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Every time you read about any aspect of income tax, you will come across several sections and provisions under the income tax laws. However, not all of us have a clear understanding of what it is exactly and what it consists of. Here is a brief structure of the important components of income tax laws every common man must know.

  1. Income Tax Act, 1961
  2. Income Tax Rules, 1962
  3. The Finance Act
  4. Circulars
  5. Government Notifications
  6. Court Decision (Judicial Pronouncements)

1. Income Tax Act, 1961

The Income Tax Act, 1961 is an act to levy, administer, collect, and recover income tax in India. The act is effective from 1 April 1962. It consists of 298 sections and 14 schedules. The act helps determine a taxpayer’s taxable income, tax liability, appeals, penalties, and prosecution. The government has been making amendments to the act from time to time.

2. Income Tax Rules, 1962

Income tax rules act as a supplement to the Income Tax Act, 1961. Income tax rules are effective from 1 April 1962. The Central Board of Direct Taxes (CBDT) has the power to amend the income tax rules. For example, Section 10 (13A) (1) of the Income Tax Act states that the house rent allowance can be exempted up to a certain limit. Rule 2A under income tax rules states how the limit can be calculated.

3. The Finance Act

The Finance Minister of India presents a Finance Bill every year that proposes amendments to the direct and indirect taxes. When both the houses of the Parliament passes the bill, it receives consent from the President of India and becomes the Finance Act. Such amendments will become a part of the Income Tax Act and will be implemented from the first day of the next financial year usually.

In addition, the Finance Act consists of four parts:

Part I: It specifies the rate at which income tax is levied for various income categories during a financial year.

Part II: It specifies the rate at which tax must be deducted at source during the financial year.

Part III: It states the changes in income tax rates in specific cases, i.e. the rate for income chargeable under salary head and rate for computing advance tax for a financial year.

Part IV: It explains the rules for calculating agricultural income in this part.

4. Circulars

In order to avoid confusion and make the provisions of the Income Tax Act more clear, CBDT issues circulars from time to time.

5. Government Notifications

The Central Government has the authority to issue notifications on various provisions according to the Income Tax Act and income tax rules. The Ministry of Finance issues these notifications on exemption of payments to employees such as allowance, pension, cost inflation, leave encashment, index for long-term capital gains, and exemption of interest on a certain security.

6. Court Decision (Judicial Pronouncements)

  • The decisions given by the Supreme Court becomes law and are applicable to all courts, appellate authorities, income tax authorities, and the assessees. If there are two contradictory decisions given, the decision given by the larger bench prevails.

  • High Court decisions bind the tribunal, income tax authorities, and all assessees in the jurisdiction.

  • It is always advisable to have a basic knowledge of the income tax rules and acts you have to abide by. If you find it interesting, you can go on and read about these sections in detail to build your knowledge.

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