Basic Concepts & Constitutional Framework
Income tax is a direct tax levied on the total income of a previous year at rates prescribed by
the annual Finance Act or the Income Tax Act, 1961.
● Entry 82 of List I (Union List): Grants Parliament the power to levy taxes on income
other than agricultural income.
● Definition of Person [Sec 2(31)]: Includes Individuals, HUFs, Companies, Firms
(including LLPs), AOPs/BOIs, Local Authorities, and Artificial Juridical Persons.
● Assessment Year [Sec 2(9)] vs. Previous Year [Sec 3]: Income earned in the Previous
Year (1st April to 31st March) is assessed to tax in the immediately following Assessment
Year.
● Exceptions to the Rule: Income of non-residents from shipping business (Sec 172),
persons leaving India permanently (Sec 174), association or body formed for a short
duration (Sec 174A), persons likely to transfer property to evade tax (Sec 175), and
discontinued business (Sec 176) are taxed in the same year they are earned.
Tax Regime Comparison (FY 2025-26 / AY 2026-27)
Taxpayers can choose between the Default Tax Regime [Sec 115BAC] (lower slabs but fewer
exemptions) and the Old Tax Regime (higher slabs but allows Chapter VI-A deductions).
Default Tax Regime [Sec 115BAC] Slabs
● Up to ₹3,000,000: Nil
● ₹3,000,001 to ₹7,000,000: 5%
● ₹7,000,001 to ₹1,000,000: 10%
● ₹1,000,001 to ₹1,200,000: 15%
● ₹1,200,001 to ₹1,500,000: 20%
● Above ₹1,500,000: 30%
● Rebate u/s 87A: Tax rebate up to 100% of tax if total income does not exceed ₹700,000.
Old Tax Regime Slabs (General Individual < 60 years)
● Up to ₹250,000: Nil
● ₹250,001 to ₹500,000: 5%
● ₹500,001 to ₹1,000,000: 20%
● Above ₹1,000,000: 30%
● Rebate u/s 87A: Tax rebate up to ₹12,500 if total income does not exceed ₹500,000.
Residential Status & Scope of Total Income [Sec 6]
Residential status must be determined independently for every previous year.
┌──────────────────────────────┐
│ Is the Individual Resident? │
└──────────────┬───────────────┘
│
┌───────────────────────┴───────────────────────┐
▼ ▼
YES [Satisfies any 1 Basic Condition] NO [Satisfies
None]
│ │
▼ ▼
┌─────────────────────────────────┐
┌──────────────────┐
│ Determine if ROR or RNOR │ │ Non-Resident
│
└────────────────┬────────────────┘ │ (NR)
│
│
└──────────────────┘
┌─────────┴─────────┐
▼ ▼
ROR RNOR
[Satisfies BOTH [Fails 1 or BOTH
Add. Conditions] Add. Conditions]
1. Basic Conditions [Sec 6(1)]
● Condition A: Physical stay in India during the previous year $\ge$ 182 days.
● Condition B: Physical stay in India during the previous year $\ge$ 60 days AND $\ge$
365 days during the 4 preceding previous years.
● Note: The 60-day period is extended to 182 days for an Indian citizen leaving India for
employment or as a crew member of an Indian ship, or an Indian citizen/PIO visiting India
whose total Indian income $\le$ ₹15 Lakhs. If Indian income > ₹15 Lakhs, it is substituted
with 120 days.
2. Deemed Resident [Sec 6(1A)]
An Indian citizen with Indian-sourced income > ₹15 Lakhs is deemed a resident if they are not
liable to tax in any other country by reason of domicile/residence. A deemed resident is always
a Resident but Not Ordinarily Resident (RNOR).
3. Additional Conditions [Sec 6(6)]
● Resident in India in at least 2 out of 10 preceding previous years.
● Physical stay in India $\ge$ 730 days during the 7 preceding previous years.
4. Incidence of Tax Matrix [Sec 5]
Nature of Income ROR RNOR NR
Received / Deemed Taxable Taxable Taxable
to be received in
India
Accrues / Arises / Taxable Taxable Taxable
Deemed to accrue or
arise in India
Earned outside India Taxable Taxable Not Taxable
from a business
controlled from India
Earned outside India Taxable Not Taxable Not Taxable
from a business
controlled outside
India
In-Depth Breakdown of the 5 Heads of Income
┌───────────────────────────────┐
│ Gross Total Income │
└───────────────┬───────────────┘
│
┌──────────────┬───────────────┼───────────────┬──────────────┐
▼ ▼ ▼ ▼
▼
Salaries House Property PGBP Capital Gains
IFOS
[Sec 15-17] [Sec 22-27] [Sec 28-44DB] [Sec 45-55A] [Sec
56-59]
Head I: Salaries [Sec 15 - 17]
● Employer-Employee Relationship: Essential to tax income under this head.
Agent-principal or director-company relationships require careful review (directors' sitting
fees go under IFOS).
● Gratuity [Sec 10(10)]:
○ Government Employees: Fully exempt.
○ Covered under Payment of Gratuity Act, 1972: Exempt up to the minimum of: (1)
Actual received, (2) ₹2,000,000, (3) $15/26 \times \text{Last drawn salary} \times
\text{Completed years of service or part exceeding 6 months}$.
● House Rent Allowance [Sec 10(13A)]: Minimum of the following is exempt:
1. Actual HRA received.
2. Rent Paid minus $10\%$ of Salary.
3. $50\%$ of salary (Metro cities) or $40\%$ of salary (Non-metro cities).
○ Salary = Basic + DA (forming part of retirement benefits) + Commission (fixed % on
turnover).
● Perquisite Valuation [Sec 17(2)]:
○ Rent-Free Accommodation (RFA): Owned by employer in cities with population >
25 Lakhs is valued at $10\%$ of salary (under default tax regime) or $15\%$ of
salary (under old tax regime).
Head II: Income from House Property [Sec 22 - 27]
● Basis of Charge: Property must consist of any buildings or lands appurtenant thereto,
and the assessee must be the legal or deemed owner.
● GAV Computation (Let-Out Property):
$$\text{Expected Rent (ER)} = \text{Higher of Municipal Value (MV) or Fair Rent (FR), but
restricted to Standard Rent (SR)}$$
$$\text{Gross Annual Value (GAV)} = \text{Higher of ER or Actual Rent
Received/Receivable (ARR)}$$
○ If ARR is lower than ER due to vacancy, then ARR is taken as GAV.
● Deductions u/s 24:
○ Sec 24(a): $30\%$ of Net Annual Value (NAV) as a statutory deduction.
○ Sec 24(b): Interest on housing loan. For self-occupied property, maximum
deduction is ₹30,000 (repair/renewal) or ₹200,000 (acquisition/construction
completed within 5 years). No deduction for self-occupied property interest under
the default tax regime u/s 115BAC.
Head III: Profits and Gains of Business or Profession (PGBP) [Sec 28 - 44DB]
● Depreciation [Sec 32]: Allowed only on the WDV of a "Block of Assets".
$$\text{Closing WDV} = \text{Opening WDV} + \text{Actual Cost of Assets Acquired} -
\text{Moneys Payable for Assets Sold/Demolished}$$
○ If an asset is put to use for < 180 days in the year of acquisition, depreciation is
restricted to $50\%$ of the normal rate.
● Admissible Deductions:
○ Sec 36(1)(iii): Interest paid on borrowed capital for business purposes.
○ Sec 37(1): General commercial expediency expenditures (must be revenue in
nature, incurred fully for business, and not illegal).
● Expressly Disallowed Expenditures:
○ Sec 40A(3): Payment made to a person in a single day via cash/bearer cheque
exceeding ₹10,000 ($₹35,000$ for plying/leasing goods carriages) is $100\%$
disallowed.
○ Sec 43B: Certain expenses (taxes, bank interest, bonus) are allowed only on an
actual payment basis on or before the due date for filing the return of income.
● Presumptive Taxation Schemes:
○ Sec 44AD: Applicable to Resident Individuals/HUFs/Firms with turnover $\le$ ₹2
Crore (increased to Substituted ₹3 Crore if cash receipts $\le 5\%$). Presumptive
profit is $8\%$ of turnover ($6\%$ if received digitally).
○ Sec 44ADA: Applicable to specified professionals with gross receipts $\le$ ₹50
Lakhs (increased to Substituted ₹75 Lakhs if cash receipts $\le 5\%$).
Presumptive profit is $50\%$ of gross receipts.
Head IV: Capital Gains [Sec 45 - 55A]
● Capital Asset [Sec 2(14)]: Excludes stock-in-trade, personal movable effects, and rural
agricultural land.
● Period of Holding Slabs:
○ 12 Months: Listed equity shares, units of equity-oriented mutual funds,
zero-coupon bonds.
○ 24 Months: Unlisted shares, land, or building.
○ 36 Months: Other assets (Debt mutual funds, unlisted securities other than shares).
● Computation of Long-Term Capital Gains (LTCG):
$$\text{LTCG} = \text{Full Value of Consideration} - \text{Transfer Expenses} -
\text{Indexed Cost of Acquisition (ICOA)} - \text{Indexed Cost of Improvement}$$
$$\text{ICOA} = \text{Cost of Acquisition} \times \frac{\text{CII of Year of
Transfer}}{\text{CII of Year of Acquisition / FY 2001-02}}$$
● Exemptions (Capital Gains Reinvestment):
○ Sec 54: Capital gains from a residential house reinvested into up to 2 residential
houses in India (Max exemption capped at ₹10 Crore).
○ Sec 54EC: Capital gains from land/building invested within 6 months into
NHAI/REC bonds (Max investment limit of ₹50 Lakhs).
Head V: Income from Other Sources (IFOS) [Sec 56 - 59]
● Dividend Income: Taxable in the hands of shareholders at regular slab rates.
● Gift Taxation Rules [Sec 56(2)(x)]:
○ Sum of Money: Received without consideration exceeding ₹50,000 in aggregate
$\rightarrow$ whole amount is taxable.
○ Immovable Property: Stamp duty value exceeds purchase consideration by more
than the higher of ₹50,000 or $10\%$ of consideration $\rightarrow$ differential
amount is taxable.
○ Exceptions: Gifts received from relatives, on marriage, under a will, or from local
authorities are fully exempt.
Clubbing of Income, Set-Off & Carry Forward
Clubbing of Income [Sec 60 - 65]
● Sec 61: Revocable transfer of assets $\rightarrow$ Income taxable to the transferor.
● Sec 64(1)(iv): Direct or indirect transfer of assets to spouse without adequate
consideration $\rightarrow$ Income from asset clubbed with transferor.
● Sec 64(1A): Income of minor child clubbed with parent earning higher total income. An
exemption of up to ₹1,500 per minor child is allowed under Sec 10(32) (under old
regime).
Set-Off and Carry Forward Order of Priority
1. Intra-source set-off within the same head (Sec 70).
2. Inter-head set-off across different heads (Sec 71) in the same assessment year.
3. Carry forward and set-off of unabsorbed losses against future income (Sec 72-74A).
┌───────────────────────────────┐
│ Loss Incurred in PY │
└───────────────┬───────────────┘
│
▼
┌───────────────────────────────┐
│ Try Intra-Head Set-off? │
└───────────────┬───────────────┘
│
┌──────────────────┴──────────────────┐
▼ ▼
SUCCESS FAILS
│ │
▼ ▼
[Incorporate remaining Try Inter-Head
Set-off
income to GTI] (Subject to
restrictions)
│
┌─────────────────┴─────────────────┐
▼
▼
SUCCESS
FAILS
│
│
▼
▼
[Incorporate remaining
Carry Forward Loss to Next AY
income to GTI]
(Check time limits table)
Deductions From Gross Total Income (Chapter VI-A)
These deductions cannot exceed Gross Total Income excluding LTCG u/s 112, LTCG u/s 112A,
and STCG u/s 111A. They are completely disallowed if opting for the default tax regime u/s
115BAC.
● Sec 80C: Deductions for LIC premiums, PPF contributions, ELSS, principal repayment of
housing loan, tuition fees. Maximum cumulative limit: ₹150,000.
● Sec 80D: Medical Insurance Premiums paid via non-cash mode:
○ Self, Spouse, Dependent Children: ₹25,000 (increases to ₹50,000 if any member is
a Senior Citizen).
○ Parents: Additional ₹25,000 (increases to ₹50,000 if parents are Senior Citizens).
● Sec 80E: Interest on loans taken for higher education. Allowed for a maximum of 8
consecutive years or until interest is paid in full, whichever comes first. No monetary
ceiling.
● Sec 80G: Donations to specified funds. Categorized into:
○ $100\%$ deduction without qualifying limit (e.g., PM National Relief Fund).
○ $50\%$ deduction without qualifying limit (e.g., Jawaharlal Nehru Memorial Fund).
○ $100\%$ or $50\%$ deductions subject to a qualifying limit of $10\%$ of Adjusted
Gross Total Income.
Advance Tax, TDS, TCS & Return Filing Rules
Advance Tax Liability [Sec 207 - 211]
Applicable to all assessees whose estimated tax liability after deducting TDS/TCS $\ge$
₹10,000. Senior citizens ($60+$ years) not running a business or profession are exempt.
Due Dates & Installments:
● By 15th June: $\ge 15\%$ of advance tax liability.
● By 15th September: $\ge 45\%$ of advance tax liability.
● By 15th December: $\ge 75\%$ of advance tax liability.
● By 15th March: $100\%$ of advance tax liability.
Vital Tax Deducted at Source (TDS) Provisions
Section Nature of Payer Type Threshold Limit TDS Rate
Payment
Sec 192 Salary Income Any Employer As per Average Rate
applicable Slab
Rates
Sec 194A Interest other Bank / Post ₹40,000 $10\%$
than interest on Office (₹50,000 for
securities Senior Citizens)
Sec 194C Payment to Any Person ₹30,000 (Single) $1\%$
Contractors / ₹100,000 (Indiv/HUF)
(Aggregate) $2\%$ (Others)
Sec 194H Commission or Any Person ₹15,000 $5\%$
Brokerage (except small
Indiv/HUF)
Sec 194I Rent (Land, Any Person ₹240,000 $10\%$ ($2\%$
Building, (except small for
Furniture) Indiv/HUF) Plant/Machinery)
Sec 194J Fees for Any Person ₹30,000 $10\%$ ($2\%$
Professional / (except small for FTS or
Technical Indiv/HUF) royalty)
Services
Return Filing Guidelines [Sec 139(1)]
Filing returns is mandatory if total income before claiming Chapter VI-A deductions exceeds the
basic exemption limit.
Mandatory Return Filing Due Dates:
● 31st July of the Assessment Year: For individuals, HUFs, and firms whose accounts are
not required to be audited.
● 31st October of the Assessment Year: For companies, or any corporate/non-corporate
assessee whose accounts must be audited under the Income Tax Act or any other law.
If you'd like, let me know:
● Which specific practical adjustment (like computing GAV with vacancy or WDV block
changes) you'd like to work through?
● If you want to solve some examination-style numerical problems on any head?
● If you want a list of important sections for quick revision?