1-MCOM Direct Tax Laws 01 (1) - Merged

UNIT
01 Basic Concepts of Income Tax and

Residential Status of Various Persons
Names of Sub-Units
Direct and Indirect Tax , Constitutional Validity of taxes, Administration of Tax Laws, Sources of
Income Tax Law in India, Basic Principles of Charging Income Tax Section- 4, Assessment Year
Section 2 (9), Previous Year Section 3,Assesses Section 2(7), Person Section 2(31), Income Section 2(24),
Heads of Income Section 14, Gross Total Income Section 80B(5), Rounding off of total Income - Section
288A, Rounding off of tax- Section 288B, Capital Receipt and Revenue Receipts- The distinction and
implication, Basis of Charge and Scope of total Income, Diversion and Application of Income.
Overview
This unit describes the direct and indirect tax, the constitutional validity of taxes and administration
of tax laws. Also, this unit explains the sources of income tax law in India and basic principles of
charging income tax section-4. Further, this unit discusses the assessment year section 2(9) with
the previous year’s section 3. This unit elaborates on person section 2(31), income section 2(24) and
Heads of Income Section 14. It also describes gross total in income section 80B (5), rounding off of total
income- section 288A and rounding off of tax- section 288B. In the end, this unit explains capital receipt
and revenue receipts - the distinction and implication, basis of charge and scope of total income and
diversion and application of income.
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Learning Objectives
In this unit, you will learn to:

 Identify the basic concepts, definitions and terms related to Income Tax
 Examine the technical terms related to Income Tax
 Determine the basis and scope of total income
 Analyse the capital receipts and revenue receipts
 Describe the diversion and application of income
Learning Outcomes
At the end of this unit, you would:

 Learn that the assessment year and previous year are different
 Examine the capital receipts and revenue receipts
 List down the various heads of income tax, diversion and application income
Pre-Unit Preparatory Material
 https://www.bankbazaar.com/tax/direct-tax.html
 https://keydifferences.com/difference-between-capital-receipt-and-revenue-receipt.html
1.1 INTRODUCTION
The 16th Amendment, passed by Congress on July 2, 1909 and ratified on February 3, 1913, is widely
credited with establishing the individual income tax. Its history, on the other hand, goes back even
further.
Governments in almost every country around the world levy compulsory levies on individuals or entities,
which is known as taxation. Taxation is primarily used to raise revenue for government expenditures,
but it can also be used for other purposes.
India’s tax system is divided into direct and indirect taxes. While direct taxes are levied on taxable
income earned by individuals and corporations, assesses are responsible for depositing taxes.
1.2 DIRECT TAX AND INDIRECT TAX

Direct tax is a tax that is charged directly to the taxpayer, who must pay it to the government and
cannot pass it on to another person.
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UNIT 01: Basic Concepts of Income Tax and Residential Status of Various Persons JGI JAIN
Following are some of the most significant direct taxes imposed in India:
 Income tax: Income tax is imposed on individuals who fall into various tax brackets based on their
earnings or revenue and they are required to file an income tax return each year, after which they
must either pay the tax or be eligible for a tax refund.
 Estate Tax: Estate tax also known as inheritance tax is a tax levied on a person’s estate or the total
value of money and property left behind after they die.
 Wealth Tax: A wealth tax is a tax levied on the value of a person’s assets.
Estate and wealth taxes, on the other hand, have been repealed.
Direct taxes do have some benefits for a country’s social and economic development. Let’s discuss these
benefits.
 It reduces inflation: When there is monetary inflation, the government frequently raises the tax
rate, which reduces demand for goods and services, causing inflation to condense as a result of
lower demand.
 It enables social and economic balance: The government has well-defined tax slabs and exemptions
in place based on each individual’s earnings and overall economic situation to balance out income
inequalities.
There are several of drawbacks to direct taxes. However, the lengthy procedures of filing tax returns are
a taxing task in and of themselves.
Indirect Tax
Indirect tax is a government tax levied on goods and services rather than an individual’s income, profit
or revenue and it can be shifted from one taxpayer to another. Previously, paying an indirect tax meant
paying more than the actual cost of a product or service. In addition, taxpayers were subjected to a slew
of indirect taxes.
The Goods and Services Tax (GST) is one of India’s existing indirect taxes. Many indirect tax laws have
been absorbed into it.
The Goods and Services Tax or GST, was implemented on July 1st, 2017 to replace the country’s various
indirect taxes. Due to this the other taxes that used to be levied previously no longer exist. It has done
away with the tax’s cascading effect.
Service tax, state excise duty, countervailing duty, additional excise duty and special additional customs
duties are all included in the GST at the state level.
Following are the benefits of GST:

 Input Tax Credit: When paying tax on the final product, one can deduct the tax already paid on their
purchases and pay only the difference. This is known as Input Tax Credit and it helps to alleviate the
burden of a high tax.
 Composition Scheme under GST: The government has done an excellent job introducing the
Composition Scheme for small businesses with a turnover of less than Rs.1 crore. They don’t have
to go through the time-consuming formalities of GST and instead pay a fixed rate based on their
business turnover under the scheme.
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1.3 CONSTITUTIONAL VALIDITY OF TAXES

Article 265 to Article 289 of the Constitution refers to taxation provisions. No tax shall be levied or
collected unless authorised by law and the right to levy taxes must be exercised by the legislature. There
is no presumption in the levy of tax, because the fiscal act governing the levy of tax must be read in its
whole.
India’s Taxation Provisions in the Constitution

Every law in India has its origins in the Constitution, hence knowing the provisions of the Constitution
is essential to have a comprehensive knowledge of any law. The following are the categories of
constitutional provisions concerning taxation in India:
 Only by the authority of law can taxes be levied. (Article 265)
 Levy of duty on tax and its distribution between centre and states (Article 268, Article 269 and Article
270)
 Restriction on power of the states to levy taxes (Article 286)
 Sale/purchase of goods that take place outside the respective state
 Sale/purchase of goods which take place during the import and export of the goods
 Taxes imposed by the state or purpose of the state (Article 276 and Article 277)
 Taxes imposed by the state or purpose of the union (Article 271, Article 279 and Article 284)
 Grants-in-Aid (Article 273, Article 275, Article 274 and article 282)
1.4 ADMINISTRATION OF TAX LAWS

A tax administration’s job is to collect all owed taxes fairly and efficiently with minimal costs to both
taxpayers and the tax administration. As a result, a tax administration must:
 Ensure that taxpayers follow the rules
 Possess sufficient resources (well-trained staff, IT, budget)
Verification of a tax return or claim for credit, rebate or refund; investigation, assessment, determination,
litigation or collection of a person’s tax liability; investigation or prosecution of a tax-related crime; or
enforcement of a tax statute are all examples of tax administration.
Responsibilities
 Inland tax regulations are written, revised and interpreted.
 National tax administrations and local tax administrations plan, direct, supervise and evaluate the
levy and collection of national tax.
 Directing, supervising and evaluating all levels of tax administration’s anti-corruption efforts
 Auditing major cases of tax evasion, as well as supervising and evaluating audit performance at all
levels of the tax administration
 Tax administration, as well as tax information, planning and evaluation
 Encouragement of tax-related education and public awareness campaigns
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1.5 SOURCES OF INCOME TAX LAW IN INDIA

Salary, business or profession, house property, capital gains and other sources are all covered by the
Income Tax Act of 1961. While the nature of income is obvious for the four sources of income, income
from residual sources is included in the other sources.
Income from Salary

This heading essentially involves any remuneration received by an individual in exchange for services
rendered under a contract of employment. Basic pay, advance salaries, pensions, commissions,
gratuities, perquisites and a yearly bonus are all included in a salary. The crucial thing to remember is
that salary is taxable on a due or received basis, depending on which comes first. Allow me to illustrate
this with an example. If you get paid in April 2020 for the month of March 2020, it will still be taxable in
the prior fiscal year 2019-20.
This is due to the fact that it was due in March. Similarly, if your company paid you in advance for April
and May in the month of March, it will be taxed again in March. As a result, salary income will be taxed
on a due or received basis, whichever comes first.
Income from House Property

Sections 22 to 27 of the Income Tax Act of 1961 deal with the income tax computation of a person’s total
standard income from his or her home or land.
In layman’s terms, this category contains the rental income from the homes.
Income from Profits and Gains of Business or Profession

The income produced through the profits of a business or profession will be attributed to the income
tax computation of total income. The difference between the revenue collected and the expenses will be
charged.
The following is a list of the income that is taxed under this heading:
 Profits made during the assessment year by the assesses
 Profits from an organisation’s revenue
 Profits from the selling of a specific license
 Cash received as a result of an individual’s export under a government program
 Profit, income or bonus earned as a result of a business collaboration
 Benefits gained as a result of working for a company
Income from Capital Gains

Profits or gains obtained by an assesses from the sale or transfer of a capital asset kept as an investment
are referred to as capital gains.
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Real estate, equities, mutual funds, bonds, gold and other capital assets are examples of capital assets.
As a result, anytime you sell a capital asset and profit. This is considered your income and it will be taxed
under the Capital Gains heading. Rental income is taxed as “Income from House Property,” but if the
property is sold and profit is made, then it will be taxed as “capital gain.”
Income from Other Sources

This category includes interest from bank deposits, lottery prizes, card games, gambling and other
sports awards. These earnings are taxable and are ascribed under Section 56(2) of the Income Tax Act.
1.6 BASIC PRINCIPLES OF CHARGING INCOME TAX SECTION -4

An income tax is a tax levied on a person’s earnings. Income tax is a yearly tax on earnings. Income earned
in one fiscal year is taxed in the following fiscal year. Previous Year refers to the financial year in which
the income is earned, while Assessment Year refers to the financial year in which the income is taxed.
Income earned in the previous fiscal year, which ended on March 31, 2011, i.e., 2010-11, will be taxed in the
assessment year 2011-12. The Finance Act determines the tax rates at which income is taxed each year. For
taxation, a person’s income must be computed. Individuals have five sources of income:
 Income from Salary
 Income from House Property
 Income from Business and Profession
 Income from Capital Gain
 Income from Other Sources
Applicable exemptions and deductions should be taken into account when calculating income under
different headings. If there is any provision for clubbing, this should be taken into account. Yearly losses
should be carried forward and losses from previous years should be deducted. Gross Total Income refers
to the income after such adjustments. Then you should claim a deduction under Chapter VIA. The total
taxable income is the amount on which tax is calculated at the prescribed rate. TDS and Advance Tax
paid will be deducted from the tax computed. If applicable, interest will be charged under sections 234A,
234B and 234C. The total tax will be rounded up to the nearest ten rupees multiple.
If your tax liability exceeds your prepaid taxes, you’ll have to pay the difference in self-assessment tax. If
the amount of prepaid taxes is greater than the actual tax liability, a refund should be requested.
1.7 ASSESSMENT YEAR SECTION 2(9)

Assessment Year” refers to the 12-month period that begins on April 1st of each year.
In India, the government keeps track of its finances for a year, from April 1 to March 31. As a result, it is
referred to as the financial year. The Internal Revenue Service has similarly chosen the same year for
its assessment method.
The Assessment year is the fiscal year of the Government of India during which a person’s income from
the previous year is assessed for taxation. Every individual who is subject to taxation under this Act is
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required to file a return of income by the specified deadlines. Officials and officers from the Internal
Revenue Service process these returns. Assessment is the term for this type of processing. This is where
the assesse’s income is scrutinised and validated.
An assessment order is issued when the tax is calculated and compared to the amount paid. The
assessment year is the year in which the entire procedure is completed.
1.8 THE PREVIOUS YEAR SECTION 3

The previous year is defined as the year immediately preceding the assessment year under Section 3 of
the Income Tax Act of 1961. The previous year is also referred to as the financial year. It primarily refers
to period beginning April 1 and ending March 31 of the following year. Tax is paid in the assessment year
for income earned in the previous/financial year.
However, in those circumstances when a new business/profession/new source of income is established

in a previous/financial year, the previous/financial year will begin/be calculated from the date the new
business/profession/new source of income was established, rather than the 1st of April.
If the prior year is regarded to be 2020-21, the previous year will begin on April 1, 2020 and end on March
31, 2021. And the previous/financial year’s evaluation year will be 2021-22, i.e., from April 1, 2021, to
March 31, 2022.
In the same way, if the assessment year was 2020-21, the previous/financial year would have been
2019-20.
1.9 ASSESSEE SECTION 2(7)

The assessment year is when the tax on the previous year’s earnings is paid. A person who is liable to
pay a tax or any other sum of money under this Act is referred to as an income tax assessee. And it’s
broken down into three groups:
1. Ordinary Assessee: This category comprises of:
 Any person who is the subject of a legal action brought under this Act. It makes no difference
whether he owes any taxes or other obligations.
 Any person who has suffered a loss and has submitted a Loss Return under Section 139 (3).
 Any person who is liable to pay an amount of interest, tax or penalty under this Act; or
 Any person who is eligible for a tax refund under this Act.
2. Deemed Assessee: This includes:
 A person may be liable not only for his income or loss, but also for the income or loss of other
people, such as a Guardian of a Minor or a Lunatic, an Agent of a Non-Resident and so on. In such
cases, the people in charge of assessing the income of these people are known as Representative
Assesses. Such a person is considered a deemed Assesses.
3. Assesses-in-Default: If a person fails to meet his statutory responsibilities, he is considered an
assesses-in-default. It is the responsibility of an employer paying a salary or a person paying
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interest to deduct tax at source and deposit the cash collected in the government treasury. Assesses-
in-default occurs when a person fails to deduct tax at the source or deducts tax but does not deposit
it in the treasury.
1.10 PERSON SECTION 2(24)

Person includes:
 Individual: A natural human being, whether male or female, minor or major, is referred to by this
term.
 Undivided Hindu Family: It is a relationship that has developed as a result of the application of
Hindu law. HUF’s manager is known as “Karta,” and its members are known as “Coparceners.”
 Company: It is a legal entity created under the Indian Companies Act 1956 or another law.
 Firm: It is a legal entity formed as a result of a partnership agreement between individuals to share
profits from a business carried on by all or any of them. Even though a partnership firm does not
have its legal entity, it is treated as such under the Income Tax Act. A partnership firm can be one of
two types under the Income Tax Act of 1961.
Note: A company that meets the requirements of section 184. A business does not meet the
requirements of Section 184.
 Association of Persons or Body of Individuals: Co-operative societies, MARKFED, NAFED and other
organisations are examples of such organisations. When individuals come together to carry on a
joint venture but do not meet the legal definition of partnership, they are assessed as an association
of persons. An association of people is more than just a group of people who get paid together. To
achieve a common goal, such as earning money, there must be a common purpose and common
action. Firms, companies, associations and individuals can all be members of an AOP.
Non-individuals cannot be members of a body of individuals (BOI). A body of individuals can only be
made up of natural human beings. Whether a group is AOP or BOI is a question of fact that must be
decided on a case-by-case basis.
 Local authorities: It includes municipalities, panchayats, cantonment boards and port trusts,
among others.
 Person of Artificial Judgment: Artificial Juridical Persons are a type of public corporation created
by a special act of the legislature and a body with its legal personality.
 Every artificial juridical person: not falling within any of the preceding sub-clauses.
 Association of Persons or Body of Individuals or a Local authority or Artificial Juridical Persons:
shall be deemed to be a person whether or not, such persons are formed or established or incorporated
with the object of deriving profits or gains or income.
1.11 INCOME SECTION 2 (24)

The definition is given in section 2 (24) is not exhaustive. The term “Income” is defined by the English
dictionary as “periodic monetary return coming in regularly from definite sources such as one’s
business, land, work, investments and so on.”
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It is never stated that “Income” only refers to monetary gain. It includes the value of Perquisites and
Benefits.
The term “income” refers to both the amount received and the amount saved by using the property
himself. Anything that can be converted into money can be considered a source of income accrual.
“Income comprises”:
 Profits and Gains: For example, a businessman’s profits are taxable as “Income.”
 Dividend: A “dividend” declared/paid by a company to its shareholders, for example, is taxable as
“income” in the hands of the shareholders.
 Voluntary contributions received by a Trust: Voluntary contributions received by a Trust are
included in its income. This rule applies in the following situations.
 A trust established entirely or partially for charitable or religious purposes receives such a
contribution; or
 A scientific research association receives such a contribution; or
 Any fund or institution established for charitable purposes receives such a contribution; or
 Any university, other educational institution or hospital can receive such a contribution.
1.12 HEAD OF INCOME SECTION-14

Individuals can have multiple sources of income, according to Section 14 of the Income Tax Act of 1961.
The computation of income tax is an important aspect that must be done according to a person’s income.
For a simple calculation, the revenue must be accurately categorised so that there is no confusion. The
government categorises different types of income under different headings and then calculates the
income tax appropriately. The regulations and guidelines are based on the specifics of the Income Tax
Act.
According to the above-mentioned Section 14 for the computation of Income Tax in India, the five
primary heads of income are:
1. Income from Salary: This heading essentially involves any remuneration received by an individual
in exchange for services rendered under a contract of employment. Basic pay, advance salaries,
pensions, commissions, gratuities, perquisites and a yearly bonus are all included in a salary. The
crucial thing to remember is that salary is taxable on a due or received basis, depending on which
comes first. Allow me to illustrate this with an example. If you get paid in April 2020 for the month
of March 2020, it will still be taxable in the prior fiscal year 2019-20.
This is because it was due in March. Similarly, if your company paid you in advance for April and
May in the month of March, will be taxed again in March. As a result, salary income will be taxed on
a due or received basis, whichever comes first.
2. Income from House Property: Sections 22 to 27 of the Income Tax Act of 1961 deal with the income
tax computation of a person’s total standard income from his or her home or land.
In layman’s terms, this category contains the rental income from the homes.
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3. Income from Profits and Gains of Business or Profession: The income produced through the profits
of a business or profession will be attributed to the income tax computation of total income. The
difference between the revenue collected and the expenses will be charged.
The following is a list of the income that is taxed under this heading:
 Profits made during the assessment year by the assesses
 Profits from an organisation’s revenue
 Profits from the selling of a specific license
 Cash received as a result of an individual’s export under a government program
 Profit, income or bonus earned as a result of a business collaboration
Benefits gained as a result of working for a company
4. Income from Capital Gains: Profits or gains obtained by an assessee from the sale or transfer of a
capital assets kept as an investment are referred to as capital gains.
Real estate, equities, mutual funds, bonds, gold and other capital assets are examples of capital
assets. As a result, anytime you sell a capital asset and profit. This is considered your income and
it will be taxed under the Capital Gains heading. Rental income is taxed as “Income from House
Property,” but if the property is sold and profit is made, then it will be taxed as “capital gain”.
5. Income from Other Sources: This category includes interest from bank deposits, lottery prizes, card
games, gambling and other sports awards. These earnings are taxable and are ascribed under
Section 56(2) of the Income Tax Act.
1.13 GROSS TOTAL INCOME IS EXPLAINED IN SECTION 80B (5)

The definition of Gross Total Income is explained in Section 80B. Gross Total Income, as defined by Section
80B (5) of the Income Tax Act, is the total income estimated by the rules of the Income Tax Act before any
deductions under Chapter VIA. This part is covered by provisions in the Income Tax Act.
GTI is calculated by multiplying the following numbers:
 Salary income: This includes earnings from employment.
 Rent from a house: This includes any rent you get from renting a house.
 Income from a business or profession: This comprises a businessman’s or a self-employed
professional’s earnings.
 Capital Gain: Profits or losses from the sale of any mobile or immovable capital property are included
in capital gains/losses. This would include things like land, buildings, houses, stocks, jewellery and
so on.
 Other sources of income: This includes any income that is not included in the above-mentioned
headings. Interest income, a lottery win and so forth are examples.
GTI (gross total income) must be determined.
Because calculating gross total income is so important.
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It is the amount that must be disclosed when filing an income tax return. Deductions under Chapter VI
A must be subtracted from GTI to arrive at the taxable or total income.
Gross Total Income does not include when computing gross total income, one must add all of their
earnings together without deducting any tax-saving investments made under Sections 80C to 80U of
the Income Tax Act of 1961.
1.14 ROUNDING OFF TOTAL INCOME SECTION-288 A

The Income Tax Act provides for rounding off taxable income as well as final tax liability, which is given
under section 288A. As per section 288A of the Income Tax Act, the total income computed as per various
sections of this act shall be rounded off to the nearest ` 10 to avoid difficulties in calculating the taxable
amounts and to make payment of tax liability easier. First, any part of the rupee consisting of paisa
should be ignored for the purpose of rounding off. The total amount should then be increased to the
next higher amount which is a multiple of ` 10, if the last digit in the total figure is 5 or greater than 5.
This means that if your total income is ` 12,98,464.50, round it up to ` 12,98,460.
If the total figure’s last digit is less than 5, the total should be reduced to the next lower number which is
a multiple of ` 10. This rounding off income should only be done on the total income, not on the income
under each of the various headings. This means that if your total income is ` 12,98,465.50, you should
round it up to ` 12,98,470.
1.15 ROUNDING OFF TAX SECTION-288 B

The total tax computed is rounded off to the nearest ` 10 under Section 288B of the Income Tax Act.
The tax would be rounded off on the total tax payable or refundable, not on various sub-heads of taxes
such as income tax, education cess, surcharge and so on. Rounding off would be done in the same way
as before, i.e., paisa would be ignored first and if the total figure’s last digit is 5 or greater than 5, the
total amount should be increased to the next higher amount that is a multiple of ` 10. For example, if a
taxpayer owes ` 62923.25 in total tax, the paisa will be ignored and the tax will be assumed to be 62923;
then, because the last digit is less than 5, the amount will be reduced to the nearest multiple of Rs. 10, i.e.
` 62920. If the tax had been ` 62926.25 instead of ` 62923.25, it would have been rounded to ` 62926 and
then to ` 62930.
1.16 CAPITAL RECEIPT AND A REVENUE RECEIPT- THE DISTINCTION AND IMPLICATION
During the business, two types of receipts are generated. The money brought into the business from
non-operating sources such as proceeds from the sale of long-term assets, capital brought in by the
proprietor, sum received as a loan or from debenture holders and so on is referred to as capital receipts.
The non-recurring income received by the company is referred to as capital receipts. Rather than being
part of the operating activities, they are part of the financing and investing activities. Capital receipts
either reduce or increase an asset or liability. The following sources can be used to generate receipts:
 Shares issued
 Debt instruments such as debentures issued
 A bank or financial institution provides a loan
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 Grants from the Government

 Insurer’s Claim
 The proprietor contributes additional funds
Revenue Receipts are receipts that are generated as a result of the company’s core operations. These
receipts are a regular part of business operations, which is why they appear so frequently. However, the
benefit can only be enjoyed during the current accounting year because the effect is temporary. All of
the operations that bring cash into the business are included in the income received from day-to-day
business activities, such as:
 Revenue generated from inventory sales
 Services provided
 Creditors or suppliers have given you a discount
 Interest has been received
 Dividend remuneration is a type of remuneration that is received in the form of a dividend
 Rent received
Capital receipts differ from revenue receipts in that the former has no impact on the financial year’s
profit or loss, whereas the latter is offset against the period’s revenue expenses.
The difference between capital and revenue receipts are as follows:

1. Capital receipts are generated from investing and financing activities, whereas revenue receipts are
generated from operating activities.
2. Capital Receipts are uncommon because they are non-recurring and irregular. Revenue receipts, on
the other hand, occur repeatedly,
3. The benefit of capital receipt can be enjoyed over several years, but the benefit of revenue receipt
can only be enjoyed this year.
4. Revenue Receipts appear on the credit side of the Profit and Loss Account as income for the financial
year, whereas Capital Receipts appear on the liabilities side of the Balance Sheet.
5. In exchange for the source of income, the capital receipt is received. In contrast to revenue received,
which is a form of income substitution.
6. Capital receipt either lowers the value of an asset or raises the value of a liability, whereas revenue
receipt does not affect on the asset or liability’s value.
1.17 THE BASIS OF CHARGE AND SCOPE OF TOTAL INCOME

The basis of the charge of an income tells us how much of a person’s income is subject to taxation. It
specifies whether the income received is taxable on a receipt or accrual basis, as well as how tax should
be charged in the event of accounting method differences. Section 4 of the Income-Tax Act of 1961 (the
Act) is the basic charging section under which income tax is levied on a person’s total income. The term
“income” is defined in section 2(24) of the Act. Tax is levied on the assessee total income. The total income
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of each person is determined by his Residential Status under the provisions of the Income Tax Act of
1961.
The assessee’s total income is taxed. The total income of each person is determined by his Residential
Status under the provisions of the Income Tax Act of 1961.
Section 56(1) states that income of any kind that is not excluded from total income under this Act is
chargeable to income tax under the heading “Income from Other Sources” if it is not chargeable to
income tax under any of the first four heads listed in Section 14.
Scope
1. Subject to the provisions of this Act, the total income of any previous year of a person who is a
resident includes all income from whatever source derived 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:
Provided that, in the case of a person not ordinarily resident in India within the meaning of sub-
section (6) * of section 6, the income which accrues or arises to him outside India shall not be so
included unless it is derived from a business controlled in or a profession set up in India.
2. Subject to the provisions of this Act, the total income of any previous year of a person who is a non-
resident includes all income from whatever source derived 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.
1.18 DIVERSION AND APPLICATION INCOME

The term “application of income” refers to how income is spent after it has been earned by the assessee.
Because it is merely the application of earned income, this amount is not excluded from the assessee
total income. In other words, in the hands of the assessee, applied income is taxable. For example, if A
is required to pay his wife 10,000 rupees in monthly alimony, A, as an employee of Mr. C, requests that
he pay the alimony first and then disburse the remainder to him. Because the wife does not have an
overriding title to such an amount, this is an example of an income application. After earning his salary,
the amount he spends is a fulfillment of duty and thus taxable.
The process of diverting income before it is earned by the assessee is known as diversion of income.
Because the income is diverted to someone else before being earned by the assessee, it is excluded from
the assessee’s total income. There is an overriding title of any other person on such income in the event
of income diversion.
For example, if XYZ is a partnership firm and their deed specifies that 20% of any profits they are likely
to earn will be distributed to X’s mother, as well as the wives of Y and Z. This is a classic case of income
diversion. The rationale is that the deed mentioning the above-mentioned provision has an overriding
right to the money and is a requirement for the firm to continue. As a result, it isn’t taxable.
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It is a diversion of income if a third party becomes entitled to receive a sum of money due to the assesses
obligation, but it is not a diversion but rather an application of income if an obligation to pay to a
third party arises after the income is received. Many people try to divert their income to avoid paying
taxes. For instance, diverting income to the wife and children. Such tax avoidance is not tolerated by the
courts. In some cases, taxes are combined (sections 60-65). Transferring income without transferring
assets, income derived from revocable asset transfers, spouse income and minor income can all be
grouped together.
Conclusion 1.19 CONCLUSION
 Taxation is primarily used to raise revenue for government expenditures, but it can also be used for
other purposes.
 Direct and indirect taxes are important for the welfare of the Economy.
 Article 265 to article 289 of the Constitution refers to taxation provisions.
 No tax shall be levied or collected unless authorised by law and the right to levy taxes must be
exercised by the legislature.
 A tax administration’s job is to collect all owed taxes in a fair and efficient manner, with minimal
costs to both taxpayers and the tax administration.
 The basis of a charge of an income tells us how much of a person’s income is subject to taxation.
1.20 GLOSSARY
 Income tax: It is a tax levied on a person’s earnings.

 Goods and Services Tax (GST): It is one of India’s existing indirect taxes.
 Assessment year: It is when the tax on the previous year’s earnings is paid.
 Capital gains: It refers to the Profits or gains obtained by an assessee from the sale or transfer of a
capital asset kept as an investment.
 Assessment order: It is issued when the tax is calculated and compared to the amount paid.
1.21 CASE STUDY: RENTAL INCOME
Case Objective
This case aims to show the computation of rental income in the case of income tax.
This case will help us in finding out how is rental income added to the owner’s income tax return?
Adi rented out his Mumbai apartment for 35,000 rupees per month. He has to file tax returns for the
year. Adi needs to find out how much he owes the Income Tax Department.
Let us know the other expenses linked with the house during the year.
In November, Adi paid 25,000/- rupees in property taxes and spent 8,000/- rupees on repairs and 30,000/-
rupees on the payment of electricity bills. Adi also paid an interest of 2,20,000/- rupees on the money
14
which he had borrowed for building the house. Since He has rented the property the entire interest on
the home loan can be claimed as a deduction.
He must determine the Gross Annual Value (GAV) of the property. It is important for calculating the
income earned from house property.
For rented property, the annual rent collected must be higher than or equal to the reasonable rent of the
property as founded by the municipality.
The municipality in the case of Adi has calculated the reasonable rent of ` 32,000/-
Therefore, GAV= ` 4,20,000/-
Deduct the property tax payment for finding the net annual value.
As per the Income Tax Act Section 24, the Act allows Adi to claim a standard deduction of 30 per cent on
the net annual value. Adi home loan interest is also fully deductible.
Gross Annual Value 4,20,000

Less: Property Taxes -25,000
Net annual value 3,95,000
Less: standard deduction at 30% -1,18,500
Less: Interest on money borrowed -2,20,000
Income from house property 56,500
Note:
 Expenses on repairs and electricity are not allowed to be deducted.
 If Adi was getting rental income from more than one house property; he would have to calculate for each one
of them individually in the same manner as above.
Source: https://cleartax.in/house-property/case-study-aditya-the-landlord
Questions
1. Summarise the Income Tax Act.
(Hint: Salary, business or profession, house property, capital gains and other sources are all covered
by the Income Tax Act of 1961.)
2. What is rental Income?
(Hint: the amount received in lieu of renting out or letting out the property)
1.22 SELF-ASSESSMENT QUESTIONS
A. Essay Type Questions

1. Explain Gross Total Income is explained in Section 80B.
2. Define Assessee Section 2(7).
3. Describe the scope of the Total Income.
4. Differentiate between Capital receipt and revenue receipt.
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5. What is a direct tax and indirect tax?
1.23 ANSWERS AND HINTS FOR SELF-ASSESSMENT QUESTIONS
A. Hints for Essay Type Questions

1. The definition of Gross Total Income is explained in Section 80B. Gross Total Income, as defined by
Section 80B (5) of the Income Tax Act, is the total income estimated by the rules of the Income Tax
Act before any deductions under Chapter VIA. This part is covered by provisions in the Income Tax
Act. Refer to section Gross Total Income is explained in Section 80B (5)
2. The assessment year is when the tax on the previous year’s earnings is paid.
A person who is liable to pay a tax or any other sum of money under this Act is referred to as an
assessee. Refer to Section Assessee Section 2(7)
3. Scope of total income
1. Subject to the provisions of this Act, the total income of any previous year of a person who is a
resident includes all income from whatever source derived 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
Refer to Section The Basis of Charge and Scope of Total Income
4. Capital receipts are generated from investing and financing activities, whereas revenue receipts
are generated from operating activities. Capital Receipts are uncommon because they are non-
recurring and irregular. Revenue receipts, on the other hand, occur repeatedly. Refer to Section
Capital Receipt and Revenue Receipts - The Distinction and Implication
5. Direct tax is a tax that is charged directly to the taxpayer, who must pay it to the government and
cannot pass it on to another person. Indirect tax is a government tax levied on goods and services
rather than an individual’s income, profit or revenue and it can be shifted from one taxpayer to
another. Refer to Section Direct and Indirect Tax
@ 1.24 POST-UNIT READING MATERIAL
 https://www.indiacode.nic.in/handle/123456789/2435?sam_handle=123456789/1362
 https://indiankanoon.org/doc/789969/
1.25 TOPICS FOR DISCUSSION FORUMS
 Discuss with your professor how income tax is computed in Western countries?
16
Basic concept of Income Tax
Unit – 01
CA. Prashant Bharadwaj
Assessment Year and Previous Year
• The period of 12 months commencing on the 1st day of April
every year is known as the Assessment Year as defined u/s
2(9). An Assessment Year is a financial year which immediately
succeeds the relevant Previous Year. For instance Assessment
Year 2022-23 the relevant Previous Year is 2021-22.
• The Financial Year in which the income is earned is referred to
as the Previous Year. Section 3 read with section 2 (34) defines
previous year to mean the financial year immediately preceding
the Assessment Year.
Person – Sec 2(31)
Person includes:
• An Individual
• A Hindu Undivided Family
• A Company
• A Firm
• An Association of Persons or a Body of individuals, whether incorporated
or not.
• A Local Authority; and
• Every artificial juridical person, not falling within any of the preceding sub-
clauses.
Assessee – Sec 2(7)
Assessee means a person by whom any tax or any other sum of
money is payable under this Act and it includes :
• Every person in respect of whom any proceeding has been initiated
under the Act for the assessment of his income, loss or refund or the
income, loss or refund of any other person in respect of which he is
assessable.
• A person who is deemed to be an assessee under any provisions of
the Act.
• A person who is deemed to be an assessee in default under any
provisions of the Act.
Income – Sec 2(24)
• Profits and gains of business or profession.
• Dividend
• Voluntary contributions received by Charitable or Religious Trust or
Institutions or Association or University or Hospitals or Electoral Trusts.
• Value of any perquisite or profit in lieu of Salary taxable u/s 17 and Special
Allowance or Benefit specifically granted personal expenses or performance
of duties.
• Export incentives.
• Any interest, salary, bonus, commission or remuneration earned by a partner
of a firm from such firm.
• Any capital gains chargeable u/s 45.
• Winnings from lotteries, crossword puzzles, races including horse races, card
games and other games from gambling or betting of any form or nature.
Income – Sec 2(24)
• Any sum received by assessee from his employee towards welfare fund contributions, such as
Provident fund or superannuation fund.
• Any sum received under keyman insurance policy including sum allocated by way of bonus on such
policy.
• Any sum of money or moveable or immovable property received as gifts as stipulated in sec 56(2).
• Any consideration received for issue of shares exceeding the fair market value of shares referred u/s
56(2)(viib).
• Any sum of money received as an advance or otherwise in the course of negotiations for a transfer of
a capital asset, if such sum is forfeited and the negotiations do not result in transfer of such capital
asset.
• Assistance by way of subsidy/grant/cash incentive/duty drawback by whatever name called by Central
Government or State Government or any authority given to the assessee. (Note: Subsidy or grant
which is taken for determination of Actual Cost of Asset under section 43 (1) shall not be treated as
income. Similarly, subsidy or grant by Central Government, for the purpose of corpus of a trust or
Institution established by Central Government or State Government, shall not be treated as Income).
• Any sum of money or property received by any person, referred in clause (x) of sub-section (2) of
section 56, including gift to a non-resident / foreign company (on or after 5th July 2019).
• Conversion of stock-in-trade into a capital asset.
• Compensation on termination of employment or modification of terms of employment.
Heads of income
1. Income from salaries
2. Income from house property
3. Profits and gains of business or profession
4. Capital gains
5. Income from other sources
Note – Taxable income under the above 5 heads is called gross
total income after considering clubbing of income and set off of
losses, if any.
Rounding off
• Section 288A – Total income shall be rounded off to nearest Rs
10.
• Section 288B – The final Tax Liability shall be rounded off to
nearest Rs. 10.
UNIT
02 Residential Status of Various Persons
Names of Sub-Units
Introduction to Key Points Regarding Residential Status of a Person, Determination of Residential

Status, Hindu Undivided Family (HUF) [Sec. 6(2)] Company [Sec. 6(3)], Firm or an Association of
Persons (AOP) or Body of Individuals (BOI) [Sec. 6(4)], Any Other Person, Incidence of Tax [Sec. 5],
Income Received in India, Income deemed to be Received in India, Income deemed to Accrue or Arise
in India [Sec. 9].
Overview
This unit begins by explaining meaning of residential status, its types. Further, it discuses types of
income and its tax lability, meaning of incidence lawand its scope, determine the residential status of
each person.
Learning Objectives
In this unit, you will learn to:

 Identify the categories of assesses based on residential status
 Discuss the residential status
 Explain the different types of incomes and calculate tax liability
 Summarise the Hindu Undivided Family (HUF)
 Specify the income earned in India
Direct Tax Laws
Learning Outcomes
At the end of this unit, you would:

 Assess the types of residential status
 Understand the rule of determination of residential status
 Analyse the Residential status of each taxpayer
 Determine Hindu Undivided Family (HUF)
Pre-Unit Preparatory Material
 https://www.indiafilings.com/learn/residential-status-income-tax/#:~:text=Residential%20
status%20refers%20to%20a,years%20preceding%20the%20financial%20year.
 https://incometaxmanagement.com/Pages/Tax-Ready-Reckoner/Residential-Status/Meaning-of-
Residential-Status.html
2.1 INTRODUCTION
Residential status refers to a person’s status in relation to how long they have lived in India over the
previous five years. A taxpayer’s income tax liability is determined by his or her residence status
during the financial year and the four years prior to the financial year. In addition, when filing income
tax returns, the taxpayer must declare the appropriate residency status. The Income Tax Act divides
taxpayers into three categories based on their residence status:
1. Resident but not ordinarily resident
2. Resident
3. Non-resident
2.2 KEY POINTS REGARDING RESIDENTIAL STATUS OF A PERSON

For the purposes of income taxation in India, taxable persons are classified as follows:
 Resident
 Resident but Not Ordinarily Resident (RNOR)
 Non-Resident (NR)
Each of the above categories of taxpayers has a different taxability. Let us look at how a taxpayer
becomes a resident, an RNOR, or an NR before we get into taxability.
a. Resident: If a taxpayer meets one of the following two criteria, he is considered an Indian resident
1. Stay in India for a year is 182 days or more, or
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.
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UNIT 02: Residential Status of Various Persons JGI JAIN
If a citizen or person of Indian origin leaves India for employment during a fiscal year, then he will
only be considered a resident of India if he stays in India for 182 days or more. These individuals are
permitted to stay in India for a period of time that is greater than 60 days but less than 182 days.
These individuals are permitted to stay in India for a period of time that is greater than 60 days but
less than 182 days. For those whose total income (other than foreign sources) exceeds ` 15 lakh, the
period is reduced to 120 days or more beginning in the financial year 2020-21.
An individual who is a citizen of India and is not liable to tax in any other country will be deemed
to be a resident of India beginning in FY 2020-21. Only if his total income (other than from foreign
sources) exceeds ` 15 lakh and he has no tax liability in other countries or territories due to his
domicile or residence, or any other similar criteria, is he considered to be a resident.
b. Resident but Not Ordinarily Resident: If a person meets the residency requirements, the next step
is to determine whether he or she is a Resident and Ordinarily Resident (ROR) or a Resident but Not
Ordinarily Resident (RNOR). If he meets both of the following criteria, he will be a ROR:
1. Has been a resident of India in at least 2 out of 10 years immediately previous years and
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 an RNOR.
From FY 2020-21, a citizen of India or a person of Indian origin who leaves India for employment
outside India during the year will be considered a resident and ordinarily resident if he spends at
least 182 days in India. This condition, however, will only apply if his total income (excluding foreign
sources) exceeds ` 15 lakh. A citizen of India who is deemed to be a resident in India will also be a
resident and ordinarily resident in India (as of FY 2020-21).
c. Non-Resident: An individual satisfying neither of the conditions stated in (a) or (b) above would be
an NR for the year.
Taxability
A resident will be taxed in India on his global income, which includes both income earned in India and
income earned outside India.
NR and RNOR: In India, their tax liability is limited to the income they earn there. They do not have to
pay any taxes in India on their foreign earnings. Also, keep in mind that in the event of double taxation
of income, where the same income is taxed both in India and abroad, one can use the Double Taxation
Avoidance Agreement (DTAA) that India would have entered into with the other country to avoid paying
taxes twice.
2.3 DETERMINATION OF RESIDENTIAL STATUS

Basic rules for determining an assesee’s residential status
1. Each person’s residency status should be determined separately. Different rules apply to determining
the residential status of individuals, HUFs and other entities such as partnerships and corporations.
2. The residential income, which is always calculated for the previous year and which we will tax.
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3. A person’s residential status should be determined each year, as it is possible that his or her
residential status will change in the following year.
4. If an assessee is resident in India for any source of income in the previous year relevant to the
assessment year, he is deemed to be resident in India for all other sources of income in the previous
year relevant to the assessment year.
5. For any given year, a person may have been a resident of more than one country.
6. There is a distinction between residential status and citizenship. In the previous year, a person could
have been an Indian national/citizen but not an Indian resident or vice versa.
Residential Status is Important
The determination of residential status is critical because a resident who is an ordinary resident must
pay tax on all of his worldwide income, even if he is eligible for DTAA benefits, whereas a non-resident
or resident who is not an ordinary resident (RNOR) must pay tax only on income derived from India,
received or earned in India.
Determine an Individual’s or a Company’s Residential Status in India
For income tax purposes, understand about your residency status in India. It differs between an
individual and a corporation.
1. Individual: An individual’s residential status is determined by the number of days spent in India.
2. Company: In any other case, residential status is determined by the place of incorporation (in the
case of a company) and the place of control and management.
The purpose of determining a person’s residential status is to determine the tax liability on the total
income earned by that person in a fiscal year.
2.4 HINDU UNDIVIDED FAMILY (HUF)
Residential Status of Hindu Undivided Family (HUF) [Sec 6(2)]

A HUF is said to be resident in India in any previous year unless the control and management of its
affairs is located entirely outside of India during that year.
If a HUF’s control and management of its affairs was entirely outside India during the previous year, it
is said to be non-resident in India.
In other words, if no part of the control and management of its affairs is located in India, it will be
considered non-resident in India.
The decisions made regarding the HUF’s affairs are referred to as control and management. Control
and management are located at the location where the HUF’s business decisions are made.
4
Once the HUF has established residency in India, it must be determined whether it is:
 Resident in India and ordinarily resident there; or
 Resident in India, but not ordinarily resident.
If the HUF’s karta meets both of the following conditions, the HUF is said to be resident and ordinarily
resident in India.
a. He (Karta) must have lived in the United States for at least two of the ten years immediately preceding
the relevant previous year; and
b. He must have spent at least 730 days in India in the seven years preceding the relevant previous
year.
If the HUF’s manager (Karta) does not meet anyone, or both, of the conditions listed in clauses (a) and
(b) above during the relevant previous year, the HUF is said to be resident but not ordinarily resident in
India.
The residential status of HUF’s ‘Karta’ for the relevant previous year has no bearing on whether HUF is a
Resident or not. However, Karta’s status in the preceding years is relevant in determining whether HUF
is ordinarily resident in India or not.
Except for individuals and HUF, everyone else is either a resident or a non-resident. They are not to be
divided into two categories: ordinarily resident and not ordinarily resident.
Residential status of ‘A Company’ as per Section 6(3)

[Sec.6(3)(i)] Indian Company
A person’s residential status must be determined in order for their income to be taxed. The Income Tax
Act originated this phrase, which has nothing to do with a person’s country or citizenship. Each year, the
assessee’s residence status is determined using the ‘prior year.’ In one year, a person may be a resident
and, in the following, a non-resident. The residential status of the assessment year is immaterial.
The state in which a company is registered determines its residential status. Section 6(3) lays out the
following requirements in this regard.[Section 6(3)] Resident A company is said to be resident in India
in any previous year if:
a. it is an Indian company; OR
b. its place of effective management is in India at any time during that year. A location where critical
management and commercial decisions necessary for an entity’s overall functioning are made is
referred to as a “place of effective management.”
[Sec. 6(3)(ii)] Foreign Company having turnover more than `50 crores in the previous year
For foreign company, the phrase ‘place of effective management’ (POEM) is used to determine the
domicile of a corporation created in another country. Almost all of India’s tax treaties recognise the
concept of ‘place of effective management’ for determining a company’s residence as a tie-breaker rule
for avoiding double taxation. Each case’s POEM will be assessed based on the facts and circumstances.
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Furthermore, an entity may have several management locations, but only one effective management
location at any given moment. POEM must be determined on a year-to-year basis since “residential
status” must be determined each year. The process of determining POEM would be primarily based on
whether or not the company is actively engaged in business outside of India.
The Central Board of Direct Tax (CBDT) issued a set of guiding principles in the form of a circular dated
24-01-2017 [Circular No. 06 of 2017] to provide a comprehensive and clear understanding of the concept
of POEM for a company.
The CBDT’s ‘Place of Effective Management’ guidelines, issued via Circular No. 6/2017, dated 24-01-2017,
do not apply to a foreign company with a turnover or gross receipts of Rs. 50 crores or less in a fiscal
year.
[Sec. 6(3)(iii)] Foreign Company having turnover less than `50 crores in the previous year.
A company whose turnover is less than 50 cr. Rupees in the previous year is always treated as non-
resident in India -Circular No. 8/2017, dated February 23, 2017. In other words, a foreign company (whose
annual turnover/gross receipts is Rs. 50 crore or less) cannot be resident in India from the assessment
year 2017-18 onwards.
2.5 FIRM, AN ASSOCIATION OF PERSON (AOP) OR BODY OF INDIVIDUALS (BOI) [SEC-6(4)]
A Firm, AOP, BOI Resident in India
When a firm, AOP, or other entity is said to be resident in India in any previous year unless the control
and management of its affairs is located entirely outside of India during that year.
The control and management of a firm is in the hands of the partners, so if the partners regularly meet
in India to discuss the firm’s affairs, the firm is said to be resident in India.
A Firm, AOP, BOI Non-Resident in India
Non-resident entities are those whose control and management of their affairs took place entirely
outside of India during the preceding year.
To put it another way, if you’re a Non-Resident, you shouldn’t have any control or management in India.
2.6 ANY OTHER PERSON

Local authority, artificial juridical person are falls under any other person category. A local authority is
an organisation that is formally in charge of all public services and facilities in each area. Municipality,
panchayat, Cantonment Board, Port, trustees called local authority.
A juridical person is a non-human legal entity that is not a single natural person but rather an
organisation recognised by law as a legal person, such as a corporation, government agency or non-
governmental organisation (NGO), university. A juridical person, also known as an artificial person,
juridical entity, juridic person, juristic person, or legal person, has certain duties and rights that are
outlined in relevant laws.
6
Residential status of Local authority, artificial juridical person

 Resident: Local authorities and artificial juridical persons have a residential status. Local
governments and artificial juridical persons will be considered Indian residents if their place of
control and management is in India. Control and management can be exercised entirely or partially
from a location in India.
 Non-Resident in India: A person is considered to be non-resident if the control and management of
the affairs were entirely located outside of India.
2.7 INCIDENCE OF TAX-(5)

The determination of a person’s tax liability, on whom the final tax is levied, is known as tax incidence.
To put it another way, it is the decision of the person who pays the final tax. The person who is subjected
to the tax may transfer the burden of the tax to another person.
Taxation Incidence — Scope of Total Income (Section 5)
We cannot calculate an assessee’s total income unless we know where he lived in India the previous year.
The assessee can be one of the following, depending on their residence status:
 A person who lives in India; or
 Non-Resident in India
Individuals and HUFs, on the other hand, cannot simply be called Indian residents. If a person lives in
India, then he will be one of the following:
 If you are a resident and ordinarily resident in India; or
 If you are non- resident and ordinarily resident in India
Other categories of people must be either Indian residents or non-Indian residents. In their case, there
is no distinction between ordinarily resident and not ordinarily resident.
Scope of Total Income according to residential status is as under:

A. In the case of Resident in India (resident and ordinarily resident in case of individual or HUF) [Section
5(1)]:
The following incomes from whatever source derived form part of Total Income in case of resident
in India/ordinarily resident in India:
(a) any income which is received or (b) any income which accrues (c) any income which accrues or
is deemed to be received in India in or arises or is deemed to accrue arises outside India during the
the relevant previous year by or on or arise in India during the relevant previous year.
behalf of such person; relevant previous year;
B. In the case of a Resident but not Ordinarily Resident in India (In the case of individuals and HUF
only) [Section 5(1) and its proviso]:
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The following incomes from whatever source derived form part of Total Income in the case of
resident but not ordinarily resident in India:
(a) any income which is received (b) any income which accrues (c) any income which accrues or arises
or is deemed to be received in or arises or is deemed to to him outside India during the relevant
India in the relevant previous accrue or arise to him during previous year if it is derived from a
year by or on behalf of such the relevant previous year; business controlled in or a profession
person; set up in India.
C. In the case of Non-Resident [Section 5(2)]:

The following incomes from whatever source derived form part of Total Income in the case of Non-
Residents in India:
(a) any income which is received or is deemed to be (b) any income which accrues or arises or is
received in India during the relevant previous year by deemed to accrue or arise to him in India during
or on behalf of such person; the relevant previous year.
In all three cases above, income described in items (a) and (b) must be included in total income of all
three categories of assessees in the same way. The income described in item (c), i.e., income earned or
arising outside of India, is as follows:
i. If the assessee is not a resident of India, it is not included in the total income.
ii. Only if it is derived from a business controlled in India or a profession set up in India is it included in
the total income of a resident but not ordinarily resident in India.
If an assessee has various incomes both inside and outside India, the tax incidence is likely to be higher
in the case of a resident and ordinarily resident in India, a little lower in the case of a resident but not
ordinarily resident in India, and the lowest in the case of a non-resident in India.
The provisions regarding incidence of tax above may be summarised in the following table:
Particulars of Income Whether Taxable

Resident and Ordinarily Resident Not-Ordinarily Non-
Resident Resident
1. Income received or deemed to be received Yes Yes Yes
in India whether earned in India or
elsewhere.
2. Income which accrues or arises or is Yes Yes Yes
deemed to accrue or arise in India during
the previous year, whether received in
India or elsewhere.
3. Income which accrues or arises outside Yes Yes No
India and received outside India from a
business controlled from India.
4. Income which accrues or arises outside Yes No No
India and received outside India in the
previous year from any other source.
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Particulars of Income Whether Taxable

5. Income which accrues or arises outside No No No
India and received outside India during
the years preceding the previous year and
remitted to India during the previous year.
2.8 INCOME RECEIVED IN INDIA AS PER (SECTION 7)

Income received in India: Any income received in India by any assessee during the previous year is
taxable in India, regardless of the assessee’s residency status or the location of the income’s accrual.
The term “receipts” refers to the first receipt: The term “receipt of income” refers to the first time the
money is placed in the recipient’s possession. Any remittance or transmission of an amount received as
income to another location does not constitute receipt within the meaning of this clause at that location.
This principle is important in determining the year of receipt, as well as determining the taxation
incidence where the income is solely dependent on receipt.
Non-residents, for example, do not have their foreign income assessed unless it is actually received in
India. In their case, unless the money is received as income from an outside source when it arrives in
India, it will not be considered an income receipt. If a non-resident received moneys as income or exempt
income outside of India (in a previous year or during the previous year) and transferred the funds into
India during the accounting year, the moneys will not be considered income in the eyes of the law.
2.9 INCOME DEEMED TO BE RECEIVED IN INDIA (SECTION 7)

Incomes deemed to be received are incomes that are not actually received but are included in the
assessee’s income under the law.
Income Deemed to be Received in India [Section 7]
Even if actual receipt is not made, the following incomes are deemed to bereceived in India in the
previous year:
1. Contribution by the employer to the recognised provident fund of more than 12% of the employee’s
salary.
2. Interest is credited to the employee’s RPF at a rate of more than 9.5 percent per year.
3. The contribution made by the Central Government or any other employer to an employee’s account
under a notified contributory pension scheme referred to in Section 80CCD in the previous year.
4. The Tax Officer adds the amount to the employee’s account if the employee has an old provident
fund that was not recognised previously but is now recognised. If the old funds had been recognised
earlier, they would have been taxed sooner. As a result, it is now taxable as income deemed to be
received.
The person is also deemed to have received tax deducted at source. The company’s dividend is considered
received in the year in which it is declared, distributed or paid. The previous year’s income is also
considered when calculating the interim dividend.
9
JGI JAIN
Direct Tax Laws
2.10 INCOME DEEMED TO ACCRUE OR ARISE IN INDIA [ SECTION 9]

Certain incomes are considered to have been earned in India under Section 9 of the Income Tax Act, 1961,
even if they accrue or arise outside of India.
Within the ambit of tax liability, Indian Income Tax Laws cover residents, non-residents and residential
but non-ordinary residents’ taxpayers. The Act also imposes a tax liability on foreign companies’ and
non-resident Indians’ income to the extent that it is sourced within India.
It is important to note that Sections 9 and 5 of the Act are inter-twined, hence a thorough understanding
of Section 5 is required first.
Section-5 of the Income Tax Act, 1961
Section 5 establishes the taxability of various items, including:

1. Residents, non-residents, and residents who are not ordinarily residents are all taxed on income
received or assumed to be received in India.
2. In the hands of all three individuals listed above, income that has accrued or arisen or is deemed to
have accrued or arisen, within India is taxable.
3. Income earned or arising outside of India is taxable in India for residents, but not for non-residents
or residents who are not ordinarily residents.
Residential status
According to the Income Tax Act of 1961, a taxpayer’s residence status can be one of the following:
A. Resident: To be a resident of India, the taxpayer must meet one of the following two requirements:
a. Has spent at least 182 days in India in the previous year
OR
b. Have spent at least 365 days in India in the previous four years
And
In the relevant financial year, spends at least 60 days in India.
B. Resident but not Ordinarily Resident: If a person meets both of the following criteria, he falls into
this category:
a. He has spent at least two of the previous ten years as a “Resident of India.”
AND
b. Has spent at least 730 days in India in the previous seven years.
C. Non-Resident of India: Indians who are not citizens of the United States (NRI)
If the taxpayer does not meet any of the above conditions of Resident or Resident Non-Ordinarily
Resident, he is said to have the residential status of an NRI.
10
Section (9) of the income tax act, 1961
The Income Tax Act’s Section 9 is a deeming provision. In a few circumstances, it specifies a certain
income that is deemed or supposed to accrue or arise in India. Non-residents’ income cannot be taxed in
India unless it falls within the four corners of the Income Tax Act, Section 5 read with Section 9.
Certain incomes are deemed to have arisen in India for tax purposes under Section 9(1). Even if it accrues
or arises outside of India, certain income is said to have been incurred in India.
Foreign companies and NRIs’ business income is taxed in India to the extent that it accrues or arises:
 through a business connection in India
 through any asset located within India
 through any source of income within India
Section 9(2) of the Income Tax Act defines deemed income as income incurred or arising in India for
taxation purposes
Income from business connections in India:

1. India is home to a branch office
2. In India, a subsidiary of a foreign holding company
3. Non-Residents’ agent or organisation
Any profit made by non-residents from such a connection is said to have been made within India and is
taxable under the Income Tax Act of 1961.
a. Income from assets or property located in India: Any income earned from any property located
in India, whether movable, immovable, tangible, or intangible, is considered incurred within India
for tax purposes.Mr. X, for example, resides in Beijing. He receives a royalty for a book that was
published in India. Such royalties are taxable in India because they are deemed to have accrued in
India, regardless of whether they are received in or outside of India.
Income arising from the transfer of capital assets located in India is said to have incurred in India if
the asset is located in India, regardless of the transferor’s or transferee’s residential status.
b. Salary earned for services performed in India: Any income earned as a salary for services
performed in India, regardless of whether the salary is paid within or outside the country.
c. Salary earned for services rendered outside India: Any Indian citizen’s salary paid by the Indian
government for services rendered outside India is considered to have been incurred in India.
d. Interest Income: In India, any interest received from the following is taxable in the hands of the
recipient:
 Except when the interest is paid in connection with money borrowed for use in a business or
profession outside India, by the Government, or
 by Indian residents.
 By NRIs, as long as the interest is related to the money borrowed for use in a business or
profession carried on in India.
11
Direct Tax Laws
e. Royalty income: Any royalty paid by any of the following is taxable in India in the hands of the
recipient of such income:
 Unless the royalty is paid in connection with the right or information used in a business or
profession located outside India, it is paid by the government, or
 by an Indian resident.
 By NRIs, as long as the royalty is in connection with a right or information that is used in a
business or profession conducted in India.
f. Fee Paid for technical service: Fees paid for rendering technical services are taxable in the hands of
the recipient of such income in India if paid by one of the following:
 by the government
 Unless the service is provided in connection with a business or profession that is based outside
of India.
 By NRIs, provided that the service is used in connection with a business or profession conducted
in India.
g. Distribution of Profits: If the entire business operations are not confined within India and are
conducted globally, only that portion of the total operation that is attributable to the operations
conducted in India is deemed to be accrued in India and taxable within India under Section 9(1)(I).
For example, in any business operation, different countries are responsible for manufacturing and
selling. Manufacturing, for example, takes place in India, and the goods produced are exported.
Profit attributable to selling operations is deemed not to accrue in India in this case.
In the event that the income from operations carried out in India cannot be determined, Rule 10 of
the Income Tax Rules, 1962, takes precedence. As per the following rule:
 Assessing Officers determine a percentage of total turnover that has accrued or arisen in India
after considering the facts and circumstances.
OR
 Any amount that has the same proportion of total profit as the total receipts of the business.
OR
 Any other method that the Assessing Officer deems appropriate.
Conclusion 2.11 CONCLUSION
 In India, a person’s residency status is important for taxation purposes.

 In India, a non-entire resident’s income is not taxable, but a resident’s and ordinary resident’s entire
income is taxable, even if he earned or received income from foreign sources in the previous year.
 Residential status refers to a person’s status in relation to how long they have lived in India over the
previous five years.
 A person is considered to a resident of India, if he stays in India for 182 days or more or stays in India
for 365 days in immediate 4 preceding year and 60 days or more in relevant year.
12
 A HUF is said to be resident in India in any previous year unless the control and management of its
affairs is located entirely outside of India during that year.
 When a firm, AOP, or other entity is said to be resident in India in any previous year unless the
control and management of its affairs is located entirely outside of India during that year.
 Non-resident entities are those whose control and management of their affairs took place entirely
outside of India during the preceding year.
 A local authority is an organisation that is formally in charge of all public services and facilities in
each area.
2.12 GLOSSARY
 Domicile: It refers to a place where a person resides with an intention of living their permanently
 Ambit: The range or area of something
 Intertwined: It means connected together and difficult to separate
 Possession: When a person is owing or controlling something
2.13 CASE STUDY: STATUS OF INCOME TO BE TAXABLE
Case Objective
The objective of this case study is to determine whether the income generated in India considered to
be taxable or not?
Ramesh was born in India in 1976 and moved to the U.K. for further studies after doing graduation from
India. He completed his studies in the U.K. and started doing a job. After some years he came to India
but stayed only for 3 months in India. He used to do this every year. Along with job he started a business
with a company in India. In the first year of his business where he supplied goods to a company which
is situated in India he made a profit of ` 3 lakhs. He was taxed by the Income tax authorities in India but
he argued and refused to pay the tax.
Question
1. Discuss whether he should be taxable? Why?
(Hint: Any profit made by non-residents from such a connection is said to have been made within
India and is taxable under the Income Tax Act of 1961. Refer Section 2.10.)
2.14 SELF-ASSESSMENT QUESTIONS
A. Essay Type Questions

1. Explain the residential status of any other person.
2. Define Income received In India.
3. Define Determination of residential status
13
Direct Tax Laws
2.15 ANSWERS AND HINTS FOR SELF-ASSESSMENT QUESTIONS
A. Answer for Essay Type Question

1. Local authorities and artificial juridical persons have a residential status. Local governments
and artificial juridical persons will be considered Indian residents if their place of control and
management is in India. Control and management can be exercised entirely or partially from a
location in India. Refer to Section Any other person
2. Income received in India: Any income received in India by any assessee during the previous year is
taxable in India, regardless of the assessee’s residency status or the location of the income’s accrual.
Refer to Section Income received in India as per (Section 7)
3. The determination of residential status is critical because a resident who is an ordinary resident
must pay tax on all of his worldwide income, even if he is eligible for DTAA benefits, whereas a non-
resident or resident who is not an ordinary resident (RNOR) must pay tax only on income derived
from India, received or earned in India. Refer to Section Determination of Residential Status
@ 2.16 POST-UNIT READING MATERIAL
 https://incometaxmanagement.com/Pages/Tax-Ready-Reckoner/Residential-Status/Meaning-of-
Residential-Status.html
 https://taxguru.in/income-tax/residential-status-individuals-income-tax-act-1961.html
2.17 TOPICS FOR DISCUSSION FORUMS
 Compare and contrast the tax systems in India and the UK.
14
Residential Status of various
Persons
Unit – 02
Residential Status of Individuals – Sec 6(1)
An individual is said to be resident in India in any previous year if
he fulfills any one of the following two basic conditions:
• He is in India, in the previous year for a total period of 182 days
or more.
OR
• He is in India for a total period of 60 days or more during the
previous year AND 365 days or more during 4 years preceding
the previous year.
Note: The day on which he enters India, as well as the day on
which he leaves India, shall be considered as stay in India.
Resident and Ordinarily Resident – Sec 6(6)
In addition to fulfilling the above basic conditions, any individual if he
fulfills both of the following conditions he will be treated as ordinarily
resident in India, in the previous year:
• He has been resident in India in at least 2 out of 10 previous years
immediately preceding the relevant previous year;
AND
• He has been in India for a period of 730 days or more during 7 years
immediately preceding the relevant previous year.
Note: An individual who satisfies one or more basic conditions as per
section 6(1), but does not satisfy the two additional conditions laid down
in section 6(6) [as above], is treated as resident but not ordinarily
resident in India.
Residential Status of HUF – Sec 6(2)
• A Hindu Undivided Family is said to be resident in India if the control and
management of its business affairs is situated wholly or partly in India.
• A Hindu Undivided Family is non-resident in India if the Control and
management of its business affairs is situated wholly outside India.
• If the control and management of the business affairs of the Hindu Undivided
Family is situated wholly or partly in India and if the manager (Karta) satisfies
the conditions of section 6(6), then the Hindu Undivided Family is considered
as “Ordinarily Resident”.
• If the control and management of the business affairs of the Hindu Undivided
Family is situated wholly or partly in India and if the manager (Karta) fails to
satisfy any of the conditions of section 6(6), then the Hindu Undivided Family
is considered as “Not Ordinarily Resident”.
Residential Status of Companies – Sec 6(3)
The following types of companies are considered resident in India:
• Indian company.
• Any other company whose turnover/gross receipts in the previous
year is more than Rs. 50 Crore and the place of effective
management is situated wholly in India.
In any other case the company shall be considered non-resident.
Note: Place of effective management means a place where key
management decision and commercial decision that are necessary for
the conduct of the business entity as a whole are, in substance made.
Residential Status of Firm or AOP – Sec 6(4)
A Firm, Association Of Persons and every other person is
considered as resident if the control and management is situated
wholly or partly in India. If the control and management is
situated wholly outside India, such firm, Association Of Persons
or any other person is considered as non-resident.
Scope of Total Income – Sec 5
PARTICULARS RESIDENT & RESIDENT & NON-
ORDINARILY NOT- RESIDENT.
RESIDENT. ORDINARILY
RESIDENT.
1. Income received or deemed to be received in India. Taxable Taxable Taxable
2. Income accruing/arising or deemed to accrue or arise Taxable Taxable Taxable

in India.
3. Income accruing or arising outside India from :
a) Business/profession controlled in India. Taxable. Taxable NOT Taxable
b) Any other source. (income accruing or arising and received
outside India) Taxable. NOT Taxable NOT Taxable.
Income Deemed to Accrue or Arise in India – Sec 9
Following income shall be deemed to accrue or arise in India:
• SECTION 9 (1)(i):-
• Any income from business connection in India.
• Any income from or through property in India.
• Any income from or through any asset or source of income in India.
• Any income through transfer of capital asset situated in India.
• SECTION 9 (1) (ii) - Any salary income if earned in India.
• SECTION 9 (1) (iii) - Any salary payable by the government of India to Indian citizen for rendering
services outside India.
• SECTION 9 (1) (iv) - Dividend paid by Indian company outside India.
• SECTION 9 (1) (v) - Interest payable by government to resident & non-resident
• SECTION 9 (1) (vi) - Royalty payable by government to resident & non-resident
• SECTION 9 (1) (vii) - Fees for technical services payable by government to residents & non-
residents.
• Section 9 (1) (viii) – Any gift received by a non-resident / foreign company from a resident person
including from a not ordinarily resident person, on or after 5th July 2019.
Exceptions to Section 9
• The following shall not be considered as business connection in India:
• No Income of a non-resident shall be deemed to accrue or arise in India by
mere purchase of goods in India for the purpose of export.
• If the non-resident is running a news agency or publish of newspapers,
magazines or journals, no income shall be deemed to accrue or arise in India
from mere collection of news/views in India transmitting out of India.
• No Income shall be deemed to accrue or arise in India, through or from
operations confined to the shooting of Cinematograph film in India by non-
resident individual who is not citizen in India or by non-resident firm not
having any partner who is citizen of India or by non-resident company not
having any share holder who is a citizen or resident in India.
• Display of uncut and unassorted diamonds a special notified zone, by a
foreign company engaged in the business of mining diamonds.
Income Tax Slab and
Rates of Tax
Unit – 03
Slab rates for AY 2022-23
Slab rates for INDIVIDUALS (Both Men and Women (Resident)
less than 60 years / non-resident (any age)/Hindu Undivided
Family/Association Of Persons /Body Of Individuals /Artificial
Juridical Persons:
INCOME (per annum) RATE OF
TAX.
 Income up to Rs.250,000/- (Basic Exemption Limit) NIL
 Above Rs.250,000/- to Rs.500,000/- 5%
 Above Rs.500,000/- to Rs.10,00,000/- 20%
 Above Rs. 10,00,000/- 30%
Slab rates for resident individuals – AY 2022-23
Slab rates for RESIDENT INDIVIDUALS aged 60 years or more but
less than 80 years (at any-time in the previous year)
INCOME (per annum) RATE OF TAX.
 Income up to Rs.300,000/- (Basic Exemption Limit) NIL.

 Above Rs.300,000/- to Rs.500.000/- 5%
 Above Rs.500,000/- to Rs.10,00,000/- 20%
 Above Rs.10,00,000/- 30%
Slab rates for resident individuals – AY 2022-23
Slab Rate for RESIDENT INDIVIDUALS aged 80 years & above (at
anytime during the previous year)
INCOME (per annum) RATE OF
TAX.
 Income up to Rs.500,000/- (Basic Exemption Limit) NIL.
 Above Rs.500,000/- to Rs.10,00,000/- 20%
 Above Rs.10,00,000/- 30%
Rebate under section 87A
A rebate from the tax payable by resident individual assessee
can be claimed up to Rs. 12,500, whose total income does not
exceed Rs. 500,000. In other words, the rebate claimed shall be
actual tax liability (before education cess of 4%) or Rs. 12,500,
whichever is lower. In case the total income of the resident
individual assesse is exceeding Rs. 500,000 then this section is
not applicable.
The surcharge rates
The surcharge rates (as a percentage of income tax) is as below

Net Income Range (Rs.) Surcharge on Income Surcharge on any other
u/s 111A and 112A income
0 – 50 Lakhs Nil Nil
Above 50 Lakhs – 1 Crore 10% 10%
Above 1 Crore – 2 Crores 15% 15%
Above 2 Crores – 5 Crores 15% 25%
Above 5 Crores 15% 37%
Special Rates of Taxes – Tax on LTCG u/s 112
• Long term capital gains shall be chargeable to tax @ 20% (Basic
Exemption benefit available).
• Long term capital gains arising from the private transfer (not through
stock exchange) of listed securities or unlisted securities or shares of
closely held companies, shall be liable to tax @ 10% on long term
capital gains without indexation or at 20% on long term capital gains
with indexation, whichever is beneficial to the assessee.
• If there is loss from any other sources or head of income which is
eligible for set off, such loss can be set off against long term capital
gains and balance if any can be taxed after considering the basic
exemption limit as above.
• Assessee is not entitled to claim any deductions under chapter VI A in
respect of long term capital gains referred u/s 112.
Special Rates of Taxes – Tax on LTCG u/s 112A
• This section applies only when the long term listed securities are transferred through stock exchange
and Securities Transaction Tax is paid on such transfer. It also applies on sale or redemption of Unit
Linked Insurance Policy(s) where exemption u/s 10(10D) is not available
• Such Long Term Capital Gains shall be in excess of Rs. 100,000.In other words, Rs. 100,000 shall be
considered as an exemption limit and transfer shall be on or after 01-04-2018.
• The Long Term Capital Gains in excess of Rs. 100,000 due to transfer of listed securities through
stock exchange and sale or redemption of Unit Linked Insurance Policy(s), shall be taxed at a special
rate @ 10% (Basic Exemption benefit also available).
• The cost of acquisition for Section 112A is as follows –
Step 1 – Find out the actual cost of acquisition of listed securities
Step 2 – Find out:
(i) Fair market value as on 31/01/2018; or
(ii) Full value of consideration received on such transfer
Whichever is lower of (i) or (ii) will be the value of step 2.
The cost of acquisition shall be, Step 1 or Step 2, whichever is higher.
• Indexation benefit is not available in case the tax is payable is u/s 112A. Also Chapter VI-A deductions
and rebate u/s 87A is not available.
Special Rates of Taxes – Tax on STCG u/s 111A
• Any Short Terms Capital Gains arising from transfer of an equity shares of a
company or a unit of equity oriented funds, shall be liable to tax @ 15% (Basic
Exemption benefit available) if transaction takes place through stock
exchange and Security Transaction Tax (STT) is paid.
• If other income of assessee is more than basic exemption then such income
shall be taxed as per slab rate and STCG u/s 111A shall be taxed at flat 15%.
• However, for resident individual and HUF if other income is lower than basic
exemption then unutilized basic exemption can be reduced from STCG u/s
111A and balance shall be taxed at 15% (applicable to LTCG u/s 112 and 112A
also)
• Assessee is not entitled to claim any deductions under chapter VI A in respect
of short term capital gains referred u/s 111A.
Special Rates of Taxes – Dividend from specified
foreign company – Sec 115BBD
• Any dividend declared, distributed or paid by a specified foreign company to
an Indian company shall be chargeable at special rate of 15%.
• No deduction in respect of any expenditure shall be allowed to Indian
company in respect of such dividend from a specified foreign company.
• Specified foreign company means a foreign company in which the Indian
company holds 26% or more in nominal value of equity capital of the
company.
• Such dividend income shall be converted into Indian rupees. The exchange
rate shall be telegraphic transfer buying rate of such currency as on last day of
month immediately preceding the month in which dividend is declared,
distributed or paid by company.
Special Rates of Taxes – Taxability of anonymous
donations – Sec 115BBC
• Taxability of anonymous donations is applicable to institutions covered
u/s 10(23C) and trust created for wholly or partly for charitable or
religious purposes u/s 11.
• This section does not apply to anonymous donations received by:
• Wholly religious institution or trust;
• A trust or institution created for wholly religious and charitable purposes
• A medical or educational institutions, wholly or substantially financed by Govt.
•Anonymous donations are taxable at 30% on total anonymous donations in excess of
Rs. 100,000 or 5% of total donations received.
Special Rates of Taxes – Manufacturing domestic
companies – Sec 115BA
• Domestic company engaged in business of manufacture or
production of any article or thing and research to or distribution
of such article or thing manufactured or produced and set up on
or after 01-04-2016.
• The tax rate on income of above-mentioned company is at 25%
plus surcharge at 7% if the income exceeds Rs. 1 Crore but does
not exceed Rs. 10 Crore or 12% surcharge if the income
exceeds Rs. 10 cores and health and education cess at 4%.
Special rate of tax for certain domestic companies
– Sec 115BAA
• This section applies to domestic companies engaged in any
business including trading, manufacturing, services etc.
• The total income of such companies shall be at its option, be
taxable at a concessional rate of 22% plus surcharge @ 10%
and health and education cess @ 4%.
• The levy of surcharge @ 10% is irrespective of the amount of its
total income.
Special rate of tax for certain domestic companies –
Sec 115BAB
• This section applies to domestic company engaged in the
business of manufacture or production of any article or a thing
and research in relation to or distribution of such article or thing
manufactured or produced by it.
• The total income of such companies shall be at its option, be
taxable at a concessional rate of 15% plus surcharge @ 10%
and health and education cess @ 4%.
• The levy of surcharge @ 10% is irrespective of the amount of its
total income.
Tax on casual income – Section 115BB
Where the total income of an assessee includes casual income, the tax shall
be chargeable at flat 30% on such income plus Health and Education cess
@ 4%. Taxability under this section is subject to the following:
• No expenditure or allowance can be allowed against such income.
• No deduction under chapter VI A shall be allowed.
• No benefit of carry forward and set off of loss / unabsorbed depreciation is
available against such casual income.
• Even the benefit of basic exemption limit is denied as the casual income is
subject to tax at flat rate.
• Rebate under section 87A is available to casual income.
Income from Salary
Unit – 04
Basis of Charge / Chargeability section (Sec 15)
Any amount due to or received by any employee including arrears of

salary from an employer or former employer and falling within the
purview of salary, is chargeable to tax under the head income from
salary.
BASIC CRITERIA FOR SALARY IS “EMPLOYER-EMPLOYEE
RELATIONSHIP”
Note: Salary is taxable either on due basis or on receipt basis,
whichever is earlier
Definition of Salary – Sec 17(1)
Salary includes:
• Any wages;
• Any annuity or pension;
• Any gratuity;
• Any fees, commission, perquisites, Profits in lieu of or in addition to any salary or
wages;
• Any advance of salary;
• Leave encashment;
• The Annual accretion to a recognized provident fund to the extent of the following:-
• Employers contribution in excess of 12% salary;
• Interest credited to the recognized provident fund in excess of 9.5% P.A.
•The accumulated balance from an unrecognized provident fund account to recognized provident fund
to the extent taxable.
•Contribution made by central government in the previous year to the account of employee under a
pension scheme referred under Section 80CCD (NPS).
Profits in Lieu of Salary – Sec 17(3)
• Any amount of compensation or due to an assessee from his employer
or former employer in connection with termination of employment or
modifications of terms and conditions of the employment.
• Any payment received or due to assessee from his employer or former
employer or from provident fund or any other fund or sum received
under keyman insurance policy, including bonus on such policy.
• Any amount received or due to assessee in lump sum from any person
before joining employment or after cessation/termination of
employment.
House Rent Allowance (HRA) – Sec 10(13A)
Least of the following is exempted:
• Rent paid in excess of 10% of the salary (Rent paid (-) 10 % of salary) OR
• If accommodation is in Mumbai, Calcutta, Delhi and Chennai 50% of salary and for
other cities 40% of the salary. OR
• Actual House Rent Allowance received.
Note 1 : Salary for this purpose means Basic salary + Dearness Allowance (DA) if
provided in terms of employment + commission as a percentage of turnover.
Note 2: Exemption is available for relevant period where the accommodation was
occupied by the assessee in the previous year. Exemption is not available to an
assessee who lives in own house for which he does not paying any rent.
Note 3: This exemption is not available to an assesse in case he opts for alternative
tax regime u/s 115BAC.
Special allowances – Sec 10(14)
The following allowance is exempt to the extent of amount utilized for the
specified purpose (official purpose) for which the allowance is received.
Taxable Allowance = Actual amount received (–) Actual amount utilized (official
purpose). The following are examples:
• Travelling allowance, (Exempt under alternative tax regime u/s 115BAC)
• Conveyance allowance (Journey between office and residence is not covered
under conveyance allowance) (Exempt under alternative tax regime u/s
115BAC).
• Daily allowance (Exempt under alternative tax regime u/s 115BAC).
• Helper allowance (Not exempt under alternative tax regime u/s 115BAC).
• Research allowance (Not exempt under alternative tax regime u/s 115BAC).
• Uniform allowance (Not exempt under alternative tax regime u/s 115BAC).
• Tiffin allowance (Not exempt under alternative tax regime u/s 115BAC).
Special allowances – Sec 10(14)
For the following allowances, the exemption would be least of actual allowance
received or amount specified in Rule 2BB.
• Hill compensatory allowance – Rs. 300 per month for a place located 1,000 meters
or above sea level or Rs. 800 per month for notified areas and Rs. 7,000 per month
in in Siachen area of Jammu & Kashmir.
• Transport allowance for employees working in transport system – 70% of allowance
received or Rs. 10,000 per month, whichever is lower.
• Children education allowance – Rs. 100 per month per child up to maximum of two
children.
• Hostel expenditure allowance – Rs. 300 per month per child up to maximum of two
children.
Note - Since Dearness Allowance, City Compensatory allowance, Medical allowance,
Telephone allowance, Transport Allowance (for travel between office to residence and
back) etc., is not a part of Section 10(14), they are fully taxable if received by the
employee.
Income from House Property
Unit – 05
Charging Section or Basis of charge – Sec 22
• The annual value of property comprising of building or land
appurtenant there to, of which the assesse is the owner is chargeable
to tax under the head “Income from House Property”.
• The annual value of the building or a portion or the building occupied
by the assesse for the purpose of business or profession carried on by
him, is not chargeable to tax under this head.
• It should be specifically noted that the annual value of the building /
property is taxable under this head but not the rental income. No doubt,
the rental income is considered for determination of annual value but
fair rent plays an important role in case of let out property in
determination of annual value.
Let out Property – Sec 23(1)
Below is the format to determine taxable income from house
property:
Particulars Amount(Rs.) Amount(Rs.)
Gross Annual Value xxx

Less: Property/Municipal Taxes paid to Local Authority (xxx)
NET ANNUAL VALUE XXX
Less: Deductions U/S 24:
(a) 30% of Net Annual Value xxx
(b) Interest on housing loan/Borrowed Capital (Paid or Payable) xxx (xxx)
INCOME FROM HOUSE PROPERTY XXX
Steps for computing the Gross Annual Value (GAV)
• Step 1: Municipal value (MV) vs. Fair Rent (FR). Whichever is higher is FR of
Step 1.
• Step 2: Fair Rent of Step 1 vs. Standard Rent (SR). Whichever is lower is FR
of Step 2.
• Step 3: Fair Rent of Step 1 or 2 vs. Actual Rent (AR).
If AR is greater than FR, then AR itself is GAV.
If AR is lower than FR due to vacancy, then AR itself is GAV.
If AR is lower than FR due to other factors other than vacancy, then FR itself is
GAV.
• NOTE 1: Step 2 is relevant only if Standard Rent is fixed for the property
otherwise, Step 1 is followed by Step 3.
• Note 2: Actual Rent includes actual rent received or receivable for the let out
period for a single unit of property. (only in a case unrealized rent).
Unrealised Rent: (Rule 4)
If any amount of rent is not capable of being realised, then such portion of rent
shall not be included in computing the actual rent. Exclusion of unrealised rent
is permissible if the following conditions under Rule 4 are satisfied:
• The tenancy is Bonafide
• The defaulting tenant has vacated, or steps have been taken to compel him to
vacate the property.
• The defaulting tenant is not in occupation of any other property of the
assesse.
• The assesse has taken all reasonable steps to institute legal proceedings for
the recovery of the unpaid rent or satisfies the assessing officer that legal
proceedings would be useless.
Municipal Tax and Deduction u/s 24(a)
Deduction of municipal tax is subject to following two
considerations:
• It should be borne by the assesse (owner)
• It should be actually paid during Previous Year.
Deduction u/s 24(a) – 30% of Net Annual value:
This section allows a flat 30% deduction on the Net Annual Value. It
does not depend on the actual expenditure incurred. Assesse can
avail this deduction even if there are no actual expenditure or tenant
undertakes the repairs. However, this deduction is not available on
the self-occupied property.
Self Occupied Property – Sec 23(2)
• The gross annual value of self-occupied property shall be adopted as NIL.
Accordingly, the Municipal and other taxes levied by the local authorities and
the ad-hoc deduction of 30% of the Net Annual Value are not deductible.
• Interest on Loans borrowed up to a maximum of Rs. 2,00,000 (Rs.30,000 in
certain specific situations) shall be allowed as a deduction.
In case a property is acquired or constructed out of a loan borrowed on or
after 01/04/1999 and where such acquisition or construction is completed
within 5 years from the end of Financial Year in which the loan is borrowed,
then interest shall be allowed upto Rs.2,00,000. (limit of construction to be
completed within 3 years is till AY 2016-17).
In respect of self-occupied property not falling in this category, the limit of
deduction shall be Rs.30,000.
• However, this deduction is not available in case assesse opts for alternative
tax regime u/s 115BAC
Deduction of interest on housing loan – Sec 24(b)
• Interest payable on the loans borrowed for the purpose of acquisition, construction,
renovation, repairing or reconstruction can be claimed as deduction. Such loan can
be borrowed from any person including friends and relatives.
• Interest relating to the year of completion of construction can be fully claimed in that
year irrespective of the date of completion.
• Interest payable during the construction period preceding the year of completion of
construction can be accumulated and claimed as a deduction over a period of 5
years in equal installments commencing from the year of completion of construction.
• Any subsequent loan borrowed to repay the original loan shall also be entitled to the
same treatment as the original loan.
• Any Interest on unpaid interest is not allowed as deduction.
• Where a person acquires a property and pays only part of the sale consideration,
interest payable on the unpaid purchase price qualifies for deduction in computation
of “Income from House Property”.
Unrealised Rent and Arrears of rent received
subsequently - Sec 25A
The amount unrealized rent or arrears of rent received
subsequently from the tenant, shall be taxable at 70% of the
amount received, after allowing a deduction of 30% of unrealized
rent or arrears of rent received subsequently. Such income shall
be taxable under the head Income from House Property in the
year of receipt. It shall be taxable under this head even if the
recipient is not the owner of the property.
Co-ownership – Sec 26
• If two or more persons jointly own a property and if their shares
are definite and ascertainable, then share of income of each
such co-owner should be determined and included in his
individual assessment. Accordingly, actual interest by each co-
owner borrowed shall be allowed subject to an independent
limit of Rs. 2,00,000 / 30,000 each (for self-occupied property).
• If two or more persons jointly own a property and if their shares
are not definite and not ascertainable, then they can be treated
as Association of persons.
Deemed owner – Sec 27
• An individual who transfers otherwise than for adequate consideration, any
house property to his or her spouse, not being a transfer in connection with an
agreement to live apart, or to a minor child not being minor married daughter,
is deemed to be the owner of the house property so transferred.
• The holder of impartible estate is deemed to be the individual owner of all the
properties comprised in the estate.
• A member of co-operative society, company or other Associations of Persons
to whom a building or a part thereof allotted or leased under a house building
scheme, shall be deemed to be the owner of that building or part thereof even
though co-operative society, company or legal association.
• A person who is allowed to take or retain possession of any building or part
thereof in part performance of contract of the nature referred in Sec 53 A of
the transfer of property act 1882, is deemed to be the owner of that property.

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UNIT

01 Basic Concepts of Income Tax and

In this unit, you will learn to:

At the end of this unit, you would:

Pre-Unit Preparatory Material

1.2 DIRECT TAX AND INDIRECT TAX

Following are the benefits of GST:

1.3 CONSTITUTIONAL VALIDITY OF TAXES

India’s Taxation Provisions in the Constitution

1.4 ADMINISTRATION OF TAX LAWS

1.5 SOURCES OF INCOME TAX LAW IN INDIA

Income from Salary

Income from House Property

Income from Profits and Gains of Business or Profession

Income from Capital Gains

Income from Other Sources

1.6 BASIC PRINCIPLES OF CHARGING INCOME TAX SECTION -4

1.7 ASSESSMENT YEAR SECTION 2(9)

1.8 THE PREVIOUS YEAR SECTION 3

However, in those circumstances when a new business/profession/new source of income is established

1.9 ASSESSEE SECTION 2(7)

1.10 PERSON SECTION 2(24)

1.11 INCOME SECTION 2 (24)

1.12 HEAD OF INCOME SECTION-14

1.13 GROSS TOTAL INCOME IS EXPLAINED IN SECTION 80B (5)

GTI (gross total income) must be determined.

Because calculating gross total income is so important.

1.14 ROUNDING OFF TOTAL INCOME SECTION-288 A

This means that if your total income is ` 12,98,464.50, round it up to ` 12,98,460.

1.15 ROUNDING OFF TAX SECTION-288 B

 Grants from the Government

The difference between capital and revenue receipts are as follows:

1.17 THE BASIS OF CHARGE AND SCOPE OF TOTAL INCOME

1.18 DIVERSION AND APPLICATION INCOME

Conclusion 1.19 CONCLUSION

 Income tax: It is a tax levied on a person’s earnings.

1.21 CASE STUDY: RENTAL INCOME

Gross Annual Value 4,20,000

1.22 SELF-ASSESSMENT QUESTIONS

A. Essay Type Questions

1.23 ANSWERS AND HINTS FOR SELF-ASSESSMENT QUESTIONS

A. Hints for Essay Type Questions

@ 1.24 POST-UNIT READING MATERIAL

1.25 TOPICS FOR DISCUSSION FORUMS

02 Residential Status of Various Persons

Introduction to Key Points Regarding Residential Status of a Person, Determination of Residential

In this unit, you will learn to:

At the end of this unit, you would:

Pre-Unit Preparatory Material

2.2 KEY POINTS REGARDING RESIDENTIAL STATUS OF A PERSON

2.3 DETERMINATION OF RESIDENTIAL STATUS

Residential Status is Important

Determine an Individual’s or a Company’s Residential Status in India

2.4 HINDU UNDIVIDED FAMILY (HUF)

Residential Status of Hindu Undivided Family (HUF) [Sec 6(2)]

Residential status of ‘A Company’ as per Section 6(3)

2.5 FIRM, AN ASSOCIATION OF PERSON (AOP) OR BODY OF INDIVIDUALS (BOI) [SEC-6(4)]

A Firm, AOP, BOI Resident in India

A Firm, AOP, BOI Non-Resident in India

2.6 ANY OTHER PERSON

Residential status of Local authority, artificial juridical person

2.7 INCIDENCE OF TAX-(5)

Taxation Incidence — Scope of Total Income (Section 5)