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ARN. No. KLI/23-24/E-BB/1201
Features
Ref. No. KLI/22-23/E-BB/999
The Income Tax Act of 1961 outlines the rules for assessing, collecting, and administering taxes on various income sources.
The Income Tax Act of 1961 stands as the strongest legislation crafted by the Government of India to regulate income taxation across the nation. This landmark Act outlines the guidelines, norms, and provisions governing the assessment, management, and retrieval of income taxes.
If you are someone who regularly pays their taxes or who recently came into the tax bracket, then you should know about the meaning or definition of Income Tax Act 1961, its important sections, and objectives.
Before starting with the introduction of Income Tax Act 1961, let us first understand what income tax is and explore what the features of income tax in India are.
It is a type of direct tax levied on the income of people. This means that the person who earns the income must pay the tax themselves and cannot transfer the burden on someone else. So, if income tax is levied on you, you will be responsible for paying it to the government. Moreover, it is a progressive taxation system, meaning that it is based on your ability to pay. If you earn more, you will typically pay more tax.
Income tax is a source of income for the government and sets the foundation for the economic development of the country. But who should pay this tax, and at what rate? What is the process that must be followed? Should there be penalties for non-payment, and who should administer them?
The above questions can overwhelm tax authorities and citizens. Therefore, the government follows the Income Tax Act of 1961, which is comprehensive legislation stating all income tax-related rules. It has several provisions spread across 23 chapters and 298 sections. This Act replaced the earlier Income Tax Act of 1922 to govern the assessment, levy, administration, and collection of income tax.
Suppose there are two taxpayers. One receives a fixed salary every year, and the other earns profit by running a business. Should both these incomes be taxed in the same manner? Under the Income Tax Act, this is not the case.
All the income sources are divided into five heads with varying provisions and calculations.
This category includes any income received by an individual from an employer. It consists of:
If you own a house or land and earn rent from it, that rental income is taxed. Even if the property is not rented out, a deemed rental value may be considered for taxation purposes in some cases.
Income earned through any business activity, trade, profession, or vocation is taxed under this head. This includes:
In case you earn a profit from the sale of property, stocks, mutual funds, or bonds, the amount will be taxed under this head. Capital gains are divided into:
This is a residual category that covers all income not classified under the above heads. Common sources include:
Simply put, any person earning income in India or from Indian sources is liable to pay tax based on the slabs. However, the word “person” has a broader meaning and includes different categories of taxpayers.
There are 23 Chapters in the Income Tax Act 1961. Take a quick look at what these chapters are and what they cover.
| Chapter Number |
Chapter Title |
Brief Description |
| I |
Short Title and Commencement |
Introduces the Act and specifies the date it came into effect. |
| II |
Definitions |
Defines important terms used throughout the Act. |
| III |
Charge of Income-tax |
Specifies the types of income chargeable to tax. |
| IV |
Incomes which are not included in total income |
Lists income that is exempt from taxation. |
| V |
Income from house property |
Deals with taxation of income earned from renting out property. |
| VI |
Profits and gains of business or profession |
Covers taxation of profits earned from business activities or professional services. |
| VII |
Capital gains |
Deals with taxation of gains arising from capital assets’ sale. |
| VIII |
Income from other sources |
Covers the taxation of income from various sources not covered elsewhere, like interest income, dividends, etc. |
| IX |
Deductions in respect of certain payments |
Lists deductions allowed from gross total income for various expenses. |
| X |
Special provisions relating to deduction of tax at source |
Explains the system of deducting tax at source from certain payments like salaries or interest. |
| XI |
Income of spouse, minor child, etc. |
Deals with how the income of a spouse or minor child is taxed. |
| XII |
Special provisions for avoidance of income-tax |
Includes anti-avoidance rules to prevent tax evasion. |
| XIII |
Liability in special cases |
Specifies tax treatment for specific situations like deceased persons or unregistered firms. |
| XIV |
Settlement of Cases |
Covers procedures for settling tax disputes through alternative dispute resolution mechanisms. |
| XV |
Assessments |
Explains the process of tax liability assessment by tax authorities. |
| XVI |
Provisions for collection and recovery of tax |
Deals with methods for collecting and recovering tax dues. |
| XVII |
Penalties |
Outlines penalties for non-compliance with tax provisions. |
| XVIII |
Refunds |
Explains the process for claiming tax refunds. |
| XIX |
Interest |
Covers rules for charging interest on tax payments or refunds. |
| XX |
Miscellaneous |
Includes various miscellaneous provisions related to tax administration. |
| XXI |
Temporary Provisions |
Contains temporary provisions that may be withdrawn or modified later. |
| XXII |
Repeals and Savings |
Deals with the repeal of previous tax laws and savings clauses. |
| XXIII |
Power to make rules |
Authorizes the government to make rules for implementing the Act. |
Being a responsible citizen of the country, it is essential to know the objectives of the Income Tax Act 1961. This will help you understand the taxes and be more consistent with tax filing.
The primary objective of the Income Tax Act of 1961 is to generate revenue for the government. The government can then use it to fund various development and welfare programs..
The Indian Income Tax Act 1961 serves as a tool for the government to implement its fiscal policy. By adjusting tax rates, deductions, and exemptions, the government can influence economic activities such as consumption, investment, and savings, thereby stabilizing the economy and promoting growth.
The Act aims to encourage voluntary compliance with tax laws by providing clear guidelines, timely payment incentives, and non-compliance penalties. This helps minimize tax evasion and ensures a steady revenue flow to the government.
You must have heard about tax exemptions and deductions such as those under Section 80C of the IT Act 1961. Sure, these provisions reduce your tax liability. However, their primary aim is to encourage the country’s economic development. Tax exemptions and deductions incentivize you to invest in certain sectors or activities deemed beneficial for nations’ growth and societal welfare. For instance, Section 80D encourages you to obtain medical insurance, while Section 80E supports your higher education goals.
The Act seeks to ensure that the burden of taxation is distributed fairly among taxpayers based on their ability to pay. It includes provisions for various exemptions, deductions, and tax credits to alleviate the tax burden on low-income individuals, senior citizens, and certain categories of taxpayers.
With the increasing globalization of economies, the Income Tax Act also addresses issues related to international taxation, including double taxation avoidance agreements, transfer pricing regulations, and measures to combat tax evasion and avoidance through offshore entities.
The scope of the Income Tax Act 1961 refers to the range of situations and types of income to which the Act applies. The following table explains the same.
| Residential Status |
Scope of Income Tax |
| Resident Individual |
Taxable on worldwide income earned or received in India and income earned abroad. |
| Non-Resident Indian |
Taxable only on income earned or received in India, not on income earned abroad. |
| Resident and Ordinarily Resident |
Taxable on worldwide income earned or received in India and income earned abroad. |
| Resident but Not Ordinarily Resident |
Taxable on income earned or received in India and income received in India or from a business or profession controlled or set up in India. |
The Income Tax Act is designed to ensure a fair and systematic approach to taxing individuals and entities based on their income. Below are some key features of Income Tax in India.
There are numerous provisions in the Income Tax Act of 1961. While a tax professional can provide guidance on the more complex details, it is important for you to grasp the basics.
Application of the Income Tax Act means how the Act is put into practice to determine who owes income tax, how much they owe, and the overall process for filing returns online and paying taxes. Let us take a quick look:
These rules provide detailed procedures and regulations for the administration and enforcement of the Income Tax Act. They specify the manner of computation, assessment, and collection of taxes, as well as the filing of returns, appeals, and other procedural aspects.
The Finance Act is passed annually as part of the Union Budget and contains amendments to the Income Tax Act, including changes in tax rates, exemptions, deductions, and other provisions. It reflects the government’s fiscal policy and economic priorities for the fiscal year.
Court judgments, including those by the Supreme Court and High Courts, interpret and clarify provisions of the Income Tax Act. These judicial pronouncements serve as precedents and guide the application and enforcement of tax laws, resolving disputes and providing clarity on legal interpretations.
The government issues notifications and circulars to provide guidance, clarification, and instructions on various aspects of the Income Tax Act. These notifications may relate to tax rates, exemptions, procedural requirements, and other administrative matters, ensuring uniform application and compliance with tax laws.
As mentioned earlier, the Income Tax Act has 298 sections covering different aspects of taxation, from definitions to procedures for income tax assessment. The following are key sections that can provide a solid foundation for understanding taxation in India and can help you get started on the subject.
This section describes key terms used throughout the Act, such as “person,” “income,” “assessment year,” “previous year,” and more. For instance, it defines assessment year as “ the period of twelve months commencing on the 1st day of April every year”.
You should also be aware of Section 10, which lists various incomes that are exempt from tax. This includes agricultural income, scholarships, interest on specific bonds, allowances for MPs/MLAs, and certain incomes of charitable trusts.
If you are looking for tax-saving measures, you cannot afford to miss Section 80C. It offers deductions up to ₹1.5 lakhs for specified investments, such as life insurance premiums, Public Provident Fund (PPF), National Savings Certificates (NSC), and tuition fees.
Section 80D is another widely known tax provision. It helps reduce tax liability while also promoting medical insurance. It allows you to claim deductions for premiums paid towards health insurance policies up to ₹25,000 (₹50,000 for senior citizens) for your own self, spouse, and dependent children. An additional ₹25,000 can be claimed for premiums paid for parents (₹50,000 for senior citizens) and ₹5000 for preventive care.
Section 24(b) allows a deduction of up to ₹2 lakhs for interest paid on home loans for a self-occupied property. For a let-out property, there is no upper limit on the deduction of interest, but net loss from house property can only be set off up to ₹2 lakhs against other income sources.
This section mandates a tax audit for businesses and professions whose total sales, turnover, or gross receipts exceed certain thresholds. For businesses, the limit is ₹1 crore, and for professionals, it is ₹50 lakhs.
The process of filing an Income Tax Return (ITR) confuses a lot of people. It is thus recommended to have a look at Section 139 which outlines the entire procedure for filing returns, due dates for different categories of taxpayers, types of ITR forms to be filed, and the consequences of late filing. Further, Section 143 (1) deals with the processing of these returns.
Do you know that if you fail to file returns or pay the tax on time, you may have to pay an additional amount in the form of interest? The provisions related to the same are available under the following sections:
Section 115BAC is a recent addition to the tax laws. It explains the tax slabs and rates under the new regime introduced in Budget 2020. Please note that while this section lowers the tax rates and administrative burden, it limits the available exemptions or deductions.
The Income Tax Act and rules serve as the pillar that supports India’s taxation system. They embody principles of equity, transparency, and fiscal prudence. Over the years, they have ensured a balanced and just distribution of tax burden while promoting economic growth and social welfare. As India strides forward on its developmental journey, the Income Tax Act of 1961 stands resolute, guiding the nation towards financial resilience and prosperity.
1
The Income Tax Act comprises 4 schedules detailing various aspects like rates, deductions, and exemptions.
2
The primary aim of the Income Tax Act of 1961 is to levy, administer, and collect income tax in India, ensuring revenue generation for the government.
3
The first Income Tax Act in India was introduced by James Wilson, the Finance Member of the Viceroy’s Council, in 1860.
4
The Income Tax Act of 1961 comprises 23 chapters and 298 sections, encompassing various provisions related to taxation.
5
The current Income Tax Act in India is the Income Tax Act of 1961, which has been amended multiple times to accommodate changes in tax policies and economic conditions.
6
Income tax is levied on the income earned by individuals, businesses, or other entities, as per the rates prescribed by the government, with certain exemptions, deductions, and allowances
7
Income tax is a direct tax imposed on the income of individuals, corporations, or other entities. Its types include progressive tax, proportional tax, and regressive tax, with rates varying based on income levels.
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Amit Raje is an experienced marketer who has worked in various Fintechs and leading Financial companies in India. With focused experience in Digital, Amit has pioneered multiple digital commerce in India. Now, close to two decades later, he is the vice president and head of the D2C business department. He masters the skill of strategic management, also being certified in it from IIMA. He has challenged his challenges and contributed his efforts in this journey of digital transformation.
Prasad Pimple has a decade-long experience in the Life insurance sector and as EVP, Kotak Life heads Digital Business. He is responsible for developing user friendly product journeys, creating consumer awareness and helping consumers in identifying need for life insurance solutions. He has 20+ years of experience in creating and building business verticals across Insurance, Telecom and Banking sectors
Pay 10,000/month for 10 years, Get 1,65,805/Year* for next 15 years.
ARN. No. KLI/23-24/E-BB/1201
Features
Ref. No. KLI/22-23/E-BB/999
The information herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. The content has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision. Further customer is the advised to go through the sales brochure before conducting any sale. Above illustrations are only for understanding, it is not directly or indirectly related to the performance of any product or plans of Kotak Life.
