Determining Tax Liability Under the Income Tax Act, 1961: A Friendly Guide
Taxation in India isn’t just about numbers—it’s about understanding as a taxpayer, what is one’s residential status, and how he/she earns. The Income Tax Act, 1961 lays out clear rules for different types of entities, and once you get the hang of it, it’s not as difficult as it seems.
Let’s walk through how tax liability is determined for individuals, partnership firms, companies, HUFs, AOPs, and BOIs—with a special spotlight on s, which plays a key role in deciding how much tax one owes.
Residential Status: The Starting Point
Before diving into tax rates and deductions, we need to figure out residential status—because it affects what income is taxable in India.
Section 6 of the Income Tax Act, 1961
This section defines who is a resident and who is a non-resident. For individuals and HUFs, there’s even a third category: Resident but Not Ordinarily Resident (RNOR).
For Individuals:
An individual is considered resident in India if:
- He/She stays in India for 182 days or more during the financial year, OR
- He/She stays for 60 days or more in the financial year AND 365 days or more in the preceding 4 years.
Exceptions apply for Indian citizens leaving India for employment or visiting India—where the 60-day rule is replaced with 182 days.
Once someone is a resident, they’re classified as:
- Ordinarily Resident (ROR): Stayed in India for 730 days in the last 7 years AND was resident in 2 out of the last 10 years.
- Not Ordinarily Resident (RNOR): If either of the above conditions is not met.
🧘 For HUFs:
Residential status depends on where the control and management of the family’s affairs is located. If it’s in India, the HUF is resident.
If it’s not in India, the HUF is non-resident.
For Companies:
A company is resident if:
- It’s registered in India, OR
- Its place of effective management is in India.
For Firms, AOPs, BOIs:
They are resident if their control and management is wholly or partly in India. Why It Matters:
- Residents (ROR): Taxed on global income.
- RNORs and Non-residents: Taxed only on income earned or received in India.
Tax Liability of an Individual
Income Sources:
- Salary
- House property
- Business/profession
- Capital gains
- Other sources (like interest, dividends)
Tax Rates:
- Based on slab system, which varies by age:
- Below 60 years
- Senior citizens (60–80)
- Super senior citizens (80+)
Deductions:
- Section 80C: Investments like PPF, LIC, ELSS
- Section 80D: Health insurance
- Section 80G: Donations
Example:
If total income of a person is ₹8 lakh and he invests ₹1.5 lakh under 80C, his taxable income drops to ₹6.5 lakh.
Tax Liability of a Partnership Firm
Definition:
A firm formed by two or more persons to carry on a business.
Tax Rate:
- Flat 30% on total income
- Plus surcharge and cess (4% Health & Education Cess)
Partners’ Taxation:
- Share of profit is exempt in partners’ hands.
- Remuneration and interest received by partners is taxable.
Deductions:
- Business expenses
- Remuneration to partners (within limits of Section 40(b))
Tax Liability of a Company
Types:
- Domestic companies
- Foreign companies
Tax Rates:
| Company Type | Tax Rate | Notes |
|---|---|---|
| Domestic (new regime) | 22% | No exemptions |
| Domestic (old regime) | 30% | With exemptions |
| Foreign company | 40% | Subject to treaties |
Other Provisions:
- MAT (Minimum Alternate Tax): 15% if regular tax is lower
- Dividend Tax: Post-2020, dividends are taxed in shareholders’ hands
Tax Liability of an Association of Persons (AOP)
What’s an AOP?
A group of persons (individuals or entities) coming together for a common purpose—not necessarily business.
Taxation:
- If no member has income above exemption limit: Taxed at slab rates
- If any member has income above exemption limit: Taxed at maximum marginal rate (30%)
No Double Taxation:
Income taxed in AOP’s hands is not taxed again in members’ hands.
Tax Liability of a Body of Individuals (BOI)
What’s a BOI?
A group of individuals only (no companies or firms) earning income together.
Taxation:
- Same rules as AOP
- Slab rates or maximum marginal rate depending on members’ income
Tax Liability of a Hindu Undivided Family (HUF)
What’s a HUF?
A family of lineal descendants with shared assets and income.
Taxation:
- Treated as a separate entity
- Taxed at individual slab rates
Benefits:
- Can claim deductions under 80C, 80D, etc.
- Helps in tax planning by splitting income
Summary Table of Tax Rates
| Entity Type | Tax Rate / Method | Key Notes |
|---|---|---|
| Individual | Slab rates | Based on age and income |
| Partnership Firm | 30% flat | Profit exempt for partners |
| Domestic Company | 22–30% | MAT may apply |
| Foreign Company | 40% | Treaty benefits possible |
| AOP / BOI | Slab or 30% | Depends on members’ income |
| HUF | Slab rates | Separate PAN and deductions |
Final Thoughts
Understanding tax liability isn’t just about compliance—it’s about empowerment. Whether a salaried individual, a small business owner, or part of a joint family, knowing how the Income Tax Act, 1961 applies to you helps you make smarter financial decisions.
Keep in mind—place of residence decides what income one has to pay tax on. So before one does any calculations, it is should be cleared about where one lives and what the law of land says