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Introduction to Income Tax

Introduction to Income Tax Act 1961 and related concepts. Rates for the PY 14-15 (India)

1 of 28
BASIC CONCEPTS
OF
INCOME TAX
WHAT IS TAX?
• Tax is a compulsory contribution to state revenue, levied by the
government on workers' income and business profits, or added to
the cost of some goods, services, and transactions. It may be direct
tax or indirect tax.
• Direct tax is a tax, such as income tax, which is levied on the income
or profits of the person who pays it, rather than on goods or
services.
• Indirect Tax is levied on goods and services rather than on income
or profits.
INTRODUCTION
• The present law of income tax is contained in the Income Tax Act,
1961. The Income tax Act contains the provisions for determination
of taxable income, determination of tax liability, procedure for
assessment, appeal, penalties and prosecutions. It also lays down the
powers and duties of various income tax authorities.
• The Income Tax Law comprises The Income Tax Act 1961, Income
Tax Rules 1962, Notifications and Circulars issued by Central Board
of Direct Taxes (CBDT), Annual Finance Acts and Judicial
pronouncements by Supreme Court and High Courts.
TAX
DIRECT
TAX
INCOME
TAX
WEALTH
TAX
INDIRECT
TAX
EXCISE
DUTY
VAT
SERVICE
TAX
CUSTOMS
DUTY
INCOME
As per [Section 2(24)], Income includes :
1. Profits or gains of business or profession.
2. Dividend.
3. Voluntary Contribution received by a Charitable / Religious Trust or University /
Education Institution or Hospital
4. Value of perquisite or profit in lieu of salary taxable u/s 17 and special allowance or
benefit specifically granted either to meet personal expenses or for performance of
duties of an office or an employment of profit.
5. Export incentives, like Duty Drawback, Cash Compensatory Support, Sale of licences
etc.
6. Interest, salary, bonus, commission or remuneration earned by a partner of a Firm from
such Firm.
7. Capital Gains chargeable u/s 45.
8. Profits and gains from the business of banking carried on by a
cooperative society with its members.
9. Winnings from lotteries, crossword puzzles, races including horse races,
card games and other games of any sort or from gambling or betting of
any form or nature whatsoever.
10. Deemed income u/s 41 or 59.
11. Sums received by an assessee from his employees towards welfare fund
contributions such as Provident Fund, Superannuation Fund etc.
12. Amount received under Keyman Insurance Policy including bonus
thereon.

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Introduction to Income Tax

  • 2. WHAT IS TAX? • Tax is a compulsory contribution to state revenue, levied by the government on workers' income and business profits, or added to the cost of some goods, services, and transactions. It may be direct tax or indirect tax. • Direct tax is a tax, such as income tax, which is levied on the income or profits of the person who pays it, rather than on goods or services. • Indirect Tax is levied on goods and services rather than on income or profits.
  • 3. INTRODUCTION • The present law of income tax is contained in the Income Tax Act, 1961. The Income tax Act contains the provisions for determination of taxable income, determination of tax liability, procedure for assessment, appeal, penalties and prosecutions. It also lays down the powers and duties of various income tax authorities. • The Income Tax Law comprises The Income Tax Act 1961, Income Tax Rules 1962, Notifications and Circulars issued by Central Board of Direct Taxes (CBDT), Annual Finance Acts and Judicial pronouncements by Supreme Court and High Courts.
  • 5. INCOME As per [Section 2(24)], Income includes : 1. Profits or gains of business or profession. 2. Dividend. 3. Voluntary Contribution received by a Charitable / Religious Trust or University / Education Institution or Hospital 4. Value of perquisite or profit in lieu of salary taxable u/s 17 and special allowance or benefit specifically granted either to meet personal expenses or for performance of duties of an office or an employment of profit. 5. Export incentives, like Duty Drawback, Cash Compensatory Support, Sale of licences etc. 6. Interest, salary, bonus, commission or remuneration earned by a partner of a Firm from such Firm.
  • 6. 7. Capital Gains chargeable u/s 45. 8. Profits and gains from the business of banking carried on by a cooperative society with its members. 9. Winnings from lotteries, crossword puzzles, races including horse races, card games and other games of any sort or from gambling or betting of any form or nature whatsoever. 10. Deemed income u/s 41 or 59. 11. Sums received by an assessee from his employees towards welfare fund contributions such as Provident Fund, Superannuation Fund etc. 12. Amount received under Keyman Insurance Policy including bonus thereon.
  • 7. 13. Amount received under agreement for (a) not carrying out activity in relation to any business, or (b) not sharing any knowhow, patent, copyright etc. 14. Benefit or perquisite received from a Company, by a Director or a person holding substantial interest or a relative of the Director or such person. 15. Gift as defined u/s 56 (2)(vi) . Any sum of money exceeding Rs. 50,000, received by an Individual or a HUF from any person during the previous year without consideration. 16. Any consideration received for issue of shares as exceeds the fair market value of the shares referred to in Section 56(2)(vii)(b). 17. Any sum of money referred to in clause (ix) of Sub-Section (2) of section 56.
  • 8. ASSESSEE As per section 2(7) of the Act, assessee means a person by whom any tax or any other sum of money (i.e. interest, penalty etc.) is payable under the Act and includes: a) every person in respect of whom any proceeding under this Act has been taken for the assessment of his income or assessment of fringe benefits or of the income of any other person in respect of which he is assessable or to determine the loss sustained by him or by such other person or to determine the amount of refund due to him or to such other person. b) every person who is deemed to be an assessee under any provision of this Act. c) every person who is deemed to be an assessee in default under any provision of this Act.
  • 9.  ASSESSMENT YEAR [SECTION 2(9)] “Assessment year” means the period of twelve months commencing on 1st April every year and ending on 31st March of the next year. Income of previous year of an assessee is taxed during the following assessment year at the rates prescribed by the relevant Finance Act.  PREVIOUS YEAR (SECTION 3) Income earned in a year is taxable in the next year. The year in which income is earned is known as previous year. From the assessment year 1989-90 onwards, all assessees are required to follow financial year (i.e. April 1 to March 31) as previous year. The uniform previous year has to be followed for all sources of income.
  • 10. Income Tax is computed on the total income of the previous year of every person in the assessment year. However, there are five exception to this rule: i. Assessment of non-residents in respect of their income from shipping business (Section 172). ii. Assessment of persons leaving India (Section 174). iii. Assessment of association of persons or body of individuals or artificial juridical person formed for a particular event or purpose (section 174A). iv. Assessment of persons trying to alienate their assets with the object of avoiding liability to tax (Section 175). v. Assessment of the income from discontinued business
  • 11. PERSON As per section 2(31), Person includes: • an individual • a Hindu undivided family • a company • a firm • an association of persons or a body of individuals whether incorporated or not • a local authority • every artificial, juridical person, not falling within any of the above categories
  • 12. • An individual a natural human being, i.e. male, female, minor or a person of sound or unsound mind. • A Hindu undivided family it consists of all persons lineally descended from a common ancestor and includes their wives and unmarried daughters. • A company Section 2(17) defines the term ‘company’ to mean: i. any Indian company, or ii. any body corporate incorporated by or under the laws of a country outside India i.e. a foreign company, or iii. any institution, association or body which is or was assessable or was assessed as a company for any assessment year under the Indian Income Tax Act, 1922 or which is or was assessable or was assessed under this Act as a company for any assessment year commencing on or before the 1st day of April, 1970, or iv. any institution, association or body, whether incorporated or not and whether Indian or non- Indian, which is declared by general or special order of the Board to be a company only for such assessment year or assessment years (whether commencing before the first day of April, 1971 or, on or after that date), as may be specified in the declaration.
  • 13. • A firm a partnership firm whether registered or not. • An association of persons or a body of individuals whether incorporated or not The difference between Association of persons and body of individuals is that whereas an association implies a voluntary getting together for a definite purpose, a body of individuals would be just a body without an intention to get-together. Moreover, the members of body of individuals can be individuals only whereas the members of an association of persons can be individual or non-individuals (i.e. artificial persons). • A local authority means a municipal committee, district board, body of port commissioners, or other authority legally entitled to or entrusted by the Government with the control and management of a Municipal or local fund. • Every artificial, juridical person, not falling within any of the above categories
  • 14. CAPITAL AND REVENUE RECEIPTS The objective of the Income-tax Act is to tax only income generally revenue receipts unless specifically exempted. On the other hand capital receipts are not chargeable to tax except when specifically provided in the Act. It may be observed that :  A receipt in substitution of a source of income is a capital receipt while a receipt in substitution of an income is a revenue receipt.  An amount received as a compensation for surrender of certain rights under an agreement is a capital receipt whereas an amount received under an agreement as compensation for loss of future profit is a revenue receipt.
  • 15. CAPITAL AND REVENUE EXPENDITURE In computing taxable income normally revenue expenditure incurred for the purpose of earning income is deductible from revenue receipt unless the law provides specific rules to disallow such expenditure wholly or partly. On the other hand capital expenditure is not deductible while computing taxable income unless the law expressly so provides. Neither the capital expenditure nor revenue expenditure has been defined in the Act. However, from the facts and circumstances of each case and from the judicial decisions the following general principles to be kept in mind.
  • 16. i. Capital expenditure is incurred in acquiring, extending or improving a fixed asset whereas revenue expenditure is incurred in the normal course of business as a routine expenditure. ii. Capital expenditure incurred for enduring benefits whereas revenue expenditure is consumed within a Previous Year. iii. Capital expenditure makes improvement with earning capacity of a business whereas a revenue expenditure maintains the profit making capacity of a business. iv. Capital expenditure is a nonrecurring expenditure whereas revenue expenditure is normally a recurring one.
  • 17. COMPUTATION OF TAXABLE INCOME AND TAX LIABILITY OF AN ASSESSEE 1. Determine the residential status of the person as per section 6 of the Act. 2. Calculate the income as per the provisions of respective heads of income. Section 14 classifies the income under five heads: 1. Income from salaries 2. Income from House Property 3. Profits and gains of business or Profession 4. Capital Gains 5. Income from other sources 3. Consider all the deductions and allowances given under the respective heads before arriving at the net income. 4. Exclude the income exempt under section 10 of the Act.
  • 18. 5. Aggregate of incomes computed under the 5 heads of income after applying clubbing provisions and making adjustments of set off and carry forward of losses is known as Gross Total Income. 6. Deduct there from the deductions admissible under Sections 80C to 80U. The balance is called Total income. The total income is rounded off to the nearest multiple of Rupees ten. (Section 288A) 7. Add agriculture income in the total income calculated in (6) above. Then calculate tax on the aggregate as if such aggregate income is the Total Income. 8. Calculate income tax on the net agricultural income as increased by 2,00,000/ 2,50,000/ 5,00,000 as the case may be, as if such increased net agricultural income were the total income. 9. The amount of income tax determined under (8) above will be deducted from the amount of income tax determined under (7) above. 10. Calculate income tax on capital gains under Section 112, and on other income at specified rates. The balance of amount of income tax left as per (9) above plus the amount of income tax at (10) above will be the income tax in respect of the total income.
  • 19. 11. The balance of amount of income tax left as per (9) above plus the amount of income tax at (10) above will be the income tax in respect of the total income. 12. Deduct the following from the amount of tax calculated under (11) above: 1. Tax deducted and collected at source. 2. Advance tax paid. 3. Double taxation relief. 13. The balance of amount left after deduction of items given in (12) above, shall be the net tax payable or net tax refundable for the assessee. Net tax payable/refundable shall be rounded off to the nearest multiple of Ten rupees (Section 288B). 14. Along with the amount of net tax payable, the assessee shall have to pay penalties or fines, if any, imposed on him under the Income-tax Act.
  • 20. A. For resident senior citizen (who is of 60 years but less than 80 years during the previous year) INCOME RATE Upto 3,00,000 NIL 3,00,000 to 5,00,000 10% 5,00,001 to 10,00,000 20% Above 10,00,000 30% TAX RATES B. For resident senior citizen (who is of 80 years during the previous year) INCOME RATE Upto 5,00,000 NIL 5,00,001 to 10,00,000 20% Above 10,00,000 30%
  • 21. C. For every other individual (resident and non-resident), every HUF/AOP/BOI/artificial juridical person INCOME (IN INR) RATE Upto 2,50,000 NIL 2,50,001 to 5,00,000 10% 5,00,001 to 10,00,000 20% Above 10,00,000 30% A resident individual, having total income not exceeding Rs. 5,00,000, can avail rebate, of 2,000 or 100% of income tax, whichever is less, u/s 87A. The amount of income tax computed in accordance with the above rates and special rates u/s 111A and 112 (relating to LTCG) shall be increased by a surcharge at the rate of 10% of such income tax in case the total income exceeds Rs. 1 crore.
  • 22. MARGINAL RELIEF • The total amount payable as income tax and surcharge on total income exceeding Rs. 1 crore shall not exceed the total amount payable as income tax on a total income of Rs. 1 crore, by more than the amount of income that exceeds Rs. 1 crore. • In case of company having a total income of exceeding Rs. 10 crores, the amount payable as income tax and surcharge shall not exceed the total amount payable as income tax and surcharge on total income of Rs. 10 crore by more than the amount of income that exceeds Rs. 10 crore.
  • 23. ROUNDING OFF TOTAL INCOME AND TAX • Rounding Off Income [Sec. 288A]: The Total Income computed under this Act, shall be rounded off to the nearest multiple of 10. • Rounding Off Tax [Sec. 288B] : The amount of Tax including Tax Deducted at Source (TDS) and advance tax, interest, penalty, fine or any other sum payable, and the amount of refund due under the Income Tax Act, shall be rounded off to the nearest ‘10.
  • 24. D. Firms/LLP @ 30% Surcharge is applicable at the rate of 10% of such income tax in case the total income exceeds Rs. 1 crore. E. Companies: i. On Domestic company @ 30% The surcharge @ 5% in case of a domestic company shall be levied if the total income of the domestic company exceeds 1 crore rupees but does not exceed 10 crore rupees and the surcharge @ 10% shall be levied if the total income of the domestic company exceeds 10 crore rupees. ii. On companies other than domestic companies @40% In case of companies other than domestic companies, the surcharge of 2 % shall be levied if the total income exceeds 1 crore rupees but does not exceed 10 crore rupees and surcharge @5% shall be levied if the total income exceeds 10 crore rupees.
  • 25. • However, for short term capital gains emanating from transfer of a short term capital asset being an equity share or unit of an equity oriental fund u/s 111A, income tax rate is 15% for all the assessee. And for long-term capital gains emanating from transfer of a long term capital asset, Income Tax rate is 20%. • The amount of income-tax as computed including surcharge thereon shall be increased by an Education Cess on Income Tax by 2% for the purpose of fulfilling the commitment of the Central Government to provide and finance universalized basic education and 1% Secondary and Higher Education Cess shall also be charged @ 1%
  • 26. TOTAL INCOME AND TAX PAYABLE DETERMINATION OF RESIDENTIAL STATUS CLASSIFICATION OF INCOME UNDER DIFFERENT HEADS EXCLUSION OF INCOME NOT CHARGEABE TO TAX COMPUTATION OF INCOME UNDER EACH HEAD CLUBBING OF INCOME OF SPOUSE, MINOR CHILD ETC. SET OFF OR CARRY FORWARD AND SET OFF OF LOSSES
  • 27. COMPUTATION OF GROSS TOTAL INCOME DEDUCTIONS FROM GROSS TOTAL INCOME TOTAL INCOME APPLICATION OF THE RATES OF TAX ON TOTAL INCOME SURCHARGE EDUCATION CESS AND SECONDARY AND HIGHER EDUCATION CESS ON INCOME TAX ADVANCE TAX AND TAX DEDUCTION AT SOURCE

Editor's Notes

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