Isabella Carter
Taxation in India has a long history, with the earliest archaeological evidence of the practice found in an inscription on Ashoka's pillar at Lumbini. The Indian government taxes the income of individuals, Hindu Undivided Families (HUFs), companies, firms, LLPs, associations, bodies, local authorities, and any other juridical persons. The amount of tax levied on each individual differs according to their income, with a progressive tax rate in place. In this context, it is important to understand what constitutes income in India for tax purposes.
What Constitutes as Income in India for Tax Purposes
| Characteristics | Values |
|---|---|
| Salary | Wages, basic, dearness allowance, annuity, gratuity, advance of salary, allowances, commission, perquisites in lieu of or in addition to salary, and retirement benefits |
| Income from House Property | Residential or commercial property owned by an individual; interest from a home loan is considered negative income |
| Income from Business or Profession | Profits and gains from business or profession; the chargeable income is the difference between income received and expenses incurred |
| Income from Capital Gains | Profit or gain from the transfer of capital assets held as investments (e.g., house, jewellery) |
| Income from Other Sources | Any income that does not fall under the previous four categories |
| Agricultural Income | Rent or revenue from land used for agricultural purposes, income from agricultural operations, income from a farmhouse, income from saplings or seedlings grown in a nursery |
| Business Income | If a taxpayer has business income, they must continue with the chosen tax regime for all subsequent financial years, with only a one-time change permitted |
| Rental Income | The amount of rent received in arrears or unrealised rent is taxable in the year it is received or realised; separate property taxes are levied as per municipal tax laws |
| Income Tax Rates | Progressive tax rates, i.e., the rate of tax increases with the increase in the assessee's income |
| Residential Status | RORs, RNORs, and NRs have different tax liabilities based on their residential status and the source of their income |
| Surcharge | A surcharge is levied when the total income of individuals exceeds INR 5 million; the surcharge rate is capped at 15% for long-term capital gains |
| Health and Education Cess | A health and education cess of 4% is levied on the income tax and surcharge (if applicable) |
| Tax Rebate | Resident individuals with a total income of up to INR 500,000 are eligible for a tax rebate of the lower amount between the income tax or INR 12,500 |
| Tax Treaties | Foreign citizens employed by foreign enterprises and not present in India for more than 90 days in a tax year may be exempt from taxation under certain conditions |
| Tax Calculation | The official website of Income Tax India provides a tax calculator to help taxpayers calculate their tax liability |
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What You'll Learn
Salary income
Taxation in India is governed by Entry 82 of the Union List of the Seventh Schedule to the Constitution of India, which empowers the central government to tax non-agricultural income. Agricultural income is tax-exempt and is defined in Section 10(1) of the Income-tax Act, 1961.
In India, income tax is a key source of government funding and is the central government's largest revenue generator. The total tax revenue increased from ₹1,392.26 billion (US$16 billion) in 1997–98 to ₹5,889.09 billion (US$69 billion) in 2007–08. In 2018–19, direct tax collections reported by the CBDT were about ₹11.17 lakh crore (₹11.17 trillion).
The scope of taxation in India differs according to the residential status of an individual. RORs are taxed on their worldwide income, whereas RNORs and NRs are taxed only on income that accrues/arises, is deemed to accrue/arise, or is received or deemed to be received in India. RNOR and NR individuals are not taxed on income earned outside of India.
In India, salaried individuals are subject to income tax on their earnings, and the tax liability is determined based on their income level and the applicable tax regime. The tax slabs for FY 2025-26 provide a zero-tax liability for those with an income of up to ₹12,00,000. For income up to ₹4,00,000, the tax rate is nil, but a rebate of ₹60,000 is allowed for income up to ₹12,00,000, resulting in a nil tax liability for this income bracket.
It is important to note that the definition of salary income includes pensions. Pensions payable by an employer or previous employer to an employee are taxed under salary income. However, pensions paid by a life insurance company are taxed under the category of "Other sources". Additionally, allowances provided to employees for specific purposes are generally considered part of their salary income and are taxable unless specifically exempted. Examples include the House Rent Allowance (HRA) and the Leave Travel Allowance (LTA).
Arrears of salary are also taxable, and employees can claim relief under Section 89 in this regard. Bonuses, performance incentives, and variable pay are fully taxable as well. Salaried employees can avail of certain exemptions, such as the Leave Travel Allowance for trips within India, but these are usually limited to the old tax regime.
The standard deduction available for salaried individuals under the new tax regime is Rs. 75,000, while it is Rs. 50,000 under the old regime. Furthermore, employees may receive perquisites or benefits-in-kind, such as rent-free accommodation or vehicles, which can be taxable or non-taxable depending on their nature.
In summary, salary income in India encompasses a wide range of monetary and non-monetary components, and the taxation of these elements is governed by the applicable tax laws and regulations.
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Income from house property
In India, income tax law is governed by Entry 82 of the Union List of the Seventh Schedule to the Constitution of India, which empowers the central government to tax non-agricultural income. Agricultural income is tax-exempt and is defined in Section 10(1) of the Income-tax Act, 1961. Personal tax depends on an individual's residential status.
The Income Tax Act does not differentiate between commercial and residential property. A self-occupied house property is one that is used for one's own residential purposes and can include a property occupied by the taxpayer's family, including parents, spouse, and children. A vacant house property can also be considered self-occupied. Prior to FY 2019-20, if a taxpayer owned more than one self-occupied house property, only one was considered self-occupied, and the remaining were assumed to be let out. Now, the annual value of up to two house properties shall be nil if the owner occupies the house as their residence or cannot occupy it for any reason.
If a house property is rented for the whole or part of the year, it is considered a let-out house property. If a taxpayer has more than two house properties, the excess properties are deemed to be let out, and the annual value of such properties will be included in their taxable income, whether or not they are actually let out. The gross annual value (GAV) of a let-out property is the rent received, while for a deemed to be let-out property, the GAV is the reasonable rent of a similar place.
Municipal taxes are the annual amount paid to the municipal corporation of the area and are deducted to ascertain the actual taxable income. The taxpayer can claim these deductions under section 24 of the Income Tax Act, 1961.
In India, rental income from a property is subject to taxation based on an individual's applicable tax slab rate. The amount of rent received in arrears or the amount of unrealised rent realised subsequently by a taxpayer will be charged to income tax in the tax year in which such rent is received or realised, whether the taxpayer is the owner of the property or not in that tax year. 30% of the arrears of rent or the unrealised rent received/realised subsequently by the taxpayer will be allowed as a deduction.
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Business or profession income
Taxation for business and profession in India is a complex process that involves maintaining complex accounts, conducting audits, and complying with various regulatory requirements. The Income Tax Act does not provide clear guidelines for categorising services under business or profession. However, it is important to note that the definitions of 'business' and 'profession' are inclusive.
The basic distinction between business and profession has ramifications on taxation and Deduction of Tax at Source (TDS) on the assessee. Income from services provided by professionals is considered 'income from profession', while income from services provided by non-professionals is considered 'income from business'. For example, accounting services would constitute 'business income' for Ms. Sita, whereas for Ms. Padma, a professional accountant, they would constitute 'income from profession'.
The concept of presumptive taxation has been introduced to simplify the process and reduce the burden on small enterprises. This allows eligible businesses and professionals to calculate their profits as a percentage of their turnover, making it easier to compute taxes and increase earnings. Presumptive taxation is applicable when the turnover or income exceeds certain limits, and maintaining books of accounts as per the Income Tax Act becomes mandatory.
In terms of tax rates, individuals with business or professional income are subject to the Alternative Minimum Tax (AMT), which is computed on the adjusted total income. The taxpayer is liable to pay tax at a rate of 18.5% plus surcharge and health and education cess on the adjusted total income. Additionally, if the taxpayer has business income, their intended tax regime must be communicated to the employer, who will then compute the total income and deduct tax accordingly.
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Capital gains income
In India, any profit or gain from the sale of a 'capital asset' is considered 'income from capital gains'. This includes the sale of real estate, stocks, bonds, and other assets. There are two types of capital gains: Short-Term Capital Gains (STCG) and Long-Term Capital Gains (LTCG). The holding period for most assets to be considered LTCG is more than 24 months, while for stocks and securities, it is more than 12 months.
Land, building, house property, vehicles, patents, trademarks, leasehold rights, machinery, and jewellery are all examples of capital assets. Rights in an Indian company, management or control rights, and any other legal rights are also considered capital assets. However, agricultural land in a rural area is not considered a capital asset, and gains from its sale are not subject to tax. Additionally, capital gains on compensation received for the compulsory acquisition of urban agricultural land are tax-exempt under Section 10(37) of the Income Tax Act.
Capital gains are taxable in the year of the transfer of the capital asset. The tax rate on long-term capital gains for both financial and non-financial assets has been reduced from 20% to 12.5% as per the 2024 budget. However, the indexation benefit for the sale of long-term assets has been removed. As a result, any sale of long-term assets after July 23, 2024, will be taxed at 12.5% without the indexation benefit. It is important to note that the tax treatment of capital gains may vary depending on the specific circumstances and the taxpayer's residential status.
In terms of exemptions, if you cannot reinvest capital gains into a new property immediately, you can deposit the gains into a Capital Gains Account Scheme (CGAS). However, the amount must be reinvested in a new house within 2 years to maintain the exemption. Additionally, there are specific sections in the tax code, such as Section 54G, 54GA, and 54GB, that provide exemptions on capital gains under certain conditions, such as the transfer of assets in specific scenarios or the use of gains to finance eligible startup companies.
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Agricultural income
In India, agricultural income is defined as any income earned from agriculture or allied activities, including farming, horticulture, and animal husbandry. This type of income is given special consideration under the Income Tax Act, 1961, and is
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