Unit III

Income Tax Act, 1961 is an act to levy, administrate, collect & recover Income-tax
in India. It came into force from 1st April 1962.

Income Tax including surcharge (if any) & cess is charged for any person at the
rate as prescribed by Central Act for that assessment year. Income-tax Act has
provided separate provisions with respect to levy of tax on income received in
advance as well as the income with respect of which the amount has not yet been
received. A person also has to keep track of his TDS deducted while calculating his
final tax liability at the end of the year.

Previous Year:

For Income Tax Act 1961, the previous year is defined as the financial year which
immediately precedes the assessment year. In case the source of income is new or
the business set up is new, the previous year for that entity will start from the date
of setting up of that business or profession or from the date when the source of
income of this new existence starts and ends in the said financial year.

The exception to Previous Year:

These incomes are taxed as the income of the year immediately preceding the
assessment year at the rates applicable to such person.

1.
1. Income of a person who is leaving India for a long period or
permanently
2. Income of a person who is trying to alienate his assets with an
intention to avoid taxes
3. Income of a discontinued business
4. Income of non-resident shipping companies who don’t have any
representative in India

Scope to Total Income:

As per the Income Tax Act 1961, the total income of the previous year for a
person who is a resident of India will include all his income irrespective of the
 source of that income which is either received or has accrued in India in the
previous year.

However, if a person is not an ordinarily resident in India as per Section 6 of

Income Tax Act, 1961, income from the sources which accrues or arises for him
outside India shall not be included in total income. In respect of non-residents, any
income which is received or arises in India is taxable in India.

Heads of Income Tax:

Every income arising to any person will always be classified under one of the
following headers provided by the Act: –

1.
1. Salaries
2. Income from house property
3. Profit and gains of business or profession
4. Capital gains
5. Income from other sources

Types of Taxes:
Income Tax holds its importance for it is the money that tends to support the
running of our government. It is one of the major sources of revenue for the
government and thus is inevitable not to impose it on the income earned or utilized
in the country. It helps meet the funds required to develop the country and other
defense-related needs of a nation.

There are basically two kinds of taxes –

Direct Tax and Indirect Tax.

 Direct Tax is a tax that is paid by an individual or any other person on the basis of
his Income. It is a form of tax that is directly paid by the person to the government,
i.e., the liability to pay the tax, and the burden of the tax falls on the same person.
 Indirect taxes are the types of taxes where the person depositing the tax with the
government and the person actually having been burdened by the tax are different.
 Generally, these taxes are included in the prices of the goods or services which are
provided to the people, and then such taxes are deposited by the person collecting
the same from their customers. GST is one of the most popular types of indirect
tax.

Some Important Definition under Income Tax Act 1961:

1. Income Tax

It is the tax that is collected by the Central Government for each financial year
levied on the total taxable income of an assessee during the previous year.

2. Assessee
As per Income Tax Act 1961 section 2(7), an assessee is a person who is liable to
pay the taxes under any provision of the Income Tax Act 1961. Assessee can also
be a person with respect to whom any proceedings have been initiated or whose
income has been assessed under the Income Tax Act 1961 Assessee is any person
who is deemed assessee under any of the provisions of this act or an assessee in
default under any provisions of this Act.

3. Assessment:

Assessment is primarily a process of determining the correctness of income

declared by the assessee and calculating the amount of tax payable by him and
further procedure of imposing that tax liability on that person.

4. Assessment Year:

Assessment year is the 12 months’ period commencing on 1st of April till 31st
March of next year. It is the year in which the income of the previous year is
assessed.

5. Person:
As per section 2(31) of the Income-Tax Act 1961, a Person would be anyone
who is-

 An Individual
 A HUF (Hindu Undivided Family)
 A Company
 A Firm
 An association of person or body of individuals
 A Local Authority
 Every artificial and juridical person who is not included in any of the above-
mentioned categories.

6. Income:
The definition of Income as per section 2 (24) is inclusive but not exhaustive of
the below-mentioned items:

 Any illegal income arising to the assessee
 Any income that is received at irregular intervals
 Any Taxable income that has been received from a source outside India
 Any benefit that can be measured in money
 Any subsidy or relief or reimbursement
 Gift the value of which exceeds INR 50,000 without any consideration by an
individual or HUF.
 Any prize
 Causal incomes like winning from lotteries or horse race gambling etc.

Section 2(7) of Income Tax: Assessee (Normal/ Representative/ Deemed/

Defaulter Assessee) – Meaning
01/01/2020 Income Tax Act 1961

As per S. 2(7) of the Income Tax Act, 1961, unless the context otherwise requires,
the term “assessee” means a person by whom any tax or any other sum of money is
payable under this Act, and includes,-

(a) every person in respect of whom any proceeding under this Act has been taken
for the assessment of his income or assessment of fringe benefits or of the income
of any other person in respect of which he is assessable, or of the loss sustained by
him or by such other person, or of the amount of refund due to him or to such other
person;

(b) every person who is deemed to be an assessee under any provision of this Act;
(c) every person who is deemed to be an assessee in default under any provision of
this Act.

From above definition, we can construe that normally the term ‘Assessee’ is
considered as one who is supposed to pay tax under the Income Tax Act, however
for better understanding of the term ‘assessee’, we need to understand the
following as well:

a. Normal Assessee
i) any person against whom proceedings under Income Tax Act are going on,
irrespective of the fact whether any tax or other amount is payable by him or not;

ii) any person who has sustained loss and filed return of loss u/s 139(3);

iii) any person by whom some amount of interest, tax or penalty is payable under
this Act;

iv) any person who is entitled to refund of tax under this Act.

b. Representative Assessee
A person may not be liable only for his own income or loss but he may also be
liable for the income or loss of other persons e.g. agent of a non-resident, guardian
of minor or lunatic etc. In such cases, the person responsible for the assessment of
income of such person is called representative assesses. Such person is deemed to
be an assessee.

c. Deemed Assessee
i) In case of a deceased person who dies after writing his will the executors of the
property of deceased are deemed as assessee.

ii) In case a person dies intestate (without writing his will) his eldest son or other
legal heirs are deemed as assessee.

iii) In case of a minor, lunatic or idiot having income taxable under Income-tax
Act, their guardian is deemed as assessee.

v) In case of a non-resident having income in India, any person acting on his behalf
is deemed as assessee.

d. Assessee-in-default
A person is deemed to be an assessee-in-default if he fails to fulfill his statutory
obligations. For example, an assessee who fails to pay the demand u/s 156 within
30 days, in full, shall be deemed to be an ‘Assessee in Default’, except in
circumstances where he has obtained Order staying the demand in due course. An
assessee in default will continue to be so, unless he has cleared the demand/
obligations in full.

Further, In case of an employer paying salary or a person who is paying interest, it

is their duty to deduct tax at source and deposit the amount of tax so collected in
Government treasury. If he fails to deduct tax at source or deducts tax but does not
deposit it in the treasury, he is known as assessee-in-default.

Residential Status of an Assessee

Need to determine Residential Status?

The total income is different in case of a person resident in India and a person non-
resident in India. Further, in case of an individual and HUF being "not ordinarily
resident in India", the meaning of total income shall be slightly different. Since the
total income of an assessee varies according to his residential status in India, the
incidence of tax shall also vary according to such residential status in India.
Tax is levied on total income of assessee. Under the provisions of Income-tax Act,
1961 the total income of each person is based upon his residential status. Section 6
of the Act divides the assessable persons into three categories

1. Ordinary Resident;
2. Resident but Not Ordinarily Resident; and
3. Non-Resident.

Residential status is a term coined under Income Tax Act and has nothing to do
with nationality or domicile of a person. An Indian, who is a citizen of India can be
non-resident for Income-tax purposes, whereas an American who is a citizen of
America can be resident of India for Income-tax purposes. Residential status of a
person depends upon the territorial connections of the person with this country,
i.e., for how many days he has physically stayed in India.

The residential status of different types of persons is determined differently.

Similarly, the residential status of the assessee is to be determined each year with
reference to the “previous year”. The residential status of the assessee may change
from year to year. What is essential is the status during the previous year and not in
the assessment year.
Important Points:

1. Residential Status in a previous year. Residential status is to be

determined for each previous year.
It implies that—
a. Residential status of assessment year is not important.
b. A person may be resident in one previous year and a non-resident in
India in another previous year, e.g., Mr. A is resident in India in the
previous year 2018-19 and in the very next year he becomes a non-
resident in India.
2. Duty of Assessee. It is assessee’ s duty to place relevent facts, evidence and
material before the Income Tax Authorities supporting the determination of
Residential status.
3. Dual Residential Status is possible. A person may be resident of one or
more countries in a relevant previous year e.g., Mr. X may be resident of
India during previous year 2018-19 and he may also be resident/non-resident
in England in the same previous year. The emergence of such a situation
depends upon the following
a. the existence of the Residential status in countries under
considerations
b. the different set of rules having laid down for determination of
residential status.

Determination of Residential status of different ‘Persons’ :

As we know that Income tax is charged on every person. The term ‘Person’ has
been defined under section 2(31) includes :

i. An individual
ii. Hindu Undivided Family
iii. Firm
iv. Company
v. AOP/BOI
vi. Local authority
vii. Every other artificial juridical person not falling in preceding six sub-
classes.

Therefore, it is essential to determine the residential status of above various types

of persons and now we shall learn the calculation of residential status of each type
of person.
Basic rules for determining Residential Status of an Assessee

The following basic rules must be kept in mind while determining the residential
status:

 — Residential status is determined for each category of persons separately

e.g. there are separate set of rules for determining the residential status of an
individual and separate rules for companies, etc.
 — Residential status is always determined for the previous year because we
have to determine the total income of the previous year only.
 — Residential status of a person is to be determined for every previous year
because it may change from year to year. For example A, who is resident of
India in the previous year 2017- 18, may become a non-resident in previous
year 2018-19.
 — If a person is resident in India in a previous year relevant to an
assessment year in respect of any source of income, he shall be deemed to be
resident in India in the previous year relevant to the assessment year in
respect of each of his other source of income. [Section 6(5)]
 — A person may be a resident of more than one country for any previous
year. If Y is a resident in India for previous year 2017-18, it does not mean
that he cannot be a resident of any other country for that previous year.
 — Citizenship of a country and residential status of that country are separate
concepts. A person may be an Indian national/citizen, but may not be a
resident in India. On the other hand, a person may be a foreign
national/citizen, but may be a resident in India.
 — It is the duty of the assessee to place all material facts before the
assessing officer to enable him to determine his correct residential status.
Tax Deductions and Types
There are various kinds of income tax deductions that can be used to reduce the
taxable income in India. There are 19 ways in which tax deductions can be availed,
ranging from public provident funds to life insurance and loans.
What is Tax deductions?
Tax deduction refers to claims made to reduce your taxable income, arising from
various investments and expenses incurred by a taxpayer. Thus, income tax
deduction reduces your overall tax liability. It is a kind of tax benefit which helps
you save tax. However, the amount of tax you can save depends on the type of tax
benefit you claim.
Tax Exemption vs Tax Deduction
Both the terms ‘tax deduction’ and ‘tax exemption‘ refer to a lowering of taxable
income; they are forms of tax relief or tax breaks provided by the government.
However, tax exemptions may also include complete relief from taxes, reduced
rates and tax on only a portion of income. Tax exemption means you don’t have to
pay tax for a particular income. E.g. you may get a tax exemption for donating to
charitable institutions and various relief funds.
In order to encourage investments, the government generally offers tax exempt
entities to invest in. Such entities are exempted from a single or multiple taxation
laws. For example, investments in the Sukanya Samriddhi Scheme are fully tax
exempt. Money deposited under this scheme will be exempted from tax at the time
of investment, accumulation of interest and payout of returns (EEE).
In case of tax deduction, your income tax liabilities decrease by a specified amount
for spending money in particular avenues. You invest in various schemes to reduce
your taxable income. For example, you can get tax deduction by paying life
insurance premiums and home loan EMI. Tax deductions are offered by
government to tempt taxpayers to participate in programs carrying societal
benefits.
What is Tax Deducted at Source?
To collect tax efficiently and quickly, the Income Tax department of the
Government of India has introduced a system called TDS (tax deducted at source).
Using TDS, tax can be deducted/collected at source of income. TDS is an indirect
method of collecting tax by the government. It ensures a regular source of revenue
for the government by ensuring the tax is collected as income is earned and not
when a taxpayer files returns at the end of the year.
 Any authorized person/institution on whom the responsibility of collecting tax is
entrusted collects tax and pays it to the government on behalf of an individual
payer. In return, the individual taxpayer gets a TDS certificate stating that the tax
has been paid on his/her behalf. Thus, tax is deducted at source and is forwarded to
the government on behalf of the payer. This provision of deduction of tax at source
is applicable to several payments such as salary, commission, interest on fixed
deposits, brokerage, professional fees, contract payments, and royalty etc.
Benefits of Tax Deductions
There are a number of benefits associated with tax deduction which include:
 Tax deductions help you reduce an amount from your taxable income and save
tax. When you claim an income tax deduction, it reduces the amount of your
income that is subject to tax.
 Reduced taxable income helps you save and invest money in other areas.
 Tax deduction first reduces the income subject to the highest tax brackets. So,
you can claim deduction for the amounts spent in tuition fees, medical expenses,
and charitable contributions.
Income Tax Return is mandatory and you cannot completely avoid paying tax. But
with proper planning, you can reduce your taxable income.
Various Types of Tax Deductions in India
You can reduce your taxable income by increasing your deductions. There are
many investment options and forms of expenditure which can help you get
reductions on your taxable income. The Indian Income Tax Act provides many
provisions for this. Mentioned below are a number of different tax deduction
options.
1. Public Provident Fund (PPF)
By contributing to your PPF account, you can get tax deduction under Section
80C, the Indian Income Tax Act, 1961.
2. Life Insurance Premiums
You can get income tax deduction for paying premium towards life insurance
policies for self, spouse and child under section 80C of the Indian Income Tax
Act, 1961. The amount received on maturity of the policy is free from tax.
However, it is subject to the terms and conditions mentioned in your policy.
3. National Saving Certificate (NSC)
The amount invested in NSC is eligible for tax deduction under section 80C of
the Indian Income Tax Act, 1961. National Saving Certificates is one of the
highly secured modes of investments in India. But, the interest earned from NSC
 is taxable. As an NSC is a cumulative scheme, interest is reinvested and qualifies
for tax deduction.
4. Bank Fixed Deposits (FDs)
You can get tax deduction by investing in fixed deposits for a tenure of 5 years,
under section 80C of the Indian Income Tax Act, 1961. Many banks in India
offer tax saving fixed deposits. However, the interest accrued on FDs is subject
to tax
5. Senior Citizen Savings Scheme (SCSS)
Senior citizens can get tax deduction by investing in Senior Citizen Savings
Scheme offered by banks. These schemes are eligible for tax deduction under
Section 80C of the same act. The interest earned from these schemes is entirely
taxable.
6. Post Office Time Deposit (POTD)
Investing in a five-year POTD, you can get tax deduction under Section 80C.
However, interest accrued on the same is fully taxable.
7. Unit-linked Insurance Plans (ULIP)
Investing in ULIPs for yourself, spouse and your children, you can get tax
deductions under Section 80C.
8. Home Loan EMIs
Equated monthly installments paid to repay the principal amount of your home
loan are eligible for income tax deductions under section 80C of the same act.
9. Mutual Funds & ELSS
Investing in mutual funds and equity-linked savings scheme, you are eligible for
tax deductions under section 80C, the Indian Income Tax Act, 1961.
10.Stamp Duty and Registration Charges for a Home
Stamp duty and registration fee paid for transferring property are entitled for
income tax deduction under section 80C, the Indian Income Tax Act, 1961.
11.Retirement Savings Plan
You can also get income tax deductions by investing in retirement plans offered
by LIC or other insurance providers. Contribution to the National Pension
Scheme is also eligible for tax deduction.
12.Tuition Fees:
Tuition fee paid for your children’s education qualifies for income tax deduction
under section 80C. However, the fee needs to be paid for full-time education in
 an Indian university, college and school for any two children. Tuition fee does
not include any donations or development fee towards education institutions.
13.Medical Insurance Premiums
Health insurance premium paid for self, spouse and children qualifies for income
tax deduction under section 80D of the Indian income Tax Act, 1961. The
deduction allowed under this section is Rs. 25,000 for youngsters and Rs. 30,000
for senior citizens.
14.Infrastructure Bonds
Investing in infrastructure bonds, you become eligible for income tax deductions
under section 80CCF of the Indian Income Tax Act.
15.Charitable Contribution
Donating for charitable tasks will help you reduce your taxable income under
section 80G of the Indian Income Tax Act, 1961. However, make sure that you
declare the whole contribution before 31st December each year.
16.Treatment of Disabled Dependents
Under section 80DD of the Indian Income Tax Act, 1961, you can get income
tax deductions for medical expense incurred in the treatment of any disabled
dependent of yours.
17.Deduction for Preventive Health Check-ups
An amount of Rs.5000 spent for preventive health check-ups of an individual or
his/her family members qualifies for tax deduction under section 80D of the
Indian Income Tax Act, 1961.
18.Interest Paid on Education Loan
You can get tax deduction on the interest paid for an educational loan under
section 80E of the Indian Income Tax Act, 1961. The loan can be taken to pursue
higher education by the employee, or for his/her spouse, children or a student to
whom the employee is a legal guardian.
19.Deduction on House Rent Paid
An employee can get income tax deduction for the house rent paid, if the
employee or his/her spouse does not own residential accommodation at the place
of employment. This deduction is usually applicable for salaried taxpayers under
section 80GG of the Indian Income Tax Act, 1961.
What is Income Tax Rebate?
Income tax rebate is a refund on taxes if the tax paid by an individual is more than
the tax liability. In other words, you will avail a refund on tax money at the end of
every financial year if your tax liability is less than that of the amount paid by you.
You need to file an Income Tax Rebate within a specified period if you want to
claim the income tax refund.

Fortunately, the Indian Income Tax Act is full of options for you to save much of
your income from tax. You can use the many tax rebates available in the act to
reduce your annual direct tax liability.

The only condition for claiming the income tax rebate is that you file the income
tax return religiously. Since the income tax rate in this country is progressive,
higher-income attracts direct tax at higher rates.
Thus, based on your rate of taxation, you can save from anywhere between Rs
12,500 to Rs 1.25 lakhs using the income tax rebates. The majority of the
transactions eligible for tax rebates are investments for long-term goals, financial
safety for the family in emergencies or necessary education or home expenses.

Eligibility to Claim Tax Rebate in India

The only way to get income tax rebate is through filing an ITR at the end of the
fiscal year. Although, there can be few cases –

1. If your gross income is less than 5 Lakhs, then in that case filing an ITR will be
useful.

2. But, if your gross income is more than 5 Lakhs, then you will have to take the
help of a tax deduction system that comes under Section 80C, Section 80D,
80CCD, etc. to reduce your taxable income.
3. Also, people with a gross income of up to 5 Lakhs need to know that they are
also eligible for a full tax rebate.

How to Calculate Income Tax Rebate?

Before you file your income tax return, you must be wondering whether you will
be eligible for an Income Tax rebate or not?

The answer to this question depends on the slab in which the income you earn falls
in. To calculate your gross taxable income, you need to add all your sources of
income and factoring in the deductions that are possible.

Let’s take the following cases

According to the Income Tax Act 1961, if your gross taxable income is below Rs 5
lakhs per annum, then you can claim tax rebate u/s 87A. As per section 87A you
can claim a tax rebate of up to Rs 12,500 via tax SOP.
While on the other hand, your annual income is more than Rs 5 Lakhs, then you
will be taxed as per the slab rate. You will not be eligible for a refund u/s 87A.
Refund, in this case, will be provided if you have paid more than your tax liability.
However, you can still take into consideration deductions offered by sections 80C,
80D etc.

To understand the calculation of rebate in both the above-listed cases better, let’s
take an example of the income of 2 friends, Raju and Shyam.

Particulars RAJU SHY

Salary (per year) 6 lakhs 10 la

Deductions claimed 1 lakh 1.5 l

Gross Taxable Income Rs 5 lakh

Income Tax Slab Rs 2.5 L - 5 L Rs 5

Tax Implication Rs 12,500 Rs 8

Eligible for rebate u/s 87A Yes No

Rebate Rs 12,500 -

4% Higher Education Cess - Rs 3

Total Tax Liability Rs 0

Now we have seen that the tax liability of Raju is nil while Shyam has to pay Rs
85,800. While filing the tax they paid Rs 5000, and Rs 1,00,000 each as they were
unaware of some deductions.

Now we have seen that the tax liability of Raju is nil while Shyam has to pay Rs
85,800. While filing the tax they paid Rs 5000, and Rs 1,00,000 each as they were
unaware of some deductions.

Particulars RAJU SHYAM

Amount Paid Rs 5000 Rs 1 lakh

Tax Refund Rs 5000 Rs 14200

 Types of Tax Rebates in India

Indian Income Tax Act provides for multiple types of tax rebates. While most
under sections 80C and 80D relate to investment and expenses, other rebates are
also available for specific transactions and even incomes:

1. Interest on Education Loan - Section 80EE

Section 80EE allows you to get a tax rebate on the interest payment of a loan you
take to purchase a house property.

The maximum deduction is Rs 50,000

Eligibility
The following are the criteria’s you need to fulfil if you want to take benefit of
deductions under Section 80EE

 The loan that you have taken should be sanctioned between 01.04.2016 to
31.03.2017 from any financial institution
 The loan amount should not be more than Rs 35 Lakhs
 The house brought through the home loan must be the only house that you own at
the time of sanctioning the loan.
2. Deduction for Scientific Research - Section 80GGA

This section involves deductions concerning donations made by you for scientific
research. You can avail of a tax deduction of up to 100% of the amount donated.

Eligibility
 The deduction should be made to an approved scientific research association.
 If paid by cash, then a deduction of only Rs 10,000 will be allowed
3. Savings Bank Interest - Section 80TTA
 A deduction that you can avail for the interest on deposits payable in your saving
account. This income tax deduction can be claimed by an individual as well as in
HUF for up to Rs 10,000

Eligibility
 Income must be earned via savings account only (time deposits are not valid)
4. Capital Gains Rebate - Section 54

This section relates to profit on the sale of property that you use for residence. The
whole of the capital gain can be exempt if it is fully utilised.
Eligibility:
 To be eligible, you must purchase another residential property, 1 year before or 2
years after you sell the property.
 There is a lock-in period of 3 years. That is you can avail exemption if you have
held the property for at least 3 years.
5. Capital Gains Rebate - Section 54 EC

If you invest the capital gain made through the sale of land, buildings etc in certain
bonds, then you can avail exemption.

Eligibility
 The maximum investment in bonds must not be more than Rs 50 lakhs in a
financial year.
 You should invest the capital gain in bonds within 6 months of selling
 Bonds must be long-term, that is redeemable after at least 3 years
The bonds in which you can invest

- NHAI

- RECL
 - Central Govt Bonds

6. Home Loan Interest Payment - Section 24B

This section allows deduction of the interest that you pay towards the home loan.
The maximum deduction you can avail of in the case of self-occupied property is
Rs 2 lakhs.

Conditions
The deduction has the following rules/conditions

- You can avail of a deduction of up to Rs.30,000 if the house property is bought,

constructed, renewed, repaired or reconstructed before 1st April 1999.

- You can avail of a deduction of up to Rs.1.5 lakhs if you borrow for property
bought or constructed within 3 years from borrowing. However, the amount should
be borrowed after 1st April 1999.

- Up to Rs.30,000 is exempted if the home loan is taken for renewing, repairing

or reconstructing the house. The home loan should be taken after 1st April 1999.

- Up to Rs.30,000 is exempted if the house is constructed or bought after 3 years

of taking the loan. The money must be borrowed after 1st April 1999.

7. House Rent Allowance Exemption - Section 10(13A)

This section is related to the house rent allowance or HRA. It is given by the
employer so that the employee can meet his rent expenses.

HRA is exempt to the minimum of following

- Actual HRA received by you

 - Rent paid over 10% of salary

- 50% of the salary in metros and 40% for other cities

No HRA is included if no rent is paid and the employee lives in his own house.

For every citizen of India, it is advisable to pay income tax before its due date.
Failing to do so would lead to several consequences such as heavy fines and
imprisonment under the IT Act.

Besides, for those who are planning to buy tax saving plan online, you choose to
go with Canara HSBC Oriental Bank of Commerce Life Insurance for better
options.
Tax Exemption
There are various categories for tax exemptions in India depending on the nature of
income. Some of the incomes that are exempt are agricultural income, pension,
allowances, etc. There is also Deduction of Tax at Source that can be availed.
Tax exemption is the monetary exclusion that reduces the taxable income. You can
get complete relief from tax or reduced tax rates or tax will be applicable on a
certain portion. Tax exemption is therefore a statutory exemption to a general rule
instead of the absence of taxation in certain circumstances. Tax exemptions are
offered to encourage certain economic activities.
What are the Tax Exemptions?
There are exemptions from tax like Property Tax and income tax if the taxpayer
has children or dependents who depend on him for finances. The various sections
of tax exemptions in India are as follows:

Section Nature of Income

10(1) Agricultural income

10(2) Share from income of Hindu Undivided Family

10(2A) Share of profit from firm whose taxes are filed separately

Income received in a casual form not exceeding Rs.5,000 and in case of hor
10(3)
it should not exceed Rs.2,500

10(10D) Receipt from life insurance policy

10(16) Scholarship to meet cost of education

10(17) Allowances of MP and MLA. MLA’s allowance should not exceed Rs.600 p

Awards and rewards by central and state government, from approved award
10(17A)
the approved rewards from central and state government.

Income of members of scheduled tribes of North Eastern States or Ladakh r

10(26)
income should be arising from those regions itself.

10(26A) Income of Ladakh resident. His income can arise in Ladakh or outside India

10(30) Subsidy from Tea Board under approved scheme

10(31) Subsidy from any concerned board under approved scheme of replantation

10(32) Income of minor clubbed with individual to a maximum of Rs.1,500

Dividend earned from Indian companies, income from Unit Trust of India, M
10(33)
income from venture capital.

Profits earned in free trade zones, electronic hardware technology park or on

10(A)
technology park for up to 10 years.

10(B) Profits form complete export oriented undertakings, manufacturing articles

software for 10 years.
 Profits from newly established undertakings in IIDC or IGC in the North-Ea
10(C)
up to 10 years.

Interests, premiums, redemptions or any other payments that you get from s
10(15)(i)(iib)(iic) capital investment bonds, relief bonds, etc. that are notified. The exemption
extent that is notified.

10(15)(iv)(h) Interest paid by public sector company on its bonds and debentures.

Interest that the government pays on the deposits made by employees of cen
10(15)(iv)(i)
government or public sector employees for their retirement under the notifie

10(15)(vi) Interest received on notified gold deposit bonds.

10(15)(vii) Interest received on notified local authorities’ bonds

Leave travel assistance or concession received. The amount should not exce
10(5)
payable by the central government to its employees.

Remuneration received by technicians who have specialised knowledge in s

10(5B) Their service must commence after 31.3.93 and their tax should be paid by t
exemption limit is in respect of tax paid by employer for a period of up to 4

Allowances and perquisites that the government provides to citizens of Indi

10(7)
their services abroad.

Remuneration received from foreign governments for duties in India provid

10(8) cooperative technical assistance programmes. You also get exemption for in
outside India provided that the tax on that income is paid by the governmen

Death-cum retirement gratuity from government, payment made under Grat

10(10) amount must be as per section(2), (3) and (4) of that Act and up to one and h
salary for each completed year of service.
 Commutation of pension from funds set by LIC under section 10(23AAB) a
10(10A) statutory corporation, etc. Commutation of pension from employers; when g
1/3rd value of the pension and when gratuity is not payable, half of the pensi

Encashment of the earned leave that was unutilised from central or state gov
10(10AA) from other employers up to an amount equal to 10 months’ salary or Rs.1,35
is less.

Retrenchment compensation, where the amount is either the amount under s

10(10B)
Industrial Dispute Act, 1947 or the amount that the government notifies, wh

10(10C) Amount received on voluntary retirement or on termination. The maximum

Payment received under Provident Fund act, 1925 and other central governm
10(11)
bonds.

Payments received from recognised provident funds to the extent provided i

10(12)
of 4th schedule.

10(13) Payments received from approved superannuation fund.

House rent allowance, the exemption is either the least of actual allowance,
10(13A) excess of 10% of the salary or 50% of salary in Mumbai, Chennai, Delhi an
40% in other places.

Prescribes special allowance or benefits granted to meet expenses that incur

10(14)
your duties, the exemption is granted to the extent of expenses that actually

10(18) Pension that includes family pension of recipients of notified gallantry awar

There are exemption specifically for non-citizens, NRIs and for funds, institutions,
etc.

Government announces 5 big tax reliefs for individuals due to COVID-19

Updated on Jan 13, 2022 - 09:33:14 AM
Taxpayers are facing multiple challenges in meeting certain tax compliances due to
the resurgence of COVID-19. To make it easy for them, the government
announced relief measures by extending compliance timelines and providing tax
exemptions in some instances.
Let’s take a closer look at these relief measures by the income tax (IT) department:

1. Tax exemption to employees

Many employers have given financial support to their employees by bearing their
COVID-19 treatment expenses. The IT department has provided an income tax
exemption on the amount received from the employer towards the COVID-19
treatment. The tax relief is also available for those taxpayers who have received
financial assistance from any other individual.
The treatment expenses from FY 2019-20 and onwards are allowed for such tax
relief.

2. Tax exemption to family members of the taxpayer

During the pandemic, several people lost their lives. Employers and well-wishers
of such taxpayers have provided financial aid to their family members to help them
cope with the financial challenges resulting from the untime loss of an earning
member.
Therefore, to reduce the tax burden, the income tax department allows exemption
on amounts received by the family.
However, the exemption limit depends on who gave the money to the taxpayer’s
family. If the family receives an amount from the taxpayer’s employer, the ex-
gratia payment shall be fully exempt without any limit. The exemption is restricted
to Rs 10 lakh if any other person makes such an ex-gratia payment. The tax relief
is available for ex-gratia payments after FY 2019-20.
The government may propose necessary legislative amendments for the tax
exemptions mentioned above in due course of time.

3. Aadhaar-PAN linking
The government extends Aadhaar-PAN linking due date by three months. One can
now link their Aadhaar with PAN by 30th September 2021. The government has
made it mandatory to link Aadhaar with PAN to file income tax returns.
4. Compliances for availing capital gains tax exemption
To avail exemption under Section 54 to 54GB, the taxpayer must complete specific
tasks within the deadline. For example, purchase or construction of the property,
capital gains bonds investment, the deposit of money, or other action required to
avail exemption under given sections.

The timelines falling between 1st April 2021 and 29th September 2021 stands
extended to 30th September 2021.

5. Payment under the Vivad se Vishwas scheme

The last date of payment of the amount, i.e. without additional amount, under
Vivad se Vishwas scheme, is extended to 31st August 2021. Previously, the due
date was 30th June 2021.
Furthermore, the last date for the payments, with the additional amount, under
Vivad se Vishwas scheme is 31st October 2021.
Apart from these important announcements, the income tax department has
extended certain timelines previously vide circular no. 09/2021. Some of the
important due dates related to FY 2020-21 extended were as follows:

 Filing of the income tax return by taxpayers whose accounts are not required
to be audited – 30th September 2021.
 Filing of the income tax return by taxpayers liable for tax audit – 30th
November 2021.
 Filing of a belated and revised return – 31st January 2022.
 Furnishing of the tax audit report -31st October 2021

The time’s lines that are extended by the CBDT will offer relief to the taxpayers
amidst partial lock-downs in many states.

Indian Contract Act 1872

Indian Contract Act frames and validates the contracts or agreements between
various parties. Contract Act is one of the central laws that regulate and oversee all
the business wherever there is a case of a deal or an agreement. The following section
will tell us what a contract is.
We will see how the Indian Contract Act, 1872 defines a contract. We will also
define the terms as per the Act and see what that means. In these topics, we will
decipher all the vivid aspects of the Contract Act. Let us begin by understanding the
concept of a contract.

Contract Act

The Indian Contract Act, 1872 defines the term “Contract” under its section 2 (h) as
“An agreement enforceable by law”. In other words, we can say that a contract is
anything that is an agreement and enforceable by the law of the land.

This definition has two major elements in it viz – “agreement” and “enforceable by
law”. So in order to understand a contract in the light of The Indian Contract Act,
1872 we need to define and explain these two pivots in the definition of a contract.

Agreement
In section 2 (e), the Act defines the term agreement as “every promise and every set
of promises, forming the consideration for each other”.

Now that we know how the Act defines the term “agreement”, there may be some
ambiguity in the definition of the term promise.

Promise
The Act in its section 2(b) defines the term “promise” here as: “when the person to
whom the proposal is made signifies his assent thereto, the proposal becomes an
accepted proposal. A proposal when accepted, becomes a promise”.

In other words, an agreement is an accepted promise, accepted by all the parties

involved in the agreement or affected by it. This definition says that in order to
establish or draft a contract, we need to initiate some steps:

i. The definition requires a person to whom a certain proposal is made.

ii. The person (parties) in step one has to be in a position to fully understand all
the aspects of a proposal.
iii. “signifies his assent thereto” – means that the person in point one accepts or
agrees with the proposal after having fully understood it.
iv. Once the “person” accepts the proposal, the status of the “proposal” changes to
“accepted proposal”.
v. “accepted proposal” becomes a promise. Note that the proposal is not a
promise. For the proposal to become a promise, it has to be an accepted
proposal.
To sum up, we can represent the above information below:

Agreement = Offer + Acceptance.

Enforceable By Law
Now let us try to understand this aspect of the definition as is present in the Act.
Suppose you agree to sell a bike for 30,000 bucks with a friend. Can you have a
contract for this?

Well if you follow the steps in the previous section, you will argue that once you and
your friend agree on the promise, it becomes an agreement. But in order to be a
contract as per the definition of the Act, the agreement has to be legally enforceable.

Thus we can say that for an agreement to change into a Contract as per the Act, it
must give rise to or lead to legal obligations. In other words, must be within the scope
of the law. Thus we can summarize it as Contract = Accepted Proposal (Agreement)
+ Enforceable by law (defined within the law)

So What Is A Contract?

Now we can define a contract and more importantly, understand what is “Not” a
contract. A contract is an accepted proposal (agreement) that is fully understood by
the law and is legally defined or enforceable by the law.

So a contract is a legal document that bestows upon the party’s special rights (defined
by the contract itself) and also obligations that are introduced, defined, and agreed
upon by all the parties of the contract.
Difference Between Agreement And Contract
Let us see how a contract and agreement are different from each other. This will help
you summarize and make a map of all the important concepts that you have
understood.

Contract Agreement

A promise or a number of promises that

A contract is an agreement that is
are not contradicting and are accepted by
enforceable by law.
the parties involved is an agreement.

An agreement must be socially acceptable.

A contract is only legally enforceable. It may or may not be enforceable by the
law.

A contract has to create some legal An agreement doesn’t create any legal
obligation. obligations.

An agreement may or may not be a

All contracts are also agreements.
contract.

Essentials of a Valid Contract

What makes a valid contract? A valid contract is enforceable by law and if a contract
is not valid it may lead to obstruction of businesses and unlawful and insincere
dealings. Let us learn about the essential features of a valid contract.
Essentials of a Valid Contract

A contract that is not a valid contract will have many problems for the parties
involved. For this reason, we must be fully aware of the various elements of a valid
contract. In other words, here we shall ponder on all the ramifications of the
definition of the contract as provided by The Indian Contract Act, 1872.

The Indian Contract Act, 1872 itself defines and lists the Essentials of a Contract
either directly or through interpretation through various judgments of the Indian
judiciary. Section 10 of the contract enumerates certain points that are essential for
valid contracts like Free consent, Competency Of the parties, Lawful consideration,
etc.

Other than these there are some we can interpret from the context of the contract
which is also essential Let us see.

1] Two Parties
So you decide to sell your car to yourself! Let us say to avoid tax or some other
sinister purpose. Will that be possible? Can you have a contract with yourself? The
answer is no, unfortunately. You can’t get into a contract with yourself.

A Valid Contract must involve at least two parties identified by the contact. One of
these parties will make the proposal and the other is the party that shall eventually
accept it. Both the parties must have either what is known as a legal existence e.g.
companies, schools, organizations, etc. or must be natural persons.

For Example: In the case State of Gujarat vs Ramanlal S & Co. –

A business partnership was dissolved and assets were distributed among the partners
as per the settlement. However, all transactions that fall under a contract are liable for
taxation by the office of the State Sales Tax Officer. However, the court held that this
transaction was not a sale because the parties involved were business partners and
thus joint owners. For a sale, we need a buyer (party one) and a seller (party two)
which must be different people.

2] Intent Of Legal Obligations

The parties that are subject to a contract must have clear intentions of creating a legal
relationship between them. What this means is those agreements that are not
enforceable by the law e.g. social or domestic agreements between relatives or
neighbors are not enforceable in a court of law and thus any such agreement can’t
become a valid contract.

3] Case Specific Contracts

Some contracts have special conditions that if not observed would render them
invalid or void. For example, the Contract of Insurance is not a valid contract unless
it is in the written form.

Similarly, in the case of contracts like contracts for immovable properties,

registration of contract is necessary under the law for these to be valid.

4] Certainty of Meaning
Consider this statement “I agree to pay Mr. X a desirable amount for his house at so
and so location”. Is this a valid contract even if all the parties agree to this term? Of
course, it can’t be as “desirable amount” is not well defined and has no certainty of
meaning. Thus we say that a valid contract must have certainty of Meaning.

5] Possibility Of Performance Of an Agreement

Suppose two people decide to get into an agreement where a person A agrees to bring
back the person B’s dead relative back to life. Even when all the parties agree and all
other conditions of a contract are satisfied, this is not valid because bringing someone
back from the dead is an impossible task. Thus the agreement is not possible to be
enforced and the contract is not valid.

6] Free Consent
Consent is crucial for an agreement and thus for a valid contract. If two people reach
a similar agreement in the same sense, they are said to consent to the promise.
However, for a valid contract, we must have free consent which means that the two
parties must have reached consent without either of them being influenced, coerced,
misrepresented or tricked into it. In other words, we say that if the consent of either
of the parties is vitiated knowingly or by mistake, the contract between the parties is
no longer valid.
7] Competency Of the Parties
Section 11 of the Indian Contract Act, 1872 is:

“Who are competent to contract — Every person is competent to contract who is (1)
of the age of majority according to the law to which he is subject, and who is (2) of
sound mind and is (3) not disqualified from contracting by any law to which he is
subject.”

Let us see these qualifications in detail:

i. refers to the fact that the person must be at least 18 years old or more.
ii. means that the party or the person should be able to fully understand the terms
or promises of the contract at the time of the formulation of the contract.
iii. states that the party should not be disqualified by any other legal ramifications.
For example, if the person is a convict, a foreign sovereign, or an alien enemy,
etc., they may not enter into a contract.
8] Consideration
Quid Pro Quo means ‘something in return’ which means that the parties must accrue
in the form of some profit, rights, interest, etc. or seem to have some form of valuable
“consideration”.

For example, if you decide to sell your watch for Rs. 500 to your friend, then your
promise to give the rights to the watch to your friend is a consideration for your
friend. Also, your friend’s promise to pay Rs. 500 is a consideration for you.

9] Lawful Consideration
In Section 23 of the Act, the unlawful considerations are defined as all those which:

i. it is forbidden by law.
ii. is of such a nature that, if permitted, it would defeat the provisions of any law,
or is fraudulent.
iii. involves or implies, injury to the person or property of another
iv. the Court regards it as immoral or opposed to public policy
These conditions will render the agreement illegal.

the competency to enter into a valid contract

Capacity to contract means the competency to enter into a valid contract legally.
The capacity to contract binds the parties of the contract with a promise to oblige
by it. But only certain persons have the competency or the capacity to make a
contract.

Capacity to Contract
Capacity to contract means the competency to enter into a valid contract legally.
The capacity to contract binds the parties of the contract with a promise to oblige
by it. But only certain persons have the competency or the capacity to make a
contract. This article deals with the basic components necessary for a person to be
competent to make a contract.

Competent to Contract
To make a contract, only certain people are eligible. The following are the people
who have the capacity to contract:

 Those with a sound mind

 People who have crossed the majority age
 Those who can contract because they are qualified under the contracting law

Incompetent to Contract
To make a contract, certain people are not eligible. The following are the people
who do not have the capacity to contract:

 Those with an unsound mind

 Minors who have not crossed the majority age
 Those who cannot contract because they are disqualified under the
contracting law

Minors
Any person who is not of the age of majority is a minor. In India, 18 years is the
age of majority. Below the age of 18 years does not have the capacity to enter into
a contract. A contract or agreement with a minor is null from the beginning, and no
one can sue them. The State provides the Minors with civil and criminal
immunities. In addition to that, it takes custody of the well being and the property
of the minor. These immunities do not let the minors to enter into a contract. But if
a minor enters into a contract knowing his incapability, then such a contract shall
work independently of any contract.

If a party is from India and another party from a foreign country, then there will
more than one law that will be applicable in the contract. In such cases, the TNS
Firm v. Muhammad Hussain has set specific guidelines. The age of the majority
for ordinary mercantile transactions will depend upon the law of the country where
they make the contract. The age of the majority for land transactions will depend
upon the law where the land is located.

Effects of a Minor’s Agreement

if a minor enters into a contract by misrepresenting the age, then no one can stop
him or her from disclosing their age. The minor is not liable for inducing another
party into a contract. Even if any mishaps take place, he is not responsible. But in
certain mishaps, he will be liable to it. The minor to avoid a contract can plead his
infancy. An agreement of a minor stands as a doctrine of restitution. Whereas if a
minor purchases a property by hiding his age, then the purchased property will
be returned. But, if he has converted or sold them, then the law cannot sue him.

Contracts Beneficial to Minors

One can bring a minor into a contract if he is beneficiary for the contract. The
minor does not have a restriction to be a promisee or payee in a contract. Thus a
minor can purchase an immovable property and also can sue for the possessions
upon the tender of the money. One cannot order a specific performance against a
minor.

Claim for Necessaries Supplied to Minors

Section 68 of the Indian Contract Act, 1872 states that if a person does not have
the capacity of being in a contract receives necessaries from another person. He
has the power to reimburse from the incapable person. Though section 68 makes
minor liable for the necessaries, it does not define the necessaries. The necessaries
will be decided upon the case. To have reimbursement for the necessaries the party
supplying the necessaries must prove that the good and reasonable. They have also
to confirm that the provided necessaries are the only support for the minor and that
they do not have any sufficient supply with them.

Agents
The minor can become an agent. But he is not responsible to the principal. The
contract of apprenticeship is a service contract, and it binds the minors by
providing benefits to them. But such an apprenticeship contract is made by a parent
or guardian.

Negotiable Instrument
The minor can draw, deliver, endorse and negotiate the negotiable instruments.
This is to bind every party except him. Any person who receives any goods from
the minor has to pay for it. A minor can avail the benefits of a partnership but
cannot be a partner. A minor can register as a member to a fully paid shares of a
company. If a minor owns the shares through transmission, then guardian of the
minor’s name will appear as a member.

Person of Unsound Mind

The contract law refers to the medical dictionary for the definition of an unsound
mind person. The mental incapacity prevents the person from understanding the
transactions and also the awareness of its implications. An agreement or contract
with an unsound mind person stays inoperative and void. But such a person cannot
avail any benefits from the contract. The property of such a person is always liable.
It is responsible for the necessaries he receives or to anyone he is bound legally to
support. A person who is normally of unsound mind but occasionally of sound
mind can contract when he is of sound mind. This is the lucid intervals.

Intoxication
It is a mental disorder if there is the incompetence of intoxication. The person who
alleges it can only prove the intoxication. A person drinking or consuming any
intoxicants cannot enter into a contract in such an unsound mind state.
Person Disqualified by Law
If the law does not accept any person, then he does not have the capacity to enter
into a contract. The law should qualify a person for them to be a part of a contract.

Alien Enemies
The foreign country citizens living in India are the alien enemies. Such persons
have the capacity to enter into a contract with the Indians only during peace times.
Such a contract is also subject to the restrictions of the Government. If there is a
war declaration between his country and India, then he will become an alien
enemy, and so he does not have the capacity to enter into a contract. If the person
from the foreign country enters into a contract before the declaration of the war,
then the contract will stay suspended during the period of war. The contract can be
revived after the end of the war if it has not barred the time limit.

Convict Serving Sentence

A person who is guilty and is serving imprisonment does not have the capacity to
enter into a contract. He also cannot sue on the contracts that were before his
conviction. After the expiry of his sentence, he is at liberty to suit.

Married Women
A married woman does not have the capacity to enter into a contract relating to the
property of her husband. But the wife can be an agent for her husband and bind his
property if he fails to provide her with the necessaries.

Insolvent
An adjudged insolvent has the capacity to enter into a contract of certain types.
The insolvent can incur debts, be an employee and purchase a property, but he
cannot sell the property. He has certain disqualifications like he cannot be a
magistrate, he cannot be a company’s director, or he cannot be a local body’s
member. The insolvent person has the capacity of a contract except for his
property. He becomes an ordinary citizen after the order of discharge.

Pardanashin Women
A person under the veil or parda and set out of the house, then she is under undue
influence. She does not have an understanding of the implications of the contracts
and so she does not have the capacity to contract.

Corporation Incorporated under a Special Act and Joint Stock Company

Such a corporation or company will be an artificial person formed by the law. It
does not have the capacity to contract outside the powers of the Memorandum of
Association or the Special Act.

Judges, Legal Practitioners or Officers

The judges, legal practitioners or officers who have a connection with the business
interest in actionable claims do not have the capacity to enter into a contract.

Officers and Employees of the Patent Office

The officers and the employees of the patent office do not have the capacity to take
rights, obtain or take an interest in the patent issued by them during the period of
appointment.

Foreign Sovereigns and Ambassadors

International laws extend diplomatic immunities to foreign consulate employees
and ambassadors. Hence the Indian laws cannot enforce the contracts on them.
They can sue the persons to implement the contracts with them, but they cannot be
sued without a sanction from the Central Government. Thus the ambassadors and
the consulate employees are in a privileged position but are considered to be not
competent to contract.