INTRODUCTION INDIAN INCOME TAX

LAW
The Indian Income Tax law is a highly complicated and confusing piece of document. For the
common man the task of understanding the procedure and provisions of law is daunting, to say
the least. Not only is the process of tax calculation very difficult, its practical implementation is
tedious and cumbersome. However, under the law, the taxpayer is legitimately entitled to plan his
taxes in such a manner that his tax liability is minimal.
Tax Planning can be defined as an arrangement of the financial affairs within the scope of law in
a manner that derives maximum benefit of the exemptions, deductions, rebates and relief and
reduces the tax liability to minimal. As long as you are within the framework of law, you can plan
your financial affairs. However, in the name of tax planning, you cannot indulge in Tax Avoidance
or Tax Evasion. And the line between Tax Planning and Tax Avoidance is very thin, so you need
to tread carefully.

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When financial transactions are arranged in a way that it becomes obvious that they were
entered with a malafide intention of either not paying taxes or with a view to defeat the genuine
spirit of law, they cannot be accepted as legitimate Tax Planning. Twisting of facts or taking a very
strict and literal interpretation of law without understanding the basic purpose of the law can only
lead to punishable Tax Avoidance and not Tax Planning.
An attempt is made in the following pages to present a bird eyes view of the Indian Income Tax
laws so that you can avoid making trips to your chartered accountant and by taking advantage of
the available legal avenues for tax planning, reduce your tax liability. This material does not deal
in procedural matters such as assessment, appeals and revisions.
To begin with lets understand the structure of tax rule in the country. Taxes are the basic source
of revenue to the government. Revenue so raised is utilised for meeting the expenses of
government as well as to carry out developmental works. There are basically two types of taxes,
Direct and Indirect taxes. Direct taxes are those, which are, collected by the government directly
from the tax payer through levies such as income tax, wealth tax and interest tax. Whereas
indirect taxes comprise of excise duty, sales tax, customs duty and value added tax. While direct

taxes from 30 per cent of governments revenue indirect taxes contribute a larger chunk of 70 per
cent. Gift tax and estate duty were part of the direct tax revenue. As an ongoing process of
simplification and rationalisation of the direct tax structure in India, the government repealed the
Gift Tax Act in 1998 and the Estate Duty Act in the late eighties.

TAX STRUCTURE IN INDIAN

ENVIRONMENT
INTRODUCTION
The average age of citizens in the country has gone up substantially, since independence. In
fact, it is improving with every passing year. Today, persons deriving income from pension and
other related sources constitute a significant segment of population and consequently of
taxpayers in the country. These people, who have either retired or are on the verge of retiring,
require special attention. In the absence of an organized social security system in the country,
the Government has felt compelled to address the special problems for this group of people.
Their problems are variant. These senior citizens, who have lived comfortable lives, postretirement, are usually constrained to depend upon fixed monthly incomes by way of pension.
This, even as, they continue to discharge important responsibilities, such as acquiring a
residential accommodation, marriage of children, education of grown-up children, looking after
sick spouse, etc. In these circumstances, it is important for such persons to know how much
money they will be left with each year after paying taxes to meet their varied needs. An attempt
has been made here to illustrate to the senior tax payers what their rights are and their
obligations under the Income-tax and Wealth Tax Acts. This will help them plan for their future in
an organized manner and discharge their tax liability under the Direct Tax Laws correctly and in
time without any hitches. The basic scheme of taxation under Income-tax Act, 1961 envisages a
single annual tax on the total income of the previous year at the rates indicated in the relevant
Finance Act for the assessment year in accordance with the law applicable to the latter. In the
case of a resident, the scope of total income includes all incomes of the previous year earned by
the tax payer, regardless of where these incomes accrued, arose or were received. On the other
hand in the case of a non-resident, or a person who is "resident but not ordinarily resident", only
the following incomes earned by him are includible in his total income.
A. Incomes which accrued or arose to him in India during the
B.Incomes which was received in India during the previous year or which is deemed to have
been so received.
C. Incomes which accrued or arose to him outside India if derived from a business controlled in,
or a profession set up in India (applicable only in the case of a person who is resident but not
ordinarily resident).

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Thus these concepts viz., residential status, previous year and assessment year are very
relevant in determining the tax liability of a taxpayer including a pensioner.

ANALYSIS
Taxes are the basic source of revenue to the government. Revenue so raised is utilized for
meeting the expenses of government as well as to carry out developmental works.

There are basically two types of taxes:

Direct Taxes
Indirect Taxes
Direct Taxes are those, which are, collected by the government directly from the taxpayer through
levies such as income tax, wealth tax and interest tax.
Indirect Taxes comprise of excise duty, sales tax, customs duty and value added tax. In India
direct taxes form 30 per cent of governments revenue while indirect taxes contribute a larger
chunk of 70 per cent. Gift tax and estate duty were part of the direct tax revenue. As an ongoing
process of simplification and rationalization of the direct tax structure in India, the government
repealed the Gift Tax Act in 1998 and the Estate Duty Act in the late eighties. To understand
Income Tax law in India, the first step is to identify what constitutes Income Tax law.

COMPONENTS OF INDIAN TAX LAW

Income Tax Law in India consists of the following: -

The Income Tax Act, 1961

The Indian constitution has empowered only the Central Government to levy and collect Income
Tax. The Income Tax Act was enacted in 1961. The Act come into force from the 1st of April 1962
and extends to the whole of India. It consists of over 400 sections and 12 schedules. The Income
Tax Act determines which persons are liable to pay tax and in respect of which income. The
various sections lay down the law of income tax and the schedules elucidate certain procedures
and give certain lists, which are referred to, in the sections. However, the Act does not prescribe
the rates of Income Tax. These rates are prescribed every year by the Finance Act (popularly

known as "The Budget"). This is done mainly to give incentives for investment in priority sectors,
to discourage tax evasion, to remove loopholes in the law and to synchronize the law with the
existing economic situation.

The Income Tax Rules, 1962

The Income Tax Act empowers the Central Board of Direct Taxes (CBDT) to formulate rules for
implementing the provisions of the Act. Income Tax Rules have been kept separate from the Act
as the rules can be amended more easily than the Act. Rules can be amended by merely
publishing a notification in the Official Gazette of the Government of India whereas to amend the
Income Tax Act, Amendment to the Bill has to be passed in the Parliament. However, in case of
conflict between the Act and the Rules, the provisions of the Act shall prevail.

Circulars Issued by the CBDT

For the guidance of the Income Tax Officers and the general public, the CBDT issues circulars on
certain taxation matters. These circulars are binding on the Income Tax Officers. However,
circulars cannot change the provisions of law; they can merely clarify the law or relax certain
provisions in favor of the taxpayers. In event of a dispute, the Courts are not bound by the
circulars.

Case Laws and Doctrine of Precedents

Decisions of the tax tribunals and courts on disputes pertaining to aspects of the income tax law
form case laws. Case laws result in formation of precedents in law. i.e. in case a similar dispute
arising in future, the decision of the court on that point may be used to decide the current dispute.
The decisions of the Supreme Court, however, are binding on all lower Courts and tax authorities
in India. High Court decisions are binding only in the states, which are within the jurisdiction of
that particular High Court. However, decision on one High Court has persuasive power over other
High Courts when deciding similar issues.

Basic Terms & Definitions in used in the

Income Tax Act
i. The term "person" under U/s 2(31) includes an individual, a Hindu Undivided Family, a
Partnership Firm, a Company, an Association of Persons, a Body of Individual, a Local authority
and every other Artificial Juridical Entity.
ii. The term "assessee" is a person by whom any tax or any other sum of money (for example
interest, penalty, fine, etc) is payable under the Income Tax Act and includes: -

A person in whose respect proceedings for determining income has commenced by the Income
Tax Department. Thus, a person may become assessee even if no amount is payable by him
under the Income Tax Act.

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A Deemed assessee is a person who is himself not an assessee but is treated as an assessee
for the purposes of the Income tax Act. For example the trustee of a trust is a deemed assessee
in respect of the trust. The income earned is the income of the trust but is assessed in the hands
of the trustee as his income.
An assessee in default i.e. a person on whom certain obligations have been imposed under the
Income Tax Act but who has failed to carry out those obligations. For example any person who
employees another person has to deduct income tax at source from the taxable salary of the
employee and pay the tax deducted at source to the government within the prescribed time as
income tax paid on behalf of the employee. In case the employer fails to carry out these
obligations, he becomes an assessee in default.
iii. The term "Assessment year (AY)" means the period of 12 months commencing on the 1st day
of April each year. The term "Previous year (PY)" means the financial year immediately preceding
the assessment year. In case of a business or profession that is newly started, the previous year
commences from the date of commencement of the new business or profession up to the next
31st day of March, unless the person is an existing assessee.
v. The term "Assessment" includes re-assessment. It is the process of determining the income of
an assessee earned during any previous year and finding out the income tax, interest or other
sum payable under the Act.
vi. The term "income" as defined in the Income Tax Act is of an inclusive nature i.e. apart from
the items listed below in the definition, any receipt that satisfies the basic condition of being
income is also to be treated as income and charged to income tax accordingly.

Income Includes
Profits or Gains from business or profession including any benefit, amenity, and perquisite
obtained in the course of such business or profession. Salary Income including any benefit,
allowance, amenity or perquisite obtained in addition to or in lieu of salary.

Dividend Income
Winnings from lotteries, crossword puzzles, races, games, gambling or betting
Capital Gains on sale of capital assets. Amounts received under a Key Man Insurance Policy i.e.
a life insurance policy taken by a person on the life of another person who is or was the
employee of the first mentioned person or is or was connected in any manner whatsoever with
the business of the first mentioned person. Voluntary contributions received by a religious or
charitable trust or scientific research association or a sports promotion association. Between
themselves, these heads of income exhaust all possible types of income that can accrue to or be
received by taxpayers.

Residential Status
Residential status of an assessee is important in determining the scope of income on which
income tax has to be paid in India. Broadly, an assessee may be resident or non-resident in India
in a given previous year.
An individual or HUF (Hindu Undivided Family) assessee who is resident in India may be further
classified into Resident and ordinarily resident Resident but not ordinarily resident.
Under the Income Tax Act, the incidence of tax is highest on a resident and ordinarily resident
and lowest on a non-resident. Therefore, it is in the assesses advantage that he claims
nonresident status if he satisfies the conditions for becoming a non-resident.