Unit 1: Introduction to taxation & income from salaries

A tax is a compulsory contribution levied by the government on persons, income, goods or services without any direct return (quid pro quo) to the taxpayer.

• Article 265: no tax shall be levied or collected except by authority of law.
• Article 246 and the Seventh Schedule: divide taxing powers — Union List (income tax other than on agricultural income, customs, corporation tax), State List (tax on agricultural income, land revenue, stamp duty, liquor), and the Concurrent List.
• Article 246A (added by the 101st Amendment, 2016) gives both Parliament and state legislatures power to levy GST; Article 279A creates the GST Council.
• Article 270: distribution of central taxes between the Union and states (Finance Commission).

Income tax framework

• Governed by the Income-tax Act, 1961, the annual Finance Act, Income-tax Rules and CBDT circulars. The Income-tax Act, 2025 replaces the 1961 Act from 1 April 2026 with renumbered sections and the term "tax year"; these notes use the 1961 section numbers that the syllabus and most textbooks follow.
• Previous year (PY): the financial year in which income is earned (1 April – 31 March). Assessment year (AY): the year following the PY in which it is assessed.
• Person (Section 2(31)): individual, HUF, company, firm, AOP/BOI, local authority, artificial juridical person.

Agricultural income (Section 2(1A))

• Rent or revenue from land in India used for agriculture.
• Income from agricultural operations (cultivation, processing to make produce marketable).
• Income from a farm building used for agriculture.
• Agricultural income is exempt under Section 10(1), but used for partial integration (rate purposes) when non-agricultural income exceeds the basic exemption and agricultural income exceeds ₹5,000.

Residential status of an individual (Section 6)

• Agricultural income — 10(1).
• Share of profit from a firm — 10(2A).
• Leave travel concession — 10(5) (within limits).
• Gratuity — 10(10); commuted pension — 10(10A); leave encashment on retirement — 10(10AA).
• Interest on PPF — 10(11); Sukanya Samriddhi — 10(11A).
• Maturity proceeds of life insurance — 10(10D) (subject to premium conditions).
• Scholarships for education — 10(16).
• HRA — 10(13A) (old regime only).

Salary is taxable when there is an employer–employee relationship. Taxable on due or receipt basis, whichever is earlier.

Allowances

• Fully taxable: dearness allowance, city compensatory allowance, overtime, tiffin, servant allowance.
• Partly exempt: HRA — least of (a) actual HRA, (b) rent paid − 10% of salary, (c) 50% of salary in metros (Delhi, Mumbai, Kolkata, Chennai) or 40% elsewhere; children education allowance (₹100 per month per child, max 2).
• Fully exempt: allowances to UN employees, judges' allowances, foreign allowances to government employees abroad.

Perquisites (Section 17(2))

• Taxable for all: rent-free accommodation, concession in rent, any obligation of the employee paid by the employer.
• Taxable only for specified employees: free gas, electricity, water; free education; motor car for personal use.
• Tax-free: medical treatment in employer's hospital, refreshments during working hours, telephone/mobile, employer's contribution to staff group insurance.

Standard deduction and other deductions

• Standard deduction: ₹50,000 (old regime) / ₹75,000 (new regime from AY 2025-26).
• Professional tax paid (old regime).