Introduction:
Sensu lato, the government levy taxes on citizens to raise revenue for the purpose of performing the undertaken responsibilities of fostering economic growth and enhancing the efficacy in improving the living standards of the people. Thus, taxes are the mandatory capital costs that the government demands and utilizes to carry out beneficial welfare activities viz. national development, improvement of infrastructure, the wellbeing of the population, and many more. Welfare schemes necessitate considerable spending, and thereof government meets such needs with the public finance raised of the tax collections.
It is purported that ancient manuscripts like Manusmurthi and Arthashastra have the endorsement of taxation. Nemine contradicente, the statutes are backed by the constitution; if not, then the same will be revoked qua ultra vires. Correspondingly, the state and the central governments acquire authority from the provisions of the Indian constitution to levy tax on the allocated sectors. It is envisaged that the taxes must not be levied or collected unless and until it is endorsed by the authority of law pursuant to Article 265 of the Constitution.
Furthermore, entry 82 of List I of Seventh schedule empowers the parliament to levy and collect income tax not inclusive of agricultural incomes, which is being collected by the state as per Entry 46 of List II.
As far as India is concerned, catchall legislation that governs, levy, collect, administer and recover income tax is Income Tax Act, implemented on 1st April of 1961. Under this Act, The phraseology income tax comprises both the cess and the surcharge for the assessment year[1]. It is pertinent to note that the Act provides provisions for the cess, which includes taxation on income received in advance, and income yet to be received.
Generally, income tax is levied on the total income[2] of the previous year[3] of an individual/ person[4]. The bedrock principle of taxation is to tax the net income i.e. reducing expenditure from the net income (gross income-expenditure = net income). Before comprehending the notion of taxation, it is a prerequisite to know the different heads of income that are chargeable as cess.
Heads of Income:
Income tax is computed for the purpose of calculating the total income of a person. But do you aware, which Section of Income Tax Act, 1961 has dealt with the computation of Income-tax? For hassle-free calculations, the incomes are supposed to be classified, aiding to preclude ambiguities. Concerning the matter in issue, the Indian government has classified the sources of income of an individual under separate heads. The computation of total income takes place subsequently after clubbing the calculated income under each head, separately. Though the income tax laws for income are the same, there are different sets of rules for calculating the income from each head.
Section 14 of Income Tax Act, 1961 provides that save as otherwise provided by this Act, all income shall, for the purposes of charge of income-tax and computation of total income, be classified under the following heads of income:
A.—Salaries
B.—[***]
C.—Income from house property
D.—Profits, and gains of business or profession
E.—Capital gains
F.—Income from other sources[5]
Therefore, the section provides the incomes that are chargeable under the five heads, So as to impose the income tax; the revenue of a concerned individual should fall/ brought under any of the aforesaid heads.
Income from salary,
To levy tax on the income from salary, firstly, the existing employer-employee relationship between the payer and the receiver should be ascertained. In other words, the paycheck from the company is salary; there exists a contract of employment pursuant to rule of law that establishes the payer as the employer and the receiver as the employee. Hence, there should last a relationship, if not, the revenue will not consider as the income from salary.
Illustration: Mrs. Angelina works in SGP Company Ltd. Owned by her Uncle. Despite being a close relation, she is getting paid 50,000 as a monthly salary. Here, her monthly earnings are chargeable under income from the salary head since she has an employer-employee relationship with her Uncle.
As per Section 15(a) of the Income Tax Act, any salary from the employer or former employer to the assessee[6](previous year) is taxable under this head regardless of the fact that it has been paid or not.
According to the Indian taxation Law, an employer could be remunerated by the mean of the following terminologies,
- Fees
- Basic Wages
- Advance salary
- Allowances
- Pension
- Gratuity
- retirement benefits and
- Annual bonus as well.
Section 15(b) any salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer though not due or before it became due to him.
Clause (c) of Section 15 provides that the arrear salary paid by the employer is chargeable only when it has not been charged in any of the previous years. It is noteworthy that any income that was paid in advance and had included in the previous year will not be added again to the total income of a person when it becomes due.
Income from House Property,
Sections 22 to 27 of the Act of 1961 elucidate the computation of the total income from the properties inclusive of land and building, which the concerned person owns. The revenue under this head is chargeable only when the property has let out or rent i.e. only the rental income is taxable.
Section 22 of the Act provides that the annual value of property consisting of any buildings or lands appurtenant thereto of which the assessee is the owner, other than such portions of such property as he may occupy for the purposes of any business or profession carried on by him the profits of which are chargeable to income-tax, shall be chargeable to income-tax under the head “Income from house property.
Hence, the chargeable cess could be levied on the gains from the building or the land appurtenant to the property comprises buildings rented for residential, businesses, professional, and entertainment purposes. In general, the income from the house property is calculated as,
Earning – expenditure = profit.
It is pertinent to note that if the recipient is not the owner of the rented property, he will not be charged under this head. But, the same is taxable under either ‘income from business or income from other sources’ head.
Profit from Business or profession,
The profit made by a person from a business is liable for taxation under this head, wherein the cess will be assessed on the difference between the earnings and the expenses incurred. However, the income from the business is not chargeable, but only the gains and the profit are chargeable. To reckon the total income of a person, it is significant to minus the expenses from the earnings, to estimate the profit[7].
The computation procedures of this head are explicated under Sections 28 to 44D of the Income Tax Act, 1961. But, it is quintessential to comprehend the meaning of the terms ‘businesses and ‘profession’ pursuant to the Act. The term business[8] is defined as an activity performed for the purpose of earning a profit, while Section 2(36) defines the latter as an occupation. Notwithstanding, both are similar in all respects that they are driven in pursuit of income/ profit.
Under this head, the following incomes are chargeable,
- Benefit reaped from the business
- Profit on the income by an organisation or as a result of being in a partnership,
- Profit earned by the assessee
- Cash received on export by the operation of the governmental scheme
Thus, Income from a business or profession includes profit/loss from a business entity or a profession, any interest, salary, or bonus to a partner of a firm is taxable[9].
Income from capital gain,
In common parlance, capital gains are the profit earned by the assessee during the effective financial year by selling or transferring the capital assets. Taxation under this head is appertaining to the holding period of the capital assets; such income from capital gains includes the long-term capital gains (LTCG) and short-term capital gains (STCG).
- LTCG- holding assets for more than 36 months and gaining profit by selling them.
- STCG- holding assets for less than 36 months and deriving profit by selling the same.
Section 45(1) of the Income Tax Act provides that Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in sections 54, 54B, 54D, 54E, 54EA, 54EB, 54F, 54G and 54H, be chargeable to income-tax under the head “Capital gains”, and shall be deemed to be the income of the previous year in which the transfer took place.
Income from other sources,
Incomes, which are being left by the aforementioned clauses, can be charged under this head. Section 56 (2) of the Income Tax Act attributes the following types of income sources as ‘other income’,
- Interest income from bank deposit
- Dividend earnings
- Gifts
- Insurance policy
- Income from the lottery, card games, gambling, and many more
The total income of an individual plays a pivotal role in income tax computation. That is why it is significant to figure out the underlying structure of income tax. The aforementioned is the brief outline of the existing five heads of income under the Income Tax Act, 1961.
References:
- https://www.fincash.com/l/5-heads-of-income-under-income-tax-act-1961
- https://www.legalraasta.com/itr/income-tax-heads/
[1] Section 2(9) of Income Tax Act, 1961
[2] Section 2(24) of Income Tax Act, 1961
[3] Section 3 of Income Tax Act, 1961
[4] Section 2(31) of Income Tax Act, 1961
[5] Section 14, Income Tax Act, 1961 (No. 2).
[6] Section 2(7) of the Income Tax Act, 1961
[7] Section 28, Income Tax Act, 1961
[8] Section 2(13), Income Tax Act, 1961
[9] https://economictimes.indiatimes.com/wealth/tax/what-are-the-five-heads-of-income-under-income-tax-act/articleshow/65077506.cms
Also Read – Who Is Required To File Income Tax Return?
