Residential Status plays a crucial role in determining an individual’s tax liability in India under the Income Tax Act, 1961. The Act classifies individuals into three categories based on their residential status for a particular financial year: Resident, Non-resident, and Resident but Not Ordinarily Resident (RNOR). Each category entails different tax implications, especially regarding the scope of total income and the taxation of global income.

Determination of Residential Status:

The determination of an individual’s residential status is primarily based on the physical presence in India during the relevant financial year (April 1 to March 31) and preceding years. Section 6 of the Income Tax Act lays down the following criteria for determining residential status:

1. Resident:

An individual is considered a resident if they satisfy any of the following conditions:

• They are present in India for 182 days or more during the relevant financial year.
• They are present in India for 60 days or more during the relevant financial year and 365 days or more in the preceding four years.

2. Non-resident:

An individual who does not meet any of the criteria mentioned above is classified as a non-resident.

3. Resident but Not Ordinarily Resident (RNOR):

An individual is categorized as RNOR if they are a resident but do not qualify as an ordinarily resident. This status applies when the individual has been a non-resident in India for nine out of ten preceding financial years, or they have been in India for a total of 729 days or less during the preceding seven financial years.

Taxation of Resident Individuals:

Residents are subject to tax on their global income, which includes income earned within and outside India’s territorial jurisdiction. Their total income encompasses income accruing or arising in India, income received or deemed to be received in India, and income accruing or arising to them globally. Residents are liable to pay tax at applicable rates on their total income, after claiming deductions and exemptions allowed under the Income Tax Act.

Taxation of Non-resident Individuals:

Non-residents are taxed only on income earned or received in India or deemed to be earned or received in India. Their total income is restricted to income derived from Indian sources, such as salaries for services rendered in India, interest income from Indian investments, capital gains from the sale of Indian assets, etc. Non-residents are subject to tax at applicable rates on their Indian-sourced income, with certain exemptions or concessions available under the Income Tax Act or applicable Double Taxation Avoidance Agreements (DTAA).

Taxation of Resident but Not Ordinarily Resident (RNOR) Individuals:

RNOR individuals enjoy a more favorable tax treatment compared to ordinary residents. They are taxed in a manner similar to non-residents, i.e., only on income earned or received in India or deemed to be earned or received in India. Their global income is not taxable in India unless it is derived from a business controlled or profession set up in India. This status provides relief to individuals transitioning between non-resident and resident status, allowing them to organize their affairs without immediate tax consequences.

Special Provisions for Returning Indians:

Income Tax Act incorporates special provisions for returning Indians or individuals of Indian origin who resume residency in India after a prolonged period abroad. These provisions offer certain tax reliefs or exemptions for a specified period to encourage the repatriation of funds and skills. Returning Indians may avail benefits such as exemption from taxation on foreign income for a specific period, relaxation in the taxation of specified assets acquired abroad, and other concessions to facilitate their reintegration into the Indian tax system.

Taxability of Foreign Income for Residents:

Residents are taxed on their global income, which includes income earned both within and outside India’s territorial jurisdiction. This means that residents are liable to pay tax in India on income generated from foreign sources, such as salaries earned abroad, income from investments in foreign assets, rental income from properties located overseas, etc. However, residents may avail relief from double taxation through provisions such as Foreign Tax Credit or Double Taxation Avoidance Agreements (DTAA) to avoid being taxed twice on the same income in India and the foreign country.

Exemptions and Deductions for Non-residents:

While non-residents are taxed only on income earned or received in India, certain exemptions and deductions may be available to them under the Income Tax Act. For example, non-residents may be eligible for exemptions on specific types of income, such as interest on certain bonds or securities, capital gains on certain investments, etc. Additionally, deductions for expenses incurred in earning Indian-sourced income may be allowable to non-residents, subject to specified conditions.

Tax Residency Certificate (TRC):

For claiming benefits under Double Taxation Avoidance Agreements (DTAA) or foreign tax credits, non-residents often need to obtain a Tax Residency Certificate (TRC) from the tax authorities of their home country. The TRC serves as proof of residency for tax purposes and helps in availing treaty benefits or claiming relief from double taxation. Non-residents should ensure compliance with TRC requirements to optimize their tax position and avoid disputes with tax authorities.

Tax Planning Opportunities for RNORs:

Resident but Not Ordinarily Resident (RNOR) individuals have a unique tax status that provides opportunities for tax planning. Since their global income is not taxable in India unless derived from a business controlled or profession set up in India, RNORs can structure their affairs to minimize tax liabilities during the RNOR period. They may strategically time the repatriation of foreign income, plan investments in tax-efficient instruments, and utilize available exemptions and deductions to optimize their tax position.

Impact of Dual Residency:

In certain cases, individuals may qualify as residents of more than one country under their domestic tax laws, leading to dual residency. Dual residency can give rise to complex tax implications, including the risk of double taxation on the same income. In such cases, taxpayers may need to rely on the tie-breaker rules provided in tax treaties or the domestic laws of the countries concerned to determine their tax residency status and allocate taxing rights between jurisdictions.

Income from Salaries represents one of the primary heads of income under the Indian Income Tax Act, 1961. It encompasses earnings received by an individual in consideration for services rendered to an employer, whether in the form of wages, salaries, bonuses, commissions, allowances, or perquisites. Understanding the tax treatment of income from salaries is essential for both employers and employees to ensure compliance with tax laws and optimize tax planning strategies.

SECTION I: Understanding Your Payslip

1. Basic Salary

This is a fixed component in your paycheck and forms the basis of other portions of your salary, hence the name. For instance, HRA is defined as a percentage (as per the company’s discretion) of this basic salary. Your PF is deducted at 12% of your basic salary. It is usually a large portion of your total salary.

2. House Rent Allowance

Salaried individuals, who live in a rented house/apartment, can claim house rent allowance or HRA to lower tax outgo. This can be partially or completely exempt from taxes. The income tax laws have prescribed a method for computing the HRA that can be claimed as an exemption.

Also do note that, if you receive HRA and don’t live on rent your HRA shall be fully taxable.

3. Leave Travel Allowance

Salaried employees can avail exemption for a trip within India under LTA. The exemption is only for the shortest distance on a trip. This allowance can only be claimed for a trip taken with your spouse, children, and parents, but not with other relatives. This particular exemption is up to the actual expenses, therefore unless you actually take the trip and incur these expenses, you cannot claim it. Submit the bills to your employer to claim this exemption.

4. Bonus

The bonus is usually paid once or twice a year. Bonus, performance incentive, whatever may be its name, is 100% taxable. Performance bonus is usually linked to your appraisal ratings or your performance during a period and is based on the company policy.

5. Employee Contribution to Provident Fund (PF)

Provident Fund or PF is a social security initiative by the Government of India. Both employer and employee contribute a 12% equivalent of the employee’s basic salary every month toward employee’s pension and provident fund. An interest of about 8.55% from FY 2017-18 (earlier it was 8.65%) gets accrued on it. This is a retirement benefit that companies with over 20 employees must provide as per the EPF Act, 1952.

6. Standard Deduction

Standard Deduction has been reintroduced in the 2018 budget. This deduction has replaced the conveyance allowance and medical allowance. The employee can now claim a flat Rs. 50,000 (Prior to Budget 2019, it was Rs. 40,000) deduction from the total income, thereby reducing the tax outgo.

7. Professional Tax

Professional tax or tax on employment is a tax levied by a state, just like income tax which is levied by the central government. The maximum amount of professional tax that can be levied by a state is Rs 2,500. It is usually deducted by the employer and deposited with the state government. In your income tax return, professional tax is allowed as a deduction from your salary income.

Broadly your CTC will are:

1. Salary received each month.
2. Retirement benefits such as PF and gratuity.
3. Non-monetary benefits such as an office cab service, medical insurance paid for by the company, or free meals at the office, a phone provided to you and bills reimbursed by your company.

Your take-home salary will are:

1. Gross salary received each month.
2. Minus allowable exemptions such as HRA, LTA, etc.
3. Minus income taxes payable (calculated after considering Section 80 deductions).

SECTION III: Retirement Benefits

1. Exemption of Leave Encashment

Check with your employer about their leave encashment policy. Some employers allow you to carry forward some amount of leave days and allow you to encash them while others prefer that you finish using them in the same year itself. The amount received as compensation for leave days accumulated is referred to as leave encashment and it is taxable as salary.

Exemption of leave encashment from tax:

It is fully exempt for Central and State government employees. For non-government employees, the least of the following three is exempt.

1. 10 months average salary preceding retirement or resignation (where average salary includes basic and DA and excludes perquisites and allowances)
2. Leave encashment actually received. (this is further subject to a limit of Rs 3,00,000 for retirements after 02.04.1998)
3. Amount equal to salary for the leave earned (where leave earned should not exceed 30 days for every year of service)

The amount chargeable to tax shall be the total leave encashment received minus exemption calculated as above. This is added to your income from salary.

Relief Under Section 89(1)

You are allowed tax relief under Section 89(1), when you have received a portion of your salary in arrears or in advance, or have received a family pension in arrears.

Calculate the Tax Relief Yourself

1. Calculate the tax payable on the total income, including additional salary in the year it is received.
2. Calculate the tax payable on the total income, excluding additional salary in the year it is received
3. Calculate the difference between Step 1 and Step 2
4. Calculate the tax payable on the total income of the year to which the arrears relate, excluding arrears
5. Calculate the tax payable on the total income of the year to which the arrears relate, including arrears
6. Calculate the difference between Step 4 and Step 5
7. The excess amount at Step 3 over Step 6 is the tax relief that shall be allowed.

Note that if the amount at Step 6 is more than the amount at Step 3, no relief shall be allowed.

3. Exemption on Receipts at the Time of Voluntary Retirement

Any compensation received on voluntary retirement or separation is exempt from tax as per the Section 10(10C). However, the following conditions must be fulfilled

1. Compensation received is towards voluntary retirement or separation
2. Maximum compensation received does not exceed Rs 5,00,000.
3. The recipient is an employee of an authority established under the Central or State Act, local authority, university, IIT, state government or central government, notified institute of management, or notified institute of importance throughout India or any state, PSU, company or a cooperative society.
4. The receipts are in compliance with Rule 2BA.

No exemption can be claimed under this section for the same AY or any other if relief under Section 89 has been taken by an employee for compensation of voluntary retirement or separation or termination of services. 
Note: Exemption can only be claimed in the assessment year the compensation is received.

4. Pension

Pension is taxable under the head salaries in the income tax return. Pension is paid out periodically on a monthly basis usually. You may also choose to take pension as a lump sum (also called commuted pension) instead of a periodical payment. At the time of retirement, you may choose to receive a certain percentage of your pension in advance.

Commuted and Uncommuted Pension Commuted pension or lump sum received may be exempt in certain cases. For a government employee, commuted pension is fully exempt. Uncommuted pension or any periodical payment of pension is fully taxable as salary.

5. Gratuity

Gratuity is a retirement benefit that employers provide for their employees. The employee is entitled to receive gratuity when he completes five years of service at that company. It is, however, only paid on retirement or resignation. Gratuity received on retirement or death by a central, state or local government employee is fully exempt from tax for the employee or his family. The tax treatment of your gratuity is different, depending on whether your employer is covered by the Payment of Gratuity Act. Check with your company about its status, and then proceed to calculate.

If your employer is covered by the Payment of Gratuity Act, then the least of the following three is tax-exempt.

1. 15 days salary based on the salary last drawn for every completed year of service or part thereof in excess of 6 months.

For simplicity sake, this is calculated as last drawn salary x number of years in employment x 15/26 (where last drawn salary is Basic salary and DA and number of years in service is rounded off to the nearest full year)

2. Rs 20,00,000
3. Gratuity actually received

If your employer is not covered under the Payment of Gratuity Act, the least of the following three is tax-exempt.

1. Half month’s salary for each completed year of service. While calculating completed years, any fraction of a year shall be ignored.

SECTION IV: Basics of Income Tax

1. Income Chargeable to Tax

Your income is not equal to your salary. You could earn income from several other sources other than your salary income. Your total income, according to the Income Tax Department, could be from house property, profit or loss from selling stocks or from interest on a savings account or on fixed deposits. All these numbers get added up to become your gross income.

2. Tax Rates

Add up all your income from the heads listed above. This is your gross total income. From your gross total income, deductions under Section 80 are allowed to be claimed. The resulting number is the income on which you have to pay tax.

3. TDS on Salary

TDS is tax deducted at source. Your employer deducts a portion of your salary every month and pays it to the Income Tax Department on your behalf. Based on your total salary for the whole year and your investments in tax-saving products, your employer determines how much TDS has to be deducted from your salary each month.

For a salaried employee, TDS forms a major portion of an employee’s income tax payment. Your employer will provide you with a TDS certificate called Form 16 typically around June or July showing you how much tax was deducted each month.
Your bank may also deduct tax at source when you earn interest from a fixed deposit. The bank deducts TDS at 10% on FDs usually. A 20% TDS is deducted when the bank does not have your PAN information.

4. Form 16

Form 16 is a TDS certificate. Income Tax Department mandates all employers to deduct TDS on salary and deposit it with the government. The Form 16 certificate contains details about the salary you have earned during the year and the TDS amount deducted.

It has two parts: Part A with details about the employer and employee name, address, PAN and TAN details and TDS deductions.

Part B includes details of salary paid, other incomes, deductions allowed, tax payable.

5. Form 26AS

Form 26AS is a summary of taxes deducted on your behalf and taxes paid by you. This is provided by the Income Tax Department. It shows details of tax deducted on your behalf by deductors, details on tax deposited by taxpayers and tax refund received in the financial year. This form can be accessed from the IT Department’s website.

6. Deductions

The lower your taxable income, the lower taxes you ought to pay. So be sure to claim all the tax deductions and benefits that apply to you. Section 80C of the Income Tax Act can reduce your gross income by Rs 1.5 lakhs. There are a bunch of other deductions under Section 80 such as 80D, 80E, 80GG, 80U etc. that reduce your tax liability.

Income from capital gains represents a significant source of income for investors and individuals engaged in the sale or transfer of capital assets such as stocks, real estate, mutual funds, and other investments. Understanding the tax treatment of capital gains is essential for investors to optimize their investment decisions, comply with tax laws, and minimize tax liabilities.

Definition of Capital Gains:

Capital gains arise when a capital asset is transferred or sold, resulting in a profit or gain. Capital assets include various types of assets such as land, buildings, securities, jewelry, artwork, and any other property held for investment purposes. The difference between the sale consideration received and the cost of acquisition of the asset determines the capital gain or loss.

Classification of Capital Gains:

Capital gains are classified into two categories based on the holding period of the capital asset:

• Short-term capital gains (STCG):

Gains arising from the sale or transfer of capital assets held for a period of up to 36 months (24 months for certain assets such as immovable property and unlisted shares) are considered short-term capital gains.

• Long-term capital gains (LTCG):

Gains arising from the sale or transfer of capital assets held for more than 36 months (24 months for certain assets) are classified as long-term capital gains.

Taxation of Capital Gains:

The tax treatment of capital gains differs for short-term and long-term gains:

• Short-term capital gains are taxed at applicable slab rates applicable to the taxpayer’s total income. For individuals, Hindu Undivided Families (HUFs), and other non-corporate taxpayers, short-term capital gains are taxed at the respective slab rates applicable to their total income.
• Long-term capital gains are subject to tax at specified rates depending on the type of asset and the applicable indexation benefit. As of the current tax regime, long-term capital gains on listed equity shares and equity-oriented mutual funds are taxed at a flat rate of 10% without indexation, provided the gains exceed Rs. 1 lakh in a financial year. For other long-term capital assets, such as real estate and debt mutual funds, gains are taxed at 20% with indexation benefit.

Cost of Acquisition and Indexation:

The cost of acquisition of a capital asset is the amount paid to acquire the asset, including purchase price, expenses incurred in acquiring the asset (such as brokerage, stamp duty, and registration charges), and any improvement costs. In the case of inherited or gifted assets, the cost of acquisition is determined based on the previous owner’s acquisition cost or fair market value as on specific valuation dates. Indexation allows taxpayers to adjust the cost of acquisition and improvement cost for inflation using the Cost Inflation Index (CII) published by the Central Board of Direct Taxes (CBDT). Indexation helps in reducing the taxable capital gains by accounting for the impact of inflation on the asset’s value over time.

Exemptions and Deductions:

The Income Tax Act provides certain exemptions and deductions to reduce the tax burden on capital gains:

• Exemption under Section 54:

Individuals can claim exemption from long-term capital gains tax on the sale of a residential property if the proceeds are reinvested in purchasing or constructing another residential property within specified timelines.

• Exemption under Section 54F:

Similar to Section 54, this provision allows exemption from long-term capital gains tax on the sale of any capital asset (other than a residential property) if the proceeds are reinvested in purchasing or constructing a residential property.

• Deduction under Section 80C:

Taxpayers can avail deductions for investments made in specified instruments such as Equity Linked Savings Schemes (ELSS), Public Provident Fund (PPF), National Savings Certificates (NSC), and other eligible investments, subject to the overall limit of Rs. 1.5 lakh per financial year.

Capital Gains from Equity Investments:

Special provisions apply to capital gains from the sale of listed equity shares and equity-oriented mutual funds:

• Long-term capital gains from listed equity shares and equity-oriented mutual funds held for more than one year are taxed at a concessional rate of 10% without indexation, provided the gains exceed Rs. 1 lakh in a financial year.
• Short-term capital gains from listed equity shares and equity-oriented mutual funds held for one year or less are taxed at the applicable slab rates.

Tax Planning Strategies:

Investors can implement various tax planning strategies to optimize their capital gains tax liability:

• Tax Loss Harvesting:

Selling investments with unrealized losses to offset gains and reduce tax liability.

• Timing of Sales:

Strategically timing the sale of assets to qualify for long-term capital gains tax rates or exemptions.

• Rebalancing Portfolio:

Adjusting investment allocations to optimize tax efficiency and diversification.

• Availing Exemptions and Deductions:

Leveraging available exemptions, deductions, and tax-saving investments to reduce taxable capital gains.

The term “house property” includes any building or land appurtenant thereto, owned by the taxpayer and used for residential or commercial purposes. It covers a wide range of properties, including residential houses, apartments, commercial buildings, shops, offices, warehouses, and vacant land. Income from house property may arise from rental income, self-occupied property, deemed let-out property, or capital gains from the sale of property.

When a property is used for the purpose of business or profession or for carrying out freelancing work – it is taxed under the ‘income from business and profession’ head. Expenses on its repair and maintenance are allowed as business expenditure.

1. Self-Occupied House Property

A self-occupied house property is used for one’s own residential purposes. This may be occupied by the taxpayer’s family parents and/or spouse and children. A vacant house property is considered as self-occupied for the purpose of Income Tax.

Prior to FY 2019-20, if more than one self-occupied house property is owned by the taxpayer, only one is considered and treated as a self-occupied property and the remaining are assumed to be let out. The choice of which property to choose as self-occupied is up to the taxpayer.

For the FY 2019-20 and onwards, the benefit of considering the houses as self-occupied has been extended to 2 houses. Now, a homeowner can claim his 2 properties as self-occupied and remaining house as let out for Income tax purposes.

2. Let Out House Property

A house property which is rented for the whole or a part of the year is considered a let out house property for income tax purposes

3. Inherited Property

An inherited property i.e. one bequeathed from parents, grandparents etc again, can either be a self-occupied one or a let out one based on its usage as discussed above.

Deductions Allowed:

From the annual value of the property, certain deductions are allowed under Section 24 of the Income Tax Act to arrive at the taxable income from house property. These deductions include:

• Standard deduction: A flat deduction of 30% of the annual value is allowed towards repairs, maintenance, and other expenses.
• Interest on housing loan: Deduction is allowed for interest paid on a loan taken for the purchase, construction, repair, or renovation of the property. The maximum deduction allowed is Rs. 2 lakh for self-occupied properties and the actual interest paid for let-out or deemed let-out properties.

Treatment of Losses:

If the net annual value of a property (after allowing deductions) results in a loss, such loss can be set off against income from other heads, such as salary, business income, or capital gains, in the same financial year. Any unadjusted loss can be carried forward for up to eight subsequent years and set off against income from house property in those years.

Taxation of Deemed Let-Out Property:

If a property is not let out or self-occupied but deemed to be let out, it is treated as let-out for taxation purposes. This provision applies when an individual owns more than one house property and chooses to occupy only one property for self-use. In such cases, the other property/properties are deemed to be let out, and income is calculated accordingly.

Taxation of Vacant Property:

Even if a property is vacant and not yielding any rental income, it is still considered to have an annual value for tax purposes. The owner is required to pay tax on the deemed rental income, which is calculated based on the fair market rent that the property would fetch if let out. However, deductions for interest on housing loan and standard deduction are still allowed.

Steps to Calculate Income from House Property

• Determine Gross Annual Value (GAV) of the property:

The gross annual value of a self-occupied house is zero. For a let out property, it is the rent collected for a house on rent.

• Reduce Property Tax:

Property tax, when paid, is allowed as a deduction from GAV of property.

• Determine Net Annual Value (NAV):

Net Annual Value = Gross Annual Value – Property Tax

• Reduce 30% of NAV towards standard deduction:

30% on NAV is allowed as a deduction from the NAV under Section 24 of the Income Tax Act. No other expenses such as painting and repairs can be claimed as tax relief beyond the 30% cap under this section.

• Reduce home loan interest:

Deduction under Section 24 is also available for interest paid during the year on housing loan availed.

• Determine Income from house property:

The resulting value is your income from house property. This is taxed at the slab rate applicable to you.

• Loss from house property:

When you own a self occupied house, since its GAV is Nil, claiming the deduction on home loan interest will result in a loss from house property. This loss can be adjusted against income from other heads.

Note: When a property is let out, its gross annual value is the rental value of the property. The rental value must be higher than or equal to the reasonable rent of the property determined by the municipality.

Income from other sources represents a diverse category of earnings under the Indian Income Tax Act, 1961, encompassing various types of income not specifically covered under other heads such as salaries, house property, business or profession, or capital gains. This head of income includes a wide range of receipts, earnings, and gains, both monetary and non-monetary, that accrue to an individual during a financial year. Understanding the tax treatment of income from other sources is essential for taxpayers to accurately compute their taxable income and fulfill their tax obligations.

1. Definition and Scope:

Income from other sources includes any income that does not fall within the ambit of the other four heads of income—salaries, house property, business or profession, and capital gains. It covers various sources of income, such as interest income, dividend income, rental income from machinery, plant, furniture, or other assets, income from gifts, winnings from lotteries, races, or games of chance, royalties, annuities, and any other income not specifically categorized under other heads.

2. Interest Income:

Interest income earned from savings accounts, fixed deposits, recurring deposits, bonds, debentures, loans, or any other financial instruments is one of the most common types of income from other sources. Interest income is fully taxable and is added to the taxpayer’s total income for the financial year. However, certain exemptions and deductions may be available for specific types of interest income, such as interest from savings accounts or tax-saving bonds.

3. Dividend Income:

Dividend income received from domestic companies, mutual funds, or other investment instruments is also classified as income from other sources. Dividend income is generally exempt from tax in the hands of the recipient shareholder under Section 10(34) of the Income Tax Act. However, dividend income exceeding Rs. 10 lakh is subject to tax at a flat rate of 10% under Section 115BBDA for individual, Hindu Undivided Family (HUF), or firm.

4. Rental Income:

Income derived from renting out machinery, plant, furniture, or any other assets not constituting a house property is taxed as income from other sources. Rental income is taxable at the applicable slab rates, and deductions for expenses incurred in generating rental income may be allowed under Section 57 of the Income Tax Act.

5. Winnings from Lotteries, Races, or Games of Chance:

Income earned from winnings in lotteries, crossword puzzles, races, card games, or other games of chance is considered income from other sources and is subject to tax at a flat rate under Section 115BB. The tax rate varies depending on the nature of the winnings and ranges from 30% to 60% of the income.

6. Royalty Income:

Royalty income received by an individual for the use of intellectual property rights, such as patents, copyrights, trademarks, or industrial designs, is taxable as income from other sources. Royalty income is added to the taxpayer’s total income and taxed at the applicable slab rates.

7. Annuity Income:

Annuity income received from annuity plans, insurance policies, pension schemes, or other financial instruments is categorized as income from other sources. Annuity income is taxable at the applicable slab rates, and certain deductions may be available for specific types of annuities under Section 80CCC of the Income Tax Act.

8. Gift Income:

Gifts received by an individual exceeding Rs. 50,000 in a financial year are taxable as income from other sources under Section 56(2)(x) of the Income Tax Act. However, certain exemptions may be available for gifts received from specified relatives or under specific circumstances, such as gifts received on marriage, through wills, or by inheritance.

Profit and Gains of Business or Profession (PGBP) represent another important head of income under the Indian Income Tax Act, 1961. This head encompasses earnings derived from business activities, including trade, commerce, manufacturing, professions, vocation, or any other activity undertaken with a profit motive. Understanding the tax treatment of PGBP is essential for businesses, professionals, freelancers, and self-employed individuals.

In view of Section 2(13), business includes any:

(a) Trade

(b) Commerce

(c) Manufacture

(d) Any adventure or concern in the nature of trade, commerce or manufacture. It covers every facet of an occupation carried on by a person with a view to earning profit.

• The word “business” is one of large and indefinite import and connotes something which occupies attention and labour of a person for the purpose of profit.
• Business arises out of commercial transactions between two or more persons. One cannot enter into a business transaction with oneself.

As per section 2(36), profession includes vocation. As profits and gains of a business, profession or vocation are chargeable to tax under the head “Profits and gains of business or profession”, distinction between “business”, “profession” and “vocation” does not have any material significance while computing taxable income. What does not amount to “profession” may amount to “business” and what does not amount to “business” may amount to “vocation”.

Business Incomes Taxable under the head of ‘Profit and Gains of Business or Profession’ (Section 28).

Under section 28, the following income is chargeable to tax under the head “Profits and gains of business or profession”:

• Profits and gains of any business or profession;
• Any compensation or other payments due to or received by any person specified in section 28(ii);
• Income derived by a trade, professional or similar association from specific services performed for its members;
• The value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession;
• Any profit on transfer of the Duty Entitlement Pass Book Scheme;
• Any profit on the transfer of the duty free replenishment certificate;
• Export incentive available to exporters;
• Any interest, salary, bonus, commission or remuneration received by a partner from firm;
• Any sum received for not carrying out any activity in relation to any business or profession or not to share any know-how, patent, copyright, trademark, etc.;
• fair market value of inventory as on the date on which it is converted into, or treated as, a capital asset determined in the prescribed manner;
• Any sum received under a Keyman insurance policy including bonus;
• any sum received (or receivable) in cash or kind, on account of any capital asset (other than land or goodwill or financial instrument) being demolished, destroyed, discarded or transferred, if the whole of the expenditure on such capital asset has been allowed as a deduction under section 35AD;
• Income from speculative transaction.

Business Income Not Taxable under the head ‘Profit and Gains of Business or Profession’

In the following cases, income from trading or business is not taxable under section 28, under the head “Profits and gains of business or profession”:

• Rental income in the case of Dealer in Property:

Rent of house property is taxable under section 22 under the head “Income from house property”, even if property constitutes stock-in-trade of recipient of rent or the recipient of rent is engaged in the business of letting properties on rent.

• Dividend on Shares in the case of a Dealer-in-Shares:

Dividends on shares are taxable under section 56(2)(i), under the head “Income from case of a dealer-in-shares other sources”, even if they are derived from shares held as stock-in-trade or the recipient of dividends is a dealer-in-shares. Dividend received from an Indian company is not chargeable to tax in the hands of shareholders (this rule is subject to a few exceptions).

• Winnings from Lotteries, etc.

Winnings from lotteries, races, etc., are taxable under the head “Income from other sources” etc. (even if derived as a regular business activity).

• Interest received on Compensation or Enhanced Compensation:

Such interest is always taxable in the year of receipt under the head “Income from other sources” (even if it pertains to a regular business activity). A deduction of 50 % is allowed and effectively only 50 % of such interest is taxable under the head “Income from other sources”.

Profits derived from the aforesaid business activities are not taxable under section 28, under the head “Profits and gains of business or profession”. Profits and gains of any other business are taxable under section 28, unless such profits are exempt under sections 10 to 13A.

Mode of Taxation on Certain Incomes (Section 145B)

Section 145B has been inserted by the Finance Act, 2018. It is applicable from the assessment year 2017-18 onwards. It provides mode of taxation of the following incomes:

1. Interest received by an assessee on compensation or on enhanced compensation, shall be deemed to be the income of the year in which it is received (however, it is taxable under section 56 under the head “Income from other sources”).
2. The claim for escalation of price in a contract or export incentives shall be deemed to be the income of the previous year in which reasonable certainty of its realization is achieved.
3. Assistance in the form of subsidy (or grant or cash incentive or duty drawback or waiver or concession or reimbursement) as referred to in section 2(24)(xviii) shall be deemed to be the income of the previous year in which it is received, if not charged to income tax for any earlier previous year.

Basic Principles for computing income Taxable under the head ‘Profit and Gains of Business or Profession’

1. Business or profession carried on by the assessee:

Business or profession should be carried on by the assessee.

2. Business or profession should be carried on during the previous year:

Income from business or profession is chargeable to tax under this head only if the business or profession is carried on by the assessee at any time during the previous year (not necessarily throughout the previous year). There are a few exceptions to this rule.

3. Income of previous year is taxable during the following assessment year:

Income of business or profession carried on by the assessee during the previous year is chargeable to tax in the next following assessment year. There are, however, certain exceptions to this rule.

4. Tax incidence arises in respect of all businesses or professions:

Profits and gains of different businesses or professions carried on by the assessee are not separately chargeable to tax. Tax incidence arises on aggregate income from all businesses or professions carried on by the assessee. If, therefore, an assessee earns profit in one business and sustains loss in another business, income chargeable to tax is the net balance after setting off loss against income. However, profits and losses of a speculative business are kept separately.

5. Legal ownership vs. beneficial ownership:

Under section 28, it is not only the legal ownership but also the beneficial ownership that has to be considered. The courts can go into the question of beneficial ownership and decide who should be held liable for the tax after taking into account the question as to who is, in fact, in receipt of the income which is going to be taxed.

6. Real profit vs. anticipated profit:

Anticipated or potential profits or losses, which may occur in future, are not considered for arriving at taxable income of a previous year. This rule is, however, subject to one exception: stock-in-trade may be valued on the basis of cost or market value, whichever is lower.

7. Real profit vs. Notional profit:

The profits which are taxed under section 28 are the real profits and not notional profits. For instance, no person can make profit by trading with himself in another capacity.

8. Recovery of sum already allowed as deduction:

Any sum recovered by the assessee during the previous year in respect of an amount or expenditure which was earlier allowed as deduction, is taxable as business income of the year in which it is recovered.

9. Mode of book entries not relevant:

The mode or system of book-keeping cannot override the substantial character of a transaction.

10. illegal business:

The income-tax law is not concerned with the legality or illegality of a business or profession. It can, therefore, be said that income of illegal business or profession is not exempt from tax.

Accounting Methods:

Taxpayers engaged in business or profession have the flexibility to adopt either the cash basis or the mercantile (accrual) basis of accounting for computing taxable income. Under the cash basis, income is recognized when received, and expenses are recognized when paid. Under the mercantile basis, income is recognized when earned, and expenses are recognized when incurred, irrespective of actual receipt or payment. Taxpayers are required to maintain proper books of accounts and records to support their accounting method.

Presumptive Taxation Scheme:

To simplify the tax compliance burden for small businesses and professionals, the Income Tax Act provides for a presumptive taxation scheme under Sections 44AD, 44ADA, and 44AE. Under these provisions, eligible taxpayers can declare income at a prescribed rate (usually a percentage of turnover or gross receipts) without maintaining detailed books of accounts. This scheme offers administrative relief and ensures a minimum level of tax compliance for small taxpayers.

Depreciation Allowance:

Businesses are allowed to claim depreciation on assets used for business purposes, such as machinery, equipment, vehicles, buildings, and intangible assets. Depreciation represents the gradual wear and tear, obsolescence, or loss in value of assets over time. The Income Tax Act prescribes depreciation rates for different categories of assets, and taxpayers can claim deductions for depreciation expenses while computing taxable income under PGBP.

Set-off and Carry-forward of Losses:

If a business or profession incurs a loss in a financial year, such loss can be set off against income from any other head of income, including salary, house property, capital gains, or other business income, in the same year. Any unadjusted loss can be carried forward for up to eight subsequent years and set off against income from the same head. However, losses from speculative business are subject to specific set-off and carry-forward restrictions.