Basic concepts of Income Tax

The Income Tax law in India consists of the following components:

1. Income Tax Act, 1961: The Act contains the major provisions related to Income Tax in India.
2. Income Tax Rules, 1962: Central Board of Direct Taxes (CBDT) is the body which looks after the administration of Direct Tax. The CBDT is empowered to make rules for carrying out the purpose of this Act.
3. Finance Act: Every year Finance Minister of Government of India presents the budget to the parliament. Once the finance bill is approved by the parliament and get the clearance from President of India, it became the Finance Act.
4. Circulars and Notifications: Sometimes the provisions of an act may need clarification and that clarification usually in a form of circulars and notifications which has been issued by the CBDT from time to time. It includes clarifying the doubts regarding the scope and meaning of the provisions.

Types of Taxes

Taxes are levied by the government on the taxpayer. Taxes are broadly divided into two parts namely, Direct Tax and Indirect Tax. Direct Tax is levied directly on the income of the person. Income Tax and Wealth Tax are the part of Direct Tax. Whereas, in indirect taxes, the person who pays the tax, shifts the burden to the person who consumes the goods or services. Before 2017 the Indirect Tax comprises of various taxes and duties like Service Tax, Sales Tax, Value Added Tax, Customs Duty, Excise Duty and etc. From July 1st, 2017 all such Indirect Taxes are submerged in one tax law which was named as ‘The Goods and Services Tax Act, 2017”.

Basic Concept of Income Tax Act

“Income Tax is levied on the total income of the previous year of every person”. To understand the basic concept.It is very important to know the various other concepts.

Concept of Income

In common parlance, Income is known as a regular periodic return to a person from his activities. However, the Income has broader classified in Income Tax law. The Income Tax Act, even take consideration of income which has not arisen regularly and periodically. For instance, winning from lotteries, crossword puzzles, income from winning of shows is also subject to tax as per income tax.

The Income includes income from:

Cash or Kind

Income in terms of Cash is not the only way to receive income, it can also be received in terms of a kind. The calculation of income from kind is subject to different treatments in both Direct and Indirect Tax. When the income is received in kind, its valuation will be made.

Legal or Illegal Income

A man of ordinary prudence may think that the illegal income may not be falling under the concept of income, but income tax does not make any distinction between the income received from a legal or illegal source. In CIT v. Piara Singh, the Supreme Court held that the loss of business of smuggling shall be allowed for deduction under Income Tax. The rationale behind the decision was that the smuggling activity is also regarded as a business. Therefore, the confiscation of currency notes employed in smuggling activity is a loss which arises directly from the carrying on of the business.

Temporary or Permanent

As per Income Tax Act, there is no distinction in computing income whether nature is temporary or permanent.

Receipt basis or Accrual basis

Income arises either on receipt basis or accrual basis. It may accrue to a taxpayer without its actual receipt. The income in some cases is deemed to accrue or arise to a person without its actual accrual or receipt. Income accrues where the right to receive arises.

Gifts 

Gifts up to Rs. 50,000 received in Cash do not constitute tax liability. Gifts in kind having the fair value maximum up to Rs. 50,000 is not liable to tax. However, the whole amount will be taxed if the value exceeds the prescribed limit. Moreover, the treatment of valuation of the gift is different in the different situation especially gifts received on occasion of marriage.

Lump sum or Instalments 

Income Tax does not make any distinction in computing income, whether it receive in lump sum or instalment.

Moreover, the income is defined in Section 2(24) of the Act.

Person

Income tax is levied on the total income of the previous year of every person. In general terms, the meaning of a person can be interpreted in a short term. Whereas, as per Section 2 (31), Person includes:

1. an individual,
2. a Hindu undivided family (HUF),
3. a company,
4. a firm,
5. an association of persons (AOP) or a body of individuals (BOI), whether incorporated or not,
6. a local authority, and
7. every artificial juridical person (AJP), not falling within any of the preceding sub-clauses.

The definition of Person starts with the word includes, therefore, the list is inclusive, not exhaustive.

Assessee

An assessee is a taxpayer means a person who under the income tax act is subject to pay taxes or any other sum of money, as defined under section 2 (7) of the Act. The expression ‘any other sum of money’ includes other such obligations payable, for instance fine, interest, penalty and other tax etc.

Assessment Year

“Assessment Year” means the year in which income of the previous year of an assessee is taxed. The timed lap of assessment year is of twelve months beginning from the 1st April every year. The period starts from 1st April of one year and ending on 31st March of next year. Broadly, assessment year is defined under section 2 (9) of the Act.

Previous Year

Income earned during the year is taxable in the next year. The definition of “Previous Year” is given under section 3 of the Act. Previous Year is the year in which income is earned. Previous year is the financial year immediately preceding the relevant assessment year. From 1989-90 onwards, every taxpayer is obliged to follow financial year (i.e., April 1st of one year to March 31st of next year) as the previous year.

For a newly set up business or profession, the first previous year will start from the day from which that business or profession has commenced, but the period of ending will remains same (i.e., 31st March).

Heads of Income

As per Income tax, section 14 classifies income under five heads:

1. Income from salaries
2. Income from House Property
3. Profits and gains of business and profession
4. Capital Gains
5. Income from other sources

Tax Rates

The Income is taxed at the rates prescribed by the relevant Finance Act. The tax levied on the basis of a slab system where different tax rates have been directed for the different slab. In India, there are three categories of individual taxpayers:

1. An individual below the age of 60 years,
2. A senior citizen above the age of 60 years, but below the age of 80 years,
3. A super senior citizen above 80 years of age.

The tax slab varies according to the different persons.

Surcharge

The Surcharge is commonly known as Tax on Tax. It is an additional tax levied on the taxpayers on a special group of people. It is an additional tax liability levied on the person having more income than prescribed.

 Education Cess and Secondary Higher Education Cess

The amount of income tax shall be increased by an Education Cess on Income Tax by 2% and Secondary and Higher Education Cess by 1% of the tax liability.