INCOME TAX : IMPORTANT TERMS

ASSESSMENT YEAR:
• The assessment year refers to the year in which the income
earned during the previous financial year is assessed for tax
purposes.
• For example, if the financial year is from April 1, 2022, to March
31, 2023, the assessment year for that income would be the
following year, starting from April 1, 2023, to March 31, 2024.
• During the assessment year, individuals and businesses file their
income tax returns, and the government assesses their taxable
income and liabilities.
• The Assessment Year is the 12 month-period that comes right
after the financial year.
PREVIOUS YEAR:
• The “previous year” refers to the financial year in which you
earned income.
• It is the year immediately preceding the assessment year.
• For example, if the financial year is from April 1, 2022, to March
31, 2023, then this period is the previous year, and the
corresponding assessment year would be from April 1, 2023, to
March 31, 2024.
• The income earned during the previous year is assessed for tax
purposes in the assessment year.
PERSON:
• Individuals: This category includes salaried individuals, professionals,
freelancers, and others who earn income.
• Hindu Undivided Families (HUFs): HUF is a separate legal entity that
consists of a family and its descendants. It is recognized as a taxable
entity.
• Companies: Business entities, whether private or public, are considered
taxpayers. They are taxed based on their profits.
• Partnerships: Partnerships and LLPs (Limited Liability Partnerships) are
also liable to pay income tax.
• Trusts: Trusts, including charitable trusts, are subject to income tax
regulations.
• Association of Persons (AOP) and Body of Individuals (BOI): AOP and BOI
are other categories of assesses, typically used when a group of people
or entities come together for a common purpose.
ASSESSEE:
• The term “Assessee” under the Income Tax Act of 1961 refers to any
individual or entity that holds the legal liability of tax payment or any other
financial commitments as specified by the Act.
• This includes not only the primary taxpayer but also any entity that is required
to settle its liabilities based on the income earned or losses incurred within a
specified assessment year.
• Assessee means a person liable for payment of taxes or any other sum of
money under the Income-tax Act.
• Assessment of refund due to him or any other person
• Person in respect of whom any proceedings have been undertaken for
(whether or not ultimately tax is found payable from him)
• Assessment of income or loss incurred by any other person, for whom he is
assessable (“Estate of a Deceased person”) .
INCOME:
• Section 2(24) of the Income Tax Act defines income as including
the following:
• Salaries: Any salary, wages, annuity, pension, gratuity, or other
payment received by an individual from his employer is considered
as income for taxation purposes.
• Income from House Property: Any rental income earned from a
house property, or the deemed rental income from a self-occupied
property, is considered as income.
• Profits and Gains of Business or Profession: Any profits or gains
earned by an individual from a business or profession is
considered as income for taxation purposes.
• Capital Gains: Any profits or gains earned from the sale of a capital
asset, such as property or shares, is considered as income.
• Income from Other Sources: Any income earned from sources other
than those mentioned above, such as interest on bank deposits,
lottery winnings, or gifts, is considered as income.
• Winnings from Lotteries, Crosswords, and Other Games: Any
winnings from lotteries, crossword puzzles, races, card games, or
any other games or gambling activities are considered as income.
• Contribution to Employees’ Provident Fund (EPF) Account: Any
contribution made by an employer to an employee’s EPF account is
considered as income.
• Voluntary Retirement Scheme (VRS) Compensation: Any
compensation received by an employee under a VRS is considered
as income.
• Foreign Income: Any income earned by an individual outside India
is also considered as income for taxation purposes.
Exclusions:
• Agricultural Income: Any income earned from agricultural land is
exempted from taxation under Section 10(1) of the Income Tax Act.
• Income of a Charitable Trust or Institution: Any income earned by a
charitable trust or institution is exempted from taxation under
Section 11 of the Income Tax Act.
• Income from a Hindu Undivided Family (HUF): Any income earned
by an HUF is taxed separately from the income of its individual
members.
GROSS TOTAL INCOME:
• It is basically, the sum of total income earned from all sources of
income.
• G.T.I. = Salary Income + House Property Income +
Business/Profession Income + Capital Gains + Other Sources
Income + Clubbed Income – Set off of Losses.
• Income Tax is not levied on this income
TOTAL INCOME:
• The income that is calculated after claiming eligible deductions,
exemptions, and allowances from the GTI. It is also referred to as
“taxable income”, as it is the income on which an individual’s tax
liability is calculated.
• Income Tax is levied on this income
• Income From Salary xx
• Add: Income Under the Head House Property xx
• Add: Profits and Gains of Business and Profession xx
• Add: capital gains Income xx
• Add: Income from Other Sources xx
• Gross Total Income xxx
RESIDENTIAL STATUS
AND TAX LIABILITY
RESIDENTIAL STATUS
• The tax liability of a person is determined based on his residence
in India in the previous year. The residential status of an assessee
may not necessarily be the same in each year; he may be a
resident in one year and a non-resident in the next. As such, clear
identification of residential status, is necessary. It is important to
note, however, that the status of an assessee will be the same for
all sources of income.
• Section 5 of the Income tax Act deals with the scope of total
income. It states that the scope of total income of a person is
determined by reference to his residence in India in the previous
year.
• Based on residence, the individuals and HUF entities are divided
into three categories, viz.
a) Persons who are ordinarily residents in India
b) Persons who are not ordinarily residents in India
c) Persons who are non-residents in India
• The tests for residence of an individual are contained
in Section 6(1), those for Hindu Undivided Families, firms or other
associations of persons are laid down in Section 6(2), those for
companies in Section 6(3) and for every other person in Section 6(4).
INDIVIDUALS:
A) Resident and Ordinarily Resident:
• An Individual shall be considered as Resident in India if he shall fulfil
at least one basic condition and both the additional conditions.
• Conditions of Part I or Basic Conditions:
i) He must be physically present in India for a period of 182 days or
more during the relevant previous year, or
ii) He must be in India for a period of 60 days (182 days in some
special circumstance) or more during the relevant previous year and
365 days or more for 4 years immediately preceding the relevant
previous year.
• Conditions of Part II or Additional Conditions [Section 6(6)(a)]
a) If he has been resident in India for at least 2 out of the 10 years
preceding the previous year, and
b) He has been in India for a period or periods amounting in all to
730 days or more during 7 previous years preceding the previous
year.
• NOTE: His stay in India for at least 182 days during the previous year
need not necessarily be a continuous one and at the same place. It is
the total duration of his stay in India that will be considered for the
purpose.
• Again, with regard to the second condition of Part I i.e. His stay for
365 days or more, the stay need not be regular, it could be only
once in four years preceding the previous year. It is the total stay
which is significant which must be 365 days or more in the 4 years
preceding the previous year.
B) Not Ordinarily Resident :
If an individual satisfies anyone of the two conditions of Part I, or
basic condition but does not satisfy both the conditions or fulfils only
one of the two additional conditions of Part II, he is said to be
resident but not ordinarily resident or simply tasted, he will be a “not
ordinarily resident”.
QUESTION: Mr. Anil citizen of Spain has been staying in India since
1985. He leaves India on 16.7.2021 on a visit to U.S.A. And returns
on 4.1.2022. Determine his residential status for the previous year
2021-22
QUESTION: Mayank came to India for the first time in July 2021 and
stayed in Delhi up to 31st March 2022. Determine his residential
status for the assessment year 2022-23.
C) Non-Resident :
• If an individual does not satisfy anyone of the basic conditions or
conditions of Part I, he is said to be non-resident in that previous
year whether he satisfies one or both conditions of Part II or
additional conditions.
HINDU UNDIVIDED FAMILY:
• The residential status of an HUF depends on two factors, the
location of control and management of its affairs and the residential
status of its Karta.
A) Ordinarily Resident [Section 6(2)]
HUF is said to be ordinarily resident in India in any previous year:
a) If the control and management of its affairs is wholly or-partly
situated in India during the previous year.
Moreover, the control and management should be de facto (in
effect) and not merely the right or power to control and manage.
b) If its manager (Karta) satisfies the following conditions of Section
6(6)(a):
i) Its manager has been resident in India in 2 out of 10 previous
years preceding that year; and
ii) Its manager has, during the 7 years preceding that year, been in
India for a period amounting in all to 730 days or more
B) Not Ordinarily Resident:
• If satisfies only one additional condition mentioned above
C) Non-Resident:
• Control and management of their affairs is situated wholly outside
India.
COMPANIES:
• Economic A company is said to be resident in India, in a previous year, if-
i) It is an Indian company, or
ii) The company is foreign company, its place of effective management
(POEM), in that year, is in India
• A company is said to be non–resident in any previous year, if –
i) It is not an Indian company, and.
ii) Its place of effective management, in that year, is not in India.
• Meaning of “Income received or deemed to be received”:
• Income is to be included in the total income of the assessee
immediately on its actual or deemed receipt. The receipt of income
refers to only the first occasion when the recipient gets the money
under his control.
• Meaning of Income ‘accruing’ and ‘arising’
• Accrue refers to the right to receive income, whereas due refers to
the right to enforce payment of the same. In other words, when the
right to receive income becomes vested in the assessee, it is said to
accrue or arise. For e.g. Salary for work done in December will
accrue throughout the month, day to day, but will become due on
the salary bill being passed on 31 st December or 1 st January.
• Social Economic System:
• An economic system in which the basic industries are owned by the
government or by the private sector with strong government control.
A socialist state controls critical, large-scale industries such as
transportation, communications, and utilities. Smaller businesses and
those considered less critical, such as retail, may be privately owned.
To varying degrees, the state also determines the goals of
businesses, the prices and selection of goods, and the rights of
workers. Socialist countries typically provide their citizens with a
higher level of services, such as health care and unemployment
benefits, than do most capitalist countries. As a result, taxes and
unemployment may also be higher in socialist countries
SCOPE OF TOTAL INCOME:
• Section 5 provides the scope of total income in terms of the
residential status of the assessee because the incidence of tax on
any person depends upon his residential status in India.
• The scope of total income of an assessee depends upon the
following three important considerations:
• the residential status of the assessee;
• the place of accrual or receipt of income, whether actual or deemed;
and
• the point of time at which the income had accrued to or was
received by or on behalf of the assessee.
• 1) Resident and ordinarily resident (ROR):
• The total income of an ROR would, under section 5(1), consist of:
• income received or deemed to be received in India during the
previous year;
• income which accrues or arises or is deemed to accrue or arise in
India during the previous year; and
• income which accrues or arises outside India even if it is not
received or brought into India during the previous year.
• In simpler terms, an ROR has to pay tax on the total income accrued
or deemed to accrue, received or deemed to be received in or
outside India during the relevant previous year.
• 2) Resident but not ordinarily resident (RNOR)
• Under section 5(1), the total income of an RNOR would consist of –
• income received or deemed to be received in India during the
previous year;
• income which accrues or arises or is deemed to accrue or arise in
India during the previous year; and
• income derived from a business controlled in or profession set up in
India, even though it accrues or arises outside India.
• Note – All other income accruing or arising outside India which is
not received or deemed to be received or deemed to accrue or arise
in India would not be included in his total income.
• 3) Non-resident :
• A non-resident’s total income under section 5(2) includes:
• income received or deemed to be received in India in the previous
year; and
• income which accrues or arises or is deemed to accrue or arise in
India during the previous year.
• Note: All assesses, whether resident or not, are chargeable to tax in
respect of their income accrued, arisen, received or deemed to
accrue, arise or to be received in India whereas a resident alone
(resident and ordinarily resident in the case of individuals and HUF)
is chargeable to tax in respect of income which accrues or arises
outside India.
EXEMPTED INCOME
EXEMPTED INCOME:
• Exempted Income is that income on which income tax is NOT
chargeable i.e. They are not included in the total income for the
purpose of tax calculation.
• Taxable incomes are chargeable to tax under Income Tax Law.
• It can be classified into 3 categories u/s 10 :
1) For all assessees
2) For Employees
3) For Institutions
FOR ALL ASSESSEES:
• 1) Agricultural income [Sec.10 (1)] – Agricultural income from the
land situated in India is fully exempted from income tax.
• 2) Sum received by a member from Hindu undivided family [Sec.10
(2)] – Any sum received by a member of Hindu undivided family at
the time of division is tax free.
• 3) Share of income of a partner in the firm [Sec.10 (2A)]
• 4) Interest on money standing to the credit of individual in his NRE
A/C [Sec.10(4)(ii)]
• 5) Royalty income or fees for technical services received from
National Technical Research Organisation (NTRO) [Sec. 10(6D)] –
Income arising to non-corporate non-residents and foreign
companies, by way of royalty from, or fees from technical services
rendered in or outside India to, the NTRO is exempt.
• 6) Compensation received by victims of Bhopal gas leak disaster [Sec.10
(10BB)]
• 7) Compensation of Disaster (Section 10 BC)
• 8) Sum received from life insurance [Sec.10 (10D)] – Any sum received
from life Insurance Corporation as the maturity of insurance policy is fully
exempt from tax, even bonus received is fully exempted. But, Keyman
Insurance Policy and any sum received under u/s 80DD(3) will not be
exempted.
• 9) Payment from Sukanya Samridhi account [Sec.10 (11A)]
• 10) Payment from National Pension System Trust [Section 10(12A)] – On
closure of account or his opting out of the pension scheme, upto 60% of
total amount payable to him shall be exempt.
• 11) Partial withdrawal from National Pension System Trust [Section
10(12B)] – Upto 25% of the amount of contribution made by him shall
be exempt.
• 12.) Interest of different types [Section 10(15)] – Interest & premium
on redemption of notified securities, bonds or certificates
• National Defence Gold Bond, 1980
• Special Bearer Bonds, 1991
• Post Office Cash Certificate (5 Year)
• P.O. Cumulative Time Deposit Account –
• P.O. Savings Bank Account
• 13) Educational Scholarships [Section 10(16)]
• 14) Allowances of M.Ps, M.L.As, and M.L.Cs [Section 10(16)]
• 15) Awards [Section 10(17A)] – any payment made, whether in cash
or in kind.
• 16) Pension of Gallantry Awardee [Section 10(18)] – Individual who has
been awarded – ‘Param Vir Chakra’, ‘Mahavir Chakra’, ‘Vir Chakra’ or such
other gallantry award.
• 17) Family Pension of a member of Armed Forces [Section 10(19)] death
of such person has been occurred in the course of operational duties
shall be exempt provided that prescribed conditions are satisfied.
• 18) Annual value of one palace of rulers of Indian States [Section
10(19A)] – If portion of palace is let out on rent, the annual value of such
portion is not exempt.
• 19) Income of Scheduled Tribes [Section 10(26)] – residing in tribal area
or in the states of Arunachal Pradesh, Manipur, Mizoram, Nagaland,
Tripura, & Sikkim or Ladakh region.
• 20) Income of a Minor Child [Section 10(32)] – exemption of actual aunt
or Rs. 1500 in respect of each minor child, whichever is les amount or
Rs.1500 less.
FOR EMPLOYEES:
• 1.) Leave Travel Concession to an Employee [Section 10(5)]
• 2.) Allowances or Perquisites outside India [Section 10(7)]
• 3.) Death cum Retirement Gratuity [Section 10(10)]
• 4.) Commutation of Pension [Section 10(10A)]
• 5.) Encashment of Earned Leave or Leave Salary [Section10(10AA)]
• 6.) Compensation on Retrenchment [Section 10(10B)]
• 7.) Compensation on Voluntary Retirement [Section 10(10C)]
• 8.) Payment from Statutory Provident Fund [Section 10(11)]
• 9.) House Rent Allowance [Section 10(13A)]
• 10.) Special Allowances for meeting certain expenditure [Section 10(14)]
FOR INSTITUTIONS:
• 1.) Income of a Local Authority [Section 10(20)]
• 2.) Income of Research Association [Section 10(21)] – any income of a
research association approved u/s35(1)(ii) or u/s35(1)(iii) is fully exempt.
• 3.) Income of News Agency [Section 10(22B)] – notified news agency
setup in India solely for collection and distribution of news.
• 4.) Income of Professional Institutes [Section 10(23A)] – applies its
income for application, solely for its objects, approved for the purpose of
this clause by the Central Government.
• 5.) Income of Regimental Fund or Non-Public Fund [Section 10(23AA)]
• 6.) Income of a fund for welfare of employees or their dependents
[Section 10(23AAA)]
• 7.) Income of Khadi and Village Industries [Section 10(23B)]
• 8.) Income of SAARC Fund [Section 10(23BBC)]
• 9.) Income of specified charitable funds [Section 10(23C)] –
• The Prime Minister’s National Relief Fund, PM Cares Fund
• The Swachh Bharat Kosh
• The Clean Ganga Fund
• The National Foundation for Communal Harmony *
• 10.) Income of Insurance Regulatory and Development Authority
[Section 10(23BBE)