Section 2 Definitions Under the Income Tax Act 2025: A Plain-Language Glossary

Section 2 of the Income-tax Act, 2025 is the definitions section. It has 112 numbered clauses, and the terms it defines (person, income, capital asset, short-term capital asset, relative, senior citizen, dividend and many more) decide who is taxed, on what, and at which rate or holding period. Each clause opens with "unless the context otherwise requires", so a later section can give a word a narrower meaning.

This guide explains the definitions that come up most often in practice, with the clause number next to each so you can check it. It is based on the Act as amended by the Finance Act, 2026, effective 1 April 2026 (tax year 2026-27), and was last reviewed on 10 November 2026. It is information, not tax advice.

What is section 2 of the Income-tax Act, 2025 and why does it matter?

Section 2 gives one fixed meaning to terms used across the whole Act. When section 393 talks about a "company" or a "person", or when a capital gains section talks about a "short-term capital asset", the meaning comes from section 2.

The clauses are in alphabetical order. Many of them simply point elsewhere: "accountant" points to section 515(3)(b), "resident" points to section 6, "annual value" points to section 21. Many others are designations of tax officers (Commissioner, Joint Director and so on), most of them appointed under section 237(1).

Group	Terms (clause numbers)
Who is taxed	person (77), assessee (11), company (28), Indian company (53), domestic company (42), foreign company (46), firm (45), partner (74), resident (96), non-resident (72), relative (94), child (25), senior citizen (100)
What is taxed	income (49), agricultural income (5), business (20), profession (86), interest (59), dividend (40), total income (108)
Capital gains vocabulary	capital asset (22), transfer (109), short-term and long-term capital asset (101, 67), fair market value (44), stamp duty value (105), slump sale (103), zero coupon bond (112), virtual digital asset (111)
Company restructuring	amalgamation (6), demerger (35), demerged and resulting company (34, 97)
Procedure and administration	advance tax (4), assessment (13), regular assessment (93), PAN (76), prescribed (80), rates in force (90), books of account (19), document (41), hearing (48)

Who is a "person" under the Income-tax Act, 2025?

Under clause (77), "person" includes seven categories. The definition applies whether or not the body was formed to earn income, profit or gain.

• an individual;
• a Hindu undivided family (HUF);
• a company;
• a firm (which includes a limited liability partnership, clause 45);
• an association of persons or a body of individuals, whether incorporated or not;
• a local authority; and
• every other artificial juridical person.

This matters because the word "person" is the starting point for most charging and compliance provisions. A trust, a society or a club that does not fit the first six categories is usually caught by the last one.

What does "income" include?

Clause (49) is an inclusive definition: it lists items that are income in addition to what the word ordinarily means. Items on the list include:

• profits and gains, and dividend;
• the value of any perquisite or profit in lieu of salary taxable under sections 17 and 18, and certain allowances granted to an employee (clause 49(e) and (f));
• capital gains chargeable under section 67;
• winnings from lotteries, crossword puzzles, races (including horse races), card games and other games of any sort, gambling or betting; the clause says "card game and other game of any sort" includes a game show or television or electronic entertainment programme where people compete to win prizes;
• any sum received under a Keyman insurance policy, including bonus allocated on it;
• assistance such as a subsidy, grant, cash incentive, duty drawback, waiver, concession or reimbursement from the Central or a State Government or any authority, other than amounts that go into the actual cost of an asset under section 39(1)(d) and (3), or a Central Government grant for the corpus of a trust or institution; and
• voluntary contributions received by a registered non-profit organisation, an electoral trust, and the other bodies named in clause 49(c).

Being "income" does not mean being taxable. Whether an amount is exempt or taxable is decided by other provisions of the Act. Clause (49) only settles that the item is within the scope of the word.

What is a capital asset, and when is agricultural land not one?

Clause (22) defines a capital asset as property of any kind held by an assessee, whether or not connected with business or profession. It also covers certain securities held by Foreign Institutional Investors and specified investment funds, and a unit linked insurance policy to which the exemption in Schedule II (Table: Sl. No. 2) does not apply.

The clause then lists what is not a capital asset:

• stock-in-trade (other than the securities referred to in clause 22(b)), consumable stores and raw materials held for business or profession;
• personal effects, meaning movable property held for personal use by the assessee or a dependent family member. Jewellery, archaeological collections, drawings, paintings, sculptures and any work of art are not personal effects, so they stay capital assets;
• agricultural land in India, unless it falls in the municipal or distance zones explained below; and
• Gold Deposit Bonds under the Gold Deposit Scheme, 1999 and deposit certificates under the Gold Monetisation Scheme, 2015, as notified.

The agricultural land test

Rural agricultural land is outside the capital asset definition. Land is brought back in if it is situated (A) within a municipality or cantonment board with a population of at least 10,000, or (B) within a set aerial distance from the local limits of such a municipality or cantonment board, as the table shows. Population is as per the last census published before the first day of the tax year.

Population of the municipality or cantonment board	Land is a capital asset if within (aerial distance from its local limits)
More than 10,000 and up to 1,00,000	2 kilometres
More than 1,00,000 and up to 10,00,000	6 kilometres
More than 10,00,000	8 kilometres

The distance is measured aerially (in a straight line), not by road. For the exemption on a sale that does fall within the zones, see our guide on exemption on agricultural land transfer.

What is the difference between short-term and long-term capital assets?

Clause (101) says a short-term capital asset is one held for not more than 24 months immediately before the date of transfer. For four kinds of asset the period is 12 months instead:

• a security listed on a recognised stock exchange in India;
• a unit of the Unit Trust of India;
• a unit of an equity-oriented fund (defined by section 198(8)); and
• a zero-coupon bond.

A long-term capital asset is simply any capital asset that is not short-term (clause 67). The same logic gives "short-term capital gain" (clause 102) and "long-term capital gain" (clause 68).

How the holding period is counted

Clause 101(c) adjusts the count in several situations. Some examples from the clause:

• for a share in a company in liquidation, the period after the company goes into liquidation is excluded;
• if you received the asset in the circumstances covered by section 73(1) (Table: Sl. No. 1), the previous owner's holding period is added;
• for shares or units received on an amalgamation, a demerger or the other specified transfers, the period you held the original shares or units is added;
• for a right share, the count starts from the date of allotment, and for bonus shares, from the date of allotment of the bonus shares;
• for specified securities or sweat equity shares allotted free of cost or at a concessional rate by an employer, the count starts from the date of allotment or transfer; and
• for any asset not covered above, the period is worked out in the manner prescribed in the Rules.

The full rates and set-off treatment are in our guide on short-term and long-term capital gains under the 2025 Act.

Worked example 1: classify five transfers in tax year 2026-27

Assumptions: all five transfers happen in tax year 2026-27 (1 April 2026 to 31 March 2027); the holding period is counted in plain calendar months from purchase date to transfer date; none of the special rules in clause 101(c) applies.

Asset	Bought	Transferred	Held	Cut-off (clause 101)	Result
Listed equity shares	10 Jan 2026	15 Feb 2027	13 months 5 days	12 months (listed security)	Long-term: 13 months is more than 12
Unlisted shares	10 Jan 2026	15 Feb 2027	13 months 5 days	24 months (general rule)	Short-term: 13 months is not more than 24
Equity-oriented fund units	20 Apr 2026	25 Mar 2027	11 months 5 days	12 months	Short-term: 11 months is not more than 12
Flat	5 Jun 2024	20 Jun 2026	24 months 15 days	24 months	Long-term: more than 24 months
Plot	5 Jun 2024	5 Jun 2026	Exactly 24 months	24 months	Short-term: "not more than" 24 months includes exactly 24

The same shares bought on the same day can be long-term if listed and short-term if unlisted. The last row shows why the words "not more than" matter: a transfer exactly on the 24-month date is still short-term.

Who is a "relative", a "senior citizen" and a "child"?

These three terms are used in many provisions that give or deny a benefit, so the exact wording is worth knowing.

Term	Meaning in section 2	What it does not cover
Relative (clause 94)	For an individual: husband, wife, brother, sister, or any lineal ascendant or descendant (maternal as well as paternal)	The list is closed. Parents-in-law, uncles, aunts and cousins are not named
Senior citizen (clause 100)	An individual resident in India aged sixty years or more at any time during the relevant tax year	A non-resident individual, even if aged sixty or more
Child (clause 25)	In relation to an individual, includes a step-child and an adopted child	Nothing else is added: the word keeps its ordinary meaning beyond these two

Real-life examples

Kavita turns 60 in February

Kavita is resident in India and turns 60 on 20 February 2027. Under clause (100) she only has to be sixty "at any time during the relevant tax year", and 20 February 2027 falls inside tax year 2026-27 (which ends 31 March 2027). So she is a senior citizen for the whole of tax year 2026-27, not only from her birthday. Her cousin Ritu, who is 62 but a non-resident, is not a senior citizen under this clause because the definition requires residence in India.

Ravi's farmland near a town

Ravi owns agricultural land 5 km from the limits of a municipality whose last published census population is 3,00,000. That population is more than 1,00,000 and up to 10,00,000, so the relevant distance is 6 km (table above). The land is within 6 km, so it is a capital asset and its sale can produce a capital gain. His brother's land is 7 km from the same limits. It is outside the zone, so it is not a capital asset under clause 22(iii) and a sale does not produce a capital gain. Population is read from the last census published before 1 April 2026 for tax year 2026-27.

Meena and her jewellery

Meena has a wardrobe, furniture at home and a gold necklace, all held for personal use by her family. The wardrobe and furniture are "personal effects" and are not capital assets. The gold necklace is jewellery, which the explanation to clause 22 (item (B)(I)) excludes from personal effects. So a sale of the necklace is a transfer of a capital asset, while a sale of the old wardrobe is not.

Suresh and the company loan

Suresh holds 12% of the voting power in a private company that is not a company in which the public are substantially interested. The company lends him money. Clause (40)(e) can treat that loan as a dividend. The next example shows how much.

When is a loan from a company treated as a dividend?

Clause (40) widens "dividend" beyond the usual cash payout to shareholders. Its first four limbs cover distributions of accumulated profits that release company assets, distributions of debentures, deposit certificates or bonus shares to preference shareholders, distributions on liquidation, and distributions on capital reduction, in each case to the extent of accumulated profits.

Limb (e) is the one practitioners meet most often. It applies to a company that is not a company in which the public are substantially interested (clause 29) and catches any sum paid by the company:

1. as an advance or loan to a shareholder who beneficially owns shares carrying not less than 10% of the voting power (shares with a fixed rate of dividend are excluded from that count);
2. as an advance or loan to a concern (an HUF, firm, association of persons, body of individuals or company) in which that shareholder is a member or partner and has a substantial interest, meaning he is beneficially entitled to not less than 20% of the concern's income at any time in the tax year (for a company, clause 79 sets the same 20% on voting power); or
3. made on behalf of, or for the individual benefit of, such a shareholder,

and it is a dividend only to the extent the company has accumulated profits. Accumulated profits for this limb include all profits of the company up to the date of payment.

Clause (40) also carves several items out of "dividend", including: a loan to a shareholder or concern in the ordinary course of business where money lending is a substantial part of the company's business; a dividend that is set off against a sum earlier treated as a deemed dividend under limb (e); and a distribution of shares by a resulting company to shareholders of the demerged company in a demerger. The list also covers distributions on liquidation or capital reduction in respect of shares issued for full cash consideration with no right to surplus assets, and, as substituted by the Finance Act, 2026 w.e.f. 1 April 2026, certain loans between group entities involving an IFSC Finance Company or Finance Unit. The Finance Act, 2026 also omitted limb (f), which had covered payments by a company on a buy-back of its own shares under the Companies Act, 2013, w.e.f. 1 April 2026.

Worked example 2: deemed dividend on loans from a private company

Assumptions: a private company that is not a company in which the public are substantially interested; accumulated profits on the date of each payment are Rs 12,00,000; the company's business is not money lending; each case is separate and independent.

Case	Loan to	Test	Loan	Deemed dividend
A	Suresh, shareholder with 12% voting power	12% is at least 10%: limb (e)(i) applies	Rs 8,00,000	Lower of Rs 8,00,000 and Rs 12,00,000 = Rs 8,00,000
B	A firm where Suresh (12% voting) is a partner entitled to 25% of firm income	12% is at least 10%, and 25% is at least 20%: limb (e)(ii) applies	Rs 20,00,000	Lower of Rs 20,00,000 and Rs 12,00,000 = Rs 12,00,000
C	A shareholder with 8% voting power	8% is less than 10%: limb (e)(i) does not apply	Rs 5,00,000	Nil under limb (e)
D	A firm where Suresh (12% voting) is a partner entitled to 15% of firm income	15% is less than 20%: no substantial interest	Rs 6,00,000	Nil under limb (e)

Step by step for Case B: (1) check the shareholder, 12% voting power, passes the 10% test; (2) check the concern, 25% of the firm's income, passes the 20% test; (3) compare the loan, Rs 20,00,000, with accumulated profits, Rs 12,00,000; (4) the dividend is capped at the smaller figure, Rs 12,00,000. The balance of Rs 8,00,000 is not a dividend under limb (e). How the deemed dividend is taxed in the recipient's hands is covered by other provisions and is not decided in section 2.

Which company terms are defined, and how do they differ?

Term	Meaning (clause)
Company (28)	Any Indian company; a body corporate incorporated outside India; an institution, association or body that was assessable as a company under the Income-tax Act, 1961; or a body declared to be a company by order of the Board
Indian company (53)	Formed and registered under the Companies Act, 2013 (or earlier company law, or a statutory corporation, or a body declared a company by the Board), with its registered or principal office in India
Domestic company (42)	An Indian company, or any other company that has made the prescribed arrangements in India for declaring and paying dividends out of its income liable to tax under the Act
Foreign company (46)	A company that is not a domestic company
Company in which the public are substantially interested (29)	Includes a company with at least 40% of shares held by the Government or the Reserve Bank of India; a section 8 company; a Nidhi or mutual benefit society; a company with at least 50% voting power held by co-operative societies; and a company that is not a private company and whose shares are listed on a recognised stock exchange in India (or at least 50% voting power is held by the Government, a statutory corporation or specified group companies, with 40% for certain manufacturing, mining and power companies)
Person who has a substantial interest in the company (79)	Beneficial owner of shares carrying at least 20% of the voting power (shares with a fixed dividend rate are excluded)

The Finance Act, 2026 substituted the definition of "co-operative society" in clause (32) with effect from 1 April 2026. It now expressly includes a society registered under the Multi-State Co-operative Societies Act, 2002, in addition to the Co-operative Societies Act, 1912 and State or Union territory laws.

Who is an "assessee", and what is a "tax year"?

An "assessee" (clause 11) is a person by whom any tax or other sum of money is payable under the Act. It also includes a person against whom a proceeding has been taken for assessing income, loss or refund, a person deemed to be an assessee, and a person deemed to be an assessee in default. So someone who only has a refund due can still be an assessee.

"Tax year" is not defined in section 2 but in section 3(1): the twelve months of the financial year beginning on 1 April. For a business or profession newly set up, or a source of income newly coming into existence during a year, section 3(2) starts the tax year on the date of setting up or the date the source arises and ends it on the last day of that financial year.

"Agricultural income" (clause 5) covers rent or revenue from land in India used for agricultural purposes, income from agriculture on it, and income from saplings or seedlings grown in a nursery, among other items. It excludes income arising from the transfer of land that falls in the zones in clause 22(iii)(A) or (B), which is why the capital asset zones above matter here too.

What do "resident", "non-resident" and "rates in force" mean?

"Resident" (clause 96) means a person who is resident in India as per section 6, and "non-resident" (clause 72) is anyone who is not a resident. For sections 161, 174 and 312, the clause stretches "non-resident" to also cover a person who is "not ordinarily resident" as per section 6(13). The tests themselves are in section 6, covered in our guide on residential status in India.

"Rates in force" (clause 90) tells you where to look for a rate. For deducting tax from salary, for computing advance tax in most cases, and for TDS under several Sl. Nos. of section 393(1) and 393(3), it means the rate specified in the Finance Act of the relevant year. For certain non-resident payments under section 393(2) (Table: Sl. Nos. 6, 7, 8, 9 and 17), it is the Finance Act rate or the rate in a tax treaty or agreement under section 159, whichever applies. Our guide on TDS on rent shows section 393 in practice.

Other definitions worth knowing

Term (clause)	What the Act says
Interest (59)	Interest payable in any manner on money borrowed or debt incurred (including a deposit, claim or similar right). It includes service fees and other charges for the borrowing, and for any credit facility that has not been utilised
Transfer (109)	Includes sale, exchange or relinquishment; extinguishment of rights; compulsory acquisition; converting a capital asset into stock-in-trade; maturity or redemption of a zero coupon bond; and allowing possession of immovable property in part performance of a contract of the kind in section 53A of the Transfer of Property Act, 1882
Fair market value (44)	The price the asset would ordinarily fetch on sale in the open market on the relevant date; if that cannot be ascertained, the price determined in the prescribed manner
Stamp duty value (105)	The value adopted, assessed or assessable by a Central or State Government authority for stamp duty on immovable property
Virtual digital asset (111)	Any code, number or token generated cryptographically or otherwise that represents value and can be transferred, stored or traded electronically; an NFT or similar token; any digital asset notified by the Central Government; and any crypto-asset relying on a cryptographically secured distributed ledger. The Government may exclude assets by notification
Slump sale (103)	Transfer of one or more undertakings for a lump sum without values being assigned to individual assets and liabilities. A value fixed only to pay stamp duty or registration fees is not treated as assigning values
Books of account (19)	Includes ledgers, day-books, cash books and other books kept in written form, in electronic or digital form (including cloud storage), or as print-outs of such data
Hearing (48)	Includes communication of data and documents by electronic mode
PAN (76)	A unique ten-character alphanumeric number allotted by the Assessing Officer for identification, including one allotted under the new series
Manufacture (69)	A change in a non-living physical object that creates a new and distinct object with a different name, character and use, or with a different chemical composition or integral structure

Common mistakes with section 2 definitions

1. Treating all agricultural land as outside capital gains. Land within the municipal or distance zones in clause 22(iii) is a capital asset. Check the population and the aerial distance each time.
2. Applying 24 months to listed shares. Listed securities, UTI units, equity-oriented fund units and zero-coupon bonds use 12 months. Unlisted shares and immovable property use 24.
3. Reading "senior citizen" as "aged 60 on 1 April". The test is any time in the tax year, and the person must be resident in India.
4. Assuming "relative" includes in-laws. The list in clause (94) is limited to spouse, siblings, and lineal ascendants and descendants.
5. Ignoring deemed dividend on shareholder loans. A loan from a closely held company to a 10% shareholder, or to a concern in which that shareholder holds a 20% interest, can be a dividend up to accumulated profits.
6. Using the old definition of buy-back or co-operative society. Both changed from 1 April 2026. Check the footnotes of section 2 for the amended text before relying on older commentary.

Quick reference: thresholds defined in section 2

Test	Threshold	Clause
Short-term holding period, general	Not more than 24 months	101(a)
Short-term holding period, listed securities, UTI units, equity-oriented fund units, zero-coupon bonds	Not more than 12 months	101(b)
Senior citizen	Resident individual aged 60 or more at any time in the tax year	100
Agricultural land becomes a capital asset	In a municipality of 10,000+ population, or within 2, 6 or 8 km of one (by population band)	22(iii)
Shareholder covered by deemed dividend on loans	At least 10% of voting power	40(e)(i)
Substantial interest in a concern other than a company	At least 20% of its income	40(e), item (D)
Substantial interest in a company	At least 20% of voting power	79
Public company treated as substantially public (Government or RBI holding)	At least 40% of shares	29(a)
Amalgamation: shareholders moving to the amalgamated company	At least three-fourths in value of shares	6(c)

Where this is in the Act

• Section 2(5): agricultural income; section 2(11): assessee; section 3: tax year; section 2(22): capital asset, with the agricultural land table
• Section 2(28), (29), (42), (46), (53), (79): company and related terms
• Section 2(40): dividend, including the loan limb in 2(40)(e)
• Section 2(49): income; section 2(77): person; section 2(108): total income
• Section 2(67), (68), (101), (102): long-term and short-term capital assets and gains
• Section 2(72), (96): resident and non-resident, read with section 6
• Section 2(90): rates in force; section 2(94), (100): relative and senior citizen
• Section 2(109): transfer; section 2(111): virtual digital asset

How CA firms keep definitions straight across a client book

For a practitioner, the same definition can change the answer for different clients in one office: one client's shares are long-term at 13 months and another's are short-term at 13 months, and a client who turned 60 mid-year is a senior citizen for the entire tax year. Finexo's practice management software lets a firm keep client profiles (resident status, age, entity type) and working notes in one place and track the deadlines that follow from them. It does not decide the classification for you.