Notes on Basic Concepts of Income Tax Act 1961

Tax is a compulsory contribution to state/central revenue, levied by the government on taxpayers income and business profits, or cost of some goods, services, and transactions.

Tax is nothing but  money that people have to pay to the Government to use for the public services.

A tax is not a voluntary payment or donation, it is an enforced contribution.

Why taxes are levied by Government?

Tax is the basic source of revenue of the Govt. Taxes are levied by the Governments to meet the common welfare expenditure of the society.

Revenue is utilized for meeting expenses of Govt. like Defence, health care, Education, Road facility, Dam Construction etc.

Types of Tax

There are 2 types of taxes in Taxation system.

What is direct tax?

Direct tax is a tax which is levied directly on the taxpayers. Taxpayers have to pay directly this tax to Government.

Direct taxes imposed in India

Below are some direct taxes imposed in India:

  • Income Tax: It is levied directly the income of person. Taxpayers need to the tax on his earnings as per slab rates defined by the Government.
  • Estate Tax: Estate tax also known as Inheritance tax. It is levied on an estate or the total value of money and property that an individual has left behind after their death.
  • Wealth Tax: Wealth tax is levied on the value of the property which a person possesses.

In India, Direct tax is known as Income Tax. It cannot be shifted to another. Both Estate and Wealth taxes are now abolished.

What is Indirect Tax?

Indirect tax is a tax which can be shifted by the taxpayer to someone else.

It is also known as consumption tax because all consumers have to bear the brunt of the indirect tax.

In India, GST is an indirect tax.

You can read more about GST in separate GST Law article.

Who has the power to levy taxes?

According to Article 265 of the Constitution of India, “No Tax shall be levied or collected except by authority of law.

Constitution of India gives the power to levy and collect taxes to both Central Government and State Government in Seventh Schedule of Article 246.

Seventh Schedule of Article 246 has 3 lists which gives the authority to make laws to levy and collect taxes to both Central and State Governments.

Here are the 3 lists:

Union List: Central government has the power to make laws to levy and collect taxes.

Sate List: State Government has the power to make laws to levy and collect taxes.

Concurrent List: Both Central and State Government has the power to make laws to levy and collect taxes.

What are the sources of the Income Tax Law?

Below are the sources or components which are defining the Income Tax law in India.

Income Tax Act 1961

Income tax structure totally controlled by the Income Tax Act 1961. This Act came into force on 1st April 1962. It has 1 to 298 and XIV schedules.

This act changes every year in Tax slab rates as per finance act passed in Parliament.

The Finance Act

Finance Act is finance bill which is introduced by the finance minister of Govt. of India in parliament’s budget session every year.

Some amendments are made in Income Tax Act and any other laws in this finance bill.

The Finance Act has 4 parts:

  • Part I: Specifies the rate of taxes for the current assessment year.
  • Part II: Specifies the TDS Rate for Current Financial Year.
  • Part III: Specifies the calculation of tax for deduction from Income Under “Salary” and computation of Advance Tax.
  • Part IV: Specifies the rules for Computing Net Agricultural Income.

Income Tax Rules 1962

For the Proper control over Income Tax Act 1961, Central Board of Direct Taxes (CBDT) is the administrative body.

CBDT has the power to make rules to control income tax act.

For the proper administration of the Income Tax act, CBDT makes rules. These rules are called as Income Tax Rules.

Circular and Notifications

CBDT issued circulars to clear problems arises in the provisions of the Income Tax Act. It Clarifies the specific doubts of the various persons related to this act.

Both CBDT and Central Government issued notifications to the effect of the Income Tax Act.

Case laws

Case laws means decisions given by the courts.

After implementation of the Act, some issues arise regarding the Act. For parliament, it is not possible to solve these issues.

Indian Courts has empowered to hear all the issues and give decisions to various issues.

How taxes are levied in India?

Income tax is levied on the total income of the previous year of the person.

Here person means an Individual, Hindu Undivided family(HUF), Association of Persons(AOP), Body of Individuals(BOI), a firm, a company, etc.

Here are the steps in which total income and tax payable of a person is calculated:

Determining of Residential status

Before computing of Total Income of a person his residential status to be determined whether the person is a Resident or Non-Resident.

Classification and Calculation of Heads of Income

A taxpayer earn from different sources. A person may earn income from his salary or from from his rented house or from any business or earn some commission or any other sources. These sources are categorized as 5 heads of Income of a taxpayers.

These are:

  1. Income from Salary
  2. Income from House Property
  3. Income from Profits and Gains from Business or Profession
  4. Income from Capital Gains
  5. Income From Other sources

Persons total income to be calculated in above different heads of Income. Also some exemptions and deductions to be made from his income.

Clubbing of Income

To minimize tax burdens, some taxpayers diverts some portion of their income to their spouse, children.

To prevent such tax avoidance, clubbing income system has been incorporated in Income Tax Act.

In this System, While computing total income of a person, all persons income( Taxpayers Spouse, Child, etc.) to be included in the Total income of a person.

Set-off of Losses or Carry-forward

Some assessee may earn income from different heads of Income. In some cases person can have losses in one head and proffit in other head.

According to the Income tax act, if any losses arises from business it can not be set-off in salary income. One heads losses are not allowed to be set-off in other head.

Losses which can not be set-off in the current year can be carry-forward to set-off in the subsequent year.

Calculation of Total Income

Total Income is calculated after deducting some deductions from gross total income.

Deductions are different types:

  • Deductions in respect of certain payments
  • Deductions in respect of Certain Incomes
  • Deductions in respect of Other Income

Total Income should be rounded of nearest Rs.10/-.

Calculation of Amount of Taxes

Tax Rates: Taxes are calculated on Total income of a different person in Tax rates specified in Annual Finance Atc.

Surcharge: It is an additional Tax payable over and above the Income Tax. Surcharge is percentage of Income Tax. Also 4% Health and Education cess will be applicable in surcharges.

Rebate: An Individual Assesses whose total income does not exceed Rs.5,00,000/- rebate is applicable. Rebate shall be equal to 5% of Income tax in total Income or an amount of Rs.12500/- whichever is less.

Advance Tax and TDS: If any advance tax or TDS is paid earlier to be deducted from total income tax.

Tax payable or Tax Refundable: After adjustment of Advance Tax and TDS assessee may have may have net tax payable or refundable. Such tax amount should be rounded off to the nearest multiple of Rs.10/-.

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