Some Basic Terms of the Income-tax Act that you should know before the Budget
The Union Budget 2020 will be presented in the Parliament on February 1, 2020 and like every year, many amendments are expected to be made under Income-tax Act. Before the budget day, we have identified a few tax jargons which every taxpayer should know.
Section 3 of the Income-tax Act defines 'Previous year' as the financial year immediately preceding the assessment year. In simple words, every financial year in which income is earned is termed as 'previous year'. Though a taxpayer pays tax in the previous year itself in which income is earned by way of TDS or Advance-tax, but it is assessed to tax by the dept. in the assessment year which begins after the previous year ends.
Section 2(9) of the Income-tax Act defines 'assessment year' as a period of 12 months commencing on 1st day of April every year. Thus, an assessment year starts from 1st April every year and ends on 31st March of the next year. Income earned by a person in a previous year is taxed in the assessment year at the rates prescribed for such assessment year in the relevant Finance Act.
For example: Income earned by a person during the financial year 2019-20 shall be assessed to tax in the financial year 2020-21. Thus, assessment year in this case shall be financial year 2020-21 and previous year shall be financial year 2019-20.
A person is taxed in respect of net taxable income earned by him during the previous year. The net taxable income is computed in two steps. In first step, gross total income is computed by aggregating the incomes computed under five heads of income – salary, house property, business income, capital gains and residuary sources. In second step, the tax deductions are reduced from gross total income and the result is net taxable income. These deductions are prescribed under Chapter-VIA of the Income-tax Act which comprises of Section 80C to 80U.
Incomes which do not form part of total income are called as exempt income. These income are exempted at the source level, thus, they are never part of gross total income. Section 10 of the Income-tax Act provides exemptions with respect to various incomes.
The basic difference between exemption and deduction is that an exempt income does not become part of total income of a taxpayer, whereas a deduction is typically allowed after computing the gross total income, and after setting off the brought forward losses and unabsorbed depreciation.
Rebates are allowed to a taxpayer to reduce his ultimate tax liability. Currently, only one rebate is allowed under Section 87A of the Income-tax. This rebate is allowed up to Rs. 12,500 to a resident individual whose total income does not exceed Rs. 5,00,000.
Relief is akin to rebate which reduces the ultimate tax liability of a taxpayer. Relief is allowed when tax burden of a taxpayer is increased due to certain types of income. Relief is allowed under Section 89(1) to a salaried person who has to pay higher taxes on account of receipt of salary in arrears or in advance. Some reliefs are allowed to avoid double taxation. For instance, relief under Section 90/90A/91 is allowed in respect of taxes paid in foreign countries.