Income Tax – Get to Know it Better : PART 1
Income Tax. The mere utterance of this word evokes dread and distaste in most individuals. To hate it a little or to hate it a lot is a choice left to you. All that we have to say is “Be familiar with whatever you hate or love”. So, here’s an attempt to introduce a few terms and concepts that are key to the understanding of Income Tax from the perspective of an individual taxpayer.
Income
Income includes anything received or receivable in terms of money or money’s worth. As per common understanding, income should always denote something positive. However, as per the law, income also includes negative income. Salary is an example of positive income. Loss on sale of shares is an example of negative income.
Heads or Types of Income
All income can be placed under any one of the following heads:
1. Salary – will include perquisites and pension.
2. Income / Loss from House Property – applicable to self-occupied property as well as property that has been let out / rented out.
3. Capital Gains / Loss – derived from the sale of assets (property, securities, bullion, machinery, other assets).
4. Income / Loss from any Business or Profession
5. Income from Other Sources – interest on savings bank / fixed deposit, winnings from lottery, gambling, horse racing & competitions.
All the above types of income, whether legal or illegal, are liable to be taxed.
Revenue Receipts & Capital Receipts
Typically, income derived from any of the above sources is called Revenue Receipt. All Revenue receipts are taxable unless specifically exempted.
On the other hand, Capital Receipts are usually exempted from tax unless there are provisions to tax them. Common examples of Capital Receipts include gifts received, loans taken and the claim amount or maturity benefit received in respect of a life insurance policy.
Exempted Income
Certain items of income are specifically exempted from being taxed subject to conditions. Agricultural income, gratuity, commuted pension, leave encashment, provident fund receipts are some examples of income exempted from tax subject to stipulated conditions.
Deductions from Income
Deductions are legitimate ways of reducing your tax liability. Tax is levied only on your net income after reducing deductions from your gross income. Permitted deductions include investments in approved schemes (e.g. PPF, NSC), donations to approved charitable institutions and certain stipulated expenses (e.g. medical insurance premium).
Proof of Income
Every individual deriving income is required to maintain suitable evidence / proof of earning to support her/his claim of the nature and amount of such income.
PAN – Permanent Account Number
Permanent Account Number or PAN is a unique 10-digit alpha numeric number allotted by the Income Tax Department to an individual. PAN helps the Department to track all transactions of any taxpayer which could potentially impact her/his earned income and tax liability.
Financial Year
Financial Year or FY is a twelve month period beginning from April and ending in March of the following year. Thus, FY 2013-14 begins on April 1, 2013 and ends on March 31, 2014.
NOTE: The above is an attempt to familiarize the lay reader with some key terms and concepts related to Income Tax. Readers are advised NOT to carry out financial actions merely based on their understanding/interpretation of the above article. It is recommended that you employ discretion/seek professional guidance before indulging in fiscal actions of any kind.
TO BE CONTINUED IN PART 2.............
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