Income Tax Act, 1961Introduction What is a Tax? Tax is a fee charged by Government on a product, fee or activity.

Overall, there are 2 types of taxesDirect and Indirect. If a tax is levied on income or wealth of a person, it is Direct tax e.g.: Income tax. If it is levied on the price of a good or service, then it is called Indirect tax e.g.: Excise Duty. Taxes are levied as they constitute a basic source of income for the Government. Following are the sub-divisions of Direct and Indirect tax:Direct Tax is sub-divided into:1) Income Tax 2) Wealth Tax Indirect Tax is sub-divided into:1)Excise Duty 2) Customs Duty 3) Service Tax 4) Sales Tax/Value Added Tax.

Overview:This act came into force on 1st April, 1962. The Bare Act contains 298 sections and XIV schedules which undergo changes every year with additions and deletions brought about by the Finance Act passed by the Parliament. The Finance Act:Every year, the Finance Minister of Government of India presents

the Budget to the Parliament. It is divided into 2 parts:1) Part A It contains the proposed policies of the Government in Fiscal Areas. 2) Part B It contains the detailed tax proposals. Finance Bill is introduced in order to implement the above proposals. Once it is approved by the Parliament, it becomes the Finance Act. Income Tax Rules:For proper administration of the Act, the Central Board of Direct Taxes(CBDT) is empowered to frame rules from time to time for carrying out the purposes of the Act. These rules are collectively known as The Income Tax Rules, 1962. Circulars and Notifications:Circulars are issued by CBDT from time to time to deal with certain specific problems and to clarify doubts regarding scope and meaning of the provisions. These circulars are issued for the guidance of the Assessing Officers and Assessees.

Levy of Income Tax:Income Tax is levied on the total income of every person. A person here includes:1) Individual 2) Hindu Undivided Family (HUF) 3) Association of Persons (AOP) 4) Body of Individuals (BOI) 5) A Firm 6) A Company

7) Any other Artificial Juridical Person.

Concept of Income:The Act covers 2 types of definitions namely Inclusive Definition and Exhaustive Definition. The definition which begins with the words, Income includes is an inclusive definition and not an exhaustive one. Certain important principles relating to income are as follows:1) Income means a periodic monetary return which accrues or is expected to accrue. 2) Income means net receipts and not gross receipts. 3) Income is taxable either on due basis or receipt basis. 4) Income normally refers to revenue receipts. However, Income tax Act has specifically included certain Capital Receipts within the definition of Income. 5) Income earned in a previous year* is chargeable to tax in the assessment year**. For e.g.:- Income of previous year 2010-11 is assessed during 2011-12. *Previous Year It is the financial year, ending on 31st march, in which income has accrued or received. **Assessment Year It is the financial year (ending on 31st march, following the Previous Year).

Total Income and Tax Payable:Income tax payable on the income of a person has to be determined as follows:Step 01:- Determination of Residential Status: The Residential Status (i.e. whether the person is a resident of

India or not) has to be determined in order to ascertain which income is to be included in computing the total income. The Residential Status as per Income Tax Act is given as follows:1) A Resident which is further classified into:a) Resident & Ordinarily Resident b) Resident but Not Ordinarily Resident 2) A Non-Resident. Note:- Income earned outside India will not be taxable in the hands of a Non-Resident but will be taxable in case of a Resident and Ordinarily Resident.

Step 02:- Classification of Income under different heads:The Act prescribes five heads of income. These are as follows: 1) Income from Salary. 2) Income from House Property. 3) Profits & Gains of Business or Profession. 4) Capital Gains. 5) Income from Other Sources.

Step 03:- Exclusion of Income not Chargeable to tax:There are certain incomes which are wholly/partly exempt from Income Tax e.g. Agricultural Income (wholly exempt). These incomes have to be excluded and will not form a part of Gross Total Income. Step 04:- Computation of Income under each head:Income is computed in accordance with the provisions governing a particular head of income. Under each head of income, there is

a charging section which defines the scope of income chargeable under that head. There are deductions and allowances as well which are prescribed under each head of income. Step 05:- Clubbing of Income:Some taxpayers in the higher tax bracket have a tendency to divert some portion of their income to their spouse, minor child etc. to minimize their tax burden. In order to prevent such tax avoidance, clubbing provisions have been incorporated in the Act, under which income arising to certain persons (like spouse, minor child etc) have to be included in the income of the person who has diverted his income for the purpose of computing tax liability. Step 06:- Set-off or carry forward and set-off of losses An assessee may have different sources of income under the same head of income. Here, loss from one source of income can be adjusted against profit from other source. It has to be noted that Income tax Act provides for Inter-head adjustment in certain cases. Further, losses which cannot be setoff can be carried forward for set-off in subsequent years. Step 07:- Computation of Gross Total Income:The final figures of income under each head, after allowing the deductions, allowances and adjustments are then aggregated after giving effect to provisions of clubbing of income and set-off and carry forward of losses to arrive at Gross Total Income. Step 08:- Deductions from Gross Total Income:These are deductions prescribed under Gross Total Income Under Chapter VI-A of Income Tax Act. Step 09:- Total Income:The income arrived at, after claiming the above deductions from

Gross Total Income is known as Total Income. It is also called as Taxable Income. It is rounded off to the nearest multiple of Rs.10. Step 10:- Application of Rates of Tax on Total Income The rates of tax for the different classes of assesses are prescribed the Annual Finance Act which has to be applied on the Total Income. For Individuals & HUFs etc there is a slab rate and basic exemption limit.

Step 11:- Education Cess and Higher Secondary Education Cess:The income tax is to be further increased by an additional surcharge called Education Cess (2%) and Higher Secondary Education Cess (1%). Step 12:- Advance tax and tax deducted at source:Although the tax liability of an assessee is determined at the end of the year, tax is required to be paid in advance in certain installment on the basis of estimated income. In certain cases, tax is required to be deducted at source from the income by the payer at the rates prescribed in the Act. Such deduction should be made either at the time of accrual or at the time of payment, as prescribed in the Act. Return of Income:Every assessee has to file a return of income within the due date specified in the Income Tax Act. Note:- An Individual is required to file his Income only if his total income exceeds the basic exemption limit.