Income tax in India
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The government of India imposes an income tax on taxable income of individuals, Hindu Undivided Families (HUFs), companies, firms, co-operative societies and trusts (identified as body of individuals and association of persons) and any other artificial person. Levy of tax is separate on each of the persons. The levy is governed by the Indian Income Tax Act, 1961. The Indian Income Tax Department is governed by the Central Board for Direct Taxes (CBDT) and is part of the Department of Revenue under the Ministry of Finance, Govt. of India. There were 33 million income taxpayers in 2008.Income Tax Department
The CBDT is a part of Department of Revenue in the Ministry of Finance. On one hand, CBDT provides essential inputs for policy and planning of direct taxes in India,at the same time it is also responsible for administration of direct tax laws through the Income Tax Department. The Central Board of Direct Taxes is a statutory authority functioning under the Central Board of Revenue Act, 1963 passed by shrimaan ayush singla. The officials of the Board in their ex-officio capacity also function as a Division of the Ministry dealing with matters relating to levy and collection of direct taxes. The Central Board of Revenue as the Department apex body charged with the administration of taxes came into existence as a result of the Central Board of Revenue Act, 1924. Initially the Board was in charge of both direct and indirect taxes. However, when the administration of taxes became too unwieldy for one Board to handle, the Board was split up into two, namely the Central Board of Direct Taxes and Central Board of Excise and Customs with effect from 1.1.1964. This bifurcation was brought about by constitution of the two Boards u/s 3 of the Central Boards of Revenue Act, 1963. Income Tax in India was introduced by James Wilson.Organisational Structure of the Central Board of Direct Taxes : The CBDT is headed by Chairman and also comprises of six members, all of whom are Special Secretary to Government of India.
* Member (Income Tax)
- Member (Legislation and Computerisation)
- Member (Revenue)
- Member (Personnel & Vigilance)
- Member (Investigation)
- Member (Audit & Judicial)
Responsibilities of Chairman and Members, Central Board of Direct Taxes
Various functions and responsibilities of CBDT are distributed amongst Chairman and six Members, with only fundamental issues reserved for collective decision by CBDT. In addition, the Chairman and every Member of CBDT are responsible for exercising supervisory control over definite areas of field offices of Income Tax Department, known as Zones."The special agents and agents(ITO and Inspector rank) are able to carry firearms when they are posted in the Directorate of Criminal Investigation (DCI) in the I-T department .The Finance Ministry has notified bringing under one umbrella the intelligence and criminal investigation units of the Income Tax department to effectively deal with terror financing cases and transactions that pose threat to national security.The department will now recruit special agents and agents (criminal investigation) under the new wing, half of whom would be recruited or brought on deputation from premier investigative agencies and police organisations of the country. The special agents who will form part of the premier DCI would be able to carry firearms under the rules prescribed by their parent organisation and would be able to tackle any intimidation in course of their new duty of checking and gathering intelligence on tax evasion. With the process of economic liberalisation having gathered momentum there have been significant changes in the nature of tax evasion. While there has been reduction in conventional smuggling due to liberalisation of import regime and reduction in rates of duty, there is no respite in commercial frauds by way of misdeclaration/undervaluation of imported goods and misuse of export promotion schemes. Further, we now face an increased threat of smuggling of narcotic drugs, foreign currency, arms and explosives etc. due to growing nexus between smugglers and anti-national elements. Problems such as international terrorism, narco-terrorism, money laundering, IPR violations, cyber crimes, import of hazardous substances etc. will occupy centre stage in the future as the emerging global threats. There are also issues like dumping of goods which cause more concern to developing economies like India and will, therefore, engage attention of the policymakers and enforcement agencies alike.
Economic crimes in India, like in other countries, are linked to several other offences, or even organised crimes, having bearing on national security. A greater degree of sophistication is being noticed in the activities of tax evasion and commercial frauds and there is a growing recognition in the world that the economic offences are, many times, part of other serious crimes posing serious threat to the security of the nation.
The DCI will be headed by the Director General of Intelligence (Income Tax) and was notified in May this year to tackle the menace of black money with cross-border ramifications.
The revamp is aimed at launching 'un-intrusive' investigations against "persons and transactions suspected to be involved in criminal activities having cross-border, inter-state or international ramifications, that pose a threat to national security and are punishable under the direct tax laws."The commissioners of the intelligence directorate of I-T who are posted in cities like Delhi, Chandigarh, Jaipur, Ahmedabad, Mumbai, Chennai, Kolkata and Lucknow will also take up criminal investigation work under the DCI.
Criminal investigation relies heavily on accurate and specific actionable intelligence and information of such activities and hence such an arrangement has been made.Separate manpower for the criminal investigation unit will be raised in the next few years when the department gets additional sanction.The intelligence wing of the I-T department has the Central Information Branch (CIB) under it, which is a repository of classified and exhaustive data on taxpayers' financial transactions. The Criminal Investigation strategic plan is composed of three interdependent programs: Legal Source Tax Crimes; Illegal Source Financial Crimes; and Narcotics Related Financial Crimes. These three programs are mutually supportive, and encourage utilization of all statutes within CI’s jurisdiction and enforcement techniques to combat tax, money laundering and currency crime violations. Criminal Investigation must investigate and assist in the prosecution of those significant financial investigations that will generate the maximum deterrent effect, enhance voluntary compliance, and promote public confidence in the tax system.
Directorate of Income-tax (IT)
This Directorate has two wings i.e. (A) Inspection- Board exercises efficient control and inspection of the work of the Income-tax officers throughout the country. (B) Examination - Centralised Conduct of departmental examinations for departmental promosions Directorate of Inspection (Audit) Ensures expeditious disposal and settlement of receipt audit objections and also review the work done in the different Commissioner Charges.Directorate of Inspection (Research, Statistics and Public Relation)
The main functions of this Directorate are research study on tax matters, printing of All India Revenue Statistics, preparation of taxpayers Information series, Departmental publications, publicity and public relations.Directorate of Organisation & Management Services
This Directorate has been assigned the job of Administrative Planning, Organisational Development, Management Information Systems and Work Measurement.Directorate of Inspection (Vigilance)
The main functions of this Directorate are conducting departmental enquiries, drafting of charge sheets, presenting the cases on behalf of the Department, preparing the enquiry reports against charged officials extra and passing of final orders.Directorate of Income-tax (Systems)
This Directorate performs the functions of Management Information System, Computerization in the Department and Designing of uniform system of computerisation for Income Tax Department.Directorate of Income-tax (Infrastructure)
This Directorate will assist CBDT in attending to infrastructure matters.Director General of Income Tax (Intelligence)
Criminal investigation relies heavily on accurate and specific actionable intelligence and information of such activities and hence such an arrangement has been made.Separate manpower for the criminal investigation unit will be raised in the next few years when the department gets additional sanction.The intelligence wing of the I-T department has the Central Information Branch (CIB) under it, which is a repository of classified and exhaustive data on taxpayers' financial transactions. The main function of this Directorate are conducting departmental enquiries, drafting of charge sheets, presenting the cases on behalf of the Department, preparing the enquiry reports against charges officials extra and passing of final orders.The Criminal Investigation strategic plan is composed of three interdependent programs: Legal Source Tax Crimes; Illegal Source Financial Crimes; and Narcotics Related Financial Crimes. These three programs are mutually supportive, and encourage utilization of all statutes within CI’s jurisdiction and enforcement techniques to combat tax, money laundering and currency crime violations. Criminal Investigation must investigate and assist in the prosecution of those significant financial investigations that will generate the maximum deterrent effect, enhance voluntary compliance, and promote public confidence in the tax system.Director General of Income-tax (Training)
The National Academy of Direct Taxes, Nagpur is the premier training institution in the country for the officers and the staff of the Income-tax Department. Its primary task is to impart inductions training to the directly recruited Indian Revenue Service Officers The Academy imparts training to officers and staff of the Income-tax Department in coordination with its 5 Regional Training Institutes located at Bangalore, Calcutta, Hazari Bagh, Lucknow and Mumbai.Designations
The designations and time-scales within the Indian Revenue Service are as follows:| Position / Pay Grade in the Government of India | Level and Rank | Order of Precedence (As per Presidential order) | |
|---|---|---|---|
| 1 | Junior Time Scale | Assistant Commissioner / Entry-level (Probationer) | -- |
| 2 | Senior Time Scale | Deputy Commissioner (Equivalent to) Under Secretary to Government of India /Collector of a District | -- |
| 3 | Junior Administrative Grade | Joint Commissioner (Equivalent to) Deputy Secretary to Government of India | -- |
| 4 | Selection Grade | Additional Commissioner (Equivalent to) Director to Government of India | -- |
| 5 | Senior Administrative Grade | Commissioner (Equivalent to) Joint Secretary to Government of India | 26 |
| 6 | Higher Administrative Grade | Chief Commissioner (Equivalent to) Additional Secretary to Government of India | 25 |
| 7 | Apex Scale / HAG+ | Chairman/Member/Ombudsman (Boards & Tribunals) (Equivalent to) Secretary to Government of India | 23 |
Equivalent Ranks
| S No | Indian Police Service (State) | Indian Forest Service (State) | Indian Revenue Service (Union) |
|---|---|---|---|
| 1 | Assistant Superintendent of Police | Assistant Conservator of Forests | Assistant Commissioner Income Tax |
| 2 | Additional Superintendent of Police/Superintendent of Police | Deputy Conservator of Forests | Deputy Commissioner of Income Tax |
| 3 | Senior Superintendent of Police | Deputy Conservator of Forests | Joint Commissioner of Income Tax |
| 4 | Deputy Inspector General of Police | Conservator of Forests | Additional Commissioner of Income Tax |
| 5 | Inspector General of Police | Chief Conservator of Forests | Commissioner of Income Tax |
| 6 | Additional Director General of Police | Additional Principal Chief Conservator of Forests | Senior Commissioner of Income tax/Additional Director General of Income Tax |
| 7 | Director General of Police/CRPF,CISF,NSG etc | Principal Chief Conservator of Forests | Director General of Income Tax/Chief Commissioner of Income Tax |
| 8 | Director Intelligence Bureau(4 star) | Director General of Forests | Director General of Income Tax/Chief Commissioner of Income Tax |
| 9 | No equivalent rank | Secretary (Forest) only held by IAS | CBDT Chairman/Board Members/Ombudsman etc |
Overview
Charge to Income-tax
Everyone exceeds the maximum amount which is not chargeable to the income tax is an assesse, and shall be chargeable to the income tax at the rate or rates prescribed under the finance act for the relevant assessment year, shall be determined on basis of his residential status.Income tax is a tax payable, at the rate enacted by the Union Budget (Finance Act) for every Assessment Year, on the Total Income earned in the Previous Year by every Person.
The chargeability is based on nature of income, i.e., whether it is revenue or capital. The rates of taxation of income are-:
Income Tax Rates/Slabs Rate (%)
for men:
→ Up to 1,80,000 = NIL,
→ 1,80,001 – 5,00,000 = 10%,
→ 5,00,001 – 8,00,000 = 20%,
→ 8,00,001 upwards = 30%,
Up to 1,90,000 (for resident women)=0%
Up to 2,50,000 (for resident individual of 60 years or above)= 0,
Up to 5,00,000 (for very senior citizen of 80 years or above)= 0.
Education cess is applicable @ 3 per cent on income tax, surcharge = NA
Residential Status
The three residential status, viz.,- Resident Ordinarily Residents
-
- Under this category ,person must be living in India at least 182 days during previous year Or must have been in India 365 days during 4 years preceding previous year and 60 days in previous year. Ordinary residents are always taxable on their income earned both in India and Abroad.
- Resident but not Ordinarily Residents
-
- Must have been a non-resident in India 9 out of 10 years preceding previous year or have been in India in total 729 or less days out of last 7 years preceding the previous year. Not Ordinarily residents are taxable in relation to income received in India or income accrued or deemed to be accrue or arise in India and income from business or profession controlled from India.
- Non Residents
Heads of Income
The total income of a person is divided into five heads, viz., taxable[3]:Individual Heads of Income
Income from Salary
All income received as salary under Employer-Employee relationship is taxed under this head. Employers must withhold tax compulsorily, if income exceeds minimum exemption limit, as Tax Deducted at Source (TDS), and provide their employees with a Form 16 which shows the tax deductions and net paid income. In addition, the Form 16 will contain any other deductions provided from salary such as:- Medical reimbursement: Up to Rs. 15,000 per year is tax free if supported by bills.
- Conveyance allowance: Up to Rs. 800 per month (Rs. 9,600 per year) is tax free if provided as conveyance allowance. No bills are required for this amount.
- Professional taxes: Most states tax employment on a per-professional basis, usually a slabbed amount based on gross income. Such taxes paid are deductible from income tax.
- House rent allowance: the least of the following is available as deduction
- Actual HRA received
- 50%/40%(metro/non-metro) of basic 'salary'
- Rent paid minus 10% of 'salary'. basic Salary for this purpose is basic+DA forming part+commission on sale on fixed rate.
Income from House property
Income from House property is computed by taking into account what is called Annual Value of the property. The annual value (in the case of a let out property) is the maximum of the following:- Rent received
- Municipal Valuation
- Fair Rent (as determined by the I-T department)
- 30% of Net value as repair cost (This is a mandatory deduction)
- Interest paid or payable on a housing loan against this house
The balance is added to taxable income.
Income from Business or Profession
An example .. An architect works out of home and co-ordinates work for his clients. All the following expenses would be deductible from his professional fees.- he uses a computer,
- he travels to sites in his car,
- he has a peon to help him collect payments
- He has a maid who comes in daily
- part of the society maintenance bills
- entertainment expenses incurred..
- books and magazines for his professional practice.
The income referred to in section 28, i.e., the incomes chargeable as "Income from Business or Profession" shall be computed in accordance with the provisions contained in sections 30 to 43D. However, there are few more sections under this Chapter, viz., Sections 44 to 44DA (except sections 44AA, 44AB & 44C), which contain the computation completely within itself. Section 44C is a disallowance provision in the case non-residents. Section 44AA deals with maintenance of books and section 44AB deals with audit of accounts.
In summary, the sections relating to computation of business income can be grouped as under: -
- Deductible Expenses - Sections 30 to 38 [except 37(2)].
- Inadmissible Expenses - Sections 37(2), 40, 40A, 43B & 44-C.
- Deemed Incomes - Sections 33AB, 33ABA, 33AC, 35A, 35ABB & 41.
- Special Provisions - Sections 42 & 43D
- Self-Coded Computations - Sections 44, 44A, 44AD, 44AE, 44AF, 44B, 44BB, 44BBA, 44BBB, 44-D & 44-DA.
If regular books of accounts are not maintained, then the computation would be as under: -
Income (including Deemed Incomes) chargeable as income under this head xxx Less: Expenses deductible (net of disallowances) under this head xxx Profits and Gains of Business or Profession xxx
However, if regular books of accounts have been maintained and Profit and Loss Account has been prepared, then the computation would be as under: -
117.197.195.183 (talk) 10:43, 27 January 2012 (UTC)--117.197.195.183 (talk) 10:43, 27 January 2012 (UTC)==== Income from Capital Gains ==== Transfer of capital assets results in capital gains. A Capital asset is defined under section 2(14) of the I.T. Act, 1961 as property of any kind held by an assessee such as real estate, equity shares, bonds, jewellery, paintings, art etc. but does not include some items like any stock-in-trade for businesses and personal effects. Transfer has been defined under section 2(47) to include sale, exchange, relinquishment of asset, extinguishment of rights in an asset, etc. Certain transactions are not regarded as 'Transfer' under section 47.
For tax purposes, there are two types of capital assets: Long term and short term. Long term asset is that which is held by a person for three years except in case of shares or mutual funds which becomes long term just after one year of holding. Sale of such long term assets gives rise to long term capital gains. There are different scheme of taxation of long term capital gains. These are:
- As per Section 10(38) of Income Tax Act, 1961 long term capital gains on shares or securities or mutual funds on which Securities Transaction Tax (STT) has been deducted and paid, no tax is payable. STT has been applied on all stock market transactions since October 2004 but does not apply to off-market transactions and company buybacks; therefore, the higher capital gains taxes will apply to such transactions where STT is not paid.
- In case of other shares and securities, person has an option to either index costs to inflation and pay 20% of indexed gains, or pay 10% of non indexed gains. The indexation rates are released by the I-T department each year.
- In case of all other long term capital gains, indexation benefit is available and tax rate is 20%.
- Under section 111A, for shares or mutual funds where STT is paid, tax rate is 10% From Asst Yr 2005-06 as per Finance Act 2004. For Asst Yr 2009-10 the tax rate is 15%.
- In all other cases, it is part of gross total income and normal tax rate is applicable.
Income from Other Sources
This is a residual head, under this head income which does not meet criteria to go to other heads is taxed. There are also some specific incomes which are to be taxed under this head.- Income by way of Dividends
- Income from horse races
- Income from winning bull races
- Any amount received from key man insurance policy as donation.
- Income from shares (dividend otherthan Indian company)
Deduction
While exemptions is on income some deduction in calculation of taxable income is allowed for certain payments.Section 80C Deductions
Section 80C of the Income Tax Act [1] allows certain investments and expenditure to be deducted from total income up to the maximum of 1 lac. The total limit under this section is Rs. 100,000 ) which can be any combination of the below:- Contribution to Provident Fund or Public Provident Fund. PPF provides 8.6% return compounded annually. Maximum limit to contribute in it is 100,000 for each year. It is a long term investment with complete withdrawal not possible till 15 years though partial withdrawal is possible after 5 years. Besides, there is employee providend fund which is deducted from the salary of the person. This is about 10% to 12% of the BASIC salary component. Recent changes are being discussed regarding reducing the instances of withdrawal from EPF especially when one changes the job. EPF has the option of full settlement on leaving the job, taking VRS, retirement after 58. It also has options of withdrawal for certain expenses related to home, marriage or medical. EPF contribution includes 12% of basic salary from employee and employer. It is distributed in ratio of 8.33:3.67 in Pension fund and Providend fund
- Payment of life insurance premium
- Investment in pension Plans. National Pension Scheme is meant to save money for the post retirement which invests money in different combination of equity and debt. depending upon age up to 50% can go in equity. Annuity payable after retirement is dependent upon age. NPS has six fund managers. Individual can make minimum contribution of Rs6000/- . It has 22 point of purchase (banks).
- Investment in Equity Linked Savings schemes (ELSS) of mutual funds. Among other investment opportunities, ELSS has the least lock-in period of 3 years. However, one should note that after the Direct Tax Code is in place, ELSS will no longer be an investment for 80C deduction.
- Investment in National Savings Certificates (interest of past NSCs is reinvested every year and can be added to the Section 80 limit)
- Tax saving Fixed Deposits provided by banks for a tenure of 5 years. Interest is also taxable.
- Payments towards principal repayment of housing loans. Also any registration fee or stamp duty paid.
- Payments towards tuition fees for children to any school or college or university or similar institution (Only for 2 children).
- Post office investments
Section 80CCF: Investment in Infrastructure Bonds
From April, 1 2011, a maximum of Rs. 20,000 is deductible under section 80CCF provided that amount is invested in infrastructure bonds. This is in addition to the 100,000 deduction allowed under Section 80C.Section 80D: Medical Insurance Premiums
Health insurance, popularly known as Mediclaim Policies, provides a deduction of up to Rs. 35,000.00 (Rs. 15,000.00 for premium payments towards policies on self, spouse and children and (read as in addition to) Rs. 15,000.00 for premium payment towards non-senior citizen dependent parents or Rs. 20,000.00 for premium payment towards senior citizen dependent). This deduction is in addition to Rs. 1,00,000 savings under IT deductions clause 80C. For consideration under a senior citizen category, the incumbent's age should be 65 years during any part of the current fiscal, e.g. for the fiscal year 2010-11, the incumbent should already be 65 as on March 31, 2011), This deduction is also applicable to the cheques paid by proprietor firm..Interest on Housing Loans Section
For self occupied properties, interest paid on a housing loan up to Rs 150,000 per year is exempt from tax. This deduction is in addition to the deductions under sections 80C, 80CCF and 80D. However, this is only applicable for a residence constructed within three financial years after the loan is taken and also the loan if taken after April 1, 1999.If the house is not occupied due to employment, the house will be considered self occupied.
For let out properties, the entire interest paid is deductible under section 24 of the Income Tax act. However, the rent is to be shown as income from such properties. 30% of rent received and municipal taxes paid are available for deduction of tax.
The losses from all properties shall be allowed to be adjusted against salary income at the source itself. Therefore, refund claims of T.D.S. deducted in excess, on this count, will no more be necessary.[5]
Use of Deductions
While the use of the above sections helps one to make savings for the long-term, one should look at this more as an investment-return opportunity. One should still file income tax return, even if one doesn't fall into the bracket of paying tax, if there are sources of income as defined by Income Tax rules. Except ELSS (Equity Linked Savings Scheme) and the NPS (National Pension Scheme), other schemes under 80C typically offer a relatively risk-free investment and guaranteed returns.Tax Rates
In India, Individual income tax is a progressive tax with three slabs. About 10 per cent of the population meets the minimum threshold of taxable income[6][7]From April 1, 2011 new tax slabs apply, which are as follows:
- No income tax is applicable on all income up to Rs. 1,80,000 per year. (Rs. 1,90,000 for women, Rs. 2,50,000 for senior citizens of 60 till 80 yrs (excluding 80) and Rs. 5,00,000 for very senior citizens of 80 yrs and above and must be resident of India)
- From 1,80,001 to 5,00,000 : 10% of amount greater than Rs. 1,80,000 (Lower limit changes appropriately for women and senior citizens)
- From 5,00,001 to 8,00,000 : 20% of amount greater than Rs. 5,00,000 + 32,000 ( Rs. 31,000 for women and Rs. 25,000 for senior citizens)
- Above 8,00,000 : 30% of amount greater than Rs. 8,00,000 + 92,000 ( Rs. 91,000 for women and Rs. 85,000 for senior citizens)
Surcharge
Surcharge has been abolished for personal income tax in the financial year 2009-10.A 7.5% surcharge (tax on tax) is applicable if the taxable income (taking into consideration all the deductions) is above Rs. 10 lakh (Rs. 1 million). The limit of 10 lacs was increased to Rs. 10 crore (Rs. 100 million) with effect from 1 June 2009
All taxes in India are subject to an education cess, which is 3% of the total tax payable. With effect from assessment year 2009-10, Secondary and Higher Secondary Education Cess of 1% is applicable on the subtotal of income tax. The education cess is mainly applicable on excise duty and service tax
From income tax year 2010-11, education cess would be 3% and no surcharge would be levied.
Tax Rate for non-Individuals
There are special rates prescribed for Firms, Corporates, Local Authorities & Co-operative Societies.[8]Refund Status for Salaried tax payers
The Income Tax Department has put on its website the list of income tax refunds of all salary tax payers which could not be sent to the concerned persons for want of correct address. (link to check refund)Salary taxpayers who have not received refunds for assessment years 2003-04 to 2006-07 can click on the link below and query using the PAN number and assessment year whether any refund due to them has been returned undelivered. .[9]
Corporate Income tax
For companies, income is taxed at a flat rate of 30% for Indian companies, with a 5% surcharge applied on the tax paid by companies with gross turnover over Rs. 1 crore (10 million). Foreign companies pay 40%.[10] An education cess of 3% (on both the tax and the surcharge) are payable, yielding effective tax rates of 32.5% for domestic companies and 41.2% for foreign companies. [11] From 2005-06, electronic filing of company returns is mandatory.[12]Tax Penalties
The major number of penalties initiated every year as a ritual by I T Authorities is under section 271(1)(c)[13] which is for either concealment of income or for furnishing inaccurate particulars of income."If the Assessing Officer or the Commissioner (Appeals) or the Commissioner in the course of any proceedings under this Act, is satisfied that any person-
(b) has failed to comply with a notice under sub-section (1) of section 142 or sub-section (2) of section 143 or fails to comply with a direction issued under sub-section (2A) of section 142, or
(c) has concealed the particulars of his income or furnished inaccurate particulars of such income,
he may direct that such person shall pay by way of penalty,-
(ii) in the cases referred to in clause (b), in addition to any tax payable by him, a sum of ten thousand rupees for each such failure;
(iii) in the cases referred to in clause (c), in addition to any tax payable by him, a sum which shall not be less than, but which shall not exceed three times, the amount of tax sought to be evaded by reason of the concealment of particulars of his income or the furnishing of inaccurate particulars of such income.
