UNIT II

Basis of Charge

2.1 Scope of Total Income

Section -5 of Income Tax Act, 1961 provides Scope of total Income in case of 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 (a) is received or is deemed to be received in India in such year by or on behalf of such person; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year; or (c) accrues or arises to him outside India during such year.

Table explaining Scope of total Income under section 5 of Income Tax Act, 1961

Note-

Explanation 1 & 2:-

Income accruing or arising outside India shall not be deemed to be received in India within the meaning of this section by reason only of the fact that it is taken into account in a balance sheet prepared in India.

Income which has been included in the total income of a person on the basis that it has accrued or arisen or is deemed to have accrued or arisen to him shall not again be so included on the basis that it is received or deemed to be received by him in India.

Key Takeaways:

2.2  Residence and Tax Liability

The Income Tax Act, 1961, (Act) to consolidate and amend the law relating to income tax. However, not everyone is liable to pay taxes on income under the Act. The Act makes certain exceptions and exempts certain kind and extent of income from taxation. As per Section 2(31) of the Act, defines the term “Person” for whom we will assess the income. Further, those who are liable to pay tax and whose incomes are assessed under the Act are known as “Assessees” and the same has been defined under section 2(7) of the Act. Also for determining the tax liability of the Assessees, the same has been further categories on the basis of Residential Status.

Residential status is a term coined under Income Tax Act, 1961, and has nothing to do with nationality or domicile of a person. An Indian, who is a citizen of India, can be non-resident for Income-tax purposes, whereas an American who is a citizen of America can be resident of India for Income-tax purposes, as per the Income Tax Act, 1961. Residential status of a person depends upon the territorial connections of the person with this country, i.e., for how many days he has physically stayed in India in any particular Financial Year.

Further it is to be note that the residential status of different types of persons viz an individual, a firm, a company etc is determined differently. Here, we have discussed about how the residential status of an individual taxpayer can be determined for the Previous Year i.e. 2019-2020 or Assessment Year 2020-2021.

Determining the Residential Status of an Individual

Under the Act, Residential Status of an individual is either Resident of India or Non-Resident of India. The first thing that needs to be kept in mind is that the residential status is determined with respect to the previous financial year – hence, an individual may be a resident in one year and a non-resident in the next year.

As per Section 6(a) of the Act which mandates that an individual is said to be resident of India in any previous year, if he satisfy any of the following primary conditions, otherwise the person become Non-Resident of India, if an individual-

i. Is in India in previous year for 182 days or more; or

ii. Is in India in previous year for 60 days or more and 365 days or more in the immediate 4 preceding Financial Year.

Further Act provides certain exemption to following persons to comply only clause (i) to become resident in India:

a. Citizen of India who leaves India for taking up employment outside India;

b. Indian Citizen who leaves India as a member of the crew of Indian Ship;

c. Citizen of India or to a person of Indian origin who visit India;

Further, Clause (a) of Section 6 of the Act, a Resident of India can be termed as Resident-Ordinary Resident of India, if an individual satisfy all the following two conditions, otherwise he can be termed as Resident-Not Ordinary Resident of India, if-

i. An individual is a resident in India for 2 years out of 10 previous years preceding current financial year; and

ii. An individual is in India for 730 days or more in 7 previous years preceding current financial year.

Amendment have also been made vide Finance Act, 2020, From F.Y. 2020-21, a citizen of India or a person of Indian origin who leaves India for employment outside India during the year will be a resident and ordinarily resident if he stays in India for an aggregate period of 182 days or more. However, this condition will apply only if his total income (other than foreign sources) exceeds Rs 15 lakhs.

The Finance Act, 2020, has also introduced the concept of “Deemed Resident” whereby all such citizen of India who are not taxable in any other country by reason of residence or domicile or any other criteria of similar nature and such individuals have income exceeding Rs. 15 lakhs from sources in India and from business controlled from India or Profession set up in India. With effect From F.Y. 2020-202 1 deemed resident will be a resident and ordinarily resident in India.

Tax Incidence in India

A Resident Ordinary Resident is subject to tax on his global income in India. Resident Not Ordinary Resident and Non-Residents are generally subject to tax in India only in respect of India source income that is, income received, accruing or arising in India or deemed to be received, accrued or arisen in India.

Salary received in India or for services provided in India, rental income from a house property in India, capital gains on sale of assets in India — be it shares or house property, income from fixed deposits or savings bank account in India are instances of income which would be taxed in the hands of not just tax residents of India, but also Resident Not Ordinary Resident and Non-Residents.

Conclusion

In order to enjoy tax benefits through Non-Resident Status, individuals visiting India on a business trip should not stay for more than 181 days during one previous business year and their total stay in the previous four years should not exceed more than 364 days.

If individuals, having been in India for more than 365 days during four years preceding the relevant previous year, and stay for more than 60 days in the previous year, they should plan their visit to India in such a manner that their total stay in India falls under two previous years. Such persons can come to India any time in the first week of February and stay till May 29.

Key Takeaways:

2.3 Income which does not form a part of Total Income

Various categories of income are exempt from income tax under section 10. The assessee has to establish that his case clearly and squarely falls within the ambit of the said provisions of the act.

1. Agriculture Income:

We can still consider India is the country mostly depending upon the agriculture and income generated from the activities of agriculture. Agriculture income shall be excluded from the assessee total income (section 10, (1)) however; it shall be taken for considering rate to tax non-agriculture income.

2. Share of Profit from a Firm:

A partners share in the total income of the firm is totally exempted from the total income of the hands of the partner because firm is separately assess as such. However, any salary interest commission paid or payable to the partner which was deductible from the total income of the firm shall be included in the income of the partner’s total income as his business.

3. Leave Travel Concession:

If an employee goes on travel (on leave) with his family and traveling cost is reimbursed by the employer, then such reimbursement is fully exempted. But some provisions for it was as bellow;

1) Journey may be performed during service or after retirement.

2) Employer may be present or former.

3) Journey must be performed to any place within India.

4) In case, journey was performed to various places together, then exemption is limited to the extent of cost of journey from the place of origin to the farthest point reached, by the shortest route.

5) Employee may or may not be a citizen of India.

6) Stay cost is not exempt.

4. Allowance Or Perquisite Paid Outside India [Sec. 10(7)]:

Any allowance or perquisite paid outside India by the Government to a citizen of India for Rendering Services outside India.

5. Death-Cum-Retirement-Gratuity [Sec. 10(10)]:

Gratuity is a retirement benefit given by the employer to the employee in consideration of past services. Sec. 10(10) deals with the exemptions from gratuity income. Such exemption can be claimed by a salaried assessee. Gratuity received by an assessee other than employee shall not be eligible for exemption u/s 10(10). E.g. Gratuity received by an agent of LIC of India is not eligible for exemption u/s 10(10) as agents are not employees of LIC of India.

6. Compensation for Any Disaster [Sec. 10(10bc)]:

Any amount received or receivable from the Central Government or a State Government or a local authority by an individual or his legal heir by way of compensation on account of any disaster, except the amount received or receivable to the extent such individual or his legal heir has been allowed a deduction under this Act on account of any loss or damage caused by such disaster.

7. Sum Received Under A Life Insurance Policy [Sec. 10(10d)]:

Any sum received under a life insurance policy including bonus on such policy is wholly exempt from tax. However, exemption is not available on – 1. Any sum received u/s 80DD (3) or u/s 80DDA (3); or 2. Any sum received under a Keyman insurance policy; or 3. Any sum received under an insurance policy issued on or after 1-4-20121 in respect of which the premium payable for any of the years during the term of the policy exceeds 10%2 of the actual capital sum assured.

8. Payment from National Pension Trust [Sec. 10(12a) & 10(12b)]:

Any payment from the National Pension Scheme Trust to an assessee on closure of his account or on his opting out of the pension scheme referred to in sec. 80CCD, to the extent it does not exceed 60% of the total amount payable to him at the time of such closure or his opting out of the scheme [Sec. 10(12A)] Any payment from the National Pension System Trust to an employee under the pension scheme referred to in sec. 80CCD, on partial withdrawal made out of his account in accordance with the terms and conditions, specified under the Pension Fund Regulatory and Development Authority Act, 2013, to the extent it does not exceed 25% of the amount of contributions made by him [Sec. 10(12B)]

9. Payment from Approved Superannuation Fund [Sec. 10(13)]:

Any payment from an approved superannuation fund made – • on the death of a beneficiary; or • to an employee in lieu of or in commutation of an annuity on his retirement at or after a specified age or on his becoming incapacitated prior to such retirement; or • by way of refund of contributions on the death of a beneficiary; or • by way of refund of contributions to an employee on his leaving the service (otherwise than by retirement at or after a specified age or on his becoming incapacitated prior to such retirement) to the extent to which such payment does not exceed the contributions made prior to 1-4-1962 and any interest thereon. • By way of transfer to the account of the employee under a pension scheme referred to in sec. 80CCD and notified by the Central Government.

10. Income of Mutual Fund [Sec. 10(23D)].

Any income of – a. A Mutual Fund registered under the Securities and Exchange Board of India Act, 1992 or regulation made there under; b. A Mutual Fund set up by a public sector bank or a public financial institution or authorised by the Reserve Bank of India and subject to certain notified conditions.

11. Income of Business Trust [Sec 10(23FC)]:

Any income of a business trust by way of a) interest received or receivable from a special purpose vehicle; or b) dividend referred to in sec. 115-O (7) Ø “Special purpose vehicle” means an Indian company in which the business trust holds controlling interest and any specific percentage of shareholding or interest, as may be required by the regulations under which such trust is granted registration.

12. Income of Specified Boards [Sec. 10(29A)]:

Any income accruing or arising to The Coffee Board; The Rubber Board; The Tea Board; The Tobacco Board; The Marine Products Export Development Authority; The Coir Board; The Agricultural and Processed Food Products Export Development Authority and The Spices Board.

13. Subsidy Received From Tea Board [Sec. 10(30)]:

Any subsidy received from or through the Tea Board under any scheme for replantation or replacement of tea bushes or for rejuvenation or consolidation of areas used for cultivation of tea as the Central Government may specify, is exempt.

14. Awards and Rewards [Sec. 10(17A)].

Any payment made, whether in cash or in kind – a. in pursuance of any award instituted in the public interest by the Central Government or any State Government or by any other approved body; or b. as a reward by the Central Government or any State Government for approved purposes.

15. Income of Scientific Research Association [Sec. 10(21)]:

Any income of a scientific research association [being approved for the purpose of Sec. 35(1)(ii)] or research association which has its object, undertaking research in social science or statistical research [being approved and notified for the purpose of Sec. 35(1)(iii)], is exempt provided such association— a. applies its income, or accumulates it for application, wholly and exclusively to the objects for which it is established; and b. invest or deposit its funds in specified investments.

16. Expenditure Related To Exempted Income [Sec. 14A]:

For the purposes of computing the total income, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income, which does not form part of the total income under this Act. Where the AO is not satisfied with the correctness of the claim of such expenditure by assessee, he can determine the disallowable expenditure in accordance with the method prescribed by the CBDT.

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