Income tax is a tax levied on the income of an individual or an entity. It is one of the primary source of revenue of the government of India. The government undertakes various functions including welfare and development activities related to health, education and rural development etc. for which it requires public finance. Taxes are one of the major source through which the government raises revenue for public spending and it has been broadly categorized into the following two sections:
Income Tax is usually the most visible and discussed component of the Indian tax system. It is generally believed that taxes on income are phenomena of modern days. However, there is enough evidence to show that taxes on income were levied in ancient days in India as well. In this regard, references can be made to the ancient scriptures like Manusmriti and Kautiliyan Arthashastra.
In the modern India, the law related to income tax was introduced for the first time in 1860 to overcome the financial crisis of 1857. Thereafter, the Income Tax (IT) Act of 1886, IT Act of 1918 and IT Act of 1922 were introduced, however, these acts were repealed later due to their inconsistency with the changing requirements of the Indian society. Later, with the consultation of the Ministry of Law the Income Tax Act 1961 was brought into effect which is currently operative in India.
The Income Tax Act, 1961 is the Indian statute that provides for levy, administration, collection and recovery of income tax in India. It contains 23 chapters, 298 sections and 14 schedules in total. Under the Income Tax Act, every person, who is an assessee and whose income exceeds the maximum exemption limit, shall be chargeable to the income tax at the rate or rates prescribed in the Finance Act, such income tax will be paid on the total income of the previous year in the relevant assessment year. Assessment year is a period of 12 months starting from 1st day of April every year and ending on 31st day of March of the next year and previous year/financial year is the 12 months period before the assessment year.
Though there is no specific definition of the term, income as per section 2(24) of the Act means and includes salary, income from house property, profits and gains of business and profession, capital gains and income from other sources. Income tax returns has to be filed compulsorily by every tax payer such as individual, Hindu Undivided Family (HUF), firms, companies etc. whose income exceeds the exemption limit. Income Tax Act, provides penalty for non-filing of income tax returns. The last date of filing income tax return is July 31 in case of individuals but in case of business or professional, the last date for filing the return is 31st October and the penalty for non-filing of income tax returns is Rs. 5,000.
The income tax to be paid by any person/assessee is based on his residential status and place of receipt of income. Section 6 of the income tax Act, 1961 specifies the basis for determination of residential status. The assessee becomes resident and ordinarily resident in India, if he/she satisfies any one of the basic and both the additional conditions stated under section 6 of the Act. If an individual satisfies any one of the basic conditions and any one or none of the additional conditions, he/she shall be treated as resident but not ordinarily resident in India but any individual who does not fulfil any of the basic conditions laid down under section 6 of the Act shall be treated as a non-resident. The conditions are:
The taxes are levied/ decided based on the cannons of taxation and distinction between capital and revenue receipt, expenditure and losses are very important because capital items are exempted from tax unless they are expressly taxable and revenue receipts, expenditure and losses are taxable unless they are expressly exempted. While computing taxable income of an assessee certain exemptions are allowed under section 10 of the Income Tax Act 1961 to encourage the tax payers like agricultural income, share of income from Hindu Undivided Family, share of income from partnership firm, life insurance policy, allowances to MLA’s, MP’s, awards made by the government in public interest, family pension, dividends from domestic company, income from units of mutual fund etc. A tax payer may get varieties of income in a period of 12 months starting from 1st day of April every year and ending on 31st day of March of the next year. All these incomes are grouped in to five heads of income for computation of taxable income i.e., income from salaries, house properties, business or profession, capital gains and other sources.
To levy income tax, one must have an understanding of the various concepts related to the charge of tax like previous year, assessment year, income, total income, person etc.
Income has been classified under five categories in the Indian Income Tax Act –
As per Section 15, the income chargeable to income tax under the head salaries would include:
Any salary due to an employee from an employer or a former employer to an assessee during the previous year irrespective of the fact whether it is paid or not.
Any salary paid or allowed to the employee during the previous year by or on behalf of an employer, or former employer, would be taxable under this head even though such amounts are not due to him during the accounting year.
Arrears of salary paid or allowed to the employee during the previous year by or on behalf of an employer or a former employer would be chargeable to tax during the previous year in cases where such arrears were not charged to tax in any earlier year.
Meera is an employee of Tara Pvt Ltd. getting a salary of Rs 40,000 per month which becomes due on the last day of the month but is paid on the 7th of next month. Salary for which months will be taxable for AY 2015-16? Solution: the salary for the months of April 2014 to March 2015 will be taxable for the Assessment Year 2015-16 because salary for April 2014 will be due on 30th April, 2014 (i.e. within the same month).
SECTION 22 of the Act provides as follows:
“The annual value of property consisting of any buildings or lands appurtenant thereto of which the assessee is the owner other than such portions of such property as he may occupy for the purposes of any business or Profession carried on by him, the profits of which are chargeable to income tax, shall be chargeable to income tax under the head from House Property.”
Tax is charged on income from the buildings or lands appurtenant thereto: the buildings include residential buildings, buildings let out for business or profession or auditoriums for entertainment purposes. Tax is charged on income from lands appurtenant to buildings: the lands appurtenant to buildings include approach roads to and from public streets, courtyards, compound, playground, motor garage. In case of non-residential buildings, car parking spaces, drying grounds shall be the lands appurtenant to buildings.
Tax is charged from the owner of the buildings and lands appurtenant thereto: where the recipient of the Income from House Property is not the owner of the building, the income is not chargeable under this head but under the head ‘Income from Business or Other Sources.’
The provisions of Sections 28 to 44D deal with the method of computing income under head “ Profits and Gains of Business or Profession.”
The meaning of the expression ‘Business’ has been defined in Section 2(13) of the Income Tax Act. According to this definition, business includes any trade, commerce or manufacture or any adventure or concern in the nature of trade commerce or manufacture.
The concept of business presupposes the carrying on of any activity for profit, the definition of business given in the Act does not make it essential for any taxpayer to carry on his activities constituting business for a considerable length of time.
The expression ‘profession’ has been defined in Section 2 (36) of the Act to include any vocation. The term profession includes the concept of an occupation requiring either intellectual skill or manual skill controlled and directed by the intellectual skill of the creator. For instance an auditor, a lawyer or a doctor carrying on their profession and not business.
The common feature in the case of both profession as well as business is that the object of carrying them out is to derive income or to make profit.
Sections 45 of the Act provides that any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in Sections 54, 54B, 54D, 54EC, 54ED, 54F, 54G, 54GA and 54H be chargeable to income tax under the head “Capital Gains” and shall be deemed to be the income of the previous year in which the transfer took place. The requisites of a charge to income tax, of capital gains under Section 45 (1) are:
Income chargeable under Income Tax Act which does not specifically fall for assessment under any of the heads discussed earlier, must be charged to tax as “Income from Other Sources.”
Sections 56 (2) specifically provides for the certain items of incomes as being chargeable to tax under the head as dividend , keyman insurance policy , winnings from lotteries, contribution to provident fund , money gifts, share premiums in excess of the fair market value to be treated as income, income by way of interest received on compensation.
The entire income of winnings, without any expenditure or allowance or deductions under Sections 80C will be taxable. However, expenses relating to the activity of owning and maintaining race horses are allowable. Further, such income is taxable at a special rate of income tax i.e. 30% + surcharge + cess @ 3%
The income chargeable under the head “Income from Other Sources” is the income after making the deductions such as sum paid by way of commission or remuneration to a banker or any other person for the purpose of realising such interest or a deduction of a sum equal to 50% of from interest on compensation or enhanced compensation and any other expenditure laid out or expended wholly.
It is a tax levied by the Government of India on the income of every person. The provisions governing the Income-tax Law are given in the Income-tax Act, 1961.
Income-tax is levied on the annual income of a person. The year under the Income-tax Law is the period starting from 1st April and ending on 31st March of next calendar year. The Income-tax Law classifies the year as (1) Previous year, and (2) Assessment year.
The year in which income is earned is called as previous year and the year in which the income is charged to tax is called as assessment year. e.g., Income earned during the period of 1st April, 2015 to 31st March, 2016 is treated as income of the previous year 2015-16. Income of the previous year 2015-16 will be charged to tax in the next year, i.e., in the assessment year 2016-17.
Income-tax is to be paid by every person. The term ‘person’ as defined under the Income-tax Act covers in its ambit natural as well as artificial persons (companies).
For the purpose of charging Income-tax, the term ‘person’ includes Individual, Hindu Undivided Families [HUFs], Association of Persons [AOPs], Body of individuals [BOIs], Firms, LLPs, Companies, local authority and any artificial juridical person not covered under any of the above.
Thus, from the definition of the term ‘person’ it can be observed that, apart from a natural person, i.e., an individual, any sort of artificial entity will also be liable to pay Income-tax.
Taxes are collected by the Government through three means:
The rates of Income-tax and corporate taxes are available in the Finance Act passed by the Parliament every year. You can also check your tax liability by using the free online tax calculator available at www.incometaxindia.gov.in.
Generally, the tax on income crystallizes only on completion of the previous year. However, for ease of collection and regularity of flow of funds to the Government for its various activities, the Income Tax Act has laid down the provisions for payment of taxes in advance during the year of earning itself. It is called as ‘pay as you earn’ concept. Taxes may also be collected on your behalf during the previous year itself through TDS and TCS mode. If at the time of filing of return you find that you have some balance tax to be paid after taking into account the credit of your advance tax, TDS & TCS, the shortfall is to be deposited as Self-Assessment Tax.
While making payment of tax, apart from other things, one should clearly mention following:
The filled-up taxpayer’s counterfoil will be stamped and returned to you by the bank. Please ensure that the bank’s stamp contains BSR Code [Bankers Serial Number Code], Challan Identification Number [CIN], and the date of payment. In case of e-payment a computer generated copy will be issued.
You can check your tax credit by viewing your Form 26AS from your e-filing account at www.incometaxindiaefiling.gov.in. Form 26AS will also disclose the credit of TDS/TCS in your account.
An assessing officer is an officer of the Income-tax Department who has been given jurisdiction over a particular geographical area in a city/town or over a class of persons. You can find out from the PRO or from the Departmental website http://www.incometaxindia.gov.in about the officer administering the law which could be based on your geographical jurisdiction or the nature of income earned by you.
Under the Income-tax Law, the word income has a very broad and inclusive meaning. In case of a salaried person all that is received from an employer in cash, kind or as a facility is considered as an income. For a businessman his net profit will constitute his income. Income may also flow from investments in the form of Interest, Dividend, Commission, etc. Further, income may be earned on account of sale of capital assets like building, gold, etc.
Income shall be computed as per relevant provision of Income-tax Act, 1961 which lays down detail condition for computation of income chargeable to tax under various heads of income.
An exempt income is not charged to tax, i.e., Income-tax Law specifically grants exemption from tax to such income. Incomes which are chargeable to tax are called as taxable incomes.
E.g., Dividend income from an Indian company is granted specific exemption and, hence, the same is not liable to tax in the hands of the shareholders. However, dividend from a foreign company is taxable.
Revenue receipts are recurring in nature like salary, profit from business, interest income, etc. Capital receipts are generally of isolated nature like receipt on account of sale of residential building, personal jewellery, etc.
The general rule under the Income-tax Law is that all revenue receipts are taxable, unless they are specifically granted exemption from tax and all capital receipts are exempt from tax, unless there is a specific provision for taxing them.
Agricultural income is not taxable. However, if you have non-agricultural income too, then while calculating tax on non-agricultural income, your agricultural income will be taken into account for rate purpose. For the meaning of Agricultural Income refer section 2(IA) of the Income-tax Act.
For every source of income you have to maintain proof of earning and the records specified under the Income-tax Act. In case no such records are prescribed, you should maintain reasonable records with which you can support the claim of income.
Even if you have only agricultural income, you are advised to maintain some proof of your agricultural earnings/expenses.
Yes, such winnings are liable to flat rate of tax at 30% without any basic exemption limit. In such a case the payer of prize money will generally deduct tax at source (i.e., TDS) from the winnings and will pay you only the balance amount.
Yes, you can claim relief in respect of income which is charged to tax both in India as well as abroad. Relief is either granted as per the provisions of double taxation avoidance agreement entered into with that country (if any) by the Government of India or by allowing relief as per section 91 of the Act in respect of tax paid in the foreign country.
The Income-tax Act does not prescribe any specific books of account for a person engaged in business or in non-specified profession. However, such a person is expected to keep and maintain such book of account and other documents as may enable the Assessing Officer to compute his total income in accordance with the provisions of the Act.
For companies the books of account are prescribed under the Companies Act. Further, the Institute of Chartered Accountants of India has prescribed various Accounting Standards and Guidelines that are required to be followed by the business entities as regards the maintenance of books of account by a professional, who is engaged in specified profession has to maintain certain prescribed books of account, if the annual receipts from the profession exceed Rs. 1,50,000 in all the three years immediately preceding year (in case of newly set up profession, his annual receipts in the profession for that year are likely to exceed Rs. 1,50,000). Specified profession covers profession of legal, medical, engineering, architectural, accountancy, company secretary, technical consultancy, interior decoration, authorized representative, film artist or information technology.
For more details on the provisions relating to maintenance of books of account you may refer to section 44AA read with Rule 6F of the Income-tax Rules, 1962.