Income under Income Tax Act — Explained

This document covers

1. Concept of Income
2. Income definition as per Income tax Act
3. Classification of Income

1. Concept of Income

• Income includes Regular receipt and casual receipt
• Normally Income refers to Revenue receipts. Capital receipts are generally not included in the scope of income. However the Income Tax Act has specifically included certain receipts like capital gains within the definition of income.
Note : Capital receipt means receipt related to fixed capital and Revenue receipt means receipt related to circulating capital.

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Example : Tangible assets is example of capital receipt

• Income means net receipts which arrived after deducting the expenditure. Income does not mean gross receipts.
• Income is taxable either on due basis or receipt basis. Some receipts will be taxable only on receipt basis. Ex: Compensation received.
• Money is a medium of exchange which is universally accepted for payment of goods and services or to clear debts
• Money is a unit of account which provides standard for measuring the value of goods and services
• Money retains purchase power over time even though there is a factor of inflation
• Money is not taxable unless it represents a specific form of income. Example: Gift to Non Relatives

2. Income definition as per Income tax Act

Income Tax Act 1961 defines the definition of Income. Section 2(24) of Income Tax Act 1961 defines the Income. It is a inclusive definition. The following will come under the definition of Income

• Profits and gains
• Dividends
• Profits and gains of business or profession
• Any Capital gains
• Any Winnings from lotteries, cross-word puzzles, races including race horses, card games and other games of any sort or from gambling or betting
• Perquisite or profit in lieu of Salary given by employer
• Any Allowance or Special allowance or benefit given by employer to employee
• Value of any benefit or perquisite whether convertible into money or not obtained from a company by a director of company or a person who has substantial interest or relatives of such persons.
• Value of any benefit or perquisite whether convertible into money or not obtained by representative assessee or any beneficiary.
• Deemed profits chargeable to tax u/s 41 or 59
• Profits and gains of any insurance business carried on by Mutual insurance company or by a cooperative society.
• Profits and gains of any business of banking carried on by a cooperative society with its members
• Any amount received under keyman insurance policy
• Any amount received by the employer from his employees as PF, superannuation fund, ESI or any other fund
• Fair Market value of inventory as on the date on which it is converted into or treated as capital asset
• Any consideration received for issue of shares as exceeds the FMV of shares
• Any amount received as advance if such amount is forfeited on account of failure of negotiation for transfer of capital asset.
• Any compensation or other payment due to or received by any person in connection with termination of employment
• Any Subsidies or grants or cash incentive or duty drawback or waiver or concession or reimbursement received by the assessee
• Any specified sum received by a unit holder from a business trust during the previous year with respect to a unit held by him at any time during the previous year.
• Sum received including the amount allocated by way of bonus under a Life Insurance Policy other than a ULIP and keyman insurance policy.

3. Classification of Income

Income tax Act has classified the income into following heads for the purpose of taxability

• Salaries
• Income from House property
• Profits and gains from business or profession
• Capital Gains
• Income from Other Sources