KASC SATHY- DEPARTMENT OF COMMERCE – INCOME TAX – BASIC CONCEPT

BASIC CONCEPT AND RESIDENTIAL STATUS OF IT

1 Meaning of Tax
• It is a compulsory contribution given by person to the government without any
expectations. It is a compulsory extraction made by central government from
the general public.
• It is not a voluntary payment or donation, but an enforced contribution, exacted
pursuant to legislative authority.
1.1 Types of Tax
There are two types
1.2 Direct tax- (Central government)
• Directly paid to the Government
• Examples of direct tax - Income tax
1.3 Indirect tax-
Collected by the intermediaries who sell or arrange products and service
Examples of indirect tax
GST, Central Excise duty on Petroleum Products, Customs Duty , State Excise
Duty on certain items, securities Transaction Tax, Stamp Duty, Local bodies Taxes
( Road tax / toll tax and property taxes, Electricity Duty
1.4 Tax Planning, Evasion and Avoidance
• Tax planning – It is consist the planning of earned is such way that tax liability
can be minimize. It is a legal one
• Tax evasion – It consist the misreprentation of the income earned and
expenditure incurred during the year. The main objective of the this to under
estimate the income or suppressing income or hiding income in order to reduce
tax burden. This is criminal offence.
• Tax avoidance – This consist the benefit derived from the loopholes of IT in
order to reduce tax burden. This is not an illegal offence. It is done deliberately

1
 KASC SATHY- DEPARTMENT OF COMMERCE – INCOME TAX – BASIC CONCEPT

Collected by the intermediaries who sell or arrange products and service

Examples of direct tax

2 Income tax
• Tax on income of the person Income tax 1961
• Income tax is charged on the total income of the previous year but it is taxable
in the next following year.
• Total income of a person is determined on the basis of his residential status in
India. It may fee, fine, penalty, interest etc.
• It came into enforce 1 April 1962
• It was introduced IT in India Sir James in the year 1860.
• Wilson 298 sections
• Un Numerous subsection
• IV schedule
• Article 246 (seventh schedule)
Three list
 Union / Central list-( 14 Heads of Taxation) It contains the areas in the
respect of which only the parliament i.e. central government can make
laws
 State list- ( 19 Heads of Taxation) It contains the area in the respect of
which only the state legislature can make laws
 Concurrent list- (No Heads of Taxation) It contains the area in the respect
of which both the parliament and the state legislature can make law
concurrently
2.1 Features of income tax in India
1. Levied as per the constitution
2. Levied by central government
3. Direct tax
4. Annual tax
5. Tax on person
6. Tax on income
 KASC SATHY- DEPARTMENT OF COMMERCE – INCOME TAX – BASIC CONCEPT

7. Income of previous year is assessable in assessment year

8. Charged at prescribed rate(s)
9. Administered by the central government
10. Applicality
2.2 Feature of income
 Definite income
 Income must come from outside
 Tainted income
 Diversion of income vs. application of income
 Temporary or permanent
 Reimbursed of payment made on behalf of others
 Dispute regarding the title
 Income in money or money’s worth
 Income of an assesse
 Treatment of gifts
 Monetary gifts
 Gift of movable property
 Gift of property other than immovable property
 Income includes loss
 Surplus from mutual activity
 No double taxation of income
 Treatment of income
 Taxable income
 Exempted income
 Rebateable ( tax free) incomes

3 Important concept and terms in IT

3.1 Person2 (31)
It includes
1. Individual-
It refers to a natural human being whether male or male
 KASC SATHY- DEPARTMENT OF COMMERCE – INCOME TAX – BASIC CONCEPT

2. Hindu undivided family-

It is a relationship created due to operation of Hindu laws. The manager of
HUF is called ‘karta’ and it members are called ‘coparceners’
3. Firm
It is an entity which comes into existence as a result of partnership
agreement between persons to share profits of the business carried on by all
or any one of the them.
4. Joint stock companies –
It is an artificial person registered under Indian company’s act 1956 or any
other law.
5. BOI or AOP
Co-operative societies, MARKFED, NAFED etc. are the example of such
person. When person combine together to carry on a joint enterprises and
they do not constitute partnership under the ambit of law, they are assessable
as an Associations of person. Receiving income joint not the only feature of
an association of person. There must be common purpose, and common
action to achieve common purpose i.e to earn income.
BOI
A body of individual cannot have non-individual as its members. Only
natural human being can be member of a body of individual
AOP
Can have firms, companies, associations and individual as its member
6. Local authorities
Municipality, Panchayat, Cantonment board, Port trust etc. are called local
authorities
7. Artificial juridical person
A public corporation established under special act of legislature and a body
juristic personality of its own are known to be artificial juridical persons.
University are an important example of this category.
 KASC SATHY- DEPARTMENT OF COMMERCE – INCOME TAX – BASIC CONCEPT

3.2 Income (section 2(24)

It includes
 Profit and gains
 Dividend
 Voluntary contribution received by a trust
 The value of any perquisites or profit in lieu of salary taxable under
section 17(2)(3) etc.,
3.3 Assessment year u/s 2(9)
• It means the period of 12 months commencing on 1st April every year. It is the
year (just after previous year) in which income is earned is charged to tax. The
current AY is 1.4.2021 to 31.03.2022
3.4 Previous year u/s 2(34)
• It means, the year in which income is earned. The current PY is 1.4.2020 to
31.03.2021
3.5 Agricultural income (Section 2(1A)
• Agricultural income is fully exempted from tax u/s 10(1) and as such does not
form part of total income.
3.6 Assessee (Section 2(7)
Assessee means a person by whom any tax or any sum of money is
payable under this act and includes
Every person in respect of whom any proceeding under the act have
been takenfor the assessment of his income or the income of any other
person in respect of which he is assessable or loss sustained by him or
such other person or of the amount of refund due him or to such person
Every person who is deemed to be an assessee under the provision of
this act
Every person who is deemed to be an assesse-in-default under the any
provision of this act
 KASC SATHY- DEPARTMENT OF COMMERCE – INCOME TAX – BASIC CONCEPT

3.7 Gross Total Income (G.T.I):-

The aggregate income under the 5 heads of income (viz. Salary, House
Property, Business or Profession, Capital Gains & Other Sources) is termed as
“Gross Total Income”.
3.8 Total Income (T.I):-
Total Income of assessee is gross total income as reduced by the amount
permissible as deduction under sections 80C to 80U.
Types of assesse
Ordinary assesse
Representative assesse or deemed assessee
Assesse-in-default
3.9 Average rate (section 2(10)
Average rate of income tax “means to rate arrived at by dividing the amount of
income tax calculated on the total income by such total income
Average rate: Total tax / Total income * 1000
3.10 Maximum marginal rate (sec 2(29C)
It means the rate of income tax applicable in relation to the highest slap of income
in the case of an individual, AOP or BOI as specified in the finance act of the
relevant year
3.11 Block of assets (Sec 2(11)
It means a group of assets falling within a class of assets comprising
a) Tangible assets
b) Intangible assets
 KASC SATHY- DEPARTMENT OF COMMERCE – INCOME TAX – BASIC CONCEPT

3.12 Business trust (Sec 2(13A)

A business trust shall mean a trust registered as,-
An infrastructure investment trust / Real estate investment trust under the SEBI
(Infrastructure investment trust) Regulation, 2014 made under the SEBI act 1992.

3.13 Charitable Trust (Sec 2(15)

Charitable purpose it includes –
Relief of the poor, education, yoga, medical relief, advancement of any other
object of general public
3.14 Child (Sec 2(15A))
Child in relation to an individual includes a step child and an adopted child of that
individual. It includes both male and female children.
3.15 Fair Market Value (Sec 2(22)
The fair market value in relation to a capital asset
3.16 Comprehensive definition of India
India means the territory of India, its territorial waters, sea belt and sub soil
underlying such water continental shelf, exclusive economic zones or any other
maritime zone and the air space above its territory and territorial waters.

4 Heads of Income (Section 14)

Income from Salary – 15 – 17
Income from House Property – 22 to 27
Profit and gains of Business or Profession 28 to 44
Profit and Gains-Depreciation – 32, 32A&33
Income from Capital Gain 45 to 55
Income from other sources- 56 to 59
Aggregation of income- 60 to 69
Set-off and carry forward of losses – 70 to 79
Deductions out of gross total income – 80A to 80U
 KASC SATHY- DEPARTMENT OF COMMERCE – INCOME TAX – BASIC CONCEPT

4.1 Gross Total Income (Section 80B (5)

Aggregating income under various heads (duly applying clubbing of provisions)
losses adjusted and resultant figure is called GTI. GTI also be understood as the
total income of an assessee before making any deduction under chapter VIA i.e u/s
80C TO 80U of the act.
GTI= Aggregating 5 head of income+ Clubbing of income – Set off of losses

4.2 Total Income (Section 2(45))

Total income = Gross Total Income – Deductions under Chapter VIA (sec 80C to
80U)

5 Rounding off total income (Sec 288A)

Total income or total taxable of the assesse shall be round-off to the nearest
multiple of 10, i.e if the last figures in the total income is five or more, it would be
raised to the next higher multiple of 10 and if the last figure of total income is less
than five, the same shall be reduced to lower amount which should be a multiple of
ten.

6 Rounding off of tax (Sec 288B)

As per taxation laws (Amendment) act 2005, the amount of tax payable
including tax deductible at source; advance tax, fine penalty, the amount of any
refund etc. shall be rounded to the nearest rupee ten, i.e last figure of rupee five or
above shall be raised to rupee ten whereas if the last figure is upto rupee four and
nighty nine paisa, it shall be ignored

7 RATE OF TAX
For individual - Age below 60 years
For senior citizen- Age between 60 to 80 years (senior citizen)
For super senior citizen - Age above 80(super senior citizen
KASC SATHY- DEPARTMENT OF COMMERCE – INCOME TAX – BASIC CONCEPT

Up to 2, 50,000 Nil
2, 50,001 to 5, 00,000 5%
5, 00.001 to 7, 50,000 10%
7, 50,001 to 10, 00,000 20%
Above 10, 00,000 30%

Up to 3, 00,000 Nil
3, 00,001 to 5, 00,000 5%
5, 00.001 to 7, 50,000 10%
7, 50,001 to 10, 00,000 20%
Above 10, 00,000 30%

Up to 5, 00,000 Nil
5, 00.001 to 7, 50,000 10%
7, 50,001 to 10, 00,000 20%
Above 10, 00,000 30%

1. Health & Education cess – 4%

2. Surcharge tax on tax
@15% if total income exceeds 1 crore
 KASC SATHY- DEPARTMENT OF COMMERCE – INCOME TAX – BASIC CONCEPT

7.1 Special rates of tax

1. For short term capital gain – 15%
2. For long term capital gain – 20%
3. Casual income – 30%
Rate of tax or tax rate or slap rate
The maximum rate of tax is 30%
The minimum rate of tax is 5%

8 Exceptions
1. Shipping business income of non-resident ship owner ( Sec 172)
2. In case of person leaving India( 174)
3. Assessment of any association of persons, body of individual or artificial
juridical person formed or established only for a limited period ( 174A)
4. In case of person who are likely to transfer their assets to avoid tax( 175)
5. In case of discontinued business(sec 176)

9 Computation of total income and tax liability

Particulars Amount Amount
Income from Salary Xxx
Income from House property Xxx
Income from Business or
Xxx
professional
Income from Capital gain Xxx
Income from Other sources Xxx
Gross Total Income Xxxx
Less: Deductions u/s 80 C to 80
U XXX XXX
Taxable Income Xxx
Add: Education Cess
XXX
Total tax XXX
 KASC SATHY- DEPARTMENT OF COMMERCE – INCOME TAX – BASIC CONCEPT

Less: Rebate u/s 87 A

GTA does not exceeding
5,00,000 XXX
Tax liability XXX

10 BASIS OF CHARGE
Tax is lived on total income of assesse. Under the provisions of income tax act,
1961 the total income of each person is based upon his residential status. Section 6
of the Act divides the assessable person into three categories:
Ordinary resident
Resident but not ordinarily resident
Non-resident
10.1 Meaning of Residential Status
Residential status is a term coined under income tax act and has nothing to
do with nationality or domicile of a person. An Indian, who is a citizen of India can
be non-resident for income tax purposes, whereas an American who is a citizen of
resident of India for income tax purpose.
Residential status of a person depends upon the territorial connections of the
person with this country, i.e, for how many days he has physically stayed in India.
The residential status of different types of persons is determined differently.
Similarly, the residential status of the assesse is to determine each year with
reference to the “previous year”. The residential status of the assesse may changes
from year to year. What is essential is the status during the previous year and not in
the assessment year.

11 Residential status
• How many days stayed in India?
• Citizenship not a criteria for payment of income tax
• Foreign citizen also want to pay tax to the Indian government
 KASC SATHY- DEPARTMENT OF COMMERCE – INCOME TAX – BASIC CONCEPT

11.1 Important points

1. Residential status of previous year
2. Duty of assesse
3. Dual residential status is possible
4. Same residential status for all source of income (6(5))
11.2 Determination of residential status of different person
11.3 Types of residential status
For individual and Hindu undivided family
- Resident
- To determine the residential status of an individual, section 6(1) prescribed
two tests. An individual who fulfils any one of the following two test is
called ‘Resident’ under provisions of this tax.
- These tests are:
- Basic conditions
If he is in India during the previous year for a period amounting in all to 182
days or more
Or
- If he is in India for a period amounting in all to 365 or more during the four
years preceding the relevant previous year and he was in India for a period
or periods amounting in all to 60 days or more in that relevant previous year

Resident = Satisfying any one of the two conditions given u/s sec 6(1)

Additional conditions 6(6)

1. A) He has been resident of India in at least 2 previous year out of 10
previous year immediately prior to previous year in question. AND
2. B)He has stayed India for at least 730 or more days in 7 previous years
immediately preceding the previous year in question
 KASC SATHY- DEPARTMENT OF COMMERCE – INCOME TAX – BASIC CONCEPT

A) Ordinary resident
OR = satisfying any one of the two conditions given u/s
6(1)+satisfying both additional conditions of Sec.6(6)(a)&(b)

B) Not-ordinarily resident – ( Sec 6(6))

NOR = Satisfying any one of the two conditions given u/s 6(1) + Not satisfying
any one or both additional conditions.

- Non-resident(Sec 2(30)
NR = Not satisfying the any one of the basic conditions u/s 6(1)

Important point
Meaning of stay in India
Stay may be continuous or intermittent
Stay need not be at one place
Object of stay is not important
Calculation of ‘period of stay’ in India
• 182 or 60 and 365 or more proceeding the 4 previous year
• 2020-21 – 60days
• 2019-20
• 2018-19
• 2017-16
• 2016-15 – 365 days

II. Residential status of HUF

11.4 Ordinary resident 6(2)
HUF, is said to be resident in everywhere except during that year the control
and management of its affairs is situated wholly outside India. It means that if a
HUF is controlled from India even partially it will be resident assesse. The control
and management of affairs refers to the controlling and directing power, the head
and the brain. It means that decision making power for vital affair is situated in
India. The
 KASC SATHY- DEPARTMENT OF COMMERCE – INCOME TAX – BASIC CONCEPT

control and management means de-facto control and management and not merely
the right to control or manage.
Resident = Control and management of affairs in India( wholly or partially
Ordinary Resident = Control of management of affairs + fulfillment of both
additional condition of karta
NOR=Control and management of affairs +non-fulfilment of any one or both
additional conditions by karta
NR= Control and management of affairs is situated wholly or partially outside
India

III All other person

For firm, company, AOP/BOI, local authorities, other artificial juridical
persons
- Resident
- Non-Resident
Resident = Control and management of affairs in India ( wholly or partially )
NR= Control and management of affairs is situated wholly outside India

12 INCIDENCE OF TAX (SCOPE OF INCOME)

The tax is lived on total income of a person. The total income is based upon the
residential status of an assessee. Section 5 provides the scope of total income which
varies on the basis of status.
i) Scope of total income of a resident sec 5(1)
ii) Scope of total income of ordinarily resident sec 5(1)
iii) Scope of total income of non-resident sec 5(2)
Types of incomes
1. Indian income
2. Foreign income
 KASC SATHY- DEPARTMENT OF COMMERCE – INCOME TAX – BASIC CONCEPT

Different types of status

Different Kinds of Income R NOR NR
Income received or deemed to be received in
India. It is not immaterial whether it is T T T
earned in India or in a foreign
Income earned in India whether received ,
paid in India or outside India T T T
Income earned or received outside India
form a business controlled or profession
set-up in India. Income may be or may not T T NOT
be remitted to India
Income earned or received outside India
form a business controlled or profession set- T NOT NOT
up outside India
Income earned or received outside India T NOT NOT
form any other source
( except income under point 3)
Income earned or received outside India in
the year preceding the previous year in NOT NOT NOT
question and if the same is remitted to India
during the current previous year