INTRODUCTION

This Act may be called the Income-tax Act, 1961.

(2) It extends to the whole of India.
(3) Save as otherwise provided in this Act, it shall come into force on the 1st day of April, 1962.

The Income tax Act 1961 replaces the Indian Income tax Act, 1922

The objects of the revision was to simplify the income tax laws

To simplify the Income tax Act, 1961, Direct Tax Code is offing

Applicable to whole of India.

S. 2(25A) of the Act defines India.

Includes all States, Union Territories, Territorial waters and air space above it
territory and territorial waters.

Consists of Twenty three chapters 298 sections and 14 schedules.

S. 2 defines 48 definitions.

BASIS OF CHARGE

S. 2(9) defines assessment year means the period of twelve months

commencing on the 1st day of April every yea. It is one year head of the
previous year.

Though tax is levied in the assessment year, the income that is the subject
matter of charge is the income of the previous year during which income is
earned.

As per S. 3, previous year means the financial year immediately

preceding the assessment year

Business set up during the previous year.

At the rate or rates prescribed by the Finance Act.

S. 4 gives power to deduct tax at source or Advance tax on the principle

As you earn

Charge is on a person.

S. 2(31) defines a person.

Person includes (i) an Individual (ii) a HUF (iii) a company (iv) a firm (v) an
AOP/BOI (vi) a local authority and (vii) every artificial judicial person.

Charge is on Income of previous year, exceptions:

(i)

Shipping business of non residents - (S. 172)

(ii)

Persons leaving India (S. 174)

(iii)

Persons trying to alienate their assets (S. 175)

(iv)

Discontinued business or dissolution (S. 176)

CONCEPT OF TOTAL INCOME

Gross Total Income (G.T.I) :- The aggregate income under the 5 heads of income (viz.
Salary, House Property, Business or Profession, Capital Gains & Other Sources) is termed
as Gross Total Income.

Total Income (T.I) :- Total Income of assessee is gross total income as reduced by the

amount permissible as deduction under sections 80C to 80U.

SCOPE OF TOTAL INCOME (S. 5)

Subject to the provisions of this Act.

Charge on the basis of status.

i)

Resident

ii)

Resident but not ordinary resident.

iii)

Non resident

In case of resident
i)

Income is received or deemed to be received in India

ii)

Accrues or arises or deemed to accrue or arises in India.

iii)

Accrues or arises to him outside India.

In case of resident but not ordinary resident.

-

Income mentioned in (i) and (ii) of resident and

Income accrues or arises to him outside India if it is derived from a

business controlled in or profession set up in India.

In case of non-resident.
i)

Income is received or deemed to be received in India.

ii)

Accrues or arises or deemed to accrue or arise in India

Income from whatever source derived.

-

source has not been defined.

S. 14 classifies the head of Income Five heads

Each head there could be different sources.

Income to be computed head wise.

Receipt Vs. Deemed Receipt

Deemed receipt

i)
employee

S. 7(1)

Annual accretions to the balance at the credit of an

participating in recognized provident Fund.

ii)
S.7(ii) So much of the transferred balance to the credit of an
employee participating in a recognized provident fund
iii)
S.7(iii)Contribution by Cent. Govt. to the pension scheme u/s.
80CCD
iv)

S.41(1)

Any sum received or any benefit obtained in a year in

recoupment of any loss, expenditure or liability incurred in

earlier years.
v) S. 41(4) Recovery of bad debts written off in earlier year.
(vi)

S. 198 - All TDS.

CRITERIA FOR DECIDING RESIDENTIAL STATUS

For an Individual - Two:

i)

In India for a period or periods amounting in all to 182 days or more in

that year.
or
ii)

having within the four years preceding that year in India for all 365

days or more and 60 days or more in that year.

But any person, being citizen of India, who leaves India in any previous year
as a member of crew of an Indian ship or for the purpose of employment outside
India the period of 182 days instead of 60 days to be considered
or

A person being a citizen of India or a person of Indian origin, who being outside
India, comes on a visit to India , the period of 182 days instead of 60 days to be
considered.

For HUF/Firm/AOP/BOI

Said to be resident, when control and management of its affairs is situated

either wholly or partly in India.

For a company : Two

i)

It is an Indian co; or

ii)

During the year, the control and management of its affairs is situated

wholly in India.

Not ordinarily resident

For Individual who has been non-resident in India in 9 out 10 previous

years preceding that year or has during the 7 previous years preceding that
year been in India for less than 730 days.

For HUF Manager/Kartas status be considered.

Control and Management:

-

Where head and brain is situate - which directs the affairs of policy,
finance, disposal of profits etc.

Not only a de jure control and management but a de facto control and
management

Control is not shareholding control.

Deemed income for all assessee:

i)

S.8 any dividend declared, or distributed, or paid by a co. u/s.2(22).

ii)

Interim dividend if unconditionally made available by the co. to its

members

Deemed to accrue or arise in India

-

S. 9(1)

Income shall be deemed to accrue or arise in India.

i)

Through or from any business connection in India; or

ii)

Through or from any property in India; or

iii)

Through or from any asset or source in India; or

iv)

Through the transfer of a capital asset situate in India.

Vodafone International holdings BV UOI [341 ITR 1 (SC)]

Through shall mean &include by means of in consequence of or

by reason of [Expl. 4].
-

An asset or a capital asset being any share or interest in a company

or entity outside India shall be deemed to have been situated in India,

if the share or interest derives its value substantially from the assets
located in India. [ Expl. 5]
-

Business of which all the operations are not carried out in India only
such part of income as is attributable to the operations carried out in
India [Expl. 1(a)]

No Income shall be deemed to accrue or arise in India to NR, if

operations are confined to purchase of goods in India for export [Expl.

1(b)]
In business of news agency or publishing, no income shall deemed to accrue or
arise in India to NR, if activities are confined to the collection of news and views in
India and for transmission out of India [Expl. 1(c) ]
-

No income shall be deemed to accrue or arise in India if NR is non citizen

Individual or a firm in which he is a partner or a co. in which he is a
shareholder, if activities are confined to shooting of any cinematograph film
in India [ Expl. 1(d)]

As per Explanation 2, business connections shall include any business

activity carried out through a person acting on behalf of the non resident:
has and habitually exercises in India, an authority to conclude

contracts; or
ii)

has no such authority but habitually maintains in India a stock of

goods/merchandise and regularly delivers the same; or

iii)

habitually secures orders in India.

S. 9(i)(ii) salaries if it is earned in India i.e. if services are rendered in India,

and for rest or leave period which preceded and succeeded by services
rendered in India,

S. 9(i)(iii) If salaries payable by Govt. to citizen of India for services outside

India.

S. 9(i)(iv) Dividend payable by Indian co. Not applicable due to S.115-O.

Let us go step by step to understand the procedure of computation of

total income for the purpose of levy of income-tax.
Step 1

Determination of residential status

Step 2

Classification of income under different heads

Step 3

Exclusion of income not chargeable to tax

Step 4

Computation of income under each head

Step 5

Clubbing of income of spouse, minor child etc.

Step 6

Set-off or carry forward and set-off of losses

Step 7

Computation of Gross Total Income.

Step 8

Deductions from Gross Total Income

Step 9

Total income

Step 10

Application of the rates of tax on the total income

Step 11

Surcharge

Step 12

Education cess and secondary and higher education cess

Step 13

Advance tax and tax deducted at source

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 statuses as per the Income-tax Act are shown below .
Residential status under Income Tax Act !961
Resident
Resident And
ordinary resident

Non-resident
Resident but notordinary resident

In the case of an individual, the duration for which he is present in

India determines his residential status. Based on the time spent by
him, 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 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.
Step 2 . Classification of income under different heads
HEADS OF INCOME:
The Act prescribes five heads of income.
SALARIES

INCOME FROM
HOUSE PROPERTY

PROFITS AND GAINS OF

BUSINESS OR PROFESSION

CAPITAL
GAINS

INCOME FROM
OTHER SOURCES

These heads of income exhaust all possible types of income that can
accrue to or be received by the tax payer.

Salary, pension earned is taxable under the head Salaries.

Rental income is taxable under the head Income from house

property.

Income derived from carrying on any business or profession is

taxable under the head Profits and gains from business or
profession.

Profit from sale of a capital asset (like land) is taxable under the
head Capital Gains.

The fifth head of income is the residuary head under which income
taxable under the Act, but not falling under the first four heads, will
be taxed.

The tax payer has to classify the income earned under the relevant
head of income.

Step 3 - Exclusion of income not chargeable to tax

There are certain income which are wholly exempt from income-tax e.g.
Agricultural income. These income have to be excluded and will not form part
of Gross Total Income.
Also, some incomes are partially exempt from income-tax e.g. House Rent
Allowance, Education Allowance. 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.
Step 4 - Computation of income under each head
Income is to be computed in accordance with the provisions
governing a particular head of income.
Under each head of income, there is a charging section which
defines the scope of income chargeable under that head.
There are deductions and allowances prescribed under each head of
income. For example, while calculating income from house 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.
Step 5 . 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 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.
Step 6 . 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 might 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,
Income from house property and profits under another head of
income, say, Profits and gains of business or profession. There are
provisions in the Income-tax Act for allowing inter-head adjustment
in certain cases.

 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.
Step 7 . Computation of Gross Total Income
The final figures of income or loss under each head of income, after
allowing the 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.
Step 8 . Deductions from Gross Total Income
There are deductions prescribed from Gross Total Income. These
deductions are of three types
Deduction in respect of
certain payments

Deduction in respect of
certain incomes

Other deductions

1. Life insurance premium

paid

1. Profit and gains from

undertaking engaged
in infrastructural
development

Deduction in case of person with d

2. Contribution to
provident fund/ Pension
fund
3. Medical insurance
premium paid
4. Payment of interest of
loan taken for higher
education
5. Rent paid
6. Certain donations

2. Profit and gains from

undertaking engaged
in development of SEZ
3. Certain income of
co-operative societies
4. Royalty income etc
of authors
5. Royalty on patents

7. Contribution to political
parties

Step 9 . Total income

The income arrived at, after claiming the above deductions from the Gross
Total Income is known as the Total Income
Step 10 . Application of the rates of tax on the total income

The rates of tax for the different classes of assesses are prescribed by the
Annual Finance Act. The tax rates have to be applied on the total income
to arrive at the income-tax liability
Step 11 . Surcharge
Surcharge is an additional tax payable over and above the incometax. Surcharge is levied as a percentage of income-tax.
Step 12 . Education cess and secondary and higher education
Cess on income-tax
The income-tax, as increased by the surcharge, is to be further
increased by an additional surcharge called education cess@2%. The
Education cess on income-tax is for the purpose of providing
universalised quality basic education. This is payable by all assesses
who are liable to pay income-tax irrespective of their level of total
income.
Further, .secondary and higher education cess on income-tax. @1% of
income-tax plus surcharge, if applicable, is leviable from A.Y.2008-09 to
fulfill the commitment of the Government to provide and finance
secondary and higher education
Step 13 - Advance tax and tax deducted 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 certain
instalments on the basis of estimated income.
In certain cases, tax is required to be deducted at source from the
income by the payer at the rates prescribed in the Act. Such
deduction should be made either at the time of accrual or at the
time of payment, as prescribed by the Act.
For 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. 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. If any tax is still due on the
basis of return of income, after adjusting advance tax and tax
deducted at source, the assessee has to pay such tax (called selfassessment tax) at the time of filing of the return.
RETURN OF INCOME
The Income-tax Act, 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 a 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. All companies and firms have to mandatorily
file their return of income before the due date.
Other persons have to file a return of income if their total income
exceeds the basic exemption limit.

The following INCOME TAX RATES ARE applicable for the Financial Year
ending March 31, 2015 (Financial Year 2014-15)-Assessment Year 2015-16):
Every year the income tax rates are changed and it is important to get the latest
income tax rates. We give below the Income Tax Rates and Slabs applicable for
the FY 2014-15 or AY 2015-16.

Income Range

General
(nonsenior
citizens)
Category

Women (Below 60 years of Senior Citizens Very Senior

age)
(Men and
Citizens
(This category is abolished Women above (Men and
from this year and is thus 60 years of age), Women
is same as that of General but below 80
above 80
Category
years
years of age)

Upto Rs. 2,50,000

Nil

Nil

Nil

Nil

10% *

10% *

Nil

Nil

Rs. 2,50,001 to Rs.

3,00,000

Rs. 3,00,001 to Rs.

5,00,000

Rs. 5,00,001 to Rs.

10,00,000

Above Rs. 10,00,000

10% *

10% *

10% *

Nil

20%

20%

20%

20%

30% **

30% **

30% **

30%**

* A tax rebate of Rs 2,000 from tax calculated will be available for people having
an annual income upto Rs 5 lakh. However, this benefit of Rs2,000 tax credit
will not be available if you cross the income range of Rs 5 lakh. Thus we can say
that tax payable in 10% slab will be maximum Rs23,000 (taking into account Rs
2000 tax credit), but for people who fall in income range of Rs5 lakh and above,
the tax will be Rs25,000 + 20% tax on income above Rs 5 lakh;
The education cess to continue at 3 percent.
** Surcharge of 10% will be payable, if income is above Rs 1 crore

Some Changes effected from the FY 2014-15 (AY

2015-16)

Investment limit under section 80C of the Income-Tax Act raised from
Rs.1 lakh to Rs. 1.5 lakh.

Deduction limit on account of interest on loan in respect of self occupied

house property raised from Rs.1.5 lakh to Rs. 2 lakh.
Personal Income-tax exemption limit raised by ` 50,000/- that is, from Rs.
2 lakh to Rs. 2.5 lakh in the case of individual taxpayers, below the age of
60 years.