Think of Section 4 as the 'on' switch for income tax. Without it, the government has no legal authority to collect even a rupee from you. It's the foundational charging section — every tax demand, every TDS deduction, every advance tax payment ultimately traces back to these two sub-sections.
Here's what Section 4 actually says in plain English: Income tax is charged for an Assessment Year (AY), at the rates fixed by the Finance Act, on the total income earned during the Previous Year (PY). So when you file your return for AY 2025-26, you're declaring income earned during PY 2024-25 (April 1, 2024 to March 31, 2025), and the tax rates are whatever Parliament fixed in the Finance Act 2025. Three moving parts — the Central Act (Finance Act fixes the rate), the Income Tax Act 1961 (fixes the rules), and the total income (the base). Section 4 links all three.
The proviso to sub-section (1) is the exception students often ignore: sometimes the Act taxes income of a period other than the previous year — for example, when a business is set up and wound up in the same year, or in cases of shipping income of non-residents. In those situations, tax is charged on that special period, not the normal PY. This is tested as a conceptual question, not a calculation.
Sub-section (2) is beautifully practical: it says tax can be collected either via TDS (Tax Deducted at Source) or Advance Tax — you don't always wait until March 31 to pay. Your employer cuts TDS from your salary every month; you pay advance tax in instalments if your liability exceeds ₹10,000. Both mechanisms are authorised right here in Section 4(2).
This is asked frequently as a 2–4 mark theory question in CA Inter: "Under which section is income tax charged?" or "Explain the basis of charge under the Income Tax Act." Know Section 4 cold — it's easy marks.
Example 1 — Identifying the correct AY and PY
Mr. Sharma works as a chartered accountant. During April 1, 2024 to March 31, 2025, his total income is ₹12,00,000. He files his return in July 2025.
Working:
- Previous Year (PY) = 2024-25 (the year income was earned)
- Assessment Year (AY) = 2025-26 (the year income is assessed and taxed)
- Rates applicable = Finance Act 2025 (the Central Act for AY 2025-26)
- Authority to charge tax = Section 4(1) of Income Tax Act 1961
- Mode of collection during the year = Advance Tax u/s 4(2), since his estimated liability exceeds ₹10,000
Answer: Tax for AY 2025-26 is charged on ₹12,00,000 at Finance Act 2025 rates, by virtue of Section 4(1). Advance tax payments made during PY 2024-25 are authorised by Section 4(2).
---
Example 2 — The proviso in action (Newly set-up & wound-up business)
Ms. Iyer starts and closes a trading business within the same previous year. The Act requires her income to be assessed for that short period, not a full PY.
Working:
- Normal rule (Section 4(1) main): Tax charged on income of full PY
- Applicable rule here (Section 4(1) proviso): Income of a period other than PY is charged — i.e., only the months the business existed
- If her income for that short period = ₹3,50,000, tax is computed on ₹3,50,000 alone, not annualised
Answer: The proviso to Section 4(1) applies. Tax is charged on ₹3,50,000, the income of the actual operating period, not the full previous year.
📖 Bare Act text — Section 4, Income Tax Act 1961
(click to expand)
(1) Where any Central Act enacts that income-tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions (including provisions for the levy of additional income-tax) of, this Act in respect of the total income of the previous year of every person: Provided that where by virtue of any provision of this Act income-tax is to be charged in respect of the income of a period other than the previous year, income-tax shall be charged accordingly. (2) In respect of income chargeable under sub-section (1), income-tax shall be deducted at the source or paid in advance, where it is so deductible or payable under any provision of this Act.