Introduction to Income Tax

The word tax was derived from the Latin word ‘taxore’ meaning to estimate, appreciate or value. Tax is a price which each citizen pays to the state to cover his share of the cost of the general public services which he will consume. It indirectly provides employment opportunities. Taxes are compulsory contributions imposed by the government on its citizens to meet its general expenses incurred for the common good, without any corresponding benefit to the tax payer.

In 1860, the British government firstly introduced tax in India. The present law of income tax is contained in the income tax Act,1961 as amended up to date; the income tax rules 1962 as amended up to date and finance Act passed by the parliament every year. Income Tax Act came into force with effect from 1-4-1962 and extends to the whole of India.

Assessee [Sec 2(7)]

                  Assessee means a person by whom any tax or any other sum of money is payable under this Act, and includes;

  1. Any person who is liable to pay tax, interest or penalty
  2. Any person who is deemed to be assessee as per the Act
  3. Any person who is considered as default assessee by the Act
  4. Any person who is entitled to get refund of tax

Types of assessee:

                There are three types of assessee;

  1. Ordinary assessee:- Any person who is liable to pay tax, interest or penalty
  2. Deemed assessee:- also known as representative assessee. He in not only responsible for his income but also responsible for income of other person to whom he acts as a representative. Guardian is a deemed assessee in the case of  minor.
  3. Assessee in default:-if any person fails to fulfill his duty or obligation, then he is as assessee in default.

Assessment year [Sec 2(9)]

                Assessment year means the period of twelve months commencing on the 1st day of April every year . It is also called the financial year. Current AY starts from 1st April 2009 and ends on 31st March 2010. AY is 2009-2010.

Previous year [Sec 3]

                Previous year means the financial year immediately preceding the assessment year. The PY is 2008-09.

Average rate of income-tax [Sec2 (10)]

Average rate of income-tax means the rate arrived at by dividing the amount of income-tax calculated on the total income, by such total income.

Person [Sec 2(31)]

           Person includes

        (i)   An individual,

       (ii)  A Hindu undivided family,

     (iii)   A company,

      (iv)  A firm,

       (v)  An association of persons or a body of individuals, whether incorporated or not,

      (vi)  A local authority

    (vii) Every artificial juridical person, not falling within any of the preceding sub-clauses.

Gross total income [Sec 14]

Gross total income refers to the sum total of five heads of income such as salary, house property, business or profession, capital gain and other sources.

                             Income from salary                                         xxxx

                             Income from house property                      xxxx

                             Income from business or profession        xxxx

                             Income from capital gains                            xxxx

                             Income from other sources                          xxxx

                             Gross total income                                            xxxx

Total Income

The excess of gross total income after allowing deductions under Sec 80 is termed as Total Income.

                             Gross total Income                           xxxxx

                              Less: deduction u/s 80                    xxxxx

                             Total Income                                       xxxxx

Agriculture Income [Sec 2(1A)]

Agricultural income refers to any income refers to any rent or revenue derived from land, which is situated in India and used for agricultural purpose and any income from a farm house. Since agriculture is a state subject, the central government can not impose tax on agricultural income. Therefore it is exempt from tax u/s 10(1). For treating an income as agricultural income it should satisfy the following conditions.

  1. Land must be situated in India. The agricultural land must situate within India. Income received from agricultural land situated outside India is taxable.
  2. Income must be derived from land There must be direct and positive relationship between the land and the income. The land must be the immediate source of income and not the secondary source.
  3. Land must be used for agricultural purpose Agriculture means field cultivation. Cultivation involves some basic operation. If the basic operations are performed, only then the income is considered as agriculture income.

Features of Income:

                The following are the main features of income

  1. Income must come from a definite source in order to get it taxed
  2. Income must come from outside. In other words self generated income cannot be taxed
  3. Legal as well as illegal income is taxed
  4. It is not necessary that income should be in the form of money, it can also be in the from of kind.
  5. Income earned may be temporary or permanent
  6. If income is collected and distributed then that income will be taxable.
  7. Any loss is also included under the concept of income
  8. In case of any disput regarding the title of the income, the beneficiary will be taxed

Accelerated Assessment

                Generally the income of the previous year is taxable in the assessment year. But in certain cases the income of the previous year is taxable in the same year. It is called accelerated assessment. The following are the situations in which accelerated assessment is made

  1. Income of a non resident from shipping business at a port in India is taxable in the year of earning itself.
  2. Income of a person, who is leaving India in any previous year with intention of not returning to India in the near future, will be assessed in such year itself.
  3. Income of an AOP or BOI formed for a short duration shall be chargeable to tax in the year in which it is dissolved.
  4. If an assessee is likely to transfer his property to avoid tax, the total income of such transfer took place.
  5. The income of discontinued business/profession will be taxed in the year in which such business or profession is discontinued.

Tax Rates [applicable for the AY 2011-2012]

  1. For Individual, HUF,AOP,BOI and artificial juridical person
Net income % of tax
Up to first 1,60,000 Nil
Rs.1,60,001-5,00,000 10%
Rs.5,00,001-8,00,000 20%
Rs.8,00,001 and above 30%
  1. For Resident women [ below the age of 65 years at any time during the PY]
Net income % of tax
Up to first 1,90,000 Nil
Rs.1,90,001-5,00,000 10%
Rs.5,00,001-8,00,000 20%
Rs.8,00,001 and above 30%
  1. For Senior citizens [ 65 years of age or more at any time during the PY]
Net income % of tax
Up to first 2,40,000 Nil
Rs.2,40,001-5,00,000 10%
Rs.5,00,001-8,00,000 20%
Rs.8,00,001 and above 30%

Education cess @3% is to be calculated on the tax amount for all assessees

4.    For firms

Firm is taxed @ 30%
Education cess @3% is to be calculated on the tax amount after charging surcharge if any

5.    For companies

Domestic companies are taxed @ 30%
Foreign companies:

  • For for royaly received from govt/ or other agreement made with govt. @40%
  • Other income @50%

Surcharge@ 7.5 % is to be calculated in the income tax to domestic company and 2.5% to foreign company if the net income exceeds Rs.1 crore.

Education cess @3% is to be calculated on the tax amount after charging surcharge if any


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