Basics of Indian Tax Laws

MeaningDerived from the Latin taxo; meaning "I

estimate")To tax is to impose a financial charge or

other levy upon a taxpayer (an individual or legal entity) by a state or the functional equivalent of a state such that failure to pay is punishable by law.

Tax administration structure organized in IndiaThree-tier structure of tax administration,

with the power and authority to levy various kinds of taxes being distributed among :The Central Govt.,The respective State Governments and The Local Govt.

The Central Govt.Income (except tax on agricultural income),Custom Duties,Central Excise and service tax

The State GovernmentsValue Added Tax (VAT),Stamp Duty,State Excise andProfession Tax

The Local Govt.

Properties,Octroi andPublic Utilities.

Direct and Indirect TaxesDirect Taxes: Taxes that are imposed on

individuals and organizations and are directly collected from them, without the interference of a third party. Income Tax,Corporate Tax, andWealth Tax.

Cont….Indirect Tax: Indirectly collected from

someone, other than the entities on whom they are imposed. Customs and Excise Duty,Sales Tax, andVAT etc.

Income-tax Act, 1961Extends to the whole of India,It shall come into force on the 1st day of April,

1962,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 40 years!

Key Terms: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.

Cont….Assessment year is the period of

twelve months commencing on the 1st day of April every year in which the income of the previous year is to be assessed to tax [ Section 9 (9)].

Previous Year: The financial year immediately preceding the assessment year.[ Section 3]

Cont….An illustration : 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.

Cont….Assessee is a person by whom any tax or any

other sum of money is payable under the Act. [ Section 2(7)]

The assessee could be any of the following:An Individual:

Cont….A Hindu Undivided Family ( HUF ), which is a

type of assessee recognized 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 recognized.

Cont….A CompanyA FirmAn Association of Persons or a Body of

IndividualsArtificial 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. 

Residence In India Resident & ordinarily a resident

  Basic Conditions: Presence for more than 182 days in India during the

yearor

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

Cont…Additional Conditions:

he should satisfy one of the above two basic conditions in 9 out of 10 preceding yearsand

he should be present for 730 days in India in the 7 preceding years

Resident but not ordinarily a residentAn 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.

Non-residentA person who does not satisfy any of the

basic conditions becomes a Non-residentSimilar rules have been laid down for the

residential status of HUF's, Firms and Companies also.

Income Tax CalculationsIncome 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.

Cont…Total Income of an assessee is calculated as

under:Income of the assessee is computed under

the following heads:Income from SalariesIncome from House PropertyProfits or gains of Business or ProfessionCapital gainsIncome from other sources

Cont…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.

Cont…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.

Cont…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.

How to calculate your Income TaxFor the current financial year (2010-11)

following procedure is to be followed:Step I : Gross Income

Calculate your Annual Income. (Monthly Income * 12)

Step II : DonationsCalculate the total donations you have made towards various institutions in accordance to Income Tax Rules. 

Cont… Step III : Savings

Calculate your total savings. This may include all the savings and investments mentioned in Income Tax Saving Schemes Sections.

Step IV : Taxable Income Follow the following rule to calculate your taxable income

Step I - ( Step II + Step III) = Taxable Income

Cont…Step V : Income Tax

When you have calculated your taxable income, refer to the following slabs to calculate your Income Tax accordingly. Choose the slab according to your income and calculate your Income tax.

Income tax slabs 2010-2011 (for Men) in India:Income Tax Slab (in Rs.) Tax

0 to 1,60,000 No Tax

1,60,001 to 5,00,000 10%

5,00,001 to 8,00,000 20%

Above 8,00,000 30%

Income tax slabs 2010-2011 (for Women) in India:

Income Tax Slab (in Rs.) Tax

0 to 1,90,000 No Tax

1,90,001 to 5,00,000 10%

5,00,001 to 8,00,000 20%

Above 8,00,000 30%

Income tax slabs 2010-2011 (for Senior Citizens) in India:

Income Tax Slab (in Rs.) Tax

0 to 2,40,000 No Tax

2,40,001 to 5,00,000 10%

5,00,001 to 8,00,000 20%

Above 8,00,000 30%

Cont…Step VI: Education CessAdd 3 % of your taxable income as the Educational Cess to the Income Tax amount calculated in step V.

EXAMPLE:1

1. Mrs. Kuldeep is 35 year old and earning 8 lac annually. (Male)

Tax on Income up to 1,60,000 Nil

Tax on Income between 1,60,000-5,00,000 (@ 10%)

34,000

Tax on Income between 5,00,000-8,00,000 (@ 20%)

60,000

Total 94,000

Educational Cess(@ 3% of Total Tax)

2,820

Net Tax Payable 96,820

2. Mrs. Harminder Kaur is 32 year old and earning 12 lac annually. (Female) Tax on Income up to 1,90,000 Nil

Tax on Income between 1,90,000-5,00,000 (@ 10%)

31,000

Tax on Income between 5,00,000-8,00,000 (@ 20%)

60,000

Tax on Income between 8,00,000- 12,00,000 (@30%)

1,20,000

Total 2,11,000

Educational Cess(@ 3% of Total Tax)

6,330

Net Tax Payable 2,17,330

3. Mrs. Rajesh is 67 years old and earning 8 lac annually. (Senior Citizen)

Tax on Income up to 2,40,000 Nil

Tax on Income between 2,40,000-5,00,000 (@ 10%)

26,000

Tax on Income between 5,00,000-8,00,000 (@ 20%)

60,000

Total 86,000

Educational Cess(@ 3% of Total Tax)

2,580

Net Tax Payable 88,580

Calculating Your Income Tax Liability

The income tax which is charged to you is based on the tax slabs declared by the Government in its annual budget every year.

Please note that the taxable income is arrived at after adding all your different sources of income and subtracting the deductions that you have taken advantage of under Section 80

ExampleRam is a salaried employee who earned

Rs.12,00,000( 2008-2009). He has bought a health insurance policy for himself worth Rs 10,000. Ram has also bought ELSS funds for Rs. 80,000 and has also paid a LIC premium of Rs. 20,000.He has also donated Rs. 20,000 to the Prime Minister's Relief Fund. Let us calculate Ram's tax liability for the financial year 2008-2009

The tax slabs applicable for the Financial Year 2008-2009 Taxable Income Slab Tax Slab

Upto Rs. 1,50,000Up to Rs. 1,80,000 (for women)Up to Rs. 2,25,000 (for residents, 65 years or above)

Nil

Rs. 1,50,000 – Rs. 3,00,000 10%

Rs. 3,00,001 – Rs. 5,00,000 20%

Rs. 5,00,001 – Rs. 10,00,000 30%

Above Rs. 10,00,001 30% + 10% surcharge on tax

Note: In addition, an education cess of 3% is charged on the entire tax amount including surcharge

Total taxable income calculationHeads Amounts

Gross Total Income Rs. 1,200,000

Section 80 C Deductions Rs.100,000

LIC Premium Rs. 20,000

Home Loan Principal Repayment Rs. 80,000

Total Rs. 100,000

Other Donations Rs. 30,000

Section 80D Health Insuance Premium

Rs. 10,000

Section 80G Donation To A Charity

Rs. 20,000

Total Taxable Income 1,070,000

Total Tax payableIncome Tax Calculations Tax

Tax on Income up to Rs 150,000 0% Zero

Tax on the next Rs 1,50,000(Slab 150,001 to 3,00,000)

10% Rs.15,000

Tax on the next Rs 2,00,000(Slab Rs. 3,00,001 to Rs. 500,000)

20% Rs.40,000

Tax on the Tax on next Rs. 570,000(above 500,001)

30% Rs. 1,71,000

Income Tax Due Rs. 2,26,000

Surcharge on total tax(Surcharge is applicable if the taxable income is above Rs.1,000,000)

10% Rs. 22,600

Income Tax Due Rs. 2,48,600

Educational Cess @ 3% Rs.7,458

Total Tax Payable Rs.2,56,058