Section 220 of the Income Tax Act contains provisions for late payment of tax demands, interest, and penalties (2). It states that the taxpayer must pay 1% interest per month if the prescribed amount is not paid within 30 days. The Assessing Officer may only reduce or remove interest where there is a good explanation, as per section 220(2) of the Income Tax Act. The taxpayer shall pay interest under section 220(2) of the Income Tax Act until they pay the full amount set out in the demand letter.
Did you know? If the taxes payable under this section have been reduced, interest shall be reduced accordingly, and any excess interest paid shall be refunded.
What Is the Income Tax Act?
The legislation to levy, manage, collect, and reclaim income tax in India is the Income Tax Act, 1961. It became effective on April 1st, 1962.
Any individual is subject to income tax, along with any applicable surcharges and cess, at the rates outlined in the applicable Central Act for the assessment year. The Income Tax Act provides distinct rules for the taxation of income that has been received in advance as well as income for which the money has not yet been received. When determining his ultimate tax burden at the end of the year, a person must also keep track of the TDS that was deducted.
Every income that a person earns is required to be categorised under one of the following headings as specified by the Act: -
- Revenue from a home investment
- Earnings from unrelated sources
- Gains from a company or vocation
- Capital gains
Types of Taxes
Income tax is significant because it provides the funding that helps keep our government functioning. It is unavoidable not to impose it on the money generated or used in the nation since it is one of the government's main revenue sources. It aids in providing a country with the resources needed for national development and other defence-related concerns.
There are two types of income tax:
1. Indirect Tax
Indirect taxes are the kinds of taxes where the people who pay the tax and the people who are really affected by it are two separate entities. In most cases, these taxes are added to the cost of the goods or services that are offered to the public, and the person who is in charge of collecting them from their clients deposits them. One of the most well-known indirect tax systems is the GST.
2. Direct Tax
An individual or any other person must pay direct tax based on their income. It is a type of tax in which the taxpayer pays the government directly, meaning that both the tax's duty and burden are placed on the same individual.
Important Definitions Under the 1961 Income Tax Act
It is the tax assessed on the entire taxable income of an assessee during the prior year; the Central Government collects that for each fiscal year.
An assessee is a person who is required to pay taxes under any provision of the Income Tax Act of 1961, according to section 2(7) of that law. A person who has been the subject of legal action or had their income evaluated under the Income Tax Act of 1961 can also be considered an assessee. Any individual who is considered to be an assessee under this Act's provisions or who is in default under one of these sections is considered an assessee.
Assessment is the process of figuring out if the assessee's reported income is accurate, figuring out how much tax is owed by him and then going through the process of imposing that tax responsibility on him.
The 12-month period beginning on April 1 and ending on March 31 of the following year is the assessment year. It is the year in which the previous year's income is calculated.
As per section 2(31) of the Income-Tax Act 1961, a person would be anyone who is:
- An Individual
- A HUF (Hindu Undivided Family)
- A Company
- A Firm
- An association of people or bodies of individuals
- A Local Authority
- Every artificial and juridical person who is not included in any of the above-mentioned categories
The following elements are included but not limited by the definition of income in section 2 (24):
- Any unreported earnings that the assessee receives
- Any money that is derived on an erratic schedule will be
- Any taxable earnings that come from sources outside of India must be
- Any advantage that can be valued financially
- Any assistance, compensation, or gift with a value greater than ₹50,000 is given to an individual or HUF without payment
- Any award
- Causal revenues, such as winnings from lotteries or wagering on horse races, etc
Deductions Under the IT Act, 1961
According to the following parts of the IT Act of 1961, one may claim deductions:
- One may deduct ₹1,50,000 from their taxable income under Sections 80C, 80CCC, and 80CCD of the IT Act of 1961.
- Provision 80D: Medical costs and health insurance premiums are eligible for an income tax deduction under this section.
- Section 80CCD of the IT Act of 1961 focuses on the income tax deductions that an individual who is assessed for income tax may take advantage of with respect to payments made to the Atal Pension Yojana and New Pension Scheme (NPS).
- Individuals who are Indian residents and HUF dependents receiving medical treatment for disability shall claim the taxes deductible under this Income Tax Act section.
- Provision 80TTA: This section permits a deduction of ₹10,000 from interest-related income. Both HUFs and private people must pay this deduction.
- Section 80DDB: Medical costs spent for the treatment of a certain ailment may be claimed under this section of the Income Tax Act of 1961.
- Section 80U: According to this Income Tax Act section, physically incapacitated individuals may deduct up to ₹10 lakhs.
What is Section 156?
Before continuing with this article, it is important to understand Section 156 of the Income Tax Act, which mandates that the Assessing Officer must serve the assessee with a notice of demand on Form No. 7 outlining the amount due in cases where any tax, penalty, fine, or another sum is due in accordance with the Act.
If the amount stated in any notice of demand as stated above is not paid within 30 days of the notice's service, the assessee must pay simple interest at a rate of 1% for each month or portion of a month. The interest term is from the payment's due date until it is received. The Assessing Officer may reduce the payment time to less than 30 days, provided the rationale for the concession is legitimate.
Section 220 (2)
In line with the first proviso to Section 220(2), if the taxes due under this section have been reduced, the interest will also be reduced by the same amount, and any extra interest paid will be refunded. According to the second proviso of Section 220(2), if the interest payable under Section 220 was previously reduced by an order under the first proviso, it will be enhanced as a result of an order under this section or Section 263. The assessee is required to pay interest under Section 220(2) on the amount owing under such an order as soon as the due date has passed. Interest shall be paid until the day of complete payment.
Issue of Notices
Under Section 220(2), the Assessing Officer is in charge of sending out previous notices requiring the taxpayer to make the necessary payments. Additionally, a new notice of demand must be provided when the assessing officer modifies his or her assessment. The first demand notice will be replaced by the second.
Also Read: All About Tax Deducted At Source (TDS)
Waiver of Section 220 (2)
Regardless of what is stated in Section 220(2), the responsible officer may lower the interest due upon fulfilment of the following requirements:
- The assessee may experience actual hardship as a result of paying this amount.
- Due to events outside of the assessee's control, interest payments were not made on time.
- The assessee has provided their cooperation in any investigation pertaining to the assessment of any process for the collection of any sum owing.
Within a year of the end of the month in which the application is received, the Principal Chief Commissioner, Chief Commissioner, Principal Commissioner, or Commissioner, as applicable, shall issue an order approving or denying the assessee's request to decrease or waive interest. However, if an application was still pending as of June 1, 2016, a decision must be made by May 31, 2017, or earlier.
Additionally, until the assessee has had a chance to be heard, no order rejecting the application may be passed.
Even though paying taxes might be challenging, it is always a wise choice to do it in accordance with the law. According to section 220 (2) of the Income Tax Act, the taxpayer will be subject to a number of penalties if they fail to comply. Therefore, always pay your taxes on time if you are still concerned about the large penalties!
Follow Khatabook for the latest updates, news blogs, and articles related to micro, small and medium businesses (MSMEs), business tips, income tax, GST, salary, and accounting.