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Semester 5: Income Tax Law and Practice I
Basic Concepts of Income Tax: Assessee, Assessment Year, Previous Year
Basic Concepts of Income Tax
Assessee
An assessee refers to an individual or entity who is liable to pay income tax. The term encompasses a broad range of taxpayers including individuals, companies, firms, and organizations. The classification of an assessee can be based on residential status, income category, and the nature of the taxpayer.
Assessment Year
The assessment year is the period of twelve months starting from April 1st to March 31st of the following year. It is the year in which the income earned during the previous year is assessed and taxed. For example, if income is earned in the financial year 2022-23, the assessment year would be 2023-24.
Previous Year
The previous year is the financial year in which income is earned by the taxpayer before it is assessed in the following assessment year. The previous year runs from April 1st to March 31st. Understanding the distinction between previous year and assessment year is crucial for filing income tax returns and determining tax liability.
Residential Status and Incidence of Tax
Definition of Residential Status
Residential status determines the taxability of an individual or entity in a particular jurisdiction. It is typically based on physical presence in that jurisdiction during the previous year or prior years.
Types of Residential Status
There are generally three types of residential status for individuals: resident, non-resident, and resident but not ordinarily resident. Each type has different implications for tax liability.
Criteria for Determining Residential Status
The criteria vary by jurisdiction but often include the number of days spent in the country during the current year and previous years. For instance, in many tax systems, being present for 180 days or more during the financial year may qualify an individual as a resident.
Tax Implications of Residential Status
The residential status significantly affects an individual's tax obligations. Residents are typically taxed on their worldwide income, while non-residents may only be taxed on income sourced within the country.
Documentation and Reporting
Individuals may need to provide documentation to substantiate their residential status, which could include travel history, immigration status, and evidence of living arrangements.
Changes in Residential Status
Changes in an individual's residential status can occur due to various factors, such as relocation for work or studying abroad, which may lead to changes in tax responsibility.
Income from Salary
Income from Salary
Definition of Salary
Income from salary refers to the compensation received by individuals from their employers for services rendered in employment. It is typically fixed and paid at regular intervals, such as monthly.
Components of Salary
Salary can include various components such as basic pay, allowances (e.g., house rent allowance, dearness allowance), bonuses, and other benefits. Each component may have tax implications.
Taxability of Salary
Under income tax law, salary income is chargeable to tax under the head 'Income from Salary'. The entire salary received during the financial year is subject to tax, except for certain exemptions under specific sections of the Income Tax Act.
Deductions from Salary
Certain deductions can be claimed from salary income, such as deductions under sections 80C (investments in specified savings schemes), 80D (health insurance premiums), and others. These can help in reducing the taxable income.
Tax Calculation for Salary Income
The tax liability is calculated based on the total salary earned after deducting exemptions and allowable deductions. The applicable income tax slab rates are then applied to determine the total tax payable.
Employer's Responsibilities
Employers are responsible for deducting tax at source (TDS) from salary payments. They must comply with the provisions of the Income Tax Act and provide Form 16 to employees as a certificate of tax deducted.
Impact of Salary on Tax Planning
Income from salary plays a crucial role in tax planning. Individuals should analyze their salary structure and utilize exemptions and deductions effectively to minimize tax liability.
Income from House Property
Income from House Property
Definition
Income from house property refers to the rental income received by an individual or entity from property that is owned. This income must be assessed under the income tax laws.
Chargeability
According to the Income Tax Act, any income derived from house property is chargeable to tax under the head 'Income from House Property'. This includes properties that are rented out as well as deemed income for owner-occupied properties.
Types of Properties
Properties can be classified into residential house properties and commercial properties. Both types can generate income, which is taxable.
Calculation of Income
To calculate income from house property, the formula is Gross Annual Value (GAV) minus the deductions allowed. The GAV is the higher of the actual rent received or the fair market value.
Deductions
Under the Income Tax Act, deductions can be claimed for municipal taxes paid and for interest on loans taken to purchase or construct the property. A standard deduction of 30% on the net income is also allowed.
Deemed Income
If an individual has more than one house property and does not rent them out, one property may be treated as a self-occupied property. The other properties, if not rented, will still be considered for tax under deemed income.
Exemptions
Certain exemptions may apply, such as for a property used for business purposes or properties in the nature of agricultural land under specified conditions.
Relevant Provisions
Key provisions of the tax laws regarding income from house property are detailed in Section 22 to Section 27 of the Income Tax Act.
Income from Business or Profession
Income from Business or Profession
Definition and Scope
Income from business or profession refers to the profits earned by an individual or entity through commercial activities or professional services. It encompasses all earnings realized from the operation of a business or the practice of a profession.
Types of Income
This category of income includes various forms of earnings such as profits from trade, fees received from services rendered, commissions, and income from investments directly related to the business.
Tax Implications
Income from business or profession is subject to taxation under the Income Tax Act. Taxpayers must report their income and, after considering deductible expenses, will calculate their taxable income.
Allowable Deductions
Certain expenses incurred in the normal course of business or profession may be deducted from taxable income. These may include rent, salaries, utilities, and other operating costs.
Filing Requirements
Taxpayers are required to maintain accurate records of their income and expenses. Filing an income tax return is mandatory, and specific forms must be used depending on the type of business or profession.
Special Provisions
Certain businesses may qualify for special tax provisions, such as lower tax rates, exemptions, or other incentives intended to encourage business growth and compliance.
