Income Tax Act 1961: Chapters, Objectives, Features & Provisions

The Income Tax Act of 1961 outlines the rules for assessing, collecting, and administering taxes on various income sources.

4,555 Views | Updated on: Oct 15, 2024

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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.

What is the Income Tax Act 1961?

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.

Which Income is Taxable Under the Income Tax Act?

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.

Income from Salary

This category includes any income received by an individual from an employer. It consists of:

Basic salary
Wages
Pension (except commuted pension)
Gratuity
Allowances
Bonuses, commissions, and other perks provided by the employer

Income from House Property

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 from Business or Profession

Income earned through any business activity, trade, profession, or vocation is taxed under this head. This includes:

Profits or gains from businesses
Income from freelancing or professional services (such as lawyers, doctors, architects)
Any other income related to commercial activities

Income from Capital Gains

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:

Short-term capital gains (STCG): Gains from assets held for less than a specified period.
Long-term capital gains (LTCG): Gains from assets held for a longer period.

Income from Other Sources

This is a residual category that covers all income not classified under the above heads. Common sources include:

Interest income
Dividends from investments
Gifts (in certain cases)
Royalties, winnings from lotteries, and prizes

Gross Taxable Income= Income from salary + Income from House Property + Income from Business or Profession + Income from Capital Gains + Income from Other Sources

Who Is Liable to Pay Income Tax?

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.

Individuals
Hindu Undivided Families
Companies
Partnership Firms and LLPs (Limited Liability Partnerships)
Sole Proprietorships
Association of Persons (AOP) and Body of Individuals (BOI)
Local Authorities and Artificial Judicial Persons

Chapters of the Income Tax Act 1961

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.

Main Objectives of Income Tax Act 1961 of India

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.

Revenue Generation

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..

Fiscal Policy Tool

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.

Encouraging Compliance

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.

Promoting Economic Development

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.

Ensuring Equity and Fairness

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.

International Cooperation and Compliance

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.

Scope of Income Tax Act 1961

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.

Features of Income Tax Act 1961

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.

Income tax applies to earnings from all sources accrued by the taxpayer in the preceding year.
Every taxpayer bears the responsibility of paying income tax, and this obligation cannot be delegated to another party.
The assessment of income tax is determined according to the relevant tax slabs applicable to the taxpayer.
Tax deductions, in certain cases, are capped at a maximum limit per fiscal year.
The administration and regulation of the taxation system in India fall under the jurisdiction of the Central Government.
India’s progressive income tax structure ensures that individuals with higher income levels contribute proportionally more to the welfare of society.

Provisions of Income Tax Act 1961

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.

Tax Criteria: Tax liability depends on your residential status (resident/non-resident) and where your income originates from.
What’s Taxed: The Act contains provisions under Section 14 about the various income sources like salaries, property rentals, business profits, capital gains, and more.
Tax Calculation: You can refer to the Act to learn how to calculate your taxable income and apply the correct tax rate.

Filing Returns and Assessment Process: Income Tax provisions specify who needs to file tax returns and define how tax authorities assess your tax liability.

Disputes and Penalties: Certain provisions also outline the consequences of not complying with tax rules and the procedures for appealing tax assessments.

Application of the Income Tax Act

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:

Income Tax Rules, 1962

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.

Finance Act

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.

Judicial Announcements

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.

Government Notifications and Circulars

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.

Important Sections of the Income Tax Act 1961

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.

Section 2 - Definitions

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”.

Section 10 - Exemptions from Total Income

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.

Section 80C - Deductions for Investments

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 - Deductions for Medical Insurance

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) - Interest on Home Loan

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.

Section 44AB - Audit of Accounts

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.

Section 139 - Filing of Income Tax Returns

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.

Section 234A/B/C - Interest for Delay in Filing or Payment

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 234A: Interest for late filing of returns.
Section 234B: Interest for non-payment of advance tax.
Section 234C: Interest for deferred payment of advance tax.

Section 115BAC - New Tax Regime

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.

Conclusion

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.

FAQs on Income Tax Act 1961

1

How many schedules are there in the Income Tax Act?

The Income Tax Act comprises 4 schedules detailing various aspects like rates, deductions, and exemptions.

2

What is the main objective of the Income Tax Act of 1961?

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

Who introduced the first Income Tax Act in India?

The first Income Tax Act in India was introduced by James Wilson, the Finance Member of the Viceroy’s Council, in 1860.

4

How many sections are there in the Income Tax Act 1961?

The Income Tax Act of 1961 comprises 23 chapters and 298 sections, encompassing various provisions related to taxation.

5

What is the current Income Tax Act?

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

What is the rule of income tax?

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

What is income tax and its types?

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.

Suggested Readings

1. What is Direct Taxes? Its Types, Rates, and Advantages

2.Old Vs New Tax Regime: Which is Better?

Written By :

Amit Raje

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.

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Prasad Pimple

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

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Income Tax Act 1961: Chapters, Objectives, Features & Provisions

What is the Income Tax Act 1961?

Which Income is Taxable Under the Income Tax Act?

Income from Salary

Income from House Property

Income from Business or Profession

Income from Capital Gains

Income from Other Sources

Who Is Liable to Pay Income Tax?

Chapters of the Income Tax Act 1961

Main Objectives of Income Tax Act 1961 of India

Revenue Generation

Fiscal Policy Tool

Encouraging Compliance

Promoting Economic Development

Ensuring Equity and Fairness

International Cooperation and Compliance

Scope of Income Tax Act 1961

Features of Income Tax Act 1961

Provisions of Income Tax Act 1961

Application of the Income Tax Act

Income Tax Rules, 1962

Finance Act

Judicial Announcements

Government Notifications and Circulars

Important Sections of the Income Tax Act 1961

Section 2 - Definitions

Section 10 - Exemptions from Total Income

Section 80C - Deductions for Investments

Section 80D - Deductions for Medical Insurance

Section 24(b) - Interest on Home Loan

Section 44AB - Audit of Accounts

Section 139 - Filing of Income Tax Returns

Section 234A/B/C - Interest for Delay in Filing or Payment

Section 115BAC - New Tax Regime

Conclusion

FAQs on Income Tax Act 1961

How many schedules are there in the Income Tax Act?

What is the main objective of the Income Tax Act of 1961?

Who introduced the first Income Tax Act in India?

How many sections are there in the Income Tax Act 1961?

What is the current Income Tax Act?

What is the rule of income tax?

What is income tax and its types?

Suggested Readings

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