Income tax is an annual levy or tax on the income earned by a particular person during a financial year. It is charged and collected by the Central Government. Income tax is a which is charged to and collected from the same person unlike GST (Goods and Services Tax) which is charged on the consumer of goods and services but is collected from the provider or supplier of such goods and services. The income tax is charged, assessed, and collected as per the law of the Income-tax Act, 1961.
For the purpose of computation of taxable income and tax thereon, entire income earned by a particular person is classified under different heads:
- Income from Salaries
- Income from House Property
- Income from profits and gains of business and profession
- Income from Capital gains
- Income from other sources
The aggregate of income computed under all the heads is clubbed together and called Gross Total Income (GTI).
The Total Income is computed after deducting the deductions under Chapter VIA of the (section 80C, 80D, etc.) from the Gross Total Income. The tax amount is computed on the Total Income.
When you are earning an income during a particular definite period like a financial year (1April of a financial year to 31 March of next financial year) the amount of income earned during that year can be final and definite only when that year gets over. And such income can be taxed only when it has reached the final and definite amount. Hence, the income earned in a particular financial year is taxed in the next immediately succeeding financial year.
- Financial Year: The financial year starts from 1st April of a year and ends on 31st March of the next year.
- Previous Year (PY): The financial year in which income is earned is called the previous year (P.Y.).
- Assessment Year: Such income is brought to tax in the next financial year and this next financial year is called the Assessment Year (A.Y.).
Suppose Mrs. ABC is employed as a salaried employee in Financial Year 2020-21 and has received the salary of Rs. 10 lacs during that year, and then Financial Year 2020-2021 is a Previous Year. Her salary income will be taxed in the next year i.e. 2021-22 and this next year is called as Assessment Year.
An assesse is a person who is required to pay tax on his income as per the Income-tax Act. This can be an individual, Hindu Undivided Family, Firm, Company, or Trust, etc.
A ‘Permanent Account Number’ (‘PAN’) is a ten-digit alphanumerical number which is issued by the Income-tax Department. It is required by every person for the purpose of
- quoting it in all correspondence, returns, statements, etc., sent by the person to the income-tax authorities, and
- quoting it at the time of entering into certain specified financial transactions.
Every person whose total income during any previous year is more than the limit prescribed for taxable income is required to apply for a PAN.
An apparently wrong notion that is prevailing is that, if a person obtains a PAN, he must statutorily file a return of income. There is no such requirement under the Act. In fact, it is specifically provided in the Income-tax Act that the persons can obtain a PAN in advance, so as to meet any eventuality that may arise in the future when they want to or may have to enter into specified financial transactions for which quoting PAN is mandatory.
The PAN card may come in handy at any time and possession of that card well in advance is thus a necessity. This apart, this card serves as an ‘identity card’ even for other purposes, especially for senior citizens, like railway reservations or airline reservations.
A person can have only one PAN under the new series.
Persons who are not residents in India and those who have agricultural income as the only source of income are not required to obtain PAN.
The application for PAN is made in