Basic Definitions and

Terms: Income Tax

By – Shivam Sachdeva (BBA-5MA)
What is an Income Tax

 An income tax is a tax that governments

impose on income generated by businesses
and individuals within their jurisdiction.
 By law, taxpayers must file an income tax
return annually to determine their tax
obligations. Income taxes are a source of
revenue for governments. They are used to
fund public services, pay government
obligations, and provide goods for citizens.
A little fact : -

 Indiaalso adopts the ‘progressive

taxation’ policy like majority of other
countries like Canada, South Africa etc.

 Under this policy, the more income you

earn the more will be your tax liability
towards the government that needs to be
paid in the assessment year.
Basic Terms: -

 Assessee
 Assessment year
 Previous year
 Person
 Agriculture Income
Assessee

 An assessee is a taxpayer means a person

who under the income tax act is subject
to pay taxes or any other sum of money,
as defined under section 2 (7) of the Act.
 The expression ‘any other sum of money’
includes other such obligations payable,
for instance fine, interest, penalty and
other tax etc.
Assessment Year

 Assessment Year” means the year in which income

of the previous year of an assessee is taxed. The
timed lap of assessment year is of twelve months
beginning from the 1st April every year.

 The period starts from 1st April of one year and

ending on 31st March of next year. Broadly,
assessment year is defined under section 2 (9) of
the Act.
Previous Year

 Income earned during the year is taxable in the

next year. The definition of “Previous Year” is given
under section 3 of the Act. Previous Year is the year
in which income is earned.

 Previous year is the financial year immediately

preceding the relevant assessment year. From 1989-
90 onwards, every taxpayer is obliged to follow
financial year (i.e., April 1st of one year to March
31st of next year) as the previous year.
Person
As per S.2(31) of Income Tax Act, 1961, unless the context otherwise
requires, the term “person” includes:
(i) an individual,
(ii) a Hindu undivided family,
(iii) a company,
(iv) a firm,
(v) an association of persons or a body of individuals, whether incorporated
or not,
(vi) a local authority, and
(vii) every artificial juridical person, not falling within any of the preceding
sub-clauses.
 Income-tax is to be paid by every person. The term ‘person’ as defined
under the Income-tax Act covers in its ambit natural as well as artificial
persons.

 For the purpose of charging Income-tax, the term ‘person’ includes

Individual, Hindu Undivided Families [HUFs], Association of Persons
[AOPs], Body of individuals [BOIs], Firms, LLPs, Companies, Local
authority and any artificial juridical person not covered under any of
the above.
Agricultural Income

 As per section 2(1A), agricultural income generally means

 (a) Any rent or revenue derived from land which is situated in
India and is used for agricultural purposes.
 (b) Any income derived from such land by agriculture operations
including processing of agricultural produce so as to render it
fit for the market or sale of such produce.
 (c) Any income attributable to a farm house subject to
satisfaction of certain conditions specified in this regard in
section 2(1A). Any income derived from saplings or seedlings
grown in a nursery shall be deemed to be agricultural income.
 Sources of Income

Income from Salary Salary, Allowances, Leave encashment basically all

the money you receive while rendering your job as a
result of your employment agreement

Income from House Property Income from house or building, this may be owned
and self-occupied or may be rented

Income from Capital Gain Income from gain or loss when you sell a capital asset

Income from Business or Profession Income/loss that arises as a result of carrying on a

business or profession

Income from Other Sources This is the residual head - includes your income from
savings bank accounts,fixed deposits,family pension or gifts
received
Deductions

 Deductions reduce your Gross Income. These are the amounts Income
Tax Department allows you to reduce your Income, bringing down your
tax liability.

Sum of All heads of Income = Gross Income Gross Income –

Deductions = Taxable Income