2 accounting methods to calculate income tax

1. The income Tax Act permits two methods of accounting, mercantile system of accounting and cash system of accounting.

2. Mercantile system of accounting requires recording all transactions when they accrue or when they become due.

3. Under cash system of accounting, transactions are only recorded when actually paid or received.

4. Mercantile system is applicable for salaries, income from property and capital gains. For profits and gains of business or profession and income from other sources one has to decide between the systems.

5. The cash method postpones tax liability to the year of actual receipt of income, and under the mercantile method, the tax on the income has to be paid even if it has not been received.

(The content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.)