In Tax Laws, various terms are used which a layman finds difficult to understand. Most of us get confused between a fiscal year, assessment year, and the list does not end here. But can we avoid taxes just because we do not understand the terms? Not an option! That is why we hereby seek to simplify the complexity and explain taxation terms which you come across once in a while.
So, as we know that TAX is the term used in every person’s home because we eventually end up paying taxes in one or the other forms. Firstly, we should know the meaning of Tax to understand the related terms.
TAX
Tax is a compulsory fee levied by the government on an individual or organisation for the development of a country. Taxes can be understood as one of the major sources of income of the governments.
There are two types of Taxes In India
a) Direct Tax: In which tax is levied on the person or entity directly, depending upon their income or wealth owned. Example – Income Tax.
b) Indirect tax: It is the Tax in which is imposed on the way to consumers in a uniform or universal manner through intermediaries. Example – Goods and Services, Tax, and Custom Laws/ Act.
INCOME TAX
Income tax is the tax levied on income. Based on the annual income of a person, the government announces different slabs and the percentage of tax levied on specific slabs. In the recent Budget 2025, the tax rebate has been extended to income of Rs 12 lakhs, and others also have been eventually relieved of the burden.
INCOME
According to Income Tax Law, Income plays an important role without Income the value of Income Tax is vague. So, if we talk about the Income in terms of Tax Laws, it includes:
a) Profits and gains
b) Dividend
c) Voluntary contribution received by the trust.
d) Value of any perquisite
e) Allowance as defined under the Act
PERSON
A person in Tax Laws is the one on whom tax is levied, and not just a human. It is defined under Section 2(31) of the Income tax Act 1961.
It includes:
a) Individual
b) Hindu Undivided Family (HUF)
c) Firm & LLP
d) Association of Persons (AOP) & Body of Individuals (BOI)
e) Local Authority
f) Artificial Judicial Person.
Here, Individual is a natural person or natural human beings like male, female, minor , or a person of sound mind.
HUF is treated as a person under the definition of person. It is considered as a separate entity for the purpose of tax assessment.
AOP – is the association of the persons and their main purpose is the same. Whereas, BOI i.e. body of Individuals only no HUF and firms get the status while they are working together.
Also explore common GST Terms
SLAB RATES
Slab rates is the rate in which all the assessees have tax liability bifurcated as per their income. This can be understood with the help of new tax regime slabs wherein income of Rs 3 to 7 lakhs is taxable at 5%, income of Rs 7 to 10 lakhs at 10%, income of Rs 10 to 12 lakhs at 15%, and so on.
Head of Income
In income tax there is only FIVE heads of Income which Includes
1. Salary
It is the first head of Income generated in furtherance of the employer and employee relationship. The provision for Salary is section 17 of the Income Tax Act.
2. House property
Section 22 of the Income Tax Act provides for House Property. It means the annual value of any property (those constructed as units in buildings or independent land) apparent thereto. Thus, any income arising through this process are covered under this head.
3. Profits and Gains from Business and Profession (PGBP)
Section 28 of the Income Tax Act discusses income from PGBP. Any Income arising from any Business or Profession comes under the definition of the PGBP.
4. Capital Gains
Section 45 of the Income Tax Act states about capital gains. Under this head, any profits or gains arising from the Transfer of Capital Assets are covered.
5. Other Sources
The income other than the aforementioned four heads is treated as the other Sources of Income as per Section 56 of the Act.
FINANCIAL YEAR
Financial year starts from 1 April and ends on 31 March of the following year. This is the calendar year during which you receive your money, whose tax liability arises the following year.
To understand with example, for the income and gains made in the financial year 2024-25 between April 1, 2024 and March 31, 2025 will be taxable afterwards in 2025-26.
PREVIOUS PEAR
Generally the previous year means the year in which a person earned income. So, it is important as a point of Tax Laws.
As per the definition given under section 3 of the Act 1961, it means that, Income tax is payable on the income which is earned during the previous year and it is assessed in the immediately succeeding financial year which is called as an Assessment Year.
ASSESSMENT YEAR
It is defined under section 2(9) of the Income Tax Act 1961.
It means that it is a period of twelve months commencing every year on 1st April. Thus, it is a period of twelve months and followed by all the assessees as a uniform year called Assessment Year for the purpose of tax liability.
ASSESSEE
Assessee is the person by whom any tax has been paid under the Income Tax Act. This concept is defined under Section 2(7) of the Act. According to this provision, Assessee means a person by whom any tax or any other sum of money is payable under this Act. It Includes:
a) Every person in respect of whom any proceedings under this Act has been taken for the Assessment of Income.
b) Every person who is deemed to be assessee under any provision of this Act.
c) Every person who is deemed to be an assessee in default under any provision of this Act.
ASSESSEE IN DEFAULT
As the term suggests, an assessee in default is the person who defaults on any payment or tax liability under this Act.
Example; If a person should file the return under a certain Income tax slab rate , suppose his income is Rs 15 lakhs, so, according to the 1961 Act, he shall be liable to file Income Tax return based on the liability, since current salaried person enjoys rebate if his/her income is upto Rs 7 lakhs in existing Tax Regime. If this person intentionally skips on filing the return or any payment in which he is liable to pay under the Act, the person may be called ‘Asseessee in Default’
RETURN
Filing of Income tax Return is mandatory as per the law given under Income tax Act 1961, which helps the persons to claim TDS refunds as given under the 1961 Act.
- ITR-1 to be filled by Individuals being resident.
- ITR-2 is filled by the Individual and HUF whose income are arising other than PGBP.
- ITR-4 SUGAM- if the business attracts the presumptive income of an Individuals, then, the persons need to fill this form.
PAN
PAN Card Plays an important role in the taxation arena. PAN refers to the Permanent Account Number. It’s a 10 digit Alphanumeric identification number. It is issued to any person who applies for the same.
AMT
The word AMT refers to Alternate Minimum Tax. It is a tax levied on adjusted total Income in a Financial year. Thus, we can say that it is leviable alternatively to normal tax. The rate of AMT is 18.5% plus applicable surcharge and Cess.
MAT
The word MAT refers to Minimum Alternate Tax. MAT is applicable to all the companies including Foreign Companies. It limits the tax exemptions availed by companies to make sure that they pay a minimum amount of corporate tax to the government. The MAT tax credits can be carried forward for 15 years (Assessment Years).
DEDUCTIONS
The concept of Deductions has been defined under Chapter VI-A and Section 10AA of the Act. It means that amount is reduced from Gross total Income to arrive at Total Income for the purpose of calculating tax liability. There are deductions available on certain investments, house rent, home loan, etc.
EXEMPTION
It is slated under Section 10 of the Act. Exemption in Taxation means that the Income which is exempt under Section 10 which shall not be included in the Gross Total Income for calculating tax liability.
TDS
Tax Deducted at Source is the part of Income tax as per the Income Tax Act Laws. TDS is the tax which is deducted by the payer on the basis of specified rates given in the Income Tax Act.
ADVANCE TAX
Advance tax is the tax which is paid by the assessee in advance rather than a lump sum paid at the year-end. It is also termed as “Pay as you earn”. Any person whose tax liability estimates at Rs 10,000 or more has to pay taxes in the form of advance tax. In case of failure of advance tax then the person will incur interest charges under Section 243 of the Act.
The Income Tax Terms have been compiled and explained by our intern, Adv. Aakash Poddar. He is assisting the team to bring the most informational and valuable legal blogs for the legal fraternity.
