Income tax Law and Practice

Unit -1
Short Questions
Q.1. What is Tax?
Ans – i. A tax is a compulsory extraction made by central govt. from the general public.
ii. It is a financial charge imposed on individuals or legal entities by the govt.
iii. So tax is not a voluntary payment or donation but an enforced contribution which is a major source of
revenue to the govt. the collected amount is spent for the common benefits of the society.
Q.2. Write the different types of Taxes?
Ans- Taxes are classified in to two types as-
i. Direct tax
ii. Indirect tax
Q.3. what is direct Tax?
Ans- i. It is a type of tax where the incidence and impact of taxation fall on the same person.
ii.It means the burden of taxation cannot be shifted by the tax payer. Income Tax, property tax, gift tax,
corporation tax, wealth tax are the example of direct tax.
Q.4. What is Indirect Tax?
Ans- i. It is that type of tax where the incidence and impact of taxation fall on different person.
ii.It means burden of taxation can be shifted by the tax payer.GST, customs duty, excise duty are the indirect
tax.
Q.5. Who has the right to levy taxes?
Ans- i) According to constitution of India, the Government has the right to levy taxes on individual and other
persons.
ii) Article 246(seventh schedule) of Indian constitution contains the legislative powers of the Union Govt. and
the State Govt. to levy taxes under 3 lists covering the various subjects.
iii) List -1- union list-contains the areas of which only the parliament can make laws. List -2- state list- contains
the area of which only state legislature can make laws and List-3- concurrent list- contains the areas of which
both the parliament and state legislature can make laws.
Q.6. Under which list Income Tax falls?
Ans- i. Income tax is levied in India by virtue of entry no. 82 of List -1 of seventh schedule to the Article 246 of
the Constitution of India.
ii.This article authorizes the central govt. to impose tax on Income other than agricultural income.
iii. The power to charge income tax on agricultural income has been vested with the state govt. as per
Entry No.46 of List -2
Q.7. Who Fixes the rate of Tax?
Ans- i. Tax rate for normal incomes are prescribed by the annual Finance Act.
ii. Tax rates for certain special incomes have been prescribed under Income Tax Act itself like tax rate for long
term capital gain @ 20%, for short term capital gain@ 15% and tax on lottery income @30%.
Q.8. Who has the administrative power on Income tax?
Ans- i. Income tax is administered by the central govt.( ministry of Finance) with the help of Income tax
department.
ii. The central Govt. has constituted the Central Board of Direct Taxes ( CBDT) which exercises overall control
over the Income tax department by issuing guidelines.
Q.9. What are the sources (documents) of Law relating to Income Tax?
Ans- There are five sources of Law
i. Income Tax Act 1961
ii. Income Tax Rule 1962
iii. Annual Finance Act
iv. Circulars and clarifications issued by CBDT
v. Judicial Decisions.
Q.10. what is Income u/s 2(24)?
Ans- i. The term Income simply means something which comes in. It is a periodical return with regularity or
expected regularity. It not only refers to only monetary return but also it includes value of benefits and
perquisites.
ii. The term income includes not only what is received by using the property but also the amount saved by using
it himself. So anything which is convertible into income can be regarded as source of accrual of income.
Q.11.Explain the term Person u/s 2(31)
Ans- The term person under the Income tax Act includes natural as well as artificial persons. It can be an
association of persons or a body of individual or a local authority or an artificial juridical person. There are seven
types of person mentioned under the income tax Act, these are-
(i) Individual- It refers to a natural human being whether male or female, major or minor.
(ii) Hindu Undivided Family- It is a relationship created due to operation of Hindu Law. The members of
HUF called as co-parceners. The head of the family is called Karta.
(iii) Company- It is an artificial person registered under Indian companies Act 1956 or any other law. There
are two types of company from tax point of view, namely domestic company and foreign company.
(iv) Firm- It is an entity which comes into existence as a result of partnership agreement between persons
to share profits of the business carried on by all or any one of them acting for all. It also includes LLP as
per Limited liability partnership Act 2008.
(v) AOP and BOI- When persons combine together to carry on a joint enterprise and they don’t constitute
partnership they are assessable as Association of persons (AOP). There must have common purpose or
action for formation of AOP. It can have firms, companies and individuals as its members. But a Body of
Individuals (BOI) cannot have non- individuals as its members. Only natural human beings can be
members of BOI. Status of person in BOI like executors and trustees.
(vi) Local Authority- It includes Authority legally entitled or entrusted by Government. Municipality,
Panchayat, District board, port trusts are its example.
(vii) Artificial Juridical person (AJP)- A public corporation established under special Act of legislature and a
body having juristic personality of its own are called AJP. For example ICAI, University, RBI, courts.
Q.12. Explain the term Assessee u/s 2(7)
Ans- Assessee means a person who pays tax, interest, penalty or any sum of money under the provisions of the
Income tax Act 1961. It contains every individual who has been assessed for his income, the income of another
person, or the profit and loss he has sustained. There are four types of Assessee-
a. Ordinary Assessee- An ordinary Assessee is an individual who is liable to pay taxes for the income earned by
him for a particular financial year. Each and every Individual who has paid taxes in preceding years against
the income earned or losses incurred by him is liable to make payments to the government in the form of
tax. Any individual who is supposed to make payments to the government in the form of interest or penalty
or anybody who is entitled to tax refund under the IT Act is an Assessee. All such individuals are grouped
under the category of ordinary Assessee.
b. Representative Assessee-A person who is not only liable to pay taxes for his income or loss only but for
income or loss of other persons also. As the name suggests, under this category assessee acts as
representative for the persons who may be able to pay their taxes due to some reasons. Examples of the
representative assessee are Guardian of Minors, Agent of NRI’s.
c. Deemed Assessee-Individuals who are covered under deemed assessee are-
 Executors or legal heir of the property will be treated as deemed assessee, where deceased person dies
after writing his will to the legal heirs and executors.
 Where a person dies, without writing his or her will. In this case, his eldest son or if there is any other
legal heir will be considered deemed assessee.
 Guardians of Minors, lunatic or an idiot whose income is taxable as per the income tax act, covered
under deemed assessee.
 Any person who is acting as the agent of NRI having taxable income in India.
d. Assessee in Default- A person is said to be an assessee in default if he fails to comply with the duties
imposed or fails to fulfill the statutory obligation under the Income-Tax Act.
For example- A person paying interest to another person is responsible for deducting TDS at source on this
amount and to deposit the tax with the government treasury. If he did not follow any of these duties, that is if
he fails to deduct tax at source or deducts tax but does not deposit it in the treasury, he shall be deemed to be
an assessee in default. Same way as per section 218, if a person does not pay advance tax (in case coming under
that) then in this case, he shall be considered assessee in default.
Q.13. what is Assessment year u/s 2(9) ?
Ans- Assessment Year” means the period of 12 months commencing on the 1st day of April every year.
In India, the Govt. maintains its accounts for a period of 12 months i.e. from 1st April to 31st March every year.
As such it is known as financial year. The income tax department has also selected same year for its assessment
procedure.
The Assessment year is the financial year of the Govt. of India during which income of a person relating to the
relevant previous year is assessed to tax. Every person who is liable to pay tax under this Act files return of
income by prescribed dates. These returns are processed by the income tax department officials and officers.
This processing is called assessment. Under this income returned by the assessee is checked and verified.
Tax is calculated and compared with the amount paid and assessment order is issued. The year in which whole
of this process is undertaken is called assessment year. Current AY is 2021-2022.
Q.14. what is Previous Year u/s 2(34) ?
Ans- As per the Income Tax law the income earned in current year is taxable in the next year. The year in which
income is earned is known as the previous year. Previous means coming before. “Previous Year” refers to the
year for which the Income is taxable and is the year beginning from first day of April and ending with last day of
March. Income of a previous year is taxable in the Assessment Year which is the year immediately succeeding a
previous year. At present Assessment year is 2021-2022 and previous year is 2020-2021.
Q.15. What are the Rules for determining Previous Year?
Ans- The followings are the rules for determining previous year.
i. In case of continuing business- The previous year is the financial year preceding the assessment year,
and for such business previous year consists of 12 months
ii. For newly set up business or profession- The previous year will be the day it is set up and ends on 31 st
march next following. For such business or profession the first previous year may be 12 months or less
than that. But subsequent previous years shall be of 12 months duration and always starting from 1 st
April each year.
iii. For newly created source of Income- In such case the previous year shall be the period between the
day on which such source comes into existence and 31 st march next following.
Q.16. State the exceptions to the rule of Income of PY is taxable In AY.
Ans- The simple rule is that the income of the previous year is taxed in its relevant assessment year subject to
certain exceptions where it is accessed for tax in the same year as follows-
a. Shipping business income of non- resident ship owners u/s 172- Where a ship is owned or chartered by a
non-resident and is used for carrying passengers, livestock, mail or goods shipped at a port in India, his
income from such business shall be taxed in the year in which it is earned. For this purpose, 7 and1/2% of
the freight paid or payable to the non-resident, or any person, on his behalf, shall be deemed to be the
income accruing in India and tax is payable on such income at the rate applicable to a foreign company.
b. Income of Persons leaving India (Sec. 174):-When it appears to the assessing officer that an individual may
leave India during the current financial year or shortly after its expiry, and that he has no present intention
of returning to India, he shall assess the total income of such an individual for the period from the expiry of
the previous year relevant to the assessment year to probable date of his departure from India, in the same
year.
c. Association or bodies formed for short duration (Sec. 174A):-When an association of persons or body of
individuals or an artificial juridical person formed, established or incorporated for a particular event or
purpose and it appears to the Assessing Officer that such association or body of individual or artificial
juridical person is likely to be dissolved in the same assessment year or shortly after that, the total income
of such association/body/juridical person for the period from the expiry of the previous year to the date of
dissolution shall be charge-able to tax in that assessment year.
d. Person trying to alienate(transfer) his assets with a view to avoid tax (Sec. 175):-If, in the opinion of the
Assessing Officer, an assessee is likely to transfer, charge, sell, dispose off or otherwise part with any of his
assets with an intention to avoid his tax liability, the total income of such a person from the close of the
relevant previous year to the date of initiating proceeding under this section shall be chargeable to tax in
the same assessment year.
e. Income of a Discontinued Business or Profession (Sec. 176):-Where a business, profession or vocation has
been discontinued or dissolved during the current financial year, the assessing officer may at his discretion
assess the income of the period from 1-e expiry of the previous year relevant to the assessment year in
which the business is discontinued or dissolved to the date of such discontinuance in the same assessment
year.
Q.17. what is Maximum marginal rate u/s 2(29C) ?
Ans-i. The maximum marginal rate is defined as the rate of income tax applicable in relation to the highest slab
of income in case of an individual, AOP or BOI. At present the MMR is 42.74% for persons with taxable income
above Rs 5crore. In the recent budget, Finance minister Nirmala Sitharaman substantially hiked the rate of
surcharge in the highest tax slab of 30% for persons with taxable income of between 2crore and 5crore from
15% to 25% and for persons with taxable income of more than Rs 5crore from 15% to 37%. By taking such
increased surcharged rate and health and education cess of 4% there on, the MMR now is 42.744%.
ii. This method of taxation, known as progressive taxation, aims to tax individuals based upon their earnings,
with low-income earners being taxed at a lower rate than higher-income earners. 
Q.18. what is PAN ?
Ans-i. Permanent Account Number (PAN) is a ten-digit alphanumeric number, issued in the form of a laminated
card, by the Income Tax Department, to any "person" who applies for it or to whom the department allots the
number without an application.
ii. PAN enables the department to link all transactions of the "person" with the department. These transactions
include tax payments, TDS/TCS credits, returns of income/wealth/gift/FBT, specified transactions,
correspondence, and so on. PAN, thus, acts as an identifier for the "person" with the tax department.
Q.19. What is cess?
Ans- i. A cess imposed by the central government is a tax on tax, levied by the government for a specific
purpose. Generally, cess is expected to be levied till the time the government gets enough money for that
purpose.
ii. For example, a cess for financing primary education – the education cess (which is imposed on all central
government taxes) is to be spent only for financing primary education (SSA) and not for any other purposes. For
instance, Education Cess @ 1%, Secondary and Higher Education Cess @ 2%, Krishi Kalyan Cess @ 0.5%,
Swacch Bharat Cess @ 0.5% etc. All the above mentioned cesses have now been abolished. The only active
cess is Health and Education Cess charged at the rate of 4%. So every taxpayer, who has to pay the income
tax, is liable to pay a cess at the rate of 4%.
Q.20. what is surcharge?
i. Surcharge is the additional tax payable over & above the normal tax. It is a conditional tax wherein if you
meet the condition you become liable to pay such additional tax. Generally the condition is dependent on
the income earned. It applies to taxpayers with higher income.
ii. Surcharge is a charge on any tax, charged on the tax already paid. As the name suggests, surcharge is an
additional charge or tax. The main surcharges are that on personal income tax (on high income slabs and on
super rich) and on corporate income tax.
From the revenue side, surcharges are important as around 35% of all cesses and surcharges come from the
surcharge on direct taxes, as-
 Surcharge of 25% on annual income between Rs. 2 crore and Rs. 5 crore for FY 2019-20.
 Surcharge of 37% on annual income in excess of Rs. 5 crore for FY 2019-20.
Q.21.Why is cess not a part of the income tax slab rates?
 Income tax slabs are to collect income tax on the income earned by an individual. The revenue collected
from income tax goes to the Consolidated Fund of India. From this fund, the money can be allocated to
develop various sectors of the economy depending upon the focus of the budget.
 On the other hand, cess is also a part of the Consolidated Fund of India but it is levied for a specific
purpose. The tax is collected for that particular purpose. If the purpose is fulfilled or ceases to exist, the
cess can be withdrawn.
 It is not made a part of the income tax slab rates because there may be certain sectors which need priority
and more importance over the rest. By earmarking the fund for that particular purpose, it is ensured that
the funds will not be diverged anywhere else. The particular sector or cause for which the funds have been
raised by means of tax collection will be secured.
Q.22. Why does surcharge not form a part of income tax slab rates?
 Surcharge is charged separately and does not form a part of the income tax slab rates.
 The intention of the law in levying surcharge is to tax the privileged ones who fall in the high income
bracket. It is shifting the burden of tax from the poor class to the high end of the society.
 In simple words, it is to take collect more from the people who are earning good and use it for the
upliftment of the less privileged.  
 So, if it forms a part of the tax slab rates, all the people falling under different income bracket will have to
suffer the burden of it and hence it will defeat the purpose.
  Also, if it is added in a particular bracket of income level then a part of his income will get exempt from
such additional charge.
Q.23. What is Gross Total Income u/s 80B(5)
Ans- Gross Total Income (GTI) is a cumulative Income which is computed after combining all heads of income of
an assessee before making any deduction under section 80C to 80U of income tax Act but after giving effect to
the clubbing provisions and making adjustments of set-off and carry forward of losses. It includes the following
Heads of income-
i. Income under the head salaries- This includes the earning from employment.
ii. Income under the head House properties- This includes any rent earned by letting out a house.
iii. Income under the head Profit and gains of Business and Profession- This includes the income earned
by a business man and a self employed professional
iv. Income under the head Capital Gain- This includes profits or losses incur by selling any movable or
immovable capital property, including land, building, house, shares, jewellery etc.
v. Income under the head Other Sources.- It means all incomes which are not included in the above
mentioned heads. It includes income from interest on securities, lotteries, horse race, card games,
cross word puzzles. Income received from sub letting of the house, any annuity or pension received
from LIC or other insurer etc.
After computing income from various sources of income within a particular head, its own deductions are
allowed and then Income from that Head is arrived. The sum total of such Heads of Income is the GTI.
Q.24. Write the Features of Income- To understand the concept of Income it is required to know the following
features of Income.
i. Definite source- There is a definite source for income of any kind. The existence of source for income is
essential to bring a receipt under the charge of tax.
ii. It must come from Outside- No one can earn income from himself. So there is no income from
transaction between head office and branch office. Similarly contribution made by members for the
mutual benefit and found surplus cannot be termed as income of such group.
iii. Temporary or permanent- Income may be permanent or temporary; it is immaterial from tax point of
view.
iv. Voluntary receipts- The receipts which do not arise from the exercise of a profession or business or do
not amount to remuneration are not included in the scope of total income.
v. It may be money or money’s worth-The income may be in cash or in kind and it is taxable in both cases.
vi. Gifts- Any monetary gift exceeding Rs 50,000 during the previous year is treated as income with full
amount. But any immovable property received without consideration having stamp duty value
exceeding Rs 50,000 then income will be the stamp duty value of such immovable property.
vii. Surplus from mutual activity- it refers to an activity where contributions are made to a common pool by
certain people who are entitled to participate or derive benefits from that common pool/ fund. Any
surplus out of such activity is not an income except in the cases like-income of a trade or professional
association, profits and gains derived from any insurance business, and profit and gains derived from
any banking business.
viii. Diversion of income and application of income- when any income is diverted to some other person due
to some legal obligation is called diversion of income and it is not included in total income of the
assessee. But application of income means spending of income after it is being earned. Such an income
is taxable in the hands of assessee.
Q.25.Explain Agricultural Income u/s 2(1A)
Ans- In India Agricultural income refers to income earned or revenue derived from sources that includes
farming land, building on or identified with an agricultural land and commercial produce from a horticultural
land. So according to section 2 (1A) of income tax Act 1961 agricultural income generally means-
i. Any rent or revenue derived from land which s situated in India is used for agricultural purpose.
ii. Any income derived from such land by agriculture operation including processing of agricultural
produce to make the produce fit for sale.
iii. Any income attributable to a firm house.
iv. Any income derived from saplings seedlings grown in a nursery.
Examples of agricultural income
(i) Income from sale of replanted tree (ii) Income from growing flowers and creepers. (iii) Interest on
capital that a partner from a firm engaged in agricultural operations. (iv) Income from sale of seeds.
Examples of non- agricultural income
(i) Income from poultry farming (ii) Income from sale of spontaneously grown trees, (iii) income from
dairy farming. (iv) Royalty income from mines, (v) receipts from T.V serial shooting in farm house.
As per section 10(1) of income tax Act 1961 agricultural income is exempted from taxation.
Q.26. What is Average rate U/S 2(10)?
Ans- i. Average rate of Income tax means the rate arrived at by dividing the amount of Income tax so calculated
on the total income by such total Income.
ii. so average rate= (Total Tax including surcharge + Health and educational cess) / Total Income X 100
Q.27. what is Total Income u/s 2(45)
Ans- i. The total income of an assessee is the Income remaining after allowing deductions u/s 80C to 80U from
Gross Total Income.
ii. This Income is also called taxable Income as income tax is charged on such income.
iii.So Total Income = GTI- Deductions under 80C to 80U.
Q.28. How Total income or taxable Income is computed?
Ans- The followings are the steps in calculating Taxable Income for any assessment year.
Step-1- Determine the residential status of the assessee to find out which income is to be included in the
computation of his total income.
Step-2- classify the income under each of the five heads of income i.e. salary, HP, PGBP, CG and income from
other sources.
Step-3- compute the income under each heads of income after allowing the deductions prescribed for each
head of income.
Step-4- Find out GTI by aggregating all net incomes arrived from the five heads of income.
Step-5- Make adjustments as regards to deductions under section 80 of chapter VI of the income tax Act.
 80C- specific investments and expenses up to Rs 1.5 lakh
 80CCD- NPS contribution up to Rs 50,000
 80D- health insurance premium paid for self and for parents up to Rs 60,000
 80 DDB- expenses incurred on specific illness up to Rs 40,000 and for seiner citizen Rs 60,000.
 80E- interest paid on education loan
 80 G-charitable donations made to recognized institutes
 80GG- HRA for those who don’t have an HRA component in their salary.
 80TTA- interest earned from the savings account up to Rs 10,000
 80 U- Physical disability up to Rs 75,000 or Rs 1.25lakh depending upon the severity of the disability
Step -6- Rounding off of total income to the nearest multiple of ten rupees.
Q.29. How Usual Taxes, surcharge and cess are different?
Ans- A common feature of both surcharge and cess is that the centre need not share it with states. Following
are the difference between the usual taxes, surcharge and cess.
1. The usual taxes goes to the consolidated fund of India and can be spent for any purposes.
2. Surcharge also goes to the consolidated fund of India and can be spent for any purposes.
3. Cess goes to Consolidated Fund of India but can be spend only for the specific purposes.
The main difference between surcharge and cess is that despite they are not shareable with state governments,
surcharge can be kept with the CFI and spent like any other taxes, the cess should be kept as a separate fund
after allocating to CFI and can be spent only for a specific purpose
Long type questions ( UNIT-1)
Q.1 Define Residential status, and how such status is determined for different persons as per Income tax Act
1961?
Ans- Under income tax Act,1961 the total income of each person is based upon his residential status. Section 6
of the Act divides the assessable persons into three categories-
i.Ordinary resident ii. Resident but not ordinarily resident, iii. Non- resident
Residential status of a person depends upon the territorial connections of a person with the country i.e. for how
many days he has physically stayed in India. It has nothing to do with nationality or domicile of a person. Just
like an Indian, who is a citizen of India can be a non- resident for Income tax purpose , where as an American
who is a citizen of America can be resident of India for Income Tax purpose.
The residential status of different types of persons is determined differently with reference to the previous year.
The residential status of the assessee may change from year to year.
DETERMINATION OF RESIDENTIAL STATUS OF DIFFERET PERSONS
A. Residential status of an Individual-u/s 6- An individual has three types of residential status as
resident/ordinary resident, not ordinarily resident and non- resident.
1. Resident/ ordinary resident u/s 6 (1)- An individual who fulfils any one of the following two tests is said to
be resident under the provision of this Act. Such tests are-
i. If he is in India for a period or periods in total of 182 days or more during the relevant previous year
Or
ii. If he was in India for a period or periods of 365 days or more in all during the four preceding years of
the relevant previous year,
And he was in India for a period or periods amounting to all to 60 days or more in that relevant previous
year.
Exceptions or concessions-
- In case of individual who leaves India in any previous year for the purpose of employment outside India or
as a member of crew in Indian ship, then the period of 60 days condition have been substituted by 182
days.
- In care an individual being a citizen of India or a person of Indian origin, who being outside India, come on
a visit to India in any previous year, then 60 days have been replaced by 182 days.
After fulfilling one of the above two test, an individual becomes resident of India but to become an ordinary
resident of India he has to fulfill both the following conditions
i. He has been resident of India in at least 2 previous years out of 10 previous years immediately prior to
the relevant previous year. And
ii. He has stayed in India for at least 730 days in 7 previous years immediately preceding the relevant
previous year.
While calculating the number of days for stay in India, day of departure and day of arrival in India are to be
counted as stay in India.
2. Resident but not ordinarily Resident (N.O.R) u/s 6(6)- An individual who is resident u/s 6(1) can claim the
beneficial status of N.O.R, if he can prove that-
i. He was non- resident in India for 9 previous years out of 10 previous years preceding the relevant
previous year
OR
ii. He was in India for a period or periods aggregating in all to 729 days or less during 7 previous years
preceding the relevant previous year.
3. Non – resident u/s 2 (30)- an Individual who does not fulfill any of the two conditions as given in section 6
(1) would be regarded as Non- resident during the relevant previous year for all purpose of this Act.
B. Residential status of HUF u/s 6(2)- HUF is also enjoying three residential status as resident, not ordinarily
resident and non- resident,
1. Ordinary resident u/s 6(2)- HUF is said to be resident in India if its control and management of affairs is
situated wholly or partially in India. The control and management of affairs means the controlling and
directing power the head and the brain. In other words if the head of HUF is a resident then HUF is said to
be resident of India.
2. Not ordinarily resident u/s 6(6)(b)- Next to individual it is the HUF who can claim the advantageous status
of NOR. A HUF s said to be NOR if-
i. Its manager or Karta has not been resident of India in 9 out of 10 previous year preceding the
relevant previous year.
ii. The manager had not been present in India for a period of 730 days during the seven previous year
preceding the relevant previous year.
3. Non- resident u/s 2(30)- HUF shall be non –resident in India if the control and management of affairs is
situated wholly outside India.
C. Residential status of all other person- It includes Firms, AOP, BOI, Company and every other person.
a. Residential status of Firm AOP, BOI- such persons enjoy two residential status as –
1. Ordinary resident- Firm AOP, BOI is said to be resident in India if its control and management of affairs is
situated wholly or partially in India.
2. Non- resident- Firm AOP, BOI shall be non –resident in India if the control and management of affairs is
situated wholly outside India.
D. Residential status of company u/s 6(3)- the residential status of a company is to be determined on the
basis of its incorporation or registration. The company claims two residential status as-
 1. Resident- A company is resident in India if it is an Indian company or during the previous year its control
and management of affairs is situated wholly in India
2. Non- Resident- a company shall be non- resident in India if during the previous year its control and
management of affairs is situated wholly outside India
Q.2. state the scope of total income and incidence of tax on the basis of residential status of an individual.
Ans- Incidence of Tax—Scope Of Total Income (Section 5)
Total income of an assessee cannot be computed unless we know his residential status in India during the
previous year. According to the residential status, the assessee can either be:
• Resident in India; or
• Non-resident in India.
However, individual and HUF cannot be simply called resident in India. If individual is a resident in India he will
be either:
• Resident and Ordinarily resident in India; or
• Resident but not ordinarily resident in India.
Other categories of persons shall either be resident in India or non-resident in India. There is no further
classification into ordinarily resident or not ordinarily resident in their case.
Scope of total income of an individual
1. Resident in India/ ordinarily resident in India u/s 5 (1)
A person is assessable to tax in respect of income which
i. Is received or deemed to be received in India by him or on his behalf.
ii. Accrues or arises or deemed to accrue or arise to him in India.
iii. Accrues or arises to him outside India. So
Scope of Income =Indian income +Foreign Income
2. Resident but not ordinarily resident in India u/s 5(1)
A person is assessable to tax in respect of income which
i. Is received or deemed to be received in India by him or on his behalf
ii. Accrues or arises or deemed to accrue or arise to him in India
iii. Accrues or arises to him outside India from a business controlled in or profession set up in India.
Scope of Income =Indian income + one particular type of Foreign Income
3. Non-resident in India u/s 5(2)
A person is assessable to tax in respect of income which
i. Is received or deemed to be received in India by him or on his behalf.
ii. Accrues or arises or deemed to accrue or arise to him in India.
Scope of Income =Indian income
Other points:
 Received in India means first receipt in India. If an income is received first outside India and then
subsequently remitted to India, it shall be treated as received outside India.
 Past untaxed profits shall not be considered to be income of the current year in any case.
Types of Income
Broadly Income can be divided into two categories- (i) Indian Income (ii) Foreign Income
A. Indian Income- the Indian income may be termed as –
i. Income earned in India
ii. Income accrues and arises in India
iii. Income received or deemed to be received in India.
iv. Income payable in India.
v. Income earned in India but is received outside India.
B. Foreign Income-following types of incomes are called foreign incomes
i. Income earned or accrues outside India and also received outside India.
ii. Any income which is not earned or accrues or arises in India.
Income received or deemed to be received in India [Sec 7)
Income received in India: Any income which is received in India is liable to tax in India, whether the person
receiving income is resident or non- resident. ‘Received in India’ means first receipt.
Income deemed to be received in India: Following incomes shall be deemed to be received in India even in the
absence of actual receipt:
i. Contribution by employer to recognized provident fund in excess of 12% of salary of employee
ii. Interest credited to RPF in excess of 9.5%
iii. Transferred balance from unrecognized PF to RPF
iv. Contribution by Government/Employer to notified pension scheme

Q.3. Explain various exempted Incomes under Income Tax Act 1961
Ans- The Income Tax Act, 1961 specifies that every individual who earns an income in India should pay income
tax on such income earned. That is why the incomes that generate in a financial year from all possible sources is
taxed at specified tax rates. Though the income earned is taxable, the Act also allows for different types of
exemptions which help in lowering taxable income. These exemptions allow specific incomes to be tax-free in
nature. As such, the exempted income is not added to gross total income which reduces tax liability.
There are different types of income tax exemptions which an assessee can claim. Section 10 of the Income Tax
Act allows a list of exemptions which are available to tax-payers, both salaried as well as non-salaried
individuals.
1. Agricultural Income u/s 10 (1)- Any agricultural income earned in a financial year, such an income would be
exempted from tax. Agricultural income, as defined under Section 2 (1A) of the Income Tax Act, 1961,
would include the following types of incomes –
 Rent or revenue earned from a land located in India which is used for agricultural purposes
 Income earned from an agricultural land located in India by doing agricultural activities. These
agricultural activities also include processing of the agricultural produce to make it fit for sale in the
market
 Income earned from a farmhouse provided specific conditions are fulfilled
Moreover, income earned from saplings or seedlings which are grown in a nursery would also be considered as
an agricultural income
2. Income received by a coparcener from the HUF u/s 10(2)- a coparcener in a Hindu Undivided Family (HUF),
share of income received from family income or income received from an impartial family estate would be
exempted from tax. For instance, in a financial year, coparcener earns Rs50, 000 as salary from HUF.
Moreover, the HUF earned an income of Rs6, 00,000 out of which coparcener received Rs20, 000 as his
share. In this case, coparcener’s salary income would be liable to tax but the share of profit which
coparcener received from the HUF, i.e.Rs20, 000 would be exempted from tax.
3. Profit received by a partner from a firm u/s 10 (2A)- If an assessee is a partner in a partnership firm or in
an LLP (Limited Liability Partnership), the share of profit which he receives from the firm or LLP would be
exempted from tax. This exemption would be allowed only on the share of profit received. Any other
amount received by way of remuneration or interest on capital would not be exempted.
4. Interest received by a non-resident under Section 10 (4)- Section 10 (4) is further divided into two sub-
sections. The first one is Section 10 (4) (i) wherein interest received by a non-resident individual on specific
securities or bonds and the premium earned on redemption on such bonds are allowed as an exemption.
The second one is Section 10 (4) (ii) wherein interest earned by a non-resident on the Non-Resident External
Account (NRE Account) is allowed as an exemption. The NRE account can be maintained with any bank as
per the Foreign Exchange Management Act, 1999 (FEMA).
5. Interest paid on notified savings certificates under Section 10 (4B)- If an individual is an Indian citizen or a
PIO (Person of Indian Origin) and he/she is a non-resident, interest income earned from saving certificates
which are issued by the Central Government would be completely exempted from tax. The saving
certificates should be notified in the Official Gazette of the Central Government and the individual should
have invested in such certificates in foreign currency or foreign exchange as specified in the Foreign
Exchange Act, 1973, FEMA or any other Act passed by the Government. However, if the securities are issued
on or after 1st June 2002, the exemption would not be allowed and the interest income would be fully
taxable.
6. Leave Travel Allowance /Concession paid to an employee under Section 10 (5)- A salaried employee can
claim an exemption for the Leave Travel Allowance (LTA) or Leave Travel Concession (LTC) paid by the
employer. 
7. perquisites and allowances paid by the Government to its employees outside India under Section 10 (7)-
If an Indian citizen is working outside India for the Government, any perquisite or allowance paid by the
Government to such employee would be exempted from tax. The salary of the employee would be deemed to
accrue in India on which the employee would be taxed. However, the perquisites and allowances paid to the
employee would not be taxed. To claim exemption, the income should be charged under the head ‘Salary
 Income’ and it should be paid by the Government to an Indian citizen (whether resident or non-resident) for
the services rendered outside India
8. Income paid to employees of foreign countries working in India under Section 10 (8)- If a foreign citizen is
working in India under the scheme of co-operative technical assistance programmes and there is an
agreement between the Government of India and the Government of the foreign State, the income earned
by the individual would be exempted from tax. The income should be paid by the Government of the
foreign State and the individual should not have any income arising in India.
9. Gratuity income received by an employee under Section 10 (10)- If an employee has completed five years
of service with an employer, the employer pays a gratuity to the employee on retirement or on the death of
the employee. Gratuity is paid as an acknowledgement of the past service rendered by the employee. If
gratuity is paid on the retirement of the employee, the amount of gratuity is recorded under ‘Income from
salary’. However, gratuity paid to the legal heir on the death of the employee would be recorded under the
head ‘Income from other sources’ in the tax return of the legal heir. Section 10 (10) exempts the gratuity
received by the employee up to specified limits.
i. Death cum retirement gratuity- for govt. employees is fully exempted
ii. For private employees- if they come under POGA or not come under POGA- some amount is
exempted as per the provisions of Act.
10. Commuted pension under Section 10 (10A)- If an employee has a pension fund to his name, a part of the
fund can be commuted. Commutation of pension means withdrawing a part of the fund in a lump sum. The
remaining fund is, then, used to pay pensions. This commutation of pension is allowed as a tax-exempt
income.
11. Leave encashment received on retirement under Section 10 (10AA)- If an employee retires from service
and receives leave encashment, the amount received would be exempted from tax. For govt. employees it
is fully exempted while for private employees it is exempted up to least of the four amount i.e. notified limit
3,00,000, actual amount received, average salary of 10 months immediately preceding the date of
retirement, cash equivalent of leave salary due at the time of retirement.
12. Retrenchment compensation paid to workmen under Section 10 (10B)- If a workman is terminated from
employment, which is called retrenched, the employer pays compensation to the worker at that time. This
is called retrenchment compensation and this compensation is payable under the provisions of the
Industrial Disputes Act, 1947, any other rules of Act issued by the Government, any standing order or
through an award, service contract or otherwise, or Rs 5,00,000 whichever is less is exempted from tax.
13. Compensation received for Bhopal Gas Tragedy under Section 10 (10BB)- Any compensation paid to an
individual under the Bhopal Gas Leak Disaster (Processing of Claims) Act 1985 would be considered to be a
tax-exempt income. However, if the compensation is paid against any loss or any damage for which the
individual has already claimed a deduction, the compensation received would be taxable.
14. Compensation received for any disaster under Section 10 (10BC)- If an individual or his legal heirs receive
compensation from the Government or local authority for a disaster, such compensation would be
exempted from tax. However, if the individual or his legal heirs suffered a loss due to the disaster and they
have claimed a deduction in the Income Tax Act, 1961 for such losses, the compensation received would be
taxable. The term ‘disaster’ would include both man-made causes and natural disasters which cause
considerable loss of life and/or damage to property or the environment. Moreover, the extent of disaster
should be beyond the coping capacity of the community of individuals in the affected areas.
15. Compensation received at the time of voluntary retirement under Section 10 (10C)- If an employee
voluntarily retires from employment, compensation is paid to him on such voluntary retirement would be
exempted from tax.
16. Non-monetary perquisites paid by the employer under Section 10 (10CC)- Perquisites are additional
benefits and facilities which the employer provides to its employees. Perquisites can be monetary or non-
monetary in nature. If the employer provides non-monetary perquisites to the employees and pays tax on
such perquisites on behalf of the employees, the tax paid by the employer would be allowed as an
exemption in the hands of the employees.
17. Benefits received from life insurance policies under Section 10 (10D)- If an individual receives any amount
from a life insurance policy, including any bonus earned on the policy, the amount received would be fully
exempted from tax without any maximum limit.
18. Payment from Statutory Provident Fund under Section 10 (11)- The exemption is allowed on payment
made to an employee from a Statutory Provident Fund set up under the provisions of the Provident Funds
 Act, 1925 or from any other Provident Fund established by the Central Government through a notification in
the Official Gazette. The employer’s contribution to such fund is not treated as an income for the employee
and is, therefore, not taxable in the employee’s hands. Moreover, interest earned and lump sum amount
received at the time of termination of services are also completely exempted from tax for the employees.
19. Sukanya Samriddhi Yojana under Section 10 (11A)- If an individual opens a Sukanya Samriddhi Account in
accordance with the Sukanya Samriddhi Account Rules, 2014 which have been created under the
Government Savings Bank Act, 1873, payments from the account would be exempted from tax. This
payment includes the interest earned, partial withdrawals from the account as well as the lump sum benefit
received on termination or maturity of the account
20. Payment received from a Recognized Provident Fund under Section 10 (12)- If an employee participates in
a Recognised Provident Fund, the accumulated amount in the fund which is payable to the employee would
be allowed as an exemption.
21. Amount received from NPS under Section 10 (12A)- If an individual invests in a National Pension System
Trust or any other pension scheme as mentioned under Section 80CCD and then closes the scheme, the
money received from the scheme would be exempted from tax. The exemption would be allowed for up to
40% of the money received. However, from 1st April 2020, the limit has been increased to 60%..
22. Payment from an approved superannuation fund under Section 10 (13)- A superannuation fund is like a
pension fund which is created to provide retirement benefits to its employees. The fund is created under a
trust to pay annuities to employees of the organisation on their retirement, incapacitation to work or on
premature death. In case of premature death of the employee, annuities are paid to the widow, children or
other dependents of the employee. The fund collects contributions from the employer and employee and
invests the contributions in prescribed avenues. Income earned from the investments is exempted from tax
provided that the fund is an approved superannuation fund.
23. House Rent Allowance under Section 10 (13A)- House Rent Allowance (HRA) is a salary component of
almost all salaried employees provided by the employer to meet the rent of accommodation of the
employee. This HRA received from the employer is exempted from tax in the hands of the employee up to a
certain extent. The limit of exemption allowed is the lowest of the following –
 50% of the salary if the house is in a metro city like Kolkata, Mumbai, Delhi and Chennai else 40% of the
salary
 HRA received by the employee from the employer
 Rent paid in excess of 10% of the salary of the employ.
24. Specified benefits and allowances paid to an employee under Section 10 (14)- If an employee receives
specified allowances and benefits from his employer for performing his employment-related duties, such
allowances and benefits would be exempted from tax.
25. Interest income under Section 10 (15)- There are different types of interest incomes on which exemption
can be claimed under Section 10 (15). Each income is specified under sub-sections of Section 10 (15) along
with the type of taxpayer who can claim the exemption.
26. Scholarship received for education under Section 10 (16)- Any scholarship is given by the Government, university,
educational board, education trust, etc. for education costs would be exempted in the hands of the student. The
exemption would be allowed for the full amount of scholarship received irrespective of the actual cost of education.
Moreover, the cost of education would not only cover the tuition fee, but it would also cover incidental expenses
which are incurred in availing education
27. Allowances paid to MP, MLA or MLC under Section 10 (17)- Any amount paid for specified allowances to Members of
Parliament (MPs), Members of Legislative Assembly (MLAs) or Members of Legislative Committee (MLCs) would be
exempted in the hands of such members. 
28. Pension paid to gallantry award winners under Section 10 (18)- If an individual was an employee of the Central or
State Government and has received a gallantry award like the Vir Chakra, Mahavir Chakra or the Param Vir Chakra, any
pension paid to such individual would be exempted from tax. Moreover, if a family pension is paid to the family
members of such individual, such pension would also be exempted from tax.