Essential Income Tax Definitions and Key Concepts
Core Income Tax Terminology and Definitions
Fundamental Definitions (Section 2)
Person (Section 2(31))
As per Section 2(31) of the Income Tax Act, a “Person” includes:
- An Individual.
- A Hindu Undivided Family (HUF).
- A Company.
- A Firm.
- An Association of Persons (AOP) or Body of Individuals (BOI).
- A Local Authority.
- Any artificial juridical person not covered above.
Assessee
An Assessee is a person by whom any tax or any other sum of money is payable under the Income Tax Act. This term also includes a person against whom proceedings have been initiated or who is deemed to be an assessee.
Previous Year (P.Y.)
The Previous Year is the financial year immediately preceding the assessment year, during which income is earned. For example, if the Assessment Year is 2024–25, the Previous Year is 2023–24.
Assessment Year (A.Y.)
The Assessment Year is the year following the previous year in which the income earned during the previous year is assessed and taxed. Example: For income earned in 2023–24, the Assessment Year is 2024–25.
Income and Exemptions
Definition of Income
Income refers to the monetary gain or benefit derived by an individual or entity during a financial year from various sources. The Income Tax Act classifies income under five heads:
- Salary
- Income from House Property
- Profits and Gains from Business or Profession
- Capital Gains
- Income from Other Sources
It includes both monetary and non-monetary receipts, and only legal and taxable income is considered under the Act.
Exempted Income
Exempted Income is income that is specifically not taxable under the Income Tax Act. Examples include agricultural income and income from certain mutual funds.
Agricultural Income (Section 10(1))
Agricultural Income refers to income earned from agricultural land in India. It includes:
- Rent or revenue derived from land used for agricultural purposes.
- Income from agricultural operations like cultivation.
- Income from farmhouses connected with agricultural land.
This income is exempt from tax under Section 10(1) of the Income Tax Act.
Salary and Property Related Terms
Perquisites
Perquisites (or Perks) are benefits or amenities provided by the employer to the employee in addition to salary. These are taxable under the head “Income from Salaries.”
- They can be monetary (e.g., rent-free accommodation) or non-monetary (e.g., use of a company car).
Composite Rent
Composite Rent is the rent received for letting out a building along with furniture, fixtures, and other amenities. It includes both rent for the property and charges for other services.
Taxation Note: If the two components (property rent and service charges) are inseparable, the entire amount is taxed under “Income from Other Sources.”
Net Annual Value (NAV)
Net Annual Value (NAV) refers to the value derived from the property after deducting municipal taxes from the Gross Annual Value (GAV). NAV is the base used to calculate income taxable under the head “Income from House Property.”
Types of House Property
For tax purposes, house property is categorized as:
- Self-occupied Property: Used by the owner for residential purposes.
- Let-out Property: Given on rent.
- Deemed to be Let-out: If an owner has more than one self-occupied property, the remaining properties are considered deemed to be let-out for tax calculation.
Tax Calculation and Payment Mechanisms
Gross Total Income (GTI)
Gross Total Income (GTI) is the aggregate of income computed under all five heads before allowing any deductions under Chapter VI-A (Sections 80C to 80U).
Formula: GTI = Total income from all five heads.
Total Taxable Income (Net Taxable Income)
Total Taxable Income (or Net Taxable Income) is the income on which tax is actually calculated. It is derived after deducting eligible deductions under Chapter VI-A from the Gross Total Income.
Formula: Total Taxable Income = Gross Total Income – Deductions (u/s 80C to 80U).
Advance Tax
Advance Tax refers to the payment of income tax in installments during the financial year itself, instead of a lump sum payment at year-end. It applies if the total tax liability exceeds ₹10,000 in a financial year. It must be paid in installments as per the due dates set by the Income Tax Department.
Tax Deducted at Source (TDS)
TDS is a method of collecting income tax at the source of income generation. A certain percentage is deducted by the payer before making payment to the payee and deposited with the government. It serves to minimize tax evasion.
Deductions and Compliance
Deduction Under Section 80C
Section 80C offers deductions up to ₹1.5 lakhs for investments made in specified instruments, such as LIC premiums, Public Provident Fund (PPF), Equity Linked Savings Schemes (ELSS), and tuition fees. This deduction helps in reducing the total taxable income.
Deduction Under Section 80G
Section 80G allows deductions for donations made to certain relief funds and charitable institutions. The deduction can be 50% or 100% of the amount donated, depending on the institution. This deduction is generally available only if the donation is made through non-cash modes (if above ₹2,000).
Permanent Account Number (PAN)
PAN is a unique 10-character alphanumeric identifier issued by the Income Tax Department. It is mandatory for most financial transactions and for filing tax returns. One PAN is allotted per person/entity and remains valid for a lifetime.
Tax Deduction and Collection Account Number (TAN)
TAN is a 10-digit alphanumeric number required by individuals or entities who deduct tax at source (TDS). Deductors must quote TAN in all TDS returns, challans, and certificates. Without TAN, TDS returns cannot be filed.
Annual Information Return (AIR)
AIR is a report submitted by specified entities to the Income Tax Department, containing details of high-value financial transactions undertaken by individuals. It is a crucial tool used by the department for tracking potential tax evasion.
Capital Assets and Gains
Capital Asset
A Capital Asset refers to any property held by a person, whether related to business or not. This includes land, buildings, shares, bonds, and jewelry. Exceptions include stock-in-trade, personal effects (like clothing or furniture), and agricultural land in rural areas.
Capital Expenditure
Capital Expenditure is money spent by a business to acquire or upgrade physical assets (e.g., property, equipment). It is not deducted in the year it is incurred but is capitalized and written off over time through depreciation.
Short Term Capital Gains (STCG)
Short Term Capital Gains are gains arising from the sale of capital assets held for not more than 36 months (or 12 months for listed shares and securities). These gains are often taxed at special rates (e.g., 15% for listed shares under Section 111A).
Transfer and Deemed Transfer
Transfer means the sale, exchange, relinquishment, or extinguishment of rights in a capital asset. Deemed Transfer includes transactions that are not actual sales but are treated as transfers for tax purposes, such as the conversion of a capital asset into stock-in-trade.
Indexed Cost of Acquisition and Improvement
This is the adjusted cost of acquiring or improving a capital asset, calculated to account for inflation using the Cost Inflation Index (CII). This indexing mechanism helps reduce the taxable capital gains.
Formula: Indexed Cost = (Cost × CII of year of sale) / CII of year of purchase.
Notional Cost of Acquisition
When an asset is received as a gift, inheritance, or without cost, the cost incurred by the previous owner is considered the Notional Cost of Acquisition. This estimated value is used for tax purposes when no actual money was paid by the current owner.
Provident Fund
A Provident Fund (PF) is a retirement savings scheme where both the employer and employee contribute monthly. Types include Statutory PF, Recognized PF, and Public PF. Interest earned may be tax-free under certain conditions.