Planning to pay your taxes for the first time? Are you confused between the different sections and provisions of income tax? Then know that you are not alone. Every first-time taxpayer should know the basics of how income tax is levied in India. In this regard, you need to know about certain aspects of the Income Tax Act 1961. The Income Tax Department levies taxes based on this Act passed by the Government of India.
Keep reading this article to know more!
Budget 2024 Latest Update
Finance Minister Nirmala Sitharaman stated, "I am announcing a comprehensive review of the Income Tax Act of 1961. This will help reduce disputes and litigation, and it is expected to be completed within six months."
What is the Income Tax Act 1961?
The Income Tax Act 1961 is the set of rules and regulations upon which the Income Tax Department levies, administers, collects and recovers taxes. It contains 298 sections, 23 chapters and several important provisions which contain all the aspects of taxation in India.
The nature of the Income Tax Act 1961 is direct i.e. the taxpayer must pay direct taxes at a certain percentage based on his/her income.
Chapters of the Income Tax Act 1961
The Income Tax Act has 23 chapters in total, some of which have subparts. Find them mentioned in the table below:
Chapter | Overview |
Chapter I | An introduction of the Income Tax Act and its overview. |
Chapter II | The beginning and scope of the IT Act. |
Chapter III | Income that does not form a part of the total income. |
Chapter IV | How is total income calculated? |
Chapter V | Other income sources of individuals which form a part of the assessee’s income, like capital gains, businesses, properties and more. |
Chapter VI | Aggregation of income, carry forward of loss and set off. |
Chapter VIA | Deductions applicable while calculating total income. |
Chapter VIB | Restriction on specific deductions for companies. |
Chapter VII | Parts of total income on which income tax is not applicable. |
Chapter VIII | Applicable rebates and reliefs while calculating income tax. |
Chapter IX | Contains information on double taxation relief. |
Chapter X | Special cases in which assessees do not have to pay income tax. |
Chapter XA | General anti-avoidance rules for income tax. |
Chapter XI | Additional tax implications on undistributed profits. |
Chapter XII | Rules of tax calculation in special cases. |
Chapter XIIA | Special rules on certain Non-Resident Indian (NRI) income. |
Chapter XIIB | Special tax provisions for certain companies. |
Chapter XIIBA | Special tax provisions for certain limited liability partnerships. |
Chapter XIIBB | Special tax rules when the Indian branch of a foreign bank gets converted to a subsidiary company. |
Chapter XIIBC | Special tax rules for companies which are resident in India. |
Chapter XIIC | Special tax rules for retail trade. |
Chapter XIID | Special tax rules for the distributed profits of domestic companies. |
Chapter XII DA | Special tax rules for the distributed income of domestic companies for buying back shares. |
Chapter XIIE | Special tax rules for distributed income |
Chapter XIIEA | Special tax rules for distributed income by securitisation trusts. |
Chapter XIIEB | Special tax rules for accredited income of specific institutions and trusts. |
Chapter XIIF | Special tax rules for income from venture capital funds and venture capital companies. |
Chapter XIIFA | Special tax rules for business trusts. |
Chapter XIIFB | Special tax rules for the income of investment fund schemes and the income received from them. |
Chapter XIIG | Special tax rules for the income of shipping organisations. |
Chapter XIIH | Tax implications on fringe benefits. |
Chapter XIII | Information of Income Tax Authorities. |
Chapter XIV | Procedure of income tax assessment. |
Chapter XIVA | Special rules for avoiding repeated appeals. |
Chapter XIVB | Special rules for assessing search cases. |
Chapter XV | Tax liabilities in special cases. |
Chapter XVI | Special tax rules applicable to firms. |
Chapter XVII | Rules of tax collection and recovery. |
Chapter XVIII | Tax relief on dividend income in specific cases. |
Chapter XIX | Tax Refunds. |
Chapter XIXA | Case settlements. |
Chapter XIX-AA | Role of Dispute Resolution Committee in specific cases. |
Chapter XIXB | Advance rulings. |
Chapter XX | Appeals and revision. |
Chapter XXA | Immovable property acquisition in special cases of transfer to prevent tax evasion. |
Chapter XXB | Mode of accepting payments or repayments in special cases in order to counteract tax evasion. |
Chapter XXC | Buying of immovable property by the central government in certain transfer cases. |
Chapter XXI | Imposable penalties. |
Chapter XXII | Punishable offences and prosecutions. |
Chapter XXIB | Certificates of tax credit. |
Chapter XXIII | Miscellaneous. |
To get further details on the contents of each chapter, you can download the Income Tax Act 1961 PDF from the Income Tax Department’s official website.
Main Objectives of Income Tax Act 1961
The main objectives of the Income Tax Act 1961 are as follows:
- Price Stability
The IT Act maintains price stability in the economy by laying out regulations for direct taxes. It serves as a measure to control private spending, thereby keeping a check on the inflation of commodity prices.
- Full Employment
This Act reduces the income tax rates in order to promote higher demand for goods and services. This, in turn, leads to increased employment opportunities, thus fulfilling the objective of full employment.
- Non-Revenue Objective
A higher tax rate is applicable for wealthy people compared to the poor. In this way, the Income Tax Act encourages a progressive taxation system that addresses the inequality in wealth among its citizens, carrying out its non-revenue objective.
- Cyclical Fluctuations Control
When there is an economic boom, the income tax rates are increased, while in times of recession, it is reduced. In this way, the Act maintains control over cyclical fluctuations in the value of money.
- Reducing Balance of Payment Issues
The Income Tax Act imposes customs duties on the import of certain goods. This helps encourage the domestic production of goods, thereby reducing the balance of payment difficulties for the authorities.
Scope of Income Tax Act 1961
The scope or extent of tax implications under the Income Tax Act 1961 depends upon the assessee’s residential status:
Income Type | Residential Status | ||
Resident and Ordinarily Resident (ROR) | Resident but not-Ordinarily Resident (RNOR) | Non-Resident (NR) | |
Income received or deemed to be received in India | Taxable | Taxable | Taxable |
Accrued income in India | Taxable | Taxable | Taxable |
Income accrues from outside India, but the profession or business is inside the country. | Taxable | Taxable | Non-taxable |
Income accrues from outside India, but the profession or business is outside the country. | Taxable | Non-taxable | Non-taxable |
The untaxed past foreign income brought into the country. | Non-taxable | Non-taxable | Non-taxable |
Features of Income Tax Act 1961
Some of the salient features of the Income Tax Act 1961 are as follows:
- Income tax is a form of direct tax that needs to be borne by the taxpayer. It cannot be transferred to another individual.
- The Central Government of India controls this form of taxation.
- It is applicable to the taxpayer's income which was earned in the previous year.
- Tax calculation is applicable based on the assessee’s income tax slab.
- The government levies a progressive income tax rate so that rich and economically powerful individuals have to pay taxes at higher rates.
- Deductions apply to a maximum limit per financial year in certain cases.
Provisions of Income Tax Act 1961
There are several provisions in the Income Tax Act 1961. Some of the notable ones are:
- Appeal under Section 260A to the High Court and Section 261 to the Supreme Court
- Annual information and financial transaction statement
- Appearance by an authorised representative
- Income taxability
- Undertaking transactions mode
- Assessing tax authorities
- Instructions to subordinate authorities
- Appeal application for reference by the Income Tax Officer
Final Word
Now that you have a clear idea of the Income Tax Act 1961, you can understand how the Income Tax Department works. Furthermore, you can take a look at the different sections in order to learn the various available deductions. This will help you make smarter investments and gain tax savings.