Shouldn't income tax be levied solely on income?

Income tax is a tax payable on income. Unfortunately, tax laws sometimes tax receipts that are not actually income, or that are actually capital gains or returns. What is this revenue and how is it taxable?

Donations are a classic form of lump-sum withdrawals that are treated as regular income for tax purposes and are taxed at your flat-rate tax rate. The exemption from gifts is only limited to gifts up to a limited number 50,000 per year, or if they are from certain close relatives or received at the time of marriage, etc. This often results in gifts from close friends or family members, such as family members, etc. B. cousins, are taxed.

The regulation, which is intended to close loopholes for tax evasion through fictitious gifts, unfortunately also affects real cases. While there is an exception for amounts received or paid by registered charitable foundations, there is no exception for socially responsible individuals who can raise funds to help people in need. Although you can use any funds raised by you for the stated purpose, possibly even through your own contribution, the tax authorities may attempt to tax you in accordance with this provision. Instead of being rewarded for charity, you may be punished for it. The Income Tax Department can certainly help alleviate such difficulties by issuing a circular clarifying that amounts raised and spent by individual benefactors on victims of natural disasters or pandemics are not taxable.

According to the law, even if you help a stranger in need by giving him / her more than. numbers 50,000, this person is taxable on this income, although they may have used these funds and their own funds to meet the need. Fortunately, the government recognized the harshness of this provision, albeit belatedly, and was tax-exempt on 25th. It also states that the voluntary benefit (unlimited) that a person receives from their employer is tax-free. In addition, the amount is up to 10 lakh received from a person by the family members of a person who succumbed to Covid are exempt from tax. This is a welcome relaxation that only applies to cases where a person becomes ill with Covid-19 or dies from the disease. One question that may arise in this context is whether such relief would be possible if a person died within weeks of recovering from Covid, as is the case in many cases. It is hoped that a change in the law will also take such cases into account.

Another taxable type of capital income is gains from the sale of assets. While cost indexing is allowed for calculating capital gains from property sales, such indexing only neutralizes 75% of the inflationary impact. Even if your property may not have had real appreciation, you will still pay tax on some of your inflation-adjusted cost of capital, taking into account the impact of inflation. In addition, such indexing is now not possible when selling listed stocks. So the longer you hold stocks that are rising at the same rate as inflation, the higher the tax you will pay. For example, suppose you bought shares for 2018 100,000, the value of which is 125,000 today is as much in real terms as the value of 100,000 in 2018, you'd still end up paying in taxes 2,500 if you win 25,000. But this gain is really nothing more than an illusion created by inflation.

The third type of lump-sum withdrawal that is taxed is an annuity or annuity under an annuity or retirement plan that has no lump-sum repayment on maturity or death. The pension or annuity that you receive is therefore also part of your capital, but the full amount is taxed as regular income. Fortunately, with life insurance policies, with recent changes in TDS regulations, it is now clear that only the excess amount you receive over the premium paid would be taxable as income. In the case of pension fund contracts issued by life insurance companies, it is possible that only part of the premium paid has been deducted from you; however, the tax authorities can attempt to tax the entire receipt if the policy is returned early. In such situations it can be argued that only the amount received equal to the deductible contribution and the revaluation can be taxed and not the entire income.

These are anomalies in tax law that must be addressed. Taxpayers should not be taxed on amounts that are not primarily income-related or that do not result in a real capital increase.

Otherwise, taxes take away some of the taxpayers' capital by taxing their income, which is not the hallmark of reasonable or fair tax law.

Gautam Nayak is a partner at CNK & Associates LLP.

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