BASIC CONCEPTS

Tax is a fee charged by a government on a product, income or activity. There are two types of taxes
(1) Direct Taxes; and
(2) Indirect Taxes.
Types of Taxes

Direct Taxes

Income Tax

Indirect Taxes

Excise

Custom

Service

Sales Tax

Duty

Duty

Tax

/ VAT

WHY ARE TAXES LEVIED

The reason for levy of taxes is that they constitute the basic source of revenue to the government. Revenue so
raised is utilized for meeting the expenses of government like Defence, provision of education, health-care,
infrastructure facilities like roads, dams etc.

TOTAL INCOME AND TAX PAYABLE

Income-tax is levied on an assessee's total income. Such total income has to be computed as per the provisions
contained in the Income-tax Act, 1961. Following steps are to be followed for 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

Rebate of upto Rs. 2,000 for Resident Individual (only if Total Income is upto Rs. 5 lakhs)

Step 12

Education Cess (2%) and Secondary and Higher Education Cess on Income-Tax (1%) [on Income
Tax + Surcharge, if applicable]

Step 13

Advance Tax and Tax Deducted at Source

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RATES OF TAX [APPLICABLE TO AY 2015-16 (PY 2014-15)]

A.
I.
i.
ii.
iii.
iv.
II.
i.
ii.
iii.
iv.
III.
i.
ii.
iii.
B.
i.
ii.
iii.
iv.
C.
i.
ii.
iii.
D.
E.
F.

Income Level / Slabs

Individuals and HUFs
Individual (other than II and III below) and HUF
Where the total income does not exceed ` 2,50,000/Where the total income exceeds ` 2,50,000/but does not exceed ` 5,00,000/-.
Where the total income exceeds ` 5,00,000/but does not exceed ` 10,00,000/-.
Where the total income exceeds ` 10,00,000/-.

Income Tax Rate

NIL
10% of amount by which the total income exceeds `
2,50,000/` 25,000/- + 20% of the amount by which the total income
exceeds ` 5,00,000/-.
` 1,25,000/- + 30% of the amount by which the total income
exceeds ` 10,00,000/-.
Individual resident who is of the age of 60 years or more but below the age of 80 years at any time during the PY
Where the total income does not exceed ` 3,00,000/-.
NIL
Where the total income exceeds ` 3,00,000/10% of the amount by which the total income exceeds `
but does not exceed ` 5,00,000/3,00,000/-.
Where the total income exceeds ` 5,00,000/` 20,000/- + 20% of the amount by which the total income
but does not exceed ` 10,00,000/exceeds ` 5,00,000/-.
Where the total income exceeds ` 10,00,000/` 120,000/- + 30% of the amount by which the total income
exceeds ` 10,00,000/-.
Individual resident who is of the age of 80 years or more at any time during the PY
Where the total income does not exceed ` 5,00,000/-.
NIL
Where the total income exceeds ` 5,00,000/20% of the amount
but does not exceed ` 10,00,000/by which the total income exceeds ` 5,00,000/-.
Where the total income exceeds ` 10,00,000/A 100,000/- + 30% of the amount
by which the total income exceeds ` 10,00,000/-.
Association of Persons (AOP) and Body of Individuals (BOI)
Where the total income does not exceed ` 2,50,000/-.
NIL
Where the total income exceeds ` 2,50,000/10% of amount
but does not exceed ` 5,00,000/-.
by which the total income exceeds ` 2,50,000/Where the total income exceeds ` 5,00,000/` 25,000/- + 20% of the amount
but does not exceed ` 10,00,000/-.
by which the total income exceeds ` 5,00,000/-.
Where the total income exceeds ` 10,00,000/-.
` 1,25,000/- + 30% of the amount
by which the total income exceeds ` 10,00,000/-.
Co-operative Society
Where the total income does not exceed ` 10,000/-.
10% of the income.
Where the total income exceeds ` 10,000/` 1,000/- + 20% of income in excess of ` 10,000/-.
but does not exceed ` 20,000/-.
Where the total income exceeds ` 20,000/` 3,000/- + 30% of the amount
by which the total income exceeds ` 20,000/-.
Firm/LLP
On the whole of the Total Income
30% of Total Income
Local Authority
On the whole of the Total Income
30% of Total Income
Company
In the case of a Domestic Company
30% of Total Income
In the case of a Foreign Company
40% of Total Income

** The above rates are prescribed by the annual Finance Acts. However, in respect of certain types of income,
as mentioned below, the Income-Tax Act, 1961 has prescribed specific rates;

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(1) Section 112 has prescribed the rate of tax @20% in respect of Long Term Capital Gains.
(2) Section 111A provides for a concessional rate of tax (i.e. 15%) on the Short-Term Capital Gains on transfer
of;
i]. an equity share in a company or
ii]. a unit of an equity oriented fund.
The conditions for availing the benefit of this concessional rate are;
i]. the transaction of sale of such equity share or unit should be entered into on or after 1.10.2004 and
ii]. such transaction should be chargeable to securities transaction tax.
(3) Section 115BB prescribes the rate of tax @30% for winnings from;
i]. any lottery; or
ii]. crossword puzzle; or
iii]. race including horse race; or
iv]. card game and other game of any sort; or
v]. gambling or betting of any form.
Surcharge
(1) In the case of domestic companies, the rate of surcharge is 5%, where the total income exceeds ` 1 crore.
(2) In the case of foreign companies, the rate of surcharge is 2%, where the total income exceeds ` 1 crore.
(3) In the case of other assessees, the rate of surcharge is 10%, where the total income exceeds ` 1 crore.
Marginal Relief
Marginal relief is available in cases having a total income exceeding Rs 1 crore i.e. the additional amount of
income-tax payable (together with surcharge) on the excess of income over Rs 1 crore should not be more
than the amount of income exceeding Rs 1 crore.
Education Cess and Secondary and Higher education cess on Income-Tax
The amount of income-tax as increased by the surcharge, if applicable, should be further increased by an
additional surcharge called the Education cess on income-tax, calculated at the rate of 2% of such income-tax
and surcharge, if applicable. Education cess is leviable in the case of all assessees i.e. individuals, HUF, AOP/
BOI, Firms, local authorities, cooperative societies and companies.
Further, Secondary and higher education cess on income-tax @1% of income-tax plus surcharge, if applicable,
is leviable in case of all assessees.
Return of Income [Section 139]
The Income-tax Act, 1961 contains provisions for filing of return of income. 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 due date for filing income tax return for corporate assessees and other assessees who are required to get
their accounts audited under Income Tax Act 1961 or under any other law for the time being in force is 30th
September and for others it is 31st July every year as have been prescribed u/s 139(1).

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IMPORTANT DEFINITIONS
1. PERSON [Section 2(31)]
Person includes,
i]. an individual,
ii]. a Hindu Undivided Family (HUF),
iii]. a company,
iv]. a firm,
v]. an AOP or a BOI, whether incorporated or not,
vi]. a local authority, and
vii]. every other artificial juridical person not falling in the categories mentioned above.
Individual means only a natural human being. It includes a minor or a person of unsound mind.
HUF consists of all males lineally descended from a common ancestor and includes both males & females.
Company [Section 2(17)] means;
i]. an Indian Company; or
ii]. any body corporate incorporated by or under the laws of a country outside India; or
iii]. any institution, association or body assessed or was assessed as company on or before AY 1970-71; or
iv]. Any institution, association or body whether incorporated or not and whether Indian or non-Indian
declared by general or special order of CBDT to be a Company.
For the purposes of Income Tax Act, the term Company has wider connotation than that under the
Companies Act. The various classes of Company as per the Act are as follows;
(a) Domestic Company [Section 2(22A)]
(b) Foreign Company [Section 2(23A)]
(c) Indian Company [Section 2(26)]
(d) A Company in which public is substantially interested [Section 2(18)]
Firm, Partner and Partnership have the same meanings as assigned to them in the Indian Partnership Act.
For Income Tax as well as Sales Tax, Firm is treated as separate legal entity.
Association of Persons (AOP) / Body of Individuals (BOI) means an association of persons for a common
cause or a common purpose or aim being to produce income or hold income producing assets or it may
involve a group of persons having under some common tie or occupation e.g. Anand Co-operative Housing
Society, Bhima Mitra Mandal etc.
The two basic differences between AOP and BOI are; (a) In BOI there are only individuals but in AOP there
can be any type of persons; and (b) BOI is creation of law e.g. legal heir of a deceased person earning
income from property inherited whereas AOP can be created by different persons coming together for
doing some income producing activity on the voluntary basis.
Local Authority means a municipal committee, district board, gram panchayat, corporation or other
authorities entrusted by the Government with the control or management of a municipal or local fund.
Artificial Juridical Person includes all artificial juridical person not falling under other heads. An idol, or
deity would be assessable in the status of an artificial juridical person.

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2. ASSESSEE [Section 2(7)]

Assessee means any person by whom tax, interest or penalty is payable under any provision of this act and
includes
i]. deemed assessee
ii]. assessee in default
iii]. Person against whom any income tax proceedings have been started for the assessment of his income
or loss or the income of some other person or the loss for whom he is liable.

3. ASSESSMENT YEAR [Section 2(9)]

This means a period of 12 months commencing on 1st April every year. Assessment year is the year in
which the income of the Previous Year is assessed to tax. e.g. for the assessment year 2014-15, the relevant
previous year is 2013-14 (1.4.2013 to 31.3.2014).

4. PREVIOUS YEAR [Section 2(34) read with Section 3]

It means the financial year immediately preceding the assessment year. Financial Year ends on 31st March
every year.
In the case of newly set up Business, previous year begins from the date of setting up or coming into
existence of the new business but ends on 31st March. First previous year may be less than 12 months but
from subsequent Assessment Year, previous year will be of 12 months.
The following are the exceptions to the general rule that income of every previous year is chargeable to tax
in the relevant assessment year. In these cases, Income of one previous year is taxable in the same year;
i]. Section 172
Shipping business of a non-resident;
ii]. Section 174
Person leaving India;
iii]. Section 174A An AOP formed for the purpose of a particular event.
iv]. Section 175
Persons likely to transfer property to avoid tax;
v]. Section 176
Discontinued business or profession

5. DIVIDEND [Section 2(22)]

The term 'dividend' as used in the Act has a wider scope and meaning than under the general law.
According to section 2(22), the following receipts are deemed to be dividend;
(a) Distribution of accumulated profits, entailing the release of company's assets
(b) Distribution of debentures, deposit certificates and bonus shares to preference shareholders
(c) Distribution on liquidation
(d) Distribution on reduction of capital
(e) Advance or loan by a closely held company to its shareholder
There are two exceptions to this rule;
i]. If the loan is granted in the ordinary course of its business and lending of money is a substantial part of
the company's business,
ii]. Where a loan had been treated as dividend and subsequently the company declares and distributes
dividend to all its shareholders including the borrowing shareholder, and the dividend so paid is set off
by the company against the previous borrowing, the adjusted amount will not be again be treated as a
dividend.

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6. GROSS TOTAL INCOME [Section 14]

Gross total income is the aggregate of income from all five heads of Income, namely;
i]. Income under the head salary
ii]. Income under the head house property
iii]. Income under the head business and profession
iv]. Income under the head capital gains
v]. Income under the head other sources
** While computing total income no deduction shall be allowed for that expenditure which has been
incurred to earn exempted income [Section 14A].

7. INCOME [Section 2(24)]

Periodical monetary return coming in with some sort of regularity or expected regularity from definite
source. It includes;
a]. Profits and gains.
b]. Dividends.
c]. Voluntary contributions received by a charitable/religious trust, any institution established wholly or
partly for the above purpose, any approved scientific research association, any institution for
promotion of sports, any university or educational institutions, hospitals etc.
d]. value of any perquisite or profit in lieu of salary taxable under section 17.
e]. any capital gains chargeable under section 45.
f]. any winnings from lotteries, cross-word puzzles, horse races etc.
g]. any sum received under a Keyman insurance policy including the sum allocated by way of bonus on
such policy
h]. any sum of money exceeding ` 50,000 received without consideration (as gift) with the following
exceptions;
i]. from any relative(spouse, brother, sister, mother, father etc.)
ii]. on the occasion of marriage
iii]. under a will/by way of inheritance
iv]. in contemplation of the death of the payer
v]. from a local authority
vi]. from any fund, foundation, university, hospitals, medical institutions, charitable institutions etc.
i]. any profits on sale of a license granted under the Import & Export Control Act etc.
Hence, income can be;
i. in cash / kind,
ii. it should be monetary periodical returns,
iii. can be lawful / unlawful,
iv. accrual basis / cash basis,
v. also includes loss,
vi. real / fictional /notional
vii. awards received by a professional sportsman
but do not includes; (a) Surplus arising from the mutual activity i.e. contributory or beneficiary should
be the same person e.g. Cricket Association; (b) Pin money; (c) awards received by professional
sportsman in the nature of gift/personal testimonials.

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Revenue Receipt vs. Capital Receipt

Any receipt of money can either be categorized as revenue or capital. Revenue receipts are always fully taxable
unless specific exemption has been provided for that. Capital receipts are never taxable. E.g. amount received
from insurance company at the time of maturity is not taxed under Section 10(10D). Similarly loan taken is also
not taxed. However, some of the capital receipts are taxable since they have been specifically provided in the
definition of Income such as tax on Capital gains on sale of Capital asset.
Difference Between Capital Receipt and Revenue Receipt
Capital Receipt
Revenue Receipts
Capital receipt is generally referable to fixed capital. Revenue receipt refers to circulating capital. For e.g.,
For e.g., Sale price on the sale of assets, which Sale price of the stock in trade is a revenue receipt
assessee uses as a fixed asset in his business is a
capital receipt
Payment received towards the compensation for the Payment received to compensate loss of earnings is a
extinction of a profit earning source is a capital receipt revenue receipt
A receipt in lieu of source of income is a capital A receipt in lieu of income is a revenue receipt
receipt. For e.g., Compensation for the loss of
employment is a capital receipt.
Capital receipts are exempt from tax unless they are Revenue receipts are always taxable unless expressly
expressively taxable like in the case of capital gains
exempt from tax under section 10

****

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