Introduction: Understanding India's Direct Tax System
Income tax is a direct tax that a government levies on the income of its citizens. The Income Tax Act, 1961, governs the provisions related to income tax in India. For any business professional, a working knowledge of income tax law is essential for financial planning, compliance, and decision-making. This course is designed to provide a practical and structured understanding of the Indian income tax system. It will take you through the fundamental concepts of taxation, the classification of income under different heads, the process of calculating total income, and finally, the computation of an individual's tax liability.
Module 1: Basic Concepts of Income Tax
This module introduces the fundamental terminology and concepts of the Income Tax Act, which form the basis for all subsequent calculations.
- Key Definitions:
- Assessee: A person by whom any tax or any other sum of money is payable under the Act.
- Person: Includes an Individual, a Hindu Undivided Family (HUF), a Company, a Firm, an Association of Persons (AOP) or a Body of Individuals (BOI), a Local Authority, and every Artificial Juridical Person.
- Assessment Year (AY): The period of 12 months commencing on the 1st day of April every year, during which the income earned in the previous year is taxed.
- Previous Year (PY): The financial year immediately preceding the assessment year, in which the income is earned.
- Income: The Act gives an inclusive definition of income. It includes profits and gains, dividends, voluntary contributions received by a trust, etc.
- Gross Total Income (GTI): The aggregate of the income computed under the five heads of income.
- Total Income: Gross Total Income less deductions under Chapter VI-A (Sections 80C to 80U). Tax is calculated on the Total Income.
- Residential Status and Scope of Total Income: The tax liability of an assessee depends on their residential status in India for the previous year. The residential status is determined based on the number of days the person has stayed in India. Based on this, an individual can be classified as:
- Resident and Ordinarily Resident (ROR): Taxable on their global income.
- Resident but Not Ordinarily Resident (RNOR): Taxable on income received or accrued in India, and income from a business controlled from India.
- Non-Resident (NR): Taxable only on income received or accrued in India.
- Exempted Incomes: The Act specifies certain incomes that are exempt from tax, such as agricultural income (subject to certain conditions).
Module 2: The Five Heads of Income
The Income Tax Act classifies income into five broad categories or "heads." The total income of an assessee is computed by aggregating the income under each of these heads.
2.1 Income from Salaries
This head covers any remuneration received by an employee from their employer. It includes wages, pension, gratuity, fees, commissions, perquisites, and profits in lieu of salary. We will cover the computation of salary income, including the valuation of various perquisites (like rent-free accommodation) and the deductions available (like standard deduction, professional tax).
2.2 Income from House Property
This head covers the income earned from owning a property. The tax is levied on the annual value of the property. We will learn how to compute the Gross Annual Value (GAV), Net Annual Value (NAV), and the deductions available (standard deduction of 30% and interest on borrowed capital).
2.3 Profits and Gains of Business or Profession (PGBP)
This head covers the income earned from carrying on a business or profession. The profit is computed by taking the net profit as per the Profit & Loss Account and making adjustments for expenses that are expressly allowed or disallowed under the Act. Key concepts include depreciation, bad debts, and treatment of various business expenses.
2.4 Capital Gains
This head covers the profit or gain arising from the transfer of a capital asset. A capital asset is any property held by the assessee. Gains can be Short-Term Capital Gains (STCG) or Long-Term Capital Gains (LTCG), depending on the holding period of the asset. The tax treatment for STCG and LTCG is different. We will also cover exemptions available for capital gains.
2.5 Income from Other Sources
This is a residual head of income. Any income that does not fall under the other four heads is taxed under this head. Examples include interest on bank deposits, dividends, winnings from lotteries, and gifts received.
Module 3: Aggregation of Income and Set-off of Losses
After computing income under each head, the next step is to aggregate them and make adjustments for any losses.
- Clubbing of Income: In certain cases, the income of another person (e.g., spouse, minor child) is included in the assessee's total income.
- Set-off and Carry Forward of Losses: The Act provides rules for setting off losses from one source against income from another source in the same year. If losses cannot be set off in the same year, they can be carried forward to subsequent years to be set off against future income.
Module 4: Computation of Total Income and Tax Liability
This is the final stage of the process, where we arrive at the taxable income and calculate the tax payable.
4.1 Deductions from Gross Total Income (Chapter VI-A)
The Act allows for several deductions from the Gross Total Income to arrive at the Total Income. These deductions are provided to encourage savings and investment. Some of the major deductions include:
- Section 80C: Deduction for investments in specified instruments like PPF, NSC, life insurance premiums, etc. (up to a limit of ₹1,50,000).
- Section 80D: Deduction for health insurance premiums.
- Section 80TTA: Deduction for interest on savings bank accounts.
4.2 Computation of Tax Liability for Individuals
Once the total income is determined, the tax is calculated based on the applicable slab rates for the relevant assessment year. We will also cover the concepts of rebate and surcharge, and the levy of Health and Education Cess.