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The Income Tax Act ("the Act") enjoys the dubious distinction of
being the law which has witnessed the highest number of amendments
being made to it. It must perhaps be the world's most amended
legislation, it having been amended more than 3500 times in 35 years!
This makes it a very complicated and haphazard law, resulting in
thousands of man-hours of tax-payers and tax-gatherers being wasted
every year to interpret the law. We have tried to explain the basics of the Act here, in a non-technical language. For any advanced topic, the author could be Contacted with specific queries at tejinder.rawal@team.indiainfo.com.The reply shall be given through the query section.
Assessment:
The Act provides a mechanism for computing the tax
relating to the income of an assessee pertaining to an assessment
year. Such computation is made after allowing various deductions,
exemptions, and rebates to the assessee, and is called assessment.
Assessment year is the year in which the income of the previous year is to be assessed to tax. Got more confused? An illustration will
clarify the matter. Income of the Financial Year 1997-98 will be
assessed to tax in the assessment year 1998-99, that is to say , the
rates of Assessment year 1998-99, will be applied to income of the
Financial year 1997-98. Incidentally, Financial Year is referred to as
the Previous Year in the Act.
Assessee is a person by whom any tax or any other sum of money is
payable under the Act. The assessee could be any of the following:
- An Individual:
- A Hindu Undivided Family ( HUF ), which is a type of assessee
recognised under the Act, consisting of all persons lineally descended
from a common ancestor and deriving income from joint family corpus.
Hindu, Jain , Buddhist, and Sikh families have been so recognised.
- A Company
- A Firm
- An Association of Persons or a Body of Individuals
- Artificial Juridical Person, e.g. a Hindu deity
Residential status of an assessee: To know the residential status of an assessee as per the Act is very important, because the taxability
of an income in the hands of an assessee depends upon his residential
status. It may be noted that being a Non-resident under other laws
does not automatically make one a Non-resident under the Act. The
status for the purpose of taxability is determined as per the provisions of this Act. Based on the residential status the assessees could be classified as under:
Residence In India
Resident &
ordinarily a resident |
Resident but not ordinarily a resident | Non-resident |
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BASIC CONDITIONS
- Presence for more than 182 days in India during the year
OR
- Presence in India of more then 60 days during the year AND more than 365 days during the previous 4 years
- This period is extended to 182 days in case of persons leaving India during the year for employment abroad
ADDITIONAL CONDITIONS
- he should satisfy one of the above two basic conditions in 9 out of 10 preceding years
AND
- he should be present for 730 days in India in the 7 preceding years
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An individual who satisfy one or more of the two basic conditions, but does not satisfy the two additional conditions is treated as a Resident but not ordinarily a resident.
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A person who does not satisfy any of the basic conditions becomes a Non-resident
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This must be enough to give you an idea about how confusing
our laws can be!
Similar rules have been laid down for the residential status of HUF's,
Firms and Companies also.
The determination of residential status is of utmost importance,
because, as I said earlier, it helps you determine the taxability of
certain incomes. Special concessional provisions have been made for
the taxability of Non-residents. Refer to Investment income info for NRIs
for the details.
Income of certain other persons is deemed to be the assessee's income
and clubbed with his income. For example, income of spouse derived by
way of remuneration from a concern where the assessee has a
substantial interest, is clubbed with his income. Similarly, income of
minor children is clubbed with the income of the parent who has the
higher income. Don't tell me it is illogical : logic sometimes has no
concern in our laws!
Total Income of an assessee is calculated as under:
- Income of the assessee is computed under the following heads:
- Income from Salaries
- Income from House Property
- Profits or gains of Business or Profession
- Capital gains
- Income from other sources
- Income exempt from tax is reduced from other income. The Act gives
a list of Income which are considered exempt from tax. It is a long
list, which one is advised to go through before proceeding to compute
the income. An example of such exemptions is the exemption pertaining
to agriculture income.
- Deductions allowable under the Act are allowed from the above
figure. Deductions are allowed from certain incomes and for certain
assessees. An example of such deductions is the deduction from bank
interest earned by the assessees.
- Tax is calculated on figure arrived at Para 3.
- From the tax so calculated, rebates regarding investments made in
Government savings like LIC, National Savings Certificates, Provident
Funds etc., and rebate for Senior Citizens and other eligible rebate
is given.
- The balance amount is the amount of tax payable. This is reduced
by the amount of tax paid as Advance Tax and Tax Deducted at Source ,
to arrive at the net tax payable.
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