Bookkeeping Basics: Importance, Types of Income Computation, and Income Tax Slab

Understanding Bookkeeping for Businesses and Individuals in India

Bookkeeping Basics:

Bookkeeping is an essential aspect of any business or individual's financial affairs. It involves the systematic recording and organization of financial transactions, including purchases, sales, receipts, and payments, in a ledger or journal. The purpose of bookkeeping is to maintain an accurate record of all financial transactions that occur within a business or individual's financial affairs. This helps to ensure that the financial statements produced at the end of a period are accurate and can be relied upon for decision-making purposes.

Book keeping importance:

Maintaining proper books of accounts is important for financial transparency and ensuring compliance with legal and regulatory requirements. Additionally, it can help businesses to manage cash flow, track expenses, and identify areas where they can reduce costs or increase revenue. Under the Indian Income Tax Act, certain entities are required to maintain books of accounts. This includes individuals, Hindu Undivided Families (HUFs), partnership firms, companies, Limited Liability Partnerships (LLPs), other corporate entities, and professionals like doctors, lawyers, accountants, etc.

As per the Indian Income Tax Act, 1961, certain entities are required to maintain books of accounts. The following entities are compulsory required to maintain books of accounts:

Individuals, Hindu Undivided Families (HUFs), and Partnership firms if their total sales, turnover, or gross receipts exceed Rs. 2,50,000 in a financial year.

Companies, Limited Liability Partnerships (LLPs), and other corporate entities, regardless of their turnover or income.

Professionals like doctors, lawyers, accountants, etc. who have income from the profession exceeding Rs. 1,50,000 in a financial year.

Persons who earn income from renting out property, regardless of the amount of income earned.

It is important to note that the above-mentioned entities are required to maintain books of accounts under the Income Tax Act, and they may also be required to maintain additional records under other laws such as the Companies Act, GST Act, etc.

It is advisable for all businesses and professionals to maintain proper books of accounts, even if they are not compulsorily required to do so, as it helps in better management of finances and facilitates compliance with various regulatory requirements.

Types of Income Computation:

The Indian Income Tax Act provides two methods of income computation: cash basis and mercantile basis. Under the cash basis method, income is considered earned when it is received or credited to the taxpayer's account, whichever is earlier. Expenses are considered to be incurred when they are paid. Under the mercantile basis method, income is considered earned when it is due or when it accrues, irrespective of whether it has been received or not. Similarly, expenses are considered to be incurred when they are due, irrespective of whether they have been paid or not.

Taxpayers can choose the method of income computation that is most suitable for them. However, once a method is chosen, it must be consistently followed for all subsequent years unless there is a reasonable cause to change it. It is important to note that some incomes are required to be computed in a specific manner, regardless of the method of income computation chosen by the taxpayer. For example, capital gains are computed based on the sale consideration received or the fair market value, whichever is higher. Similarly, income from house property is computed based on the annual value of the property, which is determined in a specific manner.

The computation of income in the income tax return form is generally divided into five heads of income: 

1) Income from salary,

2) Income from house property,

3) Profits and gains of business or profession,

4) capital gains,

5) Income from other sources.

The computation of income for each head of income involves the identification of the relevant income, deduction of allowable expenses, and computation of the taxable income after taking into account any deductions or exemptions available under the Income Tax Act.

Income Tax Slab:

The Income Tax Slab is a progressive tax system used by the Indian government to levy income tax on individual taxpayers. It is a system where the tax rate increases as the income of the taxpayer increases. The Income Tax Slab is updated every year in the Union Budget by the finance minister. The Income Tax Slab consists of different tax rates for different income levels. For example, for the financial year 2022-23, the Income Tax Slab for individuals (resident or non-resident) as follows:

For Individual (Resident or Non-Resident) less than 60 years of age anytime during the previous year:
Existing Tax Regime		New Tax Regime u/s 115BAC
Income Tax Slab	Income Tax Rate	Income Tax Slab	Income Tax Rate
Up to ₹ 2,50,000	Nil	Up to ₹ 2,50,000	Nil
₹ 2,50,001 - ₹ 5,00,000	5% above ₹ 2,50,000	₹ 2,50,001 - ₹ 5,00,000	5% above ₹ 2,50,000
₹ 5,00,001 - ₹ 10,00,000	₹ 12,500 + 20% above ₹ 5,00,000	₹ 5,00,001 - ₹ 7,50,000	₹ 12,500 + 10% above ₹ 5,00,000
Above ₹ 10,00,000	₹ 1,12,500 + 30% above ₹ 10,00,000	₹ 7,50,001 - ₹ 10,00,000	₹ 37,500 + 15% above ₹ 7,50,000
		₹ 10,00,001 - ₹ 12,50,000	₹ 75,000 + 20% above ₹ 10,00,000
		₹ 12,50,001 - ₹ 15,00,000	₹ 1,25,000 + 25% above ₹ 12,50,000
		Above ₹ 15,00,000	₹ 1,87,500 + 30% above ₹ 15,00,000
60 plus age group For Individual (Resident or Non-Resident), 60 years or more but less than 80 years of age anytime during the previous year:
Existing Tax Regime		New Tax Regime u/s 115BAC
Income Tax Slab	Income Tax Rate	Income Tax Slab	Income Tax Rate
Up to ₹ 3,00,000	Nil	Up to ₹ 2,50,000	Nil
₹ 3,00,001 - ₹ 5,00,000	5% above ₹ 3,00,000	₹ 2,50,001 - ₹ 5,00,000	5% above ₹ 2,50,000
₹ 5,00,001 - ₹ 10,00,000	₹ 10,000 + 20% above ₹ 5,00,000	₹ 5,00,001 - ₹ 7,50,000	₹ 12,500 + 10% above ₹ 5,00,000
Above ₹ 10,00,000	₹ 1,12,500 + 30% above ₹ 10,00,000	₹ 7,50,001 - ₹ 10,00,000	₹ 37,500 + 15% above ₹ 7,50,000
		₹ 10,00,001 - ₹ 12,50,000	₹ 75,000 + 20% above ₹ 10,00,000
		₹ 12,50,001 - ₹ 15,00,000	₹ 1,25,000 + 25% above ₹ 12,50,000
		Above ₹ 15,00,000	₹ 1,87,500 + 30% above ₹ 15,00,000
Individual (Resident or Non-Resident) 80 years of age or more anytime during the previous year:
Existing Tax Regime		New Tax Regime u/s 115BAC
Income Tax Slab	Income Tax Rate	Income Tax Slab	Income Tax Rate
Up to ₹ 5,00,000	Nil	Up to ₹ 2,50,000	Nil
₹ 5,00,001 - ₹ 10,00,000	20% above ₹ 5,00,000	₹ 2,50,001 - ₹ 5,00,000	5% above ₹ 2,50,000
Above ₹ 10,00,000	₹ 1,00,000 + 30% above ₹ 10,00,000	₹ 5,00,001 - ₹ 7,50,000	₹ 12,500 + 10% above ₹ 5,00,000
		₹ 7,50,001 - ₹ 10,00,000	₹ 37,500 + 15% above ₹ 7,50,000
		₹ 10,00,001 - ₹ 12,50,000	₹ 75,000 + 20% above ₹ 10,00,000
		₹ 12,50,001 - ₹ 15,00,000	₹ 1,25,000 + 25% above ₹ 12,50,000
		Above ₹ 15,00,000	₹ 1,87,500 + 30% above ₹ 15,00,000

 

Taxpayers are required to file their income tax returns based on their income levels and the applicable tax rates. They are also eligible for certain deductions and exemptions under the Income Tax Act, which can reduce their taxable income and tax liability.

Thanks with Regards

U.RAMESH

(Tax Consultant) 

Cell- 9600423331

Email: abiaccworld@gmail.com

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