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Income Tax Act 1961- A Guide for Taxpayers

Income Tax Act 1961- A Guide for Taxpayers.png

For newcomers, filing tax returns can be difficult. You must become familiar with the guidelines, deadlines, filing procedure, and several technical terms. We will delve deeply into the Income Tax Act of 1961 in this essay, including key provisions, characteristics, diverse jargon, clauses, and much more. Continue reading to learn more details on the same.

What is the Income Tax Act 1961?

The set of guidelines used by the Income Tax Department to levy, manage, collect, and recoup taxes is known as the Income Tax Act of 1961. It is broken down into 298 parts, 23 chapters, and other important laws, covering every aspect of Indian taxation. Direct taxes and indirect taxes are the two categories into which the Income Tax Act of 1961 is divided. The taxpayer must pay direct taxes at a certain percentage based on his or her income. However, the selling of goods and services is how the government indirectly collects the latter tax.

Introduction of Income Tax Act: Some Key Terms

Income Tax: This is a tax levied by the federal government that is determined by an assessee's total taxable income for the preceding year. 

Assessee: Any individual required by any section of the IT Act to make tax payments to the government. According to the Act's requirements, an individual may be considered an assessee or identified as one by default. 

Assessment: The essential procedure for confirming the veracity of the income the assessee has declared is assessment.

Assessment Year: The Income Tax Act of 1961 defines the assessment year as the year that income is subject to taxation. It is a twelve-month term that starts on April 1st of each year and ends on 31st March of the next year.

Previous Year: The financial year that comes right before the present assessment year is referred to as the prior year under the Income Tax Act of 1961. To put it another way, the income is earned in the year prior. On the other hand, if a business is newly established, the prior year will begin on the day of incorporation or business setup. The period for a new source of income starts on the date when revenue is first received and concludes after the specified financial year.

Income: The term "income" refers to a variety of things, including but not limited to: 

  • Income obtained by the assessee that is not allowed to be taxed

  • Income that is irregular or illegal

  • Income that is taxable from a foreign source (outside of India)

  • Any form of benefit, whether monetary or not

  • Subsidies, reimbursements, and reliefs of any kind

  • Gifts to those whose income is not covered 

  • Any type of side income, including prizes from lotteries and horse racing wagers

Taxable Income: From a taxation perspective, incomes are segregated under five different heads. These include:

  • Income from salary

  • Profit and gains from business or profession

  • Income from house property

  • Capital gains

  • Income from other sources

Gross Total Income: Gross Total Income is the total of all the different income heads added together. 

Net Total Income: Net Total Income is the remaining amount after deducting U/s 80C to 80U in accordance with Chapter VIA from Gross Total Income. Total Income and Gross Total Income are equal in cases when there are no deductions.

Chapters of Income Tax Act, 1961

The Income Tax Act 1961 includes 23 chapters, each covering different aspects of taxation. The following table highlights the content and overview of each chapter of the act-

Chapters of Income Tax Act, 1961 - Table.png

Who is Liable to Pay Income Tax?

In India, a "person" is obligated to pay income tax; nevertheless, the statute defines a "person" differently than what is commonly understood. Under Section 2(31), the term "Person" has been generally categorised into the following categories: 

  • An individual

  • A Hindu Undvided Family (HUF)

  • A local authority; an association of persons (AOP) or a group of people, whether or not they are incorporated; a company; a firm; and every artificial juridical person who does not come under one of the grups mentioned above

Features of Income Tax Act 1961

The following are a few of the key features of the Income Tax Act of 1961: 

  • One type of direct tax that the taxpayer is responsible for paying is income tax. The liability is not transferable to someone else. 

  • This type of taxation is managed by the Central Government of India. 

  • It is applied to the income obtained by the taxpayer in the preceding year. 

  • The assessee's income tax slab is used to determine the applicable tax amount. 

  • Rich and powerful people pay higher rates of income tax because the government imposes a progressive income tax. 

  • In some circumstances, deductions are subject to a maximum limit each financial year.

Objectives of Taxation in India

The following are the Income Tax Act of 1961's primary goals: 

  • The IT Act establishes guidelines for direct taxes, preserving economic price stability. It functions as a curb on private spending, which in turn prevents commodity price inflation. 

  • Rich people pay a greater tax rate than the impoverished do. Thus, the Income Tax Act fulfils its non-revenue goal by promoting a progressive taxing structure that tackles wealth disparities among the populace. 

  • In periods of economic expansion, income tax rates rise; during recessions, they decrease. The Act keeps control over the cyclical changes in the value of money in this way. 

  • This Act lowers income tax rates to increase demand for products and services. Thus, the goal of full employment is achieved as a result of more employment options. 

  • Certain items that are imported are subject to customs taxes as per the Income Tax Act. This aids in promoting domestic manufacturing, which lessens the government’s challenges with the balance of payments.

Scope of the Income Tax Act 1961

The following table shows the scope of income tax a person has to pay according to the Income Tax Act 1961 according to their residential status.

Scope of the Income Tax Act 1961 - Table.png

Key Sections of the Income Tax Act

Some of the key sections of the Income Tax Act 1961 that all taxpayers should know about are as follows:

Section 80C: By investing in particular investment alternatives, taxpayers can deduct up to Rs. 1.5 lakh as per Sections 80C, 80CCC, and 80CCD.

Section 80CCD: Under this provision, individual taxpayers can additionally deduct additional deductions over provision 80C as well as contributions made to the National Pension Scheme (NPS) or Atal Pension Yojana (APY).

Section 80D: Under this section, taxpayers may deduct up to Rs. 25,000 (or up to Rs. 50,000 for senior people) from their taxes as payment for the health insurance premiums of themselves, their spouses, their parents, and their children.

Section 80DD: Deductions for medical costs made on behalf of dependents with disabilities are available to individuals or Hindu Undivided Families (HUF).

Sections 80DDB: People may deduct medical expenses from their taxes under this clause if they have certain diseases.

Section 80E: This section permits interest paid on student loans taken out for postsecondary education to be deducted.

Section 80TTA: This allows individuals and HUFs to deduct up to Rs. 10,000 from their savings account interest income.

Section 80U: This provision permits deductions for those with impairments or disabilities, either physical or mental.

Provisions of the Income Tax Act 1961

The Income Tax Act of 1961 has several provisions. Among the noteworthy ones are: 

  • Appeal under Section 261 to the Supreme Court and Section 260A to the High Court

  • Financial transaction statement and annual information 

  • An official representative's appearance 

  • Taxability of income 

  • Executing transactions mode 

  • Evaluating tax officials 

  • Directives to lower-level officials 

  • Appeal application for Income Tax Officer's reference

Wrapping Up

You can now comprehend the operation of the Income Tax Department as you have a comprehensive understanding of the Income Tax Act of 1961. Additionally, you can read through the various sections to find out about the numerous deductions that are available. With this knowledge and insight, you can save taxes and make wiser investments.

Frequently Asked Questions


What is the history of Income Tax Act of 1961 in India?


In February 1860, Sir James Wilson introduced India's first Income Tax Act. He was the first Finance Minister of British India.


How many sections does the Income Tax Act 1961 have?


The Income Tax Act defines its rules and guidelines in 23 chapters and 298 sections. The portions marked 80C, 80CCD, 80CCC, 80TTA, and 80TTB are a few of the most significant ones.


Is there any way to save taxes?


Yes, several exclusions and deductions from the total income for a year are permitted by the Income Tax Act. But for average individuals, figuring out how to do it best might be intimidating. The best course of action is to prepare your taxes or hire a CPA.


How many types of ITR Forms are there?


The Income Tax Act, 1961, has 7 types of ITR Forms for taxpayers to fill out depending on their unique circumstances.


What is the difference between e-filing and e-payment?


The method of paying taxes electronically, by debit or credit card or net banking, is known as e-payment. On the other hand, the procedure of electronically furnishing an income return is known as e-filing.

Prachi Jain

Chartered Accountant

Prachi Jain is a Chartered Accountant with a passion for simplifying finance and tax-related matters through her insightful and informative blogs. With a background in finance and a deep understanding of tax regulations, Prachi has established herself as a trusted source of financial wisdom. Prachi is committed to empowering her readers with the knowledge they need to make informed financial decisions. Her expertise and dedication shine through in every blog post, helping her audience navigate the intricacies of finance and taxes with confidence. Follow Prachi Jain's blog for practical insights and guidance on managing your finances effectively.

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