Definition of Income tax in India
Income-tax is a charge on Income earned in a financial year which
starts on 1st April of a calendar year and ends on 31st March
of the following calendar year.
Under the Indian Income-tax Act, the word "income",
in addition to the common man's understanding of the term, also
refers to certain items of receipts and accruals which ordinarily
would not have been treated as income in common parlance. Section
14 classifies the various income sources under the following categories:
1. Salary
2. Income from house property
3. Profits and gains of business or profession
4. Capital gains
5. Income from other sources
Income by location is classified as
Indian Income is that income which accrues to an assessee
in the taxable territories of India.
World Income refers to income which accrues, arises
or is being received outside India
NRIs are taxed only on their Indian income. Income earned outside India
which is later remitted to India is not taxable in India, for this you
need a local tax calculator such as this.
However, pension directly remitted to India by overseas employers after
the employee's permanent return to India would be taxable.
Section 9 deals with income deemed to accrue or arise in India
which refers to income from
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Business connections in India or
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From any property or asset in India
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From a transfer of capital asset in India.
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Any other source of income in India
Income from salary is deemed to accrue or arise in India
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If it is earned in India.
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If it is income from services rendered
in India
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Salary received abroad by Indian nationals
from Government of India for services rendered outside India
However, allowances and perquisites paid abroad are fully exempt
under Section 10(7).
The following incomes which are payable outside India are deemed
to arise in India:-
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Dividend paid by an Indian company outside
India.
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Interest payable on money borrowed and
brought into India.
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Royalty and technical service fees payable
in respect of any technical services used for business or profession
in India. However, royalty and fees for technical services is
exempt, where such royalty / fees earned is in respect of computer
software supplied by a Non-resident manufacturer along with
the computer or computer based equipment under an approved scheme.
Previous year and Assessment year
Income-tax is charged in the financial year following the year
in which the income is earned. Accordingly, the financial year
in which income is earned is known as "Previous year"
and the financial year in which the charge on that income is due
is known as "Assessment year". It means income earned
by any person from 1-4-2007 to 31-3-2008 for which the previous
year is 2007-2008 will be taxed in the following financial year
which is known as assessment year 2008-2009.
Who is an Assessee?
Under the Indian Income Tax Act, the entity on which Income Tax
is levied is called an "Assessee". An "assessee"
is a "person" by whom any tax or any other sum of money
(such as interest, penalty, etc.) is payable under the Income
Tax Act or in respect of whom any proceeding under the Act has
been taken for the assessment of his income or loss. It also includes
every representative assessee deemed to be an assessee under Chapter
15 of the Income Tax Act, 1961.
A "Person" as per the IT Act, 1961
As per Section 2(31) of the I.T. Act a "person" refers
not only to an individual but also corporate bodies like companies
or non-corporate bodies such as Partnership firms, Associations,
societies, local authorities, civic or town planning bodies and
even artificial entities like temple, deities etc. It also includes
the Hindu Undivided Family (H.U.F.), a status enjoyed by Hindus
in India who follow the joint family system owning joint property.
Residential Status
The residential status is crucial in determining the taxes an
assessee is required to pay. Section 6 of the Income Tax Act defines
the following categories liable to pay tax in India:
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Non-Resident (NRI)
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Resident
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Resident, but not ordinarily resident
(RNOR)
NRIs and RNORs are liable to pay tax only on their "Indian
income" while tax payers who are resident in India as per
Income Tax Act are taxed on their "world income".
The NRI, as per the IT Act, 1961
The definition of Non-Resident under FEMA is different from that
given in the Income Tax Act. Chapter XI of the Act defines a non-resident
Indian as an individual, being a citizen of India or a person
of Indian origin, who is not a resident. A person is of Indian
origin if he or either of his Indian parents or any of his grand
parents was born in undivided India. To avail of tax sops extended
to NRIs, an individual must satisfy the following criteria
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A person who has been in India for 60
days or more during a financial year and 365 days or more during
the preceding four financial years qualifies as a 'Resident'
of India. This has been relaxed and can be extended to 182 days.
Not meeting this criterion qualifies the individual for a "non-resident"
status.
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NRIs based outside India can continue
to enjoy non-resident status in India if their presence in India
is more than 60 days but less than 182 days, even if their stay
in India during the past four financial years is 365 days or
more
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Having been deputed overseas for over
6 months also qualifies an individual for NRI status.
The relaxation to 182 days applies to:
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Indian crew members sailing overseas
on Indian ships - their stay abroad is treated as employment
outside India
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In the case of Indian citizens as well
as in the case of "Persons of Indian Origin" who are
settled abroad but visit India for personal reasons.
The concession of extended stay is available only to Indian citizens
or to "persons of Indian origin" A "Person of Indian
origin" is a person who is not an Indian citizen, but was
born, or either of his parents or grandparents was born in India.
Any other company or Association of Persons is treated as non-resident
when the control and management of its affairs is situated throughout
the year wholly outside India.
It follows that in cases of non-Individual categories of persons,
it is the control and management that determines whether that
person is Non-resident or otherwise. If the control and management
is in India, the status is Resident, if outside India, it is non-resident.
Income Tax Criteria for RNOR (Resident but Not Ordinarily
Resident)
If a NRI comes back to India and loses his NRI status, he will
not be subject to tax in India on his world-wide income, for 2
years, if either of the following two conditions are satisfied:
1. He has been in India for not more than 729 days during the
preceding seven financial years; or
2. He has qualified as a non-resident for nine out of 10 preceding
financial years.
Similarly, if in any particular financial year, his stay in India
exceeds 182 days and he loses his NRI status for that year, his
income outside India will still not be taxable if any of the above
two conditions are satisfied and his tax status will be that of
a 'Not Ordinarily Resident' Indian.
