Unit 1: Introduction
Syllabus Topics:
Basic Concepts: Income, Agricultural Income, Person, Assessee, Assessment Year, Previous Year, Gross Total Income, Total Income.
Residential Status; Scope of Total Income on the Basis of Residential Status.
Exempted Income under Section 10.
Section 1: True/False, Fill in the Blanks, MCQs (1 Mark Each)
1). Income tax is an annual tax on income. → (Basic concepts: Income) [GU BCom 2018]
Answer: True
2). Nationality of an assessee has no relation with the concept of residential status. → (Residential status) [GU BCom 2018]
Answer: False
3). An Indian citizen is always considered as resident and ordinarily resident in India. → (Residential status) [GU BCom 2018, 2017, 2015]
Answer: False
4). Residential status is determined with reference to the individual’s physical presence in India. → (Residential status) [GU BCom 2018]
Answer: True
5). As per Section 2(7), a person by whom any tax or any other sum of money is payable under the Income Tax Act is known as __________. → (Basic concepts: Assessee) [GU BCom 2018]
Answer: Assessee
6). The basis of charge of salary income is as per section __________ of the Income Tax Act. → (Basic concepts: Income) [GU BCom 2016]
Answer: Section 15
7). Agricultural income is fully exempt from income tax under Section __________ of the Income Tax Act. → (Basic concepts: Agricultural income; Exempted income under Section 10) [GU BCom 2016]
Answer: Section 10(1)
8). The present Income Tax Act came into force with effect from __________. → (Basic concepts: Income) [GU BCom 2017]
Answer: 1st April 1962
9). __________ of an assessee has no relation with the concept of residential status. → (Residential status) [GU BCom 2017]
Answer: Nationality
10). As per which of the following sections, 'a person' has been defined in the Income Tax Act? → (Basic concepts: Person) [GU BCom 2013]
Answer: Section 2(31)
Section 2: Questions Carrying 2 Marks (Short Answer, ~50 words)
1). State the meaning of 'Total Income' as per the Income Tax Act. → (Basic concepts: Total income) [GU BCom 2013, 2015]
Answer: Total income refers to the aggregate of all income earned by a person during the previous year, after deductions and exemptions as per the Income Tax Act.
2). State the meaning of 'Previous Year' as per the Income Tax Act. → (Basic concepts: Previous year) [GU BCom 2013, 2016, 2017]
Answer: The previous year is the financial year immediately preceding the assessment year in which income is earned and assessed for taxation.
3). Define 'Person' as per Income Tax Act. → (Basic concepts: Person) [GU BCom 2014]
Answer: As per Section 2(31) of the Income Tax Act, a 'Person' includes an individual, Hindu Undivided Family (HUF), company, firm, association of persons (AOP), body of individuals (BOI), and any other artificial juridical person.
4). State the meaning of 'Assessment Year' as per the Income Tax Act. → (Basic concepts: Assessment year) [GU BCom 2014]
Answer: The assessment year is the year following the previous year in which the income of the previous year is assessed and taxed.
5). Write the meaning of 'Total Income' as per Income Tax Act. → (Basic concepts: Total income) [GU BCom 2015]
Answer: Total income is the sum of all taxable income from different sources after applying exemptions and deductions as per the Income Tax Act.
6). An assessee commences his business on:
1st July, 2014 and
16th January, 2014.
In each case, what will be his assessment year and what period will be treated as his previous year for the concerned assessment year? → (Basic concepts: Assessment year, Previous year) [GU BCom 2015]
Answer:For business started on 1st July 2014:
Previous Year: 1st July 2014 – 31st March 2015
Assessment Year: 2015-16
For business started on 16th January 2014:
Previous Year: 16th January 2014 – 31st March 2014
Assessment Year: 2014-15
7). When is an individual considered 'Non-Resident in India' for income tax purposes? → (Residential status) [GU BCom 2015]
Answer: An individual is considered a 'Non-Resident' if they do not satisfy the residency conditions as per Section 6 of the Income Tax Act, meaning they are in India for less than 182 days in a financial year.
8). State the meaning of 'Income' as per the Income Tax Act. → (Basic concepts: Income) [GU BCom 2018]
Answer: Income refers to earnings from different sources, such as salary, house property, business profits, capital gains, and other sources, which are chargeable to tax.
9). State the meaning of 'Agricultural Income'. → (Basic concepts: Agricultural income) [GU BCom 2018]
Answer: Agricultural income includes income derived from agricultural land in India, such as rent from land, revenue from agriculture, and income from the sale of agricultural produce.
10). Who is a 'Resident but Not Ordinarily Resident' individual? → (Residential status) [GU BCom 2017]
Answer: An individual is a 'Resident but Not Ordinarily Resident' (RNOR) if they have been a non-resident in India in at least 9 out of 10 preceding years or have been in India for 729 days or less in the last 7 years.
11). Explain the meaning of 'Assessee' as per the Income Tax Act. → (Basic concepts: Assessee)
Answer: An assessee is a person who is liable to pay tax or any other sum of money under the Income Tax Act, including individuals, HUFs, firms, companies, and other entities.
Section 3: Questions Carrying 5 Marks (Descriptive, ~150-200 words)
1). Explain the concept of 'Previous Year' under the Income Tax Act. Discuss its significance in the taxation process with an example of a new business setup.
(Basic concepts: Previous year)
Answer: The 'Previous Year' under the Income Tax Act is the financial year in which income is earned. It starts from April 1st and ends on March 31st of the next year. The income earned in this year is assessed for taxation in the following year, known as the 'Assessment Year'.
Significance:
It ensures systematic tax collection and assessment.
It allows proper planning for tax payments and deductions.
It helps the government apply uniform tax rules.
Example: If a new business starts on July 1, 2023, its previous year will be from July 1, 2023, to March 31, 2024. The income earned during this period will be taxed in the assessment year 2024-25.
2). Describe the meaning of 'Agricultural Income' under the Income Tax Act. How does it influence the tax computation for an individual engaged in both agricultural and non-agricultural activities?
(Basic concepts: Agricultural income)
Answer: Agricultural income refers to earnings from agricultural land in India, including income from farming, rent from agricultural land, and the sale of agricultural produce. As per the Income Tax Act, agricultural income is fully exempt from tax under Section 10(1).
Influence on tax computation:
If a person has only agricultural income, no tax is payable.
If a person has both agricultural and non-agricultural income, the agricultural income is added to non-agricultural income to determine the applicable tax slab. However, tax is only paid on the non-agricultural income.
This method is called the partial integration method and is used to avoid tax evasion.
Example: If a person earns ₹3,00,000 from farming and ₹5,00,000 from a business, the total income will be ₹8,00,000 for tax slab calculation. However, tax will be charged only on the ₹5,00,000 non-agricultural income.
3). Discuss the importance of determining the 'Residential Status' of an assessee. How does it differ for an individual and a Hindu Undivided Family (HUF)?
(Residential status)
Answer: Residential status is crucial in determining a person's tax liability under the Income Tax Act. Tax is levied based on whether a person is a resident or a non-resident in India.
Importance:
A resident is taxed on their global income, while a non-resident is taxed only on their Indian income.
It prevents tax evasion and ensures proper tax collection.
Difference between Individual and HUF:
For an individual, residency depends on the number of days spent in India. If a person stays in India for 182 days or more in a financial year, they are considered a resident.
For an HUF, residency is determined based on the location of its management and control. If the control is fully or mostly in India, the HUF is considered a resident.
4). What is meant by 'Exempted Income' under Section 10 of the Income Tax Act? Provide three examples and briefly explain their tax treatment.
(Exempted income under Section 10)
Answer: Exempted income refers to earnings that are not subject to tax under the Income Tax Act. Section 10 specifies various types of incomes that are fully or partially exempt from taxation.
Examples:
Agricultural Income (Section 10(1)): Fully exempt from tax but considered for tax rate calculation if non-agricultural income exists.
Provident Fund Interest (Section 10(11)): Interest earned from a recognized provident fund is tax-free if certain conditions are met.
Gratuity (Section 10(10)): Gratuity received by government employees is fully exempt, while non-government employees get exemption up to a specified limit.
Exempted incomes help reduce the tax burden and encourage savings and investments.
5). Explain the concept of 'Total Income' under the Income Tax Act. How is it derived from various sources of income, and what role does it play in tax liability calculation?
(Basic concepts: Total income)
Answer: Total income under the Income Tax Act is the sum of all taxable incomes earned by an individual during a financial year after deducting exemptions and deductions.
It is derived from five sources of income:
Income from Salary
Income from House Property
Income from Business or Profession
Income from Capital Gains
Income from Other Sources
Calculation of tax liability:
Total income is used to determine the applicable tax slab.
Tax is computed after applying deductions under sections like 80C, 80D, etc.
The final tax payable is calculated after considering rebates and reliefs.
Example: If a person earns ₹6,00,000 from salary and ₹1,00,000 from house rent, their total income is ₹7,00,000. If they invest ₹1,50,000 in LIC (under Section 80C), taxable income reduces to ₹5,50,000, and tax is calculated accordingly.
1). Elaborate the meaning of 'Total Income'.
(Basic concepts: Total income) [GU BCom 2014]
Answer:
Total Income refers to the income of a person from all sources, calculated as per the provisions of the Income Tax Act, after allowing deductions under Chapter VI-A. It is the amount on which tax is levied.
Computation of Total Income:
Total income is derived by summing up incomes from the following five heads:
Income from Salary: Includes wages, pensions, gratuities, and perquisites received from an employer.
Income from House Property: Rental income from owned properties, subject to deductions for municipal taxes and standard deduction.
Profits and Gains from Business or Profession: Income earned by self-employed individuals, freelancers, and businesses.
Capital Gains: Profit or loss from the sale of capital assets such as land, buildings, and shares.
Income from Other Sources: Includes interest income, dividends, gifts, and lottery winnings.
Formula for Total Income:
Gross Total Income = Salary Income + House Property Income + Business Income + Capital Gains + Other Sources Income
After computing the gross total income, deductions under Chapter VI-A (Sections 80C to 80U) are subtracted to arrive at the total taxable income:
Total Income = Gross Total Income – Deductions under Chapter VI-A
Significance of Total Income:
Determines Tax Liability: The total income is used to calculate the tax payable by an individual or entity as per the income tax slabs.
Helps in Claiming Deductions: It allows taxpayers to reduce taxable income through deductions such as life insurance premiums, provident fund contributions, and medical expenses.
Necessary for Filing Returns: The total income figure is crucial for filing income tax returns (ITR) accurately.
Example:
If a taxpayer earns ₹5,00,000 from salary, ₹50,000 from house property, and ₹1,00,000 from capital gains, and claims a deduction of ₹1,50,000 under Section 80C, the total income would be:
Total Income = (5,00,000 + 50,000 + 1,00,000) - 1,50,000 = ₹5,00,000
Thus, the total income of the taxpayer is ₹5,00,000, on which income tax will be calculated based on the applicable tax slab.
2). Discuss with reason whether the following are agricultural incomes as per the Income Tax Act.
(Basic concepts: Agricultural income) [GU BCom 2018]
Answer: Agricultural income is defined under Section 2(1A) of the Income Tax Act, 1961. It includes any rent or revenue derived from land situated in India and used for agricultural purposes. It also includes income from agricultural produce and processes that make the product fit for sale. Agricultural income is exempt from tax under Section 10(1) of the Income Tax Act.
To determine whether an income qualifies as agricultural income, the following conditions must be met:
The income must be derived from land.
The land must be situated in India.
The land must be used for agricultural purposes.
If any processing is involved, it should be necessary to make the product marketable.
Analysis of Given Cases (Hypothetical Examples):
Sale of crops grown on own land → Agricultural Income
If a farmer grows wheat on his land and sells it in the market, the income earned is agricultural income and is exempt from tax.
Income from selling processed agricultural products → Not Agricultural Income
If a farmer grows sugarcane and produces sugar in a factory, the income from sugar sales is not agricultural income. Only the income from the raw sugarcane is considered agricultural income.
Rent received from agricultural land → Agricultural Income
If a person owns farmland and leases it to another person for agricultural activities, the rent received is agricultural income and is tax-exempt.
Income from a nursery → Agricultural Income (if conditions met)
If plants are grown in a nursery with soil-based cultivation, the income is agricultural income. However, if plants are grown using artificial methods (e.g., hydroponics), it is not considered agricultural income.
Dairy farming income → Not Agricultural Income
Income from selling milk or dairy products is not agricultural income because it does not involve land cultivation. It is taxable under business income.
Conclusion:
Agricultural income is tax-exempt, but income from related activities (e.g., processing, dairy farming) is taxable. Each case must be analyzed based on the Income Tax Act’s definition to determine whether it qualifies as agricultural income.
3). Discuss the manner of determining the residential status under 'Resident but Not Ordinarily Resident'.
(Residential status) [GU BCom 2018]
Answer:
The residential status of an individual is important in determining their tax liability under the Income Tax Act, 1961. A person can be classified as:
Resident and Ordinarily Resident (ROR)
Resident but Not Ordinarily Resident (RNOR)
Non-Resident (NR)
A person qualifies as Resident but Not Ordinarily Resident (RNOR) if they satisfy the basic conditions of residency but do not meet the additional conditions for being an ordinarily resident.
Basic Conditions for Resident Status:
An individual is considered a resident if they satisfy any one of the following conditions:
They have stayed in India for 182 days or more during the previous year, OR
They have stayed in India for 60 days or more in the previous year and 365 days or more in the last four preceding years.
If neither of these conditions is met, the person is a Non-Resident (NR).
Additional Conditions for Ordinary Resident Status:
A person is RNOR if they fulfill one of the following conditions:
They were a Non-Resident in India for 9 out of the 10 preceding years, OR
Their stay in India is 729 days or less in the last 7 years.
If a resident does not meet these conditions, they become a Resident and Ordinarily Resident (ROR).
Significance of RNOR Status:
An RNOR is only taxed on income earned in India.
Foreign income is not taxable unless derived from an Indian business or profession.
It is a temporary status and generally applies to returning Non-Residents or expatriates.
Example:
Mr. X, an Indian citizen, lived in the USA for 15 years and returned to India in April 2022. In the last 10 years, he was a Non-Resident for 9 years. In this case, he will be treated as RNOR for the next 2 years before becoming an Ordinary Resident.
4). What is meant by 'Exempted Income' under Section 10 of the Income Tax Act? Provide three examples and briefly explain their tax treatment.
(Exempted income under Section 10)
Answer:
Exempted income refers to income that is not taxable under the Income Tax Act, 1961. Section 10 of the Act provides a list of incomes that are fully or partially exempt from tax. These exemptions are granted to reduce the tax burden on certain categories of taxpayers.
Examples of Exempted Income under Section 10:
1. Agricultural Income (Section 10(1))
Any income earned from agricultural land in India is exempt from tax.
Includes rent from agricultural land and income from crops.
However, processed agricultural products beyond the necessary steps are taxable.
2. Life Insurance Proceeds (Section 10(10D))
Maturity amount received from a life insurance policy (including bonuses) is tax-exempt.
The policy must comply with the premium-to-sum-assured ratio (not exceeding 10% of the sum assured).
If conditions are not met, the maturity amount is taxable under “Income from Other Sources.”
3. Provident Fund Interest (Section 10(11) & 10(12))
Interest earned from Statutory Provident Fund (SPF) and Public Provident Fund (PPF) is fully tax-exempt.
Recognized Provident Fund (RPF) is exempt if withdrawn after 5 years of continuous service.
If withdrawn before 5 years, it becomes partially taxable.
Other Important Exemptions:
Scholarship income (Section 10(16)) – Scholarships for education are fully exempt.
Gratuity (Section 10(10)) – Exempt up to a certain limit based on tenure and employer type.
House Rent Allowance (HRA) (Section 10(13A)) – Exempt based on actual rent paid and salary.
Conclusion:
Exempted income plays an important role in reducing tax liability. Taxpayers should be aware of these provisions to ensure they claim legitimate exemptions while filing returns.
5). Explain the concept of 'Total Income' under the Income Tax Act. How is it derived from various sources of income, and what role does it play in tax liability calculation?
(Basic concepts: Total income)
Answer:
Total Income is the amount on which an individual or entity is liable to pay tax under the Income Tax Act, 1961. It is calculated by adding all taxable incomes from different sources and deducting eligible exemptions and deductions.
Calculation of Total Income:
Total Income is derived using the following steps:
Step 1: Identify Income from Different Sources
The Income Tax Act classifies income into five heads:
Income from Salary – Wages, pension, gratuity, bonuses, allowances, etc.
Income from House Property – Rental income from residential or commercial property.
Profits and Gains of Business or Profession – Income from self-employment, freelancing, or business.
Capital Gains – Profit from the sale of assets like property, stocks, or gold.
Income from Other Sources – Interest, lottery winnings, dividends, etc.
Step 2: Apply Exemptions
Certain incomes, such as agricultural income and PPF interest, are exempt under Section 10 and are not included in total income.
Step 3: Deduct Allowable Expenses
Expenses incurred to earn income, like business expenses or interest on home loans, are deducted.
Step 4: Compute Gross Total Income (GTI)
GTI = Sum of all taxable incomes after exemptions and expenses.
Step 5: Apply Deductions under Chapter VI-A (Section 80C to 80U)
80C: Investment in PPF, LIC, EPF (₹1.5 lakh limit)
80D: Health insurance premium
80E: Education loan interest
80G: Donations to charity
Step 6: Arrive at Total Income
Total Income = Gross Total Income - Deductions
Role of Total Income in Tax Liability Calculation
Total Income determines the tax slab applicable to an individual.
Higher total income leads to a higher tax rate.
If total income is below the basic exemption limit, no tax is payable.
Example:
Mr. A earns:
Salary: ₹6,00,000
Rental Income: ₹1,00,000
Business Profit: ₹2,00,000
After deductions of ₹1,50,000 under Section 80C, his Total Income = ₹7,50,000, which is taxed as per the income tax slab rates.
6). Elaborate on the definition of 'Person' under the Income Tax Act. How does this definition impact the taxation of different entities such as individuals, companies, and trusts?
(Basic concepts: Person)
Answer:
The Income Tax Act, 1961, defines the term 'Person' under Section 2(31). It is not limited to individuals but includes various entities that are subject to taxation.
Categories of 'Person' under the Act:
The term ‘Person’ includes the following:
1. Individual:
A single human being, including salaried employees, professionals, and freelancers.
Taxed based on slab rates.
2. Hindu Undivided Family (HUF):
A family consisting of common ancestors and their lineal descendants.
Taxed separately from individuals.
3. Company:
Includes both domestic and foreign companies.
Taxed at fixed rates (e.g., 22% for domestic companies) instead of slab rates.
4. Firm:
Includes partnership firms and LLPs (Limited Liability Partnerships).
Flat tax rate of 30% applies to firms.
5. Association of Persons (AOP) / Body of Individuals (BOI):
A group of people earning income jointly but not as a firm.
Taxed either as an entity or members individually.
6. Local Authority:
Includes municipalities, panchayats, and government bodies.
Taxed at specific rates under the Act.
7. Artificial Juridical Person:
Any other entity that is not a natural person but has a legal existence, such as universities or charitable organizations.
Tax treatment varies based on the entity type.
Impact of Definition on Taxation:
Each type of "Person" has different tax rates, exemptions, and deductions.
Individuals and HUFs get basic exemption limits and slab rates, while firms and companies do not.
Companies and LLPs are taxed at fixed corporate tax rates.
Some entities like charitable trusts enjoy tax exemptions under specific conditions.
Example:
Mr. X (Individual) earns ₹8,00,000 → Taxed as per slab rates.
ABC Pvt. Ltd. (Company) earns ₹50,00,000 → Taxed at 22% corporate tax rate.
XYZ Charitable Trust earns ₹5,00,000 → Exempt under Section 12A if used for charitable purposes.
Conclusion:
The broad definition of 'Person' ensures that all income-earning entities are brought under the tax net. The taxation of each entity depends on its nature, income, and legal structure.
7). Define 'Assessee' under the Income Tax Act. Discuss the various categories of assessees and their relevance in the tax assessment process. (Basic concepts: Assessee)
Answer: The term 'Assessee' is defined under Section 2(7) of the Income Tax Act, 1961. It refers to any person who is liable to pay tax, has received a notice under the Act, or has any tax-related obligation.
Categories of Assessee:
Normal Assessee: A person who has to pay tax based on their total income, such as salaried individuals, business owners, and companies.
Representative Assessee: A person who pays tax on behalf of another, such as a guardian paying tax for a minor or an agent for a non-resident.
Deemed Assessee: A legal heir or guardian who becomes liable to pay tax in case of a deceased person's or dissolved entity's income.
Assessee in Default: A person who fails to fulfill tax obligations, such as an employer not deducting TDS or a person failing to pay tax dues.
Relevance in the Tax Assessment Process:
The classification of assessees determines tax liability, filing requirements, and penalties. Normal assessees file tax returns based on their income, while representative assessees handle taxation for others. Deemed assessees settle tax liabilities of deceased persons, and assessees in default face penalties for non-compliance.
8). Explain the relationship between 'Assessment Year' and 'Previous Year' under the Income Tax Act. Illustrate with examples how they apply to a newly started business.
(Basic concepts: Assessment year, Previous year)
Answer:
Under the Income Tax Act, the Assessment Year (AY) and Previous Year (PY) are important terms used to determine the period for which income is taxed.
Definition and Relationship:
Previous Year (PY): It is the financial year in which income is earned. It starts on April 1st and ends on March 31st of the following year.
Assessment Year (AY): It is the next financial year in which the income of the previous year is assessed and taxed.
The income earned in the Previous Year 2023-24 is assessed and taxed in Assessment Year 2024-25.
Application in a Newly Started Business:
If a business starts on October 1, 2023, its Previous Year is 2023-24 (October 1, 2023, to March 31, 2024).** The income earned in this period will be taxed in Assessment Year 2024-25. The business must file its tax return for AY 2024-25 by the due date specified under the Act.
Example:
Previous Year: 2023-24 (Income earned between April 1, 2023 – March 31, 2024)
Assessment Year: 2024-25 (Tax return filed and tax assessed in this year)
Understanding the AY-PY relationship helps businesses and individuals plan tax filings, claim deductions, and comply with tax laws.
9). Discuss the concept of 'Gross Total Income' and its role in determining taxable income. How does it differ from 'Total Income', and what adjustments are made between the two?
(Basic concepts: Gross total income, Total income)
Answer:
Gross Total Income (GTI) and Total Income (TI) are two important terms under the Income Tax Act, 1961 that help in calculating an individual's or entity's tax liability.
1. Meaning of Gross Total Income (GTI):
Gross Total Income is the sum of all incomes earned by an individual or entity before applying any deductions under Chapter VI-A (such as Section 80C, 80D, etc.). It includes all heads of income as per Section 14 of the Income Tax Act:
Income from Salary – Wages, bonuses, pensions, etc.
Income from House Property – Rental income from owned properties.
Profits and Gains from Business or Profession – Income from self-employment, businesses, and professions.
Capital Gains – Income from the sale of assets like property or stocks.
Income from Other Sources – Interest, dividends, lottery winnings, etc.
2. Role of GTI in Determining Taxable Income:
GTI is not the final taxable income but is the starting point for tax calculation. The taxpayer can claim eligible deductions from GTI to arrive at Total Income, which is taxable.
3. Meaning of Total Income (TI) and Differences from GTI:
Total Income = Gross Total Income – Deductions (under Chapter VI-A)
GTI is the sum of all incomes before deductions.
TI is the taxable income after deductions.
GTI is always higher or equal to TI because deductions reduce the taxable portion.
4. Adjustments Between GTI and TI:
Deductions Under Chapter VI-A (such as Section 80C for LIC, PPF, Section 80D for health insurance, etc.).
Set-off of Losses (e.g., losses from house property or business can be adjusted against other income).
Exemptions and Rebates (Certain incomes like agricultural income may be excluded).
Thus, Total Income is the final amount on which income tax is calculated, whereas Gross Total Income helps determine how much can be deducted before taxation.
10). Describe the criteria for determining the residential status of an individual under the Income Tax Act. How does residential status affect the tax liability of an individual?
(Residential status)
Answer:
Residential status is an essential factor in determining an individual’s tax liability under the Income Tax Act, 1961. It is classified based on the number of days an individual stays in India during a financial year.
1. Categories of Residential Status:
An individual can be classified as:
Resident in India
Non-Resident in India (NRI)
Resident but Not Ordinarily Resident (RNOR)
2. Criteria for Determining Residential Status:
As per Section 6 of the Income Tax Act, an individual is considered a Resident in India if they satisfy any one of the following conditions:
Stay in India for 182 days or more in the relevant financial year, OR
Stay in India for 60 days or more in the relevant financial year AND 365 days or more in the last 4 years.
However, for Indian citizens and PIOs (Persons of Indian Origin) living abroad, the 60-day condition is relaxed to 182 days, ensuring NRIs are not taxed unfairly.
An individual who does not satisfy these conditions is classified as a Non-Resident (NRI).
A Resident is further classified as:
Resident and Ordinarily Resident (ROR) – Stayed in India for 2 out of the last 10 years and 730 days in the last 7 years.
Resident but Not Ordinarily Resident (RNOR) – Does not meet both the above conditions.
3. Impact of Residential Status on Tax Liability:
Resident and Ordinarily Resident (ROR):
Taxed on worldwide income (Income earned in India and abroad).
Resident but Not Ordinarily Resident (RNOR):
Taxed on Indian income and foreign income only if derived from India.
Non-Resident Indian (NRI):
Taxed only on income earned or received in India.
4. Example:
If an Indian citizen works abroad and stays in India for 150 days, he qualifies as an NRI and is taxed only on his Indian income. However, if he stays for 200 days, he qualifies as a Resident, making his global income taxable in India.
Thus, residential status directly affects tax liability, making it essential for individuals working abroad to track their stay in India carefully.
11). Explain the scope of total income for a resident, not ordinarily resident, and non-resident individual under the Income Tax Act. Provide examples to illustrate the differences.
(Scope of total income on the basis of residential status)
Answer:
The scope of total income determines how much income of an individual is taxable in India based on their residential status under the Income Tax Act, 1961.
1. Categories of Residential Status and Their Tax Scope:
Resident and Ordinarily Resident (ROR) – Taxable on worldwide income (Indian and foreign income).
Resident but Not Ordinarily Resident (RNOR) – Taxable only on Indian income and foreign income derived from India.
Non-Resident Indian (NRI) – Taxable only on Indian income, foreign income is completely exempt.
2. Scope of Total Income for Each Category:
3. Examples to Illustrate the Differences:
Example 1: ROR Individual (Resident and Ordinarily Resident)
Mr. A is a salaried employee in India and earns ₹12 lakh per year.
He has rental income in the UK of ₹5 lakh.
As an ROR, he must pay tax on ₹17 lakh in India, including foreign income.
Example 2: RNOR Individual (Resident but Not Ordinarily Resident)
Mr. B is an Indian citizen who lived in the USA for 10 years and returned to India in 2023.
He has a salary of ₹15 lakh in India and earns ₹6 lakh as US pension.
Since he is RNOR, his Indian salary is taxable, but his US pension is not taxable in India.
Example 3: NRI Individual (Non-Resident Indian)
Mr. C is an Indian citizen working in Dubai, earning ₹20 lakh per year.
He has a house in India that generates ₹3 lakh rental income.
As an NRI, only the ₹3 lakh rental income is taxable, while his ₹20 lakh foreign salary is exempt.
4. Conclusion:
The residential status directly affects taxation in India. Residents (RORs) are taxed on worldwide income, RNORs have limited foreign taxability, and NRIs pay tax only on Indian income. Proper classification helps individuals plan their tax liabilities efficiently.
12). Explain the provisions regarding the exemption of income from salaries under Section 10 of the Income Tax Act. Which salary components are exempt from tax?
(Salary exemptions under Section 10)
Answer: Section 10 of the Income Tax Act, 1961, provides various exemptions on salary income, reducing the taxable salary of an employee. These exemptions apply to specific salary components, subject to conditions and limits.
House Rent Allowance (HRA) [Section 10(13A)]: HRA is exempt from tax for salaried individuals who live in rented accommodation. The exemption is the least of the following: 50% of salary for those living in metro cities or 40% for non-metro cities, actual HRA received, or rent paid minus 10% of salary. If the individual does not pay rent, HRA is fully taxable.
Leave Travel Allowance (LTA) [Section 10(5)]: LTA provides tax exemption for travel expenses incurred by an employee and their family within India. The exemption is available for two journeys in a block of four years. The travel should be via air, rail, or other recognized public transport, and only the cost of travel (not accommodation or food) is covered.
Gratuity [Section 10(10)]: Gratuity is a lump sum amount received by an employee at the time of retirement, resignation, or death. It is fully exempt for government employees. For private-sector employees, the exemption is the least of the actual gratuity received, Rs. 20 lakh (as per amendment), or 15 days' salary for each completed year of service.
Pension [Section 10(10A)]: Commuted pension (lump sum) received by government employees is fully exempt. For non-government employees, one-third of the pension is exempt if gratuity is received; otherwise, half of the pension is exempt. Uncommuted (monthly) pension is taxable.
Provident Fund (PF) Withdrawal [Section 10(12)]: The accumulated balance withdrawn from a recognized PF is exempt if the employee has completed at least five years of continuous service. If withdrawn before five years, it becomes taxable unless due to medical reasons, employer closure, or beyond the employee’s control.
Leave Encashment [Section 10(10AA)]: Leave encashment received at retirement is fully exempt for government employees. For private-sector employees, the exemption is the least of actual leave encashment received, Rs. 25 lakh, 10 months’ salary, or the salary of unutilized leaves based on 30 days per completed year of service.
Voluntary Retirement Scheme (VRS) Compensation [Section 10(10C)]: The compensation received under VRS is exempt up to Rs. 5 lakh, provided the scheme is approved by the government and meets specified conditions. Any amount exceeding this limit is taxable.
Daily Allowances & Other Perquisites [Section 10(14)]: Daily allowances, uniform allowances, and other specified perquisites are exempt if they are actually spent for the purpose for which they are given, such as travel, uniforms, or job-related expenses.
13). Analyze how the residential status of a company is determined under the Income Tax Act. Discuss its implications on the taxation of global income with a hypothetical scenario.
(Residential status of a company)
Answer: The residential status of a company is crucial in determining its tax liability under the Income Tax Act, 1961. A company can either be resident or non-resident in India based on the place of incorporation and management control.
Resident Company: A company is considered a resident in India if it is incorporated in India or its place of effective management (POEM) is in India during the relevant financial year. POEM refers to the location where key management and commercial decisions necessary for business operations are made.
Non-Resident Company: A company is non-resident if it is not incorporated in India and its POEM is outside India. Such companies are taxed only on income that arises or is received in India.
Taxation Implications: A resident company is taxed on its global income, meaning it has to pay tax in India on income earned both within and outside India. A non-resident company is taxed only on income that is earned in India through operations like business, capital gains, or royalties.