Basic concepts of income tax act 1961 notes
Income tax is the
base that every taxpayer in India needs to understand. Knowing how your income
is taxed, what exemptions and deductions are available to you, and why it's so
important to keep records in order to avoid penalties will help you manage your
finances properly. This guide will explain the fundamentals you need to know
about income tax in India, making the tax-filing process simpler.
Explore the "basic concepts of the Income Tax Act 1961 notes" with detailed notes on provisions, tax slabs, exemptions, and key sections for better tax understanding.
1. What is Income Tax?
It is a kind of
direct tax collected by the Indian government from the income earned by the
assessee, which includes one, HUFs, and other units. Income Tax Act 1961 is
regulated by the Central Board of Direct Taxes, in India.
2. Income Tax Key Terms
a. Means of Assessee
The word "assessee" means anyone liable to pay an income tax. Thus, individuals, companies, firms, trusts, and the like are all assessees.
b. Means of
"Financial Year (FY) and Assessment Year (AY)
- Financial Year
(FY): The period of 12 months of income earning, from April 1 to March 31. The
FY 2024-25 means to the period from April 1, 2024, to March 31, 2025.
- Assessment Year
(AY): The FY immediately next to which, income is assessed for the sake of
tax. For F.Y. 2023-24, in that behalf or corresponding A.Y. is 2024-25.
c. Gross Total
Income (GTI)
Gross Total Income
(GTI) is the total income accruing to an Assessee from all sources, before
setting off the permitted deductions. Gross Total Income falls under five heads
of income in total.
Gross Total Income is
an income which arises before set offs of allowable deductions from one or more
of these above heads. Therefore, any given head can either give an addition or
reduction.
Taxable Income: Taxable Income is the amount that results when all the allowable deductions and exemptions are subtracted from GTI, for which income tax is going to be computed.
3. Heads of Income
Incomes in India have
been grouped into five main heads for tax purposes:
-Income from
Salary: Earnings arising from employment, such as wages, bonuses, pensions,
and allowances.
-Income from House
Property: Income through ownership of property. Rent income falls under this
head. Properties, which are self-occupied, fall under the exempt income head.
-Profits and Gains
from Business or Profession: Income earned through law or medical practices,
etc.
-Capital Gains:
Gains on account of sale/transfer of capital assets in the nature of property,
shares, or mutual funds.
-Other Income:
Interest in saving accounts, dividends, prize money received from lottery,
etc., fall in this category.
Every head has rules
and exceptions to it that a taxpayer should know which incomes are being taxed
as.
4. Residential Status and Taxation
Resident: All the
worldwide income, Indian as well as foreign, of a resident is taxed in India.
- Non-Resident
(NR): Only income earned or accrued in India is taxable.
- Resident but Not
Ordinarily Resident (RNOR): Only income earned in India and certain foreign
income sources are taxable.
5. Income Tax
Slabs for Individuals
Income tax in India
is progressive, meaning with every increase in income levels, the tax rate
increases. The tax slabs vary from income and age of the taxpayer. There are
two types of tax regimes in India: Old Tax Regime, which includes exemptions
and deductions, and New Tax Regime, which has less tax rates but limits
deduction.
Income Tax
Slabs for FY 2023-24 (Old Tax Regime)
- ₹2.5 Lakhs to ₹5
Lakhs: 5%
- ₹5 Lakhs to ₹10
Lakhs: 20%
- Above ₹10
Lakhs: 30%
New Tax Regime for FY 2023-24
The New Tax Regime
was made effective in 2020. It has modified the tax slabs but narrowed popular
deductions:
- Up to ₹2.5
Lakhs: Nil
- ₹2.5 Lakhs to ₹5
Lakhs: 5%
- ₹5 Lakhs to ₹7.5
Lakhs: 10%
- ₹7.5 Lakhs to ₹10
Lakhs: 15%
- ₹10 Lakhs to ₹12.5
Lakhs: 20%
- ₹12.5 Lakhs to ₹15
Lakhs: 25%
- Above ₹15 Lakhs:
30%
Taxpayers have the option of Old and New Regimes, whichever is advantageous.
6. Exemptions and Deductions
Exemptions: Exemptions reduce gross income and include the following types of income which are not taxed
- HRA (House Rent Allowance)
- LTA (Leave Travel Allowance)
- Agricultural
Income (in some circumstances)
Deductions: Deductions are subtracted from gross total income, and this reduces taxable income. Some of the most popular deductions are:
- Section 80D:
Health insurance premium for self, family, and parents.
- Section 80E:
Interest on education loans.
- Section 80G:
Donations to charitable institutions.
7. Tax Deducted at Source (TDS) and Advance Tax
Tax Deducted at Source (TDS): There are certain payments from which the payer deducts the tax before making a payment to the receiver. The examples include salaries, interest payments, and rent. TDS helps collect tax regularly throughout the year.
Advance Tax: If the tax payable in a year exceeds ₹ 10,000 after TDS, then the advance tax is payable. Advance tax essentially applies majorly to those taxpayers with the higher non-salary income.
The Filing of an
Income Tax Return, or ITR, is necessary for some and advantageous for others
because it helps track income and refund if one has overpaid tax. Some benefits
of filing ITR are:
Tax Refund:
There are tax refunds for individuals who have paid excess TDS or advance tax.
Proof of
Income Filing returns helps obtain loans and visas.
Penalties: File
late and you are attracting a penalty under Section 234F.
The Income Tax
Department has made this filing process easier through the web portal,
e-filing, where the income details are pre-filled and displayed for the
taxpayer's preview.
9. Penalties and Compliance
Non-compliance under the Income Tax Act may lead to penalties and interest imposed in the form of;
Late Filing Penalty
u/s 234F- of ₹10,000 to get ITR filed within time.
- Under Sections
234A, 234B, and 234C: Interest relating to late filing, non-payments, or
underpaying advance tax.
Be alert about tax
date and pay on time. This would save unnecessary pain of penalty.
10. Recent Developments in Indian Income Tax
Indian's tax regime
is becoming the most efficient and transparent mechanism:
- Faceless
Assessment and Appeals: More and more assessments and appeals are becoming
digital to keep it fair and transparent.
- New Tax Regime:
This is an optional new tax regime which includes fewer, lighter tax slabs
without deductions.
- Pre-filled ITR
Forms: The concept of pre-filled data in accordance with preceding tax and
income details has rendered the returning even easier.
Conclusion
Understanding these
fundamental concepts of income tax is important for managing finances
efficiently and following the Indian tax laws. It could be the new tax regime
or old one, claiming deductions, or payment of advance tax: one stays abreast,
ensures he is optimizing his tax liabilities, and hence penal-free. As
modernization continues in India's tax framework, taxpayers should get used to
the new adaptation and ease the process while availing their tax savings.