Income Tax Act, 1961

The Income Tax Act, 1961 is the principal law governing the levy, assessment, collection and recovery of income tax in India. It came into force on 1 April 1962 and applies throughout India. The Act contains various provisions explaining who is liable to pay tax, what income is taxable, how income is calculated and how tax is collected. Understanding the basic provisions of the Act is essential for students, taxpayers and professionals.

1. Definitions – Section 2

Section 2 of the Income Tax Act contains the meanings of important words and expressions used throughout the Act. These definitions ensure that the provisions of the Act are interpreted consistently. Whenever a particular term appears in any section of the Act, its meaning is generally taken from Section 2 unless the context requires otherwise.

Some important definitions include:

(a) Assessee – Section 2(7)

An assessee is a person who is liable to pay income tax or any other amount under the Income Tax Act. It also includes a person against whom assessment proceedings have been started, a person who is required to file an income tax return, or a person who pays tax on behalf of another person, such as a legal representative or guardian.

Example: Mr. Ravi earns a salary of ₹9,00,000 during the financial year. Since he is required to pay income tax and file a return, he is an assessee.

(b) Assessment Year – Section 2(9)

The Assessment Year is the period of twelve months beginning on 1 April, immediately following the Previous Year. During this year, the income earned in the Previous Year is assessed and taxed.

Example: Income earned during the financial year 2025–26 is assessed in the Assessment Year 2026–27.

(c) Company – Section 2(17)

A company means an Indian company or any body corporate incorporated under Indian or foreign law that is recognised for income tax purposes.

Example: ABC Private Limited is treated as a company under the Income Tax Act.

(d) Dividend – Section 2(22)

A dividend means the distribution of profits by a company to its shareholders. The Act also treats certain other payments as deemed dividends under specified circumstances.

Example: XYZ Ltd. distributes ₹20,000 to its shareholder as a dividend. This amount is treated as dividend income.

(e) Income – Section 2(24)

The term income has a wide meaning. It includes salary, business profits, capital gains, house property income, dividends, interest, rent and income from other sources.

Example: If a person receives salary, bank interest and rental income during the year, all these are part of his income.

(f) Person – Section 2(31)

The Act defines person to identify who can be taxed.

A person includes:

1. Individual

2. Hindu Undivided Family (HUF)

3. Company

4. Firm

5. Association of Persons (AOP)

6. Body of Individuals (BOI)

7. Local Authority

8. Artificial Juridical Person

Example: A company, a partnership firm and an individual are all treated as persons under the Income Tax Act.

2. Charge of Income Tax – Section 4

Section 4 is the charging section of the Income Tax Act. It provides the legal authority for levying income tax. According to this section, income tax is charged on the total income of every person for every assessment year at the rates prescribed by the annual Finance Act.

For income tax to be levied, there must be taxable income, the income must belong to a person recognised under the Act, and the tax must be charged according to the applicable rates.

Example: If Ms. Priya has a taxable income of ₹8,50,000 during the Previous Year, income tax will be calculated and charged in the relevant Assessment Year according to the applicable tax rates.

3. Scope of Total Income – Section 5

Section 5 explains what income is included in the total income of a person. The scope of total income depends mainly on the residential status of the assessee.

Generally, total income includes:

· Income received in India.

· Income deemed to be received in India.

· Income that accrues or arises in India.

· Income deemed to accrue or arise in India.

In the case of residents, foreign income may also be included, subject to the provisions of the Act and applicable tax treaties.

The purpose of this section is to determine which income is taxable in India.

Example: Mr. Arun is a resident of India. He earns ₹7,00,000 in India and ₹1,50,000 from investments abroad. The tax treatment of both incomes depends on the provisions applicable to his residential status.

INCOME TYPE

ROR

RNOR

NRI

Income received or deemed to be received in india

TAXABLE

Income accrued or arise in india

TAXABLE

Income accured outside india from business controlled or profession set up in india

TAXABLE

Income accured outside india from business controlled or profession set up out side india

TAXABLE

NON

TAXABLE

NON

TAXABLE

Past untaxed income brought into india

NON

TAXABLE

NON

TAXABLE

NON

TAXABLE

4. Residential Status of an Assessee – Section 6

Residential status determines the extent to which a person's income is taxable in India. It is based on the conditions prescribed in Section 6 and is not decided by citizenship.

An individual may be classified as:

· Resident and Ordinarily Resident (ROR)

· Resident but Not Ordinarily Resident (RNOR)

· Non-Resident (NR)

The residential status is determined separately for each Previous Year based on the prescribed conditions.

Importance:

A resident is generally taxable on the income covered under the Act, including foreign income where applicable.

A non-resident is generally taxable only on income that is received, accrues, arises, or is deemed to accrue or arise in India.

Example: Mr. Kumar satisfies the prescribed stay conditions and is treated as a resident. Mr. John, who stayed in India only for a short period and does not satisfy those conditions, is treated as a non-resident.

5. Income Deemed to Accrue or Arise in India – Section 9

Section 9 specifies certain incomes that are treated as accruing or arising in India even if they are received outside India. This provision ensures that income having a sufficient connection with India does not escape taxation merely because it is received in another country.

Important examples include:

· Income through a business connection in India.

· Salary for services rendered in India.

· Income from property situated in India.

· Capital gains arising from assets located in India.

· Interest, royalty and fees for technical services in specified cases.

Example: A foreign company provides technical services to an Indian company and receives payment from India. Under specified conditions, this income is deemed to accrue or arise in India and may be taxable in India.

6. Dividend Income – Section 2(22)

Dividend income refers to the amount distributed by a company to its shareholders from its accumulated profits. It is one of the recognised forms of income under the Income Tax Act. The Act also treats certain payments made by closely held companies as deemed dividends in specific situations.

Dividend represents a return on investment made by shareholders. Under the applicable provisions of the Income Tax Act, dividend received by a shareholder is taxable in accordance with the law in force.

Example: Mr. Raj owns shares in ABC Ltd. The company declares a dividend of ₹15,000. This amount is treated as dividend income and is taxed according to the applicable provisions of the Income Tax Act.

Summary of Important Sections

Section	TOPICS
SEC - 2	DEFINITION
SEC -2(7)	ASSESSEE
SEC -2(9)	ASSESSMENT YEAR
SEC -2(24)	INCOME
SEC -2(34)	PREVIOUS YEAR
SEC -2(31)	PERSON
SEC -4	CHARGES OF INCOME
SEC-5	SCOPE OF TOTAL INCOME
SEC-6	RESIDENTIAL STATUS