Unit 1: Fundamental Concepts
Introduction to Income Tax
Income Tax is a direct tax levied by the government on the income earned by individuals, businesses, and other entities. It is a key source of revenue for government operations and public welfare.
Simply put: Income Tax is the tax you pay on money you earn from various sources like salary, business, or investments.
Cannons (Principles) of Taxation
Adam Smith’s Four Cannons of Taxation:
| Canon | Explanation |
|---|---|
| Equity | Tax should be fair and proportional to the taxpayer’s ability to pay. |
| Certainty | Tax rules, amount, time, and manner should be clear and predictable. |
| Convenience | Tax should be collected at a convenient time and method for the taxpayer. |
| Economy | Cost of collecting tax should be minimal for both government and taxpayer. |
Key Terms in Income Tax
| Term | Meaning |
|---|---|
| Person | Includes individuals, companies, firms, Hindu Undivided Families (HUF), associations of persons (AOPs), and body of individuals (BOIs) liable to pay tax. |
| Assessee | Any person liable to pay tax or other liabilities under the Income Tax Act. |
| Income | Earnings from salary, business/profession, house property, capital gains, and other sources. |
| Previous Year | The financial year in which income is earned. (e.g., FY 2024-25) |
| Assessment Year (AY) | The year following the previous year in which income is assessed and tax is paid. (e.g., AY 2025-26) |
Important Income Tax Dates & Forms
| Event | Due Date (Example: FY 2024-25) | Form |
|---|---|---|
| Filing Income Tax Return for individuals | 31st July 2025 | ITR-1, ITR-2, ITR-3 (based on income source) |
| Tax Audit Filing | 30th September 2025 | ITR-3 or ITR-4 |
| TDS Payment | 7th/30th of next month (depending on type) | Form 26Q / 24Q |
| Advance Tax Payment | 15th June, 15th September, 15th December, 15th March | Form 26AS & challans |
Note: Forms vary based on taxpayer type and source of income.
Residential Status & Tax Incidence
Residential Status determines the scope of taxable income in India.
| Status | Definition | Taxable Income |
|---|---|---|
| Resident & Ordinarily Resident (ROR) | Stayed ≥182 days in India or meet other conditions | Global income is taxable in India |
| Resident but Not Ordinarily Resident (RNOR) | Resident but do not satisfy certain conditions for 2/10 years | Only Indian income and foreign income from business controlled in India is taxable |
| Non-Resident (NR) | Does not satisfy residential conditions | Only income earned or received in India is taxable |
Individual Income Exempted from Tax
Certain incomes are fully or partially exempt from income tax under the Income Tax Act, Section 10:
| Income Type | Exemption Details |
|---|---|
| Agricultural Income | Fully exempt |
| Gifts from Relatives | Fully exempt under specific conditions |
| Interest from PPF | Fully exempt |
| Certain allowances (House Rent Allowance, Transport Allowance) | Partially exempt |
| Scholarships | Fully exempt if used for education purposes |
Summary Table
| Concept | Explanation |
|---|---|
| Income Tax | Tax on income earned by individuals or entities |
| Cannons of Taxation | Equity, Certainty, Convenience, Economy |
| Person & Assessee | Entities liable to pay tax |
| Income, PY & AY | Income earned, financial year of earning, year of assessment |
| Important Dates & Forms | Return filing, TDS, tax audit, advance tax deadlines |
| Residential Status | ROR, RNOR, NR – determines taxable scope |
| Exempted Income | Agricultural income, PPF interest, scholarships, allowances |
In Short
Income Tax is a direct tax on earnings, guided by principles of fairness and efficiency.
Understanding residential status, assessment years, exemptions, and important dates/forms is crucial for compliance and effective tax planning.