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The direct tax which is paid by individual to the Central Government of India is known as
Income Tax. It is imposed on our income and plays a vital role in the economic growth &
stability of our country. For years the Government is generating revenue through this tax
system.
The word 'Tax' originated from the 'Taxation.' which mean 'Estimate.' Hence, 'Income Tax'
mean 'Income Estimate,' which helps the government to know the actual economic strength of
a person. It is also a way to set up an economic standard for general people. It helps the
Government to know the distribution of money among country's people.
Income Tax has been in force in different forms since years. If we go through the history of
India, we get relevant information regarding the taxation system of India. In ancient history, it
is mentioned that at about such system which were imposed on the income, expenditure and
other subject. Even information of such is given Manu Smriti and Arthasatra which confirms its
existence at that time.
In modern India, Income Tax came into existence in 1860 with the implementation of first
Income Tax Act. After implementation of this Act, people became aware of the actual meaning
of Income Tax. This act was in force for first five years. After this, in 1865, second Act came
into force. There were major changes in this Act relative to the first. It proved itself as a good
factor for the growth of our economy. With this Act a new concept of Agriculture Income came
into existence.
After this, different new Act was also implemented. The most important of them is the Income
Tax Act, 1961. According to ruling of Income Tax Act, 1961, any person whose salary from any
source of income is more than the maximum limit of unchargeable amount will be liable to pay
Income Tax. There is also a provision of deduction and exemptions in Income Tax, depending
upon the type of assessee, source of income, residential status and investment in saving
schemes. Income tax rates are a matter of chang, which is declared by Ministry of Finance,
Government of India regularly, usually on annual basis.
Heads of Income
Under chapter 4 of Income Tax Act, 1961 (Section 14), income of a person is calculated under
various defined heads of income. The total income is first assessed under heads of income and
then it is charged for Income Tax as under rules of Income Tax Act. According to Section 14 of
Income Tax Act, 1961 there are following heads of income under which total income of a
person is calculated:
What is Salary?
Income under heads of salary is defined as remuneration received by an individual for services
rendered by him to undertake a contract whether it is expressed or implied. According to
Income Tax Act there are following conditions where all such remuneration are chargeable to
income tax:
• When due from the former employer or present employer in the previous year,
whether paid or not
• When paid or allowed in the previous year, by or on behalf of a former employer or
present employer, though not due or before it becomes due.
• When arrears of salary is paid in the previous year by or on behalf of a former
employer or present employer, if not charged to tax in the period to which it relates.
What is Annuity:
It is an annual income received by the employee from his employer. It may be paid by the
employer as voluntarily or on account of contractual agreement. It is not taxable until the right
to receive the same arises. Under section 56, Income Tax Act, 1961 other annuities come
under a will or granted by a life insurance company or accruing as a result of contract which
comes as income under from other sources.
What is Gratuity:
It is salary received by an individual paid by the employee at the time of his retirement or by
his legal heir in the case of death of the employee.
What is Allowance:
It is the amount received by an individual paid by his/her employer in addition to salary. Under
section 15 of the Income Tax Act, 1961 these allowance are taxable excluding few condition
where they are entitled of deduction/ exemptions.
Under Income Tax Act following types of allowance are defined
Entertainment Allowance:
It is the amount paid by employer for availing entertainment services. Under section 16(ii) of
Income Tax Act, 1961 it is entitled to deduction in tax from is salary. But in this case deduction
is given to his gross salary which also includes entertainment allowance. Deduction in tax
against this allowance can be divided into two parts :
• Amount paid for the rent-free accommodation provided to the assessee by his
employer
• Any concession in the matter of rent respecting any accommodation provided to the
assessee by his employer
• Any benefit or amenity granted or provided free of cost or at concessional rate in any
of the following cases:
1. By a company to an employee, who is a director thereof
2. By a company to an employee being a person who has a substantial interest in
the company
3. By any employer to an employee whose income under the head 'Salaries'
exceeds Rs.24000 excluding the value of non monetary benefits or amenities
4. Any sum paid by the employer in respect of any obligation which, but for such
payment, would have been payable by the assessee
5. Any sum payable by the employer whether directly or through a fund, other
than a recognised provident fund or EPF, to effect an assurance on the life of
the assessee or to effect a contract for an annuity
• Medical facility
• Medical reimbursement
• Refreshments
• Subsidised Luch/ Dinner provided by employer
• Facilities For Recreation
• Telephone Bills
• Products at concessional rate to employee sold by his/ her employer
• Insurance premium paid by employer
• Loans to employees by given by employer
• Transportation
• Training
• House without rent
• Residence Facility to member of Parliament, judges of High Court/ Supreme Court
• Conveyance to member of Parliament, judges of High Court/ Supreme Court
• Contribution of employers to employee's pension, annuity schemes and group
insurance
1. Annual value of a house is zero if property is in the occupation of the owner for his
residence for the whole year & if no other benefit is availed by owner from his
property. There will be no deductions as given under section 24 except deduction
interest on borrowed capital
2. If the owner lets out the house or a part thereof for any period of time during the
previous year the annual value of the property or part has to be calculated for the
whole year and the proportionate annual value of the period for which the house or
any part thereof was in the occupation of the owner for his own residence shall be
deducted from the gross annual value. The assessee in such cases cannot claim
deduction under section 24 in excess of the annual value so determined
3. The assessee occupies more than one house for his residence the above exemption is
applicable only to one such house at the option of the assessee. The annual value of
the other house or houses shall be computed as if the house or houses are let
4. In case where the assessee has only one residential house but it cannot be occupied
by the owner by reason of that owing to his employment, business or profession
carried out on at any other place, he has to reside at that other place in a building not
belonging to him, the annual value of such house shall be taken to be nil if the house
is not actually let and no other benefit is derived by the owner from such house. The
assessee cannot claim any deduction in such case as allowable under section 24 of the
Act except for interest on borrowed capital subject to a maximum of Rs. 15,000/-
• Profits and gains assessee from any business or profession during assessment year
• Any payment or compensation due or received by a person for his services to
organization as a part of his business
• Making profit in trade Income of professional or organization against services provided
by that professional/ organization
• Profits on sale of a license granted under the Imports (Control) Order, 1955, (EXIM
control Act, 1947)
• Cash received or due by any person against exports under government schemes
• Any benefit whether it is not in cash coming from business/ profession
• Any profit, salary, bonus or commission received by company partners
• Stock of goods and raw materials used by assessee for his business or profession
• Those property which are movable like wearing apparel, furniture, automobile, phone,
household goods etc. Held by assessee. But Jewelry which is also an movable assets
comes under heads of Capital Assets
• Agricultural property in India. But agriculture land coming under municipal limits (in
area having population ore than 10,000) comes under Capital Assets. Agriculture lands
within 8KM from municipal limit also comes Capital Assets if it is notified by the central
government of India
• Few Gold Bonds issued by government
• Few special bonds issued by central government like Special Bearer Bonds, 1991
• Salary
• House Property
• Profit In Business/ Profession
• Capital Gains
So under Section 56(2) of Income Tax Act,1962 all such income comes in this heads of
income. There are following incomes which are taxed under this heads
Under section 139(1) of the Income Tax Act, there are additional six conditions, which forces a
person to file his income tax return. These conditions are:-
For Women
For Year 2005-2006
Taxable Annual Income Slab (In
Tax Rate (In %)
Rs.)
0 - 1,35,000 Nil
Note:
• Surcharge @ 10% applicable if total income exceeds Rs. 8.5 lakh for A.Y. 2005-06 and
Rs. 10 lakh for A.Y. 2006-07.
• There is a new section 80C according to which a person can get rebate upto Rs.
1,00,000 against insurance premium, PF contributions and other such schemes.
• In case of higher education there is a deduction in tax for a maximum period of 8
years.
• Marginal relief would be provided to ensure that the additional income tax payable
including surcharge, on the excess of income over Rs. 10,00,000 (Rs. 8.5 lakh for A.Y.
2005-06) is limited to the amount by which the income is more than Rs. 10 lakh (Rs.
8.5 lakh for A.Y. 2005-06).
• Education cess @ 2% on tax plus surcharge.
List of Dates:
14th January
Submission of tax deduction against interest, dividend or any other amount paid to non-
resident during 1st,October - 31st,December. Form No : 27
15th March
In case of other than company - Payment of 3rd installment of advance for the financial year
In case of a company - Payment of 4th installment of advance for the financial year
14th April
Submission of statement of tax deduction against interest, dividend or amount paid to non-
resident during 1st,January - 31st,March. Form No : 27
30th April
(i) Certificates of such taxes which are deducted due to payment given to employees as their
salary. From No : 16
(ii) Certificates of such taxes, which are deducted due to amount, paid as insurance
commissions. Form No : 16A
(iii) Certificate of tax deducted other than salary Form No: 16A
(iv) filing annual return of dividend and income in terms of units under section 206 of Income
Tax Act 1961. Form No : 26
31st May
(i) filing of annual return against earning from prize, lottery. Form No : 26B
(ii) filing of annual return against earning from horse races. Form No : 26BB
(iii) filing of annual return against salary paid. Form No : 24
15th June
In case of company - Payment of 1st installment of advance for the financial year
30th June
(i) filing of income tax return if assessee is not a corporate/ cooperative and having no source
of income from business/ profession. Form No: 3/2A
(ii) filing of income tax return against insurance commissions/ commission paid without
deduction of tax. Form No : 26D, 26E
(iii) filing of income tax return against interest either on securities or on any other. Form No :
25, 26A
(iv) filing of income tax return against payment to contractors Form No : 26C
(v) filing of income tax return against deposits under national saving schemes Form No : 26F
(vi) filing of income tax return against payment for purchasing of Mutual Funds Form No : 26G
(vii) filing of income tax return against payment of commission on sale of lottery Form No :
26H
(viii) filing of income tax return against payment of rent Form No : 26J
14th July
Submitting date for the statement of tax deducted from interest on amount paid to non
residents during 1st,April - 30th,June Form No : 27
31st August
filing of income tax return if
(i) Assessee is not a corporate/ cooperative
(ii) There is no need of auditing accounts under any law
(iii) Total income includes income through business or other profession.
Form No: 2
15th September
In case of other than company/ corporate : Payment of 1st installment of advance income tax
In case of a company/ corporate : Payment of 2nd installment of advance income tax
14th October
Submitting date for the statement of deduction of tax interest, dividend and other amount
paid to non resident during 1st July - 30th September. Form No : 27
31st October
(i) In case of non corporate : Submitting auditing report under section 44AB of Income Tax
Act. Form No : 3CA, 3CB, 3CC, 3CD, 3CE
(ii) In case of cooperative/ non corporate : filing of income tax return of the relevant
assessment year if it require to get his account audited under Income Tax Act. Form No : 2
filing of half yearly return against tax collected during 1st April - 30th September Form No :
27EA, 27EB, 27EC, 27ED
Date of submission of annual audited account for approved programs under section 35 (2AA)
of Income Tax Act 1961.
30th November
In case of a company - filing of annual return with auditing report under section 44AB
For annual return filing : Form 1
For submitting auditing report : Form 3CA & 3CD
15th December
In case of other than company - Payment of 2nd installment of advance for the financial year
In case of a company - Payment of 3rd installment of advance for the financial year
Income Tax Deductions
Under section 80DD and 80U of Income Tax Act, physical disability must be one of the
following:
Dividend
• Monthly Deposit
• Saving Deposit
• Time Deposit
• Recurring Deposit
Public Sector Employees: Under this scheme there is a return of 9.5% payable half-yearly on
30th June and 31st December respectively. There is a minimum investment limitation of
Rs.1000/- and the maximum limitaion is the amount equal to total retirement benefit. It can
be operated by retired PSU employees in his/her own name or with the spouse, jointly. In this
scheme, there is a facility of premature encashment. Entire balance or part thereof can be
withdrawn after the expiry of three years from the date of deposit. Maturity period of this
scheme is 3 years. According to Income Tax Act, 1961 interest on this scheme is tax free.
Dividend
According to Income Tax Act,1961 there is a provision benefit in Income Tax if assessee has an
income as a dividend on investment in any of the following:
• Shares
• Mutual Funds
• Unit of UTI
• According to the Income Tax Slab, the first 1,00,000 is not taxable.
• The next Rs. 50,000 is taxable @10%.
• 10% of Rs. 50,000 is Rs. 5,000.
• The remaining Rs. 60,000 i.e. 2,10,000 - (1,00,000+50,000) is taxable @20%.
• 20% of Rs. 60,000 is Rs. 12,000.
• Therefore, the net Income Tax Payable is Rs. 5,000 + Rs. 12,000 i.e. Rs. 17,000.
Example 2: Let us take a case where the assessee is women and whose taxable income is Rs.
2,40,000.
• According to the Income Tax Slab, the first 1,35,000 is not taxable.
• The next Rs. 15,000 is taxable @10%.
• 10% of Rs. 15,000 is Rs. 1,500.
• The remaining Rs. 90,000 i.e. 2,40,000 - (1,35,000+15,000) is taxable @20%.
• 20% of Rs. 90,000 is Rs. 18,000.
• Therefore, the net Income Tax Payable is Rs. 1,500 + Rs. 18,000 i.e. Rs. 19,500.
Example 3: Let us take a case where the assessee is senior citizen and whose taxable income
is Rs. 2,90,000.
• According to the Income Tax Slab, the first 1,85,000 is not taxable.
• The next Rs. 65,000 is taxable @20%.
• 20% of Rs. 65,000 is Rs. 13,000.
• The next Rs. 40,000 i.e. 2,90,000 - (1,85,000+65,000) is taxable @30%.
• 30% of Rs. 40,000 is Rs. 12,000.
• Therefore, the net Income Tax Payable is Rs. 13,000 + Rs. 12,000 i.e. Rs. 25,000.
(If the assesse claims any rebate/ exemption, the claimed amount will be deducted from his
income with reference to the law of Income Tax Act before calculating the tax.)
Note:
• Surcharge @ 10% applicable if total income exceeds Rs. 8.5 lakh for A.Y. 2005-06 and
Rs. 10 lakh for A.Y. 2006-07.
• There is a new section 80C according to which a person can get rebate upto Rs.
1,00,000 against insurance premium, PF contributions and other such schemes.
• In case of higher education there is a deduction in tax for a maximum period of 8
years.
• Marginal relief would be provided to ensure that the additional income tax payable
including surcharge, on the excess of income over Rs. 10,00,000 (Rs. 8.5 lakh for A.Y.
2005-06) is limited to the amount by which the income is more than Rs. 10 lakh (Rs.
8.5 lakh for A.Y. 2005-06).
• Education cess @ 2% on tax plus surcharge.
Income Tax Complaint
There is a provision of Income Tax Complaint in Income Tax Act, 1961. According to the act,
one can file a complain against any person who is not fulfilling the Income Tax Act to his
assessing officer or other officer incharge like CIT or CCIT or DGIT (investigation), responsible
for its further processing. The person who is filing the complain can also submit proof/
evidence for his/her own interest. On the basis of his/her complaint, if the IT department
collects more tax from such person, then he/she will be rewarded monetarily from the
department.
Income Tax
• To check tax evasion more items would come under annual information return
reporting.