What is Income Tax and what are the various heads of Income under Income Tax Act?

In one sentence "a TAX is a compulsory payment under the provision of Law". It means that a person has to pay tax if he/she comes under the provision of taxation. He/she cannot deny himself or herself from paying tax.

What is Tax and Income Tax?

In one sentence "a TAX is a compulsory payment under the provision of Law". It means that a person has to pay tax if he/she comes under the provision of taxation. He/she cannot deny himself or herself from paying tax. And the provision actually specifies the limit and rule that who is liable to pay tax to the government.

Income Tax

Income Tax is a very important direct tax. Direct tax means that it is directly imposed to a person and he or she cannot shift its burden to others. A person who pay tax is known as Assessee also called in general language a taxpayer. It is an important source of revenue for the government. The government needs money to maintain law and order, construct road and bridges, open schools and colleges, security of the country from outsiders, welfare of the people, funding various government schemes and other various types of development. In different country there are different provisions and rules regarding income tax. Since, Indian government is very much inclined towards socialist welfare, it is the foremost duty of the government to bring out such welfare policies and programmes  which help in bridging the gap between the rich and the poor. Income tax is an important tool to achieve the socio economic growth and balance. In India, Progressive System of Taxation follows. Under this system higher the income higher the tax liability. 

Income Tax, tax, heads of income, income tax act, history of tax, forms of income, types of tax,

History of Income Tax in India:

In India, Income Tax was first introduced in 1860, by Sir James Wilson in order to meet the losses suffered by the government on the account of Sepoy Mutiny of 1857. This mutiny is also known as first war of independence. Thereafter, several amendments were made in it time to time. In 1886, a separate Income Tax act was passed. This act remained in force up to 1917. In 1918, a new Income Tax act was passed and again it was replaced in 1922 with a new act. This 1922 act remained up to the assessment year 1961-62 with various amendments. 

Then , the Government of India, referred the 1922 tax act to the Law Commission in 1956 with a view to simplify and prevent the tax evasion. The Law Commission submitted its report on 1958,  and in the mean time a new committee was appointed by the government named as Direct Taxes Administration Enquiry Committee to suggest measure to improve the tax structure and evasion of tax. This new committee submitted its report on 1959. In consultation with the Ministry of Law finally Income Tax Act, 1961 was passed in the year 1961. This Income Tax Act, 1961 came into force from 1st April, 1962. Since 1962, various amendments have been made in the Income Tax Act in the Union Budget every year which also contain Finance Bill. After the finance bill passes in both the houses of the parliament and receives the assent of president it becomes the Finance Act. 

Who is liable to pay Income Tax:

Every person, who comes under the provision of income tax is liable to pay tax. It means that if a person taxable income for the previous financial year exceeds the minimum taxable limit is liable to pay income tax during the current financial year on the income of the previous financial year at the tax rate specified in the current financial year. 

For Example- Let 's assume Mr. A is a person whose total income after all deduction is Rs 500,000 in the previous financial year 2015-16. He has to pay income tax for this previous year income in the current financial year 2016-17. 

Let's Assume Tax Rate is 10% and also a provision that income up to Rs 250,000 is exempt from paying tax. So in this situation Mr A's Taxable Income is Rs (500,000 - 250,000) = Rs 250,000.
So, He has to pay tax in the current financial year for the previous year income of Rs 250,000. Then his Tax Liability will be 10% of Rs 250,000 that is Rs 25,000.

Heads Under the Income Tax: 

There are five heads under the Income Tax Act. We can also say the five sources of income through which income is generated. Let's see these heads of income briefly.

1. Income from Salaries:- Income from salaries is defined under the sections 15 to 17 of Income Tax Act.  A salary is any remuneration paid by employer to its employee in consideration of his services. Salary includes:-

  • wages
  • annuity or pension
  •  gratuity
  •  fees, commission, perquisite or profit in lieu of salary or wages. This will comes under the head salary if it is earned on a regular basis.
  • advance salary, not availed leave remuneration
  • annual accretion to the balance at the credit of the any employee participating in the recognized provident fund that is employer's contribution in excess of 12% of the employee's salary and interest on provident fund in excess of 9.5% (w.e.f. A.Y. 2002-03) rate. Please note that rates are subject to change. 
  • Allowances
2. Income from House Property:- Income from house property comes under the sections 22 to 27. The basis of charge is on the annual value of the property. Only those property comes under this head which is used to generate income not for personal use. For example; House Rent.
The property includes any lands, building, apartments or houses which are owned by assessee and it used for the purpose of generating income in the form of rent on a regular basis.

3. Income from Business or Profession: This head of income comes under the section 28 to 44. Under this head any business or profession comes. A business means purchasing and selling or manufacturing of a commodity in order to earn profit. 

Profession means doing activities which require special knowledge and skills to earn for livelihood. Example:- Lawyer. Doctor, Auditor, Engineer and so on. 

4. Income from Capital Gains: Income from Capital Gains comes under the section 45 to 55. Under this head any profit or gains which arises from transfer of capital assets in a year is included. For example; Gain from selling lands, properties, shares, short term investment and other type of securities which is done on a regular basis. This is the fourth head of income.

5.Income from Other Sources: This is the fifth and last head of income under the income tax act. Income from other sources comes under the sections 56 to 59. Any income which is not generated on a regular basis or in other words say "Casual Income" comes under this head. Also any income which does not find place in the above four head comes under the other sources of income in this head. 

Example; Dividends, Winning from Lottery, Horse Race, Puzzles, Gambling, Interest on Securities, Card Games, Plant or Machinery or Furniture let on hire and so on.