Income-tax I: Concepts, Residential Status, Exemptions, Heads of Income, Deductions and Clubbing

Residence is decided afresh for every previous year on physical presence, not on citizenship or domicile. An individual is resident in India under section 6(1) if in the previous year the individual was in India for 182 days or more, or was in India for 60 days or more in the previous year and 365 days or more in the four preceding years. The 60-day limb is relaxed to 182 days for an Indian citizen leaving India for employment or as a crew member of an Indian ship, and for an Indian citizen or person of Indian origin visiting India — except that a visiting citizen or person of Indian origin whose Indian income exceeds 15 lakh rupees becomes resident at 120 days, and is then treated as resident but not ordinarily resident. Section 6(1A), added in 2020, deems an Indian citizen with Indian income above 15 lakh rupees who is not liable to tax in any other country to be resident — again as not ordinarily resident. A resident is 'ordinarily resident' unless the individual was non-resident in nine of the ten preceding years or was in India for 729 days or less in the seven preceding years; failing either test makes the individual resident but not ordinarily resident. A Hindu undivided family is resident if its control and management is even partly in India, and ordinarily resident by reference to its karta; a company is resident if it is an Indian company or its place of effective management is in India.

Section 10 lists incomes that do not form part of total income at all. The ones the paper asks are agricultural income (10(1)); a member's share of HUF income (10(2)) and a partner's share of firm profit (10(2A)), since the family and the firm are taxed themselves; leave travel concession (10(5)); death-cum-retirement gratuity, exempt fully for government employees and up to 20 lakh rupees for others under the Payment of Gratuity Act (10(10)); commuted pension (10(10A)); leave encashment on retirement up to 25 lakh rupees for non-government employees (10(10AA)); retrenchment compensation (10(10B)); voluntary retirement compensation up to 5 lakh rupees (10(10C)); payments from a statutory or recognised provident fund and the Public Provident Fund (10(11), 10(12)); house rent allowance to the extent of the least of actual HRA, rent paid less 10% of salary, and 50% of salary in the four metros or 40% elsewhere (10(13A)); scholarships (10(16)); awards instituted by government (10(17A)); income of local authorities, certain funds and institutions; and dividend from a domestic company, which was exempt under 10(34) until 31 March 2020 and has been taxable in the shareholder's hands since the dividend distribution tax was abolished. Long-term capital gains on listed equity are exempt up to 1.25 lakh rupees a year under section 112A, a partial exemption rather than a section 10 item.

1. Determine residential status for the previous year, and so the scope of income under section 5.
2. Compute income under each head separately after the exemptions and deductions of that head, and add income clubbed under sections 60 to 64.
3. Set off current losses within and across heads (ss. 70–71) and brought-forward losses (ss. 72–74A); the total is gross total income.
4. Deduct Chapter VI-A — in the old regime; in the new regime only the standard deduction, employer's NPS under 80CCD(2), 80CCH for Agnipath and 80JJAA for new employment survive — to reach total income, rounded to ten rupees.
5. Apply the rates — the slabs for normal income, special rates for capital gains and winnings, and partial integration for agricultural income — then the rebate under section 87A for a resident individual.
6. Add surcharge where total income exceeds 50 lakh rupees (10%, 15% above 1 crore, 25% above 2 crore, 37% above 5 crore in the old regime, capped at 25% in the new; 15% on capital gains and dividend), with marginal relief, then health and education cess at 4% on tax plus surcharge.
7. Less TDS, TCS and advance tax paid; the balance is self-assessment tax under section 140A, payable with interest under sections 234A, 234B and 234C before the return is filed.

Clubbing, sections 60 to 64, taxes in the hands of one person income that legally belongs to another, so that a family cannot lower its total tax by splitting income among members. Section 60 clubs income transferred without transfer of the asset that produces it; section 61 clubs income from a revocable transfer of assets, and section 62 saves transfers irrevocable for the transferee's lifetime or for at least six years. Section 64(1)(ii) clubs remuneration paid to a spouse by a concern in which the individual has a substantial interest — 20% of voting power or profit — unless the spouse has technical or professional qualification and the pay is attributable to it. Section 64(1)(iv) clubs income from assets transferred to a spouse, and 64(1)(vi) to a son's wife, without adequate consideration or in connection with an agreement to live apart; 64(1)(vii) and (viii) cover transfers to any person for the benefit of the spouse or son's wife. Section 64(1A) clubs all income of a minor child with the parent whose total income is greater, except income of a minor with disability and income from the child's own manual work, skill, talent or specialised knowledge; the parent gets an exemption of 1,500 rupees per child under section 10(32). Section 64(2) clubs income from self-acquired property converted into HUF property. Income on the accretions to a transferred asset — interest reinvested, bonus shares — is not clubbed, and the clubbed income keeps its head.