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What is Income Tax Act? Explaination of Types of Direct Tax

Tax in India

Direct taxes in India refer to taxes that are imposed directly on individuals and entities based on their income or wealth. Levies like income tax, corporate tax and erstwhile wealth tax fall under the ambit of direct taxes and are levied by the Union Government. They play a vital role in generating revenue for the government and funding various developmental initiatives and public welfare.

Types of Direct Taxes

In India, several types of direct taxes are levied by the central government. Let’s take a look at some of the most common forms of direct taxes. Direct tax is a tax that a person or organization pays directly to the entity that imposed it. In can’t be transfer to other person.

  • Income Tax
  • Corporate Tax
  • Capital Gains Tax
  • Securities Transaction Tax (STT)
  • Dividend Distribution Tax (DDT)
  • Gift Tax
  • Estate Tax

What is Income tax act?

It is a tax levied by the Government of India on the income of every person. The provisions governing the Income-tax are covered in the Income-tax Act, 1961.

Income tax levied under Entry No. 82 & Corporation tax in India is levied under Entry 85 of List I of the Seventh Schedule of the Constitution of India. This entry empowers the Parliament of India to make laws for the imposition of corporation tax

The Basic Concept of Income Tax Act, 1961 is an act to levy, administrate, collect & recover Income-tax in India. It came into force from 1st April 1962.

Charge of Income-tax

Tax cannot be levied or collected in India except under the authority of Law. Section 4 of the Income- tax Act, 1961 gives authority to the Central Government for charging income tax. This section is the backbone of the law of income-tax

This is the charging section in the Income-tax Act, 1961 which provides that:

  • Income tax shall be levied at the rates specified in the Annual Finance Act for the relevant year.
  • The income tax liability applies to all individuals and entities defined as 'persons' under Section 2(31) of the Income Tax Act.
  • Income tax is assessed based on the total income earned during the previous year, not the assessment year. However, certain exceptions are outlined in Sections 172, 174, 174A, 175, and 176 of the Act.

Scope of Tax

Taxability of income in India depends on a person’s residential status & place of income earned or Accrued.

For tax purposes, the residential status of an individual is classified as:

    1. Ordinarily Resident
    2. Not Ordinarily Resident
    3. Non-Resident
S. No. Particulars Resident and Ordinarily Resident (ROR) Resident but not-Ordinarily Resident Non-Resident
1 Income received in India Taxable Taxable Taxable
2 Deemed to be received in India Taxable
3 Income accrues or arises In India Taxable Taxable Taxable
4 Deemed to accrue or arise in India Taxable Taxable Taxable
5 Income accrues or arises outside India but business & profession controlled or set up in India Taxable Taxable Not Taxable
6 Income accrues or arises outside India and business & profession controlled or set up outside India Taxable Not Taxable Not Taxable
7 The past foreign (un-taxed) income brought into India Not Taxable Not Taxable Not Taxable

Head Of Income

"The Heads of Income are crucial for determining tax liability under the Income Tax Act. Any income that is subject to taxation must be classified under one of these heads."

  • Income from salary
  • Income from house property
  • Income from profits and gains from business or profession
  • Income from capital gains
  • Income from other sources

It is of utmost importance to correctly identify the appropriate/Correct Head of Income for taxation purposes.

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