Income Tax Basics

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Questions and Answers

Which of the following is classified as a direct tax?

Income Tax (correct)

Goods & Services Tax

Wealth Tax (correct)

All of the above

What is the assessment year?

A period of twelve months from April 1 to March 31 for tax assessment.

What does 'previous year' mean?

The financial year immediately preceding the assessment year.

Who is defined as an 'assessee'?

All of the above Signup and view all the answers

The Income Tax Act was first introduced in 1860.

True Signup and view all the answers

Which of the following categories does NOT fall under the definition of 'Person' according to the Income Tax Act?

Natural Disaster Signup and view all the answers

The term 'Income Tax' means tax on _____

income Signup and view all the answers

What is the main purpose of the Dearness Allowance (DA)?

To meet the burden of inflation or increased cost of living Signup and view all the answers

Which of the following allowances is classified as partly taxable?

Travelling Allowance Signup and view all the answers

What is the exempt amount for Transport Allowance per month for a blind or handicapped individual?

₹3,200 Signup and view all the answers

Which of the following statements is true about the Fixed Medical Allowance?

It is invariant and paid regardless of bill submission Signup and view all the answers

What is the maximum exempt amount for Children's Education Allowance per child?

₹100 per month for a maximum of two children Signup and view all the answers

What distinguishes Conveyance Allowance from other allowances?

It covers the cost incurred during official duties Signup and view all the answers

What is the taxable income range for Mr.Shalini who is 32 years old?

Rs. 5,00,001 - Rs. 10,00,000 Signup and view all the answers

What is the classification of the City Compensatory Allowance?

Fully taxable Signup and view all the answers

What is the applicable tax rate on the total income of Rs. 12,60,000 for Mr.Sameer, who is 44 years old?

30% Signup and view all the answers

Which of the following allowances is not fully taxable?

Children's Education Allowance Signup and view all the answers

At what age does the tax rate for an individual income switch to a 20% rate for total income over Rs. 10,00,000?

Age 89 Signup and view all the answers

What is the rate of education cess applicable to the total amount of tax payable?

1% Signup and view all the answers

What is the total income of Mr.Rohit, who is 81 years old?

Rs. 60,60,600 Signup and view all the answers

What is the total income of Ms Pooja combined with her age that affects her tax calculation?

Rs. 70,60,000 at age 40 Signup and view all the answers

Identify the total income that qualifies for a 5% tax rate.

Rs. 0 - Rs. 5,00,000 Signup and view all the answers

What would be the surcharge rate for the total income of Rs. 1,50,00,000?

30% Signup and view all the answers

What is the effect on taxable income if the commission of ₹20,000 has been paid in cash?

It will not affect taxable income. Signup and view all the answers

Which of the following is included in the definition of salary under section 17(1)?

Payments received in respect of unused annual leave Signup and view all the answers

Why might the net profit computed for accounting purposes differ from that computed for taxation purposes?

Variations in the depreciation amount. Signup and view all the answers

Under what circumstances is salary chargeable to tax on a receipt basis?

When the payment is received in advance Signup and view all the answers

Which of the following statements accurately describes the tax treatment of salary received in advance?

It counts as income for the previous assessment year Signup and view all the answers

What type of income is dividend received classified as under the heading 'PGBP'?

Not taxable under this head. Signup and view all the answers

Which of the following components is NOT explicitly defined under salary in section 17(1)?

Monetary rewards for exemplary performance Signup and view all the answers

Which of the following is NOT a principle guiding the assessment of business income?

Anticipated profits are included. Signup and view all the answers

Which statement is true regarding the tax treatment of income from illegal business?

It is considered taxable income. Signup and view all the answers

Which item does NOT contribute to the taxable salary under section 17(1)?

Income from freelance projects Signup and view all the answers

If a commission received is not related to business, how is it treated for tax purposes?

Excluded from taxable income. Signup and view all the answers

What determines the due basis for charging income tax on salary?

The timing of salary payment or receipt Signup and view all the answers

What principle affects the treatment of business profits by the assessee?

All businesses are aggregated for taxation. Signup and view all the answers

Which of the following actions would NOT change the tax year for salary received?

Receiving March's salary in April Signup and view all the answers

Which of the following best describes the treatment of contributions to a recognized provident fund?

Only the non-taxable portion is included in salary Signup and view all the answers

How are trading receipts classified even if shown as capital receipts?

They are treated equally for taxation. Signup and view all the answers

What is the total value of rent-free accommodation if the value of unfurnished and furnished accommodation are ₹ 22,500 and ₹ 6,000 respectively?

₹ 28,500 Signup and view all the answers

How is the taxable value of a perquisite calculated for an interest-free loan taken from the employer?

Loan amount multiplied by the lower rate of interest charged on similar loans Signup and view all the answers

Which of the following conditions applies to the deduction for entertainment allowance for Government employees?

It is the actual amount received Signup and view all the answers

What is the maximum deduction available for entertainment allowance received by Sahil, a Government employee earning ₹ 4,000 per month?

₹ 5,000 Signup and view all the answers

From which financial year will a standard deduction of ₹ 50,000 be allowed without the need for proof of expenses?

2023-24 Signup and view all the answers

What is the value of the professional tax that can typically be found in an employee's Salary Slip?

It varies based on state regulations Signup and view all the answers

If Mr. Krishna's basic pay is ₹ 96,000 and he receives Dearness Allowance of ₹ 44,000, what is the total salary before any deductions?

₹ 120,000 Signup and view all the answers

Which of the following is NOT a criterion for determining the deduction limit on entertainment allowance for Government employees?

The employee's monthly spending on entertainment Signup and view all the answers

Study Notes

Taxation Overview

Taxation is the method by which governments collect money from citizens to fund public services.
Taxes are classified into two main categories: Direct Tax and Indirect Tax.

Classification of Tax

Direct Tax includes:
- Income Tax
- Wealth Tax
- Professional Tax
Indirect Tax includes:
- Goods and Services Tax (GST)

Income Tax

Income Tax is a tax levied on individual income.
The definition of "income" under Section 2(24) of the Income Tax Act is inclusive and not exhaustive, meaning it covers a broad range of earnings.
The Income Tax Act was established in 1961, effective from September 13, 1961, although income tax legislation dates back to 1860.
The Income Tax Department operates under the Ministry of Finance's Department of Revenue.

Assessment Year and Previous Year

Assessment Year (Sec. 2(9)): A 12-month period from April 1 to March 31 during which income from the previous year is assessed.
Previous Year (Sec. 3): The financial year preceding the assessment year, also known as the income year, where income is earned and assessed the following year.

Assessee Definition

Assessee (Sec. 2(7)) refers to:
- Individuals or entities responsible for paying taxes or penalties.
- Persons subject to assessment processes regarding income, loss, or refund.
- Legal representatives and agents of non-residents.
- Individuals in default for unpaid tax deductions at source.

Definition of Person

Person (Sec. 2(31)) includes:
- Individuals, Hindu Undivided Families (HUF), companies, and firms.
- Associations of persons or bodies of individuals, whether incorporated or not.
- Local authorities.
- Artificial judicial persons not classified in previous categories.

Specific Entities

Individual: A human being considered natural persons for tax purposes.
Hindu Undivided Family (HUF): A separate taxable entity comprising persons descending from a common ancestor, including wives and unmarried daughters.
Company: An incorporated association with independent legal personality and limited liability, characterized by transferable shares.
Firm: A partnership defined under the Partnership Act, 1932, as individuals sharing business profits.
Association of Persons: A group of individuals collaborating for a common goal that generates income.
Local Authority: Municipalities or entities authorized to manage local funds or services.
Artificial Judicial Person: Entities recognized in law but not natural persons, such as institutions or deities, which can be sued through their managing representatives.

Assessment Process

Assessment (Sec. 2(8)): The procedure to calculate total income and tax payable, involving examination of returns filed by assessees.

Tax Slabs for Individuals

Individuals aged 60 years and below:
- Income up to Rs. 5,00,000: Nil
- Income from Rs. 5,00,001 to Rs. 10,00,000: 20%
- Income above Rs. 10,00,000: 30%
Individuals aged 80 years and above:
- Income up to Rs. 10,00,000: 20%
- Income above Rs. 10,00,000: 30%

Surcharge and Cess Rates

Total Income of Mr. Right (Rs. 70,00,000): Surcharge rate depends on applicable total income brackets and is generally progressive.
Total Income of Mr. Wrong (Rs. 1,50,00,000): Higher income brackets incur higher surcharge rates.
Education Cess: Standard rate typically around 4% of income tax.
Additional Cess: Information states there is a Cess of 1%.

Tax Payable Calculation for Assessment Year 2018-19

Income of Mr. Akash (Rs. 3,45,000): Tax calculation includes base slab application and potential cess.
Income of Mr. Shalini (Rs. 8,50,000): Tax rate based on slab rates and income level.
Income of Mr. Sameer (Rs. 12,60,000): Income surpasses basic exemption limit, tax applies progressively.
Income of Ms. Pooja (Rs. 70,60,000): Subject to higher rates, includes applicable cess calculations.
Income of Mr. Siddharth (Rs. 1,20,50,000): Significant amount subject to maximum tax rate and surcharge.
Income of Ms. Tara (Rs. 9,04,000): Tax determined based on the relevant tax slab.

Salary Under Section 17(1)

Salary includes:
- Wages, annuities, pensions, gratuities, fees, commissions, and perquisites.
- Advance salary and leave encashment.
- Contributions to provident funds that are taxable.

Basis of Charge

Salary is taxable on an accrual (due) or receipt basis, whichever is earlier.
Advanced salary received prior to March 2023 is taxable in the previous year.

Taxability of Allowances

Fully Taxable Allowances:
- Dearness Allowance (DA): Compensates for inflation.
- City Compensatory Allowance: For living costs in metropolitan areas.
- Fixed Medical Allowance: Paid irrespective of claims.
Partly Taxable Allowances:
- Travel Allowance: Exempt to the extent of actual expenses incurred.
- Conveyance Allowance: Exempt for official duties.
- Daily Allowances: Exempt for travel-related daily costs.
- Other allowances like Transport, Children Education, and Hostel Expenditure have specific exemption limits.

Deductions from Salary

Entertainment Allowance: Allowed only to government employees, limited to either ₹5,000 or 20% of basic salary, or actual received amount, whichever is least.
Professional Tax: Deductible as per Salary Slip or Form 16.

Standard Deduction

As of FY 2023-24, a standard deduction of ₹50,000 is allowed without proof of expenditure.

Net Profit Calculation

Net profit for taxation may differ from accounting profit due to commission deductions and taxation rules on non-taxable income like dividends.
Business income is taxable regardless of operations mode, and illegal income is also included in this taxation.

Basic Principles for Assessment of Business Income

Business should be conducted during the previous year, profits/losses are not separately taxable, future anticipated gains/losses are not considered, and illegal profits are taxable.

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Description

This quiz covers fundamental concepts of taxation, particularly focusing on income tax. Participants will learn about the classification of taxes into direct and indirect categories, alongside the details of income tax, wealth tax, and goods and services tax. It's an essential start for anyone looking to understand the basics of income tax.

Income Tax Basics - Day 1

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