Brief History of Income Tax in India
In India, Income tax was introduced for the first time in 1860, by Sir James Wilson in order to meet the losses sustained by the Government on account of the Military Mutiny of 1857. Thereafter, several amendments were made in it from time to time.
Finally the Income Tax Act, 1961 was passed. The Income Tax Act 1961 has been
brought into force with 1.41962. It applies to the whole of India including
Jammu & Kashmir.
Finance Act:
Every year, the Finance Minister of
the Government of India presents the Budget to the Parliament. Once the Finance
Bill is approved by the Parliament and gets the assent of the President of
India, it becomes the Finance Act.
Income-Tax Rules:
The administration of Direct Taxes
is looked after by the Central Board of Direct Taxes
(CBDT). The CBDT is empowered to make
rules for carrying out the purposes of the Act. For the proper administration
of the Income-tax Act, the CBDT frames rules from time to time. These rules are
collectively called Income-tax Rules, 1962.
Tax:
A Fee charged or levied by a Government on a Income, Product or Activity.
Types of Taxes: 1) Direct Taxes 2) Indirect Taxes
1) Direct Taxes:
· If a tax is levied directly on personnel or Corporate Income, it is a Direct Tax.
· Direct Tax is imposed directly on the tax payer and is paid by the tax payer directly to the Govt.
· The incidence and Impact of the Tax is on the Same Person.
· Examples: Income Tax, Corporate Tax, Wealth Tax, Gift Tax etc.,
2) Indirect Taxes:
· If a Tax is levied on the price of a goods or services, It is a Indirect Tax.
· Indirect Tax is a Tax collected by intermediaries from the ultimate tax payer i.e., Consumers.
· The incidence and impact on the Tax is on different persons.
· Examples: Sales Tax, Excise Duty, Customs Duty, Service Tax etc.,
What kind of Tax is Income Tax?
It
is a Direct Tax. It is a tax on a person’s income. It is directly levied on a
person’s income and hence also known as a Direct Tax.
Assessment Year The year in which the earned
income is computed and put to tax is known as Assessment Year. The period of 12
months commencing on the 1st day of
April every year.
Previous Year: Normally Income earned in a particular year is taxable in the Next Year. The year in which income is earned is known as Previous Year. Previous Year is the Financial Year preceding the Assessment Year.
Example: Previous Year : 2018-19 (1.4.2018 to 31.03.2019)
Assessment Year : 2019-20 (1.4.2019 to 31.03.2020) Current Year
Assessee means “a person who paid or payable any sum of money under the Income Tax act 1961”. Any persons whose accounts are taken for assessment whether by voluntarily or compulsorily.
3 Types of Assessee
1) Ordinary Assessee: It includes
o Any person against whom some proceedings under this Act are going on. It is immaterial whether any Tax or other amount is payable by him or not ;
o Any person who has sustained loss and has filed return of Loss u/s 139 (3).
o Any person by whom some amount of Interest, Tax or Penalty is payable under this Act ; or
o Any person who entitled to refund of Tax under this Act.
2) Representative Assessee or Deemed Assessee:
A person may not be liable only for his own income or loss but also on the income or loss of other persons e.g. Guardian of Minor or Lunatic, Agent of a Non-Resident etc. in such case, the persons responsible for the assessment of Income of such other persons are called Representative Assessee or Deemed to be an Assessee.
3) Assessee-in-default:
A person is deemed to be an
assessee-in-default if he fails to fulfill his statutory obligations. In case
of an employer paying Salary or a person who is paying interest it is their
duty to deduct tax at source (TDS) and deposit the amount of tax so collected
in Government. If he fails to deduct tax at source or deducts tax but does not
deposit it in the Government treasury, he is known as Assessee-in-default.
Person: As per IT Act, 1961, The word “Person” is a very wide term and embraces in itself the following:
· Individual: It refers to a natural human being whether Male or Female, Minor or Major.
· Hindu Undivided Family (HUF): It is a relationship created due to operation of Hindu Law. The Manager of HUF is called “Karta” and their members are called ‘Coparceners’.
· Company: It is an artificial person registered under Indian Companies Act 1956 or any other Law.
· Firm: It is an entity which comes into existence as a result of partnership agreement. The Income Tax accepts only these entities as Firms which are accessed as Firms under Section 184 of the Act.
- Association of Persons (AOP) or Body of Individuals (BOI):
Co-operative societies, MARKFED, NAFED, etc are the example of such persons. When persons combine together to carry on a joint enterprise and they do not constitute partnership under the ambit of law, they are assessable as an Association of Persons. An A.O.P. can have firms, companies, associations and individuals as its members.
A Body of Individual (B.O.I.) cannot have non-individuals as its members. Only natural human being can be members of a Body of Individuals.
· Local Authority: Municipality, Panchayat, Cantonment Board, Port Trust etc. are called Local Authority.
· Artificial Judicial Person: Statutory Corporations like Life Insurance Corporation, Universities etc., are called Artificial Judicial Persons.
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Income:
In general, Income means a periodic monetary return which accrues or is expected to accrue regularly from definite sources.
However, under the Income-tax Act, 1961, even certain income which do not arise regularly but which are treated as income for tax purposes. E.g. Winnings from lotteries, crossword puzzles.
At present, the following items of receipts are included in income:
(1) Profits and Gains of business or profession
(2) Dividends.
(3) Voluntary contributions received by a trust/institution created wholly or partly for charitable or religious purposes or by an association or institution
(4) The value of any perquisite or profit in lieu of salary taxable under section 17.
(5) Any special Allowance/Benefit granted to the assessee to meet expenses wholly, necessarily and exclusively for the performance of the duties of an office or employment of profit.
(6) Any allowance granted to the assessee to meet his personal expenses.
(7) Deemed profits chargeable to tax under section 41 or section 59.
chargeable to tax under section 28.
(8) Any Capital Gains chargeable under section 45.
(9) Any winnings from lotteries, cross-word puzzles, races including horse races, card games and other games of any sort or from gambling, or betting of any form or nature whatsoever.
(10) Any sum received by the assessee from his employer as contributions to any provident fund or superannuation fund or Employees State Insurance Fund (ESI) or any other fund for the welfare of such employees.
Permanent Account Number (PAN)
· PAN is the identifier of Indian Income Tax Payers in the form of AAAPL 1234 C.
· A PAN number has been made compulsory for every transaction with the Income Tax department.
· It is unique, 10-character alpha-numeric identifier, issued to all juristic entities identifiable under the Indian Income Tax Act 1961.
·
It is issued by the Indian Income Tax Department under the
supervision of the Central Board for
Direct Taxes (CBDT) and it also serves as an important proof of
identification.
Gross Total Income
The income of a Person is computed under the following Five Heads:
1. Salaries.
2. Income from House Property.
3. Profits and gains of Business or Profession.
4. Capital Gains.
5. Income from Other Sources.
The aggregate income under these 5 Heads is termed as “Gross Total Income”.
Total Income means the amount left after making
the deductions under section 80C to 80U from the Gross Total Income.
Deduction refers to
the amount that you can reduce from your taxable income.
What is the difference between Gross Total Income and Total Income?
Section 80C to 80U provides certain deductions which can be claimed from Gross Total Income (GTI). After claiming these deductions from GTI, the income remaining is called as Total Income. Total income can also be understood as Taxable Income.
GTI less Deductions (under section 80C to 80U) = Total Income (TI).
Computation of Gross Total Income and Taxable Income
|
Income from Salaries |
xxx |
|
Income from House Property |
xxx |
|
Profits and gains of Business or Profession |
xxx |
|
Capital Gains. |
xxx |
|
Income from Other Sources |
xxx |
|
Gross Total Income |
xxxx |
|
Less: Deductions u/s 80C to 80U |
xxx |
|
Total Income |
xxxx |
Note : Inter source losses, inter head losses, brought
forward losses, unabsorbed depreciation, etc., (if any) will have to be
adjusted (as per the Income-tax Law) while computing the Gross Total Income.
Casual Income Any receipt which is of a casual and non-recurring nature is called casual income. Casual income includes the following receipts:
1. Winning from Lotteries,
2. Winning from Crossword Puzzles,
3. Winning from Races (including Horse Races),
4. Winning from Card Games and other Games of any sort
5. Winning from Gambling or Betting of any form or nature.
Agricultural Income:
Agriculture income is exempt under the Indian Income Tax Act. This means that income earned from agricultural operations is not taxed. However while computing tax on Non-Agricultural Income, Agricultural Income is also taken into consideration.
Certain income which is treated as Agriculture Income:
a) Income from sale of replanted trees.
b) Rent received for agricultural land.
c) Income from growing flowers and creepers.
d) Share of profit of a partner from a firm engaged in agricultural operations.
e) Interest on capital received by a partner from a firm engaged in agricultural operations.
f) Income derived from sale of seeds.
Certain income which is not treated as Agricultural Income:
(a) Income from Poultry Farming.
(b) Income from Bee Hiving.
(c) Income from Sale of Spontaneously Grown Trees.
(d) Income from Dairy Farming.
(e) Purchase of Standing Crop.
(f) Dividend paid by a company out of its Agriculture Income.
(g) Income of Salt produced by Flooding the Land with Sea Water.
(h) Royalty income from Mines.
(i) Income from Butter and Cheese Making.
(j) Receipts from TV Serial shooting in Farm House is not Agriculture Income.
Partly Agriculture Income
Partly agricultural income consists of both the element of agriculture and business, so non-agricultural part of the income is taxed. Some examples for partly agricultural income are given below:
1. Profit of business other than Tea
This rule applicable to agricultural produce like Cotton, Tobacco, and Sugarcane etc, here the market value of the agricultural produce raised by the Assessee for utilizing it as raw material for his business will be deducted out of the total profit of such Assessee while calculating tax on his income.
2. Profit from Tea Manufacturing
If a person using his own tealeaves grown by him for his tea manufacturing business, then 60% of his income will be treated as agricultural income and the remaining 40 % will be treated as business income. So he has to pay tax on that remaining 40% of income.
3. Income from the Coffee Manufacturing
a) 75% of the income derived from the sale of coffee grown and cured by the seller in India is deemed to be agricultural income 25% is taken as business income.
b) 65% the income derived from the sale of coffee grown, cured, roasted and grounded by the seller in India is deemed to be agricultural income 40% is taken as business income.
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Income Exempt from Income Tax
Exempted Incomes A List of Incomes which are totally exempt from Tax and so these incomes are not included in the Total Income. No Tax is payable on such incomes. These incomes are given u/s 10(1) to 10(32) of the Act.
1. Agriculture Income [Sec. 10(1)]
2. Payments received from family income by a member of HUF [Sec. 10(2)]
3. Share of Profit from a Firm [Sec. 10(2A)]
4. Interest received by a Non-Resident from prescribed Securities [Sec. 10(4)]
5. Leave Travel Concession provided by as Employer Sec. 10(5)]
6. Remuneration received by Foreign Diplomats of All Categories [Sec. 10(6)]
7. Salary Received by a Foreign Citizen as an Employee of a Foreign Enterprise provided his stay in India does not exceed 90 days [Sec. 10(6) (vi)]
8. Income arising to Notified Foreign Companies from services provided in or outside India in project connected with the Security of India [Sec. 10(6C)]
9. Foreign Allowance granted by the Govt. of India to its employees posted Abroad [Sec. 10(7)]
10. Death-cum-Retirement Gratuity [Sec. 10(10)]
11. Commuted Value of Pension
12. Leave Salary [Sec. 10(10AA)]
13. Retrenchment Compensation [Sec. 10(10B)]
14. Compensation received by victims of Bhopal Gas Leak Disaster [Sec. 10(10BB)]
15. Compensation from the Central Government or a State Government or a Local Authority received by an individual or his legal heir on account of any Disaster [Sec. 10(10BC)]
16. Compensation received from a Public Sector Company at the time of Voluntary Retirement or Separation [Sec. 10(10C)]
17. Tax on Perquisite paid by Employer [Sec. 10(10CC)]
18. Any sum (including bonus) on Life Insurance Policy [Sec. 10(10D)]
19. Any amount from Provident Fund paid to Retiring Employee [Sec. 10(11)]
20. Amount from an Approved Superannuation Fund to Legal Heirs of the Employee [Sec. 10 (13)]
21. House Rent Allowance subject to certain limits [Sec. 10(13A)]
22. Special Allowance granted to an Employee [Sec. 10(14)]
23. Interest from certain Exempted Securities [Sec. 10(15)]
24. Scholarship Granted to meet the Cost of Education [Sec. 10(16)]
25. Daily Allowance of a Member of Parliament (MP) or state Legislature (entire amount is exempt), any other allowance subject to certain conditions [Sec. 10(17)]
26. Family Pension Received by Family Members of Armed Forces [Sec. 10(19)]
27. Income from Local Authorities [Sec. 10(20)]
28. Any income of an Approved Scientific Research Association [Sec. 10(21)]
29. Income of funds established for the Welfare of Employees [Sec. 10(23AAA)]
30. Any Income of a Trust or a Society approved by Khadi and Village Industries Commission [Sec. 10(23B)]
31. Income of SAARC Fund for Regional Projects, set up by Colombo Declaration [Section 10(23BBC)]
32. Any income of Secretariat of Asian Organisation of Supreme Audit Institutions [Section 10 (23BBD)]
33. Income of Mutual Fund set up by a Public Sector Bank or a Public Financial Institution [Section 10(23D)]
34. Income of Co-Operative Society formed for promoting interests of members of Scheduled Castes/Scheduled Tribes [Section 10(27)]
35. Dividend on or after April, 2003 from domestic companies [Section 10(34)]
36. Income on units of Mutual Funds on or after April 1, 2003 [Section 10(35)]
37. Income of Industrial Units situated in Trade-Free Zones, Specified Technology Parks etc. [Sec 10A]
38. Income from Specified 100% Export Oriented Undertakings [Section 10B]
39. Specified Income of Registered Political Parties
[Section 13A]
DETERMINATION OF RESIDENTIAL STATUS
BASIS OF CHARGE
Tax is levied on total income of an Assessee. Under the provisions of Income Tax Act, 1961 the total income on each person is based upon his Residential Status. The residential status of an Assessee is determined with reference to his residence in India during the Previous Year.
Therefore, the determination of the Residential Status of a person is very significant in order to find out his Tax Liability. Residence and Citizenship are two different things. The incidence of Tax has nothing to do with Citizenship.
Sec. 6 of the Act divides the assessable persons into Three Categories.
(i) Resident
(ii) Resident but Not ordinary Resident and
(iii) Non-Resident.
The concept of Residential Status has nothing to do with nationality or domestic of a person.
· An Indian, who is a citizen of India can be non-resident for Income Tax purposes, whereas an American who is a citizen of America can be Resident of India for Income Tax purposes.
· Residential Status of a person depends upon the territorial connections of the person with this country , i.e. for how many days he has physically stayed in India.
· The Residential Status of different types of persons is determined differently. Similarly, the Residential Status of the Assessee is to be determined each year with reference to the “Previous Year”.
·
The Residential Status of the Assessee may
change from Year to Year. What is essential is the Status during the Previous year and not in the Assessment Year.
RESIDENTIAL STATUES OF AN ‘INDIVIDUAL’
An Individual may be
a) Resident and also Ordinarily Resident in India
b) Resident but not Ordinarily Resident in India;
c) Non-Resident in India.
Resident:
An individual who fulfils any one of the following Two Main Tests is called Resident.
Basic Conditions
Test 1: He was in India for a period totaling in all to 182 Days or more during relevant PY.
(OR)
Test 2: He was in India for a period totaling in all
to 60 Days or more during relevant PY and 365 Days or More during
Four PYs preceding the Relevant Previous Year.
1. Resident and Ordinary Resident [Sec. 6(1), 6(6)(a) ]
Basic Conditions
Test 1: He was in India for a period totaling in all to 182 Days or more during relevant PY.
(OR)
Test 2: He was in India for a period totaling in all to 60 Days or more during relevant PY and 365 Days or More during Four PYs preceding the Relevant Previous Year.
(AND)
Additional Conditions
Test No. 3: He must be Resident of India in atleast 2 Out of 10 PYs preceding the relevant previous year.
(AND)
Test No. 4: He must have stayed in India for 730 Days or More during 7 PYs preceding the Relevant Previous Year.
Ordinary Resident: Satisfying any one of the First Two Tests (Test 1 & 2) +
Satisfying
both the additional Conditions (Test 3 & 4)
2. Resident but not Ordinarily Resident [ Sec. 6 (6) ]
Basic Conditions
Test No. 1: He was in India for a period or periods totaling in all to 182 days or more during relevant Previous Year (OR)
Test No. 2: He was in India for a period or periods totaling in all to 60 Days or more during relevant Previous Year and 365 Days or more during Four Previous Years preceding the Relevant Previous Year.
(AND)
Additional Conditions
Test No. 3: He was Non-resident in India for 9 Previous Years out of 10 Previous Years preceding the relevant previous year. (OR)
Test No. 4: He was in India for less than 730 Days during 7 Previous Years preceding the Relevant Previous Year.
Ordinary Resident: Satisfying any one of the First Two Tests (Test 1 & 2) +
Satisfying None or any one of the Additional Conditions (Test 3 & 4)
3. Non- Resident: An Assessee who does not fulfill any of the two Basic conditions given in Sec. 6(1) (a) or (b) would be regarded as “Non-Resident”
Who are Non-Resident?
An individual who does not fulfill the below mentioned conditions in that PY will be considered as Non Resident:
1. You have to be in India atleast 182 Days in the Relevant Previous year, OR
2. You have to atleast be in India for 365 Days during 4 Years Preceding the Relevant Previous year and atleast 60 Days in the Relevant Previous year.
For Indian Citizen going abroad on a Job or as a member of crew of an Indian ship
In case of Indian citizen who is going outside Indian for a Job and his contact for such employment outside India has been approved by the Central Government or he is a member of crew of an Indian Ship, Test (a) u/s 6(1) remains same but in Test (b) words ‘60 days’ have been replaced to 182 days.
For Indian Citizens and Persons of Indian Origin For such person Test (a) remains the same but in Test (b) ) words ‘60 days’ have been replaced to 182 days.
How Residential Status of an Assessee is determined?
Residential Status of an Assessee
is determined with reference to his Residence in the Previous Year.
When an individual become Non-Resident?
Individual
becomes Non-Resident: When an
Assessee does not fulfill the basic conditions of Resident, he becomes
Non-Resident.
RESIDENTIAL STATUS OF ‘H.U.F.’ , ‘FIRM’ , ‘ A.O.P.’
1. Resident [ Sec. 6 (2) ]
It means that if a H.U.F. FIRM, AOP is controlled from India even partially it will be Resident Assessee.
The Control and management of affairs refers to the controlling and directing power, the Head and the Brain. It means that decision making power for vital affairs is situated in India.
In case of a Firm, it is said that the control and management of firm is saturated at a place where partners meet to decide the affairs of the firm. If such place is outside India, it will be said that the control and management is outside India.
2. Non- Resident [ Sec. 2 (30) ]
a H.U.F, FIRM, AOP shall be Non-Resident if the control and management affairs is situated wholly outside India.
3. Not Ordinarily Resident [ Sec. 6 (6) b ]
H.U.F. will be ‘Not Ordinarily Resident’ if :
i) its manager (Karta) has not been resident in India in 9 out of 10 previous year preceding the relevant accounting year ; or
ii) the manage had not, during the 7 PY preceding the relevant accounting year been present in India for a period or periods amounting in all to 730 days.
RESIDENTIAL
STATUS OF A ‘COMPANY’ [Sec.6(3)]
· An Indian Company is always Resident in India.
· A foreign Company is resident in India, only if, during the previous year, control and management of its affairs is situated wholly in India.
· Conversely, a Foreign Company is treated as Non-Resident if, during the previous year, Control and Management of its affairs is either wholly or partially situated out of India.
|
Control and Management of the affairs of a company is situated |
Residential Status |
|
|
An Indian company |
A Company other than an Indian Company |
|
|
Wholly in India Wholly outside India Partly in Indian and partly outside India |
Resident |
Resident |
RESIDENTIAL STATUS OF ‘OTHER PERSON’ [Sec.6(4)]
· Every other person is resident in India if Control and Management of his affairs is, wholly or partly, situated within India during the relevant previous year.
·
On the other hand, every other person is
non-resident in India if control and management of its affairs is wholly
situated outside India.
INCIDENCE OF TAX / SCOPE OF TOTAL INCOME
|
Particulars |
Resident |
Not Ordinary Resident |
Non Resident |
|
Income received or deemed to be received in India |
Taxable |
Taxable |
Taxable |
|
Income accrued / earned / deemed to be accrued in India |
Taxable |
Taxable |
Taxable |
|
Income received / accrued / earned Outside India but Business / Profession controlled / Set up in India |
Taxable |
Taxable |
Not Taxable |
|
Income received / accrued / earned Outside India but Business / Profession controlled / Set up Outside India |
Taxable |
Not Taxable |
Not Taxable |
|
Income received / accrued / earned Outside India from any other sources. [Salary / HP / CG / etc.,] |
Taxable |
Not Taxable |
Not Taxable |
|
Income earned and received outside India during the years preceding the PY and remitted to India during the PY |
Not Taxable |
Not Taxable |
Not Taxable |
|
Total Income |
xxxx |
xxxx |
xxxx |
Which income is considered as Accrued Income?
Income which has been earned but not yet received is known as accrued income. Income is recorded in the same accounting period in which it is earned rather than in the subsequent period in which it will be received.
Salary Income
Salary Income is the remuneration received by or accruing periodically to an individual for service rendered as a result of expressed or implied contract.
A Remuneration received by an employee in consideration of services rendered to his employer is called Salary.
Salary included monetary value of those benefits and facilities provided by the employer which are taxable.
What are Allowances?
Allowance is fixed amount of money given to an employee regularly in addition to salary, for the purpose of meeting specific requirements.
It may be classified as follows:
|
Fully Taxable Allowances |
Partially Taxable Allowances |
Fully Exempted Allowances |
|
1) Dearness Allowance 2) CCA 3) Fixed Medical Allowance 4) Lunch / Tiffin Allowance 5) Marriage Allowance 6) Family Allowance 7) Deputation Allowance 8) Warden Allowance 9) Project Allowance 10) Overtime Allowance 11) Entertainment Allowance for Non-Govt. Employees 12) Water/Electricity Allowance 13) Servant Allowance |
1) HRA 2) Entertainment Allowance for Govt. Employees 3) Education Allowance 4) Helper Allowance 5) Uniform Allowance 6) Academic Research Allowance 7) Conveyance Allowance 8) Travelling Allowance 9) Transport Allowance 10) Special Allowance 11) Daily Allowance |
1) Allowances to Govt. Employees posted outside India
2) HRA given to Judges of High Court and Supreme Court
3) Sumptuary Allowance given to Judges of High Court and Supreme Court
4) Allowances received by an Employee of UNO |
What are Perquisites?
Perquisite may be defined as any casual emolument or benefit attached to an office or position in addition to salary or wages. Perquisites may be given in cash or kind. If perquisites are given in kind it should be capable of being measured in terms of money.
Ex.: Car Facility, Rent Free House etc.,
What is Gratuity?
Gratuity is the form of gratitude
provided to employees in monetary terms for services rendered to the company.
It is the important form of social security benefit provided as per Gratuity
Act.
Meaning of Salary for Different Purposes
|
For HRA / PF / Gratuity / Leave Encashment |
Basic Pay + DA (Forming Part) + Commission on Turnover |
|
For Gratuity under Payment of Gratuity Act |
Basic Pay + Full DA |
|
For Rent Free House |
Basic Pay + DA (Forming Part) + Any Fee, Commission + Bonus (Except Gratuitous Bonus) + All Fully Taxable Allowances + Taxable portion of Partly Taxable Allowances + Taxable EA + Leave Encashment pertaining to Current Year |
|
For Deduction u/s 16 (ii) |
Only Basic Salary |
What are the different types of Provident Funds?
There are 4 types of Provident Funds:
1) Recognized Provident Fund (RPF): RPF schemes must be approved by The Commissioner of Income Tax and applicable to an organization which employs 20 or more employees.
2) Unrecognized Provident Fund (URPF): URPF are not approved by The Commissioner of Income Tax and is started by employer and employees in an establishment.
3)Statutory Provident Fund (SPF): This Fund is mainly meant for Government/University/Educational Institutes (affiliated to university) employees.
4) Public Provident Fund (PPF): PPF involves minimum contribution of Rs.500 per annum and the maximum contribution is Rs. 100,000 per annum. The contribution made along with interest earned is repayable after 15 years, unless extended.
What are the deductions allowed under Salary Head? Name the items.
1) Entertainment Allowance [Section 16(ii)]:
A deduction is also allowed in respect of any allowance in the nature of an Entertainment Allowance specifically granted by an employer to the assessee, who is in receipt of a salary from the Government. No deduction is available to Non-Government Employees.
Deduction u/s. 16 (ii) admissible to Govt. Employees shall be an amount equal to Least of the Following:
a) Statutory Limit of Rs. 5,000
b) 1/5th or 20% of Basic Salary (excluding all Allowances, Benefits and other Perquisites)
c) Actual Amount of Entertainment Allowance received
2) Tax on Employment / Professional Tax u/s 16 (iii)
Any amount of Professional Tax is
paid by the employee or by his employer on his behalf it is fully allowed as
Deduction.
What is Leave Encashment?
Leave Encashment: Leave encashment is the amount payable for the employee’s leave period,
depending upon he leaves to his credit and his salary at the time of termination
of employment or at the time of encashing his leaves.
What are the Exemptions available under Section 80 D?
|
Particulars |
Proposed Amount for Financial Year 2017-18 |
|
|
If a Senior Citizen |
If not a Senior Citizen |
|
|
Medical Insurance Premium Paid for Self, Spouse & Children |
30,000 |
25,000 |
|
Medical Insurance Premium Paid for Dependent Parents |
30,000 |
25,000 |
|
Cost of Preventive Health Check up ( Included in the above limits) |
5,000 |
5,000 |
What are the exemptions available in Sec 80C?
|
Description |
Proposed Investment Amount for the FY 2017-18 |
|
Premium Paid towards a life Insurance Policy ( Self, Spouse & Children ) |
Maximum exemption limit is Rs.1,50,000 |
|
Contribution to Public Provident Fund |
|
|
Deposit in National savings scheme |
|
|
Premium Paid towards a ULIP ( Self, Spouse & Children ) |
|
|
Housing Loan Principal Repayment For Financial Year |
|
|
Contribution to ELSS Mutual Fund Schemes (Eligible For Deduction Under section 80C) |
|
|
Tuition Fee Paid for children (Max.2 Children) |
|
|
Contributions to Fixed Deposit Scheme (5 Years & above- Eligible for deduction Under Section 80 C) |
|
|
Post office Time Deposits (5 years & Above –Eligible for Deduction Under Section 80 C) |
|
|
Stamp Paper Duty & Registration Charges |
|
|
Premium Paid towards a Pension Plan (Self, Spouse & Children ) Sec 80 CCC |
|
|
Employee’s (Central Govt.) Contribution to New Pension Scheme Sec 80 CCD(1) Maximum exemption limit is Rs. 50,000 |
House Property Income
Annual Value of the property is deemed to be the sum for which the property might reasonably be expected to be let out from year to year. It is thus a national income to be derived from an imaginary tenant on a reasonable basis. The basis selected as a measure of the income to be assessed is “Annual Income”.
Standard Rent: The rent fixed under the Rent Control Act, where so ever applicable, is called Standard rent. If a property is covered under the Rent Control Act, the Standard rent is applicable.
Expand: GAV= Gross Annual Value; NAV = Net Annual Value
PCI: Pre Construction Interest; PCP: Pre Construction Period
Sub-Letting: The part of Let out Portion of owner is sublet by the tenant.
Deemed Owner: An Assessee who is liable even without legal or beneficial ownership is called “Deemed Owner”. Ex. An assessee transferring property to Spouse or minor child.
How the Expected Rental Value is determined?
Determination of ERV:
MRV & FRV whichever is higher is ERV if Standard Rent is Not Given.
MRV & FRV whichever is higher is compared with Standard Rent and whichever is less is ERV if Standard Rent is given.
What deductions are allowed from the Net Annual Value while computing Let Out House Property Income?
Deductions u/s. 24: a) Standard Deductions – 30 % of Net Annual Value
b) Interest on Housing Loan
Standard Deductions: From Gross House Property Income, usually 30 % of Net Annual Value will allowed as Standard Deduction.
Business Income / Professional Income
Business means any economic activity carried on for earning profits. Any trade, commerce, manufacture or any adventure or concern in the nature of trade, commerce and manufacture.
Profession is an occupation requiring purely intellectual skill or manual skill controlled by the intellectual skill of the operator. Ex.: Lawyer, Accountant, Engineer, Surgeon, Author etc.,
Speculative Business means a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scripts.
What are Allowable and Dis-Allowable Expenditure?
Allowable Expenditure:
1) The cost of goods bought for the business
2) The prime costs of running a business asset
3) Wages and salaries of employees
4) Heat, light and cleaning of business premises
5) Repairs to and maintenance of business premises
6) Postage and stationery
7) Business telephone and rental
8) Bank charges and interest on business loans and overdrafts
9) Travel and entertaining if the sole purpose is to retain or acquire business
10) Legal costs of defending business rights and renewing leases of less
than 50 years duration
11) Bad Debts and specific doubtful debts
12) Protective Clothes necessary for the business
Disallowable Expenditure
1) Private Expenditure / Personal
2) Clothes bought for ordinary everyday wear
3) Acquisition and depreciation of business assets
4) Your own wages or salary
5) Your business partner's wages or salary
6) Payments to charities
7) Travel expenses between your home and place of business
8) A general (non-specific) provision against doubtful debts
9) Legal costs of acquiring land and buildings
10) Fines for breaking the law
11) Your own life, accident or sickness assurance
12) Costs of alterations, additions or improvements to business premises.
How would you deal with the following items in computing taxable profits from Business or Profession? State whether the following items are Deductable or not and Why? Give Reasons.
1) Sales Tax
2) Donation to Political party
3) Fees paid to the Lawyer for drafting Partnership Deed
4) Loss due to embezzlement by an Employee
5) Penalty paid to custom authorities for violating custom rules
6) Commission paid while purchasing raw Materials
7) Bad Debts
8) Wealth Tax
9) Commission paid while purchasing raw Materials
10) Bad Debts
11) Brokerage paid for raising a loan
12) Rs. 10,000 were snatched from the cashier while he was going to the bank to deposit the amount.
13) Expenditure incurred on Neon-Sign Board for the Business Premises.
14) Theft of Stock-in-Trade Assuming i) It was not Insured ii) It was Insured
15) Expenditure incurred for new Telephone Connection.
16) Foreign Travel Expenses incurred to Purchase Machinery for Factory.
17) Purchase of Sanitary and Pipeline for Factory.
1) Sales Tax: Admissible Deduction. Payment of Sales Tax in the normal running of the business and is made for the purpose of the Business.
2) Donation to Political party: Not an Allowable business deduction. Bur Assessee is allowed a deduction for Political Donation while calculating his Total Income.
3) Fees paid to the Lawyer for drafting Partnership Deed: Not an Admissible Deduction. Expenditure incurred on drafting a partnership deed is a Capital Expenditure
4) Loss due to embezzlement by an Employee: Admissible Item. The Employee of the Business have access over cash in the Business and in routine or normal running of the business, Embezzlement of cash is Possible.
5) Penalty paid to custom authorities for violating custom rules: Not allowed as Deduction. Penalty was imposed upon the assessee for his illegal work.
6) Commission paid while purchasing raw Materials: Admissible Deduction. This type of commission is paid in the ordinary course of the business and for the purpose of the business.
7) Bad Debts: Allowed as Deduction. Few Debtors or some % of debtors normally do not pay. So the debts which are not recoverable and actually written off in the books of the Assessee.
8) Wealth Tax: Expressly Disallowed. WT is levied on the value of Assets and It is Tax on Wealth and is not payable while earning profit.
9) Commission paid while purchasing raw Materials: Admissible Deduction. This type of commission is paid in the ordinary course of the business and for the purpose of the business.
10) Bad Debts: Allowed as Deduction. Few Debtors or some % of debtors normally do not pay. So the debts which are not recoverable and actually written off in the books of the Assessee.
11) Brokerage paid for raising a loan: Allowable Deduction. Brokerage paid for raising a loan for the purpose of the business is an Allowable. Brokerage paid for raising capital is not allowed.
12) Rs. 10,000 were snatched from the cashier while he was going to the bank to deposit the amount: Allowable Deduction. This type of loss is considered as Revenue loss.
13) Depreciation on Neon-Sign Board is Deductible @ 15% p.a.
14) Theft of stock-in-trade, if insured only, the loss can be Deductable
15) Expenditure incurred for new telephone scheme is Deductable
16) Foreign Travel Expenses incurred to Purchase of Machinery for Factory shall be Added to Capital Cost of the asset.
17) Purchase of Sanitary and Pipeline for Factory is to be Capitalized.
Allowable Rate of Depreciation
|
Asset Class |
Asset Type |
Rate of Depreciation |
|
Building |
Residential Buildings except Hotels and Boarding Houses |
5% |
|
Building |
Hotels and Boarding Houses |
10% |
|
Building |
Purely Temporary Erections such as Wooden Structures |
40% |
|
Furniture |
Furniture – Any Furniture / Fittings including Electrical Fittings and Air Conditioners |
10% |
|
Plant & Machinery |
Motor Car, Motor Cycle, Bike, Scooter other than those used in a business of running them on hire, Mobile Phone |
15% |
|
Plant & Machinery |
Motor Buses/Taxies/Lorries used in a Business of running them on hire |
30% |
|
Plant & Machinery |
Computers, Laptops, Computer Software, Printer, Scanner, UPS and other Peripheral Devices |
40% |
|
Plant & Machinery |
Books owned by Assessee, carrying on business / profession being / not being annual publications |
40%
|
|
Plant & Machinery |
Lifesaving Medical Equipment |
40% |
|
Plant & Machinery |
Air Pollution, Water Pollution, Solid Waste Control Equipment |
40 |
|
Intangible Assets |
Know how, patents, copyright, trademark, license, franchise or any other business or commercial rights of similar nature |
25% |
Capital Gain
Capital Gains means Any Gain / Profit earned from the sale / Transfer of capital assets.
Short Term Capital Assets: which is held by an assessee for not more than 36 months immediately preceeding the date of its transfer. Any gain or loss accruing to the assessee on such assets shall be known as STC Gain or Loss.
Long Term Capital Assets: Assets which are held by the assessee for a period exceeding 36 months immediately preceeding the date of Transfer. Any gain or loss accruing to the assessee on such assets shall be known as LTC Gain or loss.
Transfer means giving up your right on an asset. It includes sale, exchange, compulsory acquisition under any law, relinquishment etc.
Cost of Acquisition: COA of an asset is the amount paid by the assessee to acquire it. All the capital expenses paid for acquiring the title to the property are termed as the cost of acquisition.
Cost Inflation Index (CII) is a measure of inflation that is used for computing long-term capital gains on sale of capital assets.
It is set by the central government every year and useful in calculating the indexed value of the capital assets which in turn helps an individual/tax payer to understand the actual long term gain or loss on selling of capital assets and at last allows the individual/tax payer to factor the impact of inflation on the cost of their asset.
Cost Inflation Index (CII) for FY 2018-19 / AY 2019-20 Notified by CBDT at 280 (Base Year 2001-02)
FINANCIAL YEAR |
CII |
FINANCIAL YEAR |
CII |
|
2001-02 |
100 |
2010-11 |
167 |
|
2002-03 |
105 |
2011-12 |
184 |
|
2003-04 |
109 |
2012-13 |
200 |
|
2004-05 |
113 |
2013-14 |
220 |
|
2005-06 |
117 |
2014-15 |
240 |
|
2006-07 |
122 |
2015-16 |
254 |
|
2007-08 |
129 |
2016-17 |
264 |
|
2008-09 |
137 |
2017-18 |
272 |
|
2009-10 |
148 |
2018-19 |
280 |
…….. All the Very Best My Dears …....
By
Dr. K.VIJAYAKUMAR
Assistant Professors of Commerce, Jamal Mohamed College (Autonomous)
Tiruchirappalli – 620 020.
