Basic Concepts of
Income Tax
Direct tax and indirect tax
Direct tax (i.e. Income Tax)
It is
the tax levied and collected by the Government / Tax Authorities directly from
the assessee. Tax burden in this case cannot be shifted by the assessee to any other
person, and the tax is collected from the assessee on his income already earned
by him during a year before the year of assessment of his income.
Indirect tax (i.e. GST and Customs Duty)
It is
the tax levied and collected by the Government / Tax Authorities indirectly
from the final consumers of goods and/or services through the retailers,
dealers, distributors, service providers and/or manufacturers. Retailers,
dealers, distributors, service providers and manufacturers are the actual
assessees under indirect tax. Tax burden in this case is shifted by the
assessees, one after another (starting from the manufacturers or the service
providers), to the ultimate users of goods and services.
Assessment year [Section 2(9)]
Assessment
year means a period of 12 months commencing on the 1st April every
year. The year in which tax is assessed and paid is called the assessment year
while the year in respect of the income of which the tax is levied is called
the previous year.
Previous year [Section 3]
Previous
year means the financial year immediately preceding the assessment year. The
income earned during the previous year is assessed and taxed in the assessment
year.
Assessment
year cannot be more or less than a period of 12 months, whereas previous year
can be less than 12 months in certain cases. In case of a business or
profession newly established during a financial year, the previous year shall
be the period beginning on the date of setting up of the business or profession
and ending on 31st March of the said financial year.
Similarly,
if a source of income comes into existence in a financial year, the previous
year shall commence from the date on which the source of income comes into
existence and shall end on 31st March of the said financial year.
Heads of income [Section 14]
Income
of a person is assessed under the following heads:
1.
Income from salaries,
2.
Income from house property,
3.
Profits and gains from business or profession,
4.
Capital gains, and
5.
Income from other sources.
Person [Section 2(31)]
The term ‘person’ includes,
1.
An individual,
2.
A Hindu Undivided Family (HUF),
3.
A company,
4.
A firm,
5. An AOP or a BOI, whether incorporated or not,
6.
A local authority, and
7.
Every artificial juridical person e.g., an idol or deity, a University,
Bar Council, etc.
Assessee [Section 2(7)]
Assessee means a person by whom any tax or any other sum of money is
payable under the Income Tax Act, 1961. It includes every person in respect of
whom any proceeding has been taken for the assessment of his income. Sometimes,
a person becomes assessable in respect of the income of some other person or
persons. In such a case also, he may be considered as an assessee. The term
assessee also includes every person who is deemed to be an assessee or an assessee
in default under any provision of the Act.
Assessment [Section 2(8)]
This is the procedure by which the income of an assessee is determined
by the Assessing Officer. It may be by way of a normal assessment or by way of
reassessment of an income previously assessed.
Total income [Section 2(45)]
The total income of an assessee is that income which is arrived at after
making deductions under sections 80C to 80U of the Act from the gross total
income (GTI). Total income is also called as Net Taxable Income.
Gross total income [Section 80B (5)]
Gross total income means the aggregate of income
computed under each head as per provisions of the Act, after giving effect to
the provisions for clubbing of incomes, set off of losses and carry forward and
set off of losses and but before making any deductions under sections 80C to
80U. The aggregate amount of deductions under sections 80C to 80U shall not
exceed the “Gross Total Income” of the assessee.
Rounding off of Total Income
[Section 288A]
As per section 288A of the Income Tax Act, the total income computed as per
various sections of this act, shall be rounded off to the nearest multiple
Rs 10. For the purpose of rounding off, firstly any part of rupee
consisting of paise should be ignored. Thereafter, if the last digit in
the total figure is 5 or greater than 5, the total amount should be increased
to the next higher amount which is a multiple of Rs. 10. This means,
if total income is Rs 12, 98,465.50, it should be rounded off to Rs 12,
98,470.
If the last digit in the total figure is less than 5,
the total amount should be reduced to the nearest lower amount which is a
multiple of Rs 10. This rounding off of income should be done only to
the total income and not at the time of computation of
income under the various heads. This means, if total income is Rs 12,
98,464.50 then it should be rounded off to Rs 12, 98,460.
Rounding off of Tax Liability
[Section 288B]
As per Section 288B of the income tax act, the total tax liability computed shall be
rounded off to the nearest multiple of Rs 10. The rounding off of tax
would be done on the total tax payable or refundable and not on
different sub-heads of taxes like income tax, education cess, surcharge
etc. Rounding off would be done in the same manner as explained above
u/s 288A i.e. firstly paise would be ignored and thereafter, if the
last digit in the total figure is 5 or greater than 5, the total amount should
be increased to the next higher amount which is a multiple of Rs 10.
Therefore, if tax liability comes to an amount of Rs 2, 98,464.50, it
should be rounded off to Rs 2, 98,460, while tax liability of Rs 2, 98,465.50
should be rounded off to Rs 2, 98,470.
Income
[Section 2(24)]
Income includes:
1.
Profits or
gains of business or profession.
2.
Dividend
received from Companies.
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.
Deemed Incomes chargeable u/s 41 are —
(a)
Recovery of Bad Debt
[Bad Debt Recovered – (Bad Debt Claimed in an earlier
year – Bad Debt Allowed in that year)]
(b)
Sale of assets used for scientific research
(c)
Recovery against any deduction allowed in any of
the earlier years
(d) Recovery after discontinuance of business or profession
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.
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) (v i) (w.e.f. A.Y 2008-2009). Any sum of
money exceeding Rs 50,000, received on or after 1.4.2007 by an Individual or an
HUF from any person during the previous year without consideration shall be
taxable in the hands of the recipient with respect to the whole of the amount
received in aggregate.
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).
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