Financial Planning and Tax Management Antim Prahar 2026

Q.1 Explain the meaning and basic structure of Income Tax in India. Discuss the essential canons of taxation as proposed by Adam Smith with suitable examples.

Meaning of Income Tax in India:
Income Tax is a direct tax imposed by the Government of India on the income earned by individuals and organizations during a financial year. It is called a direct tax because the burden of tax is directly borne by the person who earns the income. The authority to levy and collect income tax in India comes from the Income Tax Act, 1961, which lays down the laws, procedures, exemptions, and rates related to income tax.

The main objective of income tax is to generate revenue for the government to meet its expenses on public welfare, development projects, defense, and administration. It also plays an important role in reducing income inequalities by taxing the rich more and providing reliefs or exemptions to the poor and middle class.

For example, if a person earns ₹10,00,000 in a year, he or she is liable to pay tax according to the income tax slab rates applicable for that year. In this way, income tax ensures that everyone contributes to the nation’s development according to their capacity.

Basic Structure of Income Tax in India:

The structure of income tax in India is systematic and divided into the following main parts:

1. Tax Levied and Collected by the Central Government:
   Income tax is levied and collected by the Central Government under the authority of the Income Tax Act, 1961. The tax rates and rules are announced every year in the Union Budget presented by the Finance Minister.
2. Tax Administration:
   The Income Tax Department, under the Central Board of Direct Taxes (CBDT), administers the collection, assessment, and enforcement of income tax laws. The CBDT operates under the Ministry of Finance, Government of India.
3. Assessment Year and Previous Year:
   Income is taxed based on the concept of Previous Year and Assessment Year.
   • Previous Year: The financial year in which income is earned (1st April to 31st March).

Assessment Year: The financial year immediately following the previous year in which the income is assessed and tax is paid.