How Income Tax Is Calculated In India 2020

How Income Tax Is Calculated In India 2020

4 March, 2020

Income Tax Merriam Webster defines a tax as “a charge usually of money imposed by authority on persons or property for public purposes.” It is a compulsory contribution from an individual to the government to be used in meeting the expenses incurred in the common interest of the public.

income-tax

Types Of Taxes: Direct And Indirect Taxes

Taxes can be categorized according to their nature, aim and method of taxation.

Some economists differentiate direct taxes from indirect taxes based on the shifting of the ultimate burden of taxation. Thus, it can be said that a direct tax is a tax, the burden of which  is borne by the same person on whom it is levied. On the other hand, an indirect tax is a tax which is initially imposed on and paid by one individual, but the burden of which is passed on to another individual who ultimately pays the tax.

Direct and Indirect taxes can also be classified based on the income expenditure on which a tax is imposed. A direct tax is levied on the income and property of a person. For example, income tax, corporation tax, property tax, wealth tax, etc. An indirect tax is levied on the expenditure. Examples include Excise duty, sales tax, customs duties, etc.

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Types Of Direct Taxes

Corporate Tax

A corporate tax is a levy placed on a firm’s net profit by the government. The money collected from these taxes is used for a nation’s source of income. Such taxes can be imposed at a national level as well as on a state or local level.

 Income Tax

An income tax is a tax imposed by governments on income generated by businesses and individuals within their jurisdiction. These taxes are used to fund public services and are an important source of revenue for the government. They’re used to pay for government obligations and provide goods for citizens.

Capital Gains

This type of tax is levied on the sale of a property or money received through a short-term/long-term investment.

Securities Transaction Tax

This type of tax is levied upon the price of the share and securities traded on the Indian Stock Exchange.

Prerequisite Tax

These taxes are levied on the perks and benefits provided by a company to its employees.

Indirect Tax

Currently, there is only one indirect tax levied by the government of India. This is called the GST or the Goods and Services Tax. GST is a consumption tax that is levied on the supply of services and goods in India.

Other Taxes

  • Property tax– This type of tax is levied on the owners of the residential and commercial properties by the municipal bodies based in each city.
  • Professional tax– This tax is levied on people of certain professions like lawyers, chartered accountants, doctors, etc.
  • Entertainment tax– This tax is levied on movies, television series, exhibitions, etc.
  • Education Cess– This is levied to fund the educational programs launched and maintained by the government of India.
  • Road tax and toll tax– This tax is used for maintaining the roads and toll infrastructure
  • Entry tax– Entry tax is levied on the goods that enter a state through e-commerce establishments.

BASICS OF INCOME TAX

Are you going to file your income tax returns for the first time? Then do have a look at some of the basic aspects of income tax stated below:

  • Defining the previous year– The Previous/Financial year or your tax year is the 12 month period beginning on 1st April and ending on 31st March of the next year. So, it means that your tax year closes on 31st March and a new tax year starts on the 1st of April.
  • Assessment year– Assessment year is a common term in regards to tax filing. It is the current year in which you are going to assess and file your return for the previous year.
  • Understanding your salary– When you start a job, reach out to your HR department for your salary details/tax statement. You will be provided with an idea about the major components of your salary and how much tax would be exempted from your salary.

Incomes On Which You Pay Tax

  • Income from Salary
  • Income from House Property
  • Income from Capital Gains
  • Income from Business or Profession
  • Income from other sources such as income from bank deposits, family pension, etc.

Income Tax Department

The Income Tax Department is a government agency that undertakes the responsibility of the direct collection of tax in India. The operations of the department are handled by the Central Board for Direct Taxes (CBDT). The official website of the department provides various details for the public such as international taxation, tax law, rules, organizational setup, etc.

Income Tax Act

The Income Tax Act was enacted in the year 1961 and is a statute under which everything related to taxation is listed.

The chapters of the IT Act are as follows:

  • Chapter 1: This chapter gives a basic idea of the Income Tax Act.
  • Chapter 2: This chapter deals with the commencement and extent of the IT Act.
  • Chapter 3: This chapter deals with the income tax charges, the scope of total income, dividend income, income earned from working abroad, etc.
  • Chapter 4: This chapter talks about other forms of income that do not fall under the total income such as income from property, institutions, trusts, etc.
    ● Chapter 5: This chapter deals with income earned from other sources of income like income from businesses, capital gains, etc.
  • Chapter 6: This chapter deals with the transfer of income when there is no actual transfer of assets. It also includes a revocable transfer.
  • Chapter 7: This chapter is about the deductions that are applicable to certain payments and incomes.
  • Chapter 8: This chapter deals with the rebates and how much share a member would get in a body or association.
  • Chapter 9: This chapter talks about double taxation relief that helps the taxpayer to get a rebate on the income tax paid.
  • Chapter 10: This chapter talks about special provisions where income tax payment can be avoided. This includes an agreement with foreign countries and information about those countries that follow this kind of agreement.
  • Chapter 10A: This chapter states the different types of general anti-avoidance income tax rules for income taxpayers.
  • Chapter 12: This chapter deals with the tax calculation which falls under the criteria of special cases.
  • Chapter 12A: This chapter deals with the special provisions of income earned by the Non-Resident Indians. It includes capital gains, short-term capital gains, provident funds, etc. It also includes Section 110 to Section 115BBE of the income tax rules as per the IT Act, 1961.
    ● Chapter 12B: This chapter list down special tax provisions applicable to certain companies. It also includes Section 115J to Section 115JF of the Income Tax Act.
  • Chapter 12BB: This deals with the taxation process required for the conversion of a foreign company into an Indian Subsidiary.
  • Chapter 12D: It deals with the taxation process for the profits made by domestic companies. It also deals with the interest payable in case of non-payment of taxes by the companies or in the case of companies being defaulters.
  • Chapter 12DA: This chapter states the income tax rules on the distributed income of the company.
  • Chapter 12E: It lists down the rules meant for the distributed income of the unitholders.
  • Chapter 12F: It deals with the taxes on income received from venture capital funds and venture profit companies.
  • Chapter 12G: Deals with special provisions concerning taxation of the shipping companies.
  • Chapter 13: This chapter deals with information related to different income tax authorities which includes their jurisdiction, appointment, and control, their powers and disclosure of information.
  • Chapter 14: This contains Section 139 to Section 152. It deals with the formalities of return filing, from obtaining PAN to filing returns online to methods of accounting. It also includes other amendments, the rectification of mistakes, an intimation of loss and other cases.
  • Chapter 14A: This contains provisions for avoiding repetitive appeals like those which are pending in the High court or Supreme Court.
  • Chapter 15: This lays down liabilities for each case, all general and special provisions, recovery of tax from Non-resident Indians, private companies, etc.
  • Chapter 16: This chapter deals with the assessment and taxation processes of firms. It also deals with the changes in constitution, succession and their dissolution process.
  • Chapter 17: This list contains clauses for the collection and recovery of taxes. It also deals with the interest charged on late payment of taxes or in cases where recovery is made.
  • Chapter 18: Income tax relief is provided to the companies that pay dividends to their shareholders. Relief is also provided to those companies who are involved in charitable works.
  • Chapter 19: This deals with the refund of taxes in cases where additional tax is paid to the IT department. It involves cases where a taxpayer is eligible to get a refund, interest on the refunds if no claim is made and correctness of the assessment. It includes Section 237 to Section 245.
  • Chapter 19A: This chapter deals with the settlement of cases and includes section 245A to 245L. Aspects of settlements like application, abatement of proceeding, procedure, and recovery are covered.
  • Chapter 19B: Deals with advance rulings. It includes sections from 245N to 245V. It also includes an application for the power of authority, advance ruling and procedure.
  • Chapter 20: It deals with the appeal forwarded to the commissioner and deputy commissioner. Other than this, it also deals with the appeals made to the Supreme Court, High Court and other general revision aspects by the commissioner.
  • Chapter 20A: This chapter deals with the acquisition of immovable property in certain cases to counteract tax evasion. All aspects of acquisition are covered in this chapter. It also includes section 269A to section 269S.
  • Chapter 20B: This lists down modes of payment where correction of tax evasion is required. It also deals with the taking and accepting of loans and deposits for the same and their corresponding modes.
  • Chapter 20C: This deals with the purchase of immovable properties made by the central government in cases of transfer. Aspects like restrictions on the property, appropriate authority, rectification of mistakes and vesting of property are covered here.
  • Chapter 21: This includes sections 271 to 275 and lists down all penalties that apply to various taxpayers in the event of various cases. This includes all kinds of penalties such as those for non-disclosure, for non-payment of taxes, failure to comply with various provisions of the section, etc.
  • Chapter 22: It includes sections 275A to 280D. This chapter deals with prosecution and offenses concerning compliance failure, and details regarding how this prosecution process will be taken forward.
  • Chapter 23: This chapter covers almost all the miscellaneous topics that cannot be put under any of the specific tax chapters stated above. It includes sections 281 to 298 and also contains generic as well as special cases that may arise with concern to the taxation process for various taxpaying entities.

Income Tax Rules

The Income Tax Rules were created in 1962 to help in the application and enforcement of the law constituted in the Income Tax Act. The Income Tax Rules can only be read in concurrence with the Income Tax Act.

Income Tax Forms

Income tax forms are the official government documents that you need to fill out when you pay your taxes. Usually, the more complex your finances are the more tax you need to fill out. Each state and city create its own tax forms.

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What Is Form 15G And 15H?

Form 15G and Form 15H are the forms you can submit if you want to prevent TDS deduction on your income. Some banks allow you to fill these forms online through the bank’s website. Form 15H is for senior citizens, who are 60 years or older and Form 15G for is for everyone else. Both forms are valid for one financial year.

Conditions needed to fulfill to fill Form 15G:

  • Only Indian Residents can apply.
  • The applicant should be less than 60 years old.
  • The applicant should be a individual,HUF, trust or any other assessee but not a company.
  • Tax calculated on the applicant’s total income is nil.
  • The total interest income for the year is less than the basic exemption limit of that year.

Conditions needed to fulfill to fill Form 15H:

  • The applicant should be an Indian resident.
  • The applicant should be a senior citizen or should be turning 60 during the year you will submit the form
  • Tax calculated on the applicant’s total income is nil.