Income Tax Law – Complete Guide

Introduction to Tax planning

income tax law guide

Tax planning is an exercise which is mostly undertaken to minimize tax liability

by using all available allowances,  deductions,  exclusions,  exemptions, etc. in

order to reduce income or capital gains. For instance, tax planning is needed by an

the individual in order to plan his tax properly so he/she didn’t mess anything at

that time.

So,  for an individual, an assessment year and previous is important because

for an assessment, it is necessary to plan his taxes in previous year including all

his deductions and allowances which will reduce his overall tax liability and that

deducted income will help in future and will also increase national income. If

an individual does not plan his taxes properly than in the assessment year he has

no other option but to pay all his taxes.



In India, this tax was introduced for the first time in 1860 by James Wilson

in order to meet the losses sustain by government on account of the military

mutiny of 1857. Their after several amendments were made in it from time

to time. At last in 1886 a separate Income Tax Act was passed. The Act remains

in force upto 1917 with various amendments and in 1918 a new Income Tax

Act was passed which was replaced again by 1922. This Act remain in

force up to assessment year 1961-1962 with various amendments. The Income

Tax Act of 1922 had become very complicated on account of innumerable

amendments. Therefore, the government of India referred it to law commission

in 1956 with a view to simplify and prevent evasion of tax. This committee

in consultation with ministry of Law finally passed the Income Tax Act in 1961.

This Act applies to whole of India including Sikkim and Jammu and Kashmir. This

Act after being passed in both the houses of parliament became an Act.



Residential status is to be charged on the total income of the previous

year of a person at the rate fixed for the assessment year by the Annual Finance

Act. The total income of a person is determine in accordance with the provisions

of the Income Tax Act but the tax is charged according to the Finance Act passed

by the parliament every year.

The scope of the total income of Mr. Rajeev Kumar who is an assessee is determined

with reference to his residence in India in the previous year. In other words,

the total income of an individual is based upon his residential status which is

determine with reference to his residence in the previous year.

Residence and citizenship are two different things. The incidence of tax

has nothing to do with citizenship. An Indian may be a non- resident and

a foreigner may be a resident  for Income Tax purposes. The residence of a

person may change from year to year but citizenship cannot be change every year.


On the basis of  residence the assesses are divided into three categories:

  • Persons who are resident in India popularly known as ordinarily resident.
  • Persons who are not ordinarily in India.
  • Persons who are non-resident


There are separate rules for determining the residential status of

different kinds of assesses , individual,  HUF,  AOP, artificial judicial

persons etc.


It is not necessary that the residence of the assese which in our case is

Mr. Rajeev Kumar should be the same . He can be a residence in one year ,

non –ordinarily resident in  the other and yet in the third year he may be

a non – resident. It is worth noting that a person may be a resident

in more than one country at same time for the same previous year.


Kumar went to Japan in July 2013 for business activities and came back to India in July 2015. He went back again to Japan in July 2015

and came to India in January 2016 and went back in July 2016. Now to find

out his residential status following conditions has to be full field. The conditions are as follows:



  • 182 days or more during previous year


  • 365 days or more during the 4 previous years preceding

the relevant previous year and for 60 days or more during

previous year.


  • 2 years out of 10 previous years.
  • 730 days or more.

CALCULATION:              2012-2013

{Went to Japan}  JULY 2013-2014

2014-2015 JAN{ came back    India}

{Went back to Japan} JULY  2015-2016

{Previous year} { came back}

JAN 2016  {Went back in JULY} -2017

{Assessment year} 2017-2018

So, for Mr. Rajeev Kumar to be a resident Of India he should meet

any one of the two basic conditions. In  P.Y i.e. 2016-17  he was their in

India for 91 days as in 2016 he came back to India in Jan 2016 and went back in July 2016. So, he was there in India in full April i.e. 30, May 31 days, June 30 days which comes to 91 days. According to this he is not fulfilling the first basic conditions of 182 days. Now, the second basic condition which says he should be in India either for 60 days or 365 days

Preceding the 4 previous years. The half condition of 60 days is already full field. Now for checking 365 days: MR.RAJEEV KUMAR was there for 181 days in 2015 – 2016 as he came back in Jan 2015 so full April, May, June will be calculated because assessment year starts from 1st April and again he went back to Japan in July 2015- and came back in Jan 2016 and financial period ends on 31ST MARCH so accordingly the tax will be calculated for Jan, Feb, March which makes to 181 days. Now, same will be calculated for 2014-2015 : MR. Rajeev Kumar came back from Japan in Jan 2015 so for income tax purposes three months will be included i.e Jan,  Feb,  Mar which comes to 90 days. Now for 2013- 2014 he went to Japan in July 2013 so April , May , June will be considered which makes 91 days and full 2012 – 2013 he was there in India. This means MR. Rajeev Kumar fulfills the second basic condition and is a resident of India.

Now , to check whether he is an ordinary resident or non- ordinarily resident the two additional conditions should be met. First condition which says he should be in India for 2 years out of 10 years so before 2014 i.e 2013 and before he was in India for more than 2 years. He was also present in India for more than 730 days in 7 years. So he is fulfilling the two additional conditions and therefore he is a ordinary resident of India.



The incidence of tax on a tax payer depends on his residential status and also

on place and time of accrual or receipt of income. Basically, a tax incidence

is an economic term for the division of a tax burden between buyers and

sellers. Tax incidence is related to the price elasticity of supply and demand

and when supply is more elastic than demand , the tax burden falls on the

buyers. If demand is more elastic than supply , producers will bear the cost

of tax.

So, in order to understand the relationship between residential status and

tax liability, one must understand the meaning of ‘INDIAN INCOME’ and


Indian Income: Any of the following three is an Indian income-

  • If income is received{or deemed to be recived} in India during the previous year and at the same time it accrues {or arises or is deemed to accrue or arise} in India during the previous year.
  • If income is received {o deemed to be received} in India during the previous year but it accrues {or arises}outside India during the previous year.
  • If income is received outside India during the previous year but it accrues {or arises or is deemed to accrue or arise}in India during the previous year.


Foreign Income: If the following two conditions are satisfied, then such income is foreign income:

  • Income is not received{or not deemed to be received} in India; and
  • Income does not accrue or arise{or does not deemed to accrue or arise}in India.


So,  MR. Rajeev Kumar is taxable in India as per Indian Taxable Act irrerespective of his residential status and also foreign income is taxable in the hands of resident{in case of an associations of persons, a firm, a joint stock company, and every other person} or resident and ordinarily resident {in case of an individual and Hindu undivided family} in India. Foreign income is not taxable in hands of non- resident in India. For non-ordinarily resident they are partially taxable in India and partially outside India. They follow double taxation and in if they want to avoid double taxation they must see if the country had signed double taxation memorandum with other country in order to avoid it.


For example: Mr. Rajeev Kumar had a house property in New York and the house is rented. He is not able to go to New York and received his rent charges. So he asked the person to credit his account. The person credited the money in his account which Mr. Rajeev Kumar operates from India. So, the income is arisen outside India but is received in India so, Mr Rajeev Kumar is liable to pay the taxes in the assessment year. But if the same amount was not received in previous yewar while assessing the assessment year he is not liable to pay taxes.



Provident means ‘to provide the fund . It is a compulsory government managed retirement scheme which is run in order to benefit the citizen. It is a form of security into which workers contribute a portion of their salary and employers also contribute on behalf of their workers. The money in the fund is then paid out to retires or in some cases to the disabled persons. Provident fund provides financial support for those who meet the plans defined retirement age. The government  set the age limit at which withdrawals are to be made although some fund may be withdrawn  in case of emergencies such as medical emergencies. In case an employee dies before receiving his provident fund then in that case his spouse or children may be able to receive the fund’s benefit. When an employee start working both the employee and employer start contributing 12% of basic salary which goes into the EPF account out of which 3.67% goes into EPF account and the remaining 8.33% goes into EPS i.e  Employee’s Pension Scheme.

EXAMPLE: If the basic pay of MR. Rajeev Kumar is Rs 6500 per month then an employer can only contribute 8.33%of 6500 i.e.( Rs 351) to MR. Kumar’s  EPS  and the balance will go into his EPF account.

TAX BENEFITS: The benefit of EPF is that it is tax-free and that the contribution in EPF is tax- deductable under Section 80c of the Income Tax Act. The money invested in EPF , the interest earned  and the money which is eventually withdrawn after the specified period are exempted from Income Tax.


Exempted income is that income on which Income Tax is not chargeable. Some incomes are not even included in total income and some are included but are exempt from income tax.


1.)INCOME: Agricultural income Sec 10(I)


CONDITION: If the taxable income is more than the minimum taxable limit

and the agricultural limit is more than Rs 5000, agricultural income shall be included for determining the amount of taxable income.

2.)INCOME: Share of income from Hindu Undivided Family Sec10(2)

ENTITLED TO RELIEF: An individual who is the member of HUF


3.)INCOME: Share of income of a partner from his firm Sec10(2A):


CONDITION: Share of income shall be computed by dividing the taxable profits of the firm in the agreed ratio of profits.

4.)INCOME : Interest income from savings, certificates Sec10(4B)

ENTITLED TO RELIEF: Citizen of India but non-resident.

CONDITION: Savings certificate subscribe in convertible foreign exchange

5.)INCOME: Income of a consultant out of funds available to an international organization Sec10(8A)

ENTITLED: Indiviual who may be a foreigner or not-ordinarily resident or non-resident in India .

Condition : As per agreement of technical assistance grant between the organization and a foreign government.




7.)INCOME: Life Insurance policy money Sec 10(10D)



8.)INCOME: Educational Scholarships Sec10(16)


CONDITION: Scholarship should be for meeting educational expenses

9.)INCOME: Awards made by the government in public interest Sec10(17A)



10.)INCOME: Family pension Sec10(19)

ENTITLED TO RELIEF: Widow or children of member of armed forces

CONDITION: Death of such person occurred in the course of operational duties


11.)INCOME: Annual value of one palace of rulers of Indian states Sec10(19A)


CONDITION: If any part of the palace is let out its annual value will not be exempted




There are 5 heads under which income of an individual is calculated. They are as follows:

  • Salary
  • House property
  • Business/profits
  • Capital gain
  • Residuary/other sources

We”ll discuss each of these heads in detail.


Income is taxable under the head “income from house property” only when the following three conditions are satisfied:

  • The property should consist of any buildings or lands appurtenant thereto.
  • The assessee should be an owner of the property.
  • The property should not be used by the owner for the purpose of any business or profession carried on by him, the profits of which are chargeable to income tax.



Income from let out house property is computed as under:

Gross annual value                                                                   ###

Less: Municipal taxes                                                              ###

Net annual value                                                                      ###

Less: Deduction under Sec24

  • Standard deduction ###
  • Interest on borrowed capital ###

Income from house property                                                  ###


Two deductions are available under section 24- a.) standard deductions, and b.) interest on borrowed capital. The list of allowance of section 24 is exhaustive. In other words, no other deduction can be claimed under section 24.

  • Standard deduction: 30% o net annual value is deductible irrespective of any expenditure incurred by the taxpayer.
  • Interest on borrowed funds: Deductible, if capital is borrowed for the purpose of purchase, construction, repair, renewal, or reconstruction of the property.

So, Mr. Rajeev Kumar will be allowed deductions in-house property under these two conditions only.


If a property is occupied for business, nothing is taxable under the head “income from house property” . If one house property is occupied for own residential purposes by an individual or by Hindu undivided family {for residence of members}, gross annual value of such property is nil. Municipal tax is not deductible. However, interest on borrowed capital is deductible up to a maximum ceiling of Rs 30,000(Rs 1,50,000 in few cases). If two or more properties are occupied for own residential purposes , only one property can be treated as self- occupied property and other remaining property or properties shall be “deemed to be let out property”.



Interest is deductable up to Rs 1,50,000 in the case of self-occupied property if the following conditions are satisfied:

  • Capital is borrowed on or after April 1, 1999for acquiring or constructing a property.
  • The acquisition or construction should be completed within 3 years from the end of financial year in which the capital was borrowed.


The term “salary” under Sec 17(1) signifies recompense or consideration given to any person for pains bestowed upon another person’s business. Tax treatment of different receipts are given below:

DIFFERENT ITEMS                                        TAX TREATMENT

  • Basic salary Taxable
  • Dearness allowance/pay Taxable
  • Advance salary Taxable
  • Leave encashment at the Exempt in some

time of retirement                                           cases

  • Fees $ commission Taxable
  • Bonus                                           Taxable
  • Pension Exempt in some cases



  • In the case of an employee of the central government or a state government, any amount received as cash equivalent of leave salary in respect of the period of earned leave at his credit at the time of retirement is exempt from the tax.
  • In the case of a non-government employee (i.e. an employer other than an employee of the central government or a state government) leave salary is exempt from tax under sec10 (10AA{2}) to the extent of following three conditions:
  • 10 months average salary; or
  • The amount not chargeable to tax as specified by the government.
  • Leave encashment actually received at the time of retirement.


PENSION [SEC. 17(1)2]: Pension covered is chargeable to tax as follows:

  • Uncommuted pension is taxable as salary under section 15 in the hands of a government employee as well as non-government employee.
  • Any commuted pension received by an employee of the central government, state government , local authority or statutory corporations is wholly exempt from tax under section10(10 A){1}.



Allowance is generally defined as a fixed quantity of money or other substance is given regularly in addition to salary for the purpose of meeting some particular requirements connected with the service rendered by the employee or as compensation for unusual conditions of that service.


  • HRA                                                Exempt in some       cases
  • Entertainment allowance Exempt in some cases
  • Foreign allowance Exempt from tax if paid outside India by the government to an Indian citizen for rendering service outside India.
  • Tiffin allowance, medical

Allowance                                           Taxable


HOUSE RENT ALLOWANCE [SEC.10(13A) AND RULE 2A]: Exemption in case of house rent allowance is regulated by rule 2A. The least of the following is exempt from tax-

  • An amount equal to 50% salary , where the residential house is situated at Bombay, Calcutta, Delhi or Madras and an amount equal to 40% of salary where the residential house is situated at any other place;
  • House rent allowance received by the employee in respect of the period during which the rental accommodation is occupied by the employee during the previous year; or
  • The excess of rent paid over 10% of salary.


PERQUISITES: “Perquisites” may be defined as any casual emolument or benefit attached to an office or position in addition to salary or wages. It also denotes something that benefits a man by going into his own pocket.




In it the bank interest, post office interest and other interest from other sources are calculated.



In it long term and short term capital gains are calculated. Long – term capital gains are regarding immovable property and are for three years. It means if you have property for more than 3 years it will be treated as capital gains and for share purposes long term capital gains are for 12 months. Long-term capital gains for shares which are for 12 months are exempted but immovable property in long-term gains is calculated through cost inflation index and after getting the cost price of the immovable property, we deduct it from sale prize, then the capital gain arises. If we want to save money from capital gain either we can  purchase a new property house within 3 years from date of sale or from 2 years before the date of sale .


Income from business or profession is calculated on the basis of method of accounting regularly employed by the assessee .

  • If the assessee has adopted the mercantile system of accounting , then income is calculated on accrual basis as well as admissible expenses are deducted on accrual basis.
  • If the assessee has adopted cash system of accounting , income is calculated on receipt basis. Admissible expenses will be deducted only on payment basis.



Section 30 to 37 cover expenses, which are expressly allowed as deduction while computing business income.


Sections 40, 40A and 43B cover expenses which are not deductable.



Deduction is allowed in respect of rent, rates , taxes ,land revenue, repairs and insurance for premises used for the purpose of business or profession. Rent of building is not deductable if building is owned by the assessee. Capital expenditure on repair is not deductable.



The expenditure incurred on current repairs and insurance in respect of plant, machinery and furniture used for business purposes is allowable as deduction.



In the budget of 2017, several changes related to income tax were announced .They were as follows:

1.)The income tax rate for people earning Rs 2,50,000 to Rs 5lakh per year has come down to 5% but people earning over Rs  50 lakhs p.a. will have to pay an additional surcharge along with the applicable tax rate.

2.) Filing of ITR will become easy for people earning up to Rs 5 lakhs as the government will introduce a simplified 1 page form for them.

3.) No deductions can be claimed for investments made under the Rajiv Gandhi Equity Saving Scheme from A.Y{assessment year} 2018-2019.

4.) People will have to pay a penalty of Rs 5000, if they do not file ITR for the present FY{financial year}on time.

5.) According to a report , the holding period for long term immovable property has been reduced to 2 years.

6.) From June 1, 2017 , people whose rental payments are more than Rs 50,000 per month have to subtract 5% TDS.

7.) From July 1, 2017 , people will not be able to file their ITR without Aadhar.

8.) People who make partial withdrawals from NPS { national pension system} do not have to pay tax on the same.They can withdraw 25% of their own contribution before retiring in case of emergencies.

9.) Health, two-wheelers and car insurance premiums may increase from April 1,2017.



INCOME SLAB                                       TAX RATE

Income upto Rs 2,50,000                         no tax

Income from Rs 2,50,000-5,00,000         5%

Income from Rs 5,00,000-10,00,000       20%

Income more than Rs 10,00,000              30%

Surcharge: 10% of income tax , where total income is between Rs 50 lakhs and Rs 1 crore 15% of income tax , where total income exceeds Rs 1 crore.

*Income upto Rs 2,50,000 is exempt from tax if you are less than 60 years old.



For the purpose of tax planning under the head “salaries” the following propositions should be borne in mind.They are :

  • It should be ensure that , under the terms of employment , dearness allowance and dearness pay form a part of basic salary. This will minimize tax incidence on house rent allowance , gratuity and commuted pension.
  • As commuted pension is always taxable , employees should get their pension commuted. Commuted pension is fully exempt from tax in the case of government employees and partly exempt from tax in case of non-government employees who can claim relief under section 89.
  • Pension received in India by a non-resident assessee from abroad is taxable in India. If, however , such pension is first received by or on behalf of the employee in a foreign country and later on remitted to India , it will exempt from tax.
  • As the perquisite in respect of leave travel concession is not taxable in the hands of employees if certain conditions are satisfied, it should be ensure that the travel concession should be claimed to the maximum possible extent without attracting any incidence of tax.

For the purpose of tax planning under the head “ house property” following propositions should be kept in mind. They are as follows:

1.)If a person has occupied more than one house for his own residence ,only one house of his own choice is treated as self-occcupied and all other houses are deemed to be let out. The tax exemption applies only in the case of one self –occupied house and not in the case of deemed to be let out properties. Care should be taken while selecting the house to be treated as self-occupied , in order to minimize the tax liability.


2.)As interest payable out of India is not deductible at source care should be taken to deduct tax at source in order to avail exemption.

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