Basics of Income Tax

Lecture dated 28th July, 2020

 Learning Outcomes
• Appraise the different concepts used in Income tax.
• Comprehend the applicability of income tax as per Income tax Act,
1961.
 What is tax?
• Tax is a fee charged by a Government on a product, income or activity.
• There are two types of taxes – Direct Taxes and Indirect Taxes.
 What is Income Tax?
• It is a tax charged on income earned by any person.
• It is the type of direct tax.
 Terms used in Income Tax

1) Previous Year
2) Assessment Year
3) Five heads of Income
4) Gross total income
5) Total income
6) Person
7) Assessee
 1.) Previous Year

• It is the period of 12 months which commences on the 1st April every

year.
• It is also known as ‘Financial year’.
• It is the year in which income is earned.
 2.) Assessment Year

• It is the period of 12 months which commences on the 1st April every

year.
• It is the year in which income is assessed to tax.
 Rule of Income Tax

• Income is earned in one year  PY

• It’s tax is paid on immediate next
year  AY

Current Previous Year

1st April 2019 – 31st March 2020

Current Assessment Year

1st April 2020 – 31st March 2021
 3.) Five Heads of Income

• Income under head Salary

• Income under head House
Property
• Income under head Business
or Profession
• Income under head Capital
Gains
• Income under head Other
Sources
 4.) Gross Total Income
• Income obtained by adding all 5 heads of income.

Income under head Salary

+ Income under head House Property
+ Income under head Business or Profession
+ Income under head Capital Gains
+ Income under head Other Sources
Gross Total Income
 5.) Total Income
• Income of 5 heads less deductions under section 80 of Income tax Act,
1961
Income under head Salary
+ Income under head House Property
+ Income under head Business or Profession
+ Income under head Capital Gains
+ Income under head Other Sources
Gross Total Income
- Deductions under Section 80 C to 80 U
Total Income
 6.) Person
Person includes,
i. An Individual,
ii. Hindu Undivided Family (HUF),
iii. A Company,
iv. A Firm,
v. An Association of Persons(AOP) or Body of Individuals (BOI),
vi. A Local Authority,
vii. Every other Artificial Juridical Person
 6.1.) Individual
• It means a natural person i.e. a male, female, minor, idiot or lunatic.

Analysis
a) The income of a minor is generally included in the income of parent.
b) Assessment of Lunatic or idiot is done through representative
assessee.
6.2) HUF 6.3)
Company
HUF stands for Hindu Undivided Company
Family

• It means a family which consist • It includes both Indian company

of all persons lineally descended as well as foreign company.
from a common ancestor. (for
ex- joint family business)
6.4. Firm - Firm means partnership firm having the partnership deed to assess
the income in the name of a firm.

6.5. Association of persons(AOP) : If a group of person’s are working together

voluntarily without any partnership deed then it will be called As AOP.

6.6. Body of individuals(BOI) : If a group of individuals are working together by

operation of law without partner. For ex: Any society or trust.

6.7. Local authority - Local authority means a authority which is responsible for
the local maintenance of a place falls under his jurisdiction For eg.- Municipal
committee of Delhi (MCD), Panchayat, and cantonment board etc.

6.8. Artificial juridical person (AJP) -Artificial juridical person means a person
which is not natural but is a legal person in the eyes of law (ICSI, Delhi University
etc.)
 7.) Assessee

Assessee
defined u/s 2(7)

Normal Representative Assessee in

Assessee Assessee default
 7.1) Normal Assessee
• A person who is:
• liable to pay income tax and
• other sums of money such as Penalty or interest as due from him.
For example:
• Mr Khan, aged 42 years is having the Total Income is Rs. 290000 for AY
2019-2020.
• He is liable to Pay Income tax based on the slab rate of AY 2019-2020.
• If he pays income tax as per amount due from him, he will be termed
as an assessee.
 7.2) Representative Assessee
• A person who are not in a position to pay income tax himself.
• In such cases Someone acts on behalf of such people as a
representative.
For example:
• The non-resident cannot file tax. In such case an authorized
representative can become assessee on their behalf.
• The parents and relatives of minor and lunatics can be a
representative assessee.
 7.3) Assessee - in – default
• Any person who fails to pay income tax  he is an assessee – in -
default.
• The person who fails to do the legal compliance of Income tax
become assessee in default.

For example:
Mr. John’s total tax liability for the AY 2019 – 20 is Rs. 5000. He has not
paid his income tax.
Mr. John will be termed as Assessee – in – default.
Rates of Income Tax (AY 2020 – 21)
 Charge of Income tax
Every person whose,
• Total Income of the PREVIOUS YEAR exceeds the BASIC EXEMPTION
LIMIT is an ASSESSEE and
• Chargeable to income tax at the RATES prescribed in the FINANCE ACT
for the relevant ASSESSMENT YEAR.
 MCQ – 1
• The Income tax act, 1961 came into force w.e.f........ ________
a) 1st April, 1962
b) 31st March, 1961
c) 1st April, 1961
d) None of above
 MCQ – 2
• Income Tax is charged in __________
a) Financial Year
b) Assessment Year
c) Previous Year
d) Accounting Year
 MCQ – 3
• The following is not included in the definition of 'person’
a) An individual
b) A Hindu undivided family
c) A company
d) A minor
 MCQ – 4
• Assessment year can be a period of _______
a) only more than 12 months
b) 12 months and less than 12 months
c) only 12 months
d) 12 months and more than 12 months
 MCQ – 5
• Municipality Corporation of any city falls under _________category of
person
a) Artificial juridical person
b) Local authority
c) Individual
d) Association of Person
 MCQ – 7
• Mr. Joe, aged 23 years, commenced lawyer practice on 1st September,
2018. The previous year for the profession for the assessment year
2019-20 would be ________
a) 1st April, 2018 to 31st March, 2019
b) 1st September, 2018 to 31st March, 2019
c) 1st June, 2018 to 31st March, 2019
d) 1st September, 2018 to 31st January, 2019