CHAPTER 1

BASIC CONCEPTS

LEARNING OUTCOMES
After studying this chapter, you would be able to-
♦ comprehend the meaning of tax and types of taxes;
♦ discern the difference between direct and indirect taxes;
♦ appreciate the components of income-tax law;
♦ comprehend the procedure for computation of total income for the
purpose of levy of income-tax;
♦ comprehend and appreciate the meaning of the important terms used
in the Income-tax Act, 1961;
♦ comprehend the meaning and scope of agricultural income and apply
the same to identify whether a particular income falls within the scope
of agricultural income;
♦ identify the operations which are partly agricultural and partly non-
agricultural and compute the agricultural income and business income
arising from such operations;
♦ recognise the previous year and assessment year for the purpose of
computing income chargeable to tax under the Income-tax Act, 1961;
♦ examine the circumstances when income of the previous year would
be assessed to tax in the previous year itself;

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 1.2 INCOME TAX LAW

♦ apply the rates of tax applicable on different components of total

income of a person for the purpose of determining the tax liability of
such person under default tax regime u/s 115BAC;
♦ apply the rates of tax applicable on different components of total
income of a person for the purpose of determining the tax liability of
such person, who exercises the option to shift out of the default tax
regime and pay tax under the optional tax regime as per the normal
provisions of the Act.

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CHAPTER OVERVIEW

Basic Concepts

Components of Steps for computation Important Basis of charge

Income-tax Law of Total Income (TI) Definitions & rates of tax
and tax liability

Charge of
Income-tax Assessee
Determination of Income-tax
Act, 1961
residential status

Rates of
Annual Finance Assessment
Classification of income Income-tax
Act
under different heads

Income-tax Person
Rules Computation of income
under each head
Circulars and Income
Notifications
Clubbing of income of
spouse, minor child etc.
India
Legal decisions
Set off or carry forward
& set off of losses
Assessment
Year
Computation of Gross
Total Income (GTI)
Previous Year

Deductions from GTI

Agricultural
income
Computation of TI

Computation of tax
liability

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1. INTRODUCTION
1.1 What is the meaning of tax?
Let us begin by understanding the meaning of tax.
Article 366(28) of the Constitution of India defines the term “Taxation” as follows –
“Taxation includes the imposition of any tax or impost, whether general or local or
special, and tax shall be construed accordingly."
Taxes are considered to be the “cost of living in a society”. Taxes are levied by the
Governments to meet the common welfare expenditure of the society. There are
two types of taxes - direct taxes and indirect taxes.
Direct Taxes: If tax is levied directly on the income or wealth of a person, then, it
is a direct tax. The person who pays the tax to the Government cannot recover it
from somebody else i.e. the burden of a direct tax cannot be shifted. E.g., Income-
tax.

Indirect Taxes: If tax is levied on the price of a good or service, then it is an indirect
tax e.g. Goods and Services Tax (GST) or Custom Duty. In the case of indirect taxes,
the person paying the tax passes on the incidence to another person.

TYPE OF TAXES

DIRECT TAXES INDIRECT TAXES

TAX ON UNDISCLOSED
GOODS AND
INCOME TAX FOREIGN INCOME AND CUSTOMS DUTY
SERVICES TAX (GST)
ASSETS

1.2 Why are taxes levied?

The reason for levy of taxes is that they constitute the basic source of revenue to
the Government. Revenue so raised is utilized for meeting the expenses of

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 BASIC CONCEPTS 1.5

Government like defence, provision of education, health-care, infrastructure

facilities like roads, dams etc.

1.3 Power to levy taxes

The Constitution of India, in Article 265 lays down that “No tax shall be levied or
collected except by authority of law.” Accordingly for levy of any tax, a law needs to
be framed by the government.
Constitution of India gives the power to levy and collect taxes, whether direct or
indirect, to the Central and the State Government. The Parliament and State
Legislatures are empowered to make laws on the matters enumerated in the
Seventh Schedule by virtue of Article 246 of the Constitution of India.
Seventh Schedule to Article 246 contains three lists which enumerate the matters
under which the Parliament and the State Legislatures have the authority to make
laws for the purpose of levy of taxes.
The following are the lists:
(i) Union List: Parliament has the exclusive power to make laws on the matters
contained in Union List.
(ii) State List: The Legislatures of any State has the exclusive power to make laws
on the matters contained in the State List.
(iii) Concurrent List: Both Parliament and State Legislatures have the power to
make laws on the matters contained in the Concurrent list.
Income-tax is the most significant direct tax. Entry 82 of the Union List
i.e., List I in the Seventh Schedule to Article 246 of the Constitution of
India has given the power to the Parliament to make laws on taxes on
income other than agricultural income.

1.4 Overview of Income-tax law in India

In this material, we would be introducing the students to the Income-tax law in India.
The income-tax law in India consists of the following components –

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 1.6 INCOME TAX LAW

INCOME TAX
ACT

LEGAL
DECISIONS OF ANNUAL
COURTS FINANCE ACT
COMPONENTS
OF INCOME
TAX LAW

CIRCULARS/ INCOME TAX

NOTIFICATIONS RULES

The various instruments of law containing the law relating to income-tax are
explained below.

Income-tax Act, 1961

The levy of income-tax in India is governed by the Income-tax Act, 1961. In this
book, we shall briefly refer to this as the Act.
• It extends to the whole of India.
• It came into force on 1st April, 1962.
• It contains sections 1 to 298 and schedules I to XIV.
 A section may have sub-sections or clauses and sub-clauses.
 When each part of the section is independent of each other and
one is not related with other, such parts are called a “Clause”. “Sub
section”, on the other hand refers to such parts of a section where
each part is related with other and all sub sections taken together
completes the concept propounded in that section.

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 Example
o The clauses of section 2 define the meaning of terms used
in the Income-tax Act, 1961. Clause (1A) defines
“agricultural income”, clause (1B) defines “amalgamation”
and so on. Each one of them is independent of other clause
of the same section.
o Likewise, the clauses of section 10 contain the exemptions
in respect of certain income, like clause (1) provides for
exemption of agricultural income and clause (2) provides for
exemption of share income of a member of a Hindu
Undivided Family and so on.
o Section 5 defining the scope of total income has two sub-
sections (1) and (2). Sub-section (1) defines the scope of
total income of a resident and sub-section (2) defines the
scope of total income of a non-resident. Each sub section is
related with the other in the sense that only when one reads
them all, one gets the complete idea related with scope of
total income.
 A section may also have Provisos and Explanations.
 The Proviso(s) to a section/sub-section/clause spells out the
exception(s)/ condition(s) to the provision contained in the
respective section/ sub-section/ clause, i.e., the proviso spells out
the cases where the provision contained in the respective section/
sub-section/ clause would not apply or where the provision would
apply with certain modification.
 The Explanation to a section/ sub-section/ clause gives a
clarification relating to the provision contained in the respective
section/ sub-section/ clause.
 Example

o Sections 80GGB and 80GGC provides for deduction from

gross total income in respect of contributions made by
companies and other persons, respectively, to political
parties or an electoral trust.

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o The proviso to sections 80GGB and 80GGC provide that no

deduction shall be allowed under those sections in respect
of any sum contributed by cash to political parties or an
electoral trust. Thus, the provisos to these sections spell out
the circumstance when deduction would not be available
thereunder in respect of contributions made.
o The Explanation below section 80GGC provides that for the
purposes of sections 80GGB and 80GGC, “political party”
means a political party registered under section 29A of the
Representation of the People Act, 1951. Thus, the
Explanation clarifies that the political party has to be a
registered political party.
• The Income-tax Act, 1961 undergoes change every year with additions and
substitutions brought in by the Annual Finance Act passed by Parliament.
Sometimes, the Income-tax Act, 1961 is also amended through other
legislations like Taxation Laws (Amendment) Act.

The Finance Act

Every year, the Finance Minister of the Government of India introduces the Finance
Bill in the Parliament’s Budget Session. When the Finance Bill is passed by both the
houses of the Parliament and gets the assent of the President, it becomes the
Finance Act. Amendments are made every year to the Income-tax Act, 1961 and
other tax laws by the Finance Act.

The First Schedule to the Finance Act contains four parts which specify the rates of tax -
• Part I of the First Schedule to the Finance Act specifies the rates of tax
applicable for the current Assessment Year. Accordingly, Part I of the First
Schedule to the Finance (No. 2) Act, 2024 specifies the rates of tax for F.Y.
2023-24.
• Part II specifies the rates at which tax is deductible at source for the current
Financial Year. Accordingly, Part II of the First Schedule to the Finance Act,
2024 specifies the rates at which tax is deductible at source for F.Y. 2024-25
• Part III gives the rates for calculating income-tax for deducting tax from
income chargeable under the head “Salaries” and computation of advance
tax for F.Y. 2024-25 where the assessee exercises the option to shift out of
the default tax regime provided under section 115BAC(1A).

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 BASIC CONCEPTS 1.9

• Part IV gives the rules for computing net agricultural income.

Income-tax Rules, 1962

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, 1961, the CBDT frames
rules from time to time. These rules are collectively called Income-tax Rules,
1962.
• Rules also have sub-rules, provisos and Explanations. The proviso to a Rule/
Sub-rule spells out the exception to the limits, conditions, guidelines, basis of
valuation, as the case may be, spelt out in the Rule/ Sub-rule. The Explanation
gives clarification for the purposes of the Rule.
• It is important to keep in mind that along with the Income-tax Act, 1961, these
rules should also be studied.

Circulars and Notifications

Circulars
• Circulars are issued by the CBDT from time to time to deal with certain specific
problems and to clarify doubts regarding the scope and meaning of certain
provisions of the Act.
• Circulars are issued for the guidance of the officers and/or assessees.

• The department is bound by the circulars. While such circulars are not binding
on the assessees, they can take advantage of beneficial circulars.
Notifications

Notifications are issued by the Central Government to give effect to the provisions
of the Act. The CBDT is also empowered to make and amend rules for the purposes
of the Act by issue of notifications which are binding on both department and
assessees.

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Legal decisions of Courts

Case Laws refer to decision given by courts. The study of case laws is an important
and unavoidable part of the study of Income-tax law. It is not possible for
Parliament to conceive and provide for all possible issues that may arise in the
implementation of any Act. Hence the judiciary will hear the disputes between the
assessees and the department and give decisions on various issues.
The Supreme Court is the Apex Court of the Country and the law laid down by the
Supreme Court is the law of the land. The decisions given by various High Courts
will apply in the respective states in which such High Courts have jurisdiction.

Note – Case laws are dealt with at the Final level.

2. CHARGE OF INCOME TAX

Section 4 of the Income-tax Act, 1961 is the charging section which provides that:
(i) Tax shall be charged at the rates prescribed for the year by the Annual
Finance Act or the Income-tax Act, 1961 or both.
(ii) The charge is on every person specified under section 2(31);
(iii) Tax is chargeable on the total income earned during the previous year and
not the assessment year. (There are certain exceptions provided by sections
172, 174, 174A, 175 and 176);
(iv) Tax shall be levied in accordance with and subject to the various provisions
contained in the Act.

This section is the back bone of the law of income-tax in so far as it serves as the
most operative provision of the Act. The tax liability of a person springs from this
section.

A person includes an individual, Hindu Undivided Family (HUF), Association of

Persons (AOP), Body of Individuals (BOI), a firm, a company etc.
(1) Total Income and Tax Payable

Income-tax is levied on an assessee’s total income. Such total income has to be

computed as per the provisions contained in the Income-tax Act, 1961.
Let us go step by step to understand the procedure for computation of total income
of an individual for the purpose of levy of income-tax –

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Step 1 – Determination of residential status

The residential status of a person has to be determined to ascertain which income
is to be included in computing the total income. The residential status as per the
Income-tax Act, 1961 can be classified as under –

RESIDENTIAL STATUS UNDER THE

INCOME TAX ACT, 1961

RESIDENT DEEMED NON-

RESIDENT RESIDENT
RESIDENT AND RESIDENT BUT NOT
ORDINARILY RESIDENT ORDINARILY RESIDENT

In the case of an individual, the duration for which he is present in India in the
relevant previous year or relevant previous year and the earlier previous years
determines his residential status. Based on the days spent by him in India, he may
be (a) resident and ordinarily resident, (b) resident but not ordinarily resident, or
(c) non-resident.

The residential status of a person determines the taxability of the income. For e.g.,
income earned and received outside India will not be taxable in the hands of a non-
resident but will be taxable in case of a resident and ordinarily resident.
There is also a concept of deemed resident for which presence of individual in India
is not required. A deemed resident is always a resident but not ordinarily resident
in India. Determination of residential status has been discussed in Chapter 2.
Step 2 – Classification of income under different heads
A person may earn income from different sources. For example, a salaried person
earns income by way of salary. He also gets interest from bank savings account/
fixed deposit. Apart from this, if he has invested in shares, he would be getting
dividend and when he sells these shares, he may earn profit on such sale. If he owns
a residential property which he has let out, he would earn rental income.

Under the Income-tax Act, 1961, for computation of total income, all income of a tax
payer are classified into five different heads of income. These are shown below –

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 1.12 INCOME TAX LAW

HEADS OF INCOME

INCOME PROFITS AND CAPITAL INCOME FROM

SALARIES
FROM GAINS OF GAINS OTHER
HOUSE BUSINESS OR SOURCES
PROPERTY PROFESSION

There is a charging section under each head of income which defines the scope of
income chargeable under that head. These heads of income exhaust all possible
types of income that can accrue to or be received by the tax payer. Accordingly,
income earned is classified as follows:
1. Salary, pension etc. earned is taxable under the head “Salaries”.
2. Rental income is taxable under the head “Income from house property”.
3. Income derived from carrying on any business or profession is taxable under
the head “Profits and gains of business or profession”.
4. Profit from sale of a capital asset (like land, building and shares) is taxable
under the head “Capital Gains”.
5. The fifth head of income is the residuary head. Income which is chargeable
to tax under the Income-tax Act, 1961 but not taxable under the first four
heads will be taxed under the head “Income from other sources”.
The tax payer has to classify the income earned under the relevant head of income.
Step 3 – Computation of income under each head
Income is to be computed in accordance with the provisions governing a particular
head of income.

Exemptions: There are certain incomes which are wholly exempt from income-tax
e.g., agricultural income. These incomes have to be excluded and will not form part
of total income.
Also, some incomes are partially exempt from income-tax e.g., Commuted pension.
These incomes are excluded only to the extent of the limits specified in the Act. The
balance income over and above the prescribed exemption limits would enter
computation of total income and have to be classified under the relevant head of
income.

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Deductions: There are deductions and allowances prescribed under each head of
income. For example, while calculating income from house property for let out
property, municipal taxes and interest on loan are allowed as deduction. Similarly,
deductions and allowances are prescribed under other heads of income. These
deductions etc. have to be considered before arriving at the net income chargeable
under each head.
These exemptions and deductions would be available to the individual depending upon
the regime in which he pays tax. Tax regime under section 115BAC is the default tax
regime which provides for concessional rates of tax to individuals/HUFs/
AoPs/BoIs/Artificial juridical persons. However, certain exemptions and deductions are
not allowed under the default tax regime. Such assessees have an option to opt out of
the said regime and pay tax under normal provisions of the Act. These tax regimes i.e.,
the default tax regime under section 115BAC and optional tax regime under the normal
provisions of the Act are discussed in detail later on in this Chapter.
For detailed discussion on exemptions and deductions under each head, refer to
Chapter 3: Heads of Income.
Disallowance of expenditure in relation to exempt income
[Section 14A]
 As per section 14A, notwithstanding anything to the contrary,
expenditure incurred in relation to any exempt income is not allowed as a
deduction while computing income under any of the five heads of income.
 The Assessing Officer is empowered to determine the amount of expenditure
incurred in relation to such income which does not form part of total income in
accordance with such method as may be prescribed.
 The method for determining expenditure in relation to exempt income for the
purpose of disallowance of such expenditure under section 14A is prescribed by
the CBDT.
 The provisions of section 14A regarding disallowance of expenses would apply
even in a case where exempt income has not accrued or arisen or has not been
received during the previous year relevant to an assessment year and the
expenditure has been incurred during the said previous year in relation to such
exempt income.
Step 4 – Clubbing of income of spouse, minor child etc.
In case of individuals, income-tax is levied on a slab system on the total income.
The tax system is progressive i.e., as the income increases, the applicable rate of

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 1.14 INCOME TAX LAW

tax increases. Some taxpayers in the higher income bracket have a tendency to
divert some portion of their income to their spouse, minor child etc. to minimize
their tax burden.
In order to prevent such tax avoidance, clubbing provisions have been incorporated
in the Act, under which income arising to certain persons (like spouse, minor child
etc.) have to be included in the income of the person who has diverted his income
for the purpose of computing tax liability. For detailed discussion, refer to Chapter
4: Income of other persons included in assessee’s total income.
Step 5 – Set-off or carry forward and set-off of losses
An assessee may have different sources of income under the same head of income.
He may have profit from one source and loss from the other. For instance, an
assessee may have profit from his textile business and loss from his printing
business. This loss can be set-off against the profits of textile business to arrive at
the net income chargeable under the head “Profits and gains of business or
profession”.
Similarly, an assessee can have loss under one head of income, say, profits and
gains of business or profession and profits under another heads of income, say,
income from house property. There are provisions in the Income-tax Act, 1961 for
allowing inter-head adjustment in certain cases.
However, there are also restrictions in certain cases, like business loss is not allowed
to be set-off against salary income. Default tax regime under section 115BAC puts
further more restrictions like loss from house property cannot be set off from
income under any other head. Further, losses which cannot be set-off in the current
year due to inadequacy of eligible profits can be carried forward for set-off in the
subsequent years as per the provisions contained in the Act. Generally, brought
forward losses under a particular head cannot be set-off against income under
another head i.e., brought forward business loss cannot be set-off against income
from house property of the current year. For detailed discussion, refer to Chapter 5:
Aggregation of income, set-off and carry forward of losses.
Step 6 – Computation of Gross Total Income
The final figures of income or loss under each head of income, after allowing the
eligible deductions, allowances and other adjustments, are then aggregated, after
giving effect to the provisions for clubbing of income and set-off and carry forward
of losses, to arrive at the gross total income.

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Step 7 – Deductions from Gross Total Income

There are deductions prescribed from Gross Total Income. Two types of
deductions are allowable from Gross Total Income - Deductions under Chapter VI-
A and deduction under section 10AA. These deductions would be allowable to the
assessee who opts out of the default tax regime and pays tax under the optional
tax regime as per normal provisions of the Act, subject to fulfillment of requisite
conditions stipulated thereunder.

DEDUCTIONS FROM GROSS TOTAL INCOME

(in case of an assessee opting out of the default tax regime)

DEDUCTION UNDER
DEDUCTIONS UNDER CHAPTER-VIA
SECTION 10AA

DEDUCTIONS OTHER
DEDUCTIONS IN DEDUCTIONS IN
IN RESPECT OF DEDUCTIONS
RESPECT OF CERTAIN RESPECT OF
OTHER INCOME
PAYMENTS CERTAIN INCOMES

Example
Examples Examples
Examples Deduction
1. Life Insurance Premium 1. Employment of new 1. Interest on in case of a
deposits in person with
paid employees disability
2. Contribution to 2. Royalty income etc. of saving
Provident Fund/ authors of certain account
Pension Fund books other than text 2. Interest on
3. Medical insurance books deposits in
premium paid 3. Royalty on patents case of senior
4. Payment of interest on citizens
loan taken for higher
education
5. Payment of interest on
loan taken for residential
house
6. Payment of interest on
loan taken for purchase
of electric vehicle
7. Rent paid
8. Donation to certain
funds, charitable
institutions, etc.
9. Contributions to political
parties

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However, under the default tax regime under section 115BAC, only select
deductions are permissible.

For detailed discussion, refer to Chapter 6: Deductions from Gross Total Income.
Step 8 – Computation of Total income
The income arrived at, after claiming the above deductions from the Gross Total Income
is known as the Total Income. It should be rounded off to the nearest multiple of ` 10 as
per section 288A. The process of computation of total income is shown hereunder –

COMPUTATION OF TOTAL INCOME

Determine the residential status

Classify income under five

heads

Salaries Income from Profits and gains Capital Income from

house property from business or gains other sources
profession

Compute income under each head applying the charging & deeming
provisions and providing for permissible deductions/exemptions thereunder

Apply clubbing provisions

Set-off/carry forward and

set-off of losses as per the provisions of the Act/default tax regime

Compute Gross Total Income (GTI)

Less: Deductions from GTI

Total Income (TI)

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Step 9 – Application of the rates of tax on the total income

Rates prescribed under section 115BAC of the Income-tax Act for default tax
regime
Section 115BAC of the Income-tax Act, 1961 provides for concessional rates of
tax to individuals/HUF/AoPs/BoIs and artificial juridical persons. Under this
regime certain exemptions/deductions are, however, not available like Leave
Travel Concession, interest on housing loan on self-occupied property,
deductions under Chapter VI-A [other than section 80CCD(2), 80CCH(2) or section
80JJAA] etc. The rates given under section 115BAC are the default tax rates unless
the assessee exercises an option to shift out of the said regime. The basic
exemption limit under section 115BAC is ` 3,00,000. This means that no tax is
payable by an assessee with total income of upto ` 3,00,000. The tax rates under
section 115BAC is as follows -

S. Total Income Rate of tax

No.
1. Upto ` 3,00,000 Nil
2. From ` 3,00,000 to ` 7,00,000 5%
3. From ` 7,00,000 to ` 10,00,000 10%
4. From ` 10,00,000 to ` 12,00,000 15%
5. From ` 12,00,000 to ` 15,00,000 20%
6. Above ` 15,00,000 30%

Rates prescribed by the Annual Finance Act under the optional tax regime
Individuals/HUF/AoPs/BoIs and artificial juridical persons, who exercise the option
to opt out of the default tax regime under section 115BAC, have to pay tax as per
normal provisions of the Act. Under the normal provisions of the Act, the rates of
tax are prescribed by the Annual Finance Act of the year.
For individuals, HUF etc., the basic exemption limit is ` 2,50,000. This means that,
as per the normal provisions of the Act, no tax is payable by individuals with total
income of upto ` 2,50,000. Those individuals whose total income is more than
` 2,50,000 but less than or equal to ` 5,00,000 have to pay tax on their total income
in excess of ` 2,50,000@5%. Total income between ` 5,00,000 and ` 10,00,000
attracts tax @20%. The highest rate is 30%, which is attracted in respect of income

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in excess of ` 10,00,000. The tax rates have to be applied on the total income to
arrive at the income-tax liability.

However, resident individuals enjoy rebate under section 87A in both the tax
regimes which are discussed later on in this chapter.
For certain income (like Long Term Capital Gains, Lottery Income, Specified Short
Term Capital Gains etc.), slab rates are not applicable under both the tax regimes.
These incomes are taxable at special rates of taxation under both the tax regimes.
These special rates are contained in the Income-tax Act, 1961 itself.
Step 10 - Surcharge / Rebate under section 87A
Surcharge: Surcharge is an additional tax payable over and above the income-tax.
Surcharge is levied as a percentage of income-tax, where total income exceeds
` 50 lakhs. The rates of surcharge applicable for different slabs of total income are
discussed later on in this chapter.
Rebate under section 87A: In order to provide tax relief to the individual tax
payers, section 87A provides a rebate from the tax payable by an assessee, being
an individual resident in India, whose total income does not exceed ` 7,00,000
under the default tax regime under section 115BAC or ` 5,00,000 under the normal
provisions of the Act if he opts out of the default tax regime. Under the default tax
regime, an individual whose total income exceeds ` 7 lakhs marginally is also
entitled to a rebate of the difference between tax on total income and the amount
by which the total income exceeds ` 7 lakhs, when the former is greater than the
latter.

Step 11 – Health and education cess on income-tax

The income-tax, as increased by the surcharge or as reduced by the rebate under
section 87A, if applicable, is to be further increased by an additional surcharge
called health and education cess on income-tax @4% of income-tax plus surcharge,
if applicable.
Step 12 – Alternate Minimum Tax (AMT)
The Income-tax Act, 1961 contains certain profit-linked and investment linked
deductions under normal provisions of the Act to promote investment in various
sectors. These tax benefits help to reduce the tax liability of the taxpayers who
exercise the option to opt out of the default tax regime under section 115BAC and
become eligible to claim such deductions. In order to preserve the tax base vis-a-

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vis profit linked and investment linked deductions, the Income-tax Act, 1961
provides for levy of alternate minimum tax. Section 115JC provides for minimum
tax to be paid by the taxpayers on their total income without providing profit linked
and investment linked deductions. However, the taxpayer can claim the tax credit
of the excess tax paid over the regular income-tax payable.
Individuals/HUF/AoPs/BoIs and artificial juridical persons paying tax under default
tax regime under section 115BAC, are not liable to alternate minimum tax under
section 115JC.

For detailed discussion, refer to Chapter 9: Income-tax liability – Computation and

Optimisation.
Step 13 – Examine whether to pay tax under the default tax regime under
section 115BAC or pay tax under the optional tax regime as per the regular
provisions of the Act
Total income and tax liability of individuals/HUF/AoPs/BoIs and artificial juridical
persons may be computed in accordance with both the default tax regime under
section 115BAC and as per the regular provisions of the Act including provisions
relating to AMT, if applicable. Then, such persons can determine which is more
beneficial and accordingly decide whether or not to opt out of the default tax
regime under section 115BAC.
Individuals/HUF/AoPs/BoIs not having income from business or profession can
choose whether or not to exercise the option of shifting out of the default tax
regime in each previous year. They may choose to pay tax under default tax regime
under section 115BAC in one year and exercise the option to shift out of default
tax regime in another year.
Step 14 – Advance tax and tax deducted/ collected at source
Although the tax liability of an assessee is determined only at the end of the year,
tax is required to be paid in advance in four installments on the basis of estimated
income i.e., on or before 15th June, 15th September, 15th December and 15th March.
However, residents declaring profits under presumptive taxation scheme (where
business or professional income is computed as a percentage of gross
receipts/turnover) can pay advance tax in one installment on or before 15th March
instead of four installments. In certain cases, tax is required to be deducted at
source from the income by the payer at the rates prescribed in the Income-tax Act,

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 1.20 INCOME TAX LAW

1961 or the Annual Finance Act. Such deduction should be made either at the time
of accrual or at the time of payment, as prescribed by the Act.

Example: In the case of salary income, the obligation of the employer to deduct
tax at source arises only at the time of payment of salary to the employees.
However, in respect of other payments like, fees for professional services, fees for
technical services, interest payable to residents, the person responsible for paying
is liable to deduct tax at source at the time of credit of such income to the account
of the payee or at the time of payment, whichever is earlier. Such tax deducted at
source has to be remitted to the credit of the Central Government through any
branch of the RBI, SBI or any authorized bank within the statutory due dates.
For detailed discussion, refer to Chapter 7: Advance tax, tax deduction at source and
tax collection at source.
Step 15: Tax Payable/Tax Refundable
After adjusting the advance tax and tax deducted/ collected at source, the assessee
would arrive at the amount of net tax payable or refundable. Such amount should
be rounded off to the nearest multiple of ` 10 as per section 288B.
The assessee has to pay the amount of tax payable (called self-assessment tax) on
or before the due date of filing of the return. Similarly, if any refund is due, assessee
will get the same after filing the return of income.
(2) Return of Income
The Income-tax Act, 1961 contains provisions for filing of return of income. Return
of income is the format in which the assessee furnishes information as to his total
income and tax payable. The format for filing of returns by different assessees is
notified by the CBDT. The particulars of income earned under different heads, gross
total income, deductions from gross total income, total income and tax payable by
the assessee are required to be furnished in the return of income. In short, a return
of income is the declaration of income by the assessee in the prescribed format.
The Act has prescribed due dates for filing return of income in case of different
assessees. Companies and firms have to mandatorily file their return of income
before the due date. Other assessees are required to file a return of income subject
to fulfilling of certain conditions.

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3. IMPORTANT DEFINITIONS
In order to understand the provisions of the Act, one must have a thorough
knowledge of the meanings of certain key terms like ‘person’, ‘assessee’, ‘income’,
etc. To understand the meanings of these terms we have to first check whether they
are defined in the Act.
Terms defined in the Act: Section 2 gives definitions of the various terms and
expressions used therein. If a particular definition is given in the Act itself, we have
to be guided by that definition. For e.g. the term ‘perquisite’ has been defined
under section 17(2) for the purpose of taxation of salaries.
Terms not defined under the Act: If a particular definition is not given in the Act,
reference can be made to the General Clauses Act or dictionaries.
Students should note this point carefully because certain terms like “dividend”,
“transfer”, etc. have been given a wider meaning in the Income-tax Act, 1961 than
they are commonly understood. Some of the important terms defined under
section 2 are given below:

3.1 Assessee [Section 2(7)]

“Assessee” means a person by whom any tax or any other sum of money is payable
under this Act. In addition, it includes –
• Every person in respect of whom any proceeding under this Act has been
taken for the assessment of
 his income; or
 the income of any other person in respect of which he is assessable; or
 the loss sustained by him or by such other person; or
 the amount of refund due to him or to such other person.
• Every person who is deemed to be an assessee under any provision of this
Act;
• Every person who is deemed to be an assessee-in-default under any provision
of this Act.

• Every assessee is a ‘person’, but every ‘person’ need not be an assessee.

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 1.22 INCOME TAX LAW

3.2 Assessment [Section 2(8)]

This is the procedure by which the income of an assessee is determined. It may be
by way of a normal assessment or by way of reassessment of an income previously
assessed. Assessment Procedure will be dealt with in detail at the Final level.

3.3 Person [Section 2(31)]

The definition of ‘assessee’ leads us to the definition of ‘person’ as the former is
closely connected with the latter. The term ‘person’ is important from another point
of view also viz., the charge of income-tax is on every ‘person’.

Individual

Artificial
juridical HUF
person

Person
Local
Company
Authority

AOP/BOI Firm

We may briefly consider some of the above seven categories of person each of
which constitutes a separate unit of assessment or a separate tax entity.
(i) Individual
The term ‘individual’ means only a natural person, i.e., a human being.
• It includes both males and females.
• It also includes a minor or a person of unsound mind. But the assessment in
such a case may be made 1 on the guardian or manager of the minor or lunatic

1
under section 161(1)

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 BASIC CONCEPTS 1.23

who is entitled to receive his income. In the case of deceased person,

assessment would be made on the legal representative.

(ii) HUF
Under the Income-tax Act, 1961, a Hindu undivided family (HUF) is treated as a
separate entity for the purpose of assessment. It is included in the definition of the
term “person” under section 2(31). The levy of income-tax is on “every person”.
Therefore, income-tax is payable by a HUF.
"Hindu undivided family" has not been defined under the Income-tax Act, 1961.
The expression is, however, defined under the Hindu Law as a family, which consists
of all males lineally descended from a common ancestor and includes their wives
and daughters.
Some members of the HUF are called co-parceners. They are related to each other
and to the head of the family. HUF may contain many members, but members
within four degrees including the head of the family (Karta) are called co-parceners.
A Hindu Coparcenary includes those persons who acquire an interest in joint family
property by birth. Earlier, only male descendants were considered as coparceners.
With effect from 6th September, 2005, daughters have also been accorded
coparcenary status. It may be noted that only the coparceners have a right to
partition.
A daughter of coparcener by birth shall become a coparcener in her own right in
the same manner as the son. Being a coparcener, she can claim partition of assets
of the family. The rights of a daughter in coparcenary property are equal to that of
a son. However, other female members of the family, for example, wife or daughter-
in-law of a coparcener are not eligible for such coparcenary rights.
The relation of a HUF does not arise from a contract but arises from status. There
need not be more than one male member or one female coparcener w.e.f.
6th September, 2005 to form a HUF. The Income-tax Act, 1961 also does not indicate
that a HUF as an assessable entity must consist of at least two male members or
two coparceners.

Under the Income-tax Act, 1961, Jain undivided families and Sikh undivided families
would also be assessed as a HUF.

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 1.24 INCOME TAX LAW

Schools of Hindu Law

Dayabaga school Mitakshara school

Rest of India except West

West Bengal and Assam
Bengal and Assam

The basic difference between the two schools of Hindu law with regard to
succession is as follows:

Dayabaga school of Hindu law Mitakshara school of Hindu law

Prevalent in West Bengal and Assam Prevalent in rest of India

Nobody acquires the right, share in the One acquires the right to the family
property by birth as long as the head of property by his birth and not by
family is living. succession irrespective of the fact
Thus, the children do not acquire any that his elders are living.
right, share in the family property, as Thus, every child born in the family
long as his father is alive and only on acquires a right/share in the family
death of the father, the children will property.
acquire right/share in the property.
Hence, the father and his brothers would
be the coparceners of the HUF.

(iii) Company [Section 2(17)]

For all purposes of the Act, the term ‘Company’, has a much wider connotation than
that under the Companies Act, 2013. Under the Act, the expression ‘Company’ means:
(1) any Indian company as defined in section 2(26); or
(2) any body corporate incorporated by or under the laws of a country outside
India, i.e., any foreign company; or
(3) any institution, association or body which is assessable or was assessed as a
company for any assessment year under the Indian Income-tax Act, 1922 or for
any assessment year commencing on or before 1.4.1970 under the present Act; or
(4) any institution, association or body, whether incorporated or not and whether
Indian or non-Indian, which is declared by a general or special order of the

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 BASIC CONCEPTS 1.25

CBDT to be a company for such assessment years as may be specified in the

CBDT’s order.

Classes of Companies
(1) Domestic company and Foreign Company: Companies can be classified
into two categories, viz. (1) Domestic company and (2) Foreign company.
Domestic company [Section 2(22A)] - It means an "Indian company" or any
other company that has made the necessary arrangements to declare and pay
dividends (including those on preference shares) within India from its income
that is subject to income tax.
Indian company [Section 2(26)] - A company is considered an "Indian
company" under section 2(26) of the Income-tax Act, 1961 if it meets two key
conditions:
1. Formation and Registration: The company should have been formed
and registered under the Companies Act, 1956 2.
2. Office Location: The company's registered or principal office should be
in India.
Additionally, the term "Indian company" also includes the following provided
their registered or principal office in India:
• Corporation established by or under a Central, State, or Provincial Act,
such as Financial Corporation or State Road Transport Corporation.
• Institution, association, or body declared by the Board to be a company
under section 2(17)(iv).
• Company formed and registered under any law in force in any part of
India, excluding Jammu and Kashmir and specific Union territories.
• Company formed and registered under any law in force in Jammu and
Kashmir.
• Company formed and registered under any law in force in Union
territories like Dadra and Nagar Haveli, Daman and Diu, Pondicherry, or
the State of Goa.
Foreign company [Section 2(23A)] - Foreign company means a company
which is not a domestic company

2
Now Companies Act, 2013

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Classes of companies

Domestic company Foreign company

Indian Company which has made A company which

company arrangement for declaring and is not a domestic
paying dividend within India company
out of the income chargeable
to tax in India.

(2) A company is further classified into two primary categories based on

public interest:
Widely Held Company (Company in which public are substantially
interested): A company is considered to have substantial public interest if it
meets any of the following criteria as outlined in section 2(18) of the Income-
tax Act, 1961:
(a) Government or RBI Ownership or participation: A company owned
by the Central or State Government or the Reserve Bank of India (RBI),
or where at least 40% of the shares are held (whether singly or taken
together) by the Government or the RBI or a corporation owned by the
RBI.

(b) Company registered under section 25 of the Companies Act, 1956:

A company registered under section 25 of the Companies Act, 1956 3,
which is formed to promote commerce, art, science, education,
research, social welfare, charity, environmental protection, etc., and
does not distribute dividends to their members.
(c) Companies with No Share Capital and declared by the CBDT: A
company which does not have share capital and is declared by the CBDT
to be a company in which the public are substantially interested for
specified assessment years.
(d) Mutual Benefit Finance Company (Nidhi or Mutual Benefit Society):
A company that primarily accept deposits from its members and is

3
Section 8 of the Companies Act, 2013

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 BASIC CONCEPTS 1.27

declared by the Central Government under Section 620A of the

Companies Act, 1956 4, to be a Nidhi or Mutual Benefit Society.
(e) Cooperative Society ownership: A company whose equity shares
carrying at least 50% of the voting power are unconditionally allotted
or acquired by one or more cooperative societies and held throughout
the relevant previous year.
(f) Public Limited Company: A company which is not a private company
as defined in the Companies Act, 1956 5 and which fulfills any of the
following conditions:
- its equity shares were listed in a recognized stock exchange in
India as on the last day of the relevant previous year; or
- its equity shares carrying at least 50% (40% in case of an Indian
company in ship construction business or in the manufacture or
processing of goods or in mining or in generation or distribution
of electricity or any other form of power) voting power have been
unconditionally allotted to or acquired by and should have been
beneficially held throughout the relevant previous year by
(a) Government or
(b) a Statutory Corporation or
(c) a company in which public are substantially interested or
(d) any wholly owned subsidiary of company mentioned in (c).
Closely Held Company (Company in which public are not substantially
interested): Any company that does not meet the criteria for being classified
as widely held company is considered closely held company. Thus, all private
limited companies will be treated as companies in which public are not
substantially interested.
(iv) Firm [Section 2(23)]
The terms ‘firm’, ‘partner’ and ‘partnership’ have the same meanings as assigned to
them in the Indian Partnership Act, 1932. In addition, the definitions also include

4
Section 406 of the Companies Act, 2013

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 1.28 INCOME TAX LAW

the terms limited liability partnership and a partner of limited liability partnership
as they have been defined in the Limited Liability Partnership Act, 2008.

In an LLP, since liability of the partners is limited to their agreed contribution

therein, it contains elements of both a corporate structure as well as a partnership
firm structure.

However, for income-tax purposes a minor admitted to the benefits of an existing

partnership would also be treated as partner.

Firm

As defined
As defined under the
under the Limited
Partnership Liability
Act, 1932 Partnership
Act, 2008

A partnership is the relation between persons who have agreed to share

the profits of business carried on by all or any of them acting for all. The
persons who have entered into partnership with one another are called
individually ‘partners’ and collectively a ‘firm’.

(v) Association of Persons (AOP)

When persons combine together for promotion of joint enterprise they are
assessable as an AOP, if they do not in law constitute a partnership. In order to
constitute an association, persons must join for a common purpose or action and
their object must be to produce income; it is not enough that the persons receive
the income jointly. Co-heirs, co-legatees or co-donees joining together for a
common purpose or action would be chargeable as an AOP.
For e.g., Mr. Yash, AB & Co. (Firm) and X (P) Ltd. join together to carry on
construction activity otherwise than as a partnership firm, such an association will
be recognized as an association of persons.

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 BASIC CONCEPTS 1.29

(vi) Body of Individuals (BOI)

It denotes the status of persons like executors or trustees who merely receive the
income jointly and who may be assessable in like manner and to the same extent
as the beneficiaries individually. Thus, co-executors or co-trustees are assessable
as a BOI as their title and interest are indivisible. Income-tax shall not be payable
by an assessee in respect of the receipt of share of income by him from BOI and on
which the tax has already been paid by such BOI. For e.g., mutual trade associations,
members club, etc.

Section 2(31) further explains that an association of persons or a body of individuals

shall be treated as a person, whether or not it was formed with the object of
deriving income, profits or gains. Accordingly, even if such entities have been
formed not for earning any income/ profit still they are "person" for the purpose of
the Act and are covered by the provisions of the Act.
Difference between AOP and BOI:

In case of a BOI, only individuals can be the members, whereas in case of AOP, any
person can be its member i.e. entities like company, firm etc. can be the member
of AOP but not of BOI.
In case of an AOP, members voluntarily come together with a common will for a
common intention or purpose, whereas in case of BOI, such common will may or
may not be present.

(vii) Local Authority

The term “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 or management of a municipal or local fund.
Note: A local authority is taxable in respect of that part of its income which arises
from any business carried on by it in so far as that income does not arise from the
supply of a commodity or service within its own jurisdictional area. However,
income arising from the supply of water and electricity even outside the local
authority’s own jurisdictional area is exempt from tax.

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(viii) Artificial Juridical Persons

Artificial Juridical Persons are the entities which are not natural persons but are
separate entities in the eyes of law. This is a residual category could cover all
artificial persons with a juristic personality not falling under any other category of
persons. Deities, Bar Council, Universities are some important examples of Artificial
Juridical Persons.

3.4 Income [Section 2(24)]

(1) Definition of Income
The definition of income as per the Income-tax Act, 1961 begins with the words
“Income includes”. Therefore, it is an inclusive definition and not an exhaustive one.
Such a definition does not confine the scope of income but leaves room for more
inclusions within the ambit of the term.
Section 2(24) of the Act gives a statutory definition of income. The following items
of receipts are specifically included in the said definition:—
(1) Profits and gains;
(2) Dividends;
(3) The value of any perquisite or profit in lieu of salary taxable under section
17(2)/(3);
(4) Any special allowance or benefit, other than the perquisite included above,
specifically granted to the assessee to meet expenses wholly, necessarily and
exclusively for the performance of the duties of an office or employment of
profit;
(5) Any allowance granted to the assessee to meet his personal expenses at the
place where the duties of his office or employment of profit are ordinarily
performed by him or at a place where he ordinarily resides or to compensate
him for the increased cost of living;

(6) The value of any benefit or perquisite whether convertible into money or not,
obtained from a company either by a director or by a person who has a
substantial interest in the company or by a relative of the director or such
person and any sum paid by any such company in respect of any obligation
which, but for such payment, would have been payable by the director or
other person aforesaid;

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(7) Profits and gains of business or profession chargeable to tax under section
28(ii)/(iii)/(iiia)/(iiib)/(iiic)/(v)/(va);

(8) Deemed profits chargeable to tax under section 41 or section 59;

(9) The value of any benefit or perquisite taxable under section 28(iv);
(10) Any capital gains chargeable under section 45;
(11) Any 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. For this purpose,

(i) “Lottery” includes winnings from prizes awarded to any person by draw
of lots or by chance or in any other manner whatsoever, under any
scheme or arrangement by whatever name called;
(ii) “Card game and other game of any sort” includes any game show, an
entertainment programme on television or electronic mode, in which
people compete to win prizes or any other similar game;
(12) Any sum received by the assessee from his employees as contributions to any
provident fund (PF) or superannuation fund or Employees State Insurance
Fund (ESI) or any other fund for the welfare of such employees;
(13) Any sum received under a Keyman insurance policy including the sum
allocated by way of bonus on such policy will constitute income;
“Keyman insurance policy” means a life insurance policy taken by a person on
the life of another person where the latter is or was an employee of former
or is or was connected in any manner whatsoever with the former’s business.
It also includes such policy which has been assigned to a person with or
without any consideration, at any time during the term of the policy.
(14) Fair market value of inventory as on the date of its conversion into or
treatment as a capital asset under section 28(via);
(15) Any sum of money received as advance, if such sum is forfeited consequent
to failure of negotiation for transfer of a capital asset [Section 56(2)(ix)];
(16) Any sum of money or value of property received without consideration or for
inadequate consideration by any person [Section 56(2)(x)];

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 1.32 INCOME TAX LAW

(17) Any compensation or other payment, due to or received by any person, in

connection with termination of his employment or the modification of the
term and conditions relating thereto [Section 56(2)(xi)];
(18) Sum received, including the amount allocated by way of bonus, under a LIP
other than under a ULIP and keyman insurance policy, which is not exempt
u/s 10(10D), to the extent the same exceeds the aggregate of the premium
paid during the term of the policy, and not claimed as deduction under any
other provision of the Act [Section 56(2)(xiii)];

[For details, refer to Unit 5 of Chapter 3: Income from Other Sources]

(19) Assistance in the form of a subsidy or grant or cash incentive or duty
drawback or waiver or concession or reimbursement, by whatever name
called, by the Central Government or a State Government or any authority or
body or agency in cash or kind to the assessee is included in the definition of
income.
However, subsidy or grant or reimbursement which has been taken into
account for determination of the actual cost of the depreciable asset in
accordance with Explanation 10 to section 43(1) shall not be included in the
definition of income.
(2) Concept of Income under the Income-tax Act, 1961
 Regular receipt vis-a-vis casual receipt: Income, in general, means a
periodic monetary return which accrues or is expected to accrue regularly
from definite sources. However, under the Income-tax Act, 1961, even certain
casual receipts which do not arise regularly are treated as income for tax
purposes e.g. Winnings from lotteries, crossword puzzles.
 Revenue receipt vis-a-vis Capital receipt: Income normally refers to
revenue receipts. Capital receipts are generally not included within the scope
of income in general parlance. However, the Income-tax Act, 1961 has
specifically included certain capital receipts within the definition of income
e.g., Capital gains i.e., gains on sale of capital assets like land, jewellery.
 Net receipt vis-a-vis Gross receipt: Income means net receipts and not
gross receipts. Net receipts are arrived at after deducting the expenditure
incurred in connection with earning such receipts. The expenditure which can
be deducted while computing income under each head is prescribed under
the Income-tax Act, 1961. Income from certain eligible businesses/

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 BASIC CONCEPTS 1.33

professions is also determined on presumptive basis i.e., as a certain

percentage of gross receipts. [We will discuss in detail in Unit 3 of Chapter 3:
Profits and gains of business or profession].
 Due basis vis-a-vis receipt basis: Income is taxable either on due basis or
receipt basis. For computing income under the heads “Profits and gains of
business or profession” and “Income from other sources”, the method of
accounting regularly employed by the assessee should be considered, which
can be either cash system or mercantile system. Some receipts are taxable
only on receipt basis, like, income by way of interest received on
compensation or enhanced compensation.
 Application of Income vis-a-vis Diversion of Income: Application of
income means to discharge an obligation (which is gratuitous or self-
imposed) after such income reaches the assessee. Where by virtue of an
obligation by overriding title, income is diverted before it reaches the
assessee, it is known as diversion of income. In case of the former, the income
would be taxable in the hands of the person who applies it, whereas in the
case of the latter, it is not taxable (i.e., even if the assessee were to collect the
income he does so on behalf of the person to whom it is payable).
(3) Concept of revenue and capital receipts
Students should carefully study the various items of receipts included in the
definition of income. Some of them like capital gains are not revenue receipts.
However, since they have been included in the definition, they are chargeable as
income under the Act. The concept of revenue and capital receipts is discussed
hereunder -
The Act contemplates a levy of tax on income and not on capital and hence it is
very essential to distinguish between capital and revenue receipts. Capital receipts
cannot be taxed, unless they fall within the scope of the definition of “income” and
so the distinction between capital and revenue receipts is material for tax purposes.
Certain capital receipts which have been specifically included in the definition of
income are compensation for modification or termination of services, income by
way of capital gains etc.
It is not possible to lay down any single test as infallible or any single criterion as
decisive, final and universal in application to determine whether a particular receipt

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 1.34 INCOME TAX LAW

is capital or revenue in nature. Hence, the capital or revenue nature of the receipt
must be determined with reference to the facts and circumstances of each case.
Criteria for determining whether a receipt is capital or revenue in nature
The following are some of the important criteria which may be applied to
distinguish between capital and revenue receipts.

Fixed capital or Circulating capital: A receipt referable to fixed capital would be

a capital receipt whereas a receipt referable to circulating capital would be a
revenue receipt. The former is not taxable while the latter is taxable. Tangible and
intangible assets which the owner keeps in his possession for making profits are in
the nature of fixed capital. The circulating capital is one which is turned over and
yields income or loss in the process.

Income from transfer of capital asset or trading asset: Profits arising from the
sale of a capital asset are chargeable to tax as capital gains under section 45
whereas profits arising from the sale of a trading asset being of revenue nature are
taxable as income from business under section 28 provided that the sale is in the
regular course of assessee’s business or the transaction constitutes an adventure
in the nature of trade.
Capital Receipts vis-a-vis Revenue Receipts: Tests to be applied
(1) Transaction entered into the course of business: Profits arising from
transactions which are entered into in the course of the business regularly
carried on by the assessee, or are incidental to, or associated with the
business of the assessee would be revenue receipts chargeable to tax.
Example: A banker’s or financier’s dealings in foreign exchange or sale of
shares and securities, a shipbroker’s purchase of ship in his own name, a share
broker’s purchase of shares on his own account would constitute transactions
entered and yielding income in the ordinary course of their business. Whereas
building and land would constitute capital assets in the hands of a trader in
shares, the same would constitute stock-in-trade in the hands of a property
dealer.

(2) Profit arising from sale of shares and securities: In the case of profit arising
from the sale of shares and securities, the nature of the profit has to be
ascertained from the motive, intention or purpose with which they were bought.
If the shares were acquired as an investor or with a view to acquiring a controlling
interest or for obtaining a managing or selling agency or a directorship, the profit

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or loss on their sale would be of a capital nature; but if the shares were acquired
in the ordinary course of business as a dealer in shares, it would constitute his
stock-in-trade. If the shares were acquired with speculative motive, the profit or
loss (although of a revenue nature) would have to be dealt with separately from
the profit or loss of other businesses.
Securities held by Foreign Institutional Investor which has invested
in such securities in accordance with the regulations made under
the SEBI Act, 1992 would be treated as a capital asset. Even if the
nature of such security in the hands of the Foreign Portfolio Investor is stock-
in-trade, the same would be treated as a capital asset and the profit on transfer
would be taxable as capital gains.
(3) A single transaction - Can it constitute business? Even a single transaction
may constitute a business or an adventure in the nature of trade even if it is
outside the normal course of the assessee’s business. Repetition of such
transactions is not necessary. Thus, a bulk purchase followed by a bulk sale
or a series of retail sales or bulk sale followed by a series of retail purchases
would constitute an adventure in the nature of trade and consequently, the
income arising therefrom would be taxable. Purchase of any article with no
intention to resell it, but resold under changed circumstances would be a
transaction of a capital nature and capital gains would arise. However, where
an asset is purchased with the intention to resell it, the question whether the
profit on sale is capital or revenue in nature depends upon (i) the conduct of
the assessee, (ii) the nature and quantity of the article purchased, (iii) the
nature of the operations involved, (iv) whether the venture is on capital or
revenue account, and (v) other related circumstances of the case.
(4) Liquidated damages: Receipt of liquidated damages directly and intimately
linked with the procurement of a capital asset, which lead to delay in coming
into existence of the profit-making apparatus, is a capital receipt. The amount
received by the assessee towards compensation for sterilization of the profit
earning source is not in the ordinary course of business. Hence, it is a capital
receipt in the hands of the assessee.
(5) Compensation on termination of agency/service contract: Where an
assessee receives compensation on termination of the agency business being
the only source of income, the receipt is of capital nature, but taxable under
section 28(ii)(c). However, where the assessee has a number of agencies and
one of them is terminated and compensation is received therefor, the receipt
would be of a revenue nature since taking up an agency and exploiting the
same for earning income is in the ordinary course of business. The loss of one

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agency would be made good by profit from another agency. Compensation

received from the employer or from any person for premature termination of
the service contract is a capital receipt, but is taxable as profit in lieu of salary
under section 17(3) or as income from other sources under section 56(2)(xi),
respectively. Compensation received or receivable in connection with the
termination or the modification of the terms and conditions of any contract
relating to its business shall be taxable as business income.
(6) Gifts: Normally, gifts constitute a capital receipt in the hands of the recipient.
However, certain gifts are brought within the purview of income-tax, for
example, receipt of property without consideration is brought to tax under
section 56(2)(x).
For example, any sum of money or value of property received without
consideration or for inadequate consideration by any person, other than a
relative, is chargeable under the head “Income from Other Sources” [For
details, refer to Unit - 5 of Chapter 3: Income from Other Sources].

3.5 India [Section 2(25A)]

The term 'India' means –
(i) the territory of India as per Article 1 of the Constitution,
(ii) its territorial waters, seabed and subsoil underlying such waters,
(iii) continental shelf,
(iv) exclusive economic zone or
(v) any other specified maritime zone and the air space above its territory and
territorial waters.
Specified maritime zone means the maritime zone as referred to in the Territorial
Waters, Continental Shelf, Exclusive Economic Zone and other Maritime Zones Act,
1976.

3.6 Agricultural income [Section 2(1A)]

Agricultural income definition is very wide and covers the income of not only the
cultivators but also the land holders who might have rented out the lands.
Agricultural income may be received in cash or in kind.
Agricultural income may arise in any one of the following three ways:-
(1) It may be rent or revenue derived from land situated in India and used for
agricultural purposes.

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(2) It may be income derived from such land by

(a) agriculture or
(b) the performance of a process ordinarily employed by a cultivator or
receiver of rent in kind to render the produce fit to be taken to the
market or
(c) the sale, by a cultivator or receiver of rent in kind, of such agricultural
produce raised or received by him, in respect of which no process
has been performed other than a process of the nature mentioned in
point (b) above.
(3) Lastly, agricultural income may be derived from any farm building required
for agricultural operations.
Now let us take a critical look at the following aspects:
(1) Rent or revenue derived from land situated in India and used for
agricultural purposes: The following three conditions have to be satisfied
for income to be treated as agricultural income:
(a) Rent or revenue should be derived from land;
(b) land has to be situated in India (If agricultural land is situated in a
foreign country, the entire income would be taxable); and
(c) land should be used for agricultural purposes.
The amount received in money or in kind, by one person from another for
right to use land is termed as Rent. The rent can either be received by the
owner of the land or by the original tenant from the sub-tenant. It implies
that ownership of land is not necessary. Thus, the rent received by the original
tenant from sub-tenant would also be agricultural income subject to the other
conditions mentioned above.
The scope of the term “Revenue” is much broader than rent. It includes
income other than rent. For example, fees received for renewal for grant of
land on lease would be revenue derived from land.
(2) Income derived from such land by
(a) Agriculture
The term “Agriculture” has not been defined in the Act. However,
cultivation of a field involving human skill and labour on the land can
be broadly termed as agriculture.

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“Agriculture” means tilling of the land, sowing of the seeds and similar
operations. It involves basic operations and subsequent operations.

Basic Subsequent
Operations Operations
Those operations Operations to be
by agriculturists performed after the
which are produce sprouts from
absolutely the land (e.g.,
necessary for the weeding, digging etc.)
purpose of are subsequent opera-
effectively raising tions. These
produce from the subsequent operations
land are the would be agricultural
basic operations. operations only when
taken in conjunction
with and as a
continuation of the
basic operations.

Note: The term ‘agriculture’ cannot be extended to all activities which

have some distant relation to land like dairy farming, breeding and
rearing of live stock, butter and cheese making and poultry farming.
This aspect is discussed in detail later on in this chapter.

Whether income from nursery constitutes agricultural

income?
Yes, as per Explanation 3 to section 2(1A), income derived from
saplings or seedlings grown in a nursery would be deemed to be agricultural
income, whether or not the basic operations were carried out on land.
(b) Process ordinarily employed to render the produce fit to be taken
to the market: Sometimes, to make the agricultural produce a saleable
commodity, it becomes necessary to perform some kind of process on
the produce. The income from the process employed to render the
produce fit to be taken to the market would be agricultural income.
However, it must be a process ordinarily employed by the cultivator or
receiver of rent in kind and the process must be applied to make the
produce fit to be taken to the market.

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The ordinary process employed to render the produce fit to be taken to

market includes thrashing, winnowing, cleaning, drying, crushing etc.
For example, the process ordinarily employed by the cultivator to obtain
the rice from paddy is to first remove the hay from the basic grain, and
thereafter to remove the chaff from the grain. The grain has to be
properly filtered to remove stones etc. and finally the rice has to be
packed in gunny bags for sale in the market.
After such process, the rice can be taken to the market for sale. This
process of making the rice ready for the market may involve manual
operations or mechanical operations. All these operations constitute
the process ordinarily employed to make the product fit for the market.
The produce must retain its original character in spite of the processing
unless there is no market for selling it in that condition.
However, if marketing process is performed on a produce which can be
sold in its raw form, income derived therefrom is partly agricultural
income and partly business income.
(c) Sale of such agricultural produce in the market: Any income from the
sale of any produce to the cultivator or receiver of rent-in kind is
agricultural income provided it is from the land situated in India and
used for agricultural purposes. However, if the produce is subjected to
any process other than process ordinarily employed to make the
produce fit for market, the income arising on sale of such produce
would be partly agricultural income and partly non-agricultural income.
Similarly, if other agricultural produce like tea, cotton, tobacco,
sugarcane etc. are subjected to manufacturing process and the
manufactured product is sold, the profit on such sale will consist of
agricultural income as well as business income. That portion of the
profit representing agricultural income will be exempted.
Apportionment of Income between business income and
agricultural income: Rules 7, 7A, 7B & 8 of Income-tax Rules, 1962
provide the basis of apportionment of income between agricultural
income and business income.

(i) Rule 7 - Income from growing and manufacturing of any

product - Where income is partially agricultural income and
partially income chargeable to income-tax as business income,

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the market value of any agricultural produce which has been

raised by the assessee or received by him as rent in kind and which
has been utilised as raw material in such business or the sale
receipts of which are included in the accounts of the business shall
be deducted. No further deduction shall be made in respect of
any expenditure incurred by the assessee as a cultivator or
receiver of rent in kind.
Determination of market value - There are two possibilities here:

(I) The agricultural produce is capable of being sold in the market

either in its raw stage or after application of any ordinary
process to make it fit to be taken to the market. In such a case,
the value calculated at the average price at which it has been so
sold during the relevant previous year will be the market value.
(II) It is possible that the agricultural produce is not capable of
being ordinarily sold in the market in its raw form or after
application of any ordinary process. In such case the market
value will be the total of the following:—
• The expenses of cultivation;
• The land revenue or rent paid for the area in which
it was grown; and

• Such amount as the Assessing Officer finds having

regard to the circumstances in each case to
represent at reasonable profit.
ILLUSTRATION 1
Mr. B grows sugarcane and uses the same for the purpose of
manufacturing sugar in his factory. 30% of sugarcane produce is sold
for ` 10 lakhs, and the cost of cultivation of such sugarcane is
` 5 lakhs. The cost of cultivation of the balance sugarcane (70%) is
` 14 lakhs and the market value of the same is ` 22 lakhs. After
incurring ` 1.5 lakhs in the manufacturing process on the balance
sugarcane, the sugar was sold for ` 25 lakhs. Compute B’s business
income and agricultural income.

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SOLUTION
Computation of Business Income and Agriculture
Income of Mr. B

Particulars Business Agricultural Income

Income
(`) (`) (`)
Sale of Sugar
Business income
Sale Proceeds of sugar 25,00,000
Less: Market value of sugar- 22,00,000
cane (70%)
Less: Manufacturing exp. 1,50,000
1,50,000
Agricultural income
Market value of sugarcane 22,00,000
(70%)
Less: Cost of cultivation 14,00,000
8,00,000

Sale of sugarcane
Agricultural Income
Sale proceeds of sugarcane 10,00,000
(30%)
Less: Cost of cultivation 5,00,000
5,00,000
13,00,000

(ii) Rule 7A – Income from growing and manufacturing of rubber

- This rule is applicable when income derived from the sale of
centrifuged latex or cenex or latex based crepes or brown crepes
or technically specified block rubbers manufactured or processed

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from field latex or coagulum obtained from rubber plants grown

by the seller in India. In such cases, 35% profits on sale is taxable
as business income under the head “Profits and gains from
business or profession”, and the balance 65% is agricultural
income which is exempt.
ILLUSTRATION 2
Mr. C manufactures latex from the rubber plants grown by him in
India. These are then sold in the market for ` 30 lakhs. The cost of
growing rubber plants is ` 10 lakhs and that of manufacturing latex
is ` 8 lakhs. Compute his total income.
SOLUTION
The total income of Mr. C comprises of agricultural income and
business income.
Total profits from the sale of latex= ` 30 lakhs – ` 10 lakhs –
` 8 lakhs= ` 12 lakhs.
Agricultural income = 65% of ` 12 lakhs = ` 7.8 lakhs
Business income = 35% of ` 12 lakhs = ` 4.2 lakhs
(iii) Rule 7B – Income from growing and manufacturing of coffee
a) In case of income derived from the sale of coffee grown and
cured by the seller in India, 25% profits on sale is taxable as
business income under the head “Profits and gains from
business or profession”, and the balance 75% is agricultural
income and is exempt.
b) In case of income derived from the sale of coffee grown, cured,
roasted and grounded by the seller in India, with or without
mixing chicory or other flavoring ingredients, 40% profits on
sale is taxable as business income under the head “Profits and
gains from business or profession”, and the balance 60% is
agricultural income and is exempt.

(iv) Rule 8 - Income from growing and manufacturing of tea - This

rule applies only in cases where the assessee himself grows tea
leaves and manufactures tea in India. In such cases 40% profits on
sale is taxable as business income under the head “Profits and

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gains from business or profession”, and the balance 60% is

agricultural income and is exempt.

Rule Apportionment of Agricultural Business

income in certain cases Income Income
7A Income from sale of rubber 65% 35%
products derived from
rubber plant grown by the
seller in India.
7B Income from sale of coffee
- grown and cured by 75% 25%
the seller in India
- grown, cured, roasted 60% 40%
and grounded by the
seller in India
8 Income from sale of tea 60% 40%
grown and manufactured
by the seller in India

(3) Income from farm building: Income from the farm building which is owned
and occupied by the receiver of the rent or revenue of any such land or
occupied by the cultivator or the receiver of rent in kind, of any land with
respect to which, or the produce of which, any process discussed above is
carried on, would be agricultural income.
However, the income arising from the use of such farm building for any
purpose (including letting for residential purpose or for the purpose of
business or profession) other than agriculture referred in (1) & (2) of para 3.6
in pages 1.36 & 1.37 would not be agricultural income.
Further, the income from such farm building would be agricultural income
only if the following conditions are satisfied:
(a) The building should be on or in the immediate vicinity of the land; and
(b) The receiver of the rent or revenue or the cultivator or the receiver of
rent in kind should, by reason of his connection with such land require
it as a dwelling house or as a store house.

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In addition to the above conditions any one of the following two conditions
should also be satisfied:

(i) The land should either be assessed to land revenue in India or be

subject to a local rate assessed and collected by the officers of the
Government as such or;

(ii) Where the land is not so assessed to land revenue in India or is not
subject to local rate:-
a. It should not be situated in any area as comprised within the
jurisdiction of a municipality or a cantonment board and which
has a population not less than 10,000 or
b. It should not be situated in any area within such distance,
measured aerially, in relation to the range of population as shown
hereunder –

Shortest aerial Population according to the

distance from the local last preceding census of which
limits of a municipality the relevant figures have been
or cantonment board published before the first day
referred to in item a. of the previous year
(i) ≤ 2 kms > 10,000
(ii) >2 kms but ≤ 6 kms > 1,00,000
(iii) >6 kms but ≤ 8kms > 10,00,000
Example:

Area Shortest aerial Population according Would

distance from to the last preceding income
the local limits of census of which the derived from
a municipality or relevant figures have farm
cantonment been published building
board referred to before the first day of situated in
in item a. the previous year this area be
treated as
agricultural
income?
(i) A 1 km 9,000 Yes
(ii) B 1.5 kms 12,000 No

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(iii) C 2 kms 11,00,000 No

(iv) D 3 kms 80,000 Yes
(v) E 4 kms 3,00,000 No
(v) F 5 kms 12,00,000 No
(vi) G 6 kms 8,000 Yes
(vii) H 7 kms 4,00,000 Yes
(viii) I 8 kms 10,50,000 No
(ix) J 9 kms 15,00,000 Yes

Would income arising from transfer of agricultural land situated in urban

area be agricultural income?
No, as per Explanation 1 to section 2(1A), the capital gains arising from the
transfer of urban agricultural land would not be treated as agricultural income
under section 10 but will be taxable under section 45.
Example: Suppose A sells agricultural land situated in New Delhi for ` 10 lakhs and
makes a surplus of ` 8 lakhs over its cost of acquisition. This surplus will not constitute
agricultural income exempt under section 10(1) and will be taxable under section 45.

Indirect connection with land

We have seen above that agricultural income is exempt, whether it is received

by the tiller or the landlord. However, non-agricultural income does not become
agricultural merely on account of its indirect connection with the land. The
following examples will illustrate the above point.
Example: A rural society has as its principal business the selling on behalf of its
member societies, butter made by these societies from cream sold to them by
farmers. The making of butter was a factory process separated from the farm.
The butter resulting from the factory operations separated from the farm was not an
agricultural product and the society was, therefore, not entitled to exemption under
section 10(1) in respect of such income.
Example: X was the managing agent of a company. He was entitled for a
commission at the rate of 10% p.a. on the annual net profits of the company. A part
of the company’s income was agricultural income. X claimed that since his
remuneration was calculated with reference to income of the company, part of

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which was agricultural income, such part of the commission as was proportionate
to the agricultural income was exempt from income tax.

Since X received remuneration under a contract for personal service calculated on

the amount of profits earned by the company; such remuneration does not constitute
agricultural income.

Example: Y owned 100 acres of agricultural land, a part of which was used as
pasture for cows. The lands were purely maintained for manuring and other
purposes connected with agriculture and only the surplus milk after satisfying the
assessee’s needs was sold. The question arose whether income from such sale of
milk was agricultural income.
The regularity with which the sales of milk were effected and quantity of milk sold
showed that the assessee carried on regular business of producing milk and selling it
as a commercial proposition. Hence, it was not agricultural income.
Example: In regard to forest trees of spontaneous growth which grow on the soil
unaided by any human skill and labour there is no cultivation of the soil at all. Even
though operations in the nature of forestry operations performed by the assessee
may have the effect of nursing and fostering the growth of such forest trees, it
cannot constitute agricultural operations.
Income from the sale of such forest trees of spontaneous growth does not, therefore,
constitute agricultural income.
Examples of Agricultural income and Non-agricultural income

For better understanding of the concept, certain examples of agricultural income

and non-agricultural income are given below:
Example: Agricultural income
 Income derived from saplings or seedlings grown in a nursery.
 Income from growing of flowers and creepers.
 Rent received from land used for grazing of cattle required for agricultural
activities.
 Income from growing of bamboo.

Example: Non-agricultural income

 Income from breeding of livestock.

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 Income from poultry farming.

 Income from fisheries.
 Income from dairy farming.

4. PREVIOUS YEAR AND ASSESSMENT YEAR

Previous Year 2024-25 Assessment Year 2025-26

4.1 Assessment year

The term has been defined under section 2(9). This means a period of 12 months
commencing on 1st April every year. The year in which income is earned is the
previous year and such income is taxable in the immediately following year which
is the assessment year. Income earned in the previous year 2024-25 is taxable in
the assessment year 2025-26.

Assessment year always starts from 1st April and it is always a period of 12 months.

4.2 Previous year

The term has been defined under section 3. It means the financial year immediately
preceding the assessment year. As mentioned earlier, the income earned during
the previous year is taxable in the assessment year.
Business or profession newly set up during the financial year - In such a case,
the previous year shall be the period beginning on the date of setting up of the
business or profession and ending with 31st March of the said financial year.
If a source of income comes into existence in the said financial year, then, the
previous year will commence from the date on which the source of income newly
comes into existence and will end with 31st March of the financial year.

Examples:
A is running a business from 1993 onwards. Determine the previous year for the
assessment year 2025-26.
Ans. The previous year will be 1.4.2024 to 31.3.2025.

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A chartered accountant sets up his profession on 1st July, 2024. Determine the
previous year for the assessment year 2025-26.

Ans. The previous year will be from 1.7.2024 to 31.3.2025.

4.3 Certain cases when income of a previous year will be

assessed in the previous year itself

General Rule
Income of a previous year is assessed in the assessment year following
the previous year

Exceptions to this rule

Cases where income of a previous year is assessed in the previous year itself

Shipping Persons AOP/ BOI/ Artificial Persons likely

business of leaving Juridical Person to transfer Discontinued
non-resident India formed for a property to business
particular event or avoid tax
purpose

The income of an assessee for a previous year is charged to income-tax in the

assessment year following the previous year. For instance, income of previous year
2024-25 is assessed during 2025-26. Therefore, 2025-26 is the assessment year for
assessment of income of the previous year 2024-25.
However, in a few cases, this rule does not apply and the income is taxed in the
previous year in which it is earned. These exceptions have been made to protect
the interests of revenue. The exceptions are as follows:
(i) Shipping business of non-resident [Section 172]

Where a ship, belonging to or chartered by a non-resident, carries passengers,

livestock, mail or goods shipped at a port in India, the ship is allowed to leave the
port only when the tax has been paid or satisfactory arrangement has been made
for payment thereof. 7.5% of the freight paid or payable to the owner or the
charterer or to any person on his behalf, whether in India or outside India on
account of such carriage is deemed to be his income which is charged to tax in the
same year in which it is earned.

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(ii) Persons leaving India [Section 174]

Where it appears to the Assessing Officer that any individual may leave India during
the current assessment year or shortly after its expiry and he has no present
intention of returning to India, the total income of such individual for the period
from the expiry of the respective previous year up to the probable date of his
departure from India is chargeable to tax in that assessment year.

Example: Suppose Mr. X is leaving India for USA on 10.6.2024 and it appears to the
Assessing Officer that he has no intention to return. Before leaving India, Mr. X may
be asked to pay income-tax on the income earned during the P.Y. 2023-24 as well as
on the total income earned during the period 1.4.2024 to 10.06.2024.

(iii) AOP/BOI/Artificial Juridical Person formed for a particular event or

purpose [Section 174A]
If an AOP/BOI etc. is formed or established for a particular event or purpose and
the Assessing Officer apprehends that the AOP/BOI is likely to be dissolved in the
same year or in the next year, he can make assessment of the income up to the
date of dissolution as income of the relevant assessment year.
(iv) Persons likely to transfer property to avoid tax [Section 175]
During the current assessment year, if it appears to the Assessing Officer that a
person is likely to charge, sell, transfer, dispose of or otherwise part with any of his
assets to avoid payment of any liability under this Act, the total income of such
person for the period from the expiry of the previous year to the date, when the
Assessing Officer commences proceedings under this section is chargeable to tax
in that assessment year.
(v) Discontinued business [Section 176]
Where any business or profession is discontinued in any assessment year, the
income of the period from the expiry of the previous year up to the date of such
discontinuance may, at the discretion of the Assessing Officer, be charged to tax in
that assessment year.

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5. UNDISCLOSED SOURCES OF INCOME

Amount
borrowed or
repaid on hundi
Cash [Section 69D]
Unexplained
Credits
expenditure
[Section
68] [Section 69C]

Undisclosed
sources of
income

Unexplained Investment etc.

Investments not fully
[Section 69] disclosed
[Section 69B]
Unexplained
money
[Section 69A]

(i) Cash Credits [Section 68]

Where any sum is found credited in the books of an assessee maintained for any
previous year and the assessee offers no explanation about the nature and source
or the explanation offered is not satisfactory in the opinion of the Assessing Officer,
the sum so credited may be charged as income of the assessee of that previous
year.
Unexplained loan or borrowing - Where the sum so credited consists of loan or
borrowing or any such amount, by whatever name called, any explanation offered
by the assessee in whose books such sum is credited shall not be deemed to be
satisfactory, unless -
- the person in whose name such credit is recorded in the books of such
assessee also offers an explanation about the nature and source of such sum
so credited; and
- such explanation in the opinion of the Assessing Officer has been found to
be satisfactory.
Unexplained Share Capital/ Premium- Any explanation offered by a closely held
company in respect of any sum credited as share application money, share capital,

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share premium or any such amount, by whatever name called, in the accounts of
such company shall be deemed to be not satisfactory, unless

- the person, being a resident, in whose name such credit is recorded in the
books of such company also explains about the nature and the source of such
sum so credited and

- such explanation in the opinion of the Assessing Officer has been found to
be satisfactory
Non-applicability to Venture Capital Fund or Venture Capital Company –These
additional conditions would not apply if the person, in whose name the sum is
recorded, is a Venture Capital Fund or Venture Capital Company registered with
SEBI.

(ii) Unexplained Investments [Section 69]

Where in the financial year immediately preceding the assessment year, the
assessee has made investments which are not recorded in the books of account
and the assessee offers no explanation about the nature and the source of
investments or the explanation offered is not satisfactory in the opinion of the
Assessing Officer, the value of the investments are taxed as deemed income of the
assessee of such financial year.
(iii) Unexplained money etc. [Section 69A]
Where in any financial year the assessee is found to be the owner of any money,
bullion, jewellery or other valuable article and the same is not recorded in the books
of account and the assessee offers no explanation about the nature and source of
acquisition of such money, bullion etc. or the explanation offered is not satisfactory
in the opinion of the Assessing Officer, the money and the value of bullion etc. may
be deemed to be the income of the assessee for such financial year.
(iv) Amount of investments etc., not fully disclosed in the books of account
[Section 69B]
Where in any financial year the assessee has made investments or is found to be
the owner of any bullion, jewellery or other valuable article and the Assessing
Officer finds that the amount spent on making such investments or in acquiring
such articles exceeds the amount recorded in the books of account maintained by
the assessee and he offers no explanation for the difference or the explanation

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offered is unsatisfactory in the opinion of the Assessing Officer, such excess may
be deemed to be the income of the assessee for such financial year.

Example:
If the assessee is found to be the owner of say 300 gms of gold (market value of which
is ` 25,000) during the financial year ending 31.3.2025 but he has recorded to have
spent ` 15,000 in acquiring it, the Assessing Officer can add ` 10,000 (i.e., the
difference of the market value of such gold and ` 15,000) as the income of the
assessee, if the assessee offers no satisfactory explanation thereof.

(v) Unexplained expenditure [Section 69C]

Where in any financial year an assessee has incurred any expenditure and he offers
no explanation about the source of such expenditure or the explanation is
unsatisfactory in the opinion of the Assessing Officer, Assessing Officer can treat
such unexplained expenditure as the income of the assessee for such financial year.
Such unexplained expenditure which is deemed to be the income of the assessee
shall not be allowed as deduction under any head of income.
(vi) Amount borrowed or repaid on hundi [Section 69D]
Where any amount is borrowed on a hundi or any amount due thereon is repaid other
than through an account-payee cheque drawn on a bank, the amount so borrowed or
repaid shall be deemed to be the income of the person borrowing or repaying for the
previous year in which the amount was borrowed or repaid, as the case may be.
However, where any amount borrowed on a hundi has been deemed to be the
income of any person, he will not be again liable to be assessed in respect of such
amount on repayment of such amount. The amount repaid shall include interest
paid on the amount borrowed.

6. RATES OF TAX, SURCHARGE & CESS

Income-tax
Income-tax is to be charged on every person at the rates prescribed for the year by
the Annual Finance Act or the Income-tax Act, 1961 or both.
Surcharge
Surcharge is an additional tax payable over and above the income-tax. Surcharge
is levied as a percentage of income-tax. Surcharge is presently being levied beyond

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a particular threshold of income for different persons. Also, higher rates of

surcharge are prescribed for higher thresholds of income. However, under the
special tax regimes for domestic companies and co-operative societies, a uniform
surcharge is prescribed irrespective of the level of total income.
“Health and Education cess” on Income-tax

The amount of income-tax as increased by the union surcharge, if applicable,

should be further increased by an additional surcharge called the “Health and
Education cess on income-tax”, calculated at the rate of 4% of such income-tax and
surcharge, if applicable. Health and education cess is leviable in the case of all
assessees i.e. individuals, HUF, AOPs/BOIs, Artificial Juridical Persons, firms, local
authorities, co-operative societies and companies.
It is leviable to fulfill the commitment of the Government to provide and finance
quality health services and universalised quality basic education and secondary and
higher education.

6.1 Individual/Hindu Undivided Family (HUF)/Association of

Persons (AOP)/Body of Individuals (BOI)/Artificial
Juridical Person
Income-tax
Individual/HUF/AoP/BoI and Artificial Juridical Persons can pay tax at concessional
rates under the default tax regime under section 115BAC. However, he/it has to
forego certain exemptions and deductions under this regime. Alternatively, he/it
can exercise the option to shift out of the default tax regime and pay tax under the
optional tax regime as per the regular provisions of the Act at the tax rates
prescribed by the Annual Finance Act of that year.
Default tax regime under section 115BAC of the Income-tax Act, 1961

I. Concessional tax rates

Individuals/ HUF/ AoPs/ BoIs or artificial judicial persons, other than those who
exercise the option to opt out this regime under section 115BAC(6), have to pay tax
in respect of their total income (other than income chargeable to tax at special
rates under Chapter XII such as section 111A, 112, 112A, 115BB, 115BBJ etc.) at the
following concessional rates, subject to certain conditions specified under section
115BAC(2) –

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 1.54 INCOME TAX LAW

(i) Upto ` 3,00,000 NIL

(ii) From ` 3,00,001 to ` 7,00,000 5%
(iii) From ` 7,00,001 to ` 10,00,000 10%
(iv) From ` 10,00,001 to ` 12,00,000 15%
(v) From ` 12,00,001 to ` 15,00,000 20%
(vii) Above ` 15,00,000 30%

II. Conditions to be satisfied

The following are the conditions to be satisfied:

S. Particulars
No.
(1) Certain deductions/exemptions not allowable: Section 115BAC(2)
provides that while computing total income, the following
deductions/exemptions would not be allowed:
Section Exemption/Deduction
10(5) Leave travel concession
10(13A) House rent allowance
10(14) Exemption in respect of special allowances or
benefit to meet expenses relating to duties or
personal expenses (other than those as may be
prescribed for this purpose)
10(17) Daily allowance or constituency allowance of MPs
and MLAs
10(32) Exemption in respect of income of minor child
included in the income of parent
10AA Tax holiday for units established in SEZ
16 (i) Entertainment allowance
(ii) Professional tax
24(b) Interest on loan in respect of self-occupied property
32(1)(iia) Additional depreciation

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 BASIC CONCEPTS 1.55

35(1)(ii),(iia),(iii) Deduction in respect of contribution to

or 35(2AA) - notified approved research association/
university/college/other institutions for scientific
research [Section 35(1)(ii)]
- approved Indian company for scientific research
[Section 35(1)(iia)]
- notified approved research association/
university/college/other institutions for research
in social science or statistical research [Section
35(1)(iii)]
- An approved National laboratory/university/IIT/
specified person for scientific research
undertaken under an approved programme
[Section 35(2AA)]
35AD Investment linked tax incentives for specified
businesses
80C to 80U Deductions under Chapter VI-A (other than
employers contribution towards NPS under section
80CCD(2), Central Government contribution
towards Agnipath Scheme under section 80CCH(2)
and deduction in respect of employment of new
employees under section 80JJAA).
(2) Certain losses not allowed to be set-off: While computing total
income, set-off of any loss -
(i) carried forward or depreciation from any earlier assessment year,
if such loss or depreciation is attributable to any of the deductions
referred to in (1) above; or
(ii) under the head house property with any other head of income;
would not be allowed.
(3) Depreciation or additional depreciation: Depreciation u/s 32 is to be
determined in the prescribed manner. Depreciation in respect of any
block of assets entitled to more than 40%, would be restricted to 40%
on the written down value of such block of assets. Additional
depreciation u/s 32(1)(iia), however, cannot be claimed.
(4) Exemption or deduction for allowances or perquisite: While
computing total income, any exemption or deduction for allowances or

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perquisite, by whatever name called, provided under any other law for
the time being force in India would not be allowed.
Additional points:
Loss or depreciation referred to in (2) above would be deemed to have been already
given effect to and no further deduction for such loss or depreciation shall be
allowed for any subsequent year.
Where income-tax on total income of the assessee is computed under this section
and there is a depreciation allowance in respect of a block of asset from an earlier
assessment year attributable to additional depreciation u/s 32(1)(iia), which has
not been given full effect to prior to A.Y. 2024-25 and which is not allowed to be
set-off in the A.Y.2024-25 due to section 115BAC, corresponding adjustment shall
be made to the WDV of such block of assets as on 1.4.2023 in the prescribed
manner i.e., the WDV as on 1.4.2023 will be increased by the unabsorbed
additional depreciation not allowed to be set-off.

III. Time limit for exercising the option to shift out of the default tax regime
(i) In case of an assessee having no income from business or profession:
Where such individual/HUF/AoP/BoI or Artificial Juridical person is not
having income from business or profession, he/it can exercise an option to
shift out/opt out of the default tax regime under this section and such option
has to be exercised along with the return of income to be furnished
under section 139(1) for a previous year relevant to the assessment year. In
effect, such individual/HUF/AoP/BoI or Artificial Juridical person can choose
whether or not to exercise the option of shifting out of the default tax regime
in each previous year. He/it may choose to pay tax under default tax regime
under section 115BAC in one year and exercise the option to shift out of
default tax regime in another year.
(ii) In case of an assessee having income from business or profession: Such
individual/HUF/AoP/BoI or Artificial Juridical person having income from
business or profession has an option to shift out/ opt out of the default tax
regime under this section and the option has to be exercised on or before
the due date specified under section 139(1) for furnishing the return of
income for such previous year and once such option is exercised, it would
apply to subsequent assessment years.
Such person who has exercised the above option of shifting out of the default
tax regime for any previous year shall be able to withdraw such option only

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 BASIC CONCEPTS 1.57

once and pay tax under the default tax regime under section 115BAC for a
previous year other than the year in which it was exercised.
Thereafter, such person shall never be eligible to exercise option under this
section, except where such person ceases to have any business or
professional income in which case, option under (i) above would be available.
AMT liability not attracted: Individual/HUF/AoP/BoI or Artificial Juridical person
paying tax under default tax regime under section 115BAC is not liable to alternate
minimum tax u/s 115JC. Such person would not be eligible to claim AMT credit also.
Note: It may be noted that in case of Individual/HUF/AoP/BoI or Artificial Juridical
person not having income from business or profession, the total income and tax
liability (including provisions relating to AMT, if applicable under normal provisions)
may be computed every year both in accordance with the regular provisions of the
Income-tax Act, 1961 and in accordance with the provisions of section 115BAC, in
order to determine which is more beneficial and accordingly such person may decide
whether to pay tax under default tax regime under section 115BAC or exercise the
option to shift out and pay tax under normal provisions of the Act for that year.
ILLUSTRATION 3
Mr. X has a total income of ` 16,00,000 for P.Y.2024-25, comprising of income from
house property and interest on fixed deposits. Compute his tax liability for
A.Y.2025-26 under the default tax regime under section 115BAC.
SOLUTION
Computation of tax liability of Mr. X for A.Y. 2025-26
Tax liability:
First ` 3,00,000 - Nil
Next ` 3,00,001 – ` 7,00,000 - @5% of ` 4,00,000 = ` 20,000
Next ` 7,00,001 – ` 10,00,000 - @10% of ` 3,00,000 = ` 30,000
Next ` 10,00,001 – ` 12,00,000 - @15% of ` 2,00,000 = ` 30,000
Next ` 12,00,001 – ` 15,00,000 - @20% of ` 3,00,000 = ` 60,000
Balance i.e., ` 16,00,000 minus ` 15,00,000 - @30% of ` 1,00,000 = ` 30,000
= ` 1,70,000
Add: Health and Education cess@4% = ` 6,800
= ` 1,76,800

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Tax rates prescribed by the Annual Finance Act for optional tax regime
The slab rates for A.Y. 2025-26 applicable to an Individual/HUF/AOP/BOI/ Artificial
Juridical Person, which has exercised the option of shifting out of the default tax
regime, are as follows:

(i) where the total income does NIL

not exceed ` 2,50,000
(ii) where the total income 5% of the amount by which the total
exceeds ` 2,50,000 but does income exceeds ` 2,50,000
not exceed ` 5,00,000
(iii) where the total income ` 12,500 plus 20% of the amount by which
exceeds ` 5,00,000 but does the total income exceeds ` 5,00,000
not exceed ` 10,00,000
(iv) where the total income ` 1,12,500 plus 30% of the amount by which
exceeds ` 10,00,000 the total income exceeds ` 10,00,000

For a senior citizen (being a resident individual who is of the age of 60 years or
more at any time during the previous year), the basic exemption limit is ` 3,00,000
and for a very senior citizen (being a resident individual who is of the age of 80
years or more at any time during the previous year), the basic exemption limit is
` 5,00,000. Therefore, the tax slabs for these assessees would be as follows –
For senior citizens (being resident individuals of the age of 60 years or more
but less than 80 years)

(i) where the total income does NIL

not exceed ` 3,00,000
(ii) where the total income 5% of the amount by which the total
exceeds ` 3,00,000 but does income exceeds ` 3,00,000
not exceed ` 5,00,000
(iii) where the total income ` 10,000 plus 20% of the amount by which
exceeds ` 5,00,000 but does the total income exceeds ` 5,00,000
not exceed ` 10,00,000
(iv) where the total income ` 1,10,000 plus 30% of the amount by which
exceeds ` 10,00,000 the total income exceeds ` 10,00,000

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 BASIC CONCEPTS 1.59

For resident individuals of the age of 80 years or more at any time during the
previous year

(i) where the total income does NIL

not exceed ` 5,00,000
(ii) where the total income 20% of the amount by which the total
exceeds ` 5,00,000 but does income exceeds ` 5,00,000
not exceed ` 10,00,000
(iii) where the total income ` 1,00,000 plus 30% of the amount by which
exceeds ` 10,00,000 the total income exceeds ` 10,00,000

Clarification regarding attaining prescribed age of 60 years/ 80 years on

31st March itself, in case of senior/very senior citizens whose date of birth
falls on 1st April [Circular No. 28/2016, dated 27-07-2016]
The CBDT has clarified that a person born on 1st April would be considered to have
attained a particular age on 31st March, the day preceding the anniversary of his
birthday. In particular, the question of attainment of age of eligibility for being
considered a senior/very senior citizen would be decided on the basis of above
criteria.
Therefore, a resident individual whose 60th birthday falls on 1st April, 2025, would
be treated as having attained the age of 60 years in the P.Y.2024-25 and would be
eligible for higher basic exemption limit of ` 3 lakh while computing his tax liability
for A.Y.2025-26 under the optional tax regime as per the normal provisions of the
Act. Likewise, a resident individual whose 80th birthday falls on 1st April, 2025, would
be treated as having attained the age of 80 years in the P.Y.2024-25, and would be
eligible for higher basic exemption limit of ` 5 lakh in computing his tax liability for
A.Y.2025-26 under the optional tax regime as per the normal provisions of the Act.

In respect of certain types of income, as mentioned below, the Income-tax Act,

1961 has prescribed specific rates. The special rates of tax have to be applied on
the respective component of total income irrespective of the tax regime and the
slab rates have to be applied on the balance of total income after adjusting the
basic exemption limit.

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S. Section Income Rate of Tax

No.
(a) 112 (I) Long term capital gains (other than LTCG
taxable as per section 112A and mentioned in
(II) below) arising -
(a) from transfer of capital asset which takes 20% with
place before 23.7.2024 indexation
(b) from transfer of capital asset which takes
place on or after 23.7.2024
- from transfer of any land or building Lower of 20% with
or both by an individual or a HUF, indexation or
being a resident acquired before 12.5% without
23.7.2024 indexation
- from transfer of other capital asset 12.5% without
indexation
(II) Long-term capital gains arising from transfer
of unlisted securities or shares of company in
which public are not substantially interested by
non-resident assessee
- If transfer takes place before 23.7.2024 10% without
indexation and
foreign currency
fluctuations
- If transfer takes place on or after 12.5% without
23.7.2024 indexation and
foreign currency
fluctuations
(b) 112A Long term capital gains on transfer of – 10% on LTCG >
• Equity share in a company ` 1.25 lakhs if
• Unit of an equity oriented fund transfer takes
place before
• Unit of business trust
23.7.2024
Condition for availing the benefit of this
12.5% on LTCG >
concessional rate is that securities transaction
` 1.25 lakhs if
tax (STT) should have been paid –
transfer takes
place on or after
23.7.2024

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In case of Time of Note: Total

payment of STT exemption in a
P.Y. cannot
Equity shares both at the time exceed ` 1.25
of acquisition lakhs.
and transfer
Unit of equity oriented at the time of
fund or unit of business transfer
trust
(c) 111A Short-term capital gains on transfer of – 15% if transfer
• Equity shares in a company takes place before
• Unit of an equity oriented fund 23.7.2024
• Unit of business trust
The conditions for availing the benefit of this 20% if transfer
concessional rate are – takes place on or
after 23.7.2024
(i) the transaction of sale of such equity
share or unit should be entered into on or
after 1.10.2004; and
(ii) such transaction should be chargeable
STT.
(d) 115BB Winnings from 30%
• Lotteries;
• Crossword puzzles;
• Races including horse races;
• Card games and other games of any sort;
• Gambling or betting of any form or
nature
(other than winning from any online game)
(e) 115BBJ Net winnings from online games 30%
(f) 115BBE Unexplained money, investment, expenditure, 60%
etc. deemed as income under section 68 or
section 69 or section 69A or section 69B or
section 69C or section 69D [See discussion
below]
Note – For detailed discussion on taxability of capital gains, please refer Unit 4: Capital
Gains of Chapter 4: Heads of Income.

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Unexplained money, investments etc. to attract tax@60% [Section 115BBE]

(i) In order to control laundering of unaccounted money by availing the benefit
of basic exemption limit, the unexplained money, investment, expenditure,
etc. deemed as income under section 68 or section 69 or section 69A or
section 69B or section 69C or section 69D would be taxed at the rate of 60%
plus surcharge @25% of tax. Thus, the effective rate of tax (including
surcharge@25% of tax and cess@4% of tax and surcharge) is 78%.
(ii) No basic exemption or allowance or expenditure shall be allowed to the
assessee under any provision of the Income-tax Act, 1961 in computing such
deemed income.
(iii) Further, no set off of any loss shall be allowable against income brought to
tax under sections 68 or section 69 or section 69A or section 69B or section
69C or section 69D.
ILLUSTRATION 4
Mr. X has a total income of ` 16,00,000 for P.Y.2024-25, comprising of income from
house property and interest on fixed deposits. Compute his tax liability for
A.Y.2025-26 assuming his age is –
(a) 45 years
(b) 63 years
(c) 82 years
Assume that Mr. X has exercised the option to shift out/ opt out of the default tax regime.
SOLUTION
(a) Computation of tax liability of Mr. X (aged 45 years)
Tax liability:
First ` 2,50,000 - Nil
Next ` 2,50,001 – ` 5,00,000 - @5% of ` 2,50,000 = ` 12,500
Next ` 5,00,001 – ` 10,00,000 - @20% of ` 5,00,000 = ` 1,00,000
Balance i.e., ` 16,00,000 minus ` 10,00,000- @30% of ` 6,00,000 = ` 1,80,000
= ` 2,92,500
Add: Health and Education cess@4% = ` 11,700
= ` 3,04,200

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 BASIC CONCEPTS 1.63

(b) Computation of tax liability of Mr. X (aged 63 years)

Tax liability:
First ` 3,00,000 - Nil
Next ` 3,00,001 – ` 5,00,000 - @5% of ` 2,00,000 = ` 10,000
Next ` 5,00,001 – ` 10,00,000 - @20% of ` 5,00,000 = ` 1,00,000
Balance i.e., ` 16,00,000 minus ` 10,00,000- @30% of ` 6,00,000 = ` 1,80,000
= ` 2,90,000
Add: Health and Education cess@4% = ` 11,600
= ` 3,01,600
(c) Computation of tax liability of Mr. X (aged 82 years)
Tax liability:

First ` 5,00,000 - Nil

Next ` 5,00,001 – ` 10,00,000 - @ 20% of ` 5,00,000 = ` 1,00,000
Balance i.e., ` 16,00,000 minus ` 10,00,000- @ 30% of ` 6,00,000 = ` 1,80,000

=` 2,80,000
Add: Health and Education cess@4% = ` 11,200
=` 2,91,200
Surcharge
In case the Individual/HUF/AoP 6/BoI and Artificial Juridical Person pays tax
under default tax regime under section 115BAC
Income-tax computed in accordance with the provisions of section 115BAC and/ or
section 111A or section 112 or section 112A or 115BBE or section 115BBJ would be
increased by surcharge given under the following table:

6
(other than an AOP consisting of only companies as members)

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 1.64 INCOME TAX LAW

Rate of Example
Particulars surcharge
Components of Applicable rate
on income-
total income of surcharge
tax
(i) Where the total 10% Example
income (including
• Dividend 15 Surcharge would
`
dividend income
lakhs; be levied@10%
and capital gains
• STCG u/s 111A on income-tax
chargeable to tax
` 15 lakhs; computed on
u/s 111A, 112 and
total income of
112A) > ` 50 lakhs • LTCG u/s 112
` 1 crore.
but ≤ ` 1 crore ` 25 lakhs;
• LTCG u/s 112A
` 20 lakhs; and
• Other income
` 25 lakhs
(ii) Where total income 15% Example
(including dividend
• Dividend income Surcharge would
income and capital
` 10 lakhs; be levied@15%
gains chargeable to
tax u/s 111A, 112 • STCG u/s 111A on income-tax
` 35 lakhs; computed on
and 112A) > ` 1
total income of
crore but ≤ ` 2 • LTCG u/s 112
` 1.85 crores.
crore ` 50 lakhs;
• LTCG u/s 112A
` 35 lakhs; and
• Other income
` 55 lakhs
(iii) Where total income 25% Example
(excluding dividend
• Dividend income Surcharge@15%
income and capital
` 51 lakhs; would be levied
gains chargeable to
tax u/s 111A, 112 and • STCG u/s 111A on income-tax
` 44 lakh; on:
112A) > ` 2 crore
• LTCG u/s 112 • Dividend
` 42 lakhs; income of ` 51
lakhs;

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 BASIC CONCEPTS 1.65

The rate of Not • LTCG u/s 112A • STCG of ` 44

surcharge on the exceeding ` 55 lakh; and lakhs
income-tax 15% • Other income chargeable to
payable on the ` 6 crores tax u/s 111A;
portion of dividend • LTCG of ` 42
income and capital lakhs
gains chargeable to chargeable to
tax u/s 111A, 112 tax u/s 112;
and 112A and
• LTCG of ` 55
lakhs
chargeable to
tax u/s 112A.
Surcharge@25%
would be leviable
on income-tax
computed on
other income of
` 6 crores
included in total
income
(iv) Where total income 15% Example
(including dividend
• Dividend income Surcharge would
income and capital
` 40 lakhs; be levied@15%
gains chargeable to
tax u/s 111A, 112 • STCG u/s 111A on income-tax
` 35 lakhs; computed on
and 112A) > ` 2
total income of
crore in cases not • LTCG u/s 112 ` 42
` 2.77 crore.
covered under (iii) lakhs;
above • LTCG u/s 112A
` 50 lakhs; and
• Other income
` 1.10 crore

Marginal relief
The purpose of marginal relief is to ensure that the increase in amount of tax
payable (including surcharge) due to increase in total income of an assessee

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beyond the prescribed limit should not exceed the amount of increase in total
income.

Marginal relief is available in case of such persons paying tax under default tax
regime u/s 115BAC referred to in above i.e., -

Particulars Marginal relief

(i) Where the total Step 1 - Compute income-tax on total income; and
income > ` 50 lakhs add surcharge@10% on such income-tax (A)
but ≤ ` 1 crore Step 2 - Compute income-tax on ` 50 lakhs
Step 3 - Total income (-) ` 50 lakhs
Step 4 - Add the amount computed in Step 2 and Step
3 (B)
Step 5 – Income-tax liability on total income (along
with surcharge) would be the lower of the amount
arrived at in Step 1 (i.e., A) or Step 4 (i.e., B).
Consequently, if A>B, the marginal relief would be
A – B.
(ii) Where the total Step 1 - Compute income-tax on total income; and
income > ` 1 crore add surcharge@15% on income-tax (C)
but ≤ ` 2 crores Step 2 - Compute income-tax on total income of ` 1
crore + surcharge on such income-tax@10%
Step 3 - Total income (-) ` 1 crore
Step 4 - Add the amount computed in Step 2 and Step
3 (D)
Step 5 – Income-tax liability on total income (along
with surcharge) would be the lower of the amount
arrived at in Step 1 (i.e., C) or Step 4 (i.e., D).
Consequently, if C>D, the marginal relief would be
C – D.
(iii) Where the total Step 1 - Compute income-tax on total income; and
income > ` 2 crores add surcharge@25% on income-tax (E)
Step 2 - Compute income-tax on total income of ` 2
crore + surcharge on such income-tax@15%
Step 3 - Total income (-) ` 2 crore
Step 4 - Add the amount computed in Step 2 and Step
3 (F)

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Step 5 – Income-tax liability on total income (along

with surcharge) would be the lower of the amount
arrived at in Step 1 (i.e., E) or Step 4 (i.e., F).
Consequently, if E>F, the marginal relief would be
E – F.
Note – It is presumed that the total income referred to above does not include
dividend income, long term capital gains taxable under section 112/ 112A and
short-term capital gains taxable under section 111A.
In case the total income includes dividend income, long term capital gains taxable
under section 112/ 112A or short term capital gains taxable under section 111A,
surcharge on income-tax computed on such dividend income and capital gains
cannot exceed 15%. This must be kept in mind while computing marginal relief in
cases referred to in (iii) above.

In case the Individual/HUF/AoP 7/BoI and Artificial Juridical Person exercises

the option to shift out of the default tax regime
Income-tax computed in accordance with normal provisions of the Act or section
111A or section 112 or section 112A or 115BBE or section 115BBJ would be
increased by surcharge given under the following table:

Rate of Example
Particulars surcharge Components of Applicable rate of
on income- total income surcharge
tax
(i) Where the total 10% Example
income (including • Dividend ` 10 Surcharge would
dividend income lakhs; be levied@10% on
and capital gains • STCG u/s 111A income-tax
chargeable to tax ` 20 lakhs; computed on total
u/s 111A, 112 and • LTCG u/s 112 income of ` 90
112A) > ` 50 lakhs ` 15 lakhs; lakhs.
but ≤ ` 1 crore • LTCG u/s 112A
` 20 lakhs; and
• Other income
` 25 lakhs

7
(other than an AOP consisting of only companies as members)

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 1.68 INCOME TAX LAW

(ii) Where total income 15% Example

(including dividend • Dividend income Surcharge would be
income and capital ` 10 lakhs; levied@15% on
gains chargeable to
• STCG u/s 111A income-tax
tax u/s 111A, 112 computed on total
` 40 lakhs;
and 112A) > ` 1 income of ` 1.90
crore but ≤ ` 2 crore • LTCG u/s 112
crores.
` 55 lakhs;
• LTCG u/s 112A
` 35 lakhs; and
• Other income
` 50 lakhs
(iii) Where total income 25% Example
(excluding dividend • Dividend income Surcharge@15%
income and capital ` 51 lakhs; would be levied on
gains chargeable to
• STCG u/s 111A income-tax on:
tax u/s 111A, 112 and
` 44 lakh; • Dividend
112A) > ` 2 crore but
• LTCG u/s 112 income of ` 51
≤ ` 5 crore
` 42 lakhs; lakhs;
The rate of Not
• STCG of ` 44
surcharge on the exceeding • LTCG u/s 112A
` 55 lakh; and lakhs chargeable
income-tax 15%
to tax u/s 111A;
payable on the • Other income
portion of dividend ` 3 crores • LTCG of ` 42
income and capital lakhs chargeable
gains chargeable to to tax u/s 112;
tax u/s 111A, 112 and
and 112A • LTCG of ` 55
lakhs chargeable
to tax u/s 112A.
Surcharge@25%
would be leviable
on income-tax
computed on other
income of ` 3
crores included in
total income

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 BASIC CONCEPTS 1.69

(iv) Where total income 37% Example

(excluding • Dividend income Surcharge@15%
dividend income ` 60 lakhs; would be levied on
and capital gains income-tax on:
• STCG u/s 111A
chargeable to tax
` 50 lakhs; • Dividend
u/s 111A, 112 and
• LTCG u/s 112 income of ` 60
112A) > ` 5 crore
` 42 lakhs; lakhs;
Rate of surcharge Not • STCG of ` 50
• LTCG u/s 112A
on the income-tax exceeding lakhs chargeable
` 25 lakhs; and
payable on the 15% to tax u/s 111A;
• Other income
portion of dividend
` 6 crore • LTCG of ` 42
income and capital
lakhs chargeable
gains chargeable to
to tax u/s 112;
tax u/s 111A, 112
and
and 112A
• LTCG of ` 25
lakhs chargeable
to tax u/s 112A.
Surcharge@37%
would be leviable on
the income-tax
computed on other
income of ` 6 crores
included in total
income.
(v) Where total income 15% Example
(including dividend • Dividend income Surcharge would
income and capital ` 55 lakhs; be levied@15% on
gains chargeable to income-tax
• STCG u/s 111A
tax u/s 111A, 112 computed on total
` 60 lakhs;
and 112A) > ` 2
• LTCG u/s 112 ` 42 income of ` 3.02
crore in cases not crore.
lakhs;
covered under (iii)
and (iv) above • LTCG u/s 112A
` 35 lakhs; and
• Other income
` 1.10 crore

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Marginal relief
Marginal relief in case of such persons referred to in above under the optional tax
regime (as per the normal provisions of the Act).
Particulars Marginal relief
(i) Where the total Step 1 - Compute income-tax on total income; and
income > ` 50 lakhs add surcharge@10% on such income-tax (A)
but ≤ ` 1 crore
Step 2 - Compute income-tax on ` 50 lakhs
Step 3 - Total income (-) ` 50 lakhs
Step 4 - Add the amount computed in Step 2 and Step
3 (B)
Step 5 – Income-tax liability on total income (along
with surcharge) would be the lower of the amount
arrived at in Step 1 (i.e., A) or Step 4 (i.e., B).
Consequently, if A>B, the marginal relief would be
A – B.
(ii) Where the total Step 1 - Compute income-tax on total income; and
income > ` 1 crore add surcharge@15% on income-tax (C)
but ≤ ` 2 crores
Step 2 - Compute income-tax on total income of ` 1
crore + surcharge on such income-tax@10%
Step 3 - Total income (-) ` 1 crore
Step 4 - Add the amount computed in Step 2 and Step
3 (D)
Step 5 – Income-tax liability on total income (along
with surcharge) would be the lower of the amount
arrived at in Step 1 (i.e., C) or Step 4 (i.e., D).
Consequently, if C>D, the marginal relief would be
C – D.
(iii) Where the total Step 1 - Compute income-tax on total income; and
income > ` 2 crores add surcharge@25% on income-tax (E)
but ≤ ` 5 crores
Step 2 - Compute income-tax on total income of ` 2
crore + surcharge on such income-tax@15%
Step 3 - Total income (-) ` 2 crore

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 BASIC CONCEPTS 1.71

Step 4 - Add the amount computed in Step 2 and Step

3 (F)
Step 5 – Income-tax liability on total income (along
with surcharge) would be the lower of the amount
arrived at in Step 1 (i.e., E) or Step 4 (i.e., F).
Consequently, if E>F, the marginal relief would be
E – F.
(iv) Where the total Step 1 - Compute income-tax on total income; and
income > ` 5 crores add surcharge@37% on income-tax (G)
Step 2 - Compute income-tax on total income of ` 5
crore + surcharge on such income-tax@25%
Step 3 - Total income (-) ` 5 crore
Step 4 - Add the amount computed in Step 2 and Step
3 (H)
Step 5 – Income-tax liability on total income (along
with surcharge) would be the lower of the amount
arrived at in Step 1 (i.e., G) or Step 4 (i.e., H).
Consequently, if G>H, the marginal relief would be
G – H.

Note – It is presumed that the total income referred to above does not include
dividend income, long term capital gains taxable under section 112/ 112A and
short-term capital gains taxable under section 111A.
In case the total income includes dividend income, long term capital gains taxable
under section 112/ 112A or short term capital gains taxable under section 111A,
surcharge on income-tax computed on such dividend income and capital gains
cannot exceed 15%. This must be kept in mind while computing marginal relief in
cases referred to in (iii) and (iv) above.
ILLUSTRATION 5
Compute the tax liability of Mr. A (aged 42), having total income of ` 51 lakhs for the
Assessment Year 2025-26. Assume that his total income comprises of salary income,
Income from house property and interest on fixed deposit. Assume that Mr. A has
exercised the option to shift out of section 115BAC.

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 1.72 INCOME TAX LAW

SOLUTION
Computation of tax liability of Mr. A for the A.Y.2025-26

(A) Income-tax (including surcharge) computed on total income of ` 51,00,000

` 2,50,000 – ` 5,00,000 @5% ` 12,500
` 5,00,001 – ` 10,00,000 @20% ` 1,00,000

` 10,00,001 – ` 51,00,000 @30% ` 12,30,000

Total ` 13,42,500
Add: Surcharge @ 10% ` 1,34,250 ` 14,76,750
(B) Income-tax computed on total income of ` 50 lakhs
(` 12,500 plus ` 1,00,000 plus ` 12,00,000) ` 13,12,500
(C) Total Income Less ` 50 lakhs ` 1,00,000
(D) Income-tax computed on total income of ` 50 lakhs plus the
excess of total income over ` 50 lakhs (B +C) ` 14,12,500
(E) Tax liability: lower of (A) and (D) ` 14,12,500
Add: Health and education cess @4% ` 56,500
Tax liability (including cess) ` 14,69,000
(F) Marginal Relief (A – D) ` 64,250
Alternative method -
(A) Income-tax (including surcharge) computed on total income of ` 51,00,000
` 2,50,000 – ` 5,00,000@5% ` 12,500
` 5,00,001 – ` 10,00,000@20% ` 1,00,000
` 10,00,001 – ` 51,00,000@30% ` 12,30,000
Total ` 13,42,500

Add: Surcharge@10% ` 1,34,250 ` 14,76,750

(B) Income-tax computed on total income of ` 50 lakhs
(` 12,500 plus ` 1,00,000 plus ` 12,00,000) ` 13,12,500
(C) Excess tax payable (A)-(B) ` 1,64,250

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 BASIC CONCEPTS 1.73

(D) Marginal Relief (` 1,64,250 – ` 1,00,000, being the amount

of income in excess of ` 50,00,000) ` 64,250
(E) Tax liability (A)-(D) ` 14,12,500

Add: Health and education cess @4% ` 56,500

Tax liability (including cess) ` 14,69,000
ILLUSTRATION 6

Compute the tax liability of Mr. B (aged 51) under the default tax regime, having total
income of ` 1,01,00,000 for the Assessment Year 2025-26. Assume that his total income
comprises of salary income, Income from house property and interest on fixed deposit.
SOLUTION
Computation of tax liability of Mr. B for the A.Y. 2025-26
(A) Income-tax (including surcharge) computed on total income of
` 1,01,00,000
` 3,00,000 – ` 7,00,000@5% ` 20,000
` 7,00,001 – ` 10,00,000@10% ` 30,000
` 10,00,001 – ` 12,00,000@15% ` 30,000
` 12,00,001 – ` 15,00,000@20% ` 60,000
` 15,00,001 – ` 1,01,00,000@30% ` 25,80,000

Total ` 27,20,000
Add: Surcharge@15% ` 4,08,000
Tax liability without marginal relief ` 31,28,000
(B) Income-tax computed on total income of ` 1 crore
(` 1,40,000 plus ` 25,50,000) ` 26,90,000
Add: Surcharge@10% ` 2,69,000
` 29,59,000
(C) Total Income Less ` 1 crore ` 1,00,000
(D) Income-tax computed on total income of ` 1 crore plus the
excess of total income over ` 1 crore (B +C) ` 30,59,000

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 1.74 INCOME TAX LAW

(E) Tax liability: lower of (A) & (D) ` 30,59,000

Add: Health and education cess @4% ` 1,22,360

Tax liability (including cess) ` 31,81,360

(F) Marginal relief (A-D) ` 69,000
Alternative method:

(A) Income-tax (including surcharge) computed on total income of

` 1,01,00,000
` 3,00,000 – ` 7,00,000@5% ` 20,000

` 7,00,001 – ` 10,00,000@10% ` 30,000

` 10,00,001 – ` 12,00,000@15% ` 30,000
` 12,00,001 – ` 15,00,000@20% ` 60,000

` 15,00,001 – ` 1,01,00,000@30% ` 25,80,000

Total ` 27,20,000
Add: Surcharge @ 15% ` 4,08,000 ` 31,28,000
(B) Income-tax computed on total income of ` 1 crore
[(` 1,40,000 plus ` 25,50,000) plus surcharge@10%] ` 29,59,000
(C) Excess tax payable (A)-(B) ` 1,69,000
(D) Marginal Relief (` 1,69,000 – ` 1,00,000, being the amount
of income in excess of ` 1,00,00,000) ` 69,000
(E) Tax liability (A) - (D) ` 30,59,000
Add: Health and education cess @4% ` 1,22,360
Tax liability (including cess) ` 31,81,360
ILLUSTRATION 7

Compute the tax liability of Mr. C (aged 58), having total income of ` 2,01,00,000 for
the Assessment Year 2025-26. Assume that his total income comprises of salary
income, Income from house property and interest on fixed deposit. Assume that
Mr. C has exercised the option to shift out of section 115BAC.

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 BASIC CONCEPTS 1.75

SOLUTION
Computation of tax liability of Mr. C for the A.Y. 2025-26
(A) Income-tax (including surcharge) computed on total income of
` 2,01,00,000
` 2,50,000 – ` 5,00,000 @ 5% ` 12,500
` 5,00,001 – ` 10,00,000 @ 20% ` 1,00,000
` 10,00,001 – ` 2,01,00,000@30% ` 57,30,000
Total ` 58,42,500
Add: Surcharge @ 25% ` 14,60,625 ` 73,03,125
(B) Income-tax computed on total income of ` 2 crore
(` 12,500 plus ` 1,00,000 plus ` 57,00,000) ` 58,12,500
Add: Surcharge@15% ` 8,71,875
` 66,84,375
(C) Total Income Less ` 2 crore ` 1,00,000
(D) Income-tax computed on total income of ` 2 crore plus the
excess of total income over ` 2 crore (B +C) ` 67,84,375
(E) Tax liability (A) or (D), whichever is lower ` 67,84,375
Add: Health and education cess @4% ` 2,71,375
Tax liability (including cess) ` 70,55,750
(F) Marginal relief (A-D) ` 5,18,750
Alternative method
(A) Income-tax (including surcharge) computed on total income of
` 2,01,00,000

` 2,50,000 – ` 5,00,000 @ 5% ` 12,500

` 5,00,001 – ` 10,00,000 @ 20% ` 1,00,000
` 10,00,001 – ` 2,01,00,000@30% ` 57,30,000

Total ` 58,42,500
Add: Surcharge@25% ` 14,60,625 ` 73,03,125

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 1.76 INCOME TAX LAW

(B) Income-tax computed on total income of ` 2 crore

[(` 12,500 plus ` 1,00,000 plus ` 57,00,000)
plus surcharge@15%] ` 66,84,375
(C) Excess tax payable (A)-(B) ` 6,18,750
(D) Marginal Relief (` 6,18,750 – ` 1,00,000, being the amount
of income in excess of ` 2,00,00,000) ` 5,18,750
(E) Tax liability (A) - (D) ` 67,84,375
Add: Health and education cess@4% ` 2,71,375
Tax liability (including cess) ` 70,55,750
ILLUSTRATION 8
Compute the tax liability of Mr. D (aged 65) in a most beneficial manner. He is having
total income of ` 5,01,00,000 for the Assessment Year 2025-26. Assume that his total
income comprises of salary income, Income from house property and interest on fixed
deposit and is the same under both tax regimes.
SOLUTION
Computation of tax liability of Mr. D under default tax regime
for the A.Y. 2025-26
Income-tax (including surcharge) computed on total income of ` 5,01,00,000
` 3,00,000 – ` 7,00,000@5% ` 20,000
` 7,00,001 – ` 10,00,000@10% ` 30,000
` 10,00,001 – ` 12,00,000@15% ` 30,000
` 12,00,001 – ` 15,00,000@20% ` 60,000
` 15,00,001 – ` 5,01,00,000@30% ` 1,45,80,000

Total ` 1,47,20,000
Add: Surcharge@25% ` 36,80,000
` 1,84,00,000

Add: Health and education cess @4% ` 7,36,000

Tax liability ` 1,91,36,000

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 BASIC CONCEPTS 1.77

Computation of tax liability of Mr. D under optional tax regime

for the A.Y. 2025-26

(A) Income-tax (including surcharge) computed on total income of

` 5,01,00,000
` 3,00,000 – ` 5,00,000 @ 5% ` 10,000

` 5,00,001 – ` 10,00,000 @ 20% ` 1,00,000

` 10,00,001 – ` 5,01,00,000@30% ` 1,47,30,000
Total ` 1,48,40,000
Add: Surcharge @ 37% ` 54,90,800 ` 2,03,30,800
(B) Income-tax computed on total income of ` 5 crore
(` 10,000 plus ` 1,00,000 plus ` 1,47,00,000) ` 1,48,10,000
Add: Surcharge@25% ` 37,02,500

` 1,85,12,500
(C) Total Income Less ` 5 crore ` 1,00,000
(D) Income-tax computed on total income of ` 5 crore plus the
excess of total income over ` 5 crore (B +C) ` 1,86,12,500
(E) Tax liability (A) or (D), whichever is lower ` 1,86,12,500
Add: Health and education cess@4% ` 7,44,500
Tax liability (including cess) ` 1,93,57,000
(F) Marginal Relief (A – D) ` 17,18,300
Alternative method
(A) Income-tax (including surcharge) computed on total income of
` 5,01,00,000
` 3,00,000 – ` 5,00,000@5% ` 10,000

` 5,00,001 – ` 10,00,000@20% ` 1,00,000

` 10,00,001 – ` 5,01,00,000@30% ` 1,47,30,000
Total ` 1,48,40,000
Add: Surcharge @ 37% ` 54,90,800 ` 2,03,30,800

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(B) Income-tax computed on total income of ` 5 crore

[(` 10,000 plus ` 1,00,000 plus ` 1,47,00,000)
plus surcharge@25%] ` 1,85,12,500
(C) Excess tax payable (A)-(B) ` 18,18,300
(D) Marginal Relief (` 18,18,300 – ` 1,00,000, being the amount
of income in excess of ` 5,00,00,000) ` 17,18,300
(E) Tax liability (A) - (D) ` 1,86,12,500
Add: Health and education cess @4% ` 7,44,500
Tax liability (including cess) ` 1,93,57,000
It is beneficial for Mr. D to pay tax under default tax regime under section 115BAC,
since his tax liability would be lower by ` 2,21,000 (` 1,93,57,000 - ` 1,91,36,000).

6.2 Firm/ LLP/ Local Authority

Income-tax
On the whole of the total income 30%
Special rates for capital gains under sections 112, 112A and 111A would be
applicable to Firm/ LLP/ local authority also.
Surcharge
Where the total income exceeds ` 1 crore, surcharge is payable at the rate of 12%
of income-tax computed as above.
Marginal Relief
Marginal relief is available in case of such persons having a total income exceeding
` 1 crore i.e., the total amount of income-tax (together with surcharge) computed
on such income should not exceed the amount of income-tax computed on total
income of ` 1 crore by more than the amount of income that exceeds ` 1 crore.

6.3 Co-operative Society

Income-tax rates as per the normal provisions of the Act

(i) Where the total income does 10% of the total income
not exceed ` 10,000

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 BASIC CONCEPTS 1.79

(ii) Where the total income ` 1,000 plus 20% of the amount by which
exceeds ` 10,000 but does not the total income exceeds ` 10,000
exceed ` 20,000

(iii) Where the total income 3,000 plus 30% of the amount by which the
exceeds ` 20,000 total income exceeds ` 20,000

Note – A manufacturing co-operative society, resident in India, can opt for

concessional rates of tax under section 115BAE and other co-operative societies,
resident in India, can opt for concessional rates of tax under section 115BAD.

Tax rate in case of a manufacturing co-operative society, resident in India (set

up and registered on or after 1.4.2023 and commences manufacture of article
or thing before 31.3.2024) opting for concessional tax regime u/s 115BAE

15% of income derived from or incidental to manufacturing or production of an

article or thing

Tax rate in case of other resident co-operative society opting for concessional
tax regime u/s 115BAD:

22% of total income

Note - Co-operative society, resident in India, can opt for concessional rate of tax
u/s 115BAD or 115BAE, as the case may be, subject to certain conditions. The total
income of such co-operative societies would be computed without giving effect to
deduction under section 10AA, 33AB, 33ABA, 35(1)(ii)/(iia)/(iii), 35(2AA), 35AD,
35CCC, additional depreciation under section 32(1)(iia), deductions under Chapter
VI-A (other than section 80JJAA) etc. and set off of loss and depreciation brought
forward from earlier years relating to the above deductions. The provisions of
alternate minimum tax under section 115JC would not be applicable to a co-
operative society opting for section 115BAD or 115BAE. This section will be dealt
with in detail at Final level.

Special rates for capital gains under sections 112, 112A and 111A would be
applicable to Co-operative society also.

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Surcharge
(a) In case of a co-operative society (other than a co-operative society
opting for section 115BAD or section 115BAE), whose total income >
` 1 crore but is ≤ ` 10 crore
Where the total income exceeds ` 1 crore but does not exceed ` 10 crore,
surcharge is payable at the rate of 7% of income-tax computed in accordance
with the slab rates given above and/ or section 111A or section 112 or section
112A.
Marginal Relief
Marginal relief is available in case of such co-operative societies i.e., the total
amount of income-tax (together with surcharge) computed on such income
should not exceed the amount of income-tax computed on total income of
` 1 crore by more than the amount of income that exceeds ` 1 crore.
(b) In case of a co-operative society (other than a co-operative society
opting for section 115BAD or section 115BAE), whose total income is >
` 10 crore
Where the total income exceeds ` 10 crore, surcharge is payable at the rate of
12% of income-tax computed in accordance with the slab rates given above
and/ or section 111A or section 112 or section 112A.
Marginal Relief
Marginal relief is available in case of such co-operative societies i. e., the total
amount of income-tax (together with surcharge) computed on such income
should not exceed the amount of income-tax and surcharge computed on
total income of ` 10 crore by more than the amount of income that exceeds
` 10 crore.
(c) In case of a co-operative society opting for section 115BAD or section
115BAE
Surcharge @10% of income-tax computed under section 115BAD or section
115BAE would be leviable. Since there is no threshold limit for applicability of
surcharge, consequently, there would be no marginal relief.

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6.4 Domestic Company

Income-tax

If the total turnover or gross receipt in the 25% of the total income
P.Y.2022-23 ≤ ` 400 crore
In any other case 30% of the total income
Notes –
• In case of a domestic manufacturing company (set up and registered
on or after 1.10.2019 and commences manufacture of article or thing 8
before 31.3.2024) exercising option u/s 115BAB: 15% of income derived
from or incidental to manufacturing or production of an article or thing
• In case of a domestic company exercising option u/s 115BAA: 22% of
total income
Domestic company can opt for section 115BAA or section 115BAB, as the case
may be, subject to certain conditions. The total income of such companies
would be computed without giving effect to deductions under section 10AA,
33AB, 33ABA, 35(1)(ii)/(iia)/(iii), 35(2AA), 35(2AB), 35AD, 35CCC, 35CCD, Chapter
VI-A (except section 80JJAA or section 80M), additional depreciation under
section 32(1)(iia) etc. and without set-off of brought forward loss and
unabsorbed depreciation attributable to such deductions. These sections will be
dealt with in detail at Final Level.

Special rates for capital gains under sections 112, 112A and 111A would be
applicable to domestic company also.
Surcharge
(a) In case of a domestic company (other than a domestic company opting
for section 115BAA or section 115BAB), whose total income > ` 1 crore
but is ≤ ` 10 crore

Where the total income exceeds ` 1 crore but does not exceed ` 10 crore,
surcharge is payable at the rate of 7% of income-tax computed in accordance
with the rates given above.

8
Including business of generation of electricity

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Marginal Relief
Marginal relief is available in case of such companies i.e., the total amount of
income-tax (together with surcharge) computed on such income should not
exceed the amount of income-tax computed on total income of ` 1 crore by
more than the amount of income that exceeds ` 1 crore.
(b) In case of a domestic company (other than a domestic company opting
for section 115BAA or section 115BAB), whose total income is > ` 10
crore

Where the total income exceeds ` 10 crore, surcharge is payable at the rate
of 12% of income-tax computed in accordance with the rates given above.
Marginal Relief
Marginal relief is available in case of such companies i.e., the total amount of
income-tax (together with surcharge) computed on such income should not
exceed the amount of income-tax and surcharge computed on total income
of ` 10 crore by more than the amount of income that exceeds ` 10 crore.
(c) In case of a domestic company opting for section 115BAA or section
115BAB
Surcharge @10% of income-tax computed under section 115BAA or section
115BAB would be leviable. Since there is no threshold limit for applicability
of surcharge, consequently, there would be no marginal relief.

6.5 Foreign Company

Income-tax

Royalties and fees for rendering technical services (FTS) received from 50%
Government or an Indian concern in pursuance of an agreement,
approved by the Central Government, made by the company with the
Government or Indian concern between 1.4.1961 and 31.3.1976 (in case
of royalties) and between 1.3.1964 and 31.3.1976 (in case of FTS)
Other income 35%

Special rates for capital gains under sections 112, 112A and 111A would be
applicable to foreign company also.

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Surcharge
(a) In case of a foreign company, whose total income > ` 1 crore but is
≤ ` 10 crore
Where the total income exceeds ` 1 crore but does not exceed ` 10 crore,
surcharge is payable at the rate of 2% of income-tax computed in accordance
with the rates given above.
Marginal Relief
Marginal relief is available in case of such companies i.e., the total amount of
income-tax (together with surcharge) computed on such income should not
exceed the amount of income-tax computed on total income of ` 1 crore by
more than the amount of income that exceeds ` 1 crore.
(b) In case of a foreign company, whose total income is > ` 10 crore
Where the total income exceeds ` 10 crore, surcharge is payable at the rate
of 5% of income-tax computed in accordance with the rates given above.
Marginal Relief
Marginal relief is available in case of such companies i.e., the total amount of
income-tax (together with surcharge) computed on such income should not
exceed the amount of income-tax and surcharge computed on total income
of ` 10 crore by more than the amount of income that exceeds ` 10 crore.

7. REBATE FOR RESIDENT INDIVIDUALS

[SECTION 87A]
In order to provide tax relief to the individual tax payers, section 87A provides a
rebate from the tax payable by an assessee, being an individual resident in India.
Rebate to resident individual paying tax under default tax regime u/s 115BAC
(i) If the total income of the resident individual is chargeable to tax under section
115BAC and the total income of such individual does not exceed ` 7,00,000,
the rebate shall be equal to the amount of income-tax payable on his total
income for any assessment year or an amount of ` 25,000, whichever is less.
The amount of rebate under section 87A shall not exceed the amount of
income-tax (as computed before allowing such rebate) on the total income
of the assessee with which he is chargeable for any assessment year.

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ILLUSTRATION 9
Mr. Raghav aged 26 years and a resident in India, has a total income of
` 6,50,000, comprising his salary income and interest on bank fixed deposit.
Compute his tax liability for A.Y.2025-26 under default tax regime under
section 115BAC.

SOLUTION
Computation of tax liability of Mr. Raghav for A.Y. 2025-26

Particulars `
Tax on total income of ` 6,50,000
Tax@5%of ` 3,50,000 17,500
Less: Rebate u/s 87A (Lower of tax payable or ` 25,000) 17,500
Tax Liability Nil

(ii) If the total income of the resident individual is chargeable to tax under section
115BAC and the total income of such individual exceeds ` 7,00,000 and
income-tax payable on such total income exceeds the amount by which the
total income is in excess of ` 7,00,000, the rebate would be as follows.
Step 1 – Total income (-) ` 7 lakhs (A)
Step 2 - Compute income-tax liability on total income (B)
Step 3 - If B>A, rebate under section 87A would be a B – A.
The amount of rebate under section 87A shall not exceed the amount of
income-tax (as computed before allowing such rebate) on the total income
of the assessee.
ILLUSTRATION 10
Mr. Pawan aged 35 years and a resident in India, has a total income of
` 7,15,000, comprising his salary income and interest on bank fixed deposit.
Compute his tax liability for A.Y.2025-26 under default tax regime under
section 115BAC.

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 BASIC CONCEPTS 1.85

SOLUTION
Computation of tax liability of Mr. Pawan for A.Y. 2025-26

Particulars `
Step 1: Total Income of ` 7,15,000 - ` 7,00,000 15,000 (A)
Step 2: Tax on total income of ` 7,15,000
Tax@10%of ` 15,000 + ` 20,000 21,500 (B)
Step 3: Since B>A, rebate u/s 87A would be B-A
[` 21,500 - ` 15,000] 6,500
15,000
Add: HEC@4% 600
Tax Liability 15,600

Rebate to a resident individual paying tax under optional tax regime (normal
provisions of the Act)

If total income of such individual does not exceed ` 5,00,000, the rebate shall be
equal to the amount of income-tax payable on his total income for any assessment
year or an amount of ` 12,500, whichever is less.
The amount of rebate under section 87A shall not exceed the amount of income-
tax (as computed before allowing such rebate) on the total income of the assessee
with which he is chargeable for any assessment year.
ILLUSTRATION 11
Mr. Piyush, aged 35 years and a resident in India, has a total income of ` 4,15,000,
comprising his salary income and interest on bank fixed deposit. Compute his tax liability
for A.Y.2025-26 if he exercises the option to shift out of the default tax regime.
SOLUTION
Computation of tax liability of Mr. Piyush for A.Y. 2025-26

Particulars `
Tax on total income of ` 4,15,000
Tax@5%of ` 1,65,000 8,250
Less: Rebate u/s 87A (Lower of tax payable or ` 12,500) 8,250
Tax Liability Nil

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 1.86 INCOME TAX LAW

• Rebate under section 87A is allowed from income-tax computed

before adding Health and education cess on income-tax.

• Rebate under section 87A is, however, not available in respect of

tax payable on long-term capital gains taxable u/s 112A.

8. PARTIAL INTEGRATION OF AGRICULTURAL

INCOME WITH NON-AGRICULTURAL
INCOME
Agricultural income is exempt subject to conditions mentioned in the definition
given under section 2(1A). However, a method has been laid down to levy tax on
agricultural income in an indirect way. This concept is known as partial integration
of agricultural income with non-agricultural income. It is applicable to
individuals, HUF, AOPs, BOIs and artificial juridical persons. Two conditions which
need to be satisfied for partial integration are:
1. The net agricultural income should exceed ` 5,000 p.a., and
2. Non-agricultural income should exceed the maximum amount not chargeable
to tax. (i.e., If such person is paying tax under default tax regime u/s 115BAC,
then ` 3,00,000 is the basic exemption limit irrespective of the age of the
person. If such person has exercised the option to shift out of the default tax
regime, then, the basic exemption limit would be ` 5,00,000 for resident
individuals of the age of 80 years or more at any time during the previous
year, ` 3,00,000 for resident individuals of the age of 60 years or more (but
less than 80 years) at any time during the previous year and
` 2,50,000 for all others). Only if non-agricultural income exceeds this limit,
partial integration would be required.

It may be noted that aggregation provisions do not apply to company, LLP, firm,
co-operative society and local authority. The object of aggregating the net
agricultural income with non-agricultural income is to tax the non-agricultural
income at higher rates.
Tax calculation in such cases is as follows:
Step 1: Add non-agricultural income with net agricultural income. Compute tax
on the aggregate amount.

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Step 2: Add net agricultural income and the basic exemption limit available to
the assessee. Compute tax on the aggregate amount.

Step 3: Deduct the amount of income tax calculated in step 2 from the income
tax calculated in step 1 i.e., Step 1 – Step 2.
Step4: The sum so arrived at shall be –

- increased by surcharge, if applicable,

- reduced by the rebate, if any, available u/s 87A.
Step 5: Thereafter, it would be increased by health and education cess @4%.
The above concept can be clearly understood with the help of the following
illustration:
ILLUSTRATION 12
Mr. X, a resident, has provided the following particulars of his income for the
P.Y. 2024-25.
i. Income from salary (computed) - ` 10,80,000
ii. Income from house property (computed) - ` 2,50,000
iii. Agricultural income from a land in Jaipur - ` 4,80,000
iv. Expenses incurred for earning agricultural income - ` 1,70,000

Compute his tax liability for A.Y. 2025-26 assuming his age is -
(a) 45 years
(b) 70 years

SOLUTION
(a) Computation of tax liability (age 45 years)
Computation of total income of Mr. X for the A.Y. 2025-26 under
default tax regime under section 115BAC
For the purpose of partial integration of taxes, Mr. X has satisfied both the
conditions i.e.

1. Net agricultural income exceeds ` 5,000 p.a., and

2. Non-agricultural income exceeds the basic exemption limit of ` 3,00,000.

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His tax liability is computed in the following manner:

Particulars ` `

Income from salary 10,80,000

Income from house property 2,50,000

Net agricultural income [` 4,80,000 – ` 1,70,000] 3,10,000

Less: Exempt under section 10(1) (3,10,000) -

Gross Total Income 13,30,000

Less: Deductions under Chapter VI-A -

Total Income 13,30,000

Step 1 : ` 13,30,000 + ` 3,10,000 = ` 16,40,000

Tax on ` 16,40,000 = ` 1,82,000
(i.e., 5% of ` 4,00,000 plus 10% of ` 3,00,000 plus 15% of
` 2,00,000 plus 20% of ` 3,00,000 plus 30% of ` 1,40,000)
Step 2 : ` 3,10,000 + ` 3,00,000 = ` 6,10,000
Tax on ` 6,10,000 = ` 15,500
(i.e. 5% of ` 3,10,000)
Step 3 : ` 1,82,000 – ` 15,500 = ` 1,66,500
Step 4 & 5 : Total tax payable = ` 1,66,500
= ` 1,66,500 + 4% of ` 1,66,500 = ` 1,73,160.
Computation of total income of Mr. X for the A.Y. 2025-26 under
normal provisions of the Act
For the purpose of partial integration of taxes, Mr. X has satisfied both the
conditions i.e.
1. Net agricultural income exceeds ` 5,000 p.a., and
2. Non-agricultural income exceeds the basic exemption limit of ` 2,50,000.

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His tax liability is computed in the following manner:

Particulars ` `

Income from salary 10,80,000

Income from house property 2,50,000
Net agricultural income [` 4,80,000 – ` 1,70,000] 3,10,000
Less: Exempt under section 10(1) (3,10,000) -
Gross Total Income 13,30,000
Less: Deductions under Chapter VI-A -
Total Income 13,30,000

Step 1 : ` 13,30,000 + ` 3,10,000 = ` 16,40,000

Tax on ` 16,40,000 = ` 3,04,500

(i.e., 5% of ` 2,50,000 plus 20% of ` 5,00,000 plus 30% of

` 6,40,000)

Step 2 : ` 3,10,000 + ` 2,50,000 = ` 5,60,000

Tax on ` 5,60,000 = ` 24,500

(i.e. 5% of ` 2,50,000 plus 20% of ` 60,000)

Step 3 : ` 3,04,500 – ` 24,500 = ` 2,80,000

Step 4 & 5 : Total tax payable = ` 2,80,000

= ` 2,80,000 + 4% of ` 2,80,000 = ` 2,91,200.

(b) Computation of tax liability (age 70 years)
Computation of total income of Mr. X for the A.Y. 2025-26 under
default tax regime under section 115BAC
Tax liability of Mr. X would be same under default tax regime whether he is
of age of 45 years of 70 years i.e., ` 1,73,160.

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Computation of total income of Mr. X for the A.Y. 2025-26 under

normal provisions of the Act

His tax liability is computed in the following manner:

Step 1 : ` 13,30,000 + ` 3,10,000 = ` 16,40,000
Tax on ` 16,40,000 = ` 3,02,000
(i.e., 5% of ` 2,00,000 plus 20% of ` 5,00,000 plus 30% of
` 6,40,000)
Step 2 : ` 3,10,000 + ` 3,00,000 = ` 6,10,000

Tax on ` 6,10,000 = ` 32,000

(i.e. 5% of ` 2,00,000 plus 20% of ` 1,10,000)
Step 3 : ` 3,02,000 – ` 32,000 = ` 2,70,000

Step 4 & 5 : Total tax payable = ` 2,70,000

= ` 2,70,000 + 4% of ` 2,70,000 = ` 2,80,800.

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LET US RECAPITULATE

Income-tax is the most significant direct tax. Entry 82 of the Union List i.e.,
List I of Seventh Schedule to Article 246 of the Constitution of India has given
the power to Parliament to make laws on taxes on income other than
agricultural income.
Components of income-tax law
• Income-tax Act, 1961 – governs the levy of income-tax in India.
• Income-tax Rules, 1962 – formulated for proper administration of the Act.
• Annual Finance Act – Amendments in the Income-tax Act, 1961 are
effected every year through the Annual Finance Act.
• Circulars – issued by CBDT to clarify the meaning and scope of certain
provisions of the Act.
• Notifications – issued to give effect to the provisions of the Act/ make or
amend Rules.
• Court decisions – interprets the various provisions of income-tax law.

Income-tax is a TAX levied on the TOTAL INCOME of the PREVIOUS YEAR of

every PERSON.

(1) Total Income: Total income has to be computed as per the provisions
contained in the Income-tax Act, 1961. The following steps has to be followed
for computing the total income of an assessee:
Step 1 – Determination of residential status

Step 2 – Classification of income under different heads

Step 3 – Computation of income under each head after providing for
permissible deductions/ exemptions.

In this step, it is necessary to consider whether the individual is paying tax under
the default tax regime or exercising the option to shift out of the default tax
regime and pay tax under the optional tax regime as per the normal provisions
of the Act. Certain deductions which are allowable under the normal provisions
of the Act are not permissible under the default tax regime.

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Step 4 – Clubbing of income of spouse, minor child etc.

Step 5 – Set-off or carry forward and set-off of losses

Step 6 – Computation of Gross Total Income

Step 7 – Providing Deductions from Gross Total Income
Here again, only very select deductions, namely, 80CCD(2), 80CCH(2) and
80JJAA, are allowable under the default tax regime under section 115BAC.
Step 8 – Computation of Total income
Step 9 - Application of the rates of tax on the total income
For default tax regime, concessional tax rates are provided under section
115BAC. For optional tax regime as per the normal provisions of the Act, the
tax rates are provided in the Annual Finance Act. The special rates u/s 111A,
112, 112A, 115BB, 115BBJ, etc. would apply under both tax regimes.
Step 10 – Add Surcharge, if applicable/ Deduct Rebate under section 87A, if
applicable
Step 11 – Add Health and education cess on income-tax
Step 12 – Compute Alternate Minimum Tax (AMT), if applicable, [under the
optional tax regime]
Step 13 - Examine whether to pay tax under default tax regime under section
115BAC or pay tax under the regular provisions of the Act, by comparing the
tax liability under both regimes.
Step 14 – Deduct Advance tax and tax deducted/ collected at source
Step 15 – The resultant figure would be Tax Payable/Tax Refundable

(2) Person: A person includes an individual, Hindu Undivided Family (HUF),

Association of Persons (AOP), Body of Individuals (BOI), a firm, a company etc.

(3) Concept of Previous year (P.Y.) and Assessment Year (A.Y.): Previous
year is the financial year immediately preceding the assessment year i.e., it is
the financial year ending on 31st March, in which the income has
accrued/received.

In case of a newly set-up business, the previous year would be the period
beginning with the date of setting up of the business or profession or, as the

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case may be, the date on which the source of income newly came into existence,
and ending on 31st March.

Assessment year (A.Y.): Assessment year means the period of twelve months
commencing on the 1st April every year.

Exceptions to the rule that income is charged to income-tax in the

Assessment Year following the previous year:
The income of an assessee for a previous year is charged to income-tax in the
assessment year following the previous year. However, in the following cases,
this rule does not apply and the income is taxed in the previous year in which
it is earned.
(i) Shipping business of non-resident [Section 172]
(ii) Persons leaving India [Section 174]
(iii) AOP/BOI/Artificial Juridical Person formed for a particular event or
purpose [Section 174A]
(iv) Persons likely to transfer property to avoid tax [Section 175]
(v) Discontinued business [Section 176]

Rate of tax for Undisclosed Sources of Income: The following undisclosed

incomes are chargeable to tax @78% [i.e., 60% plus surcharge @25% plus cess
@4%] as specified under section 115BBE:
(i) Cash Credits [Section 68]
(ii) Unexplained Investments [Section 69]
(iii) Unexplained money etc. [Section 69A]

(iv) Amount of investments etc., not fully disclosed in the books of account
[Section 69B]
(v) Unexplained expenditure [Section 69C]

(vi) Amount borrowed or repaid on hundi [Section 69D]

(4) Tax liability: Tax has to be computed by applying the rates of tax
mentioned in the Annual Finance Act and the rate specified under the Income-
tax Act, 1961, as the case may be.

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If an Individual/ Hindu Undivided Family (HUF)/ Association of Persons (AOP)/

Body of Individuals (BOI)/ Artificial Juridical Person is paying tax under default
tax regime, concessional tax rates are prescribed under section 115BAC.
However, if he/it exercises the option to shift out of the default tax regime, tax
rates prescribed by the Annual Finance Act of that year would apply.

Persons Rate of taxes

Individual/HUF/ Total income (in `) Rate of Tax
AOP/BOI/ Artificial Upto ` 3,00,000 Nil
Juridical Person
` 3,00,001 to ` 7,00,000 5%
(Under default tax
regime) ` 7,00,001 to ` 10,00,000 10%
` 10,00,001 to ` 12,00,000 15%
` 12,00,001 to ` 15,00,000 20%
Above ` 15,00,000 30%
Individual (As per Total income (in `) Rate of Tax
the normal
(i) Upto ` 2,50,000 (below 60 years) Nil
provisions of the
(ii) Upto ` 3,00,000 (60 years or
Act under the
above but less than 80 years and
optional tax
resident in India)
regime)
(iii) Upto ` 5,00,000 (above 80 years
and resident in India)
` 2,50,001/ ` 3,00,001, as the case 5%
may be, to ` 5,00,000 [in cases (i) and
(ii) above, respectively]
` 5,00,001 to ` 10,00,000 20%
Above ` 10,00,000 30%
HUF/AOP/BOI/ Total income (in `) Rate of Tax
Artificial Juridical
Upto ` 2,50,000 Nil
Person
` 2,50,001 to ` 5,00,000 5%
(As per the normal
provisions of the ` 5,00,001 to ` 10,00,000 20%
Act under the Above ` 10,00,000 30%
optional tax
regime)

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 BASIC CONCEPTS 1.95

Firm/LLP/local 30%
authority
Co-operative Total income (in `) Rate of Tax
Society (not opting
Upto ` 10,000 10%
for the provisions
of section 115BAD ` 10,001 to ` 20,000 20%
or section 115BAE) Above ` 20,000 30%

Company (not Domestic Company Foreign

opting for the Company
provisions of Total turnover Other
section or gross domestic
115BAA/115BAB) receipts in the companies
P.Y. 2022-23 ≤
` 400 crore
25% 30% 35%
Surcharge

Under the default tax regime

Individual/ HUF/ AOP (other than an AOP consisting of only companies
as members)/ BOI/ Artificial juridical person
(i) Where the total income (including dividend income and 10%
capital gains chargeable to tax u/s 111A, 112 and 112A)
> ` 50 lakh but is ≤ ` 1 crore
(ii) Where the total income (including dividend income and 15%
capital gains chargeable to tax u/s 111A, 112 and 112A)>
` 1 crore but is ≤ ` 2 crore
(iii) - Where the total income (excluding dividend income 25%
and capital gains chargeable to tax u/s 111A, 112 and
112A)> ` 2 crore
- Rate of surcharge on the income-tax payable on the Not
portion of dividend income and capital gains exceeding
chargeable to tax u/s 111A, 112 and 112A 15%
(iv) Where the total income (including dividend income and 15%
capital gains chargeable to tax u/s 111A, 112 and 112A)
> ` 2 crore in cases not covered in (iii) above

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Under the optional tax regime as per the normal provisions of the Act
Individual/ HUF/ AOP (other than an AOP consisting of only companies
as members)/ BOI/ Artificial juridical person
(i) Where the total income (including dividend income and 10%
capital gains chargeable to tax u/s 111A, 112 and 112A) >
` 50 lakh but is ≤ ` 1 crore
(ii) Where the total income (including dividend income and 15%
capital gains chargeable to tax u/s 111A, 112 and 112A)>
` 1 crore but is ≤ ` 2 crore
(iii) - Where the total income (excluding dividend income 25%
and capital gains chargeable to tax u/s 111A, 112 and
112A)> ` 2 crore but is ≤ ` 5 crore
- Rate of surcharge on the income-tax payable on the Not
portion of dividend income and capital gains exceeding
chargeable to tax u/s 111A, 112 and 112A 15%
(iv) - Where the total income (excluding dividend income 37%
and capital gains chargeable to tax u/s 111A, 112 and
112A)> ` 5 crore
- Rate of surcharge on the income-tax payable on the Not
portion of dividend income and capital gains exceeding
chargeable to tax u/s 111A, 112 and 112A. 15%
(v) Where the total income (including dividend income and 15%
capital gains chargeable to tax u/s 111A, 112 and 112A) >
` 2 crore in cases not covered in (iii) and (iv) above
In case of an AOP of only companies as members
(i) Where the total income > ` 50 lakh but is < ` 1 crore 10%
(ii) Where the total income > ` 1 crore 15%
Firm/Limited Liability Partnership/Local Authorities
Where the total income > ` 1 crore 12%
Co-operative societies (other than a co-operative society opting for
section 115BAD or section 115BBE)
Total income > ` 1 crore but is ≤ ` 10 crore 7%
Total income is > ` 10 crore 12%

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Domestic company (other than a domestic company opting for section

115BAA or section 115BAB)
Total income > ` 1 crore but is ≤ ` 10 crore 7%
Total income is > ` 10 crore 12%
Foreign company
Total income > ` 1 crore but is ≤ ` 10 crore 2%
Total income is > ` 10 crore 5%
Rebate under section 87A:
If the total income of the resident individual is chargeable to tax under
section 115BAC
(i) Where total income ≤ ` 7,00,000 - Rebate of up to ` 25,000 for resident
individuals.
(ii) Where total income > ` 7,00,000 and income-tax payable on such total
income exceeds the amount by which the total income is in excess of
` 7,00,000 - Rebate of tax on total income as reduced by the total income
exceeding ` 7,00,000 for resident individuals.
Under normal provisions of the Act
Rebate of up to ` 12,500 for resident individuals having total income of up to
` 5 lakh.
“Health and Education cess” on Income-tax: 4% of income-tax and
surcharge, if applicable
Agricultural income is exempt under section 10(1).
However, agricultural income has to be aggregated with non-agricultural
income for determining the rate at which non-agricultural income would be
subject to tax, in case of individuals, HUF, AOPs & BOIs etc., where the –
• agricultural income exceeds ` 5,000 p.a. and
• non-agricultural income exceeds basic exemption limit.
The following are the steps to be followed in computation of tax-
Step 1: Tax on non-agricultural income plus agricultural income
Step 2: Tax on agricultural income plus basic exemption limit
Step 3: Tax payable by the assessee = Step 1 – Step 2
Step 4: Add Surcharge/Deduct Rebate u/s 87A, if applicable.
Step 5: Add Health and Education Cess@4%.

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TEST YOUR KNOWLEDGE

1. Who is an “Assessee”? Explain

2. State any four instances where the income of the previous year is assessable in
the previous year itself instead of the assessment year.
3. Whether the income derived from saplings or seedlings grown in a nursery is
taxable under the Income-tax Act, 1961? Examine.
4. What are the two schools of Hindu law and where are they prevalent? Explain.
Also, mention the difference between the two schools of Hindu Law.
5. What is the difference between an Association of Persons and Body of
Individuals?
6. Mr. Sumit, a resident Indian, earns income of ` 15 lakhs from sale of rubber
manufactured from latex obtained from rubber plants grown by him in India
and ` 20 lakhs from sale of rubber manufactured from latex obtained from
rubber plants grown by him in Malaysia during the A.Y.2025-26. What would
be his business income, assuming he has no other business?
7. Mr. Raja, a resident Indian, earns income of ` 10 lakhs from sale of coffee grown
and cured in India during the A.Y.2025-26. His friend, Mr. Shyam, a resident
Indian, earns income of ` 20 lakhs from sale of coffee grown, cured, roasted
and grounded by him in India during the A.Y.2025-26. What would be the
business income chargeable to tax in India of Mr. Raja and Mr. Shyam?
8. The Jain HUF in Assam comprises of Mr. Suresh Jain, his wife Mrs. Sapna Jain,
his son Mr. Sarthak Jain, his daughter-in-law Mrs. Preeti Jain, his daughter Miss
Seema Jain and his unmarried brother Mr. Pritam Jain. Which of the members
of the HUF are eligible for coparcenary rights?
9. Compute the tax liability under default tax regime of Mr. Kashyap (aged 35),
having total income of ` 51,75,000 for the Assessment Year 2025-26. Assume
that his total income comprises of salary income, income from house property
and interest on fixed deposit.
10. Mr. Agarwal, aged 40 years and a resident in India, has a total income of
` 6,50,00,000, comprising long term capital gain taxable @20% under section

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112 of ` 55,00,000, short term capital gain taxable @15% under section 111A
of ` 65,00,000 and other income of ` 5,30,00,000. Compute his tax liability for
A.Y.2025-26 under the default tax regime and optional tax regime as per the
normal provisions of the Act assuming that the total income and its
components are the same in both tax regimes.

11. Mr. Sharma aged 62 years and a resident in India, has a total income of
` 2,30,00,000, comprising long term capital gain taxable @12.5% under section
112 of ` 52,00,000, short term capital gain taxable @20% under section 111A
of ` 64,00,000 and other income of ` 1,14,00,000. Compute his tax liability for
A.Y.2025-26 under the default tax regime and optional tax regime as per the
normal provisions of the Act assuming that the total income and its
components are the same in both tax regimes.

ANSWERS
1. As per section 2(7), assessee means a person by whom any tax or any other
sum of money is payable under the Income-tax Act, 1961.
In addition, the term includes –
 Every person in respect of whom any proceeding under the Act has
been taken for the assessment of –

• his income; or
• the income of any other person in respect of which he is
assessable; or

• the loss sustained by him or by such other person; or

• the amount of refund due to him or to such other person.
 Every person who is deemed to be an assessee under any provision of
the Act;
 Every person who is deemed to be an assessee in default under any
provision of the Act.
2. The income of an assessee for a previous year is charged to income-tax in the
assessment year following the previous year. However, in a few cases, the
income is taxed in the previous year in which it is earned. These exceptions

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have been made to protect the interests of revenue. The exceptions are as
follows:

(i) Where a ship, belonging to or chartered by a non-resident, carries

passengers, livestock, mail or goods shipped at a port in India, the ship
is allowed to leave the port only when the tax has been paid or
satisfactory arrangement has been made for payment thereof. 7.5% of
the freight paid or payable to the owner or the charterer or to any
person on his behalf, whether in India or outside India on account of
such carriage is deemed to be his income which is charged to tax in the
same year in which it is earned.
(ii) Where it appears to the Assessing Officer that any individual may leave
India during the current assessment year or shortly after its expiry and
he has no present intention of returning to India, the total income of
such individual for the period from the expiry of the respective previous
year up to the probable date of his departure from India is chargeable
to tax in that assessment year.
(iii) If an AOP/BOI etc. is formed or established for a particular event or
purpose and the Assessing Officer apprehends that the AOP/BOI is
likely to be dissolved in the same year or in the next year, he can make
assessment of the income up to the date of dissolution as income of
the relevant assessment year.
(iv) During the current assessment year, if it appears to the Assessing
Officer that a person is likely to charge, sell, transfer, dispose of or
otherwise part with any of his assets to avoid payment of any liability
under this Act, the total income of such person for the period from the
expiry of the previous year to the date, when the Assessing Officer
commences proceedings under this section is chargeable to tax in that
assessment year.
(v) Where any business or profession is discontinued in any assessment
year, the income of the period from the expiry of the previous year up
to the date of such discontinuance may, at the discretion of the
Assessing Officer, be charged to tax in that assessment year.

3. As per Explanation 3 to section 2(1A), income derived from saplings or

seedlings grown in a nursery shall be deemed to be agricultural income and

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exempt from tax, whether or not the basic operations were carried out on
land.

4. The two schools of Hindu law are Dayabaga school, prevalent in West Bengal
and Assam, and Mitakshara school, prevalent in rest of India.
Under the Dayabaga school of Hindu Law, nobody acquires the right, share
in the property by birth as long as the head of family is living. Thus, the
children do not acquire any right, share in the family property, as long as his
father is alive and only on death of the father, the children will acquire
right/share in the property. Hence, the father and his brothers would be the
coparceners of the HUF.
Under the Mitakshara school of Hindu Law, one acquires the right to the
family property by his birth and not by succession irrespective of the fact that
his elders are living. Thus, every child born in the family acquires a right/share
in the family property.
5. In order to constitute an Association of Persons (AOP), persons must join for
a common purpose or action and their object must be to produce income; it
is not enough that the persons receive the income jointly.
Body of Individuals denotes the status of persons like executors or trustees
who merely receive the income jointly and who may be assessable in like
manner and to the same extent as the beneficiaries individually. Thus, co-
executors or co-trustees are assessable as a BOI as their title and interest are
indivisible.
The difference between an AOP and BOI is that in case of a BOI, only
individuals can be the members, whereas in case of AOP, any person can be
its member i.e. entities like company, firm etc. can be the member of AOP but
not of BOI.

In case of an AOP, members voluntarily come together with a common will

for a common intention or purpose, whereas in case of BOI, such common
will may or may not be present.
6. Since Mr. Sumit is a resident, his global income would be taxable in India.
Income of ` 20 lakhs from sale of rubber manufactured from latex obtained
from rubber plants grown by him in Malaysia would be his business income
since it is from rubber plants grown outside India. 35% income from sale of
rubber manufactured from latex obtained from rubber plants grown by him

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 1.102 INCOME TAX LAW

in India would be taxable as business income and balance 65% would be

exempt as agricultural income.

Business income = 35% of ` 15 lakhs + ` 20 lakhs = ` 25.25 lakhs

7. In case of income derived from the sale of coffee grown and cured by the
seller in India, 25% income on such sale is taxable as business income. In case
of income derived from the sale of coffee grown, cured, roasted and
grounded by the seller in India, 40% income on such sale is taxable as
business income.
Business income of Mr. Raja = 25% of ` 10 lakhs = ` 2.5 lakhs
Business income of Mr. Shyam = 40% of ` 20 lakhs = ` 8 lakhs
8. Dayabaga school of Hindu law is prevalent in Assam. In Dayabaga school of
Hindu law, nobody acquires the right, share in the property by birth as long
as the head of family is living.
Thus, the children do not acquire any right, share in the family property, as
long as his father is alive and only on death of the father, the children will
acquire right/share in the property.
Hence, Mr. Suresh Jain and his brother, Mr. Pritam Jain would be the
coparceners of the Jain HUF and are eligible for coparcenary rights.
9. Computation of tax liability of Mr. Kashyap for the A.Y.2025-26
under default tax regime

(A) Tax payable including surcharge on total income of ` 51,75,000

` 3,00,000 – ` 7,00,000 @5% ` 20,000

` 7,00,001 – ` 10,00,000 @10% ` 30,000

` 10,00,001 – ` 12,00,000 @15% ` 30,000

` 12,00,001 – ` 15,00,000 @20% ` 60,000

` 15,00,001 – ` 51,75,000 @30% ` 11,02,500

Total ` 12,42,500

Add: Surcharge @ 10% ` 1,24,250 ` 13,66,750

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 BASIC CONCEPTS 1.103

(B) Tax Payable on total income of ` 50 lakhs (` 1,40,000 plus

` 10,50,000) ` 11,90,000

(C) Total Income Less ` 50 lakhs ` 1,75,000

(D) Tax payable on total income of ` 50 lakhs plus the

excess of total income over ` 50 lakhs (B +C) ` 13,65,000

(E) Tax payable: lower of (A) and (D) ` 13,65,000

Add: Health and education cess @4% ` 54,600

Tax liability ` 14,19,600

(F) Marginal Relief (A – D) ` 1,750

Alternative method -

(A) Tax payable including surcharge on total income of ` 51,75,000

` 3,00,000 – ` 7,00,000 @5% ` 20,000

` 7,00,001 – ` 10,00,000 @10% ` 30,000

` 10,00,001 – ` 12,00,000 @15% ` 30,000

` 12,00,001 – ` 15,00,000 @20% ` 60,000

` 15,00,001 – ` 51,75,000 @30% ` 11,02,500

Total ` 12,42,500

Add: Surcharge@10% ` 1,24,250 ` 13,66,750

(B) Tax Payable on total income of ` 50 lakhs (` 1,40,000 plus

` 10,50,000) ` 11,90,000

(C) Excess tax payable (A)-(B) ` 1,76,750

(D) Marginal Relief (` 1,76,750 – ` 1,75,000, being the amount

of income in excess of ` 50,00,000) ` 1,750

(E) Tax payable (A)-(D) ` 13,65,000

Add: Health and education cess @4% ` 54,600

Tax liability ` 14,19,600

© The Institute of Chartered Accountants of India

 1.104 INCOME TAX LAW

10. Computation of tax liability of Mr. Agarwal for the A.Y.2025-26

under default tax regime

Particulars `

Tax on total income of ` 6,50,00,000

Tax@20% of ` 55,00,000 11,00,000
Tax@15% of ` 65,00,000 9,75,000
Tax on other income of ` 5,30,00,000
` 3,00,000 – ` 7,00,000 @5% 20,000
` 7,00,000 – ` 10,00,000 @10% 30,000
` 10,00,000 – ` 12,00,000 @15% 30,000
` 12,00,000 – ` 15,00,000 @20% 60,000
` 15,00,000 – ` 5,30,00,000 @30% 1,54,50,000 1,55,90,000
1,76,65,000
Add: Surcharge @15% on ` 20,75,000 3,11,250
@25% on ` 1,55,90,000 38,97,500 42,08,750
2,18,73,750
Add: Health and education cess @4% 8,74,950
Tax Liability 2,27,48,700

Computation of tax liability of Mr. Agarwal for the A.Y.2025-26

under normal provisions of the Act

Particulars `

Tax on total income of ` 6,50,00,000

Tax@20% of ` 55,00,000 11,00,000
Tax@15% of ` 65,00,000 9,75,000
Tax on other income of ` 5,30,00,000
` 2,50,000 – ` 5,00,000 @5% 12,500
` 5,00,000 – ` 10,00,000 @20% 1,00,000
` 10,00,000 – ` 5,30,00,000 @30% 1,56,00,000 1,57,12,500

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 BASIC CONCEPTS 1.105

1,77,87,500
Add: Surcharge @15% on ` 20,75,000 3,11,250
@37% on ` 1,57,12,500 58,13,625 61,24,875
2,39,12,375
Add: Health and education cess @4% 9,56,495
Tax Liability 2,48,68,870

11. Computation of tax liability of Mr. Sharma for the A.Y.2025-26

under default tax regime

Particulars `

Tax on total income of ` 2,30,00,000

Tax@12.5% of ` 52,00,000 6,50,000
Tax@20% of ` 64,00,000 12,80,000
Tax on other income of ` 1,14,00,000
` 3,00,000 – ` 7,00,000 @5% 20,000
` 7,00,000 – ` 10,00,000 @10% 30,000
` 10,00,000 – ` 12,00,000 @15% 30,000
` 12,00,000 – ` 15,00,000 @20% 60,000
` 15,00,000 – ` 1,14,00,000 @30% 29,70,000 31,10,000
50,40,000
Add: Surcharge @15% 7,56,000
57,96,000
Add: Health and education cess @4% 2,31,840
Tax Liability 60,27,840

Computation of tax liability of Mr. Sharma for the A.Y.2025-26

under normal provisions of the Act

Particulars `

Tax on total income of ` 2,30,00,000

Tax@12.5% of ` 52,00,000 6,50,000

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 1.106 INCOME TAX LAW

Tax@20% of ` 64,00,000 12,80,000

Tax on other income of ` 1,14,00,000
` 3,00,000 – ` 5,00,000 @5% 10,000
` 5,00,000 – ` 10,00,000 @20% 1,00,000
` 10,00,000 – ` 1,14,00,000 @30% 31,20,000 32,30,000
51,60,000
Add: Surcharge @15% 7,74,000
59,34,000
Add: Health and education cess @4% 2,37,360
Tax Liability 61,71,360

© The Institute of Chartered Accountants of India