tax is charged under the Indian Income Tax Act, 1961. It is an annual
tax on income levied by the Central Government. Tax is charged in
respect of the income of the financial year (known as previous year)
in the next financial year (known as assessment year) at the rates
fixed for such assessment year in the Finance Act passed each year
by the Parliament.
speaking, the word 'income' covers receipts in the shape of money
or money's worth which arise with certain regularity or expected
regularity from a definite source. It is not all receipt that form
the basis of taxation under the Act. Broadly, an analogy is drawn
of a tree and the fruits of that tree. The tree symbolises the source
from which one gets fruits which symbolise 'income'. The receipt
arising from the sale of tree itself is, therefore, considered a
capital receipt which is not income; but the receipts flowing from
this source viz., fruits is income. On application of this analogy,
it can be said that while the receipt arising from the sale of a
house is not income, the receipt arising from the realisation of
rent is income. In the same way, receipt from the sale of a machine
is not income but from the sale of product brought out from the
machine is income. In these cases, however, if a person deals in
purchase and sale of house properties or machines, these assets
do not remain a source and the profit derived from activities of
purchase and sale become income. The source need not necessarily
be tangible as the return for human exertion is also income.
above is abroad generalisation. While a distinction is generally
made between the capital receipt and revenue receipts, as illustrated
above, the Act has widened the scope of income by expressly including
within the meaning of 'income' the receipts which do not fall under
the broad concept explained above. For instance, the Act specifically
makes the profit arising from the sale of certain capital assets
also subject to tax under certain circumstance. The winnings from
lotteries, cross-word puzzles, races, card games etc. which do not
arise from any definite source and do not have the element of regularity
have also been specifically clarified to be 'income' under the Act.
is not the gross receipts but only the net receipts arrived at after
deducting the related expenses incurred in connection with earning
such receipts that are made the basis of taxation.
tax is charged in respect of the income of the previous year and
the same is chargeable in the assessment year. "Previous year"
means the financial year i.e. the period beginning on April 1 and
ending on March 31. The return of income for this period is due
in the next financial year called the Assessment Year in which the
proceedings for assessment commence either by filing of return voluntarily
by the income earner or by the Income Tax Department initiating
action for calling the return. The income earned in the period beginning
on 1st April 1995 and ending on 31st March 1996 will, for instance,
be assessable earliest in the next financial year i.e. the year
Act categorises the income of a person under different heads and
provides for the manner of computation of taxable income of each
head. These heads of income are:
ii) Income from house property,
iii) Profits and gains of business or profession,
iv) Capital gains, and
v) Income from other sources
receipts having the character of income are taxable unless they
are specifically exempted from taxation.
total of the income under each head as worked out in accordance
with the provisions of the Act is termed as 'gross total income'.
The act provides for certain deduction from such gross total income.
These deductions are not referable to any particular head of income,
but are allowed from the aggregate of income under all the heads
and are in the nature of incentive provisions of different kinds.
For example, deductions are allowed for promotion of charitable
activities, promoting exports and other activities resulting in
the inflow of foreign exchange, for development of industries and
for other socio-economic objectives. Incentives for promotion of
savings are provided in the form of deduction in tax liability by
grant of rebate at certain percentage on certain savings made out
of taxable income.
reducing the 'gross total income' by the amount of incentives deductions
mentioned in the preceding paragraph. What is left is the amount
on which tax is to be calculated at the rates prescribed by the
relevant Finance Act. This amount is termed as 'Total income' and
is the base for taxation. For certain categories of tax payers,
a basic exemption limit is provided and tax is calculated only on
that part of the total income which is in excess of such exemption
limit. If such 'Total income' is below the basic exemption limit,
no tax is chargeable. For instance, under the Finance Act, 2000,
no tax is payable by an individual if his total income is below
Rs. 50,000/-. The rates of taxation and the exemption limit applicable
to different categories of Assessees are given in Chapter XIII.
total income of an individual also includes certain income of other
persons. These are:-
income of spouse
remuneration derived from the concern in which the individual is
substantially interested unless the remuneration is by virtue of
the application of technical or professional skill possessed by
him or her.
assets transferred by the individual to the spouse or to any other
person for the benefit of the spouse unless the transfer is for
adequate consideration or in consideration of an agreement to live
income of son's wife from assets transferred by the individual to
her or to any other person for her benefit unless the transfer is
for adequate consideration.
income of his minor child -other than the minor child suffering
from disability except when such income arises to the child on account
of any manual work done by him or on account of any activity which
involves application of any skill, talent or specialised knowledge
individual in whose income the income of other spouse as mentioned
in (a) (i) above is to be included will be the husband or wife whose
total income - before including such remuneration income - is greater.
Similarly the income of minor child is to be included in the income
of the parent having greater income. If the marriage of the parents
does not subsist, it will be parent who maintains the child.
persons who are liable to pay income tax and against whom proceeding
for assessment are taken under the Act, are known as' Assessees
' .These persons can be natural persons or artificial juridical
persons like, corporations, local authorities etc. For the purpose
of assessment, two or more persons earning income jointly also form
a separate entity 'firm' or 'association' or persons'. The persons
forming an assessable entity can be
ii) a Hindu Undivided Family,
iii) a corporation,
iv) a firm,
v) an 'association or persons' or 'body of individuals',
vi) a local authority,
vii) any other artificial juridical person not falling in any of
the above categories.
Different rules for computation of income and tax exist for different
types of persons.
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