by In the context of income tax in India, the term “charge” has a different meaning than its financial transaction definition. In income tax, a charge refers to the imposition of tax liability on a person or entity for a particular financial year.
Some basics of charge in income tax in India:
- Types of charge: There are different types of charges under the Income Tax Act, such as income tax, surcharge, education cess, and interest. These charges are imposed on the taxable income of a person or entity.
- Chargeability: A charge under the Income Tax Act is generally based on the income earned or received by a person or entity during a financial year. The chargeability of income tax depends on various factors, such as the residential status of the person or entity, the type of income earned, and the applicable tax rates.
- Assessment year: The charge for income tax is imposed for a particular financial year, but it is assessed in the following year, which is known as the assessment year. For example, the charge for income tax for the financial year 2021-22 is assessed in the assessment year 2022-23.
- Filing of return: The person or entity on whom the charge for income tax is imposed is required to file an income tax return to report their income and tax liability for the financial year. The return should be filed within the due date specified by the Income Tax Department.
- Penalties: Failure to pay the charge for income tax or file the income tax return within the due date can attract penalties and interest charges under the Income Tax Act.
It is important for individuals and entities to understand the basics of charge in income tax in India and comply with the applicable tax laws and regulations. Seeking professional advice can help in effective tax planning and minimizing tax liability.
Scope of Total income
The scope of total income refers to the extent to which the Income Tax Act, 1961 covers different types of income, gains, or profits that are taxable under the act. The term ‘total income’ refers to the total amount of income on which tax liability is calculated, after taking into account various deductions, exemptions, and allowances provided under the act.
Here is a detailed explanation of the scope of total income under the Income Tax Act:
- Residential status: The scope of total income varies based on the residential status of the taxpayer. A resident taxpayer is taxed on his global income, i.e., income earned or accrued both in India and outside India, while a non-resident or resident but not ordinarily resident (RNOR) taxpayer is taxed only on income earned or accrued in India.
- Sources of income: The Income Tax Act covers different types of income under its scope, such as income from salary, income from house property, income from business or profession, capital gains, and income from other sources. The act specifies the rules and provisions for calculating the taxable income under each category.
- Tax-exempt income: Certain types of income are exempt from tax under the Income Tax Act, such as agricultural income, dividend income from Indian companies, long-term capital gains on specified assets, etc. The scope of total income excludes these types of income from the tax liability calculation.
- Deductions and allowances: The Income Tax Act provides various deductions and allowances that can be claimed by taxpayers to reduce their taxable income, such as deductions for investments in specified tax-saving instruments, deductions for expenses incurred for certain purposes, and allowances for specific professions. The scope of total income takes into account these deductions and allowances while calculating the tax liability.
- Tax treaties: India has signed tax treaties with various countries to avoid double taxation on the same income. The scope of total income considers the provisions of these treaties while calculating the tax liability of a taxpayer.
Residence and Tax liability
Residence and tax liability are closely linked under the Indian Income Tax Act, 1961. The residential status of a taxpayer determines the extent to which their global income is taxed in India. The Income Tax Act defines three categories of residential status for individuals, which are:
Resident: A person is considered a resident if they satisfy any one of the following conditions:
- They have been in India for 182 days or more in the relevant financial year, or
- They have been in India for 60 days or more in the relevant financial year and for a total of 365 days or more in the preceding four years.
Non-Resident: A person is considered a non-resident if they do not satisfy any of the above conditions.
Resident but not ordinarily resident (RNOR): A person is considered an RNOR if they satisfy any one of the following conditions:
- They have been a non-resident in India in nine out of the ten preceding financial years, or
- They have been in India for 729 days or less in the preceding seven financial years.
The tax liability of a person is based on their residential status. A resident taxpayer is taxed on their global income, which includes income earned in India as well as income earned outside India. A non-resident taxpayer is taxed only on income earned in India. An RNOR taxpayer is taxed on income earned in India and income earned outside India, but the tax liability is lower than that of a resident taxpayer.
The Income Tax Act also provides various tax exemptions, deductions, and credits based on the residential status of the taxpayer. It is important for taxpayers to determine their residential status correctly and comply with the applicable tax laws and regulations. Incorrect determination of residential status can result in penalties and interest charges under the Income Tax Act. Seeking professional advice can help in effective tax planning and compliance with the applicable tax laws and regulations.
Income which does not form part of total income
The Income Tax Act, 1961 provides for certain types of income which are exempt from tax and do not form part of the total income of the taxpayer. These incomes are not subject to tax, and no tax liability arises on such incomes. Here are some of the types of income that do not form part of the total income:
- Agricultural Income: Income earned from agricultural operations carried out in India is exempt from tax. However, if the taxpayer has non-agricultural income along with agricultural income, the non-agricultural income is taxable.
- Dividend Income: Dividend income received from Indian companies is exempt from tax under Section 10(34) of the Income Tax Act.
- Interest on PPF: Interest earned on Public Provident Fund (PPF) is exempt from tax.
- Long-Term Capital Gains: Long-term capital gains arising from the sale of equity shares and equity-oriented mutual funds are exempt from tax under Section 10(38) of the Income Tax Act.
- Gifts: Gifts received by an individual or a Hindu Undivided Family (HUF) from specified relatives or on occasions such as marriage or inheritance are exempt from tax.
- Scholarships: Scholarships granted to meet the cost of education are exempt from tax.
- Provident Fund Withdrawals: Withdrawals from a recognized provident fund, superannuation fund or approved gratuity fund are exempt from tax under certain conditions.
It is important to note that while the above-mentioned income does not form part of the total income, it may still be necessary to disclose it in the income tax return or other tax-related forms. Additionally, some of these income types may have specific conditions or restrictions that need to be met to qualify for the exemption. It is always advisable to consult with a tax professional or refer to the relevant sections of the Income Tax Act for more information.
Deduction from Gross total income
Under the Indian Income Tax Act, 1961, certain deductions are allowed from the gross total income of a taxpayer, resulting in a lower taxable income. These deductions are provided for specific expenses, investments, and contributions made by the taxpayer during the financial year. The following are some of the deductions available to taxpayers:
- Section 80C: Deduction of up to Rs.1.5 lakh is allowed for investments in certain instruments such as Public Provident Fund (PPF), National Savings Certificate (NSC), Equity Linked Saving Scheme (ELSS), Tax-Saving Fixed Deposits, and payment of Life Insurance Premiums, among others.
- Section 80D: Deduction of up to Rs.25,000 is allowed for payment of health insurance premiums for self, spouse, and dependent children. Additional deduction of up to Rs.25,000 is allowed for payment of health insurance premiums for parents, and up to Rs.50,000 for senior citizen parents.
- Section 80E: Deduction of interest paid on education loan taken for higher education of self, spouse, or dependent children is allowed for up to 8 years.
- Section 80G: Deduction for donations made to certain charitable organizations, up to specified limits.
- Section 80TTA: Deduction of up to Rs.10,000 is allowed for interest earned on savings bank account.
- Section 80GG: Deduction is allowed for rent paid when the taxpayer does not receive House Rent Allowance from the employer.
- Section 80DDB: Deduction of up to Rs.1 lakh is allowed for expenses incurred for medical treatment of self or dependent family members suffering from specified diseases.
It is important to note that the above-mentioned deductions are subject to specific conditions and limits. Taxpayers must carefully consider and understand the eligibility criteria and limits before claiming these deductions. Failing to comply with the rules and regulations may result in penalties and interest charges under the Income Tax Act. It is always advisable to seek professional advice for effective tax planning and compliance with the applicable tax laws and regulations.
