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Basic Concepts
Assessment:
This is the procedure by which the income of an assessee is
determined by the Income Tax Assessing Officer.
Assessee- Section 2 (7):
Assessee means a person by whom any tax or any other sum of
money is payable under the Income Tax Act.
Person Section 2(31):
The term person includes:
(i) an individual(ii) a !indu "ndivided #amily (!"#)
(iii) a company
(iv) a firm(v) an association of persons (AO$) or body of
individuals (%OI)
(vi) a local authority
(vii) any other artificial &udicial person not falling in
any of the above categories
Assessment Year -Section 2 (9):
Assessment 'ear means the period of months starting from stApril
and ending on *st+arch in the next
year. e.g The Assessment 'ear ,,-,/ begins on stApril ,,- and
ends on *st+arch ,,/
Previous Year Section 3:
$revious 'ear is financial year immediately preceding assessment
year. e.g. #or the Assessment 'ear ,,-,/$revious 'ear shall be the
#inancial 'ear ,,0,-.
!owever in case of a newly started business $revious 'ear shall
begin from the date of setting up of thebusiness and end on
immediately following *st+arch.
Chare o! "ncome #a$ Section %:
The following basic principles are followed while charging
tax:(i) Income Tax is an annual charge on income.(ii) 1enerally
income of previous year is charged to income tax in the immediately
following Assessment
year.
(iii) Income tax rates are fixed by the #inance Act every
year.
(iv) Income Tax is charged on every person.
&ross #ota' "ncome :
1ross Total Income means total income computed in accordance
with the provisions of the Income Tax Actbefore allowing any
deductions under sections 2, 333 to 4ection 2, ".
In other words aggregate of the income under following heads is
1ross Total Income.
. 4alaries. Income from !ouse $roperty
*. 5et profit from businessprofession
0. 3apital 1ains-. Income from other sources
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esientia' status uner "ncome #a$ Act
4ection / of the Income Tax Act lays down the test of residence
for the different persons.
Assessees
Individuals and Other
!"#s Assessees
6esident in India 5on 6esident in India 6esident in India 5on
6esident in India
6esident and 6esident but not
Ordinary 6esident Ordinary 6esident
esientia' status o! an iniviua'7
4ection (/): An individual may be i) resident and ordinary
resident ii) resident but not ordinary resident iii) non
resident.
Basic conitionsto test whether an individual is resident in
India:
"nder 4ection / if an individual satisfies any of the following
basic conditions he is said to be resident in India
a) !e is in India in the previous year for a period of at least
2 days orb) !e is in India for a period of at least /, days during
the previous year and at least */- days during the 0years
immediately preceding the previous year.
6elaxations: The explanation to 4ection /() ma8es following
relaxation in regard to above (b):(i) In case of Indian citi9ens
who leave India in any previous year as a member of a crew of an
Indian ship
or for purposes of employment outside India they will be treated
as residents only if the period of their
stay during the relevant previous year amounts to 2 days. In
other words even if such persons were inIndia during 0 preceding
years for an aggregate period of */- days or more they will be not
be treated as
residents unless during the relevant previous year they were in
India for 2 days or more.
(ii) In case of Indian 3iti9en or person of Indian Origin
engaged outside India either in an employment or a
business or profession or in any other vocation who comes on a
visit to India in any previous year suchpersons will be treated as
residents only if they are present in India for period or periods
amounting in
all to 2 days or more in the relevant previous year. In other
words even if such persons were in India
during the 0 preceding years for an aggregate period of */- days
or more they will not be treated asresident in relevant previous
year unless they were present in India for a period of 2 days or
more in
the relevant previous year.
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Aitiona' Conitionsto test when a resident individual is
ordinarily resident in India:A resident individual is treated as
resident and ordinarily resident if he satisfies following two
additional
conditions.
) !e has been resident in India in at least out of , previous
years immediately preceding the relevant
previous year and) !e has been in India for a period of at least
*, days during years immediately preceding the relevant
previous year.
esient *ut not orinari'+ resient:An individual who satisfies at
least one of the basic conditions but does not satisfy both the
additionalconditions is treated as resident but not ordinarily
resident.
,on esient:
An individual is a non resident in India if he satisfies none of
the basic conditions. In case of 56 additionalconditions do not
have any relevance.
,otes:
It is not essential that the stay should be continuous
It is not essential that the stay should be at the same
place.
* ;here a person is in India only for a part of a day the
calculation of physical presence in India inrespect of such bro8en
period should be made on an hourly basis. A total of 0 hours of
stay spread over
a number of days is to be counted as being e
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esientia' status o! Compan+:
An Indian 3ompany is always resident in India.
A foreign company is resident in India if during the previous
year control and management of its affairs is
situatedwhollyin India.
A 3ompany can never be >resident but not ordinarily resident?
or > resident and ordinarily resident?.
esientia' Status an incience o! ta$:
Incidence of tax on 6esident and Ordinarily 6esident
assessees:
A resident and ordinarily resident in India is assessable to tax
in respect of
. income which is received or deemed to be received in India in
previous year by him or on his behalf@. income which accrues or
arises or deemed to accrue or arise to him in India during the
previous year@
*. income which accrues or arises to him outside India during
the relevant previous year.
Incidence of tax on 6esident but not Ordinarily 6esident
assessees:
A resident but not ordinarily resident in India is assessable to
tax in respect of. income which is received or deemed to be
received in India in previous year by him or on his behalf@
. income which accrues or arises or deemed to accrue or arise to
him in India during the previous year@
*. income which accrues or arises to him outside India from a
business controlled or profession set up in
India@
0. income which received outside India from a business
controlled or profession set up in India@
Incidence of tax on 5on 6esident assessees:
A non resident assessable to tax in respect of
income which is received or deemed to be received in India in
previous year by him or on his behalf@. income which accrues or
arises or deemed to accrue or arise to him in India during the
previous year@
,otes:
" eceipt o! "ncome
6eceipt s 6emittance
3ash s Bind* 6eceipt s Accrual
0 6eceipt s Ceemed 6eceipt
- 6eceipt by agent/ 6eceipt in case of sale by commission
agent
6eceipt by che
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"" Accrua' o! "ncome:
Income is said to be received when it reaches to the assessee@
when the right to receive the income become
vested in the assessee.
Accrual is generally unconditional
If income is taxable at the time of accrual it can not be again
taxed on receipt basis.* 3ommission payable for services accrues at
the place where service is rendered.
0 Interest accrues where money is lent.
- 5o profit arises on valuation of closing stoc8./ $rofit does
not arise on transfer from head office to branch or from branch to
head office.
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"ncome e$empt !rom "ncome #a$ Section 10
The various items of income referred to in the different clauses
of 4ection , are not only excluded from thetaxable income of an
assessee but also from his total income.
The following incomes are exempt under different clauses from
Income tax on fulfilling certain conditionsunder the concerned
clause.
1 Aricu'ture "ncome -Section 10(1):
Agriculture Income is not included in the total income of the
assessee. The 3onstitution does not give powers to
the parliament to levy Income Tax on agricultural income.
Indirect way of charging income tax on agricultural income:
!owever the scheme of partial integration of tax on
non7agricultural income with agricultural income has beenintroduced
by #inance Act D*. The 4cheme is applicable on satisfaction of
following conditions.
( I ) The Tax payer is an individual an !"# a %OI an AO$ or
artificial &uridical person.
( II ) The tax payer has non agricultural income of amount
exceeding the amount of exemption limit
( III ) The agricultural income exceeds 6s.-,,,
The above scheme is not applicable to firm company 3o7operative
society.
3omputation of tax under the scheme
3ompute 5et Agricultural Income 4um the Agricultural Income and
5on Agricultural Income
* 3ompute income Tax on the aggregated income as computed in
4tep above.
0 Add 6s. Exempt Fimit Income to 5et Agricultural Income
- 3ompute income tax on the aggregated sum as computed in 4tep 0
above./ Ceduct Income tax computed in 4tep - from the Income tax
computed in step * above. This will be
the income tax payable by the assessee sub&ect to rebate us
2o 3.
2 Amounts receive *+ a mem*er !rom the income o! the ./ Section
10 (2):
An !"# is a separate entity under the Income Tax Act paying tax
on its income. ;hen the income of the !"#is paid to the member such
payments are exempted from Income Tax i.e. the member of the !"#
does not have
to pay any tax in respect of the amounts received from the !"#
income.
3 Share o! income o! a partner Section 10(2A):
"nder section , (*) partner=s share in the total income of the
firm is exempts from tax. In other words the
partner=s share in the total income of the firm determined in
accordance with the profit sharing ratio will beexempt from
tax.
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% $emptions to non resients Section 10 (%):
This clause provides that in case of a non resident any income
by way of interest on central government
securities as may be prescribed will be exempt. Even income by
way of premium on redemption of such
securities is exempt.
"nterest on savins certi!icates Section 10 (%B):
An individual being citi9en of India or a person of Indian
origin who is non resident shall be entitled forexemption in
respect of interest on such savings certificates issued by the
central 1overnment and notified by itin the Official 1a99ette.
4eave #rave' Concession Section 10():
The amount of exemption under section ,(-) is the value of any
travel concession or assistance received or due
to the assessee
#rom his employer for himself and his family in connection with
his proceeding on leave to any place in India
#rom his employer or previous employer for himself and his
family in connection with his proceeding to any
place in India after his retirement or termination of
service.
The amount of exemption can not exceed expenditure actually
incurred by the assessee for the purpose of such
travel.
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"ncome !rom ouse Propert+
(Section 23 to27)
An income to be charged under the head >Income from !ouse
$roperty? should satisfy following * conditions.
The !ouse $roperty must consist of a %uilding or land
appurtenant thereto. The Assessee must be owner of the !ouse
$roperty.
* The property must not have been occupied by the assessee the
purpose of carrying on his business or
profession.
If all the above conditions are satisfied income from house
property shall be charged under the head >Incomefrom !ouse
$roperty? otherwise under any other head depending upon the
circumstances and facts of the case.
Basis o! computin "ncome !rom 'et out ouse Propert+:
1ross Annual alue: xxx
Fess: +unicipal Taxes xxx77777
5et Annual alue xxx
Fess: 4tandard Ceduction us 0 xxx
Interest on borrowed capital xxx
7777777Income #rom !ouse $roperty xxx
GGGGG
&ross Annua' 5a'ue:
Step 1 6easonable Expected 6ent of $roperty
Step 2 If the rent received or receivable is more than the
expected rent the rent actually received or receivableshall be the
1ross Annual alue
Step 3 If the property remains vacant and because of such
vacancy the rent actually received or receivable is
less than the expected rent than rent actually received
receivable shall be the 1ross Annual alue
4tep
"! rent actua''+ receive 6receiva*'e is more than the e$pecte
rent Section 23(1)(*)
If the rent actually received receivable (after excluding
unreali9ed rent and rent pertaining to vacancy) is morethan the
amount determined under 4tep above then rent actually
receivedreceivable shall be the 1ross Annual
alue.
5otes:
If actual rent receivedreceivable is lower than amount
determined under step then step no is notapplicable.
4tep is applicable only in case of let out property. If a
property is >Ceemed? let out step is not
applicable
* 4o if the actual rent received receivable is more than
expected rent as mentioned in step theamount so receivedreceivable
shall be the 1ross Annual alue.
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4tep *
"! rent actua''+ receive6receiva*'e is 'ess than the e$pecte
rent oin to propert+ remainin vacant
Section 23(1)( c )
4tep * shall be applicable when the following * conditions are
satisfied.
The property is let out
The property is vacant during any part of the previous year. The
actual rent receivedreceivable is less than the amount of expected
rent as computed under step
and the decline in actual rent is caused by the vacancy and not
by any other factors If the loss is partly because of vacancy and
partly due to other factors then loss due to vacancy shall be
deducted from the amount of expected rent as computed in
step
8unicipa' #a$es :
#rom the 1ross Annual alue as computed above municipal taxes
levied by the local authority shall be
deducted. !owever municipal taxes shall be deducted only if
following conditions are satisfied.
+unicipal Taxes are borne by the owner and +unicipal taxes are
actually paid during the previous year
Ceductions us 0A 4tandard Ceduction
% Interest on borrowed capital
A 4tandard Ceduction 7777 4ection 0(a)
*,H of net annual value is deductible as standard deduction
whether the owner has incurred any expenditure or
not.
% Interest on borrowed capital 777 4ection 0(b)
Interest on capital borrowed for purchase construction repairs
renewal or reconstruction of house property
shall be allowed as deduction on accrual basis.
Interest on pre construction period: Interest payable by the
assessee for the period prior to the previous year in
which the property is ac
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Interest on borrowed capital: Interest (for the current previous
year and pre construction period) on capital
borrowed is deductible ( as above) sub&ect to the maximum
ceiling as follows.
( ) +aximum ceiling if capital is borrowed on or after
707DDD
If the following * conditions are satisfied interest on borrowed
capital is deductible up to 6s. -,,,,( a ) capital is borrowed on
or after 707DDD for ac
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"ncome uner the hea Capita' &ains;
Any profit or gain arising from the transfer of capital asset is
chargeable to tax under the head >3apital 1ains?
in the previous year in which transfer too8 place. In other
words if the following conditions are satisfied an
assessee shall be liable for 3apital 1ains Tax.
( a ) There is a 3apital Asset
( b ) The 3apital Asset is transferred by the assessee( c ) The
transfer ta8es place during the previous year
( d ) $rofit or gain arises as a result of such transfer( e )
4uch profits or gains are not exempted us -0 -0% -0C -0E3 -0EC -0#
or -01
>3apital Asset? is defined to include property of any 8ind
fixed or circulating movable or immovable tangible
or intangible. !owever the following assets are excluded from
the definition of >3apital Asset? 4toc8 in Trade
$ersonal Effects of assessee
* Agricultural Fand in India0 / H 1old %onds D H 1old %onds D2,
national Cefence 1ol@d %onds D2,
- 4pecial %earer %onds DD
/ 1old Ceposit %onds issued under 1old Ceposit 4cheme DDD
#+pe o! Capita' Assets Short #erm or 4on #erm
>4hort Term 3apital Asset? means a capital asset held by the
assessee for not more than */ months immediatelyprior to its date
of transfer. !owever in the following cases an assets held for not
more than months is treated
as short term capital asset
a E
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Capita' &ains arisin !rom trans!er o! resientia' house
propert+ Section %
3apital 1ains arising from transfer of residential house
property shall be exempt if following conditions are
satisfied
A 6esidential house property should be transferred by an
individual an !"#% It should be a long term capital asset
3 A new house should be purchased or constructed 77 The assessee
has purchased a residential house
within a period of one year before the transfer or within years
after the transfer or the assessee hasconstructed a residential
house property within a period of * years from the date of
transfer
Amount o! e$emption: The amount of exemption shall be the cost
of the new house or full amount amount ofcapital gain whichever is
lower.
Capita' &ain arisin !rom trans!er o! 'an use !or aricu'tura'
purpose Section %B
$emption u6s %B is avai'a*'e on trans!er o! aricu'tura' 'an.
3onditions
A The tax payer is an individual% !e transfers an agricultural
land. It may be Fong term capital asset or short term capital
asset
3 The agricultural land was used by the tax payer or his parents
for agricultural purposes for a period of
years immediately prior to date of transferC The tax payer has
purchased another land for agricultural purposes within a period of
years from the
date of such transfer
Amount o! e$emption:
The amount of exemption shall be the amount of capital gain or
investment in new agricultural land whichever
is lower.
Capita' &ains on compu'sor+ ac
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Capita' &ain not to *e chare on investments in certain *ons
Section %C
#eatures
A long term capital asset is transferred by an assessee who may
be an individual an !"# a firm a
company or any other person ;ithin / months from the date of
transfer of the asset the assessee should invest the whole or
any
part of capital gain in long term specified assets
Amount of Exemption:
If the cost of specified is not less than the capital gain the
whole of capital gains shall be exempt from tax. Ifhowever the
amount invested in specified assets is less than the capital gain
the exemption is e
