• Harmehak Kaur Anand

Section 4 of the Income Tax Act, 1961 - Charge of Income-Tax

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#incometax

#taxliability

#surcharge

#marginalrelief


Chapter II of the Income Tax Act, 1961 comprising of sections 4 to 9A deals with basis of charge. Section 4 of the Act provides for charge of income tax and is divided into two subsections. Section 4 (1) states that when a Central Act specifies the rate or rates at which income tax shall be levied for any assessment year, income tax at those rates shall be levied for that year in accordance with and subject to the provisions of this Act (including provisions for the levy of additional income tax), with respect to the total income of each person for the previous year. However, income tax must be levied in accordance with any provision of this Act where it applies to income from a period other than the preceding year. According to section 4 (2), regarding income chargeable under the previous section, the tax must be deducted at the source or paid in advance.


Basic Exemption Limit

For the financial year 2022–2023, individuals, HUFs, AOPs, and BOIs with income under Rs. 2,50,000 are exempt from paying income tax. The basic exemption limit is Rs. 3,00,000 for residents of 60 to 80 years of age, while the limit is Rs. 5,00,000 for residents 80 years of age and above. There is no basic exemption limit for co-operative societies, firms, companies and local authorities.


Computing Total Tax Liability

After determining the total income subject to tax, one computes the tax due for the year. This is done by applying the rates prescribed for this purpose. The official government website of the income tax department provides the following table to help you better understand the method of computing total tax liability.


Computation of total income and tax liability for the year

Particulars

Amount

Income from salary

XXXXX

Income from house property

XXXXX

​Profits and gains of business or profession

XXXXX

​Capital gains

XXXXX

​Income from other sources

XXXXX

Total of head wise income

XXXXX

​Set off of cosses

XXXXX

Gross Total Income

XXXXX

Less : Deductions under Chapter VI-A (i.e., under section 80C to 80U))

(XXXXX)

Total Income (i.e., taxable income)

XXXXX

​Tax on total income to be computed at the applicable rates (for rates of tax, refer "Tax Rate" section)

XXXXX

Less : Rebate under section 87A

(XXXXX)

Tax Liability After Rebate

XXXXX

Add: Surcharge

XXXXX

Tax Liability After Surcharge

​XXXXX

Add: Health & Education cess @ 4% on tax liability after surcharge

XXXXX

Tax liability before rebate under sections 86, section 89, sections​ 90, 90A and 91 (if any) (*)

​XXXXX

Less : Rebate under sections 86, section 89, sections​ 90, 90A and 91(if any) (*)

(XXXXX)

Tax liability for the year before pre-paid taxes

XXXXX

Less: Prepaid taxes in the form of TDS, TCS and advance tax

(XXXXX)

Tax payable/Refundable

XXXXX

(*) A member of an association of persons (AOP) or body of individuals (BOI) may be eligible for a rebate under section 86 with respect to income received from the AOP/BOI. A salaried employee is eligible for relief under section 89 in relation to arrears of salary, gratuity, etc. A taxpayer may get a rebate under sections 90, 90A, and 91 in relation to income that is subject to double taxation, that is, income that is taxed both domestically and internationally.


Computing Surcharge

An additional tax imposed on the amount of income tax is known as a surcharge. The different rates at which surcharge is levied for individuals, HUF, AOP, BOI and artificial juridical person is given below:

Rate of surcharge

Total Income

10%

>50 lakh but <1 crore

15%

>1 crore but <2 crore

25%

>2 crore but <5 crore

37%

>5 crore

Note: The maximum surcharge rate for AOP with all members as a company is 15%.


Other situations:

Rate of surcharge

Total Income

Firm and Local Authority

12%

>1 crore

Co-operative Society

7%

12%

>1 crore but <10 crore

>1 crore

Domestic Company

7%

12%

>1 crore but <10 crore

>10 crore

Foreign Company

2%

5%

>1 crore but <10 crore

>10 crore

Example:

Miss. Sharma is a doctor, her total income for the year amounted to Rs. 41,00,000. Will she be liable to pay surcharge, if yes, then how much?

Since the total income of Miss. Sharma is less than Rs. 50 lakh, she is not liable to pay surcharge.


Computing Marginal Relief

Marginal relief is intended to give a taxpayer respite from surcharge levy when their total income is marginally more than Rs. 50 lakh, Rs. 1 crore, Rs. 2 crore, Rs. 5 crore, or Rs. 10 crore, depending on the situation. Marginal Relief is available in the following cases and in the following manner:


When computing surcharge, taxpayers (i.e., individuals, HUFs, AOPs, BOIs, and artificial juridical persons) with total income exceeding Rs. 50 lakh are eligible for marginal relief in a way that ensures the net amount of income tax and surcharge due does not exceed the total amount of income tax due on the total of Rs. 50 lakh by a sum greater than the amount of income exceeding Rs. 50 lakh.


When a company's total income is more than Rs. 1 crore but does not exceed Rs. 10 crore, marginal relief will be calculated as discussed above, but when a company's total income exceeds Rs. 10 crore, marginal relief is available in a way that ensures the net amount of income tax and surcharge that must be paid does not exceed the total amount of income tax and surcharge that must be paid on the company's total income of Rs. 10 crore by more than the amount of income that exceeds Rs. 10 crore.


Example

Mr. Shah is a 45 year old salaried employee and his total income from salary is Rs. 55,00,000 (2022-23). Does he have to pay surcharge? Will he get marginal relief?

In case of individuals, HUFs, AOPs, BOIs and artificial juridical person surcharge is levied @ 10% on the amount of income-tax where the total income of the taxpayer exceeds Rs. 50 lakh. Here, total income of Mr. Shah is Rs. 55,00,000. Thus, has to pay surcharge. Also, marginal relief is available when total income is slightly above Rs. 50 Lakh.


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