Understanding the basic concepts and terminology of income tax is vital for individuals and businesses alike, as it can help them comply with tax laws, plan their finances effectively, and avoid penalties for non-compliance.

In this section, we will discuss the basic concepts and terms used with reference to Income tax:

Financial Year

For the purpose of Income-tax, financial year means the year starting from 1^st April and ends on 31^st March.

Assessment Year

Assessment year refers to the year when the details of income earned and taxes thereon are furnished to the Income Tax Department. For example, for the year starting from 1^st April, 2020 and ending on 31^st March, 2021, Assessment Year is 2021-22.

Previous Year

Previous year means the financial year immediately preceding the Assessment Year. It refers to the financial year in which income is earned. For Assessment Year 2021-22, the relevant previous year is 2020-21.

Assessee

An income tax assessee is a person who pays tax or any sum of money under the provisions of the Income Tax Act, 1961. The term ‘assessee’ covers everyone who has been assessed for his income, the income of another person for which he is assessable, or the profit and loss he has sustained.

Income

It is very critical term as income tax is charged on the income of a person. Income ordinarily means any earnings. Definition of income under the Income Tax Act is broad to cover various transactions beyond typical earnings. Section 2(24) of the Act enumerates certain items, including those that cannot ordinarily be considered income but are treated statutorily.

Tax-free Income

There are certain types of income on which no tax is required to be paid, e.g., agricultural income, share of income from the firm, etc.

Gross Total Income

Gross Total Income means the aggregate amount of taxable income computed under five heads of income, i.e., salaries, house property, business & profession, capital gains and other sources.

Deductions

While computing the income tax, there are certain expenses, investments or income that are allowed to be deducted from the Gross Total Income, which is called deductions. These deductions are given in section 80C to 80U of the Income Tax Act.

Total Income

After making deductions under section 80C to 80U from the gross total income, the amount left is known as Total Income. Income tax is computed on this income. Total income is rounded off to nearest multiples of ten rupees. Total Income is computed as follows:

Gross Total Income                                        xxx

Less: Deductions under section 80 to 80U      xxx

Total Income                                              xxx

Now that you understand the basic concepts and terminology of income tax, you can go a long way in helping you manage your finances effectively and stay compliant with tax laws.