Income Tax in India

Income tax is a financial and legal obligation in

India. All individuals earning above a certain amount
are required to pay income tax on their earned income.
The income tax rates, income slabs, and rules are
regulated by the government and are subject to change
from time to time. However, all taxpayers are
responsible for accurately reporting their income and filing their taxes on time. Failure
to do so can result in penalties and fines. The term “income tax” refers to a type of tax
governments impose on income businesses and individuals within their jurisdiction
generate. By law, taxpayers must file an income tax return annually to determine their
tax obligations. Income taxes are a source of revenue for governments. They are used
to fund public services, pay government obligations, and provide goods for citizens. In
addition to the federal government, many states and local jurisdictions also levy income
taxes. Certain investments, like housing authority bonds, are exempt from income taxes
in some cases.

 Income tax is a type of tax governments impose on income generated by

businesses and individuals within their jurisdiction.
 Income tax is used to fund public services, pay government obligations, and
provide goods for citizens.
 The federal government and many states, as well as local jurisdictions, levy
their own income taxes.
 Personal income tax is a type of income tax levied on an individual’s wages,
salaries, and other types of income.
 Business income taxes apply to corporations, partnerships, small businesses,
and the self-employed.

An income tax is a tax imposed on individuals or entities (taxpayers) in respect of

the income or profits earned by them (commonly called taxable income). Income tax
generally is computed as the product of a tax rate times the taxable income. Taxation
rates may vary by type or characteristics of the taxpayer and the type of income.

The tax rate may increase as taxable income increases (referred to as graduated
or progressive tax rates). The tax imposed on companies is usually known as corporate
tax and is commonly levied at a flat rate. Individual income is often taxed at
progressive rates where the tax rate applied to each additional unit of income increases
(e.g., the first $10,000 of income taxed at 0%, the next $10,000 taxed at 1%, etc.).
Most jurisdictions exempt local charitable organizations from tax. Income from
investments may be taxed at different (generally lower) rates than other types of
income. Credits of various sorts may be allowed that reduce tax. Some jurisdictions
impose the higher of an income tax or a tax on an alternative base or measure of
income.

Taxable income of taxpayers resident in the jurisdiction is generally total income less
income producing expenses and other deductions. Generally, only net gain from the
sale of property, including goods held for sale, is included in income. The income of a
corporation's shareholders usually includes distributions of profits from the
corporation. Deductions typically include all income-producing or business expenses
including an allowance for recovery of costs of business assets. Many jurisdictions
allow notional deductions for individuals and may allow deduction of some personal
expenses. Most jurisdictions either do not tax income earned outside the jurisdiction
or allow a credit for taxes paid to other jurisdictions on such income. Nonresidents are
taxed only on certain types of income from sources within the jurisdictions, with few
exceptions.

Most jurisdictions require self-assessment of the tax and require payers of some types
of income to withhold tax from those payments. Advance payments of tax by taxpayers
may be required. Taxpayers not timely paying tax owed are generally subject to
significant penalties, which may include jail-time for individuals. Taxable income of
taxpayers resident in the jurisdiction is generally total income less income producing
expenses and other deductions. Generally, only net gain from the sale of property,
including goods held for sale, is included in income. The income of a corporation's
shareholders usually includes distributions of profits from the corporation. Deductions
typically include all income-producing or business expenses including an allowance
for recovery of costs of business assets. Many jurisdictions allow notional deductions
for individuals and may allow deduction of some personal expenses. Most jurisdictions
either do not tax income earned outside the jurisdiction or allow a credit for taxes paid
to other jurisdictions on such income. Nonresidents are taxed only on certain types of
income from sources within the jurisdictions, with few exceptions.
A tax is a compulsory financial charge or some other type of levy imposed on
a taxpayer (an individual or legal entity) by a governmental organization in order to
collectively fund government spending, public expenditures, or as a way
to regulate and reduce negative externalities. Tax compliance refers to policy actions
and individual behaviour aimed at ensuring that taxpayers are paying the right amount
of tax at the right time and securing the correct tax allowances and tax relief. The first
known taxation took place in Ancient Egypt around 3000–2800 BC. Taxes consist
of direct or indirect taxes and may be paid in money or as its labor equivalent.

All countries have a tax system in place, in order to pay for public, common societal,
or agreed national needs and for the functions of government. Some countries levy
a flat percentage rate of taxation on personal annual income, but most scale taxes are
progressive based on brackets of annual income amounts. Most countries charge a tax
on an individual's income as well as on corporate income. Countries or subunits often
also impose wealth taxes, inheritance taxes, estate taxes, gift taxes, property
taxes, sales taxes, use taxes, environmental taxes, payroll taxes, duties and/or tariffs.
It is also possible to levy a tax on tax, as with a gross receipts tax.

In economic terms (circular flow of income), taxation transfers wealth from

households or businesses to the government. This has effects on economic
growth and economic welfare that can be both increased (known as fiscal multiplier)
or decreased (known as excess burden of taxation). Consequently, taxation is a highly
debated topic by some, as although taxation is deemed necessary by general consensus
in order for society to function and grow in an orderly and equitable manner through
the government provision of public goods and public services, others such
as libertarians and anarcho-capitalists are anti-taxation and denounce taxation broadly
or in its entirety, classifying taxation as theft or extortion through coercion along with
the use of force. Within market economies, taxation is considered as the most viable
option to operate the government (instead of widespread state ownership of the means
of production), as taxation enables the government to generate revenue without heavily
interfering with the market and private businesses; taxation preserves
the efficiency and productivity of the private sector by allowing individuals
and businesses to make their own economic decisions, engage in
flexible production, competition and innovation as a result of market forces.
Certain countries function as tax havens by imposing minimal taxes on the personal
income of individuals and on corporate income. These tax havens attract capital from
abroad whilst resulting in loss of tax revenues within other non-haven countries
(through base erosion and profit shifting).

Legal and economic definitions of taxes differ, such that many transfers to
governments are not considered taxes by economists. For example, some transfers to
the public sector are comparable to prices. Examples include tuition at public
universities and fees for utilities provided by local governments. Governments also
obtain resources by "creating" money and coins (for example, by printing bills and by
minting coins), through voluntary gifts (for example, contributions to public
universities and museums), by imposing penalties (such as traffic fines), by borrowing
and confiscating criminal proceeds. From the view of economists, a tax is a non-penal,
yet compulsory transfer of resources from the private to the public sector, levied on a
basis of predetermined criteria and without reference to specific benefits received.

In modern taxation systems, governments levy taxes in money; but in-

kind and corvée taxation are characteristic of traditional or pre-capitalist states and
their functional equivalents. The method of taxation and the government expenditure
of taxes raised is often highly debated in politics and economics. Tax collection is
performed by a government agency such as the Internal Revenue Service (IRS) in
the United States, His Majesty's Revenue and Customs (HMRC) in the United
Kingdom, the Canada Revenue Agency or the Australian Taxation Office. When taxes
are not fully paid, the state may impose civil penalties (such as fines or forfeiture) or
criminal penalties (such as incarceration) on the non-paying entity or individual.

History

The concept of taxing income is a modern innovation and presupposes several things:
a money economy, reasonably accurate accounts, a common understanding of receipts,
expenses and profits, and an orderly society with reliable records.

For most of the history of civilization, these preconditions did not exist, and taxes were
based on other factors. Taxes on wealth, social position, and ownership of the means
of production (typically land and slaves) were all common. Practices such as tithing,
or an offering of first fruits, existed from ancient times, and can be regarded as a
precursor of the income tax, but they lacked precision and certainly were not based on
a concept of net increase.

The first known system of taxation was in Ancient Egypt around 3000–2800 BC, in
the First Dynasty of the Old Kingdom of Egypt. The earliest and most widespread
forms of taxation were the corvée and the tithe. The corvée was forced labor provided
to the state by peasants too poor to pay other forms of taxation (labor in ancient
Egyptian is a synonym for taxes). Records from the time document that the Pharaoh
would conduct a biennial tour of the kingdom, collecting tithes from the people. Other
records are granary receipts on limestone flakes and papyrus. Early taxation is also
described in the Bible. In Genesis (chapter 47, verse 24 – the New International
Version), it states "But when the crop comes in, give a fifth of it to Pharaoh. The other
four-fifths you may keep as seed for the fields and as food for yourselves and your
households and your children". Samgharitr is the name mentioned for the Tax collector
in the Vedic texts. In Hattusa, the capital of the Hittite Empire, grains were collected
as a tax from the surrounding lands, and stored in silos as a display of the king's wealth.

In the Persian Empire, a regulated and sustainable tax system was introduced by Darius
I the Great in 500 BC; the Persian system of taxation was tailored to each Satrapy (the
area ruled by a Satrap or provincial governor). At differing times, there were between
20 and 30 Satrapies in the Empire and each was assessed according to its supposed
productivity. It was the responsibility of the Satrap to collect the due amount and to
send it to the treasury, after deducting his expenses (the expenses and the power of
deciding precisely how and from whom to raise the money in the province, offer
maximum opportunity for rich pickings). The quantities demanded from the various
provinces gave a vivid picture of their economic potential. For instance, Babylon was
assessed for the highest amount and for a startling mixture of commodities;
1,000 silver talents and four months supply of food for the army. India, a province
fabled for its gold, was to supply gold dust equal in value to the very large amount of
4,680 silver talents. Egypt was known for the wealth of its crops; it was to be the
granary of the Persian Empire (and, later, of the Roman Empire) and was required to
provide 120,000 measures of grain in addition to 700 talents of silver. This tax was
exclusively levied on Satrapies based on their lands, productive capacity and tribute
levels.
The Rosetta Stone, a tax concession issued by Ptolemy V in 196 BC and written in
three languages "led to the most famous decipherment in history—the cracking of
hieroglyphics".

In the Roman Republic, taxes were collected from individuals at the rate of between
1% and 3% of the assessed value of their total property. However, since it was
extremely difficult to facilitate the collection of the tax, the government auctioned it
every year. The winning tax farmers (called publicani) paid the tax revenue to the
government in advance and then kept the taxes collected from individuals.
The publicani paid the tax revenue in coins, but collected the taxes using
other exchange media, thus relieving the government of the work to carry out the
currency conversion themselves. The revenue payment essentially worked as a loan to
the government, which paid interest on it. Although this scheme was a profitable
enterprise for the government as well as the publicani, it was later replaced by a direct
tax system by the emperor Augustus; after which, each province was obliged to pay
1% tax on wealth and a flat rate on each adult. This brought about regular census and
shifted the tax system more towards taxing an individual's income rather than wealth.
Islamic rulers imposed Zakat (a tax on Muslims) and Jizya (a poll tax on conquered
non-Muslims). In India this practice began in the 11th century.

Definition of Income Tax

Income tax is a tax charged on the annual income of an individual or business earned
in a financial year. The Income Tax system in India is governed by The Income Tax
Act, 1961, which lays out the rules and regulations for income tax calculation,
assessment, and collection. All taxpayers are mandated to submit an Income Tax
Return (ITR) every year by respective due dates as per the law to report their income
and claim a tax refund if applicable. An income tax return can be filed online or offline
on the Income Tax Department's official website or through verified third-party
websites.

The Indian Income Tax system also includes various deductions and exemptions that
can be used to lower the tax liability for a given financial year.

In this Act, unless the context otherwise requires,—

(1) "agricultural income" means—

(a) any rent or revenue derived from land which is used for agricultural purposes and
is either assessed to land revenue in India or is subject to a local rate assessed and
collected by officers of the Government as such;

(b) any income derived from such land by—

(i) agriculture; or

(ii) the performance by a cultivator or receiver of rent-in-kind of any process ordinarily

employed by a cultivator or receiver of rent-in-kind to render the produce raised
or received by him fit to be taken to market; or

(iii) the sale by a cultivator or receiver of rent-in-kind of the produce raised or received
by him, in respect of which no process has been performed other than a process
of the nature described in paragraph (ii) of this sub-clause;

(c) any income derived from any building owned and occupied by the receiver of the
rent or revenue of any such land, or occupied by the cultivator or the receiver of
rent-in-kind, of any land with respect to which, or the produce of which, any
process mentioned in paragraphs (ii) and (iii) of sub-clause (b) is carried on:

Provided that the building is on or in the immediate vicinity of the land, and is a
building which the receiver of the rent or revenue or the cultivator, or the receiver
of rent-in-kind, by reason of his connection with the land, requires as a dwelling
house, or as a store-house, or other out-building;

(2) "annual value", in relation to any property, means its annual value as determined
under section 23;

(3) "Appellate Assistant Commissioner" means a person appointed to be an Appellate

Assistant Commissioner of Income-tax under sub-section (1) of section 117;

(4) "Appellate Tribunal" means the Appellate Tribunal constituted under section 252;

(5) "approved gratuity fund" means a gratuity fund which has been and continues to
be approved by the Commissioner in accordance with the rules contained in Part
C of the Fourth Schedule;

(6) "approved superannuation fund" means a superannuation fund or any part of a

superannuation fund which has been and continues to be approved by the
Commissioner in accordance with the rules contained in Part B of the Fourth
Schedule;
(7) "assessee" means a person by whom income-tax or super-tax or any other sum of
money is payable under this Act, and includes—

(a) every person in respect of whom any proceeding under this Act has been taken for
the assessment of his income or of the income of any other person in respect of
which he is assessable, or of the loss sustained by him or by such other person, or
of the amount of refund due to him or to such other person;

(b) every person who is deemed to be an assessee under any provision of this Act;

(c) every person who is deemed to be an assessee in default under any provision of this
Act;

(8) "assessment" includes re-assessment;

(9) "assessment year" means the period of twelve months commencing on the 1st day
of April every year;

(10) "average rate of income-tax" means the rate arrived at by dividing the amount of
income-tax calculated on the total income, by such total income;

(11) "average rate of super-tax" means the rate arrived at by dividing the amount of
super-tax calculated on the total income, by such total income;

(12) "Board" means the Central Board of Revenue constituted under the Central Board
of Revenue Act, 1924 (4 of 1924);

(13) "business" includes any trade, commerce or manufacture or any adventure or

concern in the nature of trade, commerce or manufacture;

(14) "capital asset" means property of any kind held by an assessee, whether or not
connected with his business or profession, but does not include—

(i) any stock-in-trade, consumable stores or raw materials held for the purposes of his
business or profession;

(ii) personal effects, that is to say, movable property (including wearing apparel,
jewellery and furniture) held for personal use by the assessee or any member of
his family dependent on him;

(iii) agricultural land in India;

(15) "charitable purpose" includes relief of the poor, education, medical relief, and the
advancement of any other object of general public utility not involving the
carrying on of any activity for profit;
(16) "Commissioner" means a person appointed to be a Commissioner of Income-tax
under sub-section (1) of section 117;

(17) "company" means—

(i) any Indian company, or

(ii) any association, whether incorporated or not and whether Indian or non-Indian,
which is or was assessable or was assessed under the Indian Income-tax Act, 1922
(11 of 1922), as a company for the assessment year commencing on the 1st day
of April, 1947, or which is declared by general or special order of the Board to be
a company for the purposes of this Act;

(18) "company in which the public are substantially interested"—A company is said
to be a company in which the public are substantially interested—

(a) if it is a company owned by the Government or in which not less than forty per cent
of the shares are held by the Government; or

(b) if it is not a private company as defined in the Companies Act, 1956 (1 of 1956),
and

(i) its shares (not being shares entitled to a fixed rate of dividend whether with or
without a further right to participate in profits) carrying not less than fifty per cent
of the voting power have been allotted unconditionally to, or acquired
unconditionally by, and were throughout the relevant previous year beneficially
held by, the Government or a corporation established by a Central, State or
Provincial Act or the public (not being a director, or a company to which this
clause does not apply);

(ii) the said shares were at any time during the relevant previous year the subject of
dealing in any recognised stock exchange in India or were freely transferable by
the holder to other members of the public, and

(iii) the affairs of the company, or the shares carrying more than fifty per cent of its
total voting power were at no time during the relevant previous year controlled or
held by five or less persons.

Explanation 1.—In computing the number of five or less persons aforesaid,—

(i) the Government or any corporation established by a Central, State or Provincial Act
or company to which this clause applies shall not be taken into account, and
(ii) persons who are relatives of one another, and persons who are nominees of any
other person together with that other person, shall be treated as a single person.

Explanation 2.—In its application to any such company as is referred to in sub-clause

(2) of clause (iii) of section 109, sub-clause (b) shall have effect as if for the words
"not less than fifty per cent" and "more than fifty per cent" the words "not less
than forty per cent" and "more than sixty per cent" had been substituted;

(19) "co-operative society" means a co-operative society registered under the Co-
operative Societies Act, 1912 (2 of 1912), or under any other law for the time
being in force in any State for the registration of co-operative societies;

(20) "director", "manager" and "managing agent", in relation to a company, have the
meanings respectively assigned to them in the Companies Act, 1956 (1 of 1956);

(21) "Director of Inspection" means a person appointed to be a Director of Inspection

under sub-section (1) of section 117, and includes a person appointed to be an
Additional Director of Inspection, a Deputy Director of Inspection or an Assistant
Director of Inspection;

(22) "dividend" includes—

(a) any distribution by a company of accumulated profits, whether capitalised or not,

if such distribution entails the release by the company to its shareholders of all or
any part of the assets of the company;

(b) any distribution to its shareholders by a company of debentures, debenture-stock,

or deposit certificates in any form, whether with or without interest, and any
distribution to its preference shareholders of shares by way of bonus, to the extent
to which the company possesses accumulated profits, whether capitalised or not;

(c) any distribution made to the shareholders of a company on its liquidation, to the
extent to which the distribution is attributable to the accumulated profits of the
company immediately before its liquidation, whether capitalised or not;

(d) any distribution to its shareholders by a company on the reduction of its capital, to
the extent to which the company possesses accumulated profits which arose after
the end of the previous year ending next before the 1st day of April, 1933, whether
such accumulated profits have been capitalised or not;

(e) any payment by a company, not being a company in which the public are
substantially interested, of any sum (whether as representing a part of the assets
 of the company or otherwise) by way of advance or loan to a shareholder, being
a person who has a substantial interest in the company, or any payment by any
such company on behalf, or for the individual benefit, of any such shareholder, to
the extent to which the company in either case possesses accumulated profits;

but "dividend" does not include—

(i) a distribution made in accordance with sub-clause (c) or sub-clause (d) in respect
of any share issued for full cash consideration, where the holder of the share is
not entitled in the event of liquidation to participate in the surplus assets;

(ii) any advance or loan made to a shareholder by a company in the ordinary course of
its business, where the lending of money is a substantial part of the business of
the company;

(iii) any dividend paid by a company which is set off by the company against the whole
or any part of any sum previously paid by it and treated as a dividend within the
meaning of sub-clause (e), to the extent to which it is so set off.

Explanation 1.—The expression "accumulated profits", wherever it occurs in this

clause, shall not include capital gains arising before the 1st day of April, 1946, or
after the 31st day of March, 1948, and before the 1st day of April, 1956.

Explanation 2.—The expression "accumulated profits" in sub-clauses (a), (b), (d) and
(e), shall include all profits of the company up to the date of distribution or
payment referred to in those sub-clauses, and in sub-clause (c) shall include all
profits of the company up to the date of liquidation;

(23) "firm", "partner" and "partnership" have the meanings respectively assigned to
them in the Indian Partnership Act, 1932 (9 of 1932); but the expression "partner"
shall also include any person who, being a minor, has been admitted to the benefits
of partnership;

(24) "income" includes—

(i) profits and gains;

(ii) dividend;

(iii) the value of any perquisite or profit in lieu of salary taxable under clauses (2) and
(3) of section 17;
(iv) the value of any benefit or perquisite, whether convertible into money or not,
obtained from a company either by a director or by a person who has a substantial
interest in the company, or by a relative of the director or such person, and any
sum paid by any such company in respect of any obligation which, but for such
payment, would have been payable by the director or other person aforesaid;

(v) any sum chargeable to income-tax under clauses (ii) and (iii) of section
28 or section 41 or section 59;

(vi) any capital gains chargeable under section 45;

(vii) the profits and gains of any business of insurance carried on by a mutual insurance
company or by a co-operative society, computed in accordance with section 44 or
any surplus taken to be such profits and gains by virtue of provisions contained in
the First Schedule;

(25) "Income-tax Officer" means a person appointed to be an Income-tax Officer

under section 117;

(26) "Indian company" means a company formed and registered under the Companies
Act, 1956 (1 of 1956), and includes—

(i) a company formed and registered under any law relating to companies formerly in
force in any part of India (other than the State of Jammu and Kashmir);

(ii) in the case of the State of Jammu and Kashmir, a company formed and registered
under any Law for the time being in force in that State:

Provided that the registered office of the company in all cases is in India;

(27) "Inspecting Assistant Commissioner" means a person appointed to be an

Inspecting Assistant Commissioner of Income-tax under sub-section (1) of section
117;

(28) "Inspector of Income-tax" means a person appointed to be an Inspector of Income-

tax under sub-section (2) of section 117;

(29) "legal representative" has the meaning assigned to it in clause (11) of section 2 of
the Code of Civil Procedure, 1908 (5 of 1908);

(30) "non-resident" means a person who is not a "resident", and for the purposes of
sections 92, 93, 113 and 168, includes a person who is not ordinarily resident
within the meaning of sub-section (6) of section 6;
(31) "person" includes—

(i) an individual,

(ii) a Hindu undivided family,

(iii) a company,

(iv) a firm,

(v) an association of persons or a body of individuals, whether incorporated or not,

(vi) a local authority, and

(vii) every artificial juridical person, not falling within any of the preceding sub-
clauses;

(32) "person who has a substantial interest in the company", in relation to a company,
means a person who is the beneficial owner of shares, not being shares entitled to
a fixed rate of dividend whether with or without a right to participate in profits,
carrying not less than twenty per cent of the voting power;

(33) "prescribed" means prescribed by rules made under this Act;

(34) "previous year" means the previous year as defined in section 3;

(35) "principal officer", used with reference to a local authority or a company or any
other public body or any association of persons or any body of individuals,
means—

(a) the secretary, treasurer, manager or agent of the authority, company, association or
body, or

(b) any person connected with the management or administration of the local authority,
company, association or body upon whom the Income-tax Officer has served a
notice of his intention of treating him as the principal officer thereof;

(36) "profession" includes vocation;

(37) "public servant" has the same meaning as in section 21 of the Indian Penal Code
(45 of 1860);

(38) "recognised provident fund" means a provident fund which has been and
continues to be recognised by the Commissioner in accordance with the rules
contained in Part A of the Fourth Schedule, and includes a provident fund
 established under a scheme framed under the Employees' Provident Funds Act,
1952 (9 of 1952);

(39) "registered firm" means a firm registered under the provisions of clause (a) of
sub-section (1) of section 185 or under that provision read with sub-section (7)
of section 184;

(40) "regular assessment" means the assessment made under section 143 or section
144;

(41) "relative", in relation to an individual, means the husband, wife, brother or sister
or any lineal ascendant or descendant of that individual;

(42) "resident" means a person who is resident in India with in the meaning of section
6;

(43) "tax" means income-tax and super-tax chargeable under the provisions of this Act;

(44) "Tax Recovery Officer" means—

(i) a Collector;

(ii) an additional Collector or any other officer authorised to exercise the powers of a
Collector under any law relating to land revenue for the time being in force in a
State; or

(iii) any Gazetted Officer of the Central or a State Government who may be authorised
by the Central Government, by notification in the Official Gazette, to exercise the
powers of a Tax Recovery Officer;

(45) "total income" means the total amount of income referred to in section 5,
computed in the manner laid down in this Act;

(46) "total world income" includes all income wherever accruing or arising, except
incomes which are not included in the total income under any of the provisions of
Chapter III and except any capital gains which are not includible in the total
income of an assessee;

(47) "transfer", in relation to a capital asset, includes the sale, exchange or

relinquishment of the asset or the extinguishment of any rights therein or the
compulsory acquisition thereof under any law;

(48) "unregistered firm" means a firm which is not a registered firm.

Types of taxation in India

In India, there are primarily two types of income tax:

1. Direct Tax: These forms of taxes are levied directly on the taxable income
generated by individuals and corporations. The importance of these taxes are that they
are paid directly to the government and make up a significant portion of India’s tax
generated revenue. An important thing of note is that while they are known as ‘direct’
taxes, the responsibility of submitting these tax amounts rests on the taxpayers
themselves.

Some of the most important direct taxes are the income tax, Corporate Tax, capital
gains tax, property tax, entitlement tax and such.

This includes taxes that are levied

directly on individuals or entities
based on their income. It is further
divided into two categories:

- Personal Income Tax: This is the

tax paid by individuals on their
income earned from various sources such as salary, business, or investments.

- Corporate Income Tax: This is the tax paid by companies or corporations on their
profits.

2. Indirect Tax: The other form of taxes are not levied directly on a taxpayer’s income
but rather indirectly when they avail or purchase goods and services. These taxes are
included and paid by the consumer to the service provider or goods seller. The same
amount is then paid by these parties to the government, hence the term ‘indirect’.

One of the most important indirect taxes is the Goods and Services tax (GST) which
has subsumed a large number of indirect taxes that existed before 2017. Apart from
GST, there is also Dividend Distribution Tax, Custom Duty, Securities Transaction
Tax and such.
This includes taxes that are levied on goods and services. It is not directly based on
income, but rather on the value of goods or services consumed. Examples of indirect
taxes in India include Goods and Services Tax (GST), customs duty, and excise duty.

Importance of Taxes:

Now that we understand the types of taxes in the Indian tax structure, let us review the
importance of taxes as understood by this distinction.

Importance of Direct Taxes

Direct taxes display the importance of taxes by reducing income equalities with its
progressive tax structure. Citizens are taxed in proportion to their economic
circumstances, thereby encouraging social and economical equality.

Moreover, with direct taxes, taxpayers remain aware of how much tax they can be
expected to pay in a financial year and prepare well in advance. Direct taxes are also
useful in controlling inflation as any change in their rates can help in regulating
demand and supply in the economy.

Importance of Indirect Taxes

The importance of taxes for the government when it comes to indirect taxation is that
they are an automatic function that accompany the buying and selling of goods and
services across the country. They are therefore easy to collect and convenient for both
taxpayers and the tax collection authorities.

They also help broaden the country’s net of tax liabilities, gathering contributions from
those sections of society that are otherwise exempted from direct tax.
Basic Concepts of Income Tax

Income Tax Law

Income-tax is a tax levied on the total income of an assessee, being a person charged
under the provisions of this Act, for the relevant previous year.

For understanding Income tax law in India, the following components need to be
studied carefully:

(1) Income-tax Act, 1961

(2) Annual Finance Acts
(3) Income-tax Rules, 1962
(4) Notification and Circulars, issued from time to time
(5) Judicial Decisions

Income-tax Act, 1961

The levy of income-tax in India is governed by the Income-tax Act, 1961 which
extends to whole of India and came into force on 1st April, 1962. The Act contains
298 sections and XIV schedules. It contains provisions for determination of taxable
income, tax liability, assessment procedures, appeals, penalties and prosecutions.
These undergo changes every year with additions and deletions brought by the Annual
Finance Act passed by the Parliament.

Annual Finance Acts

Every year, Finance Bill is introduced by the Finance Minister of the

Government of India in the Parliament’s Budget Session. When the Finance Bill is
passed by both the Houses of the Parliament and gets the assent of the President, it
becomes the Finance Act. Amendments are made every year to the Income-tax Act,
1961 and other tax laws by the Finance Act. Finance Bill also mentions the Rates of
Income tax and other taxes given in various schedules which are attached to it.
Therefore, though Income-tax Act is a settled law, the operative effect is given by the
Annual Finance Act.
Income-tax Rules, 1962

Central Board of Direct Taxes (CBDT) looks after the administration of direct
taxes and is empowered u/s 295 of the Income Tax Act, to make rules for carrying out
the purposes of the Act and thereby it frames various rules from time to time for the
proper administration of the Income-tax Act, 1961. These rules were first framed in
1962 and are thereby collectively called Income-tax Rules, 1962. It is important to
read these rules along with the Income-tax Act, 1961. The power to make rules under
this section shall also include the power to give retrospective effect, but not earlier
than the date of commencement of this Act. However, such retrospective effect shall
not be given so as to prejudicially affect the interests of the assessees.

Circulars and Notifications

Circulars are issued by the CBDT from time to time to deal with certain specific
problems and to clarify doubts regarding the scope and meaning of the provisions.
These circulars are issued for the guidance of the officers and/or assessees. These
circulars are binding on the department and not on the assessee and therefore the
assessee can take advantage of beneficial circulars.

Notifications are issued by the Central Government to give effect to the provisions of
the Act. For example, u/s 10(15)(iv)(h), interest on bonds and debentures are exempt
by the Central Government subject to such conditions through Notifications. The
CBDT is also empowered to make and amend rules for the purposes of the Act by issue
of notifications. For example, u/s 35CCD, the CBDT is empowered to prescribe
guidelines for notification of skill development project.

Judicial Decisions

Judicial decisions are an important and unavoidable part of the study of

income-tax law. For the Parliament, it is not possible to provide for all possible issues
that may arise in the implementation of any Act and hence the judiciary will have to
consider various cases between the assessees and the department and give decisions on
various issues. The Supreme Court is the Apex Court of the country and the law laid
down by the Supreme Court is the law of the land. In case, where the apparently
contradictory decisions are given by benches having similar number of judges, the
principle of the later decision would be applicable. The decisions given by various
High Courts will apply in the respective states in which such High Courts have
jurisdiction.

Charge of Income-tax: [Sec. 4]

Tax cannot be levied or collected in India except under the authority of Law.
Section 4 of the Income- tax Act, 1961 gives authority to the Central Government for
charging income tax. This is the charging section in the Income-tax Act, 1961 which
provides that:
(i) Tax shall be charged at the rates prescribed for the year by the Annual Finance Act;

(ii) The charge is on every person specified under section 2(31);

(iii) Tax is chargeable on the total income earned during the previous year and not the
assessment year. (There are certain exceptions provided by sections 172, 174, 174A,
175 and 176);

(iv) Tax shall be levied in accordance with and subject to the various provisions
contained in the Act.
This section is the backbone of the law of income-tax insofar as it serves as the most
operative provision of the Act. The tax liability of a person springs from this section.

Assessment year: [Sec. 2(9)]

Assessment year means a period of 12 months commencing on 1st April every

year. The total income earned by the assessee during the previous year shall be
chargeable to tax in the next year; which is termed as the assessment year. For example,
for the previous year 2022-23, the relevant assessment year shall be 2023-24 (1.4.2023
to 31.3.2024).

Previous year: [Sec. 3]

The year in which income is earned, i.e. the financial year immediately preceding the
assessment year, is called the previous year and the tax shall be paid on such income
in the next year which is called the assessment year. This means that the tax is levied on
the income in the year in which it is earned; referred as previous year and the tax on
such income will be paid in the assessment year. All assessees are required to follow
a uniform previous year i.e. the financial year starting from 1st April and ending on
31st March.

Person: [Sec. 2(31)]

As the income tax is levied on the total income of the previous year of every
‘person’, it becomes important to understand the term ‘Person’. The term ‘person’
includes the following seven categories:

(i) an individual,
(ii) a Hindu Undivided Family (HUF),
(iii) a company,
(iv) a firm,
(v) an Association of Persons (AoP) or a Body of Individuals (BoI), whether
incorporated or not,
(vi) a local authority, and
(vii) every artificial juridical person not falling within any of the preceding sub-
clauses e.g., a university or deity.

As per Explanation to Sec. 2(31), an AoP/BoI/Local authority or any artificial juridical

person shall be deemed to be a person, irrespective of whether they were formed or
established with the purpose of earning or deriving profits or not.

Assessee: [Sec. 2(7)]

Assessee means a person by whom any tax or any other sum of money is payable under
this Act. It also includes the following:

(i) Every person in respect of whom any proceeding under this Act has been taken for
the assessment of his income;

(ii) Every person who is deemed to be an assessee under any provisions of this Act.
Sometimes, a person becomes assessable in respect of the income of some other
persons. In such case also, he is considered as an assessee. For example, legal
representative of a deceased person;

(iii) Every person who is deemed to be an assessee in default under any provision of
this Act. For example, where a person making any payment to other person is liable to
deduct tax at source, and if he has not deducted tax at source or has deducted but not
deposited the tax with the government; he shall be deemed to be an assessee in default.

Certain Principles relating to Income under Income-tax Act

The following are the important principles relating to income:

Income generally refers to revenue receipts, but however under the Income-
tax Act, 1961, certain capital receipts have also been specifically included within the
definition of income for example capital gains i.e. gains on sale of a capital assets like
land.

The income to be considered for tax purpose shall be net receipts and not gross
receipts.Net receipts are arrived at after deducting the expenditure incurred in
connection with earning such receipts. Income is taxable either on due basis or receipt
basis, as provided under the respective head of income. For the purpose of computing
income under the heads ‘Profits and gains of business or profession’ and ‘Income from
other sources’, the method of accounting which is regularly followed by the assessee
should be considered, which can be either cash system or mercantile system. Income
earned during the year i.e. the previous year shall be chargeable to tax in the next
year i.e. the assessment year e.g. the income of the P.Y. 2022-23 shall be chargeable
in the A.Y. 2023-24. But, there are certain exceptions to this principle (i.e. Accelerated
assessment u/s 172, 174, 174A and 175) which are discussed in the Chapter ‘Liability
in Special Cases’.

Income: [Sec. 2(24)]

The definition of ‘Income’ given under section 2(24) is inclusive and not
exhaustive and therefore it may be possible that certain items may be considered as
income under this Act according to its general and natural meaning, even if it is not
included under section 2(24). The term ‘Income’ includes the following:
 Profits and gains;
 Dividend;
 Voluntary contributions received by a trust which is created wholly or partly for
charitable or religious purposes; or by educational institutions, hospitals or electoral
trust;
 The value of any perquisite or profit in lieu of salary taxable u/s 17;
 Any special allowance granted to the assessee to meet expenses wholly, necessarily
and exclusively for the performance of office or employment duties;
 The value of any benefit or perquisite, whether converted into money or not, obtained
from a company either by a director or by a person who has substantial interest in the
company or by a relative of the director or such person, and any sum paid by any such
company in respect of any obligation which, otherwise, would have been payable by
the director or other person aforesaid;
 The value of benefit or perquisite to a representative assessee like a trustee appointed
under a trust;
 Any sum chargeable to income-tax under clauses (ii) and (iii) of sec. 28 or sec. 41 or
sec. 59;
 Any sum chargeable to income-tax under clauses (iiia), (iiib), (iiic), (iv), (v), (va) and
(via) of sec. 28;
 Any capital gains chargeable u/s 45;
 The profits and gains of any insurance business carried on by a mutual insurance
company or by a co-operative society, computed in accordance with section 44 or any
surplus taken to be such profit and gains by virtue of provisions contained in the First
Schedule;
 The profits and gains of any of banking business (including providing credit facilities)
carried on by a co-operative society with its members;
 Winnings from lottery, crossword puzzles, races (including horse races), card games
or other games of any sort or from gambling or betting;
 Any sum received by the assessee from his employees as contributions to any
provident fund or superannuation fund or any fund set up under Employees’ State
Insurance Act, 1948 or any fund for the welfare of such employee; [Sec. 2(24)(x)]
 Any amount received under the Keyman insurance policy including the sum allocated
by way of bonus; [Sec. 2(24)(xi)]
 Any sum chargeable to income-tax u/s 56(2)(v), (vi);
 Any sum of money or specified movable or immovable properties received without
consideration or inadequate consideration as provided u/s 56(2)(vii), (via);
 Any consideration received for issue of shares as exceeds the FMV of shares referred
to in section 56(2)(viib);
 Any sum of money received as advance in the course of negotiation for transfer of a
capital asset, if such sum is forfeited as the negotiation do not resulted in transfer of
the asset 56(2)(ix);
 Any sum chargeable to income-tax u/s 56(2)(x);
 Any compensation or other payment referred to in Sec. 56(2)(xi);
 Income shall include assistance received in the form of a subsidy or grant or cash
incentive or duty drawback or waiver or concession or reimbursement (by whatever
name called) from the Central Government or a State Government or any other
authority or body or agency in cash or kind to the assessee other than:

(a) the subsidy or grant or reimbursement which is taken into account for determination
of the actual cost of the asset in accordance with the provisions of Explanation 10 to
clause (1) of section 43,

(b) the subsidy or grant by the Central Government for the purpose of the corpus of a
trust or institution established by the Central Government or the State Government, as
the case may be.

Heads of Income: [Sec. 14]

For the purpose of computation of total income under the Income-tax Act, 1961, all
the incomes shall be classified under the following 5 heads of income:
(i) Salaries [Secs. 15 to 17]

(ii) Income from House Property [Secs. 22 to 27]

(iii) Profits and Gains of Business or Profession [Secs. 28 to 44DB]

(iv) Capital Gains [Secs. 45 to 55A]

(v) Income from Other Sources [Secs. 56 to 59]

Gross Total Income means aggregate of income computed under the above five
heads, after making clubbing provisions and adjustments of set off and carry forward
of losses.

Total Income and Computation of Tax Liability

Total income of an assessee means the Gross Total Income (GTI) as reduced by the
amount of deduction available under sections 80C to 80U.

1. Income from Salaries

……
Income from salary
..

……
Add: Taxable allowances
..

……
Add: Taxable perquisites
…

……
Gross Salary
..

Less: Deductions u/s 16

– Standard deduction

……
– Entertainment allowance
..

……
– Professional tax
..
Taxable Income under the head ‘Salaries’ ……..

2. Income from House Property

……
Net Annual Value
..

……
Less: Deductions u/s 24
..

Taxable Income under the head ‘Income from House Property

……..
’

3. Profits and Gains of Business and Profession

……
Net profit as per Profit and Loss Account
..

Add: Amounts debited to P & L A/c but are not allowable as d ……

eduction under the Act ..

Add: Amounts not credited to P & L A/c but are taxable under ……
the head PGBP ..

Less: Amounts credited to P & L A/c but are exempt u/s 10 or ……

are taxable under other heads of income ..

Less: Amounts not debited to P & L A/c but are allowable as ……

deduction under the Act ..

Taxable Income under the head ‘Profits and Gains of Business

……..
and Profession’
4. Capital Gains

……
Amount of Capital gains u/s 48
..

Less: Exemption u/ss 54, 54B, 54D, 54EC, 54EE, 54F, 54G, 5 ……
4GA, 54GB, 54H ..

Taxable Income under the head ‘Capital gains’ ……..

5. Income from other sources

……
Gross income
..

……
Less: Deductions u/s 57
..

Taxable Income under the head ‘Income from other sources’ ……..

Total [1 + 2 + 3 + 4 + 5] ……..

Less: Adjustment of set off and carry forward of losses ……..

Gross Total Income ……..

Less: Deductions under sections 80C to 80U [Chapter VI-A] ……..

Net Taxable Income ……..

Computation of Tax Liability:

Tax on Net income ……..

Less: Rebate u/s 87A (Available if resident individual is havin

……..
g net taxable income of ` 5,00,000 or less)

Income Tax after rebate ……..

Add: Surcharge, if applicable ……..

Tax and surcharge ……..

Add: Health and Education cess ……..

Less: Rebate u/ss 86, 89, 90, 90A and 91 ……..

Less: Prepaid taxes, if paid

Self assessment tax paid (SAT) ……..

Tax Deducted or Collected at Source (TDS and TCS) ……..

Advance tax ……..

Total Net Tax liability ……..

 Exemption and Deduction in respect of income

 Exemption in respect of any income means that such income shall not form part of any
head of income and therefore not to be included in computation of total income.
Whereas, deduction in respect of any income means that such income shall be first
included under the respective head of income for the computation of gross total income
and thereafter deduction can be claimed on such income under the respective head or
from the gross total income. Deduction may also be allowed for making certain
specified payments or contributions.
 For e.g. Section 10 provides exemption in respect of certain incomes; sections 54, 54b,
54d, 54ec, 54f, 54g, 54ga, 54gb, 54H provides exemption in respect of capital gains of
the assessee. Section 16 [i.e. standard deduction, entertainment allowance and
professional tax] provides deduction from gross salary, section 24 provides standard
deduction and deduction for interest of loan borrowed under the head ‘Income from
House Property’. Further, Chapter VI-A [i.e. sections 80C to 80U]
provides deduction from gross total income of the assessee.
 Exemption cannot exceed the taxable income; but deduction can exceed taxable
income.

The total income

computed in
accordance with the
provisions of this
Act shall be
rounded off to the
nearest multiple of
` 10.

If the last figure in that amount is five or more, the amount shall be increased to the
next higher amount which is multiple of 10 and if the last figure is less than five, the
amount shall be reduced to the next lower amount which is multiple of 10.
Rounding off of Tax: [Sec. 288B]

The total amount of income tax payable and the amount of refund due, computed in
accordance with the provisions of this Act shall be rounded off to the nearest multiple
of ` 10.

If the last figure in that amount is five or more, the amount shall be increased to the
next higher amount which is multiple of 10 and if the last figure is less than five, the
amount shall be reduced to the next lower amount which is multiple of 10.