Key Income-Tax Definitions underSection 2 of the Income-tax Act, 1961

Discover essential definitions—Person, Business, Capital Asset, Income, Financial Year, Gross Total Income, Agricultural Income, Firm, HUF, Dividend, TDS—plus every other term defined in Section 2 of the Income-tax Act, 1961, to file returns accurately and understand your obligations.

Accurate tax compliance in India depends on understanding every term the Act defines. Section 2 of the Income-tax Act, 1961 contains over 40 definitions that set the groundwork for all subsequent provisions. Below is a complete, consolidated article you can publish directly—covering each definition in turn, followed by practical FAQs and a clear call to action.

Introduction

Section 2 of the Income-tax Act, 1961 lays out every term—legal, procedural, financial—that appears elsewhere in the law. From “Advance Tax” through “Yield” (where defined), mastery of these definitions ensures precise interpretation of liability, computation, exemptions, and enforcement. These definitions are dynamic, often updated through Finance Acts to address evolving economic landscapes and combat new forms of tax evasion, making their precise understanding paramount for taxpayers and professionals alike.

Legal Entities & Statuses

Assessee [Section 2(7)]

Any person by whom any tax or any other sum of money (e.g., interest, penalty) is payable under this Act. It also includes:

• Every person in respect of whom any proceeding under this Act has been taken for the assessment of his income or loss, or of the amount of refund due to him.
• A person who is deemed to be an assessee under any provision of this Act (e.g., legal representative of a deceased person).
• A person who is deemed to be an assessee in default under any provision of this Act.
• Example: An individual filing their income tax return, a company paying corporate tax, or a legal heir responsible for the tax dues of the deceased.

Assessee in Default [Section 2(7A)]

An assessee who fails to comply with any obligation imposed by the Act, such as:

• Non-payment of tax by the due date.
• Failure to furnish a return of income.
• Failure to deduct or collect tax (e.g., TDS/TCS) or remit it to the government by the due date.
• Failure to comply with notices or orders issued under the Act.

Person [Section 2(31)]

An inclusive definition, covering various entities that can earn income and are subject to tax. It includes:

• An individual (a natural living person).
• A Hindu Undivided Family (HUF).
• A company (as defined separately below).
• A firm (including a Limited Liability Partnership or LLP).
• An Association of Persons (AOP) or a Body of Individuals (BOI), whether incorporated or not.
• A local authority.
• Every artificial juridical person (e.g., universities, deities, Bar Council, which are not covered in other categories).

Firm [Section 2(23)]

Includes a partnership firm as defined in the Indian Partnership Act, 1932, and also a Limited Liability Partnership (LLP) as defined under the Limited Liability Partnership Act, 2008. Essentially, an association of persons carrying on a business under a common name with a view to profit.

Hindu Undivided Family (HUF) [Section 2(31)]

A family unit governed by Hindu law (which, for tax purposes, also includes Jains, Sikhs, and Buddhists), treated as a separate taxable entity. It consists of a common ancestor and all his lineal descendants, including their wives and unmarried daughters. The landmark 2005 amendment granted daughters equal coparcenary rights by birth.

Company [Section 2(17)]

A broad term that covers:

• Any Indian company (incorporated under the Companies Act, 2013, or earlier Acts).
• Any body corporate incorporated by or under the laws of a country outside India (i.e., a foreign company).
• Any institution, association, or body which is or was assessable as a company for any assessment year under earlier Income-tax Acts.
• Any institution, association, or body, whether incorporated or not, which the Central Board of Direct Taxes (CBDT) may, by general or special order, declare to be a company for tax purposes.

Local Authority [Section 2(20)]

Refers to a municipal committee, district board, body of port commissioners, or other authority legally entitled to, or entrusted by the Government with, the control or management of a municipal or local fund. This ensures specific bodies providing local governance are subject to tax in a defined manner.

Government Company [Section 2(23A)]

A company in which not less than 51% of the paid-up share capital is held by the Central Government, or by any State Government(s), or partly by the Central Government and partly by one or more State Governments. This classification can have implications for specific tax benefits or obligations.

Authority [Section 2(8)]

Refers to the Income-tax Authorities (as defined separately under Section 116, including the Central Board of Direct Taxes, Principal Commissioners, Commissioners, etc.), or any other authority empowered by the Act to carry out its provisions. This defines the administrative and enforcement bodies.

Non-resident [Section 2(30)]

A person who is not a "resident" as defined in Section 6 of the Act. Residential status, determined by physical presence in India, is crucial as it dictates the scope of taxable income (e.g., global income for residents vs. only India-sourced income for non-residents).

Relative [Section 2(41)]

This definition is particularly relevant for gift taxation and certain disallowances. It includes husband, wife, brother or sister, lineal ascendant or descendant of the individual, lineal ascendant or descendant of the spouse of the individual, brother or sister of the spouse of the individual, brother or sister of either of the parents of the individual, any lineal ascendant or descendant of either brother or sister of the individual, any lineal ascendant or descendant of either brother or sister of the spouse of the individual. This comprehensive definition helps identify related parties for various tax provisions.

Timing & Periods

Previous Year (PY) [Section 3]

The financial year immediately preceding the Assessment Year, in which income is earned. It always commences on 1st April and ends on 31st March. Income of a PY is generally taxed in the immediately succeeding AY.

Assessment Year (AY) [Section 2(9)]

The 12-month period commencing on 1st April immediately following the Previous Year, during which the income earned in the Previous Year is assessed. For example, for income earned in FY 2024-25 (Previous Year), the Assessment Year would be AY 2025-26.

Financial Year

While not explicitly defined in Section 2, it is synonymous with the concept of the Previous Year in the context of the Income-tax Act, running from 1st April to 31st March. This standard accounting period is used for all tax computations.

Assessment [Section 2(8)]

The process of computation and determination of tax liability under the Act by the Assessing Officer. This includes various types of assessments:

• Self-Assessment: Done by the taxpayer while filing their return.
• Summary Assessment (Section 143(1)): Automated processing of the return without manual intervention.
• Scrutiny Assessment (Section 143(3)): Detailed examination of the return and accounts to ensure accuracy and completeness.
• Best Judgment Assessment (Section 144): Conducted by the Assessing Officer based on available information if the taxpayer fails to cooperate.
• Reassessment (Section 147): Initiated when the Assessing Officer believes income has escaped assessment.

Computation & Liability

Total Income [Section 2(45)]

The final amount of income on which tax is charged. It is arrived at after making all allowable deductions, exemptions, and adjustments from the Gross Total Income in accordance with the provisions of the Act.

Gross Total Income (GTI) [Section 2(5)]

The aggregate of incomes computed under all five heads of income (Salaries, House Property, Profits and Gains of Business or Profession, Capital Gains, and Income from Other Sources) before allowing for any deductions under Chapter VI-A (e.g., 80C, 80D, 80G).

Income [Section 2(24)]

A comprehensive definition that includes not just profits and gains from various sources, but also specific receipts and deemed incomes. It covers:

• Profits and gains from salary, house property, business or profession, capital gains, and other sources.
• Any dividend (as defined in Section 2(22)).
• Voluntary contributions received by trusts or institutions.
• Perquisites, profits in lieu of salary.
• Specific inclusions like winnings from lotteries, crossword puzzles, races, card games, betting, etc.
• Any sum received under a Keyman insurance policy.
• Any sum referred to in Section 28(va) (non-compete fees).
• Any sum received by a person from any other person without consideration or for inadequate consideration, subject to certain limits and exceptions (often referred to as 'taxable gifts').

Business [Section 2(13)]

Includes any trade, commerce, or manufacture or any adventure or concern in the nature of trade, commerce, or manufacture. This is a very broad definition that covers a wide range of activities undertaken with an intention to earn profit, whether regular or an isolated venture.

Capital Gains [Section 2(14)]

The profit or gain arising from the transfer of a capital asset, computed in accordance with the provisions related to capital gains (Sections 45 to 55A).

Capital Asset [Section 2(14)]

Property of any kind held by an assessee, whether or not connected with his business or profession. This is a very broad definition but comes with important exclusions:

• Exclusions:
  • Any stock-in-trade, consumable stores, or raw materials held for the purpose of his business or profession. [Section 2(14)(i)]
  • Personal effects (i.e., movable property, including wearing apparel and furniture held for personal use by the assessee or any member of his family dependent on him). [Section 2(14)(ii)]
    • Important Exception to Exclusion: This exclusion does NOT apply to specific items that are considered capital assets even if held for personal use. These are:
      • Jewellery
      • Archaeological collections
      • Drawings
      • Paintings
      • Sculptures
      • Any work of art
  • Rural agricultural land in India: Agricultural land which is not situated: [Section 2(14)(iii)]
    • within the jurisdiction of a municipality or cantonment board having a population of not less than ten thousand; or
    • within such distance, not being more than 8 kilometers, from the local limits of any municipality or cantonment board, as notified by the Central Government.
  • 6½% Gold Bonds, 1977, or 7% Gold Bonds, 1980, or Special Bearer Bonds, 1991, issued by the Central Government. [Section 2(14)(iv)]
  • Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999, or deposit certificates issued under the Gold Monetisation Scheme, 2015. [Section 2(14)(v)]

Agricultural Income [Section 2(1A)]

Income derived from agricultural activities, which is generally exempt from income tax in India. It includes:

• Any rent or revenue derived from land which is situated in India and is used for agricultural purposes.
• Any income derived from such land by agricultural operations including processing of agricultural produce, raised or received as rent in kind, to render it fit for sale in the market.
• Income attributable to a farm-house (subject to conditions related to its use and proximity to agricultural land).
• Income from saplings or seedlings grown in a nursery.

Income from Salaries [Section 15-17]

Any payment received by an employee from an employer-employee relationship. This includes wages, annuities, pensions, gratuity, fees, commissions, perquisites (non-cash benefits), profits in lieu of salary, advance of salary, and leave encashment.

Income from House Property [Section 22-27]

The net annual value of any building or land appurtenant thereto of which the assessee is the owner, other than such portions as he may occupy for the purposes of any business or profession carried on by him. It is computed after allowing a standard deduction of 30% of Net Annual Value and interest paid on borrowed capital for acquisition, construction, repair, or renewal of the property.

Income from Business or Profession [Section 28-44D]

The profits and gains of any business or profession carried on by the assessee during the previous year. This head covers income from manufacturing, trading, providing services, and professional earnings.

Income from Other Sources [Section 56-59]

A residual head of income that covers any income not chargeable under the other four heads of income. Common examples include:

• Dividends (not exempt).
• Interest income from bank deposits, loans, or bonds.
• Winnings from lotteries, crossword puzzles, races (including horse races), card games, and other games of any sort, or from gambling or betting.
• Gifts (cash, movable, or immovable property received without consideration or for inadequate consideration, subject to specified limits and relationships).
• Family pension.
• Director's sitting fees.

Tax [Section 2(43)]

Refers to income tax chargeable under the provisions of the Income-tax Act. It includes any interest, penalty, or any other sum payable under the Act, establishing the broad scope of financial obligations to the government under this law.

Payments & Deductions

Advance Tax [Section 207-209]

Tax payable in installments as per a prescribed schedule during the previous year itself, on the estimated total income for that year. It applies if your tax liability after TDS/TCS exceeds a certain limit (currently ₹10,000).

Tax Deducted at Source (TDS) [Section 190-206CCA]

A mechanism where a payer (deductor) deducts tax on specified payments (such as salaries, interest, professional fees, rent, dividends, etc.) at the time of payment or credit, whichever is earlier, and remits it to the Government. The tax deducted is creditable to the payee against their final tax liability.

Tax Collected at Source (TCS) [Section 206C]

Tax collected by a seller on specified receipts from buyers at the time of debiting the amount payable by the buyer or at the time of receipt, whichever is earlier. It applies to sales of certain goods (e.g., scrap, minerals, motor vehicles, certain overseas tour packages) and services, with the collected tax being remitted to the Government and creditable to the buyer.

Deduction

An amount allowed under the Act to be subtracted from the Gross Total Income to arrive at the Total Income. These can be specific business expenses, or various allowances under Chapter VI-A (80C, 80D, 80G, etc.).

Relief

An exemption, rebate, or reduction in tax liability allowed under specific sections of the Act. Examples include Section 87A rebate (for individuals with income up to certain limits), relief under Section 89 (for arrears of salary), and relief under Sections 90/91 for double taxation avoidance agreements (DTAA).

Financial Instruments & Transactions

Dividend [Section 2(22)]

Generally refers to any distribution of accumulated profits by a company to its shareholders. The definition is exhaustive and includes:

• Distribution of accumulated profits, whether capitalized or not, if such distribution entails the release of the company’s assets.
• Any distribution of debentures, debenture-stock, or deposit certificates by a company to its shareholders to the extent to which the company possesses accumulated profits.
• Any distribution to shareholders on liquidation of a company to the extent of accumulated profits immediately before liquidation.
• Any distribution to shareholders on reduction of capital to the extent of accumulated profits.
• Any payment by a company for the benefit of a shareholder to the extent of its accumulated profits (deemed dividend).

Securities [Section 2(h) of Securities Contracts (Regulation) Act, 1956]

While not directly defined in Section 2 of the Income-tax Act, the term typically refers to shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate, government securities, and rights or interests in securities. Its meaning is usually borrowed from the Securities Contracts (Regulation) Act, 1956.

Royalty [Defined by context in Section 9(1)(vi)]

Consideration received or receivable for the transfer of all or any rights (including the granting of a license) in respect of any patent, invention, design, trademark, or similar property. It also includes consideration for the use of, or the right to use, any copyright, literary, artistic, or scientific work, including films or tapes for radio or television broadcasting, and consideration for the imparting of information concerning the working of, or the use of, any patent, invention, design, trademark or similar property.

Interest [Section 2(28A)]

Interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) and includes any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilized.

Fees for Technical Services [Defined by context in Section 9(1)(vii)]

Any consideration (including any lump sum consideration) for the rendering of managerial, technical or consultancy services, including the provision of services of technical or other personnel. Excludes consideration for services rendered in a permanent establishment of the person providing the services.

Transfer [Section 2(47)]

This definition is crucial for determining Capital Gains liability. It includes, but is not limited to:

• Sale, exchange, or relinquishment of the asset.
• Extinguishment of any rights therein.
• Compulsory acquisition under any law.
• Conversion of a capital asset into stock-in-trade.
• Maturity or redemption of a zero coupon bond.
• Any transaction (whether by way of becoming a member of, or acquiring shares in, a co-operative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of, any immovable property.

Special Provisions & Miscellaneous

Charitable Purpose [Section 2(15)]

Includes relief of the poor, education, medical relief, preservation of environment (including watersheds, forests, and wildlife), preservation of monuments or places or objects of artistic or historic interest, and the advancement of any other object of general public utility. However, the advancement of any other object of general public utility shall not be a charitable purpose if it involves carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use or application of the income from such activity, or the retention of such income, unless certain conditions relating to turnover are met. [Proviso to Section 2(15)]

Political Party [Section 2(24C)]

As defined under Section 2(f) of the Representation of the People Act, 1951, which essentially means an association or body of individual citizens of India registered with the Election Commission of India as a political party.

Specified Entity [Section 2(48)]

Refers to designated entities (e.g., Infrastructure Debt Fund referred to in Section 194LB) as notified by the Central Government for specific purposes under the Act. This allows for flexibility in extending benefits or regulations to particular types of entities.

International Financial Services Centre (IFSC) [Section 2(1)(q) of SEZ Act]

A jurisdiction notified under the Special Economic Zones Act, 2005, for carrying out financial services. Income from eligible businesses in an IFSC enjoys significant tax concessions, making it a key concept for international financial transactions in India.

Block of Assets [Section 2(11)]

A group of assets falling within a class of assets comprising building, machinery, plant or furniture, in respect of which the same rate of depreciation is prescribed. This concept simplifies depreciation calculation, allowing for a common depreciation rate for a group of similar assets, rather than individual asset computation.

Associated Person [Section 92F(a)]

For transfer pricing purposes, this typically refers to two enterprises where one participates, directly or indirectly, or through one or more intermediaries, in the management, control, or capital of the other. It also covers situations where the same person(s) participate, directly or indirectly, or through one or more intermediaries, in the management, control, or capital of both enterprises. This definition is crucial for identifying related-party transactions for scrutiny.

Amalgamation [Section 2(1B)]

The merger of two or more companies into one, or the merger of one company with another, which generally meets specific conditions to ensure tax neutrality. These conditions typically include that all property and liabilities of the amalgamating company become the property and liabilities of the amalgamated company, and at least 75% of the shareholders of the amalgamating company become shareholders of the amalgamated company.

Form [Section 2(23)]

Refers to any form prescribed under the Act for various purposes, including income tax returns, statements, certificates, or any other documents required for compliance.

Fund [Section 2(24)(iia)]

Any fund or institution established for a charitable purpose, to which voluntary contributions are made and which are eligible for deduction under specific sections (e.g., Section 80G).

Audit [Section 2(13)]

Specifically refers to the examination of accounts by an accountant under Section 44AB. This is distinct from a financial audit under company law. A tax audit is mandatory for certain taxpayers exceeding specified turnover/gross receipts limits to ensure proper reporting of business income.

Permanent Account Number (PAN) [Section 2(49A)]

A unique alphanumeric identification issued by the Income Tax Department to every taxpayer in India. It is a mandatory requirement for most financial transactions and tax-related activities, serving as a primary identifier for tax purposes.

Conclusion

Section 2’s definitions are the bedrock of the Income-tax Act. From knowing who qualifies as an “assessee” to understanding “advance tax” schedules, every term shapes your obligations and entitlements. Precise understanding of these foundational terms is not merely academic; it is essential for accurate income tax return filing, effective tax planning, and robust defense in case of scrutiny by tax authorities. Ensure you reference each definition precisely when preparing returns or advising clients. For tailored assistance—whether filing, planning, or disputing assessments—contact our tax experts or explore our comprehensive Income-tax resources today.