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CS Executive · Tax Laws and Practice

Basic Concept of Income Tax for CS Executive

Basic Concept of Income Tax is the opening chapter of Paper 7. It covers key definitions, the charge of tax, residential status, the five heads of income, the rebate for individuals and the tax authorities. Solve problems by fixing residential status first, then the scope of income, then the head, then the rebate.

What this chapter covers

This chapter builds the vocabulary and logic of the Income-tax Act, 2025, which is the Act examined in Paper 7 from the June 2027 session. It tells you who is taxed, on what income, and under which head that income falls. It also covers the rebate for resident individuals and the authorities who administer the Act.

The chapter is mostly conceptual, but a few parts are computational. Residential status decides the scope of total income under section 5. Section 13 lists five heads: Salaries, Income from house property, Profits and gains of business or profession, Capital gains, and Income from other sources. Section 156 gives the rebate, with its own conditions and limits.

Everything later in Part I (Direct Tax) depends on this chapter. Each head chapter, the deductions and the computation of total income assume you already know residential status, the heads and the rebate. Spend time here and the rest of Paper 7 becomes easier to follow.

Paper 7 is a written paper, so you earn marks by stating the provision, applying it to the facts and giving a clear conclusion. This chapter supplies the provisions you will cite in almost every tax answer: scope of income by residential status, the heads of income and the rebate. Short theory questions and small numerical or case-based questions can both come from it. Errors here, such as taxing foreign income of a non-resident, carry into every later step of a computation. Because the chapter is compact, it is one of the best places to secure marks early.

Basic Concept of Income Tax: topics in the order to study them

  1. 1Introduction to Income Tax and Key DefinitionsEvery later topic uses these terms, so learn the vocabulary first.
  2. 2Charge of Income-taxIt shows what is taxed and who is liable, which sets the frame for scope and heads.
  3. 3Classification of Income and Heads of IncomeThe five heads in section 13 are simple to memorise and give you a map of the whole paper.
  4. 4Residential Status and Scope of Total IncomeThis is the most tested logic in the chapter. Study it once you know the heads, so you can place each income correctly under section 5.
  5. 5Tax Where Total Income Includes Income Not TaxableIt builds on total income and scope, and is easier once you see how income is included or left out.
  6. 6Rebate of Income-tax for Certain IndividualsRebate applies after tax is computed, so study it after scope and heads.
  7. 7Income-tax AuthoritiesThis is mainly descriptive theory, best done last as a lighter revision topic.

How to prepare Basic Concept of Income Tax

Treat this chapter as a mix of definitions, decision rules and one small calculation. Read the Income-tax Act, 2025 wording, then practise writing answers in ICSI style: provision, application, conclusion.

  1. Make a one-page glossary of key terms and write each definition in your own words.
  2. Memorise the five heads of income in section 13 in order, and note one typical income for each head.
  3. Build a table for residential status. Put resident, not ordinarily resident and non-resident down the side, and the three limbs of section 5 (received in India, accrues or arises in India, accrues or arises outside India) across the top.
  4. Practise short case questions. For each, decide residential status, then ask if the income is taxable in India under section 5, then name the head.
  5. Learn the two rebate rules in section 156 separately: sub-section (1) for total income up to ₹5,00,000 (lower of tax or ₹12,500), and sub-section (2) for income taxed under section 202(1) (up to ₹60,000 where income is up to ₹12,00,000, with relief above that limit).
  6. Revise the authorities by listing who can make enquiries under section 256 and what powers they have.
  7. Write three or four full answers under timed conditions and check that each cites the section and ends with a clear conclusion.

Common mistakes in Basic Concept of Income Tax

  • Applying the rebate to every assessee.

    Fix: Start every rebate answer by checking that the assessee is an individual and a resident, then check the income limit and which sub-section applies.

  • Mixing up section 156(1) and 156(2).

    Fix: Pair each sub-section with its limit and its income ceiling in your notes, and note that sub-section (2) applies to income chargeable under section 202(1).

  • Taxing foreign income of a non-resident or a not ordinarily resident.

    Fix: Fix residential status first. Then apply section 5(1) for residents, the limited rule for not ordinarily residents and section 5(2) for non-residents.

  • Taxing the same income twice, as accrued and as received.

    Fix: Remember section 5(4): once income is included as accrued or arisen, it is not included again as received in India.

  • Writing answers with no section number or conclusion.

    Fix: Use the order provision, application, conclusion. Cite the Income-tax Act, 2025 section where you are sure of it.

  • Using the Income-tax Act, 1961 terms or section numbers.

    Fix: For June 2027, use the Income-tax Act, 2025 as amended by the Finance Act, 2026. Use the 1961 Act only for the December 2026 session.

Last-day revision: Basic Concept of Income Tax

  • Section 13 lists five heads: Salaries, Income from house property, Profits and gains of business or profession, Capital gains, Income from other sources.
  • Section 5(1): a resident is taxed on income received or deemed received in India, accruing or arising in India, and accruing or arising 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.
  • Section 5(2): a non-resident is taxed only on income received or deemed received in India, or accruing or arising in India.
  • Income accruing outside India is not treated as received in India merely because it is shown in a balance sheet prepared in India (section 5(3)).
  • Income already included as accrued or arisen is not taxed again as received in India (section 5(4)).
  • Rebate under section 156 is only for a resident individual.
  • Section 156(1): the rebate is the lower of 100% of tax or ₹12,500, if total income does not exceed ₹5,00,000.
  • Section 156(2)(a): for income taxed under section 202(1), the rebate is the lower of 100% of tax or ₹60,000, if income does not exceed ₹12,00,000.
  • Above ₹12,00,000, the rebate equals tax minus the excess of income over ₹12,00,000, so net tax does not exceed that excess.
  • Rebate cannot exceed the income-tax computed before the rebate (section 155(2)).
  • Section 256 lets senior authorities, down to Joint Commissioner, make enquiries with the powers of an Assessing Officer.

Basic Concept of Income Tax practice questions

Basic Concept of Income Tax in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Basic Concept of Income Tax: frequently asked questions

Which Act should I study for the Basic Concept of Income Tax chapter?

For the June 2027 session, study the Income-tax Act, 2025 as amended by the Finance Act, 2026. The December 2026 session still examines the Income-tax Act, 1961 as amended by the Finance Act, 2025. Do not mix section numbers from the two Acts.

How many heads of income are there?

There are five heads under section 13. They are Salaries, Income from house property, Profits and gains of business or profession, Capital gains, and Income from other sources. Every income is classified under one of them for computing total income.

Who gets the rebate under section 156?

Only an individual who is resident in India. Under sub-section (1), the rebate is the lower of 100% of tax or ₹12,500 where total income does not exceed ₹5,00,000. Under sub-section (2), for income chargeable under section 202(1), it is the lower of 100% of tax or ₹60,000 where income does not exceed ₹12,00,000.

Is this chapter more theory or numericals?

It is mostly theory and short case questions, with a small calculation on the rebate. Expect to apply residential status and scope rules to facts, so practise writing short reasoned answers.

Why does residential status matter so much?

It decides which income is taxable in India under section 5. A resident is taxed on a wider scope of income than a non-resident. A wrong status leads to wrong total income in every later computation.