Module-2

A) Income not included in total income

1. Agricultural Income

India can still be considered a country that mostly

depends upon agriculture and income generated
from the activities of agriculture. Agriculture
income shall be excluded from the assessee’s total
income. However, it shall be considered while
calculating the rate to tax non-agriculture income.

2. Leave Travel Concession

In the event of an employee travelling with his

family for which he has taken a leave, and the
travelling cost is reimbursed by the employer, then
such reimbursement shall be fully exempted and
won’t form a part of the total income. But some
provisions for the same are provided below.
a) The journey might have taken place during
service or after retirement.

b) It must be a present or a former employer.

c) The place of the journey must be within India.

d) In case the journey has taken place to various

places together, then the exemption is limited to
the extent of the cost of the journey from the place
of origin to the farthest point reached by the
shortest route.

e) The employee might or might not be a citizen of

India.

f) The stay cost is not exempt.

3. Allowance Or Perquisite Paid Outside India

Any perquisite or allowance paid outside India by

the Govt to a citizen of India for Rendering Services
outside India.
4. Profit Share from a Firm

The profit share of a partner in a firm’s total income

is exempted as the firm is assessed separately. But
in the event of payment (payable or paid) of salary
interest commission to the partner, which was
supposed to be deducted from the firm’s total
income shall be included in the income of partner’s
total income as his business.

5. Compensation For Any Disaster

Any amount which an individual or his legal heir

gets as compensation on account of any disaster
from the Central or State Government or local
authority except the amount received or receivable
to the extent such individual or his legal heir is
permitted a deduction under this Act on account of
any loss or damage caused by such disaster.

6. Payment From Approved Superannuation Fund

Any payment from an approved superannuation

fund made as per the prescribed circumstances
shall not be a part of the assessee’s total income of
the assessee.
7. Daily Allowance, Etc. To MP And MLA

Any income by way of –

a. Reciept of any Daily allowance by any person due

to having membership of Parliament or of any State
Legislature or of any Committee thereof;

b. Receipt of any allowance by any person by

reason of his membership of Parliament;

c. Constituency Allowance received by any person

by reason of his membership in the State
legislature.

8. Income Of Mutual Fund

Any income of a Mutual Fund registered under the

SEBI Act 1992 or regulation made thereunder or set
up by a public sector bank or a public financial
institution or having authorization from the RBI
and subject to certain notified conditions.
9. Awards & Rewards

Any payment made, either in cash or in kind, for any

award or reward instituted in by the govt for the
interest of the general public by the Central Govt or
any State Govt or by any other approved body; for
approved shall not for a part of the total income of
the assessee.

10. Death-Cum-Retirement-Gratuity

Sec. 10(10) of the Act deals with the exemptions

from gratuity income, which is granted to the
salaried assessee. Gratuity received by an assessee
other than an employee won’t be eligible for
exemption u/s 10(10).

B) Residential Status

Residential Status Under Income Tax Act

It is critical for the Income Tax Department to
establish a taxable individual’s or company’s
residence status. It is especially important during
the tax filing season. In reality, this is one of the
variables used to determine a person’s taxability.
An individual’s taxability in India is determined by
his residential status under the income tax act in
India for any given fiscal year. The phrase
“residential status” was coined by India’s income
tax rules and should not be confused with an
individual’s citizenship in India.

An individual may be an Indian citizen but become a

non-resident for a certain year. Similarly, a foreign
citizen may become a resident of India for income
tax purposes in a given year.

It is also worth noting that the residential status as

per income tax differs to sorts of people, such as an
individual, a corporation, a company, and so on,
decided differently.

The following categories are used to classify an

individual’s residence status.

1. Resident and Ordinarily Resident (ROR)

Individuals are deemed to be residents of India

under Section 6(1) of the Income Tax Act if they
meet the following conditions: If he/she stays in
India for 182 days or more in a fiscal year, or if
he/she stays in India for 60 days or more in a fiscal
year, and if he/she stays in India for 365 days or
more in the four years immediately before the
previous year and comes under ordinary resident in
income tax.

According to section 6(6) of the Income Tax Act of

1961, there are two criteria under which an
individual will be considered a “Resident and
Ordinarily Resident” (ROR) in India.

If he or she spends 730 days or more in India in the

seven years preceding the current year.
If he/she has resided in India for at least two of the
ten prior fiscal years before the current year.

A resident will be taxed in India on his total income,

which includes money generated in India as well as
income obtained outside of India.

2. Resident but Not Ordinarily Resident (RNOR)

When an assessee meets the following

fundamental requirements, he or she will be
regarded as RNOR: If an individual stays in India for
a time of 182 days or more in a fiscal year; or if
he/she stays in India for a period of 60 days in a
fiscal year and 365 days or more in the four
preceding fiscal years.

An Assessee, on the other hand, will be classified as

a Resident but Not Ordinarily Resident (RNOR) if
they meet one of the following fundamental
conditions:

If he/she stays in India for 730 days or more in the

previous fiscal year.
If he/she was a resident of India for at least 2 out of
10 days in the previous fiscal year.

3. Non-Resident (NR)

An individual will be eligible for Non-Resident (NR)

status if he or she meets the following criteria:

If an individual spends less than 181 days in India

within a fiscal year.
If an individual stays in India for no more than 60
days in a fiscal year.
If an individual stays in India for more than 60 days
in a fiscal year but does not remain for 365 days or
more in the preceding four fiscal years.
[NOTE: NR & RNOR's tax burden in India is limited to
the income they make in the country. They are not
required to pay any tax in India on their
international earnings. Also, in the event of double
taxation of income, when the same income is taxed
in India and overseas, one may rely on the Double
Taxation Avoidance Agreement (DTAA) that India
would have signed with the other nation to avoid
paying taxes twice.]

C) Clubbing of Income

In India, we have a progressive system of taxation

which means as your income increases, you have to
pay more taxes as per the applicable income tax
slab. In order to avoid paying high taxes, many
people transfer their assets or arrange the sources
of income in the name of their wives, children,
parents, and relatives to bring down their income.

In order to curb such tax avoidance practices, the

income tax introduced a “clubbing of income “
provision under section 60 to section 64 of the
income tax act.
When the income of another person is included in
your income and taxed in your hands, then such a
situation is called Clubbing of Income. The income
clubbed in your income is called deemed income.
The provisions of clubbing of income are applicable
only to individuals and no other type of assessee
like firm/HUF/Company etc.

Let’s say you have a total income of Rs 3,00,000. It

comprises a salary income worth Rs 2,00,000 &
rental income of Rs 1,00,000. With an aim to fall
below the basic exemption limit, you transfer rental
income without transferring the house ownership
in your wife’s name. Now, while calculating tax,
your taxable income shall be taken at Rs 3,00,000,
not Rs 2,00,000. This is because of the income tax
provisions on Clubbing of Income.

• When Will Clubbing of Income Be Taxable?

1. Transfer of Income without Transfer of Asset

When a person transfers the income without

transferring the ownership of the asset from which
such income is earned. Then, such income will be
taxable in the hands of the transferor. The most
popular example that we see is the rental income,
when the owner of the property asks his tenant to
make the rental payments in his/her parent’s/wife’s
or children's name.

2. Revocable Transfer of Asset

When a person transfers an asset to another

person keeping a clause in the transaction which
empowers the transferor to take back the
ownership anytime in the future. Such a situation is
called Revocable Transfer. As per provisions of
Clubbing of Income, when a “revocable transfer” of
an asset is made, then any income from that asset
shall be taxable in the hands of the transferor.

For instance, Karan transferred his house property

to Arjun. There is a condition in the agreement that
the asset will transfer back to Karan after 2 years.
Now, as per clubbing of income, any income arising
to Arjun from such house during 2 years will be
included in Karan’s income only.
3. Clubbing of Income of Spouse

(I) Your spouse works in a concern/entity in which

you have a substantial interest: There are 2 aspects
in this situation, discussed below:

a) Your spouse is employed because of his/her

professional/ technical qualification. (Clubbing of
income won't apply)

b) No such professional/ technical qualification.

(Clubbing of income will apply)

(II) If you have transferred any asset to your wife

without adequate consideration: It is a very
common practice where a husband transfers an
income-earning asset in his wife’s name to save
tax. These provisions have been introduced to
target such tax avoidance practices. In this case,
income from such assets shall be taxable in your
hands. This provision of clubbing of income will not
apply in the case:

A . the asset is transferred for adequate

consideration or,
B. as a condition of divorce or,

C. it was transferred before marriage

4. Clubbing of Income of Minor Child

Any income earned by a minor child is clubbed in

the hands of either of his/her parents, whose
income (excluding minor child income) is greater.
For example, in a Fixed deposit taken in the name of
a minor child, the interest earned Will be clubbed
with the income of the highest-earning parent.
However, as per Income Tax provisions, there are
certain situations in which the clubbing of income
provisions will not apply. These are -

a) When a minor child is suffering from any

disability as mentioned in Sec 80U, or

b) When income is earned by a minor child through

manual work, or

c) Income earned by the minor child through his

skill, talent, knowledge, etc. For e.g., a minor child
wins money on TV shows like Indian Idol Junior
winner, Voice India Kids, etc.
Moreover, an exemption of Rs 1500 is provided u/s
10 (32) on income earned by each minor child to the
parent under which the minor’s income is being
clubbed.

D) Rate of Income Tax

What Is Income Tax Slab?

In India, the Income Tax applies to individuals based
on a slab system, where different tax rates are
assigned to different income ranges. As the
person's income increases, the tax rates also
increase. This type of taxation allows for a fair and
progressive tax system in the country. The income
tax slabs are revised periodically, typically during
each budget. These slab rates vary for different
groups of taxpayers.
Tax Slab During Old Regime:

1. Indian Residents aged < 60 years + All the non-

residents (I)

2. 60 to 80 years of age: Resident Senior citizens (II)

3. More than 80 years: Resident Super senior
citizens(III)

i) Upto Rs 2.5 lakh for all slabs under Old Regime: 0

ii) Rs 2,50,001 to 3,00,000: For (I)-5%; For (II) & (III)-0

iii) Rs 3,00,001 to 5,00,000: For (I) & (II)- 5% & For

(III)-0

iv) Rs 5,00,0001 to 10,00,000- 20% for all

v) Above Rs 10,00,000- 30% for all

Under New Regime:

i) Upto Rs 3,00,000- 0

ii) 3,00,001 to 6,00,000- 5% (Tax Rebate under

S.87A)

iii) 6,00,001 to 9,00,000- 10% (Tax Rebate under

S.87A upto Rs 7,00,000)

iv) 9,00,001 to 12,00,000- 15%

v) 12,00,001 to 15,00,000- 20%

vi) Above 15,00,000- 30%

E) Heads of Income

The 5 heads of income tax are:

1. Income from salary

Any income that you receive in terms of the service

you provide on a contract of employment is
applicable for taxation under this head. This
includes salary, advance salary, perquisites,
gratuity, commission, annual bonus and pension.

This tax head also includes some exemptions:

a) House Rent Allowance (HRA): As a salaried

individual, if you live in a rented house, you can
claim House Rent Allowance for partial or complete
tax exemptions.

b) Conveyance Allowance: You can get a monthly

tax exemption of up to Rs.800.
2. Income from house property

An individual’s income from his or her property or

land is taxable under the head of income from
house property. To put it simply, this head includes
the policy for calculating tax on rental income that
you receive from your properties.

In case you own more than one self-occupied

house, then only one house is considered to be
occupied and the rest are considered to be rented
out. The taxation occurs on income received from
both commercial and residential property.

3. Income from profits and gains from business or

profession

The profits that you earn from any kind of business

or profession are taxable under this head. You can
subtract your expenses from the total income in
order to determine the amount on which tax is
chargeable.
4. Income from capital gains

When you earn profits by transferring or selling an

asset that was held as an investment, that income
is taxable under the head of income from capital
gains. A large number of assets, like gold, bonds,
mutual funds, real estate, stocks, etc., fall under
capital assets.

Now, you can subdivide capital gains into short-

term capital gains and long-term capital gains.

When you sell your capital assets after holding

them for a period of 36 months or more, they will
fall under long-term capital gain and will have a tax
rate of 20%. Alternatively, if you sell your capital
assets within a period of 36 months, the tax
deduction will be under short-term capital gain at
the rate of 15%. In the case of securities, this is
applicable if you sell your holdings within 12
months from the purchase date.
5. Income from other sources

Among the five heads of income tax, this one

includes any other income that does not have any
mention in the above 4 heads. They fall under
Section 56 sub-section (2) of the Income Tax Act
and include income from lottery, bank deposits,
gambling, card games, sports rewards, etc.

F) Deductions under the Income Tax Act, 1961

Under Section 80, a taxpayer will receive tax

deduction for payment made towards:

a) Life Insurance.

b) Contribution to one’s Provident Fund or

contributions to Public Provident Fund.

c) Mutual Fund subscriptions.

d) Tuition fees paid towards a taxpayer’s offspring.

e) Repayment of the principle amount taken
towards housing loan etc.

(Some of the detailed deductions)

↓

1. Payment made on life insurance policies (for

oneself, spouse or children).

2. The contribution made towards provident fund.

3. Educational tuition fees incurred for two children

or less.

4. Expenditures for construction or purchase of a

residential property.

5. Deposits made for fixed deposits with a

minimum plan tenure of 5 years.

[NOTE: Point 1. To .5 upto Rs 1.5 lakh deduction]

6. 100% tax exemption without qualifying criteria:

When donations are made towards funds like
National Defence Fund, Prime Minister’s Relief
Fund, National Illness Assistance Fund etc. then tax
exemption can be as high as 100% of the donated
amount.

7. 100% tax deduction under certain criteria:

Donations funded towards local authorities and
public associations which work for family
development or promotion of sports will be eligible
for 100% deduction.

8. 50% tax exemption without qualifying criteria:

When a taxpayer makes donations towards the
Prime Minister’s Drought Relief fund, Rajiv Gandhi
Foundation, etc. he / she become eligible for 50%
deduction on the payable tax.

9. 50% tax deduction under certain criteria:

Donations funded towards religious institutions or
local charities are eligible under a certain qualifying
limit for this deduction.