The Income Tax Act 1961 is the major tax law that regulates tax in India, including those aspects related to levy, collection, administration and enforcement of income tax. It is crucial that people, companies, and professionals gain knowledge of its stipulations, since, besides establishing the taxation of income, it dictates exemptions, deductions, compliance, and penalties.
Introduction
Income Tax Act was enacted in 1961 to supersede previous tax laws, in order to develop a cohesive approach towards the collection of tax on income throughout India. It is imposed in the entire nation and managed by the Central Board of Direct Taxes (CBDT) under the Ministry of Finance. The Act is annually amended as part of the Finance Act declared during the Union Budget to make it relevant to the changes in the economy and policies carried out by the government.
Basics of the Income Tax Act
1. Scope and Applicability
The provisions of the Act cover every taxpayer, whether an individual, Hindu Undivided Family (HUF), firm, company, association of persons (AOP), body of individuals (BOI) or local authority, as also other artificial juridical persons.
An income tax is assessed with respect to each succeeding “previous year” on rates as set forth in the succeeding year of assessment; that is, income earned in a financial year is taxed in the following financial year.
2. Residential Status and Tax Liability
One of the most outstanding characteristics of the Act is the residential status of a taxpayer that influences the liability of that taxpayer:
- Resident and Ordinarily Resident (ROR): Pay a tax on worldwide income.
- Resident and not Ordinarily Resident (RNOR): Taxed on income acquired in India and the income involved in business controlled out of India.
- NR (Non-Resident): Only incomes received or earned in the territory of India are taxed.
This is determined by the number of days a given person has spent in India in the financial year.
3. Classification of Income
There are five heads under which the Income Tax Act divides income and gives different rules of computation to each:
- Salary Income: Covers wages, pensions, allowances, perquisites and benefits which are derived from employment. Among the benefits that a salaried person could avail are standard deduction, HR exemption, and leave travel allowance.
- Income from House Property: Taxation is at the rental income or the supposed rent of the properties owned, and deductions are made on municipal taxes and a standard deduction of 30 percent on the net annual value.
- Gains and Profits of Business or Profession: Insures trade, business, factory income or professional service revenue. Expenses that you incurred in their entirety and exclusively to run the business are deductible.
- Capital Gains: Capital gains on the sale or transfer of property, shares or gold. Stratified as short-term and long-term capital gains with individually varying tax rates.
- Other Source of Income: The other categorisation of income that cannot fall into the above categories, such as interest, dividends, or lottery winnings.
4. Income Tax Reliefs
The Act offers various exemptions (income not taxable) and deductions (reduction from taxable income) to encourage savings, investments, and certain expenditures.
Popular Deductions:
- Section 80C: up to 1.5 lakhs investment in PPF, EPF, NSC, life insurance, ELSS, etc.
- Section 80D: Health insurance premium.
- Section 80E: Interest on Educational loans.
- Section 80G: Giving to charities.
Popular Exemptions:
- Farming revenues.
- Certain allowances (HRA, LTA, etc.).
- Section 54, 54EC and 54F exemptions.
5. Tax rates and Tax slabs
The Act prescribes different tax slabs for individuals, based on age and income, under both the old regime (with deductions) and the new regime (lower rates without most deductions). Rates charged by companies and firms are fixed, and they too may differ depending on the turnover and nature of business.
6. Tax Filing and Compliance
Every eligible taxpayer must file an Income Tax Return (ITR) within the prescribed due date. The due dates are postponed according to the type of taxpayer and the availability of the audit. An online filing of returns can be made on the income tax e-filing portal.
Key compliance notes:
- Advance Tax Payment in a case where the liability is 10,000 in a year.
- Tax Deduction at Source (TDS) by employers or other payers.
- Keeping of books of accounts of firms and practitioners.
- Audit demands on specific levels of turnover.
7. Penalties and Prosecution
The Act provides fines for lateness of filing, failure to pay taxes, misreporting and tax evasion. These can carry fines, interest and even imprisonment where there has been willful evasion of the taxes.
8. New Amendments
The government has been giving its attention towards digitisation, faceless evaluation and quicker offensive in recent years. Simplification of the procedures associated with complying and reducing the corporate tax rates, and the new tax regime are some of the changes undertaken that will help in making the tax system more transparent and taxpayer-friendly.
Conclusion
In India, the Income Tax Act comprises the core of direct taxation in the country. Although seen to be complex as it is voluminous and amended frequently, the basic framework, income categorisations, exemptions, deductions, and compliance laws give taxpayers the ability to make appropriate financial decisions. Engaging the help of professional advisors that you trust, such as Kanakkupillai, would make it an easier task to take care of compliance in time and also allow the utilisation of existing tax benefits to the maximum extent possible.
FAQs
1. What is the Income Tax Act in India?
In India, the collection, administration and levy of income tax are done according to the Income Tax Act, 1961. It is charged on individuals, companies, firms, and other platforms that generate income within the country.
2. Who needs to file an Income Tax Return (ITR)?
An ITR has to be filed by any individual whose earnings are larger than the fundamental exemption threshold, or whose circumstances fall under certain criteria outlined by the Income Tax Department.
3. What are the five heads of income under the Income Tax Act?
These five heads are Income under Head Salary, Income under House Property, Profits and Gains of Business or Profession, Capital Gains and Income under Other Sources.
4. Are there any Income Tax Act deductions available?
Yes. Sections like 80C, 80D, and 24(b) allow deductions for investments, health insurance premiums, and home loan interest, which help reduce taxable income.
5. How often does the Income Tax Act change?
The Union Budget amends the Act annually and this may come in the form of an increase or decrease of tax rates of the existing provisions, or addition of new provisions.
