Income Tax – Basics

What is Income Tax?

Income tax is a direct tax payable by an assessee on the income earned during the previous year.

A direct tax is the one where the incidence & impact of taxation fall on the same entity.

Who is an Assessee?

An Assessee is any individual who is liable to pay taxes to the government against any kind of income earned or any losses incurred by him for a particular assessment year. Each and every person who has been taxed in the previous years for income earned by him is treated as an Assessee under the Income Tax Act, 1961.

An Assessee may be any individual liable to pay taxes for himself or to pay tax on behalf of somebody else.

Who is a Person?

Person includes:

  1. an Individual;
  2. a Hindu Undivided Family (HUF) ;
  3. a Company;
  4. a Firm
  5. an association of persons or a body of individuals, whether incorporated or not;
  6. a local authority; and
  7. Every artificial juridical person not falling within any of the preceding sub-clauses.
  8. Association of Persons or Body of Individuals or a Local authority or Artificial Juridical Persons shall be deemed to be a person whether or not, such persons are formed or established or incorporated with the object of deriving profits or gains or income.

What is Previous Year (PY)?

The Financial year in which the income is earned is referred to as the previous year.

In case of newly set up or a source of income newly coming to existence, then the previous year will be from the date of commencement of such set up or source of income till the end of financial year.

What is Assessment Year (AY)?

Assessment Year is the year following the financial year in which you have to evaluate the previous year’s income and pay taxes on it.

     Examples:

  • Income earned during PY 2018-2019 is chargeable to tax in the AY 2019-2020.
  • ABC Pvt. Ltd. is incorporated on 1-7-2018, the previous year for ABC Pvt. Ltd. will commence from 1-7-2018 and ends at 31-3-2019 and not from 1-4-2018. The AY is 2019-2020.

Exceptions to definition of Assessment year

As mentioned before, income earned in PY is assessed and taxed in AY. However, there are certain transactions or events, in respect of which such income earned in PY is taxed in that year itself, instead of taxability in AY.

Such exceptions are explained as below.

  • Income of non-resident from shipping business
  • No representative in India.
  • Income derived from carrying passengers, livestock or goods shipped at a port in India – 7.5% of the freight amount payable to owner of ship is deemed to be the Income accruing to the owner.
  • Income of persons leaving India.
  • Assessment of any association of persons, body of individuals or Artificial Juridical person formed or established only for a limited period
  • Any Person likely to transfer property to avoid tax
  • Discontinued Business.

Classification of heads of Income- Sec 14

The income earned by the assesse shall be classified under the following 5 heads of income for the purpose of computation of taxable amount subject to certain exemptions and deductions:

  1. Income from Salaries
  2. Income from House Property
  3. Profits & Gains from Business/Profession
  4. Capital Gains
  5. Income from Other Sources

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