INTRODUCTION

Income tax is levied and collected by the Central Government on income of a person. Income
tax is calculated on total income of a person and paid directly to the Central Government.
Income tax is levied at specified rated according to the residential and income status of a person
which is regulated by the Income Tax Act, 1961. The scope of total income depends upon the
residential status of the assesse: resident, not ordinarily resident or non-resident. There are
various heads of income such as salary, income from house property, profits or gains of
business, capital gains and other sources. Income tax holds its importance as it is the money
which tends to support the running of our government. It is one of the major sources of revenue
for the government and thus is inevitable to not to impose it on the income earned or utilized
in the country. It helps meet the funds required to develop the country and other defense related
needs of a nation. For Income Tax Act 1961, previous year is defined as the financial year
which immediately precedes the assessment year. Different tax rates are there for different level
of income in the society and certain exemptions also prevail in payment of income tax.

CONCEPT OF RESIDENTIAL STATUS

Residential status plays an important role when it comes to determining of taxability of an
individual. Taxability depends upon residential status in India for any particular financial
year. The term residential status has a separate meaning than that of citizenship under the
Income tax Act. An individual may be a citizen of India but may end up being a non-resident
for a particular year in India. Similarly, a foreign citizen may end up being a resident of India
for a particular year for taxation purposes.

The income tax laws in India classify taxable person into three categories:

1. A resident
2. A resident not ordinarily resident
3. A non-resident

RESIDENT

A taxpayer would qualify as a resident of India if he satisfies one of the following 2 conditions1:

1. Stay in India for a year is 182 days or more or

1
Section 6(1) of Income Tax Act, 1961.

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 2. Stay in India for the immediately 4 preceding years is 365 days or more and 60 days
or more in the relevant financial year

In the event an individual leaves India for employment during a Financial Year, he will qualify
as a resident of India only if he stays in India for 182 days or more. This otherwise means,
condition (b) above of 60 days would not apply to him

RESIDENT NOT ORDINARILY RESIDENT

If an individual qualifies as a resident, the next step is to determine if he/she is a Resident

ordinarily resident (ROR) or an RNOR. He will be a ROR if he meets both of the following
conditions2:

1. Has been a resident of India in at least 2 out of 10 years immediately previous years
2. Has stayed in India for at least 730 days in 7 immediately preceding years

Therefore, if any individual fails to satisfy even one of the above conditions, he would be a
Resident but not ordinarily resident.

NON-RESIDENT

An individual satisfying neither of the conditions stated in for resident but not ordinarily
resident above would be a non-resident for the year.

Every year the finance act prescribes the tax rates for payment of income tax. All the tax
threshold for individual are modified year on year, tax rates for business more or less remain
constant individuals an individual is said to be resident in India in any previous year if he:

1. is in India in that year for a period for periods amounting to 182 days or more
2. is in India for 60 or more days in the relevant year and 365 or more days in preceding
four financial years.

There are liberalized provisions which apply for certain categories as below:

1. A person who is an Indian citizen and who leaves India during the previous year for the
purpose of employment law.
2. Indian citizen who leaves India as a member of the crew of an Indian ship or

2
Section 6(6) of Income Tax Act, 1961.

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 3. An Indian citizen or a person of Indian origin who comes to India on a visit during the
previous year;
4. A person who has spent 365 days or more in India in the preceding four years will not
lose his non-resident status unless his stay in India is 182 days or more during the
financial year.

A person of Indian origin is one if he, or either of his parents or any of his grandparents was
born in in undivided India. Thus, the residential status of an individual generally depends on
his physical presence for period of stay in India and not all his nationality or domicile.

DIFFERENT TAXABLE ENTITIES

According to Section 5, taxability of a person depends upon its residential status. Therefore it
is important to ascertain the residential status of a person to find out which income will be
taxable in India under this Act. Section 6 guide us how to determine the residential status of a
person.

A Hindu undivided family or a firm or all association of persons is said to be president in India
in every case except where the control and management of its affairs is situated wholly outside
India during the financial year. Thus, where the control and management of its affairs is situated
even partly in India a firm or HUF becomes a resident in India. A HUF is said to be not
ordinarily resident in India if its manager is not ordinarily resident in India. For the purpose of
calculating the length of the manager’s stay in India, the period of stay in India of the successive
managers of a HUF during its continued existence have to be added up. The residential status
of the members of HUF is generally irrelevant for determining the residential status of the
HUF.3

An Indian company is a resident of India. Foreign company is said to be resident in India if its
place of effective management in that year is in India during the financial year. 4 Place of
effective management means a place where key management and commercial decisions that
are necessary for the conduct of business of entity as a whole are, in substance made.

3
Section 6(2) of Indian Income Tax Act, 1961.
4
Section 6(3) of Indian Income Tax Act, 1961.

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 TAXABILITY OF INCOME BASED ON RESIDENTIAL STATUS

Scope of Income Liable To Tax (Section 5)

Persons who are resident and ordinarily resident are chargeable to tax on all income:
a) Received or deemed to be received in India in the previous year by the individual or on
his/her behalf.
b) Accrued or raised or deemed to be accrued during the period of such year in India.
c) Received or accrued or raised or deemed to be received/accrued outside of India.
The liability of the persons who are resident but not ordinarily resident is the same as in the
case of persons who are resident and ordinarily resident except that the income which accrues
or arises outside India is not included in their total income unless it is derived from a business
controlled in or a profession set up in India. Non-residents are liable in respect of income
received or deemed to be received in India or which accrues or arises or is deemed to accrue or
arise in India. They are not at all liable in respect of income accruing or arising outside India
even if it is remitted to India.

Residential status of an individual is considered based on section 6 of Income Tax Act, 1961.
Deemed income here is the net of income charged not actually accrued but is supposed to be
accrued notionally. The income accrued is when the assessee obtains the rights to receive it.
Income taxable is charged based on only one income. If income is taxed on accrual basis, then
same income cannot be taxed on receipt basis. Previous year means the financial year
immediately preceding the assessment year. Residence during the previous year is taken into
account but the residence during the assessment year is not take into account.5

Income received or deemed to be received in India

Location of receipt determines the liability of the assesse to pay tax. If the receipt is located in
India it will be taxed and the question of the place of its accrual will be immaterial. 6 However
this provision is subject to the provisions of this act and therefore, the receipt located in India
will not be taxed if it is found to have been exempted from income tax under the provision of
any other section of this act.

The following incomes shall be deemed to be received in the previous year7:

5
Wallace Bros. & Co. Ltd Vs. CIT (1948); CIT Vs. AM Durai, Pillai, (1965).
6
CIT Vs. Smt. Sankari Manikyamma, (1976) 105 ITR 172 (AP).
7
Section 7 of Indian Income Tax Act, 1961.

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 i. The annual accretion in the previous year to the balance at the credit of an employee
participating in a recognised provident fund, to the extent provided in Rule 6 of Part
A of the fourth schedule.
ii. The transferred balance in a recognised provident fund, to the extent provided in
sub rule (4) of rule 11 of Part A of the fourth schedule.
iii. The contribution made, by the central government or any other employer in the
previous year, to the account of an employee under the pension scheme referred in
section 80CCD.

Section 8 provides that any dividend declared by a company or distributed or paid by it shall
deemed to be the income of the previous year in which it is so declared, distributed or paid as
the case may be. However, it is to be noted that a declaration of dividend which is conditional
does not amount to a ‘declaration’ and therefore not taxable until the condition is fulfilled.8

Section 9 thereafter specifies certain types of income that are deemed to accrue or arise in India
in certain circumstances.

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 situated 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 the
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

8
Jhimi Bajoria Vs. CIT, 80 ITR 273.

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 (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.

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

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 VARIOUS HEADS OF INCOME

Income is classified under the income tax act into the following categories:

INCOME FROM SALARY

The meaning of the term ‘salary’ for purpose of income tax is much wider than what is normally
understood. Every payment made by and employee to his employee for service chargeable to
tax as income from salary. The term ‘salary’ for the purpose of income tax bill includes both
monetary payments as well as non-monetary facility like housing accommodation etc. Before
an income can become chargeable under the head salary it is vital that there should exist
between the payer and the payee the relationship of an employer and employee. It is not matter
whether the employee is a full time for a part time one. Once salary accrues, the subsequent
waiver by the employee does not absolve him from liability to income tax. Such waiver is only
and application and hence, chargeable. However employer surrender salary to the central
government under section to of the Voluntary Surrender of Salaries (Exemption from Taxation)
act 1961 the salary so surrendered would be exempt while computing his taxable income.

Under section 15, following income is chargeable to income tax under the heads “Salaries”:

1. Any salary due from and employee or a former employer to an assessee in the previous
year whether paid
2. Any salary paid or allowed to him in the previous year by or on behalf of employer or
a former employer though not due or before it becomes due to him.
3. Any arrears of salary paid or allowed to him in a previous year by or on behalf of an
employer or a former employer not charged to income tax for any earlier previous year.

Thus, salary has been made taxable and you basis as well as on receipt basis weather due or
not example advance of salary where any salary paid in advance is included in total income of
any person for any previous year it share not be included again in the total income of the person
when the said salary become due.

INCOME FROM HOUSE PROPERTY

House owner who has two or more than two houses is liable to pay income tax on such property.
One house is exempted from tax. There are three conditions for the rental income to be taxed
under the head of income from house property:

1. The property should consists of any building or lands appurtenant thereto;

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 2. The assessee should be the owner of the property; and
3. The property should not be used by the owner for the purpose of any business or
profession carried on by him, the profit of which chargeable to tax.

If all the aforesaid conditions are satisfied, property income taxable under section 22 under the
head income from house property irrespective of whether the assesse is a company which has
been incorporated with the object of buying or developing land properties. In case the employee
want the tax to be deducted at source in respect of income other than salary income, then the
employee must submit the particular of other income of the employer in the prescribed form.

Section 22: annual value of a property, consisting of any building of land appurtenant thereto,
of which the assessee is owner is chargeable to tax under the head income from house property.
If, however a house property is occupied by the assessee for the purpose of this business or
profession carried on by him, the profit of which chargeable to income tax annual value of such
property is not chargeable to tax under the head of “income from house property”.

PROFIT AND GAINS OF BUSINESS OR PROFESSION

It is the highest source of income to the government in terms of amount collected from tax
payers. Under section 28 following income is chargeable to tax under this head:

a) profit & Gains of any business or profession;

b) any compensation or other payments due to or received by any person specified in
Section 28(ii);
c) income derived by a trade, professional or similar association from specific services
performed for its members;
d) the valve of any benefit or perquisite, whether convertible into money or not, arising
from business or the exercise of a profession;
e) export incentive available to exporters.
f) any interest, salary, bonus, commission or remuneration received by a partner from
firm;
g) any sum received for not carrying out any activity in relation to any business or not to
share any know-how, patent, copy right, trademark etc.;
h) any sum received under a key man insurance policy including any bonus;
i) profits and gain of managing agency; and
j) income from speculative transaction.

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Under section 2 (13) business include any trade, commerce, manufacture or any adventure or
concern in the nature of trade, commerce or manufacture. The definition is not exhaustive it
covers every face of occupation carried on by person with a view to earn profit. On the other
hand, a professional light lawyer, doctor, CA etc. must know basic concepts of income tax law
before trying to understand the specific provisions relating to the determination of taxable
income and income tax payable by him. The most important source of income tax from a
business or profession is 'Profits and Gains'. The important point to note is that income tax is
chargeable on income and not receipts.

Out of gross receipts of business or profession certain allowances expenditure and losses are
allowed to be deducted in order to remove at the net profits or gains of business or profession
chargeable to income-tax. The profits and gains have to be computed according to the
accounting methods regularly.

CAPITAL GAINS

Any profits or gains arising from the transfer of a capital asset effected in the previous year
shall, save otherwise provided in Section 54, 54B, 54D, 54EC. 54ED, 54F & 54G be chargeable
to income tax under the head “capital gains”, and shall be deemed to be income of the previous
year in which transfer took place. If the aforesaid condition are satisfied them capital gain is
taxable in the assessment year relevant to the previous year in which capital asset is transferred.

Capital gains tax liability arises only when the following conditions are satisfied;

 There should be a capital asset.

 The capital asset is transferred by the assessee.
 Such transfer takes place during the previous year.
 Any profits or gain arises as a result of transfer.
 Such profit or gains is not exempt from tax u/s 54, 54B, 54D, 54EC.54ED, 54f, 54G.

INCOME FROM OTHER SOURCES:

Basis of charge [Section 56(1)]:

This is the last & residual head of charge of income. A source of income which does not
specifically fall under any one of the other four heads of income, is to be computed and brought
to charge u/s 56 under the head, “Income from other sources”.

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As per the provisions of S.56(1) income of every kind, which is excluded in other four specific
heads of income mention above, is charged to income tax under this head of income. Provisions
of S.56 (2) are more specific and enlists various incomes which are taxable under the head of
‘Income from Other Source’. This list includes; Dividend, Casual income such as winning from
lotteries, crossword, puzzles, horse races, etc. Any sum received by the assessee from his
employers as contributions to any provident fund, super annuation fund or any other fund for
the welfare of the employees, Interest on securities, Income from letting out on hire of
machinery, plant or furniture. Any sum received under the Keyman insurance policy including
the sum allocated by way of loans on such policy.

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 CONCLUSION

Section 4 is the charging section. It imposes income tax upon a person in respect of his income.
Income tax is to be charged at the rate or rates fixed by the Central Government. There are
certain basic rules related to the determination of residential status in addition all the above
provisions. Residential status is determined for each category of persons separately e.g. there
are separate rules for determining the residential status of an individual and separate rules for
companies etc. Residential status is always determined for the previous year because we have
to determine the total income of the previous year only. Residential status of a person to be
determined for every previous year because it may change from year to year. For example A,
who is president of India in the previous year 2017-18, may become a non-resident in previous
year 2018-19. A person may be a resident of more than one country for any previous year. If
Y is a resident in India for previous year 2017-18, it does not mean that he cannot be a resident
of any other country for that previous year. Citizenship of a country are separate concepts. A
person may be an Indian National/Citizen, but may not be a resident in India. On the other
hand, a person maybe a foreign national/citizen, but may be a resident in India. It is the duty of
the assessee to place all material facts before the assessing officer to enable him to determine
his correct residential status.

Income tax is to be levied on the total income of the assesse computed in accordance with and
subject to the provisions of this act. Full effect must be given to all the exemptions and
deductions granted including the provisions for the levy of additional income tax by the various
provisions of the act.

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