Income Tax in India

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Income Tax Is not one Tax but an Aggregation Of Taxes

Tax is a fee charge by the Govt. on any product income or activity. Taxes in India are of two types, Direct Tax and Indirect Tax. Direct Tax, like income tax, wealth tax, etc. are those whose burden falls directly on the taxpayer. The burden of indirect taxes, like service tax, VAT, etc. can be passed on to a third party.

Income Tax is all income other than agricultural income levied and collected by the central government and shared with the states.

According to Income Tax Act 1961, every person, who is an assessee and whose total income exceeds the maximum exemption limit, shall be chargeable to the income tax at the rate or rates prescribed in the finance act. Such income tax shall be paid on the total income of the previous year in the relevant assessment year.

The total income of an individual is determined on the basis of his residential status in India.

Residence Rules

An individual is treated as resident in a year if present in India For 182 days during the year or
For 60 days during the year and 365 days during the preceding four years. Individuals fulfilling neither of these conditions are nonresidents. (The rules are slightly more liberal for Indian citizens residing abroad or leaving India for employment abroad.) A resident who was not present in India for 730 days during the preceding seven years or who was nonresident in nine out of ten preceding yeas I treated as not ordinarily resident. In effect, a newcomer to India remains not ordinarily resident.

For tax purposes, an individual may be resident, nonresident or not ordinarily resident.

Non-Residents and Non-Resident Indians

Residents are on worldwide income. Nonresidents are taxed only on income that is received in India or arises or is deemed to arise in India. A person not ordinarily resident is taxed like a nonresident but is also liable to tax on income accruing abroad if it is from a business controlled in or a profession set up in India.

Capital gains on transfer of assets acquired in foreign exchange are not taxable in certain cases.

Non-resident Indians are not required to file a tax return if their income consists of only interest and dividends, provided taxes due on such income are deducted at source.

It is possible for non-resident Indians to avail of these special provisions even after becoming residents by following certain procedures laid down by the Income Tax act.

Taxability of individuals is summarised in the table below
StatusIndian IncomeForeign Income
Resident and ordinarily residentTaxableTaxable
Resident but not ordinary residentTaxableNot Taxable
Non-ResidentTaxableNot Taxable
The Income Tax history in modern India dates back to 1860. In this year first Income Tax Act was introduced and which remained in force for a period of 5 years. This Act lapsed in 1865. Thereafter Act-II of 1886 was in force. This Act of 1886 was the improved version. The year 1918 saw the introduction of Act VII of 1918, it recasted the entire tax laws. The Indian Income Tax Act, 1922 which came into being as a result of the recommendations of the All India Income Tax Committee is a milestone in the evolution of Direct Tax Laws in India. The Act of 1922, similar to the Act of 1918, applied to all incomes "accruing or arising", or received in British India, or deemed to be accrued, arisen or received. The Act of 1922 remained in force till the year 1961. In 1956 the Government had referred the Act to the Law Commission to recast it on logical lines and to make it simple without changing the basic tax structure. The present Income Tax Act is the Act of Sept., 1961. Income tax is levied on the 'total income' of the assessee. Income of the 'previous year' is taxed in the 'assessment year.' Income is classified into and compted under five categories called 'heads of income.' The basic scheme of income tax is the principle 'pay as you earn.' One...
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