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Income Tax In India

A tax that is levied on income of individuals/corporations/legal entities is known as Income Tax. The Central Board for Direct Taxes (CBDT) governs the Indian Income Tax department. Income tax is imposed by Govt. of India on taxable income of individuals, Hindu Undivided Families (HUFs), companies, firms, co-operative societies and trusts (Identified as body of Individuals and Association of Persons) and any other artificial person. Levy of tax is different for different entities and it is governed by the Indian Income Tax Act, 1961.

The history of Income Tax in modern India dates back to 1860 when the first Income Tax Act was introduced and which remained in force for a period of 5 years. This Act lapsed in 1865. Thereafter Act-II of 1886 was the next landmark. This Act of 1886 was a great improvement on its predecessor. It introduced the definition of agricultural income in the form in which it stands today and the exemption it granted in respect of agricultural income has continued to be a feature of all subsequent legislations. The year 1918 saw the introduction of Act VII of 1918 which recasted the entire tax laws. This Act was designed inter-alia to remedy certain inequalities in the assessment of individual tax payers under the 1886 Act. The Act introduced, for the first time, the scheme of aggregating income from all sources for the purpose of determining the rate of tax.

The Indian Income Tax Act, 1922 which came into being as a result of the recommendations of the All India Income Tax Committee is a milestone in the evolution of Direct Tax Laws in our country. Its importance lies in the fact that the administration of the Income Tax hitherto carried on by the Provincial Governments came to be vested in the Central Government. The Act of 1922, like the Act of 1918, applied to all incomes ''accruing or arising'', or received in British India, or deemed to be accrued, arisen or received. It marked an important change from the Act of 1918 by establishing the charge in the year of assessment on the income of the previous year instead of merely adopting the previous year's income as a measure of income of the year of assessment. The Act of 1922 made a departure by abandoning the system of specifying the rates of taxation in its own Schedules. It left the rates to be announced by the Finance Acts, a feature which survives to this day. It also enabled loss under one head of income to be set-off against profits under any other head, so that the tax was chargeable only on net income.

The Act of 1922 remained in force till 1961. Meanwhile, in 1956 the Government had referred the Act to the Law Commission in order to recast it on logical lines and to make it simple without changing the basic tax structure. Based on the Law Commission's report, the Income Tax Bill giving effect to its recommendations was submitted in the Lok Sabha in April, 1961. The Bill received the assent of the President on 13th Sept., 1961. The present Income Tax Act is this Act of Sept., 1961.

Tax Rates:

The new tax slabs applicable from April 1, 2009 are as follows:

• On all incomes up to Rs. 1,60,000 per year. (For women -Rs. 1,90,000 and for senior citizens - Rs. 2,40,000), no Income Tax is applicable.
• From 1,60,001 - 3,00,000 : 10% of amount more than Rs. 1,60,000/- ( The lower limit differs appropriately for women as well as senior citizens)
• From 3,00,001 to 5,00,000 : 20% of amount more than Rs. 3,00,000 + 14,000 (slightly less for women and further less for senior citizens)
• Above 5,00,000 : 30% of amount more than Rs. 5,00,000 + 54,000 (for women – slightly less and for senior citizens - further less)

Income from Salary

Under this head, income received as salary under Employer-Employee relationship is taxed. If income exceeds minimum exemption limit, then Employers must withhold tax compulsorily as Tax Deducted at Source (TDS). The employees should also be provided with a Form 16 which shows the tax deductions and net paid income. Form 16 also contains any other deductions provided from salary as follows:

• Medical reimbursement up to Rs. 15,000 per year is tax exempt provided bills are given
• Conveyance allowance up to 9600 per year is tax free
• Professional taxes which are usually a slabbed amount based on gross income are deductible from income tax.
• House rent allowance: the minimum of the following is available as deduction
  • The actual HRA received
  • 50%/40 % (metro/non-metro) of 'salary'
  • Rent paid minus 10% of 'salary'

Income from House Property

Income from House property is calculated by considering the Annual Value. The annual value (for a let out property) will be maximum of the following:

• HRA Rent received
• Municipal Valuation
• Fair Rent (as determined by the I-T department)

However if a house is not let out and not self-occupied, then annual value is assumed to have accrued to the owner. In case of a self occupied house, annual value is to be taken as NIL. But if there is more than one self occupied house then the annual value of the other house/s is taxable. From this, Municipal Tax paid is deducted to arrive at the Net Annual Value. From this Net Annual Value, the following are deducted:

• 30% of Net value as repair cost - mandatory deduction
• Interest paid or payable on a housing loan for the house

Income from Business or Profession:

Income arising from profits and gains of any Business or Profession; income derived by a Trade/ Professional/ similar Association by performing specific services for its members; any benefit from business whether convertible into money or not, incentives for exporters; any salary, interest, bonus, commission or remuneration received by Partner of a firm; any amount received under a Key man Insurance Policy which also covers Bonus; income from managing agency and speculative transactions; is taxable.

Income from Capital Gains

Under section 2(14) of the I.T. Act, 1961, Capital asset is defined as property of any kind held by an assessee such as real estate, equity shares, bonds, jewellery, paintings, art etc. but does not consist of items like stock-in-trade for businesses or for personal effects. Capital gains arise by transfer of such capital assets.

Long term and short term capital assets are considered for tax purposes. Long term assets are those assets which are held by a person for three years except in case of shares or mutual funds which becomes long term just after one year of holding. Sale of long term assets give rise to long term capital gains which are taxable as below:

• As per Section 10(38) of Income Tax Act, 1961 long term capital gains on shares/securities/ mutual funds on which Securities Transaction Tax (STT) has been deducted and paid, no tax is payable. Higher capital gains taxes will apply only on those transactions where STT is not paid.
• For other shares & securities, person has an option to either index costs to inflation and pay 20% of indexed gains, or pay 10% of non indexed gains.
• For all other long term capital gains, indexation benefit is available and tax rate is 20%

Income from Other Sources

There are some specific incomes which are to be taxed under this category such as income by way of dividends, horse races, winning of bull races, winning of lotteries, amount received from key man insurance policy.

So as we can see the Indian Income Tax law is a subject which is filled with legal jargons and complexities that keep on changing every new financial year and the importance of this law in our routine life simply cannot be ignored. Whether it is filing of Income Returns on due dates or whether it's a financial investment decision to be taken, every where the Income Tax provisions play a major role in driving of the cost factor.

• Taxable Income In India.
• Incomes which are exempt from Tax
• Duduction And Rebate In Income Tax.
• Tax Free Incomes In India.
• Double Taxation Avoidance Agreements (DTAA).
• Appeals In Income Tax India.
• Penalties under Income Tax Act.
• PAN In Income Tax India.
• Non-resident under Income Tax Act.