Explained: Income tax

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The basic definition of income tax is the tax levied by the government on the income of the citizens of the country. In India, it is a compulsory contribution by the people to the government which varies according to the amount of wealth an individual possesses. The proportion of tax that a person needs to pay depends on its level of earning in an entire financial year.

Its legal definition

The term income on which the government imposes the tax has been defined under Section 2(24) of the Income Tax Act, 1961. The income refers to monetary returns. It includes the value of profits. Anything which can be reasonably described as income is said to be taxable under this Act unless particularly exempted under various provisions of this Act. The term income not only includes what is received by using the property but also the amount saved by using it. Anything which is convertible into income can be termed as source of income.

The definition of income under the said Act includes:

  1. Profits and gains;
  2. Dividend;
  3. The contributions received by trusts, associations, funds etc. are categorized under voluntary contributions;
  4.  The value of profit instead of salary which is taxable under § 17(2)(3);
  5. Any benefit other than profit is particularly granted to the assessee to meet the expenses entirely, exclusively for the performance of the duties of an office;
  6. Any allowance which is granted to the assessee either for personal expenses at the office or employment places or at a place where he resides ordinarily;
  7. Value which is convertible into money or not, obtained by a representative assessee or any other person on whose behalf it is received by representative assessee;
  8. Value of any benefit which is convertible into money or not, obtained from a director or a person of a company, who has a substantive interest in the company, such payment would have been payable by the director or any other person.
  9. Any sum chargeable to income-tax under section 28(u) and (iii) or section 41 or section 59;
  10. Any sum chargeable to tax under § 28(iii) (a);
  11. Any sum chargeable to tax under § 28(iii) (b);
  12. Any sum chargeable to tax under § 28(iii) (c);
  13. Value of any benefit taxable under § 28(iv);
  14. Any capital gain taxable under §45;
  15. Any sum receivable or non-receivable in cash or under an agreement for not carrying out any activity in relation to the business or not sharing any franchise, trade-mark, copyright or any other commercial right of any kind of nature;
  16. The gains of any business of insurance carried on by an insurance company or co-operative society, in accordance with section 44;
  17. Any winnings from several kinds of games like lotteries, crossword puzzles, races including horse races and any other games;
  18. Any sum received by the assessee under the provisions of the Employee’s State Insurance Act, 1948 or any other fund for the welfare of the employees;
  19. Any sum received through a key man insurance policy;
  20. Any sum received by an individual or any person from HUF during 2013-14 in cash or by issue of cheque, draft or through any other mode by way of credit otherwise than by way of consideration for goods and services;
  21. The total amount of gifts received in cash or in any other form of property which exceeds Rs. 50,000 in a previous year by a person or non-relatives from Hindu families shall be treated as income; and
  22. The gifts received by a firm or a company as provided in §56(2) (vii) (a);
  23. Any consideration for issue of shares by a company as exceeds the market value of shares provided under §56(2) (vii) (b).
  24. Laws regarding it
  25. Income Tax Act, 1961: The Income Tax Act, 1961 acts as a means to levy, collect, administer, and recover the income tax. The act consists of 298 sections and 14 schedules. The act helps in determining a taxpayer’s taxable income, penalties, liabilities, appeals and prosecution. By changing times, government has made certain changes in the Act through the amendments.
  26. Income Tax Rules, 1962: Income tax rules are a supplement to the Income Tax Act, 1961. The amending power lies with the Central Board of Direct Taxes (CBDT).
  27. Constitutional Provisions of Income Tax: The Income Tax in India may be classified into two broad heads: (a) Taxation of non agriculture income being a central subject and (b) Taxation of agricultural income being a matter of state legislation. The two important entries in union list of the seventh schedule of constitution which empowers the parliament to levy income tax are: Entry 82, “taxes on income other than agricultural income” and Entry 85 which talks about corporation tax. According to the Article 366 (6) of the constitution, corporation tax means any tax on income payable by companies. Article 265 of the constitution particularly states that no taxes shall be collected except by the authority of law. Entry 82 to 92B of list Ist in the seventh schedule refers to the taxation powers of the union government.
  28. The Finance Act: The Finance Minister of India presents a Finance Bill every year which proposes amendments to the direct as well as the indirect taxes. When both houses of the Parliament pass a bill and it receives the assent from the President of India, a Bill becomes the Finance Act. Such amendments become a part of the Income Tax Act and are implemented from the first day of the next financial year.

In addition, the Finance Act consists of four parts:

Part I: It specifies the rate at which income tax is levied for various income categories during a financial year.

Part II: It specifies the rate at which tax must be deducted at source during the financial year.

Part III: It states the changes in income tax rates in specific cases, i.e. the rate for income chargeable under salary head and rate for computing advance tax for a financial year.

Part IV: It explains the rules for calculating agricultural income in this part.

Circulars: CBDT issues circulars from time to time to avoid ambiguity and make the provision of the Act clearer.

Government Notifications: The Central Government has the authority to issue notifications on various provisions according to the Income Tax Act and income tax rules. The Ministry of Finance issues these notifications on exemption of payments to employees such as allowance, pension, and cost inflation, leave encashment, index for long-term capital gains, and exemption of interest on a certain security.

Court Decision (Judicial Pronouncements): The decisions given by the Supreme Court becomes law and are applicable to all courts, appellate authorities, income tax authorities, and the assesses. If there are two contradictory decisions given, the decision given by the larger bench prevails. High Court decisions bind the tribunal, income tax authorities, and all assesses in the jurisdiction. It is always advisable to have a basic knowledge of the income tax rules and acts you have to abide by. If you find it interesting, you can go on and read about these sections in detail to build your knowledge.

Salient features

The salient features of the income tax are as follows:

Income tax acts as a medium through which the Government takes care of the activities of the community.

 The duties towards the public are catered effectively and in a timely manner by the Government.

Every salaried as well as self-employed individuals of the country files an income tax return on an annual year basis under Income Tax law in India.

It helps in computing if the taxes are owed or are eligible for a tax refund.

The tax rate might increase as soon as taxable income increases.

New schemes regarding it

Under the Budget 2020 of India, new tax slabs have been introduced regarding the income tax to be charged on the people. The irony is that the government has declared the new tax slabs as optional for the people of India i.e. the citizens of the country can choose to opt for either the old tax slabs which gave rebate in the scheme of income tax or the new tax slabs which does not give rebate in the income tax. The following is the classification of the new scheme introduced under Budget 2020.

  1. Up to Rs.2.50 Lac: The existing as well as the new rate is completely same i.e. the income tax on the mentioned income is nil.
  2. From Rs.2.50 Lac to Rs.5 Lac: There is no change in the existing as well as the new scheme as 5% income tax would be charged in both the scenarios. Under §87A, the taxpayer is not supposed to pay any tax as it is adjusted with the rebate of Rs. 12,500.
  3. From Rs.5 Lac to Rs.7.50 Lac: The income tax charging rate from old to new is directly decreased from 20% to 10%. Hence, benefit of Rs. 25,000 is expected if an individual chooses new scheme over the old scheme.
  4. From Rs.7.50 Lac to Rs.10 Lac: The income tax charging rate from old to new scheme is directly decreased from 20% to 15%. Hence, the benefit that can be derived by choosing the new scheme over old is Rs. 37,500.
  5. From Rs.10 Lac to Rs.12.50 Lac: The income tax charging rate from old to new scheme is decreased from 30% to 20%. Hence, the benefit that can be derived by choosing the new scheme over old is Rs. 62,500.
  6. From Rs.12.50 Lac to Rs.15 Lac: The income tax charging rate from old to new scheme has decreased from 30% to 25%. Hence, the benefit derived by choosing the new scheme over old is Rs. 75,000.
  7. From Rs.15 Lac and Above: There is no change in the existing and new rates of the income tax scheme i.e. 30% remains the same in both the cases.

Conclusion

The New Tax Regime under Budget 2020 has provided lower income tax rates, for income earned up to Rs. 15 lac. There is a slight catch in choosing between the old scheme and the new scheme. If an individual opts for lower income tax rates i.e. the new scheme then that individual has to give up on its exemptions and deductions which are available under the Income Tax Act, 1961.

Hence, an individual has to forgo certain exemptions under the New Tax Regime such as House Rent Allowance, Leave Travel Allowance etc. These exemptions and deductions are mentioned in Chapter VI A of the Income Tax Act, 1961 under §80 C.

The Sections which comes under exceptions for granting deduction and exemption in the New Tax Regime are §80CCD (2) (employer’s contribution in a notified pension scheme) and §80JJAA (for new employment).

The Standard Deduction under §16 [Rs. 50,000] available to the salaried individuals and deduction on the home loan interest under §24(b) will also be disallowed. In the New Tax Regime, around 70 deductions and exemptions are being removed.

The people of the middle-income group, for instance, are earning Rs. 5 lac then the new tax regime would prove to be a much better option than the old scheme as it would act as advantageous to them. The Old Tax Regime would work as an advantage towards the financial well being of an individual in case if that individual is looking to fulfil financial obligations such as paying EMI(s)of an education loan, premiums for insurance needs, tuition fees, home loans etc.

Author: Jahnvi Pandey from University of Petroleum and Energy Studies, Dehradun, Uttarakhand.

Editor: Tamanna Gupta from RGNUL, Patiala.

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