What is Taxation?
The word ‘tax’ has its origin in a Latin word Taxo. Tax refers to a kind of financial charge that is imposed on an individual or a company by the central government or state governments of a country or any other recognised local body. The taxation system of a country is important for the successful working of the overall economy. The purpose of collecting taxes is to construct a pool of money that can be used for various public expenditures, such as providing subsidies and carrying out developmental activities.
Table of Content
- 1 What is Taxation?
- 2 Types of Taxes
- 3 Terms Related to income Tax (Sections 2 and 3)
- 3.1 India – Section 2(25A)
- 3.2 Person – Section 2(31)
- 3.3 Assessee – Section 2(7)
- 3.4 Firm – Section 2(23)
- 3.5 Company – Section 2(17)
- 3.6 Assessment – Section 2(8)
- 3.7 Income – Section 2(24)
- 3.8 Agricultural Income – Section 2(1A)
- 3.9 Previous Year (PY) – Sections 2(34) and 3
- 3.10 Assessment Year (AY) – Section 2(9)
- 3.11 Exceptions to the General Rule of Taxation
- 4 Heads of Income
- 5 Income Tax Rates and Slabs
- 6 Concept of Tax Deducted at Source (TDS)
In other words, we can say that the government charges taxes in order to accomplish its economic and social objectives and to reduce economic disparity. India has a three-tier tax structure. It means that the central government, state governments and local municipal bodies are allowed to levy and collect taxes as per Article 256 of the Constitution. You might have heard about various types of financial charges (taxes and cesses), such as sales tax, income tax, Value Added Tax (VAT), excise duty, customs duty and cess.
All these types of taxes can be classified into two major categories: direct tax and indirect tax. A few of them are non-existent as they have been subsumed under the newly introduced Goods and Services Tax (GST). In India, tax is levied on the income generated by a person or an organisation in a financial year. Income tax and corporate tax are the most important sources of revenue for the Government of India.
The Income Tax Department functions under the Central Board of Direct Taxes (CBDT) which further works under the Department of Revenue, Ministry of Finance, Government of India. Another board called the Central Board of Excise and Customs (CBEC) works under the Department of Revenue, Ministry of Finance, Government of India.
Figure shows the hierarchy of bodies related to taxation:
Vital Attributes of Taxes
Vital attributes or characteristics of a taxes are as follows:
- Taxes must be paid within the defined timelines.
- Taxes are levied on assets owned/income earned by persons.
- Taxes are levied for achieving economic parity in the society.
- Taxes are collected on the income generated by persons and by property owned by people.
Objectives of Taxation
As stated earlier, taxes are an instrument of social and economic policies in the hands of the government.
Other important objectives of taxation are as follows:
- Revenue generation (Social objective)
- Preventing the concentration of wealth in a few hands (Equality objective)
- Redistribution of wealth (Redistribution objective)
- Providing boost to the economy (Economic growth objective)
- Reducing unemployment (Employment objective)
- Eliminating regional disparities (Regional equality objective)
Tax Structure
Before we understand the concept of income tax, it is important to understand the tax structure of India. The tax structure has undergone a lot of changes in the past few years. Let us revisit the old tax structure of India which is shown in Figure:
The new tax structure of India post introduction of GST is shown in Figure:
Income tax is a direct tax that is levied by the government of a country on the personal income of an individual or corporate.
Some important features of Income tax are as follows:
- The incidence and impact of tax falls on the same individual or assessee.
- It is a progressive tax.
- It is levied upon and collected from the assessee.
- The burden of tax cannot be shifted from one assessee to another.
- It is levied on the annual income of an assessee.
- It is governed by the Income Tax (IT) Act, 1961 which is subject to amendments made to the Act by the Finance Act passed each year
- Determination of taxable income, tax liability and procedure for tax assessment, appeal, penalties and prosecutions is done as per extant laws.
- The Government enacts the law in the Parliament, whereas it is administered by the Central Board of Direct Taxes (CBDT).
- Section 295 of the IT Act empowers the CBDT to frame rules (called Income Tax Rules) from time to time in order to implement amendments in tax provisions for proper administration of the Act.
- CBDT frames rules which, in turn, prescribe forms, procedures and principles of valuation of perquisites under the Act.
- Section 119 of the IT Act prescribes that CBDT can issue circulars and notifications from time to time.
Tax Planning, Avoidance and Evasion
The terms ‘tax planning’, ‘tax avoidance’ and ‘tax evasion’, all are methods of reducing the tax liability of a person or a corporate body or any assessee. Before explaining these concepts in detail, let us first look at their definitions.
Tax Planning refers to the practice of availing all available exemptions, deductions and rebates provided in the Act in order to reduce an assessee’s tax liability. Methods using which an assessee can reduce his/her tax burden are provided in the Income Tax Act itself. For example, allowable exemptions are provided under Section 10 of the Act; allowable deductions are provided under Sections 80C to 80U of the Act; and allowable rebates and reliefs are provided under Sections 87–89 of the Act.
Tax Avoidance is an act of dodging tax without breaking the law. When an assessee indulges in tax avoidance, he/she arranges his/ her financial activities in such a manner which takes advantages of loopholes present in the tax law without breaking any law or doing anything illegal. This is done for reducing an assessee’s overall tax liability.
Tax Evasion refers to the use of any illegal methods that lead to the reduction of tax liability of an assessee. Tax evasion is achieved using dishonest means, such as concealing income, claiming excessive expenditures and forged accounts.
Types of Taxes
All taxes which are the liability of an assessee (taxpayer) come under the category of direct tax. Examples include income tax, capital gains tax (CGT), perquisite tax, wealth tax (now abolished) and corporate tax. On the contrary, all those taxes which an assessee can recover from other person(s), but the liability of payment of which lies with him/her, are called indirect taxes.
For example, income tax is a direct tax, whereas GST is an indirect tax. As you have studied earlier, the tax system of India is primarily a threetier system that includes the central government, state governments and some local government bodies. The central government levies income tax, Central GST (CGST) and customs duty. The state governments have the right to levy taxes, such as State GST (SGST).
Direct Tax
As explained earlier, direct taxes are taxes that are to be paid by an assessee or the taxpayer (person or corporate) directly to the government. The tax has to be paid by the taxpayer only and cannot be transferred to any other person. Various types of direct taxes include income tax, capital gains tax, securities transaction tax, perquisite tax, corporate tax, etc.
Direct taxes are overseen by the Central Board of Direct Taxes (CBDT). The CBDT was formed in accordance with the Central Board of Revenue Act, 1924. The CBDT is headed by a chairman along with six other members. The chairman acts as the special secretary to the Government of India.
Some of the important direct taxes imposed in India are as follows:
Income Tax
This is the most important direct tax. Almost everybody is acquainted with the concept of income tax. CBDT fixes the annual income range till which a person has to pay no income tax. However, on exceeding this limit, the assessee becomes liable to pay tax on the income over and above the fixed limit.
TDS is a concept related to direct taxation, wherein taxes are deducted at the very source of the origin of the income. This system of tax collection is based on the concepts of ‘pay tax as you earn’ and ‘collect tax as and when the income is being earned’.
Property Tax
In India, property is considered to be a source of income. Therefore, tax is levied on properties, such as buildings, flats, shops and land appurtenant to the building (land appurtenant to buildings means the land that is attached to buildings). This tax is known as property tax.
Inheritance Tax (Now Abolished)
Inheritance tax was also known as estate tax or death duty. It was a kind of tax levied on the total value of the money and property of a deceased person.
Gift Tax (Now Abolished)
Gift tax was imposed when a living person gifted certain amount of money or property to another living person.
Indirect Tax
Indirect tax refers to a group of tax laws and regulations. In India, it is levied on various business activities including manufacturing, trading, imports and exports, stamp duty, registration, transfer, etc. It is levied by both central and state governments. In recent years, the indirect taxation system in India has undergone extensive reforms in order to meet the requirements of international markets.
Till the F.Y. 2016-17, and for the first quarter of F.Y. 2017-18, India had in place a host of indirect taxes, such as sales tax, service tax, Central Excise Duty, Additional Excise Duties, the Excise Duty levied under the Medicinal and Toilet Preparations Act, Additional Customs Duty or the Countervailing Duty (CVD), Special Additional Duty of Customs – (SAD), Surcharges, Cesses, VAT/Sales tax, Entertainment tax (unless it is levied by the local bodies), Luxury tax, Taxes on lottery, betting and gambling, state cesses, surcharges related to supply of goods and services, and Entry tax. The Government of India rolled out the Goods and Services Tax (GST) on July 01, 2017. GST is a tax that subsumed a number of state and central indirect taxes.
The taxes subsumed under GST are as follows:
- Central excise duty
- Duties of excise (medicinal and toilet preparations)
- Additional duties of excise (goods of special importance)
- Additional duties of excise (textiles and textile products)
- Additional duties of customs (CVD)
- Special additional duty of customs (SAD)
- Service tax
- Central surcharges and cesses so far as they relate to supply of goods and services
- State VAT
- Central sales tax
- Luxury tax
- Entry tax (all forms)
- Entertainment and amusement tax (except when levied by the local bodies)
- Taxes on advertisements
- Purchase tax
- Taxes on lotteries, betting and gambling
- State surcharges and cesses so far as they relate to supply of goods and services
India has adopted a dual model of GST under which the GST is levied and collected by both the Centre and the State. Prior to the introduction of GST, the Centre was responsible for taxing the manufacturing of goods, whereas the State was responsible for taxing the sales of goods. With respect to services, only the Centre had the authority to levy Service Tax.
If GST was to be introduced, this segregation of power would have become a roadblock. Therefore, an amendment was made to the Constitution Act, 2016 in order to allow both the Centre and the States to levy and collect this tax. All this was done in order to smoothly implement GST.
| S. No. | Direct Tax | Indirect Tax |
|---|---|---|
| 1. | Direct tax is levied on and is paid by entities, such as individuals, HUFs, and companies, etc. For example, any company that earns profit has to file direct tax. | Indirect taxes are filed by businesses but are ultimately paid for by the end consumer of goods or service. For example, 5% GST is applicable for selling space for advertisement in print media. The cost of advertisement includes GST and is charged by the print media from the customer who gives the advertisement, but it is paid by the concerned print media. |
| 2. | Burden of tax cannot be shifted. For example, an individual must pay his tax in his own name. | Burden of tax can be shifted. For example, addition of GST on a luxury tax increases the cost of the product and shifts the burden on the purchaser. |
| 3. | Direct taxes may help in decreasing inflation. During periods of high inflation, the government may increase the tax rate which leads to a decrease in consumption demand, which, in turn, helps in reducing the inflation. | Indirect taxes may lead to increased inflation. Increasing the amount of indirect tax leads to increased price of the product or service, which is an inflationary act. In addition, this may lead to an inflationary spiral if workers are involved in production of goods and services start demanding greater wages. |
| 4. | Collection of direct taxes is easier and less costly, leading to better allocation. It is easier to collect direct taxes because they have to be collected from known parties. For example, tax is collected from wage and salary earners using the PayAs-You-Earn (PAYE) system. | Collection of indirect taxes is a bit tough as they have to be collected from multiple sources. |
| 5. | Direct taxes are progressive taxes. A progressive tax means that the people who are earning more pay more taxes as compared to people who are earning less. It means that progressive taxes take into consideration the taxpayer’s ability to pay. | Indirect taxes are regressive because the poor and the rich pay the same price (same tax) while purchasing the same product and service. |
| 6. | They involve higher administrative costs. It is so because they involve a lot of exemptions. | They involve lower administrative costs. It is so because they involve convenient and stable collections. |
Taxes are majorly differentiated on the basis of nature, incidence and impact, evasion, transfer of burden, impact on inflation, costs involved in collection, collection coverage, etc.
The Income Tax Act, 1961 extends to the whole of India. With a view to understand the provisions of the Income Tax Act, 1961, it is first necessary to gain a thorough knowledge of the terms defined under the Act. Section 2 defines the terms and expressions used under the Income Tax law, and Section 3 provides the meaning of the term ‘previous year’. Let us understand some of these important terms and definitions.
India – Section 2(25A)
The term ‘India’ means:
- the territory of India
- the territorial waters of India including the seabed and subsoil extending up to 12 nautical miles
- the continental shelf and exclusive economic zone extending up to 200 nautical miles
- other maritime zones specified under the Act including the airspace above its territory and territorial waters
Person – Section 2(31)
The term ‘person’ includes the following:
- an individual
- a Hindu Undivided Family (HUF)
- a company
- a firm
- an Association of Persons (AOP) or a Body of Individuals (BOI)
- a local authority
- every other artificial judicial person not covered above
Assessee – Section 2(7)
The term ‘assessee’ includes any person who is liable to pay any tax or other sum of money under the Act. It includes the following:
- Any person in respect of whom income tax assessment proceedings have been initiated under the Act
- Any person deemed to be an assessee or assessee in default under the provisions of the Act
Firm – Section 2(23)
The term ‘firm’ and ‘partner’ mean the same as defined under the Indian Partnership Act, 1932. A firm also includes a Limited Liability Partnership (LLP) and a partner also includes the partner of LLP as defined under the Limited Liability Partnership Act, 2008. Any minor admitted to the benefits of a firm shall also be treated as partner for the purposes of the Income Tax Act.
Company – Section 2(17)
The term ‘company’ includes the following:
- Indian company
- Foreign company as incorporated under the laws of a country outside India
- Any institution or body which is assessable or assessed under the earlier Income Tax Act, 1922, or under the current Income Tax Act.
- Any institution or body, whether Indian or foreign and whether incorporated or not, which is declared to be a company by the special orders of CBDT
Assessment – Section 2(8)
Assessment refers to the procedure through which the assessing officer determines the income of an assessee. It may include normal assessment or reassessment of a previously assessed income.
Income – Section 2(24)
As income is the main source which is put to tax, the term ‘income’ has been exhaustively defined in an illustrative manner under the Act. It majorly includes the following:
- Dividend
- Profits and gains
- Any capital gains
- Export incentives
- Any voluntary contribution received by religious trust, charitable institution, hospital, educational university, etc.
- Perquisites or profits in lieu of salary and special allowances granted to meet personal expenses or to perform official duties
- Salary, interest, bonus and commission received by partners of the firm
- Winnings from lotteries, races including horse races, crossword puzzles, card games or such other forms of gambling
- Sums received under a keyman insurance policy
- Money or any movable or immovable property received as gifts
Agricultural Income – Section 2(1A)
Agricultural income derived in India is exempt from tax by virtue of Section 10(1). Agricultural income may arise in any of the following ways:
- Rent received from land situated in India and used for agricultural purposes
- Any income derived by performance of agricultural operations on such land
- Revenue received from sale of agricultural produce in the market by the cultivator or receiver of rent in kind
- Income derived from farm building operations
Previous Year (PY) – Sections 2(34) and 3
The financial year in which the income is earned is referred to as the previous year. It means the financial year which immediately precedes the assessment year. However, in cases of new sources of income or newly set up businesses or professions, previous year shall be the year beginning from the date of set-up of such new source of income and ending on the 31st March of the said financial year. Only one financial year, i.e., 1st April to 31st March is considered as the previous year for the purpose of the provisions of this Act.
Assessment Year (AY) – Section 2(9)
The financial year in which the income is subjected to tax by the Income Tax Authority is referred to as the assessment year. It means the financial year which immediately succeeds the previous year. It is the period of 12 months beginning on the 1st of April every year. Therefore, it is very important to note that the income earned in a previous year is assessed/put to tax in an assessment year. The chargeability of income tax is based on this rule of thumb. Income of the previous year 2020-2021 is assessed to tax in the Assessment Year 2021-2022.
Exceptions to the General Rule of Taxation
The general rule of taxation states that the income of the assessee earned in the previous year is charged to tax in the relevant assessment year. However, there are certain exceptions to this rule. Under these exemptions, the income of the previous year is assessed to tax in the same previous year itself.
Some instances of these cases are explained in Table:
| Nature of Exception | Amount taxable in the previous year itself |
|---|---|
| Shipping business run by nonresidents | Amount taxable is 7.5% of the carriage paid to owner or charterer or any person on his behalf, whether paid or payable in or outside India |
| Persons leaving outside India during the current assessment year with no intention of returning to India | Amount taxable from the period of expiry of the respective previous year to his probable departure date from India in the AY |
| AOP or BOI or other artificial judicial person established for a particular purpose and likely to be dissolved in the current AY | Amount taxable from the expiry of the respective previous year to the date of its dissolution in the AY |
| Persons appearing to the Assessing Officer as likely to transfer property to avoid tax payment in the AY | Amount taxable from the expiry of the respective previous year to the date of commencement of assessment proceedings in the AY |
| Discontinuance of business in the AY | Amount taxable from the expiry of the respective previous year to the date of discontinuance in the AY |
Heads of Income
For the purpose of computation of total taxable income under the Income Tax Act, 1961, there are five heads of income prescribed for the classification of income. The charging section of each head of income exhaustively defines the scope of income to be charged to tax under that particular head.
These five heads of income are as follows:
- Salaries: Sections 15 to 17 – Salary and pension earned by the assessee is taxable under this head.
- Income from house property: Sections 22 to 27 – Rental income derived by the assessee is taxable under this head.
- Profits and gains of business or profession: Sections 28 to 44DB – Income earned from carrying on of business or profession by the assessee is taxable under this head.
- Capital Gains: Sections 45 to 55A – Profits arising to an assessee from the sale of capital assets is taxable under this head.
- Income from Other Sources: Sections 56 to 59 – Incomes which are not taxable under the above four heads are to be made taxable under this head. This head is also known as the residuary head of income.
Tax payers are required to appropriately classify their incomes under the relevant heads of income. The aggregate amount of taxable income under all the heads of income is adjusted for set off of the current year and brought forward losses to arrive at the Gross Total Income of the assessee. The Gross Total Income is to be further adjusted for deductions allowable under Chapter VI-A to arrive at the Total Income of the assessee for putting it subject to tax.
Table gives an overview of the different heads of income:
| Head of Income | Nature of Income |
|---|---|
| Salaries | It includes incomes earned by an assessee by virtue of the pursuance of employee-employer relationship. Moreover, it includes any sum received before joining of employment or after cessation of employment. The income is taxable in the previous year in which it is received or due, whichever is earlier. Certain deductions/ exemptions are allowed to assessees from their salary income. These are standard deduction under Section 16 and other exemptions of allowances and perquisites. For example, exemption is available in respect of House Rent Allowance (HRA) allowed to an employee from his employer towards payment of rent for his residential accommodation. |
| Income from House Property | Under this head, the annual value of buildings or lands appurtenant thereto is chargeable in the hands of the assessee who is the owner or deemed owner of such house property. The purpose is to tax the rental income received by letting out of house property. The income is taxable in the previous year in which the tax payer is the owner or deemed owner of the house property. Certain deductions are allowed to assessees under Sections 23 and 24 in respect of municipal taxes paid and interest on funds borrowed for the acquisition or construction of house property. |
| Profits and gains of business or profession | Under this head, all profits and gains derived from the activity of carrying on of a business or profession are chargeable to tax in the hands of the assessee. Moreover, deemed business profits and income from discontinued business are also subjected to tax under this head. The income is taxable on the basis of receipt method or accrual method as regularly followed by the assessee. |
| Capital Gains | It includes incomes or gains arising from the transfer of a capital asset by the assessee. Capital gains on sale of capital assets are categorised into short-term capital gains and long-term capital gains depending upon the period for which the asset was held by the tax payer during the previous year. The amount is taxable in the previous year in which the capital asset is transferred. Certain deductions and/or exemptions are allowed from capital gains income under Sections 54 to 54F. |
| Income from Other Sources | Any income of an assessee which is not includible in the above heads is chargeable under this head. Thus, it includes income of all other sources not covered under the preceding heads. The nature of income taxable under this head may include dividend income, winnings from lotteries or other casual income, gifts received in cash or kind, transfer of movable or immovable property for no or inadequate consideration, etc. Certain deductions are allowed income from other sources under Section 57. |
Income Tax Rates and Slabs
Different tax rates have been furnished for several sections of taxpayers and for varied sources of income. Individuals, Hindu Undivided Families (HUFs), Association of Persons (AOP), Body of Individuals (BOI) or Artificial Juridical Person (AJP) are taxed as per different income tax rates. However, companies are taxed at a fixed rate barring some exceptions. Tax rates applicable to two classes of taxpayers, namely domestic and foreign companies, for Assessment Year 2021-2022 have also been discussed.
Tax rates applicable to all other categories of taxpayers for Assessment Year 2021-2022 are as follows:
For individuals, the rates of income tax are as explained in Table:
| Individuals | |
|---|---|
| Net Income Range | Rate of Income-tax |
| Assessment Year 2021-22 | |
| Up to ₹2,50,000 | – |
| ₹2,50,000 to ₹5,00,000 | 5% |
| ₹5,00,000 to ₹10,00,000 | 20% |
| Above ₹10,00,000 | 30% |
| Senior Citizen | |
|---|---|
| Net Income Range | Rate of Income-tax |
| Assessment Year 2021-22 | |
| Up to ₹3,00,000 | – |
| ₹3,00,000 to ₹5,00,000 | 5% |
| ₹5,00,000 to ₹10,00,000 | 20% |
| Above ₹10,00,000 | 30% |
| Super Senior Citizen (who is 80 years or more at any time during the previous year) | |
|---|---|
| Net Income Range | Rate of Income-tax |
| Assessment Year 2021-22 | |
| Up to ₹5,00,000 | – |
| ₹5,00,000 to ₹10,00,000 | 20% |
| Above ₹10,00,000 | 30% |
For HUF, AOP, BOI and AJP, the rates of income tax are as explained in Table:
| Individuals | |
|---|---|
| Net Income Range | Rate of Income-tax |
| Assessment Year 2021-22 | |
| Up to ₹2,50,000 | – |
| ₹2,50,000 to ₹5,00,000 | 5% |
| ₹5,00,000 to ₹10,00,000 | 20% |
| Above ₹10,00,000 | 30% |
Add:
Surcharge:
| Rate of Surcharge | |
|---|---|
| Assessment Year 2021-22 | |
| Range of Income | Rate |
| ₹50 Lakhs to ₹1 Crore | 10% |
| ₹1 Crore to ₹2 Crores | 15% |
| ₹2 Crores to ₹5 Crores | 25% |
| ₹5 crores to ₹10Crores | 37% |
| Exceeding ₹10 Crores | 37% |
Health and Education Cess: Health and Education Cess is levied at the rate of 4% on the amount of income-tax plus surcharge.
Special Tax Rate for Individual and HUFs
| Total Income (₹) | Rate |
|---|---|
| Up to ₹2,50,000 | Nil |
| From ₹2,50,001 to ₹5,00,000 | 5% |
| From ₹5,00,001 to ₹7,50,000 | 10% |
| From ₹7,50,001 to ₹10,00,000 | 15% |
| From ₹10,00,001 to ₹12,50,000 | 20% |
| From ₹12,50,001 to ₹15,00,000 | 25% |
| Above ₹15,00,000 | 30% |
Add:
Surcharge
| Assessment Year 2021-22 | |
|---|---|
| Range of Income | Rate |
| ₹50 lakhs to ₹1 crore | 10% |
| ₹1 crore to ₹2 crores | 15% |
| ₹2 crores to ₹5 crores | 25% |
| ₹5 crores to ₹10 crores | 37% |
| Exceeding ₹10 crores | 37% |
For firms, LLPs and local authority, the rate of income tax is 30% of total income.
For co-operative societies, the rates of income tax are as explained in Table:
| Total income (in ₹) | Rates of tax (in %) |
|---|---|
| Up to ₹10,000 | 10% |
| From ₹10,001 to ₹20,000 | 20% |
| Above ₹20,000 | 30% |
Tax Rate on Special Tax Rates Applicable to a Co-operative Society
| Taxable income | Tax Rate |
|---|---|
| Any income | 22% |
For domestic and foreign companies, the rates of income tax are as explained in Table:
Tax Rate on Domestic Company
| Domestic Company | Assessment Year 2021-22 |
|---|---|
| Where its total turnover or gross receipt during the previous year 2017-18 does not exceed ₹400 crores | NA |
| Where its total turnover or gross receipt during the previous year 2018-19 does not exceed ₹400 crores | 25% |
| Any other domestic company | 30% |
| Royalty received from the Government or an Indian concern in pursuance of an agreement made with the Indian concern after March 31, 1961, but before April 1, 1976 or fees for rendering technical services in pursuance of an agreement made after February 29, 1964 but before April 1, 1976 and where such agreement has, in either case, been approved by the Central Government | 50% |
| Any other income | 40% |
The above income tax rates are as prescribed by the Finance Act, 2018. However, in respect of certain types of income, such as long-term capital gains under Section 112 or 112A, some specific rates are prescribed by the Income Tax Act, 1961, as the case may be. These rates are discussed along with the relevant sections at appropriate places.
Rebate – Section 87A
A tax rebate is allowed to resident individuals under Section 87A. If the total income of resident individuals does not exceed ₹5,00,000 during the previous year, a tax rebate of ₹12,500 or 100% of total income tax, whichever is less, is allowed to them. It is very important to note here that the rebate, if any, is deducted from total income tax before calculating the health and education cess.
Health and Education Cess
It is computed on total income tax (i.e., income tax and surcharge, if applicable). After allowing for rebate under Section 87A, health and education cess is levied @ 4% of income tax plus surcharge, if any. Thus, health and education cess is an additional surcharge computed on income tax as increased by surcharge and as reduced by rebate, if any. Net income tax payable is arrived at after the tax is increased by health and education cess.
Concept of Tax Deducted at Source (TDS)
Tax Deducted at Source (TDS) is defined as a means of collection of tax by Indian authorities, and is governed by the Income Tax Act, 1961. TDS is managed by the Central Board of Direct Taxes (CBDT), which is a part of the Indian Revenue Service (IRS). TDS is collected so as to enable the government to maintain a stable revenue source throughout the year, while at the same time ensuring that people do not avoid paying taxes. TDS is deducted at prescribed rates and is mandatory to be filed by certain persons responsible for making payments.
This tax is deducted at the source where income is generated and is deposited to the government. The person concerned receives income after deducting the tax amount. The person who receives the net income called the assessee needs to file a return stating that the TDS has been deducted and paid to the government. The person or the entity that deducts the TDS amount is called TDS deductor and it must issue a TDS certificate to the deductee within a specified time.
It is the duty of a deductor to deduct the appropriate amount of TDS and deposit it to the government. The TDS must be deducted irrespective of the mode of payment. It means that whether the income is paid to the deductee in cash, cheque or credit, all will first be deducted for tax. The TDS is always linked to the PAN of the deductor and deductee.
TDS is deducted on various types of payments (income and expenditure) including:
- Salaries
- Interest payments by banks
- Commission payments
- Rent payments
- Consultation fees
- Professional fees
- Lotteries
TDS is a kind of advance tax. While making payments under such segments, a percentage of the overall payment is withheld by the source that is making payments. TDS is one of the major sources of direct taxes, which is paid to the government by the person on whom it is imposed. The TDS concept is based on the system of ‘Pay As You Earn (PAYE)’, which means the government obtains the benefit as soon as others receive the net payment. The TDS is to be deducted when the payment is to be made. Different rates of TDS are prescribed for different items depending upon the type of payment.
Some instances where TDS is to be deducted and the associated rates are shown in Table:
| Nature of Payment | Relevant Section | TDS Rate (in %) |
|---|---|---|
| Salaries | 192 | At relevant income tax rates including cess. |
| Accumulated Taxable Part of Provident Fund | 192A | 10% |
| Interest on Securities | 193 | 10% |
| Income by way of dividend | 194 | 10% |
| Interest other than Interest on Securities | 194A | 10% |
| Winnings from lotteries, crosswords or any sort of game | 194B | 30% |
| Winning from horse race | 194BB | 30% |
| Insurance commission received by an individual | 194D | 5% |
| Payment in respect of life insurance policy | 194DA | 5% (w.e.f. 1/9/2019, the tax shall be deducted on the amount of income comprised in insurance pay-out) |
| Commission or brokerage received except for insurance commission | 194H | 5% if the payment in the F.Y. exceeds ₹15,000. |
| Payment made while purchasing land or property | 194IA | 1% |
| Payment of rent by individual or HUF the amount of which exceeds ₹50,000 per month | 194IB | 5% |
Some of the important terms used in the TDS concept are shown in Figure:
Let us now study these terms in detail.
- Deductor: It refers to a person who is liable to deduct the tax.
- Deductee: It refers to a person from whom tax is to be deducted.
- TDS returns: Once the tax is deducted and paid, the deductor has to file quarterly returns containing the details of the deductee and payments made.
- TDS certificates: After filing the TDS returns, the deductor is required to issue Form 16A (for non-salary/other payment deductees), and Form 16 (for salary deductees).
Some of the advantages of TDS are as follows:
- Tax is automatically paid to the government at the time when payment is accrued.
- Once the return is filed, the department gets to know about the details of the deductor, deductee and taxes remitted.
- TDS allows the regular flow of income.
- TDS makes it possible for taxes to be paid on behalf of the individual at regular intervals and there is no burden at the last moment.
- TDS takes care of the time value of money.
Obligations of a Tax Deductor
The tax deductor has to fulfil a number of duties, some of which are as follows:
Obtain TAN
Tax Deduction and Collection Account Number (TAN) is an identification number allotted to tax deductors for tax deduction or collection on behalf of its nature of business. It is a 10-digit alphanumeric number; the first four digits of TAN are a letter of alphabet, followed by five integers and a letter of alphabet. For TDS, as well as TCS, the same TAN is to be used. For obtaining TAN, the tax deductor is required to apply in Form 49B.
Identify the Nature of Payment
The identification of the nature of payment is equally important because only after doing so, the rate at which the tax is to be deducted can be identified.
Deduct Tax at the Prescribed Rates
After identifying the nature of payment, the tax is to be deducted at the prescribed rates under different heads at the following instances, whichever is earlier:
- At the time of payment or receipt of cash.
- At the time of issuance or at the time of receipt of cash or demand draft.
- Making credit entries or debit entries to the account of the buyer or the seller.
Remit in the Government Account in Due Time
The TDS deducted is to be deposited in the account of the government by the 7th of the following month. For example, TDS deducted in the month of November shall be deposited by the 7th of December, while the TDS of March can be deposited by the 30th of April.
File TDS Statement on or Before the Due Date
The TDS statement is prepared and submitted on a quarterly basis, except for the quarter ending 31st March. For the quarter ending 31st March, the deadline is 15th May. The due dates of filing the TDS statements are shown in Table:
| Particulars | Due Date for Govt. Deductor | Non-Govt. Deductor |
|---|---|---|
| Quarter ending 30th June | 31st July | 15th July |
| Quarter ending 30th September | 31st October | 15th October |
| Quarter ending 31st December | 31st January | 15th January |
| Quarter ending 31st March | 15th May | 15th May |
Issue TDS Certificates on Time
The deductor shall issue the TDS certificate to the deductee in the form specified as per the applicable Income Tax Rules. There are different forms specified for different types of taxes deducted. The brief details of the forms (types of TDS certificates) to be provided to the deductee are shown in Table:
| Description | Period | Form No. | Due Date |
|---|---|---|---|
| Deduction of tax from salary | Annually | 16 | By 31st May of following F.Y. when TDS is deducted |
| Deduction of tax from other than salary | Quarterly | 16A | Within 15 days of furnishing the TDS statement |
| TCS | Quarterly | 27D | Within 15 days from the due date of furnishing the TCS statement |
Further, Table shows forms that are required to be submitted to the Income Tax Department for filing the returns:
| Nature of Deduction | Form No. |
|---|---|
| TDS on payments to residents for salary | 24Q |
| TDS on payments made to residents other than salary | 26Q |
| TDS on payments made to foreigners and non-residents other than salary | 27Q |
| TCS | 27EQ |
| Statements of non-deduction of TDS by the banking company | 27QAA |
Implications of Not Following TDS Provisions
Following instances are considered as default in TDS:
- Non-deduction or delay in the deduction of whole or a part of tax at source
- Failure to deduct TDS
- Failure or delay in deduction to deposit the whole or part of a tax deducted at source
- Failure to apply for TAN within the prescribed time limits
- Failure to submit the TDS returns on time
- Failure to issue the TDS certificate on time
- Failure to quote PAN details of the deductee in all the quarterly statements filed with the government
Consequences of the above defaults are as follows:
- The tax deductor shall be treated as an assessee by default.
- Penal interest can be levied under Section 201 (1A) (failure to deduct tax at source/delay in payment of tax deducted at source).
- Penalty can be levied under sections 221, 271C, 272A(2).
- Prosecution can be launched under sections 276B and 277.
Penalties for default in TDS are shown in Figure:
Let us now study these penalties in detail.
- Tax demand: Tax demand can be generated for the amount of tax deductible but not deducted.
- Penalty: Penalty can be levied on the amount of tax deductible but not deducted. The penalty amount could be up to the amount of arrears.
- Interest: If the TDS is deposited late, interest @1% or 1.5% can be levied.
- Prosecution: Prosecution is also possible for a period of minimum 3 months and maximum 7 months along with fine.
