In this article, I will take you through 30 Important Income Tax Sections of Income Tax Act which you should definitely Know About. It will not only help in your Competitive Exams but also in filing Income Tax Returns in case you are eligible. Every year many of the working professionals struggles to file their Income Tax Return(ITR) due to the complexity involved around it. So I decided to put together all the important sections in an article so that it will help others as well. Before moving on further, Let's try to understand first what is ITR and what are the different types of ITR one can fill. More about Income Tax Act, 1961 on Official website.
What is Income Tax Return (ITR)
An Income tax return(ITR) is a form through which an individual submit his/her income and taxes information for a particular financial year to Income Tax Department.
Types of ITR
While there are many types of ITR but primarily one needs to fill from below different types.
- ITR 1: This ITR is applicable for those who has only Salary Income or Pension Income.
- ITR 2: This ITR is applicable for those who has been earning income through Salary or pension, Income from house property, Income from STCG and LTCG.
- ITR 3: This ITR is applicable for all those persons who has been earning income from doing business or some other profession.
- ITR 4: This form is applicable to those individual and Hindu Undivided Families who want to declare their income from Business or Profession under Presumptive Income Scheme of Income Tax under Section 44AD ,Sec 44ADA and Section 44AE of the Income Tax Act.
Important Income Tax Sections Everyone Should Know About
Section 2(22)(e): Deemed Dividend
Section 2(22)(e) of the Income Tax Act mandates that deemed dividends are loans or advances extended by a company (barring a closely held one) to the following personnel:-
- any of its shareholders who has more than 10% voting power in the company or
- to any concern in which such shareholder is substantially interested or
- for the individual benefit of such shareholder or
- on behalf of such shareholder to the extent the company has accumulated profits, such payment would be deemed as a dividend under Section 2(22)
- a company in which public is not substantially interested is otherwise called a closely held company.
Section 10: Exemptions
Section 10 of Income Tax Act allows the computation of specific incomes as tax-free. This includes Leave Travel allowance, House Rent Allowance, self-employed agricultural income and many more.
Section 10(34): Income Tax Exemption on Dividend Income
Dividend received from an Indian company under section 10 (34) is exempt from tax provided the dividend distribution tax has already charged under section 115-O.
Note:- It is important to note here that dividend distribution tax is abolished as informed in the Financial Budget 2020. Thus the domestic company is not liable to pay any dividend distribution tax. It is now the dividend recipients who needs to pay the tax on dividend income.
Section 10(35): Exemption towards income received from units
The provisions of section 10(35) offer exemption towards the following:-
- Any income arising in respect of the units of the specified mutual fund
- Any income arising in respect of the units from the Administrator of the specified undertaking or
- Any income arising in respect of the units from the specified company.
Thus, in case the income falls within the criteria mentioned above, the entire income arising from such a unit is exempted under section 10(35) of the Income Tax Act.
Note:- It is very important to note here that exemption under section 10(35) of the Income Tax Act shall not be available to income arising in respect of units received on or after 1st April 2020.
Section 16(ia): Deductions under the head 'Salaries'
Deduction u/s 16(ia) states that a tax payer having income chargeable under the head 'Salaries' shall be allowed a deduction of ₹ 50,000 or the amount of salary, whichever is less, for computing his total income. Now all employees will get a standard deduction of ₹ 50,000 per annum.
Section 16(ii): Entertainment Allowance
Section 16(ii) deductions allowed to only government employees only to the extent of the least of the following:-
- 20% of basic salary
- Amount granted as entertainment allowance in the financial year
Section 16(iii): Professional Tax
Section 16(iii) allows professional tax deduction depending on who paid it. It says:-
- If paid by Employee then deduction is allowed from Gross Salary.
- If paid by Employer then tax so paid should be included in gross salary as perquisite & then deduction can be claimed from Gross Salary.
Section 17(1): Definition of Salary
The term 'salary' has been defined under section 17( 1) of the Income Tax Act to include salary, perquisites and profits in lieu of salary. Hence, to calculate the income under the head salaries, the total amount of salary, perquisites and profits in lieu of salary received in a year must be calculated.
Section 17(2): Definition of Perquisite
“Perquisite” is defined in the section 17(2) of the Income tax Act as including: (i) Value of rent-free/accommodation provided by the employer. (ii) Value of any concession in the matter of rent respecting any accommodation provided to the assessee by his employer.
Section 17(3): Definition of "Profit in lieu of Salary"
Section 17(3) gives an inclusive definition of "Profits in lieu of salary". As the name suggests, these payments are received by the employee in lieu of or in addition to salary or wages.
Section 37: Deductions for Certain Businesses
Any expenditure not being the expenditure allowed under Sections 30 to 36 and not of capital or personal nature and which are expended exclusively for the purposes of the business or profession are allowed while computing the income from business or profession.
Section 44AB: Tax Audit
Under Section 44AB, a taxpayer needs to compulsory audit his account by chartered accountant if the annual gross turnover/receipts in business exceeds Rs10 crore(Previously it was Rs1 crore then increased to Rs5 crore).
Section 44AD: Presumptive Taxation for Traders
Under Section 44AD of presumptive taxation, small taxpayers with less than 2 crore of turnover are not required to maintain books of accounts and their profit are presumed to be 8% of total turnover.
Section 44ADA: Presumptive Taxation for Professionals
This is applicable only to professional whose gross total receipts does not exceed Rs50 lakh rupees.
Section 44AE: Presumptive Taxation
Section 44AE of Income Tax act, 1961 states that small business engaged in the business of plying, hiring or leasing goods carriages having not more than ten goods carriage vehicles, can adopt the Presumptive taxation scheme for ascertaining the taxable income for a particular financial year.
Section 48: Mode of Computation
The income chargeable under the head “Capital gains” shall be computed, by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely :-
(i) expenditure incurred wholly and exclusively in connection with such transfer;
(ii) the cost of acquisition of the asset and the cost of any improvement thereto;
(iii) in case of value of any money or capital asset received by a specified person from a specified entity referred to in section 45(4), the amount chargeable to income-tax as income of such specified entity under that sub-section which is attributable to the capital asset being transferred by the specified entity, calculated in the prescribed manner.
Section 80C: Deductions
Section 80C allows to reduce taxable income by making tax saving investments. It allows maximum deductions up to Rs1.5 lakh every year.
Section 92E: Report from Accountant
Every person who has entered into an international transaction or specified domestic transaction during a previous year shall obtain a report from an accountant and furnish such report on or before the specified date in the prescribed form duly signed and verified in the prescribed manner by such accountant and setting forth such particulars as may be prescribed.
Section 111A: Short Term Capital Gain(STCG) Tax
Section 111A is applicable in the case of short term capital gain on the purchase or sale of equity shares or equity-oriented mutual fund units transferred through a recognized stock exchange.
Section 112A: Long Term Capital Gain (LTCG) Tax
It provides for long-term capital gains tax on the sale of listed equity shares, equity-oriented mutual funds and business trust. The rate of long-term capital gains tax on these listed securities is 10% for gains exceeding the threshold of Rs 1 lakh.
Section 115AD(1)(b)(ii): Tax on Income from Foreign Institutional Investors
The amount of income- tax calculated on the income by way of short term capital gains referred to in clause (b), if any, included in the total income, at the rate of 30%.
Section 115H: Benefit to Non-Residents Indian(NRI)
Section 115H talks about giving certain amount of concession to the Non-Residents Indian(NRI) on the tax rates applicable on Interest earned from their deposit or any Interest Income.
Section 115JC: Alternate Minimum Tax(AMT) - Adjusted Total Income
Section 115JC lays down that an assessee liable to AMT should obtain a report certifying the adjusted total income and the alternate minimum tax duly computed, by an accountant and furnish the report on or before the due date of filing of the return u/s.
Section 115JD: Tax credit for Alternate Minimum Tax(AMT)
As per the section 115JD of the income tax Act, the Alternate Minimum Tax (AMT) is payable in case the normal amount of tax payable is less than the tax amount payable under AMT. Such credit can be adjusted with normal tax liability arising in subsequent or future year in which regular tax payable exceeding AMT.
Section 139(1): Mandatory and Voluntary Returns
Under Section 139(1), Every person who has a total income that exceeds the exemption limit is liable to furnish Income Tax Return within the due date.
Section 192: Tax Deducted at Source(TDS)
It provides that every person responsible for paying any income which is chargeable under the head 'salary', shall deduct income tax on the estimated income of the assessee under the head salaries.
Section 208: Liability to Pay Advance Tax
As per section 208, every person whose estimated tax liability for the year is Rs. 10,000 or more, shall pay his tax in advance, in the form of “advance tax”. In this part you can gain knowledge on various provisions relating to payment of advance tax by a taxpayer.
Section 234(A): Interest Payable by Taxpayer
Interest under section 234A is levied for delay in filing the return of income. Interest is levied at 1% per month or part of a month. The nature of interest is simple interest. In other words, the taxpayer is liable to pay simple interest @ 1% per month or part of a month for delay in filing the return of income.
Section 234(B): Interest for default in payment of Advance Tax
Under section 234B, interest for default in payment of advance tax is levied at 1% per month or part of a month. The nature of interest is simple interest. In other words, the taxpayer is liable to pay simple interest at 1% per month or part of a month for default in payment of advance tax.
Section 234(C): Payment of Advance Tax not on Time or Interest for Deferment of Advance Tax
Section 234C of the Income Tax Act defines the rate of interest and conditions if you delay the advance tax instalments. Everyone, including salaried taxpayers, is required to pay advance tax every quarter of the financial year.
Section 234(F): Penalty for Delay in Filing ITR
As per section 234F of the Income-tax Act, taxpayers must pay penalty for delay in filing ITR. In other words, if you fail to file your tax returns within the deadline for current year i.e., 31st of December or any extended date, you might end up paying up to INR 5,000 as penalties.