BASIC CONCEPTS
OF
INCOME TAX

WHAT IS TAX?
• Tax is a compulsory contribution to state revenue, levied by the
government on workers' income and business profits, or added to
the cost of some goods, services, and transactions. It may be direct
tax or indirect tax.
• Direct tax is a tax, such as income tax, which is levied on the income
or profits of the person who pays it, rather than on goods or
services.
• Indirect Tax is levied on goods and services rather than on income
or profits.

INTRODUCTION
• The present law of income tax is contained in the Income Tax Act,
1961. The Income tax Act contains the provisions for determination
of taxable income, determination of tax liability, procedure for
assessment, appeal, penalties and prosecutions. It also lays down the
powers and duties of various income tax authorities.
• The Income Tax Law comprises The Income Tax Act 1961, Income
Tax Rules 1962, Notifications and Circulars issued by Central Board
of Direct Taxes (CBDT), Annual Finance Acts and Judicial
pronouncements by Supreme Court and High Courts.

TAX
DIRECT
TAX
INCOME
TAX
WEALTH
TAX
INDIRECT
TAX
EXCISE
DUTY
VAT
SERVICE
TAX
CUSTOMS
DUTY

INCOME
As per [Section 2(24)], Income includes :
1. Profits or gains of business or profession.
2. Dividend.
3. Voluntary Contribution received by a Charitable / Religious Trust or University /
Education Institution or Hospital
4. Value of perquisite or profit in lieu of salary taxable u/s 17 and special allowance or
benefit specifically granted either to meet personal expenses or for performance of
duties of an office or an employment of profit.
5. Export incentives, like Duty Drawback, Cash Compensatory Support, Sale of licences
etc.
6. Interest, salary, bonus, commission or remuneration earned by a partner of a Firm from
such Firm.

7. Capital Gains chargeable u/s 45.
8. Profits and gains from the business of banking carried on by a
cooperative society with its members.
9. Winnings from lotteries, crossword puzzles, races including horse races,
card games and other games of any sort or from gambling or betting of
any form or nature whatsoever.
10. Deemed income u/s 41 or 59.
11. Sums received by an assessee from his employees towards welfare fund
contributions such as Provident Fund, Superannuation Fund etc.
12. Amount received under Keyman Insurance Policy including bonus
thereon.

13. Amount received under agreement for (a) not carrying out activity in
relation to any business, or (b) not sharing any knowhow, patent,
copyright etc.
14. Benefit or perquisite received from a Company, by a Director or a person
holding substantial interest or a relative of the Director or such person.
15. Gift as defined u/s 56 (2)(vi) . Any sum of money exceeding Rs. 50,000,
received by an Individual or a HUF from any person during the previous
year without consideration.
16. Any consideration received for issue of shares as exceeds the fair market
value of the shares referred to in Section 56(2)(vii)(b).
17. Any sum of money referred to in clause (ix) of Sub-Section (2) of section
56.

ASSESSEE
As per section 2(7) of the Act, assessee means a person by whom any tax or any other
sum of money (i.e. interest, penalty etc.) is payable under the Act and includes:
a) every person in respect of whom any proceeding under this Act has been taken
for the assessment of his income or assessment of fringe benefits or of the
income of any other person in respect of which he is assessable or to determine
the loss sustained by him or by such other person or to determine the amount
of refund due to him or to such other person.
b) every person who is deemed to be an assessee under any provision of this Act.
c) every person who is deemed to be an assessee in default under any provision of
this Act.

 ASSESSMENT YEAR [SECTION 2(9)]
“Assessment year” means the period of twelve months commencing on 1st
April every year and ending on 31st March of the next year. Income of
previous year of an assessee is taxed during the following assessment year
at the rates prescribed by the relevant Finance Act.
 PREVIOUS YEAR (SECTION 3)
Income earned in a year is taxable in the next year. The year in which
income is earned is known as previous year. From the assessment year
1989-90 onwards, all assessees are required to follow financial year (i.e.
April 1 to March 31) as previous year. The uniform previous year has to be
followed for all sources of income.

Income Tax is computed on the total income of the previous year of every
person in the assessment year. However, there are five exception to this
rule:
i. Assessment of non-residents in respect of their income from shipping
business (Section 172).
ii. Assessment of persons leaving India (Section 174).
iii. Assessment of association of persons or body of individuals or
artificial juridical person formed for a particular event or purpose
(section 174A).
iv. Assessment of persons trying to alienate their assets with the object of
avoiding liability to tax (Section 175).
v. Assessment of the income from discontinued business

PERSON
As per section 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
• every artificial, juridical person, not falling within any of the above
categories

• An individual a natural human being, i.e. male, female, minor or a person of sound or unsound mind.
• A Hindu undivided family it consists of all persons lineally descended from a common ancestor and
includes their wives and unmarried daughters.
• A company Section 2(17) defines the term ‘company’ to mean:
i. any Indian company, or
ii. any body corporate incorporated by or under the laws of a country outside India i.e. a foreign
company, or
iii. any institution, association or body which is or was assessable or was assessed as a company for
any assessment year under the Indian Income Tax Act, 1922 or which is or was assessable or was
assessed under this Act as a company for any assessment year commencing on or before the 1st day
of April, 1970, or
iv. any institution, association or body, whether incorporated or not and whether Indian or non-
Indian, which is declared by general or special order of the Board to be a company only for such
assessment year or assessment years (whether commencing before the first day of April, 1971 or, on
or after that date), as may be specified in the declaration.

• A firm a partnership firm whether registered or not.
• An association of persons or a body of individuals whether incorporated
or not
The difference between Association of persons and body of individuals is that whereas
an association implies a voluntary getting together for a definite purpose, a body of
individuals would be just a body without an intention to get-together. Moreover, the
members of body of individuals can be individuals only whereas the members of an
association of persons can be individual or non-individuals (i.e. artificial persons).
• A local authority means a municipal committee, district board, body of port
commissioners, or other authority legally entitled to or entrusted by the Government
with the control and management of a Municipal or local fund.
• Every artificial, juridical person, not falling within any of the above
categories

CAPITAL AND REVENUE RECEIPTS
The objective of the Income-tax Act is to tax only income generally revenue
receipts unless specifically exempted. On the other hand capital receipts are
not chargeable to tax except when specifically provided in the Act. It may be
observed that :
 A receipt in substitution of a source of income is a capital receipt while a receipt in
substitution of an income is a revenue receipt.
 An amount received as a compensation for surrender of certain rights under an
agreement is a capital receipt whereas an amount received under an agreement as
compensation for loss of future profit is a revenue receipt.

CAPITAL AND REVENUE EXPENDITURE
In computing taxable income normally revenue expenditure
incurred for the purpose of earning income is deductible from
revenue receipt unless the law provides specific rules to disallow
such expenditure wholly or partly. On the other hand capital
expenditure is not deductible while computing taxable income
unless the law expressly so provides. Neither the capital expenditure
nor revenue expenditure has been defined in the Act. However, from
the facts and circumstances of each case and from the judicial
decisions the following general principles to be kept in mind.

i. Capital expenditure is incurred in acquiring, extending or improving a
fixed asset whereas revenue expenditure is incurred in the normal
course of business as a routine expenditure.
ii. Capital expenditure incurred for enduring benefits whereas revenue
expenditure is consumed within a Previous Year.
iii. Capital expenditure makes improvement with earning capacity of a
business whereas a revenue expenditure maintains the profit making
capacity of a business.
iv. Capital expenditure is a nonrecurring expenditure whereas revenue
expenditure is normally a recurring one.

COMPUTATION OF TAXABLE INCOME
AND TAX LIABILITY OF AN ASSESSEE
1. Determine the residential status of the person as per section 6 of the Act.
2. Calculate the income as per the provisions of respective heads of income. Section 14
classifies the income under five heads:
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
3. Consider all the deductions and allowances given under the respective heads before
arriving at the net income.
4. Exclude the income exempt under section 10 of the Act.

5. Aggregate of incomes computed under the 5 heads of income after applying clubbing
provisions and making adjustments of set off and carry forward of losses is known as Gross
Total Income.
6. Deduct there from the deductions admissible under Sections 80C to 80U. The balance is called
Total income. The total income is rounded off to the nearest multiple of Rupees ten. (Section
288A)
7. Add agriculture income in the total income calculated in (6) above. Then calculate tax on the
aggregate as if such aggregate income is the Total Income.
8. Calculate income tax on the net agricultural income as increased by 2,00,000/ 2,50,000/
5,00,000 as the case may be, as if such increased net agricultural income were the total
income.
9. The amount of income tax determined under (8) above will be deducted from the amount of
income tax determined under (7) above.
10. Calculate income tax on capital gains under Section 112, and on other income at specified
rates. The balance of amount of income tax left as per (9) above plus the amount of income tax
at (10) above will be the income tax in respect of the total income.

11. The balance of amount of income tax left as per (9) above plus the amount of income
tax at (10) above will be the income tax in respect of the total income.
12. Deduct the following from the amount of tax calculated under (11) above:
1. Tax deducted and collected at source.
2. Advance tax paid.
3. Double taxation relief.
13. The balance of amount left after deduction of items given in (12) above, shall be the
net tax payable or net tax refundable for the assessee. Net tax payable/refundable
shall be rounded off to the nearest multiple of Ten rupees (Section 288B).
14. Along with the amount of net tax payable, the assessee shall have to pay penalties or
fines, if any, imposed on him under the Income-tax Act.

A. For resident senior citizen (who is of 60 years but less than 80
years during the previous year)
INCOME RATE
Upto 3,00,000 NIL
3,00,000 to 5,00,000 10%
5,00,001 to 10,00,000 20%
Above 10,00,000 30%
TAX RATES
B. For resident senior citizen (who is of 80 years during the
previous year)
INCOME RATE
Upto 5,00,000 NIL
5,00,001 to 10,00,000 20%
Above 10,00,000 30%

C. For every other individual (resident and non-resident), every
HUF/AOP/BOI/artificial juridical person
INCOME (IN INR) RATE
Upto 2,50,000 NIL
2,50,001 to 5,00,000 10%
5,00,001 to 10,00,000 20%
Above 10,00,000 30%
A resident individual, having total income not exceeding Rs.
5,00,000, can avail rebate, of 2,000 or 100% of income tax,
whichever is less, u/s 87A.
The amount of income tax computed in accordance with the
above rates and special rates u/s 111A and 112 (relating to LTCG)
shall be increased by a surcharge at the rate of 10% of such
income tax in case the total income exceeds Rs. 1 crore.

MARGINAL RELIEF
• The total amount payable as income tax and surcharge on total
income exceeding Rs. 1 crore shall not exceed the total amount
payable as income tax on a total income of Rs. 1 crore, by more than
the amount of income that exceeds Rs. 1 crore.
• In case of company having a total income of exceeding Rs. 10 crores,
the amount payable as income tax and surcharge shall not exceed
the total amount payable as income tax and surcharge on total
income of Rs. 10 crore by more than the amount of income that
exceeds Rs. 10 crore.

ROUNDING OFF TOTAL INCOME AND TAX
• Rounding Off Income [Sec. 288A]: The Total Income computed
under this Act, shall be rounded off to the nearest multiple of 10.
• Rounding Off Tax [Sec. 288B] : The amount of Tax including Tax
Deducted at Source (TDS) and advance tax, interest, penalty, fine or
any other sum payable, and the amount of refund due under the
Income Tax Act, shall be rounded off to the nearest ‘10.

D. Firms/LLP @ 30%
Surcharge is applicable at the rate of 10% of such income tax in case
the total income exceeds Rs. 1 crore.
E. Companies:
i. On Domestic company @ 30%
The surcharge @ 5% in case of a domestic company shall be levied if the total
income of the domestic company exceeds 1 crore rupees but does not exceed
10 crore rupees and the surcharge @ 10% shall be levied if the total income of
the domestic company exceeds 10 crore rupees.
ii. On companies other than domestic companies @40%
In case of companies other than domestic companies, the surcharge of 2 %
shall be levied if the total income exceeds 1 crore rupees but does not exceed
10 crore rupees and surcharge @5% shall be levied if the total income exceeds
10 crore rupees.

• However, for short term capital gains emanating from transfer of a short
term capital asset being an equity share or unit of an equity oriental fund
u/s 111A, income tax rate is 15% for all the assessee. And for long-term
capital gains emanating from transfer of a long term capital asset, Income
Tax rate is 20%.
• The amount of income-tax as computed including surcharge thereon shall
be increased by an Education Cess on Income Tax by 2% for the purpose of
fulfilling the commitment of the Central Government to provide and
finance universalized basic education and 1% Secondary and Higher
Education Cess shall also be charged @ 1%

TOTAL INCOME AND TAX PAYABLE
DETERMINATION OF RESIDENTIAL STATUS
CLASSIFICATION OF INCOME UNDER DIFFERENT HEADS
EXCLUSION OF INCOME NOT CHARGEABE TO TAX
COMPUTATION OF INCOME UNDER EACH HEAD
CLUBBING OF INCOME OF SPOUSE, MINOR CHILD ETC.
SET OFF OR CARRY FORWARD AND SET OFF OF LOSSES

COMPUTATION OF GROSS TOTAL INCOME
DEDUCTIONS FROM GROSS TOTAL INCOME
TOTAL INCOME
APPLICATION OF THE RATES OF TAX ON TOTAL INCOME
SURCHARGE
EDUCATION CESS AND SECONDARY AND HIGHER EDUCATION
CESS ON INCOME TAX
ADVANCE TAX AND TAX DEDUCTION AT SOURCE

THANKS