Income tax

Income tax act The income tax act of 1961 has been in effect from the first day of April 1962
(sec 1). It contains 298 sec, sub sections, schedules etc. the income tax rules of 1962 was
framed by central board of Direct Taxes (CBDT)

Assessment year (sec 2(9) Assessment year may be defined as a year in which the income
tax of the previous year is to be assessed. It is a period of twelve months starting from April 1
of every year and ending on March 31 of the next year.

Previous year (sec 3) For the purposes of this Act, the term “previous year” means that the
financial year immediately preceding the assessment year. ... Under Income Tax, the returns
are filed by assesses after end of the year/ period during which earnings are made and that
period is called as previous year/ financial year.

Salient Feature of Income Tax:

1. Central Tax
2. Direct Tax
3. Tax on Taxable Income
4. Tax Exemption limit
5. Progressive rates of Tax
6. Scope of Taxation
7. Burden on Rich class of Persons
8. Administration of Income Tax
9. Distribution of Income Tax

Definition of 'Assessee' Section 2(7) of Income Tax Act. As per S. 2(7) of the Income Tax Act,
1961, unless the context otherwise requires, the term “Assessee” means a person who is responsible
for payment of any tax or any other sum of money under this Act, and includes.

Deemed Assessee: A person who is liable to pay tax not only on his own income but on the income
of any another person. Deemed assesses includes legal representative, agent of non resident, guardian
or manager of an infant and lunatic, trustees and administrators etc.

AGRICULTURAL INCOME (SEC 2(1A)) In India, agricultural income refers to income earned or
revenue derived from sources that include farming land, buildings on or identified with an agricultural
land and commercial produce from a horticultural land. Agricultural income is defined under section
2(1A) of the Income Tax Act, 1961.

Agricultural income
 Agricultural income is any rent or revenue by means of cash or in-kind, derived from
a land, which is used for an agricultural purpose and land should be situated in India.
 Income from agricultural should be produced by a cultivator or a rent receiver of that
produce in-kind, which can be fit to take that into the market.
  The income should be derived from the sale by a cultivator or a rent receiver of that
product which is produced or received by him, no process can be performed other
than the process to render it fit for the market. You can read more about agricultural
income here.

Non-agricultural income from land

➢ Income from markets
➢ Income from stone quarries
➢ Income from mining royalties
➢ Income from land used for storing agricultural produce
➢ Income from supply of water for irrigation purpose
➢ Income from self-grown, grass and trees
➢ Income from fisheries
➢ Remuneration received as manager of an agricultural farm
➢ Income from interest on arrears of rent of agricultural land

The exception to Previous Year:

These incomes are taxed as the income of the year immediately preceding the assessment
year at the rates applicable to such person.

1. Income of a person who is leaving India for a long period or permanently

2. Income of a person who is trying to alienate his assets with an intention to
avoid taxes
3. Income of a discontinued business
4. Income of non-resident shipping companies who don’t have any representative
in India

Heads of Income:-
Every income arising to any person will always be classified under one of the following
headers provided by the Act: –

1. Salaries
2. Income from house property
3. Profit and gains of business or profession
4. Capital gains
5. Income from other sources

Person:
As per section 2(31) of the Income-Tax Act 1961, a Person would be anyone who is-

 An Individual
 A HUF (Hindu Undivided Family)
 A Company
 A Firm
 An association of person or body of individuals
 A Local Authority
 Every artificial and juridical person who is not included in any of the above-mentioned
categories.

Income From Salary

DEFINITION OF SALARY Any remuneration received by an employees in consideration of

services rendered to his employer is called salary. Salary includes monetary value of those benefits
and facilities provided by the employer which are taxable

Employer and Employee Relationship – Any payment that is received by a person will be
treated as Income under Income Tax Act if there exist an Employer and employee
relationship between the payer and payee. For the purpose of qualifying income as income
from salary, their relationship should be that of a master and servant. Where a master is a
person who directs his employee that what is to be done and how it is to be done and servant
is the person who is liable to conduct that work in the manner told by his employer.

Specified Employee

The following employees are deemed as specified employees:

1) A director-employee

2) An employee who has substantial interest (i.e. beneficial owner of equity shares carrying
20% or more voting power) in the employer-company

3) An employee whose monetary income* under the salary exceeds Rs.50,000 *Monetary
Income means Income chargeable under the salary but excluding perquisite value of all non-

TYPES OF PROVIDENT FUND

1. Statutory provident fund

2. Recognised provident fund

3. Unrecognised provident fund

4. Public provident fund

ALLOWANCES An allowance is a cash payment to the employee on a regular basis in addition to

basic salary to meet certain expenses required to be incurred by him in connection with duties of his
officer.
Perquisites “Perquisite” may be defined as any casual emolument or benefit attached to an
office or position in addition to salary or wages. “Perquisite” is defined in the section 17(2) of
the Income tax Act as including:

(i) Value of rent-free/concessional rent accommodation provided by the employer.

(ii) Any sum paid by employer in respect of an obligation which was actually payable by the
assessee.

(iii) Value of any benefit/amenity granted free or at concessional rate to specified employees
etc. (iv)

The value of any specified security or sweat equity shares allotted or transferred, directly or
indirectly, by the employer, or former employer, free of cost or at concessional rate to the
assesssee.

(v) The amount of any contribution to an approved superannuation fund by the exployer in

respect of the assessee, to the extent it exceeds one lakh rupees; and (vi) the value of any

other fringe benefit or amenity as may be prescribed.

Gross Total Income

As the name suggests Gross Total Income is the aggregate of all the income earned by you
during a specified period. According to Section 14 of the Income Tax Act 1961, the income
of a person or an assessee can be categorised under these five heads,

 Income from Salaries

 Income from House Property
 Profits and Gains of Business and Profession
 Capital Gains
 Income from Other Sources

And, Gross Total income is arrived at when your earnings from all these five heads of income
is taken together.

Total income :-
Total income sum up your annual income under all the five heads of income and account for
the deductions under chapter VIA.(u/s 80c to 80 u) The net result would be your total or net income.

Income from house property

Basis of Charge [Section 22]: Income from house property shall be taxable
under this head if following conditions are satisfied:

a) The house property should consist of any building or land appurtenant

thereto;

b) The taxpayer should be the owner of the property;

c) The house property should not be used for the purpose of business or
profession carried on by the taxpayer.

Meaning of Self-occupied property

A self-occupied property means a property owned by the taxpayer which is

occupied throughout the year by the owner for the purposes of his own
residence and is not actually let out during the whole or any part of the year.
Thus, a property not occupied by the owner for his residence cannot be treated
as a self occupied property. However, there is one exception to this rule. If the
following conditions are satisfied, then the property can be treated as self-
occupied and the annual value of a property will be “Nil”, even though the
property is not occupied by the owner throughout the year for his residence: a)
The taxpayer owns a property; b) Such property cannot actually be occupied
by him owing to his employment, business or profession carried on at any
other place and he has to reside at that other place in a building not owned to
him; c) The property mentioned in (a) above (or part thereof) is not actually let
out at any time during the year; d) No other benefit is derived from such
property.

Let Out House Property

A house property which is rented for the whole or a part of the year is considered a let out
house property for income tax purposes

Income from Business :

Sec. 2(13) Business : Business means the purchase and sale or manufacture of a commodity
with a view to make profit. It includes any trade, commerce or manufacture or any adventure
(Doing activity for the first time without knowing the outcome) or concern in the nature of
trade, commerce and manufacture.

Sec. 2(36) Profession: Profession means the activities for earning livelihood which require
intellectual skill or manual skill, e.g. the work of a lawyer, doctor, auditor, engineer and so on
are in the nature of profession. Profession includes vocation. Vocation : Vocation implies
natural ability of a person to do some particular work e.g. singing, dancing, etc. Here, no
training or no qualification is required but having natural ability. Profits : Excess income over
expenditure. Gains : Any incidental revenue from business. As the rules for the assessment of
business, profession or vocation are the same, there is no importance of making any
distinction between them for income tax purposes.

Income from capital gain

Section 45 of Income Tax Act, 1961 provides that any profits or gains arising from the
transfer of a capital asset effected in the previous year will be chargeable to income-tax under
the head 'Capital Gains'. Such capital gains will be deemed to be the income of the previous
year in which the transfer took place.

Meaning of capital gains (Sec. 45) Any profit or gain arising from the sale or transfer of a capital
asset is chargeable to tax under the head “Capital Gains”, Capital asset means any movable or
immovable asset like land, building, plot, gold, silver, jewellery, shares, securities etc. Profit/Loss
arising from transfer of such assets is compared under the had of capital gain from Income tax point
of view

Definition of Capital Asset Sec-2 (14) - Capital asset means property of any kind, whether fixed or
circulating, movable or immovable, tangible or intangible e.g. land, building, plot, gold, silver,
precious metals, jewellery, shares, securities, furniture, machinery etc.

Types of Capital Gains

1. Short term capital gain
2. Long term capital gain

Short term capital asset

(i) Shares, securities, bonds, units are held by the assessee for not more than 12 months before
transfer.
(ii) Assets on which deprecation has been allowed under the Income Tax Act, whether
depreciable asset held by the assessee more or less 36 months. (iii) Any other asset which is
held by the assessee for not more than 36 months, e.g., land, building, precious metals,
jewellery etc.
Long term capital asset
(i) Shares, securities, bonds, units held by the assessee for more than 12 months.

(ii) Other assets like building, gold, plot, land, jewellery etc. held by the assessee for more
than36 months.
Income from other sources
 Income from other sources’ is the residual head of income. Hence, any income which
is not specifically taxed under any other head of income will be taxed under this head.
Further, there are certain incomes which are always taxed under this

Section 56(2)(i) of the Income Tax Act, 1961 mentions that dividends will always be
taxed under this category. However, dividends from companies based in India, except
those covered by Section 2(22)(e), are exempt from tax under Section 10(34).
 Income from horse races, gambling, betting, lotteries, crossword puzzles are taxable
at a rate of 30% under this head.
 1. Dividends
Dividends are taxable under ‘income from other sources,’ based on the residential
status of the source company that paid out the dividend.

CASUAL INCOME Causal Income means such income the receipt of which is
accidental and without any stipulation. It is the nature of an unexpected windfall.
Though causal income is fully taxable but it is necessary to clear this meaning from
the following point of view – 1. Causal income like lottery, race income are taxable at
special rate of 30% 2. Causal income cannot be set off against other causal income as
well as casual income cannot be used for setting off loss of other head.

Carry Forward & Set-off of losses

If the losses could not be set off under the same head or under different heads of income in
the same assessment year, such losses are allowed be carried forward to be to claimed as set
off from the income of the subsequent assessment years.
Nature of losses Set off against which Max. Mandatory
income period loss Filing of
can be Return of
carried Income u/s
forward 139(1)

Loss from House Property Income from House 8 Years No

Property*

Loss from normal business Profit from any normal 8 Years Yes
under the head Profits and business
Gains from business or
profession

Loss from Speculation Profit from any speculation 4 Years Yes

Business business
 Loss from Specified Profit from Specified No Limit Yes
Business u/s 35AD Business

Short Term Capital Loss Both Short Term and Long 8 Years Yes
Term Capital Gain

Long Term Capital Loss Only Long Term Capital Gain 8 Years Yes

Loss from activity of Income from activity of 4 Years Yes

owning and maintaining owning and maintaining race
race horses horses

Clubbing – up income.

What is income clubbing?

Clubbing of income is done to ensure taxpayers do not avoid paying their tax liabilities
through moving of incomes of assets within the family. In general, a taxpayer is required to
pay on his own income only but the tax department provides certain circumstances where the
incomes in a family may be clubbed together and levied tax on.
What are the Rules of Clubbing of Income?
The clubbing of income concerns income from investments by you made on behalf of close
relative such as minor child, spouse or daughter-in-law. These incomes are clubbed and you
are ultimately taxed on the overall income. All investments including property, fixed
deposits, shares, mutual funds and post office savings etc. are covered as clubbed income.
Clubbing of income is governed by Sections 60 to 64 of the Income Tax Act, 1961. The
sections also states that income derived from assets that are directly or indirectly transferred
in cases other than for due consideration to other people or associations that are likely to
benefit the assessee’s spouse or daughter-in-law are also to be clubbed with the assessee’s
earnings.
The following rules define clubbing of income:
Clubbing of Income in case of Minor Child (under 18 years):
 Income from fixed deposit accounts made in the name of a minor child will be clubbed
with that of the higher earning parent and taxes accordingly. In case of divorced parents,
the one maintaining the child will be taxed.
 Income of minor child’s when clubbed with your own will fetch you tax exemptions up to
Rs.1,500 (subject to actual income) for each child.
 Exceptions exist for income of disabled children as well as for minors who earn income
from their talents, experience, knowledge or manual work.
Clubbing of Income in case of Spouse:
 Income from investments made by you in the name of your spouse will be clubbed with
your income and taxed accordingly.
 Income from assets like properties in the name of your spouse when he/she hasn’t invested
any money in buying the property will be clubbed with your income and taxed accordingly.
Clubbing of Income in case of Major Child (over 18 years):
 Income from investments made by a major child will be taxed in the child’s hands only,
even if the investments came from you.
Clubbing of Income of Daughter-in-law:
 Income from assets transferred directly or indirectly to your daughter-in-law without any
adequate consideration will be taxed after clubbing with your income.
 Income from assets transferred to a person or association for instant or delayed benefit to
your daughter-in-law without adequate consideration will be taxed on you after clubbing it
with your income

Various Types of Clubbing of Income under the Income Tax Act, 1961
There are a variety of ways of clubbing income, including:

 Various investing options for children, such as mutual funds.

 Having bank accounts under the names of family members.
 Purchasing shares for family members through a Demat account.
 Savings in the post office for relatives.
 Purchasing real estate in the name of family members.
 Making assets in the names of the wife, son, daughter, mother, and father who is
unemployed.
 Investment in the form of a fixed deposit in children’s name.