Section 4 of the Income Tax Act, 1961, is often called the “charging section.” And rightly so. This single provision is what gives the government the power to levy income tax on the income of every taxpayer in India. Without Section 4, the entire tax structure would collapse, because this is the section that clearly states who will be taxed, on what income, and how.
The language may look technical at first, but the principle is surprisingly simple: income tax is charged every year on the total income earned in the previous year. Everything else in the Income Tax Act exists only because Section 4 gives the authority to charge tax in the first place.
What Does Section 4 Really Say? Explained in Human Language
If you read the section in its raw legal form, it may feel overwhelming. But when we simplify it, the meaning becomes very clear.
The basic principle of charging income tax, as per Section 4 of the Income Tax Act, 1961, is that income tax is an annual charge levied on the total income of a person earned during the previous year, at the rates prescribed by the annual Finance Act.
In other words:
- You earn income today.
- You pay tax on it next year.
- The government tells you the tax rates each year through the Finance Act."
Everything is neatly structured so taxpayers know exactly how the system works.
Income Tax Is an Annual Charge — What Does That Mean?
Section 4 introduces the concept of income tax being an “annual charge.” This simply means that you do not pay tax on your lifetime earnings or on each transaction separately. Instead, the government collects tax once every year after calculating your total income.
This system keeps tax collection predictable & systematic. Whether you are a salaried employee, a freelancer, a landlord earning rent, or someone running a business — you follow the same yearly cycle of earning, calculating, and paying tax.
Income-Tax Shall Be Charged at Any Rate or Rates — Why This Matters
Another important phrase under Section 4 is that income-tax shall be charged for any assessment year at any rate or rates. These “rates” are not fixed inside Section 4. Instead, they are updated every year through the Union Budget (also known as the Finance Act).
This keeps the tax system flexible. When economic needs change, the government can revise tax rates accordingly. Section 4 acts like a permanent foundation, while the Finance Act updates the numbers placed on top of that foundation.
Also Read: Tax-Free Allowances Explained for Employees
Section 4 Applies to Individuals, HUFs, Companies, Firms & More
Even though Section 4 doesn’t list every taxpayer type, the person definition in income tax section ensures that all categories of taxpayers fall under this charging principle. This includes:
- individuals
- Hindu Undivided Families (HUFs)
- companies
- firms
- LLPs
- associations of persons
- artificial juridical persons
Everyone pays tax based on the foundational rules of Section 4.
How Businesses Fall Under Section 4
Section 4 applies not only to individuals but also to businesses. It clearly ensures that businesses are required to pay income tax on their profits. Whether small or large, businesses must compute their profits according to the Income Tax Act & pay taxes accordingly.
The charging section empowers the government to tax:
- business income
- capital gains"
- rental income
- interest income
- professional income
This makes Section 4 the backbone of business taxation.
Income Earned in the Previous Year Is Taxed in the Assessment Year
This is one of the first concepts every taxpayer learns. Section 4 mandates that tax is levied on an individual’s total income for the assessment year, but the income being taxed is actually earned during the previous financial year. This one-year shift helps both taxpayers and the government organize accounts and avoid confusion.
You earn during FY 2024–25.
You pay taxes in AY 2025–26.
Simple & organised.
Clause 4 Establishes the Foundational Charge of Income Tax
Every section in the Income Tax Act has a purpose. Some sections define income. Some offer deductions. Some explain tax procedures. But Section 4 stands tall as the charging section. Clause 4 establishes the foundational charge of income-tax, making it legally possible for all other tax provisions to operate.
If Section 4 did not exist, no one could collect taxes, give deductions, or compute income. It is the anchor point of the entire law.
Also Read: The ₹1.5 Lakh Tax-Saving Secret Most Taxpayers Miss!
How Section 4 Works With Deductions Like Scientific Research Expenses
The Income Tax Act also allows for deductions while computing taxes for expenses relating to scientific research. These fall under special sections that support innovation & development. The law:
- provides for deduction of expenses incurred on scientific research and development activities
- allows deduction on expenditure of a capital nature on scientific research
- provides a special provision for claiming scientific research & development deductions
But none of these deductions would matter without Section 4, because the charging section decides the tax first and then deductions reduce it.
Section 4 Interacts With Many Key Tax Provisions
Section 4 isn’t a standalone island. It influences & connects with many important parts of the Income Tax Act, such as:
- Sukanya Samriddhi Yojana Income Tax Section
- This gives deductions under Section 80C, reducing taxable income charged under Section 4.
- Section 86 of Income Tax Act
- Income from an AOP is taxed based on special rules but still depends on the foundational charge of Section 4.
- Section 10(46A)
- Exemptions provided under this section apply only after Section 4 defines the basis of total income."
- Section 15H
- Even if a senior citizen submits Form 15H to prevent TDS, final tax is still computed under Section 4.
- Section 69D
- Unexplained hundi borrowings become taxable income because Section 4 permits taxation of such income.
Each of these sections functions because Section 4 lays the base principle.
A Practical Example to Understand Section 4
Let’s say an individual earns:
- salary: ₹12,00,000
- bank interest: ₹30,000
- rental income: ₹1,80,000
Section 4 ensures tax must be charged on the total income, not each category separately. After adding all incomes, deductions under 80C or others may reduce the taxable figure — but the foundational charge arises solely through Section 4.
Also Read: Income Tax Intimation Under Section 143(1)
Why Section 4 Makes the Tax System Fair and Predictable
Section 4 prevents confusion by setting simple rules:
- tax is annual
- tax is charged on total income
- tax is calculated at rates set by the Finance Act
- tax applies to all persons
This framework makes tax computation consistent, fair, & easier for both taxpayers and professionals.
Final Thoughts
Section 4 of the Income Tax Act is the heartbeat of India’s taxation system. It clearly states that income tax is an annual charge on total income, that businesses must pay tax on profits, & that tax will be calculated at prescribed rates for every assessment year. Once this core principle is understood, the rest of the Income Tax Act becomes far easier to navigate.
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