Income Tax Act

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An Introduction to Income Tax Act

The concept of the Income Tax is not new in India rather it is present for many years. However, James Wilson, who was India’s first finance member, presented the 1st modern income tax act in the year 1860.

What Exactly is Income Tax?

In India, an income tax is a tax that one pays to the government as per his/her income (and if companies, then profit). This money (tax money) is used by the government for different purposes such as infrastructure development, public services, defense subsidies, and spending with other available options. If the income of a person is beyond a specified limit, then he/she is required to pay the income tax every year.

What is the Income Tax Act, 1961?

The IT Act enacted in 1961 and is the sculpture under which all the things related to taxation are listed. The typical inclusions under this act are tax collection, levy, recovery, and administration of the income tax. This act aims to consolidate and improve all the rules that are related to Indian taxation.

The Income Tax Act, 1961 has many sections that try to deal with various taxation aspects of India. Let us know about each of these sections which are known as chapters with their relevant sections and sub-sections.

  • Chapter 1: This is the very first section, therefore, it contains the introduction of the IT Act and gives a rough idea about it.
  • Chapter II: This chapter contains the extent and commencement of the IT Act.
  • Chapter III: This is the third chapter that talks about the income tax charge, total income’s scope, income that is arising because of abroad working, and dividend income, and so on.
  • Chapter IV: Chapter four of the Income Tax Act, 1961 deals with various forms of income that do not come under total income. It contains income that comes from property, institutions, trusts, political party income, etc.
  • Chapter V: This chapter talks about the income of those individuals that become a part of assessee’sincome. This contains income that comes from capital gains, from house property, from business, etc.
  • Chapter VI: This deals with income transfer when no transfer of assets occurs. This contains transfer and revocable transfer.
  • Chapter VII:This chapter contains the details of deductions that occur on some specific payments and specific income.
  • Chapter VIII: This chapter deals with the share of members and rebates associated with a body or association.
  • Chapter IX:This chapter tells about double relief in taxation which is income tax relief and rebate on it.
  • Chapter X: This talks about special provisions in which income tax payment is avoided. This contains all the agreements with foreign countries and as well as information related to these countries with which there is no agreement related to tax payment.
  • Chapter XI: Contains the list of all the anti-avoidance rules related to income tax.
  • Chapter XII: This section refers to tax calculation under some special classes.
  • Chapter XIIA: Under this section, there is a special provision for all the income that is gained by Non-Resident Indians.In this capital gains, provident fund, short-term capital gains, etc are included. This chapter has sections 110 to 115BBE. Under these sections, different types of taxes relevant to incomes that are earned through various sources such as dividends, royalty, foreign currency unit, etc. are listed down. All the relevant sections list down the tax for the income that is earned by any non-resident Indian.
  • Chapter XIIB:Under this section, a special provision of taxation applies to specific companies. This chapter has sections from 115J to 115F.
  • Chapter XIIBB: In this chapter, the process of taxation for the changeover of a foreign organization to some Indian subsidiary is mentioned.
  • Chapter XIID: This chapter deals with the process of the transaction for the profits that are made by Indian or domestic organizations. The interest is payable over tax non-payment by these organizations and deals with the cases when the organization becomes a defaulter.
  • Chapter XIIDA: Contains rules that apply to the distributed earning of the company.
  • Chapter XIIE: Here the tax over the distributed earning of the unitholder is considered.
  • Chapter XIIF:Tax over the income that is received through the venture capital funds is considered here.
  • Chapter XIIG: Here the special provision related to tax on shipping companies is considered.
  • Chapter XIII: It contains all the information for the income tax authorities like their control and appointment, jurisdiction, disclosure of information, and their power.
  • Chapter XIV: This has a long list of sections that start from section number 139 to 152. Under this, the complete information related to return filing formality is mentioned. Starting from the PAN obtaining to filing online returns to the accounting method everything is given here. This as well contains some other amendments, an intimation of loss, the rectification of mistakes, and some other relevant classes.
  • Chapter XIVA: Contains the provision for avoiding repetitive appeals such as those that are pending in the Supreme Court and/or High Court.
  • Chapter XV: Contains liabilities for every case, all the special and general provision, tax recovery from private companies, non-resident Indians, etc.
  • Chapter XVI:Under this chapter, firms and their taxation and assessment processes are considered. This also deals with constitution change, dissolution, and the succession process.
  • Chapter XVII: This contains the clauses for recovery and collection of the taxes. It also lists taxes late payment or in the cases where recovery is made.
  • Chapter XVIII:Description of the income tax relief to the organizations because they pay their shareholders the dividends. The relief here can be considered as relief from the tax to the organizations that are involved in the work of the charity through their foundation wings.
  • Chapter XIX: It deals with refunds that pertain to the taxes if more tax is being paid to the department of IT. Cases are there when an individual is eligible for a refund, interest on refund, and assessment correctness when no claim is being made. Section 237 to section 245 includes all the aspects of this taxation chapter.
  • Chapter XIXA: This section specifically deals with cases settlement. The section starting from 245A to 245L comes in this chapter. All the aspects of the settlement like application, proceeding’s abatement, procedure, sum’s recovery are considered in this chapter.
  • Chapter XIXB: All the advance rulings are considered in this chapter’s purview. The sections that are involved here are 245N to 245V. This contains the advance ruling application, procedure, power of authority, and some other relevant topics.
  • Chapter XX:It deals with the deals that contain appeals that are to the commissioner and deputy commissioner. It also includes the appeals that are made to the High Court, revision's general aspects by the commissioner, and Supreme Court.
  • Chapter XXA: It contains sections 269A to section 269S. This chapter is linked to the acquisition of immovable properties. In some specific cases to counteract the evasion of tax. All the aspects of the acquisition including the same jurisdiction are considered in this chapter and its different sections.
  • Chapter XXB:Contains the payment mode when tax evasion's correction is needed. It deals with accepting and taking deposits and loans for corresponding and the same model.
  • Chapter XXC: It deals with the immovable property purchase made by the Indian government in the situation of the transfer. Restrictions on the appropriate authority, property, vesting of property, mistakes rectification are some of the aspects that are covered in this chapter.
  • Chapter XXI: It contains sections from 271 to 275 and contains all the penalties that apply to all the taxpayers in different cases. This refers to all kinds of penalties like those for the non-disclosure, for failure to follow with different provisions of a section, for taxes non-payment, etc.
  • Chapter XXII:In this chapter sections from 275A to 280D are included. It deals with offenses and prosecutions in respect of the failure of compliance and some other details about how the process of prosecution will be carried forwarded.
  • Chapter XXIII:The sections that come under this chapter are 281 to 298, wherein all the miscellaneous topics are covered. This contains generic as well as some special cases that can come for taxation for different entities who are paying the tax.

These are the chapters present in the Income Tax Act, however, every year the government of India presents a Financial Budget in February month. Most of the time, the new budget brings different amendments to the Income Tax Act. This generally includes some changes in the slab of Income Tax. For instance, the Finance Minister has announced that the rate of tax for individuals who fall in the lowest tax bracket of Rs.2.5 Lakh to Rs.5 Lakh will cut down to 5% from 10% in the Financial Year 2017. In the same manner, the taxes on Long Term Capital Gains were re-introduced during the budget of Financial Year 2018. As a result, to this, all the gains that are more than Rs.1 Lakh from the equity mutual funds and shares that held longer than a year are now eligible to pay 10% LTCG tax.

In the recent budget for FY 2020 -21, the Finance Minister has introduced the optional system of taxation with a reduced rate of income tax.

These are a few examples of the amendments that become Income Tax Act’s part from the coming FY, which begins from 1st April. This is done with the approval of the Indian President.

Who Pay Income Tax in India?

Every Indian citizen must pay the Income Tax if his/her annual salary is more than Rs.2.5 Lakh (this is Rs.3 Lakh for senior citizens). With individuals, entities like Hindu Undivided Family (HUF), corporate firms, Body of Individuals (BOI), local authorities, Artificial Juridical Persons, and Association of Persons (AOP) as well must pay the Income Tax.

Rates of Income Tax Slab

The income tax that one pays depends on his/her annual income. In budget 2020, new and reduced tax rates have been introduced that will come in effect from the FY 2020 – 21. The rates of these tax slabs are categorized in the below-mentioned method:

Slabs of the Income Tax IT Rate
Salary is less than Rs.5 Lakh Exempt
Salary is between Rs.5 lakh and Rs.7.5 lakh 10%
Salary is between Rs.7.5 Lakh and Rs. 10 Lakh 15%
The salary is between Rs.10 Lakh and Rs. 12.5 Lakh 20%
The salary is between Rs. 12.5 Lakh and Rs.15 Lakh 25%
Salary is above Rs.15 lakh 30%

From the FY2020-21, the taxpayers will have the option of selecting between an existing system of taxation and the new one. However, as per the new system, the tax slab has been revised (as mentioned in the above table) by reducing the rates. Another main change that has incorporated in this new scheme is that most of the exemptions and deductions are applicable as per the old regime are not valid now. Approximately 70 of the 100 or so current exemptions and deductions should be scrapped in this new system. All the taxpayers can compare the liabilities of tax and in two systems and opt for the one that is beneficial for them.

For FY 2019-20, the taxpayers should continue the old system of tax payment in which one can claim all the existing deductions.

Current Deductions under IT Act, 1961

As per the IT Act 1961, one can claim the deductions under the below-mentioned sections:

  • Section 80 to 80C: In Section 80C, 80CCC, and 80CCD of the IT Act 1961, one can reduce his/her taxable income by Rs.1, 50, 000.
  • Section 80D:In this section, one can claim the deduction of the income tax for medical expenses and premiums of health insurance.
  • Section 80CCD: This Section of the IT Act, 1961 focuses on the deductions of the Income Tax that an individual assesses of the income tax are eligible for availing on the contributions made against the Atal Pension Yojana and New Pension Scheme (NPS).
  • Section 80DD:The taxes that are deducted under this section of the income tax act should be claimed by the individuals who are Indian residents and HUFs dependents with disabilities medical treatment.
  • Section 80TTA:This section provides the deduction of 10, 000 rupees on the income that is generated through interest. This deduction is levied on HUFs and individuals.
  • Section 80DDB:The taxes under this act of the Income Tax Act 1961 are claimed for medical expenses that have been incurred for the medical treatment of some certain illness.
  • Section 80U:Under this section of the Income Tax Act, the physically disabled people can claim the deduction of up to 1, 00, 000 rupees.

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