Income-tax Basic Concepts: CA Inter revision notes

Income-tax law rests on four bedrock concepts that appear in every paper—constitutional authority, the basic exemption limit, the definition of agricultural income, and what qualifies as "income" under the Act. Understanding these deeply means you'll spot the right answer even in disguised application questions. Most students rush past these, but toppers spend revision time locking them in.

Constitutional Basis: Article 265

The entire Income-tax Act derives its legitimacy from a single constitutional principle enshrined in Article 265 of the Constitution of India: no tax shall be levied or collected except by authority of law. This is not procedural detail—it is the legal foundation that makes every demand notice, every assessment, and every penalty valid.

What this means in practice: the Central Government cannot arbitrarily impose a tax by executive order. Tax must be backed by an Act passed by the legislature. This is why income-tax amendments must go through Parliament. If the CBDT issues a circular that contradicts the Act, the Act prevails.

Exam tip: when a question asks "on what authority does the government levy tax", look for answers mentioning "law" or "legislative authority", not executive power or emergency powers.

Parliamentary Power: Entry 82, Union List

The Constitution delegates the power to levy tax on income (other than agricultural income) to Parliament alone, under Entry 82 of the Union List (List I) in the Seventh Schedule. This is not shared power; States cannot levy income-tax on non-agricultural income.

State Legislatures do have power over taxes on agricultural income (that is why agricultural income can be taxed by States—a critical exemption). But for salaries, business income, capital gains, and dividends? Parliament's exclusive domain.

Exam frequency: this appears almost every year in at least one MCQ. Learn the entry number (Entry 82) and the list name (Union List).

Basic Exemption Limit (Default Regime)

Under section 2(1) of the Income-tax Act, tax is levied on the total income of a person. But the Act does not tax all income from rupee one. Instead, it provides an exemption threshold—the basic exemption limit—below which no tax is payable.

For Assessment Year 2026–27 under the default tax regime (section 202(1)), the basic exemption limit for an individual is Rs 4,00,000. Income up to this amount is not taxable. Beyond this, a progressive slab structure applies.

Important note: tax slabs and exemption limits change each financial year based on statutory amendment. Always verify the current limit against the latest ICAI study material or the Finance Act of the relevant year before your exam. Do not rely solely on this article for current-year figures.

The slab structure for A.Y. 2026–27 under the default regime is:

This graduated structure is central to income-tax problems. Always apply the correct slab when computing tax; never apply one flat rate to the entire income.

Income vs. Capital: Section 2(45)

The Income-tax Act is a tax on income, not on capital. This distinction is fundamental and trips up many students.

What this means: if you sell land at a profit, that profit is income and is taxable. But the value of the land itself (the capital you owned) is not taxed just by sitting on it. When you inherit property, the property itself is not income. But if the inherited property generates rental income, that rental is taxable income.

Section 2(45) defines "income" to include all receipts that fall within the specified heads of income—salaries, profits and gains of business, capital gains, house property, and so on. If a receipt does not fall into one of these heads, it is not "income" under the Act and is not taxed, however large it may be.

Exam pattern: questions often present a scenario with multiple receipts and ask which is taxable. The answer hinges on whether each receipt is "income" under s. 2(45) or simply a return of capital or a non-taxable windfall.

Agricultural Income: Section 2(5)

Agricultural income is defined under section 2(5) as rent or revenue derived from land situated in India that is used for agricultural purposes. Key words: land, agricultural purposes, India, and rent or revenue.

What qualifies:

• Rent from farm land to a tenant farmer.
• Revenue from sugarcane cultivation, paddy, cotton, or other crops grown on owned land.
• Income from forestry, dairy farming, or horticulture on agricultural land.

What does NOT qualify:

• Dividend from an agricultural company (it is company income, not land revenue).
• Salary paid to a farm manager (it is salary, not land revenue).
• Interest on a loan to a farmer (it is interest income, not land revenue).
• Rent from land used for non-agricultural purposes (e.g. a petrol pump or a factory).

Why does this matter for exam? Agricultural income is exempt from income-tax under section 10(1). So identifying whether income is "agricultural" directly determines whether it is taxable. A common exam trap: present income from a business run on agricultural land, and ask if it is "agricultural income". Answer: no. The income must be rent or revenue from the land itself, not from a business activity conducted there.

What is the Charge to Tax?

Section 2(1) imposes the charge to tax: the income of a person (resident or non-resident) is taxable under the Income-tax Act. The Act contemplates a tax on income, and only income—not wealth, not capital, not consumption.

This is why you can own a crore-rupee house and owe no income-tax on the property itself. But if you rent it out, the rent is taxable income. If you sell it, the gain (if any) is capital gains income, which is taxable. But the mere fact of owning it is not taxed as income.

Practice Questions

You can practise thousands more free MCQs on the Conferenza app to reinforce these concepts.

Where to Study These Topics in Depth

CA Inter Taxation - Income-tax Law lectures by CA Bhanwar Borana (from ₹7999) cover the foundational concepts with detailed case law and statute references.

If you prefer alternative faculty perspectives, CA Inter Taxation - Income-tax Law lectures by CA Arushi Aggarwal (from ₹3000), CA Inter Taxation - Income-tax Law lectures by CA Shirish Vyas (from ₹1799), and CA Inter Taxation - Income-tax Law lectures by Chirag Goyal (from ₹6499) are also excellent resources.

For compact revision and quick reference, the CA Inter/CMA Inter Income Tax Books Combo—LAWgical Provisions Book + Questionnaire Book (₹1099) distils provisions and definitions into exam-ready formats.

FAQs

Q: Does Article 265 prevent tax collection by State Governments?
A: No. Article 265 requires that any tax—whether levied by Parliament or a State Legislature—must be authorised by law. States can and do levy taxes (e.g. on agricultural income, stamp duty, land revenue) within their constitutional competence. The principle is that law must authorise the tax, not who levies it.

Q: If I earn Rs 5,00,000 in a year, what tax do I owe?
A: Under the default regime for A.Y. 2026-27, the first Rs 4,00,000 is exempt. On the remaining Rs 1,00,000 (which falls in the Rs 4,00,001–Rs 8,00,000 slab), you pay 5%, i.e. Rs 5,000. Always verify the current exemption limit and slab rates with your latest ICAI material.

Q: Is dividend income "agricultural income"?
A: No. Dividend is income from a company (shares), not revenue from land. Even if the company runs an agricultural business, the dividend is company income and is taxed as such. Agricultural income under s. 2(5) must be rent or revenue directly from land.

Q: Can a State Legislature levy income-tax on salaries earned in its territory?
A: No. Income-tax on non-agricultural income is Parliament's exclusive domain under Entry 82 of the Union List. A State Legislature cannot legislate on it. However, States can tax agricultural income and other State-list subjects (e.g. stamp duty, land revenue).

Lock these four concepts in before your exam—they are the skeleton on which every Income-tax problem hangs. Explore all Bhanwar Borana's lectures to deepen your understanding.