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Income Tax Basic Concepts Notes

Basic Concepts of Income Tax

Income-tax is the most significant direct tax. Entry 82 of the Union List i.e., List I of Seventh Schedule to Article 246 of the Constitution of India has given the power to Parliament to make laws on taxes on income other than agricultural income.

Components of income-tax law

  • Income-tax Act, 1961 – governs the levy of income-tax in India.
  • Income-tax Rules, 1962 – formulated for proper administration of the Act.
  • Annual Finance Act – Amendments in the Income-tax Act, 1961 are effected every year through the Annual Finance Act.
  • Circulars – issued by CBDT to clarify the meaning and scope of certain provisions of the Act.
  • Notifications – issued to give effect to the provisions of the Act/ make or amend Rules.
  • Court decisions – interprets the various provisions of income-tax law.

Income-tax is a TAX levied on the TOTAL INCOME of the PREVIOUS YEAR of every PERSON.

Person: A person includes an individual, Hindu Undivided Family (HUF), Association of Persons (AOP), Body of Individuals (BOI), a firm, a company etc.

Concept of Previous year (P.Y.) and Assessment Year (A.Y.): Previous year is the financial year immediately preceding the assessment year i.e., it is the financial year ending on 31st March, in which the income has accrued/received.
In case of a newly set-up business, the previous year would be the period beginning with the date of setting up of the business or profession or, as the case may be, the date on which the source of income newly came into existence, and ending on 31st March.
Assessment year (A.Y.): Assessment year means the period of twelve months commencing on the 1st April every year.

Exceptions to the rule that income is charged to income-tax in the Assessment Year following the previous year:
The income of an assessee for a previous year is charged to income-tax in the assessment year following the previous year. However, in the following cases, this rule does not apply and the income is taxed in the previous year in which it is earned.
(i) Shipping business of non-resident [Section 172] (ii) Persons leaving India [Section 174] (iii) AOP/BOI/Artificial Juridical Person formed for a particular event or purpose [Section 174A] (iv) Persons likely to transfer property to avoid tax [Section 175] (v) Discontinued business [Section 176]

Rate of tax for Undisclosed Sources of Income: The following undisclosed incomes are chargeable to tax @78% [i.e., 60% plus surcharge @25% plus cess @4%] as specified under section 115BBE:
(i) Cash Credits [Section 68] (ii) Unexplained Investments [Section 69] (iii) Unexplained money etc. [Section 69A] (iv) Amount of investments etc., not fully disclosed in the books of account [Section 69B] (v) Unexplained expenditure [Section 69C] (vi) Amount borrowed or repaid on hundi [Section 69D]

Total Income: Total income has to be computed as per the provisions contained in the Income-tax Act, 1961. The following steps has to be followed for computing the total income of an assessee:
Step 1 – Determination of residential status
Step 2 – Classification of income under different heads
Step 3 – Computation of income under each head after providing for permissible deductions/ exemptions
Step 4 – Clubbing of income of spouse, minor child etc.
Step 5 – Set-off or carry forward and set-off of losses
Step 6 – Computation of Gross Total Income
Step 7 – Deductions from Gross Total Income
Step 8 – Computation of Total income

Tax liability: Tax has to be computed by applying the rates of tax mentioned in the Annual Finance Act and the rate specified under the Income-tax Act, 1961, as the case may be.

Rates of Tax

Persons Rate of taxes
Individual (not opting for the provisions of section 115BAC)
Total income (in ₹) Rate of Tax
(i) Upto ₹ 2,50,000 (below 60 years)
(ii) Upto ₹ 3,00,000 (60 years or above but less than 80 years and resident in India)
(iii) Upto ₹ 5,00,000 (above 80 years and resident in India)
Nil
₹ 2,50,001/ ₹ 3,00,001, as the case may be, to ₹ 5,00,000 [in cases (i) and (ii) above, respectively] 5%
₹ 5,00,001 to ₹ 10,00,000 20%
Above ₹ 10,00,000 30%
Hindu Undivided Family (HUF) (not opting for the provisions of section 115BAC)/ Association of Persons (AOP)/ Body of Individuals (BOI)/ Artificial Juridical Person
Total income (in ₹) Rate of Tax
(i) Upto ₹ 2,50,000 (below 60 years) Nil
₹ 2,50,001/ ₹ 3,00,001, as the case may be, to ₹ 5,00,000 [in cases (i) and (ii) above, respectively] 5%
₹ 5,00,001 to ₹ 10,00,000 20%
Above ₹ 10,00,000 30%
Firm/LLP/local authority 30%
Co-operative Society (not opting for the provisions of section 115BAD)
Total income (in ₹) Rate of Tax
Upto ₹ 10,000 10%
₹ 10,001 to ₹ 20,000 20%
Above ₹ 20,000 30%
Company (not opting for the provisions of section 115BAA/115BAB)
Domestic Company Foreign Company
Total turnover or gross receipts in the P.Y. 2018-19 ≤ ₹ 400 crore Other domestic companies
25% 30% 40%

Surcharge

Individual/ HUF/ AOP/ BOI/ Artificial juridical person
(i) Where the total income (including dividend income and capital gains chargeable to tax u/s 111A and 112A) >₹ 50 lakh but is ≤ ₹ 1 crore 10%
(ii) Where the total income (including dividend income and capital gains chargeable to tax u/s 111A and 112A)> ₹ 1 crore but is ≤ ₹ 2 crore 15%
(iii) Where the total income (excluding dividendincome and capital gains chargeable to tax u/s111A and 112A)> ₹ 2 crore but is ≤ ₹ 5 crore 25%
Rate of surcharge on the income-tax payableon the portion of dividend income and capitalgains chargeable to tax u/s 111A and 112A Not exceeding 15%
(iv) Where the total income (excluding dividendincome and capital gains chargeable to tax u/s111A and 112A)> ₹ 5 crore 37%
Rate of surcharge on the income-tax payableon the portion of dividend income and capitalgains chargeable to tax u/s 111A and 112A . Not exceeding 15%
(v) Where the total income (including dividend income and capital gains chargeable to tax u/s 111A and 112A) > ₹ 2 crore in cases not covered in (iii) and (iv) above 15%
Firm/Limited Liability Partnership/Local Authorities/Co-operative societies (other than co-operative societies opting for section 115BAD)
Where the total income > ₹ 1 crore 12%
Domestic company (other than a domestic company opting for section 115BAA or section 115BAB)
Total income > ₹ 1 crore but is ≤ ₹ 10 crore 7%
Total income is > ₹ 10 crore 12%
Foreign company
Total income > ₹ 1 crore but is ≤ ₹ 10 crore 2%
Total income is > ₹ 10 crore 5%

Rebate under section 87A: Rebate of up to ₹ 12,500 for resident individuals having total income of up to ₹ 5 lakh.

“Health and Education cess” on Income-tax: 4% of income-tax and surcharge, if applicable.

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