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Frequently Asked Questions About Income Tax Act, India


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What is Income Tax?
Income Tax is a tax levied by the Government of India on anybody who earns income in India. This tax is levied on as perf an Act called Income tax Act which was passed by the Parliament of India.

What do you mean by income earned in India?
Income earned in India does not limit income earned within the geographical boundaries of the country. There are certain incomes also deemed to have been earned in India although they may have been earned outside the country.

What is the period for which a person’s income is taken into account for purpose of Income tax?
Income tax is calculated on Income earned in the twelve months for the period from 1st April to 31st March (commonly referred as Financial Year or FY). Under the income tax Act this period is called a Previous year.

What is an Assessment Year?
It is the twelve-month period 1st April to 31st March immediately following the previous year [refer answer-3]. In the Assessment year a person files his return for the income earned in the previous year. For example for FY 2006-07 the AY is 2007-08.

Who is supposed to pay Income Tax?
Any Individual or group of Individual or artificial bodies who/which have earned income during the previous years are required to pay Income tax on it. The IT Act recognizes the earners of income under seven [7] categories. Each category is called a Status. These are Individuals, Hindu Undivided Family [HUF], Association of Persons [AOP], Body of individuals [BOI], Firms, Companies, Local authority, Artificial juridical person.
When Companies pay taxes under the Income tax Act it is called Corporate tax.

Is Income tax Act applicable only to residents?
No, The Income tax Act applies to all persons who earn income in India, whether they are resident or non-resident.

Who is a resident?
If an individual stays in India for 182 days or more in a year, he is treated as resident in that year regardless of his citizenship. If the stay is less than 182 days he is a non-resident.

What does the Income Tax Department consider as income?
The term Income has a very broad and inclusive meaning. If you are a salaried person, all that is received from your employer in cash, kind or as a facility is considered as income. 
For a businessman, his net profits will constitute income. Earnings from investments in the form of Interest, Dividend, and Commission etc. are also considered as Income. In fact, the Income Tax Act does not differentiate between legal and illegal income for purpose of taxation. Under the Act, all incomes earned by persons are classified into 5 different heads, such as:
Income from Salary
Income from House property
Income from Business or Profession
Income from capital gains
Income from other sources

Are all receipts considered as income?
No.Receipts can be classified into two kinds. A) Revenue receipt B) Capital receipt.
As per the Income tax Act, all revenue receipt are taxable unless a receipt is specifically exempted and all capital receipts are exempt from taxation unless there is a provision to tax it. Gifts and loans etc are in the nature of capital receipts not attracting tax.

What are revenue and capital receipts?
In a simple language, all that one derives from a source is called revenue receipt. For ex. Salary from employment, Rent from property, Interest or Divided from Investments, Profits from business. When an income is earned on account of transacting the source itself, it is called Capital receipt. For e.g. Sale of land and building, business, investment etc.

Is income tax levied on gifts received by a person?
Gift exceeding Rs 25,000 is taxable unless it is received from
any person who is a relative or
on occasion of marriage or
under will or by inheritance or
in contemplation of death of the payer

Can I claim deduction for my personal and household expenditure in calculating my income or profit?

My daughter stays in USA. She owns a house in India and has let it out. She has asked tenants to pay rent to me so that I can a lead decent life. She has not received any rent. Is she still liable to tax? What if she transfers the house to me?
Your daughter is the owner of the house and therefore she is liable to pay tax even though you receive the rent. If the house is transferred, then you would become the owner and you will have to pay tax on the rental income.

My children living abroad send me Rs.20000/- per month for my maintenance. Would this be considered as my income?

I am an agriculturist. Is my income taxable?
Your agricultural income is not taxable per se. However, if you have any other source of income like income from investments, property etc, while calculating tax on them, your agricultural income will be taken into account, so that you pay tax at a higher rate on that other income.

Do I have to maintain any records or proof of earnings?
For every source of income you have to maintain proof of earning and the records specified under the IT Act. In case, no such records have been laid down, you should maintain reasonable level of records with which you can support the claim of income.

I win a lottery or prize money in a competition. Am I required to pay taxes on it?

How does the Government collect Income Tax?
Government collects taxes by three means: 
a) voluntary payment by persons into various designated Banks. For example Advance Tax and Self Assessment Tax b) Taxes deducted at source [TDS] on your behalf from the payments receivable by you. 
c) Taxes collected at source [TCS] on your behalf at the time of spending. It is the constitutional obligation of every person earning income to compute his income and pay taxes correctly.

When do I have to pay the taxes on my income?
Generally the tax on income crystallizes only on completion of the previous year. However for ease of collection and regularity of flow of funds to the Government for its various activities, the Income tax Act has laid down payment of taxes in advance during the year of earning itself. Taxes may also be collected on your behalf during the previous year itself through TDS and TCS. If at the time of filing of return you find that you have some balance tax to be paid after taking into account your advance tax, TDS & TCS, the short fall is to be deposited as Self Assessment Tax.

What is the procedure for depositing tax?
A form called Challan available in the Income Tax department, in banks and on the IT department website should be filled up and deposited in the bank along with the money. Taxes can also be paid on-line.

What are the precautions that I should take while filling up the tax payment challan?
Clearly mention:

Head of payment e.g. Corporation Tax/Income Tax
Amount and mode of payment of tax
Type of payment [Advance tax/Self assessment/Regular/Tax on Dividend]
Assessment year
The unique identification number called PAN [Permanent Account Number] allotted by the IT Department. (Since PAN related services have been outsourced, for further details on PAN please see the departmental website or

What can I do to reduce my tax?
The tax can be reduced by making investment in approved schemes and also by making donations to approved charitable institutions.

What are the benefits of obtaining a Permanent Account Number or PAN Card?
A PAN number has been made compulsory for every transaction with the Income Tax department. It is also mandatory for numerous other financial transactions such as opening of bank accounts, availing institutional financial credits, purchase of high-end consumer item, foreign travel, transaction of immovable properties, dealing in securities etc. A PAN card is a valuable means of photo identification accepted by all government and non-government institutions in the country.

I have been allotted two PANs. Which number should I use?
You may retain any one of the numbers and surrender the other through a letter addressed to your jurisdictional Assessing Officer.

If I do not surrender the additional PAN number, is there any problem?
Yes. Retaining more than one PAN is illegal and the penalty for such offence is Rs.10000/-

Is it mandatory to file return of income after getting PAN?
No. Return is to be filed only if you have taxable income.

I am always on tour and my employer gives me substantial daily allowance, most of which is saved. Will this saving be treated as income?

My employer reimburses all my expenses on grocery and childrens’ education. Would this be considered as income?
Yes. These are in the nature of perquisite.

Is Family pension considered as salary?

Is leave encashment taxable as salary?
It is taxable if received while in service. Received as retirement benefit, however it is exempt subject to certain conditions.

Life insurance amount received on maturity along with bonus - is it taxable?

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