Income tax forms the backbone of a country’s fiscal framework, serving as a key source of revenue for the government. It facilitates national development, supports infrastructure, and funds welfare schemes. In India, the income tax system is governed primarily by the Income Tax Act, 1961, which outlines the framework for levy, computation, and collection of income tax.
This article aims to demystify the basic concepts of income tax by explaining key terms, types of income, methods of computation, and legal provisions that are essential for both taxpayers and students of tax law.
What is Income Tax?
Income tax is a direct tax levied by the Central Government on the income of individuals and entities. It is progressive in nature—higher income attracts a higher rate of tax.
Governing Law:
- The Income Tax Act, 1961
- The Finance Act (passed annually, determines tax rates)
- Income Tax Rules, 1962
Administering Authority:
Central Board of Direct Taxes (CBDT) functions under the Ministry of Finance.
Who is Liable to Pay Income Tax?
As per Section 2(31) of the Income Tax Act, the following are considered “persons” and liable to pay tax if their income exceeds the prescribed threshold:
- Individuals
- Hindu Undivided Families (HUFs)
- Companies
- Firms
- Association of Persons (AOPs) or Body of Individuals (BOIs)
- Local Authorities
- Artificial Juridical Persons
Assessee [Section 2(7)]
The term “assessee” refers to a person by whom any tax or any other sum of money is payable under the Act. It includes not only those who are liable to pay tax but also those in respect of whom any proceeding has been initiated under the Income Tax Act.
As per Section 2(7), “assessee” includes:
1. A person against whom proceedings have been initiated under the Act for assessment of:
- Income or loss
- Refund
2. A person deemed to be an assessee, such as:
- Legal representatives of a deceased person
- Guardians of minors
3. A person deemed to be an assessee in default, for example:
- An employer or payer who fails to deduct TDS
Residential Status and Tax Liability
Residential status under Sections 6(1) to 6(6) determines the scope of income taxable in India.
Categories:
- Resident and Ordinarily Resident (ROR)
- Resident but Not Ordinarily Resident (RNOR)
- Non-Resident (NR)
Scope of Taxation
| Status | Indian Income | Foreign Income |
|---|---|---|
| ROR | Taxable | Taxable |
| RNOR | Taxable | Partially |
| NR | Taxable | Not taxable |
Income
Section 2(24) of the Income Tax Act, 1961 provides an inclusive definition of “income,” meaning it includes not only the specific items listed but also others that may reasonably be considered income.
Below is a detailed list of the various components considered “income” under Section 2(24):
- Profits and Gains: From business or profession (Section 28)
- Dividend: Including deemed dividends under Section 2(22)
- Voluntary Contributions: Received by a trust or institution under Section 12
- Perquisites or Profits in lieu of Salary: Included under salary income (Sections 17(2) & 17(3))
- Capital Gains: Profits from transfer of capital assets (covered under Section 45)
- Winning from Lotteries, Crossword Puzzles, Races: Including horse races, card games, gambling, etc.
- Keyman Insurance Policy Proceeds: Any sum received under a Keyman insurance policy is included
- Gifts and Other Non-Cash Benefits: Covered under Section 56(2), especially where such benefits are provided without consideration
Previous Year (Section 3)
The Previous Year is the financial year in which the income is earned by an assessee.
- It starts on 1st April and ends on 31st March of the following year.
- Income earned in the previous year is taxed in the assessment year.
As per Section 3 of the Income Tax Act, “the previous year” means the financial year immediately preceding the assessment year.
- If income is earned during 1st April 2024 – 31st March 2025, the previous year is 2024–25.
Assessment Year [Section 2(9)]
The Assessment Year is the year following the previous year, in which the income earned is evaluated and taxed by the Income Tax Department.
As per Section 2(9), “assessment year means the period of twelve months commencing on the 1st day of April every year immediately following the previous year.”
For income earned in PY 2024–25, the Assessment Year is 2025–26.
Five Heads of Income
Under Section 14, total income is classified under five heads:
i) Income from Salary (Sections 15-17)
Includes wages, pension, gratuity, allowances, perquisites, etc.
ii) Income from House Property (Sections 22-27)
Income from letting out of building or land appurtenant thereto.
iii) Profits and Gains from Business or Profession (Sections 28-44)
Covers trade, commerce, manufacturing, and professional income.
iv) Capital Gains (Sections 45-55A)
Arises from the transfer of capital assets. Can be short-term or long-term depending on holding period.
v) Income from Other Sources (Section 56)
Residual head, includes dividends, interest, lottery winnings, etc.
Exemptions and Deductions
A. Exempt Income – Section 10
- Agricultural income
- Share of profit from a partnership firm
- Certain allowances and perquisites
- Scholarship for education
B. Deductions – Sections 80C to 80U
Allow taxpayers to reduce taxable income:
- Section 80C: Life insurance, PPF, NSC (Limit: ₹1.5 lakh)
- Section 80D: Health insurance premium
- Section 80E: Education loan interest
- Section 80G: Donations
- Section 80TTA/80TTB: Interest on savings for individuals and senior citizens
Computation of Total Income under the Income Tax Act, 1961
- Classify the income under the five heads as per Section 14: Salary, House Property, Business or Profession, Capital Gains and Other Sources
- Calculate income under each head by applying the relevant provisions of the Act.
- Add all heads of income to determine the Gross Total Income (GTI).
- Subtract deductions allowed under Chapter VI-A (Sections 80C to 80U) from the GTI.
- The result is the Total Income of the assessee.
- Round off the total income to the nearest ₹10 as per Section 288A.
- Apply tax rates as per the applicable Finance Act to compute tax liability.
- Adjust tax payable by subtracting any TDS (Tax Deducted at Source) and advance tax paid.
- Arrive at the net tax payable or refund due.
Advance Tax v. TDS – At a Glance
| Particulars | Advance Tax | TDS (Tax Deducted at Source) |
|---|---|---|
| Meaning | Tax paid in instalments by the assessee during the year | Tax deducted by the payer while making certain payments |
| Applicable When | Tax liability exceeds ₹10,000 in a financial year | On specified payments like salary, interest, rent, etc. |
| Who Pays | The assessee (self-employed, business, etc.) | The payer (employer, bank, company, etc.) |
| Due Dates | 15th June, 15th Sept, 15th Dec, 15th Mar | At time of payment or credit |
| Relevant Sections | Sections 208 to 219 | Sections 192 to 206AA |
| Form Used | Self-calculated, paid via Challan ITNS 280 | Reflected in Form 16 or Form 16A |
| Penalty for Default | Interest under Section 234B/234C | Interest and penalty for late deposit under Section 201 |
| Credit in ITR | Adjusted while filing return | Auto-populated in Form 26AS and adjusted in return |
Filing of Income Tax Return (ITR)
Due Dates:
31st July: For individual taxpayers (non-audit cases)
31st October: For firms/companies requiring audit
Common ITR Forms:
ITR-1: Salaried individual
ITR-2: Individuals with capital gains
ITR-3: Business/professional income
ITR-4: Presumptive taxation
Filing Mode:
Online via: https://www.incometax.gov.in
Penalties and Prosecution
Penalties (Civil Consequences)
- Late filing of return (Section 234F): Penalty up to ₹5,000.
- Underreporting or misreporting income (Section 270A): Penalty of 50% to 200% of tax evaded.
- Failure to maintain books (Section 271A): ₹25,000 penalty.
- Failure to get accounts audited (Section 271B): 0.5% of turnover (up to ₹1.5 lakh).
- Non-payment of advance tax: Interest under Sections 234B and 234C.
- Not quoting PAN (Section 272B): Penalty of ₹10,000.
Prosecution (Criminal Consequences)
- Willful tax evasion (Section 276C): 6 months to 7 years imprisonment + fine.
- Failure to deposit TDS/TCS (Sections 276B/276BB): 3 months to 7 years + fine.
- False statement in return (Section 277): 3 months to 7 years + fine.
- Willful failure to file return (Section 276CC): Jail up to 7 years + fine.
- Abetment or aiding tax fraud (Section 278): Same punishment as the main offender.
Recent Developments (Union Budget 2025–26 Highlights)
Revised Tax Slabs: No tax on income up to ₹12 lakh (₹12.75 lakh for salaried with standard deduction); simplified slab structure benefits the middle class.
|
|---|
Simplification Measures: New Income Tax Bill and Jan Vishwas Bill 2.0 introduced to reduce litigation and improve ease of compliance.
Focus on Digital Tax Administration: Continued push for faceless assessment, e-verification, and expanded use of technology for better tax governance.
Fiscal Policy Context: Fiscal deficit target set at 4.4% of GDP, reflecting a balance between expenditure and revenue generation through efficient tax administration and reforms.
Conclusion
Understanding the basic concepts of income tax equips taxpayers to meet their compliance responsibilities and plan their finances efficiently. With the tax system becoming increasingly digital and transparent, staying informed is essential.
Whether you’re a salaried individual, a professional, or a student of law, these fundamentals provide a solid foundation for deeper study into taxation or effective personal tax management.
References
[1] Income Tax Act, 1961
[2] Finance Act, 2025
[3] Budget Highlights, Available Here
[4] Tax Deducted at Source (TDS), Available Here