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 the tax on all incomes, except the 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.

  • 1. Income Tax Act 1961
  • 2. Income Tax rules 1962
  • 3. The Finance Act passed every year
  • 4. Circulars
  • 5. Government notification
  • 6. Court Decision i.e. Judicial Pronouncements
1. 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 time to time. The law is applicable to the whole of India including the state of Jammu and Kashmir.

2. Income Tax Rules 1962

These rules are the supplement to the Income Tax Act. Every act normally gives power to an authority, responsible for implementation of the act, to make rules for carrying out the purpose of the act. in case of Income Tax Act, CBDT (Central Board of Direct Taxes) has been empowered to make rules.
Example: Section 10 (13A)(1) provide 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.

3. The Finance Act

Every year the Finance Minister of India presents a Finance Bill in the Parliament, which contains various amendment proposed to be made in the Direct and Indirect Taxes levied by the Central Government. As soon as the Bill is passed by both the 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 are 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 for 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 ie. 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 computation of net agricultural income.
4. Circulars

The provision 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.

5. Government Notification

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

6. Court Decisions

(a)Supreme Court: The decisions given by the Supreme Court becomes law. All decisions given by 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 decision 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?

Frequently Asked Questions

Q- Which components of CTC are taxable?

Ans. Basic salary is fully taxable which is 40% to 50% of the CTC. other allowance given to employees are exempt depend upon their limit prescribed under the Act.

Q- Which components of salary are non taxable?

Ans. Salary includes several components which are non taxable or taxable or partially taxable or partially exempt. these are the following components which can be used by the employee to minimising the tax burden like 1. Employee provident fund 2. Leave travel allowance 3. HRA 4. Food coupons 5. children education allowance 6. hostel expenditure allowance 7. uniform allowance etc.

Q- What is taxable component?

Ans. Basic salary is fully taxable which is 40% to 50% of the CTC. other allowance given to employees are exempt depend upon their limit prescribed under the Act.

Q- What is tax free salary?

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

Q- What income is tax exempt?

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

Q- How is tax calculated salary?

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

Q- How can I reduce my income tax?

Ans. Income tax of the assessee can be reduced by availing the deduction benefits under section 80C, 80D, 80EE and many more.

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 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.