In India, income liable to tax refers to all income earned by a person that falls under the scope of taxation as defined by the Income Tax Act, 1961. The Act levies tax on income earned by individuals, Hindu Undivided Families (HUFs), firms, companies, associations of persons (AOPs), and others, based on the residential status and nature of income. Taxable income is computed under five broad heads—salary, house property, profits and gains of business or profession, capital gains, and income from other sources.
Legal Basis and Scope
As per Section 5 of the Income Tax Act, 1961, the total income of a person includes:
- Income received or deemed to be received in India,
- Income that accrues or arises in India,
- And for residents, also income that accrues or arises outside India.
Further, Section 4 is the charging section that states income tax shall be charged on the total income of the previous year at the rates specified in the Finance Act. Certain types of income such as agricultural income (Section 10(1)), gratuity, scholarships, etc., are exempt under Section 10.
Importance and Taxpayer Obligations
Understanding what income is liable to tax is crucial for accurate tax filing and compliance. Income must be classified correctly, and deductions/exemptions must be claimed as allowed. The tax system operates on a self-assessment model, meaning the taxpayer is responsible for computing and paying taxes on their total income. Failure to disclose income can lead to penalties, interest, and prosecution under various provisions of the Act.
Mnemonic to Remember Income Liable to Tax
Use the mnemonic “R.A.T.E.S.” to remember the fundamentals of taxable income:
- R – Received or accrued in India
- A – Arising in or outside India (for residents)
- T – Total income under five heads
- E – Exemptions under Section 10
- S – Self-assessment responsibility
