INCOME TAX LAW & PRACTICE

BASIC CONCEPTS

D r. N . S a r a v a n a b h a v a n
“Tax Management is now an integral part of business
management”

In India, Income Tax was introduced on 1860 by Sir James Wilson

Let us begin by understanding the meaning of tax.

 What is TAX?

Tax is a fee (amount) charged by a government on a

product,

income or activity(services).
 (As a revenue to the Government)

 A tax is a mandatory fee or financial charge levied by any government on an individual or

an organization to collect revenue for public works providing the best facilities and
infrastructure. The collected fund is then used to fund different public expenditure
programs. If one fails to pay the taxes or refuse to contribute towards it will invite serious
implications under the pre-defined law.
 EVOLUTION OF TAX IN INDIA
 Ancient period
 Initial period (1860-1886) -The Tax was introduced for the first time by Sir
James Wilson
 Pre independence period (1886-1947)
 (1886 -Separate Income tax act was passed)

 1918 - a new Income Tax Act was passed)

 (1921-All India Income Tax Committee)

 (1922-Came into existence with new act)

 Post independence period (1947-1961)

 In consultation with the Ministry of Law finally the Income Tax Act, 1961 was
passed.
 The Income Tax Act 1961 has been brought into force with 1 April 1962. It
applies to the whole of India (including Jammu and Kashmir).
 Need for Taxes

Taxes are the sources of funding the expenditure of Governments. In

the context of India the following are the categories of Govt
Expenditure:

Govt
Establishment Programs
Armed Forces PSU Funding
Costs &
Policies

Salaries of Govt Indian Railways, Food Bill,

Employees & Posts & Manrega, Road
establishment Telegraph Etc Construction etc
costs
 Indirect Taxes – Paid by one person but
Direct Taxes – Paid by the person incidence on another person – These taxes
who bears the incidence – are collected indirectly from persons other
Collected directly from the than those on whom the incidence of these
persons meant to bear these taxes taxes are meant to fall
Under GST
 Sources for the Study
 The Income Tax Act 1961
 The Finance Act (variable)
 Income Tax Rules
 Circulars and Notifications
 Legal decisions of courts.
 Income-tax Act
 The levy of income-tax in India is governed by the Income-tax Act, 1961. We shall briefly
refer to this as the Act.

 This Act came into force on 1st April, 1962.

 The Act contains 298 sections and XXIII chapters.

 These undergo change every year with additions and deletions brought about by the Finance
Act passed by Parliament.

 In pursuance of the power given by the Income-tax Act, rules have been framed to facilitate
proper administration of the Income-tax Act.
 The Finance Act
 Every year (preferably Jan/Feb.), the Finance Minister of the Government of
India presents the Budget to the Parliament.

 Part A of the budget speech contains the proposed policies of the Government in
fiscal areas.

 Part B of the budget speech contains the detailed tax proposals.

 In order to implement the above proposals, the Finance Bill is introduced in the
Parliament.

 Once the Finance Bill is approved by the Parliament and gets the assent of the
President, it becomes the Finance Act.
Administration
 Income-tax Rules
 The administration of direct taxes is looked after by the Central Board
of Direct Taxes (CBDT).

 The CBDT is empowered to make rules for carrying out the purposes
of the Act.

 For the proper administration of the Income-tax Act, the CBDT frames
rules from time to time. These rules are collectively called Income-tax
Rules, 1962. It is important to keep in mind that along with the
Income-tax Act, these rules should also be studied.
 Concept of Income (Section 2(24))

“Income” means “periodical monetary return

coming in regularly from definite sources like one’s
Business, Land, Work, Investments etc.”.
 Sec 2 (24) Income: Income includes the following

 Profits and Gains

 Dividend from shares
 Voluntary contribution received by trust.
 Perquisite or Profit in lieu of salary
 Special allowance or benefits to assesse.
 Allowance granted to assesse to meet personal expenses
 Value of any benefit or perquisite received from a company.
 Int., salary, commission, etc.. Received by a partner from his firm
 Value of benefits received by a representative of NR, minor or a
lunatic.
 Profit on sale of license granted under the import control Act 1955.
 LEVY OF INCOME-TAX

 Income-tax is a tax levied on the total income of the previous

year of every person.
 A person includes ……………
PERSON – U/s 2 ( 31 )
INDIVIDUAL

HUF

COMPANY(Under Companies Act)

FIRM (Under Partnership Act)

BOI / AOP

LOCAL AUTHORITY

ANY OTHER ARTIFICIAL JURIDICAL PERSON

Sec. 6 provides the test for residential status for
the persons which can be categorized as under:
 Body of Individual(BOI)
1. BOI means a group of individuals (individual only- not
company or firms) who join together for common purpose(s)
whether or not to earn income.

Association Of Persons (AOP)

1. An AOP means a group of persons (whether individuals, HUF,

companies, firms, etc.) who join together for common objective
and have the same mindsets
2. Every combination of person cannot be termed as AOP. It is only
when they associate themselves in an income-producing activity
then they become AOP.
Sec 2(7) Assesse:
Assesse means any person by whom any tax or
any other sum of money is payable under this act
and also includes:
1. Person on whom any proceedings under the act
are being conducted for the assessment of his
income.(Ordinary Assesse)
2. Deemed assesse
3. Assesse in default
Sec 2 (9) Assessment Year

AY means the period of 12 months starting from April 1

of every year and ending on March 31 of the next year.
For Ex: 01-04-2024 to 31-03-2025
Sec 3 Previous Year
PY means Income earned in a year is taxable in the
next year. The year in which income is earned is
known as previous year.(Preceding 12 months period of AY)
For Ex:01-04-2023 to 31-03-2024
TOTAL INCOME AND TAX PAYABLE Sec(4))
 Income-tax is levied on an assesses total income. Such total income has to
be computed as per the provisions contained in the Income-tax Act, 1961.

 Step 1 Determination of residential status

 Step 2 Classification of income under different heads
 Step 3 Exclusion of income not chargeable to tax
 Step 4 Computation of income under each head
 Step 5 Clubbing of income of spouse, minor child etc.
 Step 6 Set-off or carry forward and set-off of losses
 Step 7 Computation of Gross Total Income.
 Step 8 Deductions from Gross Total Income
 Step 9 Total income
 Step 10 Application of the rates of tax on the total income
 Step 11 Surcharge
 Step 12 Education cess and secondary and higher education cess
 Step 13 Advance tax and tax deducted at source
 Incidence of Taxation (Sec(5))
• Tax incidence on an assessee depends on his residential status.
• For instance, whether an income, accrued to an individual outside
India, is taxable in India depends upon the residential status of the
individual in India.
• Similarly, whether an income earned by a foreign national in India (or
outside India) is taxable in India, depends on the residential status of
the individual, rather than on the citizenship. Therefore, the
determination of the residential status of a person is very significant
in order to find out his tax liability.
 Residential Status (Sec(6))
•Residential status of an assessee determines the scope of
chargeability of his income.
•Whether a person will be charged to a particular income or not,
depends on his residential status.
•Residential status of an assesse is to be determined in respect of
each previous year as it may vary from previous year to previous
year.
 Types of residential status
Resident

Ordinarily resident

Not-ordinarily resident

Non Resident (NRI)

How to determine residential status of an individual/HUF

Step 1 First find out whether such individual is

“Resident” in India
Step 2 If such individual is “Resident” in India,
then find out whether he is “Ordinary
resident” in India or “Not Ordinary
resident in India.
However, if such individual is a “Non-
resident” in India, then no further
investigation is necessary
Conditions to test as to when a individual is a
resident in India?
 A taxpayer would qualify as a resident of India if he
satisfies one of the following two basic conditions :

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

previous year (22-24) or

2. Stay in India for the immediately 4 preceding years

is 365 days or more and 60 days or more in the
relevant previous year (22-24)
 Additional conditions [Sec. 6(6)(a)] to test as to when a
Resident individual is Ordinarily Resident in India (ROR)

1. He/she has been resident in India for at least two years out of
ten(10) previous year’s (preceding to the relevant previous
year)
(and)
2. He/she has been in India for at least 730 days in all during the
7 previous year preceding to the relevant previous year.
[ADDITIONAL CONDITIONS: 2/10 AND 730/7]

ROR = ONE BASIC + BOTH Additional Condition’s

Conditions to test as to when a individual is Not Ordinary resident(RNOR)

If an individual satisfies any one of the basic conditions

but does not satisfy (any one or none) of the additional
conditions then individual is not ordinarily
resident(NOR).
 CONDITIONS TO TEST AS TO WHEN A INDIVIDUAL IS
NON-RESIDENT OF INDIA

If an individual satisfies none of the basic

conditions he/she is said to be Non-Resident (NRI).

While calculating the presence of 182 days or

more, “both day of arrival and day of departure”
should be included
Exceptions to Section 6(1)(c)
 Indian citizens leaving India: If an individual is an Indian citizen
and leaves India for employment or any other purpose, he/she will
not be considered a resident under section 6(1)(c) if he/she is
present in India for less than 182 days during the relevant financial
year.
 PIOs leaving India: If an individual is a person of Indian origin
(PIO) and leaves India for employment or any other purpose, he/she
will not be considered a resident under section 6(1)(c) if he/she is
present in India for less than 182 days during the relevant financial
year.
 Crew members of Indian ships: If an individual is a crew member
of an Indian ship, he/she will not be considered a resident under
section 6(1)(c) if he/she is present in India for less than 182 days
during the relevant financial year.
Residential Status (Sec (6))
PERIOD OF STAY IN INDIA………………..
Gross total income
A s per section 14, income of a person is
computed under the following five heads :
1. Income from salary
2. Income from house property
3. Profits and gains of business or
profession
4. Capital gains
5. Income from other sources.
 Scope of Total Income (Section-5)
Particulars Ordinarily Not ordinarily Non
Resident resident resident
a). Income received or deemed to be received Y Y Y
in India

b). Income accrue or arises or deemed to Y Y Y

accrue or arises in India

c). Income of a business outside India which Y Y N

was controlled from India. (foreign (foreign (foreign
income) income) income)
d). Income received or due from outside Y N N
India or controlled from outside India (foreign (foreign (foreign
income) income) income)
e). Past untaxed income brought to India. N N N

f) Any other source T N N

Simple problems on Residential Status

Mr. Sam came to India first time during the P.Y. 2022-23. During the previous year,
he stayed in India for (i) 50 days; (ii) 183 days; and (iii) 153 days. Determine his
residential status for the A.Y. 2024-25.

X, a foreign national (not being a person of Indian origin), came to India for the
first time from USA on July 11, 2018. He stayed here for a stretch of 3 years and
left for Japan on July 11, 2021. He returned to India on April 10, 2022 and
remained here till August 17, 2022, when he went back to USA. He again came
back to India on January 30, 2024 at 11.59 p.m. and continued to stay in India
thereafter. Determine his residential status for the assessment year 2024-25.
Simple problems for Residential Status

Mr. K, an Indian citizen leaves from India for the first time on 31 st May 2019 and
comes back on 15th May 2022. He again leaves India on 10th June 2023 and comes
back on 14th January 2024. He is living in India since then. Determine his residential
status for the previous year 2023-2024.

Mr. X, a foreign citizen, leaves India for the first time in the last 20 years on
November 25th 2022. During the calendar year 2022, he comes to India on
September 1st and stays for a period of 20 days. During the calendar year 2023 he
does not visit India at all but comes to India on January 15 th 2024. Determine the
residential status of Mr. X for the assessment year 2024-2025.
Simple problems for Residential Status
Mr. K.V. Rao, senior scientist goes to Nigeria, on a job approved by Central Govt. for a
period of 3 years on 15th September 2023. He has never been out of India before.
Determine his residential status for the previous year 2023-2024.
Mr. Singh, an Indian citizen, went to U.S.A on 10th October, 2015 and returned after
two years stay from there. Again on 10th October 2019 he went to Iran but returned
on 10th May 2023. He made another attempt to go abroad and finally succeeded to
go Canada. He left Delhi for Canada on 10th February 2024. Find out his residential
status for the A/Y’s 2023-24 and 2024-2025
Mr. Sid, a British national, joined XYZ Co. Ltd. as an engineer in India on 1st May,
2012. On 31st December, 2013, he went to Sri Lanka on deputation. On 1st April,
2018, he came back to India and left for Sri Lanka again on 31st May, 2018. He
returned to India and joined his original post on 1st July, 2023. Determine his
residential status for the A.Y. 2024-25.
 Compute the total income in the hands of an individual aged 35 years, being a resident and
ordinarily resident, resident but not ordinarily resident, and non-resident for the A.Y. 2024-25.
1. Interest on UK Development Bonds, 50% of interest received in India 10,000
2. Income from a business in Chennai (50% is received in India) 20,000
3. Profits on sale of shares of an Indian company received in London 20,000
4. Dividend from British Company received in London 5,000
5. Profits on sale of plant at Germany 50% of profits are received in India 40,000
6. Income earned from Business in Germany which is controlled from Delhi (INR 40,000 is received in India) 70,000
7. Profits from a business in Delhi but managed entirely from London 15,000
8. Income from House Property in London deposited in an Indian Bank at London, brought to India (computed) 50,000
9. Interest on debentures in an Indian company received in London. 12,000
10. Fees for technical services rendered in India but received in London 8,000
11. Profits from a business in Bombay managed from London 26,000
12. Income from property situated in Pakistan received there 16,000
13. Past foreign untaxed Income brought to India during the previous year 5,000
14. Income from agricultural land in Nepal received there and then brought to India 18,000
15. Income from profession in Kenya which was set up in India, received there but spent in India 5,000
16. Gift received on the occasion of his wedding 20,000
17. Interest on Savings Bank Deposit in State Bank of India 12,000
18. Income from a business in Russia, controlled from Russia 20,000
19. Dividend from Reliance Petroleum Limited, an Indian company 5,000
20. Agricultural income from a land in Rajasthan 15,000
EXEMPTED INCOMES U/S 10
Agricultural income-Fully exempted U/S10(1).
.
Share of income from HUF-Fully exempted u/s 10(2).
Share of profit from a Partnership Firm - Section 10(2a)
Interest paid to a Non-Resident (Section 10(4)(i))

Imgres.htm
Leave Travel Concession - Section 10(5)
Section 10(6) – Remuneration received by an
individual who is not a citizen of India

 Such individuals include ambassadors or other officials of

the Embassy, High Commission or Legation of a foreign
State in India, Consulate Officer of a foreign State in
India and trade commissioner or other official
representatives in India of a foreign State

Section 10(7) – Perquisites and Allowances paid by

Government to its Employees serving outside India
 Section 10(10CC)- Tax on Perquisites paid by employer
 Only Non-monetary perquisites employer pay tax on behalf of employee is treated as
exempt in the hands of the employee.
 Section 10(10D) – LIC sum received Tax Exemption
 If policy issued before 31st March 2003 an individual receives any amount from a life
insurance policy, including any bonus, the amount received would be fully exempted from
tax without any maximum limit.
 If any sum received from insurance company on insurance of a dependent handicapped
member [under subsection (3) of section 80DD].
 If any sum received from insurance company when a dependent, or a member of family is
suffering from a notified disease [under subsection (3) of section 80DDA].
 Any sum received under a key man insurance policy.
 If policy issued between 1-4-2003 to 31-03-2012(premium payable more than 20% of
sum assured is taxable) and after 1-4-2012 onwards only 10% of premium is allowed for
exemption
Commuted value of pension-Fully exempted u/s
10(10A) as per conditions given.
Section 10(11) of Income Tax Act – Payment
from Statutory Provident Fund
 Any payment received on statutory provident fund related
to employer’s contribution, interest, amount received on
termination will be exempted.

• Section 10(18) of Income Tax Act – Pension

received by certain winners of gallantry
awards (Paramvir Chakra, Mahavir Chakra, or Vir- Chakra)
• Section 10(19) of Income Tax Act – Family
pension received by family members of
armed forces including paramilitary forces
Leave salary [Sec. 10(10AA)]
Retrenchment compensation [Sec. 10(10B)] received
based on industrial disputes act 1947
Special Allowance Exemption u/s 10(14)
• Allowances granted to High Court Judges
• Allowance given to a UNO employee
• Sumptuary allowance received by Supreme Court and High Court judge
• Allowances granted to government employees who are Indian citizens,
working abroad
Educational Scholarships for Children's-Fully exempted
u/s10(16).
Any award instituted or notified by State or Central Govt.-
Fully exempted u/s 10(17 A).

 A).
Income from one palace self occupied by former
rulers shall be fully exempted u/s 10(19A).
Income of a local authority-exempted as per conditions given
u/s 10(20)
Any income (other than business income) of a trust or a society approved by
Khadi and village industries commission [Sec. 10(23B)].

Income of State level Khadi and Village Industries Boards at the State level-
exempted as per conditions given u/s 10(23BB)
Income earned by authorities established for administering
charitable trusts u/s 10(23BBA)

The administration of the following types of institutions –

• Public trusts, charitable trusts or religious trusts
• Endowments like Maths, Temples, Gurudwaras, Wakfs, etc.
Income by way of interest on securities, property income and income
from other sources of a registered trade union or an association of
registered trade unions [Section 10(24)]

The following incomes of registered trade unions are exempt from tax :

• Income from house property.

• Income from other sources.
The trade union must be a registered one and formed primarily for the purpose of
regulating the relations between workmen and employer or between workmen and
workmen. This benefit shall also be available to an association of registered trade
unions.
Income of Provident Funds or Superannuation Funds-exempted as per
conditions given u/s 10(25).

Superannuation is an organizational pension program created by a

company for the benefit of its employees. It is also referred to as a
company pension plan.
Income of a corporation set up for promoting the interests of Scheduled
castes, tribes and backward classes - exempted as per conditions
Section 10(26)
Specified incomes[Section[10(35)]

The following incomes would be exempted from tax

• Income earned on units of a mutual fund specified under Clause 23D
• Income earned on units from the Administrator of specified
undertakings
• Income earned on units from a specified company
Capital gains on transfer of listed equity shares [Section 10(36)]
covered under Share Transaction Tax (STT)
Income of an international sporting event held in India
[Section 10(39)]
THANK YOU