Taxation: Basic Concepts
What this domain tests
The taxation part begins with structure and vocabulary: previous year versus assessment year, the meaning of person, assessee, income, agricultural income, casual income, gross total income and total income, and the difference between exemption, deduction and rebate. Definitions carry easy marks and underpin the later computation questions.
Core rules
- Previous year is the year in which income is earned; assessment year is the year in which it is charged to tax. Income of the financial year 2023-24 is assessed in the assessment year 2024-25.
- Agricultural income is exempt, but it is included for rate purposes when non-agricultural income exceeds the basic exemption limit and agricultural income exceeds ₹5,000 - this is partial integration.
- Capital versus revenue: only revenue receipts are ordinarily income; a capital gain is taxed only where the Act expressly provides for it.
- Deduction is allowed from gross total income under Chapter VI-A (80C, 80D, 80G, 80TTA); an exemption keeps an item out of total income altogether, as with agricultural income or the exempt part of HRA.
- Tax planning works within the law, avoidance exploits its gaps, and evasion is illegal.
Worked example (illustrative rates - substitute the rates for your assessment year)
Assume slabs of nil up to ₹2,50,000, 5% from ₹2,50,001 to ₹5,00,000 and 20% from ₹5,00,001 to ₹10,00,000. For total income of ₹6,00,000: tax = 12,500 + 20,000 = ₹32,500; health and education cess at 4% = ₹1,300; tax payable ₹33,800. Check separately whether the rebate applies at that level of income.
Traps
- Naming the previous year when the assessment year is asked for.
- Treating agricultural income as fully taxable or ignoring partial integration.
- Confusing a rebate, which reduces tax, with a deduction, which reduces income.
- Quoting slab rates without stating the assessment year to which they belong.