Section 7: Income deemed to be received.
7(1)
The following incomes shall be deemed to be received in the tax year:—
(a) the annual accretion in that year to the balance at the credit of an employee participating in a recognised provident fund, to the extent provident in paragraph 6 of Part A of the Schedule XI;
(b) the transferred balance in a recognised provident fund, to the extent provided in paragraph 11(4) and (5) of Part A of the Schedule XI;
(c) the contribution made by the Central Government or any other employer in that year to the account of an employee under a pension scheme mentioned in section 124.
7(2)
For inclusion in the total income of an assessee,—
(a) any dividend declared by a company or distributed or paid by it within the meaning of section 2(40)(a) or (b) or (c) or (d) or (e) or (f) shall be deemed to be the income of the tax year in which it is so declared, distributed or paid, as the case may be;
(b) any interim dividend shall be deemed to be the income of the tax year in which the amount of such dividend is unconditionally made available by the company to the member who is entitled to it.
Section Summary:
Section 7 of the Income Tax Act deals with incomes that are "deemed to be received" by a taxpayer, even if they are not actually received in cash or kind during the tax year. This section ensures that certain types of income are taxed in the year they are deemed to accrue, regardless of when they are physically received. It primarily covers incomes related to provident funds, pension schemes, and dividends.
Key Changes:
- Provident Fund Accretions and Transfers: The section clarifies that annual accretions to a recognized provident fund and transferred balances are deemed as income in the tax year they occur. This aligns with the provisions in Schedule XI, Part A.
- Pension Scheme Contributions: Contributions made by the Central Government or employers to an employee's pension scheme (under Section 124) are deemed as income in the year they are made.
- Dividends: Dividends, including interim dividends, are deemed as income in the year they are declared, distributed, or made unconditionally available to shareholders.
Practical Implications:
- Employees: Employees participating in recognized provident funds or pension schemes must include the annual accretion or employer contributions in their taxable income, even if they do not physically receive the amount.
- Shareholders: Dividends, including interim dividends, are taxable in the year they are declared or made available, not when they are actually received. This ensures timely tax reporting.
- Employers: Employers must ensure accurate reporting of contributions to provident funds and pension schemes, as these are deemed as income for employees.
Critical Concepts:
- Deemed Income: Income that is considered received for tax purposes, even if not actually received.
- Recognized Provident Fund: A provident fund approved by the Commissioner of Income Tax, where contributions and interest are tax-exempt up to certain limits.
- Dividend: A distribution of profits by a company to its shareholders, which is taxable in the hands of the recipient.
Compliance Steps:
- Employees: Report annual accretions to provident funds and employer contributions to pension schemes as part of taxable income in the relevant tax year.
- Shareholders: Include dividends in taxable income for the year they are declared or made available, not when received.
- Employers: Maintain accurate records of contributions to provident funds and pension schemes and ensure timely reporting to tax authorities.
Examples:
- Provident Fund Accretion: If an employee's provident fund balance increases by ₹50,000 due to interest in a tax year, this ₹50,000 is deemed as income and must be included in their taxable income for that year.
- Dividend Income: If a company declares a dividend on March 31, 2023, but the shareholder receives it in April 2023, the dividend is still taxable in the 2022-23 tax year.
- Pension Scheme Contribution: If an employer contributes ₹20,000 to an employee's pension scheme in March 2023, this amount is deemed as income for the employee in the 2022-23 tax year.