1

CHAPTER
Basic concepts that
one must know

BWHATIS AN ASSESSMENT YEAR

1. "Assessment year" means the period starting from April 1 and ending on March 31 of the next year. For
instance, the assessment year 2021-22 commenced on April 1, 2021 and will end on March 31, 2022
Income of a previous year of an assessee is taxed during the next following assessment year at the rates
prescribed by the relevant Finance Act [for tax rates, see Appendix 1.

WHAT IS APREVIOUS YEAR

2. Income earned in a year is taxable in the next year. The year in which income is earned is known as previous
year and the next year in which income is taxable is known as assessment year

Provisions illustrated-
Incomeearned by an individual during the previous year 2020-21 is taxable in the imnediately following assessrment
year 2021-22 at the rates applicable for the assessment year 2021-22. Similarly, income earned during the previous
year 2021-22 by a company will be taxable in the assessment year 2022-23 at the rates applicable for the assessment
year 2022-23. This rule is applicable in all cases |see, however, para 2.4 for exception to this rule.

2.1 Uniform previous year - All assessees are required to follow financial year (ie., April 1 to March 31) as
previous year. This uniform previous year has to be followed for all sources of income. However, it is not
necessary that one should maintain books of account on the basis of financial year.

2.2 Previous year in the case ofa newly set-up business/profession or new source ofincome- In the case
of newly set-up business/ profession or a source of income newly coming into existence, previous year shall be
as follows-
First prervious year - First previous year is the period commencing from the date of setting up of business/
profession (or, as the case may be, the date on which the source of income newly comes into existence) and
ending on the immediately following March 31. Thus, in the case of a newlyset-upbusiness/profession or new
sourve of income, the first previous year is a period of 12 months or less than 12 months. It can never exceed 12
months.
Secomd and subsequent previous year - The second and subsequent previous years arealways of 12 months each
i.e., April to March).

1
 KNOw
Para 2.3 BASIC CONCEPTS THAT ONE MUST

Problems n t are the first and second previous yearsars and assessmient
business on October 20, 2020.
2.2-P1 X starts a new
years
will be the period
commencing
on
October 20, 2020 and ending on March 21

2021
.

Solution: The first previous year I4.

n e second previous year wiu
will be taxable in the
assessnente
2022-23.
De
Income of this previous year in the assessment year
taxable
which will be
2021-22, income of
March 29, 2021.
above case, business
is started on
2.2-P2 Suppose in the and ending on March 21
202l
will be the period commencng
on
March 29, ,2021
The first previous year Ihe second previous vear wo
Solution: the assessment year 202l-zz. d
will be taxable in be
Income of this previous year the assessment year 2022-23.
which will be taxable
in
2021-22, income of
2021 (before thuat he is not in employment). What are the freh
companyas a consultant on February 10,
2.2-P3 Yjoins a

previous years and

assessment years?
second to March 31, 2021. Income of this previous .
will be from February 10, 2021
Solution: The first previous year The second previous year
will be 2021-22 and income w
assessment year 2021-22. be
would be taxable in the
2022-23.
taxable in the assessment year

on March 30, 2021.

He wants to close down first books of account on March 31 20 He
his
2.2-P4 X sets up a new business March 31, 2022 as first previous year. Can he do
on March 30,
2021 and ending on
so?
wants to adopt the period commencing
31 without ending previous year.
In this case, the first previous year will be th
Solution: No one can cross March and end ng on March 31, 2021. Income of this previous year will be
on March 30, 2021
period of 2 days commencing 2021-22. The second previous year will be 2021-22 and income is taxable in the
taxable in the assessment year
assessment year 2022-23.

income up till March 10, 2020. On March 10, 2020, he starts. new
2.2-P5 The income comprises of only property
of X
From the data given below, find out the taxable income of Xfor the assessment years 2019-20
business of computer hardware.
2021-22:
income : Rs. 42,000 every year.
Property
Business income: Rs. 69,000 from March 10, 2020 to March 31, 2021 (out of which Rs.10,000 is for the period ending March
31, 2020).
Solution:
Property incomme Business income
Assess1ment
Total
year
Prerious Income Previous Income Rs.
Rs. year Rs.
year
2019-20 2018-19 42,000 42,000
2020-21 2019-20 42,000 March 10, 2020 to March 31, 2020 10,000 52,000
2021-22 2020-21 42,000 2020-21 59,000 1,01,000

Note - For the assessment year 2020-21, the assessee has income from house property which can be said to be his
existing source of income during the previous year. His new source of income comes into existence in the form of
business income from March 10,2020.Therefore, the assessee has two previousyears for assessment year 2020-21.
For the property income which is his existing source, the previous year is 2019-20. For the businessincome,which is
his new source of income, the previous year is the period commencing from March 10, 2020 to March 31, 2020
For computing taxable inconme for the assessment year 2020-21 (and subsequent years), the income from both the
previous years will be aggregated.

2.3 Previous year as defined in section 3- Except in the case mentioned in para 2.2, previous year is the
financial year immediately preceding the assessment year. For instance, for the assessment year 2021-22, e

immediately preceding financial year (ie., 2020-21) is the previous year.

2.4 When income ofprevious year is not taxable in the immediately following assessment year- The rue
that the income of the previous year is assessable as the income of the immediately following assessment yea
has certain exceptions. These are:
a. income of non-resident from
shipping
b. income of persons leaving India either permanently or for a long period of time;
 WHO IS REGARDED AS ASSESSEEPara 4

C. income of bodies formed for short duration;

d. income of a person trying to alienate his assets with a view to avoiding payment of tax ; ana

c. income of a discontinued business.

In these cases, income of a previous year may be taxed as the income of the assessment year immediately
preceding the normal assessment year.
These exceptions have been incorporated in order to ensure smooth collection of income-tax from the aforesaid
ot the
tapayers who may not be traceable, if tax assessment procedure is postponed till the commencement
normal assessment.

2.5 Afinancial year has a double role to play - It is a previousyear as well as an assessmentyear- Onthe
as
discussion, it can be saidthat a financial year plays a double role-it is a previous year
basis of the aforesaid
well as an assessment year. Examine the cases given in the table below

Financial Previous year Assessment year

year
income received
2020-21 2020-21 is previous year for the income 2020-21 is the assessment year for the

received o r accrued during April 1, 2020
to March 31, 2021
2021-22 2021-22 is previous year for the income
received or accrued during April 1, 2021
to March 31, 2022
or accrued in the immediately preceding previous year
(i.e., April 1, 2019 to March 31, 2020)
received
2021-22 is the assessment year for the income
or accrued in the immediately preceding previous year
(i.e., April 1, 2020 to March 31, 2021)

WHO ARE INCLUDED IN "PERSON"

3. The term "person" includes:
a. an individual;
b. a Hindu undivided family;
C. a company;
d. a firm
e. an association of persons or a body of individuals, whether incorporated or not;

f a local authority; and

8. every artificial juridical person not falling within any of the preceding categories.
These are seven categories of persons chargeable to tax under the Act. The aforesaid definition is inclusive and
not exhaustive. Therefore, any person, not falling in the above-mentioned seven categories, may still fall in the
four corners of the term "person" and accordingly may be liable to tax under section 4.

Problems
3-P1 Determine the status ofthefollowing:
1. Delhi University.
2. DCM Ltd.
3. Delhi Municipal Corporation.
4. Taxmann Publications (P.) Ltd.
5. Laxmi Commercial Bank Ltd.
6. ABC Group Housing Co-operative Society.
7. XY&Co,firm of X and Y
8. A joint family of X, Mrs. X and their sons A and B.
9.X and Y who are legal heirs of Z (Z died in 1996 and X and Y carry on his business without entering into partnership).
Solution: () artificial juridical person; (2)a company; 9) a local authority : () a company (6) a company : () an
association of persons; (7) a firm; (8) a Hindu undivided family; (9) an association of persons.

WHOIS REGARDED AS "ASSESSEE"

4. "Assessee" means a person by whom income-tax or any other sum of money is payable under the Act. It

includes
Para 5
BASIC CONCEPTS THAT ONE MUST KNOw
First category- A person (i.e'., an individual ; a Hinduundivided family ;a company;a firm; an associatic
persons or body of individuals, whether incorporated or not a local authority ; and every artificial jurid
person) y whom any tax or any other sum of money (including interest and penalty) is payable underthe A
(irrespective of the fact whether any proceeding under the Act has been taken against him or not) Act
Second entegory - A person in respect of whom any proceeding under the Act has been taken (whether Or Rs
he is liable for any tax, interest o r penalty). Proceeding may
be taken: not
a. either for the assessment of the amount of his income or of the loss sustained by him ; or
b. of the income (or loss) of any other person in respect of whom he is assessable; or
C. of the amount of refund due to him or to such other person.
Third category - Every person who is deemed to be an assessee. For instance, a representative asceca
e is
deemed to be an assessee by virtue of section 160(2).
Fourth category- Every person who is deemed to be an assesseein default under any provision of the Act.
instance, under section 201(1), any person who does not deduct tax at source, or after deductino faileor
such tax, is deemed to be an assessee in default. Likewise, under section 218, if a person does not pay advan
a n assessee in default.
ance
tax, then he shall be deemed to be

Provisions illustrated-
The following examples are given to clarify the above points-
1. Income ofX (age : 35 years) is Rs. 2,50,000 for the assessment year 2021-22. He does not file his return ofinc
because his income is not more than the amount of exempted slab. Income-tax Department does not take anyincome a
against him. He is not an "assessee because no tax or any other sum is due from him. action
2. Income of Y (age : 38 years) is Rs. 2,55,000 for the assessment year 2021-22. He does not file his return of incon
come.
Since he is supposed to file his return of income (income being more than exempted slab of Rs. 2,50,000), he isa
an
"assessee".
3. Income of Z (age : 51 years) is Rs. 75,000 for the assessment year 2021-22. He files his return of income (even if his
taxable income is less than Rs. 2,50,000). Assessment order is passed by the Assessing Officer without
any
adjustment. Z is an "assessee"
4. Income of A for the assessment year 2021-22 is (G Rs. 60,000. He files his return of income. He is an "assessee".
5. Income of B (age : 28 years) is less than Rs. 2,50,000 for the assessment year 2021-22. He files his return of income
o n interest paid to him. B is a n "assessee".
to claim refund of tax deducted by X Ltd.
6. Income of c (age :30 years) is less than Rs. 2.50.000 for the assessmernt year 2021-22. He does not file his return of
income. During 2020-21, he has paid salary of Rs. 16,90,000 to an employee. Though he is supposed to deduct tax at
source, yet due to ignorance of law, no tax is deducted by him. In this case, C isanassessee as he has failed to
deduct tax at source. This rule is applicable even if his own taxable income is below Rs. 2,50,000.

HOW ToCHARGE TAX ON INCOME

5. To know the procedure for charging tax on income, one should be familiar with the following:

5.1 Annual tax -

Income-tax is an annual tax on income.

5.2 Tax rate of assessment year Income of previous year is chargeable to tax in the next following
assessment year at the tax rates applicable for the assessment year. This rule is, however, subject to some

exceptions.
5.3 Rates fixed by Finance Act- Tax rates are fixed by the annual Finance Act and not by the Income-tax Act
2021. If, however, on the
For tax rates for the assessment year 2021-22 are fixed by the Finance Act,
first instance,
day of April of the assessment year, the new Finance Bill has not been placed on the statute book, the
in the Finance Bill betore
provisions in force in the preceding assessment year or the provisions proposed
Parliament, whichever is more beneficial to the assessee, will apply until the new provisions become etfectv

5.4 Tax on person - Tax is charged on every person.

assessee computed in accordance w

S.5 a x on
totalincome- Tax is levied on the "total income" of every
the provisions of the Act. ent
S.6 Provisions as on April 1 of the assessmentyear applicable for computing income for the assess
on the
stau
income is calculated in accordance with the provisions of the
Income-tax Act, as they o
year-Total
first day of April of the assessment year.
 Para 6.1
MEANING OF INCOME AS GENERALLY UNDERSTOOD
For calculating taxable income for the assessment year 2021-22, the provisions of the Income-tax Act as on
it is irrelevant for
April 1, 2021 are applicable. If an amendment is made with effect from April 2, 2021,
calculating income for the assessment year 2021-22. Likewise, the law existing during the previous year
2020-21 has no relevance for determining the total income for the assessment year 2021-22
The above rule is applicable only for the purpose of computing taxable income and tax liability. If, however,
an amendment is made in procedural law (not in substantive law), then it is applicable from the date of

amendment.

Provisions illustrated
Consider the cases given below. Example 1 is on amendment in substantive law, Example 2, however, covers an

amendment in procedural law. Rates, dates and form numbers are imaginary (only for illustration purposes).
1. Suppose depreciation rate is reduced from 22 per cent to 18 per cent with effect from April 10, 2021. For calculating
income and income-tax liability for the assessment year 2021-22, the provisions of income-tax law on April1.202 s
2021-22
applicable. On April 1, 2021, depreciation rate is 22 per cent. Consequently, income for the assessment year
shall be calculated by taking into consideration depreciation at the rate of 22 per cent.
2. Anew Form Ul is introduced with effect from July 7, 2021 (in placeof old Form T3) for making applicationto the
Officer for waiver of income-tax penalty. This is amendment in procedural law. It is applicable from
Assessing an
the date of amendment. If an application for waiver is filed on or after July 7, 2021, it should be submitted in the new
Form U1 regardless of the assessment year for which waiver is to be obtained.

WHAT IS REGARDED AS"INCOME" UNDER THE INCOME-TAXACT

6. The definition of the term "income" in section 2(24) is inclusive and not exhaustive. Therefore, the term
"income" not only includes those things which are included in section 2(24) but also includes such things
which the term signifies, according to its general and natural meaning, Before discussing the definition of
income given in section 2(24), it is imperative to know meaning of "income" as generally understood.
6.1 Meaning ofincome as generally understood- Income is a periodical monetary return with some sort of
regularity. It may be recurring in nature. It may be broadly defined as the true increase in the amount of wealth
which comes to a person during a fixed period of time.
6.1-1 BROAD PRINCIPLES WHICH CLARIFY THE CONCEPT OF INCOME A study of the following broad principles
will be helpful for understanding the concept of income:
Regular and definite source - The term "income" connotes a periodical monetary return coming in with some
sort of regularity or expected regularity from definite sources.
Different forms of income - Income may be received in cash or in kind. When income is received in kind, its
valuation is to be made according to the rules prescribed in the Income-tax Rules. If, however, there is no
prescribed rule, valuation thereof is made on the basis of market value.
Receipt vs. Accrual - Income arises either on receipt basis or on accrual basis. Income may accrue to a

taxpayer without its actual receipt. Moreover, in some cases, income is deemed to accrue or arise to a person
without its actual accrual or receipt.
llegal income - The income-tax law does not make any distinction between income accrued or arisen from a
legal source and income tainted with illegality.
Disputed title - Income-tax assessment cannot be held up or postponed merely because of existence of a

dispute regarding the title of income.

Relief or reimbursement of expenses not treated as income Mere relief or reimbursement of expenses is not
treated as income. For instance, reimbursement of actual travelling expenses to an employee is not an income.
Diversion ofincome by overriding title vs. Application of income - Any expenditure/ investment, after income is
received, is application of income. "Income" under the Income-tax Act, which is chargeable to tax, is income
before application of income. Any expenditure/investment out of such income is deductible only if it is
permitted by a provision under the Income-tax Act or Income-tax Rules.
"Diversion of income" is where by an obligation, income is diverted to some other person. When an assessee
on behalf of some other person receives income and later on it is diverted to such person, it is known as
diversion of income and, consequently, it is not chargeable to tax.
Para 6.1 BASIC CcONCEPTS THAT ONE MUST KNow

Provisions illustrated o n the understandino

law weekly magazine,
tax and corporate
a
Xand Yprepare an article for publication in Taxman, is published
in August 8, 2020 issue of Taxman. On September

that remuneration will be shared equally. The article of the magazine, the
remuneration is paid to
of Rs. 9,000 (as per practice
X the entire remuneration
X to Y is diversion of incomo
7, 2020, The payment of Rs. 4,500 by
receives
later on paid by X to Y.
the first author), a half of which is of Rs. 4,500 to Y will not be treated a s incomene
will be Rs. 4,500 (payment
by overriding title. The taxable income of X
of X as it is diverted by an overriding title).
out of a transaction with himself. Income
A person cannot make taxable profit
Surphus from mutual activity income
-

cannot be regarded a s
to a mutual c o n c e r n
from outside. A surplus arising
must, therefore, come
individuals, raising
fund for the mutual benefit
contribution to a common of
chargeable to tax. A body of earned an income when it finds
that it has overcharged members and some
members, cannot be said to have
refunded.
raised may safely be
portion of contribution
Provisions illustrated-
Each one of them contributes Rs. 80 Der
have formed a tea club in the office.
X Ltd. has 50 employees. Employees
breaks. During the financial year 2020-21, the excess of receipt over
month to the club. Club provides tea in tea club as it is surplus arising to a mutual
be taken as taxable income of the
expenditure of the club is Rs. 470. It cannot
for the mutual benefit of the members.
activity

of income-tax, there is no distinction between temporary

Temporary and permanent income For the purpose
-

is taxable.
and permanent income. Even temporary inconme
in lump s u m o r in instalnments, is liable to tax. For instance,
Lump sum receipt - Income, whether
received
arrears of bonus, received in lump sum, is income and is taxable as salary.
o n which tax is paid by the person making payment on
Tax-free income If a person receives tax-free income
-

inclusion in his total income.

behalf of the recipient, it has to be grossed up for
For instance, X pays Rs. 25,000 per month to Y as tax-free salary (tax of Rs. 3,000 per month is borne by X and directly
In this case, the amount taxable in the hands of Y is Rs. 28,000 per month.
paid to the Government).
Receipt on account ofdharmada, etc. - Receipt on account of dharmada, gaushala and pathshala is not income and,
therefore, not liable to tax.
Devaluation of currency - If any assessee receives extra money on account of devaluation of currency, it is
taxable.
Income includes loss - Income includes loss. While income, profits and gains represent "plus income", losses
represent "minus income".
Same income cannot be taxed twice - It is a fundamental rule of the law of taxation that, unless otherwise
expressly provided, the same income cannot be taxed twice.
Income should be real and notfictional - Income means real income and not fictional income. A person cannot
make a profit by trading with himself or out of transfer of funds/assets from one pocket to another pocket.
Similarly, income does not arise in a transaction between head office and branch office even if goods are
invoiced at a price higher than the cost price. Likewise, income does not accrue or arise at the time of
revaluation of assets.
Source ofincome need not exist in the assessment year - It is not necessary that a source of income should exist in
the assessment year.
Pin money Pin money received by wife for her dress/personal expenses and small savings made by a
woman out of money received from her husband for meeting household expenses is not treated as her income.
Award received by a sportsman - In the case of a sportsman, who is a professional, the award received by him
is in the nature of a benefit in exercise of his profession and, therefore, it is chargeable to tax.
Revenue receipt vs. Capital receipt- A revenue receipt is taxable as income unless it is expressly exempt under
the Act. On the other hand, a capital receipt is generally exempt from tax unless it is expressly taxable.
VoluntarY payment - In some cases, a sum of money received without consideration is chargeable to tax (ee
para 114].
Burden ofproof - In all cases in whicha receipt is sought to be taxed as income, the burden lies upon the

epartmentto prove that it is within the taxing provision. Where, however, a receipt isin the nature of income
the burden of
proving that it is not taxable, because it falls within an exemption provided by the Act, lies upo
the assessee.
1 EXTENDED MEANING OF "INCOME" U/S 2(24) a Para 6.2

6.2 Extended meaning of"income"under section 2(24)- Under section 2(24), the term "income" specitically
includesthe following
6.2-1 PROFITS AND GAINS - Income includes profits and gains. For instance, profit generatecd by à businessman
is taxable as "income".

6.2-2 DIVIDEND Income includes "dividend"

|see para 109.1].
-

6.2-3 VOLUNTARY CONTRIBUTIONS RECEIVED BY A TRUST - In the hands of a trust, income includes voluntary
contributions received by it.

Provisions illustrated-
XY Trustis created for public charitable purposes. On June 10, 2020, it receives a sum of Rs. 1 lakh as voluntary
contribution (not being with any specific direction) from a business house. Rs. 1 lakh would be included in the
income of the trust.

6.2-4 PERQUISITES IN THE HANDS OF EMPLOYEE - Any perquisite or profits in lieu of salary is treatedas
"income" in the hands of an employee.

Provisions illustrated-
X is employed by A Ltd. Apart from salary, he has been provided a rent-free house by the employer. The value of
perquisite in respect of rent-free house is taxable as "income" in the hands of X.

6.2-5 ANY SPECIAL ALLOWANCE OR BENEFIT Any special allowance or benefit specifically grarnted to the
assessee to meet expenses wholly, necessarily and exclusively for the performance of the duties of an office or
employment is treated as "income".

Provisionsillustrated-
X is employed by A Ltd. He gets Rs. 3,000 per month as conveyance allowance apart from salary. Rs. 3,000 per
month is treated as "income" [any amount which is spent for official purposes out ot conveyance allowance is
exempt under section 10(14)].

6.2-6 CITY COMPENSATORY ALLOWANCE/DEARNESS ALLOWANCE City compensatory allowance or dearness

allowance is treated as "income".
6.2-7 ANY BENEFIT OR PERQUISITE TO A DIRECTOR - A non-monetary benefit or perquisite is treated as "income"
in the hands of the following:
a. if it is given by a company to a director (whole time or part time) or a relative of a director; or
b. if it is given by a company to a person who has a substantial interest in the company or a relative of such
person.
Relative, for this purpose, means the husband, wife, brotheror sister or any lineal ascendant or descendant of
that individual. If a person is beneficial owner of 20 per cent (or more) of equity share capital in a company
then such person is known as a person who has substantial interest in the company.
The aforesaid rule is also applicable if any sum is paid by a company in respect of any obligation which, but for
such payment, would have been payable by the director or any other aforesaid person.

Provisions illustrated
The following illustrations are given to have better understanding
1.X is a director in a company. The company provides a domestic servant for private purposes. The perquisite value

of domestic servant is treated as "income" of X.

A Ltd. A Ltd. repays loan of Rs.15,000 on behalf of X. Rs.15,000 is
2. X holds 20 per cent equity share capital in a

treated as "income" of X.
3. B is a director in C Ltd. C Ltd. pays a s u m
of Rs.47,000 to ITC Hotels on behalf of Mrs. B (the payment is made only
as "income" of B.
because B is director in C Ltd.). Rs.47,000 is treated

6.2-8 ANY BENEFIT OR PERQUISITE TO A

REPRESENTATIVE ASSESSEE -

Any non-monetary benetit or perquisite to

under a trust) is treated as "income".
a representative assessee (like a trustee aPpointed

Director need not be a person having substantial interest.

Para 6.2 BASIC CONCEPTS THAT ONE MUST KNOW

Provisions illustrated
Xis one of trustees of a charitable trust. The trust provides him a residential accommodation. The perquisite value s
e of
the accommodation is treated as "income" of X.

6.2-9 ANY sUM CHARGEABLE UNDER SECTIONS 28, 41 AND 59 Any sum chargeable under sections 28, 41 and 5a
is taxable as income. Some of such cases are given below - 9,
1. X is an agent of A Ltd. He gets a compensation of Rs. 2,00,000 at the time of termination of his agency froO
A Ltd. Rs. 2,00,000 is treated as "income" of X. rom
2. A profit of Rs. 2,50,000 is generated by A Ltd. on sale of licence granted under the Imports (Control) Order
1955. Rs. 2,50,000 is treated as "income" of A Ltd.
3. A car owned by a partnership firm is used by one of the partners for private purposes. The perquisite value
of the case is "income" in the hands of the partner.
4. X Ltd. gets a sum of Rs. 8,00,000 from A Ltd. for not
carrying out the activity of selling goods in Agra for a
period of two years from June 1, 2021. Rs. 8,00,000 is treated as "income" of X Ltd.
6.2-10 CAPITAL GAINS -

Any capital gain under section 45 is treated as "income".

6.2-11 INSURANCE PROFT - Any insurance profit computed under section 44 is treated as "income.

6.2-12 BANKING INCcOME OF A CO-OPERATIVE Profit from banking

SOCIETY (including
facilities) carried on by a co-operative society with its members is taken as income. providing credit
6.2-13 WINNINGS FROM LOTTERY
Winnings from lottery, crossword puzzles, races (including horse races).
-

card games, other games (including entertainment

programme on television), gambling, betting, etc., are
chargeable to tax.
6.2-14 EMPLOYEES' CONTRIBUTION TOVWARDS PROVIDENT FUND
Any sum received an employer from his
employees as employees' contribution to any provident fund, superannuation fundbyor staff
-

taxable as income of the employer. welfare fund, is

Employer can claim deduction under
section 36(1)(va), if such sum
credited by the employer to the employees' account in the relevant fund before is
the due date
fund regulations). (under provident
Provisions illustrated-
Netprofit of X Ltd. for the previous year 2020-21 is Rs. 7,86,000. It is calculated after
Rs.5 lakh. Out of Rs. 5 lakh, Rs. 50,000 is employees' contribution towards debiting salary to employees:
by X Ltd. to the provident fund account of the employees as follows Rs. provident fund. Rs. 50,000 is transferred
30,000 before the due date of making such
-

payment and Rs. 20,000 after the due date of such payment. Income of X Ltd. shall
be calculated as under:
Net profit as per Rs.
profit and loss account
Add: Employees' contribution towards 7,86,000
Total
provident fund which is treated as "income" of X Ltd.
50,000
Less: Amount paid by X Ltd. on or before the due date of 8,36,000
Isee para 81.25] making provident fund payment
Taxable income of X Ltd. 30,000
8,06,000
6.2-15 AMOUNT RECEIVED UNDER
KEYMAN INSURANCE POLICY
policy (including bonus) is treated as "income" Any sum received under a Keyman insurance
-

in the hands of the

6.2-16 FAR MARKET VALUE OF
INVENTORY Fair market value for
-
recipient.
trade) is treated as income of the year in which inventory (which is converted into stock-m*
6.2-17 AMOUNT EXCEEDING RS. conversion takes place.
50,000 BY WAY OF GIFT
is taxable as income in a few
cases. See para 114.
-Gift exceeding Rs. 50,000 received without considering
6.2-18 CONSIDERATION FOR
ISsUE OF SHARES
market value of shares - Consideration received for issue of shares
referred to in section
56(2)(viib)] is taxable as income [see para 114.3 [as exceeds
rau
6.2-19 ADVANCE MONEY
is taxable as
income [see para
Any sum of money received as advance
-

114.4]. money and referred to in section

6.2-20 COMPENSATION ON 5o{4)
Any compensation or otherTERMINATION
payment
OF EMPLOYMENT OR
referred MODIFICATION OF TERMS OF EMPLOYME
to in section
employment or modification of terms of 56(2)(xi) [i.e., compensation on
employment] is treated as income. terminauo
 WHAT IS TOTAL INcOME Para 8

6.2-21 ASSISTANCE IN THE FORM OF A SUBSIDYGRANT - Subsidy/grant is taxable as income if the following
conditions are satisfied
1. Assistance is in the form of a subsidy or grant or cash incentive or duty drawback or waiver or concession Or

reimbursement (by whatever name called).

2. It is received from the Central Government or State Government or any authority or body or agency.
3. It may be in cash or kind.
4.It is not a subsidy or grant or reimbursement which is taken into consideration for determination of "actual
cost within the parameters of Explanation 10 to section 43(1).
5. It is not a subsidy or grant by the Central Government for the purpose of the corpus of a trust or institution
established by the Central Government or State Government.
If the above conditions are satisfied, subsidy, grant, etc., shall be considered as "income".

WHATIS GROSS TOTAL INCOME

7. As per section 14, income of a person is computed under the following five heads :
1. Salaries.
2. Income from house property.
3. Profits and gains of business or profession.
4. Capital gains.
5. Income from other sources.
The aggregate income under these heads is termed as "gross total income". In otherwords.gross total income
means total income computed in accordance with the provisions of the Act before making any deductiorn
under sections 80C to 80U.
7.1 Expenditure in respect of income not chargeable to tax - If income is not chargeable to tax, any
expenditure for earning such income is not deductible.

sWHATIS TOTAL INCOME AND HOW ISIT COMPUTED

8. Total income of an assessee is gross total income as reduced by the amount permissible
as deduction under sections 80C to 80U. The scheme of computation of total income and tax liability thereon
can be easily understood with the help ofthe following chart:
COMPUTATION OF INCOME FOR AN ASSESSMENT YEAR
Rs Rs.
1. Income from salaries
Income from salary
Income by way of allowances
Taxable value of perquisites
Gross salary
Less: Deduction under section 16
Standard deduction **

Entertainment allowance
Professional tax
Income from salaries *****

2. Income from house property

Adjusted net annual value
Less: Deduction under section 24 **

Income from house property **

3. Profits and gains of business or profession

Net profit as per profit and loss account
Add Amounts which are debited to P & La/c but are not allowable as deduction under
the Act ******|

Less: Expenditure which are not debited to P & L a/c but are allowable as deduction under
the Act ***

Less Income which are credited to P & L a/c but are exempt under section 10 or are taxable
under other heads of income
Para 8.1 BASIC cONCEPTS THAT ONE MUST KNOW
emc

Rs. Rs.
to P &La/c but are taxable under the head
Add Those income which are not credited
"Profits and gains of business or profession"
Profits and gains of business or profession ..

4. Capital gains
Amount of capital gains ****

Less : Amount exempt under sections 54, 54B, 54D, 54EC, 54F, 54G, 54GA, 54GB and 54H ****

Income from capital gains

5. Income from otlher sources
Gross income **
Less: Deductions under section 57 *

Income from other sources ****

Total [i.e., (1)+ (2) + (3) + (4) + (5)]

Less: Adjustment on account of set-off and carry forward of losses

Gross total income
Less: Deductions under sections 80C to 80U ****

Total income or net income* [rounded off - see para 8.1]

*******

cOMPUTATION OF TAX LIABILITY

Tax on net income [see Appendix 1]
Less: Rebate under section 87A [in the case of a resident individual having net income not
exceeding Rs. 5 lakh]
Income-tax after rebate under section 87A .....

Add:Surcharge * *****

Tax and surcharge

Add: Health and education cess |4 per cent of tax and surchargel
Less: Rebate under sections 86, 89, 90, 90A and 91 *

Tax .. *

Less:Pre-paid taxes
Tax-paid on self-assessment ***

Tax deducted or collected at source *

Tax paid in advance ******

Tax liability [rounded off - see para 8.2]

8.1 Rounding-off of income - The taxable income shall be rounded off to the nearest multiple of ten rupees
and for this purpose any part of a rupee consisting of paise shall be ignored and thereafter if such amount is not
a multiple of ten, then, if the last figure in that amount is five or more, the amount shall be increased to the next
higher amount which is a multiple of ten and if the last figure is less than five, the amount shall be reduced to
the next lower amount which is a multiple of ten.

Provisions illustrated-
The above provisions may be illustrated as follows-

Income before rounding off Income after rounding off

Rs. Rs.
7,80,514.99 7,80,510
7,80,515.00 7,80,520
7,80,515.99 7,80,520
7,80,519.99 7,80,520
7,80,524.99 7,80,520

nnot
i n the case ot a company, tax liability cannot be less than minimum alternate tax. In the case of non-corporate assessee it cate
be less than alternate minimum tax (see para 194.2
used
n i s income is chargeable to tax. In the Income-tax Act it is termed as "total income". In this book, however, "netincome
for this purpose.
11 WHAT ARE CAPITAL AND REVENUE RECEIPTSPara 11

8.2 Roundingoff of tax The amount payable by the assessee and the amount of refund due, under the
provisions of the Act shall be rounded off to the nearest ten rupees.

WHAT IS AGRICULTURAL INCOME

9, Agriculturalincome in India is not chargeable to tax. It is defined by section 2(1A). For detailed discussion
please refer to paras 185 to 188.

WHAT IS DIFFERENCE BETWEEN EXEMPTION AND DEDUCTION

10. income
If an is
exempt tax, it is not included in the computation of income. Exemption can never
from
exceed the amount of income. Deduction is generally given from income chargeable to tax. Deduction can be
less than or equal to or more than the amount of income. If the amount deductible is more than the amount of
income, the resulting amount will be taken as los.

WHAT ARE CAPITAL AND REVENUE RECEIPTS

11. Receipts are of two types-capital receipts and revenue receipts. The distinction between the two is vital
because capital receipts are exempt from tax unless they are expressly taxable. For instance, capital gains are
taxable under section 45 even if they are capital receipts. On the other hand, revenue receipts are taxable,
unless they are expressly exempt from tax. For instance, income exempt under section 10.
As the Act does not define the terms "capital receipts" and"revenue receipts", one has to depend upon natural
meaning of the concepts as well as decided cases.
Girculating capital andfixed capital - A receipt on account of circulating capital is a revenue receipt, whereas a
receipt on account of fixed capital is a capital receipt.
Receipt in the hands ofrecipient is material - In order to determine whether a receipt is capital or revenue in
nature, one has to go by its nature in the hands of the recipient. The source from which the payment is made,
has no
bearing on the question.
Payer's motive irrelevant- The motive of payer is not relevant while deciding whether a particular receipt is
revenue or capital in nature.
Receipt in lieu of source of income - A receipt in lieu of source of income is a capital receipt. A receipt in lieu of
income is a revenue receipt.
Lump sum payment- In order to determine whether a receipt is capital or revenue in nature, the fact that it is
a lump sum payment, large payment or periodic payment is not relevant. It is not necessary that a revenue
receipt should be recurring or a capital receipt should be a single receipt.
Natureofreceipt under company law irelevant- Treatment of a receipt under company law is not relevant while
deciding whether a receipt is capital or revenue in nature under tax laws.
Compensation measured by estimated profits - The mere fact that a compensation is measured by estimated

annual profits, it cannot make the receipt as revenue receipt. It is the quality of payment t at is decisive of the
character of the payment and not the method of payment or its measure.
Disallowance to person making payment - The fact that the amount paid is not allowed as permissible deduction

in the assessment of a person making payment, cannot determine the character of receipt in the hands of the
recipient.
Changes in rate ofexchangeofcurrency- If by virttue of change in exchange rate of currency, excess amount is
realised by an assessee engaged in the business of exporting goods, the excess amount is treated as revenue
receipt. On the other hand, if foreign currency is kept as investment or to acquire a capital asset, the profit
made due to change in the rate of exchange of currency is capital receipt.
These are a few principles which one has to follow while deciding nature of a receipt. It is, however, difficult to
state any specific test for determining true nature of a receipt. Though the dividing line between a capital and
revenue receipt is real, yet sometimes it becomes difficult to draw. Therefore, a decision will have to be taken
in each case in the light of its facts and surrounding circumstances. The onus of proving that a particular
receipt is of capital or revenue nature is normally on the Income-tax Department. Where, however, the
assessee in the normal circumstances is in a position to prove his contention, the onus will be on him to
produce the necessary evidence.
 ara 12 BASIC CONCEPTS THAT ONE MUST KNOw
WHAT IS CAPITAL AND REVENUE EXPENDITURE

12. See para 81.38.

COMPUTING INCOME
HOW FAR METHOD OF AccoUNTING IS RELEVANT IN or "Income
and gains of business or profession from atl
13. Income chargeable under the head "Profits
in accordance with the method of accounting regularly employed by the assese
sources" is to be computed
methods- there are two types of accounting
Mainly
methods mercantile systa
stem
13.1 Types of accounting
and cash system.
recorded at the time of occurre
income and expenditure are irTence
Mercamtile system Under mercantile system,
-

is recorded whether
For instance, income accrued during the previous year it
during the previous vear. or following the previous year. Simila
received during the previous year or during year
a preceding
of the tact whether it is na
becomes due during the previous year, irrespective
expenditure is recorded if it under mercantile system is, thus, profit actually earn
during the previous year o r not. The profit calculated arned
not necessarily realised in cash.
during the previous year, though are recorded only when received
r e v e n u e and expenses
Cash system Under cash system of accounting,
.
-
O
is included in taxable income whether it is ear
paid. For instance, income received during the previous year rned
the previous year. Similarlk,
earned during a year preceding or following
during the previous year or it is year, irrespective of th
only if it is paid during previous
expenditure is deductible from the taxable incomeIncome
the
under cash system of accounting is, therefore, exce
cess
fact whether it relates to the previous year or not.
of receipts over disbursements during the previous year.
13.2 Method of accounting for computing income- Section 145 provides the following:
and gains of business or profession" or "Income from other
1. Income chargeable under the head "Profits
either the cash or the mercantile system of accountino
sources" shall be computed only in accordance with
if a trader follows mercantile system of accounting, his
regularly employed by an assessee. For instance, business
and will be deductible on "due" basis,
business income will be taxable on "accrual" basis expenses
of his professional income will be taxable on "receipt" basis and
a professional follows cash system accounting,
basis.
professional expenses will be deductible "payment"
on

has notified the Income Disclosure and Tax Accounting Standards vide
2. The Central Board of Direct Taxes
standards a r e to be followed by all assessees (other
2016. These
Notification No. 87/2016, dated September 29, audited under section
to get his account of the previous year
than an individual/HUF who is not required
of These standards are applicable for computation of income
44AB) following mercantile system accounting. or "Income from other sources" and
"Profits and gains of business or profession"
chargeable under the head standards are applicable from the assessment
maintenance of books of account. These
not for the purpose of
year 2017-18.
house property" and "Capital
under the heads "Salaries", "Income from
3. In the case of income chargeable
by the a s s e s s e e is not relevant in calculating taxable income. For
gains", method of accounting adopted
these heads, one has to follow the statutory provisions
of the Income-tax Act
calculating taxable income under is taxable (or deductible) on "accrual basis" or
which expressly provide whether r e v e n u e (or expenditure)
"cash basis".

a TAX COMPUTATION
Tax rates are not given by
14. Provisions for computatiorn of taxable incomegiven by the Income-tax Act.
are

Finance Act which is passed by

Parliament along with budget for the Central
the Income-tax Act, but by the other direct/
various amendments to the Income-tax Act (and
Government every year. Apart from making for the current assessment
Finance Act specifies (in the First Schedule) income-tax rates
indirect tax laws) every tax rates
For instance, the Finance Act, 2021, provides
year.
year and advance tax rates for thenext assessment
in the First Schedule (Parts I, II and IIl) as follows
assessees for tne
rates for different
First Schedule to the Finance Act, 2021 - It gives income-tax
Part I of the
assessment year 2021-22.
rates for deduction of tax
at source applicable ut to
Schedule to the Finance Act, 2021 It gives
-

Part Ilthe First

of if a person is responsible for making
a payment on which
ne
financial year 2021-22. To put it differently, has to be deducted
at sour
2021-22, then tax
source during the financial year for t a
Supposed to deduct tax at the Finance Act, 2021. However, rate
in Part II of the First Schedule to
during 2021-22 at the rates given
deduction from salary is given by Part II.
 COMPUTATION OF TAX FOR ASsSESSMENT YEAR 2021-22 Para 14.1
13
Part 1ll of the First Schedule to the Finance Act, 2021 - It gives tax rates for different assessees for payment of
advance tax during the financial year 2021-22 (i.e., for thee assessment year 2022-23). The same rates are
applicable, for the tax deduction from salary payment during the financial year 2021-22.

Generally, Part Ill of the First Schedule of a Finance Act becomes Part I of the First Schedule of the subsequent
Finance Act. For instance, Part Ill of the First Schedule to the Finance Act, 2021 will become Part I of the First
Schedule to the Finance Act, 2022.

14.1 Computation of tax for the assessment year 2021-22t Tax rates applicable for the assessment year
2021-22 are given in Appendix 1. Some of the important rates for the assessment year 2021-22 are given
below -

14.1-1 INCOME-TAX - Income-tax rates are as follows -

14.1-1a INDIVIDUAL, HUF, AOP, BOI - The tax rates applicable to an individual, HUF, AOP, BOL, etc., are given
below
1. Senior citizen - In the case of a resident individual who is at least 60 years of age at any time during the previous
year 2020-21 but less than 80 years on March 31, 2021 (i.e., born during April 2, 1941 and April 1, 1961), first Rs.
3,00,000 of net income is exempt from tax. Net income in the range of Rs. 3,00,000 to Rs. 5,00,000 1s taxable at the
rate of 5 per cent. Between Rs. 5,00,000 and Rs. 10,00,000, the slab rate is 20 per cent and the income in excess of
Rs.10,00,000 is taxable at the rate of 30 per cent. These rates are applicable only in the case of a resident(ordinarily
or otherwise) senior citizen. In the caseof a non-resident senior citizen, the exemption limitis Rs. 2,50,000 as given
below.
2. Super senior citizen - In the case of a resident individual who is at least 80 years of age at any time duringthe
previous year 2020-21 (i.e., born before April 2, 1941), first Rs. 5,00,000 of net income is exempt from tax. Net
income in the range of Rs. 5,00,000 to Rs. 10,00,000 is taxable at the rate of 20 per cent. Net income in excess of
Rs.10,00,000 is taxable at the rate of 30 per cent. These rates are applicable only in the case of a resident (ordinarily
or otherwise) super senior citizen. In the case of a non-resident, theexemptionlimitis Rs. 2,50,00 as givenbelow
3. Any other resident individual, any non-resident individual, any HUF, AOP, BOI- In the case of any other resident
individual (born on or after April 2, 1961), any non-resident individual, any HUF/AOP/BOL, the first
Rs. 2,50,000 of net income is exempt from tax. Net income in the range of Rs. 2,50,000 to Rs. 5,00,000 is taxable
at the rate of 5 per cent. Between Rs.5,00,000 and Rs. 10,00,000, the slabrate is 20 per cent and the income in excess
of Rs. 10,00,000 is taxable at the rate of 30 per cent.
Rebate under section 87A - A resident individual (whose taxable income does not exceed Rs. 5 lakh) can claim
a rebate under section 87A from income-tax. The amount of rebate is income-tax on total income or Rs. 12,500,
whichever is less.
Alternative tax regime - An individual/HUF can opt for the alternative tax regime under section115BAC.Under
alternative tax regime, tax rates are lower than the regular rates given above. However, a few tax incentives are
blocked. Taxable income is calculated without availing of these blocked incentives. These provisions are
discussed in para 194.3.
14.1-1b FIRM - A partnership firm (including a limited liability partnership firm) is taxable at the rate of 30 per
cent (no exemption limit).
14.1-1c coOMPANY - A domestic company is taxable at the rate of 30 per centt and a non-domestic company is
taxable at the rate of 40 per cent.
14.1-2 suRCHARGE ON INCOME-TAX - Income-tax (as computed above) shall be increased by a surcharge as

follows-
Net income range Surcharge (as % ofincome-tax)
Individuals/HUF/ AOP/BOI/ artificial juridical 0 Rs. 50 lakh Nil
person Rs. 50 lakh - Rs. 1 crore 10%
Rs. 1 crore - Rs. 2 crore 15%
Rs. 2 crore - Rs. 5 crore 25% [see Note 1
Above Rs. 5 crore 37% [see Note 1

tin the case of a company, tax liability cannot be less than minimum alternate tax. In the case of a non-corporate assessee, tax liability
cannot be less than alternate minimum tax [see para 194.2].
tIf a few conditions are satisfied a domestic company has an option to pay tax at the rate of (e) 25 per cent under section 115BA,
b) 22 per cent under section 115BAA or () 15 per cent under section 115BAB. Besides, a domestic company (whose turnover/gross
receipt during the previous year 2018-19 does not exceed Rs. 400 crore) is taxable at the rate of 25 per cent for the assessment year
2021-22
 4
MUST KNOW

Para 14.l BASIC CONCEPTS THAT ONE urc

Net income range Surcharge(as %ofincome-taz

Nil
0 Rs. 1 c r o r e 12%
Firm/co-operative society/local authority Above Rs. 1 c r o r e
Nil [see Note 2]
0- Rs. 1 c r o r e 7% (see Note 2]
-Rs. 10 crore

Rs. 1 c r o r e 12% [see Note 2]

Domestic company
Above Rs. 10
crore

Nil
0 Rs. 1 crore
2%
-
Rs. 10 crore
Rs. 1 crore
5%
Foreign company
Above Rs. 10 crore

is chargeable under see

dividend income a n d
income w h i c h tion
Notes pertaining to
income-tax
15% of
1. Surcharge is or
115BAB.
115BAA
111A or 112A. under section

income is chargeable
to tax
shall be increased by health and .

10% if and surcharge

2. Surcharge is of i n c o m e - t a x
EDUCATION
CESS- A m o u n t
14.1-3 HEALTH AND + surcharge).
cent of (income-tax
education cess
which is 4 per

assessees? What ic s.

Problems 2 0 2 1 - 2 2 1n
the c a s e of diferent the
a s s e s s m e n t year alternative tax regime.
i n c o m e - t a x for
the under tlhe
calculate tax computation
14-P1 How would you limit ? 1gnore Finance Act. For the ases
rate of tax and
the exemption in relevant
m a x i m u n n marginal to the rates given Act, 2021. In this boot
be calculated according the Finance
I n c o m e - t a x shall a r e prescribed by First Schedule) which are
Solution : the rates which I of the
c a l c u l a t e d at 2021 (Part
2021-22, tax shall the F i n a n c e Act,
year prescribed by
calculations are
based upon tax rates different rates.
taxable at
assessees are 45 years) for the a s s e sssment
sn
of a n i n d i v i d u a l (age:
above. Different
given taxable income
family- Suppose
Individual or Hindu undividedTax shall be calculated as
under-
Rate of tar Amount of tax
10,86,920.
2021-22 is Rs.
year Rs.
Nil Nil

5% 12,500
First Rs. 2,50,000
20% 1,00,000
Next Rs. 2,50,000
Next Rs. 5,00,000
30% 26,076
R s . 10,00,000)
Rs. 10,86,920 1,38,576
Income in excess
of Rs. 10,00,000 (i.e., Nil
Taxt income exceeds Rs. 50 lakh)
Add: Surcharge (applicable
only if net 1,38,576

Tax and surcharge

5,543
education cess (4% of tax and surcharge) 1,44,120
Add: Health and
Tax liability (rounded off) shall be calculated
Rs. 10,86,920, then tax
taxable income ofa firm is
Firm-Suppose for the
assessment year 2021-22,
as under - Rs
3,26,076
Tax (30% of Rs. 10,86,920)
exceeds Rs. 1 crore)
income-tax if net income 3,26,076
Add Surcharge (12% of
13,043
Tax and surcharge
(4% of tax and surcharge) 3,39,120
Add: Health and education
cess

Tax liability (rounded off) assessment yea

than Rs. 400 crore) for the
income of a company (turmover always more

Company-Suppose taxable under

is Rs. 10,86,920, then tax liability will be as
2021-22

available (income being more than Rs. 5,00,000).

tRebate under section 87A is not
15 COMPUTATION OF TAX FOR ASSESSMENT YEAR 2021-22 Para 14.1

Tax rate Amountoftax Surcharge Health and Total

education (rounded
cess @4% off
of tax and
surcharge
Rs. Rs. Rs. Rs.
If it is a domestic company 13,043 3,39,120
30%
-

3,26,076 Nil
-
If it is a
foreign company 40% Nil 17,391 4,52,160
4,34,768
Co-operaoe society- Iffor the assessment year 2021-22, income of a co-operative society is Rs. 10,86,920, tax liability
shallbe determined as follows
Rate of tax Amount of tax
Rs.
First Rs. 10,000 10% 1,000
Next Rs. 10,000 20% 2,000
Income in excess of Rs. 20,000 (i.e., Rs. 30% 3,20,076
10,86,920 -
Rs. 20,000)
Tax 3,23,076
Add: Surcharge (12% of income-tax if net income exceeds Nil
Rs. 1 crore)
Tax and surcharge 3,23,076
Add: Health and education cess (4% of tax and 12,923
surcharge)
Tax liability (rounded off 3,36,000
Rebate under section 87A-Rebate under section 87A is available in the case of a resident individual if his taxable
income is Rs. 5,00,000 or less for the assessnment year 2021-22. Suppose taxable income is Rs. 5,00,000. Tax liability for
the assessment year 2021-22 for different taxpayers will be determined as follows -

Resident individual
Non Firm
Super senior Senior Any other resident domestic
citizen (80 years citizen (60- (less than individual Companyy
and above) 80 years) 60 years) or any HUJF
Rs. Rs. Rs. Rs. Rs.
Income-tax on Rs. 5,00,000 Nil 10,000 12,500 12,500 1,50,000
Less: Rebate under section A in the
case of resident individual (100% of
income-tax or Rs. 12,500, whichever is
lower) Nil 10,000 12,500 Nil Nil
Income-tax Nil Nil Nil 12,500 1,50,000
Add: Surcharge Nil Nil Nil Nil Nil
Income-tax and surcharge Nil il Nil 12,500 1,50,000
Add: Health and education cess@ 4% Nil Nil Nil 500 6,000
Tax liability Nil Nil Nil 13,000 1,56,000
Special tax rates - The above rates are given in the Finance Act, 2021 (Part I of First Schedule). Besides the above tax
rates, some income is taxable at special rates given under the Income-tax Act [these rates are givern in the book in
Appendix 1, para 0.6|. For instance, long-term capital gains are taxable at the rate of 20%t [sec. I12), winnings from
lotteries, races, card games, etc., aretaxable at the rate of 30% [sec. 115BB], royalty income in hands of a foreign
company is taxable at the rate of 10%t [sec. 115A(1)(b)].
Suppose income of X, a resident, for the assessment year 2021-22 is determined as follows
RS Rs
Salary (after standard deduction) 1,12,60,000
Capital gain
Long-term 26,000
Short-term 90,000 1,16,000
Winnings from lottery
5,00,000
Net income
1,18,76,000

*Surcharge is applicable only if taxable income exceeds Rs. 1 crore.

TPlus surcharge, and health and education cess.
BASIC CONCEPTS THAT ONE MUST KNOw
16
Tax on Rs. 1,18,76,000 shall be calculated as under (it is assumed that X has not opted for the alternative
ve tax
tax re
regime
given by section 115BAC)-
Amount of Tax rate
Nature of income
income
Tax
Rs.
Rs.
26,000 20%
Long-term capital gain
5,00,000 30% 5,200
Winning from lottery
1,13,50,000
1,50,000
Rs. 1,18,76,000 Rs. 26,000 -
Rs. 5,00,000)
Other income (i.e.,
Tax on Rs. 1,13,50,00o
2,50,000 Nil
First Rs. 2,50,000 Niu
2,50,000 5%
Next Rs. 2,50,000
5,00,000 20%
12,500
Next Rs. 5,00,000
1,03,50,000 30%
1,00,000
Income in excess of Rs. 10,00,000 (i.e., Rs. 1,13,50,000 Rs. 10,00,000) 31,05,000
Taxt
Add: Surcharge @ 15%
33,72,700
5,05,905
Tax and surcharge 38,78,605
Add: Health and education cess (4% of tax and surcharge) 1,55,144
Tax liability (rounded off) 40,33,750
Maximum marginal rate of tax -It is defined by section 2(29C) as the rate of income-tax (including surcharge) applicak
in relation to the highest slab of income in the case of an individual as specified by the relevant Finance Act E
instance, for the assessment year 2021-22, the maximum marginal rate of tax is 42.744 per cent (i.e., 30 per cent
surcharge : 37 per cent of income-tax + health and education cess: 4 per cent of income-tax and surcharge).
Exemption limit or exempted slab - The amount of the first slab of income which is taxable at nil rate is known a
exemption limit or exempted slab |see Appendix 1]. For the assessment year 2021-22, the amount of exemption limit
is as follows for different assessees
Individual Rs.
Resident senior citizen (who is 60 years or more) 3,00,000tt
- Resident super senior citizen (who is 80 years or more) 5,00,000tt
- Any other individual 2,50,000
Hindu undivided family 2,50,00
Company Nil
Firm Nil
Association of persons or body of individuals 2,50,00
Local authority Nil
Artificial juridical person 2,50,000
The above limit is not applicable in a case where specialtax rates are applicable [these rates are given in Appendix
1, para 0.6]. For instance, if an individual gets a lottery prize of Rs. 33,000 and he does not have any other income, then
Rs. 33,000 is taxable (even if it is below Rs. 2,50,000) at the rate of 31.2%* (i.e, Rs. 7,700**).

Test your knowledge

1. Define the relationship between "previous year" and "assessment year". What will be the first previous year
when a business is newly started on February 20, 2021?
2. How would you define "person"?
3. Who is an assessee?
4. What is regarded as "income" under the Income-tax Act?
5. Income of previous year is taxable in the immediately following assessment year. Is there any exception to this
rule?
6. What are the tax rates applicable in the case of an individual for the assessment year 2021-22?
7. (P1.5)* Let the depreciation rates in respect of a depreciable asset be as under

tRebate under section 87A is not available (income being more than Rs. 5,00,000).
of the ag
tt Exemption limit is Rs. 2,50,000 under the alternative tax regime given by section 115BAC [see para 194.3] irrespective
of taxpayer.
tSee, however, paras 104.1-2 and 104.4-2.
**Tax rate 30% + education cess 4% of tax. Surcharge not applicable.
***It is after rebate under section 87A.
Number given in the bracket is solved Problem No. of Students Guide to Income-tax, Problems and Solutions.
17
TEST YOUR KNOWLEDGE

a. 16 per cent up to April 1, 2021;

b. 36 per cent from April 2, 2021 to April 10, 2022;
c. 40 per cent from April 11, 2022 to
May 10, 2023;
d. 31 per cent from May 11, 2022 to March 31, 2023; and
e. 50 per cent from April 1, 2023 onwards.
At what rate depreciation is admissible in respect of that asset for the assessment years 2021-22 to 2023-24.
8. (P1.6)* Find out the tax liability in the following cases pertaining to the assessment year D4l44
ASsessee ing
Taxable Long-tenm
income capitalgain fromlotte
tncudedin
taxable

X, a resident Hindu undivided family 2,30,000 18,000

Y, a Hindu undivided family 2,86,000 2,000 16,000
Z, an individual (age: 42 years) 11,70,000 40,000 70,000
Mrs. A, a resident individual (age: 58 42,50,000
years)
B Ltd., an Indian company 1,12,00,000 50,000 73,000
C Ltd., an Indian company 35,000 500
D Society, a co-operative society 5,000 700 150
E&Co, partnership firm 10,30,000 60,000
F, a non-resident individual (age 74 years) 2,65,000 12,000

"Number given in the bracketis solved Problem No. of Studernts' Guide to

Income-tax, Problems and Solutions