Income Tax for Beginners

 Introduction to Income Tax

What is Tax?

Taxes are recognised as cost of living in a society. Taxes are levied by the government authorities upon individuals and business on the income and/or expenditure. There are two types of taxes:

  1. Direct Tax: This tax is charged upon income or wealth of an individual or body corporate. The burden and incidence of tax is charged upon the same person like Income Tax.
  2. Indirect Tax: The tax is charged upon price of goods or services (GST) or custom. The incidence of tax is passed upon to another person.

Overview of Income tax in India

Income tax law has the following components:

  1. Income Tax law
  2. Finance Act
  3. Income tax Rules
  4. Circulars or notifications issued by CBDT
  5. Decisions of tribunal or courts

  1. Following is the brief about Income Tax law:

It extends to the whole of India

It came into force 01-Apr-1962

It contains Sections 1 – 298 and schedules I to XIV

  1. Following is the brief about Finance Act:
  1. Every year in Parliament’s Budget session the Finance Minister of Government of India introduces the Finance Bill before both houses of the Parliament and gets assent of the President, thereafter it becomes the Finance Act.

  1.   The First Schedule to the Finance Act contains four parts which specifies the rate of tax – 

  1. Part I of the First Schedule contains the rates of applicable for the current Assessment Year.
  2. Part II states the rate at which tax is deductible at source for the current financial year
  3. Part III states the rates of tax for salary and advance tax
  4. Part IV gives method of computation of net agricultural income

  1.   Income Tax Rules

  1. The government has formed a board to issue to makes rules with reference to the Act
  2. For proper administration of Act the board issues rules from time to time as and when required
  3. Therefore, it is important to read the Act along with Rules

  1. Circulars/Notifications 

  1. The board formed by government also issues circulars and notifications
  2. Circulars and notifications are issued by the board for better understanding of the provisions of income tax

  1. Decisions of Courts

The decisions made by tribunal and courts in cases related to Income Tax is also referred while reading the provisions and it takes a front seat in deciding the provisions 

Some Important terms in Income Tax

In order to have a better understand of Income Tax it is important to have knowledge of some important terms in the law. Following are some important terms:

  1. Assessee: It refers to any person from whom tax can be demanded It almost includes everything whether a person of blood and flesh or company or artificial jurisdictional person
  2. Assessment: It is the process through which department determines the tax payable on income by any person.
  3. Person: The root of the word person comes from assessee because income tax is charged on an assessee who is a person

 

  1. Assessment Year: It is a period of 12 months commencing one financial year and ending that financial year. 
  2. Previous Year: It means the year before the assessment year it may or may not be a period of 12 months.

For example: A business is operating from 2020. Determine the previous year for assessment year 2023-24.

The previous year will be 2022-23

Sources of Income

An individual can have five sources of income:

  1. A fixed income from salary
  2. Income from a house owned by any person
  3. Income from being engaged in anu business or profession
  4. Gain/Loss from selling off any capital assets
  5. Income from any other source

Income from Salary

A person doing a job to earn his livelihood and earning a fixed income from any organisation, the fixed income is termed as salary. A person drawing salary can also earn income by way of dearness allowance, bonus, gratuity, fees, commission and other allowance and perquisites.

It is important to note that salary is charged to tax upon cash or due basis whichever is earlier.

Some FAQ’s about Salary income?

  1. Doing part time employment and receiving salary will come under salary income?

Yes, once the relationship of employee and employer is established the salary received from such organisation is chargeable to tax under salary.

  1. If an employee waives his salary but the salary is due does that salary is taxable?

Yes, once the salary is due to an employee it becomes taxable whether the salary is forgone by that employee.

For example: Mr. Robin an employee instructs his employer that he is not interested in receiving salary for the month of April 2023.

In this case Mr. A cannot claim exemption from his salary because he is intending to waive his salary. The salary for the month of April 2023 will be taxed under the head of salary.

  1. If a person surrenders his salary whether the salary is chargeable to tax?

No, once the employee surrenders his salary to government under any legal provision such salary will not be liable to be taxed.

Income from House Property Owned by the Assessee

A person who owns, whether in India or outside India, a house and receives any income from such house, such income is charged to tax under Income Tax.

Some FAQ’s to consider under this head:

  1. What is a house?

Any land surrounded by wall and any land apparent to such house shall be called as house property.

  1. What if any person has two or more vacant house is it chargeable to tax?

If a person has more than one vacant property then any of the property shall be termed as vacant and one property shall be termed as deed to let out at the discretion of the owner.

  1. What type of ownership should the person have so that he is considered as owner of the house?

  1. Owner is the person who is entitle to receive rent
  2. Registration of sale deed is not important
  3. Ownership includes deemed ownership - Deemed ownership refers that it is not important to determine the legal owner of the property the beneficial owner will also be covered for determining the chargeability of tax.

Capital Gain

Apart from normal rate of tax on income the Act provides special rate of tax in case of Capital Gain. To understand better, one must first get the knowledge of capital asset and capital gain/loss arsing from transfer of such asset.

The taxability of income tax is considered based on time for which the asset is used by the person holding the asset.

The capital asset is categorised into the following as follows:

  1. Long Term capital Asset – It depends on the asset and its period of holding
  2. Short term Capital Asset – It depends on the asset and its period of holding

The following items shall not be termed as Capital Assets:

  1. Stock in trade: – Any business holding asset as stock in trade shall not be deemed to be a capital asset and its transfer will not be liable to capital gain tax.
  2. Personal goods: Any person holding any asset for its personal purpose will not be considered as capital asset and its transfer will not be liable to capital gain tax like jewellery, drawings, paintings, sculptures and any work of art.
  3. Agricultural Land in Rural India 
  4. Specified Gold Bonds 
  5. Gold Deposit Bonds

Deductions

Deduction refers to those expenses which form part of the income but it shall be deducted from the gross total income of the person. Tax deductions help you to reduce and save taxes legally, therefore this is part of tax management.

In order to avail deductions one must make investments in mutual fund or fixed deposit or other notified investments. In order to lift up various sectors government announces deductions like to lift up mutual fund sector one can get Rs. 1,50,000 as deduction by investing in mutual fund.

Various deductions are provided under chapter VI of the Act.

Tax Deductible at Source

Tax deductible at source refers to a system of taxation where one person enters into a notified transaction where the amount of transaction exceeds a certain limit then a percent of tax is deducted by the payer and submitted as a portion to tax to government on behalf of payee.

Tax Deducted at Source (TDS) exists in several nations including India and the United States. He­re's how it works: Let's say someone­ owes a payment. Before­ paying, they remove a small slice­ of the amount. This slice goes straight to the­ government. Why? TDS makes certain the government ge­ts some tax revenue­ regularly, as income arrives. This model helps reduce the­ stress of taxpayers having to cough up the whole­ tax chunk at the end of the fiscal year.  

Deduction Rate: According to the details of the payment and the appropriate tax regulations, there are variations in the rate at which TDS is deducted. These charges may be expressed as a percentage of the entire payment or as a fixed rate.

Deductor and Deductee: the entity or person in charge of transferring the money is called the "deductor," and the receiver is called the "deductee." It is the deductor's role to take out the TDS and send it to the government.

TDS Certificates: As proof of the TDS deduction, the deductor gives the deductees with TDS certificates. After that, deductible individuals may file their income tax returns and get a tax credit for the TDS amount.

Income Tax Return

Registered with the tax authorities, an income tax return is a document that taxpayers must provide that details their income, deductions, and other financial information for a given period, generally a fiscal year. The amount of income tax payable to the government or, in some situations, the potential tax refund for the taxpayer is calculated based on the information on this return. For individuals, businesses, and other entities, filing an income tax return is crucial as it ensures compliance to tax law and enables the calculation of precise tax liabilities for the reporting period. Depending on the nation's tax laws, there might be variations in the precise requirements and deadline dates for filing income tax returns. Taxpayers are frequently urged to utilize those assets that are reported in the return.

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