TAXATION

Unit 1: Income Tax; Basic Concepts; Residential Status

and Incidence of Tax
Classification of Taxes
Direct Taxes Indirect Taxes
Income Tax, Securities Transaction Tax, GST, VAT, Excise Duty, Customs Duty
Inheritance Tax, Capital Gains Tax
Imposed on Income and Profits Imposed on Goods and Services
Impact of tax and its incidence coincides Impact of tax can be shifted
Progressive and Equitable Regressive and Inequitable
Administered by the Central Board of Administered by the Central Board of
Direct Taxes Indirect Taxes and Customs
Income Tax
The Income Tax Act, 1961 came into force from
April 1, 1962, for levy, administration, collection,
and recovery of income taxes in India. The income
earned by an assessee during the previous year is
assessed to tax in the assessment year.
Factors affecting income tax liability

 Category as a person

 Age in case of individual assessee

 Taxable Income

 Residential status
Who is liable to pay income tax?
Every person whose taxable income exceeds the minimum taxable
limit is liable to pay income tax on the income of the previous
financial year at applicable rates.

Exemption limits:

• Super senior citizens: Rs. 500,000

• Senior citizens : Rs. 300,000
• Others: Individuals, HUF, AOP or BOI : Rs. 250,000
• Firm, Company, Local Authority: Nil
• Income tax is a direct tax which is levied by the
Central Government
• Income tax is computed on total income or taxable
income at prevalent rates as per the provisions of
the Income Tax Act, 1961
• Tax is charged on every person as defined in Sec. 2
( 31)
Who is a ‘Person’?
‘Person’ includes the following:
• An individual

• A Hindu Undivided Family

• A company

• A firm or LLP

• An Association of Persons or a Body of Individuals,

whether incorporated or not
• A local authority

• Every other artificial juridical person

Previous year: previous year is defined as the financial year
which immediately precedes the assessment year.
Assessment year: Assessment year is the 12 months’ period
commencing on 1st of April till 31st March of next year. It is
the year in which the income earned by the assessee in the
previous year is assessed.
Assessee: An assessee is a person who is liable to pay tax
under any provision of the Income Tax Act.
Assessment: Assessment is the process of determining the
correctness of income declared by the assessee and
calculating the amount of tax payable by him and further
procedure of imposing tax liability on that person.
How does the Government collect
Income Tax
 Voluntary payment by taxpayer into designated
bank by way of advance tax
 Voluntary payment by taxpayer into designated
bank by way of self assessment tax
 Tax deducted at source ( TDS)
Steps in Computation of Income Tax
 Compute gross total income by including taxable
income under all five heads of income
 Take deductions under Chapter VIA ( Sec. 80 C – Sec.
80U) to arrive at taxable income or total income
 Compute tax liability by applying the prevalent rate to
total income. Add surcharge if applicable, and health
and education cess.
 Deduct taxes already paid through TDS or advance
taxes and self assessment tax
 The remaining amount is the income tax payable, which
needs to be paid before filing IT return.
Computation of Income Tax
Illustration
Income from salaries xxx
+ Income from house property xxx
+ Profits / gains of business or profession xxx
+ Capital gains xxx
+ Income from other sources xxx
= Gross Total Income xxx
Less: Deductions under Chapter VI A ( S. 80 C (xxx)
– S. 80 U )
Taxable Income / Total Income 102,00,000
Tax on the first Rs. 250,000 -
Tax on the next Rs. 250,000 ( 500,000 – 12,500
250,000) @ 5 %
Tax on the next Rs. 500,000 ( 10,00,000 – 100,000
500,000) @ 20%
Tax on the remaining Rs. 92,00,000 @ 30% 2,760,000
28,72,500
Add: Surcharge @ 15% 430,875
33,03,375
Tax Slabs
Taxable Income Tax Rate ( Existing Tax Rate ( New Scheme)
Scheme)
Up to Rs. 250,000 NIL NIL
Rs. 250,001 – 500,000 5% 5%
Rs. 500,001 – 750,000 20 % 10 %
Rs. 750,001 – 10,00,000 20 % 15 %
Rs. 10,00,001 – 12,50,000 30 % 20 %
Rs. 12,50,001 – 15,00,000 30 % 25 %
Above Rs. 15,00,000 30 % 30 %
Surcharge
 Surcharge:
a) 10% of Income tax where total income exceeds
Rs.50 lakh
b) 15% of Income tax where total income exceeds
Rs.1 crore
c) 25% of Income tax where total income exceeds
Rs.2 crore
d) 37% of Income tax where total income exceeds
Rs.5 crore
 Education cess: 4% of income tax plus surcharge
Heads of Income
• Income from Salaries

• Income from House Property

• Capital Gains

• Profits & Gains arising from Business or Profession

• Income from other sources

• The year in which income is earned is the previous year
• The period of twelve months following the previous
year is the assessment year.
Illustrations:
a. An assessee commences business on July 1, 2020
b. As assessee commences business on January 1, 2021
c. Mr. X was appointed on July 1, 2020 as lecturer in a
college on probation, but he was confirmed on June
30, 2021
d. X Enterprises maintains books of accounts on calendar
year basis. It closed it books on December 31, 2020
Residence and Incidence of Taxes
Which income is taxable in India depends on the
residential status of the assessee.

Type of
Resident

Resident Non-
Resident

Ordinarily Not
Resident Ordinarily
Resident
Resident and Ordinarily Resident in India

Step 1:An individual is a resident in India in any

previous year if he satisfies any one of the basic
conditions:
• He is in India during the previous year for a period

of 182 days or more, or

• He has been in India for at least 365 days during

the four years preceding the previous year, and is

in India for at least 60 days during the previous
year.
In case you are an Indian citizen and you leave
India for employment outside of India or as a
member of the crew on an Indian ship, in other
words if you take up a job outside India the 60
days minimum period will be increased to 182
days.
• However, an Indian Citizen or a Person of Indian
Origin ( PIO ) , who comes back to India can stay in
India for 120 days instead of 60 days as above.
This benevolent provision only applies to persons
already abroad, and come to India on short visits.
• Further, if you are an NRI and you have income in
India more than Rs. 15 lakhs, then you have to
restrict your stay in India to 120 days in a year.
For NRIs:

A citizen of India or a person of Indian (PIO) origin may become

resident in India only in one of the following situations: -
(i) if his total income from Indian sources (i.e., other than the income
from foreign sources) does not exceed fifteen lakh rupees in the PY
and he stays in India for 182 days or more during the the PY ; or
(ii) if his total income from Indian sources (i.e., other than the income
from foreign sources) exceed fifteen lakh rupees in the PY and
(a) he stays during the PY for 182 days or more; or
(b) he stays during the PY for 120 days or more and also stays for 365
days or more in preceding four previous years.

F. No. 370142/1812020-TPL Government of India Ministry of Finance, Department of

Revenue, Central Board of Direct Taxes
For foreign nationals

B. An Individual who is not citizen of India or PIO may

become resident in India only in one of the
following situations: -
(i) If he stays during the PY for 182 days or more;
or
(ii) (ii) if he stays during the PY for 60 days or more
and also stays for 365 days or more in preceding
four previous years.
Resident and Ordinarily Resident

Step 2:
A resident individual will be treated as resident and
ordinarily resident in India during the PY if both the
following additional conditions are satisfied:
a. He is resident in India for at least 2 years out of
the 10 years immediately preceding the relevant
previous year, and
b. His stay in India is for 730 days or more during 7
years immediately preceding the relevant year
Resident but not ordinarily resident

If the individual satisfies one of the two basic

conditions, but does not satisfy the additional
conditions, he is resident but not ordinarily resident.
Non-resident

If the individual does not satisfy any of the basic

conditions, he/she is a non-resident
Income Residential Status
ROR RNOR NR
Income accrued in Taxed Taxed Taxed
India
Income deemed to Taxed Taxed Taxed
be accrued in India
Income received in Taxed Taxed Taxed
India
Income deemed to Taxed Taxed Taxed
be received in India
Income from a Taxed Taxed Not Taxed
business controlled
in India
Income with no Taxed Not Taxed Not Taxed
relation to India
Particulars of income and the losses of the PY 2020-21 of
Sachin Bansal are listed below. Compute his GTI for AY
2021-2022, if he is a: a. Resident, b. Not ordinarily
resident and c. Non-resident:

Income from house Rs. 500

property in Kazakhstan
received in India
1. Profit from business in Iran 5,000
received in India
2. Income from house 1,000
property in Pakistan,
deposited in a bank in
Pakistan
3. Income accrued in India, 2,000
but received in England
4. Income from business in 6,000
Delhi
5. Income from agriculture in 5,000
 ROR RBNOR NR
1. 500 500 500
2. 1,000 - -
3. 2,000 2,000 2,000
4. 6,000 6,000 6,000
5. 5,000 - -
6. 20,000 20,000 -
Gross Total
Income
Mr. X, a citizen of India gets a job in a foreign
country. His estimated total income till his departure
from India: Rs. 630,000. His foreign income after his
departure from India: Rs. 650,000. Compute his tax
liability for AY 2021- 2022 if he leaves India on:
a. July 1, 2021 and
b. October 31, 2021
a. Mr. X is a non resident in India. Therefore, his
foreign income is not liable to tax in India.

Tax on Rs. 630,000 ( 630,000 Rs. 38,500

– 500,000 ) * 20 % + Rs. (
500,000 – 250,000 ) * 5 %
Add: Surcharge Nil
38,500
Add: Health and education 1,540
cess @ 4 %
Tax liability Rs. 40,040
b. Mr. X was in India for at least 182 days. Therefore,
he is ordinarily resident for PY 2021-2022.
Tax on Rs. 12,80,000 [ ( Rs. 196,500
500,000 – 250,000 ) * 5 % +
( 10,00,000 – 500,000 ) * 20
% + Rs. 280,000 x 30 % ]
Add: Surcharge Nil
196,500
Add: Health and education 7,860
cess @ 4 %
Tax liability Rs. 204,360
Deductions under Chapter VIA
S.80C: LIC premiums, contributions to EPF, PPF, Equity Linked Savings Scheme (
ELSS), repayment of housing loan, children’s tuition fees etc. Maximum
deduction: Rs. 150,000.
S. 80CCD ( 1B) : Contribution to National Pension Scheme (NPS) and Atal
Pension Yojana. Maximum deduction: Rs. 50,000
S. 80CCD (2) : Employer’s contribution to NPS. Maximum deduction : 10 % of
salary
S. 80D : Health insurance premium. For self, spouse and dependent children: Rs.
25,000. For parents less than 60 years of age: additional Rs. 25,000. If
parents above 60 years of age: additional Rs. 50,000. If taxpayer and
parents are above 60 years of age: Maximum deduction Rs. 100,000
S. 80E : Interest on education loan for pursuing higher education for taxpayer,
spouse or children. Legal guardian is also eligible. No monetary ceiling.
Maximum period: 8 assessment years beginning the year in which the loan
starts getting repaid.
80EE: Interest on housing loan for first time home buyers. Value of the property must be
less than Rs. 50 lakhs, and the amount of the loan must be less than Rs. 35 lakhs.
Maximum deduction: Rs. 50,000. This is over and above the deduction available
under S.24.
S. 80G: Donations. National Defence Fund, Prime Minister’s National Relief Fund, Chief
Minister’s National Relief Fund, National Sports Fund etc. qualifying limit : 100 %.
Jawaharlal Memorial Fund, Prime Minister’s Drought Relief Fund, Ramkrishna Mission
etc : 50 %
S. 80GG : Deduction for rent paid
S. 80GGB : Contribution by an Indian company to political parties or an electoral trust.
S. 80GGC : Contribution by individual taxpayers for contributions to political parties or
electoral trust.
S.80RRB : Royalty income of a patentee. Maximum deduction : Rs. 300,000
S. 80TTA : Interest income on savings account. Maximum deduction: Rs.10,000.
S. 80TTB : Interest income from banks, post office etc only for senior citizens. Maximum
deduction: Rs. 50,000.