The Effect of different Classes of Income on Assessment
An income tax is a government tax on the taxable profit earned by an individual or corporation. In short, it is a certain percentage of your income that you have to pay regularly to the government. Classification income for income tax purpose has an important bearing on the determination of total taxable incomes, tax rate and tax liability. Here the impact of each classification is discussed below –
Non-taxable income: All sources of income are not taxable. Some items of income are not included in the total income either fully or partially. These are known as non-volume of total income and the rate of tax.
Total taxable income: All source of income except non-taxable incomes constitute the total amount of taxable income. It is generally called “Total income”.
Tax-exempt income: Tax-exempt incomes are of different categories. The items of tax-exempt comes which are not included in total income at all are called non-assessable income. But there are some items of tax-exempt incomes which are included in total income but which have fluent tax rebate facilities. These can be categories as follows:
- Tax-free income: There are some items of income included in total income but tax rebate is granted on these items at an average rate of tax. These sources of income are called tax free income. These items increase total income and determine the tax rate. But they reduce the net tax liability.
- Investment allowance: Payment of any amount of investment or for a specific purpose by the assesses is termed as investment allowance. This term has an effect on the determination of total income and tax rate. A tax rebate is allowed on this allowance at a specified rate up to the certain limit to reduce tax liability.
- Tax-exempted income under specific head: These are similar to nom-assessable income in terms of their impact on total income and tax rate. They reduced the taxable income from an individual source and consequently they reduce total income and tax rate and net tax liability.
