TAXATION

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Introduction
 INTRODUCTION

India is a federal union of States with

distribution of powers.

As per Article 265, No tax shall be levied
or collected except by authority of law.
Distribution of legislative powers is
stipulated in Article 246 read with
Schedule VII of the Constitution of India.
Articles 245 to 255 of the Constitution of India
relate to legislative relations between the Union
and States in the form of distribution of
legislative powers between the Parliament and
the Legislature of a State.

Powers to make laws are conferred by

Articles 245, 246 and 248 of the
Constitution while subject matters of
laws to be made by Parliament and
Legislature of a State are listed in
Schedule VII to the Constitution.
 Entry No Particulars
82 Taxes on income other than agricultural income.

83 Duties of customs including export duties.

84 Duties of excise on the following goods manufactured or produced in India, namely : (a) petroleum crude; (b)
high speed diesel; (c) motor spirit (commonly known as petrol); (d) natural gas; (e) aviation turbine fuel; and
(f) tobacco and tobacco product
THERE ARE THREE LISTS IN
SCHEDULE VII IN RESPECT OF 85 Corporation tax
W H I C H U N I O N O R S T AT E O R B O T H
W I L L H AV E C O N C U R R E N T P O W E R 86 Taxes on the capital value of the assets, exclusive of agricultural land, of individuals and companies; taxes on
T O M A K E L AW S . the capital of companies.
TA X - R E L AT E D E N T R I E S I N T H E
U N I O N L I S T ( L I S T- I O F S C H E D U L E
VII) 87 Estate duty in respect of property other than agricultural land.

88 Duties in respect of succession to property other than agricultural land.

89 Terminal taxes on goods or passengers, carried by railway, sea or air; taxes on railway fares and freights.

90 Taxes other than stamp duties on transactions in stock exchanges and futures markets.

91 Rates of stamp duty in respect of bills of exchange, cheques, promissory notes, bills of lading, letters of credit,
policies of insurance, transfer of shares, debentures, proxies and receipts

TA X - R E L AT E D
ENTRIES IN THE
S TAT E L I S T ( L I S T -
II OF SCHEDULE VII)
Entry No. Particulars
46 Taxes on agricultural income
47 Duties in respect of succession to agricultural land.
48 Estate duty in respect of agricultural land
49 Taxes on lands and buildings.
50 Taxes on mineral rights subject to any limitations imposed by Parliament by law
relating to mineral development.
51 Duties of excise on the following goods manufactured or produced in the State
and countervailing duties at the same or lower rates on similar goods
manufactured or produced elsewhere in India : (a) alcoholic liquors for human
consumption; (b) opium, Indian hemp and other narcotic drugs and narcotics; but
not including medicinal and toilet preparations containing alcohol or any
substance included in subparagraph (b) of this entry.
53 Taxes on the consumption or sale of electricity
54 Taxes on the sale of petroleum crude, high speed diesel, motor spirit (commonly
known as petrol), natural gas, aviation turbine fuel and alcoholic liquor for
human consumption, but not including sale in the course of inter-State trade or
commerce or sale in the course of international trade or commerce of such goods.
56 Taxes on goods and passengers carried by road or on inland waterways.
 OTHER CONSTITUTIONAL PROVISIONS

Article Article Article Article Article Article Article

13 248 246 269 273 274 279A

Article Article Article Article Article

286 289 298 304 366
• Income tax being direct tax happens to be one of the
major source of revenue for the Central Government.
• The entire amount of income tax collected by the Central
Government is classified under the head:
• 1. Corporation Tax (Tax on the income of the
companies); and
• 2. Income tax (Tax on income of the non-corporate INTRODUCTION
assessees)
Income-tax is a tax levied on the total income of the
previous year of every person. A person includes an
individual, Hindu Undivided Family (HUF), Association of
Persons (AOP), Body of Individuals (BOI), a firm, a
company etc
THE INCOME- TAX LAW IN INDIA CONSISTS
OF THE FOLLOWING COMPONENTS

Income Tax Act

Components of Income Tax

Finance Act

Law
Income Tax Rules

Circulars/Notifications

Legal Decisions of
Courts
 OBJECTIVES OF TAXATION

Economic
Social Economic
Revenue significance
Objectives growth
of taxes

Enforcing
Economic
government
stability
policy
 TYPES OF
TAXATION
 DIRECT
V.
INDIRECT
 Equity

Elasticity and productivity

Certainty
MERITS OF
DIRECT TAX Reduce inequality

Good instrument in the case of inflation

Simplicity
 Evasion

Uneconomically

Unpopular
DEMERITS OF
DIRECT TAX Little incentive to work and save

Not suitable for a poor country

Arbitrary
 Income Tax Act Income Tax Act Income Tax Act

LEGISLATION 1886 1922

S 1860 1918 1961

Income Tax Act Income Tax Act

 PERSON [SECTION 2(31)

BASIC
CONCEPTS OF
INCOME TAX
 • any Indian company, or
• ii. any body corporate incorporated by or under the laws
of a country outside India i.e. a foreign company, or
• iii. any institution, association or body which is or was
assessable or was assessed as a company for any
assessment year under the Indian Income Tax Act, 1922
COMPANY or which is or was assessable or was assessed under this
Act as a company for any assessment year commencing
SECTION 2(17) on or before the 1st day of April, 1970, or
• iv. any institution, association or body, whether
incorporated or not and whether Indian or non Indian,
which is declared by general or special order of the
CBDT to be a company only for such assessment year
or assessment years as may be specified by the order of
CBDT.
 ASSESSEE [SECTION 2(7)]

As per Section 2(7) of Income Tax Act, assessee is A person –

by whom any tax or – any other sum of money is payable
under Income Tax Act and includes
• Person in respect of whom any proceedings under this Act
has been taken for assessment of his income
• Deemed assessee under provisions of this Act
• Any person deemed to be an assessee in default under any
provisions of this Act
 TYPES

• Normal Assessee 
• Representative Assessee
• Deemed Assessee
• Assessee-in-default 
 ASSESSMENT YEAR [SECTION 2(9)]
“Assessment year” means the period of
twelve months commencing on 1st
April every year. Therefore, the period
beginning on 1st April of one year and
ending on 31st March of the next year.
Income of previous year of an assessee
is taxed during the following
assessment year at the rates prescribed
by the relevant Finance Act.
Exception to the General Rule
• Income of Non-Resident from Shipping: [Section
172]
• Income of persons leaving India either
permanently or for long duration: [Section 174]
• Income of bodies formed for short duration:
[Section 174A]
• Income of person trying to transfer his assets
with a view to avoid tax: [Section 175]
• Income of discontinued business: [Section 176]
 PREVIOUS YEAR [SECTION 3]

Income tax is payable on the income

which is earned during the Previous
Year and it is assessed in the
immediately succeeding financial year
which is called an Assessment Year.
All assesses are required to follow a
uniform previous year i.e. The
Financial Year (1st April to 31st
March) as their Previous year.
Although assessee may maintain books
of accounts on calendar year basis (1st
January to 31st December) but his
previous year for income tax purposes
shall be the Financial year
 • What is income?
• Distinction between Taxable Income and Taxfree Income
• Heads of Income
INCOME • Sources of Income
• Gross Total Income
• Deductions
• Total Income
• Tax on Total Income
 INCOME

“Income is the consumption and savings opportunity gained by an entity within a specified timeframe,
which is generally expressed in monetary terms. However, for households and individuals, “income is the
sum of all the wages, salaries, profits, interests payments, rents, and other forms of earnings received in a
given period of time.” In general terms, Income is a periodical monetary return with some sort of regularity.

However, the Income Tax Act, even certain income which does not arise regularly are treated as income for
tax purposes e.g. Winnings from lotteries, crossword puzzles
 • Profits and gains
• Dividend
• Voluntary Contributions received by a trust. Voluntary contributions received by a
trust are included in the definition of income. As such contributions received by
following types of trusts, funds, associations, bodies etc. are included in the income
of such bodies.
• Contributions received by a trust created wholly or partly for charitable or
religious purposes.
• Contributions received by a scientific research association.
• Contributions received by a fund or institution set up for charitable purposes
and notified u/s 10(23c)(iv)(v).

INCOME • Contribution received by any university or other educational institution,

hospital referred in section 10(23c).

INCLUDES : • The value of any perquisite or profit in lieu of salary taxable under section 17(2)(3)
• Any special allowance or benefit, other than perquisite included under sub-clause
(iii), specifically granted to the assessee to meet expenses wholly, necessarily and
exclusively for the performance of the duties of an office or employment of profit
• Any allowance granted to the assessee either to meet his personal expenses at the
place where the duties of his office or employment of profit are ordinarily
performed by him or at a place where he ordinarily resides or to compensate him
for the increased cost of living
• Value of any benefit or amenity, whether convertible into money or not, obtained
by a representative assessee or by any person on whose behalf such benefit is
received by representative assessee and sum paid by representative assessee in
respect of any obligation which hut for such payment would have been payable by
the person on whose behalf representative assessee has made such payments
• The profits and gains of any business of banking (including providing credit
facilities) carried on by a co-operative society with its members;
 • The value of any benefits or perquisites, whether convertible into money or not, obtained from a
company either by a director or by a person, who has a substantial interest in the company, or by
a relative of a director of such person, and any sum paid by such company in respect of any
obligation but for which, such payment would have been payable by the director or other person
aforesaid

• Any sum chargeable to income-tax under section 28(u) and (iii) or section 41 or section 59;

• Any sum chargeable to tax u/s 28 (iiia)

• Any sum chargeable to tax u/s 28(iiib)

• Any sum chargeable to tax u/s 28 (iiic) , -

• The value of any benefit or perquisite taxable under section 28 (iv)

CONTD.. • Any capital gain taxable under section 45

• Any sum whether received or receivable in cash or in kind under an agreement for—not carrying
out any activity in relation to any business ; or not sharing any know-how, patent, copyright,
trade-mark, license, franchise or any other business or commercial right of similar nature or
information or technique likely to assist in the manufacture or processing of goods or provision of
services

• The profit and gains of any business of insurance carried on by a mutual insurance company or
by a co-operative society, computed in accordance with section 44 or any surplus taken to be such
profits and gains by virtue of provisions contained in the first schedule

• Any winnings from lotteries, crossword puzzles, races including horse races, card games and
other games of any sort or from gambling or betting of any form or nature whatsoever

• Any sum received by the assessee as his employers’ contributions to any provident fund or
superannuation fund or any fund set up under the provisions of the Employee’s State Insurance
Act, 1948 or any other fund for the welfare of’ such employees
 • Any sum received under a key man insurance policy including the sum allocated by way
of bonus on such policy
• Any sum received by an individual or HUF from any person during 2013-14
• in cash or by issue of cheque ordraft or by any other mode or by way of credit
• otherwise than by way of consideration for goods or services but does not include
• An aggregate amount of gift or gifts received (whether in cash or in the form of
property) exceeding Rs. 50,000 in a previous year by an individual or Hindu undivided
family from non-relatives shall be treated as income which will be taxable in the hands
of the recepient. (For details, please refer to chapter on Other Sources)
• Gifts received by a firm or closely held company as provided in Section 56(2)(viia).
• Any consideration for issue of shares by a closely held company as exceeds the fair

CONTD.. market value of shares as provided in Section 56(2)(viib) [w.e.f. Assessment year 2013-
14].
• The definition of term ‘Income’ as given above does not explain what income is ? It
only tells that the above mentioned receipts are also included in the meaning of term
income. The definition given u/s 2(24) is inclusive and not exhaustive. According to
English dictionary, the term income means “periodical receipts from one ‘s
business, land, work, investments etc.”
• The term income simply means something which comes in. It is a periodical return
with regularity or expected regularity. It’s nowhere mentioned that income refers to
only monetary return. It includes value of benefits and perquisites. Any thing which
can reasonably and properly be described as income is taxable under this Act unless
specifically exempted under the various provisions of this Act.
• The term income includes not only what is received by using the property but also
the amount saved by using it himself. Any thing which is convertible into income
can be regarded as source of accrual of income.
 Under Income Tax Act all incomes are categorized under 5 Heads of Income. There is
a charging section under each head of income which defines the scope of income
chargeable under that head. These heads of income cover all possible avenues for a
person to earn any income.
Income earned is classified under the following heads:
HEADS OF a. Income under the head Salary : Earned by employee from his employer
INCOME b. Income under the head House Property : Rental income earned by a landlord
from house property
[SECTION 14] c. Income under the head Profits and Gains from Business and
Profession(PGBP) : Business income
d. Income under the head Capital Gains: Income by sale/transfer of Capital
Asset
e. Income under the head Other Sources: Residual head of income.
 • Section 6 of the Income tax Act prescribes the tests
RESIDENTIAL to be applied to determine the residential status of all
tax payers for purposes of income-tax. An assessee’s
STATUS [SECTION residential status must be determined with reference
6] to the previous year in respect of which the income is
sought to be taxed.
 BASIC CONDITION FOR A PERSON TO
BE RESIDENT

• Under Section 6(1) of the Income-tax Act, an individual is said to be resident in India in
any previous year if he:
• (a) is in India in the previous year for a period or periods amounting in all to one hundred
and eighty-two days or more i.e., he has been in India for at least 182 days during the
previous year; or,
• (b) has been in India for at least three hundred and sixty-five days (365 days) during the
four years preceding the previous year and has been in India for at least sixty days (60
days) during the previous year
 In the case of following individual – (a) being a
citizen of India, who leaves India in any
previous year as a member of the crew of an
Indian ship as defined in clause (18) of section
3 of the Merchant Shipping Act, 1958 (44 of
1958), or for the purposes of employment
EXCEPTION TO outside India,
THE BASIC
In the case of following individual – (a) being a
CONDITION citizen of India, who leaves India in any
previous year as a member of the crew of an
Indian ship as defined in clause (18) of section
3 of the Merchant Shipping Act, 1958 (44 of
1958), or for the purposes of employment
outside India,
Non-Resident
• If an individual does not satisfy any of the above basic condition then, he will be treated as Non-Resident. It must be noted
that the fulfilment of any one of the above conditions (a) or (b) as applicable will make an individual resident in India for tax
purposes. Further it is to be noted that these conditions are alternative and not cumulative in their application.
Resident and Ordinarily Resident (ROR)
An individual may become a resident and ordinarily resident in India if he satisfy both the following conditions given u/s
6(1)besides satisfying any one of the above mentioned conditions:
(i) he is a resident in atleast any two out of the ten previous years immediately preceding the relevant previous year, and
(ii) he has been in India for 730 days or more during the seven previous years immediately preceding the relevant previous year.
Resident but Not Ordinarily Resident (RNOR)
• An individual is not ordinarily resident in any previous
year if –
• he has been a non-resident in India in nine out of the
ten previous years preceding that year, or
• (b) he has during the seven previous years preceding
that year been in India for a period of, or periods
amounting in all to, seven hundred and twenty-nine
days (729 days) or less
 • A Hindu Undivided Family (HUF) is said to be resident
in India if the control and management of its affairs are
wholly or partly situated in India.
• A resident HUF is treated as Resident and ordinarily
resident in India if the Karta (inclusive successive karta)
RE SIDE NT IAL satisfies satisfies both of the following conditions-
STAT US OF HUF • (i) he has been resident in India in at least 2 out of 10
years immediately preceding the relevant year
• (ii) he has been in India for a period of 730 days or
more during 7 years immediately preceding the relevant
year.
If HUF’s control and management is situated wholly
outside India then it is treated as non resident.
A partnership firm or association of persons is said to be
resident in India if then control and management of its R E S ID E N T IA L S TAT U S
affairs wholly or partly situated within India during the O F A F I RM O R
relevant previous year. It is however treated as non resident A S S O C IAT IO N O F
in India if the control and management of its affairs are PERSONS (AOP)
situated wholly outside India.
 An Indian company is always resident in India.

A foreign company will be resident in India if its place

RE SIDE NT IAL of effective management (POEM) during the relevant
STAT US OF COMPANY previous year is in India. For this purpose, the place of
effective management means a place where key
management and commercial decisions that are
necessary for the conduct of the business of an entity as
a whole are in substance made. 
 TOTAL INCOME
Section -5 of Income Tax Act, 1961
provides Scope of total Income in case
of of person who is a resident, in the
case of a person not ordinarily resident
in India and person who is a non-
resident which includes.
Income can be Income from any source
which
• (a) is received or is deemed to be received in
India in such year by or on behalf of such
person ; or
• (b) accrues or arises or is deemed to accrue or
arise to him in India during such year ; or
• (c) accrues or arises to him outside India
during such year 
 2. Deemed 3. The income 4. Previous year
1. Residential
income is not accrued is when means the
status is as per
actually accrued the assessee financial year
Note- section 6 of
but is supposed obtains the immediately
Income Tax Act,
to be accrued rights to receive preceding the
1961.
notionally. it. assessment year.
No Sources of Resident Non
Income Resident
1 Indian Income T T
2 Foreign Income T NT

FOR OTHERS (COMPANY, FIRM, AOP,

BOI, ETC)
INCOME DEEMED TO BE RECEIVED
IN INDIA – SECTION 7

Contribution in excess of
Income deemed to be 12% of salary to recognized
received in India shall PF by the employer or
include the following interest credited in excess
income : – of 9.5% p.a. in a recognized
Provident Fund.

Employer contribution and

Contribution by Central interest amount which is
Government or other transferred from
employer under pension unrecognized Provident
scheme of Section 80CCD Fund to recognized
Provident Fund
• New Deemed Resident Provision for Taxability from Financial Year 2020-
21
• A new Section 6(1A) has been inserted by Financial Act 2020 which is
applicable beginning from financial year 2020-21 (01st April 2020 to 31st March
2021).
the new section does not impact taxability of salary receipt by sea fearers and
they will enjoy the benefit of tax-free salary as they have currently even they
become resident but not ordinarily resident as per new Section 6(1A).
 “BUSINESS CONNECTION”

• business connection includes :

• (i) the maintenance of a branch office, factory, agency, receivership, management or other establishment for the
purchase or sale of goods or for transacting any other business;
• (ii) the erection of a factory where the raw products purchased locally are processed or converted into some form
suitable for export outside India;
• (iii) appointing an agent or agents in India for the systematic and regular purchase of raw materials or other
commodities or for the sale of the non-residents goods, or for any other purpose;
• (iv) the formation of a close financial association between a resident and a non-resident company which may or may
not be related to one another as a holding and subsidiary company;
• (v) the formation of a subsidiary company to sell or otherwise deal with the products of the non-resident parent
company;
• (vi) the grant of a continuing licence to a non-resident for the purpose of exploitation for profit of an asset belonging
to the non-resident
 SECTION-8: DIVIDEND INCOME

For the purposes of inclusion in the total income of an assessee,—

• (a) any dividend declared by a company or distributed or paid by it within the
meaning of sub-clause (a) or sub-clause (b) or sub-clause (c) or sub-clause (d)
or sub-clause (e) of clause (22) of section 2 shall be deemed to be the income
of the previous year in which it is so declared, distributed or paid, as the case
may be ;
• (b) any interim dividend shall be deemed to be the income of the previous year
in which the amount of such dividend is unconditionally made available by the
company to the member who is entitled to it
 S E C TI O N 9 : I N C O M E D EE M ED TO A C CR U E O R A RI S E
IN INDIA

• 1) The following incomes shall be deemed to accrue or arise in India :—

• (i) all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or
from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset
situate in India.
• (ii) income which falls under the head ―Salaries‖, if it is earned in India
• (iii) income chargeable under the head ―Salaries‖ payable by the Government to a citizen of India for service outside India;
• (iv) a dividend paid by an Indian company outside India;
• (v) income by way of interest payable by—
a) the Government; or
b) a person who is a resident, except where the interest is payable in respect of any debt incurred, or moneys borrowed and used,
for the purposes of a business or profession carried on by such person outside India or for the purposes of making or earning any
income from any source outside India; or
c) a person who is a non-resident, where the interest is payable in respect of any debt incurred, or moneys borrowed and used, for
the purposes of a business or profession carried on by such person in India
 CONTD….

• (vi) income by way of royalty payable by— (a) the Government; or (b) a person who is a
resident, except where the royalty is payable in respect of any right, property or information
used or services utilised for the purposes of a business or profession carried on by such person
outside India or for the purposes of making or earning any income from any source outside
India; or (c) a person who is a non-resident, where the royalty is payable in respect of any
right, property or information used or services utilised for the purposes of a business or
profession carried on by such person in India or for the purposes of making or earning any
income from any source in India
• (vii) income by way of fees for technical services payable by— (a) the Government; or (b) a
person who is a resident, except where the fees are payable in respect of services utilised in a
business or profession carried on by such person outside India or for the purposes of making
or earning any income from any source outside India; or (c) a person who is a non-resident,
where the fees are payable in respect of services utilised in a business or profession carried on
by such person in India or for the purposes of making or earning any income from any source
in India:
• Explanation 1 to section 9(1)(i) provides for following exemptions:-
• through the transfer of a capital asset situate in India
• Business where all operations aren’t carried out in India, only that income reasonably  attributable to
Indian operations would deem to accrue or arise in India.
• No income shall be taxable in India if, operations of NR  is confined to purchase of goods in India
for the purpose of export. NR runs a news agency/ publishes newspapers/magazines/journals,
activities confined to collection of news & views in India for transmission out of India.
• operations are limited to shooting of film in India provided that NR is either,
• An individual who is not a citizen of India o A firm which doesn’t have any partner who is Indian
citizen or resident in India, or
• A company which doesn’t have any shareholder who is a citizen or resident of India
• Explanation 3: In case of a business connection, only that income which is attributable to activities
in India shall be deemed to accrue or arise in India.  If no operations are carried out in India, no
income  can  be deemed  to accrue  or  arise in India even  though  there  may  be  a "business
connection" in India.
• Explanation 4: It is clarified that the expression "through" shall mean and include and shall be
deemed to have always meant and included "by means of", "in consequence of" or "by reason of".
• Explanation 5: It is clarified that an asset or a capital asset being any share or interest in a company
or entity registered or incorporated outside India shall be deemed to be and shall always be deemed
to have been situated in India, if the share or interest derives, directly or indirectly, its value
substantially from the assets located in India;
• Property in India: does not refer merely to buildings or lands. It includes any tangible property
movable or immovable
SECTION 10 OF THE INCOME TAX ACT

As per the Act every Indian citizen who earns above a certain

threshold of income is liable to pay taxes. Hence, with the
drawdown of each financial year, taxpayers seek out ways to
minimize their tax liabilities. 

To ease the burden off the taxpayer, while encouraging them to

save, invest and pay taxes, the law has listed certain incomes as
exempted.
Section and Sub-section Category Exemption

10(1) Self-employed agricultural income No tax

10(2) Income of a member of Hindu –undivided Family No tax

10(10C) Voluntary retirement compensation Exempt up to Rs. 5 lakh

10(10D) Life insurance benefit including bonus No tax

10(11)(12) Amount withdrawn from provident fund No tax

Government compensation for damage due to

10(10BC) No tax
disaster

Least of the below is exempted: Actual HRA40% of

10 (13A) House Rent Allowance (HRA) salary or 50% of salary if living in metro cities Rent paid
excluding 10% of salary

10(15) Earnings of tax-free securities No tax

 OTHER EXEMPTIONS UNDER SECTION 10

Salaried employees are given several

benefits apart from their regular incomes.
Most of these benefits are considered a Special allowance under section
Daily allowance
part of the total income, where some of 10(14)
them are allowed exemption under
Section 10.

Travel allowance Helper Allowance Uniform Allowance

Conveyance Allowance Research or Academic Allowance

 E X E M P T E D A L L O WA N C E S U N D E R S U B - S E C T I O N ( 1 4 )
( II ) O F S E C T I O N 1 0 O F T H E I N C O ME TA X A C T

Climatic allowance: This includes Up to ₹800 for hills of Himachal

Deductions Up to ₹7,000/month for Deductions Up to ₹300 for other
compensation for working in high Pradesh, Uttar Pradesh, Jammu &
Siachen. high-altitude places.
altitude or hilly areas. Kashmir and the North East.

Compensatory field allowance: A

Tribal area allowance: Grant of grant of ₹2,600/month is permissible
Border area allowance: Under Rule Children education fund: This
₹200 for those working in pre- under Section 10 (14)(ii), provided it
2BB of Section 10 (14)(ii), Armed Section 10 (14)(ii) exemption is
classified Tribal, Schedule or Agency is given to an individual for
Forces personnel serving in the given to an allowance of ₹100/child
areas such as Karnataka, West delivering duties in unusual fields
border area, remote places or in any maximum up to 2 children. A hostel
Bengal, Madhya Pradesh, Assam, such as Nagaland, Jammu &
disturbed areas are given allowance allowance can also be claimed for
Orissa, Tamil Nadu, Bihar, Uttar Kashmir, Himachal Pradesh, Uttar
ranging from ₹200 to ₹1,300/month. ₹300/month/child up to 2 children.
Pradesh, and Tripura. Pradesh, Sikkim, Andhra Pradesh
and Manipur.
 CONTD…

• Counterinsurgency allowance: This grant of ₹3,900/month in Section 10 (14)(ii) is directed to those employed in Armed
Forces for counterinsurgency.
• Island duty allowance: An exemption under Section 10 (14)(ii) of ₹3,250/month is for members of the Armed Forces serving
in the Andaman and Nicobar Islands or Lakshadweep Group of Islands.
• Other allowances under sub-section (14)(ii) of Section 10 of the Income Tax Act include:
• ₹800/month for underground mine workers.
• ₹4,200/month for employees in highly active areas.
• ₹1,000/month for workers in specified modified field areas.
• ₹1,600/month as transport allowance to physically disabled employees.
• ₹1,600/month as transport allowance for employees to commute between homes to the office.
Where tax incidence arises in case of Resident & Ordinarily Resident but not NonResident
Resident Ordinarily

Income received in India (Whether accrued in or YES YES YES

outside India)

Income deemed to be received in India (Whether YES YES YES

accrued in or outside India)

Income accruing or arising in India (Whether YES YES YES

received in India or outside India)

Income deemed to accrue or arise in India (Whether YES YES YES

received in India or outside India)

Income received and accrued outside India from a YES YES NO

business controlled or a profession set up in India

Income received and accrued outside India from a YES NO NO

business controlled from outside India or a profession
set up outside India

Income earned and received outside India but later on NO NO NO

remitted to India (whether tax incidence arises at the
time of remittance?)
Past untaxed profits (not taxable as relates to past years) NO NO NO

Agricultural Income in India [Exempt under Section 10(1)] NO NO NO

Long term capital gain [on STT paid shares or on shares sold through NO NO NO
stock exchange] Exempt u/s 10(38) arising before 1st April, 2018

Long term capital gain u/s 10(38) on or after 1st April, 2018 YES YES YES

Dividend from a Domestic Company [Exempt u/s 10(34)] or Income NO NO NO

from Mutual funds specified u/s 10(23D) [Exempt u/s 10(35)]

Gifts from relatives or on marriage or under will etc. (or gifts from NO NO NO
others upto Rs. 50,000 in a year)
• In computing the total income of a previous year of any person, any income falling within any of the following clauses shall
not be included—
• (1)  agricultural income ;
• (2)  subject to the provisions of sub-section (2) of section 64, any sum received by an individual as a member of a Hindu
undivided family, where such sum has been paid out of the income of the family, or, in the case of any impartible estate, where
such sum has been paid out of the income of the estate belonging to the family ;
• (2A) in the case of a person being a partner of a firm which is separately assessed as such, his share in the total income of the
firm.
• (6)  in the case of an individual who is not a citizen of India,—(ii) the remuneration received by him as an official, by whatever
name called, of an embassy, high commission, legation, commission, consulate or the trade representation of a foreign State, or
as a member of the staff of any of these officials, for service in such capacity
• (vi) the remuneration received by him as an employee of a foreign enterprise for services rendered by him during his stay in
India, provided the following conditions are fulfilled—
• (a)  the foreign enterprise is not engaged in any trade or business in India ;
• (b)  his stay in India does not exceed in the aggregate a period of ninety days in such previous year ; and
• (c)  such remuneration is not liable to be deducted from the income of the employer chargeable under this Act
• (viii) any income chargeable under the head "Salaries" received by or due to any such individual being a
non-resident as remuneration for services rendered in connection with his employment on a foreign ship
where his total stay in India does not exceed in the aggregate a period of ninety days in the previous year
• (xi) the remuneration received by him as an employee of the Government of a foreign State during his
stay in India in connection with his training in any establishment or office of, or in any undertaking
owned by,—
•  (i)  the Government ; or
• (ii)  any company in which the entire paid-up share capital is held by the Central Government, or any
State Government or Governments, or partly by the Central Government and partly by one or more State
Governments ; or
• (iii) any company which is a subsidiary of a company referred to in item (ii) ; or
• (iv) any corporation established by or under a Central, State or Provincial Act ; or
• (v)  any society registered under the Societies Registration Act, 1860 (14 of 1860), or under any other
corresponding law for the time being in force and wholly financed by the Central Government, or any
State Government or State Governments, or partly by the Central Government and partly by one or more
State Governments
• Sec 10($)(II) Interest on money standing to the credit of individual in his NRE account
• Payment to Bhopal Gas Victims – sec 10 (10 BB)
• Compensation received on account of disaster – sec 10
(10BC)
• Payment from Sukanya Samriddhi Account (sec 10
(11A))
• Education scholarship – Sec 10 (16)
• Payment to MPs and MLAs – Sec 10 (17)
• Award for literary, scientific and artistic work and other
awards by the Government – Sec 10 (17A)
• Pension received by recipient of gallantry awards – SEC
10 (18)
• Income of member of Schedule Tribe – Sec 10 (26)
• Specific income of a Sikkimese individual – Sec 10
(26AAA)
• Tea boards subsidy – Sec 10 (30)
• Other subsidies (sec 10(31)
 INCOME UNDER VARIOUS HEADS

1. INCOME FROM 2. INCOME FROM HOUSE 3. INCOME FROM 4. INCOME FROM

SALARY PROPERTY BUSINESS OR CAPITAL GAINS
PROFESSION 5. INCOME FROM OTHER
SOURCES
 SECTION - 15

INCOME FROM DEDUCTIONS ALLOWABLE

SALARY – 16

OTHER PROVISION - 17
 • Section 15 deals with the basis of charge. Salary is
chargeable to tax either on ‘due’ basis or on ‘receipt’
basis, whichever is earlier.
BASIS OF • However, where any salary, paid in advance, is
CHARGE assessed in the year of payment, it cannot be
subsequently brought to tax in the year in which it
(SECTION 15) becomes due.
• If the salary paid in arrears has already been assessed
on due basis, the same cannot be taxed again when it
is paid.
(1) Advance salary

Advance salary is taxable when it is received by the employee irrespective of the fact whether it is due or not. It may so happen that when
advance salary is included and charged in a particular previous year, the rate of tax at which the employee is assessed may be higher than
the normal rate of tax to which he would have been assessed.

(2) Arrears of salary

Normally speaking, salary arrears must be charged on due basis.

• Meaning
• The meaning of the term ‘salary’ for purposes of income
tax is much wider than what is normally understood. The
term ‘salary’ for the purposes of Income-tax Act, 1961
will include both monetary payments (e.g. basic salary, SAL ARY, PERQUISIT E
bonus, commission, allowances etc.) as well as non- AND PROFIT S IN
monetary facilities (e.g. housing accommodation, LIE U OF SAL ARY
medical facility, interest free loans etc.). (SE CT ION 17)
• Section 17(1) defined the term “Salary”. It is an inclusive
definition and includes monetary as well as non-
monetary items.
• wages,
• any annuity or pension,
• any gratuity,
• any fees, commission, perquisite or profits in lieu of or in addition to any
salary or wages,
• any advance of salary, S A L A RY ’ U N D E R
• any payment received in respect of any period of leave not availed by S E C T IO N 1 7 ( 1 ) ,
him i.e. leave salary or leave encashment, IN C L U D E S T H E
• Provident Fund: - the portion of the annual accretion in any previous year F O L L O W IN G :
to the balance at the credit of an employee participating in a recognized
provident fund to the extent it is taxable and - transferred balance in
recognized provident fund to the extent it is taxable,
• The contribution made by the Central Government or any other employer
in the previous year to the account of an employee under a pension
scheme referred to in section 80CCD
Fully Taxable
(i) Entertainment Allowance
(ii) Dearness Allowance
(iii) Overtime Allowance
(iv) Fixed Medical Allowance
(v) City Compensatory Allowance (to meet
increased cost of living in cities)
(vi) Interim Allowance
(vii) Servant Allowance
(viii) Project Allowance
(ix) Tiffin/Lunch/Dinner Allowance
(x) Any other cash allowance
(xi) Warden Allowance
(xii) Non-practicing Allowance
Partly Taxable
(i) House Rent Allowance [u/s
10(13A)]
(ii) Special Allowances [u/s 10(14)]
Fully Exempt
(i) Allowance granted to Government
employees outside India.
(ii) Allowance granted to High Court Judges
(iii) Sumptuary allowance granted to High
Court or Supreme Court Judges
(iv) Allowance paid by the United Nations
Organization
(v) Compensatory Allowance received by a
judge

ALLOWANCES

U N D E R S TA N D I N G T H E
A L L O WA N C E S
• House rent allowance (HRA)
• HRA is a special allowance specifically granted to an
employee by his employer towards payment of rent for
residence of the employee. HRA granted to an employee is
exempt to the extent of least of the following:
• The deduction available is the least of the following
amounts:
• Actual HRA received;
• 50% of [basic salary + DA] for those living in metro cities
(40% for non-metros); or
• Actual rent paid less 10% of basic salary + DA
Click to add text
• Children education allowance
• -Rs. 100 per month per child upto a maximum of two children.
• Any allowance granted to an employee to meet the hostel expenditure on his child
• -Rs. 300 per month per child upto a maximum of two children.
• Transport allowance
• Any transport allowance granted to an employee to meet his expenditure for the purpose of commuting between the place of
his residence and the place of his duty shall be exempted to the extent of 1,600 per month. For person who is blind or deaf
and dumb or orthopedically handicapped with disability of the lower extremities of the body, to meet his expenditure for
commuting between his residence and place of duty shall be exempted to the extent of 3,200 per month.
• City compensatory allowance
• City Compensatory Allowance is normally intended to compensate the employees for the higher cost of living in cities. It is
taxable irrespective of the fact whether it is given as compensation for performing his duties in a particular place or under
special circumstances.
• Entertainment allowance
• This allowance is given to employees to meet the expenses towards hospitality in receiving customers etc. The Act gives a
deduction towards entertainment allowance only to a Government employee.
 PENSION

• Pension is of two types: commuted and uncommuted.

• Exemption in respect of Commuted Pension
• (a) Employees of the Central Government/local authorities/Statutory
Corporation/ members of the Defence Services: Any commuted pension
received is fully exempt from tax.
• (b) Non-Government Employee: Any commuted pension received is exempt
from tax in the following manner:
 GRATUITY

• If the employee is in receipt of gratuity,

• Exemption = 1/3rd of the amount of pension which he would have received
had he commuted the whole of the pension.
• If the employee does not receive any gratuity
• Exemption = ½ of the amount of pension which he would have received had he
commuted the whole of the pension.
E X EM P TI O N I N
RE S PE CT O F
G R AT U I T Y
EXEMPTION IN
RESPECT OF
L E AV E
ENCASHMENT
 PROVIDENT FUND

• Provident fund scheme is a scheme intended to give substantial benefits to an employee at the
time of his retirement. Under this scheme, a specified sum is deducted from the salary of the
employee as his contribution towards the fund. The employer also generally contributes the
same amount out of his pocket, to the fund. The contribution of the employer and the
employee are invested in approved securities. Interest earned thereon is also credited to the
account of the employee. Thus, the credit balance in a provident fund account of an employee
consists of the following:
• (i) Employee’s contribution
• (ii) Interest on employee’s contribution
• (iii) Employer’s contribution
• (iv) Interest on employer’s contribution
Voluntary Retirement
13. 10(10C) Amount received on Voluntary Retirement Least of the following is exempt from tax:
or Voluntary Separation (Subject to certain 1) Actual amount received as per the guidelines
conditions) i.e. least of the following
a) 3 months salary for each completed year of
services
b) Salary at the time of retirement X No. of
months of services left for retirement; or
2) Rs. 5,00,000