What is Income Tax?

What is Income Tax?

A straightforward interpretation would be that it is a tax on the income. So to understand income tax, we need to understand these two words – tax and income.

What is tax and what is income?

A tax is a levy – it is a statutory, mandatory payment made to the government. And, what is income tax? When the amount to be paid is a percentage of the income, it is called income tax. The critical word to be understood is ‘income’. Unless you know what is income you will not be able to work out the income tax payable

So, what is income? Income from the point of view of Income Tax. The amount which needs to be declared in the Income Tax Return.

People have a number of misconceptions when it comes to defining income.

  1. A misconception is that income is everything that comes in – all the receipts of money. But many receipts do not constitute income. For example, a loan taken from a bank brings money in but is obviously not income. Also inheritances are not considered income. Nor are gifts, under certain circumstances.

2. Another misconception that income refers to earnings. But unearned receipts, such as winnings from lottery or lucky draws, are also income subject to income tax.

3. Another misconception is that legal earnings are income and illegally obtained money is not.

So the truth is that income is something broader than mere earnings and not as broad as to cover all receipts.Income for the purposes of income tax covers almost all the money coming in, barring a few specific exceptions like loans, and gifts (in some cases) and inheritances. It does not matter whether it is earned or unearned, legal or illegal, received or accrued.

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