INCOME TAX LAW AND PRACTICES​

INCOME TAX LAW AND PRACTICES​ –

I WILL START DIGGING FROM THIS SIDE OF THE    MOUNTAIN. YOU START DIGGING FROM THE OTHER SIDE . WHEN WE MEET IN THE MIDDLE , WE WILL HAVE MADE A TUNNEL . AND IF WE DO NOT MEET , WE WILL HAVE MADE TWO TUNNEL !

 

Income tax law in India

The income tax law in India consists of the following
components:
. Income tax Acts
. Income tax rules
. Finance Act
. Circulars, notifications etc
. Legal decision of courts.

Important Definitions

Assessment Year : Section 2(9)
“Assessment year” means the period starting from April 1 and ending on March 31 of the next year. Eg: Assessment year 2015-16 which commences on April 1, 2015 and ends on March 31, 2016. Income of previous year of an assessee is taxed during the assessment year at the rates prescribed by the relevant Finance Act for tax rates.
Previous year : section 3
Income earned in a particular year is taxable in the next year. The
year in which income is earned is known as previous year and the
next year in which income is taxable is known as assessment year. In
other words, previous year is the financial year immediately
proceeding the assessment year.

Exceptions

In the following situations income of an assessee is liable to be assessed to tax in the same year in which he earns the income:
. Income of non-residents from shipping;
. Income of persons leaving India either permanently       or for a long period of time;
. Income of bodies formed for short duration;
. Income of a person trying to alienate his assets with      a view to avoiding payment of tax;
. Income of a discontinued business.

Person : Section 2(31)

The term “person” includes:
an individual;
. Hindu undivided family;
. a company;
. a firm;
. an association of persons or a body of individuals . . . whether incorporated or not;
. a local authority; and
. every artificial juridical person not falling with in any of the preceding categories.

Various Assessee

Assessee : Section 2(7)
Every person in respect of whom, any proceeding under the act has been
taken for the assessment of his income or of the income of any other person
in respect of which he is assessable or of the loss sustained by him or by such
other person or the amount of refund due to him or to such other person
may be called an assessee.
Deemed Assessee:
A person who is deemed to be an assessee for some other person is called
“Deemed Assessee”.
Assessee In Default:
When a person is responsible for doing any work under the Income Tax Act
and he fails to do it, he is called an “Assessee in default”.
Assessment [Section 2(8)]
This is the procedure by which the income of an assessee is determined by the
Assessing Officer.

Basis Of Charge Of Income Tax Sec : 4

. Annual tax – Income-tax is an annual tax on income.
. Tax rate of assessment year – Income of previous year is chargeable to tax in the next following assessment year at the tax rates applicable for the assessment year. This rule is, however, subject to some exceptions.
. Rates fixed by Finance Act – Tax rates are fixed by the annual Finance Act and not by the Income-tax Act. For instance, the Finance Act, 2013, fixes tax rates for the Financial year 2013-14.
. Tax on person – Tax is charged on every person
. Tax on total income – Tax is levied on the “total income” of every assessee computed in accordance with the provisions of the Act.

 

INCOME : Section2 (24)

Section 2(24) of the Act gives a statutory definition of income which is
inclusive not exclusive. Apart from its natural meaning the following items of
receipts are also included in income:—
(1) Profits and gains.
(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 or benefit other than the perquisite included above, specifically 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) Profits and gains of business or profession chargeable to tax under section 28.

(7) Any capital gains chargeable under section 45.
(8) The profits and gains of any insurance business carried on by Mutual Insurance Company or by a cooperative society, computed in accordance with Section 44 or any surplus taken to be such profits and gains by virtue of the provisions contained in the first Schedule to the Act.
(9) The profits and gains of any business of banking (including providing credit facilities) carried on by a co-operative society with its members.
(10) 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.

Gross Total Income Sec: 80b (5)

As per section 14, 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.
If the income is not derived from any of the above sources, it is
not taxable under the act. The aggregate income under these
heads is termed as “gross total income”.
Total Income Sec : 2(45) : Total income means the amount left
after making the deductions under section 80C to 80U from the gross
total income.

Agriculture income – Sec 10(1)

:- Agriculture income is exempt under the Indian Income Tax Act.
:- This means that income earned from agricultural operations is
not taxed.
:- The reason for exemption of agriculture income from

Central Taxation is that the Constitution gives exclusive power to make laws with respect to taxes on agricultural income to the State Legislature.

:- However while computing tax on non-agricultural income
:- agricultural income is also taken into consideration.

Agriculture income

In order to consider an income as agricultural income certain
points have to be kept in mind:
(i) There must me a land.
(ii) The land is being used for agricultural operations.
(iii) Agricultural operation means that efforts have been induced for the crop to sprout out of the land .
(iv) If any rent is being received from the land then in order to assess that rental income as agricultural income there must be agricultural activities on the land.
(v) In order to assess income of farm house as agricultural income the farm house building must be situated on the land itself only and is used as a store house/dwelling house.

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.

Residential Status And Tax Incidence

. Tax incidence on an assessee depends on 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.

Residential Status of an Individual

. As per section 6, an individual may be (a) resident        and ordinarily resident in India, (b) resident but not        ordinarily resident in India, or(c) non-resident in            India.The following are the two sets of conditions        for determining the residential status of an                    individual:
Basic conditions :
He is in India in the previous year for a period of 182    days or more
OR
He is in India for a period of 60 days or more during      the previous year and has been in India for a period      of 365 days or more during 4 years immediately            preceding the previous year.

Additional Conditions:

(i) He has been resident in India in at least 2 out of 10 previous years [according to basic condition noted above] immediately preceding the relevant previous year. AND
(ii) He has been in India for a period of 730 days or more during 7 years immediately preceding the relevant previous year.
Resident
An individual is said to be resident in India if he satisfies any one of the basic conditions.
(A) Resident And Ordinarily Resident
An individual is said to be resident and ordinarily resident in India if he satisfies any one of the basic conditions and both of the additional conditions.
(B) Resident But Not Ordinarily Resident
An individual is said to be resident but not ordinarily resident in India if he satisfies any one of the basic conditions but not satisfies both of the additional conditions.
( c ) Non-Resident
An individual is a non-resident in India if he satisfies none of the basic conditions.

 

Residential Status of Firm and Company

Residential Status of Firm

. As per section 6(2), a partnership firm and an association of persons are said to be resident in India if control and management of their affairs are wholly or partly situated within India during the relevant previous year. They are, however, treated as non-resident in India if control and management of their affairs are situated wholly outside India

Residential Status of company

. As per section 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. However, a foreign company is treated as non-resident if, during the previous year,
control and management of its affairs is either wholly or partly situated out of India.

Illustration:1 & 2

. Mr. Alex Joseph, an American, came to India for the    first time 10-01-2010 and left for Britain on 15-09-        2010. He again came to India on 01-05-2013 and left    for Korea on 15-06-2013. Determine his residential      status for the assessment year 2014-15.
. Solution:
During the previous year 2013-14, Mr. Alex Joseph        was in India only for 46 days only. So he is a non-          resident for the assessment year 2014-15.
. Mr. Ahammed Khan, a citizen of India went to Tokyo    to join a course in Business Administration on 01-        03-2013and came back to India on 5th                            September,2013. Determine his residential status        for the A.Y 2014-15.

Solution

During the P.Y. 2013-14, Ahammed Khan was in India  for a period of 208 days (26+31+30+31+31+28+31), and therefore he satisfies the basic conditions. As he satisfies both the additional conditions, he is ordinarily resident for the A.Y. 2014-15.
Scope of Total Income (Section 5)
Resident and ordinarily resident:
Total income of an assessee who is resident and ordinarily resident includes:
(a) any income received or deemed to be received in India during the previous year by or on behalf of the assessee ; or
(b)any income accrues or arises or deemed to accrue or arise to him in India during the previous year ; or
(c) any income accrues or arises to him outside India during such year.

Scope of Total Income (Section 5)

Resident but not ordinarily resident:
(a) any income received or deemed to be received in     India during the previous year by or on behalf of the     assessee ; or
(b)any income accrues or arises or deemed to               accrue or arise to him in India during the previous       year ; or
(c) any income accrues or arises to him outside             India from a business controlled in or a profession       set up in India.
. Non- resident:
(a) any income received or deemed to be received in     India during the previous year by or on behalf of           the assessee ; or
(b)any income accrues or arises or deemed to               accrue or arise to him in India during the previous       year.

Income Exempt from Income Tax

The following Income is exempt from Income tax:-
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. Interest received by a person who is resident outside India on amounts credited in the nonresident (External) account [Sec. 10(4)]
6. Leave travel concession provided by as employer to his Indian citizen employee,Sec. 10(5)].                      7. Remuneration received by foreign diplomats of all categories [Sec. 10(6)]

8. 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)]

9. Salary received by a non-resident foreign citizen as a member of ship’s crew provided his total stay in India does not exceed 90 days [Sec. 10(6)(vii)]
10. Remuneration received by an employee, being a foreign national, of a foreign government deputed in India for training in a Government establishment or public sector undertaking [Sec. 10(6)(xi)]
11. Tax paid on behalf of foreign companies [Sec. 10(6A)]
12. Tax paid by Government or an Indian concern in case of a non-resident / foreign company [Sec.10(6B)]

13. Income arising to notified foreign companies from services provided in or outside India in project connected with the security of India [Sec. 10(6C)]
14. Foreign allowance granted by the Government of India to its employees posted abroad [Sec. 10(7)]
15. Remuneration received from a foreign Government by an individual who is in India in connection with any sponsored co-operative technical assistance programme with a foreign Government and the income of the family members of such employee [Sec. 10(8)and(9)]
16. Remuneration / fee received by non-received consultants and their foreign employees [Sec. 10(8A),(8B) and (9)]
17. Death-cum-retirement gratuity [Sec. 10(10)]
18. Commuted value of pension and any payment received by way of commutation of pension by as individual out of annuity plan of LIC or any other insurer from a fund set up by that corporation or insurer [Sec. 10(10A)]

19. Leave salary [Sec. 10(10AA)]

20. Retrenchment compensation [Sec. 10(10B)]
21. Compensation received by victims of Bhopal gas leak disaster [Sec. 10(10BB)]
22. 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)]
23. Compensation received from a public sector company at the time of voluntary retirement or separation [Sec. 10(10C)]
24. Tax on perquisite paid by employer [Sec. 10(10CC)]

25. Any sum (including bonus) on life insurance policy (not being a keyman insurance policy) [Sec. 10(10D)]
26. Any amount from provident fund paid to retiring employee [Sec. 10(11)]
27. Amount from an approved superannuation fund to legal heirs of the employee [Sec. 10(13)]
28. House rent allowance subject to certain limits [Sec. 10(13A)]
29. Special allowance granted to an employee [Sec. 10(14)]
30. Interest from certain exempted securities [Sec. 10(15)]

31. Payment made by an Indian company, engaged in the business of operation of an aircraft, to acquire an aircraft on lease from a foreign Government or foreign enterprise [Sec. 10(15A)]
32. Scholarship granted to meet the cost of education [Sec. 10(16)]
33. Daily allowance of a member of parliament or state Legislature (entire amount is exempt), any other allowance subject to certain conditions [Sec. 10(17)]
34. Rewards given by the central or state Government for literary, scientific or artistic work or attainment or for service for alleviating or for service for alleviating the distress of the poor, the weak and the ailing, or for proficiency in sports and games or gallantry awards approved by the
Government [Sec. 10(17A)]
35. Pension and family pension of gallery award winners [Sec. 10(18)]
36. Family pension received by family members of armed forces [Sec. 10(19)]

Income from Salaries

Salary (Section 15 – 17)
Salary is the remuneration received by or accruing to an individual,
periodically, for service rendered as a result of an express or implied
contract. The actual receipt of salary In the previous year is not material
as far as its taxability is concerned. According to Income Tax Act there are
certain conditions where all such remuneration is chargeable to income tax:
1. When due from the former employer or present employer in the previous year, whether paid or not
2. When paid or allowed in the previous year, by or on behalf of a former employer or present employer, though not due or before it becomes due.
3. When arrears of salary is paid in the previous year by or on behalf of a former employer or present employer, if not charged to tax in the period to which it relates.

Section 17(1) of the Income tax Act gives an inclusive and not exhaustive
definition of “Salaries” , which includes:
(i) Wages
(ii) Annuity or pension
(iii) Gratuity
(iv) Fees, Commission, allowances perquisites or profits in lieu of salary
(v) Advance of Salary
(vi) Amount transferred from unrecognized provident fund to recognized provident fund
(vii) Contribution of employer to a Recognized Provident Fund in excess of the prescribed limit
(viii) Leave Encashment
(ix)Compensation as a result of variation in Service contract etc.
(x) Contribution made by the Central Government to the account of an employee under a notified Pension scheme.

Pension

Pension is a payment made by the employer after the retirement
or death of employee as a reward for past service. It is normally
paid as a periodical payment on monthly basis but certain
employers may allow an employee to forgo a portion of pension
in lieu of lump sum amount. This is known as commutation of
pension.
The treatment of these two kinds of pension is as under:
Periodical pension (or uncommuted pension): It is fully taxable
in the hands of all employee, whereas government or non-
government.

Commuted pension

1. For employees of government organizations, local authorities
and statutory corporations, it is fully exempted from tax, hence
not included in gross salary.
2. For other employees, commuted value of half of the total
value of pension is exempted from tax. Any amount received
over and above this amount is taxable, so included in gross
salary.
3. If, however, the employee is also receiving gratuity (another
retirement benefit) along with pension, then one third of the
total value of pension is exempted from tax. Amount received in
excess of this is taxable, so included in gross salary.

Illustration:1

Mr. Kamath retires from X LTD. , on 31.10.12 . He Gets pension
Rs. 2000 per month up to 31.10.13 . With effect from 1st
November 2013, he gets 60% of Pension commuted for
Rs. 30,000/- . He is not in receipt of gratuity . Compute taxable
pension for A/Y 2014-15.

SOLUTION

1. Un – commuted pension before the date of
commutation ( 2000 x 7 ) =              14,000
2. Un – commuted pension after the date of
commutation ( 2000 x 40% x 5 )        4000
3. Commuted pension; 30,000
half of the full value of commuted pension is
exempt as he is not in receipt of gratuity
30000 x 100/60 x ½ = 25,000             5,000

TAXABLE PENSION                            23,000

Gratuity

Gratuity is the payment made by the employer to an employee
in appreciation of past services rendered by the employee. It is
received by the employee on his retirement. Gratuity is
Exempted up to certain limit depending upon the category of
employee. For the purpose of exemption, employees are divided
into 3 categories:
(i)Government employees and employees of local authority:
In case of such employees, the entire amount of gratuity
received by then is exempted from tax nothing will be added to
gross salary.

(ii)Employees covered under Payment of Gratuity Act, 1972
In case of employees who are covered under Payment of
Gratuity Act, the minimum of the following amounts are
exempted from tax:
1) Amount of gratuity actually received.
2)15 days of salary for every completed years of service or part thereof in excess of six months. (15 / 26 x [basic salary + Dearness Allowance] x No. of years of service+1 [if fraction > 6 months]).
3) Rs.10, 00,000 (amount specified by government).

(iii) Other employees.
In case of employees not falling in the above two categories, gratuity
received from the employers is exempt to the extent of minimum of
following amounts:
1. Actual amount of gratuity received.
2. Half month average salary for every completed year of service
(1/2 x average salary of last 10 months x completed years of service).
3. Rs. 10, 00,000 (amount specified by government).
Salary = 10 months average salary preceding the month of
retirement. = Basic Pay + Dearness Allowance considered for retirement benefits + commission (if received as a fixed percentage on turnover).

Leave Salary

. Employees are entitled to various types of leave.          The  leave generally can be taken (casual                      leave/medical leave) or it lapses. Earned leave is a      kind of leave which an employee is said to have            earned every year after working for some time. This    leave can either be availed every year, or get                  encashment for it. If leave is not availed or                    encashed, it is allowed to be carried forward. This        leave keeps getting accumulated and is encashed        by employee on his retirement.
. The tax treatment of leave encashment is as under:
(i)Encashment of leave while in service. This is fully taxable and so is added to gross salary.
(ii)Encashment of leave on retirement. For the purpose of exemption of accumulated leave encashment, the employees are divided into two categories. They are Govt employees and Other employees.

State or Central Government employees:
Leave encashment received by government employees is fully exempted from
tax. Nothing is to be included in gross salary.
Other employees: Leave encashment of accumulated leave at the time of
retirement received by other employees is exempted to the extent of minimum
of following four amounts:
1. Amount specified by Central Government (3,00,000).
2. Leave encashment actually received.
3. 10 months average salary (10 x average salary of 10 months preceeding retirement).
4. Cash equivalent of unavailed leave.
(Leave entitlement is calculated on the basis of maximum 30 days leave every year, cash equivalent is based on average salary of last 10 months).
. Salary = Basic Pay + Dearness Allowance (forming a part of salary for retirement benefits) + Commission (if received as a fixed percentage on turnover).

Taxable Value of Allowances

Allowance is a fixed monetary amount paid by the employer to the
employee (over and above basic salary) for meeting certain expenses,
whether personal or for the performance of his duties. These
allowances are generally taxable and are to be included in gross salary
unless specific exemption is provided in respect of such allowance.
For the purpose of tax treatment, we divide these allowances into 3
categories:
I. Fully taxable cash allowances
II. Partially exempt cash allowances
III. Fully exempt cash allowances.

Fully Taxable Allowances

. Dearness Allowance and Dearness Pay
. City Compensatory Allowance
. Tiffin / Lunch Allowance
. Non practicing Allowance
. Warden or Proctor Allowance
. Deputation Allowance
. Overtime Allowance
. Fixed Medical Allowance
. Servant Allowance

Partly Exempted Allowances

House Rent Allowance or H.R.A. [Sec. 10(13A) Rule 2A]
An allowance granted to a person by his employer to meet expenditure
incurred on payment of rent in respect of residential accommodation
occupied by him is exempt from tax to the extent of least of the following
three amounts:
a)House Rent Allowance actually received by the assessee
b) Excess of rent paid by the assessee over 10% of salary due to him
c) An amount equal to 50% of salary due to assessee (If accommodation is situated in Mumbai, Kolkata, Delhi, Chennai) ‘Or’ an amount equal to 40% of salary (if accommodation is situated in any other place).
Salary for this purpose includes Basic Salary, Dearness Allowance (if it forms
part of salary for the purpose of retirement benefits), Commission based on
fixed percentage of turnover achieved by the employee.

Special Allowances to meet personal expenses

Children Education Allowance: This allowance is exempt to the extent of Rs.100 per
month per child for maximum of 2 children (grand children are not considered).
Children Hostel Allowance: Any allowance granted to an employee to meet the hostel
expenditure on his child is exempt to the extent of Rs.300 per month per child for
maximum of 2 children.
Transport Allowance: This allowance is generally given to government employees to
compensate the cost incurred in commuting between place of residence and place of
work. An amount uptoRs.800 per month paid is exempt. However, in case of blind and
orthopedically handicapped persons, it is exempt up to Rs. 1600 p.m.
Running Allowance (Out of station allowance ): An allowance granted to an
employee working in a transport system to meet his personal expenses in
performance of his duty in the course of running of such transport from one place to
another is exempt up to 70% of such allowance or Rs.10000 per month, whichever is
less.
Tribal area allowance: Exemption is available as Rs: 200 p.m
Under ground allowance : Exempted up to Rs:800 p.m.

Perquisites

Perquisites are defined as any casual emolument or benefit attached to an
office or position in addition to salary or wages. . Perquisites are taxable and
included in gross salary only if they are :
(i)  Allowed by an employer to an employee,
(ii) Allowed during the continuation of employment,
(iii) directly dependent on service,
(iv) resulting in the nature of personal advantage to the employee and
(v) derived by virtue of employer’s authority.
As per Section 17 (2) of the Act, perquisites include:
1.Value of rent free accommodation provided to the employee by the
employer.
2. Value of concession in the matter of rent in respect of accommodation
provided to the employee by his employer

3. Value of any benefit or amenity granted free of cost or at a concessional
rate in any of the following cases:
a) by a company to an employee who is a director thereof
b) by a company to an employee who has substantial interest in the company
c) by any employer to an employee who is neither a director, nor has
substantial interest in the company, but his monetary emoluments under the head ‘Salaries’ exceeds Rs.50, 000.
4. Any sum paid by the employer towards any obligation of the employee.
5. Any sum payable by employer to effect an assurance on the life of assessee.
6. The value of any other fringe benefit given to the employee as may be prescribed.

Provident Fund

. Provident Fund Scheme is a welfare scheme for the    benefit of
employees.
. Under this scheme, certain amount is deducted by      the employer from the employee’s salary as his            contribution to
. Provident Fund every month. The employer also            contributes
certain percentage of the salary of the employee to      the Fund.
. The contributions are invested outside in securities. . The interest earned on it is also credited to the               Provident Fund Account.
. At the time of retirement, the accumulated balance      is given to the
employee.

Statutory Provident Fund

. This is set up under the provisions of Provident             Fund Act, 1925.
. Contribution is made by Employer and Employee.
. Assesse’s Contribution: will get Deduction u/s 80C
. Employer’s Contribution- Not taxable
. Interest credited- Fully exempted
. Withdrawal at the time of retirement/resignation/termination, etc- Exempted u/s 10(11)

Recognized Provident Fund

. This is set up under the Employee’s Provident Fund       and Miscellaneous Provisions Act, 1952 (PF Act,        1952) and is maintained by private sector e                     employeess
. Assessee’s Contribution- will get Deduction u/s 80C
. Employer’s Contribution-Amount exceeding 12% of       salary is taxable
. Interest credited-Exempted up to 9.5% p.a. Any excess is taxable.
. Withdrawal at the time of retirement/ resignation/termination, etc-Exempted u/s 10(12) .

Unrecognized Provident Fund

. If a provident fund is not recognized by the                    Commissioner of Income Tax, it is known as                  unrecognized PF.
. Assesse’s Contribution: will not get Deduction u/s        80C. No Income Tax Benefit.
. Employer’s Contribution- Not taxable at the time of      contribution
. Interest credited- On Employee’s contribution                taxable under the head “Other Sources” and, on            Employer’s contribution not taxable at the time of        credit
. Withdrawal at the time of                                         be      retirementon/termination, etc- Employee’s                      contribution thereon is not taxable. Interest on employees share has taxable under the head income from other sources. Employer’s contribution and interest thereon is taxable as Profits in lieu of Salary, under “Salaries”.

Public Provident Fund

. The Central Government has established the Public Provident Fund for the benefits of general public to mobilize personal savings. Any member of general public (whether salaried or self employed) can participate in this fund by opening a Provident Fund Account at the State Bank of India or its subsidiaries or other nationalized banks. A salaried employee can simultaneously become member of employees provident fund (whether statutory, recognized or unrecognized) and public provident fund. Any amount may be deposited (subject to minimum of Rs.500 and maximum of Rs.70, 000 per annum) under this account. The accumulated sum is repayable after 15 years.
. Assesse’s Contribution: will get Deduction u/s 80C
. Interest credited- Fully exempted
. Withdrawal at the time of retirement/resignation/termination, etc-Exempted u/s 10(11)

 

INCOME FROM HOUSE PROPERTY

The annual value of a property, consisting of any buildings or
lands appurtenant thereto, of which the assessee is the owner, is
chargeable to tax under the head ‘Income from house
property’.
Thus, three conditions are to be satisfied for property income to be
taxable under this head:
1. The property should consist of buildings or lands appurtenant thereto.
2. The assessee should be the owner of the property.
3. The property should not be used by the owner for the purpose of any business or profession carried on by him, the profits of which are chargeable to income-tax.

House Property Income Is Exempt From Tax To                                    Certain Persons

1. An Ex-Ruler for his occupation (palace)
2. Local Authority.
3. Approved Scientific Research Association.
4. Institution for the development of Khadi and                  Village Industries.
5. Khadi and Village Industries Boards.
6. A body or authority for administering religious or          charitable Trust or endowments.
7. Certain Funds, educational institutions, hospitals         etc.
8. Registered Trade Union.
9. Statutory Corporation or an institution or association financed by the Government for promoting in the interests of members of SC or ST.
10. Co-operative Society for promoting the interest of the members of SC or ST.
11. Charitable Trust.
12. Political Parties

DETERMINATION OF ANNUAL VALUE

. The basis of calculating Income from House                 property is the ‘annual value’.
. This is the inherent capacity of the property to earn i     incomemend it has been defined as the amount for     which they property may reasonably be expected to     be let out from year to year.
. It is not necessary that the property should actually    be let out.
. The municipal value of the property, the cost of             construction,
the standard rent, if any, under the Rent Control Act,     the rent of similar properties in the same locality, a-     ree all pointers to the determination of annual value.

Gross Annual value

The principle of determining GAV is :
. Expected Rental Value (ERV) OR
Actual Rent received for full year,
Whichever is more..                                                          .  Here, Expected Rental Value is calculated as                  follows:
If the let out property is not subject to Rent Control    Act ERV is:
Fair rental value (FRV) or Municipal rental value             (MRV) whichever is higher.
If the let out property is subject to Rent Control Act    ERV is:
FRV or MRV whichever is higher
OR
Standard Rental Value ,
Whichever is less.

Deduction from Gross Annual Value

. Municipal Tax and Unrealized Rent
Deduction from Net Annual Value
A. Standard Deduction u/s 24(a): Standard deduction of 30% of NAV (Net Annual Value) shall be allowed to the assessee.
B. Interest on Loan u/s 24(b):
1. Purpose of loan: The loan shall be borrowed for the purpose of acquisition, construction, repairs, renewal or reconstruction of the house property.
2. Accrual basis: The interest will be allowed as a deduction on accrual basis, even though it is not paid during the financial year.
3. Interest on interest: Interest on unpaid interest shall not be allowed as a deduction.
4. Brokerage: Any brokerage or commission paid for acquiring the loan will not be allowed as a deduction.
5. Prior period interest: Prior Period Interest shall be allowed in five equal installments commencing from the financial year in which the property was acquired or construction was completed.

FOR EXAMPLE :-

Calculate annual rental value from the following particulars for
the assessment year 2014- 15.Actual rent Rs: 14,000 p.m.; MRV
Rs: 1,20,000 p.a.; FRV Rs:1,32,000 p.a. Standard rent Rs:
1,38,000. During the P.Y. the assessee is not able to realize two
months rent.

SOLUTION

. Expected Rental Value = 1,32,000
. Actual rent for the full year (14,000×12) = 1,68,000
. Therefore, GAV = 1,68,000.
. Annual Value = 1,68,000 – unrealized rent
= 1,68,000 — 28,000 = 1.40,000.

Income from Business or Profession

. Business : Sec 2 (13)
Business includes any trade, commerce, or manufacture or any adventure or concern in the nature of trade, commerce, or manufacture. For practical purpose business means the purchase and sale or manufacture of a commodity with a view to make profit. Business includes banking, transport business or any other adventure. Profit of an isolated transaction is also taxable under this head.
. Profession
A profession is a vocation founded upon specialized educational training, the purpose of which is to supply objective, counsel and service to others, for a direct and definite compensation, wholly apart from expectation of other business gain. For example the work of lawyer, doctor, auditor,
engineer and so on. Vocation means activities which are performed in order to earn livelihood. For example brokerage, music, dancing etc.

Income not taxable under the head “profits andgains of business or profession”

. Rent of house property is taxable under the head “Income from house property”. Even if the property constitutes stock in trade of recipient of rent or the recipient of rent is engaged in the business of letting properties on rent.
. Deemed dividends on shares are taxable under the head “Income from other sources”.
. Winnings from lotteries, races etc. are taxable under the head “Income form other sources”.

Deduction In Respect Of Losses Incidental to                                        Business

A loss (other than capital loss), which is incidental to the trade, is
allowable in computing the business profits on ordinary
principles of commercial trading. Such trading losses can be
claimed as deduction provided the following conditions are
satisfied:
(a) Loss should be real in nature and not notional or fictitious;
(b) It should be a revenue loss and not capital;
(c)Loss should have resulted directly from carrying on of business i.e. it should be incidental to business;
(d)Losses should have actually occurred during the previous year.

Amounts expressively allowed as deduction [ U/s 30 to 37 ]

. Deduction In Respect Of Rent, Rates, Taxes, Repairs and Insurance, etc. for Buildings, Plant and Machinery and Furniture [Section 30 And 31]
. Depreciation [Section 32]
. Carry Forward and Set-Off Of Unabsorbed Depreciation [Section 32(2)]
. Deduction in respect of prospecting for or extraction or production of petroleum or natural gas or both in India (Section 33ABA)
. Expenditure on scientific research (section 35)
Amount contributed to National Laboratory [Section 35(2AA)]

Capital Gains

CHARGEABILITY : Sec 45 (1)
Profits or gains arising from the transfer of a capital asset made
in a previous year are taxable as capital gains under the head
“Capital Gains”. The capital gain is chargeable to income tax if
the following conditions are satisfied:
. There is a capital asset.
. Assessee should transfer the capital asset.
. Transfer of capital assets should take place during       the previous year.
. There should be gain or loss on account of such          transfer of capital asset.

Capital assets

Sec. 2(14): Capital Asset means property of any kind (Fixed, Circulating,
movable, immovable, tangible or intangible) whether or not connected with
business or profession.
Exclusions —
. Stock-in-trade
. Personal effects of the assessee i.e., personal use      excluding jewellery, costly stones, silver,
Gold
. Agricultural land in a rural area provided it is not          situated in any area within the territorial jurisdiction     of a municipality having a population 10,000 or             more.
. 6½% Gold Bonds, 1977 or 7% Gold Bonds, 1980 or      National Defence Bonds, 1980 issued by the Central    Government
. Special Bearer Bonds, 1991 issued by the Central        Government.
. Gold Deposit Bonds issued under Gold Deposit            Scheme 2000

Kinds of capital assets

There are two kinds of capital assets :
Short-term capital asset: Sec. 2(42A): means a capital asset held by
an assessee for not more than thirty six months immediately
preceding the date of its transfer. However, in the following
cases, an asset, held for not more than twelve months, is treated as
short-term capital asset—
. Quoted or unquoted equity or preference shares in a     company
. Quoted Securities
. Quoted or unquoted Units of UTI
. Quoted or unquoted Units of Mutual Funds                    specified  u/s. 10(23D)
Long-term capital asset: Sec. 2(29A): means a capital asset which is
not a short-term capital asset.

Method of computing short term capital gainsSec 48

A.Find out Full Value of Consideration
B. Deduct:

(i) Expenditure incurred wholly and exclusively in connection
with such Transfer.
(ii) Cost of Acquisition
(iii) Cost of Improvement
(iv) Exemption provided by Ss. 54B, 54D & 54G, 54GA

C. (A-B) is the short-term capital gain

Method of computing long term capital gains Sec 48

A.Find out Full Value of Consideration
B.Deduct:
(i) Expenditure incurred wholly and exclusively in connection
with such Transfer.
(ii) Indexed Cost of Acquisition
(iii) Indexed Cost of Improvement
(iv) Exemption provided by Ss. 54B, 54D, 54EC,54F &
54G, 54GA
C. (A-B) is the long-term capital gain

Special points of Long Term Capital Gain

. It arises out of transfer of long term capital assets.
Tax rate is 20%
. Cost of acquisition and cost of improvement are          indexed on the basis of CII.
. If LTCA is acquired before 1-4-1981, then the fair          market value of the asset as on 1-4-1981 is taken as    the value of acquisition.

Special points of Short Term Capital Gain

. It arises out of transfer of short term capital assets.
. Rates applicable are same as for all other incomes.
. No indexing is done.
. Short term capital loss can be set off against short      term capital gain or long term capital gain.

Full value of consideration

Full value of consideration means and it includes the whole or
complete sale price or exchange value or compensation including
enhanced compensation received in respect of capital asset in transfer.
The following points are important to note in relation to full value of
consideration.
. The consideration may be in cash or kind.
. The consideration received in kind is valued at its         fair market value.
. It may be received or receivable.

Cost of Acquisition

Cost of Acquisition (COA) means any capital expense at the time
of acquiring capital asset under transfer, i.e., to include the
purchase price, expenses incurred up to acquiring date in the
form of registration, storage , expenses incurred on
completing transfer.
Indexed Cost of Acquisition =
Cost of Acquisition x CII for the year in which the asset is sold

CII for the year in which asset was first held by the assessee or 1981-82 whichever is later

Cost of improvement

Cost of improvement is the capital expenditure incurred by an
assessee for making any addition or improvement in the capital
asset. It also includes any expenditure incurred in protecting or
curing the title. In other words, cost of improvement includes all
those expenditures, which are incurred to increase the value of
the capital asset.
Indexed Cost of Improvement =
Cost of Improvement x CII for the year in which the asset is sold

CII for the year in which Improvement took place

Exemption from Capital Gains

Capital gain arising on the transfer of property used for residence
(Sec 54):
. The exemption u/s 54 relates to the capital gain          arising out of transfer of residential house.
. The exemption is available to only Individual                  assessed.
Exemption is available if: –
. House Property transferred was used for residential    purpose.
. House Property was a long term capital                          asset.Assesses has purchased another house              property within a period of one year before or two        years after the date of transfer or has constructed        another house property within three years of date of
transfer

Capital gain arising from the transfer of agricultural land (sec 54 )

. Any capital gain arising on the transfer of                      agricultural land situated in an urban area is exempt    subject to the following conditions:
. The agriculture land is owned by an individual or a       HUF
. The agriculture land was , in the two years                       immediately preceding the date of transfer, being         used either by the assessee or his parent or HUF         for agriculture purposes.
. The assessee has purchased within a period of two    years from the date of transfer any other land for          agricultural purposes.

Capital gain on compulsory acquisition of land and buildings forming part of industrial undertaking (sec 54 D)

This exemption is available to all categories of taxpayers. To get
exemption the following conditions are to be satisfied.
1. The asset transferred is land or building or any right in land or building which formed part of industrial undertaking belonging to the tax payer.
2. Asset in question is transferred by way of compulsory acquisition under any law.
3. The asset in question was used for the purpose of industrial undertaking at least for two years immediately before the date of compulsory acquisition.
4. Assessee has purchased any other land or building with in a period of three years from the date of receipt of compensation or constructed a building within such a period which will be used for his industrial undertaking .

Income from other sources

Basis of Charges (Sec 56)
Income from other sources is a residuary head of income i.e.
income not chargeable under any other head is chargeable to tax
under this head. All income other than income from salary,
house property, business and profession or capital gains is
covered under ‘Income from other sources’.
The following incomes are chargeable to tax under this head:-
Dividend received from any entity other than domestic company. This is because dividend received from a domestic company has been made exempt in the hands of the receiver. Accordingly dividend received from a cooperative bank or dividend received from a foreign company will be taxable as income from other sources.

Income from other sources

. Any winnings from lotteries, crosswords, puzzles, races including horse races, card games or other games of any sort or gambling or betting of any form or nature..

. Income from any plant, machinery or furniture let out on hire where it is not the business of the assessee to do so.
. Income from securities by way of interest.
. Income from subletting.
. Interest on bank deposits
. An individual or HUF receives in any previous year from any person or persons , any sum of money, without consideration, the aggregate value of which exceeds Rs 50,000.

Gift of Cash / Cheque / Draft

. If, through one or more transactions, gift received is    up to Rs 50,000 per financial year, then nothing is        taxable. If gift is Rs 50,001 or above, then it is fully      taxable. For example, if gift of Rs 70,000 is received    in cash, then taxable amount is Rs 70,000 and              not Rs20,000.

. Gift of immovable property : In this case, if Stamp       duty value is up to Rs 50,000 then nothing is taxable.    If it is above Rs 50,000, then fully taxable. It is              applicable for each individual transaction.
. Gift of movable property (one or more                  transactions):  If fair market value of all movable properties gifted in one financial year is up to Rs 50,000, then nothing is taxable. But if it is more than Rs 50,000, then it is fully taxable.

Exempted Gifts

. Money / property received from a relative or by HUF    from its members
. Money / property received on the occasion of the        imarriage of the individual
. Money / property received by way of will/inheritance
. Money / property received from a local authority
. Money / property received from any fund,                     foundation, university, other educational institution,   hospital, medical institution, any trust, or institution   referred to in the section10(23C).
. Money / property received from a charitable                   institute registered u/s 12AA.

DEDUCTIONS AGAINST INCOME FROM OTHER SOURCE U/S 57

. commission or remuneration for realising dividend      or interest on securities – Section 57(i)
. Repairs, depreciation in case of letting out of plant,       machinery, furniture, building etc.
. Standard deduction in case of family pension –              57(iia)
. Any other expenditure of revenue nature [57(iii)]
Interest on borrowed capital [loan taken to invest in    shares/ debentures etc.]

Aggregation of Income

. In certain cases, some amounts are deemed as            income in the hands of the assessee though they        are actually not in the nature of income.
. These cases are contained in sections 68, 69, 69A,      69B, 69C
and 69D.
. The Assessing Officer may require the assessee to       furnish explanation in such cases.
. If the assessee does not offer any explanation or           the   explanation offered by the assessee is not            satisfactory, the amounts referred to in these                sections would be deemed to be the income of the      assessee. Such amounts have to be aggregated          with  the assessee’s income.

Aggregation of Income

. Cash credits (sec 68)
. Unexplained investments (sec 69)
. Unexplained money, etc (Sec 69A)
. Amount of investments, etc., not fully disclosed in        books of account( 69B)
. Unexplained expenditure, etc (69C)
. Amount borrowed or repaid on hundi (69D)

 

INTER SOURCE ADJUSTMENTS

Set off of loss from one source against income from another
source under the same head of income is allowed for the same
Assessment year (Sec 70).
EXCEPTIONS
. Loss from speculation business cannot be set off against income from other business. This loss can be set off only against income from another speculation business.
. Loss of specified business cannot be set off against income from other business. This loss can be set off only against income from other specified business.

EXCEPTIONS

. Long term capital loss cannot be set off against short term capital gain. This loss can be set off only against long term capital gain.
. Loss from the activity of owning and maintaining race horses shall be set off against income from owning and maintaining race horses only and not against any other income under the head other sources.

Inter head adjustment [Section 71]

Loss under one head of income can be adjusted or set off against income
under another head. However, the following points should be considered:
. Where the net result of the computation under any head of income (other than ‘Capital Gains’) is a loss, the assessee can set-off such loss against his income assessable for that assessment year under any other head, including ‘Capital Gains’.
. Where the net result of the computation under the head “Profits and gains of business or profession” is a loss, such loss cannot be set off against income under the head “Salaries”.
. Where the net result of computation under the head ‘Capital Gains’ is a loss, such capital loss cannot be set-off against income under any other head.
. Speculation loss and loss from the activity of owning and maintaining race horses cannot be set off against income under any other head.

Carry forward and set off losses

If it is not possible to set off the losses during the same assessment year in
which they occurred, so much of the loss as he has not been so set off out of
the following losses can be carried forward for being set off against his
income in the succeeding years provided the losses have been determined in
pursuance of a return filed by the assessee within the time allowed u/s 139(i)
and it is the same assessee who sustained the loss. Under the Act, the
following losses can be carried forward:
. Loss under the head income form house property        (Sec 71B).
. Loss of non speculation business or profession            (Sec 72 ).
. Loss of speculation business (Sec 73).
. Short term capital loss or long term capital loss            (Sec 74 ).
. Loss from activity of owning and maintaining race       horses (Sec 74 A).
. Unabsorbed depreciation (Sec 32 ).

Deductions From Gross Total Income

In computing the total income of an assessee, deductions
specified under sections 80C to 80U will be allowed from his
Gross Total Income.
Total Income = Gross Total Income – Deductions under sections
80C to 80U.
SECTION 80C: Deduction in respect of life insurance premia,
deferred annuity, contributions to provident fund, subscription
to certain equity shares or debentures, etc.
Section 80D- Deductions In Respect Of Medical Insurance
Premiums

. Section 80DD- Deduction In Respect Of                          Maintenance  Including Medical Treatment Of              Handicapped Dependant
. Section 80DDB- Deduction In Respect Of Medical        Treatment, Etc.
. Section 80E- Deduction in Respect of Interest on           Loan Taken for Higher Education
. Section 80G- Deduction In Respect of Donations to      Certain Funds, Charitable Institutions, Etc.
. Section 80GG- Deduction in Respect of Rent Paid
. Section 80GGA – Deduction In Respect Of Certain         Donations For Scientific Research Or Rural                     Development

. Section 80GGB – Deduction in Respect of                       Contribution Given by Companies to Political                 Parties or an Electoral Trust
. Section 80GGC- Deduction In Respect of                        Contribution Given by any Person to Political Parties    or an Electoral Trust
. Section 80QQB – Deduction in respect of royalty            income, etc., of authors of certain books other than    text books – Available to resident individual, for a        maximum deduction of Rs 3,00,000.
. Section 80RRB: Deduction in respect of royalty on        patents – Available to Resident Individual,                      maximum     of Rs. 3,00,000.
. Section 80TTA: Deduction in respect of interest on   deposits in savings account – Available to                      Individual.   /     HUF upto Rs.10,000.
. Section 80U – Deduction in the case of a person           with disability.

 

 

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