Income Tax of India

Last Updated on February 3, 2023

In India, taxation on income is regulated under the Income Tax Act 1961. It is a form of an indirect-tax charged. This act provided sections and definitions according to the law applied to assess, justify, and charge income tax in India.

Section (2) Definitions 

Agricultural income

1. Any income from land situated in India derived in the form of rent and revenue. The land must be used for agriculture purposes.
2. Any income on land by the way of agriculture, performance of cultivator or any process  employed by the cultivator.
3. Income from sale of produce grows over such land received by the cultivator.
4. Any income from building occupied by the cultivator or the receiver of any income.
5. The building must be in the vicinity of the agricultural land and is required to be used as a dwelling house, storehouse or any other building for agriculture purposes.
6. Any income derived from sapling and seeds grown in nursery. 

Amalgamation

It means the merger of one or more companies with another company or two or more companies to form one company. By the virtue of amalgamation in such a manner that-

1. All the assets of the amalgamating company or companies immediately before the amalgamation becomes the assets of the amalgamated company.
2. All the liabilities of the amalgamating company or companies immediately before the amalgamation become the liabilities of the amalgamated company.
3. Shareholders holding not less than 3/4ths in value of the shares in the amalgamating company or companies become shareholders of the amalgamated company.

Assessee

A person whose income is assessed and tax under this act is levied from this person upon his/her income.

Assessment year

A year (12 months period) starting from 1st April of every year.

Average rate of Income tax

It is calculated by dividing total income tax levied upon total taxable income divided by such total taxable income.

Formula for calculating average rate of income tax:

Total Income Tax/ Total Taxable Income

For example: if a person has total taxable income of Rupees 10 lakh per year. He has to pay 2.5 lakh as income tax. So, the rate of income tax is 2.5 lakh divided by 10 lakh equals 25%.

Block of assets

1. Tangible assets: buildings, plant, machinery, land, furniture, etc.
2. Intangible assets: patents, copyrights, trademarks, licenses, commercial-rights, or any other assets of intangible nature.

Capital assets

1. Any kind of property under the possession of an assessee.
2. Any kind of securities held by foreign institutional investors (FIIs) in accordance with the rules and regulations mentioned under Securities and Exchange Board of India Act 1992.

Exclusions:

1. Any stock-in-trade, raw materials, consumable stores.
2. Personal properties: clothes, footwear, etc.
3. Agriculture land in Indian subcontinent.
4. Gold bonds issued by the Central Government of India.
5. Special bearer bonds issued by the Central Government of India.
6. Gold deposit bonds under gold deposit scheme and deposit certificates under gold monetization scheme.

Charitable purpose

It includes charity for education, medical purpose, relief to poor, charity for yoga, preservation of the environment or the monuments, preservation of places and objects of historical nature or development of objects of general public utility.

Company

1. Indian company
2. Corporate body incorporated by any law outside India.
3. Any association, body corporate, or institution assessed under Income Tax Act 1922.
4. Any association, body corporate, or institution declared as company by general or special order of board.

Substantially Public interested Company

1. Company-owned by the Government of India or by the Reserve bank of India (RBI) or not less than 40% of the company’s shares are held by the Government of India or RBI.
2. Company registered under Companies act 1956, section 25.
3. A company with no share capital but by nature, objectives, and relevant considerations declared by the board to be a substantially Public Interested Company.
4. A company whose principal business is acceptance of deposits from its members and is a mutual benefit finance company declared to be a Nidhi or mutual benefit society under companies act 1956, section 650A.
5. A company whose not less than 50% shares and voting rights held, acquired, allotted, unconditionally by one or more co-operative societies.
6. Defined in the companies act 1956, not a private company and which fulfilled certain specified conditions-

• On the relevant previous year the shares of the company were listed in accordance with the Securities Contracts (Regulation) Act, 1956 on a recognized stock exchanges in India.
• Company whose not less than 50% shares and voting rights held, acquired, allotted, unconditionally by- the Government of India, corporate body established under government, state or provincial act.
• Any company or its subsidiary company to which this clause applies.

Demerger

The demerger, in relation to companies of India, means the transfer, by a demerged company of its one or more undertakings, by the way of a scheme of arrangement under sections 391 to 394 of the Companies Act, 1956 into any resulting company in a manner i.e.

1. All the assets of the undertaking, immediately before the demerger, transferred by the demerged company, become the assets of the resulting company.
2. All the liabilities of the undertaking, immediately before the demerger, transferred by the demerged company, become the liabilities of the resulting company.
3. The assets and the liabilities of the undertaking or undertakings, immediately before the demerger transferred by the demerged company are transferred at values appearing in its books of accounts.
4. For the consideration of demerger, the resulting company issues its share to the shareholders of the demerged company on their proportionate basis.
5. The shareholders holding, not less than 3/4ths value of the shares in the demerged company, become shareholders of the resulting company or companies.
6. The transfer must be on the basis of going concerned.
7. The demerger is in accordance with the conditions provided under sub-section (5) of section 72A.

Dividend

1. Accumulated profits distributed by a company whether those profits are capitalized or not. Such a distribution involve release by the company to its shareholders any, part, or all of the assets of the company.
2. Any distribution by the company to its shareholders with or without interest, debentures, deposit certificates, or debenture-stocks and its preference shareholders distribution of shares by way of a bonus, to the extent to which the company possesses accumulated profits.
3. The company immediately before its liquidation made any distribution to its shareholders, to the extent of the accumulated profits of the company.
4. Distribution made by the company on the reduction of its capital, to the extent of accumulated profits possess by the company to its shareholders, which raised after the end of the previous year ending next before the 1st day of April 1933.
5. Any payment made by a company, not being a substantially public interested company, of any sum made after the 31st day of May 1987.

Income

1. Profits and gains.
2. Dividends.
3. The amount of profit or any perquisite.
4. The amount of any benefit, whether convertible into money or not, obtained from a company either by a director or his/her relative, or by a person who is substantially interested in the company, and any sum paid by any such company in respect of any obligation/payment payable by the director or other such person.
5. Any sum chargeable to income tax under section 28 or section 41 or section 56 or section 59.
6. Any capital gains are chargeable under section 45.
7. Gains and profits of any insurance business carried on by a mutual insurance company or a co-operative society, according to section 44 of this act, or any surplus define as profits and gains according to provisions of the I^st Schedule.
8. Any winnings from lotteries, gambling, or betting of any form or nature.
9. Employees’ contributions to any provident fund, superannuation fund, or any kind of fund set-up under the provisions of the Employees’ State Insurance Act, 1948, or any other fund for the welfare of such employees received by the assessee.
10. Any sum received under a Key-man insurance policy including bonus.
11. Any subsidy, grant, cash incentive, concession, or reimbursement by the Central Government or a State Government, any authority in the form of cash or kind to the assessee.

Long-term capital gain (LTCG)

Capital gains arising from the transfer of a capital asset which are not short-term. Income tax is charged at the rate 20% upon LTCG.

LTCG on Shares:

1. Gain up to Rs. 1,00,000 – no income tax charged.
2. Gain more than Rs. 1,00,000 – income tax charged at the rate 10%.

Dividend:

1. Gain upto Rs. 5,000 – no income tax charged.
2. Gain more than Rs. 5,000 – income tax charged at the rate 10%.

Person

1. Individual
2. Hindu undivided family (HUF)
3. Company
4. Firm
5. Body of Individuals (BOI), or an association of persons (AOP), whether incorporated or not.
6. Local authority
7. Artificial person, not falling within any of the preceding sub-clauses.

Short-term capital gain (STCG)

Those capital gains which arise from the transfer of a short-term capital asset. Income tax is levied at the rate 15% upon STCG.

Note: For more information and better understanding refer to Section 2 of the Income tax act.

Section (3) Previous Year

The financial year i.e. from 1st April to 31st March preceding immediately before the assessment year.

Section (6) Residents of India

An individual is said to be a resident of India if, following criteria are fulfilled:

• If a person resides in India for 182 days or more.
• Is in India for 60 days or more in that year and 365 days or more in the preceding 4 years of that year.

If a person has a total income of more than 15 lakh rupees excluding income from foreign sources during the previous year.

A firm, an association of persons, or Hindu undivided family (HUF) is residents of India in any previous year, and if the management and control of it situated outside India then they are not accounted as residents of India for that particular period.

For a Company to be resident of India, if

• It is an Indian Company.
• The company’s place of effective management is in India that year.

A person is a Non-ordinarily resident (NOR), if

• For 9 years out of 10 previous years, an individual is Non-Resident of India (NRI) or been in India for 729 days or less during the 7 previous years of that year.
• For 9 years out of 10 previous years, the manager of a Hindu undivided family (HUF) is Non-Resident of India (NRI) or been in India for 729 days or less during the 7 previous years of that year.
• A person is of Indian origin or a citizen of India has a total income of more than 15 lakh rupees excluding income from foreign sources in the previous year and been in India for 120 days or more but less than 180 days.

Section (10) Exempted Income

The income which is not part of total income upon which income tax is assessed and charged are as follows:

1. Agricultural income

• Must have agricultural land.
• The land must be in India.
• Some agricultural activities must be performed on that land.

2. The amount paid out of the income of the family to an individual as a member of a Hindu undivided family (HUF).

3. The share of the person in the total income of the firm who is a partner and assessed separately.

4. Any income of a Non-Resident of India (NRI), in the form of interest on securities and bonds or premium on redemption of bonds on which the central government may specify by the notification in the official gazette.

Any income of an individual, in the form of interest on funds in a Non-Resident of India (NRI), account in any bank in India, in accordance with the rules and regulations of Foreign Exchange Management Act (FEMA), 1999.

Any income arises, accrued, or paid to a specified fund for the transfer of any capital asset on any recognized stock exchanges, and the consideration for the transfer of the capital asset is paid or payable.

5. Any amount of travel assistance or concession received or due to an individual-

• From the employer, in connection with the proceeding on his/her leave to any place in India by the individual or his/her family.
• From the employer or former employer in connection with the proceeding of his/her to any place in India after retirement or termination of service by the individual or his/her family.

6. For rendering services outside boundaries of Indian country any perquisite or allowance paid by the government to an Indian citizen.

7. Any gratuity received on retirement or death to the members of civil services, or the holders of defense of civil posts, or those persons with relative services under the pension schemes of the central government at the time of death or retirement.

• The amount of paid leave salary received by any employee of the central or state government at the time of his/her retirement.
• At the time of retrenchment of workman any amount received by him/her workman under the Industrial Disputes Act, 1947.
• Any sum received by the central or state government, or by local authority as compensation in the event of any disaster by an individual or his/her legal heir.
• An amount received under life insurance policy including bonus.
• Any sum received or receivable by an employee-
  • Of a public sector company.
  • Of any authority established under central, state, or provincial act.
  • Any local authority.
  • Co-operative society.
  • Of any other company.
  • Of a university incorporated or established by central government, state government, or provincial act.
  • Of an Indian Institute of Technology described in clause (g) of sec. 3 of the Institutes of Technology Act, 1961.
  • Of institute of management on behalf, specify by the central government in the official gazette.

8. Any amount of provident fund or notified by the central government in official gazette.

9. Any payment from an account, opened in accordance with the Sukanya Samriddhi Account Rules, 2014.

10. Amount of scholarship granted for education purpose.

11. Amount of income from any mutual fund registered under Securities and Exchange Board of India (SEBI) Act 1992.

12. Any income from a venture capital fund or a venture capital company from investments made in equity shares as dividends or long-term capital gains.

Section (14) Income heads

1. Salaries
2. Income from house properties.
3. Income from business and profession.
4. Income from capital gains.
5. Income from other sources.

Section (15) Salaries

It includes-

1. Due amount of salary, paid or unpaid to an assessee by his/her employer or pervious employer in the previous year.
2. Amount of salary paid by an employer in previous year.
3. Any arrears of salary.

Deductions-

1. 50,000 rupees or the amount of salary, whichever is less.
2. 1/5th of the salary or 5,000 rupees whichever is less as entertainment allowance granted by the employer.

Section (22) Income from house properties

The annual value of lands or buildings which belong to the assessee who is the owner of it.

Deductions-

1. Amount equal to 30% of the annual value.
2. The amount of interest payable on borrowed capital used to acquire, construct, repair and renew of the real-estate property.

Section (28) Income from business and profession

1. Profits and gains arise from the business or from the profession of an assessee in the previous year.
2. Any payment or compensation received by-
   • Any person managing the whole affairs of the Indian company at termination of his/her management or modification of the terms and conditions related to management of the company.
   • Any person managing the whole affairs of any other company in India, at termination of his/her office or modification of the terms and conditions related to it.
   • Any person holding an agency for any part of the business activities in India, of any other person at the termination of agency or modification of the terms and conditions related to it.
   • Any person, under any law for the time being in force for vesting in government or any undertaking owned by the government.
   • Any person at termination of contract or modification in the terms and conditions of the contract relating to his/her business.
3. Income derived for performing specific services for the members of any trade or professional association.
4. The value of perquisite or benefit arise from business or profession.
5. Any remuneration, commission, bonus, interest, salary received by partner from the partnership firm.
6. Any sum including bonus amount under a Key-man insurance policy.

Section (45) Income from Capital Gains

1. Any profits arise in the previous year from the transfer of capital assets.
2. Profits or gains by an assessee on money or any asset received during any previous year for insurance by an insurance company of any capital assets destroyed or damaged due to-
   1. Hurricane, typhoon, flood, earthquake, or any convulsion of nature.
   2. Riots or civil disturbance
   3. Fire or explosion
   4. Damage by an enemy
3. Profits from the transfer by conversion of any capital asset by an assessee for business carried on by him into stock-in-trade.
4. Any person who has a beneficial interest in any securities and on behalf, any depositories or participants made a transfer of such beneficial interest, then the gain that arises on such transfer is chargeable as a capital gain by that person.
5. The profits arising from the transfer of the capital assets by an assessee to a company, firm, association of persons, or body of individuals in which the person is or becomes a partner by the way of capital contribution.
6. Gains arise in the previous year to an assessee by the transfer of land or building under a specific agreement.
7. The difference between the repurchase price value of units of the Equity Linked Saving Scheme and the capital value of such units shall be deemed to be capital gains.
8. Any money or other assets received by the shareholder on liquidation of a company then is chargeable as income from capital gains.

Section (56) Income from Other Sources

Any income not exempted and not included in above mentioned heads are chargeable under income from other sources. These includes-

1. Income from dividends.
2. Income from interest received.
3. Amount of money received during or in advance for any negotiations for the transfer of capital assets.
4. When an assessee receives from another person or person in any previous year after April 2017-
   1. Amount of money more than 50,000 Rupees.
   2. Any immovable property.
   3. Any movable property.

Major Deductions from Gross Total Income

Gross Total Income

Total income aggregating the income from salaries, house properties, business and profession, capital gains and other sources.

The deduction is available to individuals and HUF, limited to 1.5 Lakh rupees in a previous year.(including under 80CCC and 80CCD).

Section 80 (C) (Qualified investments)

1. Investment in Public Provident Funds (PPF).
2. Employees share of Provident Fund contribution.
3. National Saving Certificates (NSCs).
4. Life insurance premium payment.
5. Children’s tuition fees.
6. Principal repayment of home loan.
7. Investment in Sukanya Samriddhi Yojana.
8. Unit Linked Insurance Plans (ULIPs).
9. Equity Linked Saving Schemes (ELSS).
10. Amount paid to purchase deferred annuities.
11. 5 years deposit schemes
12. Senior Citizen Saving Schemes.
13. Contribution to pension fund set-up by mutual fund or Unit Trust of India (UTI) notified by the government.
14. Contribution to annuity plan of Life Insurance Company (LIC) notified by the government.
15. Subscription to home loan scheme of the National Housing Bank.
16. Subscription to deposit scheme of a public sector company or companies engaged in providing Housing finance.

Section 80 (D)

1. Up to 25,000 rupees, paid to keep in effect health insurance of assessee or his family, or contribution to Health schemes of the central government, or sum of money utilizes for preventive health check-ups.
2. Up to 25,000 rupees, paid to keep in effect health insurance of assessee’s parents, or sum of money utilizes for preventive health check-ups of the parents.
3. Further, a deduction of 5,000 rupees is allowed for preventive health check-ups.
4. Up to 50,000 rupees, paid to keep in effect health insurance of Senior Citizen of the age of 60 years or more.

Section 80 (E)

1. Interest on specified loans for financing full-time higher education of self, spouse or child, or any student for whom the individual is legal guardian. From the initial year of repayment of loan and 7 years immediately after the initial year until the interest is paid in full.

Section 80 (GG)

1. Excess of 10% of the gross total income for the payment of rent.
2. The excess amount does not exceed 5,000 rupees per month or 25% of the gross total income whichever is less.

Section 80 (TTA) Income from Interest savings account deposit

1. Amount of 10,000 rupees allowed as a deduction.
2. In the case of senior citizens amount of 50,000 rupees allowed as a deduction.

Section 80 (U)

1. In the case of a person with disability a sum of 75,000 rupees is allowed as a deduction.
2. In the case of a person with a severe disability a sum of 1,25,000 rupees is allowed as a deduction.

Rebate allowed on Income-tax

Section 87 (A)

The total Income of the assessee not exceed rupees 7 lakh shall entitled to pay no income tax.

Income Tax Slabs & Rates

Earlier the assessee has the option to pay taxes on the basis of old income tax rates and avail all the deductions and surcharge benefits or to pay on the basis of new reduced income tax rates and forgone all the deductions and surcharge benefits. Now the new tax regime is set as default option, but tax payer can choose whether to pay on either basis.

For individuals, Hindu Undivided Family (HUF), AOP, BOI

Old Income Tax Regime

A. Below age 60 years.

Income Tax Slabs (in Rupees)	Rates
0-2,50,000	nil
2,50,000-5,00,000	5%
5,00,000-10,00,000	20%
Above 10,00,000	30%

B. Senior Citizens: age 60-80 Years.

Income Tax Slabs (in Rupees)	Rates
0-3,00,000	nil
3,00,000-5,00,000	5%
5,00,000-10,00,000	20%
Above 10,00,000	30%

C. Super Senior Citizens: above age 80 years.

Income Tax Slabs (in Rupees)	Rates
0-5,00,000	nil
5,00,000-10,00,000	20%
Above 10,00,000	30%

New Income Tax Regime Revised

Income Tax Slabs (in Rupees)	Rates
0-3,00,000	nil
3,00,001-6,00,000	5%
6,00,001-9,00,000	10%
9,00,001-12,00,000	15%
12,00,001-15,00,000	20%
Above 15,00,000	30%

After calculation of the income tax payable on gross total income according to the specified given income tax rates, if the total income of an assessee is more than the specified limits then he/she has to pay surcharge over income tax.

Surcharge

Slabs (in Rupees)	Rates
50,00.,000-1 Crore	10%
1 Crore-2 Crores	15%
2 Crores-5 Crores	25%
Above 5 Crores	37% in Old Tax Regime & 25% in New Tax regime

Cess

The amount of income tax plus surcharge is calculated and a 4% education and health cess is also charged upon income tax amount.

Example: Mr. X is a resident of India and has a gross total income is Rs.1 Crore in previous year. He is also eligible for a deduction of Rs. 1,50,000 under section 80 (C) under old tax regime and a standard deduction of Rs. 50,000. The maximum deduction of upto Rs. 4,00,000 can be claimed under old tax regime.

Let say, Mr. X is able to claim maximum deduction available. Then, the total income after such deduction is Rs. 95,50,000 and income tax charged upon such income is Rs. 26,77,500.

10% surcharge is levied as X’s gross total income falls under Rs. 50,00,000-1 Crore slab. So, income tax payable after adding surcharge is Rs. 29,45,250. Additional an amount 4% cess is charged upon tax payable amount.

So, the total income tax payable after cess by Mr. X is Rs. 30,52,350 as per old regime.

Note: For more information and better understanding refer to Income tax act 1961.