This article is written by Bhavna Arul, a fourth-year law student from Symbiosis Law School.
Indian Taxation law is a complex system; it is a source of revenue for the government. It is divided into two parts where one is governed by the central government and the other by the state government. Local authorities like Municipalities and the Local government also play a significant role in tax levied. Central Government controls the affairs of Income-tax, Central Goods and Service Tax, Customs Duty and Integrated Goods and Service Tax. Whereas, State government looks over State Goods and Service Tax and Stamp Duty Registration.
India has a progressive system of tax, where the tax rates (percentage of tax payable) increase with an increase in income. The Income-tax Act 1961 governs income tax of an individual, firm, LLP, an association of person and any other artificial juridical person. To put in simple words, income tax is the tax on the income of a person. Tax is always calculated for the previous year in assessment year which is from 1st April to 31st March in India.
Section 5 of Income Tax Act, 1961 provides Scope of Total Income in case of a person who is a resident, in the case of a person not ordinarily resident in India and person who is a non-resident which includes. Income can be Income from any source which-
is received or is deemed to be received in India in such year by or on behalf of such person
accrues or arises or is deemed to accrue or arise to him in India during such year
accrues or arises to him outside India during such year.
To understand the definition of resident we shall first refer to section 6 of the Income Tax Act.
Section 6 of the Income Tax Act
This section lays down rules as to who can be considered a citizen under the Act for tax purposes. It is divided into various heads, namely- individuals, HUF/ LLP/ Firm and joint-stock companies.
Residential status of Individual
To determine an individual to be a resident or non-resident, we look at the basic conditions.
He is in India for the assessment year for 182 days or more. This 182-day period need not be a continuous need or in a single place in India. The number of hours of flight departure and arriving is also counted. The day of take-off and landing are also counted as within India. A person may be a resident of India and also a resident in another country or countries.
He is in India for 60 days or more during the assessment year and 365 days or more during the previous year proceeding the assessment year. In all four years preceding the assessment year a total of 365 days he must be in India.
Basic condition 2 is not taken into consideration in the following cases:
- A person leaving India for employment, business, job or profession purpose.
- If a person is of an Indian origin, visits India (e.g. – coming to India after generations settling abroad). In these cases, basic condition 2 is not applicable. They are known as special Individuals.
- Resident in India at least 2 out of 10 previous years immediately preceding the relevant assessment year.
- He has been in India for 730 days or more during 7 years immediately preceding the relevant assessment year.
Additional condition 1 speaks about a resident, and additional condition 2 speaks about stay. Thus, additional condition to decide if the person is ordinarily resident Additional condition 1 has a pre-condition of “resident”. Additional condition 2 then deals with stay.
Residency Status of HUF/ LLP/ Firm
To decide whether HUF is resident or non-resident control and management of the HUF are taken into consideration. Either partial control and management or full control and management both are considered to be resident. In case of HUF the position of Karta is seen.
Residency Status of Joint-Stock Company
These are classified only as resident or non-resident. There is no specific division for an ordinary and non-ordinary resident. An Indian company is always a resident. In the case of a foreign company if gross receipt or turnover is more than 50 Cr and place of effectiveness is India, then it is considered a resident.
Incidence of tax based on Residential status
Income can be divided into 2 parts- Indian income and foreign income. Indian income is that which is earned in India. It includes income which is either earned in India or accrued, arises, deemed to accrue or arise and received outside India.
|Tax||Income||Ordinary resident||Non ordinary resident||Non resident|
|Business income controlled from India||Yes||yes||no|
|Business income not controlled from India||Yes||no||no|
|Any other foreign Income||Yes||no||no|
|3.||Passed untaxed profits remitted now||No||no||no|
Section 5 of the Income Tax Act
Now that we have understood what a resident status is, we can go back to Section 5. As per the income tax laws, a person can have a total of 5 sources of income which are: Income from Salary, Income from House Property, Income from Business or Profession, Income from Capital Gains, Income from Other Sources. Gross total income is the sum of income from all 5 heads after setting off the losses under the relevant heads of income. Gross total income is to be categorized in 2 parts i.e. one which is to be taxed at normal slab rates and other which is subject to tax at specific rates.
Computation of Income from Employment
It will be gross salary as reduced by the aggregate amount of permissible deductions. It will be a part on due or receipt base whichever is earlier.
- Amount of professional tax paid.
- Transport allowance to an extent.
- Prescribed special allowance or benefit in the performance of duties.
- Compensation under the voluntary retirement scheme.
- Amount of gratitude received on retirement or death.
- Amount received on the computation of pension
- Pension received by gallantry awards.
Head salary includes:
- Value of rent-free, or concessional accommodation provided by an employer.
- Value levied on travel concession.
- The amount received on encashment of unveiled leave on retirement or otherwise;
- The value of free or concessional medical treatment paid for or provided by the employee.
Computation of Income from House property
It is not occupied for business or profession by its owner. Income from house property will be gross rent less specific deduction. Gross rent is calculated at 6% where the per cent is not specified, and the gross rent will be higher of the amount of contractual rent for the financial year. The gross rent of one self-occupied property is not taxed.
- The income of the property includes the plant and machinery in case it is inseparable.
- Permissible deduction
- Amount of taxes levied by a local authority and taxed on services, if paid.
- 20% of gross rent for repair and maintenance.
- Amount of interest paid on capital borrowed for construction, repair, and re-construction or renewing the property.
Computation of Income from Business
There are two modes of computation. In the first model taxable income is equal to business profits with specified adjustments. The second model is the income expense model where taxable income under the head will be equal to gross income minus allowable deductions for expenses. Income from the investment assets will be computed under the head capital gains. Ordinarily, all accrual and receipts derived from a business will form a part of gross earnings.
Computation of Capital Gain
Income from all investment assets comes under the head of capital gain. For the purpose of capital gain, certain transactions are not treated as a transfer. All capital gain between 1.04.1981 to 31.03.2000 will not be liable to tax. A general provision has therefore been made to the effect that the cost of acquisition of an investment asset shall be deemed to be nil if it cannot be determined or ascertained for any reason, and capital gains will be computed accordingly. A similar provision has been provided in respect of the cost of the improvement.
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