Income Tax liability of an Individuals

The power to levy income tax is available with the central government vide Entry 82 of the Union list of the Seventh Schedule to the Constitution of India. Tax is nothing but money that people have to pay to the government, which is then used by the government to provide public services. Tax is not a voluntary payment, it is enforced by the government authorities under the authority of law.

Assesse: Section 2(7) Assesse means a person by whom any tax or any other sum is payable under the Income Tax Act 1961. Any other sum would normally include interest, penalty, fines etc.

Person: Section 2(31) Person includes an Individual, a Hindu Undivided Family, a company, a partnership firm, an association of person, a body of Individual, a local authority, every artificial juridical person not covered above (Artificial juridical person are the entities which are not natural persons but are separate entities in the eyes of law e.g. ICAI,ICSI).

Assessment Year: Section 2(9) Assessment year means the period of 12 months commencing on the first day of April every year.

Previous year: Section 3 Previous year means the financial year immediately preceding the Assessment year.

(Financial year means a year starting on 1^st April and ending on 31^st march. Income tax is payable on the income earned during the previous year and it is assessed in the immediately succeeding financial year which is called assessment year)

Deduction: certain concessions are allowed to be deducted from Gross Total Income under section 80C to 80U to arrive at Total Income (Deductions under Chapter VI-A). Deductions are never allowed from income taxable at special rates.

Gross Total Income:

Under the Income tax Act 1961, income is computed under five different heads. Gross Total Income is the aggregate of these five heads.

1 Salary: Salary is a periodic payment made by an employer to an employee as per the terms specified in the employment contract signed by both the parties. It is treated as normal income.

2 House Property: Income from letting out of any house property is taxable under the head house property. It is treated as normal income.

3 Profit and gain from Business or Profession (PGBP): where a person carries on any business/ profession, such person is required to compute his income from such business/ profession by preparing a profit and loss account. It is treated as normal income.

4 Capital gain: Income arising from transfer of any capital asset in commonly known as capital gain. There are two types; Short term capital gain STCG and Long term capital gain LTCG.

5 Other Sources: If any income does not covered under the first four heads, such income would be taxable under the head other sources.

Total Income: deductions u/s 80C t0 80U are deducted from Gross Total Income and the resultant figure so obtained is known as Total Income.

(Section 288A; Rounding off of total income: the total income shall be rounded off to the nearest multiple of RS. 10. For this purpose any Paisa shall be ignored and if the last digit is 5 or more, such amount will be rounded off to the higher multiple. If the last digit is less than 5, such amount will be rounded off to the lower multiple.)

Computation of Tax liability of an Individuals:

(Section 288b; Rounding off of Tax Liability: the final tax liability shall be rounded off to the nearest multiple of RS. 10. For this purpose any Paisa shall be ignored and if the last digit is 5 or more, such amount will be rounded off to the higher multiple. If the last digit is less than 5, such amount will be rounded off to the lower multiple.)

(Collection from levy of tax can be used for any purpose what-so-ever; however collection from levy of cess can be used only for the purpose for which the cess has been collected)

Special incomes:

Long Term capital gains (LTCG) taxed @10% under section 112A and taxed @20% under section 112.

Short Term capital gains (STCG) taxed @15% under section 111A.

Casual income taxed @30% under section 115B.

Normal Income:

Non- residents of any age and residents below the age of 60 years throughout the relevant previous year taxed First rs2.5L as Nil, Next rs2.5L @5% on amount in excess of rs2.5L, Next rs5L @20% on amount in excess of rs5L, Balance income in excess of rs10L @30% on amount in excess of rs10L.

Residents who are the age of 60 years or more but below the age of 80 years (i.e. senior citizen) at any time during the relevant previous year taxed First rs3L as Nil, Next rs2L @5% on amount in excess of rs3L, Next rs5L @20% on amount in excess of rs5L, Balance income in excess of rs10L @30% on amount in excess of rs10L.

Residents who are the age of 80 years or more at any time during the relevant previous year taxed First rs5L as Nil, Next rs5L @20% on amount in excess of rs5L, Balance income in excess of rs10L @30% on amount in excess of rs10L.

(Vide Circular No. 28/2016, dated 27^th July 2016, the CBDT has been clarified that a person born on 1^st April would be considered to have attained a particular age on 31^st March, the day preceding the anniversary of his birthday)

Surcharge:

Surcharge shall be calculated on the total tax payable before Health & Education cess. The finance Act 2019 introduced in July 2019 has introduced a multi-tier surcharge for individual with effect from 2019-20 as follows:

Marginal relief:

Where total income of an individual marginally exceeds rs.50L/ rs.1 cr /rs.2 cr / rs.5 cr, surcharge is calculated on the entire amount of income tax due to which increase in tax amount may be more than the increase in income. Such defect is rectified by allowing the assesse the benefit of marginal relief.

–

–

–

Special benefits for resident individuals:

Deficiency in normal income: the benefit is available to a resident individual provided his normal income is below the exemption limit. The difference between the normal income and the exemption limit is referred to as deficiency. Such deficiency is allowed to be set-off against the special incomes. Deficiency needs to be adjusted Firstly against LTCG u/s 112 (20%), Secondly against STCG u/s 11A (15%), balance against LTCG u/s 112A (10%) and no deficiency can be adjusted against Casual Income.

Rebate of rs12,500:  under section 87A a rebate is available to a resident individual where his/her total income does not exceed rs5lakhs.

Rebate is available from tax on all kinds of income including casual income. Rebate is deducted before Health & Education cess. The amount of rebate can be 100% of tax payable before Health & Education cess or rs12,500.

(To determine whether surcharge and rebate are applicable or not, we need to check the level of income before adjustment of deficiency if any).