Unit 3: Introduction to Tax

Introduction to Tax

Tax is a financial charge or levy imposed by the government on individuals or businesses. The government collects tax to generate revenue to run the country and provide public services like roads, hospitals, schools, defense, etc.

In simple terms: Tax is the money we pay to the government from our income, business, or goods we buy.

Types of Taxes

Type	Example	Who Pays?
Direct Tax	Income Tax	Paid directly by individuals or companies to the government
Indirect Tax	GST (Goods & Services Tax)	Paid indirectly when buying goods or services

Cannons (Principles) of Taxation by Adam Smith

These are guidelines for a good tax system:

Cannon	Meaning
1. Canon of Equity	Tax should be fair – rich people should pay more.
2. Canon of Certainty	People should know how much tax to pay and when.
3. Canon of Convenience	Tax collection should be easy and convenient for taxpayers.
4. Canon of Economy	The cost of collecting tax should be low.

Key Taxation Terms

Person (Under Income Tax Act, Section 2(31))

"Person" means anyone who can be taxed under law. It includes:

• Individual (one person)

• Hindu Undivided Family (HUF)

• Company

• Firm (Partnership/LLP)

• Association of Persons (AOP)

• Body of Individuals (BOI)

• Local Authority (like municipalities)

• Artificial Juridical Person (like trusts)

Assessee (Section 2(7))

An assessee is a person who is liable to pay tax under the Income Tax Act.

Types of Assessee:

• Normal Assessee – Pays tax for own income.

• Representative Assessee – Pays tax on behalf of someone else.

• Deemed Assessee – Considered as assessee by law (e.g., legal heir).

• Assessee in Default – Failed to fulfill tax duty (e.g., did not deduct TDS).

Income (Section 2(24))

"Income" means any earning a person receives in cash or kind during the financial year.

Sources of Income:

1. Salary

2. House Property

3. Business/Profession

4. Capital Gains (sale of shares/property)

5. Other Sources (interest, lottery, etc.)

Previous Year (Section 3)

• The Previous Year is the financial year in which income is earned.

• It starts on 1st April and ends on 31st March of the next year.

📝 Example: If income is earned between 1 April 2024 to 31 March 2025, that is the previous year 2024–25.

Assessment Year

The Assessment Year (AY) is the year in which income is assessed (examined and taxed) by the Income Tax Department.

• You earn income in the Previous Year and

• You file return and pay tax in the Assessment Year.

Example:

Particular	Period
Previous Year (PY)	1 April 2024 – 31 March 2025
Assessment Year (AY)	1 April 2025 – 31 March 2026

So, income earned in PY 2024–25 is assessed in AY 2025–26.

Important Income Tax Dates (For Individual Taxpayers)

Date	Event
31st July	Due date for filing Income Tax Return (ITR) for individuals and salaried employees (if audit not required)
15th March	Due date for the last installment of Advance Tax
31st October	Due date for filing ITR for companies and audited individuals
31st December	Last date to file belated or revised returns
31st January	Deadline for filing updated ITR (up to 2 years from end of AY)

Important Income Tax Forms

Return Filing Forms (ITR Forms)

Form	Who Should Use It?
ITR-1 (Sahaj)	Salaried individuals with income up to ₹50 lakh
ITR-2	Individuals/HUFs with more than one house, capital gains, foreign income
ITR-3	Business/professional income (non-audit)
ITR-4 (Sugam)	Presumptive income (under Sections 44AD, 44ADA, 44AE)
ITR-5	Firms, LLPs, AOPs, BOIs
ITR-6	Companies (except those claiming exemption under Section 11)
ITR-7	Trusts, NGOs, political parties (under Sections 139(4A) to 139(4F))

Other Important Forms

Form No.	Purpose
Form 16	TDS certificate from employer for salaried employees
Form 26AS	Annual tax statement showing TDS, TCS, advance tax paid
Form 15G / 15H	Declaration for no TDS deduction (if income is below taxable limit)
Form 10E	For claiming tax relief under Section 89(1) (e.g., arrears)
Form 49A	Application for PAN (Permanent Account Number) for Indian citizens

Residential Status & Its Importance

The residential status of a person decides how much of their income will be taxed in India.

📌 Taxability = Residential Status + Source of Income

Residential Status – For Individuals

As per Income Tax Act (Section 6), an individual can be:

Tax Incidence (Scope of Total Income)

Taxability Based on Residential Status

Source of Income	ROR	RNOR	NR
Income earned in India	✅ Taxable	✅ Taxable	✅ Taxable
Income earned & received outside India	✅ Taxable	❌ Not Taxable	❌ Not Taxable
Income earned outside India but received in India	✅ Taxable	✅ Taxable	✅ Taxable

✅ = Taxable in India

❌ = Not Taxable in India

Individual Income Exempted from Tax

Some income is totally or partially exempt under Section 10 of the Income Tax Act.

Common Tax-Free Incomes

Section	Exempt Income	Remarks
10(1)	Agricultural income	Only if earned in India
10(2)	Share of profit from HUF	Fully exempt
10(10D)	Life insurance maturity amount	Exempt if premium <10% of sum assured
10(10BC)	Disaster compensation	Compensation from govt. is exempt
10(10C)	VRS compensation (up to ₹5 lakh)	Exempt for eligible employees
10(14)	Special allowances (e.g., transport, children education)	Subject to limits
10(15)	Interest from certain savings bonds	Like tax-free RBI bonds, PPF
10(16)	Scholarships for education	Fully exempt
10(23C)	Income of educational/medical institutions	If approved by the government
10(34)	Dividend from Indian companies	Exempt up to ₹10 lakh (now taxable beyond a point under new rules)
10(38)	Long-term capital gains on listed shares (till AY 2018–19)	Now replaced by Section 112A

Summary (Quick Revision)

Concept	Key Point
Residential Status	Decides taxability of global income
Tax Incidence	Depends on both income source and residential status
Exempt Incomes	Certain types of income are not taxed under Section 10