chapter 6 - income tax
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An income tax is a tax levied on the income of
individuals or businesses (corporations or other
legal entities). Various systems define income differently, and
often allow notional reductions of income (such
as a reduction based on number of children
supported).
The "tax net" refers to the types of payment
that are taxed, which included personal
earnings (wages), capital gains, and business
income.
Capital gains may be taxed when realized (e.g.
when shares are sold) or when incurred (e.g.
when shares appreciate in value).
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The concept of taxing income is a modern
innovation and presupposes several things: amoney economy, reasonably accurate accounts,
a common understanding of receipts, expenses
and profits, and an orderly society with
reliable records.
For most of the history of civilization, these
preconditions did not exist, and taxes were
based on other factors. Taxes on wealth, social
position, and ownership of the means of
production (typically land and slaves) were all
common.
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Practices such as tithing, or an offering offirst fruits, existed from ancient times, and
can be regarded as a precursor of the income
tax, but they lacked precision and certainly
were not based on a concept of net increase.
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Personal: A personal or individual income tax is leviedon the total income of the individual (with somedeductions permitted).
It is often collected on a pay-as-you-earn basis, with
small corrections made soon after the end of the tax
year.These corrections take one of two forms: payments to
the government, for taxpayers who have not paid
enough during the tax year; and tax refunds from the
government for those who have overpaid.
They may allow losses from one type of income to be
counted against another. For example, a loss on the
stock market may be deducted against taxes paid on
wages.
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Corporate: Corporate tax refers to a direct taxlevied on the profits made by companies or
associations and often includes capital gains of acompany.
Corporate expenses related to capital expenditures
are usually deducted in full (for example, trucks
are fully deductible in the Canadian tax system,while a corporate sports car is only partly
deductible) over their useful lives by using
percentage rates based on the class of asset they
belong to.Accounting principles and tax rules about
recognition of expenses and revenue will vary at
times, giving rise to book-tax differences.
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Payroll: A payroll tax generally refers to two
kinds of taxes: employee and employer payrolltaxes.
Employee payroll taxes are taxes which employers
are required to withhold from employees' pay,
also known as withholding, pay-as-you-earn (PAYE)
or pay-as-you-go (PAYG) tax.
Employer payroll taxes are paid from the
employer's own funds, either as a fixed charge per
employee or as a percentage of each employee's
pay.
Payroll taxes often cover government social
insurance programs, such as social security,
health care, unemployment, and disability.
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Inheritance: The inheritance tax, estate taxand death duty are the names given to varioustaxes which arise on the death of an individual.
In international tax law, there is a distinction
between an estate tax and an inheritance tax:
the former taxes the personal representativesof the deceased, while the latter taxes the
beneficiaries of the estate.
However, this distinction is not universally
recognized.
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Capital gains tax: A capital gains tax is the
tax levied on profits from the sale of capital
assets. In many cases, the amount of a
capital gain is treated as income and subjectto the marginal rate of income tax.
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The total income of a person is divided into
five heads, viz., taxable:
1. Salaries
2. Income from House Property
3. Profits and Gains of Business or Profession4. Capital Gains
5. Income from Other sources
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Income from Salary All income received as salary under Employer-Employee
relationship is taxed under this head.
Employers must withhold tax compulsorily, if income exceedsminimum exemption limit, as Tax Deducted at Source (TDS), andprovide their employees with a Form 16 which shows the taxdeductions and net paid income.
In addition, the Form 16 will contain any other deductionsprovided from salary such as:
1. Medical reimbursement: Up to Rs. 15,000 per year is taxfree if supported by bills.
2. Conveyance allowance: Up to Rs. 800 per month (Rs. 9,600per year) is tax free if provided as conveyance allowance.No bills are required for this amount.
3. Professional taxes: Most states tax employment on a per-professional basis, usually a slabbed amount based ongross income.
4. House rent allowance
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Income From House property
Income from House property is computed
by taking what is called Annual Value. Theannual value (in the case of a let outproperty) is the maximum of the following:
1. Rent received
2. Municipal Valuation3. Fair Rent (as determined by the I-T
department)
If a house is not let out and not self-
occupied, annual value is assumed to haveaccrued to the owner. Annual value in caseof a self occupied house is to be taken asNIL.