In this blog post, Somanka Ghosh, a fourth-year BA LLB student from Calcutta University and pursuing a Diploma in Entrepreneurship Administration and Business Laws by NUJS, analyses the five categories under which income tax is calculated.  

 

“Income Tax is levied on the total income of the previous year of every person.”

To levy income tax , one must have understanding of the various concepts related to the charge of tax like previous year, assessment year, income , total income , person etc.

Income is classified under five categories in the Indian Income Tax Act –

  • Income from Salary
  • Income from House Property
  • Income from Business or Profession
  • Income from Capital Gains
  • Income from Other Sources

PART I: INCOME FROM SALARY

As per Section 15, the income chargeable to income tax under the head salaries would include:

Any salary due to an employee from an employer or a former employer to an assessee during the previous year irrespective of the fact whether it is paid or not.

Any salary paid or allowed to the employee during the previous year by or on behalf of an employer , or former employer , would be taxable under this head even though such amounts are not due to him during the accounting year.

Arrears of salary paid or allowed to the employee during the previous year by or on behalf of an employer or a former employer would be chargeable to tax during the previous year in cases where such arrears were not charged to tax in any earlier year.

Illustration

Meera is an employee of Tara Pvt Ltd. getting a salary of Rs 40,000 per month which becomes due on the last day of the month but is paid on the 7th of next month. Salary for which months will be taxable for AY 2015-16?

Solution : the salary for the months of April 2014 to March 2015 will be taxable for the Assessment Year 2015-16 because salary for April 2014 will be due on 30th April ,2014 (i.e. within the same month)

Salary (SECTION 17(1))

“Salary” includes:

  • Wages or Salary :salary is generally used in respect of payment for services of a higher class ,whereas ‘wages’ is confined to the earnings of labourers.
  • Annuity is annual grant made by the employer to the employee.
  • Pension – periodical payment for past services
  • Gratuity- lump sum payment for past services
  • Fees and Commission- remuneration to encourage employees
  • Perquisites- include all benefits by the employer to the employee
  • Profit in lieu
  • Advance of salary

PART II: INCOME FROM HOUSE PROPERTY

SECTION 22 of the Act provides as follows:

“The annual value of property consisting of any buildings or lands appurtenant thereto of which the assessee is the owner other than such portions of such property as he may occupy for the purposes of any business or Profession carried on by him, the profits of which are chargeable to income tax , shall be chargeable to income tax under the head from House Property.”

  • Tax is charged on income from the buildings or lands appurtenant thereto : the buildings include residential buildings , buildings let out for business or profession or auditoriums for entertainment purposes.
  • Tax is charged on income from lands appurtenant to buildings: the lands appurtenant to buildings include approach roads to and from public streets , courtyards, compound, playground ,motor garage. In case of non residential buildings, car parking spaces , drying grounds shall be the lands appurtenant to buildings.
  • Tax is charged from the owner of the buildings and lands appurtenant thereto : where the recipient of the Income from House Property is not the owner of the building, the income is not chargeable under this head but under the head ‘Income from Business or Other Sources.’

 

PART III: INCOME FROM BUSINESS OR PROFESSION

 

 The provisions of Sections 28 to 44D deal with the method of computing income under head “ Profits and Gains of Business or Profession.”

  The meaning of the expression ‘Business’ has been defined in Section 2(13) of the Income Tax Act. According to this definition, business includes any trade, commerce or manufacture or any adventure or concern in the nature of trade commerce or manufacture.

The concept of business presupposes the carrying on of any activity for profit, the definition of business given in the Act does not make it essential for any taxpayer to carry on his activities constituting business for a considerable length of time.

The expression ‘profession’ has been defined in Section 2 (36) of the Act to include any vocation. The term profession includes the concept of an occupation requiring either intellectual skill or manual skill controlled and directed by the intellectual skill of the creator. For instance an auditor, a lawyer or a doctor carrying on their profession and not business.

The common feature in the case of both profession as well as business is that the object of carrying them out is to derive income or to make profit.

 

PART IV: INCOME FROM CAPITAL GAINS

Sections 45 of the Act provides that any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in Sections 54, 54B, 54D, 54EC, 54ED, 54F, 54G, 54GA and 54H be chargeable to income tax under the head “Capital Gains” and shall be deemed to be the income of the previous year in which the transfer took place.

The requisites of a charge to income tax, of capital gains under Section 45 (1) are :

  • There must be a capital asset
  • The capital asset must have been transferred
  • The transfer must have been effected in the previous year
  • There must be a gain arising on such transfer of a capital asset
  • Such capital gain should not be exempt under Sections 54, 54B, 54D, 54EC, 54ED, 54F, 54G or 54GA.

 

PART V: INCOME FROM OTHER SOURCES

 

Income chargeable under Income Tax Act which does not specifically fall for assessment under any of the heads discussed earlier , must be charged to tax as “Income from Other Sources.”

Sections 56 (2) specifically provides for the certain items of incomes as being chargeable to Tax under the head as Dividend , Keyman Insurance Policy , winnings from lotteries, contribution to provident fund , money gifts, share premiums in excess of the fair market value to be treated as income, income by way of interest received on compensation.

The entire income of winnings, without any expenditure or allowance or deductions under Sections 80C will be taxable. However, expenses relating to the activity of owning and maintaining race horses are allowable. Further, such income is taxable at a special rate of income tax i.e. 30% + surcharge + cess @ 3%

The income chargeable under the head “Income from Other Sources” is the income after making the deductions such as sum paid by way of commission or remuneration to a banker or any other person for the purpose of realising such interest or a deduction of a sum equal to 50% of from interest on compensation or enhanced compensation and any other expenditure laid out or expended wholly.

 

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