The Income Tax Act 1961 and its amendments provide for the taxation of income earned by individuals, businesses, and other entities. The Act specifies various concepts such as income, residential status, tax slabs, tax deductions, advance tax, tax returns, tax refunds, penalties, and tax audit. Understanding these basic concepts is essential for individuals and businesses to comply with the provisions of the Act and to manage their tax liability effectively.
- Income: Income tax is levied on the income earned by individuals, businesses, and other entities. Income can be in the form of salaries, wages, profits, capital gains, rent, interest, dividends, and other sources of income.
- Assessment Year: The Assessment Year (AY) is the year following the financial year in which the income is earned and taxes are paid. For example, if an individual earns income during the financial year 2021-22, the corresponding Assessment Year would be 2022-23.
- Residential Status: The Income Tax Act divides individuals into three categories based on their residential status. The categories are Resident, Non-Resident, and Resident but Not Ordinarily Resident. The tax liability of the individual is determined based on their residential status.
- Tax Deductions: The Income Tax Act provides for various deductions that can be claimed by individuals and businesses to reduce their tax liability. These deductions are available for expenses such as medical expenses, education expenses, charitable contributions, and others.
- Tax Slabs: The Income Tax Act specifies different tax slabs for individuals based on their income. The tax rate increases with an increase in income, and higher-income individuals are taxed at a higher rate.
- Tax Returns: Taxpayers are required to file income tax returns with the Income Tax Department. The returns provide details of the income earned during the financial year, deductions claimed, and tax paid. The Income Tax Department uses this information to assess the tax liability of the taxpayer.
- Advance Tax: Advance tax is a mechanism through which taxpayers can pay their tax liability in installments during the financial year. Individuals and businesses with an estimated tax liability of more than Rs. 10,000 are required to pay advance tax.
- Tax Refunds: If the tax paid by the taxpayer is more than their tax liability, they are eligible for a tax refund. The Income Tax Department processes refund claims after verifying the tax returns and other details.
- Penalties: The Income Tax Act provides for penalties for non-compliance with the provisions of the Act. Penalties can be levied for non-filing of tax returns, late payment of taxes, incorrect declaration of income, and other violations.
- Tax Audit: Businesses and professionals with a certain level of turnover or income are required to undergo a tax audit. The tax audit is carried out by a Chartered Accountant, and the objective is to ensure compliance with the provisions of the Income Tax Act.
Residential status is an important concept in the Indian Income Tax system. It determines the tax liability of an individual for a particular financial year. The Income Tax Act 1961 divides individuals into three categories based on their residential status. The categories are Resident, Non-Resident, and Resident but Not Ordinarily Resident (RNOR). Each category has different tax implications.
Resident: An individual is considered a resident for a financial year if they fulfill either of the following conditions:
- They have stayed in India for a minimum of 182 days in that financial year, or
- They have stayed in India for a minimum of 60 days in that financial year and 365 days in the preceding four financial years.
In other words, an individual who has stayed in India for at least 182 days during the financial year is considered a resident. However, if an individual has not stayed in India for 182 days but has stayed in India for at least 60 days during the financial year and 365 days in the preceding four financial years, they are also considered a resident.
Non-Resident: An individual who does not satisfy either of the above conditions is considered a non-resident for that financial year. In other words, an individual who has not stayed in India for at least 182 days during the financial year and has not stayed in India for at least 60 days during the financial year and 365 days in the preceding four financial years is considered a non-resident.
Resident but Not Ordinarily Resident (RNOR): An individual who satisfies any one of the following conditions is considered an RNOR for that financial year:
- They have been a non-resident in India for nine out of the ten preceding financial years, or
- They have stayed in India for a minimum of 729 days in the preceding seven financial years.
In other words, an individual who has not been a resident in India for nine out of the ten preceding financial years or has stayed in India for at least 729 days in the preceding seven financial years is considered an RNOR.
The tax liability of an individual is determined based on their residential status. A resident individual is taxed on their global income, which includes income earned in India and outside India. A non-resident individual is taxed only on the income earned in India. An RNOR individual is taxed on the income earned in India and on income earned outside India, which is received or deemed to be received in India.
The tax rates applicable to residents, non-residents, and RNORs are different. The tax rates for residents are progressive, which means the tax rate increases with an increase in income. The tax rates for non-residents and RNORs are fixed at 30% for most types of income.
In addition to tax rates, there are other tax implications based on residential status. For example, a resident individual is eligible for various deductions and exemptions under the Income Tax Act, which can help reduce their tax liability. A non-resident individual is not eligible for many of these deductions and exemptions.
Scope of Total Income
The concept of Total Income is a crucial one in the Indian Income Tax system. It refers to the total amount of income earned by an individual during a particular financial year, which is subject to tax. The scope of Total Income is determined by the Income Tax Act, 1961, and its amendments.
The Income Tax Act specifies different categories of income that are included in the scope of Total Income. These categories are broadly classified as:
- Income from Salaries: This includes any income earned by an individual as a salary, bonus, commission, or any other type of remuneration for their services as an employee.
- Income from House Property: This includes any rental income earned from a property owned by an individual. It also includes any income earned from the transfer of a property.
- Income from Business or Profession: This includes any income earned by an individual from any business or profession carried out by them.
- Income from Capital Gains: This includes any income earned by an individual from the sale of a capital asset, such as property, stocks, or bonds.
- Income from Other Sources: This includes any income earned by an individual that does not fall under any of the above categories. It includes income from interest, dividends, and any other type of income that is not specifically covered under the other categories.
In addition to the above categories, the Income Tax Act also specifies certain deductions and exemptions that can be claimed by an individual while computing their Total Income. These include deductions for investments made in specified instruments such as Provident Fund, Public Provident Fund, Life Insurance Premiums, National Pension Scheme, etc. Exemptions are available for certain types of income such as agricultural income, income from long-term capital gains, etc.
The Scope of Total Income also includes income earned outside India by an Indian resident. The Income Tax Act mandates that an Indian resident should report their global income while filing their tax returns. This means that income earned outside India is also included in the scope of Total Income for Indian residents.
It is important to note that the scope of Total Income is not limited to cash income. It also includes non-cash benefits, such as perquisites and allowances received by an individual from their employer. These include benefits such as rent-free accommodation, club memberships, company cars, etc.