chapter 6 - income tax

8/3/2019 Chapter 6 - Income Tax

1/12


2/12

An income tax is a tax levied on the income of

individuals or businesses (corporations or other

legal entities). Various systems define income differently, and

often allow notional reductions of income (such

as a reduction based on number of children

supported).

The "tax net" refers to the types of payment

that are taxed, which included personal

earnings (wages), capital gains, and business

income.

Capital gains may be taxed when realized (e.g.

when shares are sold) or when incurred (e.g.

when shares appreciate in value).


3/12

The concept of taxing income is a modern

innovation and presupposes several things: amoney economy, reasonably accurate accounts,

a common understanding of receipts, expenses

and profits, and an orderly society with

reliable records.

For most of the history of civilization, these

preconditions did not exist, and taxes were

based on other factors. Taxes on wealth, social

position, and ownership of the means of

production (typically land and slaves) were all

common.


4/12

Practices such as tithing, or an offering offirst fruits, existed from ancient times, and

can be regarded as a precursor of the income

tax, but they lacked precision and certainly

were not based on a concept of net increase.


5/12

Personal: A personal or individual income tax is leviedon the total income of the individual (with somedeductions permitted).

It is often collected on a pay-as-you-earn basis, with

small corrections made soon after the end of the tax

year.These corrections take one of two forms: payments to

the government, for taxpayers who have not paid

enough during the tax year; and tax refunds from the

government for those who have overpaid.

They may allow losses from one type of income to be

counted against another. For example, a loss on the

stock market may be deducted against taxes paid on

wages.


6/12

Corporate: Corporate tax refers to a direct taxlevied on the profits made by companies or

associations and often includes capital gains of acompany.

Corporate expenses related to capital expenditures

are usually deducted in full (for example, trucks

are fully deductible in the Canadian tax system,while a corporate sports car is only partly

deductible) over their useful lives by using

percentage rates based on the class of asset they

belong to.Accounting principles and tax rules about

recognition of expenses and revenue will vary at

times, giving rise to book-tax differences.


7/12

Payroll: A payroll tax generally refers to two

kinds of taxes: employee and employer payrolltaxes.

Employee payroll taxes are taxes which employers

are required to withhold from employees' pay,

also known as withholding, pay-as-you-earn (PAYE)

or pay-as-you-go (PAYG) tax.

Employer payroll taxes are paid from the

employer's own funds, either as a fixed charge per

employee or as a percentage of each employee's

pay.

Payroll taxes often cover government social

insurance programs, such as social security,

health care, unemployment, and disability.


8/12

Inheritance: The inheritance tax, estate taxand death duty are the names given to varioustaxes which arise on the death of an individual.

In international tax law, there is a distinction

between an estate tax and an inheritance tax:

the former taxes the personal representativesof the deceased, while the latter taxes the

beneficiaries of the estate.

However, this distinction is not universally

recognized.


9/12

Capital gains tax: A capital gains tax is the

tax levied on profits from the sale of capital

assets. In many cases, the amount of a

capital gain is treated as income and subjectto the marginal rate of income tax.


10/12

The total income of a person is divided into

five heads, viz., taxable:

1. Salaries

2. Income from House Property

3. Profits and Gains of Business or Profession4. Capital Gains

5. Income from Other sources


11/12

Income from Salary All income received as salary under Employer-Employee

relationship is taxed under this head.

Employers must withhold tax compulsorily, if income exceedsminimum exemption limit, as Tax Deducted at Source (TDS), andprovide their employees with a Form 16 which shows the taxdeductions and net paid income.

In addition, the Form 16 will contain any other deductionsprovided from salary such as:

1. Medical reimbursement: Up to Rs. 15,000 per year is taxfree if supported by bills.

2. Conveyance allowance: Up to Rs. 800 per month (Rs. 9,600per year) is tax free if provided as conveyance allowance.No bills are required for this amount.

3. Professional taxes: Most states tax employment on a per-professional basis, usually a slabbed amount based ongross income.

4. House rent allowance


12/12

Income From House property

Income from House property is computed

by taking what is called Annual Value. Theannual value (in the case of a let outproperty) is the maximum of the following:

1. Rent received

2. Municipal Valuation3. Fair Rent (as determined by the I-T

department)

If a house is not let out and not self-

occupied, annual value is assumed to haveaccrued to the owner. Annual value in caseof a self occupied house is to be taken asNIL.

chapter 6 - income tax

Documents