Basic Concepts

Assessment:
This is the procedure by which the income of an assessee is determined by the Income Tax Assessing Officer.
Assessee- Section 2 (7):
Assessee means a person by whom any tax or any other sum of money is payable under the Income Tax Act.
Person Section 2(31):
The term person includes:
(i)
an individual,
(ii)
a Hindu Undivided Family (HUF)
(iii)
a company
(iv)
a firm
(v)
an association of persons (AOP) or body of individuals (BOI)
(vi)
a local authority
(vii) any other artificial judicial person not falling in any of the above categories
Assessment Year -Section 2 (9):
Assessment Year means the period of 12 months starting from 1st April and ending on 31st March in the next
year. e.g The Assessment Year 2005/06 begins on 1st April 2005 and ends on 31st March 2006
Previous Year Section 3:
Previous Year is financial year immediately preceding assessment year. e.g. For the Assessment Year 2005/06
Previous Year shall be the Financial Year 2004/05.
However, in case of a newly started business Previous Year shall begin from the date of setting up of the
business and end on immediately following 31st March.
Charge of Income Tax Section 4:
The following basic principles are followed while charging tax:
(i)
Income Tax is an annual charge on income.
(ii)
Generally, income of previous year is charged to income tax in the immediately following Assessment
year.
(iii)
Income tax rates are fixed by the Finance Act every year.
(iv)
Income Tax is charged on every person.
Gross Total Income :
Gross Total Income means total income computed in accordance with the provisions of the Income Tax Act
before allowing any deductions under sections 80 CCC to Section 80 U.
In other words, aggregate of the income under following heads is Gross Total Income.
1.
Salaries
2.
Income from House Property
3.
Net profit from business/profession
4.
Capital Gains
5.
Income from other sources

Residential status under Income Tax Act

Section 6 of the Income Tax Act lays down the test of residence for the different persons.

Assessees

Individuals and
HUFs
Resident in India

Resident and
Ordinary Resident

Non Resident in India

Other
Assessees
Resident in India

Non Resident in India

Resident but not

Ordinary Resident

Residential status of an individualSection (6): An individual may be i) resident and ordinary resident ii) resident but not ordinary resident iii) non
resident.
Basic conditions to test whether an individual is resident in India:
Under Section 6 if an individual satisfies any of the following basic conditions he is said to be resident in India
a)
b)

He is in India in the previous year for a period of at least 182 days or

He is in India for a period of at least 60 days during the previous year and at least 365 days during the 4
years immediately preceding the previous year.

Relaxations: The explanation to Section 6(1) makes following relaxation in regard to above (b):
(i)
In case of Indian citizens, who leave India in any previous year as a member of a crew of an Indian ship
or for purposes of employment outside India, they will be treated as residents only if the period of their
stay during the relevant previous year amounts to 182 days. In other words even if such persons were in
India during 4 preceding years for an aggregate period of 365 days or more they will be not be treated as
residents unless during the relevant previous year they were in India for 182 days or more.
(ii)
In case of Indian Citizen or person of Indian Origin engaged outside India either in an employment or a
business or profession or in any other vocation who comes on a visit to India in any previous year such
persons will be treated as residents only if they are present in India for period or periods amounting in
all to 182 days or more in the relevant previous year. In other words, even if such persons were in India
during the 4 preceding years for an aggregate period of 365 days or more, they will not be treated as
resident in relevant previous year unless they were present in India for a period of 182 days or more in
the relevant previous year.

Additional Conditions to test when a resident individual is ordinarily resident in India:

A resident individual is treated as resident and ordinarily resident if he satisfies following two additional
conditions.
1)
He has been resident in India in at least 2 out of 10 previous years immediately preceding the relevant
previous year and,
2)
He has been in India for a period of at least 730 days during 7 years immediately preceding the relevant
previous year.
Resident but not ordinarily resident:
An individual who satisfies at least one of the basic conditions but does not satisfy both the additional
conditions is treated as resident but not ordinarily resident.
Non Resident:
An individual is a non resident in India if he satisfies none of the basic conditions. In case of NR additional
conditions do not have any relevance.
Notes:
1
It is not essential that the stay should be continuous
2
It is not essential that the stay should be at the same place.
3
Where a person is in India only for a part of a day, the calculation of physical presence in India in
respect of such broken period should be made on an hourly basis. A total of 24 hours of stay spread over
a number of days is to be counted as being equivalent to stay of one day. However, if data is not
available to calculate the period of stay of an Individual in India in terms of hours, then the day on
which he enters India or departs India shall be taken in to account as his stay in India.
4
Place of stay and purpose of stay in India is immaterial.

Residential status of HUF:

An HUF can be either I) resident and ordinarily resident, ii) resident but not ordinarily resident or iii) non
resident.
An HUF is said to be resident in India if control and management of its affairs is wholly or partly situated in
India. An HUF is said to be non resident in India if control and management of its affairs is situated wholly
outside India.
A resident HUF is said to be ordinarily resident in India if the karta or the manager (or Successive karta or
manager) satisfies the following two additional conditions.
1
he has been resident in India in at least 2 out of 10 previous years (according to basic conditions laid
down above) immediately preceding the relevant previous year
2
he has been in India for a period of 730 days or more during 7 years immediately preceding the previous
year
If the karta or manager of the resident HUF does not satisfy the two additional conditions, the HUF is said to be
resident but not ordinarily resident in India.

Residential status of Company:

An Indian Company is always resident in India.
A foreign company is resident in India if during the previous year control and management of its affairs is
situated wholly in India.
A Company can never be resident but not ordinarily resident or resident and ordinarily resident.

Residential Status and incidence of tax:

Incidence of tax on Resident and Ordinarily Resident assessees:
A resident and ordinarily resident in India is assessable to tax in respect of
1.
income which is received or deemed to be received in India in previous year by him or on his behalf;
2.
income which accrues or arises or deemed to accrue or arise to him in India during the previous year;
3.
income which accrues or arises to him outside India during the relevant previous year.
Incidence of tax on Resident but not Ordinarily Resident assessees:
A resident but not ordinarily resident in India is assessable to tax in respect of
1.
income which is received or deemed to be received in India in previous year by him or on his behalf;
2.
income which accrues or arises or deemed to accrue or arise to him in India during the previous year;
3.
income which accrues or arises to him outside India from a business controlled or profession set up in
India;
4.
income which received outside India from a business controlled or profession set up in India;
Incidence of tax on Non Resident assessees:
A non resident assessable to tax in respect of
1
income which is received or deemed to be received in India in previous year by him or on his behalf;
2.
income which accrues or arises or deemed to accrue or arise to him in India during the previous year;
Notes:
I Receipt of Income
1 Receipt Vs Remittance
2 Cash Vs Kind
3 Receipt Vs Accrual
4 Receipt Vs Deemed Receipt
5 Receipt by agent
6 Receipt in case of sale by commission agent
7 Receipt by cheque
8 Mere book entry is not sufficient
9 Burden of proof that the income is received by the assessee is on the Revenue

II Accrual of Income:
Income is said to be received when it reaches to the assessee; when the right to receive the income become
vested in the assessee.
1 Accrual is generally unconditional
2 If income is taxable at the time of accrual it can not be again taxed on receipt basis.
3 Commission payable for services accrues at the place where service is rendered.
4 Interest accrues where money is lent.
5 No profit arises on valuation of closing stock.
6 Profit does not arise on transfer from head office to branch or from branch to head office.

Income exempt from Income Tax Section 10

The various items of income referred to in the different clauses of Section 10 are not only excluded from the
taxable income of an assessee but also from his total income.
The following incomes are exempt under different clauses from Income tax on fulfilling certain conditions
under the concerned clause.
1

Agriculture Income -Section 10(1):

Agriculture Income is not included in the total income of the assessee. The Constitution does not give powers to
the parliament to levy Income Tax on agricultural income.
Indirect way of charging income tax on agricultural income:
However, the scheme of partial integration of tax on non-agricultural income with agricultural income has been
introduced by Finance Act, 1973. The Scheme is applicable on satisfaction of following conditions.
(I)

The Tax payer is an individual, an HUF, a BOI, an AOP, or artificial juridical person.

( II )

The tax payer has non agricultural income of amount exceeding the amount of exemption limit

( III ) The agricultural income exceeds Rs.5,000

The above scheme is not applicable to firm, company, Co-operative society.
Computation of tax under the scheme
1
2
3
4
5
6
2

Compute Net Agricultural Income

Sum the Agricultural Income and Non Agricultural Income
Compute income Tax on the aggregated income as computed in Step 2 above.
Add Rs. Exempt Limit Income to Net Agricultural Income
Compute income tax on the aggregated sum as computed in Step 4 above.
Deduct Income tax computed in Step 5 from the Income tax computed in step 3 above. This will be
the income tax payable by the assessee subject to rebate u/s 8o C.
Amounts received by a member from the income of the HUF Section 10 (2):

An HUF is a separate entity under the Income Tax Act paying tax on its income. When the income of the HUF
is paid to the member, such payments are exempted from Income Tax i.e. the member of the HUF does not have
to pay any tax in respect of the amounts received from the HUF income.
3

Share of income of a partner Section 10(2A):

Under section 10 (3) partners share in the total income of the firm is exempts from tax. In other words, the
partners share in the total income of the firm determined in accordance with the profit sharing ratio will be
exempt from tax.

Exemptions to non residents Section 10 (4):

This clause provides that in case of a non resident any income by way of interest on central government
securities as may be prescribed will be exempt. Even income by way of premium on redemption of such
securities is exempt.
5

Interest on savings certificates Section 10 (4B):

An individual, being citizen of India or a person of Indian origin, who is non resident shall be entitled for
exemption in respect of interest on such savings certificates issued by the central Government and notified by it
in the Official Gazzette.
6

Leave Travel Concession Section 10(5):

The amount of exemption under section 10(5) is the value of any travel concession or assistance received or due
to the assessee
From his employer for himself and his family in connection with his proceeding on leave to any place in India,
From his employer or previous employer for himself and his family in connection with his proceeding to any
place in India after his retirement or termination of service.
The amount of exemption can not exceed expenditure actually incurred by the assessee for the purpose of such
travel.

Income from House Property

(Section 23 to27)
An income to be charged under the head Income from House Property should satisfy following 3 conditions.
1
The House Property must consist of a Building or land appurtenant thereto.
2
The Assessee must be owner of the House Property.
3
The property must not have been occupied by the assessee the purpose of carrying on his business or
profession.
If all the above conditions are satisfied income from house property shall be charged under the head Income
from House Property otherwise under any other head depending upon the circumstances and facts of the case.
Basis of computing Income from let out House Property:
Gross Annual Value:
xxx
Less: Municipal Taxes
xxx
----Net Annual Value
xxx
Less:1 Standard Deduction u/s 24
2 Interest on borrowed capital
Income From House Property

xxx
xxx
------xxx
=====

Gross Annual Value:

Step 1 Reasonable Expected Rent of Property
Step 2 If the rent received or receivable is more than the expected rent, the rent actually received or receivable
shall be the Gross Annual Value
Step 3 If the property remains vacant and because of such vacancy the rent actually received or receivable is
less than the expected rent, than rent actually received / receivable shall be the Gross Annual Value
Step 2
If rent actually received /receivable is more than the expected rent Section 23(1)(b)
If the rent actually received / receivable (after excluding unrealized rent and rent pertaining to vacancy) is more
than the amount determined under Step 1 above then rent actually received/receivable shall be the Gross Annual
Value.
Notes:
1
2
3

If actual rent received/receivable is lower than amount determined under step 1 then step no 2 is not
applicable.
Step 2 is applicable only in case of let out property. If a property is Deemed let out step 2 is not
applicable
So if the actual rent received /receivable is more than expected rent as mentioned in step 1 the
amount so received/receivable shall be the Gross Annual Value.

Step 3
If rent actually received/receivable is less than the expected rent owing to property remaining vacant
Section 23(1)( c )
Step 3 shall be applicable when the following 3 conditions are satisfied.
1
2
1
2

The property is let out

The property is vacant during any part of the previous year.
The actual rent received/receivable is less than the amount of expected rent as computed under step 1
and the decline in actual rent is caused by the vacancy and not by any other factors
If the loss is partly because of vacancy and partly due to other factors, then loss due to vacancy shall be
deducted from the amount of expected rent as computed in step 1

Municipal Taxes :
From the Gross Annual Value as computed above, municipal taxes levied by the local authority shall be
deducted. However municipal taxes shall be deducted only if following 2 conditions are satisfied.
1
Municipal Taxes are borne by the owner, and
2
Municipal taxes are actually paid during the previous year
Deductions u/s 24
A
Standard Deduction
B
Interest on borrowed capital
A
Standard Deduction ---- Section 24(a)
30% of net annual value is deductible as standard deduction whether the owner has incurred any expenditure or
not.
B
Interest on borrowed capital --- Section 24(b)
Interest on capital borrowed for purchase, construction, repairs, renewal or reconstruction of house property
shall be allowed as deduction on accrual basis.
Interest on pre construction period: Interest payable by the assessee for the period prior to the previous year in
which the property is acquired or constructed shall be deducted in five equal annual instalments commencing
with the previous year in which the house is acquired or constructed.
Income from Self Occupied House Property:
1

Annual Value of one self occupied property: Where the property consists of onr house in occupation of
the owner for his residence the annual value of such house shall be taken as NIL if
( a ) The property is not actually during the previous year and
( b ) No other benefit is derived therefrom.
Gross Annual Value:
NIL
Less: Municipal Taxes
NIL
---------Net Annual Value
NIL
Less: Deductions u/s 24
Standard Deduction
NIL
Interest on borrowed capital
XXX
---------Income from House Property
XXX
======

Interest on borrowed capital: Interest (for the current previous year and pre construction period) on capital
borrowed is deductible ( as above) subject to the maximum ceiling as follows.
( 1 ) Maximum ceiling if capital is borrowed on or after 1-4-1999
If the following 3 conditions are satisfied interest on borrowed capital is deductible up to Rs. 1,50,000
( a ) capital is borrowed on or after 1-4-1999 for acquiring or constructing a house property, and
( b ) acquisition or construction should be completed within 3 years from the end of the Financial Year in
which the capital was borrowed
( c ) The person extending the loan certifies that such interest is payable in respect of the amount
advances for acquisition or construction of the house
Note: If the capital is borrowed for any other purpose say reconstruction, repairs or renewals of the house
property then the maximum deduction on account of interest shall be Rs. 30,000
( 2 ) Maximum ceiling in any other case:
If the above conditions are not satisfied, then interest on borrowed capital is deductible up to a maximum of Rs.
30,000. In following cases, interest on borrowed capital is deductible up to Rs. 30,000
( a ) If the capital is borrowed before 1st April 1999 for purchase,construction,reconstruction,repairs or
renewals of a house property
( b ) If capital is borrowed on or after 1-4-1999 for reconstruction, repairs or renewals of a house
property
Unrealised Rent Section 25A :
Where deduction is allowed in respect of unrealized rent for the assessment year 2001/02 or earlier years and
subsequently the assessee has realized any amount in respect of such unrealized rent, the amount so realized
will be chargeable to tax under the head Income from House Property.

Income under the head Capital Gains

Any profit or gain arising from the transfer of capital asset is chargeable to tax under the head Capital Gains
in the previous year in which transfer took place. In other words if the following conditions are satisfied an
assessee shall be liable for Capital Gains Tax.
(a)
(b)
(c)
(d)
(e)

There is a Capital Asset

The Capital Asset is transferred by the assessee
The transfer takes place during the previous year
Profit or gain arises as a result of such transfer
Such profits or gains are not exempted u/s 54, 54B, 54D, 54EC, 54ED, 54F or 54G

Capital Asset is defined to include property of any kind fixed or circulating, movable or immovable, tangible
or intangible. However, the following assets are excluded from the definition of Capital Asset
1
Stock in Trade
2
Personal Effects of assessee
3
Agricultural Land in India
4
61/2 % Gold Bonds 1977, 7% Gold Bonds 1980, national Defence Gol;d Bonds 1980
5
Special Bearer Bonds 1991
6
Gold Deposit Bonds issued under Gold Deposit Scheme 1999
Type of Capital Assets Short Term or Long Term
Short Term Capital Asset means a capital asset held by the assessee for not more than 36 months immediately
prior to its date of transfer. However in the following cases an assets held for not more than 12 months is treated
as short term capital asset
a
Equity or Preference share of a company
b
Units of UTI
c
Units of MF
A capital asset which is not a short term capital asset is a long term capital asset
Computation of Short Term Capital Gains
A
B
C
D
E
F

Find out full value of consideration

Deduct expenditure wholly and exclusively in connection with the transfer
Deduct cost of acquisition
Deduct Cost of Improvement
Deduct exemption u/s 54B and 54G
The Balancing amount is short term capital gain

Computation of Long Term Capital Gains

A
Find out full value of consideration
B
Deduct expenditure wholly and exclusively in connection with the transfer
C
Deduct indexed cost of acquisition
D
Deduct indexed cost of Improvement
E
Deduct exemption u/s 54, 54B, 54D, 54EC, 54ED, 54F and 54G
F
The Balancing amount is long term capital gain

Capital Gains arising from transfer of residential house property Section 54

Capital Gains arising from transfer of residential house property shall be exempt if following conditions are
satisfied
A
Residential house property should be transferred by an individual / an HUF
B
It should be a long term capital asset
C
A new house should be purchased or constructed -- The assessee has purchased a residential house
within a period of one year before the transfer or within 2 years after the transfer or the assessee has
constructed a residential house property within a period of 3 years from the date of transfer
Amount of exemption: The amount of exemption shall be the cost of the new house or full amount amount of
capital gain whichever is lower.
Capital Gain arising from transfer of land used for agricultural purpose Section 54B
Exemption u/s 54B is available on transfer of agricultural land.
Conditions
A
The tax payer is an individual
B
He transfers an agricultural land. It may be Long term capital asset or short term capital asset
C
The agricultural land was used by the tax payer or his parents for agricultural purposes for a period of 2
years immediately prior to date of transfer
D
The tax payer has purchased another land for agricultural purposes within a period of 2 years from the
date of such transfer
Amount of exemption:
The amount of exemption shall be the amount of capital gain or investment in new agricultural land whichever
is lower.
Capital Gains on compulsory acquisition of land and building forming part of
industrial undertaking Section 54D
Conditions:
A
The tax payer may be an individual, HUF, Firm, Company or any other person
B
The asset may be short term capital asset or long term capital asset
C
Capital Gains arise on transfer by way of compulsory acquisition of land or building which forms part of
an industrial undertaking belonging to the tax payer.
D
Such land or building was used by the assessee for the purpose of the industrial undertaking for at least 2
years prior to the date of compulsory acquisition
E
Assessee has purchased any other land or building within a period of 3 years from the date of receipt of
compensation or constructed a building within such time
F
Newly acquired land or building should be used for the purposes of shifting or re establishing the said
undertaking or setting up another industrial undertaking
Amount of Exemption:
The amount of exemption shall be equal to the cost of new land or building or the amount of capital gain
whichever is lower

Capital Gain not to be charged on investments in certain bonds Section 54EC

Features
1
2

A long term capital asset is transferred by an assessee, who may be an individual, an HUF, a firm, a
company or any other person
Within 6 months from the date of transfer of the asset the assessee should invest the whole or any
part of capital gain in long term specified assets

Amount of Exemption:
If the cost of specified is not less than the capital gain, the whole of capital gains shall be exempt from tax. If
however, the amount invested in specified assets is less than the capital gain, the exemption is equal to the
amount invested in specified asset. In other words the amount of exemption shall be the amount of capital gain
or amount of investment whichever is lower.
Capital Gains on transfer of a long term capital asset other than a house property Section 54F
Conditions:
1
2
3
4

The assessee is an individual or an HUF

The asset transferred is a long term capital asset other than a house property
The assessee has purchased within 1 year before the date of transfer or 2 years after the date of
transfer or constructed within 3 years after the transfer, a residential house
The assessee should not own on the date of transfer of the original asset more than one residential
house (other than the new house). Moreover he should not purchase within period of 2 years after
such date any residential house

Amount of Deduction:
1
If the cost f the new house is not less than the net consideration in respect of the capital asset
transferred, the entire capital gain arising from the transfer shall be exempt from tax
2
If the cost of the new house is less than the net consideration in respect of the asset transferred, the
exemption from long term capital gain shall be granted proportionately on the basis of investments
of net consideration either fro purchase or construction of the residential house i.e
Cost of new house *

Capital Gains / Net Consideration