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Income Tax Basics

Income Tax Basics

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Published by: sandeshshiva on Jul 31, 2010
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10/25/2012

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Income Tax Introduction
The direct tax which is paid by individual to the Central Government of India is known asIncome Tax. It is imposed on our income and plays a vital role in the economic growth & stability of our country. For years the Government is generating revenue through this taxsystem.The word 'Tax' originated from the 'Taxation.' which mean 'Estimate.' Hence, 'Income Tax'mean 'Income Estimate,' which helps the government to know the actual economic strength of a person. It is also a way to set up an economic standard for general people. It helps theGovernment to know the distribution of money among country's people.Income Tax has been in force in different forms since years. If we go through the history of India, we get relevant information regarding the taxation system of India. In ancient history, itis mentioned that at about such system which were imposed on the income, expenditure andother subject. Even information of such is given Manu Smriti and Arthasatra which confirms itsexistence at that time.In modern India, Income Tax came into existence in 1860 with the implementation of firstIncome Tax Act. After implementation of this Act, people became aware of the actual meaningof Income Tax. This act was in force for first five years. After this, in 1865, second Act cameinto force. There were major changes in this Act relative to the first. It proved itself as a goodfactor for the growth of our economy. With this Act a new concept of Agriculture Income cameinto existence.After this, different new Act was also implemented. The most important of them is the IncomeTax Act, 1961. According to ruling of Income Tax Act, 1961, any person whose salary from anysource of income is more than the maximum limit of unchargeable amount will be liable to payIncome Tax. There is also a provision of deduction and exemptions in Income Tax, dependingupon the type of assessee, source of income, residential status and investment in savingschemes. Income tax rates are a matter of chang, which is declared by Ministry of Finance,Government of India regularly, usually on annual basis.
Heads of Income
Under chapter 4 of Income Tax Act, 1961 (Section 14), income of a person is calculated undervarious defined heads of income. The total income is first assessed under heads of income andthen it is charged for Income Tax as under rules of Income Tax Act. According to Section 14 of Income Tax Act, 1961 there are following heads of income under which total income of aperson is calculated:
Heads of Income: Salary
What is Salary? 
Income under heads of salary is defined as remuneration received by an individual for servicesrendered by him to undertake a contract whether it is expressed or implied. According to
 
Income Tax Act there are following conditions where all such remuneration are chargeable toincome tax:
When due from the former employer or present employer in the previous year,whether paid or not
When paid or allowed in the previous year, by or on behalf of a former employer orpresent employer, though not due or before it becomes due.
When arrears of salary is paid in the previous year by or on behalf of a formeremployer or present employer, if not charged to tax in the period to which it relates.
What Income Comes Under Head of Salary:
Under section 17 of the Income Tax Act, 1961 there are following incomes which comes underhead of salary:1.Salary (including advance salary)2.Wages3.Fees4.Commissions5.Pensions6.Annuity7.Perquisite8.Gratuity9.Annual Bonus10.Income From Provident Fund11.Leave Encashment12.Allowance13.Awards
What is Leave Encashment:
Leave encashment is the salary received by an individual for leave period. It is a chargeableincome whether he is a government employee or not. Under section 10(10AA) (i) there is alsoa provision of exemption in case of leave encashment depending upon whether he is agovernment employee or other employees.
What is Annuity:
It is an annual income received by the employee from his employer. It may be paid by theemployer as voluntarily or on account of contractual agreement. It is not taxable until the rightto receive the same arises. Under section 56, Income Tax Act, 1961 other annuities comeunder a will or granted by a life insurance company or accruing as a result of contract whichcomes as income under from other sources.
What is Gratuity:
It is salary received by an individual paid by the employee at the time of his retirement or byhis legal heir in the case of death of the employee.
What is Allowance:
It is the amount received by an individual paid by his/her employer in addition to salary. Undersection 15 of the Income Tax Act, 1961 these allowance are taxable excluding few conditionwhere they are entitled of deduction/ exemptions.
 
Under Income Tax Act following types of allowance are defined
House Rent Allowance:
Under sections 10(13A) of Income Tax Act, 1961 allowance is defined as an amount receivedby an employee paid by his/ her employer as a rent of his/her house. It is a taxable income.There is no exemption in tax if he is living in his own house or house for which he is notpaying rent. There are following amount which are exempt from tax:
Actual house rent paid by that individual
Rent paid for the accommodation over 10% of the salary
50% of the salary if house is placed at Delhi, Mumbai, Kolkata, Chennai or 40% of thesalary in it is placed in any other city
Entertainment Allowance:
It is the amount paid by employer for availing entertainment services. Under section 16(ii) of Income Tax Act, 1961 it is entitled to deduction in tax from is salary. But in this case deductionis given to his gross salary which also includes entertainment allowance. Deduction in taxagainst this allowance can be divided into two parts :In case of Government employee entitled to minimum deduction of 
Entertainment allowance received
20% of basic salary excluding any other allowance
Rs. 5000In case of other employee entitled to minimum deduction of 
(a) Entertainment allowance received
20% of basic salary excluding any other allowance
Rs. 7500
Entertainment allowance received during 1954-1955
Other Special Allowances
 
Children Education Allowance
Tribal Area Allowance
Hostel Expenditure Allowance
Remote Area Allowance
Compensatory Field Area Allowance
Counter Insurgency Allowance
Border Area Allowance
Hilly Area AllowanceAllowances for there is a provision of exempt in income tax are:
Allowance given to a citizen of India, who is a government employee, for renderingservices outside India
Allowances given to Judges of High Courts
Allowance given Judges of Supreme Court
Allowances received by an employee of UNO

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