Section 4 of the Income Tax Act, 1961 is an essential provision that lays down the foundation for the taxation of income in India. This section defines the scope of taxable income under the Income Tax Act and is critical in determining the liability of taxpayers. Let’s take a closer look at section 4 of the Income Tax Act, including its provisions and implications.
Overview of Section 4
Section 4 of the Income Tax Act, 1961 provides for the charge of income tax on the total income of a taxpayer. The section lays down the scope of taxable income, which includes all income from whatever source derived, subject to certain exemptions and deductions. This means that all sources of income, including salary, business income, capital gains, and other sources of income, are subject to taxation under this section.
Meaning of Total Income
According to Section 2(45) of the Income Tax Act, 1961, “Total income” means the aggregate of income, computed under the provisions of the Act, and all other incomes chargeable to tax under the Act, after making deductions under Chapter VI-A of the Act. This means that the total income of an individual or a business is the sum of income from all sources, reduced by the deductions specified in Chapter VI-A.
Residential Status
The Income Tax Act divides taxpayers into three categories based on their residential status, i.e., resident, non-resident, and resident but not ordinarily resident. The residential status of an individual or a business determines the taxability of income under the Income Tax Act. A resident is liable to pay tax on his global income, whereas a non-resident is taxed only on income that accrues or arises in India.
Tax Rates
The Income Tax Act provides for different tax rates for different categories of taxpayers based on their income levels. The tax rates are subject to change from time to time through amendments made in the Finance Act. The tax rates for the financial year 2022-23 are as follows:
Individuals and HUFs
o Income up to Rs. 2.5 lakh – Nil
o Income between Rs. 2.5 lakh and Rs. 5 lakh – 5%
o Income between Rs. 5 lakh and Rs. 7.5 lakh – 10%
o Income between Rs. 7.5 lakh and Rs. 10 lakh – 15%
o Income between Rs. 10 lakh and Rs. 12.5 lakh – 20%
o Income between Rs. 12.5 lakh and Rs. 15 lakh – 25%
o Income above Rs. 15 lakh – 30%
Domestic Companies
o Income up to Rs. 1 crore – 25%
o Income above Rs. 1 crore – 30%
Foreign Companies
o Income up to Rs. 1 crore – 40%
o Income above Rs. 1 crore – 43%
Deductions under Chapter VI-A
Chapter VI-A of the Income Tax Act provides for various deductions that taxpayers can claim while computing their taxable income. These deductions are available to individuals, HUFs, and other taxpayers, and include deductions for contributions to certain investment schemes, health insurance premiums, and donations made to charitable institutions. The deductions specified in Chapter VI-A are subtracted from the gross income of the taxpayer to arrive at the taxable income.
TDS and Advance Tax
Under the Income Tax Act, taxpayers are required to pay tax on their income in advance through the payment of Advance Tax. The amount of Advance Tax to be paid is calculated based on the estimated income for the financial year. Taxpayers are also required to deduct tax at source (TDS) while making payments to certain recipients, such as employees, contractors, and professionals. The TDS amount is then deposited with the government by the deductor.
Penalties and Prosecution
Non-compliance with the provisions of the Income Tax Act can lead to penalties and prosecution for taxpayers. Penalties may be imposed for late filing of tax returns, failure to deduct TDS, and other violations of the Income Tax Act. In serious cases of non-compliance, taxpayers may also face prosecution, which can lead to fines and imprisonment.
Impact of Section 4 on Businesses
Section 4 of the Income Tax Act has a significant impact on businesses operating in India. Businesses are required to pay income tax on their profits, which are calculated by subtracting the expenses incurred during the financial year from the revenue earned. This means that businesses must maintain accurate records of their income and expenses to determine their taxable income accurately.
Compliance with Section 4
Compliance with Section 4 of the Income Tax Act is crucial for taxpayers to avoid legal consequences. Taxpayers must file their tax returns on time, pay the correct amount of tax, and comply with other provisions of the Income Tax Act. Failure to comply with the provisions of the Income Tax Act can result in penalties and prosecution.
Recent Changes to Section 4
The Indian government has made several changes to the Income Tax Act in recent years, including changes to Section 4. In the Union Budget 2021, the government introduced a new tax regime for individuals and HUFs that offers lower tax rates but eliminates certain deductions and exemptions. Taxpayers have the option to choose between the old tax regime and the new tax regime based on their preference.
Conclusion
In conclusion, Section 4 of the Income Tax Act, 1961 is a crucial provision that lays down the foundation for the taxation of income in India. The section defines the scope of taxable income, provides for different tax rates, and specifies the deductions available to taxpayers. Taxpayers should be aware of the provisions of this section and should comply with the requirements of the Income Tax Act to avoid any legal consequences.
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Frequently Asked Questions (FAQs)
- Who is liable to pay income tax in India?
Any individual, HUF, partnership firm, company, or any other entity that earns income in India is liable to pay income tax.
2. How is taxable income calculated under Section 4 of the Income Tax Act?
Taxable income is calculated by subtracting deductions available under Chapter VI-A of the Income Tax Act from the gross total income.
3. What are the different tax slabs for individuals under Section 4 of the Income Tax Act?
The tax slabs for individuals are based on their income levels and range from 0% to 30%.
4. What are the deductions available under Chapter VI-A of the Income Tax Act?
Deductions available under Chapter VI-A of the Income Tax Act include contributions to certain investment schemes, health insurance premiums, and donations made to charitable institutions.
5. Can taxpayers choose between the old and new tax regime introduced in the Union Budget 2021?
Yes, taxpayers have the option to choose between the old tax regime and the new tax regime based on their preference.
6. What is the penalty for late filing of tax returns under Section 4 of the Income Tax Act?
The penalty for late filing of tax returns is Rs. 5,000 if the return is filed after the due date but before December 31 of the relevant assessment year, and Rs. 10,000 if filed after December 31.
7. Is TDS applicable to all types of payments made by taxpayers?
No, TDS is applicable only to certain payments made by taxpayers, such as salaries, rent, and professional fees.
8. Can taxpayers claim a refund of excess tax paid during the financial year?
Yes, taxpayers can claim a refund of excess tax paid during the financial year by filing their income tax return.
9. How does Section 4 of the Income Tax Act impact businesses operating in India?
Businesses are required to pay income tax on their profits, which are calculated by subtracting the expenses incurred during the financial year from the revenue earned.
10. What are the consequences of non-compliance with Section 4 of the Income Tax Act?
Non-compliance with Section 4 of the Income Tax Act can lead to penalties and prosecution for taxpayers. Penalties may be imposed for late filing of tax returns, failure to deduct TDS, and other violations of the Income Tax Act.
