Unit 1: Income tax fundamentals

• Finance Bill: presented with the Union Budget; once passed it becomes the Finance Act, which prescribes rates of income tax for the year, TDS rates, and amendments to the Income-tax Act; Part I of the First Schedule gives rates for the current assessment year.
• CBDT (Central Board of Direct Taxes) administers direct taxes under the Central Boards of Revenue Act, 1963.

• Governing law: Income-tax Act, 1961 (replaced by the Income-tax Act, 2025 from 1 April 2026, which uses the term "tax year" and renumbers sections); annual Finance Act (rates); Income-tax Rules, 1962; CBDT circulars. These notes use the 1961 section numbers followed by the syllabus and most textbooks.
• Article 265: no tax without authority of law; income tax (other than on agricultural income) is in the Union List (Entry 82).

Important definitions

• Income (Section 2(24)): inclusive definition — profits and gains, dividends, voluntary contributions to trusts, perquisites, capital gains, winnings from lotteries, gifts above limits, etc. Income includes illegal income; a receipt from a source is income, a windfall may be casual income.
• Person (Section 2(31)): individual, HUF, company, firm (including LLP), AOP/BOI, local authority, artificial juridical person.
• Assessee (Section 2(7)): a person by whom tax is payable; includes deemed assessee and assessee in default.
• Previous year (Section 3): the financial year (1 April – 31 March) in which income is earned; assessment year (Section 2(9)) — the 12 months starting 1 April following the previous year.
• Exceptions where income of the PY is taxed in the same year: non-residents' shipping business, persons leaving India permanently, AOP formed for a particular event, persons likely to transfer property to avoid tax, discontinued business.

Individual

• The 60-day condition becomes 182 days for an Indian citizen leaving for employment abroad and for Indian citizens/PIOs visiting India (120 days if Indian income exceeds ₹15 lakh, then RNOR).
• Deemed resident (Section 6(1A)): an Indian citizen with Indian income over ₹15 lakh not liable to tax in any other country — treated as RNOR.

HUF, firm and company

• HUF/firm/AOP: resident unless control and management are wholly outside India; an HUF is ROR if the Karta satisfies the additional conditions.
• Company: resident if it is an Indian company or its Place of Effective Management (POEM) is in India.

• Deemed to accrue in India (Section 9): business connection, property or asset in India, salary for services rendered in India, interest, royalty and fees for technical services paid by residents, dividend by an Indian company.

• Agricultural income (Section 2(1A)): rent or revenue from agricultural land in India, income from agricultural operations, income from farm buildings. Partial integration applies for individuals/HUFs when agricultural income exceeds ₹5,000 and non-agricultural income exceeds the basic exemption limit.

New tax regime — slab rates for FY 2025-26 (AY 2026-27)

• Rebate (Section 87A): new regime — up to ₹60,000 for residents with total income up to ₹12 lakh (so no tax up to ₹12 lakh, ₹12.75 lakh for salaried after standard deduction); old regime — up to ₹12,500 for income up to ₹5 lakh.
• Old regime slabs: up to ₹2.5 lakh nil (₹3 lakh senior, ₹5 lakh super senior); ₹2.5–5 lakh 5%; ₹5–10 lakh 20%; above ₹10 lakh 30%.
• Surcharge on high incomes (10%–25% in the new regime) and 4% health and education cess on tax + surcharge.

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

• HRA exemption (old regime): least of — actual HRA; rent paid − 10% of salary; 50% of salary in Delhi, Mumbai, Kolkata, Chennai (40% elsewhere). Salary = basic + DA (forming part) + commission at fixed % of turnover.
• Gratuity, leave encashment, commuted pension — partly exempt.
• Employer's contribution to recognised PF above 12% of salary is taxable; aggregate employer contribution to PF, NPS and superannuation above ₹7.5 lakh is taxable.

• Expected rent: higher of municipal value and fair rent, but limited to standard rent.
• Self-occupied property: annual value nil (up to two houses); interest deduction up to ₹2 lakh (old regime) — usually a loss.
• Pre-construction interest: deducted in 5 equal instalments from the year of completion.
• Arrears and unrealised rent recovered (Section 25A): taxable after a 30% deduction.

• Allowed: rent, repairs, insurance (Sections 30–31); depreciation (Section 32) on WDV of block of assets — half rate if used under 180 days; scientific research (Section 35); bad debts, interest on capital borrowed, employer's PF contributions (Section 36); general deduction for business purposes (Section 37).
• Disallowed: cash payments above ₹10,000 per day (Section 40A(3)); 30% of expense where TDS not deducted (Section 40(a)(ia)); payments to relatives in excess of fair value (Section 40A(2)); taxes, bonus, interest to banks and payments to MSEs beyond time allowed — allowed only on payment (Section 43B); penalties, CSR spending.
• Presumptive taxation: Section 44AD (business, turnover up to ₹2 crore — ₹3 crore if cash receipts ≤ 5%: 8% of turnover, 6% for digital receipts); 44ADA (professionals, receipts up to ₹50 lakh/₹75 lakh: 50%); 44AE (goods carriages).

• Short-term vs long-term: listed equity shares and equity mutual fund units — long-term if held more than 12 months; other assets (land, building, unlisted shares, gold) — more than 24 months.

• Rates for transfers on or after 23 July 2024: STCG on listed equity (Section 111A) 20%; LTCG on listed equity (Section 112A) 12.5% above ₹1.25 lakh; other LTCG (Section 112) 12.5% without indexation (individuals/HUFs may choose 20% with indexation for land/building acquired before 23 July 2024).
• Exemptions: Section 54 (residential house to residential house), 54EC (bonds up to ₹50 lakh within 6 months), 54F (any long-term asset to a residential house), 54B (agricultural land).

• Residual head: dividends, interest on deposits and securities, family pension (deduction one-third or ₹15,000 — ₹25,000 new regime), rent from machinery, casual income (lotteries, crossword puzzles — taxed at 30% flat, no deductions), gifts over ₹50,000 a year from non-relatives (exempt from relatives, on marriage, under a will).
• Deductions (Section 57): commission for collecting dividends, depreciation on let-out machinery, standard deduction on family pension.

Clubbing and aggregation of income (Sections 60–69D)

• Clubbing: income of spouse (from assets transferred without adequate consideration, remuneration from a concern where the individual has substantial interest), son's wife, minor child (₹1,500 exemption per child), revocable transfers — included in the transferor's income.
• Aggregation (deemed income): unexplained cash credits (Section 68), unexplained investments (69), unexplained money (69A), unexplained expenditure (69C) — taxed at 60% + surcharge 25% + cess (Section 115BBE) with no deductions.