written by Khatabook | November 23, 2021

What Are the Components of Income Tax Law in India?

The tax paid on the total income generated by a person during the Previous Year is known as Income Tax. It is the tax that the government charges on the income generated by individuals and businesses. Governments rely on income taxes to fund their operations. They're used to pay for government commitments, public finance services and offer products to residents. 

Who is Responsible for Adhering to the Indian Income Tax Law?

  • Individuals since personal income tax is a form of income tax paid on a person's wages, salaries, and other sources of income.
  • Corporations, partnerships, small companies, and self-employed persons are all subject to business income taxes.

These taxes are one of the essential sources of revenue in the economy because:

1. It is an important source of revenue to the Government of India.

2. It helps maintain an equal status in society as we have a progressive system of Taxes.

Is Income Tax a Direct Tax?

Income tax in India is a direct tax as the individual pays income tax depending on their taxable income in a particular financial year. Total income less relevant deductions and exemptions are referred to as taxable income. There are two schemes for Income Tax. The existing scheme started in 1962 whereas the New Income Tax Regime was introduced in February 2020. However, it is up to the people to choose which scheme is more beneficial to them.

Power to Levy Taxation Laws in India

  • The power to charge tax on all incomes except agriculture income has been given to the Central Government through Entry 82 of the Union List of Schedule VII of the Constitution of India. 
  • The power to charge tax on Agriculture Income lies with the State Government via Entry 46 of the State List of said Schedule VII.

What are the Various Components of Income Tax Law in India?

There are a total of 6 components of Income Tax Law in India. They are as follows:

  1. Income Tax Act 1961
  2. Income Tax Rules 1962
  3. The Finance Act 
  4. Government Notifications
  5. Circulars
  6. Court Decision, i.e. Judicial Pronouncements

Income Tax Laws and Rules in Details:

1. The Income Tax Act 1961

The Income Tax Act of 1961 is  a taxation law in India that governs how income tax is levied, administered, collected, and recovered in India. The Income Tax Act was passed in the year 1961. The Act came into force in India on 1st April 1962. The Income Tax Act has a total of 298 sections and 14 schedules. The Income Tax Act 1961 provides essential information in determining taxable income, calculation of income tax Liability, appeals, penalties, and prosecution for taxpayers. The Act is ame nded by the government regularly, usually through Annual Amendments in the Budget.

2. Income Tax Rules 1962

Income tax rules supplement the Income Tax Act of 1961. The regulations provide important support to the Income Tax Act 1961. The income tax rules came into effect on April 1, 1962.  The power to change Income Tax Laws lies with the Central Board of Direct Taxes (CBDT). For example, there is a maximum limit on the House Rent Allowance. This limit has been given in Clause 13A of Section 10. However, the method for calculating the said limit is provided in the Rule 2A of the Income Tax Rules 1962.

3. The Finance Act

The Finance Act is changed every year. The Finance Bill is introduced in Parliament by the Finance Minister. This bill proposes the various changes recommended to Direct and Indirect Taxes. Upon passing by both houses of Parliament and signature by the President of India, the bill becomes the Finance Act. Such changes will become part of the Income Tax Law in India and, in most cases, will take effect on the first day of the next fiscal year.

In addition, the Finance Act is divided into four sections:

  • Part I: It establishes the rate at which income tax is levied on income chargeable to tax for various income categories during a fiscal year.
  • Part II: It establishes the tax rate that must be deducted at source throughout the fiscal year.
  • Part III: It explains how income tax rates have changed in certain circumstances, such as the rate for salary-related income and the rate for computing advance tax for a financial year.
  • Part IV: In this section, the rules for determining agricultural revenue are explained.

4. Government Notifications 

According to the Income Tax Act and Income tax law and rules, the Central Government has the right to make notifications on certain aspects. These notifications are issued by the Ministry of Finance on exemptions of payments to employees, such as allowances, pensions, cost inflation, leave encashment, long-term capital gains index, and interest exemption on specific securities.

5. Circulars

 Central Board of Direct Taxes (CBDT) produces circulars from time to time to avoid ambiguity and make the terms of the Income Tax Act more clear. The circulars provide clarity to the Income Tax Act. People should be aware of the various circulars issued by the CBDT to be up to date with all the latest guidelines.

6. Court Decision, i.e. Judicial Pronouncements

  • The various decisions passed by the honourable Supreme Court, High Court, and the Tribunals provide important solutions in case of a dispute regarding the Income Tax Rules 1961.
  • The Supreme Court's judgments become legislation binding on all courts, appellate authorities, income tax agencies, and assessees. If two contradictory judgments are made, the larger bench's decision takes precedence.
  • The tribunal, the income tax authorities, and assessees in the jurisdiction are bound by the High Court's decisions.

Also Read: Charitable Donations - Definition, What is Charitable Donations?

Different Tax Rates and Slabs of Income Tax Law India

Every individual falls under a different tax rate according to age and salary. The tax rates and slabs as per the existing scheme are as follows:

For resident individuals, Hindu Undivided Families (HUF ) who are below the age of 60 years

Limit of slab

Income tax rate

Up to Rs 2.5 Lakh

Nil

From Rs 250001 to Rs 500000

5% of total income that is more than Rs 2.5 Lakh + 4% cess

From Rs 500001 to Rs 1000000

20% of total income that is more than Rs 5 Lakh 12500 + 4% cess

Income above Rs 10 Lakh

30% of total income, which is more than Rs 10 Lakh 112500 + 4 % cess.

For Senior citizens who are above 60 years but below 80 years of age

Limit of slab

Income tax rate

Up to Rs 3 Lakh

Nil

From Rs 300001 to Rs 500000

5% of total income that is more than 3 Lakh + 4% cess.

From Rs 500001 to Rs 1000000

20% of total income that is more than 5 Lakh Rs. 10500 + 4% cess.

Income above Rs 10 Lakh

30% of total income that is more than 10 Lakh 110000 + 4 % cess.

For Super Senior Citizen, i.e. resident Indians who are more than 80 years of age

Limit of slab

Income tax rate

Up to Rs 5 Lakh

Nil

From Rs 500001 to Rs. 1000000

20% of total income that is more than Rs .5 Lakh + 4% cess

Income above Rs 10 Lakh

30% of total income that is more than 10 Lakh 100000 + 4% cess

New Tax Regime

On 1st February 2020, a new tax regime was introduced by Finance Minister Nirmala Sitharaman. This new regime is only optional. People can choose whether to follow this one or the existing one. The tax rate structure for the new tax regime has been given below:

Income tax slab

Tax rate

Up to Rs 2.5 Lakh

Nil

From Rs 250001 to Rs.500000

5% of total income that is more than Rs.2.5 Lakh + 4% cess

From Rs 500001 to Rs 750000

10% of total income that is more than 5 Lakh + 4% cess

From Rs 750001 to Rs 1000000

 15 % of total income that is more than 7.5 Lakh + 4 % cess.

From Rs 1000001 to Rs 1250000

20 % of total income that is more than 10 Lakh + 4 % cess.

From Rs 1250001 to Rs 1500000

25 % of total income that is more than 12.5 Lakh + 4 % cess.

Above Rs 1500001

30 % of total income that is more than 15 Lakh + 4 % cess.

Also Read: How To Save Income Tax on Income From Salary For Individuals

Conclusion 

The power to charge Income Tax lies mainly with the Central Government. There are six components of Income Tax Law in India that enable smooth and efficient operation of the Tax Laws in India.  We hope the article gave you relevant information about the meaning of income tax, the Power to Levy Income, and the various components of Income Tax Law in India in detail. 

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FAQs

Q: Who is bound by the High Court decisions?

Ans:

The tribunal, the income tax authorities, and assessees in the jurisdiction are bound by the High Court's decisions.

Q: What if there are contradictory Judicial judgments on the same issue?

Ans:

If two contradictory judgments are made, the larger bench's decision takes precedence.

Q: On whom are the Supreme Court Decisions binding?

Ans:

The Supreme Court Decisions are binding on all courts, appellate authorities, income tax agencies, and assessees.

Q: What are the ways to resolve disputes over the Income Tax Rules 1961?

Ans:

The various decisions passed by the honourable Supreme Court, High Court, and the Tribunals provide important solutions in case of a dispute regarding the Income Tax Act Rules 1961.

Q: How does the CBDT help in removing ambiguity and providing clarity for the Terms of Income Tax Act?

Ans:

The CBDT issued various circulars removing ambiguity and providing clarity for the Terms of Income Tax Act.

Q: How many parts are there in the Finance Act, and what are these parts?

Ans:

The Finance Act is divided into four parts:

  • Part I: It establishes the rate at which income tax is levied on income chargeable to tax for various income categories during a fiscal year.
  • Part II: It establishes the tax rate that must be deducted at source throughout the fiscal year.
  • Part III: It explains how income tax rates have changed in certain circumstances, such as the rate for salary-related income and the rate for computing advance tax for a financial year.
  • Part IV: In this section, the rules for determining agricultural revenue are explained.

Q: What is the total number of Sections and Schedules in the Income Tax Act 1961?

Ans:

The Income Tax Act 1961 sections have a total of 298 sections and 14 schedules.

Q: What is the age criteria to be qualified as a senior or super senior citizen?

Ans:

People having attained 60 years of age and less than 80 years of age fall in the category of senior citizens. Whereas people who have reached the age of 80 or above fall in the category of super senior citizens.

Q: Is it compulsory to follow the New Income Tax regime introduced in February 2020?

Ans:

No, the New Income Tax regime introduced in February 2020 is optional and not compulsory. People can choose whether to follow this one or the existing one. 

Q: What are the various components of Income Tax Law in India?

Ans:

There are a total of 6 components of Income Tax Law in India. They are as follows:

  • Income Tax Act 1961
  • Income Tax Rules 1962
  • The Finance Act 
  • Government Notifications
  • Circulars
  • Court Decision, i.e. Judicial Pronouncements

Q: Why is Income Tax Law an important source of revenue in the Economy?

Ans:

Income Tax Law in India is one of the essential sources of revenue in the economy because of two reasons:

  • The primary source of revenue of the government comes from Income tax. 
  • It helps in government expenditure such as the development of infrastructure and public welfare. 

Q: Who has the power to levy tax on Agriculture Income?

Ans:

The power to charge tax on Agriculture Income lies with the State Government via Entry 46 of the State List of said Schedule VII.

Q: Who has the power to levy taxes on all income?

Ans:

The power to charge tax on all incomes except agriculture income has been given to the Central Government through Entry 82 of the Union List of Schedule VII of the Constitution of India.

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