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Person – Taxable Entities under Income Tax Act

Can a company be a person? Can a family be a person? In Income Tax law - YES! Let's understand who all are "persons".

Definition - Section 2(31)

"Person" includes:

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1. Individual

Simple: Any human being - you, me, anyone!

Tax Treatment:

  • Slab rates: 0%, 5%, 10%, 20%, 30%
  • Residential status: Resident or NR (based on stay)
  • PAN: Mandatory if income > ₹2.5L

Types:

  • Male, Female, Senior Citizen (60+), Super Senior (80+)

Example:

  • Rahul (25, software engineer) - Individual
  • Mrs. Sharma (65, pensioner) - Individual (Senior citizen)

2. Hindu Undivided Family (HUF)

Special Indian concept!

What is HUF?

  • Joint family under Hindu law
  • Governed by Mitakshara or Dayabhaga law
  • Karta (head, usually eldest male)
  • Coparceners (members with right in property)

Tax Benefits:

  • Separate person from individuals
  • Gets own PAN
  • Own ₹2.5L basic exemption
  • Own ₹1.5L deduction under 80C

Example:

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How HUF is Created:

  • By Hindu family (or Jain, Sikh, Buddhist)
  • Ancestral property, gift from father/grandfather
  • Business income can be HUF income

Karta's Role:

  • Files HUF's tax return
  • Represents the family
  • Liable for HUF's tax

3. Company

Entity incorporated under Companies Act

Types for Tax:

A. Domestic Company:

  • Incorporated in India
  • Tax rate: 25% (turnover < ₹400 cr) OR 30%
  • New regime: 22% (Section 115BAA) if no deductions claimed

B. Foreign Company:

  • Incorporated outside India
  • Tax rate: 40%
  • Example: Google Ireland (tax office in India)

Tax Features:

  • No slabs - flat rate
  • No exemption (₹2.5L benefit only for individuals)
  • MAT (Minimum Alternate Tax) - 15% even if loss
  • Dividend Distribution Tax abolished (2020)

Example:

  • Infosys Ltd - Domestic company, 25% tax
  • Apple Inc (India branch) - Foreign company, 40% tax

4. Firm (Partnership)

Two or more persons doing business together

Types:

A. Partnership Firm:

  • Registered under Partnership Act
  • Tax rate: 30% (flat)
  • Partners taxed separately on their share

B. LLP (Limited Liability Partnership):

  • Registered under LLP Act 2008
  • Tax rate: 30%
  • Partners have limited liability

Taxation:

1. Firm level:

  • Firm's profit taxed @ 30%

2. Partner level:

  • Salary/interest to partner: Deductible for firm
  • Partner pays tax on salary at slab rates
  • Share in profit: Exempt for partner (already taxed at firm level)

Example:

ABC & Co (Partnership):

  • Profit: ₹10 lakh
  • Firm pays: ₹10L × 30% = ₹3L
  • Profit distributed: ₹7L to partners (no further tax!)

Partner's Receipt:

  • Gets ₹3.5L each (if equal partners)
  • Tax on this: NIL (Section 10(2A) - exempt!)

5. Association of Persons (AOP) / Body of Individuals (BOI)

AOP: Association of persons (can be individuals, HUFs, companies, any combination)

BOI: Body of only individuals

When Formed?:

  • Joint venture for specific purpose
  • Co-owners of property earning rent
  • Joint business (not formal partnership)

Tax Rate:

If all members known, assessable:

  • Tax at maximum marginal rate of members
  • Usually 30%

If members unknown/unascertainable:

  • 30% flat

Example:

3 friends jointly buy property:

  • Earn ₹9 lakh rent
  • AOP formed (joint ownership)
  • Tax @ 30% = ₹2.7 lakh
  • Or distributed: Each friend pays tax at own slab rate

6. Local Authority

Government bodies providing civic services

Examples:

  • Municipal Corporation (Mumbai, Delhi)
  • Gram Panchayat (village council)
  • Cantonment Board
  • Port Trust, Development Authority

Tax Treatment:

  • Most income exempt (Section 10(20))
  • Public welfare body, not profit-oriented
  • Commercial income may be taxable

Example:

  • Bombay Municipal Corporation: Most income exempt
  • If runs commercial complex: Rent income taxable

7. Artificial Juridical Person

Catch-all category for any legal entity not covered above

Examples:

  • University, College (not individuals, not companies)
  • Cooperative Society
  • Business Trust
  • Investment Fund

Tax: Depends on nature (usually 30%)

Comparison Table

PersonTax RateExemptionPAN Required
IndividualSlab (0-30%)₹2.5L (₹3L in new regime)Yes (if income > ₹2.5L)
HUFSlab (0-30%)₹2.5LYes
Domestic Company25-30% (or 22% new)NoAlways
Foreign Company40%NoAlways
Partnership Firm30%NoAlways
LLP30%NoAlways
AOP/BOI30% (or max marginal rate)NoAlways

Why "Person" Matters?

1. Tax Liability:

  • Only a "person" can be taxed
  • Determines which tax rate applies

2. Return Filing:

  • Each "person" files separate return
  • HUF return different from Karta's individual return

3. Legal Rights:

  • Each "person" has separate legal identity
  • Can sue, be sued

Real-World Application

Mr. Verma's Income Structure:

As Individual:

  • Salary: ₹8 lakh
  • Tax @ slab: ₹50,000

As Karta of HUF:

  • HUF property rent: ₹4 lakh
  • HUF tax @ slab: ₹7,500

As Partner in firm:

  • Share in profit: ₹3 lakh (exempt!)
  • Salary from firm: ₹2 lakh (taxable @ slab)

Total Persons: 3 (Individual, HUF, Firm) Total Returns: 3 (each person files separately)

Summary

  • Person (Section 2(31)): 7 categories - Individual, HUF, Company, Firm, AOP/BOI, Local Authority, Artificial Juridical Person
  • Individual: Human being, slab rates 0-30%, ₹2.5L exemption
  • HUF: Joint family, separate entity, own PAN, own tax benefits (double benefit strategy!)
  • Company: Domestic 25-30%, Foreign 40%, flat rate
  • Firm/LLP: 30% flat, partner's profit share exempt
  • AOP/BOI: 30% or max marginal rate, formed by joint activity
  • Each person: Separate tax return, separate PAN, separate liability

Quiz Time! 🎯

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Next Chapter: Agricultural Income – Definition & Tax Treatment! 🌾

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