Direct Tax Laws: Basic Concepts
What the exam tests
This domain tests the charging architecture of the Income-tax Act, 1961: who is chargeable, what counts as income, how the previous year and assessment year interact, and how receipts are classified before any head-wise computation. Expect definitions from Section 2, the charge in Section 4, scope in Section 5 and the five heads in Section 14.
Core rules
- Person and assessee: A person includes an individual, HUF, company, firm, AOP, BOI, local authority and artificial juridical person. An assessee is a person liable to pay tax and includes a deemed assessee such as a representative assessee.
- Previous year and assessment year: Income of the previous year is taxed in the following assessment year. The assessment year is the 12-month period beginning 1 April.
- Income: Income is comprehensive; it includes profits, gains, dividends, perquisites, profits in lieu of salary, allowances and deemed incomes. A receipt may be revenue or capital.
- Heads of income: Salaries; house property; profits and gains of business or profession; capital gains; other sources. Total income is computed head-wise after allowable deductions and set-off.
Worked example
A trader receives ₹5,00,000 as compensation for loss of stock destroyed by fire. The receipt replaces a revenue asset, stock-in-trade, so it is business income. If the same trader receives ₹5,00,000 for compulsory acquisition of land used in the business, the receipt is consideration for a capital asset and is taxed under capital gains, not as business income.
Traps that cost marks
Do not confuse the previous year with the assessment year. Citizenship is not residential status. Agricultural income is exempt under Section 10(1), but it may be aggregated for rate purposes in the old regime. A capital receipt is not automatically exempt; it may be taxable as capital gains. Casual income such as winnings is taxed at the special rate, not as ordinary business income.