CruxIncome Tax Law and Practice

Income has no closed definition. Section 2(49) says income includes the items below, so whatever is income in its ordinary sense is caught as well, and the list adds receipts that might otherwise escape.

Features of income:

• It may come in cash or in kind, regularly or once, in a lump sum or in instalments.
• Income from an unlawful source is still income.
• It must be real income. A person cannot earn from himself, so the surplus of a purely mutual body from its members' own contributions is not income, unless the Act taxes it, as it does for mutual insurance and co-operative banking.
• Income diverted at source by an overriding title, such as a charge a court places on the source before the income reaches the assessee, is not his income. Income he receives and then applies to meet an obligation, such as maintenance paid out of his salary, remains his.

Capital and revenue receipts

A revenue receipt is income unless the Act exempts it; a capital receipt is not income unless the Act taxes it.

1. Money for parting with fixed capital, the assets the business earns with (building, plant, goodwill), is capital; money from circulating capital, the stock it trades in, is revenue.
2. Compensation for losing a source of income is capital; compensation in place of income, such as for lost profits, is revenue.
3. A recurring return for the use of an asset, such as rent, interest or royalty, is revenue.

Capital receipts taxed all the same include capital gains (s. 67), compensation for ending a management or agency contract (s. 26(2)(b)), non-compete receipts (s. 26(2)(h)), Keyman sums and gifts above the limit.

Agricultural income (s. 2(5)) is excluded from total income (IT03). It has four limbs:

1. Rent or revenue from land in India used for agricultural purposes, in money or in kind.
2. Income derived from such land by:
   • agriculture;
   • any process the cultivator or receiver of rent-in-kind ordinarily uses to make the produce fit for the market, such as threshing, winnowing, drying or cleaning; or
   • his sale of that produce, where it has had no process beyond such a marketing process.
3. Income from a farm building that the receiver of the rent or revenue owns and occupies, or that the cultivator or receiver of rent-in-kind occupies, where all of these hold:
   • the building is on the land or in its immediate vicinity;
   • he needs it, because of his connection with the land, as a dwelling house, store-house or other out-building;
   • the land is assessed to land revenue or to a local rate collected by government officers, or, if not so assessed, lies outside an urban area.
4. Income from saplings or seedlings grown in a nursery.

Agriculture needs basic operations on the land itself: tilling, sowing, planting, irrigating. These are usually followed by subsequent operations such as weeding, pruning and harvesting. Produce that grows wild, like forest trees nobody planted, is not the result of agriculture; trees planted and tended are.

An urban area (s. 2(22)(iii)) is a municipality or cantonment board with a population of 10,000 or more, and the belt around it measured aerially from its limits: 2 km for a population above 10,000 up to 1 lakh, 6 km above 1 lakh up to 10 lakh, 8 km above 10 lakh. Population is taken from the last census published before the tax year begins.

Two receipts are expressly not agricultural income:

• income from the farm building or land when it is used for any other purpose, such as letting it as a residence or for a business;
• income from transferring urban agricultural land: it is a capital gain.

Grown and manufactured. Where the grower also makes the finished product, only part of the income is agricultural and the rest is business income from the manufacture: 60% for tea; 65% for latex, crepe or block rubber made from his own plants; 60% or 75%, as the case may be, for coffee; in each case grown and made in India (Finance Act, 2026, First Schedule, Part IV-B, rule 4). The income itself is computed under the Income-tax Rules.

Tax is charged on the total income of every person (s. 4(2)). Section 2(77) says person includes seven classes:

1. An individual: a natural person, a minor or a person of unsound mind included.
2. A Hindu undivided family (HUF): a family of persons descended from a common ancestor, with their wives and unmarried daughters, managed by the karta; Jain and Sikh families are treated alike.
3. A company (s. 2(28)): an Indian company, a body corporate formed under a foreign law, a body assessed as a company under the 1961 Act, or a body the Board declares a company.
4. A firm (s. 2(45)): a firm under the Indian Partnership Act, 1932, a limited liability partnership (LLP) included. A partner (s. 2(74)) includes a minor admitted to the benefits of partnership and an LLP partner.
5. An association of persons (AOP) or a body of individuals (BOI), incorporated or not. An AOP is two or more persons, who may be companies or firms, joining in a common purpose to earn income; a BOI is made up of individuals only.
6. A local authority, such as a municipality or a panchayat.
7. Every artificial juridical person (AJP) not covered above, such as a university or a deity, which the law treats as able to hold property.

An AOP, a BOI, a local authority and an AJP are persons whether or not they were formed to earn income.

An assessee (s. 2(11)) is a person who owes tax, or any other sum, under the Act. The term also covers:

• a person against whom a proceeding has been taken to assess his own income, loss or refund, or the income, loss or refund of another person for whom he is assessable;
• a person deemed to be an assessee;
• a person deemed to be an assessee in default.

The tax year is the financial year starting on 1 April (s. 3(1)). Tax is charged on the total income of the tax year at the rates the Finance Act fixes for that year (s. 4(1)-(2)). During the year it comes in through tax deducted or collected at source and through advance tax (s. 4(5)). The return is filed and the income assessed after the year ends. Assessment includes reassessment and recomputation (s. 2(13)); the Assessing Officer (AO) is the officer given jurisdiction over the assessee (s. 2(12)).

When a new business or profession is set up, or a new source of income first arises, during a financial year, its first tax year runs from that date to 31 March (s. 3(2)). Every later tax year is a full year, the same for all sources.

Income taxed in the year it is earned

Where the Act charges the income of some other period, tax is charged accordingly (s. 4(4)). Five provisions tax current income at once, because waiting for the year to end could lose the tax:

Shipping (s. 316). Before the ship leaves the port, the master files a return of the freight earned there. If the AO is satisfied that he cannot, and that he has arranged for someone to file it and pay the tax, his authorised person may file within 30 days after the ship sails. The AO assesses the 7.5% income at the rate for a company that has not arranged to declare and pay its dividends in India, in effect the foreign-company rate, within nine months from the end of the tax year of the return, and the master pays. Port clearance is refused until the tax is paid or its payment secured. The owner or charterer may instead claim, before the end of the year following the tax year of departure, a normal assessment of his total income; the tax paid then counts as advance tax, and any excess is refunded.

Persons leaving India (s. 317), single-purpose bodies (s. 318) and persons parting with assets (s. 319). The income becomes chargeable once the facts appear to the AO. Each completed tax year and part year in the period is assessed separately, at the rates in force for that year. The AO may estimate income that cannot readily be worked out, and may call for a return within a time he fixes, not less than seven days. The tax is in addition to tax under any other provision.

Discontinued business or profession (s. 320). The person must give the AO notice within 15 days of discontinuing. The same separate-assessment rule applies, and the tax is again additional. A sum received after a business is discontinued, or after a profession ends through the holder's retirement, death or ceasing to practise, is taxed as the recipient's income in the year of receipt, if it would have been income of the business or profession had it come in before.

Gross total income (GTI) is the total income computed under the Act before the deductions of Chapter VIII (s. 122(10)). Reach it in steps:

1. Leave out the exempt incomes of the Schedules to s. 11 (IT03).
2. Put every other income under one of the five heads (s. 13): salaries, house property, business or profession, capital gains and other sources.
3. Compute each head under its own rules.
4. Add the income of other persons that the Act includes in yours, such as a spouse's or minor child's (s. 99).
5. Set off current losses and brought-forward losses as the Act allows. The total is GTI.

Total income (s. 2(108)) is the income that s. 5 brings into charge, computed as the Act lays down. It is GTI less the deductions of Chapter VIII (s. 122(1)). Those deductions together can never exceed GTI (s. 122(2)), and under the default regime of s. 202 most of them are not allowed. Total income is then rounded off to the nearest multiple of ₹10: ignore paise, then raise a last digit of 5 or more and drop one below 5 (s. 516). The tax payable or refundable is rounded off the same way.

The maximum marginal rate (MMR, s. 2(70)) is the rate of income-tax, surcharge included, that applies to the highest slab of income of an individual, AOP or BOI, as the Finance Act of the year specifies. Some income is taxed at this rate: an AOP or BOI whose members' shares are indeterminate or unknown, for one, pays it on its total income (s. 311(1)).

For tax year 2026-27 the top slab rate is 30% under both regimes. Surcharge rises with income; at the top, and with the 4% Health and Education Cess (Finance Act, 2026, s. 3(15)), the rate works out as:

A Permanent Account Number (PAN, s. 2(76)) is a unique ten-character alphanumeric number that the AO allots to a person to identify him under the Act; it includes a PAN of the new series.

A person without a PAN must apply for one, within the prescribed time, if any of these holds (s. 262(1)):

• his total income, or that of anyone for whom he is assessable, exceeded the maximum amount not chargeable to tax in any tax year;
• his business or profession has sales, turnover or gross receipts above ₹5,00,000 in a tax year, or is likely to;
• he has to furnish a return of income under s. 263;
• he is a resident other than an individual that enters into financial transactions of ₹2,50,000 or more in a tax year, or a director, partner, trustee, karta, chief executive, principal officer or other person who can act for such an entity;
• he intends to enter into a transaction the Board prescribes.

Anyone else may apply, and the AO then allots a PAN (s. 262(2)). The Central Government may also notify classes of persons, importers and exporters among them, who must apply (s. 262(11)). Once a PAN is allotted:

• quote it in every return, every letter to an income-tax authority and every tax challan (s. 262(3));
• report a change of address, or of the name or nature of the business on which the PAN was given (s. 262(4));
• if eligible for Aadhaar, quote the Aadhaar number in the PAN application and in the return, or intimate it if the PAN came first; a PAN not so linked is made inoperative (s. 262(5)-(6));
• the Aadhaar number may be quoted in place of the PAN, and a person with Aadhaar but no PAN who quotes it is allotted one (s. 262(7));
• hold one PAN only (s. 262(8));
• quote and authenticate the PAN or Aadhaar in documents for prescribed transactions; the person receiving the document must check that it is quoted and authenticated (s. 262(9)). The Act does not list these transactions: they are prescribed by the Income-tax Rules, and the Board's rule-making power covers documents of a business or profession and other transactions (s. 262(10)(c), as amended by the Finance Act, 2026, s. 65).

Section 5 taxes a resident on his world income and a non-resident only on income connected with India. Residential status is decided for each tax year on its own facts (s. 6(1)): a person can be resident one year and non-resident the next. A resident is a person resident under s. 6 (s. 2(96)); a non-resident is one who is not (s. 2(72)).

Neither citizenship nor domicile settles status; they count only in the rules below for citizens and persons of Indian origin. India (s. 2(52)) includes its territorial waters, continental shelf, exclusive economic zone and the air space above, so days spent there count as days in India.

An individual is resident for a tax year when he satisfies at least one of two tests (s. 6(2)):

• (a) he is in India for 182 days or more in the year; or
• (b) he is in India for 60 days or more in the year and for 365 days or more in all in the four years before it.

If he meets neither, he is NR. The stay need not be continuous or at one place. Count both the day of arrival and the day of departure as days in India.

Test (b) is switched off or changed in three cases:

1. An Indian citizen leaving India during the year to take up a job abroad, or to serve as crew of an Indian ship, is resident only under test (a) (s. 6(3)).
2. So is a citizen or person of Indian origin (PIO: a person born in undivided India, or whose parent or grandparent was, s. 2(78)) who lives abroad and comes to India on a visit (s. 6(4)).
3. If that visitor's income for the year, leaving out income from foreign sources, is above ₹15 lakh, test (b) applies to him with 120 days in place of 60 (s. 6(5)).

For an Indian citizen serving as crew of a ship bound abroad, the days in India on that voyage are counted as the rules prescribe (s. 6(6)).

An individual who is not resident under s. 6(2) to (6) is still deemed resident if all three hold (s. 6(7)-(8)):

1. he is a citizen of India;
2. no other country or territory makes him liable to tax because of his domicile, his residence or a similar test; and
3. his income for the year, leaving out income from foreign sources, is above ₹15 lakh.

A citizen deemed resident is always NOR (s. 6(13)(c)). A foreign citizen, even a PIO, can never be deemed resident.

Income from foreign sources (s. 6(14)) is income arising outside India, other than income deemed to arise in India and income from a business controlled in India or a profession set up in India. So the ₹15 lakh figure of s. 6(5), 6(7) and 6(13)(b) counts income accruing in India, income deemed to accrue in India, and the foreign income of an Indian-controlled business or an Indian-set-up profession.

A resident individual is NOR if any one of these applies (s. 6(13)):

1. he was non-resident in at least nine of the ten tax years before this one;
2. he was in India for 729 days or less in all during the seven tax years before this one;
3. he is a citizen or PIO whose income, leaving out income from foreign sources, is above ₹15 lakh, and who is resident only through the 120-day test, with a stay of at least 120 days but under 182;
4. he is a citizen deemed resident under s. 6(7).

If none applies, he is ROR. A resident HUF is NOR if its manager (the karta) meets test 1 or 2; a firm, AOP, company or other person is never NOR.

1. Count the days in India in the tax year and in each of the ten years before it.
2. Apply the day tests, with s. 6(3) to 6(6), to the tax year; if he is not resident under them, test deemed residence.
3. If he is resident, check tests 3 and 4; then find the status of each of the ten earlier years by that year's own tests, and apply tests 1 and 2.

• Control and management means the directing power, the place where the key decisions on the affairs are taken, not where the day-to-day work is done. If any part of it is exercised in India, it is not wholly outside India, and the HUF, firm or AOP is resident.
• An Indian company (s. 2(53)) is one formed and registered under the Companies Act, 2013 or an earlier companies law, a corporation set up by a Central, State or Provincial Act, or a body the Board declares a company, in each case with its registered or principal office in India.
• The place of effective management is where the key management and commercial decisions for the company's business as a whole are in substance made.
• A resident HUF is ROR or NOR by its karta's history (sub-topic 4).
• A person resident for one source of income is resident for all his sources that year (s. 6(12)).

Section 5 decides which income enters total income:

• Income accrues when the right to receive it arises; it is received when it first comes into the hands of the assessee or of someone on his behalf. Only the first receipt counts: income first received abroad is not received in India when it is later sent here.
• Foreign income is not received in India just because it is taken into a balance sheet prepared in India (s. 5(3)). Income included once on accrual is not included again on receipt (s. 5(4)).
• Deemed to be received in the year (s. 7(1)): interest credited to an employee's recognised provident fund above the notified rate (Schedule XI, Part A, para 6, as substituted by the Finance Act, 2026, s. 127); a transferred provident fund balance to the extent Schedule XI provides; and an employer's contribution to the employee's account under the pension scheme of s. 124. A dividend is income of the year in which it is declared, distributed or paid, and an interim dividend of the year in which it is unconditionally made available (s. 7(2)).
• Spouses in Goa, Dadra and Nagar Haveli and Daman and Diu governed by the Portuguese community-of-property system are taxed separately: income under each head other than salaries is split equally between them, and salary stays with the spouse who earns it (s. 10).

Income deemed to accrue or arise in India (s. 9)

• Interest, royalty and fees of a non-resident are caught by these rules whether or not he has a residence, place of business or business connection in India, or rendered the services in India (s. 9(11)).
• A business connection includes a significant economic presence: transactions with persons in India, or dealings with users in India, above prescribed levels, wherever the contract is made (s. 9(9)(d)).
• Not income from a business connection: business done through an independent broker or agent in the ordinary course of his business; purchase of goods in India for export; collection of news in India by a news agency or publisher for transmission abroad; display of uncut diamonds in a notified zone by a foreign diamond-mining company; and shooting of a film in India by a non-resident who is a foreign citizen, or a firm or company without an Indian citizen or resident among its partners or shareholders (s. 9(9)(c)).

Working out taxable income by status

1. Fix the status for the tax year (sub-topics 2 to 4).
2. List each income with where it accrues and where it is first received.
3. Apply the scope table: an ROR keeps everything; a NOR drops foreign income except from an Indian-controlled business or Indian-set-up profession; a NR drops all foreign income not received in India.
4. Leave out past income remitted to India, then compute each head and total income.

In computing total income, an income listed in Schedules II to VI is left out, subject to the conditions stated against it (s. 11(1)). If a condition is not met in a tax year, the income is taxed in that year (s. 11(2)). The persons in Schedule VII are not taxed on their total income at all, again on conditions (s. 11(3)).

• No deduction is allowed for expenditure incurred in relation to exempt income (s. 14(1)). Where the AO is not satisfied with the assessee's claim of such expenditure, or of none, he determines it by the prescribed method (s. 14(2)). The bar applies even in a year in which no exempt income arises (s. 14(3)).
• An exempt income never enters GTI; a deduction comes off GTI. Agricultural income alone still affects the rate of tax (sub-topic 2).
• Under the default regime, Schedule III items 5 to 8, 11 and 17 (legislators' allowances, leave travel concession, house rent allowance and the minor's ₹1,500) are withdrawn, and items 12 and 13 (allowances for official duties and personal expenses) survive only as prescribed (s. 202(2)(a)(i)-(ii)). Allowances and perquisites exempted by any other law are also withdrawn (s. 202(2)(c)).

Agricultural income (meaning: IT01) is excluded with no condition (Schedule II, Sl. No. 1). It is still brought in to fix the rate on the other income, a method called partial integration (Finance Act, 2026, s. 3(2)). It applies only when all three conditions hold:

• the assessee is an individual, HUF, AOP, BOI or AJP, so a firm or company is outside it;
• net agricultural income exceeds ₹5,000; and
• total income exceeds the maximum amount not chargeable to tax: ₹2,50,000; ₹3,00,000 for a resident aged 60 or more but under 80; ₹5,00,000 for a resident aged 80 or more; ₹4,00,000 where tax is under s. 202, whatever the age.

Net agricultural income is computed under the rules in Part IV-B of the First Schedule to the Finance Act, 2026:

• rent or revenue from land is computed as income from other sources; income from farming, processing and sale, and from farm buildings other than a dwelling house, as business income; a farm dwelling house as house property (rules 1 to 3);
• tea, rubber and coffee incomes are split as in IT01 (rule 4);
• agricultural income-tax levied by a State is deducted (rule 7);
• a loss from one agricultural source is set off against another, but a loss shared from an AOP or BOI is not (rule 6);
• agricultural losses of the eight tax years 2018-19 to 2025-26, so far as not yet set off and determined by the AO, are set off against this year's agricultural income; a successor can use them only if he inherited the source (rule 8);
• if the net result is a loss, net agricultural income is taken as nil (rule 9).

Work out the tax in three steps, at the slab rates that apply (Part I-B, Paragraph A, or s. 202):

1. Find the tax on total income plus net agricultural income.
2. Find the tax on net agricultural income plus the maximum amount not chargeable.
3. The difference is the income-tax on total income. Then allow any rebate and add surcharge and the 4% cess.

Sum received from an HUF (Schedule III, Sl. No. 1). An individual member is not taxed on a sum he receives from the family if both conditions hold:

• it comes out of the family's income or, where the family holds an impartible estate, out of that estate's income; and
• it is not covered by s. 99(3)-(4). Those provisions deal with a member's own property converted into family property after 31 December 1969, whether by giving it the family's character, putting it into the common stock or transferring it to the family for inadequate consideration: its income is taxed as his, and after a partition the part his spouse receives is taxed as his too.

The exclusion does not depend on the family having paid tax on that income.

Share of profit from a firm (Schedule III, Sl. No. 2). A partner of a firm assessed separately as a firm, an LLP included, is not taxed on his share in the firm's total income, the share being fixed by the profit-sharing ratio in the partnership deed. The firm has already paid tax on the whole.

Any sum received under a life insurance policy, bonus included, is excluded if the policy passes the test for its date of issue (Schedule II, Sl. No. 2). The test is the premium to sum assured ratio: the highest annual premium payable in any year of the term, as a percentage of the actual capital sum assured.

• The aggregate limit applies to the premium on all such policies taken together, in any tax year of their term. It is lifted for policies that an IFSC Insurance Office issues from 1 April 2025.
• A special policy is one on the life of a person with disability or severe disability (s. 154), or with a disease or ailment specified in rules under s. 128.
• Neither test applies to a sum received on the death of a person, or to a policy issued before 1 April 2003, since no condition is set for that period.
• Never excluded: a sum under a Keyman insurance policy (one a person takes on the life of a present or past employee or business associate, including such a policy later assigned), and a sum taxed under s. 127(4) (money returned under a scheme for a disabled dependant who dies before the assessee).

When the exemption fails: a sum under an ordinary policy is taxed as income from other sources so far as it exceeds the premiums paid over the term and not claimed as a deduction, computed as prescribed (s. 92(2)(l)); a unit linked policy that fails becomes a capital asset (s. 2(22)(c)), so its proceeds fall under capital gains; a Keyman sum is business income, or income from other sources if not taxed under business or salaries (s. 26(2)(i), s. 92(2)(d)).

Gratuity, commuted pension, leave encashment, retrenchment and voluntary retirement compensation are not Schedule items: they are deductions from salary under s. 19(1), studied with Salaries.

Items 38A to 38D were inserted by the Finance Act, 2026 (s. 123), from 1 April 2026.

The rest of Schedule III and Schedules V to VIII exclude the income of bodies rather than individuals: a local authority (its house property, capital gains and other sources income, and business income from supplying goods or services within its area, or water or electricity anywhere); approved research associations; approved bodies of the legal, medical, accountancy, engineering and similar professions (except property income, fees for specific services and investment income); khadi and village industries institutions; securitisation trusts; investor protection funds of stock and commodity exchanges and depositories; core settlement guarantee funds; registered trade unions (house property and other sources income); provident funds under the 1925 Act (interest and gains on their securities); notified international sporting events, treaty bodies and regulatory bodies; investment funds, business trusts and IFSC units (Schedules V and VI); exempt persons such as regimental funds of the armed forces, approved employee welfare funds, insurers' pension funds, State khadi boards and notified educational and medical institutions (Schedule VII); and political parties and electoral trusts (s. 12, Schedule VIII).

Kautilya, also known as Chanakya, minister to Chandragupta Maurya, wrote the Arthashastra, a treatise on running a State. He placed the treasury before the army among the elements of the State, since every undertaking of the State depends on it. His rules for raising revenue:

• Moderation. Revenue should be gathered the way a gardener picks fruit as it ripens; picking unripe fruit hurts the tree and yields little. Tax must never destroy the payer's power to produce. The image of a bee taking nectar without harming the flower is often used for the same idea.
• Ability to pay. The land tax was a share of the produce, usually one-sixth, varied with the quality of the land and its source of water.
• Convenience. Tax was collected when the payer had the means, such as at harvest.
• Certainty. Rates, dues and times of payment were fixed and recorded, and officials kept accounts open to audit.
• Economy. Collection was organised under a chief collector and a treasurer, so that little of what was gathered was lost on the way to the treasury.
• A wide base. Revenue came from land, customs and tolls, trade, mines, forests and many other sources, so no single class bore the whole load.
• Incentives and relief. People who brought new land under the plough or built irrigation works got remission for some years, and relief was given in famine and other calamities.
• Elasticity, used sparingly. Extra demands were allowed only in a real crisis, and only once.
• Honest administration. Collectors were watched closely, and embezzlement and evasion were punished.
• Welfare. Revenue was to be spent on protecting and improving the lives of the people; the king's own good lay in theirs.

1. Moderate rates on a broad base yield more over time than heavy rates on a few; the lower slab rates of the default regime rest on the same idea.
2. Tax should be taken when and as the payer can bear it: deduction at source and advance tax collect it as income arises.
3. Certainty: clear law, fixed rates and fixed dates let the payer know his liability; the single tax year of the 2025 Act replaces the old two-year language.
4. Equity: progressive slabs, and reliefs for older people, the disabled and small incomes, follow the ability to pay.
5. Economy and simplicity: electronic filing and processing cut the cost of collection for the State and of compliance for the payer.
6. Incentives: exemptions and deductions reward saving, farming and productive investment.
7. Firm but fair administration: punish evasion, protect honest payers and keep officials accountable.
8. Welfare: revenue should visibly return as public services; the 4% Health and Education Cess is levied to fund health and education.