Important Concepts of Taxation

1.   Definition of “Person” under Section 2(31)

Section 2(31) of the Income Tax Act, 1961 provides an inclusive definition of the term “person” for taxation purposes, which is much broader than the ordinary meaning of an individual human being. This definition is fundamental as it determines who can be assessed for income tax in India.

Comprehensive Definition

According to Section 2(31), a “person” includes:

1. An individual– Refers to a natural human being whether male, female, minor or major. A minor’s income is generally taxable through their legal guardian
2. A Hindu Undivided Family (HUF)– A family arrangement recognized under Hindu law consisting of all persons lineally descended from a common ancestor including their wives and unmarried daughters. The manager is called “Karta” and members are “coparceners”
3. A company– A legal entity registered under the Companies Act, including Indian companies, foreign companies, and certain declared associations
4. A firm– An association of persons carrying on business under a partnership agreement, including Limited Liability Partnerships (LLPs) under the LLP Act, 2008
5. An association of persons (AOP) or body of individuals (BOI)– Whether incorporated or not
6. A local authority– Such as municipalities, panchayats, cantonment boards, port trusts etc.
7. Every artificial juridical person– Not falling within any of the preceding categories (e.g., universities, deities, idols)

Examples of Different Categories

• Company: Reliance Industries Ltd., Punjab National Bank
• Artificial Juridical Person: Calcutta University, Reserve Bank of India
• Local Authority: Municipal Corporation of Delhi, Village Panchayat
• Firm: Partnership firm with partners A, B and C
• HUF: Joint family consisting of Mr. A, his brother B, Mrs. A and B
• Individual: Any natural person like Prime Minister Narendra Modi
• AOP: MARKFED, Housefed

2.   Assessment Year [Section 2(9)]

Section 2(9) of the Income Tax Act, 1961, defines “Assessment Year” (AY) as:

“the period of twelve months commencing on the 1st day of April every year.”

Key Points:

• Assessment Year (AY)is the financial year (April 1 to March 31) in which the income earned in the Previous Year (PY) is assessed and taxed.
  • Example:Income earned in PY 2024-25 (April 1, 2024 – March 31, 2025) is assessed in AY 2025-26 (April 1, 2025 – March 31, 2026).
• Relation with Previous Year (PY):
  • PY= Year in which income is earned.
  • AY= Year in which income is taxed.
• Exceptions (Where Income is Taxed in the Same Year, Not Next AY):
  • Income of non-resident shipping businesses (Section 172)
  • Persons leaving India permanently (Section 174)
  • Discontinued businesses (Section 176)
• Significance:
  • Determines tax return filing deadlines.
  • Decides applicable tax rates & deductions.
  • Used for income assessment, scrutiny, and refunds.

Example:

• If you earn ₹10 lakh in 2024-25 (PY), you file returns and pay tax in 2025-26 (AY).

3.   Previous Year [Section 3]

As per Section 3 of the Income Tax Act, 1961:

“The year in which income is earned is termed the ‘Previous Year’ (PY).”

• It is the financial year (April 1 to March 31)immediately preceding the Assessment Year (AY).
• Example:Income earned during PY 2024-25 (April 1, 2024 – March 31, 2025) is taxed in AY 2025-26.

1. Key Features of Previous Year

• General Rule: PY is always a 12-month period (April–March), except for:
  • New businesses/professions: PY starts from the date of commencement until March 31 of that financial year (e.g., a business started on July 1, 2024, has PY from July 1, 2024, to March 31, 2025).
  • New income sources: Similar to new businesses, PY begins when the income source is activated.
• Uniformity: Since AY 1989-90, all taxpayers must follow the April–March cycle

Example Scenarios

CASE	PREVIOUS YEAR (PY)	ASSESSMENT YEAR (AY)
Salary earned (April 2024–March 2025)	2024-25	2025-26
New business started on December 1, 2024	Dec 1, 2024 – Mar 31, 2025	2025-26
Discontinued business (closed June 2024)	April 1, 2023 – June 30, 2024	Taxed in PY 2023-24

4.   Assessee [Section 2(7)]

1. Statutory Definition

As per Section 2(7) of the Income Tax Act, 1961, an Assessee means:

“A person by whom any tax or any other sum of money (interest, penalty, etc.) is payable under this Act.”

This includes:

• Every person in respect of whom any proceeding under the Act has been taken
• A person who is deemed to be an assessee under any provision of the Act
• A person who is deemed to be an assessee in default under any provision of the Act

2. Categories of Assessees

1. Ordinary Assessee

Any person against whom proceedings are taken for:

• Assessment of income
• Assessment of loss
• Refund of tax

2. Representative Assessee[Sections 160-163]

• Legal representatives of deceased persons
• Guardians of minors/lunatics
• Agents of non-residents
• Trustees of trusts

3. Assessee-in-Default

A person who fails to fulfill statutory obligations:

• Employer not deducting TDS (Section 201)
• Person not collecting TCS (Section 206C)

4. Deemed Assessee

Persons treated as assessees due to specific circumstances:

• Legal heir of deceased (Section 159)
• Successor in business (Section 170)

3. Key Concepts

• Person vs. Assessee:
  While all assessees are persons (as per Section 2(31)), not all persons are assessees (only those liable to pay tax)
• Tax Liability:
  An assessee becomes liable when:
  • Income exceeds exemption limit
  • Required to file return (even if below taxable limit)
  • Obligated to deduct/collect tax at source

4. Special Cases

SITUATION	TYPE OF ASSESSEE
Minor’s income clubbed with parent’s	Parent is assessee
Non-resident’s Indian income	Non-resident or their agent
HUF income	Karta as representative assessee
Company in liquidation	Liquidator as assessee

5. Practical Implications

• Return Filing: Only assessees need to file returns
• Tax Proceedings: Assessments are made in the name of the assessee
• Legal Responsibility: Assessees must maintain proper books and documents

6. Example Scenarios

1. Salaried Employeeearning ₹8 lakh/year → Ordinary assessee
2. NRIsearning rental income in India → Assessee (may appoint agent)
3. Companyfailing to deduct TDS → Assessee-in-default

5.   Charge of Income-Tax [Section 4]

Section 4(1) of the Income Tax Act, 1961, states:

*”Income-tax shall be charged for every assessment year (AY) at the rates prescribed in the Finance Act on the total income of the previous year (PY) of every person (as defined under Section 2(31)).”*

This means:

• Tax is levied annually(for each AY).
• Rates are fixed by the Finance Act(e.g., Budget 2024 sets rates for AY 2025-26).
• Tax applies on “total income”(computed per Income Tax rules).
• Taxable entity = “Person”(individual, HUF, company, etc., as per Section 2(31)).

Example :

Scenario: Mr. A (resident) earns ₹15L in PY 2024-25 (salary + rent).

• AY: 2025-26
• Taxable Income: ₹15L – ₹50K (standard deduction) = ₹14.5L
• Tax Rate: As per AY 2025-26 slabs (e.g., 5% on ₹2.5L–₹5L, 20% on ₹5L–₹10L, etc.).

6.   “Total Income” under Income Tax Act, 1961.

1. Statutory Definition (Section 2(45))

The Income Tax Act defines “Total Income” as:

*”The total amount of income referred to in Section 5, computed in the manner laid down in this Act (i.e., after applying provisions for clubbing, set-off, carry forward of losses, and deductions).”*

2. Key Components of Total Income

1. Income as per Section 5

Includes all income:

• Received or deemed received in India (for residents and non-residents)
• Accrued or arising in India (for non-residents)
• Accrued/arising outside India (for residents)

2. Computation Methodology
   Total Income is calculated as:

Gross Total Income (GTI)  (-) Deductions under Chapter VI-A (Sections 80C to 80U)  = Total Income

3. Classification of Income (Heads of Income – Section 14)

Total income comprises 5 heads:

1. Salaries (Section 15-17)

• Basic salary, allowances, perks, bonuses

2. House Property (Section 22-27)

• Rental income from owned property

3. Profits from Business/Profession (Section 28-44)

• Business profits after allowable expenses

4. Capital Gains (Section 45-55)

• Income from sale of capital assets

5. Other Sources (Section 56-59)

• Interest, dividends, lottery winnings

4. Special Adjustments

• Clubbing of Income (Sections 60-65)
  (e.g., minor’s income with parent’s income)
• Set-off/Carry Forward of Losses (Sections 70-80)
  (Inter-head and intra-head adjustments)
• Exemptions (Section 10)
  (Agricultural income, HRA, LTA etc.)

5. Practical Example

Mr. X’s Income Computation (AY 2025-26)

INCOME HEAD	AMOUNT (₹)
Salary	12,00,000
House Property (Net)	3,00,000
Capital Gains (LTCG)	1,50,000
Other Sources (Interest)	50,000
Gross Total Income	17,00,000
Less: Deductions (80C, 80D)	(2,00,000)
Total Income	15,00,000

7.   Rounding off of Total Income [Section 288A]

Section 288A mandates that the total income computed under the Income Tax Act must be rounded off to the nearest multiple of ₹10 before calculating tax liability. This simplifies tax computations and ensures uniformity .

Step-by-Step Rounding Method

1. Ignore Paisa:

• First, discard any fractional amount (e.g., ₹5,76,897.50 → ₹5,76,897).

2. Round to Nearest ₹10:

• If the last digitis 5 or more, round up (e.g., ₹5,76,895 → ₹5,76,900).
• If the last digitis less than 5, round down (e.g., ₹5,76,892 → ₹5,76,890) .

Example:

• Total Income = ₹2,52,844.99 → Ignore paise → ₹2,52,844 → Last digit (4) < 5 → Rounded to ₹2,52,840.
• Total Income = ₹2,52,845.01 → Ignore paise → ₹2,52,845 → Last digit (5) ≥ 5 → Rounded to ₹2,52,850

8.   How to Compute “Tax Liability on Total Income” under the Income Tax Act, 1961.

Step 1: Determine Residential Status

First, establish if you’re:

• Resident(taxed on global income)
• Non-Resident (NRI)(taxed only on India-sourced income)
• Not Ordinarily Resident (NOR)(special rules apply)

This affects which incomes are taxable under Section 6.

Step 2: Calculate Gross Total Income

Compute income under all applicable heads:

1. Salaries(Section 15-17)

• Basic salary + allowances + perks – exemptions

2. House Property(Section 22-27)

• GAV – Municipal taxes – Standard deduction (30%)

3. Business/Profession(Section 28-44)

• Revenue – Allowable expenses – Depreciation

4. Capital Gains(Section 45-55)

• Short-term/long-term with applicable indexation

5. Other Sources(Section 56-59)

• Interest, dividends, etc.

Step 3: Adjust for Clubbing & Losses

• Clubbing provisions(Sections 60-65): Include spouse’s/minor’s income if applicable
• Set-off losses(Sections 70-80):
  • Intra-head (same head)
  • Inter-head (different heads)
  • Carry forward remaining losses (if eligible)

Step 4: Apply Deductions (Chapter VI-A)

Subtract eligible deductions under:

• Section 80C(₹1.5L): EPF, PPF, ELSS, etc.
• Section 80D(Health insurance)
• Section 80G(Donations)
• Other applicable sections (80E, 80TTA, etc.)

Formula: Gross Total Income – Deductions = Total Income

Step 5: Round Off Total Income

As per Section 288A:

• Round final total income to nearest ₹10
• Example: ₹5,25,344 → ₹5,25,340

Step 6: Apply Applicable Tax Rates

Use the current year’s slab rates:

For Individuals/HUF (AY 2025-26):

INCOME RANGE	TAX RATE
Up to ₹3L	Nil
₹3L-6L	5%
₹6L-9L	10%
₹9L-12L	15%
₹12L-15L	20%
Above ₹15L	30%

For Senior Citizens (60+):

• Higher basic exemption limit (₹3L)

For Super Senior Citizens (80+):

• Higher basic exemption limit (₹5L)

Additional Charges:

• Surcharge(if income exceeds specified limits)
• Health & Education Cess: 4% on (tax + surcharge)

Step 7: Subtract Tax Credits

• TDS/TCS(From Form 26AS)
• Advance Taxpaid
• Relief under Section 89/90/91

Step 8: Final Tax Payable/Refundable

• If (Computed Tax – Credits) > 0 → Pay balance by March 31
• If negative → Eligible for refund

Example Calculation (AY 2025-26)

Taxpayer Profile:

• Resident individual (age 35)
• Salary: ₹12L
• House Property Income: ₹2.4L
• Section 80C deductions: ₹1.5L

Computation:

1. Gross Total Income: ₹12L + ₹2.4L = ₹14.4L
2. Less Deductions: ₹14.4L – ₹1.5L = ₹12.9L (Total Income)
3. Rounded to: ₹12,90,000
4. Tax Calculation:

• • First ₹3L: Nil
  • Next ₹3L (₹3L-6L): 5% of ₹3L = ₹15,000
  • Next ₹3L (₹6L-9L): 10% of ₹3L = ₹30,000
  • Next ₹3.9L (₹9L-12.9L): 15% of ₹3.9L = ₹58,500
  • Total Tax: ₹1,03,500

5. Add Cess: 4% of ₹1,03,500 = ₹4,140
6. Final Tax Liability: ₹1,07,640