Why Rates of Income tax to be announced in February 2020 budget will be  applicable for Income Earned in Financial Year (F.Y.) 2020-21 and not for F.Y. 2019-20?

For a layman it is difficult to understand that on which rate the Income Tax is calculated on the Income Earned in the F.Y. 2019-20, whether the rates which will be announced in Budget 2020 or on the rates announced in Budget 2019. Even if someone would know which rates would be applicable, but would not know the reason for the same.

First of all we shall incept with applicability of rate of tax. Different person would be covered under different provisions of the Income Tax Act, 1961, for example person earning capital gain shall be chargeable under Section 111A or Section 112 of the Income Tax Act, 1961 and person earning salary shall be chargeable at the slab rate.

Budget

However we should be cognizant of the fact that slab rates shall be the rates mentioned in the Finance Act of the relevant year and the same is not referred from the Income Tax Act, 1961. As taking reference of Section 2(37A) of the Income Tax Act, 1961 which defines rate in force as “for the purpose of calculating Income Tax for specified Sections the rates of Income Tax shall be the rate as mentioned in the Finance Act of the relevant year” i.e. it is the Finance Act that provides the applicable rate of Income Tax, Surcharge and Education Cess.

However there is a protocol which requires to be adhered for enforcing a Finance Bill that demands certain time which shall be as follows:

The gist of Indian Constitution’s prerequisite for enforcing the Finance bill is as follows:

Announcement of Budget

Hence Finance Bill to be announced in February 2020 would be given accent by 31st March  2020 subsequent to the above procedure.

Furthermore in accordance to Section 4 of the Income Tax Act, 1961 Income Tax shall be charged on the income earned by a person in the previous year (2019-20) at the rates applicable on the first day of the assessment year (2020-21).

Previous Year refers to the year in which Income is earned whereas Assessment Year refers to the year in which Tax is to be computed and paid on the aforesaid Income.

As mentioned above for the income earned in a previous year the rates shall be the rates applicable on the first day of the Assessment year, and hence in accordance to Section 4 of the Income Tax Act, 1961 income earned in previous year 2019-20 shall be chargeable to tax at the rates as specified in the Finance Act 2019 and income earned in previous year 2020-21 shall be chargeable to tax at the rates as specified in the Finance Act 2020.

(Republished with Amendments)

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