UNIT II

Basis of Charge

Q1) Explain the scope of Total income.

A1) 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-

Q2) What do you mean by Residential Status?

A2) 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.

Q3) How is the residential status of an individual determined?

A3) 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.

Q4) Write about Tax Incidence in India.

A4) 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.

Q5) What can an individual do to enjoy the benefits through Non-Resident status?

A5) 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.

Q6) What are the incomes which do not form a part of total income?

A6) 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:

2. Share Of Profit From A Firm:

3. Leave Travel Concession:

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

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

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

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

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

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

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

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

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

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

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

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

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

Q7) Explain the provisions related to leave travel concession.

A7) 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.

Q8) What is Gratuity and what are the provisions for its exemption?

A8) 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.

Q9) What are the basic or primary conditions for an individual to become a resident in India?

A9) 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.

Q10) When can a Resident be termed as Resident and ordinarily resident?

A10) 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.