Income tax act (IT act) 1961 is a comprehensive act and it presents a detailed structure and basis regarding the tax treatment of individuals and corporations operating in any part of our large country. After independence, it was quite an essential act to be enacted and implemented by the government as the revenue collected by the government through tax is the main fuel of running the country and its large economy.
We all understand the importance of paying income tax, the revenue collected by the government is utilized in many ways like supporting various government initiatives, boosting the economy, financing the welfare schemes of marginalized sects of the society, defense programs and a lot more. Declaring the exact income and filing the tax returns before stipulated deadlines by the finance ministry is the duty of every resident of our nation.
Basic knowledge of the income tax rules and amendments thereto is required for every tax payer so that they are aware of the rules and can take an informed decision while paying and filing their tax every assessment year. The purpose of this article is to shed some light on the section as mentioned in the title and additionally to some of the relevant sections as per the theme of this write up.
As mentioned earlier as well IT act is a comprehensive one and thus it is lengthy too. Since the act was enacted first time in 196, the Tax treatment environment has undergone major changes and improvement through amendments to update the obsolete parts of the act and to update it and make it relevant to the current context.
One of the major changes regarding taxation in India of the recent times is introduction of the GST (goods and service tax), this is helping government setting new standards of tax collection which is recording new highs and thus enabling the government to build infrastructure and facilities to promote growth of this country.
In this particular paragraph we will frame a layout about arrangement of sections in the said act and inform the reader about the chapters and the sections incorporated therein with the particular relevance. In totality the IT act has 298 sections and 14 schedules with a basic purpose of determining taxable income as per the brackets and slabs announced by the government in the yearly budget, tax liability on individuals and corporations, appeals, penalties, prosecution and others which helps to levy, recover, collect and administer income tax in India.
Amongst the humongous 298 sections and 48 schedules we will concentrate on chapter IV of the IT act 1961 which exclusively deals with computation of total income. This chapter IV itself is pretty lengthy and comprehensive one dealing from section 15 to 59. The major heads under this chapter are Heads of income, salaries, income from house property, profits or gains from business or profession, capital gains, and income from other sources. Under the heads mentioned there are various sections which in detail introduces the methodology and tenets of tax treatment under the various scenarios as mentioned.
As per the title of the article our primary focus here is on the salaries part which comprises of three sections 15, 16 and 17. Although the title of the article is succinct to section 16 but we need to set a context herein so that the reader is able to understand stepwise about the applicability and relevance of the said sections in the act.
Section 15: Determines what all income will be charged under the IT act under the head salaries. This is all salary or arrear payment due or allowed from an employer or former employer to the tax payer in previous year of assessment whether it is actually paid or not.
Also it is further clarified that any if a salary is paid in advance and included in taxable income in previous years, it will not be included again when the same becomes due to avoid double taxation. Also any salary, bonus, commission, remuneration etc. due or received by a partner in a firm is not considered as salary for the purposes in this particular section.
Section 16: The taxable income under the head salary is arrived at after making the deductions as mentioned in this section. For government employees a deduction is allowed for an allowance in nature of entertainment allowance, a sum equal to one fifth of the salary exclusive of all allowances, perquisite, bonuses etc. or five thousand rupees whichever is less. A deduction is also allowed of any sum paid by the tax payer assessee on account of a tax on employment within the meaning of clause (2) of article 276 of the Constitution, leviable by or under any law.
We quote the Article 276(2) in The Constitution of India 1949 for complete understanding of the reader:
(2) The total amount payable in respect of any one person to the State or to any one municipality, district board, local board or other local authority in the State byway of taxes on professions, trades, callings and employments shall not exceed two hundred and fifty rupees per annum: Provided that if in the financial year immediately preceding the commencement of this Constitution there was in force in the case of any State or any such municipality, board or authority a tax on professions, trades, callings or employments the rate, or the maximum rate, of which exceed two hundred and fifty rupees per annum, such tax may continue to be levied until provisions to the contrary is made by Parliament by law, and any law so made by Parliament may be made either generally or in relation to any specified States, municipalities, boards or authorities.