C O N C E P TS O F D I RE C T TA X AT I O N

By Utsav Mishra
BASIC CONCEPTS.....

1) What is Tax?

Tax is the primary source for Government Income.

It is used to overcome the expenses of government.

As government first do Expenses then then identify the source of income for such expenses,
which is the cause each year government in its budget announces the rate of taxation which
will be levied.
 Income Tax

Wealth Tax

I N D I A N TA X AT I O N SY STE M
Property Tax Direct Tax

CST

Corporate Tax

Direct Taxation – taxation which is imposed VAT

directly by the government to the tax payer, Gift Tax

Custom Duty
direct taxes are usually of progressive nature Taxation
Before GST
which means an increase in the income of the tax Sales Tax

payer will result in increase in the tax liability of

individual. Service Tax

• Indirect Taxation - the indirect taxation are those Excise Duty Indirect Tax

which are levied by the government on

consumption of goods and services, they are GST

usually of regressive nature, which means they

Custom Duty
are same for every individual in the economy After GST

Excise Duty

Old Version Taxes

(only on Certain
Commodities)
 BASIC CONCEPTS.....

3) Steps Followed in Computation of Total Income & Tax Liability

Computation of Taxable
Define the Residential Status Set off & Carryforward Deductions From GTI Computation of Tax Liabilty
Income under Each Head

Cllubing of Income of spouse Computation of Gross Total Computation of Taxable

Classification of Income
and Minor Child Income Income
U N D E R S TA N D I N G T H E AC T S T R U C T U R E

• Every act is divided into certain number of chapters, Sub divided into section which have
their explanation in sub sections and sub section have their explanation in clause

• Every act have certain Schedule which explains the application structure and mechanism
of working

• The first chapter of the act explains about the preliminary position

• Section 2 of the act is mainly focused upon the definitions used

• Income tax act have in total of "23" Such Chapters

• It has in total "14" Such Schedule

• There are total number of 298 sections in the act
PRELIMINARY OF ACT
CHAPTER-I

Section 1

• This act will be termed as "The Income tax Act 1961

• This Act will be applicable from 1st April 1962

• This act will be applicable to the whole of India including the union teroteries
I M P O R TA N T D E F I N I T I O N

Following are the major definitions given under the income tax act 1961
1) Section 2 (1) (A)
Agricultural Income
(a) any Rent or revenue derived from land which is situated in India and is used for Agricultural
purpose.
(b) any Income derived from such land by:
(i) agriculture
(ii) the performance of cultivator
(iii) the Sale of cultivator
© any income derived by any building owned and occupied by the receiver of the rent
I M P O R TA N T D E F I N I T I O N

Section 2(7)

Assessee

• Means the person from whom any tax or any other some of money is payable under this
act the concept
I M P O R TA N T D E F I N I T I O N

Section 2(9)

Assessment Year

Assessment Year Means a period of 12 month in which tax is payable.

Section 3

Previous Year

Previous Year Means a period of 12 month for which tax is payable.

CHA RGE OF INCO ME TAX Tax at a
Prescribed Rate
by Annual

SECTION-4 Finance act

CHAPTER -II Tax on Every

person
Specified U/s
• Section 4 of the 2(31)

income tax Act 1961

10
provides that:
Tax on Total

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Income Earned
During the
Previous Year

Tax to be levied
as per the
provisons of the
Income tax act
I N C O M E TA X R AT E

11

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 R E S I DE N TI A L STATU S ( I N D I V I D UA L )

Should be in India for 182

days.
Resident
Basic Condition 6 (1) (a)
Should be in India for 60 Days
in previous year and for more
than 365 days in preceding
previous four year

Should be a resident of India NonResident

Residential
for 2 time in Preceding
previous 10 year

Additional Condition 6(6)

12
Status
Should Be in India For a

Ordinary
period of 730 Days in
Precceding previous 7 Years

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Individual/ HUF

Deemed Resident 6(1)A

Income Exceeds 15 lakh and
is not taxable in any other
country Resident
Citizen of India

Not ordinary
Person of Indian Domicile
Resident
Exception of Basic Condition

If income exceeds 15 Lakh

Person left India f or from Income other than Either 182 days or 120+365
Employment Purpose Days in previous year
foreign sources
R E S I DE N TI A L STATU S O F C O MPA N Y

13

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SCOPE OF TOTAL INC OME
Conditions on which the scope of total Income Depends:

Resedential
Status Ordinary • Everything is taxable and is
Resident considered as Income

• Received or Deemed to be 14

Place of Total For Not Received In India

• Accrued or Deemed to be Accrued

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Accrual or Ordinary in India
Reciept
Income Resident
• Income from business and
operation if it is controlled from
India

• Received or Deemed to be
Received in India
Point of time at For Non • Income Accrued or Deemed to be
Acrrued in India
which Income
accrued or was Resident
arrised
INCOME DEEMED TO BE RECEIVED IN INDIA
• In RPF in Excess to
Contribution by 12%
• It is Important to Note Employer
• Interest on such RPF
that only following Exceeding 9.5%
income as per section 7
15
of the act is considered Contribution by
Central; state or
as Deemed to be

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by any Employer in
any pension
Received in India: Scheme 80- ccd

Amount
transferred from
unrecognised
provident fund to
Recognised
provident fund
I N C O M E W H I C H D O N OT F O R M PA R T O F TO TA L
INCOME (EXEMPT INCOME) SECTION-10
CHA PTER -III OF THE INCO ME TAX ACT 1961
Wholly
Exempt
• The exemption of Section 10 are
16
mainly classified into two parts

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Partly
Exemp
I N C O M E W H I C H D O N OT F O R M PA R T O F TO TA L
INCOME

Exempt Income 17

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Income which
Income which
are partly
are fully Exempt
Exempt
 I N C O M E W H I C H D O N OT F O R M PA R T O F TO TA L
I N C OME ( FU L LY E X EM P T)
Family
Amount pension Income
payable to Payment Received by Received by
Amount Income tax
Interest on Individual from Widow/ buyback of
Fully Exempt Received by paid by
NRE A/c who lives Provident children/ secqurity of
partner employer
outside Fund Nominated Domestic
India by GOI hier of company
armed force 18

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Capital gain
Remunratio on
Payment Income
n to Compensati Pension to compulsory
Agricultural from receive In
Individual on on Recipent of aquisation
Income Share in HUF sukanya Transaction
who are not Account of Bravery of land
10(1) Samridhi of Revrse
Indian Disaster Award within
yojna Morgage
citizen specified
urban limits
I N C O M E W H I C H D O N OT F O R M PA R T O F TO TA L
I N C OME ( PA RT LY E X EMP T )
Payment
Interest from NPS
Encashment Voluntary Payment Special
Income to trust to an
Gratuity of Earned Retrenchmen from NPS Allowance or
certain employee on
Leave t Receipt Scheme Benefit
Person partial
withdrawl
19

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Exemption of
Rentrenchme Exemption of
Specified
Leave Travel Cumulation nt Receipt From House Rent Clubbed
Income of
Concession of Pension Compensatio LIC Allownce Income of
Sikkim
n Minor Child
Individual
F U L LY E X E M P T I N C O M E ( E X P L A N AT I O N )

Rent or Revenue
Derived from land
• Rent should be derived from land
situated from India • Land Should be situated in India
and is used for • Land Should be used for
agricultural
agricultural Purpose
Agricultural Income purpose

As Defined
• Agriculture
Under Section 2-1-A • Basic / Special 20
Income derived • Process employed to Render
from such land by produce fit to be taken to market.
As per the Definition

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• Sale of Such agricultural product
Agricultural Income raised or received by him

Doesn't only Includes the

• (And Rule) Building should be
Income of cultivator but it Income derived immediate Vancity of land; Used
from any form any as a store house
also includes the income form of building
• (Or Rule) Assessed or is under
which is required
of landholder who has for agricultural jurisdiction of muncipality/ or
operation population should be more than
rented out his land. 10,000
PROVISION OF SECTION 10(1)

• As per the section Agricultural income is not to be included in the total income of the
assesses.

• The reason for such exemption is under our constitution the central government has no 21
power to levy tax on the agricultural income.

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• Agricultural Income is not chargeable to tax, however Business income is chargeable to tax
and following are some rules which determine the proportion of agriculture and business
Income.
DETERMINING THE PROPORTION OF
A G RI C U LTU R A L I N C O ME & B U S I N ES S I N C O ME

Rule No 7 Rule no 7 A Rule no 7 B Rule No 8

Income from growing or
22
manufacturing ANY Product Income from Growing manufacturing Income from Growing or Income from Growing and
•When it is used as raw material in business Rubber Manufacturing Coffe manufacturing Tea in India

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Coffe grown & cured
•25% chargable to tax
35% Chargeable to tax •75% Exempt from tax 40% Chargeable to tax
Market value of agricultural produce
sale receipt of which is included
•Shall be Deducted and rest portion will be
taxable Coffe grown cured roasted and
grounded
65 % Exempt from tax • 40 % Chargeable to tax as business Income 60% Exempt from tax
•60% Exempt as Agricultural Income
INTEREST ON NRE ACCOUNT (NONRESIDENT
EXTERNAL A/C- SECTION- 10(4)(II)

Any interest income of such person will be exempt from tax provided:

1) He is Resident outside India as per the FEMA act

2) He is permitted by RBI to maintain such account 23

Note: NRE account is an account facility offered by the domestic bank to the Non Residents,

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whatever foreign currency is deposited into such account is converted into domestic currency
and NRI can easily transacted within the course.
C O MP E N SAT I O N O N A C C O UN T O F D I S A ST E R
UNDER SECTION- 10(10BC)

• Any amount received on account of disaster as compensation to individual or legal heirs

granted by the central government state government or legal authority will be exempt

• Here Disaster = Life; Property: Environment 24

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PAY ME N T TO M P & M L A
GIVEN U/S 10(17)

Following income of member of parliament or state legislature will be exempt:

1) Daily Allowance.

2) Constituency Allowance of MP. 25

Constituency Allowance of MLA.

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3)
C O M P U TAT I O N TO TA L I N C O M E
CHAPTER IV
O F T H E I N C O M E TA X AC T 1 9 6 1
SECTION- 14-59
The Second & third step of the process of taxation is classification of income under different
heads and computation of income under each head. 26

So, if we Summarize it:

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1) This section explain in brief the computation of Net taxable Income of the Assesse under
different Heads

2) Further this chapter explains the major deduction under each head of the income.

I
FIVE HEADS OF INCOME

27
Heads of Income

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Profits & gains
Income from Income from Income from Income from
from business &
Salary House Property Capital Gain Other Sources.
Profession
INCOME FROM SALARY
1) This Section summarizes the computation of income of the assesses under the salary
head.

2) The chapter Revolve around 4 Main Section

Income from salary 28

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Section-10 Section-15 Section-16 Section-17
• Although it is not the • It Explains the • It Explains the deduction • It defines certain other
implicit part of chapter chargeabilty and scope available from Salary provisons which are
but is frequently used of sallary necessary for
under the head. computation of total
• It explains which income salary
don't form part of total
income.
CONCEPT BOX

The Logic behind whichever is less

We know tax is charged by

government and government always 29
tries to increase its income hence,

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government will conduct all those
activity which increases its income;
hence in the overall all were so ever
the Exemption or deductions are
used the phrase whichever is less is
used.
DEALING SECTION

Dealing
Section
30

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Section 15 Section 16
Section 17
Charging Deductions
Other Provison
Section Available

Salary paid
Arrears of Standard Entertainment Profit in lieu of
Salary Due. although not Profesional tax Salary Perqusites
Salary. Deduction Allownace salary
due.
W H AT I S S A L A R Y

31

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C O RE STR U C TU R E O F F O R MAT O F
C O M P U TAT I O N O F TA X L I A B I L I T Y O F A N
ASSESSES

32

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SALARY
SECTION 15
"Remuneration paid by an employer to his employee for Points to Remember:
rendering services can be stated as salary"
1) There must be a Relationship between payer
As per section 15
and payee as employer and employee.
Following income shall be chargeable to income tax under 2) However it must also be noted that for the
the head income from salary: purpose of chargeability of tax it is not necessary 33
that employment is full time or part time.
(a) Any Salary Due from an Employer or Former Employer to

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3) As the salary is Due or Received the person is
an assesses in the previous year whether paid or not. liable to pay tax.
(b) Any Salary Paid or allowed to him in the previous year by 4) In Case salary is Surrendered to Central
or on behalf on an employer or a former employer though not Government Such salary is tax Free.
due or before it became due to him. 5) If employer has paid tax on behalf of employee
such payment will also be considered as salary
©Any arrears of salary paid or allowed to him in the previous and will be included for computation of tax.
year by or on behalf of an employer or a former employer, if
not charged to income tax for an earlier previous year.
 SECTION 15 (BASIS OF CHARGE)

Section 15-(1) Important Note

Advance Salary
• If Salary is Paid in Advance it will be assessed
Nature of in the year in which it was actually received. 34
Salary • It cannot be brought into the tax bracket in the
year in which it was becoming due.

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• Advance salary is chargeable to tax in the year
it was received.
Whichever Recipt
Due Basis • However advance against salary is not
is Earlier Basis chargeable to tax as it is treated as loan not as
salary.
 SECTION 15 (BASIS OF CHARGE)

Section 15-iii

A salary being paid in arrear is liable to be

assessed in the year in which it become due 35
and not in the year in which it is received

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(however in certain spec