Income Tax Law and Practice
Gauhati University BCom 4th Sem. NEP FYUGP
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: Objective Type Questions (1 Mark Each)
Section 1: Objective Type Questions (1 Mark Each)
1. ‘Assessment Year’ refers to the period starting from 1st April and ending on _______ of the next year. (GU BCom 2021, 2022)
Answer: 31st March
2. The year in which income is earned is called the Assessment Year, and the year it is taxed is the Previous Year. (State true or false) (GU BCom 2021, 2022)
Answer: False
3. Under the Income Tax Act, 1961, what is the status of Gauhati University as a ‘Person’? (GU BCom 2022)
Answer: Artificial Juridical Person
4. An assessee’s tax liability depends on his/her residential status. (State true or false) (GU BCom 2021, 2022)
Answer: True
5. Agricultural income is taxable under section 10(1) of the Income Tax Act, 1961. (State true or false) (GU BCom 2021, 2022)
Answer: False
6. As per section 2(7), a person liable to pay tax or any sum under the Income Tax Act is known as _______. (GU BCom 2022)
Answer: Assessee
7. The current Income Tax Act, 1961, came into effect from the year _______. (GU BCom 2023)
Answer: 1962
8. The definition of Previous Year is provided under section _______ of the Income Tax Act, 1961. (GU BCom 2023)
Answer: Section 3
9. An Indian citizen is always deemed "resident and ordinarily resident" in India. (State true or false) (GU BCom 2023)
Answer: False
10. Gross Total Income includes income exempted under section 10. (State true or false)
Answer: False
11. Residential status under the Income Tax Act, 1961, is determined by an individual’s physical presence in India. (State true or false) (GU BCom 2022)
Answer: True
12. Income under the Income Tax Act, 1961, must always be in the form of cash. (State true or false)
Answer: False
13. A Hindu Undivided Family (HUF) qualifies as a ‘Person’ under section 2(31) of the Income Tax Act, 1961. (State true or false)
Answer: True
14. Total Income is derived after subtracting exemptions and deductions from Gross Total Income. (State true or false)
Answer: True
15. Agricultural income from land outside India is exempt under section 10 of the Income Tax Act, 1961. (State true or false)
Answer: False
Section 2: Short Answer Questions (2 Marks Each)
1. Define the term "Income" as per the Income Tax Act, 1961. (GU BCom 2021, 2022)
Answer: As per the Income Tax Act, 1961, "Income" includes all earnings received in cash or kind, regularly or occasionally. It covers salaries, business profits, capital gains, rent, interest, dividends, and other sources, whether legal or illegal.
2. What is an ‘Assessee’ according to the Income Tax Act, 1961? (GU BCom 2021, 2022, 2023)
Answer: An ‘Assessee’ is a person who is liable to pay tax or any other sum under the Income Tax Act. It includes individuals, Hindu Undivided Families (HUFs), companies, firms, associations of persons (AOPs), and other entities.
3. Explain the meaning of agricultural income under the Income Tax Act, 1961. (GU BCom 2022)
Answer: Agricultural income refers to income derived from land situated in India and used for agricultural purposes. It includes rent from agricultural land, income from growing crops, and income from agricultural processing activities.
4. What is meant by ‘Uniform Previous Year’ under the Income Tax Act, 1961? (GU BCom 2021, 2022)
Answer: ‘Uniform Previous Year’ means that the financial year starting from 1st April to 31st March is considered the previous year for all taxpayers, regardless of when they start earning income.
5. Define "Person" as per section 2(31) of the Income Tax Act, 1961. (GU BCom 2022)
Answer: As per section 2(31), "Person" includes an individual, Hindu Undivided Family (HUF), company, firm, association of persons (AOP), body of individuals (BOI), local authority, and artificial juridical persons.
6. What does "Assessment Year" signify under the Income Tax Act, 1961? (GU BCom 2022)
Answer: Assessment Year is the 12-month period from 1st April to 31st March in which the income earned in the previous year is assessed and taxed.
7. When is an individual classified as "Non-resident" in India for tax purposes? (GU BCom 2023)
Answer: An individual is classified as a Non-resident if they do not meet the conditions of staying in India for at least 182 days in a financial year or 60 days in a year and 365 days in the past four years.
8. Explain the term "Total Income" as per the Income Tax Act, 1961. (GU BCom 2023)
Answer: Total Income is the amount remaining after deducting all exemptions and allowable deductions from the Gross Total Income. It is the taxable income on which tax is calculated.
9. What is Gross Total Income under the Income Tax Act, 1961?
Answer: Gross Total Income is the total of all income earned from different heads, including salaries, business profits, house property, capital gains, and other sources, before deductions under Chapter VI-A.
10. Define "Previous Year" under the Income Tax Act, 1961.
Answer: Previous Year is the financial year (1st April to 31st March) in which the income is earned. It is the year before the Assessment Year.
11. Why is residential status important in determining tax liability under the Income Tax Act, 1961?
Answer: Residential status determines the scope of taxable income. Residents are taxed on their global income, while Non-residents are taxed only on their Indian income.
12. List two types of income exempted under section 10 of the Income Tax Act, 1961.
Answer: (i) Agricultural income under Section 10(1)
(ii) Share of profit from a partnership firm under Section 10(2A)
13. What is the scope of total income for a resident and ordinarily resident individual?
Answer: A resident and ordinarily resident individual is taxed on their global income, including income earned inside and outside India.
14. Differentiate between Assessment Year and Previous Year under the Income Tax Act, 1961.
Answer: The Previous Year is the year in which income is earned (e.g., 2023-24), while the Assessment Year is the next year in which the income is assessed and taxed (e.g., 2024-25).
15. What constitutes agricultural income? Provide one example.
Answer: Agricultural income includes revenue from agricultural land in India. Example: Income from selling crops grown on farmland.
16. Who qualifies as an assessee under the Income Tax Act, 1961?
Answer: An assessee is any person liable to pay tax, interest, penalty, or any sum under the Income Tax Act. It includes individuals, HUFs, companies, firms, AOPs, BOIs, and artificial juridical persons.
Section 3: Descriptive Questions (5 Marks Each)
1. Briefly outline the five heads of income under the Income Tax Act, 1961.
Answer: The Income Tax Act, 1961, categorizes taxable income into five heads:
Income from Salary – Includes wages, pensions, allowances, perquisites, and bonuses received by an employee from an employer. Example: A monthly salary of ₹50,000.
Income from House Property – Earnings from renting out residential or commercial properties. Example: Rental income of ₹20,000 per month from a house.
Profits and Gains from Business or Profession – Income from business operations or a profession like freelancing, consultancy, or medical practice. Example: A doctor earning ₹10,00,000 per year from private practice.
Capital Gains – Profits from the sale of capital assets such as land, buildings, or shares. It can be short-term or long-term based on the holding period. Example: Selling shares at a profit of ₹1,00,000.
Income from Other Sources – Any income that does not fall under the above heads, such as interest, dividends, lottery winnings, or gifts. Example: Interest income of ₹5,000 from a savings account.
2. Explain how the residential status of ‘Resident and Ordinarily Resident’ is determined in India.
Answer: A person is classified as Resident and Ordinarily Resident (ROR) if they meet both the basic condition and the additional conditions under the Income Tax Act:
Basic Conditions (Any one must be met):
Stayed in India for 182 days or more in the financial year, or
Stayed for 60 days or more in the financial year and 365 days or more in the last four years.
Additional Conditions (Both must be met):
The person was a Resident in at least 2 out of the last 10 years, and
Stayed in India for 730 days or more in the last 7 years.
If both additional conditions are met along with a basic condition, the person is Resident and Ordinarily Resident (ROR). This means their global income is taxable in India.
3. Define "Agricultural Income" and provide examples of incomes related to land that are not considered agricultural income.
Answer:
As per the Income Tax Act, Agricultural Income includes:
Income from cultivating land in India.
Rent or revenue derived from agricultural land.
Income from farm buildings used for agricultural operations.
Examples of incomes NOT considered Agricultural Income:
Income from sale of trees/timber without agricultural operations.
Income from processing farm produce beyond basic agricultural processes.
Income from renting land for non-agricultural purposes, like using farmland for a warehouse.
Trading in agricultural produce (buying and selling crops without cultivating them).
Income from breeding livestock like poultry farming, which does not involve direct agricultural operations.
4. Discuss the scope of total income based on the residential status of an assessee under the Income Tax Act, 1961.
Answer: The taxability of total income depends on the residential status of an assessee:
Resident and Ordinarily Resident (ROR):
Taxed on global income (income earned in India and abroad).
Example: An Indian engineer working remotely for a US company; his US salary is also taxable in India.
Resident but Not Ordinarily Resident (RNOR):
Taxed only on income earned in India and income from foreign business if controlled from India.
Example: An NRI returning to India after long-term residency abroad, earning rental income in India.
Non-Resident (NR):
Taxed only on income earned in India.
Example: A foreign citizen earning salary abroad but earning rental income from a property in India (only the rental income is taxable in India).
Thus, residents are taxed on global income, while non-residents are taxed only on Indian income.
5. Enumerate and explain five incomes exempted under section 10 of the Income Tax Act, 1961.
Answer:
Section 10 of the Income Tax Act provides exemptions on certain incomes:
Agricultural Income [Section 10(1)] – Income from farming and agricultural land is exempt.
Receipts from Hindu Undivided Family (HUF) [Section 10(2)] – Income received as a family member from an HUF is tax-free.
Leave Travel Allowance (LTA) [Section 10(5)] – Employees can claim exemption for domestic travel expenses incurred on leave.
Gratuity [Section 10(10)] – Lump sum received on retirement or death is exempt up to a limit.
Dividends from Indian Companies [Section 10(34)] – Dividends received from domestic companies are tax-exempt (subject to conditions).
These exemptions help in reducing tax liability for eligible taxpayers.
6. Elaborate on the concept of "Person" under section 2(31) of the Income Tax Act, 1961, with examples.
Answer: As per Section 2(31) of the Income Tax Act, 1961, a "Person" includes different types of entities that are subject to taxation. The following are the categories of persons under this section:
Individual – A natural human being, whether male or female. Example: A salaried employee or a sole proprietor.
Hindu Undivided Family (HUF) – A family consisting of lineal descendants of a common ancestor, including their wives and unmarried daughters. Example: A joint Hindu family business.
Company – A corporate entity registered under the Companies Act, whether public or private. Example: Tata Motors Ltd.
Firm – A partnership firm or a limited liability partnership (LLP) formed under the Indian Partnership Act. Example: A law firm or a CA firm.
Association of Persons (AOP) or Body of Individuals (BOI) – A group of individuals who come together for a common purpose and earn income. Example: A group of individuals managing a joint business without forming a firm.
Local Authority – Any municipal body or local governing organization. Example: A municipal corporation or a panchayat.
Artificial Juridical Person – An entity recognized by law as a person, though not a natural human being. Example: A university or a temple trust.
7. Distinguish between Gross Total Income and Total Income under the Income Tax Act, 1961.
Answer: Gross Total Income (GTI) and Total Income are two key concepts in income tax computation. The distinction is as follows:
Gross Total Income (GTI) refers to the sum of income earned under all five heads of income before allowing any deductions under Chapter VI-A (Section 80C to 80U).
Total Income is the income on which tax is actually levied. It is calculated by deducting eligible exemptions and deductions from the Gross Total Income.
For example, if a person has a GTI of ₹8,00,000 and claims deductions under Section 80C of ₹1,50,000, the Total Income becomes ₹6,50,000, which is taxable.
8. Describe the conditions for an individual to be classified as "Resident but Not Ordinarily Resident" in India.
Answer:
An individual is classified as Resident but Not Ordinarily Resident (RNOR) if:
They satisfy one of the basic conditions for being a Resident:
Stay in India for 182 days or more in the financial year, or
Stay for 60 days in the financial year and 365 days or more in the preceding four years.
They do not satisfy both the following additional conditions:
They have been a resident in India for at least 2 out of the last 10 years, and
They have stayed in India for 730 days or more in the last 7 years.
If a person satisfies the basic condition but fails at least one of the additional conditions, they are classified as RNOR. This status provides tax benefits as their foreign income is not taxed unless it is derived from an Indian business or profession.
9. Explain the significance of Previous Year in the context of income taxation in India.
Answer: The Previous Year is the financial year in which income is earned by an individual or entity. It is significant because:
Taxation Basis – Income tax is levied on the income earned during the Previous Year, but it is assessed in the following Assessment Year.
Uniform Accounting Period – The Previous Year runs from April 1st to March 31st, ensuring consistency in income computation.
Determining Tax Liability – Tax planning and exemptions are based on income earned in the Previous Year.
Applicability of Deductions and Exemptions – Various tax benefits under the Income Tax Act apply to income earned in the Previous Year.
Compliance and Record-Keeping – Taxpayers must maintain financial records for the Previous Year to file returns in the subsequent Assessment Year.
For example, income earned between April 1, 2023, and March 31, 2024, is assessed in Assessment Year 2024-25.
10. Discuss the concept of income under the Income Tax Act, 1961, including its characteristics and examples.
Answer:
The term "Income" under the Income Tax Act, 1961, has a broad meaning and includes various earnings that are taxable.
Characteristics of Income:
Regularity is not essential – Income can be earned regularly (salary) or occasionally (lottery winnings).
Legal or Illegal Sources – Even income from illegal activities is taxable.
Received in Cash or Kind – Income may be monetary (salary) or non-monetary (company-provided car).
Earned in India or Abroad – Taxability depends on residential status.
Examples of Income:
Salary received from employment.
Rent from a house property.
Profits from a business.
Capital gains from the sale of assets.
Dividend and interest income.
Gifts received beyond the exempted limit.
The Income Tax Act ensures that various sources of earnings are taxed appropriately based on their nature and classification.
Section 4: Detailed Questions (10 Marks Each)
1. Discuss the fundamental concepts of income, agricultural income, person, assessee, assessment year, and previous year as defined under the Income Tax Act, 1961.
Answer:
The Income Tax Act, 1961, provides clear definitions for various important terms that are essential for understanding taxation. Some of these fundamental concepts are explained below:
Income
Income refers to any money or benefits a person receives in a year. It is not just salary but also includes profits from business, rent from property, interest from bank deposits, and even lottery winnings. The Act categorizes income into five main heads:
Salary – Money earned from employment.
Income from house property – Rent received from owning property.
Profits and gains from business or profession – Earnings from a business or freelancing work.
Capital gains – Profit from selling property, shares, or other assets.
Income from other sources – Includes interest, lottery winnings, dividends, etc.
Agricultural Income
Agricultural income means any income earned from farming activities. According to Section 2(1A) of the Act, it includes:
Money earned by growing and selling crops.
Rent received from agricultural land.
Income from farmhouses used for agricultural purposes.
However, income from activities like selling processed food, renting farmland for non-agricultural purposes, or running a poultry farm is not considered agricultural income. Agricultural income itself is not taxed, but it is considered for determining the tax rate if a person has other taxable income.
Person
The term "Person" under Section 2(31) of the Act includes:
Individuals – Like salaried employees or business owners.
Hindu Undivided Families (HUFs) – A family unit considered as a single taxpayer.
Companies – Private and public limited companies.
Firms – Partnership firms.
Associations of Persons (AOP) or Body of Individuals (BOI) – Groups of people earning income together.
Local authorities – Like municipal corporations.
This broad definition ensures that all kinds of entities that earn income are covered under tax laws.
Assessee
An assessee is any person who is liable to pay tax or is being assessed under the Income Tax Act. This includes:
Anyone who has to pay tax.
Anyone who has received a notice from the tax department.
The legal representative of a deceased taxpayer.
For example, if a person dies before paying their taxes, their legal heir becomes an assessee.
Assessment Year
The Assessment Year (AY) is the 12-month period from 1st April to 31st March of the next year in which the income of the previous year is assessed and taxed. For example, if someone earns income in 2023-24, the assessment year will be 2024-25.
Previous Year
The Previous Year (PY) is the financial year in which income is earned. It runs from 1st April to 31st March before the assessment year. The tax for this income is calculated and paid in the following assessment year.
For example, if a person earns money between April 2023 and March 2024, this is the Previous Year 2023-24, and the tax will be assessed in the Assessment Year 2024-25.
Conclusion
Understanding these terms is important because they form the basis of taxation. The Income Tax Act ensures that all incomes, whether from salary, business, or agriculture, are categorized properly and taxed accordingly.
2. Determination of Residential Status under the Income Tax Act, 1961, and Its Impact on the Scope of Total Income
Answer: The residential status of an individual is important in determining how much of their income is taxable in India. Under the Income Tax Act, 1961, a person’s tax liability depends on whether they are classified as:
Resident and Ordinarily Resident (ROR)
Resident but Not Ordinarily Resident (RNOR)
Non-Resident (NR)
1. Determination of Residential Status
The residential status of an individual is determined based on the number of days they stay in India during a financial year (1st April – 31st March). The conditions are:
(A) Resident
A person is considered a resident in India if they satisfy any one of the following conditions:
Stayed in India for at least 182 days in the relevant financial year, OR
Stayed in India for 365 days or more in the last 4 years and at least 60 days in the relevant financial year.
Exception: For Indian citizens working abroad or members of a crew of an Indian ship, the second condition is modified, requiring a stay of at least 182 days in the relevant year instead of 60 days.
(B) Resident and Ordinarily Resident (ROR) vs. Resident but Not Ordinarily Resident (RNOR)
A resident is considered Ordinarily Resident (ROR) if they meet both of the following additional conditions:
They were a resident in India for at least 2 out of the last 10 years immediately before the relevant year.
They stayed in India for at least 730 days in the last 7 years before the relevant year.
If a person does not meet both of these conditions, they are considered Resident but Not Ordinarily Resident (RNOR).
(C) Non-Resident (NR)
If a person does not satisfy any of the basic conditions of being a resident, they are considered a Non-Resident (NR) for that year.
2. Impact on Scope of Total Income
The residential status affects how much of a person’s income is taxable in India. The taxability is as follows:
Explanation of Taxability:
Resident and Ordinarily Resident (ROR):
A person who is ROR is taxed on all income, whether earned in India or outside India.
Example: If an ROR earns salary in India and rental income in the USA, both will be taxable in India.
Resident but Not Ordinarily Resident (RNOR):
Taxable only on income earned in India and income earned outside India but received in India.
Foreign income is not taxed unless it is from a business controlled in India.
Example: If an RNOR has a salary in India and a business in the UK, only the Indian salary and income from an India-controlled business are taxable.
Non-Resident (NR):
Taxable only on income earned in India or income received in India.
Foreign income is not taxed in India.
Example: An Indian citizen working in the US with a salary deposited in a US bank is not taxable in India.
Conclusion
The residential status plays a crucial role in deciding how much income is taxed in India. Residents (ROR) pay tax on global income, while non-residents (NR) pay tax only on Indian income. RNORs fall in between these two categories.
3. Provide a detailed explanation of the exemptions available under section 10 of the Income Tax Act, 1961, with relevant examples.
Answer:
Section 10 of the Income Tax Act, 1961, lists incomes that are exempt from tax, meaning you don’t have to pay tax on them. These exemptions reduce the amount of income you are taxed on. Here are some key exemptions with examples:
Agricultural Income (Section 10(1)): Income from farming, like selling crops or dairy products, is fully exempt. Example: If a farmer earns ₹5 lakh from selling wheat, it’s not taxed.
House Rent Allowance (HRA) (Section 10(13A)): If you get HRA from your employer and pay rent, part of it is exempt based on a formula (least of actual HRA, rent paid minus 10% of salary, or 40-50% of salary depending on the city). Example: If your HRA is ₹20,000, rent is ₹25,000, and salary is ₹50,000, the exempt amount is calculated and the rest is taxable.
Leave Travel Allowance (LTA) (Section 10(5)): Money from your employer for travel within India (for you and family) is exempt, but only for two trips in four years. Example: If you spend ₹50,000 on a family trip and your employer gives you ₹50,000 as LTA, it’s tax-free.
Gratuity (Section 10(10)): Money received at retirement or resignation is exempt up to a limit (₹20 lakh or as per rules). Example: If you get ₹15 lakh as gratuity after 30 years of service, it’s fully exempt.
Scholarships (Section 10(16)): Money given for education is fully exempt. Example: A student gets a ₹2 lakh scholarship; no tax is applied.
Pension or Family Pension (Section 10(10A) & 10(19)): Part of the pension for government employees or family pension for armed forces widows is exempt. Example: A soldier’s widow gets ₹10,000 monthly pension; it’s tax-free.
These exemptions help people save tax on specific incomes, but conditions must be met for each.
4. Define Gross Total Income and Total Income under the Income Tax Act, 1961, and elaborate on their differences and importance in tax computation.
Answer:
Gross Total Income (GTI): This is the total income you earn from all sources before any deductions or exemptions. It includes salary, house property income, business profits, capital gains, and other sources (like interest). Example: If you earn ₹6 lakh from salary, ₹2 lakh from rent, and ₹1 lakh from interest, your GTI is ₹9 lakh.
Total Income (TI): This is the income left after subtracting deductions (like under Section 80C for investments or 80D for insurance) from GTI. This is the amount on which tax is calculated. Example: From ₹9 lakh GTI, if you claim ₹1.5 lakh under Section 80C, your TI becomes ₹7.5 lakh.
Differences:
GTI is the starting point (total earnings), while TI is the final taxable amount after deductions.
GTI includes all income; TI excludes exempt income and deductions.
Importance:
GTI helps calculate the total earnings to check which deductions apply.
TI determines your tax slab and how much tax you pay. For example, if TI is ₹7.5 lakh, you fall in a lower tax slab than if it were ₹9 lakh, saving tax.
5. Describe the rules for determining the residential status of an individual under the Income Tax Act, 1961, covering Resident and Ordinarily Resident, Resident but Not Ordinarily Resident, and Non-Resident categories.
Answer: Residential status decides how much of your income is taxed in India. It depends on how many days you stay in India. There are three categories:
Resident: You are a resident if:
You stay in India for 182 days or more in the previous year (April 1 to March 31), OR
You stay 60 days or more in the previous year AND 365 days or more in the last 4 years.
Example: If you stayed 200 days in India in 2024-25, you’re a resident.Resident and Ordinarily Resident (ROR): A resident is ROR if:
They were a resident in 2 out of the last 10 years, AND
They stayed in India for 730 days or more in the last 7 years.
Example: If you meet both conditions, all your global income is taxed in India.Resident but Not Ordinarily Resident (RNOR): A resident who doesn’t meet the above two conditions is RNOR. Example: If you’re a resident in 2024-25 but were abroad most of the last 10 years, only Indian income is taxed.
Non-Resident (NR): If you don’t meet the resident conditions (less than 182 days or 60+365 days rule), you’re NR. Example: If you stayed 50 days in India in 2024-25, you’re NR, and only income earned in India is taxed.
Rules Impact: ROR pays tax on worldwide income, RNOR and NR pay only on Indian income.
6. Explain the concept of agricultural income under the Income Tax Act, 1961, including its definition, conditions for exemption, and examples of non-agricultural income.
Answer:
Definition: Agricultural income is money earned from farming or land used for agriculture in India. It includes growing crops, dairy farming, poultry, or renting agricultural land. Example: Selling rice grown on your farm is agricultural income.
Conditions for Exemption: Under Section 10(1), it’s fully exempt if:
The income comes from agricultural land in India.
It’s from activities like cultivating crops, breeding livestock, or selling produce.
Example: ₹3 lakh from selling milk from your farm cows is exempt.Examples of Non-Agricultural Income:
Selling processed goods (e.g., sugar from sugarcane).
Income from a factory on agricultural land.
Rent from land not used for farming (e.g., a shop built on it).
Example: If you earn ₹2 lakh from a tea factory, it’s not exempt.
Note: Agricultural income is added to other income to decide your tax rate (partial integration), but no tax is paid on it directly.
7. Discuss the definitions and roles of "Person" and "Assessee" under the Income Tax Act, 1961, in the taxation framework.
Answer:
Person (Section 2(31)): A "person" is anyone who can earn income and includes:
An individual (like you or me).
A Hindu Undivided Family (HUF).
A company, firm, or association.
A local authority or government body.
Example: A company earning profits or an individual with a salary is a "person."
Role: It defines who can be taxed under the Act.Assessee (Section 2(7)): An "assessee" is a person who:
Has to pay tax, OR
Is assessed for tax (their income is checked), OR
Owes tax on someone else’s behalf.
Example: If you file a return and pay ₹50,000 tax, you’re an assessee.
Role: It identifies who interacts with the tax department for filing returns or paying tax.
Difference: All assessees are persons, but not all persons are assessees (e.g., someone with no taxable income isn’t an assessee).
8. Elaborate on the interrelationship between Assessment Year, Previous Year, and Total Income under the Income Tax Act, 1961, and their significance in tax assessment.
Answer:
Assessment Year (AY): The year when your income is assessed and tax is calculated. It runs from April 1 to March 31. Example: AY 2025-26 is April 1, 2025, to March 31, 2026.
Previous Year (PY): The year in which you earn the income that’s taxed in the AY. It’s the year before the AY (April 1 to March 31). Example: For AY 2025-26, PY is 2024-25.
Total Income (TI): The income left after deductions, on which tax is calculated in the AY. Example: If you earn ₹10 lakh in PY 2024-25 and claim ₹2 lakh deductions, TI is ₹8 lakh for AY 2025-26.
Interrelationship:
Income earned in the PY is reported and taxed in the AY.
TI is calculated based on PY earnings, then taxed in AY.
Example: Salary of ₹6 lakh earned in PY 2024-25 is filed in AY 2025-26; after ₹1 lakh deduction, TI is ₹5 lakh, and tax is paid in AY.
Significance:
PY tracks when income is earned.
AY is when tax is finalized and paid.
TI ensures the right amount is taxed after adjustments.