Income tax is one of the most important sources of revenue for the Indian government. It is levied on the income earned by individuals, companies, and other entities during a financial year. In this unit, we’ll break down the key concepts, rules, and calculations that form the foundation of the Indian income tax system.
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Key Concepts in Income Tax
1. Assessee
An assessee is a person or entity who is liable to pay income tax under the Income Tax Act, 1961.
It includes:
Individuals
Hindu Undivided Families (HUFs)
Companies
Firms / LLPs
Associations of Persons (AOP)
Local authorities
2. Income
For tax purposes, income means all monetary gains, not just salary. It includes:
Salary and pension
Business or professional profits
Capital gains
Rental income from property
Income from other sources (e.g., interest on savings, dividends)
3. Previous Year
The previous year is the financial year in which the income is earned. In India, the financial year runs from 1st April to 31st March.
4. Assessment Year (AY)
The assessment year is the year following the previous year in which the income is assessed and taxed.
Example: Income earned in 2024–25 (previous year) is taxed in 2025–26 (assessment year).
Residential Status and Tax Incidence
Your residential status determines how your income is taxed in India. The Income Tax Act classifies individuals into:
Resident and Ordinarily Resident (ROR) – Taxed on global income (income earned in India and abroad).
Resident but Not Ordinarily Resident (RNOR) – Taxed on income earned in India and income from business/profession controlled from India.
Non-Resident (NR) – Taxed only on income earned or received in India.
Tax Incidence refers to the extent to which income is taxable in India depending on residential status:
| Residential Status | Income Earned in India | Income Earned Abroad |
|---|---|---|
| ROR | Taxable | Taxable |
| RNOR | Taxable | Partially taxable |
| NR | Taxable | Not taxable |
Section 10 of the Income Tax Act specifies incomes that are fully or partially exempt from tax. Some common exemptions are:
Agricultural income (Section 10(1))
House rent allowance (HRA) [Section 10(13A)]
Leave travel concession (LTC) [Section 10(5)]
Scholarships [Section 10(16)]
Certain allowances for government employees
Dividend income from domestic companies (up to limits)
Gross Total Income (GTI) and Total Income
The calculation of taxable income involves several steps:
Step 1: Classify Income Under Five Heads
Income from Salary
Income from House Property
Profits and Gains of Business or Profession
Capital Gains
Income from Other Sources
Step 2: Add All Incomes → Gross Total Income (GTI)
GTI = Total of all incomes under the five heads before deductions.
Step 3: Deductions Under Chapter VI-A
These include deductions under Sections 80C to 80U, such as:
80C – Investments in LIC, PPF, ELSS (up to ₹1.5 lakh)
80D – Health insurance premium
80G – Donations to charities
Step 4: GTI – Deductions = Total Income
This Total Income is the figure on which income tax is finally calculated.
Example Calculation
Suppose Mr. Arjun has:
Salary income: ₹6,00,000
Rental income from house property: ₹1,20,000
Interest income: ₹30,000
Gross Total Income (GTI):
= ₹6,00,000 + ₹1,20,000 + ₹30,000
= ₹7,50,000
Deductions:
Section 80C: ₹1,50,000
Section 80D: ₹25,000
Total Income:
= ₹7,50,000 – ₹1,75,000
= ₹5,75,000 (This is the taxable amount)
Conclusion
Understanding the basics of income tax—such as assessee, income, assessment year, previous year, residential status, and exemptions—is essential for anyone who earns money in India. By learning how Gross Total Income and Total Income are calculated, you can plan your finances better and make full use of available deductions to reduce your tax burden.
Income tax may seem complicated at first, but once you break it down into these simple steps, it becomes a logical and manageable process.