Basics of Income Tax and Practical Aspects

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Kalpesh D Katira & Co.
Chartered Accountants
Basics of Income Tax and Practical Aspects
CA Kalpesh Katira 8 March 2018

Table of contents
• Overview of Income-tax in India • Legal Status and Residential Status • Heads of Income • Preparation of Computation of Income • Types of ITR • Master Database, Filing and Documentation

Overview of Income-tax in India

Overview of Income-tax in India
• The income-tax law in India consists of the following components.
– Income Tax Act – Annual Finance Acts – Income Tax Rules – Circulars / Notifications – Legal decisions of Courts

Overview of Income-tax in India
• The levy of income-tax in India is governed by the Income-tax Act, 1961. We shall briefly refer to this as the Act.
• This Act came into force on 1st April, 1962.
• The Act contains 298 sections and XIV schedules.
• These undergo change every year with additions and deletions brought about by the Finance Act passed by Parliament.
• In pursuance of the power given by the Income-tax Act, rules have been framed to facilitate proper administration of the Income-tax Act.
• Every year, the Finance Minister of the Government of India presents the Budget to the Parliament.
• Part A of the budget speech contains the proposed policies of the Government in fiscal areas.

Overview of Income-tax in India
• Part B of the budget speech contains the detailed tax proposals. • In order to implement the above proposals, the Finance Bill is introduced in the Parliament. • Once the Finance Bill is approved by the Parliament and gets the assent of the President, it
becomes the Finance Act. • The administration of direct taxes is looked after by the Central Board of Direct Taxes (CBDT). • The CBDT is empowered to make rules for carrying out the purposes of the Act. • For the proper administration of the Income-tax Act, the CBDT frames rules from time to time.
These rules are collectively called Income-tax Rules, 1962. It is important to keep in mind that along with the Income-tax Act, these rules should also be studied.

Circulars / Notifications
• Circulars are issued by the CBDT from time to time to deal with certain specific problems and to clarify doubts regarding the scope and meaning of the provisions.
• These circulars are issued for the guidance of the officers and/or assessee. • The department is bound by the circulars. While such circulars are not binding the assessee they
can take advantage of beneficial circulars.

Case Laws
• The study of case laws is an important and unavoidable part of the study of income-tax law. • It is not possible for Parliament to conceive and provide for all possible issues that may arise in the
implementation of any Act. Hence the judiciary will hear the disputes between the assessee and the department and give decisions on various issues. • The Supreme Court is the Apex Court of the country and the law laid down by the Supreme Court is the law of the land. • The decisions given by various High Courts will apply in the respective states in which such High Courts have jurisdiction.

• Income-tax is levied on an assessee’s total income. Such total income has to be computed as per the provisions contained in the Income-tax Act, 1961. Let us go step by step to understand the procedure of computation of total income for the purpose of levy of income-tax.
– Step 1 Determination of residential status – Step 2 Classification of income under different heads – Step 3 Exclusion of income not chargeable to tax – Step 4 Computation of income under each head – Step 5 Clubbing of income of spouse, minor child etc. – Step 6 Set-off or carry forward and set-off of losses – Step 7 Computation of Gross Total Income. – Step 8 Deductions from Gross Total Income – Step 9 Total income – Step 10 Application of the rates of tax on the total income – Step 11 Surcharge – Step 12 Health and Education cess – Step 13 Advance tax and tax deducted at source

Legal Status and Residential Status

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Basics of Income Tax and Practical Aspects