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A Brief on Income TAX:

Income tax is a tax which is an annual tax on income. The Indian Income Tax Act (Section 4) provides that in respect of the total income of the previous year of every person, income tax shall be charged for the corresponding assessment year at the rates laid down by the Finance Act for that assessment year. Section 14 of the Income tax Act further provides that for the purpose of charge of income tax and computation of total income all income shall be classified under the following heads of income:

Salaries
Income from house property
Profits and gains of business or profession.
Capital gains
Income from other sources.

The total income from all the above heads of income is calculated in accordance with the provisions of the Act as they stand on the first day of April of any assessment year.

Income under the Head Salary:

Salary is the remuneration received by or accruing to an individual, periodically, for service rendered as a result of an express or implied contract. The actual receipt of salary in the previous year is not material as far as its taxability is concerned. The existence of employer-employee relationship is the must for taxing a particular receipt under the head “salaries”. For instance, the salary received by a partner from his partnership firm carrying on a business is not chargeable as “Salaries” but as “Profits & Gains from Business or Profession”. Similarly, salary received by a person as MP or MLA is taxable as “Income from other sources”, but if a person received salary as Minister of State/ Central Government, the same shall be charged to tax under the head “Salaries”. Pension received by an assessee from his former employer is taxable as “Salaries” whereas pension received on his death by members of his family (Family Pension) is taxed as “Income from other sources”.

Section 17(1) of the Income tax Act gives an inclusive and not exhaustive definition of “Salaries” including therein

i. Wages
ii. Annuity or pension
iii. Gratuity
iv. Fees, Commission, perquisites or profits in lieu of salary
v. Advance of Salary
vi. Amount transferred from unrecognized provident fund to recognized provident fund
vii. Contribution of employer to a Recognized Provident Fund in excess of the prescribed limit
viii. Leave Encashment
ix. Compensation as a result of variation in Service contract etc.
x. Contribution made by the Central Government to the account of an employee under a notified pension scheme

While computing the income earned from Salary, one can avail (where eligible) various deductions available under section 16 of the Income Tax Act and Section 10 Exemptions of some of the allowances to arrive at the net taxable income from Salary.

Income from house property is taxable in the hands of its legal owner in whose name the property stands. „Owner‟ for this purpose means a person who can exercise the rights of the owner not on behalf of the owner but in his own right. A person entitled to receive income from a property in his own right is to be treated as its owner, even if no registered document is executed in his name.

The following three conditions must be satisfied before the income of the property can be taxed under the head “Income from House Property”:

  • The property must consist of buildings and lands appurtenant thereto;
  • Assesse must be the owner of such house property;
  • The property may be used for any purpose, but it should not be used by the owner for the purpose of any business or profession carried on by him, the profit of which is chargeable to tax. If the property is used for own business or profession, it shall not be chargeable to tax.

While computing the income earned from letting out the property, one can avail (where eligible) various deductions available under section 24 of the Income Tax Act to arrive at the net taxable income from house property income

Profits and gains of business or profession

Sec. 2(13) defines “business” to include any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture. As per the said definition business means any continuous or systematic or organized activity carried on with the intention to earn profits. Even a single transaction can be business if it is aimed at earning profit. The definition does not explain what the business is, but it says that every activity intended to earn profits is included in the definition of business. The definition says not only continuous transactions as business but also a single transaction can be covered by the definition:


Sec. 2(36) defines “profession” to include vocation. i.e. income earned not on the basis of professional degree but also on the basis of inborn talent.

The following types of income are chargeable to tax under the heads profits and gains of business or profession:-

  • Profits and gains of any business or profession
  • Any compensation or other payments due to or received by any person specified in section 28 of the Act
  • Income derived by a trade, profession or similar association from specific services performed for its members
  • Profit on sale of import entitlement licences, incentives by way of cash compensatory support and drawback of duty
  • The value of any benefit or perquisite, whether converted into money or not, arising from business
  • Any interest, salary, bonus, commission, or remuneration received by a partner of a firm, from such a firm
  • Any sum whether received or receivable in cash or kind, under an agreement for not carrying out any activity in relation to any business or not to share any know-how, patent, copyright, franchise, or any other business or commercial right of similar nature or technique likely to assist in the manufacture or processing of good
  • Any sum received under a keyman insurance policy
  • Income from speculative transactions.

Profits and gains of any other business are taxable, unless such profits are subjected to exemption.


While computing the income earned from Business and Profession, one can avail (where eligible) various deductions available under section 30 to Section 36 of the Income Tax Act and certain disallowance as per the Income Tax Act is considered to arrive at the net taxable Income Business and Profession.


Capital Gains:

Profits or gains arising from transfer of a capital asset are called Capital Gains and is charged to tax under the head “Capital Gains”. Income from capital gains is classified as “Short Term Capital Gains” and “Long Term Capital Gains”. The gain is not realized until the asset is sold. A capital gain may be short-term (one year or less) or long-term (more than one year) and must be claimed on income taxes.

Chargeability basis
  • The capital asset must be present.
  • Transfer of capital must take place.
  • Profit or loss must be there from such transfer.
  • Capital gain shouldn’t be exempted.

Capital asset: Under the existing provisions of Section 2(14), a 'capital asset' means, property of any kind held for personal use by the assessee, whether or not connected with his business or profession, personal effects held for personal use by the assessee or any number of his family dependent on him are excluded from the ambit of the definition of capital asset. The only asset that is in the nature of personal effects, but is included in the definition of capital asset is jewellery and ornaments. However, with effect from assessment year 2008-09, archeological collections, drawings, paintings, sculptures or any work of art have also been excluded from the meaning of personal effects and transfer of such personal effects will also attract capital gains tax.


The capital assets are divided into two parts: A capital asset held for 36 months or less before it is sold or transferred.is called as a short-term capital asset and if the period exceeds 36 months, the asset is known as a long-term capital asset. In case of shares, debentures and mutual fund units the period of holding required is only 12 months. Transfer of a short term capital asset gives rise to "Short Term Capital Gains" (STCG) and transfer of a long capital asset gives rise to "Long Term Capital Gains" ( LTCG). Different rates of tax apply for gains on transfer of the long term and short-term capital assets. Gains on short-term capital asset are taxed as regular income.


While computing the income earned from Capital gain there are certain cases where the transfer of capital assets is taking place but the capital gain arising out of such transactions is exempt from income tax. Such exemptions are of two types:-

  • Exemption of capital gains under section 10 of the Income Tax Act. It contains exempted capital gain in the hands of various categories of persons.
  • Exemptions of capital gains under Section 54, 54B, 54D, 54ED, 54F, 54G.

Income from other sources sources is a residuary head of income. Any item which is chargeable to tax but does not fall with the scope of the other four specific heads of income shall be included under this head of income. . All income other than income from salary, house property, business and profession or capital gains is covered under 'Income from other sources'.


Certain items of income which are specifically chargeable only under this head of income under section 56, are as follows:

  • Dividend income (including deemed divided un/s. 2(22)(e))
  • Income through winnings from lotteries, races including horse races, gambling, betting, etc.
  • Any sum of money, the aggregate value of which exceeds Rs. 50,000, received from any person without consideration by an individual or HUF during the year
  • Any movable property, the aggregate value of which exceeds Rs. 50,000, received from any person without consideration, or for inadequate consideration where such inadequacy exceeds Rs. 50,000, by an individual or HUF during the year
  • Where an immovable property, stamp duty value of which exceeds Rs. 50,000, received by an individual or HUF from any person without consideration, the stamp duty value of such property will be considered.
  • Any immovable property received for a consideration which is less than the stamp duty value of the property by an amount exceeding Rs. 50,000/-, the difference between the stamp duty value & the consideration will be considered
  • Where a firm or closely held company receives shares of a closely held company from any person or persons, without consideration where the aggregate fair market value exceeds Rs. 50,000 or for inadequate consideration where the inadequacy in aggregate exceeds Rs. 50,000
  • Income from subletting
  • Interest Income
  • Family Pension

While computing the income earned from Other Source, one can avail (where eligible) various deductions available under section 57 of the Income Tax Act and certain disallowance as per the Income Tax Act is considered u/s 58 to arrive at the net taxable Income from Other Source.