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  7. Income Tax Law - What are the Components of Income Tax Law?

Components of Income Tax Law

Updated on: 07 Jan, 2025 03:09 PM

Income tax is part of the direct tax which is paid on the Total Income of the Previous Year of every person. In India Income Tax plays an important role in the revenue system of the economy. It is because of two reasons: firstly, it is a flexible source of revenue to the Government of India and secondly, it can be helpful in bringing the equal status of the society(since there is a progressive system of tax in India). In this post, we will explain to you the Components of Income Tax Law in India.

Let’s understand who has the power to levy the Income Tax –

Contents

The Body of Income Tax Law in India

The Central Government has the power through entry 82 of the Union List of Schedule VII of the Constitution of India to impose tax on all incomes except agricultural income. State Government has been given the power to impose Tax on agricultural income as per entry 46 of the State List of said schedule VII.

In order to understand the law regarding Income Tax, the study of the following enactments and rules is necessary.

  • Income Tax Act 1961
  • Income Tax Rules 1962
  • The Finance Act passed every year
  • Circulars
  • Government notification
  • Court Decision, i.e., Judicial Pronouncements

Income Tax Act, 1961

This act was applicable from 1st April 1962. This act contains 298 sections and 14 schedules. It contains provisions for the determination of taxable income, determination of tax liability, appeals, penalties and prosecution. This act is being amended from time to time. The law is applicable to the whole of India, including the state of Jammu and Kashmir.

Income Tax Rules, 1962

These rules are a supplement to the Income Tax Act. Every act normally gives power to an authority responsible for the implementation of the act to make rules for carrying out the purpose of the act. In the case of the Income Tax Act, CBDT (Central Board of Direct Taxes) has been empowered to make rules.

Example: Section 10 (13A)(1) provides that house rent allowance exempts up to a certain limit, how to calculate such limit is given in rule 2A of the Income Tax Rules 1962.

The Finance Act

Every year, the Finance Minister of India presents a Finance Bill in Parliament, which contains various amendments proposed to be made in the Direct and Indirect Taxes levied by the Central Government. As soon as the Bill is passed by both houses of the Parliament and thereafter receives the assent of the President of India, it becomes the Finance Act. The amendment proposed therein is then incorporated in the Income Tax Act, which is applicable from the very first day of the next financial year.

For Example, generally, amendments by Finance Act 2018 are effective for FY starting from 1.04.2018
First Schedule to Annual Finance Act: It contains four parts which, as applicable to the Finance Act 2018, are as follows-

Part I It specifies the rate at which income tax is to be levied on income chargeable to tax for the financial year 2018-19, i.e., assessment year 2019-20.
Part II It lays down the rate at which tax is to be deducted at source during the financial year 2018-19, i.e., assessment year 2019-20.
Part III It lays down the rates for charging income tax in certain cases, rates for directing income tax from income chargeable under the head salaries, and the rates for computing advance tax for the financial year 2017-18, i.e., the assessment year 2018-19.
Part IV It lays down the rules for the computation of net agricultural income.

Circulars

The provisions of the Income Tax Act are not very clear and complete; therefore, various types of circulars are being issued by the CBDT from time to time to avoid any sort of controversy and ambiguity.

Government Notification

According to the Income Tax Act of 1961 and the Income Tax rules, the Central Government has the power to issue the notification in several cases. Such notifications are issued by the Ministry of Finance regarding the exemption of various payments to employees such as Allowance, Pension, Leave Encashment, Cost Inflation, Index for long-term capital gain, and Exemption of interest on certain securities.

Court Decisions

(a)Supreme Court: The decisions given by the Supreme Court become law. All decisions given by the Supreme Court are binding on all the courts, Appellate Authorities, Income Tax authorities, and the assessees. Where any two judgments are contradictory, then the decision of the larger bench( whether earlier or later in time) shall prevail. In the case where benches have an equal number of judges, then later decisions shall prevail.

(b) High Court: High court decisions are binding on the tribunal, Income Tax Authorities and on all assesses falling under its jurisdiction.

Income tax law infographic

Read more- What are Direct Taxes & Indirect Taxes in India?

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Frequently Asked Questions

Q- Which components of CTC are taxable?

Basic salary is fully taxable, which is 40% to 50% of the CTC. Other allowances given to employees are exempt depending upon their limit prescribed under the Act.

Q- Which components of salary are non-taxable?

Salary includes several components which are non-taxable or taxable or partially taxable or partially exempt. These are the following components that can be used by the employee to minimize the tax burden such as Employee provident fund, Leave travel allowance, HRA, Food coupons, children's education allowance, hostel expenditure allowance, and uniform allowance, etc.

Q- What is taxable component?

Basic salary is fully taxable, which is 40% to 50% of the CTC. Other allowances given to employees are exempt depending upon their limit prescribed under the Act.

Q- What is tax-free salary?

Tax-free salaries are those on which the amount of income tax is borne by the employer not by the employee.

Q- What income is tax-exempt?

Exempt income is that type of income that is not subject to income tax. These incomes are covered under the section 10. for e.g. agriculture income, dividend income, etc.

Q- How is tax calculated for salary?

Taxable income from salary is calculated after the deduction of applicable deductions. Like HRA, LTA, etc. After that, the tax is calculated according to the slab rate of the assessee.

Q- How can I reduce my income tax?

The income tax of the assessee can be reduced by availing of the deduction benefits under sections 80C, 80D, 80EE, and many more.

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CA Abhishek Soni
CA Abhishek Soni

Abhishek Soni is a Chartered Accountant by profession & entrepreneur by passion. He is the co-founder & CEO of Tax2Win.in. Tax2win is amongst the top 25 emerging startups of Asia and authorized ERI by the Income Tax Department. In the past, he worked in EY and comes with wide industry experience from telecom, retail to manufacturing to entertainment where he has handled various national and international assignments.