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Introduction to Income Tax Act, 1961
Introduction to Income Tax Act, 1961
In India, Income tax is a tax you pay to the government based on your income. The government uses this tax money for various purposes including public services, infrastructure development, defence spending and subsidies among other options. It is compulsory that one has to pay income tax if the income he or she earns crosses beyond a certain limit.
The Income Tax Act,enacted in 1961, is a statute that focuses on the different rules and regulations that govern taxation in the country. It provides for collecting, levying, administering and recovering income tax for the Indian government.
The Income Tax Act,1961 contains a total of 23 chapters and 298 sections. These deal with various aspects of taxation in India. The various heads for which one has to pay income tax include:
- Salary
- Income from house property if any
- Capital gains, can be short term or long term as the case may be
- Profit and gains from business or profession if any
- Income from other sources if any
During the month of February, every year, the Indian government presents a finance budget. There are various amendments to the Income Tax Act in the finance budget. This includes changes in tax slabs wherever applicable. For example, the Finance Minister announced that the tax rate for individuals of Rs. 2.5 lakh to 5 lakh would be cut from 10% to 5% in the financial year 2017. Similarly, tax on Long Term Capital Gains (LTCG) was reintroduced during the financial year 2018 budget. As a result, all gains greater than Rs. 1 lakh from shares and equity mutual funds held longer than one year will be eligible for LTCG tax at 10%.
Finance Minister Nirmala Sitharaman recently presented the budget which included the introduction of a new optional system of taxation that comes with reduced income tax rates. From the financial year 2020-21 these new rates shall be available as an option.
Amendments become a part of the Income Tax Act in the financial year which was followed by the approval from the President of India.
Every Indian citizen has to pay income tax if their annual income is above Rs. 2.5 lakh (Rs. 3 lakh for senior citizens). Besides individuals, entities such as corporate firms, companies, Artificial Juridical Persons, Hindu Undivided Family (HUF), Body of Individuals (BOI), local authorities and Association of Persons (AOP) are also bound to pay income tax.
During the financial year 2017-18, 6.84 crore people filed Income Tax Returns (ITRs). This resulted in net direct tax collections of Rs. 9.95 lakh crore for the year. According to the Central Board of Direct Taxes (CBDT), this was 17.1% higher than the collections for the previous year.
The Government of India reduced the tax rate for people earning between Rs. 2.5 lakhs to Rs. 5 lakhs, from ten percent to five percent, during the financial year 2017 Union budget. Also budget 2020 reduced the tax rates for other income slabs. This was aimed at encouraging a greater number of income earners to pay tax as well as at reducing the tax liability for a large percentage of the Indian population.
