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Income Tax Act 1961: Sections, Chapters, Rules

Updated on: 27 Mar, 2024 12:17 PM

The Income Tax Act 1961, a cornerstone of India's taxation framework, comprises a comprehensive set of rules, chapters, and sections that govern the levying, collection, recovery, and administration of income taxes. The Income Tax Act 1961 imposes taxes on the income earned by individuals and companies from various sources, including salaries, businesses, house properties, capital gains, and more. In this guide, we will learn about the various chapters, rules, sections, features, deductions, and purposes of the IT Act 1961.

What is the Income Tax Act 1961?

The Income Tax Act 1961 sets out certain rules and regulations based on which the Income Tax Department levies, collects, recovers, and administers taxes. The Income Tax Act broadly covers 23 chapters, 298 sections, and various rules and provisions based on which the Income Tax Department operates.

In simple words, it is the tax levied by the government on income earned by individuals and companies from various sources, such as salary, business/profession, house property, capital gains, and others.

Who is a Person Under the Income Tax Act 1961?

As per the Income Tax Act 1961, the term person has been defined under section 2(31). Person, as per the IT Act 1961, can be divided into these 7 categories -

These categories are as follows -

  • An Individual ( Salaried, teacher, sole proprietor, etc.)
  • HUF (Hindu Undivided Family)
  • A Company (Winiin Taxscope Private Limited, Infosys Ltd.)
  • A Firm
  • An Association of persons(AOP) / Body of Individuals(BOI) , even without registration
  • A Local Authority (Jaipur Development Authority)
  • Every artificial judicial person has not been covered above.

What are the Features of the Income Tax Act 1961?

Given below are some features of the Income Tax Act 1961 -

  • Income tax is a type of direct tax that has to be borne by the taxpayer himself/herself. This tax liability cannot be transferred to another person.
  • The Central Government of India controls the income tax.
  • It applies to the taxpayer's income earned in the previous year.
  • Tax calculation is done on the basis of the applicable slab rate.
  • This type of tax is a progressive tax, where the rates are set so that the rich pay more taxes.
  • Deductions are also available for different types of income, subject to a maximum limit in a financial year.

Main Objectives of Income Tax Act 1961

The primary reasons for introducing the Income Tax Act 1961 are -

  • The Income Tax Act helps maintain the stability of prices by laying out certain rules and regulations. It also helps control private spending and keeps a check on inflation.
  • This reduces the rates of products and increases its demand, thus leading to the generation of more employment opportunities.
  • The progressive system of taxation addresses the inequality of wealth among citizens.
  • Income tax rates increase or decrease depending on the economy’s condition. This act helps maintain control over the fluctuations in the value of money.
  • The levy of import duty also encourages domestic production and helps domestic manufacturers beat the competition.

Scope of Income Tax Act 1961

The Income Tax Act, 1961 is a comprehensive piece of legislation in India that governs the taxation of income generated by individuals, businesses, and other entities. The scope of the Income Tax Act, 1961 is extensive and covers various aspects related to the assessment, computation, and collection of income tax. Some key areas covered by the Income Tax Act, 1961 include:

  • Residential Status: The Act defines the criteria for determining the residential status of individuals and entities, which in turn determines their tax liability in India.
  • Classification of Income: The Act classifies income into various categories such as salary income, income from house property, profits and gains of business or profession, capital gains, and income from other sources.
  • Computation of Total Income: It provides rules and guidelines for computing the total taxable income of individuals, Hindu Undivided Families (HUFs), firms, companies, and other entities.
  • Tax Deductions and Exemptions: The Act allows for certain deductions and exemptions from taxable income under specific conditions, such as investments in certain schemes, donations to eligible charities, and expenses incurred for specific purposes.
  • Tax Rates and Slabs: It specifies the applicable tax rates and tax slabs for different categories of taxpayers based on their income levels and residential status.
  • Tax Deduction at Source (TDS): The Act lays down provisions for deduction of tax at source by certain entities, such as employers, on various types of payments like salaries, interest, rent, etc.
  • Advance Tax and Self-Assessment Tax: It mandates the payment of advance tax by taxpayers on their estimated income during the financial year, and self-assessment tax on their actual income before filing their tax returns.
  • Assessment Procedures: The Act outlines the procedures for the assessment of income tax, including filing of tax returns, scrutiny assessments, and assessments in case of defaults or discrepancies.
  • Taxation of Special Entities: It contains provisions for the taxation of special entities such as companies, partnership firms, co-operative societies, trusts, and non-resident entities.
  • Penalties and Prosecution: The Act prescribes penalties and prosecution for various offenses such as non-compliance with tax laws, concealment of income, and evasion of tax.
  • Appeals and Dispute Resolution: It provides mechanisms for taxpayers to appeal against tax assessments and resolve disputes with tax authorities through appellate authorities, tribunals, and courts.
  • International Taxation: The Act includes provisions for the taxation of income earned by residents and non-residents from international transactions, transfer pricing regulations, and agreements to avoid double taxation.

Provisions of Income Tax Act 1961

  • Appeal under Section 260A to the High Court and Section 261 to the Supreme Court
  • Annual information and financial transaction statement
  • Appearance by an authorised representative
  • Income taxability
  • Undertaking transactions mode
  • Assessing tax authorities
  • Instructions to subordinate authorities
  • Appeal application for reference by the Income Tax Officer

What are the Chapters Covered Under the Income Tax Act?

The Income Tax Act 1961 broadly covers 23 chapters. Given below are the chapters of the IT Act 1961 and a brief overview of the constituents of these chapters -

Chapter Overview
Chapter I It consists of an overview of the Income Tax Act.
Chapter II It covers the scope of the IT Act 1961.
Chapter III It covers the provisions for income that is not a part of the total income.
Chapter IV It covers the method of calculation of total income.
Chapter V Other income sources for individuals like capital gains, business/profession, properties, capital gains, etc.
Chapter VI It covers the provisions of aggregate income, set off, and carry forward of losses.
Chapter VIA This chapter covers all the deductions available to assessees in different conditions while calculating total income.
Chapter VIB This chapter covers the exceptions on deductions available for companies.
Chapter VII It covers those parts of total income that do not come under the purview of income tax or on which the income tax is not applicable.
Chapter VIII It covers the various rebates and tax reliefs that apply to different types of incomes while calculating income tax.
Chapter IX Contains information on double taxation relief.
Chapter X It covers special cases in which assessees are exempt from paying income tax.
Chapter XA General anti-avoidance rules for income tax.
Chapter XI It covers the tax implications on undistributed profits.
Chapter XII It consists of the rules based on which tax is calculated in special cases.
Chapter XIIA Special rules on certain Non-Resident Indian (NRI) income.
Chapter XIIB Special tax provisions for certain companies.
Chapter XIIBA Special tax provisions for certain limited liability partnerships.
Chapter XIIBB It covers special tax rules when the Indian branch of a foreign bank is converted into a subsidiary company.
Chapter XIIBC Special tax rules for Indian Resident companies.
Chapter XIIC Special tax rules for retail trade.
Chapter XIID Special tax rules for the distributed profits of domestic companies.
Chapter XII DA It covers the special tax rules for the income of domestic companies available for buying back shares.
Chapter XIIE Special tax rules for distributed income
Chapter XIIEA Special tax rules for income distributed by securitization trusts.
Chapter XIIEB Special tax rules for accredited income of specific institutions and trusts.
Chapter XIIF Special tax rules for income from venture capital funds and venture capital companies.
Chapter XIIFA Special tax rules for business trusts.
Chapter XIIFB Special tax rules for the income of investment fund schemes
Chapter XIIG It consists of the special tax rules laid out for the income of shipping organizations.
Chapter XIIH Tax implications on fringe benefits.
Chapter XIII Information of Income Tax Authorities.
Chapter XIV Procedure of income tax assessment.
Chapter XIVA Special rules for avoiding repeated appeals.
Chapter XIVB Special rules for assessing search cases.
Chapter XV Tax liabilities in special cases.
Chapter XVI Special tax rules applicable to firms.
Chapter XVII Rules of tax collection and recovery.
Chapter XVIII Tax relief on dividend income in specific cases.
Chapter XIX Tax Refunds.
Chapter XIXA Case settlements.
Chapter XIX-AA Role of Dispute Resolution Committee in specific cases.
Chapter XIXB Advance rulings.
Chapter XX Appeals and revision.
Chapter XXA Immovable property acquisition in special cases of transfer to prevent tax evasion.
Chapter XXB Mode of accepting payments or repayments in special cases in order to counteract tax evasion.
Chapter XXC Buying of immovable property by the central government in certain transfer cases.
Chapter XXI Imposable penalties.
Chapter XXI Punishable offences and prosecutions.
Chapter XXIB Certificates of tax credit.
Chapter XXIII Miscellaneous.

What are the Deductions Available Under the Income Tax Act 1961?

The Income Tax Act 1961 allows taxpayers/assessees to avail of deductions from their total income under the below-mentioned sections.

  • Section 80C: Assessees can avail of a deduction of Rs.1.5 lakhs under sections 80C, 80CCC, and 80CCD of the IT Act 1961. These sections provide for deduction in certain cases on certain types of investments.
  • Section 80D: Under section 80D, assessees can claim a deduction of Rs.25000 (Rs.50,000 for senior citizens) against health insurance premiums paid for spouses, children, and parents.
  • Section 80CCD: This section allows the individual assessees to claim a deduction against the contributions made on the Atal Pension Yojana (APY) or New Pension Scheme (NPS).
  • Section 80DD: Under this section, assessees can claim a deduction for medical expenses made. This can be availed of by individuals who are residents of India or HUF dependents with disabilities.
  • Section 80TTA: This section allows the assessees to claim a deduction of Rs.10,000 on the interest earned from savings bank accounts. Individuals and HUF can avail of this deduction.
  • Sections 80DDB: If any medical expenses are incurred on the treatment of specified illnesses, then individuals can claim a deduction under this section of the Income Tax Act.
  • Section 80U: 80U deduction can be claimed by individuals who are physically or mentally disabled or impaired.
  • Section 80G: Section 80G of the Income Tax Act 1961 covers the deduction available on donations made to charitable institutions. The deduction can range between 50% to 100%, depending on the type of institution and the nature of the donation.
  • Section 80E: Individuals can claim a deduction for the interest paid on an education loan that was taken for the purpose of higher education.

Given the complexity of the Income Tax Act 1961, it can be very difficult to understand and maintain compliance without having proper knowledge about it, especially for laymen. Therefore, it is a better idea to seek professional help for your tax-related queries. Tax2win’s CAs help you solve your tax problems by navigating through 300+ tax provisions. Get Tax Advice Now!

Frequently Asked Questions

Q- Who introduced the first income tax in India?

Income Tax Act was introduced for the first time in India in February 1860 by Sir James Wilson, who was British India’s first Finance Minister.

Q- How can I calculate my Income Tax?

Even if you don’t know how to calculate your Income Tax or are completely new to it, you can still calculate your tax liability very easily with Tax2win’s Income Tax Calculator. All you have to do is -

  • Enter your personal details like email ID, name, date of birth, and profession.
  • Enter your income details, including the sources of income like house property, salary, business/profession, capital gains, or others.
  • Enter any other income you might have earned during the year.
  • Now, enter the deductions available to you under the sections mentioned or any other investments you have made.

Q- Is there any way to save taxes?

Yes, as mentioned above, the Income Tax Act allows various exemptions and deductions from the total income during a year. However, finding the best way to do so can be intimidating for normal people. The best idea is to use Tax Planning Optimiser to plan your taxes or to get professional help from CAs.

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.