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Income Tax Act

The Indian Income Tax Act was enacted in the year 1961. It essentially is the decree under which every aspect related to tax across the nation is listed, including collection, administration, recovery, and levy of income tax. Income Tax Act of India aims to majorly consolidate and modify the rules related to taxation in the nation.

The government had introduced a draft statute, also referred to as "Direct Taxes Code," to replace the Indian Income Tax Act 1961 and the Wealth Tax 1957, but it was later dismissed as the Wealth Tax Act went on to be revoked.

The prime aim behind levying income tax was to finance the diverse operations of the government, such as finding developmental activities, defence efforts, and building infrastructure. As per the Indian Income-tax Act 1961, all the following parties that are liable to pay income tax provided their annual income falls into one of the income slabs as prescribed in the Act: 

  • Individual
  • Hindu Undivided Families (HUFs)
  • Companies
  • Association of persons
  • Body of individuals 
  • Local authority

Income tax is levied annually, at the end of every financial year (April – March).

Chapters of the Indian Income Tax Act

The Indian Income-tax Act 1961 features a long list of sections, each of them dealing with diverse aspects of taxation in the nation. The following table mentions each of the chapters of the Indian Income Tax Act, their related sections, and subsections.

Chapters Details
Chapter I The very 1st section of the Income Tax Act largely introduces the Indian Income Tax Act 1961 and gives a fundamental idea about it. 
Chapter II The 2nd chapter discusses the foundation, as well as the degree of the Act.
Chapter III The 3rd chapter of the Indian Income Tax Act 1961 deals with the charge of income tax, the scope of total income, dividend income as well as and income that arises due to working out of India, etc.
Chapter IV The 4th chapter mentions the diverse types of income that do not come under the full amount of income of a person. This includes the incomes that come from institutions, property, trusts and even the incomes of political groups.
Chapter V The 5th chapter of the Indian Income Tax Act 1961 talks about the incomes of any other person that forms the portion of the income of the assessee. This would be comprised of the income coming from capital gains, from businesses and house property, and so on.
Chapter VI The 6th chapter discusses the transfer of income in the scenario when there is no real transfer of any assets. These transactions tend to include both transfers and revocable transfers.
Chapter VII  In this chapter of the Indian Income Tax Act 1961, people can find detailed information about the various deductions that would have been applied to particular incomes, and even payments. 
Chapter VIII Both the rebates and share of a member in a certain body or associated are elaborated in this chapter.
Chapter IX In this chapter, the aspect of double taxation relief and how it is dealt with is explained.
Chapter X The special provisions, where payment of income tax is avoided, have been mentioned in the 10th chapter. This tends to include agreements with various foreign nations, as well as information about the countries with which there is no conformity on tax payments.
Chapter XA   The 11th chapter of Income Tax Act 1961 lists all the typical anti-avoidance regulations that are relevant for income tax.
Chapter XII The calculations of tax, in particular special cases, are highlighted in the 12th chapter of the Income Tax Act 1961.
Chapter XIIA This major section of the Indian Income Tax Act 1961 highlights special provisions for incomes that are earned by Indians who are not the residents of the country. This would include many policy scheme options. This chapter features sections 110 to the section of 115BBE. The various sections coming under this chapter points out the diverse types of taxes that are applied to incomes from distinguished exquisite cases, like from royalty, foreign currency units, dividends, and so on. 
Chapter XIIB This chapter mentions the tax provisions that apply to particular companies.  This chapter additionally includes sections 115J to section 115JF. 
Chapter XIIBB This chapter points out the taxation process involved in converting a foreign firm to ultimately an Indian subsidiary.
Chapter XIID This chapter talks about the tax procedure for profits that are made by firms based in India. The interest payable by these firms in case they fail to make their tax payments is also featured under this section.
Chapter XIIDA This section underlines the regulations involved for tax on the distributed income of a firm.
Chapter XIIE This chapter talks about the tax involved in the distributed income of unit holders. 
Chapter XIIF This section deals with the tax on income that is acquired from venture capital firms or venture capital funds are highlighted.
Chapter XIIG Special provisions concerning the taxation of shipping companies are pointed out in this section.
Chapter XIII This chapter of the Indian Income Tax Act 1961 provides detailed information about Income Tax authorities, including their appointment and control, their powers and disclosure of information, as well as their jurisdiction.
Chapter XIV Chapter XIV of the Indian Income Tax Act 1961 features a long list of sections, right from section 139 to section 152. This chapter involves the return filing formalities, including the elements of obtaining PAN to filing returns online to methods of accounting. This Income Tax Act chapter also features other amendments, the rectification of mistakes, and even intimation of loss and other related cases. 
Chapter XIVA This chapter mentions the provisions that are involved in avoiding the cases of repetitive appeals, like the ones that are still pending in the High court or Supreme Court.
Chapter XV The 15th chapter of the Indian Income Tax Act 1961 mentions the liabilities for every case, general and special provisions, recovery of tax from non-resident Indians, private companies, and so on.
Chapter XVI The 16th chapter of the Income Tax Act is meant for commercial organizations and their assessment and taxation process. It also underlines the changes involved in their constitution, succession, and their dissolution procedure. 
Chapter XVII In the 17th chapter of Income Tax Act, 1961, one can find the clauses for the collection and recovery of tax. It even points out the interest charged on late payment of taxes or in cases where recovery is made.
Chapter XVIII In the 18th chapter of Income Tax Act 1961, income tax relief to firms provided due to the fact they pay dividends to their shareholders are highlighted. Relief given to firms in terms of tax for being involved in charitable work through their foundation wings is also dealt with here.
Chapter XIX In the 19th chapter of Income Tax Act 1961, the refunds about taxes in the scenario that more tax is paid to the IT department are highlighted. Cases, where an individual is eligible to acquire a refund, as well as the correctness of assessment and interest on refund when there is no claim made, are also discussed here.
Chapter XIXA The chapter deals with case settlements. Income Tax Sections 245A to 245L fall in this chapter, and it features all settlement aspects like procedure, application, recovery of sums, abatement of proceeding, and so on.
Chapter XIXB All advance rulings tend to come under the purview of this chapter, and it features section 245N to 245V. The application for the procedure, powers of authority, advance ruling, and other related topics are highlighted in this chapter.
Chapter XX Under this chapter, appeals made to deputy commissioners and commissioners are discussed. This 20th chapter includes the appeals made to the Supreme Court, High Court, and even the general aspects of revision by the commissioner.
Chapter XXA This chapter of Income Tax Act 1961 features sections 269A to 269S and majorly deals with the acquisition of immovable properties in certain cases to the aspects of counteracts tax evasion. This chapter covers all the aspects of acquisition, including the jurisdiction of the same.
Chapter XXB In this chapter of the Income Tax Act 1961, the modes of payment in the scenarios where correction of tax evasion is required are mentioned. It particularly deals with the taking and accepting of loans and deposits for the same, as well as their corresponding modes.
Chapter XXC This chapter of Income Tax Act 1961 deals with the purchase of immovable properties that are made by the central government in the scenarios of the transfer. The diverse elements covered under this chapter include appropriate authority, the rectification of mistakes, restrictions on the property, vesting of property, and so on. 
Chapter XXI The sections 271 to 275 are featured under the 21st chapter of Income Tax Act 1961, and it points out all penalties that apply to diverse taxpayers in the event of distinguished cases. This pertains to all kinds of penalties, such as those for non-disclosure, for non-payment of taxes, for failure to comply with various provisions of the section, and so on.
Chapter XXII Section 275A to section 280D are included under the 22nd chapter of Income Tax Act, and it largely talks about prosecution and offences for a compliance failure, as well as other details about how the prosecution process shall be taken forward.
Chapter XXIII Sections 281 to 298 come under the purview of the 23rd chapter of Income Tax Act 1961. It covers just about all the miscellaneous topics that cannot be put under any of the specific tax chapters that have been mentioned above. Both generic and special cases that may arise to the taxation process for distinguished taxpaying entities are included in the last chapter of the Indian Income Tax Act.

Role of Income Tax Act 

Passed in the year of 1961, the Income Tax Act of India handles all income tax provisions, as well as tax deductions that might be applicable.  Ever since its introduction, there have been multiple changes to the law made due to economic situations and inflation.

The Indian Income Tax Act 1961 was created to administer and govern income tax in the nation. The Indian Income Tax Rules 1962 was subsequently created to help the application, and enforcement for the law constituted in the Act. Apart from this, the Indian Income Tax Rules can only be read in conjunction with the Income Tax Act. Income Tax Rules subsequently fall within the framework of the Income Tax Act, and they are not allowed to override its provisions.

Under the Income Tax Act, every person, whose income is more than the maximum limit of exemption, will be charged income tax at the rate prescribed in the Finance Act. This income tax shall be paid on the total income of the previous year in the relevant assessment year. 

 Assessment year is 12 months that starts from the 1st day of April every year and ends on the 31st day of March of the next year. While there is no specific definition of the term, income as per section 2(24) of Income Tax Act includes the salary, income from house property, profits and gains of business and profession, capital gains, as well as income from other sources.

Income Tax Based on the New Union Budget 

The finance budget is presented in February every each by the Indian Government.  This budget brings in diverse amendments to the Income Tax Act, including changes in tax slabs wherever applicable. 

The Union Budget of India was announced on the 1st of February in 2020. According to the new budget, Finance Minister Nirmala Sitharaman has announced a brand new regime for income tax. This new income tax regime is, however, optional. The taxpayers may choose to pay their taxes as per the new plan option or file their taxes according to the old regime. People can typically compare online the differences between these two regimes, and select the one that they find the most feasible. 

New Slab for individuals for the Financial Year 2020-2021

Income Tax Slab Tax Rate
Up to INR.2.5 Lakh Nil
From INR 2,50,001 to INR 5 Lakh 5% of the total income, which is beyond the sum of INR 2.5 Lakh + 4% cess
From INR.5,00,001 to INR 7,50,000 10% of the total income, which is beyond the sum of INR 5 Lakh + 4% cess
From INR.7,50,001 to INR  10,00,000 15% of the total income, which is beyond the sum of INR 7.5 Lakh + 4% cess
From INR.10,00,001 to INR 12,50,000  20% of the total income, which is beyond the sum of INR 10 Lakh + 4% cess
From INR.12,50,001 to INR 15,00,000 25% of the total income, which is beyond the sum of INR 12.5 Lakh + 4% cess
Income above INR 15,00,001 30% of the total income, which is beyond the sum of INR15 Lakh + 4% cess

The example given below shows the calculations of the payable tax sum of a person who earns Rs 12.50 Lakh in a year and files his/her taxes according to the new income tax regime.

Computation of Tax on the Total Gross Income

The mentioned figures are indicative, and the rates of tax are optional:

Components Amount (Rs)
Annual Salary (Rs.) 12.50 Lakh

Computation of Tax on the Total Gross Income

Up to INR 2.5 Lakh Nil
INR 2,50,001 to INR 5 Lakh – 5% INR 12,500
INR 5,00,001 to INR 7.5 Lakh – 10% INR 25,000
INR 7,50,001 to INR 10L – 15% INR 37,500
INR 10,00,001 to INR.12.5 Lakh – 20% INR 50,000
Total Tax Amount INR 1.25 Lakh
Additional Cess (4%) INR 5,000
The total payable tax amount INR 1.30 Lakh

Existing Income Tax Slabs for FY 2020 - 21 (Alternative)

The income earned by people will decide income tax slabs under which they fall. The lower the income earned by people, the lower shall be their tax liability. People earning lesser than Rs 2.5 Lakh p.a. are additionally exempted from taxes. According to the Indian Income Tax Act, there are three categories under which individual resident taxpayers are divided, based on their age:

  • Individuals who are less than the age of 60 years old
  • Senior citizens who are above 60 years old and below 80 years of age
  • Super senior citizens who are above 80 years old

The slab for individuals who are less than 60 years old:

Income Tax Slab Tax Rate
Up to Rs 2.5 Lakh  Nil
Rs 2.5 Lakh to Rs 5 Lakh  5% of the sum going beyond Rs 2.5 Lakh
Rs 5 Lakh to Rs 10 Lakh Rs 12,500 + 20% of the sum going beyond Rs 5 Lakh
More than Rs 10 Lakh Rs 1,12,500 + 30% of the sum going beyond Rs 10 Lakh

The slab for individuals above the age of 60 and below 80 years:

Income Tax Slab Tax Rate
Up to Rs 3 Lakh  Nil
Rs 3 Lakh to Rs 5 Lakh 5% of the sum going beyond Rs 3 Lakh
Rs 5 Lakh to Rs 10 Lakh  20% of the sum going beyond Rs 5 Lakh
More than Rs 10 Lakh  30% of the sum going beyond Rs 10 Lakh

The slab for people above 80 years:

Income Tax Slab Tax Rate
Up to Rs 5 Lakh Nil
Rs 5 Lakh to Rs 10 Lakh 20% of the sum going beyond Rs 5 Lakh
More than Rs 10 Lakh 30% of the sum going beyond Rs 10 Lakh

*An additional cess of 4% will apply to the tax amount calculated above. 

Income tax is only of the direct means of taxation in the nation, such as securities taxation, capital gains tax, and so on. Indirect taxes include service tax, VAT, sales tax, etc.

Online Tax Payments

Income tax can be paid directly with the help of the e-payment facility. To avail of this facility, however, people would have to have a net-banking account with an authorized bank. They would need Permanent Account Number (PAN) or Tax Deduction and Collection Number (TAN) for validation as well.

How to file Income Tax Returns?

People can easily file their income tax returns online through the website of the Income Tax department of India. Taxpayers can make their income tax payment, TDS/TCS payments, and even non-TDS/TCS payments online. But before doing so, they have to fill up all the relevant details required. They need to have the Form 16, provided by their employer, or any other proof of investment. Once they have all the documents ready, they can easily start the filing process online at the https://incometaxindiaefiling.gov.in. 

Income Tax Returns Forms

Depending on their income assessment group, people would have to submit one of the ITR forms listed below when filing their ITR returns:

ITR Form Name Description
ITR-1 For people who have income from sources like interest, house property, as well as salaries
ITR-2 For Individuals and Hindu Undivided Families who do not have an Income from Business or Profession
ITR-2A For Individuals and Hindu Undivided Families who do not have an Income Business, Profession, or Capital Gains, as well as do not hold any kind of foreign assets
ITR-3 For Individuals/ Hindu Undivided Families being partners in companies and not carrying out business or profession under any type of proprietorship
ITR-4 For individuals and Hindu Undivided Families having income from any type of proprietary business or profession
ITR-4S Presumptive business income tax return
ITR-5 For persons other than - 
  • Individual
  • company 
  • HUF
  • a person filing Form ITR-7
ITR-6 For Companies excepting from the ones claiming exemption under section 11
ITR-7 For persons, including companies who are required to furnish return under sections 139(4A) , 139(4B) , 139(4C) , 139(4D) , 139(4E) or 139(4F)
ITR-V The acknowledgement form of filing a return of income

Existing Deductions under the Income Tax Act 

According to the Indian Income Tax Act 1961, you can claim deductions under the following sections:

  • Section 80C to 80: Under Section 80C, and& 80CCD of the Indian Income Tax Act 1961, people can reduce their taxable income by 1, 50,000.
  • Section 80CCD:  This section of the Indian Income Tax Act focuses on income tax deductions that individual assesses are eligible to avail on contributions made towards the Atal Pension Yojana (APY) and New Pension Scheme (NPS).
  • Section 80D: Under this section of the Indian Income Tax Act, people can claim tax deductions for medical expenses, as well as under section 80D; you can claim an income tax deduction for medical expenses and health insurance policy option premiums.
  • Section 80DD: Tax deduction under this section of the Indian Income Tax Act 1961 can be claimed by individuals who are residents of India for medical treatment of a dependant with disability (ies)
  • Section 80DDB: Tax deductions under this section for the Indian Income Tax Act 1961 can be claimed due to medical expenses incurred for medical treatment of specific illnesses. 
  • Section 80TTA:  This section of the Indian Income Tax Act provides a deduction of Rs 10,000 on interest income to individuals and HUF.
  • Section 80U: Physically disabled persons can claim deductions up to Rs 1 Lakh under this section of the Indian Income Tax Act. 

Income Tax Saving Investments

People can avail of great deduction on tax by declaring their diverse investments, right from ELSS Tax Saving Mutual Funds and National Savings Certificate to life insurance policy option premiums and HRA. The following options are considered for income tax savings: 

  1. Investment Options

    Mutual funds like Equity Linked Savings Schemes (ELSS) might be claimed for tax deduction under Section 80C of the Indian Income Tax Act. In comparison to plan options like PPFs and fixed deposits, the ELSS tend to offer a much shorter lock-in period, while also providing much more benefits when it comes to making money. Unit Linked Insurance Plans (ULIP) are policy schemes that are linked to the market, and the investments made under it qualifies for tax deductions.

  2. Insurance

    The money paid towards health insurance and life insurance policies scheme is considered tax deductions under Section 80C of the Indian Income Tax Act. 

  3. Loans

    People would be eligible for tax deductions up to the amount of Rs 1.5 Lakh for a single financial year as they take up a loan for buying a house or for renovation purposes

    People may also consider the options mentioned in the points given below to reduce the tax amount on their income:

    Fixed Deposits (FD)

    A fixed deposit policy option having a lock-in period of five years can help people to earn interest on the deposited sum of money. People should also opt for such a plan renewal to save their taxes for a long period.

    National Saving Certificate

    NSC has been providing people with a safe and reliable method of investing money. People can easily deposit an amount like Rs.100 for a high lock-in period, including 5-10 years with NSC. All the investments made under the NSC are eligible for tax deductions.

    Provident Fund (PF)

    You can also opt to invest a superior sum towards their PF account to reduce their taxable amount.

    People can compare online options for investments that are mentioned above, and ultimately select the one that helps them to meet their financial goals while helping them to reduce the tax amount on their income. There are many websites available that can help people in an investment fund and policy comparison. 

Income Tax Calculator 

One can calculate income tax either manually, or opt for an income tax calculator option. The income tax rate applicable for individuals would depend on the tax slab to which they belong. For a salaried person, income from salary would ideally include basic income + Transportation Allowance + House Rent Allowance + Special Allowance (if applicable). There, however, are certain specific components of the salary that are tax accepted, like reimbursement of telephone bills, Leave Travel Allowance (LTA), and so on.  A person might also be eligible to claim tax exemption on HRA if they reside in the rented house. Many online income tax calculators help people to swiftly calculate the sum of tax they are liable to pay.  

FAQ's

  • Q: How does the Government collect Income-tax?

    Ans: There are three means through which the Government collects taxes, they are: 
    • By voluntary payment by taxpayers into diverse designated Banks. For example, Advance Tax and Self-Assessment Tax paid by the taxpayer
    • TDS - Taxes deducted at source from the income of the receive
    • TCS - Taxes collected at source 

    As per the Indian Income Tax Act, every earning person must compute the income and pay taxes.

  • Q: How would I know that the Government has received the amount deposited by me as taxes in the bank?

    Ans: The NSDL website [http://www.tin-nsdl.com] offers an online service known as the Challan Status Enquiry by which you can check the status of your tax payment. You may also check your tax credit by viewing Form 26AS from your e-filing account.
  • Q: Do I need to pay any tax on the maturity amount received from the life insurance scheme policies?

    Ans: Section 10(10D) of the Income Tax Act states that any amount you receive under a life insurance policy option, including bonus, is exempt from taxation if they satisfy the following conditions:
    • The insurance policies issued after 01.04.2003 but on or before 31.03.2012 should have an annual premium payable should be less than or equal to 20% of the actual sum insured. In this scenario, the actual sum insured is the minimum sum insured in all the policy years and does not comprise of premiums or bonuses.  
    • For the life insurance policy options issued on or after 01.04.2012, the premium payable for any policy year must be less than 10% of the actual sum insured.
Written By: Paisawiki - Updated: 12 April 2021