UNIT I

Introduction to
Income Tax

Ms. BHAWNA THAKRAN

Introduction to Tax

• Derived from a Latin word taxare which means “to assess/estimate”

• Tax can be defined as a fee or financial charge levied by the government on
its citizens and business entities. Main source of income for government

TAXES
GOVERNMENT
Provides security,
People
infrastructure, facilities, etc.

• Tax structure in India can be classified into two main categories:

o Direct Tax
o Indirect Tax
 Direct Taxes
Taxes are paid by the taxpayer directly to the government
Person paying taxes cannot shift his burden to some other person
E.g., Income tax, Wealth Tax.

 Indirect Taxes
Taxes are paid by the taxpayer indirectly
Consumption based tax i.e., applied to goods or services when they are
bought or sold
Person paying taxes can recover it from another person
E.g., Goods and Service Tax (GST), Custom Duty etc
Income Tax in India
•Income Tax Act was first introduced in India in February 1860 by Sir James
Wilson
• Many laws were brought to streamline income tax laws
New Income Tax Act was passed in 1918, then in 1922 and finally in 1961

Who has the power to levy and collect taxes

As per Article 265, no taxes shall be levied or collected except the authority
of law

As per Article 246,constitution gives power to levy taxes between Centre and
State Governments with the help of Schedule VII
Schedule VII gives power to collect taxes with the help of 3 lists

List I List II List III

Union List State List Concurrent List
• Taxes on Income • Taxes on • Property tax or
except Agricultural Agricultural Income House tax, etc.
Income • Excise on liquor for
• Taxes other than human
stamp duties on consumption
transactions in • Taxes on
stock exchange and consumption or
future markets sale of electricity
• Custom Duty, etc. • Tolls, etc.
Components of Income Tax Law
i. Income Tax Act, 1961
• Govern Income Tax in India
• Came into force on 1st April, 1962
• Contains 298 sections and XIV Schedules
• Undergo changes every year with addition and deletion brought by Finance
Act passed by Parliament.

ii. Finance Act

• Finance Minister introduces bill every year in budget session on the last
working day of February every year
• When bill is passed by both the houses and gets assent of President of
India, it becomes Finance Act
Components of Income Tax Law (Contd.)
iii. Income Tax Rules
• Administration is looked after by CBDT (Central Board of Direct Taxes)
• CBDT is empowered to make rules from time to time
• These rules are collectively known as Income Tax Rules, 1962

iv. Circulars and Notifications

• Circulars and notifications are issued by CBDT to deal with specific problems
or to clarify doubts regarding scope or meaning
• Circulars are issued for guidance of officers or/and assessee
• Department bound by circulars but not assessee. Assessees can take
advantage of beneficial circulars
Components of Income Tax Law (Contd.)
v. Legal Decisions of Courts (Case Laws)
Whenever there is a dispute between Assessing Officer (AO) and
Assessee them it can be referred to
o Income Tax Appellate Tribunal
o High Court
(decisions are binding on all assessees as well as Income Tax
authorities which fall under their jurisdiction, unless overrules
by higher authority)
o Supreme Court (Law of land and decisions are binding on
all courts, assessees etc.)
Definition of Income Tax

Income Tax is a tax imposed/ levied in the assessment

year on the total income of the previous year of every
person.
Person [Section 2(31)]
a. An individual;

b. A Hindu Undivided Family (HUF);

c. A Company;

d. A Firm;

e. An Association of Persons (AOP) or a Body of Individuals (BOI), whether

incorporated or not;

f. A local authority; and

g. Every artificial juridical person not falling within any of the preceding sub
clauses.
Assessee
Means a person by whom income-tax or any other sum of money is payable under
the act. It includes:
a. A person by whom any tax or any other sum of money (including interest and
penalty) is payable under the act
b. A person in respect of whom any proceeding under the Act has been taken
(whether or not he is liable for any tax, interest or penalty). Proceedings may be
taken:
• either for the assessment of the amount of his income or the loss sustained by
him; or
• of the income (or loss) of any other person in respect of whom he is
assessable; or
• of the amount of refund due to him or to such other person
c. Every person who is deemed to be an asssessee
d. Every person who is deemed to be an assessee in default under any provisions
of the act
Assessment Year (AY)
• AY means the period starting from April 1 and ending on March 31 of
next year

• For example, AY 2020-21 commenced on 1st April, 2020 and will end
on 31st March, 2021

• Income of a previous year of an assessee is taxed during the next

following AY at the rates prescribed by relevant Finance Act

• Assessment Year is always of 12 months

Previous Year (PY)
• Income earned in a year is taxable in the next year

• Year in which income is earned is known as previous year

Year in which income is taxable is known as assessment year

• For example, income earned by an individual during the PY 2019-20 is

taxable in the immediately following AY 2020-21

• All assessees are required to follow uniform PY for all sources of income
Previous year in case of newly setup business/ profession or new
source of income
In case of a newly setup business/ profession or a source of income newly
coming into existence, first previous year is the period commencing from the
date of setting up of a business/ profession and ending on the immediately
following 31st March.

Thus, first previous year is a period of 12 months or less than 12 months. It can
never exceed 12 months.

Second and subsequent previous years are always of 12 months each

Exceptions when income of Previous Year is not taxable
in the immediately following Assessment Year
a. Income of non – resident from shipping (Sec. 172);
b. Income of person leaving India either permanently or for a long period of
time (Sec. 174);
c. Income of an AOP or BOI or an artificial juridical person formed for a
particular event (Sec. 174A);
d. Income of a person trying to alienate his assets with a view to avoid
payment of tax (Sec. 175); and
e. Income of a discontinued business (Sec. 176)
Scheme of Taxation

Every person, whose total income of the previous year exceeds

the maximum amount which is not chargeable to tax, is an
assessee and chargeable to income tax in the assessment year at
the rate or rates prescribed in the Finance Act/ Income tax act for
that relevant assessment year
Income tax is levied in India in following manner:

• Income earned by every person if exceeds maximum exemption limit

• Charged on total income of previous year but taxable in next assessment year

• Charged at two rates i.e., normal rates and special rates

• Charged on total income computed in accordance with provisions of the Act

• Income determined on the basis of residential status in India

• Although income in previous year is taxable in assessment year but assessee

has to pay income tax in the same previous year in which income is earned, in
form of advance tax and TDS.
Rates of Income Tax
1. In case of an individual, resident in India who is of age of 80 years or more
(Super Senior Citizen) at any time during the previous year

Up to Rs 5,00,000 NIL
Rs 5,00,010 to Rs 10,00,000 20%
Above Rs 10,00,000 30%

2. In case of an individual, resident in India who is of age of 60 years or more

but less than 80 years (Senior Citizen) at any time during the previous year

Up to Rs 3,00,000 NIL
Rs 3,00,010 to Rs 5,00,000 5%
Rs 5,00,010 to Rs 10,00,000 20%
Above Rs 10,00,000 30%
Rates of Income Tax (Contd.)
3. In case of an individual, resident in India who is of age of less than 60 years
at any time during the previous year, HUF, AOP/BOI (other than a co-
operative society) and artificial juridical person

Up to Rs 2,50,000 NIL
Rs 2,50,010 to Rs 5,00,000 5%
Rs 5,00,010 to Rs 10,00,000 20%
Above Rs 10,00,000 30%
Surcharge: If total income of a person exceeds Rs 50 lakhs and up to Rs 1 crore,
10% of such income tax will be charged
If income exceeds Rs 1 crore and up to Rs 2 crore, 15% of such income
tax will be charged
If income exceeds Rs 2 crore and up to Rs 5 crore, 25% of such income
tax will be charged
If income exceeds Rs 5 crore, 37% of such income tax will be charged
Marginal Relief: The total amount payable as income tax and surcharge on
total income exceeding Rs 50 lakhs and Rs 1 crore shall not exceed the total
amount payable as income tax on total income of Rs 50 lakhs and Rs 1 crore
by more than the amount of income that exceeds Rs 50 lakhs and Rs 1
crore respectively
Health and education cess: 4% on income tax (inclusive of surcharge,
wherever applicable)
Example: Income of Mr. X for assessment year 2020-21 is Rs. 50,90,000. Calculate the
tax payable by Mr. X for AY 2020-21

Particulars Rs. Rs.

On first Rs 2,50,000 NIL
Rs 2,50,000 – Rs 5,00,000 @ 5% 12,500
Rs 5,00,000 – Rs 10,00,000 @ 20% 1,00,000
Above Rs 10,00,000 @ 30% 12,00,000
13,12,500
Tax on Rs 90,000, which is above Rs 50,00,000
Rs 90,000 @ 30% 27,000
Total Tax 13,39,500
Additional Income above Rs 50,00,000 90,000
Tax payable @ 30% 27,000
Balance Income 63,000
 Particulars Rs. Rs.
Surcharge on Rs 13,39,500 @ 10% = Rs 1,33,950
Surcharge in this case shall be Rs 63,000 or Rs 63,000
1,33,950; whichever is less due to marginal relief
Tax including surcharge 14,02,500
Add: Health and Education Cess @ 4% 56,100
Total tax payable 14,58,600
Rebate u/s 87A
Eligibility conditions
a. The assessee is an individual;
b. Resident in India; and
c. Total income after reducing deductions does not exceed Rs 5 lakh

Quantum of rebate
a. Amount of income tax payable (before adding cess) on total income; or
b. Rs 12,500
whichever is less.
Example: (a)The total income of Mr. X, resident in India, for AY 2020-21 is Rs
4,90,000.
Tax liability of Mr. X (before adding cess) = Rs 12,000
[Upto Rs 2,50,000 = NIL
Rs 2,50,000- 4,90,000 @ 5% = Rs 12,000]

Rebate available to Mr. X u/s 87A = Rs 12,000 or Rs 12,500, which ever is less

(b) The total income of Mr. X, resident in India, for AY 2020-21 is Rs 5,10,000.
Tax liability of Mr. X= Rs 14,500
Rebate is not available to Mr. X as he does not fulfill the eligibility criteria (c)
Income u/s 2(24)
• Term “income” is inclusive and not exhaustive
• Term “income” specifically includes:
o Profits and gains
o Dividend
o Voluntary contributions received by a trust
o Perquisites in the hands of employee
o Capital Gain
o Winnings from lottery
o Employees contribution towards provident funds
oAmount exceeding Rs 50,000 by way of gift, etc.
Income u/s 2(24) (Contd.)
Meaning of income as generally understood
o Regular and definite source
o Different forms of income
o Receipt vs Accrual
o Illegal income
o Disputed title
o Relief or reimbursement of expenses not treated as income
o Income includes loss
o Temporary and permanent income
o Income should be real and not fictional
o Pin money, etc
Gross Total Income
Aggregate income from the following heads of income is termed as “Gross Total
Income”

• Salaries

• Income from house property

• Profits and gains of business or profession

• Capital Gains, and

• Income from other sources

Total Income

Total income of an assessee is gross total income as reduced by the amount of

permissible deduction under section 80C to 80U

Rounding off of total income

Total income shall be rounded off to the nearest multiple of ten rupees and any
part of rupee consisting of paise shall be ignored

Example: Total income is Rs 8,48,287, it shall be rounded off to Rs 8,48,290

If total income is Rs 83,973, it shall be rounded off to Rs 83,970.

Computation of Total Income
THANK YOU!!