The Income Tax Act, 1961 is one of the most important fiscal laws in India, governing the levy, assessment and collection of income tax. It provides a comprehensive framework to determine what constitutes taxable income, who is liable to pay tax and how income is taxed. The Act applies to different categories of persons and covers income earned both within and outside India, depending on the residential status of the assessee. By clearly defining key concepts such as income, total income and charge of tax, the Act ensures an organised, fair and effective system of income taxation in India.
The Income Tax Act, 1961 contains several important definitions under Section 2, which help in understanding the meaning and application of various provisions of the Act. These definitions form the basic foundation of income tax law.
The term “income” is defined in an inclusive manner, which means it covers not only what is specifically mentioned but also other similar receipts. It includes salary, profits and gains from business or profession, dividends, capital gains, and income from other sources. Because of its wide meaning, almost every type of monetary gain can fall within the scope of income unless specifically exempted.
An assessee is a person who is liable to pay tax or any other amount under the Act. It includes a person whose income is assessed, a person against whom proceedings are taken for tax liability, and a person who is required to file a return of income. Thus, any person connected with tax payment or assessment is treated as an assessee.
The assessment year is the period of twelve months during which the income earned in the previous year is assessed and taxed. It immediately follows the previous year. For example, income earned in the financial year 2023–24 is assessed in the assessment year 2024–25.
The previous year means the financial year in which income is actually earned by the assessee. Income earned during this year is taxed in the following assessment year. Generally, the previous year starts on 1st April and ends on 31st March.
These definitions form the foundation of income tax law.
The scope of total income is defined under Section 5 of the Income Tax Act, 1961. The taxability of income under this section mainly depends on the residential status of the assessee, such as whether the person is a resident or a non-resident.
Under the Act, total income includes the following:
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Income received or deemed to
be received in India
This includes income actually received in India or income which is treated as
received in India under the provisions of the Act.
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Income that accrues or arises
or is deemed to accrue or arise in India
Income earned in India or income which is considered by law to have accrued or
arisen in India is taxable, even if it is received outside India.
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Income accruing outside India
(in certain cases)
Income earned outside India is taxable in India in the case of residents,
subject to the provisions of the Act.
The Income Tax Act adopts a wide and comprehensive scope of total income to ensure that all taxable income is properly assessed and brought under the tax net.
Under Section 2(31) of the Income Tax Act, 1961, the term “person” has a wide meaning and includes various individuals and entities who can be taxed under the Act. Each person mentioned in this section is treated as a separate taxable entity.
The term person includes:
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Individual
A natural human being, whether male or female, resident or non-resident.
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Hindu Undivided Family (HUF)
A family consisting of lineal descendants of a common ancestor, recognised as a
separate taxable entity under Hindu law.
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Company
A corporate body registered under the Companies Act or any foreign company.
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Firm
A partnership firm carrying on business or profession.
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Association of Persons (AOP)
Two or more persons who join together for a common purpose to earn income.
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Body of Individuals (BOI)
A group of individuals coming together without forming a partnership or AOP.
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Local Authority
Municipalities, Panchayats and other local bodies recognised by law.
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Artificial Juridical Person
A legal entity which is not a natural person but is recognised by law, such as
a trust or statutory corporation.
Each of these persons is separately assessed to tax according to the provisions of the Income Tax Act.
The residential status of an assessee is determined under Sections 6 and 7 of the Income Tax Act, 1961. It is an important factor in deciding which income is taxable in India, as the scope of total income varies based on residential status.
An individual assessee may be classified into the following three categories:
1. Resident and Ordinarily Resident (ROR)
A person who satisfies the conditions of residence and has been ordinarily
resident in India. Such a person is taxed on his global income, that is, income earned both in India and
outside India.
2. Resident but Not Ordinarily Resident (RNOR)
A person who is a resident but does not satisfy the conditions of being
ordinarily resident. In this case, income received or accrued in India and
income from a business controlled or profession set up in India is taxable.
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Non-Resident (NR)
A person who does not satisfy the conditions of residence under the Act. A
non-resident is taxed only on income
received or accrued or deemed to accrue in India.
Residential status plays a crucial role in determining the tax liability of an assessee, as residents are taxed on a wider scope of income compared to non-residents.
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The charging section of the Income Tax Act, 1961 is Section 4. This section provides that income tax shall be charged for every assessment year on the total income of the previous year of an assessee. It establishes the authority of the Government to levy income tax in India.
The rates of income tax are not fixed permanently in the Act. Instead, they are prescribed every year through the Finance Act, which is passed by Parliament. This allows the Government to revise tax rates according to economic conditions.
Thus, Section 4 forms the legal foundation for the levy and collection of income tax in India.
Dividend income refers to the income received by shareholders from a company out of its profits. It represents the return on investment made by shareholders in the company.
Under the Income Tax Act, 1961, dividend income is taxable in the hands of the shareholder under the head “Income from Other Sources”, subject to the provisions of the Act. The earlier system of dividend distribution tax has been replaced, and shareholders are now liable to pay tax on dividend income received.
The Act also provides for Tax Deducted at Source (TDS) on dividend income. Companies are required to deduct tax at source while paying dividends, which helps ensure proper tax compliance and timely collection of tax by the Government.
Certain types of income are treated as having accrued or arisen in India, even if they are earned or received outside India. This concept is governed by Section 9 of the Income Tax Act, 1961. The purpose of this provision is to ensure that income having a close connection with India does not escape taxation.
Under Section 9, income deemed to accrue or arise in India includes:
1. Income from business connections in India, even if part of the business is carried on outside India
2. Salary for services rendered in India, regardless of where the salary is paid
3. Income from property, assets or sources situated in India
4. Capital gains arising from the transfer of assets located in India
This provision plays an important role in preventing tax evasion and ensures that income linked to India is fairly and effectively taxed under Indian tax laws.
The Income Tax Act, 1961 lays down the legal framework for taxing income in India. It clearly defines key terms like income, assessee and assessment year, which form the base of income tax law. The scope of total income depends mainly on the residential status of the assessee, ensuring fair taxation of residents and non-residents.
The Act identifies different persons as taxable entities and provides the charging provision under Section 4, which gives authority to levy income tax. Provisions relating to dividend income and income deemed to accrue or arise in India ensure that income connected with India does not escape taxation.
The Act provides a clear, fair and effective system for the levy and collection of income tax in India.
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