Definition of Income Tax

 Taxes in India are of two types, Direct Tax and Indirect Tax. 

 Direct Tax, like income tax, wealth tax, etc. are those whose burden falls directly on the
taxpayer. 

 The burden of indirect taxes, like service tax, VAT, etc. can be passed on to a third
party.

Income Tax is all income other than agricultural income levied and collected by the central
government and shared with the states. 

According to Income Tax Act 1961, every person, who is an assessee and whose total income

exceeds the maximum exemption limit, shall be chargeable to the income tax at the rate or rates
prescribed in the finance act. Such income tax shall be paid on the total income of the previous
year in the relevant assessment year.

The total income of an individual is determined on the basis of his residential status in India.

Residence Rules

An individual is treated as resident in a year if present in India

I. for 182 days during the year or

II. for 60 days during the year and 365 days during the preceding four years. Individuals
fulfilling neither of these conditions are nonresidents. (The rules are slightly more liberal
for Indian citizens residing abroad or leaving India for employment abroad.)

A resident who was not present in India for 730 days during the preceding seven years or who
was nonresident in nine out of ten preceding yeas I treated as not ordinarily resident. In effect, a
newcomer to India remains not ordinarily resident.

For tax purposes, an individual may be resident, nonresident or not ordinarily resident.

Non-Residents and Non-Resident Indians

Residents are on worldwide income. Nonresidents are taxed only on income that is received in
India or arises or is deemed to arise in India. A person not ordinarily resident is taxed like a
nonresident but is also liable to tax on income accruing abroad if it is from a business controlled
in or a profession set up in India. 

Capital gains on transfer of assets acquired in foreign exchange is not taxable in certain cases. 

Non-resident Indians are not required to file a tax return if their income consists of only interest
and dividends, provided taxes due on such income are deducted at source. 
It is possible for non-resident Indians to avail of these special provisions even after becoming
residents by following certain procedures laid down by the Income Tax act.

Modern History of Income Tax

1860 1860 Introduced for the first time for a period of five years to cover
the 1857 mutiny expenses. It was abolished in 1873.
1877 1877 The tax system was revived as a result of the Great Famine of
1876.
1886 1886 Introduced as Act II of 1886. It laid down the basic scheme of
income tax that continues till the present day.
1918 1918 Introduced as Act VII of 1918. It had features like aggregation
of income from various sources for the determination of the rate,
classification of income under six heads and application of the Act to
all income that accrued or arose or was received in India from
whatever source in British India.
1922 1922 On the recommendations of the All-India Income Tax
Committee, the father of the present act was introduced. The central
government was vested with the power to administer the tax.
1961 1961 The Act came into force from 1 April 1962, it extended to the
whole of India.
1997 1997 Establishment of the Tax Reform Committee under the
chairmanship of Dr. Raja J. Chelliah. It was followed by restructuring
the income tax with parameters like lower taxes, fewer slabs, higher
execptions, etc.
2003 The Kelkar Task Force, which was followed by outsourcing of
PAN/TAN, exemption of dividend income, compensated by levy of
the dividend distributed tax to be paid by the company.
 INCOME TAX
 Income tax is levied on the 'total income' of the assessee.
 Income of the 'previous year' is taxed in the 'assessment year.'
 Income is classified into and compted under five categories called 'heads of income.'
 The basic scheme of income tax is the principle 'pay as you earn.'
 One must pay his taxes in advance and by the due dates, in the prescribed percentages.
 Deferment in the payment of advance tax would result in the payment of interest.

The income tax basic scheme is explained in brief as:

 Income tax is levied on the 'total income' of the assessable entity which is computed
under the provisions of the Act.
 The income which are pertaining to the 'previous year' is taxed, but in the 'assessment
year.'
 Income tax is charged at the rates being fixed by the for the year by the annual Finance
Act. But the liability to pay the tax is based on the principle 'pay as you earn.'

Also check Taxable Heads of Income for the definition of salary, wages, pension, allowance,
etc.

Pay as you Earn

A persone is not allowed to wait until 31 March to pay his/her taxes. The Income Tax Act has
the provision of 'pay as you earn.' This do not pinch a tax payer at the end of the year making a
lump sum payment. Such payments are done during the previous year in the form of 'TDS',
'TCS' and 'advance tax.'

TDS (Tax deducted at source)

This tax is deducted at the source of encome, by the employer or the payer and paid to the
government. It includes salary, interest, commission and contract fees, rent, professional fees,
etc. This type of deduction is popularly known as TDS. Such tax is subject to certain limits and
certain conditions. For example if the earning up on fixed deposit is Rs. 5,000 in a bank, TDS at
10% and education cess at 2% i.e. a total of 10.2% will be deducted at the time of credit or at
the time of payment, whichever is earlier.

In case of senior citizen, if he/she estimates that the tax on the income is nil, Form No.15H duly
filled and signed is to be submitted in duplicate to the bank. So, no TDS will be deducted. If the
total income is less than the threshold limit, Form No.15G is to be submitted to the payer to
prevent TDS from such interest.

TCS (Tax collected at source)

Unlike tax deducted at source, TCS is collected by a seller of certain specified goods at the
specified rates on the purchase of the goods and it is remitted to the trasury on behalf of the
buyer. In the same way, a person granting a lease or licence in a parking lot, toll-plaza, etc.
collects the taxes at the specified rates as tax paid on behalf of the lessee.

Advance Tax
Advance Tax is paid by the income earner during the previous year. The computing of the
liability of advance tax is done by estimating the 'total income' for the year, calculating the
surcharge and taking into consideration the rebate that will be available. The advance tax is
required to be paid in three instalments.

Schedule of Advance Tax:

On or before 15
A Not less than 30% of advance tax.
September
On or before 15 Not less than 60% of advance tax as reduced by amount
B
December paid earlier.
On of before 15 Full advance tax as reduced by the amount or amounts if
C
March any, paid in earlier instalments.

If the assessee does not pays the advance tax as described above, an interest of 1% is charged
per month for 3 months for the deferment of advance tax instalment. If the total amount of
advance tax is not paid on or before 15 March, an interest of 1% is charged for one month.

Further, if the total advance tax paid is less than 90% of the advance tax payable, the interest at
1% per month is charged for the shortfall in the advance tax paid for the period commencing
from 1 April of the assessment year and ending on the date of payment or assessment,
whichever is earlier.
Income Tax Rates/Slabs for Assesment Year 2012-13 (F Y 2011-12)

Rate
Income Tax Rates/Slabs
(%)
Up to 2,00,000
Up to 2,50,000 (for women)
NIL
Up to 2,50,000 (for resident individual of 65 years or
above)
2,00,000 – 5,00,000 10
5,00,001 – 10,00,000 20
10,00,001 upwards 30

Income Tax Rates/Slabs for Assesment Year 2011-12 (F Y 2010-11)

Rate
Income Tax Rates/Slabs
(%)
Up to 1,60,000
Up to 1,90,000 (for women)
NIL
Up to 2,40,000 (for resident individual of 65 years or
above)
1,60,001 – 5,00,000 10
5,00,001 – 8,00,000 20
8,00,001 upwards 30
Income tax in India
The Indian Income Tax department is governed by the Central Board for Direct Taxes (CBDT)
and is part of the Department of Revenue under the Ministry of Finance.

The government of India imposes an income tax 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
separate on each of the persons. The levy is governed by the Indian Income Tax Act, 1961.

Charge to Income-tax

Income tax is a tax payable, at the rate enacted by the Union Budget (Finance Act) for every
Assessment Year, on the Total Income earned in the Previous Year by every Person.

The chargeability is based on the nature of income, i.e., whether it is revenue or capital. The
principle of taxation of income is: -

1. All revenue incomes are chargeable to tax unless it is specifically exempt (declared as
not taxable).
2. All capital profits are not chargeable to tax unless specifically made chargeable.

Residential Status

The inclusion of a particular income in the Total Income of a person for income-tax in India is
based on his residential status. There are three residential status, viz., (i) Residents (or)
Resident & Ordinarily Residents (ii) Resident but not Ordinarily Residents and (iii) Non
Residents. There are several steps involved in determining the residential status of a person

All residents are taxable for all their income, including income outside India. Non residents are
taxable only for the income received in India or Income accrued in India. Not Ordinarily
residents are taxable in relation to income received in India or income accrued in India and
income from business or profession controlled from India.

Heads of Income

The total income of a person is divided into five heads, viz., taxable.

1. Income from Salary

2. Income from House Property
3. Income from Business and Profession
4. Income from Capital Gains
5. Income from Other sources
Individual Heads of Income

Income from Salary

All income received as a salary is taxed under this head such that the Employer & Employee
relation-ship exists. Employers must withhold tax compulsorily, if income exceeds minimum
exemption limit, as Tax Deducted at Source (TDS), and provide their employees with a Form
16 which shows the tax deductions and net paid income. In addition, the Form 16 will contain
any other deductions provided from salary such as:

1. Medical reimbursement: Up to Rs. 15,000 per year is tax free if supported by bills.
(Company pays Fringe Benefit Tax on this amount)
2. Conveyance allowance: Up to Rs. 800 per month (Rs. 9,600 per year) is tax free if
provided as conveyance allowance. No bills are required for this amount.
3. Professional taxes: Most states tax employment on a per-professional basis, usually a
slabbed amount based on gross income. Such taxes paid are deductible from income tax.
4. House rent allowance: the least of the following is available as deduction.

1) actual HRA received .

2) 50%/40%(metro/nonmetro) of 'salary'

3) rent paid minus 10% of 'salary.'

4) Salary for this purpose is basic+DA forming part+commission on sale on fixed rate.

Income from salary is net of all the above deductions. For more information Income From Salary

Income From House property

Income from House property is computed by taking what is called Annual Value. The annual
value (in the case of a let out property) is the maximum of the following:

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

If a house is not let out and not self-occupied, annual value is assumed to have accrued to the
owner. Annual value in case of a self occupied house is to be taken as NIL. (However if there is
more than one self occupied house then the annual value of the other house/s is taxable.) From
this, deduct Municipal Tax paid and you get the Net Annual Value. From this Net Annual Value,
deduct :

 30% of Net value as repair cost (This is a mandatory deduction)

 Interest paid or payable on a housing loan against this house

In the case of a self occupied house interest paid or payable is subject to a maximum limit of
Rs,1,50,000 (if loan is taken on or after 1st April 1999) and Rs.30,000 (if the loan is taken before
1st April 1999). For all non self-occupied homes, all interest is deductible, with no upper limits.
The balance is added to taxable income.

Income from Business or Profession

The income referred to in section 28, i.e, the incomes chargeable as "Income from Business or
Profession" shall be computed in accordance with the provisions contained in sections 30 to
43D. However, there are few more sections under this Chapter, viz., Sections 44 to 44DA
(except sections 44AA, 44AB & 44C), which contain the computation completely within itself.
Section 44C is a disallowance provision in the case non-residents. Section 44AA deals with
maintenance of books and section 44AB deals with audit of accounts.

In summary, the sections relating to computation of business income can be grouped as under:
-

1. Deductible Expenses - Sections 30 to 38 [except 37(2)].

2. Inadmissible Expenses - Sections 37(2), 40, 40A, 43B & 44-C.
3. Deemed Incomes - Sections 33AB, 33ABA, 33AC, 35A, 35ABB & 41.
4. Special Provisions - Sections 42 & 43D
5. Self-Coded Computations - Sections 44, 44A, 44AD, 44AE, 44AF, 44B, 44BB, 44BBA,
44BBB, 44-D & 44-DA.

The computation of income under the head "Profits and Gains of Business or Profession"
depends on the particulars and information available.

If regular books of accounts are not maintained, then the computation would be as under: -

Income (including Deemed Incomes) chargeable as income under this head xxx
Less: Expenses deductible (net of disallowances) under this head xxx
Profits and Gains of Business or Profession xxx

However, if regular books of accounts have been maintained and Profit and Loss Account has
been prepared, then the computation would be as under: -

Net Profit as per Profit and Loss Account xxx

Add : Inadmissible Expenses debited to Profit and Loss Account xxx
Deemed Incomes not credited to Profit and Loss Account xxx
xxx
Less: Deductible Expenses not debited to Profit and Loss Account xxx
Incomes chargeable under other heads credited to Profit & Loss A/c xxx
xxx
Profits and Gains of Business or Profession xxx

Income from Capital Gains

Transfer of capital assets results in capital gains. A Capital asset is defined under section 2(14)
of the I.T. Act, 1961 as property of any kind held by an assessee such as real estate, equity
shares, bonds, jewellery, paintings, art etc. but does not include some items like any stock-in-
trade for businesses and personal effects. Transfer has been defined under section 2(47) to
include sale, exchange, relinquishment of asset, extinguishment of rights in an asset, etc.
Certain transactions are not regarded as 'Transfer' under section 47.

For tax purposes, there are two types of capital assets: Long term and short term. Long term
asset 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 such long term assets gives rise to
long term capital gains. There are different scheme of taxation of long term capital gains. These
are:

1. As per Section 10(38) of Income Tax Act, 1961 long term capital gains on shares or
securities or mutual funds on which Securities Transaction Tax (STT) has been
deducted and paid, no tax is payable. STT has been applied on all stock market
transactions since October 2004 but does not apply to off-market transactions and
company buybacks; therefore, the higher capital gains taxes will apply to such
transactions where STT is not paid.
2. In case of other shares and securities, person has an option to either index costs to
inflation and pay 20% of indexed gains, or pay 10% of non indexed gains. The
indexation rates are released by the I-T department each year.
3. In case of all other long term capital gains, indexation benefit is available and tax rate is
20%.

All capital gains that are not long term are short term capital gains, which are taxed as such:

 Under section 111A, for shares or mutual funds where STT is paid, tax rate is 10% From
Asst Yr 2005-06 as per Finance Act 2004 .
 In all other cases, it is part of gross total income and normal tax rate is applicable.

For companies abroad, the tax liability is 20% of such gains suitably indexed (since STT is not
paid).

For more information Short Term and Long Term Capital Gains ,[1] and Exemptions from
Capital Gains under Sections 54, 54B, 54D, 54EC, 54F, 54G, 54GA

Income from Other Sources

This is a residual head, under this head income which does not meet criteria to go to other
heads is taxed. Also there are also some specific incomes which are to be taxed under this
head.

1. Income by way of Dividends

2. Income from horse races
3. Income from wining of lotteries
4. Income from winning bull races
5. Any amount received from key man insurance policy.

Income Exempt from Tax

Sections 10,10A, 10AA, 10B, 10BA, and 13A deal with income which does not form part of an
assessee's total income. While section 10 provides a list of income absolutely exempt from tax,
sections 10A, 10AA, 10B, 10BA, and 13A deal with specific exemptions available to newly
established industrial undertakings in free trade zones, and political parties. These exemptions
are provided from social, political, Constitutional considerations, for avoiding double taxation, on
the basis of casual and non-recurring nature ,on the basis of non-residents and non-citizens
status, on the basis of Certain specific securities, bonds, certificates, funds and the like, on the
basis of Education, science, research, achievements, rewards, sports, charity, on the basis of
certain types of bodies, funds and institutions, Subsidies to promote business, and international,
economic, and other considerations. Sikkim is the only state of India where citizens do not pay
income tax. Residents of Sikkim are eligible for this exemption but excluding the non-Sikkimese
spouse of a Sikkimes.

Agricultural Income [Section 10(1)] Eligible Assesses :- All assesses Exempt income  :-
Agricultural income Other points :- Agricultural income means as it is defined in Section 2(1A) In
case of individual, HUF, AOP, BOI, unregistered firms and artificial juridical persons, agricultural
income is to be aggregated for the purpose of determining the rate of tax on Non-Agricultural
income and they would get tax rebate or relief.

Dividends

Dividend income (as referred u/s 115-O of the I.Tax Act) paid by Companies and Mutual Funds
are exempt from tax. A 15% dividend distribution tax and surcharge of 3% is paid by companies
before distribution. Equity mutual funds (with more than 65% of assets invested in equities) do
not pay a dividend distribution tax, though other funds do. Liquid and Money Market funds pay
25% dividend distribution tax.01123

Other Exempt Income

The Indian Income tax act specifically exempts certain income from tax:

 Money received from an Insurance company as proceeds of an insurance policy (by way
of an insurance claim, or by maturity) is generally exempt. However there are three
types of payments under life insurance policy that are not tax free . These are :

 any sum received under sub-section (3) of section 80DD or sub-section (3) of
section 80DDA - this refers to specific policies for disabled dependants; or
 any sum received under a Keyman insurance policy; or
 any sum received under policies issued on or after 1 April 2003 where premium
paid is greater than 1/5th the sum assured

 Maturity proceeds of a Public Provident Fund (PPF) account.

Deduction

While exemptions is on income some deduction is calculation of taxable income is allowed for
certain payments.
Section 80C Deductions

Section 80C of the Income Tax Act allows certain investments and expenditure to be tax-
exempt. The total limit under this section is Rs. 100,000 (Rupees One lakh) which can be any
combination of the below:

 Contribution to Provident Fund or Public Provident Fund

 Payment of life insurance premium
 Investment in pension Plans
 Investment in Equity Linked Savings schemes (ELSS) of mutual funds
 Investment in specified government infrastructure bonds
 Investment in National Savings Certificates (interest of past NSCs is reinvested every
year and can be added to the Section 80 limit)
 Payments towards principal repayment of housing loans.Also any registration fee or
stamp duty paid.
 Payments towards tuition fees for children to any school or college or university or
similar institution. (Only for 2 children)

The investment can be from any source and not necessarily from income chargeable to tax.

More information on section 80C deductions can be found at Saving Income Tax –
Understanding Section 80C Deductions and at All about Section 80C and Investments based
Deductions from the Income: Section 80C, 80CCC, 80CCD, 80CCE .

Section 80D: Medical Insurance Premiums

Medical insurance, popularly known as Mediclaim Policies, provide deduction up to Rs 15000 .

This deduction is additional to Rs.1,00,000 savings. For senior citizens, the deduction up to Rs.
20,000 is allowable. This deduction is available for premium paid on medical insurance for
oneself, spouse, parents and children. For more information Medical based Deductions from
Income: Sections 80D, 80DD, 80DDB, 80U

Interest on Housing Loans

For self occupied properties, interest paid on a housing loan up to Rs 150,000 per year is
exempt from tax. However, this is only applicable for a residence constructed within three
financial years after the loan is taken and also the loan if taken after April 1, 1999.

For let out properties, the entire interest paid is deductible under section 24 of the Income Tax
act

If the house is not occupied due to employment, the house will be considered self occupied.

Tax Rates

In India, Individual income tax is a progressive tax with three slabs.

From April 1, 2008 new tax slabs apply, which are as follows:
  No income tax is applicable on all income up to Rs. 1,50,000 per year. (Rs. 1,80,000 for
women and Rs. 2,25,000 for senior citizens)
 From 1,50,001 to 3,00,000 : 10% of amount greater than Rs. 1,50,000 (Lower limit
changes appropriately for women and senior citizens)
 From 3,00,001 to 5,00,000 : 20% of amount greater than Rs. 3,00,000 + 15,000 (Rs.
12,000 for women and Rs. 7,500 for senior citizens)
 Above 5,00,000 : 30% of amount greater than Rs. 5,00,000 + 55,000 (Rs. 52,000 for
women and Rs. 47,500 for senior citizens)
o Income Tax Rates Financial Year 2007-2008 (Assessment Year 2008-2009)
o Income Tax Rates for the Financial Year April 1, 2008 to March 31, 2009

Surcharge

A 10% surcharge (tax on tax) is applicable if the taxable income (taking into consideration all the
deductions) is above Rs. 10 lakh (Rs. 1 million). The limit of 10 lacs was increased to Rs. 1
crore (Rs. 10 million) with effect from 1st June 2007 for corporate assessees

Education Cess

All taxes in India are subject to an education cess, which is 2% of the total tax payable. With
effect from assessment year 2008-09, Secondary and Higher Secondary Education Cess of 1%
is applicable on the subtotal of taxable income.

Tax Rate for non-Individuals

There are special rates prescribed for Firms, Corporates, Local Authorities & Co-operative
Societies. [5]

Refund Status for Salaried tax payers

The Income Tax Department has put on its website the list of income tax refunds of all salary
tax payers which could not be sent to the concerned persons for want of correct address.

Salary taxpayers who have not received refunds for assessment years 2003\04 to 2006\07 can
click on the link below and query using the PAN number and assessment year whether any
refund due to them has been returned undelivered.

Corporate Income tax

For companies, income is taxed at a flat rate of 30% for Indian companies, with a 10%
surcharge applied on the tax paid by companies with gross turnover over Rs. 1 crore (10
million). Foreign companies pay 40%. An education cess of 3% (on both the tax and the
surcharge) are payable, yielding effective tax rates of 33.99% for domestic companies and
41.2% for foreign companies.

From 2005-06, electronic filing of company returns is mandatory.

 Fringe Benefit Tax

Fringe Benefit Tax is a tax payable by companies against benefits that are seen by employees
but cannot be attributed to them individually. This tax is paid as 33.99% of the benefit, which is
only a percentage of the actual amount paid.

Some fringe benefits and their taxable rates are mentioned (For more information Fringe Benefit
Tax):

Fringe Benefit Taxable percentage Effective Tax Rate

Medical reimbursement 20% 6.8%

Telephone bills 20% 6.8%

Employee Stock Options (Difference between

market value and purchase price on vesting 100% 33.99%
date)

Tax Penalties

"If the Assessing Officer or the Commissioner (Appeals) or the Commissioner in the course of
any proceedings under this Act, is satisfied that any person-

(b) has failed to comply with a notice under sub-section (1) of section 142 or sub-section (2) of
section 143 or fails to comply with a direction issued under sub-section (2A) of section 142, or

(c) has concealed the particulars of his income or furnished inaccurate particulars of such
income,

he may direct that such person shall pay by way of penalty,-

(ii) in the cases referred to in clause (b), in addition to any tax payable by him, a sum of ten
thousand rupees for each such failure;

(iii) in the cases referred to in clause (c), in addition to any tax payable by him, a sum which
shall not be less than, but which shall not exceed three times, the amount of tax sought to be
evaded by reason of the concealment of particulars of his income or the furnishing of inaccurate
particulars of such income"