CMA Intermediate · Direct and Indirect Taxation

Basic Concepts, Basis of Charge and Capital and Revenue Receipts: formula sheet

Full chapter guide

Key formulas

Tax year: Tax year = 1 April to 31 March (12 months); Income is taxed in the tax year in which it is earned. The terms previous year and assessment year do not apply under the 2025 Act.
Newly set up source: First tax year for that source = date of setting up or arising to the next 31 March; Applies to a new business, profession or new source of income. It only shortens the first tax year for that source and can be shorter than 12 months. The person's other income stays in the normal tax year.
Person: Person includes individual, HUF, company, firm, AOP/BOI, local authority, other artificial juridical person; The definition is inclusive, so the list is not exhaustive. Learn the list as it is. Examination questions often ask whether an entity is a person.
Assessee: Assessee = person by whom tax or any sum is payable, or against whom proceedings are pending, or who is entitled to a refund, or who has a loss assessed (summary; also includes a deemed assessee and an assessee in default); Every assessee is a person, but not every person is an assessee. A person with no tax payable, no refund, no loss assessed and no proceedings is not an assessee.
Tax payable: Tax payable = tax on slabs − rebate (if any) + surcharge (if any) − marginal relief (if any) + 4% cess on the resulting amount; Follow this order. Cess is computed on tax plus surcharge, after rebate and marginal relief. Surcharge applies only above the income limits in the Act. Use the rates given in the question or the rate schedule for the relevant tax year.
Individual slab method (illustrative rates): Illustrative slabs: Up to ₹4,00,000: nil | ₹4,00,001 to ₹8,00,000: 5% | ₹8,00,001 to ₹12,00,000: 10% | ₹12,00,001 to ₹16,00,000: 15% | above ₹16,00,000: higher rates as the question gives; These rates are assumed for illustration only. They are not confirmed law. In the exam, use the rates and any rebate threshold stated in the question or the rate schedule for the relevant tax year.
Individual: basic conditions for residence: Resident if (A) stay in India in the tax year ≥ 182 days, OR (B) stay in the tax year ≥ 60 days AND stay in the 4 preceding tax years ≥ 365 days; Satisfy either one to be resident. If neither is met, the individual is non-resident. Both the day of arrival and the day of departure count as days in India.
Exception: citizen or person of Indian origin (PIO) leaving India for employment abroad, or as crew of an Indian ship: In condition (B), 60 days is replaced by 182 days; Condition (A) of 182 days still applies. So such a person becomes resident only by staying 182 days or more in the tax year.
Exception: citizen or PIO visiting India: In condition (B), 60 days is replaced by 182 days if Indian-source income ≤ ₹15 lakh. If Indian-source income > ₹15 lakh, 60 days is replaced by 120 days (with 365 days in the 4 preceding years).; Indian-source income means total income excluding income from foreign sources. A visiting citizen or PIO with Indian-source income above ₹15 lakh who is resident only through the 120-181 day route is RNOR, by the express provision for that case.
Deemed resident individual: Indian citizen who is not otherwise resident (neither condition A nor condition B is met), Indian-source total income > ₹15 lakh, and not liable to tax in any other country by reason of domicile or residence → deemed resident; The deemed-resident rule applies only to a citizen who is not already resident under the basic conditions. A deemed resident is RNOR, by the express provision for deemed residents.
ROR test for individual or HUF manager: ROR if resident in at least 2 of the 10 preceding tax years AND stay in the 7 preceding tax years ≥ 730 days. Otherwise RNOR.; Both conditions must be met for ROR. Failing either one makes the assessee RNOR.
HUF, firm, AOP, BOI, other persons (not company): Resident unless control and management of affairs is wholly outside India during the tax year; If even part of the control and management is in India, the person is resident. For a HUF, ROR or RNOR depends on the status of its manager (karta) under the ROR test.
Company: Indian company → always resident. Foreign company → resident only if place of effective management (POEM) in the tax year is in India; POEM is the place where key management and commercial decisions needed for the conduct of the business as a whole are, in substance, made.
Scope of income by status: ROR: Indian + foreign income. RNOR and NR: income received, accruing, arising or deemed to accrue or arise in India; An RNOR is also taxed on foreign income from a business controlled in India or a profession set up in India.
Resident: section 5(1): Taxable = received/deemed received in India + accrues/deemed accrues in India + accrues outside India; All income from whatever source derived. Foreign income is taxable for a resident in the sense of section 5(1)(c), subject to the other provisions of the Act.
Not ordinarily resident: section 5(1)(c) proviso: Taxable = Indian receipt + Indian accrual + foreign income only if from a business controlled in India or a profession set up in India; NOR is defined in section 6(13). Foreign income from other sources is not taxable for a NOR.
Non-resident: section 5(2): Taxable = received/deemed received in India + accrues/deemed accrues in India; Foreign income accruing outside India and received outside India is not taxable.
Balance sheet rule: section 5(3): Foreign income is not 'received in India' only because it is in a balance sheet prepared in India; Use it when a question says the foreign income appears in Indian books.
No double inclusion: section 5(4): Income taxed as accrued or arisen (or deemed so) is not taxed again as received in India; Count each rupee once.
Fixed capital vs circulating capital test: Receipt from disposing of a fixed asset (the tool) = capital; receipt from dealing in circulating capital (the stock) = revenue; Fixed capital is the framework you use to earn profit. Circulating capital is what you turn over to earn profit.
Profit-making apparatus test: Compensation for loss or sterilisation of the profit-making structure = capital; compensation for loss of income in the ordinary course = revenue; Ask whether the business structure itself was hit, or only one season's profit.
Recurring vs one-time test: Recurring, regular receipts point to revenue; a one-time lump sum for giving up a right points to capital; This is only a pointer. A one-time sum can still be revenue, for example a lump sum paid in place of regular income.
Purpose of the payment test: Nature of receipt = what the payment is for, not the form or the name; A receipt for a lost source of income is capital. A receipt in place of income is revenue.
Taxability rule: Revenue receipt: taxable unless exempt. Capital receipt: not taxable unless a provision charges it; Capital gains on transfer of a capital asset are the main charge. Section 193 charges certain GDR income and gains for specified resident employees.
Section 193 rates (specified resident employee): GDR dividend: 10%. Long-term capital gain on transfer of such GDRs: 12.5%. Remaining total income: rates in force; Applies to a resident individual who is an employee of an Indian company in a specified knowledge based industry or of its subsidiary, with GDRs bought in foreign currency under the notified ESOP scheme.
Stage of completion (cost method): Stage of completion = Contract costs incurred to date ÷ Total estimated contract costs; Exclude costs of work yet to be done, such as materials bought but not yet used. Other methods, such as surveys of work done, can be used if the question says so.
Revenue to date: Revenue to date = Stage of completion × Total contract revenue; Total contract revenue includes variations, claims and incentives that are probable and measurable.
Revenue for the year: Revenue for the year = Revenue to date − Revenue recognised in earlier years; Always work on a cumulative basis, then take the difference.
Profit or loss for the year: Profit (loss) for the year = Revenue for the year − Contract costs recognised for the year; Costs recognised for the year are the change in the eligible cumulative cost.
Expected loss: If total estimated cost > total contract revenue, the whole expected loss is recognised immediately; Do this whatever the stage of completion is.

Quick revision

Use tax year, not assessment year, for all questions under the Income-tax Act, 2025.
Fix residential status first. Everything else in the chapter depends on it.
A resident is taxed on income received in India, accruing in India and accruing outside India.
A not ordinarily resident is taxed on foreign income only if it is derived from a business controlled in or a profession set up in India.
A non-resident is taxed only on income received or deemed received in India, or accruing or deemed to accrue in India.
Income accruing abroad is not deemed received in India merely because it appears in a balance sheet prepared in India.
Income already included as accrued or arisen is not included again as received.
Revenue receipts are generally taxable. Capital receipts are generally not, unless a provision specifically taxes them.
Section 57: the base method for construction and service contracts is percentage of completion.
Service contracts of not more than ninety days use project completion. Contracts with indeterminate acts over a period use straight line.
Contract revenue includes retention money. Contract costs are not reduced by incidental interest, dividends or capital gains.

Common mistakes

Writing previous year and assessment year in answers on the 2025 Act. Fix: Use tax year throughout. Mention the old terms only when a question compares the two Acts.
Treating tax year as always 12 months. Fix: For a new business or source, start the first tax year on the date of setting up or arising and end it on the following 31 March.
Using 60 days for an Indian citizen who left India for employment abroad or who is visiting India. Fix: Read the question for citizenship or Indian origin, the purpose of stay or departure, and Indian-source income before choosing the threshold.
Deciding status by citizenship or domicile. Fix: Remember that for tax purposes an individual is tested only on days of stay. Citizenship matters only for the exceptions and the deemed-resident rule.
Taxing a non-resident on foreign income because it appears in the books of an Indian office. Fix: Apply section 5(3): income accruing outside India is not deemed received in India only because it is in a balance sheet prepared in India.
Taxing all foreign income of a NOR. Fix: A NOR is taxed on foreign income only if derived from a business controlled in India or a profession set up in India.
Treating every capital receipt as exempt. Fix: Say a capital receipt is taxed only if a provision charges it. Capital gains on transfer of a capital asset are taxable.
Deciding by the name of the payment, such as 'compensation'. Fix: Look at what the payment is for. Compensation for loss of a source is capital. Compensation in place of regular income is revenue.
Taking the contract price as the revenue of the year it is received or billed. Fix: Revenue depends on the stage of completion, not on billing or receipt. Compute the percentage first.
Including the cost of unused materials in the cost incurred when finding the stage of completion. Fix: Exclude costs relating to future work from the ratio. Treat them as stock or advance, not as cost of work done.

Exam tips

In MCQs, an option that uses previous year or assessment year for tax year 2026-27 is usually the wrong one.
For short notes, give the definition, the period or list, one Indian example and a one-line contrast with the old Act. This gets step marks.
In rate questions, show every slab on its own line. The method earns marks even if one addition is wrong.
Learn the list of persons as a set and practise tagging entities such as a Pune partnership firm or a municipal corporation.
Read the question for the assumptions: regime, residential status, slab rates, any rebate, and whether the income is at normal or special rates.
In MCQs, read for the traps first: citizenship or Indian origin, purpose of stay (employment abroad or visit), and whether Indian income is above ₹15 lakh. These decide which threshold applies.
In written answers, show each test as a line with the numbers and a conclusion such as 'satisfied' or 'not satisfied'. Step marks go to the working, not just the final label.
Always end by stating the status and, if asked, the scope of income. Do not leave it at 'resident'. Say ROR or RNOR for individuals and HUFs.