INCOME TAX

Income:
income is the money you receive in exchange for your labour or products.
Income may have different definitions depending on the context—for
example, taxation, financial accounting, or economic analysis.

For most people, income is their total earnings in the form of wages and
salaries, the return on their investments, pension distributions, and other
receipts. For businesses, income is the revenue from selling services,
products, and any interest and dividends received with respect to their
cash accounts and reserves related to the business.

Economists have different definitions of income and different ways of

measuring it, from focusing on earnings, savings, consumption,
production, public finance, capital investment, or other topics.

KEY TAKEAWAYS

• Income generally refers to the amount of money, property, and other

transfers of value received over a set period of time in exchange for
services or products.
• Taxable income is gross income minus exclusions, exemptions, and
deductions allowed under the tax law.
• Financial regulators, businesses, and investors focus on businesses’
annual financial statements, which are prepared in accordance with
generally accepted accounting principles (GAAP).

Types of Income
Three main categories of income that are part of taxation are: ordinary
income, capital gain, and tax-exempt income.

Ordinary Income
In the United States, the tax law distinguishes ordinary income from capital
investments. Ordinary income encompasses earnings, interest, regular
dividends, rental income, distributions from pensions or retirement
accounts, and Social Security benefits. Ordinary income is taxed at rates
ranging from 10% to 37% in 2023.

Capital Gains
Capital gains are the gains from selling assets that have appreciated in
value. In the United States, the capital gains tax rates on assets held for
more than one year are 0%, 15%, and 20%. Capital assets include
personal residences and investments such as real estate, stock, bonds,
and other financial instruments.

tax-Exempt Income
Interest paid on certain bonds issued by governmental entities is treated
as tax-exempt income. Interest paid on federal bonds and Treasury
securities is exempt from state and local taxation.

Interest on bonds issued by state and local governments generally is not

subject to federal taxation. Municipal private activity bonds are not subject
to the regular federal income tax, but they are subject to the federal
alternative minimum tax. Some states and local governments also exempt
interest on state and local bonds from taxation.

Q.1 Explain the following as per Indian income tax act 1961.

I. Assessee
II. Assessment year
III. Gross total income
IV. Person
V. Salary

1 Assessee:
An income tax assessee is a person who pays tax or any sum of
money under the provisions of the Income Tax Act, 1961. Moreover,
Section 2(7) of the act describes income tax assessee as everyone,
liable to pay taxes for any earned income or incurred loss in a
single assessment year. Also, they can be termed as each person
for whom:
• Any proceedings are going on under the act for the
assessment of his income
• Income of another person for which he is assessable
• Any loss sustained by him or by such other person or
 • Person entitled to any tax refund

Since an assessee is a person who pays a certain amount to the

government it is important to understand the definition of a
person.

Types of Assessee

As per the income tax act 1961, they can be classified into different
categories as follows:
• Normal Assessee
• Representative Assessee
• Deemed Assessee
• Assessee-in-default

Normal Assessee

An individual who pays tax for the total income earned during
a financial year or the loss incurred by him. Also, if any person is
liable to pay any interest or penalty to the government or entitled
to get any refund under the act is considered normal assessee.

Moreover, any person against whom proceedings under Income

Tax Act are going on, irrespective of the fact whether any tax or
other amount is payable by him or not is also a normal assessee.

Representative Assessee

A person who is responsible to pay tax for the income or loss

caused by a third party. It generally happens in case person liable
for tax payment is a non-resident, minor, or lunatic. They cannot
file tax by themselves. Therefore, It can either be an agent or
guardian who need to comply with the rules on their behalf.

Deemed Assessee

An individual who is responsible to pay the tax by the legal

authorities. It can be:
• Every person who is deemed to be an assessee under
the Act
• Every person in respect of whom any proceeding under
this Act has been taken for the assessment of the
income/loss of any other person in respect of whom he
is assessable or the amount of refund due to him or to
such other person

Moreover, this category covers a person to pay taxes on behalf of

any other person in specified circumstances.
Examples
• Legal representative of a deceased person – (a) if a
person dies intestate (without writing will) then his
elder son or other legal heirs (b) if a person dies after
writing will the executor of property
• Agent of a non-resident
• Trustee of a trust
• Guardian of a minor

Assessee-in-default

When individuals fail to meet their statutory responsibilities of

paying tax, then they become assessee in default. For example, an
employer should deduct tax from the salary of his employees
before giving the salary. Moreover, employer must pay deducted
taxes to the government as per the due date. However, If the
employer fails to deposit this tax, he is an assessee-in-default.

2 Assessment year
“Assessment Year” means the period of 12 months commencing on the 1 St.
day of April every year.

In India, the Govt. maintains its accounts for a period of 12 months i.e. from 1st
April to 31st March every year. As such it is known as financial year. The income
tax department has also selected same year for its assessment procedure.

The Assessment year is the financial year of the Govt. of India during which
income of a person relating to the relevant previous year is assessed to tax.
Every person who is liable to pay tax under this Act. files return of income by
prescribed dates. These returns are processed by the income tax department
officials and officers. This processing is called assessment. Under this income
returned by the assessee is checked and verified.

Tax is calculated and compared with the amount paid and assessment order is
issued. The year in which whole of this process is undertaken is called
assessment year.

3 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 categorized under these five
heads,

Income from Salaries

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

Gross Total income is arrived at when your earnings from all these five heads of
income is taken together. In other words, the aggregate of the incomes computed
under the above 5 heads after setting off and carrying forward of losses and after
applying clubbing provisions is known as Gross Total Income (GTI) under section
80B (5). Here is the formula for calculating G.T.I. -

G.T.I. = Salary Income + House Property Income + Business/Profession

Income + Capital Gains + Other Sources Income + Clubbed Income - Set
of Losses.

4-person
Meaning of Person: Section 2(31) Income Tax
For the purpose of charging Income-tax, the term ‘person’ has been defined under
Section 2(31) of the Income Tax Act, 1961 to include Individuals, Hindu Undivided
Families [HUFs], Association of Persons [AOPs], Body of individuals [BOIs], Firms,
LLPs, Companies, Local authority and any Artificial Juridical Person (AJP).

As per Section 2(31) of Income Tax Act, 1961, unless the context otherwise requires,
the term “person” includes:

(i) an individual,

(ii) a Hindu undivided family,

(iii) a company,

(iv) a firm,

(v) an association of persons or a body of individuals, whether incorporated or not,

(vi) a local authority, and

(vii) every artificial juridical person, not falling within any of the preceding sub-clauses.

Types of Persons in the Income Tax Act

1. Individuals:
An individual is a natural person who is a citizen of India or a resident of India. Under
the Income Tax Act, an individual is taxed on his or her income. The income tax rates
for individuals vary depending on their income level.

2. Hindu Undivided Family (HUF):

An HUF is a type of family arrangement that is recognized under Hindu law. An HUF
consists of all persons lineally descended from a common ancestor, including their
wives and unmarried daughters. Under the Income Tax Act, an HUF is taxed as a
separate entity from its members.

3. Companies:
A company is a separate legal entity that is registered under the Companies Act, 2013.
Companies are taxed on their income at a flat rate.

4. Firms:
A firm is an association of two or more individuals who come together to carry on a
business. Under the Income Tax Act, a firm is taxed as a separate entity from its
partners.

5. Association of Persons (AOP):

An AOP is a group of two or more persons who come together for a common purpose,
other than for profit. An AOP is taxed as a separate entity from its members.

6. Body of Individuals (BOI):

A BOI is a group of two or more individuals who come together for a common purpose,
other than for profit. A BOI is taxed as a separate entity from its members.

7. Artificial Juridical Person:

An artificial juridical person is a legal entity that is not a natural person. These entities
are taxed on their income at the same rates as individuals.

5-salary

Definition of Salary as per Income Tax Act 1961

Sub-section (1) of Section 17 of the Income Tax Act provides an inclusive

definition of “Salary”. It is a much broader term than it is usually
understood. In a financial year, the amount received by the employee from
his employer in any of the following forms will be considered “Salary” for
income tax purposes:

• Wages- A sum of money paid under contract by the employer to

the employees for services rendered is called wages. The
employee may generally receive it under various names such as
basic pay, salary, remuneration, etc. The payment may be for
paid leaves, actual work, or the actual amount received or due
during the relevant previous year.
• Annuity or Pension – Annuity or pension is the payment received
from the previous or present employer after attaining retirement.
It may be a pay out from the pension plans created by the
employer.

• Annuity received from a present employer is taxed as

‘Salary’.

• Annuity received from a previous employer is taxed

as ‘Profits in lieu of Salary’.

• Profits in lieu of Salary or Wages- These payments include:

• Employment termination compensation or

employment terms modification compensation.

• Payment due or received from an unrecognized

provident fund or an unrecognized superannuation
fund to the extent of contribution by the employer and
interest on the employer’s contribution.

• Payments from the keyman insurance policy and the

sum allocated as a bonus on such policy.

• Any amount received from any person before joining

or after cessation of the employment is also termed
as ‘profits in lieu of salary’.

• Gratuity- A lump-sum amount voluntarily paid by the employer to

the employee as a token of appreciation for the services
rendered to the organization is gratuity. The concept of gratuity
is statutorily recognized under The Payment of Gratuity Act,
1972.
• Fees- An amount received as fees to the employee from the
employer for the services rendered is included in the definition
of salary.

• Commission- Any amount of commissions given to the employee

for the services provided shall form part of the salary. If the
employee receives a fixed commission as a percentage of the
sales or profits, it shall be considered salary.

• Perquisites- Perquisites are additional benefits received over and

above the salary due to the employee’s official position. It may
be provided in cash or kind. For example, club fee payments,
interest-free loans, educational expenses, rent-free
accommodation or concession in accommodation rent,
insurance premium paid for employees.

• The advance Salary- Payments received in a financial year are

advance salary payments before the year they are actually due.
A loan taken by the employer is not an advance salary.

• Leave encashment- The government and some private employers

compensate employees for the accumulated leaves. They can
give the payment during the service or after retirement or
resignation. The payment received for encashment of leaves
unveiled during the service period will form part of the salary.

• Employee Provident Fund- Contributions by the employer

exceeding 12 percent of salary or the annual interest exceeding
the rate notified by the Central Government (FY 2021-22 EPF
interest rate is 8.1%) on balance to the credit of an employee’s
recognized provident fund.
 • Transfer PF balance- The taxable portion of the transferred
balance from an unrecognized provident fund to a recognized
provident fund will be considered salary.

• National Pension Scheme (NPS)- A contribution made by the Central

Government or any other employer in a financial year in an
employee’s account under National Pension Scheme (NPS) will
form part of the salary.

Q2. What do you mean by tax planning?

Understanding what is tax planning is one of the most important aspects of financial
planning. It is a practice where one analyses his financial situation based on tax
efficiency point of view so as to invest and utilize the resources optimally. Tax
planning means reduction of tax liability by the way of exemptions, deductions and
benefits.

Tax planning in India allows a taxpayer to make the best use of the various tax
exemptions, deductions and benefits to minimize his tax liability every financial year.
As responsible citizens of the country, paying Income Tax on time, on your income is
mandatory for the country to grow. However, majority amongst us still refrain from
paying income tax which in turn curbs country’s growth and put you under direct
suspicion of IT official where if found guilty, you are subject to heavy fines and
imprisonment. Thus, instead of avoiding income tax, one should readily pay tax yet
save money by investing in tax saving instruments under different sections of the IT
Act, 1962

Objectives of tax planning:

Tax planning is a pivotal part of financial planning. Through effective tax planning all
elements of the financial plan falls in place in the most efficient manner. This results
in channelization of taxable income to different investment avenues thus relieving
the individual of tax liability. The investment amount post lock-in can be utilized for
fulfilling needs and act as the retirement corpus in most cases. All in all, the
objective of tax planning is to reduce tax liability and attain economic stability.
Types of Tax Planning:

Tax planning is an integral part of every individual’s financial growth story. Since
paying taxes is mandatory for every individual falling under the purview of the IT
bracket, why not streamline your tax payments in ways that it offers substantial
returns over a period of time with minimum risk? In addition, effective planning also
reduces your tax liability drastically.

The different mindset under which tax planning can be broadly classified are:

• Purposive tax planning:

Planning taxes with a particular objective in mind

• Permissive tax planning:

Tax planning that is under the framework of law

• Long range and short-range tax planning:

Planning done at the start and end of a fiscal year respectively

Different B/W
Tax planning
Tax avoidance
Tax evasion

Differences between tax evasion, tax avoidance, and tax planning

Businesses in search of saving tax often come up with those couple of

terms. Each term has been clarified quite obviously in our above-
mentioned sections. Below are key differences between tax evasion, tax
avoidance, and tax planning to help you get a better understanding:
 Tax evasion Tax avoidance Tax planning
Purpose Not paying tax Minimizing tax Ensure tax
efficiency

Legality Illegal Legal Legal

Nature Employ illegitimate Avail loopholes in Use the law to

means law reduce tax liability

Exercise Done after the tax Done before the Done before the
liability tax liability tax liability

Impact Penalty or Penalty or Positive

imprisonment imprisonment

Q3. What do you mean by income from capital gains? Explain in detail.

Income from Capital Gains

Any profit or gain arising from transfer of capital asset held as

investments are chargeable to tax under the head capital gains.
The gain can be on account of short- and long-term gains. A
capital gain arises only when a capital asset is transferred. Which
means if the asset transferred is not a capital asset; it will not be
covered under the head capital gains. Profits or gains arising in
the previous year in which the transfer took place shall be
considered as income of the previous year and chargeable to
income tax under the head Capital Gains and the

Capital Asset: It is any property held by the income tax assessee excluding

• Any item held for a person's business or profession (stock, ready goods, raw
material) will be taxed under the head profits and gains of business or
profession
 • Agricultural land means any land from which agricultural income is derived.
Land which is not urban and is outside of 8 kilometres of a municipality,
where population is less than 10,000 qualifies to be agricultural land
• Capital assets are of two types: Short- and long-term capital asset.
• Short-term capital asset: This is an asset that is held for not more than 36
months immediately preceding the date of its transfer. This period of 36 months
is substituted to 12 months in case of certain assets like equity or preference
shares held in a company, any other security listed on a recognised stock
exchange of India, Units of specific equity mutual funds and Zero-coupon bonds.
In case of immovable property, the period of 36 months is substituted by 24
months.
• Long term capital asset: This is an asset that is held for more than 36
months, 12 months or 24 months, as the case may be. Transfer is defined as
the sale of the asset, giving up of rights on the asset, forceful takeover by law
or maturity of the asset. Many transactions are not considered as transfer, for
example, transfer of a capital asset under a will. Stocks and units of equity
diversified mutual funds qualify for long term capital gains if held for more
than a year. In case of real estate, it qualifies for long term capital.

Q4. What is meant by set off and carry forward of losses?

Set-off loss means deducting the losses against any other profits of the same
financial year. In other words, reducing the taxable Income against such losses
saves taxes. Even If losses are not set off against income or profits in the same year
in which losses were incurred, they can be carried forward to the future assessment
years (with some limitation and set off against income of subsequent years). Intra-
head set-off and Inter-head set-off are two types of set-offs.

• Intra-head set off

• Inter-head set off

Intra-Head Set Off of Losses

Intra-Head Set Off of Loss allows taxpayers to set off losses from income from one
source against income from another source under the same head of income. For
example, if a taxpayer has a business loss from one source of income, they can set it
off against the profit from another business source of income under the same head.

carry forward of losses?

After adjusting the Intra-head set-off and inter-head set-off against the income of
the same financial year, there could still be some losses remaining, or there is not
enough income or profit to adjust the losses in that particular financial year. Losses
can be carried forward to the future assessment years and set off against the
income of those years.

Rules to carry forward losses:

• Losses under Income from house property

If losses under house property are not fully adjusted in the same financial year in
which losses were incurred, they can be carried forward to the next 8 years. Such
losses can be adjusted only against income from house property and can be carried
forward even though ITR is filed after the due date {Section 139(1)}.
• Losses from Non-speculative Business
If losses under business or profession (non-speculative business) are not fully
adjusted in the same financial year in which losses were incurred, they can be
carried forward to the next 8 assessment years. Such losses can be adjusted only
against income from business or profession and can only be carried forward if the
ITR is filed on or before the due date as per {Section 139(1)}. It is not necessary
that the business from which such loss is incurred should be in continuance to carry
forward losses.
• Losses from speculative business
If losses under speculative business are not fully adjusted in the same financial year
in which losses were incurred, they can be carried forward to the next 4 assessment
years. Such losses can be adjusted only against income from the speculative
business and can only be carried forward if the ITR is filed on or before the due
date {Section 139(1)}. It is not necessary that the business from which such loss
is incurred should be in continuance to carry forward losses.
• Losses under specified Business (35AD)
If losses under specified business are not fully adjusted in the financial year in which
losses were incurred, they can be carried forward to infinite numbers of years. Such
 losses can be adjusted only against income from the specified business
under 35AD and can only be carried forward if the ITR is filed on or before the due
date {Section 139(1)}.
• Losses from capital gain

o If not fully adjusted in the financial year in which losses were incurred, capital
losses can be carried forward to the next 8 assessment years.
o Long-term capital losses can only be adjusted against income from the LTCG.
i.e., long term capital gains.
o Short-term capital losses can be adjusted against both LTCG and STCG, i.e.,
long term capital gains and Short-term capital gains.
o It can only be carried forward if the ITR is filed on or before the due
date {Section 139(1)}.
• Losses from owning and maintaining racehorses
Losses under racehorses can be carried forward for the next 4 financial years if not
fully adjusted in the previous year in which losses were incurred. Such losses can be
adjusted against income from owning and maintaining racehorses and can only be
carried forward if the ITR is filed on or before the due date {Section 139(1)}.

Q5. What is mean by agricultural income? Explain the

provision of income tax act 1961 for agricultural income.

What is Agricultural Income?

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. According to this Section,
agricultural income generally means: (a) Any rent or revenue derived from land
which is situated in India and is used for agricultural purposes. (b) Any income
derived from such land by agriculture operations including processing of
agricultural produce so as to render it fit for the market or sale of such produce. (c)
Any income attributable to a farmhouse subject to satisfaction of certain conditions
specified in this regard in section 2(1A). (d) Any income derived from saplings or
seedlings grown in a nursery shall be deemed to be agricultural income.

Examples of Agricultural Income

The following are some of the examples of agricultural income:
 • Income derived from sale of replanted trees.
• Income from sale of seeds.
• Rent received for agricultural land.
• Income from growing flowers and creepers.
• Profits received from a partner from a firm engaged in agricultural produce or
activities.
• Interest on capital that a partner from a firm, engaged in agricultural
operations, receives.

Provision of income tax act 1961 for agricultural income

Agriculture is said to be the main day job in India. It is generally the only source
of income for the large rural population in India. Moreover, the country is
entirely dependent on agriculture for its basic food requirements. The
government has numerous schemes, policies and other measures to promote
growth in this sector- one of them being an exemption to income tax. Many
committees were established for imposing partial or some type of method for
charging tax on the agricultural revenue, but none of the measures ever saw the
light of the day.

According to section 2(1A) of the Income Tax Act, agricultural income can be
defined as follows:

• Any rent or revenue obtained from land located in India and is used for
agricultural purposes.

• Any income obtained from such land by agriculture operations, including the
processing of agricultural produce to render it suitable for the market or sale
of such produce.

• Any earnings attributable to a farmhouse is subject to the satisfaction of

definite conditions stated in this regard in section 2(1A). Also, any income
obtained from saplings or seedlings grown in a nursery shall be deemed to be
agricultural income.
Agricultural income in India is exempt from tax by virtue of section 10(1).
Income from agricultural land situated outside India is taxable as income from
other sources.