An income tax is an expense that government charges on budgetary wage produced by all elements inside their locale. By law, organizations and people must file an income tax each year to decide if they owe any assessments or are qualified for a duty discount. Income tax is the main source of funds that the government uses to do its activities and serve the public. For every assessment year, the rate of tax charged on different income levels, as prescribed in the slab, is defined in the Union Budget (Finance Act).
According to the Indian Income-tax Act, 1961, the following parties are liable to pay the income tax, provided their annual income falls into one of the income slabs as prescribed in the Act:
- Hindu Undivided Families (HUFs),
- Association of persons
- Body of individuals
- Local authority
For the betterment of the society, every individual falling into any of the above-mentioned categories must pay income tax which is used by the government.
Almost all income tax systems permit residents to reduce gross income by business and some other types of deductions. By contrast, nonresidents are generally subject to income tax on the gross amount of income of most types plus the net business income earned within the jurisdiction.
Expenses that are incurred in a trading, business, rental, or other income-producing activity are generally deductible, though there may be limitations on some types of expenses or activities. Business expenses include all manner of costs for the benefit of the activity performed by the businessmen. An allowance (as a capital allowance or depreciation deduction) is nearly always allowed for recovery of costs of assets used in the activity. Rules on capital allowances vary widely and often permit recovery of costs more quickly than over the life of the asset.
Most systems allow individuals some sort of notional deductions or an amount subject to zero tax. In addition, many systems allow deduction of some types of personal expenses, such as home mortgage interest or medical expenses.
In India, the income tax is charged annually at the end of each financial year (April – March). It is the main source of Income for the Government that is essential to maintain the deficits and the optimum cash flow in the money market.
There are different tax rates for different income levels on the basis of which the tax amount is computed. There is a minimum cap on income beyond which the tax is calculated.
There are some deductions under different sections of the Income Tax Act that gives relaxation in the Tax Amount.
Few Common Deductions are:
- Public Provident Fund (PPF)
- Life insurance premium
- medical insurance
- Tuition fees for child education
- Contribution to NPS
- Tax Saver Fixed Deposit (FD)
- Health insurance premium
- Investments made under The Rajiv Gandhi Saving Scheme
- Home loan repayment, etc.
Most jurisdictions restrict to self-assessment of the tax and require payers of some types of income to withhold tax from those payments. Advance payments of tax by taxpayers may be required. Taxpayers who are not paying the tax owed are generally subject to significant penalties, which may include jail for individuals or revocation of an entity’s legal existence.