based on gross income. Such taxes paid are deductible from income tax.

Income from salary is net of all the above deductions.

Income from House property is computed by taking what is called Annual Value. The annual value (in the case of a let out property or a deemed let out property )may be maximum of the following:

• Rent received
• Municipal Valuation
• Market Value

Annual value in case of a self occupied house is to be taken as NIL From this, deduct Municipal Tax paid and you get the Net Annual Value. From this Net Annual Value, deduct :

• 30% of Net value as repair cost (This is mandatory deduction)
• Interest paid or payable on a housing loan against this house

In the case of a self occupied house interest paid or payable is subject to a maximum limit of Rs,1,50,000 (if loan is taken for purchase or construction of house property) / Rs.30,000 (if the loan is taken for repairs)
The balance is added to taxable income.

Sale of capital assets results in capital gains. A Capital asset is defined under section 2(14) of the I T Act as property of any kind held by an assessee such as real estate, equity shares, bonds, jewellery, paintings, art etc. but does not include some items like any stock-in-trade for businesses and personal effects. For tax purposes, there are two types of capital assets: Long term and short term. Long term asset are held by a person for three years except in case of shares or mutual funds which becomes long term just after one year of holding. Sale of such long term assets gives rise to long term capital gains. There are different scheme of taxation of long term capital gains. These are:

1. For long term capital gains on shares or securities or mutual funds on which Securities Transaction Tax (STT) has been deducted and paid, no tax is payable. STT has been applied on all stock market transactions since October 2004 but does not apply to off-market transactions and company buybacks; therefore, the higher capital gains taxes will apply to such transactions where STT is not paid.
2. In case of other shares and securities, person has an option either to index costs to inflation and pay 20% of indexed gains, or pay 10% of non indexed gains. The indexation rates are released by the I-T department each year.
3. In case of all other long term capital gains, indexation benefit is available and tax rate is 20%.

All capital gains that are not long term are short term capital gains, which are taxed as such:

• For shares or mutual funds where STT is paid, tax rate is 10% .
• In all other cases, it is part of gross total income and normal tax rate is applicable.

For companies abroad, the tax liability is 20% of such gains suitably indexed (since STT is not paid).

For companies, income is taxed at a flat rate of 30% for Indian companies, with a 10% surcharge applied on the tax paid by companies with gross turnover over Rs. 1 crore (10 million). Foreign companies pay 40%..An education cess of 3% (on both the tax and the surcharge) are payable, yielding effective tax rates of 33.99% for domestic companies and 41.2% for foreign companies. From 2005-06, electronic filing of company returns is mandatory.

Fringe Benefit Tax is a tax payable by companies against benefits that are seen by employees but cannot be attributed to them individually. This tax is paid as 33.99% of the benefit, which is only a percentage of the actual amount paid.

Service tax is a tax levied on service providers in India, except the State of Jammu and Kashmir. The tax is levied on service providers who have an annual revenue of more than 8 lakhs, which encourages smaller service providers.