Income Tax Law and Practice: Key Concepts and Provisions

Income Tax Fundamentals

Previous Year and Assessment Year

In the Income Tax system of India, the Previous Year is the financial year in which income is earned, while the Assessment Year is the year in which that income is assessed and taxed. According to Section 3 of the Income Tax Act, 1961, the general rule is that income earned in one financial year is taxed in the next. For example, income earned in FY 2022-23 is taxed in AY 2023-24.

Exceptions to the Rule

In specific cases, income is taxed in the same year it is earned to prevent revenue loss:

• Shipping Business of Non-Residents (Section 172)
• Persons Leaving India (Section 174)
• Association of Persons for a Particular Event (Section 174A)
• Discontinued Business (Section 176)
• Income of Deceased Person (Section 174(3))

Casual Income

Casual income refers to occasional, non-recurring earnings like lottery winnings, betting, or gambling. Under Section 56(2)(ib), it is classified as “Income from Other Sources”.

• Fully Taxable: No deductions allowed.
• Flat Tax Rate: Taxed at 30% plus surcharge and cess (Section 115BB).
• TDS: Payer must deduct 30% TDS if winnings exceed ₹10,000 (Section 194B).

Salary and Retirement Benefits

Gratuity Provisions (Section 10(10))

Gratuity is a lump sum payment from an employer to an employee. Taxability depends on the category:

• Government Employees: Fully exempt.
• Covered under Gratuity Act, 1972: Exempt up to the least of ₹20,00,000, actual amount, or 15 days' salary per completed year.
• Not Covered: Exempt up to the least of ₹20,00,000, actual amount, or half-month's average salary per completed year.

Allowances

Allowances are fixed payments to meet specific expenses. They are categorized as:

• Fully Taxable: Dearness Allowance, City Compensatory Allowance, Overtime.
• Partially Exempt: House Rent Allowance (HRA), Children Education Allowance, Transport Allowance.

Entertainment Allowance (Section 16(ii))

Only government employees can claim a deduction for entertainment allowance, limited to the least of ₹5,000, 20% of basic salary, or the actual amount received.

Capital Gains and Business Income

Short-Term vs. Long-Term Capital Gains

Capital Gain Account Scheme (CGAS), 1988

This scheme allows taxpayers to deposit unutilized capital gains in an authorized bank to claim exemptions under Sections 54, 54B, or 54F if the reinvestment is not completed before the ITR filing deadline.

Business Deductions (Section 37(1))

Allows deductions for expenses incurred wholly and exclusively for business. Disallowed items include personal expenses, bribes, penalties, and illegal activity costs.

Other Important Provisions

Clubbing of Income (Sections 60-64)

Income is clubbed to prevent tax evasion. This includes income transferred without asset transfer, revocable transfers, and income of a minor child (with an exemption of ₹1,500 per child).

Residential Status

An individual is a Resident if they stay in India for 182 days or more in the previous year, or 60 days in the previous year plus 365 days in the preceding four years. Residential status determines whether global income is taxable in India.

Income Tax Authorities

The hierarchy includes the CBDT (apex policy body), followed by Principal Commissioners, Commissioners, and Assessing Officers (ITOs), who manage assessment, scrutiny, and tax recovery.