Basics of Income Tax

ASSESSMENT YEAR [Sec. 2(9)]

"Assessment year" means the period starting from April 1 and ending on March 31 of the next year. Example- Assessment year 2006-07 which will commence on April 1, 2006, will end on March 31, 2007.

Income of previous year of an assessee is taxed during the next following assessment year at the rates prescribed by the relevant Finance Act.

PREVIOUS YEAR [Sec. 3]

Income earned in a year is taxable in the next year. The year in which income is earned is known as previous year and the next year in which income is taxable is known as assessment year. In other words, previous year is the financial year immediately preceding the assessment year.

Illustration 1.1 - For the assessment year 2008-09, the immediately preceding financial year (i.e., 2007-08) is the previous year.

Income earned by an individual during the previous year 2007-08 is taxable in the immediately following assessment year 2006-07 at the rates applicable for the assessment year 2008-09.

Similarly, income earned during the previous year 2008-09 by a company will be taxable in the assessment year 2009-10 at the rates applicable for the assessment year 2009-10.

This rule is applicable in all cases except the following:

WHEN INCOME OF PREVIOUS YEAR IS NOT TAXABLE IN THE IMMEDIATELY FOLLOWING ASSESSMENT YEAR

a. Income of non-residents from shipping [Sec. 172]

b. Income of persons leaving India either permanently or for a long period of time [Sec. 174]

c. Income of bodies formed for short duration [Sec. 174A]

d. Income of a person trying to alienate his assets with a view to avoiding payment of tax [Sec. 175] and

e. Income of a discontinued business [Sec. 176].

In these cases, income of a previous year may be taxed as the income of the assessment year immediately preceding the normal assessment year.

These exceptions have been incorporated in order to ensure smooth collection of income tax from the aforesaid taxpayers who may not be traceable if tax assessment procedure is postponed till the commencement of the normal assessment.

THUS, A FINANCIAL YEAR HAS A DOUBLE ROLE TO PLAY - IT IS A PREVIOUS YEAR AS WELL AS AN ASSESSMENT YEAR.

PERSON [Sec. 2(31)]

The term "person" includes:

a. an individual;

b. a Hindu undivided family;

c. a company;

d. a firm;

e. an association of persons or a body of individuals, whether incorporated or not;

f. a local authority; and

g. every artificial juridical person not falling within any of the preceding categories.

These are seven categories of persons chargeable to tax under the Act. The aforesaid definition is inclusive and not exhaustive. Therefore, any person, not falling in the above-mentioned seven categories, may still fall in the four corners of the term "person" and accordingly may be liable to tax.

ASSESSEE [Sec.2 (7)]

"Assessee" means a person by whom income tax or any other sum of money is payable under the Act. It includes every person in respect of whom any proceeding under the Act has been taken for the assessment of his income or loss or the amount of refund due to him. It also includes a person who is assessable in respect of income or loss of another person or who is deemed to be an assessee, or an assessee in default under any provision of the Act.

HOW TO CHARGE TAX ON INCOME

To know the procedure for charging tax on income, one should be familiar withthe following:

1. Annual tax - Income-tax is an annual tax on income.

2. Tax rate of assessment year - Income of previous year is chargeable to tax in the next following assessment year at the tax rates applicable for the assessment year. This rule is, however, subject to some exceptions.

3. Rates fixed by Finance Act - Tax rates are fixed by the annual Finance Act and not by the Income-tax Act. For instance, the Finance Act, 2006, fixes tax rates for the assessment year 2006-07.

4. Tax on person - Tax is charged on every person.

5 Tax on total income - Tax is levied on the "total income" of every assessee computed in accordance with the provisions of the Act.

MEANING OF INCOME

Meaning of Income as generally understood - Income is periodical monetary return with some sort of regularity. It may be recurring in nature. It may be broadly defined as the true increase in the amount of wealth which comes to a person during a fixed period of time.

The definition of the term "income" in section 2(24) is inclusive and not exhaustive. Therefore, the term "income" not only includes those things that are included in section 2(24) but also includes those things that the term signifies according to its general and natural meaning.

GROSS TOTAL INCOME

As per section 14, the income of a person is computed under the following five heads:

1. Salaries.

2. Income from house property.

3. Profits and gains of business or profession.

4. Capital gains.

5. Income from other sources.

The aggregate income under these heads is termed as "gross total income". In other words, gross total income means total income computed in accordance with the provisions of the Act before making any deduction under sections 80C to 80U.

INCOME TAX SLAB FOR RESIDENT INDIVIDUAL
Age	For AY 2008-09
	Income	Tax Rate
a) Less than 65 years (males)	0 to 1,10,000	Nil
	1,10,001 to 1,50,000	10%
	1,50,001 to 2,50,000	20% + 4,000
	2,50,001 & above	30% + 24,000
b) Less than 65 years (females)	0 to 1,45,000	Nil
	1,45,001 to 1,50,000	10%
	1,50,001 to 2,50,000	20% + 500
	2,50,001 & above	30% + 20,500
c) Equal to 65 years or above	0 to 1,95,000	Nil
(male/female senior citizens)	1,95,001 to 2,50,000	20%
	2,50,001 & above	30% + 11,000

GLOSSARY

Financial year: Period of 12 months beginning on April 1 every year and ending on immediately following March 31.

Finance Act: The finance bill is commonly referred to as budget and is presented generally on the last day of February every year. The finance bill when signed by the President becomes the Finance Act.