Introduction
In the world of taxation, the term “income” goes far beyond just your monthly salary. Under the Indian Income Tax Act, 1961, income includes not just earned money, but also profits, dividends, rent, gifts, and even lottery winnings. Understanding what qualifies as income and how it’s taxed—known as the incidence of tax—is essential for every taxpayer in India.
This article explains the meaning of income, how residential status determines tax liability, and explores the legal framework that governs the incidence of tax. A mnemonic at the end will help you remember the key points for easy recall.
What is Income?
Definition Under Section 2(24) of the Income Tax Act, 1961
The term “income” is defined in an inclusive manner, meaning it includes many categories and is not limited to what is specifically listed. According to Section 2(24), income includes:
- Profits and gains from business or profession
- Dividends
- Voluntary contributions received by a trust
- Capital gains
- Winnings from lotteries or games
- Perquisites received in place of salary
- Rental income from house property
- Amounts received under Keyman Insurance
- Gifts exceeding ₹50,000 in a financial year
It’s important to note that income can be in cash or kind, and can come from legal or deemed sources.
Classification of Income
Under the Indian Income Tax system, income is categorized under five heads:
- Income from Salary
- Income from House Property
- Profits and Gains of Business or Profession
- Capital Gains
- Income from Other Sources
What is Incidence of Tax?
The incidence of tax refers to the extent and source of income on which an individual is taxed, depending on their residential status. It answers the question: “Which income is taxable for whom?”
Sections 5 to 9 of the Income Tax Act provide a framework for this.
Residential Status and Its Impact
The residential status of a person—whether an individual, company, or entity—decides whether their global income or only Indian income will be taxed.
Under Section 6 of the Income Tax Act, an individual is classified as:
- Resident and Ordinarily Resident (ROR)
- Resident but Not Ordinarily Resident (RNOR)
- Non-Resident (NR)
Resident and Ordinarily Resident (ROR)
Taxable on global income, including:
- Income earned or received in India
- Income earned abroad
- Assets or earnings brought into India later
Resident but Not Ordinarily Resident (RNOR)
Taxable only on:
- Income earned or received in India
- Foreign income if the business or profession is controlled from India
Non-Resident (NR)
Taxable only on:
- Income earned or received in India
- Income that accrues or arises in India
Illustration: Incidence of Tax by Residential Status
| Type of Income | ROR | RNOR | NR |
|---|---|---|---|
| Salary earned in India | Yes | Yes | Yes |
| Salary earned abroad | Yes | No | No |
| Rental income in India | Yes | Yes | Yes |
| Foreign business income | Yes | Yes (if controlled from India) | No |
| Bank interest from India | Yes | Yes | Yes |
Example: If Mr. Raj is working in Canada and is a Non-Resident for tax purposes, only the rental income he earns from a flat in Mumbai will be taxable in India, not his Canadian salary.
Importance of Knowing the Incidence of Tax
- Helps in accurate tax filing
- Avoids double taxation
- Ensures proper financial planning
- Important for NRIs and global citizens
- Enables DTAA (Double Taxation Avoidance Agreement) benefits
Relevant Legal Provisions
| Section | Description |
|---|---|
| Section 5 | Scope of total income |
| Section 6 | Residential status |
| Sections 7 to 9 | Income deemed to accrue/arise in India |
| Section 90 | Double taxation relief |
| Section 115H | Benefits for NRIs returning to India |
Tax Planning Tips
- NRIs should avoid income being credited in India unless necessary
- Take advantage of DTAA between India and other countries
- Disclose all foreign assets if you qualify as a resident
- Keep all income documentation ready for both Indian and global earnings
Mnemonic :
Mnemonic to Remember: R-N-R
Use this simple code to remember the taxability based on residency:
- R – Resident (ROR) – All income is taxed (Indian + Foreign)
- N – RNOR – Indian + Foreign (if controlled from India)
- R – NR – Only Indian income is taxed
