Concept of Real Income, Hypothetical Income, and Tax-Free Salary

The word ‘Income’ is defined under section 2(24) of the income tax act. The section defines the ‘income’ as Inclusive, not exhaustive. Anything which can be defined as income is taxable under the income tax act unless exempted.

The object of the income tax act 1961 is to tax ‘income’. The word ‘income’ is more general than the word ‘Profit and Gain’. An element of ‘profit’ is not an essential ingredient of the receipt to be taxable as an income (Danfoss Industries Private Limited. In re 268 ITR 1 (AAR)). The receipt may be taxable as income even income element is not included. A simple example we can put with the help of a judgment of (Gopal vs commissioner of income tax 3 ITR 237, 242 PC.), where a person has transferred his estate worth Rs. 5 crores for an annuity of Rs.5,00,000 for a life. The annuity received by the assessee does not constitute Profit or Gain, however, a such annuity is chargeable to tax under the income tax act.

Real or Hypothetical Income:

The income tax is chargeable or payable on the Real income. The income tax is not payable on any income which you could have earned but have not earned. The income stated above is called hypothetical income, which as per the various judgment does not render the purpose of the income tax act consultant in Gurgaon. Let us clear that, as cleared above with an example, every income is not a profit or gain but every profit or gain is an income. The Gain is equivalent to profit.

Under the income tax act, there are five heads of income which includes Profit and Gain from Business or Profession. The profit of any trade or business is a surplus by which the receipts (sale) exceed the expenditure of the business. Where such receipt i.e sale is not more than expenses then losses reflect in the books of accounts.

The income tax act charges income tax not only real income but in some circumstances taxes artificial or deemed Income. Unless the definition of income is artificially expanded the income should include only real income. However, the concept has to be applied based on the facts and circumstances of the case.

The source of income is irrelevant. This means that the income tax act charges taxes on legal as well as illegal Income. The Supreme Court held that it was a well-settled law that the word income would include within it both profits as well as losses (Commissioner of income tax vs Sati Oil Udyog Limited 372 ITR 746). Income tax consultant in gurgaon

When a certain income was shown as interest income from another private limited company but this entry was reversed due to a change in the factual situation, the initial entry was only about a hypothetical income that did not materialize. Consequently, the reversal was rightly done and this entry could not be taxed as it is only real income that will be liable to tax (Commissioner of income tax vs Bokaro Steel Limited 236 ITR 315).

What is Tax-Free Income:

Where any income which is due or received during the year but does not become part of the total income on which tax is determined or payable is called tax-free income. In a simple term, we may call it an income on which income tax is not levied or charged is called tax-free income. Where the employer pays Income tax on behalf of employees is known as tax-free income. Although it does not make any difference in income tax liability because income tax paid by the employer also becomes part of the gross total income and it should be included in the salary income. The above conditions with not get changed if the employer does it voluntarily or under a contractual obligation. The gross-up method will apply if income tax is paid by the employer. Practically the income tax paid by the employer is called a Perquisite as defined under section 17 of income tax consultant in Gurgaon.


Determination of income as per the income tax act is a challenging job for the income tax consultant and chartered accountant in Gurgaon. It looks easy but when you go through the various provisions of the income tax act and link it with other sections and other allied laws, you may find it a difficult job and will transfer this task to the expert income tax consultant who will guide the implication of transaction and method of tax treatment. Also, there is no provision or concept of tax-free salary in India. Every employee is liable to pay income tax on the salary he or she earns in India. There are tax planning tools or methods they can adopt to save tax such as Section 80C, 80D, HRA, etc, but it is impractical to avoid all your taxes if you are in a high tax bracket. High-paying salaried employees should be extra cautioned about the provisions and consultant chartered accountant in gurgaon because their salary includes different prerequisites or benefits like ESOP, Sweat equity share, Car on leasing policy, which could impact their tax liability.

Talk to us