Month: August 2026

Management Notes

Company [Sec. 6(10)], Residential Status, Taxation

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A company is treated as a Resident in India if it is an Indian company, or if its Place of Effective Management (POEM) during the relevant previous year is situated in India. POEM refers to the place where key management and commercial decisions necessary for the conduct of the business are, in substance, made. Indian companies are always resident regardless of where they operate globally. Foreign companies are resident only if POEM is in India; otherwise, they are classified as Non-Resident. Residential status determines the scope of taxable income — resident companies are taxed on global income, while non-residents are taxed only on India-sourced income.

Residential Status of a Company under Section 6(10):

1. Indian Company — Always Resident

Under Section 6(10), an Indian company (incorporated under the Companies Act, 2013 or earlier corresponding law) is always treated as a resident in India, irrespective of where its control, management, or business operations are actually situated or conducted during the previous year. This is an absolute test based purely on the place of incorporation, with no exceptions or conditions attached. Even if an Indian company conducts its entire business abroad, holds board meetings overseas, or is wholly owned by foreign entities, it remains a resident of India for tax purposes. This ensures India retains full taxing rights over domestically incorporated entities, taxing their global income regardless of operational geography.

2. Foreign Company — Residency Based on POEM

A foreign company (incorporated outside India) is treated as a resident only if its Place of Effective Management (POEM) during the relevant previous year is situated in India. If POEM lies outside India, the foreign company is classified as non-resident, taxable only on India-sourced income. This test, introduced through the Finance Act, 2015 (effective AY 2017-18), replaced the earlier stringent “control and management wholly in India” test, aligning Indian law with international standards like the OECD Model. POEM determination applies primarily to foreign companies with turnover/receipts exceeding ₹50 crore, as clarified by CBDT guidelines, ensuring genuine economic substance is assessed.

3. Meaning of Place of Effective Management (POEM)

POEM is defined as the place where key management and commercial decisions necessary for the conduct of the business of an entity, as a whole, are in substance made. It focuses on the location of real, substantive decision-making authority rather than mere legal formalities or registered office address. CBDT’s POEM guidelines (Circular No. 6/2017) distinguish between companies engaged in “active business outside India” (ABOI) and others, applying a two-stage test: first identifying persons who make key decisions, then determining the place where those decisions are actually made, considering board meeting locations, headquarters, and senior management presence.

4. Active Business Outside India (ABOI) Exception

A foreign company is presumed to have POEM outside India if it satisfies the Active Business Outside India test — meaning its passive income (royalty, dividend, interest, rental income, capital gains) is 50% or less of total income, less than 50% of its assets are situated in India, less than 50% of employees are based in India, and payroll expenses on such employees are under 50% of total payroll. If these conditions are met, majority board meetings held outside India create a presumption of POEM being outside India, protecting genuine multinational businesses from being classified as Indian residents.

5. Tax Implications of Residential Status

Residential status determines the scope of total taxable income for a company under Section 5. A resident company (Indian or foreign with POEM in India) is taxed on its global income — income earned both within and outside India. A non-resident company is taxed only on income that accrues, arises, or is deemed to accrue or arise in India, or is received in India, with foreign-sourced income remaining outside the Indian tax net. This distinction significantly impacts multinational corporations’ tax planning, as POEM classification can substantially alter their Indian tax liability and compliance obligations, including transfer pricing and reporting requirements.

Tax Liability Based on Residential Status under Section 6(10):

1. Resident Company — Taxation on Global Income

A company classified as Resident under Section 6(10) — whether an Indian company or a foreign company with POEM in India — is liable to tax in India on its entire global income under Section 5(1). This includes income received or deemed to be received in India, income accruing or arising in India, and income accruing or arising outside India as well, regardless of whether it is remitted to India or not. Such companies must report and offer to tax all worldwide earnings, including foreign branch profits, overseas investment income, and international business receipts. Relief from double taxation on foreign income is typically claimed through DTAA provisions (Section 90/90A) or unilateral relief under Section 91, where applicable, to avoid taxing the same income twice.

2. Non-Resident Company — Taxation Limited to Indian-Sourced Income

A Non-Resident company, being a foreign company whose POEM lies wholly outside India, is taxed in India only on income that accrues or arises, or is deemed to accrue or arise, in India, or is received or deemed to be received in India, as per Section 5(2). Income earned entirely outside India, with no connection to Indian operations, remains outside the scope of Indian taxation altogether. This narrower tax base reflects the principle that India can only tax income having a genuine nexus with its territory when the taxpayer lacks resident status. Such companies are commonly taxed through mechanisms like Permanent Establishment (PE) attribution, withholding tax on India-sourced payments, or presumptive taxation schemes under Sections 44B, 44BB, or 44BBB.

3. Deemed Income Accruing or Arising in India

Regardless of residential status, certain categories of income are deemed to accrue or arise in India under Section 9, and thus become taxable even for non-resident companies. This includes income arising from a business connection in India, income from any property, asset, or source of income located in India, capital gains from transfer of a capital asset situated in India, and income from services rendered in India. These deeming provisions ensure India retains taxing rights over economic activity genuinely connected to its territory, irrespective of the company’s incorporation or POEM location, forming a critical anti-avoidance mechanism within the residential status framework for foreign companies operating in or with India.

4. Impact on Foreign Tax Credit and DTAA Relief

Residential status significantly affects a company’s ability to claim relief under Double Taxation Avoidance Agreements. Resident companies, being taxed on global income, can claim Foreign Tax Credit (FTC) under Section 90/91 read with Rule 128 for taxes paid on foreign-sourced income in the country where it arose, preventing double taxation. Non-resident companies, taxed only on India-sourced income, instead rely on DTAA provisions to claim reduced withholding tax rates in India on items like dividends, interest, and royalties, or to establish that no Permanent Establishment exists, thereby limiting India’s taxing rights over their business profits. This distinction shapes cross-border tax planning strategies significantly.

5. Compliance and Reporting Obligations

Tax liability based on residential status also determines the compliance burden on companies. Resident companies must disclose global assets, foreign bank accounts, and overseas income in their Indian tax returns (including Schedule FA), and are subject to stricter reporting under laws like the Black Money Act, 2015 for undisclosed foreign income and assets. Non-resident companies, conversely, face compliance obligations primarily limited to their Indian income streams, including filing returns for India-sourced income, complying with TDS provisions on payments received from India, and maintaining documentation to support DTAA benefit claims such as Tax Residency Certificates (TRC) and Form 10F, as mandated under Indian tax administration rules.

Management Notes

Residential Status, Individual [Sec. 6(2)] to [Sec. 6(8)]

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Under the Income tax Act, 2025, the residential status of an individual is determined under Section 6 and is important for deciding the extent of income taxable in India. The residential status is determined separately for each tax year, mainly on the basis of the individual’s physical stay in India. An individual may be classified as Resident, Resident but Not Ordinarily Resident (RNOR), or Non Resident (NR). Section 6(2) lays down the basic conditions for determining residence, while Sections 6(3) to 6(8) provide special rules for certain Indian citizens, persons of Indian origin, visiting individuals, deemed residents and related exceptions.

1. Basic Condition for Resident Individual [Section 6(2)]

An individual is considered resident in India if he satisfies either of the prescribed basic conditions during the relevant tax year. The first condition is that the individual must be in India for a total period of 182 days or more during that tax year. The second condition is that he must be in India for 60 days or more during the tax year and must have been in India for 365 days or more during the four preceding tax years. Therefore, physical presence in India is the main basis for determining residential status. Once either condition is satisfied, the individual becomes resident in India, subject to the special provisions applicable to certain Indian citizens and persons of Indian origin.

2. Individual Leaving India for Employment or as Ship Crew [Section 6(3)]

Section 6(3) provides a special rule for an Indian citizen who leaves India during a tax year either as a member of the crew of an Indian ship or for the purpose of employment outside India. In such cases, the normal 60 day condition mentioned in Section 6(2)(b) does not apply. This prevents individuals who leave India for employment abroad or qualifying ship crew duties from becoming resident merely because they satisfy the general 60 day and 365 day test. The provision recognises the special circumstances of persons working outside India and provides a specific relaxation in determining their residential status.

3. Citizen or Person of Indian Origin Visiting India [Section 6(4)]

Section 6(4) provides a special rule for an Indian citizen or a person of Indian origin who is living outside India and comes to India on a visit during a tax year. Normally, the 60 day condition under Section 6(2)(b) is not applied to such a visiting individual, subject to the special rule contained in Section 6(5). This provision is intended to provide relaxation to Indian citizens and persons of Indian origin residing abroad who visit India temporarily. However, where the individual satisfies the income condition specified in Section 6(5), the relaxed rule does not operate in the same manner and the prescribed 120 day threshold becomes relevant.

4. Special Rule for High Income Visiting Individual [Section 6(5)]

Section 6(5) applies to an individual covered by Section 6(4) whose total income exceeds ₹15 lakh during the relevant tax year, excluding income from foreign sources. In such a case, for applying Section 6(2)(b), the normal 60 day period is replaced by 120 days. Therefore, an Indian citizen or person of Indian origin visiting India may become resident if he stays in India for 120 days or more during the tax year and satisfies the prescribed 365 day condition for the preceding four tax years. This provision is designed to address the residential status of higher income individuals who live abroad but maintain substantial connections with India.

5. Crew of Foreign Bound Ship [Section 6(6)]

Section 6(6) provides a special method for determining the period of stay in India for an Indian citizen who is a member of the crew of a foreign bound ship leaving India. For the purpose of determining whether the individual satisfies the residence conditions under Section 6(2), the number of days spent in India in relation to such a voyage is determined in the manner and subject to the conditions prescribed by the Rules. This special provision recognises that the normal calculation of physical presence may not appropriately reflect the circumstances of ship crew members. Therefore, prescribed rules are followed for calculating their stay in India.

6. Deemed Resident Individual [Section 6(7)]

Section 6(7) provides for deemed residence in India in certain circumstances. An individual is deemed to be resident if he is an Indian citizen, is not liable to tax in any other country or territory because of domicile, residence or a similar criterion, and has total income exceeding ₹15 lakh, excluding income from foreign sources, during the relevant tax year. This provision addresses situations where an Indian citizen may not satisfy the ordinary physical stay conditions but is not liable to tax in any other country. The purpose is to prevent individuals from remaining outside the scope of taxation in both India and other jurisdictions merely because they do not meet the normal residence conditions.

7. Exception to Deemed Residence [Section 6(8)]

Section 6(8) provides an important exception to the deemed residence rule under Section 6(7). It states that Section 6(7) will not apply to an individual who is already resident in India under Sections 6(2) to 6(6). Therefore, the deemed residence provision is relevant only where the individual does not become resident under the ordinary or special residence conditions covered by the earlier subsections. This prevents duplication in determining residential status. In simple terms, if an individual is already treated as resident under the normal stay based rules or special provisions, there is no need to apply the deemed resident provision again.

Management Notes

Double Taxation Avoidance Agreement (DTAA), Objectives, Types, Taxation

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Double Taxation Avoidance Agreement (DTAA) is a bilateral tax treaty entered into between two countries to prevent taxpayers from being taxed twice on the same income earned across both jurisdictions. In India, DTAAs are governed by Section 90 (agreements with specified countries) and Section 90A (agreements with specified associations) of the Income Tax Act, 1961, and currently extend to over 90 countries. These agreements allocate taxing rights between the source country and residence country, typically through methods like the exemption method or tax credit method. DTAAs promote cross-border trade, investment, and economic cooperation by eliminating tax barriers and offering certainty to taxpayers with international income sources.

Objectives of Double Taxation Avoidance Agreement (DTAA):

1. Elimination of Double Taxation

The primary objective of a DTAA is to ensure that income earned by a taxpayer is not taxed twice — once in the country where it is earned (source country) and again in the country of residence. This is achieved through mechanisms like the exemption method (income taxed only in one country) or the tax credit method (tax paid in one country credited against liability in the other). In India, Section 90(2) allows taxpayers to opt for provisions of the DTAA or the Income Tax Act, whichever is more beneficial, ensuring relief and fairness for cross-border income earners.

2. Prevention of Fiscal Evasion

DTAAs are designed to prevent tax evasion and avoidance by facilitating the exchange of information between tax authorities of contracting countries. This includes provisions for sharing financial account details, ownership structures, and transaction data to identify undisclosed income or assets held abroad. India’s DTAAs typically include Article 26 (Exchange of Information), aligned with OECD standards, enabling authorities to track cross-border tax avoidance schemes. Globally, this objective has gained prominence through initiatives like the Common Reporting Standard (CRS) and BEPS Action Plans, strengthening international cooperation to curb base erosion and profit shifting by multinational entities and individuals.

3. Promotion of Cross-Border Trade and Investment

By removing the uncertainty and financial burden of double taxation, DTAAs encourage foreign direct investment (FDI), trade, and economic collaboration between countries. Investors and businesses are more willing to expand operations internationally when they have clarity on tax liabilities and are assured they won’t face duplicate taxation. India’s DTAAs with countries like the USA, UK, Singapore, and Mauritius have historically played a significant role in attracting foreign capital inflows. This objective supports broader economic goals like technology transfer, employment generation, and integration with global markets, benefiting both the source and residence countries through increased economic activity.

4. Allocation of Taxing Rights

DTAAs establish clear rules for allocating taxing rights between the source country (where income arises) and the residence country (where the taxpayer resides), avoiding jurisdictional conflicts. Different types of income — business profits, dividends, interest, royalties, capital gains — are addressed through specific articles that determine which country has primary or exclusive taxing rights. Most Indian DTAAs follow the OECD or UN Model Tax Conventions as a framework. This structured allocation reduces disputes between tax authorities and provides taxpayers with predictability regarding their tax obligations, forming the technical backbone of international tax treaty architecture.

5. Providing Tax Certainty and Reducing Litigation

DTAAs offer clarity and predictability to taxpayers regarding their tax liabilities in cross-border transactions, reducing the scope for prolonged disputes and litigation. Mechanisms like the Mutual Agreement Procedure (MAP) under most DTAAs allow taxpayers to resolve disputes arising from double taxation or inconsistent interpretation by approaching competent authorities of both countries. India has increasingly relied on MAP and Advance Pricing Agreements (APAs) to provide certainty on transfer pricing matters. This objective enhances taxpayer confidence, reduces compliance costs, and minimizes the risk of prolonged litigation across multiple jurisdictions for internationally operating businesses and individuals.

6. Non-Discrimination Between Residents and Non-Residents

DTAAs typically include a Non-Discrimination clause ensuring that nationals or enterprises of one contracting state are not subjected to more burdensome taxation in the other state compared to nationals of that state in similar circumstances. This principle, commonly found in Article 24 of most treaties, protects foreign investors and businesses from discriminatory tax treatment based on nationality or residence status. It ensures a level playing field for foreign entities operating in India and vice versa, reinforcing fairness and equal treatment as a cornerstone of international tax cooperation and fostering trust between treaty partner nations.

7. Facilitating Economic Cooperation Between Nations

Beyond taxation, DTAAs serve as instruments of broader diplomatic and economic cooperation between countries, often forming part of larger bilateral economic relationships. They signal a commitment to stable, rule-based economic engagement and often accompany other trade and investment agreements. India’s DTAA network reflects its strategic economic partnerships with major trading partners and investment sources worldwide. By formalizing tax treatment through treaty law, countries strengthen mutual trust, encourage long-term economic planning by businesses, and build institutional frameworks for resolving future economic disputes, contributing to sustained bilateral relations beyond mere tax administration.

Types of Double Taxation Avoidance Agreement (DTAA):

1. Bilateral DTAA

A Bilateral DTAA is an agreement entered into between two countries to avoid double taxation of income earned by residents of either country. This is the most common form of tax treaty, negotiated directly between two sovereign nations based on their specific economic relationship, trade volume, and investment flows. India has bilateral DTAAs with over 90 countries, including the USA, UK, Singapore, Japan, and UAE. Each bilateral treaty is customized to address the particular concerns of the two nations involved, covering income categories like business profits, dividends, royalties, and capital gains, generally structured around the OECD or UN Model Conventions.

2. Multilateral DTAA

A Multilateral DTAA involves three or more countries agreeing to a common framework for avoiding double taxation among all signatory nations simultaneously. Unlike bilateral treaties, multilateral agreements streamline tax treatment across an entire group of countries through a single instrument, reducing the need for numerous individual negotiations. A prominent example is the OECD’s Multilateral Instrument (MLI), which India ratified to modify its existing bilateral tax treaties collectively, incorporating BEPS-related measures like preventing treaty abuse. Multilateral agreements are particularly useful for regional economic blocs or groups of countries seeking harmonized tax policies and coordinated approaches to cross-border taxation issues.

3. Comprehensive DTAA

A Comprehensive DTAA covers all types of income — including business profits, dividends, interest, royalties, capital gains, salaries, and other income — earned by residents of either contracting country. These agreements provide a complete framework addressing taxing rights, methods of relief, and administrative cooperation across virtually all income categories. Most of India’s DTAAs, such as those with the USA, UK, Germany, and Singapore, are comprehensive in nature, offering extensive coverage and detailed provisions. Comprehensive agreements are preferred when two countries have substantial and diverse economic engagement, ensuring that all forms of cross-border income are addressed under a unified treaty framework.

4. Limited DTAA

A Limited DTAA restricts its scope to specific types of income only, rather than covering the entire spectrum of cross-border earnings. Such agreements typically address particular sectors like shipping, air transport, or specific categories of income where two countries have significant mutual interest but limited overall economic engagement. India has limited DTAAs with certain countries focusing narrowly on income from international air and sea transport operations, avoiding double taxation only in those specific areas. Limited agreements are typically transitional or sector-specific arrangements, often expanded into comprehensive treaties later as bilateral economic relationships deepen and diversify over time.

Taxation of Income under DTAA:

1. Residence-Based Taxation

Under the residence rule, income is taxed in the country where the taxpayer is a resident, regardless of where the income is actually earned or sourced. This principle reflects the idea that residents benefit from the public services and infrastructure of their home country and should contribute taxes accordingly. Most DTAAs, following the OECD Model, use “Place of Effective Management” or similar residency tests to determine tax jurisdiction for individuals and entities with cross-border ties. India applies this principle under Section 6 of the Income Tax Act, with DTAA tie-breaker rules resolving cases of dual residency between contracting states.

2. Source-Based Taxation

Under the source rule, income is taxed in the country where it originates or is generated, irrespective of the taxpayer’s residence. This ensures that countries where economic activity actually occurs — where goods are sold, services rendered, or assets located — retain the right to tax the income generated within their territory. DTAAs balance source and residence taxation through specific articles allocating primary or exclusive rights to the source country for certain income types like immovable property income or business profits attributable to a Permanent Establishment (PE), while granting the residence country secondary taxing rights.

3. Taxation of Business Profits

Business profits of an enterprise are generally taxable only in the country of residence unless the enterprise carries on business in the other country through a Permanent Establishment (PE) situated there. If a PE exists, profits attributable to that PE become taxable in the source country as well. This concept, central to Article 7 of most DTAAs including India’s treaties, prevents source countries from taxing foreign businesses unless they have substantial economic presence. Determining PE status — whether through a fixed place of business, dependent agent, or service PE — is often a key area of dispute in international tax matters.

4. Taxation of Dividends

Dividend income under DTAAs is typically taxed in both the country of residence of the shareholder and the source country where the paying company is located, but the source country’s tax rate is usually capped at a reduced rate specified in the treaty (commonly 5-15%). This capped withholding tax rate is lower than the domestic tax rate that might otherwise apply, providing relief to cross-border investors. India’s DTAAs, such as with Mauritius and Singapore, have historically offered concessional dividend tax rates, making these jurisdictions attractive for structuring inbound investments, though anti-abuse provisions now regulate treaty shopping practices.

5. Taxation of Interest Income

Interest income earned by a resident of one country from sources in another country is typically subject to a reduced withholding tax rate in the source country under DTAA provisions, usually ranging between 10-15%, compared to higher domestic rates. The residence country then provides relief through exemption or tax credit methods to avoid double taxation. India’s DTAAs commonly cap interest withholding tax rates, benefiting foreign lenders, bondholders, and financial institutions engaged in cross-border lending. Certain DTAAs also provide specific exemptions for interest paid to government bodies or approved financial institutions, encouraging international debt financing and investment.

6. Taxation of Royalties and Fees for Technical Services

Royalties and fees for technical services (FTS) paid for the use of intellectual property or technical expertise are typically taxed in the source country at a reduced treaty rate, alongside residual taxation rights for the residence country. India’s DTAAs generally cap royalty and FTS withholding tax rates between 10-15%, lower than domestic rates under the Income Tax Act. This provision is particularly relevant for technology transfer, licensing arrangements, and consultancy services involving multinational corporations, ensuring reasonable tax treatment while allowing India to tax income generated from the use of intangible assets or expertise within its territory.

7. Taxation of Capital Gains

Capital gains arising from the transfer of assets are taxed based on specific rules under each DTAA, often depending on the nature of the asset. Gains from immovable property are generally taxable in the country where the property is situated, while gains from movable business property may be taxed where the Permanent Establishment exists. Gains from shares of companies, particularly in India’s treaties with Mauritius and Singapore (post-amendment), are increasingly taxed in the source country following India’s renegotiation efforts to prevent treaty abuse. This area has seen significant evolution to address concerns over capital gains tax avoidance through treaty shopping.

8. Taxation of Income from Employment (Dependent Personal Services)

Income from employment is generally taxable in the country where the employment is actually exercised, even if the employee is a resident of another country, unless specific short-stay exemption conditions are met (typically presence under 183 days, employer not a resident of the source state, and remuneration not borne by a PE). This provision, found in Article 15 of most DTAAs, prevents double taxation of cross-border employees while ensuring source countries can tax income from services physically performed within their jurisdiction. India’s treaties follow this standard framework for taxing salaries, wages, and similar employment compensation.

Management Notes

Distinguish between Gross Total Income and Taxable Income

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Gross Total Income (GTI) is an important concept under the Income Tax Act, 1961. It represents the aggregate income of an assessee computed under the different heads of income after applying the applicable provisions of the Act, but before allowing deductions under Chapter VI A. The five heads of income are Salary, Income from House Property, Profits and Gains of Business or Profession, Capital Gains, and Income from Other Sources. GTI forms the basis for calculating Total Income because eligible deductions are subsequently reduced from GTI to determine the taxable income of the assessee.

  • Meaning of Gross Total Income

Section 80B(5) of the Income Tax Act, 1961 defines Gross Total Income as the total income computed in accordance with the provisions of the Act before making any deduction under Chapter VI A. In simple terms, GTI is the income remaining after considering income under all applicable heads and adjusting eligible losses, wherever permitted, but before deductions such as those under Sections 80C to 80U. Thus, GTI is an intermediate figure used to arrive at Total Income. It is important for determining the amount of deductions that can be claimed by the assessee.

  • Calculation of Gross Total Income

Gross Total Income is calculated by aggregating income under the five heads prescribed under Section 14 of the Income Tax Act, 1961. These include Salary, Income from House Property, Profits and Gains of Business or Profession, Capital Gains, and Income from Other Sources. After computing income under each head, permissible adjustments and set off of eligible losses are made according to the Act. The resulting amount is Gross Total Income. Deductions available under Chapter VI A are not deducted while calculating GTI. Such deductions are allowed subsequently to determine the Total Income.

  • Importance of Gross Total Income

Gross Total Income is important because it serves as the starting point for determining the taxable income of an assessee. Under Section 80A, deductions under Chapter VI A are generally allowed from Gross Total Income. The amount of deduction cannot exceed the Gross Total Income. Therefore, taxpayers must correctly calculate GTI before claiming deductions such as investments, insurance premiums, donations, and certain other eligible payments. GTI also helps in understanding the overall income position of a taxpayer before deductions. Correct computation ensures accurate determination of Total Income and tax liability.

Taxable Income:

Taxable Income refers to the amount of income that remains chargeable to tax after applying the provisions of the Income Tax Act, 1961. It is generally determined after computing income under the relevant heads and allowing eligible deductions. Under Section 2(45), Total Income means the amount of income referred to in Section 5, computed according to the provisions of the Act. In practical terms, taxable income is the final income figure on which the applicable income tax rates are applied. It forms the basis for determining the taxpayer’s tax liability for the relevant assessment year.

  • Calculation of Taxable Income

Taxable Income is calculated by first determining income under the applicable heads of income. These include Salary, Income from House Property, Profits and Gains of Business or Profession, Capital Gains, and Income from Other Sources. After making permissible adjustments and set off of eligible losses, Gross Total Income is determined. Eligible deductions under Chapter VI A, such as deductions under Sections 80C to 80U, are then reduced subject to the applicable provisions. The resulting amount is generally treated as Total Income or taxable income, on which tax is calculated according to the applicable tax regime and rates.

  • Taxable Income under Old Tax Regime

Under the Old Tax Regime, taxpayers can claim various deductions and exemptions available under the Income Tax Act, subject to prescribed conditions. Taxable Income is determined after considering eligible exemptions, deductions, and loss adjustments. Deductions under Chapter VI A, including specified deductions under Sections 80C, 80D, 80G and others, may reduce the Gross Total Income. The remaining amount becomes the Total Income on which the applicable slab rates are applied. The old regime may therefore be beneficial for taxpayers who have substantial eligible deductions and exemptions, depending on their individual income and investment pattern.

  • Taxable Income under Default Tax Regime

The default tax regime under Section 115BAC provides a different method for calculating taxable income. It generally offers lower slab rates but restricts or disallows several deductions and exemptions available under the old regime, subject to specified provisions. Taxable income is calculated after considering the deductions and adjustments permitted under the default regime. Eligible taxpayers can compare their tax liability under both regimes and select the applicable option where the law permits. The default regime is designed to simplify taxation by providing lower rates with fewer deductions and exemptions.

  • Tax on Taxable Income

After determining taxable income, income tax is calculated according to the applicable slab rates and provisions of the Income Tax Act. The tax liability may also be affected by rebate under Section 87A, surcharge, health and education cess under applicable provisions, and other relevant rules. The tax calculated on taxable income represents the basic tax liability before considering taxes already paid, such as tax deducted at source and advance tax. After adjusting eligible tax credits and payments, the taxpayer determines whether additional tax is payable or a refund is due.

Distinguish between Gross Total Income and Taxable Income

Basis Gross Total Income Taxable Income
Meaning Income computed before Chapter VI A deductions Income remaining after eligible deductions
Legal Reference Defined under Section 80B(5) Related to Total Income under Section 2(45)
Calculation Stage Calculated before deductions Calculated after eligible deductions
Chapter VI A Deductions are not yet reduced Eligible deductions are reduced
Purpose Forms the basis for claiming deductions Forms the basis for calculating tax
Income Heads Includes income from applicable five heads Represents income after permissible deductions
Loss Adjustment Permissible loss adjustments are considered Final adjustments are reflected
Tax Liability Not the final tax base Used to determine tax liability
Deductions Chapter VI A deductions remain available Chapter VI A deductions are considered
Amount Generally higher than taxable income Generally lower than Gross Total Income
Tax Rates Tax rates are not directly applied Applicable slab rates are applied
Rebate Rebate is not determined directly on GTI Rebate may depend on applicable total income
Role Intermediate stage of income computation Final income figure for tax calculation
Example GTI is ₹8,00,000 before eligible deductions Taxable income may be ₹6,00,000 after deductions
Importance Helps determine allowable deductions Helps determine final income tax payable
Management Notes

Rate Of Tax Under Default Tax Regime (New Regime) U/S 202

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Under the Income tax Act, 2025, Section 202 provides the Default Tax Regime, commonly known as the New Tax Regime, for specified taxpayers. It applies to an individual, Hindu Undivided Family, Association of Persons other than a co operative society, Body of Individuals and specified Artificial Juridical Persons, unless the taxpayer exercises the prescribed option to choose the regular tax regime. The new regime provides lower and wider tax slabs compared with the old regime. The rates under Section 202 apply from Tax Year 2026 27. The taxpayer generally gets fewer deductions and exemptions under this regime, subject to the deductions specifically permitted by law.

Tax Rates under Section 202

Sl. No. Total Income for Tax Year 2026 27 Rate of Tax
1 Up to ₹4,00,000 Nil
2 ₹4,00,001 to ₹8,00,000 5%
3 ₹8,00,001 to ₹12,00,000 10%
4 ₹12,00,001 to ₹16,00,000 15%
5 ₹16,00,001 to ₹20,00,000 20%
6 ₹20,00,001 to ₹24,00,000 25%
7 Above ₹24,00,000 30%

These rates are the default rates under Section 202. A taxpayer can exercise the prescribed option to move out of the default regime and choose the regular tax regime.

Example: If an individual has total income of ₹18,00,000, tax is calculated progressively using the applicable slabs of 0%, 5%, 10%, 15% and 20%. Surcharge, where applicable, and Health and Education Cess at 4% are added separately.

Management Notes

Rate of Tax Under Old Tax Regime / Regular Tax Regime

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The Old Tax Regime, also known as the Regular Tax Regime, provides the traditional slab based method of taxation for individuals and Hindu Undivided Families. Under this regime, taxpayers can generally claim various deductions and exemptions available under the Income Tax law, subject to the prescribed conditions. The applicable tax rate depends on the total income and, in the case of resident individuals, the age of the taxpayer. The old regime continues to be available when the taxpayer exercises the prescribed option. For FY 2025 26, AY 2026 27, there has been no change in the basic old regime slab rates.

Tax Rates under Old Tax Regime

Category of Individual Total Income Rate of Tax
Individual below 60 years and non resident individual Up to ₹2,50,000 Nil
₹2,50,001 to ₹5,00,000 5%
₹5,00,001 to ₹10,00,000 20%
Above ₹10,00,000 30%
Resident Senior Citizen aged 60 years or more but below 80 years Up to ₹3,00,000 Nil
₹3,00,001 to ₹5,00,000 5%
₹5,00,001 to ₹10,00,000 20%
Above ₹10,00,000 30%
Resident Super Senior Citizen aged 80 years or more Up to ₹5,00,000 Nil
₹5,00,001 to ₹10,00,000 20%
Above ₹10,00,000 30%

These are the normal slab rates. Surcharge, where applicable, and Health and Education Cess at 4% are added separately. The old regime also permits eligible deductions and exemptions, making it potentially beneficial for taxpayers who have substantial eligible investments or deductions.

Note: The rates above are for FY 2025 26 / AY 2026 27.

Management Notes

Rounding-off of total income [Sec. 516]

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Under the Income-tax Act, 2025, Section 516 provides for the rounding off of total income for the purpose of determining the amount on which income tax is calculated. After computing the total income of an assessee in accordance with the provisions of the Act, the amount is rounded off to the nearest multiple of ₹100. This provision ensures uniformity and simplifies the calculation and collection of tax.

The rule operates on the total income determined after considering the applicable provisions, including eligible deductions and adjustments. If the last two digits of the total income are less than ₹50, those digits are ignored and the amount is rounded down to the nearest hundred. If the last two digits are ₹50 or more, the amount is rounded up to the next multiple of ₹100.

For example, if the total income is ₹7,45,430, the last two digits are ₹30. Therefore, it will be rounded down to ₹7,45,400. If the total income is ₹7,45,570, the last two digits are ₹70. Therefore, it will be rounded up to ₹45,600.

The rounding provision applies to the total income, not merely to individual items of income. It helps in arriving at a standard figure for calculating the tax liability. Rounding off does not change the actual income earned by the assessee; it only affects the figure used for tax computation.

Thus, Section 516 ensures that the total income is rounded to the nearest ₹100 before determining the tax payable, making tax computation simpler and consistent.

Management Notes

Gross Total Income (GTI) [Sec. 122], Total Income (TI) [Sec. 2(108) read with section 122]

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Under the new Income tax Act, 2025, Gross Total Income (GTI) means the total income computed according to the provisions of the Act before making deductions under Chapter VIII. Section 122(10) specifically defines gross total income for the purpose of deductions. Thus, GTI represents the income arrived at after applying the provisions relating to computation of income, but before allowing deductions available under Chapter VIII.

The computation generally involves determining income from the applicable heads of income, such as salary, house property, business or profession, capital gains and other sources. Applicable adjustments and set off of losses are made according to the Act. The resulting amount is GTI.

Section 122(1) provides that eligible deductions specified in Chapter VIII are allowed from GTI while computing total income. Further, the aggregate deductions cannot exceed the GTI.

Formula:

GTI = Income computed under the Act before Chapter VIII deductions

Total Income (TI) [Section 2(108) read with Section 122]

Under the new Income tax Act, 2025, Section 2(108) defines Total Income as the total amount of income referred to in Section 5, computed in the manner laid down in the Act.

In practical computation, Total Income is obtained after allowing the eligible deductions under Chapter VIII from the Gross Total Income. Section 122 provides the mechanism for allowing these deductions.

Formula:

Total Income = Gross Total Income − Eligible deductions under Chapter VIII

For example, if GTI is ₹10,00,000 and eligible deductions are ₹1,50,000, the Total Income will be ₹8,50,000.

Thus, GTI is the income before Chapter VIII deductions, whereas Total Income is the amount after such eligible deductions.

Management Notes

Exempt Supply: Education Sector, Government Organization, Agriculture Sector, Interest Income, Rental Income, Transportation, Health Sector

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Exempt Supply refers to a supply of goods or services that attracts no GST because it is specifically exempted under the GST law. Under Section 2(47) of the CGST Act, 2017, exempt supply includes supplies attracting nil rate of tax, wholly exempt supplies, and non taxable supplies. Exemptions are generally provided to reduce the tax burden on essential goods and services or important sectors of the economy. Various exemptions are available in sectors such as education, healthcare, agriculture, transportation and certain government activities. The following are important areas where GST exemptions may apply, subject to prescribed conditions.

1. Education Sector

GST provides exemptions for specified educational services to make education more affordable and accessible. Under Notification No. 12/2017 Central Tax (Rate), certain services provided by educational institutions are exempt from GST. Services relating to education provided by recognised educational institutions to their students, faculty and staff, subject to specified conditions, are covered by exemptions. Examples may include certain admission related services and specified services provided as part of education. However, not every service connected with education is automatically exempt. The exact exemption depends on the nature of the institution, service and conditions prescribed under the notification.

2. Government Organizations

Certain services provided by Central Government, State Government, Union Territory or local authorities are exempt from GST under Notification No. 12/2017 Central Tax (Rate), subject to specified conditions. Examples include certain functions performed by public authorities in relation to constitutional or governmental responsibilities. However, services provided by government bodies are not universally exempt. Activities carried out in a commercial or business capacity may attract GST. Therefore, the exemption depends on the nature of the service and the specific entry under the relevant GST notification. Proper classification is necessary to determine whether a government service is exempt.

3. Agriculture Sector

GST provides exemptions for various agricultural related activities to support farmers and reduce the tax burden on essential agricultural operations. Under Notification No. 12/2017 Central Tax (Rate), specified agricultural operations and services relating to cultivation, harvesting, agricultural produce and certain support activities may be exempt. Services directly connected with agricultural production can qualify when prescribed conditions are satisfied. However, processing or other commercial activities beyond the specified agricultural services may not receive the same treatment. Therefore, businesses must examine the exact nature of the agricultural activity and applicable exemption entry before treating a supply as exempt.

4. Interest Income

Interest income is generally exempt from GST when it represents interest on deposits, loans or advances. Entry 27 of Notification No. 12/2017 Central Tax (Rate) provides exemption for services by way of extending deposits, loans or advances where consideration is represented by interest or discount, except specified charges such as processing fees. Therefore, banks and financial institutions generally do not charge GST on the interest component of loans and deposits. However, other charges collected in connection with financial services may be taxable. The exact treatment depends on the nature of the amount charged and the applicable GST provisions.

5. Rental Income

Rental income is not automatically exempt from GST. GST treatment depends upon the type of property, use of the property, nature of the recipient and applicable exemption notification. Under Notification No. 12/2017 Central Tax (Rate), certain specified services relating to renting of residential dwelling for use as residence may be exempt, subject to applicable conditions and changes in law. However, renting of commercial properties can generally attract GST when the relevant conditions for taxation are satisfied. Therefore, landlords and tenants should examine the property type, purpose of use and applicable exemption provisions before determining GST liability.

6. Transportation

GST exemptions are available for certain transportation services under Notification No. 12/2017 Central Tax (Rate). Specified passenger transportation services and transportation of certain goods may qualify for exemption, subject to prescribed conditions. For example, certain transportation of agricultural produce, newspapers, milk and other specified goods may receive exemption. However, transportation services are not universally exempt and many services are taxable at prescribed rates. The exemption depends on the type of goods or passengers transported, mode of transportation and other conditions specified in the notification. Therefore, the exact nature of the transportation service must be examined.

7. Health Sector

Specified healthcare services are exempt from GST to make essential medical treatment more affordable. Under Notification No. 12/2017 Central Tax (Rate), healthcare services provided by a clinical establishment, authorised medical practitioner or paramedics are generally exempt, subject to the prescribed conditions. Services provided by hospitals and healthcare professionals in relation to diagnosis, treatment or care may therefore qualify for exemption. However, all services provided by healthcare institutions are not automatically exempt. Certain cosmetic, non medical or unrelated services may be taxable. The nature of the service and the applicable exemption conditions must therefore be carefully examined before determining GST treatment.

Bangalore North University B.Com Notes

Insurance and Risk Management Bangalore North University BCOM SEP 2024-25 6th Semester Notes

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