Basic concepts of income tax act 1961 notes

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.

Basic Concepts of Income Tax Act 1961


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

 The scope of taxable income for a resident is determined by residential status. Residential status is classified under two heads:

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.

 An individual's residential status is determined by his physical presence in India during the financial year.

 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)

 - Up to ₹2.5 Lakhs**: Nil

- ₹2.5 Lakhs to ₹5 Lakhs: 5%

- ₹5 Lakhs to ₹10 Lakhs: 20%

- Above ₹10 Lakhs: 30%

 Senior citizens above 60 years and super senior citizens above 80 years are eligible for higher basic exemptions of ₹3 Lakhs and ₹5 Lakhs, respectively.

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 80C: Investment up to ₹1.5 Lakhs in PPF, NSC, ELSS, etc.

- 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.

 "Paying income tax is a burden but also a means of giving back to the nation."

Rajveer Singh

Tax Law Page, led by Rajveer Singh, simplifies Tax Laws with 19+ years of expertise, offering insights, compliance strategies, and practical solutions.

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