MEANING OF TAX
The word ‘tax’ is derived from the Latin word ‘Taxo’. A tax is a compulsory financial charge or some other type of levy imposed by the government upon a taxpayer ( an individual or other legal entity) on its income, commodity, services, activities or transaction. Taxes are the basic source of revenue for the government, which are utilized for the welfare of the people of the country. The taxation is an exercise in the collective solution of individual problems. The state takes upon itself the duty of solving the problems of the underprivileged and need finance for this purpose. The government can mobilize resources by imposing taxes on the privileged ones.
TYPES OF TAXES
In India, Taxes are broadly divided into two parts namely, Direct Tax and Indirect Tax.
- Direct Tax is levied directly on the income of the person. Income Tax and Corporate Tax are the part of Direct Tax.
- Whereas, Indirect tax is a tax that somebody else collects on your behalf and pays to the government e.g. restaurants, theatres and e-commerce websites recover taxes from you on goods you purchase or a service you avail. Before 2017 the Indirect Tax comprises various taxes which are submerged in one tax law named as ‘The Goods and Services Tax Act, 2017”.
ORIGIN OF INCOME TAX IN INDIA
The Income Tax was introduced in India for the first time in 1860 by Sir James Wilson in order to meet the losses sustained by the Government on account of the Military Mutiny of 1857. In 1918, a new income tax was passed and again it was replaced by another new Act which was passed in 1922. This Act remained in force up to the assessment year 1961-62 with numerous amendments.
On the recommendation of Law Commission & Direct Taxes Enquiry Committee and in consultation with the Ministry of Law, the Income Tax Act, 1961 was passed. This Act came into force from 1st April. 1962. It applies to the whole of India including Jammu and Kashmir. Since 1962 several amendments so far have been made in the Act by the Union Budget every year.
WHAT IS INCOME TAX
“Income Tax is levied on the total income of the previous year of every person”.
The earnings may be both actual and notional. In India, we follow progressive income tax system in which high income earners are taxed at higher rates. The taxable income slabs are changed from time to time, keeping in mind the price levels. Sometimes, the government also provides income tax rebates, which benefit people in the lower-income group. To collect long-term funds, the government also provides income tax incentives. The amount invested in tax-saving schemes is deducted from gross income, which reduces the amount of taxable income and benefits the taxpayer.
By law, taxpayers must file an income tax return annually to determine their tax obligations. In case the actual tax payable is less than either the amount of advance tax paid or the amount of TDS for the corresponding year, the assessee may claim the excess tax back by filing the appropriate ITR Form. Once the ITR is verified, the income tax refund is processed if the Income Tax Department finds that the claim is genuine.
COMPONENTS OF INCOME TAX
The Income Tax law in India consists of the following components:
- Income Tax Act, 1961: The Act contains the major provisions related to Income Tax in India. It defines the levy, collection and recovery of income tax.
- Income Tax Rules, 1962: Central Board of Direct Taxes (CBDT) is the body which looks after the administration of Direct Tax. The CBDT is empowered to make rules for carrying out the purpose of this Act.
- Finance Act: Every year the Finance Minister of the Government of India presents the budget to the parliament. This budget contains the proposed policies related to commercial areas and taxation. Once the finance bill is approved by the parliament and gets clearance from the President of India, it becomes the Finance Act.
- Circulars and Notifications: Sometimes the provisions of an act may need clarification and that clarification usually in a form of circulars and notifications which has been issued by the CBDT from time to time. It includes clarifying the doubts regarding the scope and meaning of the provisions.
SOURCES OF INCOME
- Income from salary/pension: This includes basic salary, taxable allowances, perquisites, and profit in lieu of salary, advance salary as well as pension or any amount received in terms of services provided by him based on a contract of employment. There must be an employer-employee relationship to qualify for taxable income under this head.
- Income from house property: The annual value of property consisting of anu buildings or land appurtenant thereto of which the assess is the owner, other than such portions of such property as he may occupy for the purposes of any business or profession carried on by him the profits of which are chargeable to tax, shall be chargeable to income tax under this head.
- Income from business/profession: The third head is profit and gains of business or profession in which the computation of the total income will be attributed from the income earned from business and professions that individuals do in their personal capacity and is added to taxable income after adjustment of the deductions allowed.
- Capital Gain: Capital gains arise at the time of selling capital assets like gold, house properties, stocks, securities, mutual fund units etc. Depending on the types of capital assets and the period of holding, gains on the sale of such assets are categorised as short-term and long-term capital gains.
- Income from other sources: Any other form of income, which is not categorized in the above-mentioned clauses, can be sorted in this category. This includes incomes like interest from a savings account, fixed deposits (FDs), family pension, lottery awards, card games, betting etc are chargeable to income tax.
- Assessee: “Assessee” means any person by whom any tax or any other sum of money is payable under this Act and includes –
- Every person in respect of whom any proceedings 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
- to determine the loss sustained by him or by any such other person;or
- the amount of refund due to him or to such other person;
- Every person who is deemed to be an assessee under any provision of this Act.
- Assessee in Default: Every person who has failed to comply with any of the duties imposed upon him by the Income-tax Act
- Assessment Year: “Assessment year” means the period of twelve months commencing on the 1st day of April every year and ending 31st March of the next year.Income earned in previous year is taxed in the assessment year.
- Previous Year: Previous Year for the purpose of Income Tax Act,1961 is the financial year in which the income is earned. Previous Year means the Financial Year immediately preceding the Assessment Year.
- Surcharge: The Surcharge is commonly known as Tax on Tax. It is an additional tax levied on the taxpayers on a special group of people. It is an additional tax liability levied on the person having more income than prescribed.
- Education Cess and Secondary Higher Education Cess: The amount of income tax shall be increased by an Education Cess on Income Tax by 2% and Secondary and Higher Education Cess by 1% of the tax liability.
- Person: The word “Person” is a very wide term and embraces in itself the following :
- An Individual : It refers to a natural human being whether Male or Female, minor or a person of sound or unsound mind.
- A Hindu Undivided Family (HUF) : It is a relationship created due to operation of Hindu Law. The Manager of HUF is called “ Karta” and its members are called ‘Coparceners’. It consists of all persons lineally descended from a common ancestor and includes their wives and unmarried daughters.
- Company : “company” means—
(i) any Indian company, or
(ii) any body corporate incorporated by or under the laws of a country outside India, or
(iii) any institution, association or body which is or was assessable or was assessed as a company for any assessment year under the Indian Income-tax Act, 1922 (11 of 1922) or which is or was assessable or was assessed under this Act as a company for any assessment year commencing on or before the 1st day of April, 1970, or
(iv) any institution, association or body, whether incorporated or not and whether Indian or non-Indian, which is declared by general or special order of the Board to be a company
- Firm : A firm includes a partnership firm whether registered or not and shall include a Limited Liability Partnership as defined in Limited Liability Partnership Act, 2008.
- Association of Persons (AOP) or Body of Individuals (BOI) whether incorporated or not.
- Local Authority : Municipality, Panchayat, Cantonment Board, Port Trust etc. are called Local Authority.
- Artificial Judicial Person : Statutory Corporations, Deity, charitable institutions are called Artificial Judicial Persons. Any person not falling in the above-mentioned six categories, he is assessed under this clause.
- “Income” : The Definition given u/s 2 (24) starts with the word includes therefore it is inclusive and not exhaustive. It’s nowhere mentioned that “Income” refers to only monetary return. It includes value of Benefits and Perquisites. Anything which is convertible into income can be regarded as source of accrual of income.
“The term Income means and includes “ :
- Profit and Gains : For instance, Profit generated by a businessman is taxable as “Income”.
- Dividend : For instance, “Dividend” declared/paid by a company to a shareholders is taxable as “ income” in the hands of shareholders
- Voluntary contributions: Voluntary contribution received by:
- a trust created wholly or partly for charitable or religious purposes
- a research association; or
- a fund or trust or institution established for charitable purposes or
- any university or other educational institution or by any hospital
- An electoral trust.
- The value of any perquisite or profit in lieu of salary taxable.
- Any special allowance or benefit specifically granted to the assessee to meet expenses wholly, necessarily and exclusively for the performance of the duties of an office or employment of profit.
- City Compensatory Allowance/ Dearness allowance: Any allowance granted to the assessee either to meet his personal expenses at the place where the duties of his office or employment of profit are ordinarily performed by him or at a place where he ordinarily resides or to compensate him for the increased cost of living.
- Benefit or Perquisite to a Director. The value of any benefit or perquisite, whether convertible into money or not, obtained from a company by: (a) a director, or (b) a person having substantial interest in the company, or (c) a relative of the director or of the person having substantial interest.
- Anv Benefit or perquisite to a Representative Assessee
- Capital Gain: Any capital gains chargeable to tax
- Insurance Profit
- Banking income of a Co-operative Society: The profits and gains of any business of banking (including) providing credit facilities carried on by a cooperative society with its members.
- Winnings from Lottery
- Employees Contribution Towards Provident Fund
- Amount Received under Keyman Insurance policy
- Amount received for not carrying out any activity: any sum whether received or receivable in cash or kind, under an agreement for-
- not carrying out any activity in relation to any business; or
- not sharing any know-how, patent, copyright, trade-mark, license, franchise or any other business or commercial right of similar nature or information or technique likely to assist in the manufacture or processing of goods or provision for services:
- Consideration received for issue of shares as exceeds the fair market value of the shares.
CONCEPT OF “INCOME’
The following features of income can help a person to understand the concept of income.
- Cash or kind: Income may be received in cash or kind. When the income is received in kind.
- Definite Source : Income has been compared with a fruit of a tree or a crop from the field. Fruit comes from a tree and crop from fields. Thus the source of income is definite in both cases. The existence of a source for income is somewhat essential to bring a receipt under the charge of tax.
- Receipt basis/ Accrual basis: Income arises either on receipt basis or on accrual basis. It may açcrue to a taxpayer without its actual receipt. The income in some cases is deemed to accrue or arise to a person without its actual accrual or receipt. Income accrues where the right to receive arises.
- Tainted Income : Income earned legally or illegally remains income and it will be taxed according to the provisions of the Act. Assessment of illegal income of a person does not grant him immunity from the applicability of the provisions of other Act. Any expenditure incurred to earn such illegal income is allowed to be deducted out of such income only.
- Temporary or Permanent : There is no difference between temporary and permanent income under the Act. Even temporary income is taxable same as permanent income.
- Dispute regarding the Title : In case a person is receiving some income but his title to such receipts is disputed, it will not free him from tax liability. The receipt of such income has to pay tax.
- Lumpsum/instalments: Income whether received in lump sum or in instalments is liable to tax. For example: arrears of salary or bonus received in lump sum is income and charged to tax as salary.
- Revenue or Capital receipt. Income-tax, as the name implies, is a tax on income and not a tax on every item of money received. Therefore, unless the receipt in question constitutes income as distinguished from capital, it cannot be charged to tax. For this purpose, income should be distinguished from capital which gives rise to income. However, some capital receipts have been specifically included in the definition of income.
TAX TREATMENT OF “INCOME’
For the purposes of calculation of tax, income can be divided into 3 categories :
A. Taxable Income : These incomes form part of total income and are fully taxable. These are treated u/s 14 to 69 of the Act. These are Salaries, Rent, Business Profits, Professional Gain, Capital Gain, Interest, Dividend, Winning from Lotteries, Races etc.
B. Exempted Incomes : These incomes do not from part of total income either fully or partially . hence, No Tax is payable on such incomes. These incomes are given u/s 10(1) to 10(32) of the Act.
C. Rebateable ( Tax Free) Incomes : These incomes form part of total income and are fully taxable. Tax is calculated on total income out of which a Rebate of Tax at average Rate is allowed .
INCOME TAX SLABS
Union Budget 2020 has proposed a new tax structure by slashing income tax rates to provide relief to the individual tax payers and simplification of tax provisions. The budget 2020 has given taxpayers the option to choose between the existing income tax regime (which allows availing existing income tax exemptions and deductions) and a new tax regime with slashed income tax rates and new income tax slabs but no tax exemptions and deductions. The new tax regime offers lower tax rates and new tax slabs and simultaneously removes tax exemptions/deductions and will result in lower tax outgo for taxpayers, according to the finance minister.
New Income Tax Slab for Individual (New Regime)
|Income Tax Slab||Tax Rates|
|Up to Rs.2.5 lakh||Nil|
|From Rs.2,50,001 to Rs.5,00,000||5%|
|From Rs.5,00,001 to Rs.7,50,000||10%|
|From Rs.7,50,001 to Rs.10,00,000||15%|
|From Rs.10,00,001 to Rs.12,50,000||20%|
|From Rs.12,50,001 to Rs.15,00,000||25%|
|Income above Rs.15,00,001||30%|
Cess and surcharge on income tax payable in the new proposed personal tax regime remain the same as in the existing tax regime.
The choice of the new tax regime, although, comes with a few pre-requisite conditions such as:
- Foregoing prescribed exemptions under Section 10 (such as leave travel concession, house rent allowance etc.), Section 16 (standard deduction, professional tax, etc), Section 24 (home loan interest in respect of self occupied property) deductions etc.
- Denial of specified deductions under chapter VI-A of the Act (such as Section 80C, Section 80D, Section 80G, etc.)
- Restriction on other specified exemptions/ deductions, set-off, etc depending upon certain specific cases.
Income Tax Slab for Individuals (Existing Regime)
|Income Slab||General Category||Senior Citizens (60 years and above but below 80 years)||Very senior citizens(above 80 years)|
|Up to ₹ 2,50,000||Nil||Nil||Nil|
|₹ 2,50,001 – ₹ 3,00,000||5 %||Nil||Nil|
|₹ 3,00,001 – ₹ 5,00,000||5 %||5 %||Nil|
|₹ 5,00,001 – ₹ 10,00,000||20 %||20 %||20 %|
|Above ₹ 10,00,000||30 %||30 %||30 %|
The effective tax rate for individuals with taxable income up to Rs 5 lakh would be NIL under both the new and the existing tax regime as these individuals would be able to avail the tax-benefit of rebate up to Rs 12,500 under Section 87A under both regimes.
Health and education cess at the rate of 4% is levied on the income tax plus surcharge wherever applicable.
Surcharge will be added to the total income tax payable by the individual as follows:
10% for income between Rs 50 lakh and Rs 1 crore,
15% for income between Rs 1 crore and Rs 2 crore,
25% for income between Rs 2 crore and Rs 5 crore and
37% for income exceeding Rs 5 crore.
DEDUCTIONS ALLOWED UNDER VARIOUS SECTIONS
A taxpayer can claim for additional deductions under various sections. Some of these are mentioned below:
- Under Section 80CCC, contributions to annuity plans such as LIC are considered for tax benefit up to ₹ 1.5 lakhs.
- Interest on savings account is tax exempt up to Rs. 10,000 annually under Section 80TTA.
- Investment in Rajiv Gandhi Saving Scheme is eligible for deduction under Section 80CCG.
- Under Section 80D, if an individual makes a payment for medical insurance premium for his spouse, children or his own self, he can claim income tax deduction for the same for ₹ 25,000. For senior citizens, the limit has been extended to ₹ 30,000. Additionally, preventive health check-up costs till ₹ 5000 per family qualify for tax deductions.
- Under Section 80DD, if a family member of the tax payer is suffering from 40% disability, he can claim deductions for up to ₹ 75,000 for spending on medical treatments for disabled dependents.
- Under Section 80DDB, a person is allowed deductions if he pays an amount of ₹ 40,000 or more on treatment of specific diseases which includes malignant cancers, neurological diseases, chronic renal failure, haematological disorders and AIDS.
- If you have taken an education loan and you are repaying the interest, you will qualify for income tax deductions under Section 80E. However, deductions are not allowed for repayment of the principal amount of the education loan.
- Under Section 80G, 80GGA, 80GGB, 80GGC, if a person has made donations to an approved body during a financial year, he will qualify for deductions.
- A standard deduction of ₹ 40,000 has been introduced in Budget 2018 for the salaried class in lieu of Medical Reimbursement and Transport allowance. This deduction is allowed irrespective of expenses incurred by the employee. The assessee does not have to submit actual bills to claim this deduction.
ABOUT INCOME TAX REBATE
A number of confusions arise when terms like income tax rebate, income tax exemption and income tax deduction are used. Although all these terms are beneficial to the tax payer, they have different meanings.
- Income tax rebate includes those items which can be claimed from the total tax payable.
- Tax deductions and tax exemptions are claimed from the income whereas in case of rebates, claims are made from the tax payable.
- You can claim an Income Tax rebate under section 87A when you file the income tax returns.
- A rebate will be available if the tax payer is a resident individual who has not crossed the 80 year mark and whose taxable income is ₹ 5,00,000 or less.
- Hindu undivided Families, companies, trusts, LLP, partnership firms and NRIs are not eligible for tax rebate.
DETERMINATION OF RESIDENTIAL STATUS
The residential status of an individual will be determined as under –
|He must satisfy at least one of the basic conditions (as given below).||Not required.|
|Not Ordinarily Resident|
|He must satisfy at least one of the basic conditions||He must satisfy either one or both the additional conditions given under section 6(6).|
|Should not satisfy any of the basic conditions||Not required.|
- Residential status of an individual [Section 6(1)]: An individual is said to be a Resident in India in any previous year if he satisfies one or both of the basic conditions as given under section 6(1).
- Basic conditions:
- He must be in India for a period of 182 days or more during the previous year; or
- He must be in India for a period of 60 days or more during the previous year and 365 days or more during the four years preceding the previous year.
Exceptions: As per Explanation to Section 6(1), the period of 60 days [given in (2) above] is substituted by 182 days in case of an individual –
- being an Indian citizen, leaves India during the previous year for employment outside India;
- being an Indian citizen, leaves India during the previous year as a member of the crew of an Indian ship;
- being an Indian citizen or a person of Indian origin, who being outside India, comes on a visit to India in the previous year.
Thus, condition number (2) is not applicable in the above 3 cases.
- Person is deemed to be of Indian origin: According to Explanation to Section 115Ce), a person is deemed to be of Indian origin, if he, or either of his parents, or any of his grandparents was born in undivided India.
- Period of stay in case Indian citizen being crew member of foreign bound ship – To be determined in prescribed manner: In the case of an individual, being a citizen of India and a member of the crew of a foreign bound ship leaving India, the period or periods of stay in India shall, in respect of such voyage, be determined in the manner and subject to such conditions as may be prescribed.
- RESIDENT (Ordinary Resident) -ROR
After fulfilling one of the above two tests, an individual becomes resident of India. Further to become, an ordinary resident of India an individual has to in addition to Test A fulfill both the following two conditions:
- He has been resident of India in at least 2 previous years out of 10 previous years immediately prior to the previous year in question.
- He has stayed in India for at least 730 days in 7 previous years immediately prior to the previous year in question.
- RESIDENT (NOT Ordinary Resident) – “RNOR”
Further to become, Resident but NOT ordinary resident (‘RNOR’) an individual has to in addition to Test A fulfill any the following two conditions:
An individual who is resident u/s 6(1) Test A can claim the beneficial status of RNOR, if he can prove that:
- He was a non-resident in India for 9 previous years out of 10 previous years preceding the relevant previous year.
- He was in India for a period or periods aggregating in all to 729 days or less during seven previous years preceding the relevant previous year.
- NON RESIDENT
Under section 2(30) of the Income-tax Act, 1961 an assessee who does not fulfill any of the two conditions given in section 6(1) (a) or (b) i.e. TEST A would be regarded as ‘Non-resident’ assessee during the relevant previous year for all purposes of this Act.
Determination of residential status for certain categories of individuals: (Proposed)
The budget 2020 proposes to introduce the following amendments in determining residential status for certain categories of individuals. As per the proposed amendments;
- Resident and Ordinary resident (‘R&OR’)
Finance Bill, 2020 proposes to amend part 2 of the twin condition by substituting 182 days to 120 days, thereby making the provisions stringent.
- Deemed Resident
The Bill insert a new clause 5 subsequent to clause (1) of section 6, which states as under:
“Notwithstanding anything contained in clause (1), an individual, being a citizen of India, shall be deemed to be resident in India in any previous year, if he is not liable to tax in any other country or territory by reason of his domicile or residence or any other criteria of similar nature”
- Not Ordinary resident (‘NOR’)
It is proposed to substitute the following condition in place of the aforementioned conditions for classification of NOR: An individual shall be considered as R&OR if such person is –
- He should be a resident in India in at least 4 out of 10 previous financial years immediately preceding the current financial year; or
- A HUF whose manager has been a resident in India in atleast 4 out of 10 previous financial years immediately preceding the current financial year.
Accordingly, the condition for cumulative stay in India is 730 days or more during the 7 financial years immediately preceding the current financial year has been deleted vide the proposed amendment.
Further, the amendments are proposed to be applicable from PY 2020-21 (i.e. AY 2021-22) and subsequent years.
INCOME TAX RETURN
An Income Tax return/ITR is the form where all eligible taxpayers are required to declare the taxable income, deductions and tax payments. In the ITR Form taxpayers need to declare all information under various heads to the best of their knowledge. ITR is the proof that you have paid your tax on time. ITR filing is also the closure of financial year for the individuals. ITR Filing is done in the good faith and therefore each and every ITR is not scrutinized by IT Department
Types of Income Tax Returns:
- ITR1 Sahaj Form:
ITR 1 Form is also known as SAHAJ Form. The form is applicable only for individuals. Any other person whose income is taxable shall not be eligible to file its return in this form.
- ITR 2:
This Return Form is to be used by an individual or an Hindu Undivided Family who is not eligible to file Sahaj ITR-1 and whose income chargeable to income tax under the head “Profits or gains of business or profession” is in the nature of interest, salary, bonus, commission or remuneration, by whatever name called, due to, or received by him from a partnership firm.
- ITR 3:
This Return Form is to be used by an individual or a Hindu Undivided Family who is carrying out a proprietary business or profession.
- ITR-4S Sugam Form:
The Sugam ITR-4S Form is the Income Tax Return form for those taxpayers who have opted for the presumptive income scheme as per Section 44AD and Section 44AE of the Income Tax Act. However, if the turnover of the business mentioned above exceeds INR 2 crores, the tax payer will have to file ITR-4.
- ITR 5:
ITR-5 has to be filed by firms, Limited Liability Partnerships (LLPs), Association of Persons (AOP) and Body of Individuals (BOI).
- ITR 6:
Companies other than companies claiming exemption under section 11 must furnish their income tax must in ITR-6 Form.
- ITR 7:
ITR-7 is filed when persons including companies fall under section 139(4A) or section 139 (4B) or section 139 (4C) or section 139 4(D).
Due Date for Tax Filing
The due date for filing income tax returns is the date by which the returns can be filed without any late fee or penalty. The taxpayers filing their return beyond such due date will have to pay interest under 234A and penalty under section 234F
|Category of Taxpayer||Due Date for Tax Filing – FY 2019-20|
|Individual||31st July 2020|
|Body of Individuals (BOI)||31st July 2020|
|Hindu Undivided Family (HUF)||31st July 2020|
|Association of Persons (AOP)||31st July 2020|
|Businesses (Requiring Audit)||30th September 2020|
|Businesses (Requiring TP Report)||30th November 2020|