The Income-tax Act, 1961

The Income-tax Act, 1961
Parliament of India
Long title An Act to consolidate and amend the law relating to income-tax and super-tax.
Citation	Act 43 of 1961
Enacted by	Parliament of India
Commenced	1 April 1962
Status: In force

The Income Tax Act, 1961 is the charging statute of income tax in India. It provides for the levy, administration, collection, and recovery of income tax. The Government of India brought a draft statute called the Direct Taxes Code intended to replace the Income Tax Act, 1961 and the Wealth Tax Act, 1957. ^[1]

New Income Tax Bill 2025 was presented by the government in the Lok Sabha (Lower house of India) on 13.02.2025, If the bill is approved and passed then it will become an act of law and will come into force with effect from 01.04.2026. ^[2]

Amendments

The Government of India presents the finance bill (budget) every year in the month of February. The finance budget brings various amendments in the Income Tax Act, 1961 including tax slabs rates. ^[3] The amendments are generally applicable to the following financial year beginning from 1 April unless otherwise specified. Such amendments become part of the Income Tax Act after receiving approval of the President of India.

The partial budget presented for a non-full financial year, typically during a General Election year in India, is called a "Vote on Account." It is introduced to ensure the continuation of essential government expenditures required for the smooth functioning of the country. A full-fledged budget is presented once a new government is formed.

Scope of total income

The scope of total income is contingent on the category of the taxpayer and their residential status in India. For example, a person resident in India is liable to pay income tax in India on his total world income. On the other hand, a person non-resident in India is liable to pay tax in India only on his Indian income. Under the Income Tax Act, there are five heads of income: salary, house property, business or profession, capital gains, and other sources. Total income consists of income computed under these heads. The tax on total income is computed as per the tax rates specified for the year during which the income is earned.

Objectives of the Income Tax Act 1961

The primary objectives of the Income Tax Act 1961 are:

1. Revenue Generation: To generate revenue for the government to fund public services and infrastructure development.
2. Equitable Distribution of Wealth: To ensure a fair distribution of wealth by imposing higher taxes on higher income groups.
3. Economic Regulation: To regulate economic activities and promote investments in specific sectors through tax incentives and exemptions.
4. Compliance and Enforcement: To establish a robust framework for the assessment, collection, and enforcement of income tax. ^[4]

Simplification

The Union Government established a panel, led by Arbind Modi, to overhaul and simplify the income tax laws. On 22 November 2017, the government formed a task force to draft a new direct tax law, replacing the existing Income Tax Act, which has been in effect since 1961. Arbind Modi, a member of the Central Board of Direct Taxes (CBDT), will lead the six-member panel, with Chief Economic Advisor Arvind Subramanian serving as a permanent special invitee. ^[5]

Notable cases

• Cairn Energy and Government of India dispute
• Vodafone International Holdings B.V. vs. Union of India & Anr.

Notes

1. "Direct Tax Code 2025".
2. "Income Tax Bill 2025: Top 5 highlights of newly-introduced Income Tax Bill 2025 impacting taxpayers - Income Tax Bill 2025". The Economic Times. Retrieved 16 February 2025.
3. "Tax Rates-Individual". Galactic.
4. "Income Tax Act 1961". 8 July 2024. Retrieved 27 July 2024.
5. "Govt sets up Arbind Modi-led panel to overhaul, simplify income tax laws", Business Standard , Press Trust of India, 23 November 2017