An Overview of The Income Tax Act Of 1961

In 1860, income tax was introduced in India for the first time by Sir James Wilson, the pre-independence finance minister of India. He enforced the Income Tax Act, 1860 to cover up for the losses sustained by the government due to the military mutiny of 1857. From time to time, the act was replaced with different licence taxes. In 1886, a separate Income Tax Act was passed, which was further amended by the Income Tax Act of 1918 and 1922. The Income Tax Act of 1922 became highly complicated due to several changes. Hence, the Income Tax Act of 1961 was introduced on April 1, 1962.

Presently, the Income Tax Act of 1961 is applicable in India. Over the years, the act has undergone several changes, even those of far-reaching nature, as proposed by the Union Budget every year. Currently, the act levies income tax under the following five heads: 

• Income from Salary 
• Income from House Property 
• Income from Profits and Gains of Profession 
• Income from Capital Gains 
• Income from Other Sources

• Previous Year (PY) - The previous year, also known as PY, refers to the financial year immediately preceding the assessment year. In other words, the previous year is equivalent to the financial year.
   
• Assessment Year (AY) - The assessment year, or AY, is the period of 12 months starting on April 1st and ending on March 31st of the following year. It follows the financial year. For example, the assessment year for the financial year 2021-2022 would be 2022-2023. During the assessment year, individuals and businesses are required to file their income tax returns for the corresponding financial year.
   
• Assessment - Assessment is the process of reviewing and evaluating the returns filed by individuals or businesses with the Income Tax Department.
   
• Assessee - An assessee is a person or entity that is required to pay income tax, or any other sum of money as specified by the Income Tax Act. This includes individuals, Hindu Undivided Families (HUFs), Association of Persons (AOPs), Body of Individuals (BOIs), companies, firms, Limited Liability Partnerships (LLPs), local authorities, and any artificial juridical persons (AJPs) that do not fit into any of the other aforementioned categories.
   
• Self-Assessment Tax - Self-assessment tax is the income tax paid by the assessee after accounting for advance tax and tax deduction at source. It is required to be paid during the assessment year before the individual or business files their income tax returns.
   
• Income Tax Return - An income tax return is a form that individuals and businesses use to report their income to the Income Tax Department for a specific financial year. There are several different forms that can be used, depending on the sources of income, the amount of income earned, and the type of assessee (such as an individual, HUFs, firm, or company). These forms include ITR 1, ITR 2, ITR 3, ITR 4, ITR 5, ITR 6, and ITR 7.
   
• Tax Deduction at Source (TDS) - It refers to the tax that is withheld before payment is made to the recipient (the deductee). Under the provisions of the Income Tax Act, TDS may be applied to salary, interest on bank deposits, commission, consulting fees, professional fees, and rent payments, among others. The deductors, or the party making the payment, is responsible for reporting this deduction in appropriate form which will reflect in Form 26AS and TDS certificate shall also be available by deductors. The assessee, or the individual or business responsible for paying the tax, can use this certificate when filing their income tax return to claim credit for the tax paid.
   
• Net Taxable Income - Net taxable income is the income that is subject to income tax, calculated after considering deductions that are permitted under the Income Tax Act (such as those outlined in various Section 80s). Tax is paid on this amount.
   
• Gross Total Income - Gross Total Income (GTI) is the starting point for calculating and filing income tax returns. It includes all sources of income, such as salary, income from property, profits from a business or profession, capital gains, and income from other sources. These amounts are calculated after considering any exemptions or deductions that may be applicable, such as the exemption for Housing Rent Allowance (HRA) and eligible allowances.
   
• Form 16 - Form 16 is a certificate issued by an employer that contains the information necessary to prepare and file an income tax return. Part A of the form includes the employer and employee's full address, their Permanent Account Number (PAN), the Tax Deduction Account Number (TAN) of the employer, the amount of tax deducted and deposited by the employee for the relevant assessment year, and the challan numbers. Part B provides details on salary paid, any other income, exemptions and deductions claimed, and tax deducted.
   

An Indian citizen below the age of 60 years, earning more than ₹2.5 lakhs annually is liable to pay income tax as per a pre-determined percentage. Indian citizens above the age of 60 years and earning more than ₹3 lakhs are liable to directly pay taxes to the Government of India.

Apart from an individual, the following entities also have to pay taxes on their annual income: 

• Hindu Undivided Family (HUF) 
• Association of Persons (AOP) or Body of Individuals (BOI) 
• Local authorities 
• Corporate firms and companies 
• Artificial judicial person 

Broadly, there are two kinds of taxes:

• Direct tax. And

• Indirect tax.

Direct Taxes are taxes levied directly on the person who is ultimately bearing the cost of the tax. Income Tax is the most prominent form of Direct Tax.

Indirect Tax are taxes that are levied indirectly on goods/ services such as Goods and Service Tax on production of goods, transport of goods, sales of goods and services etc. These taxes are levied on the person providing these goods/ services but are borne by the ultimate user of the goods and services. GST, Professional Tax, Customs Duty etc. are examples of Indirect taxes.

Within the purview of Income Tax (IT) which is a Direct Tax, there are certain terms to be understood with respect to taxation. Some of these are:

Long term Capital Gain Tax and Short-Term Capital Gain Tax

Assets are considered long term or short term on the basis of what they are and how long they are held.

Shares and securities of a company that are listed on a recognized stock exchange, mutual funds, units of equity oriented mutual funds and zero-coupon bonds are considered long term when they are held for a period greater than 12 months.

Immovable property such as land, building, house etc. are considered long term when they are held for a period greater than 24 months.

Movable property such as jewellery and other assets are considered long term when they are held for a period greater than 36 months.

This distinction is important as the income tax rates applied to capital gains differ greatly.

Where short term capital gains are taxed at 15% or the rate of the individuals slab as applicable, long term capital gains are taxed at 10%/ 20%. Also, the long-term capital gains provides the option of indexation benefit, which is basically the cost of the asset adjusted for inflation so that only real gains are taxed.

What Is TDS: Tax Deducted At Source?

TDS means that the person who is responsible for making payments to you will deduct tax before paying you the balance amount. In this way, tax is deducted at the source of income itself. On deducting the tax, this amount has to be paid by the person deducting into the governments account within the stated time period and they will issue you a TDS certificate.

This TDS certificate is proof of the tax having been deducted from your income and the proof you need to claim the same as credit.

Examples of payments on which Tax is deducted at source is Salary, interest on fixed deposits in banks, other payments to vendors exceeding the limits specified etc.

TDS is applicable to various types of income, such as salary, interest, rent, commission, etc. It is the responsibility of the person making the payment to deduct TDS and deposit it with the government. The individual whose income is being taxed can then claim credit for the TDS that was paid by presenting a TDS certificate or Form 26AS.

The new tax regime allows individuals and HUFs to pay lower taxes without claiming deductions under different sections. Unlike the old tax regime, the new tax regime does not differentiate taxpayers into age groups.  

Additionally, new tax regime has not replaced the old tax structure; it is an option available to the taxpayers. 

India follows a progressive system of taxation. This basically means that the income tax rates are determined as per threshold amounts set by the government and for lower amounts a lower rate of tax is levied and as the income slab goes higher the rate of tax levied is greater.

• Interest accrued in Provident Fund account for contributions of more than Rs. 2.5 lakhs per financial year will become taxable.


• State Government employees can claim deduction up to 14% of their base salary plus dearness allowances for contributions towards National Pension Systems payments from their employers. This is line with the deductions available to Central Government employees.


• Gains accrued through transfer of virtual digital assets is taxed @ 30%. Further, no set off of losses will be available against the gains made.


• New provision is inserted to allow taxpayers to file updated ITR within two years from the end of applicable assessment year. This provision cannot be used for reporting additions losses or reducing tax liability.


• No extra tax incentive for affordable homebuyers from current financial year. Earlier, additional tax relief of 1.5 lakhs was available for interest paid on home loans taken by first home buyers owning a house costing up to 45 lakhs.

• New tax regime has been enhanced and made the default tax regime. However option is provided to taxpayers to opt for old tax regime (with deductions). Proposed slab rates under new tax regime (from 1^st April, 2023) are as follows:



Total Income	Rate of tax
Up to Rs. 3,00,000	Nil
3,00,001- 6,00,000	5%
6,00,001- 9,00,000	10%
9,00,001-12,00,000	15%
12,00,001-15,00,000	20%
Above 15,00,000	30%



• Further to above, rebate has been increased from Rs. 12,500 to Rs. 25,000. Hence, an individual is not required to pay tax income tax under New Tax Regime where total income is upto Rs 7,00,000/-


• Reduction of highest rate of surcharge from 37% to 25% under New Tax Regime where income of such person exceeds Rs 5 crore.


• Introduction of standard deduction of Rs 50,000 under New Tax Regime


• No tax changes has been proposed for Old Tax Regime


• Limit of tax exemption on leave encashment has been increased from Rs. 3,00,000/- to Rs. 25,00,000/- on retirement for non-government employees


• Tax exemption on long term capital gains arising out of transfer of long-term residential property or capital asset has been restricted to Rs.10 crores. Earlier there was no such restriction and entire amount of capital gain being exempt if gains amount is invested in residential house property.


• TDS @ 20% capped on taxable component of withdrawal of accumulated balance due to an employee under Employees’ Provident Fund Scheme on non-furnishing of PAN. Earlier TDS was deducted at maximum marginal rate (MMR) upto 34.608%

• The current Budget proposes to amend section 10(10D) criteria, whereby it is proposed to tax proceeds received from non-ULIP policies issued on or after 1 April 2023, where aggregate premium for one or more policy exceeds Rs 500,000 in any year during the term of policy. The said income will taxed under income from other sources.


• Proceeds received on death will continue to be exempt.


• Non-ULIP policies issued prior to 1 April 2023 continue to be exempt (subject to satisfaction of section 10(10D) criteria).

For calculating your Income Tax Payable, there are certain broad steps to be undertaken.

• Step 1: Calculate your total income.

• Step 2: Deduct all allowable deductions from Income as a good tax planning practice.

• Step 3: Apply the appropriate rate of tax as per category of taxpayer and the slab rates of tax applicable.

• Step 4: Deduct the Tax Rebates allowable under the Income Tax Act.

• Step 5: Deduct taxes already paid by way of TDS, TCS and advance taxes from the Tax amount calculated. The balance amount is either the Tax payable or tax refund receivable.

Let’s understand the steps in some detail.

Step 1: Calculate your Total income

Income is calculated under the following heads:

Income from Salary – All income from an employer that is received as salary is to be offered as Salary income earned. This is detailed in the Form 16 given by the employer to the employee.

Income from Capital Gains – Income earned on sale of capital assets is taxable under the head of Capital Gains. Capital Assets include assets such as land, building, jewellery, stocks, bonds, etc.

Income from house property – Rental income earned from owned house property is taxable under this head.

Income from business / profession – The profits and gains earned from any business or profession are taxable under this head.

Income from other sources – All other income that is not included under the other heads of income fall under this residual head of income. This includes interest income, pensions received, dividend received, winnings from lottery or gambling, gifts received etc. The classification of income is important from the perspective of filing returns. All income is calculated on the basis of the financial year as defined in the Income Tax Act as the twelve-month period from April 1st of a year to March 31st of the following year. For example, financial year 2022-23 would mean the period between 1st April 2022 to 31st March 2023.

Step 2: Deductions from Taxable Income

The Income Tax Act allows some deductions from the Income that has to be taxed. This is the step that can help you save a lot of tax on your income for the year. Sections 80C to 80U of the Income Tax Act, 1961 specifies these deductions. In addition, there are other deductions under Section 16, 24 etc which could be availed.

So what are these deductions from taxable income and how can a person get the income tax benefits³ of these?

Spend on a good life insurance policy – Not only does a good life insurance policy provide coverage to your loved ones in the event of your death, but it makes for good financial planning as well. The premium paid for life insurance policies of the taxpayer for self and for his dependent wife and children are deductible from tax under Section 80C. This amount is deductible if the annual premium is less than 10% of the sum assured if the policy has been issued after 1st April 2012. For policies issued prior to 1 April 2012, in order to claim this deduction, the premium paid should not exceed 20% of the sum assured. Section 10(10D) of the Income Tax Act, 1961 provides for certain exemptions with respect to proceeds from life insurance policies. When the premium paid on the policy does not exceed 10% of the sum assured for policies issued after 1 April 2012 and 20% of sum assured for policies issued before 1 April 2012– any amount received on maturity of a life insurance policy or amount received as bonus is fully exempt from Income Tax under Section 10(10D). Also covered here are policies taken after 1 April 2013, on the life of a person with a disability or a disease specified under Sections 80U and 80DDB respectively, where the amount received on maturity is tax-free provided the premium paid does not exceed 15% of the sum assured.

As per Union Budget 2023, proceeds from life insurance premium over the annual premium of ₹5 lakh would be taxable from new financial year i.e. from 1st April 2023. However, the new income tax rule will keep death benefit on such premium would continue to remain tax exempted. Also, the new income tax rule won't be applicable on ULIP (Unit Linked Insurance Plan).. So as you can see payments paid towards life insurance policies have a twofold income tax benefit – for the years while paying the premium as well as for the maturity proceeds.

Tax Saving³ Investments under Section 80C - There are certain financial investments which has been listed by the Income tax laws as deductible from your taxable income. The key motive of this incentive seems to incentivize people to perform proper financial planning and structuring for present and future. The key point to be noted is that you are creating investments for yourself and receiving income tax benefits³ on them. However, this benefit is given to individuals and Hindu Undivided Families only.

Investments can be made under section 80C to the extent of Rs 1,50,000. Apart from this, investment in notified pension schemes provide additional benefit to the extent of Rs 50,000 under section 80CCD(1B). This total of Rs.2,00,000/- in investments can save you an amount of Rs.60,000/- if you fall under the 30% tax bracket.

Some of the key tax-saving investments provided under Section 80C are:

• Premiums paid towards Life Insurance (for self, spouse or dependent children),

• ULIP or deferred annuity plan deposit (for self, spouse, or dependent children)

• Fixed Deposits made for a period of five years,

• Public Provident Fund (PPF) contributions or contributions made by employee to approved Superannuation Fund

• Investments in NABARD Bonds,

• Investments with Post Office in their post office saving schemes for tax benefit, or senior citizen savings schemes (SCSS)

• Investments in National Savings Certificates – for current year investment and the accrued interest.

• Investment in tax saving mutual fund schemes which are linked to equity markets such as ELSS funds, notified pension funds or others.

• Certain expenses are also included such as for:
  • Tuition fees paid for two children
  • Repayment of Principal component of housing loan
  • Stamp duty, Registration expense or other expenses for residential house

A taxpayer can calculate their income tax manually or use an online income tax calculator. The rate of income tax is determined as per the annual income in the income tax slab. For instance, for a salaried taxpayer, the income from salary is calculated by including:

• Basic income 


• House rent allowance (HRA) 


• Transportation allowance 


• Special allowance 

The Income Tax Act, 1961 allows several deductions under different Sections to help you reduce your taxable income.

Section 80C:

Section 80CCC:

Section 80CCD:

Section 80D:

Section 80DDB:

Section 80E:

Section 80EE:

Section 80RRB:

Section 80TTA:

Section 80U:

Section 24:

Section 10(10D):

Under Section 10(10D) of the Income Tax Act, any amount received under a life insurance plan is exempt from taxes. This is inclusive of bonus, interest, or any other grant received in the plan. However, this rule is not applicable for:

• Sum received under Section 80DD (3) 




• Sum received under a Keyman Insurance Policy 




• Sum received other than death benefit under a life insurance plan issued on or after April 1, 2003, but before March 31, 2012. In this case, the premium payable in any of the policy years should not be more than 20% of the sum assured. For plans issued on or after April 01, 2012, the exemption is allowed on policies with premiums lower than 10% of the sum assured.  




• For ULIPs, the maturity payout will be tax-free if the total annual premium in the given fiscal year is under ₹2.5 lakhs. 

Life insurance is a great investment because it protects you and your family as well as helps you save tax. As per the Income Tax Act, 1961, the premiums you pay towards a life insurance policy are exempt from taxes up to ₹1.5 lakh under Section 80C. Taxation relief is allowed on life insurance policies purchased for self, spouse, or dependent children.

Payment of premium on life insurance policy not only gives insurance cover to a taxpayer but also offers certain tax benefits. Various life insurance plans offer tax benefits under Section 80C of the Income Tax Act against the premiums paid including: 

• Term Insurance Plans


• Unit Linked Insurance Plans


• Guaranteed Returns Income Plans


• Retirement Insurance Plans 

Edelweiss offers various life insurance plans that help you save on taxes. These include: 

Income Tax Return is an income tax declaration which is filed by all taxpayers stating the income – sources of income, tax due and tax paid during the year. There are seven ITR form types notified by the Income Tax Department – they are ITR 1Sahaj Form, ITR 2, ITR 3, ITR 4, ITR 5, ITR 6, and ITR 7. An Income taxpayer must know which form they should fill in for filing their income tax returns. Form applicable dependents on the individual entity and their sources of income. 

A simplistic guide is that:

ITR 1 form

- For individuals being a resident (other than not ordinarily resident) having total income up to Rs.50 lakh, having Income from Salaries, one house property, other sources (Interest etc.), and agricultural income up to Rs. 5000.

ITR 2

- is used by all who would file ITR 1 but have income greater than 50 lakhs. Also people who have Income from capital gains, Income from house property, Hold directorships in a company or hold unlisted equity assets, or foreign assets and/or have foreign income. Basically it is for Individuals and HUFs not having income from profits and gains of business or profession.

ITR 3

- In case Individual has Income from Business / Profession or is a partner in a firm then ITR 3 must be filed.

ITR 4

- is for Individuals, HUFs and Firms (other than LLP) being a resident having total income upto Rs.50 lakh and having Presumptive income from business and profession and agricultural income upto Rs.5000. 

ITR 5

- Is to be used by LLP’s, AOP’s and BOI’s.

ITR 6

- is to be used by Companies who are not claiming exemption under Section 11 .

ITR 7

- is to be used by Persons and companies who claim exemption under Sections 139 of the Income Tax Act, 1961.

There are no separate ITR form for housewife or senior citizens. The forms are the same and based on sources of income. You can look up your sources of income and decide to file ITR for housewife, senior citizens or any other categories. You should file an income tax return³ if your income is above the exempt income tax limit, or you have lottery winnings, or you wish to claim income tax refund on tax paid, to create a proper financial base which helps with obtaining loans and visa etc. and if the tax payer is a company or firm then irrespective of profit or loss it is mandatory to file ITR.

By adhering to these rules you will find it easy to comply with the requirements of the income Tax Act, 1961 and build a good financial base for yourself. You will find online income tax calculators to assist you and you may file ITR return online easily as well. There are detailed instructions on how to file income tax returns online for salaried employees and non-salaried taxpayers.

Income Tax Filing are an important part of the government process. Not only would you be fulfilling your responsibility by you would create a solid base with your declared income. In case you have missed filing your return you can get income tax extension and there are also instructions on how to file income tax returns³ for last 3 years if you would like to right an earlier wrong.

Filing your tax returns³ is a good idea and one to be embraced to get the income tax benefit. There is an income tax helpline available for various general tax issues as well as other helplines for specific issues. You can click here to find the one that suits your query/question. 

Tax Evasion is covered under Chapter XXII of the Income Tax Act, 1961 and is considered a criminal offence. While filing the return of tax it is important to abide by the intent as well as the letter of the law. There are several acts that are specifically mentioned in the Income tax Act that are considered offences and carry severe fines, penalties as well as prosecution.

These offences may arise on failure to fulfill basic requirements – such as not filing return of income in a timely and honest manner, failure to pay taxes on time, failure to pay tax deducted at source or tax collected at source on time, and such. Or maybe willful – such as a willful attempt to evade tax, failure to comply with notices, failure to produce books of accounts, false statements in return, falsification of books, abetment in filing wrongful return etc.

What is important to know is that all such acts carry a heavy fine and penalty with the possibility of prosecution.

So whether it be a simple error or deliberate falsification – the returns if scrutinized would likely to result to applicability of provisions as mentioned in Sections 275A to Section 280C of the Income Tax Act, 1961.