Income Tax and GST आयकर व वस्तू व सेवा कर

Quick summary

Income tax in India is levied under the Income-tax Act, 1961, on the total income of a "person" for a year. This topic explains the basic words used in every tax problem (assessee, previous year, assessment year, person, gross total income) and how to decide the residential status of an individual. Residential status decides which incomes are taxable in India.

Key points

• Income tax is a direct tax: the person who earns pays it. It is charged under Section 4.
• Previous year (PY) is the financial year (1 April to 31 March) in which income is earned. Assessment year (AY) is the next year, in which it is assessed. Income of PY 2025-26 is assessed in AY 2026-27.
• Person (Sec 2(31)) has 7 types: individual, HUF, company, firm, AOP/BOI, local authority, artificial juridical person.
• Assessee (Sec 2(7)) is a person by whom tax is payable.
• Income is computed under five heads: Salaries, House Property, Profits and Gains of Business or Profession, Capital Gains, Other Sources.
• Residential status (निवासी दर्जा) of an individual (Sec 6) is: Resident and Ordinarily Resident (ROR), Resident but Not Ordinarily Resident (RNOR), or Non-Resident (NR).
• Status is decided separately for every previous year.
• An ROR is taxed on world income; an NR is taxed only on income received, accrued or deemed to accrue in India.
• Agricultural income in India is exempt (Sec 10(1)).

Important terms

• Gross Total Income (GTI) – total of income under all five heads after clubbing and set-off.
• Total Income – GTI minus deductions under Chapter VI-A (80C to 80U).
• Exempt income – income not included in total income, e.g. agricultural income.
• Casual income – lottery, crossword, game-show winnings; taxed at a flat rate.

Formats and formulas

Basic conditions for an individual to be resident (any one is enough):

• For an Indian citizen leaving India for employment, or a crew member of an Indian ship, condition (b) does not apply (only 182 days counts).
• For an Indian citizen or PIO visiting India, 60 days becomes 182 days; but if Indian income exceeds ₹15 lakh, it becomes 120 days (with 365 days in 4 years).
• A resident becomes ROR if he was resident in at least 2 of the 10 preceding years AND stayed 730 days or more in the 7 preceding years. Otherwise he is RNOR.

5 important questions

Q1. Distinguish between previous year and assessment year.

Previous year is the financial year in which income is earned; assessment year is the year following it, in which that income is assessed and taxed. Example: income of 2025-26 is assessed in AY 2026-27.

Q2. Define "person" under the Income-tax Act.

Under Sec 2(31) a person includes an individual, HUF, company, firm, AOP or BOI, local authority, and every artificial juridical person not covered above.

Q3. Mr. John, a foreign national, came to India for the first time on 1 October 2024 and stayed till 31 March 2025. Find his residential status for PY 2024-25.

Days in India: October 31 + November 30 + December 31 + January 31 + February 28 + March 31 = 182 days. He satisfies condition (a), so he is resident. He was not resident in 2 of the 10 preceding years (he never came before), so he is Resident but Not Ordinarily Resident (RNOR).

Q4. Explain the provisions for determining the residential status of an individual.

Outline: basic conditions (182 days; 60 + 365 days), exceptions for citizens leaving for employment and visiting citizens/PIO (182 / 120 days), deemed resident (Indian citizen with income above ₹15 lakh not liable to tax in any other country), additional conditions for ROR (2 of 10 years and 730 days in 7 years), and how status changes scope of income.

Q5. Explain the scope of total income according to residential status.

Outline: Sec 5; draw the table above; give one example of each income (salary earned in India, profit from foreign business controlled from India, foreign rent); conclude that ROR pays on world income and NR only on Indian income.

Exam tip

In residential status problems, always count days month by month in a table and write the conclusion in one line: "Hence, he is RNOR for PY ____."

Quick summary

Salary (वेतन) is taxable only when there is an employer–employee relationship. Sections 15 to 17 cover what is included in salary: basic pay, allowances, perquisites and profits in lieu of salary. This topic shows how to compute taxable salary, including HRA exemption, standard deduction and professional tax.

Key points

• Salary is taxed on a due or receipt basis, whichever is earlier (Sec 15).
• Salary includes wages, pension, annuity, gratuity, fees, commission, perquisites, leave encashment and advance salary (Sec 17(1)).
• Allowances are fixed money given for expenses: fully taxable (dearness allowance, city compensatory), partly exempt (HRA, children education), or fully exempt (allowance to UN employees).
• Perquisites (परिलब्धी) are benefits in kind, e.g. rent-free house, car, free education (Sec 17(2)).
• Profits in lieu of salary include compensation on termination (Sec 17(3)).
• Standard deduction (Sec 16(ia)): ₹50,000 in the old regime and ₹75,000 in the new regime.
• Professional tax (Sec 16(iii)) is deductible in the old regime only. In Maharashtra it is ₹2,500 a year.
• Entertainment allowance deduction (Sec 16(ii)) is only for government employees.
• In the new regime (Sec 115BAC), HRA exemption and professional tax deduction are not allowed.

Important terms

• Basic salary – fixed pay as per the terms of employment.
• Dearness Allowance (DA) – paid to offset inflation; "DA forming part" counts for retirement benefits.
• House Rent Allowance (HRA) – allowance for rent; exemption under Sec 10(13A).
• Gratuity – lump sum paid on retirement for long service.
• Leave encashment – payment for unused earned leave.

Formats and formulas

HRA exempt = least of:

1. Actual HRA received
2. Rent paid − 10% of salary
3. 50% of salary (Mumbai, Delhi, Kolkata, Chennai) or 40% of salary (other cities)

Here, salary = basic + DA (if forming part) + commission at a fixed % of turnover, for the period of stay.

Format of taxable salary:

5 important questions

Q1. What is a perquisite? Give two examples.

A perquisite is a benefit in kind given by the employer in addition to cash salary, such as a rent-free house or free use of a car for personal purposes.

Q2. What is the standard deduction from salary?

It is a flat deduction from gross salary under Sec 16(ia), without proof of expense: ₹50,000 (old regime) or ₹75,000 (new regime). Check the current year's figures.

Q3. Mr. Patil works in Nagpur. Basic ₹40,000 p.m., DA 10% of basic (forming part), HRA ₹10,000 p.m., rent paid ₹12,000 p.m., professional tax ₹2,500. Compute income from salary under the old regime.

Salary for HRA = 4,80,000 + 48,000 = ₹5,28,000.

Under the new regime, the whole HRA (₹1,20,000) is taxable and only ₹75,000 standard deduction is allowed.

Q4. Explain the different types of allowances with their tax treatment.

Outline: meaning of allowance; fully taxable (DA, overtime, city compensatory, tiffin); partly exempt (HRA, children education ₹100 p.m. per child for two children, hostel ₹300 p.m. per child, transport for disabled); fully exempt (to UN staff, government employees abroad); note which are lost in the new regime.

Q5. Explain the tax treatment of gratuity.

Outline: government employees – fully exempt; employees covered by the Payment of Gratuity Act – least of actual, 15/26 × last salary × years of service, ₹20 lakh; others – least of actual, ½ month's average salary × completed years, ₹20 lakh. Check the current limit.

Exam tip

Always show the HRA working separately as "least of three" before the main computation. Write the city type (metro or non-metro) clearly.

Quick summary

Income from house property (घरमालमत्तेपासून उत्पन्न) is taxed under Sections 22 to 27. The tax is on the annual value of a building and the land attached to it, owned by the assessee and not used for his own business. This topic explains how to find Gross Annual Value, Net Annual Value and the deductions allowed.

Key points

• Three conditions (Sec 22): there must be a building or land attached, the assessee must be the owner, and it must not be used for own business or profession.
• Rent from vacant land is not taxed here; it is "income from other sources".
• Gross Annual Value (GAV) is found from Municipal Value, Fair Rent, Standard Rent and Actual Rent.
• Municipal taxes are deducted only if paid by the owner during the year.
• Two deductions are allowed (Sec 24): standard deduction of 30% of NAV and interest on borrowed capital.
• For a self-occupied property the annual value is nil. Up to two houses can be treated as self-occupied.
• Interest on a loan for a self-occupied house is deductible up to ₹2,00,000 (construction/purchase, old regime); in the new regime no interest deduction is allowed for a self-occupied house.
• Pre-construction interest is allowed in 5 equal instalments starting from the year of completion.
• Loss under this head can be set off against other heads only up to ₹2,00,000 a year; the rest is carried forward for 8 years.

Important terms

• Municipal Value (MV) – value fixed by the local body for property tax.
• Fair Rent (FR) – rent a similar property in the same area would fetch.
• Standard Rent (SR) – maximum rent allowed under the Rent Control Act.
• Expected Rent (ER) – higher of MV and FR, but not more than SR.
• Net Annual Value (NAV) – GAV minus municipal taxes paid by the owner.

Formats and formulas

• Expected Rent = higher of (MV, FR), limited to SR
• GAV = higher of (ER, Actual rent received/receivable) — when there is no vacancy

5 important questions

Q1. What is Gross Annual Value?

GAV is the starting figure of house-property income. It is the higher of Expected Rent and the actual rent received or receivable for a let-out property.

Q2. What deductions are allowed under Section 24?

(a) Standard deduction of 30% of NAV, for repairs and collection, whatever the actual spending; (b) interest on capital borrowed to buy, build, repair or reconstruct the property.

Q3. Compute income from house property: MV ₹1,20,000; FR ₹1,50,000; SR ₹1,40,000; actual rent ₹1,60,000; municipal tax paid by owner ₹10,000; interest on housing loan ₹60,000.

Expected Rent = higher of MV and FR = ₹1,50,000, but limited to SR = ₹1,40,000. GAV = higher of ER (1,40,000) and actual rent (1,60,000) = ₹1,60,000.

Q4. Explain the tax treatment of a self-occupied house property.

Outline: annual value nil (Sec 23(2)); two houses allowed; no deduction for municipal tax or standard deduction; interest limit ₹2,00,000 for loans taken after 1-4-1999 for purchase/construction completed within 5 years, otherwise ₹30,000; new-regime position; resulting loss and its set-off.

Q5. Explain the conditions for taxing income under the head "House Property" and the cases where rent is not taxed under this head.

Outline: three conditions; exceptions – property used for own business, rent of vacant land, composite letting of building with machinery (business or other sources), farm house, property held as stock-in-trade (notional rent after 2 years).

Exam tip

Write the Expected Rent working first in one line. Remember: municipal tax is deducted only when the owner pays it, not when it is merely due.

Quick summary

Income from business or profession (व्यवसाय व पेशा यापासून नफा) is taxed under Sections 28 to 44. The starting point is the net profit shown by the Profit and Loss Account. This profit is then adjusted: expenses the Act does not allow are added back, and incomes taxed under other heads are deducted. Small businesses can also use presumptive taxation.

Key points

• Business (Sec 2(13)) includes trade, commerce, manufacture or any adventure in the nature of trade. Profession needs special skill and learning, e.g. doctor, lawyer, CA.
• Expenses allowed: rent, repairs and insurance of premises (Sec 30); of machinery (Sec 31); depreciation as per block of assets (Sec 32); and any expense wholly and exclusively for business (Sec 37(1)).
• Not allowed: personal and capital expenses, income tax, penalties for breaking law, donations (allowed only under Sec 80G), drawings.
• Sec 40A(3): a cash payment of more than ₹10,000 to one person in a day is disallowed (₹35,000 for transporters).
• Sec 43B: certain expenses (taxes, employer's PF, bonus, bank interest, payments to micro and small enterprises) are allowed only when actually paid.
• Sec 40(a): expenses on which TDS was not deducted can be partly or fully disallowed.
• Incomes credited in P&L but taxable under other heads (rent, dividend, interest on securities, capital gain) are deducted.
• Presumptive taxation: Sec 44AD (business) – 8% of turnover, or 6% of turnover received digitally; Sec 44ADA (profession) – 50% of gross receipts.
• Book depreciation is replaced by depreciation under the Income-tax Act.

Important terms

• Block of assets – group of assets of the same class with the same rate of depreciation.
• Written Down Value (WDV) – cost less depreciation allowed in earlier years.
• Capital expenditure – spending that gives a lasting benefit, e.g. buying machinery.
• Revenue expenditure – day-to-day running expense, e.g. wages, rent.

Formats and formulas

Presumptive limits (check the current year's figures): Sec 44AD up to ₹2 crore turnover (₹3 crore if cash receipts are not more than 5%); Sec 44ADA up to ₹50 lakh (₹75 lakh on the same condition).

5 important questions

Q1. What is Section 40A(3)?

If a payment for an expense exceeding ₹10,000 is made to one person in one day otherwise than by account payee cheque, draft or electronic mode, the whole payment is disallowed.

Q2. What is presumptive taxation under Section 44AD?

An eligible small business (individual, HUF or firm other than LLP) may declare profit at 8% of turnover (6% for digital receipts) without keeping detailed books.

Q3. Mr. Shinde's P&L shows net profit ₹3,00,000. Debited: income tax ₹20,000, personal expenses ₹15,000, book depreciation ₹40,000, donation to a charitable trust ₹10,000. Credited: dividend ₹8,000. Depreciation allowable under the Act is ₹35,000. Compute business income.

Q4. Explain the expenses expressly allowed and disallowed under the head "Profits and gains of business or profession".

Outline: Sections 30–37 (rent, repairs, insurance, depreciation, scientific research, bad debts u/s 36(1)(vii), employer's PF contribution, interest on business loans); general deduction u/s 37(1); disallowances under Sec 40, 40A(2) (excess payment to relatives), 40A(3), 43B; give an example of each.

Q5. Explain depreciation under the Income-tax Act.

Outline: Sec 32; conditions (owned, used for business); block of assets and WDV method; half rate if the asset is used for less than 180 days in the year of purchase; additional depreciation for new plant in manufacturing; common rates (building 10%, furniture 10%, plant 15%, computers 40%); no depreciation on land and goodwill.

Exam tip

Write every adjustment with a short reason in the table ("Add: income tax – not a business expense"). Examiners give marks for the reasons, not just the final figure.