Important Keyword: Income Source, Income Tax, Resident Status.
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Residential Status for Income Tax
Determining the residential status of a taxpayer is pivotal in Income Tax assessment, as it directly influences their tax liabilities. It’s important to note that residential status isn’t contingent upon citizenship. A person may hold Indian citizenship yet not qualify as a resident for tax purposes in a given financial year, thereby affecting their tax obligations.
Types of Residential Statuses as per Income Tax Act
Ordinary Resident of India
Resident but Not Ordinary Resident of India (RNOR)
Non-Resident of India (NRI)
The determination of residential status for Income Tax purposes involves specific conditions that individuals must meet. Here are the primary conditions:
182 Days Rule: An individual is considered a resident of India if they have resided in the country for 182 days or more during the financial year.
60/120 Days Rule: Alternatively, if the individual has resided in India for at least 60 days during the financial year and for at least 365 days in the preceding four years, they qualify as a resident. However, this 60-day threshold is extended to 120 days if the individual’s total income, excluding income from foreign sources, exceeds INR 15 lakhs.
Exceptions to the 60-day rule:
For Indian citizens or persons of Indian origin, the 60-day requirement is replaced with 182 days.
Crew members of Indian ships and Indian citizens leaving India for employment purposes abroad also follow the 182-day rule.
Failure to meet any of these conditions renders an individual a Non-Resident Indian (NRI).
Additional conditions for Ordinary Resident status:
Two-Year Rule: The individual must have resided in India for at least 2 years out of the previous 10 financial years.
730 Days Rule: They should have spent at least 730 days in India during the seven years preceding the current financial year.
If an individual meets any one of the primary conditions and fulfills both additional conditions, they are classified as an Ordinary Resident of India. Conversely, if they fail to meet these criteria, they become a Not Ordinary Resident of India (RNOR).
Sources of Income and its taxability
Source of Income
Ordinary Resident
Not Ordinary Resident
Non-Resident
Income earned in India.
Taxable in India
Taxable in India
Taxable in India
Any income received in India.
Taxable in India
Taxable in India
Taxable in India
Income earned outside India but received in India.
Taxable in India
Taxable in India
Taxable in India
Income earned and received outside India.
Taxable in India
Taxable in India
Not Taxable in India
Any income earned outside India for a business/ profession controlled in/from India.
Taxable in India
Taxable in India
Not Taxable in India
Income earned outside India from any source other than business/ profession controlled from India.
Important Keyword: Aadhaar, Business and Profession Income, Capital Gains, Income from House Property, Income Source, ITR Documents, ITR Form, Salary Income, Tax Saving Investments.
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Documents required for Income Tax Return filing in India
Income Tax Return (ITR) forms vary depending on the taxpayer’s sources of income. Specific documents are necessary for filing the ITR.
Additional documents required may vary depending on the taxpayer’s income situation. These documents do not need to be submitted to the Income Tax Department during the filing of the Income Tax Return since ITR forms are annexure-less. However, if a taxpayer receives a notice from the Income Tax Department, such documents may be required to be submitted.
List of Basic Documents required for filing the Income Tax Return – ITR
Here’s a breakdown of the essential documents required for filing an Income Tax Return (ITR) in India, based on different income heads:
Salary Income/ Pension Income:
Form 16
Salary Slips (if Form 16 is unavailable)
Pension Statement/ Passbook
House Property Income:
Property Address
Rent Agreement
Co-ownership details for co-owned property
Municipal Tax Receipts
Form 16A (if TDS is deducted on rental income)
Home loan repayment certificate/ Interest Certificate from the bank
Pre-Construction Interest Details
Capital Gains Income:
Sales and Purchase deed, stamp duty valuation (for sale of land/ building)
Details of Improvement cost
Details of expenses related to the transfer of capital assets
Proof of cost of the asset, cost of improvement, and sales receipts (for movable assets)
Details of investments made to claim exemptions
Capital Gains Deposit Account details (if applicable)
For shares & securities: Trading statement/ Stock Ledger/ Contract Notes
Business and Professional Income:
Balance Sheet and Profit & Loss Statement
Bank Account Statement/ Passbook
Supporting documents for expenses incurred
Cash Register
Any other documents required to maintain business & profession books of accounts
Audit Report (if profit from business is less than 8% of Total Turnover)
Income from Other Sources:
Total interest income earned from savings/ current account
Interest certificate from deposits/ Bonds/ NSC
PPF Account Statement/ Passbook
Dividend Warrants/ counterfoils
Proof of details of receipt of any other incomes
Rent Agreement (in case of let out machinery)
These documents provide comprehensive support for accurate tax filing across various income categories.
Documents Required for Tax Saving Investments (Section 80)
For individuals seeking tax-saving investment opportunities, certain documents play a crucial role in claiming deductions. Here’s a list of documents essential for tax-saving investments:
ELSS/ ULIP/ NSC Investment Details:
Documents confirming investment in Equity Linked Savings Schemes (ELSS), Unit Linked Insurance Plans (ULIP), or National Savings Certificate (NSC).
PPF Account Passbook/ Statement:
Passbook or statement reflecting transactions and balances in the Public Provident Fund (PPF) account.
Life/Medical Insurance Receipts:
Receipts or premium payment details for life insurance policies or medical insurance plans.
Details of Tax-Saving FD:
Information related to investments in Tax-Saving Fixed Deposits, including deposit receipts and interest certificates.
National Pension Scheme Investment Details:
Documentation supporting contributions made to the National Pension Scheme (NPS).
Senior Citizen Saving Scheme Investment Details:
Documentation pertaining to investments in the Senior Citizen Saving Scheme (SCSS).
Donation Receipts:
Receipts or certificates acknowledging donations made to eligible charitable organizations.
Children Tuition Fees Paid Receipts:
Receipts confirming payment of tuition fees for children’s education.
Repayment Certificate for Home Loan/ Education Loan:
Certificate or statement from the lending institution confirming repayment of home loan or education loan, eligible for tax deduction.
Certificate from Specified Medical Authorities in Case of Disability:
Certification from designated medical authorities validating disability for claiming tax benefits.
Receipts/Proof of Any Other Tax-Saving Investments/Contributions:
Supporting documents for other tax-saving investments or contributions made during the financial year.
Documents Required for Foreign Income and Foreign Investments:
Details of foreign income earned and taxes deducted, if applicable.
Information regarding assets held outside India, including foreign bank accounts.
These documents serve as evidence of tax-saving investments and contributions, facilitating the process of claiming deductions while filing income tax returns.
Important Keyword: Business and Profession Income, Capital Gains, Income from House Property, Income Source.
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Set Off and Carry Forward Losses
Setting off and carrying forward losses is a vital strategy for individuals and businesses alike when they encounter financial setbacks. This approach allows them to utilize these losses to diminish their tax obligations, thereby turning adversity into opportunity. By leveraging this strategy, taxpayers can navigate challenging financial circumstances more effectively, making it a crucial aspect of income tax planning.
Basics of Carry forward and Set off of losses
Taxpayers have the flexibility to offset losses against their income for the current year. If any losses remain unutilized, they can carry them forward to subsequent years to offset against future income. It’s worth noting that if taxpayers fail to file their Income Tax Return (ITR) within the stipulated deadline under Section 139(1), they forfeit the opportunity to carry forward losses to future years, except for losses under the head “Income from House Property.” However, even if they file a belated ITR, they can still carry forward losses under this category to future years.
Set Off Losses
Intra-Head Set Off of Loss:
Intra-head set-off entails offsetting losses against income within the same category. This means losses from a specific source within a particular category can be adjusted against income from another source within that same category. For instance, if there’s a loss from a self-occupied property but profit from another rented house property, you can use the losses to offset the income from the profitable property.
Inter-Head Set Off of Loss:
Inter-head set-off involves adjusting losses from one income category against profits from another income category. Therefore, if a taxpayer incurs losses in one income category but earns positive income in another, those losses can be offset against the income. For example, you could set off losses from a self-occupied house property against income from salary. However, before applying inter-head set-off, the taxpayer must first utilize intra-head set-off.
Methodology of set-off of losses for each head
Business (PGBP) Loss:
Non-Speculative Business Loss: Can be set off against any income except salary income.
Speculative Business Loss: Can be adjusted against only Speculative Business Profit.
Loss under Capital Gains:
Short-term capital loss: Can be adjusted against short-term and long-term capital gains.
Long-term capital losses: Can be adjusted against long-term capital gains only.
Capital gains losses can only be set off against capital gains and not with any other income.
House Property Loss:
Loss from house property: Can be set off against any other income.
Set off of losses can be done up to INR 2,00,000 for a particular assessment year.
Loss from trading in Cryptocurrency and other Virtual Digital Assets (VDA):
Losses from the transfer of cryptocurrency, NFT, or VDA: Cannot be set off against any other income.
Losses from other heads can be set off against profit on the transfer of cryptocurrency, NFT, or VDA.
Horse-Race Loss:
Losses from the business of owning and maintaining racehorses: Cannot be set off against any income other than income from the business of owning and maintaining racehorses.
Specified Business Loss:
Losses from businesses specified under section 35AD: Can be adjusted against income from specified businesses only.
Losses from other businesses and professions can be set off against specified business losses.
Loss from Gambling or betting:
Losses from winnings from lotteries, crossword puzzles, horse races, card games, and games having gambling or betting: Cannot be set off against any income.
Example of Set-Off Loss:
Non-Speculative Business Loss: INR 5,00,000 Speculative Business Income: INR 1,00,000 House Property Income: INR 2,50,000
Solution:
Taxpayers can set off Non-Speculative Business Loss in the following order:
Speculative Business Income (Intra-head set off): INR 1,00,000
House Property Income (Inter-head set off): INR 2,50,000
Carry Forward Loss to future years: INR 1,50,000 (5,00,000 – 1,00,000 – 2,50,000)
Carry Forward Losses
Loss remaining after set-off refers to the portion of the loss that taxpayers can carry forward to future years to offset against future incomes. For instance, if there is a loss from self-occupied house property remaining after intra-head and inter-head set-off, the taxpayer can carry it forward for up to 8 years and adjust it against future income from house property.
To carry forward the loss to future years, taxpayers must file the Original Income Tax Return (ITR) within the due date as per Section 139(1). However, even if taxpayers file a Belated ITR under Section 139(4), they can still carry forward loss under the head House Property to future years. Below is a table outlining the rules for carrying forward and setting off losses against future incomes:
Example for Carry Forward of Loss:
FY 2021-22 (AY 2022-23)
Non-Speculative Business Loss: INR 5,00,000
Speculative Business Income: INR 1,00,000
House Property Income: INR 2,50,000
FY 2022-23 (AY 2023-24)
Speculative Business Income: INR 30,000
Non-Speculative Business Income: INR 1,40,000
Solution:
FY 2021-22 (AY 2022-23)
The taxpayer can set off Non-Speculative Business Loss in the following order:
Speculative Business Income (Intra-head set off) – INR 1,00,000
House Property Income (Inter-head set off) – INR 2,50,000
Carry Forward Loss to future years – INR 1,50,000 (5,00,000 – 1,00,000 – 2,50,000)
FY 2022-23 (AY 2023-24)
The taxpayer can set off Non-Speculative Business Loss in the following order:
Carry Forward Loss – INR 1,50,000
Non-Speculative Business Income – INR 1,40,000
Speculative Business Income – INR 10,000
Carry Forward and Set Off Business Loss
Non-speculative business loss:
Taxpayers can carry forward Non-Speculative Business Loss remaining after set off for up to 8 assessment years. These losses can be set off against incomes under the head ‘Profits and Gains from Business and Profession.’
Speculative business loss:
Losses from speculative business can be carried forward for 4 years. However, these brought-forward losses can only be adjusted against speculative business incomes.
Specified business loss:
There is no time restriction for carrying forward losses from specified business. These brought-forward losses can be adjusted against specified business incomes only.
Owing and maintaining racehorses
The taxpayer can carry forward losses from owning and maintaining racehorses for up to 4 years. However, they can only adjust these losses against the profits earned specifically from owning and maintaining the racehorses.
Carry Forward and Set Off of House Property Loss
The taxpayer has the option to carry forward and set off losses from House Property for a duration of 8 assessment years. Moreover, this carry forward of losses is permissible even if the Income Tax Return (ITR) is filed after the due date specified under section 139(1).
In the subsequent financial years, these carried forward House Property Losses can be set off against any income generated from House Property.
Carry Forward and Set Off of Capital Loss
The taxpayer has the provision to carry forward losses under the head of ‘Capital Gains’ for up to 8 assessment years, provided that they have filed their Income Tax Return (ITR) before the due date as specified under section 139(1).
In the subsequent financial years, the taxpayer can utilize the carried forward Short Term Capital Loss (STCL) to offset both Short Term Capital Gains (STCG) and Long Term Capital Gains (LTCG). However, the carried forward Long Term Capital Loss (LTCL) can only be set off against Long Term Capital Gains (LTCG).
Carry Forward and Set Off of Crypto Loss
As per the amendments introduced in Budget 2022, significant changes have been made to the taxation of cryptocurrency, NFTs, and other virtual digital assets (VDA). One notable change is regarding the treatment of losses incurred from the transfer of these assets.
Under the new provisions, taxpayers are no longer permitted to offset losses from the transfer of one virtual digital asset against profits from the transfer of another VDA or any other form of income. Additionally, the option to carry forward such losses to subsequent years for set-off against future income has been eliminated.
Furthermore, if a taxpayer experiences a loss under any other income head, they are prohibited from using it to offset profits generated from the transfer of virtual digital assets. These changes represent a significant shift in the tax treatment of cryptocurrency and other similar assets, highlighting the evolving regulatory landscape in this space.
Treatment of Loss as per New Tax Regime
With the implementation of Section 115BAC in Budget 2020, several changes were introduced in the treatment of losses under the income tax regime. Here’s a breakdown of the key modifications:
House Property Loss: Under the new tax regime, taxpayers can only set off the current year’s loss from house property against income derived from house property itself. Importantly, they are prohibited from offsetting house property losses against any other form of income. Moreover, if taxpayers opt for the new tax regime, they cannot carry forward house property losses to subsequent years.
Set Off Business and Profession Loss: In the scenario of business income, individuals or Hindu Undivided Families (HUFs) are restricted from setting off brought forward business losses or unabsorbed depreciation. Furthermore, they cannot carry forward these losses or unabsorbed depreciation if they are associated with deductions or exemptions withdrawn under clause (i) of sub-section (2) of section 115BAC.
In essence, under the new tax regime, taxpayers can carry forward short-term and long-term capital losses, as well as derivatives trading losses. However, losses such as house property losses and additional depreciation, which are invalidated under Section 115BAC(2)(i), cannot be set off or carried forward.
This distinction between the treatment of losses in the new and old tax regimes is illustrated in the accompanying image, providing a clearer understanding of the changes introduced.
Important Keyword: Dividend Income, Income Interest, Income Source, TDS.
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Income from Other Sources (IFOS)
Income from Other Sources (IFOS) constitutes one of the five heads of income in the Indian taxation system. It encompasses any income that doesn’t fall under the purview of the other specified heads of income. For instance, income derived from gifts, dividends, and other similar sources is taxed under IFOS. This head of income serves as a catch-all category for taxable income that doesn’t fit neatly into other classifications.
Incomes covered under IFOS
Under the head “Income from Other Sources” (IFOS), various sources of income are taxable. Some of these sources include:
Dividends from companies.
Winnings from lotteries, crossword puzzles, races (including horse races), card games, gambling, betting, or similar games.
Income by way of interest received on compensation or on enhanced compensation.
Gifts received.
Family pension.
Different interest incomes, such as interest from post office savings accounts, bank savings accounts, bank fixed deposits, etc.
Interest received from the Income Tax Department on refunds.
Insurance commission.
Income from letting out machinery, plant, or furniture.
Income from royalty.
Any sum received under a Keyman Insurance Policy, including a bonus.
Director’s commission for standing as guarantor to bankers.
Remuneration received by Members of Parliament.
Income from sub-letting of house property by a tenant, etc.
Agricultural income exceeding INR 5,000.
This list is not exhaustive, but it provides an overview of the various sources of income that fall under the IFOS category for taxation purposes.
Apart from the sources mentioned earlier, certain incomes are also taxed under the head “Income from Other Sources” if they are not taxed under the head “Profits and Gains of Business or Profession.”
These include:
Contributions to funds for the welfare of employees received by the employer.
Income from:
Interest on securities.
Letting out or hiring of plant, machinery, or furniture.
Letting out of plant, machinery, or furniture along with a building where both the lettings are inseparable.
These additional sources of income are subject to taxation under the head “Income from Other Sources” if they do not fall under the scope of business or professional income.
Taxability of Income from Other Sources (IFOS)
Certainly, here’s an overview of the tax treatment for various types of income falling under the head “Income from Other Sources”:
Gifts can encompass various forms, including monetary gifts, movable properties, or immovable properties, and their tax treatment can vary depending on the circumstances. Generally, gifts are taxable under the head “Income from Other Sources” and are subject to applicable slab rates.
However, there are exceptions to this rule:
Exemption Limit: Gifts are exempt from tax if the aggregate value received during a financial year does not exceed INR 50,000. Additionally, any property received without consideration, with a total fair market value not exceeding INR 50,000 throughout the year, is also exempt.
Gifts from Relatives: Gifts received from certain relatives on specific occasions are exempt. This includes gifts received on marriage, by way of inheritance, or under a will. Additionally, gifts received from local authorities, funds, foundations, educational institutions, hospitals, trusts, or charitable trusts are exempt.
Tax Treatment on Life Insurance Policy: Amounts received under a life insurance policy, including bonuses, are exempt from tax under Section 10(10D) of the Income Tax Act.
However, there are conditions to this exemption:
Premium Limit: The exemption is available only if the premium paid for a financial year does not exceed 20% of the actual capital sum assured (10% for policies taken on or after April 1, 2012).
Exemption on Death: Amounts received on the death of the policyholder are completely exempt from tax without any conditions.
Tax on Dividend Income: Dividend income is taxable under Income from Other Sources at applicable slab rates. Dividends received from cooperative societies or foreign companies are fully taxable.
Tax on Interest Income: Interest income from various sources like fixed deposits, recurring deposits, savings accounts, or post office deposits is taxable. Banks deduct TDS at 10% (20% if PAN is not provided) if the total interest income exceeds INR 10,000. However, interest earned on tax-free bonds, Public Provident Fund (PPF), and certain post office savings accounts is exempt up to specified limits.
Tax on Commission Income: Commission or brokerage income received from sources other than business is taxed as Income from Other Sources at slab rates.
Can I claim any expenses from Incomes from Other Sources (IFOS)?
Under Income from Other Sources, taxpayers can claim certain deductions as per Section 57 of the Income Tax Act. However, there are specific deductions that cannot be claimed under this head, as outlined in Section 58 of the Income Tax Act:
Section 40A: Any amount mentioned as per Section 40A cannot be claimed as a deduction under Income from Other Sources. Section 40A deals with expenses or payments made in certain cases where the expenditure is disallowed if it exceeds a specified limit.
Personal Expenses: Deductions for personal expenses are not allowed under Income from Other Sources. This includes expenses incurred for personal purposes or non-business-related activities.
Wealth Tax: Amounts paid towards wealth tax cannot be claimed as deductions under this head. Wealth tax is a tax levied on the net wealth of individuals and HUFs exceeding a specified limit.
Expenses from Winnings: Expenses associated with winnings from lotteries, races, crossword puzzles, games, gambling, or betting cannot be claimed as deductions under Income from Other Sources. This includes any costs incurred in participating in such activities.
Salary Payable Outside India: Deductions cannot be claimed for salaries payable outside India on which tax is not deducted at the source. This pertains to salaries earned outside India that are not subject to tax deduction at source (TDS).
Interest Payable Outside India: Similarly, any interest subject to tax that is payable outside India cannot be claimed as a deduction under Income from Other Sources. This applies to interest payments made outside India that are not subject to TDS.
Important Keyword: Capital Gains, Exempt Income, Income Interest, Income Source, Provident Fund.
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Exempt Income u/s 10 of the Income Tax Act
It’s a common misconception that any income earned is subject to taxation. However, certain types of income fall under the category of Exempt Income according to section 10 of the Income Tax Act, meaning there’s no tax liability on them. Exempt income can take various forms, such as interest received from PPF or agricultural land, among others.
What is Exempt Income?
Exempt income pertains to specific types of earnings that are not taxable under the Income Tax Act’s provisions. This differs from deductions under income tax, where deductions are claimed against taxable income. In essence, exempted incomes are excluded from a taxpayer’s total taxable income, while deductions are applied to taxable incomes.
Types of Exempt Income
Agriculture Income:
Income derived from agricultural activities is exempt from taxation under the Income Tax Act. However, this income must be accounted for in the total income calculation to determine the applicable tax slab rates. As a result, it indirectly impacts taxation by potentially pushing non-agricultural income into higher tax brackets.
Gifts from Relatives:
Gifts received from relatives are not subject to taxation. This exemption extends to gifts received during marriage ceremonies or through wills. Additionally, monetary gifts from non-relatives up to INR 50,000 are also exempt from tax.
Long Term Capital Gains:
As of the financial year 2018-19, long-term capital gains (LTCG) up to INR 1,00,000 are not taxable. Previously, gains from the sale of stocks and equity mutual funds were exempt from tax under section 10(38), though this provision does not apply to debt mutual funds.
Interest on Securities:
Income from securities such as interest and premium received from government-issued bonds, certificates, and deposits is tax-free. This includes bonds issued by entities like NHAI, IRFC, and REC.
Profit Share from Partnership Firms:
The share of profits from a partnership firm or LLP is exempt from tax in the hands of the partner. However, interest on capital and remuneration received may be taxable.
Provident Fund:
Payments received from Provident Fund (PF) are exempt under Section 10. However, withdrawals from PF before completing five years of service may be taxable. For EPF, withdrawal is permissible under certain conditions.
Gratuity:
Gratuity received by government employees is tax-free. In the case of private organization employees, gratuity is exempt from tax subject to specific conditions.
Commuted Pension:
Commuted pension received by government employees is entirely tax-free. Other employees may also enjoy tax exemption on commuted pension subject to certain conditions.
Other Exempt Income
Life Insurance:
Payments received from a life insurance policy are exempt from tax under section 10(10D) of the Income Tax Act. This exemption applies to both the maturity amount and death claims.
Receipts from HUF:
Any funds received from the family income are tax-free for the member of a Hindu Undivided Family (HUF). For instance, if a family owns an impartible estate, any amount received by a member from the family estate’s income is exempt from tax.
Scholarships and Awards:
Scholarships or awards granted to deserving students to cover educational expenses are exempt from tax. The entire scholarship amount receives this tax exemption.
Amount Received under VRS (Voluntary Retirement Service):
Employees receiving amounts under voluntary retirement schemes, as per Rule 2BA of the Income Tax Rules, are eligible for tax exemption of up to Rs. 5,00,000 from the retirement amount received.
Allowance for Foreign Services:
Indian residents providing services outside the country and receiving allowances or perquisites abroad are exempt from income tax under section 10(7) of the Act. This provision ensures that allowances and perquisites received by government servants while working overseas remain tax-free.
Reporting of Income in ITR
Taxpayers can disclose their exempt income when filing their income tax returns each year. Exempt income should be reported in the “Exempt Income” section under the “Computation of Income and Tax” tab in ITR-1 and ITR-4. By adding a row, selecting the nature of income from the dropdown list, and entering a description and amount, taxpayers can accurately report their exempt income.
For ITR-2 and ITR-3, taxpayers should report non-taxable income under Schedule EI, which stands for Schedule Exempt Income. Details should be provided for various types of exempt income, including Interest Income, Agriculture Income, Income not chargeable as per DTAA, and other exempt income, selecting the relevant option from the dropdown list. This income is reported separately and not included in the Gross Total Income.
Disclosure of Exempt Income for Salary and Non-Salary Allowances
For individuals with salary income, exempt income should be disclosed under Schedule S – Details of Income from Salary when filing income tax returns using ITR-2. Various exemptions such as House Rent Allowance (HRA), Leave Travel Allowance (LTA), Leave Encashment Amount, Pension Amount, Gratuity Amount, and any perquisites received, including amounts received from a Voluntary Retirement Scheme, should be reported here.
For self-employed individuals or those without salary income, certain incomes fall under the category of exempt income. These include agricultural income, interest on funds, and other income, which must be disclosed under Schedule EI while filing income tax returns.
