Chapter 7: Income Tax

PERSONAL INCOME TAX

Tax imposed by the Government on the income of an indivisual person is known as personal Income tax.

Every indivisual, whose annual income exceeds a certain limit, has to pay tax to the Government known as income tax.

SOME TERMS RELATED TO INCOME TAX

Assessess: - Every individual who pays income tax is called assessee.

Financial Year:- 31^st Every year from 1st April to 31^st March is called financial year.

Assessment Year: – The year next to financial year is called assessment year. For example assessment year is 2006-2007 for the financial year 2005-2006.

Income Tax Return: - Every assess files a statement of previous years income to the income tax department which is called income tax return. It is must.

Income from Salary: - Income from salary includes. Basic Pay; Dearness Allowance (DA), City compensatory allowance (CCA), Interin Relief (IR); Honorium; Bonus; Overtime Allowance, Children’s Education Allowance; Refund of Tuition Fees; Pension, Family Pension; Leave Encashment during service period other than at the time of retirement.

Exemption on Savings: - Saving upto Rs. 1 lakh will be deducted from the following investment before calculating the taxable income:

1. Contributory Provident Fund                                                                                              (CPF)
2. General Provident Fund                                                                                                     (GPF)
3. Public Provident Fund                                                                                                        (PPF)
4. Life Insurance Premium                                                                                                    (LIC)
5. Unit Linked Insurance Plan                                                                                               (ULIP)
6. National Saving Certificate                                                                                                (NSC)
7. Nation Saving Scheme                                                                                                      (NSS)
8. Some special infrastructure Bonds

Exemption on Donations: - Deduction on income is allowed on the following donations:

1. Prime Minister’s National Relief Fund                                                                           100%
2. National Defence Fund                                                                                                     100%
3. Medical Research Institute                                                                                             100%
4. Charitable Trust, Educational Institution, Hospitals, Orphanages etc                       50%
   Note: - An indivisual can donate only upto 10% of his/her income during a financial year:

A. Rate of Income Tax for Male Person of age less than 55 years.

Taxable Income	Rate of Income Tax
Upto Rs. 1 lakh More than Rs. 1 lakh to Rs. 1.5 lakh More than Rs. 1.5 lakh to Rs. 2.5 lakh More than Rs. 2.5 lakh	Nil 10% 20% 30%

B. Rate of Income Tax for Female Person

Taxable Income	Rate of Income Tax
Upto Rs. 1.35 lakh More than Rs. 1.35 lakh to Rs. 1.5 lakh More than Rs. 1.5 lakh to Rs. 2.5 lakh More than Rs. 2.5 lakh 30%	Nil 10% 20% 30%

C. Rate of income Tax for A senior citizen

Taxable Income	Rate of Income Tax
Upto Rs. 1.85 lakh More than Rs. 1.85 lakh to Rs. 2.5 lakh >More than Rs. 2.5 lakh	Nil 20% 30%

Surcharge: - If the Taxable income of a salaried person exceeds Rs. 10 lakh then a surcharge of 10% is levied on the amount of Tax payable.

Education Cess: - Every tax payer has to pay 2% education cess on the tax payable including surcharge whereever applicable.

Computation of Income Tax: - For calculating the Income Tax follow the following steps:

Step I – Find the total income.

Step II – From the total income subtract the saving up to Rs. 1 lakh.

Step III – From the balance subtract the donations eligible for donation under section 80 G.

Step IV – Convert the balance into nearest multiple of Rs.10. This is the taxable income.

Step V – Calculate the total tax on the taxable income from the table of income tax.

Step VI - If taxable income exceeds Rs. 10 lakh, a surcharge of 10% will be added.

Step VII - Add 2% of the total tax to get not tax payable.

Step VIII - Subtract the advance tax for 11 months to get tax to be paid in the last month.