Income Tax & Taxable Income

Income-tax is charged on the Total Income of a Previous Year at the rates prescribed for the Assessment Year. 'Assessment Year' means the period of 12 months commencing on April 1, every year. 'Previous Year' is the financial year immediately preceding the assessment year.

A 'resident' tax payer is charged income tax on his global income, subject to a double taxation relief in respect of foreign incomes taxed abroad.

In the case of a non-resident, income-tax is charged only on incomes received, accruing or arising in India or which are deemed to be received, accrued or arisen in India.

For the purpose of computing total income and charging tax thereon, income from various sources is classified under the following heads:

  1. Salaries
  2. Income from House Property
  3. Profits and Gains of business or profession
  4. Capital Gains
  5. Income from Other Sources

These five heads of income are mutually exclusive. If any income falls under one head, it cannot be considered under any other head. Income under each head has to be computed as per the provisions under that head. Then, subject to provisions of set off of losses between the heads of income, the income under various heads has to be added to arrive at a gross total income. From this gross total income, deductions under Chapter VIA are to be allowed to arrive at the total income.

On this total income tax is calculated at the rates specified in the relevant Finance Act or the rates given in the Income Tax Act itself {as in the case of long term capital gains]. From this tax, rebates and reliefs, if any, allowable under Chapter VIII are allowed to arrive at the total tax payable by the assessee. The above procedure is summarized below:

Gross Total Income=A+B+C+D+E

Total Taxable Income=Gross Total Income - Deductions allowable from Income.

Total Tax Payable=Tax on Total Income - Rebates and relief allowable from Income Tax.

Frequently Asked Questions

What is Income Tax?
It is a tax imposed by the Government of India on any body who earns income in India. This tax is levied on the strength of an Act called Income Tax Act which was passed by the Parliament of India.
What is meant by 'income earned in India'?
Income earned in India. is not limited to income earned within the geographical limits or boundaries of the country. Certain incomes are also deemed to have been earned in India although they may have been earned outside the country.
Who administers the Income-Tax Act?
The job of monitoring the Income-tax collection by the government is entrusted to a Department called Income Tax. This department functions under the Department of Revenue, Ministry of Finance, Government of India.
What is the period for which a person's income is taken into account for purpose of Income tax?
Income earned in the twelve months contained in the period from 1st April to 31st March (commonly called Financial Year{FY]) is taken into account for purposes of calculating Income Tax. Under the income tax Act this period is called previous year.
What is an 'Assessment Year'?
It is the twelve-month period 1st April to 31st March immediately following the previous year{the financial year in which the income was earned]. In the Assessment year a person files his return for the income earned in the previous year. For example for Financial Year 2006-07 the Assessment Year is 2007-08.
Who is supposed to pay Income Tax?
Any Individual or group of Individuals or artificial bodies who/which have earned income during the previous years are required to pay Income tax on it. The IT Act recognizes the earners of income under seven {7] categories. Each category is called a Status. These are Individuals, Hindu Undivided Family {HUF], Association of Persons {AOP], Body of individuals {BOI], Firms, Companies, Local authority and Artificial Judicial person.

When Companies pay taxes under the Income tax Act it is called Corporate tax.
Is Income tax Act applicable only to residents?
No, The Income tax Act applies to all persons who earn income in India. Whether they are resident or non-resident.
Who is a resident?
If an individual stays in India for 182 days or more in a year, he is treated as resident in that year regardless of his citizenship. If the stay is less than 182 days he is a non-resident.
How can I know whether a company is resident or non-resident?
A company is considered as 'resident' if it is incorporated under the Indian Companies Act. A foreign company can also become a 'resident' if the control and management of its affairs is done entirely in India during the previous year.
How is resident/ non-resident status relevant for levy of income tax?
In case of resident individuals and companies, their global income is taxable in India. However non-residents have to pay tax only on the income earned in India or from a source/activity in India.
I am an Indian scientist, who had gone abroad on a government project. Should my return of income include income earned/received abroad?
It depends on your residential status. If you are a resident all incomes earned globally are taxable. Therefore the same needs to be included in the return. However if any tax is paid on that income in the foreign country, you will get credit for the same.
What is considered as income for the purpose of Income Tax?

The word "Income" has a very broad and inclusive meaning. In case of a salaried person, all that is received from an employer in cash, kind or as a facility is considered as income. For a businessman, his net profits will constitute income. Income may also flow from investments in the form of Interest, Dividend, and Commission etc. In fact the Income Tax Act does not differentiate between legal and illegal income for purpose of taxation. Under the Act, all incomes earned by persons are classified into 5 different heads, such as:

  • Income from Salary
  • Income from House property
  • Income from Business or Profession
  • Income from capital gains
  • Income from other sources
Are all receipts considered as income?
No.

Receipts can be classified into two kinds.
A) Revenue receipt
B) Capital receipt

The general rule under the Income tax Act is that, all revenue receipt are taxable unless a receipt is specifically exempted and all capital receipts are exempt from taxation unless there is a provision to tax it. Gifts and loans etc. are in the nature of capital receipts not attracting tax.

What are revenue and capital receipts?
In a simple language, all that one derives from a source is called revenue receipt. For example Salary from employment, Rent from property, Interest or Divided from Investments, Profits from business. When an income is earned on account of transacting the source itself, it is called Capital receipt. For example Sale of land and building, business, investment etc.
Are gifts received by a person taxable?
Gift exceeding Rs 25,000 is taxable unless it is received from any person who is a relative or on occasion of marriage or under will or by inheritance or in contemplation of death of the payer.
Is dividend received on shares of Indian companies taxable?
No. The dividend declared by Indian companies is not taxable in the hands of the share holders because tax on distributed profits have already been borne by the company.
Does a religious preacher earning money from preaching has to pay tax and file return?
Yes.
Can I claim deduction for my personal and household expenditure in calculating my income or profit?
No
Most of my income is given away in charity and I am left with just enough to meet my personal requirement. What will be considered as my income?
What is done after the income is earned does not determine its taxation. However charitable contribution to approved institutions will give you the benefit of certain deductions from taxable income.
My daughter stays in USA. She owns a house in India and has let it out. She has asked tenants to pay rent to me so that I can lead a decent life. She has not received any rent. Is she still liable to tax? What if she transfers the house to me?
Your daughter is the owner of the house and therefore she is liable to pay tax even though you receive the rent. If the house is transferred, then you would become the owner and you will have to pay tax on the rental income.
My children living abroad send me Rs.20000/- per month for my maintenance. Would this be considered as my income?
No.
Is there any limit of income below which I need not pay taxes?
At the moment individual, HUF, AOP, and BOI having income below Rs. 200,000/- need not pay any income tax. For other categories such as co-operatives societies, firms, companies and local authorities no such exempted limits exists, so they have to pay taxes on their entire income. For more details, please visit Income Tax Slabs and Rates
I am an agriculturist. Is my income taxable?
Your agricultural income is not taxable per se. However, if you have any other source of income like income from investments, property etc, while calculating tax on them, your agricultural income will be taken into account, so that you pay tax at a higher rate on that other income.
What is agricultural income?
To consider an activity as 'agriculture' the basic operation such as tilling, sowing, irrigating & harvesting should have been carried out. Thereafter what is sold in the market should be the primary product harvested. Receipt from such sale is considered as agricultural receipt. If however some further processing or modification were done to the harvested product to enhance its marketable value then such enhanced value would be considered as business income.
Is income from animal husbandry considered as agricultural income?
No.
Do I have to maintain any records or proof of earnings?
For every source of income you have to maintain proof of earning and the records specified under the IT Act. In case, no such records have been laid down, you should maintain reasonable level of records with which you can support the claim of income.
As an agriculturist, am I required to maintain any proof of earning and expenditure incurred?
Even if you have only agricultural income you are advised to maintain some proof of your agricultural earnings.
I win a lottery or prize money in a competition. Am I required to pay taxes on it?
Yes.

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The visitors may visit the web site of Income Tax Department for resolving their doubts or for clarifications.