The Income Tax Act

India’s earliest known Income Tax Act has been practiced since 1922. The Act has undergone several changes and amendments to the current version we have today. The most important administrative and structural change to the Income Tax Act happened in the year 1961. It was in this year that the Income Tax Act 1961 was brought into effect. It came into existence on 1st April, 1961. The Income-Tax Act, 1961 is India's evolving Income Tax Law. It makes provision for administration, collection and recovery of Income Tax levy.

What is income tax?

Income tax in India is a tax based on your income (and profit, in the case of companies) that you pay to the government. The Government uses this tax money for various purposes including, among other options, public services, infrastructure development, defence spending and subsidies. If you earn income beyond a certain limit, paying income tax is obligatory each year.

Income Tax Act 1961

The Income Tax Act is a comprehensive legislation which focuses on the country's various rules and regulations governing taxation. It provides for the Indian Government to levy, administer, raise and recover income tax. It came into effect in 1961.

According to the Indian Income Tax Department's official website, the Income Tax Act contains 23 chapters and 298 sections in total. Such different sections deal with various aspects of Indian taxation. The various headings under which you are expected to pay income tax include:

• Salary
• Income from house property
• Capital gains
• Profit and gains from business or profession
• Income from other sources

Income Tax Rules 1962

​​​​The Income Tax Rules serve as an addition to the Income Tax Act, 1961. The Income Tax Rules came into effect as of 1 April, 1962. The Central Board of Direct Taxes (CBDT) has the power to change the laws governing income tax. Section 10(13A)(1) of the Income Tax Act, for example, states that the house rent allowance can be exempted up to a certain amount. Rule 2A lays out how the exemptions may be measured under income tax laws.

The Finance Act

Every year, India's Finance Minister tables a Finance Bill proposing changes to direct and indirect taxes. As both Parliament houses pass the bill, it gets approval from India 's President and becomes the Finance Act. Such changes will become part of the Income Tax Act, and will usually be implemented from the first day of the next financial year.

The Finance Act consists of four parts:

Part I: Determines the rate at which income tax is imposed on various types of income during a financial year.

Part II: It determines the rate at which tax at source will be deducted during the financial year.

Part III: It points out the increases in income tax rates, i.e. the rate of taxes paid under the head of salary and the rate of advance tax assessment for a financial year.

Part IV: It explains the rules in this section for calculating agricultural profits.

Who are income taxpayers in India?

Every Indian citizen has to pay income tax if their annual income is above Rs. 2.5 lakhs (Rs. 3 lakhs for senior citizens). In addition to individuals, entities such as Hindu Undivided Family (HUF), Body of Individuals (BOI), corporate firms, companies, Artificial Juridical Persons, local authorities and Association of Persons (AOP) also pay income tax.

57.8 million individuals filed returns for their FY19 income. A total of 43.2 million individuals disclosed income up to Rs.5 lakhs but are not liable to pay taxes since they are exempt under Finance Act 2019. This leaves only around 14.6 million individual taxpayers liable to pay income-tax.

Key Components of the Income Tax Acts & Laws in India

The Income Tax Act, 1961: The Indian Tax System is governed by the 1961 Income Tax Act. This specifies Income Tax levy, collection, and recovery. It consists of 298 parts and XIV schedules, which change with the additions and deletions introduced by the Annual Finance Act.

Annual Finance Act: Each year, the Finance Minister presents a budget to the Indian Parliament. This budget contains the proposed commercial taxation policies. In Parliament, a finance bill is presented comprising all of the measures. This bill, once approved by Parliament and the President of India, is converted into the Finance Act.

Income Tax Rules, 1962: The Central Board of Direct Taxes (CBDT) regulates the country's direct taxes effectively enforced and controlled. The CBDT establishes basic rules for the effective management of the Income Tax Act’s intents & purpose. Such laws are referred to as the Income Tax Rules, 1962.

Judicial (Case Laws): Studying the Judicial Laws is very important for a full comprehension of the Income Tax Act. Judicial laws provide for rulings on certain issues which can occur when the Income Tax Act is applied. The Supreme Court is the country's first court, and its decisions are final and followed.

Circulars & Notifications: The CBDT issues circulars to clarify any questions concerning the provision of the Act. Such circulars have the primary function of providing information to the assessee and the officers. It bounds the department, whereas the assessee is able to take advantage of the circulars because they are not bound.

End Note: The Income Tax Acts aims at eliciting the different laws and rules pertaining to the income tax deducted on an individuals’ income earned during a financial year. It is the duty of every citizen to abide by these laws and pay tax accordingly.

FAQs

End Note:

The income tax act in India is a comprehensive rulebook that guides income tax regulations in the country. It helps each taxpayer better understand the various aspects of taxation in India.