INCOME TAX IN INDIA
WHY TAX
The Government needs finance in order to
- promote the well being of the people,
- to meet the administrative expenses
- to improve and maintain the infrastructure
- to provide the security to the people of the country
- and the list goes on
TYPE OF TAXES IN INDIA
We can classify the Taxes in India in Two categories –
1. Direct Tax
2. Indirect Tax
DIRECT TAX
Direct Tax is the tax levied by the Government on the Income of the Person during the Financial Year . The Government levied this tax on different types of the entity and the person has to deposit the Tax directly with the Government. This is popularly called as Income Tax.
INDIRECT TAX
On the Other hand Government levied various type of taxes which is levied on Sale of Various Products and Services which are popularly called as VAT, Sales Tax, Goods and Service Tax, Excise Duty, Service Tax etc. These are collected by the other persons from the buyer of products and services and deposited with the Government. This type of taxes are known as Indirect Taxes.
ABOUT THE AUTHOR
I am MBA Finance practicing in Accounting and Taxation for more than 10 years. I have 35 years of experience in the field of Taxation, Accounting and Finance. I had worked with various big corporate, handled various portfolio in Accounting, Direct and Indirect Taxation and Payroll Management.
INCOME TAX DEFINED
Everyone who earns or gets an income in India is subject to income tax- whether he is a resident in India or not. The income can be earned by way of Salary, Business, Profession, Renting, profit on sale of assets, shares, mutual funds, Interest, dividend etc.. Income Tax is even charged on the casual income like earning from Quiz Competition, realty shows, Lottery etc.
The Income Tax Department has distributed these different source of income into following five heads for the purpose of Taxation:
1.Income From Salary
The Amount received by an employee from his Employer for performance of the Duty as part
of Employment Agreement. This also Covers the Pension received by the retired persons.
2.Income from House Property
The Income earned by renting of Property is covered under this heading. The property can be
given for residential and/ or commercial purpose.
3.Capital Gain
The gain arising from sale of Immoveable Property, Shares, Mutual Funds, and other capital goods which are not the item of his/her business
4.Income from Business and Profession
This covers the income of all persons who are engaged in their own Business i.e. trade & manufacturing of products and also the persons who are rendering the services to others and deriving income there from.
5.Income from Other Sources
The Income which can not be classified under above four heads are covered here. This includes the Interest Income of all types, Dividend, winning from lottery, crossword puzzle, realty shows etc.
TYPE OF TAX PAYERS
Income Tax Act has divided the Tax Payers in following broad categories:
- Individuals,
- Hindu Undivided Family (HUF),
- Association of Persons(AOP)
- Body of Individuals (BOI)
- Partnership Firms including LLP
- Companies
The Taxation basis is different for each of these type of taxpayers under the Indian Income Tax Act. While Firms and Indian Companies have a fixed rate of tax of the profits, the individual, HUF, AOP and BOI taxpayers are taxed based on the income slab they fall into. The Income of Individual, HUF, AOP and BOI are grouped into different blocks popularly known as tax brackets or tax slabs. These tax slab has a different tax rate depending on the income of the year.
Please Note only an individual can have income from any or all of the above HEADS while the other forms of tax payer can not have income from Salary.
FINANCIAL YEAR AND ASSESSMENT YEAR DEFINED
Financial Year is the period for which the Income earned is subject to Tax. The Financial Year in India is April 1 to March 31 of subsequent year i.e. the financial year for 2019-20 from April 1, 2019 to March 31, 2012
Assessment Year is the year during which your income is assessed to Tax. This is the year subsequent to Financial Year i.e. assessment year for financial year 2019-20 is 2020-21 and is from April 1, 2020 to March 31, 2021.
DIFFERRENT TYPE OF HEADS OF INCOME AND HOW TO ARRIVE AT THE INCOME UNDER IT
1. SALARY
SALARY is earned by an individual where there is an employer – employee contract exist. The Employer pays the agreed amount to the employee for performing the assigned duties . While calculating the income the employee gets a deduction of Rs.50000/- called as standard deduction from his salary. If the employee stays on rent then he can claim the deduction on the rent paid subject to the limitations imposed by the Act.
2.HOUSE PROPERTY
When a tax payer earns the income by way of Renting of Property the Income Tax Act allows it deduction of the Municipal Taxes i.e. Property Tax paid and also a flat deduction of 30% of the Residual Income towards repair and maintenance of the Property.
3.CAPITAL GAIN
Gain arising on transfer of capital asset is charged to tax under the head “Capital Gains”. Income from capital gains is classified as “Short Term Capital Gains” and “Long Term Capital Gains”.
Profits or gains arising from transfer of a capital asset are called “Capital Gains” and are charged to tax under the head “Capital Gains”.
Meaning of Capital Asset
Capital asset is defined to include:
(a) Any kind of property held by a taxable person, whether or not connected with business or profession of the taxable person.
(b) Any securities held by a FII which has invested in such securities in accordance with the regulations made under the SEBI Act, 1992
Here the property covers all type of fixed assets, investment in Shares, Mutual Funds, Debenture, Bonds, etc.
4.INCOME FROM BUSINESS OR PROFESSION
The term "business" is meant by dealing in goods and includes any type of trade be it trading, manufacturing, supplying of goods . The term "profession" implies all types of specialized skills and knowledge which can be acquired only after study and application. The term Profits and Gains means any surplus amount generated after meeting all expenses of business and profession. This term should be understood to include losses also, so that in one sense 'profit and gains' represent excess of income over expenditure while 'losses' represent excess of expenditure over income.
The following types of income are chargeable to tax under the heads profits and gains of business or profession:-
Profits and gains of any business or profession
-Any compensation or other payments due to or received by any person
-Income derived by a trade, profession or similar association from specific services performed for its members
-Profit on sale of import entitlement license, incentives by way of cash compensatory support and drawback of duty
-The value of any benefit or perquisite, whether converted into money or not, arising from business
-Any interest, salary, bonus, commission, or remuneration received by a partner of a firm, from the firm
-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 to share any know-how, patent, copyright, franchise, or any other business or commercial right of similar nature or technique likely to assist in the manufacture or processing of good
-Income from speculative transactions.
General principals governing the computation of taxable income under the head "profits and gains of business or profession:-
- Business or profession should be carried on by the taxable entity.
- Income from business or profession is chargeable to tax under this head only if the business or profession is carried on by the taxable entity at any time during the financial year. This income is taxable during the following assessment year.
- Profits and gains of different business or profession carried on by the taxable entity are clubbed together for the year and tax arrived at accordingly except in case of a speculative business.
- Taxable profit is the real profit accrued or arising in the financial year.
- The yield of income by a commercial asset is the profit of the business irrespective of the manner in which that asset is exploited by the owner of the business.
- Any sum recovered by the taxable entity during the previous year, in respect of an amount or expenditure which was earlier allowed as deduction, is taxable as business income of the year in which it is recovered.
5.INCOME FROM OTHER SOURCES
Income which can not be classified under any of the above category are Classified under Income from Other Sources.
Broadly following type of incomes are covered under this head
1. Income from Dividend
2. Interest Income from Bank, Securities etc.
3. Winning from Lotteries, crossword puzzle, quiz shows, reality shows, races etc.
4. Gifts Received .
5. Family Pension received by the Individual
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