Income Tax Act 1961: Key Concepts and Rules

Posted on Dec 14, 2024 in Economy

Short-Term vs. Long-Term Capital Assets

Here’s a 6-mark answer distinguishing between Short-term Capital Assets and Long-term Capital Assets as per the Income Tax Act, 1961:

In conclusion, the main difference between Short-term Capital Assets and Long-term Capital Assets is the period of holding. The taxability and tax rates also differ between the two.

Profit in Lieu of Salary

Here’s a 6-mark answer with short notes on “Profit in lieu of Salary”:

• Definition: Profit in lieu of salary refers to the profit or benefit received by an employee in lieu of or in addition to their regular salary.
• Examples:
  • Commission or bonus received by an employee
  • Profit-sharing ratio received by a partner
  • Remuneration received by a director
• Taxability: Profit in lieu of salary is taxable under the head “Salaries” (Section 17 of the Income Tax Act, 1961).
• Deductions: Deductions under Section 16 of the Income Tax Act, 1961, are allowed from profit in lieu of salary.
• TDS: Tax Deducted at Source (TDS) is applicable on profit in lieu of salary (Section 192 of the Income Tax Act, 1961).

Definition of a Capital Asset

Here’s a 6-mark answer defining a capital asset:

According to Section 2(14) of the Income Tax Act, 1961, a capital asset is defined as:

“Property of any kind held by an assessee, whether or not connected with his business or profession, but does not include:

• Stock-in-trade, raw materials, and consumable stores.
• Personal effects, that is, movable property (including wearing apparel and furniture) held for personal use by the assessee or any member of his family dependent on him.
• Agricultural land situated in a rural area.
• 6 1/2 per cent Gold Bonds, 1977, or 7 per cent Gold Bonds, 1980, or National Defence Gold Bonds, 1980, issued by the Central Government.
• Special Bearer Bonds, 1991, issued by the Central Government.”

Inclusions

Capital assets include:

• Immovable property, such as land and buildings.
• Movable property, such as shares, debentures, and jewelry.
• Intangible assets, such as patents, copyrights, and trademarks.
• Gold and silver, including ornaments and bullion.

In conclusion, a capital asset is any property held by an assessee, whether connected to their business or profession or not, excluding certain specified assets.

Rules for Determining Residential Status of an Individual

Here are the rules relating to the Residential Status of an Individual as per the Income Tax Act, 1961:

1. Resident: An individual is considered a resident in India if they satisfy any of the following conditions:
   1. They have been in India for at least 182 days in the previous year.
   2. They have been in India for at least 365 days in the preceding four years and at least 60 days in the previous year.
2. Ordinarily Resident: An individual is considered ordinarily resident in India if they satisfy the following conditions:
   1. They have been a resident in India for at least two out of the ten preceding years.
   2. They have been in India for at least 730 days in the preceding seven years.
3. Not Ordinarily Resident: An individual is considered not ordinarily resident in India if they do not satisfy the conditions mentioned above.
4. Non-Resident: An individual is considered a non-resident in India if they do not satisfy any of the conditions mentioned above.

Additional Conditions

1. Stay in India: If an individual stays in India for more than 182 days in a year, they will be considered a resident unless they can prove that their stay in India was for a temporary purpose.
2. Intent to Stay: An individual’s intention to stay in India can also be a factor in determining their residential status. If an individual intends to stay in India for an indefinite period, they may be considered a resident.

In conclusion, the residential status of an individual is determined based on their physical presence in India, their intention to stay, and other factors. Understanding one’s residential status is essential to comply with tax laws and regulations.

Residential Status and Incidence of Tax in India

Here’s a 6-mark answer note on Residential Status and Incidence of Tax in India:

Residential status plays a crucial role in determining the incidence of tax in India. The Income Tax Act, 1961, categorizes individuals into three types of residential status:

1. Resident (R): Taxed on global income, including income earned in India and abroad.
2. Non-Resident (NR): Taxed only on Indian income, including income earned or accrued in India.
3. Not Ordinarily Resident (NOR): Taxed on Indian income, but with some exemptions and reliefs.

Incidence of Tax

The incidence of tax depends on the residential status of the individual:

• Residents are taxed on their global income, including income from:
  • Salary
  • Business or profession
  • Capital gains
  • Other sources
• Non-residents are taxed only on their Indian income, including:
  • Salary earned in India
  • Business or professional income earned in India
  • Capital gains from the sale of Indian assets
  • Other Indian income

In conclusion, residential status is a critical factor in determining the incidence of tax in India. Understanding one’s residential status is essential to comply with tax laws and regulations.

Setting Off Losses Against Salary Income in India

In India, under the Income Tax Act, 1961, certain losses can be set off against income from salary. Here are some of the losses that can be set off:

Specified Business Losses

1. Business loss: Losses incurred in a business or profession can be set off against salary income.
2. Speculative business loss: Losses incurred in speculative businesses, such as trading in shares or commodities, can be set off against salary income.

Specified Capital Losses

1. Short-term capital loss: Losses incurred from the sale of capital assets, such as shares, mutual funds, or real estate, held for less than 36 months can be set off against salary income.
2. Long-term capital loss: Losses incurred from the sale of capital assets held for more than 36 months can be set off against long-term capital gains.

Other Losses

1. Loss from renting out property: Losses incurred from renting out property, such as a house or a commercial building, can be set off against salary income.
2. Loss from other sources: Losses incurred from other sources, such as a partnership firm or a Hindu Undivided Family (HUF), can be set off against salary income.

Important Notes

1. Set off limits: The total loss that can be set off against salary income is limited to ₹2 lakhs (₹200,000) in a financial year.
2. Carry forward of losses: Unabsorbed losses can be carried forward for eight assessment years and set off against income from the same source.
3. Documentation: It is essential to maintain proper documentation, such as books of accounts, invoices, and bank statements, to support the losses claimed.

Please consult a tax professional or chartered accountant to ensure you are eligible to set off losses against your salary income and to understand the specific rules and regulations applicable to your situation.