5.taxation slides

7/27/2019 5.Taxation Slides

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Prof. Mayur Malviya - NCRD's SIMS


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WHAT IS TAX??????????WHAT IS TAX??????????

A sum of money demanded by government for itssupport or for specific facilities or services,

, , .

OR

A burdensome charge, obligation, duty, ordemand OR

A financial charge or other levy imposed upon ataxpayer by a state or the functional equivalent ofa state such that failure to pay is punishable by

law. Prof. Mayur Malviya - NCRD's SIMS


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A tax "is not a voluntary payment ordonation, but an enforced contribution,

exacted pursuant to legislative authority". Taxes consist of direct tax or indirect tax



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REVENUE FROM PEOPLES INCOME DEVELOPMENT OF COUNTRY

INCOME TAX IS THE PRICE ONE PAYS FOR

CIVILISATION



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Taxes in India are levied by the CentralGovernment and the state governments.

Some minor taxes are also levied by the localauthorities such the Municipality or the LocalCouncil.

The authority to levy a tax is derived from theConstitution of India which allocates the power tolevy various taxes between the Centre and the

State. An important restriction on this power isArticle 265 of the Constitution which states that"No tax shall be levied or collected except by theauthority of law."[



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Taxation laws Article 246 of the Indian Constitution, distributes legislative powers

including taxation, between the Parliament of India and the State

Legislature. Schedule VII enumerates these subject matters with theuse of three lists;

-to make laws,

List - II entailing the areas on which only the state legislature canmake laws, and

List - III listing the areas on which both the Parliament and the StateLegislature can make laws upon concurrently.



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Direct taxes & Indirect taxes

A Direct tax is a kind of charge, which is imposed directlyon the taxpayer and paid directly to the government by the

persons (juristic or natural) on whom it is imposed. A Direct tax is one that cannot be shifted by the taxpayer to

someone else. Some important direct taxes imposed in

Income Tax Corporation Tax Property Tax

Inheritance (Estate) Tax Gift Tax



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Indirect Taxes

An Indirect tax is a tax collected by an intermediary (such as aretail store) from the person who bears the ultimate economic

burden of the tax (such as the customer). An indirect tax is one thatcan be shifted by the taxpayer to someone else.

An Indirect tax may increase the price of a good so that consumersare actually paying the tax by paying more for the products. The

Customs Duty Central Excise Duty Service Tax Sales Tax Value Added Tax (VAT) Securities Transaction Tax (STT)



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Taxes Levied by the Central Government of

IndiaThe Central Indian Government that is officially named as the

"Union Government" is responsible for the imposition of both

direct taxes as well indirect taxes. Listed below are some of the

taxes that are imposed by the India Government:

Direct Taxes Indirect Taxes

Banking Cash Transaction Tax

Corporate Tax

Capital Gains Tax

Securities Transaction TaxPersonal Income Tax

Custom Duty

Excise Duty

Sales Tax

Service TaxValue Added Tax or V. A. T.



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Role of Direct and Indirect Taxes

Resource Mobilization

Reduction in Inequalities of Income

Social Welfare

Foreign exchange

Regional Development



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Categories of sales

Inter-State Sale

Sale

Sale duringimport/export

Intra-State



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Tax on sales by Union and State Governments

Sales tax on Inter State sale levied by Union Government under Entry

92A of List I (Union List),

sales tax on intra-State sale

(sale within State)

is levied by State Government

under Entry 54 of List II (State List) of Seventh

Schedule to constitution of India.



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CENTRAL SALES TAX Inter State can be either direct u/s 3(a) or by

transfer of documents u/s 3(b) of CST Act.

In case o inter state sa e u s 3 a , sa e is interstate if it occasions movement of goods from

one State to other. There should be express or

implied stipulation for movement of goodsoutside the State



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Salient features It extends to the whole of India.

Every dealer who makes the inter state sale isthe registered dealer and a certificate ofre istration has to be dis la ed in all laces of

business Under this act, Goods are being classified as

i) Declared goods or goods of specialimportance in inter-state trade and commerceand ii) Other goods.



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Salient features There is no exemption limit of turnover for the

levy of CST. The rates of tax on declared goods are lower thanthe rates of tax on the goods in second category.

goods are sold.

Rules regarding submission of returns, paymentof tax, appeals etc . Would be followed that of

state. State government are allowed to frame rules or

make alterations as it deemed to be fit



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Dealers Dealer means any person who carries on

(whether regularly or otherwise) the business ofbuying, selling, supplying or distribution of goods,directly or indirectly, for cash, or for deferred

y , v u c

Definition of dealer is wide, but only those whoeffect sale are liable to register and pay CST.

Government is dealer if it carries on business.Railways are dealers.

Insurance company is also dealer.



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Important terms Appropriate state

Dealer Business

Place of Business

Sale

Sale price Turnover



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Rate of CST

CST rate for sale to registered dealers was 3% or localsales tax rate, whichever is lower, if the purchasingdealer issues C form to selling dealer in 2007.

It was announced that it would be reduced by 1% every.

If the buyer is not registered, sales tax payable is sameas applicable for sale within the State.

Sale to Government will be treated as sale to

unregistered buyer. It is finally replaced by VAT. But still in many instances

this act is referred.



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VAT VAT is a tax, which is charged on the increase in value of goods

and services at each stage of production and circulation. It is also

chargeable on the value of all imported goods.

s ev e on t e erence etween t e sa e pr ce o t e goo sproduced or the services rendered, and the cost thereof that is, thedifference between the output and the input.



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FEATURES OF VAT:

1. Tax levied and collected at every point of sale.

2. Tax collected at every point of sale and the tax already paid by thedealer at the time of purchase of goods will be deducted from the amount

of tax paid at the next sale.

3. Dealers reselling tax paid goods will have to collect VAT and filereturns and pay VAT at every stage of sale (value addition)

4. It is transparent and easier.

. spenses w t suc orms an sets o a tax pa at t e t me opurchase from the amount of tax payable on sale.

6. The returns and the challans are filed together in a simple formatafter self assessment

done bythe dealer himself.

7. At the most a few forms are required.

8. Tax on goods and services both.

9. Self assessmentsby dealers.



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Definitions Agriculture Business Capital asset

Dealer Deemed dealer Goods [sec.2(12)]

.

Importer Manufacturer Place of business Purchase price

Resale Sale Sale price [Sec.2(25)] Turnover



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Turnover limits for the purpose of

Liability/Registration

[Sec 3(4)]

Turnover of

Category ofdealer Total turnoverof sales

taxable goodspurchased orsold

Importer Rs. 1,00,000 Rs. 10,000

Others Rs. 5,00,000 Rs. 10,000



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HOW TO CALCULATE VAT?Example (Rate of vat assumed is IO%)

Purchase Price 100

Tax paid during purchase 10 (input tax)

Selling Price 150

Input tax credit (tax paid during purchase) 10

VAT payable (output tax input tax) 5

Total tax collected y government

At the time of purchase by the dealer

At the time of resale by the dealer

Rs. (10+5)=Rs.15



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Example -11



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MVAT CALCULATION Question - Mr. X, a manufacturer sells goods to

Mr. B, a distributor for Rs. 2,000 (excluding ofVAT). Mr. B sells goods to Mr. K, a wholesaledealer for Rs. 2,400. The wholesale dealer sells

g . , , wultimately sells to the consumers for Rs. 4,000.Compute the Tax Liability, input credit availed andtax payable by the manufacturer, distributor,

wholesale dealer and retailer under Invoicemethod assuming VAT rate @ 12.5% .



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MVAT CALCULATIONX

(Manufacturer

)

B (Distributor) K (wholesale

dealer)

Retailer

Net Price 2,000 2,400 3,000 4,000

A Vat @

12.5%

2 0 300 37 00

Total Selling

Price (Net plus

vat)

2,250 2,700 3,375 4,500

Vat Credit

available

Nil 250 300 375

Net Vat payable 250 50 75 125



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Rates Schedule A Necessities of life and agricultural

implements Nil

Schedule B Jewellery, Diamonds and precious stones 1%

Schedule C Drugs, readymade garments, Edible oil,

Iron and steel goods, IT products, Industrial inputs andpacking materials, chemicals, sweetmeats, farsan,utensils, oil seeds, non ferrous metal etc 4%

(Now at present by 2010 amendment it is 5% for most

of the goods in Schedule C) Schedule D Liquor 20% Schedule E Any items not covered above 12.5%



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CENTRAL EXCISE ACT Central Excise duty is an indirect tax which is levied

and collected on the goods/commodities manufacturedin India.

The rates at which the excise duty is to be collectedare stipulated in the Central Excise Tariff Act, 1985.

It is mandatory to pay Central Excise duty payable onthe goods manufactured, unless exempted eg., duty isnot payable on the goods exported out of India

Further various other exemptions are also notified bythe Government from the payment of duty by themanufacturers



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BASIC CONDITIONS FOR EXCISE LIABILITY

(1) The duty is on goods.

(2) The goods must be excisable.

(3) The goods must be manufactured or

pro uce (4) Such manufacture or production must be

in India. Unless all of these conditions are

satisfied, Central Excise Duty cannot be levied



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Valuation of goods under Central

Excise Excise duty is payable on one of the following basis :

Specific duty

Based on production capacity

Compound levy scheme

Duty as % of Tariff Value fixed under Section 3(2).

Duty based on Maximum Retail Price printed on carton

after allowing deductions - section 4A of CEA

Duty as % based on Assessable Value fixed under Section 4



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CENVAT CREDIT Central value added tax

Under the Cenvat Scheme, a manufacturer of

shall be allowed to take credit of duty ofexcise as well as of service tax paid on anyinput received in the factory or any input

service received by manufacturer of finalproduct.



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CENVAT CREDIT The term "Input" means: -

All goods, except light diesel oil, high speed diesel oil and motor spirit,commonly known as petrol, used in or in relation to the manufacture of finalproducts whether directly or indirectly and whether contained in the finalproduct or not and includes lubricating oils, greases, cutting oils, coolants,

,

used as paint, or as packing material, or as fuel, or for generation ofelectricity or steam used in or in relation to manufacture of final products orfor any other purpose, within the factory of production

All goods, except light diesel oil, high speed diesel oil, motor spirit,

commonly known as petrol and motor vehicles, used for providing anyoutput service



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Credit of duty is allowed only if all the conditions given below are met:-

The basic criteria for availment of credit of

duty paid on inputs or capital goods is that thegoods shall be used in manufacture of final

.

The goods shall be accompanied with properprescribed documents.

The final products shall not be exempt fromwhole of duty or chargeable to nil rate of duty.



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Income tax Income tax is levied on the 'total income' of the assessee.

Income of the 'previous year' is taxed in the 'assessmentyear.'

Income is classified into and computed under fivecategories called 'heads of income.'

The basic scheme of income tax is the rinci le ' a as

you earn.' One must pay his taxes in advance and by the due dates, in

the prescribed percentages.

Deferment in the payment of advance tax would result inthe payment of interest.



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Exempted Income (Sec.10) Agricultural Income

Payments received by HUF Family member Share of profit from a firm

Remuneration received by foreign diplomats. Leave travel concession

Payment from Recognised Provident fund.

Dividend Income



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TDS (Tax deducted at source)

This tax is deducted at the source of income, by theemployer or the payer and paid to the government. It

includes salary, interest, commission and contract fees,rent, professional fees, etc. This type of deduction ispopularly known as TDS. Such tax is subject to certainlimi n r in n i i n .

For example if the earning up on fixed deposit is Rs.5,000 in a bank, TDS at 10% and education cess at 2%

i.e. a total of 10.2% will be deducted at the time of creditor at the time of payment, whichever is earlier.

.



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TCS (Tax collected at source)TCS is collected by a seller of certain specified

goods at the specified rates on the purchaseof the goods and it is remitted to the treasuryon behalf of the buyer.

In the same way, a person granting a lease orlicense in a parking lot, toll-plaza, etc. collectsthe taxes at the specified rates as tax paid on

behalf of the lessee.



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DIRECT &INDIRECT TAXDirect Taxes Indirect Taxes

Income tax

Banking Cash Transaction Tax

Custom Duty

Excise Duty

Capital Gains TaxSecurities Transaction Tax

Personal Income Tax

Service TaxValue Added Tax or V. A. T.



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Tax incidence on an assessee depends on hisresidential status.

whether an income, accrued to a person outside,

residential status of the person in India.

. Therefore, the determination of the residential

status of a person is very significant in order tofind out his tax liability.


I t t d fi iti l t f


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Important definitions relevant for

computation of Total Income Assessment year [sec.2(9)] Previous Year [Sec.3]

Assessee [Sec.2(7)] Person [Sec.2(31)]

Income Sec.2 24

Heads of Income Deemed Income

Gross Total Income [Sec.80B(5)] Exempted Income

Assessment Total Income [Sec.2(25)]



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Assessment year [Sec.2(9)] Means the period of 12 months commencing

on the first day of April every year. It istherefore the period from 1st April to 31st

.



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Previous year [Sec 3] Means the financial year immediately

preceeding the assessment year. The year in which Income is earned is known

income is taxable is known as assessment

year.



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Assessee [Sec.2(7)] Every person in respect of whom any tax or

any other sum of money is payable under thisact.



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Person [Sec.2(31)]The term Person includes:

a) An Individualb) A Hindu Undivided Family

d) A Firme) An association of Persons or a Body of

Individuals whether incorporated or not;

f) A local authority

g) Every artificial juridical person



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DEFINITION OF INCOME

Income is that it can be received in cash or in kind.

The Income Tax Act does not make distinction

between legal source of income or illegal source of

income.

More over gifts of personal nature for eg. birthday/

marriage gifts are not treated as income (but there

are some exceptions in this ).



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TERM INCOME INCLUDE:

a. Profits and gains of Business or Profession

b. Dividend

c. Profit in lieu of Salary, perquisite

.

incurred for performance of his dutiese. Any capital gains

f. Winning from lotteries, crossword puzzles, races, card game,T.V. Show , etc

g. Any sum received for fund created for welfare of employees.

h. Monetary or immovable property gift exceeding the worth ofRs.50,000/-


RULES FOR DETERMINING THE RESIDENTIAL STATUS OF A


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RULES FOR DETERMINING THE RESIDENTIAL STATUS OF A

PERSON

RESIDENTIAL STATUS

ResidentialStatus of anIndividual

ResidentialStatus of an

HinduUndivided

Family (HUF)

ResidentialStatus ofFirms and

Associationof Persons

ResidentialStatus of aJoint StockCompany.

ResidentialStatus ofevery other

ArtificialJuridical

person.



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CATEGORIES OF RESIDENTIAL STATUS

Category Individuals/ HUF Any Other forms ofPerson

A Resident in India Resident in India .

Not Ordinarily Resident

B Non resident in India Non resident in India


Basic and additional conditions

RESIDENTIAL STATUS OF AN INDIVIDUAL


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RESIDENTIAL STATUS OF AN INDIVIDUAL

Basic Condition (1) He is in India in the previous year for a period of182 days or more.

OR

Basic Condition (2) He is in India for a period of 60 days or moreduring the previous year and 365 days or more

ur ng years mme ate y prece ng t e

previous year

(a) He has been resident in India in at least 2 out of 10 previousyears immediately preceding the relevant previous year.

(b) He has been in India for a period of 730 days or more during 7years immediately preceding the relevant previous year

ADDITIONAL CONDITIONS



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2 exceptions to the basic rule no.2

1. Individual who is a citizen of India, who

leaves India i)for the purpose of Employmentoutside India ii) or as a member of a crew onIndian ship, the period of 60 days shall be

substituted by 182 days.2. Individual, citizen of India or a person ofIndian origin, comes on a visit to India on any

previous year, the period of 60 days shall besubstituted by 182 days.


Resident but Not Ordinary Resident


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Resident but Not Ordinary Resident

(RNOR)

if an Individual is able to satisfy either none oronly one of the two additional conditions

Resident but not Ordinarily Resident

Abbreviated as RNOR


RESIDENTIAL STATUS


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The three residential status:

Resident Ordinarily Residents

living in India at least 182 days during previous year

In India 365 days during 4 years preceding previous year & 60 days in previous

year.

Resident but not Ordinarily Residents

Non-resident in India for 9 or 10 out of 10 years immediately preceding the

previous year

or have been in India in total 729 or less days out of last 7 years immediately

preceding the previous year.

Non Residents

Non Residents are exempt from tax if accrue or arise or deemed to be accrue or

arise outside India. Taxable if income is earned from business or profession

setting in India or having their head office in India.Prof. Mayur Malviya - NCRD's SIMS


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Mr .Kumar, came to India after 20 yrs, on his

appointment as a Manager ,on 1st

April2006.On 1st Feb 2007, he was transferred to

.

2nd Feb 2010 and joins the same company andsince then he is in India.

Determine the residential status of Mr Kumarfor the assessment year 2006-2007 to2011 -12



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Assessment year previous year No .of days stay

2007-2008 1-4-2006 to31-3-2007 306

2008-2009 1-4-2007 to 31-3-2008 NIL

2009-2010 1-4-2008 to 31-3-2009 NIL

2010-2011 1-4-2009 to 31-3-2010 58

2011-2012 1-4-2010 to 31-3-2011 365



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A.Y 2007-08 - Resident more than 182 days

A.Y 2008-09 - Non-resident A.Y 2009-10 - non resident

A.Y 2010-11 - non resident A.Y 2011-12 - Resident


RESIDENTIAL STATUS OF A HUF


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When a HUF qualifies as a RESIDENT

Basic Condition The Control and Management of affairs of the HUF is wholly or partly

situated in India.

Additional Condition (a) Karta has been resident in India in at least 2 out of 10 previous years

immediately preceding the relevant previous year

Additional Condition (b) Karta has been in India for a period of 730 days or more during 7 years

immediately preceding the relevant previous year.

Basic Condition

(non-resident)

The Control and Management of affairs of the HUF is

totally Outside India


AOP &FIRMS


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AOP &FIRMS

Status Control and Management of Affairs

RESIDENT Is situated Wholly in India

Is situated Partly in India

NON RESIDENT Is situated totally Outside India


RESIDENTIAL STATUS OF A JOINT STOCK COMPANY


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RESIDENTIAL STATUS OF A JOINT STOCK COMPANY

An Indian

Company

A Foreign Company Control and Management

of Affairs

NON-RESIDENT


Is situated totally Outside India

The term Control and management herein refers to Central Controlling Power and has

no reference to the day to day affairs of the Company



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RESIDENTIAL STATUS OF EVERY ARTIFICIAL JURIDICAL PERSON

Status Control and Management

of Affairs

Is situated Wholl in India


NON RESIDENT Is situated totally Outside India


Incidence of tax and residential status


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Incidence of tax and residential statusIndian Income:

Income received and accrues (arises) in India duringprevious year

Received in India but accrues outside India during theprevious year

previous year

Foreign Income:

Income is not received in India Income does not accrue in India


Relationship between residential status and Incidence of Tax

(Section 5)


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If it is Business

Income & business

is controlled wholly

Taxable in India Taxable in India Not Taxable in India

Type of Income ROR RNOR Non Resident

Indian IncomeTaxable in India Taxable in India Taxable in India

Foreign Income

or partly from India

It is from Incomefrom Profession

which is setup in

India

Taxable in India Taxable in India Not Taxable in India

For Business and

profession totallyoutside India

Taxable in India Not taxable in

India

Not taxable in India

Any other Foreign

Income

Taxable in India Not Taxable in

India

Not Taxable in India


ANY OTHER FORM OF PERSON


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ANY OTHER FORM OF PERSON

Type of Income Resident Non Resident

Indian Income Taxable in India Taxable in India

Foreign Income Taxable in India Not Taxable in

India


Case study


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Case study

Vodafone International Holdings B.V. vs. Union

of India & Anr. An Analysis of the Judgment by Shalin on February 25, 2012

and telecom giant Vodafone which continued forover four years has finally come to an end with

the Supreme Court giving its ruling in favour of

Vodafone International Holdings. The SupremeCourt in its landmark decision has set aside the


Bombay High Courts judgment asking Vodafone to pay Rs 11,000crore to the Income Tax department, on the ground that Indian


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crore to the Income Tax department, on the ground that Indian

authorities do not have jurisdiction on the instant overseastransaction.

The Apex Court held that the Government has no Jurisdiction overVodafones purchase of mobile assets in India as the transactiontook place in Cayman Islands and Indian authorities have nojurisdiction over transactions, which have taken place outside thecountry.

The Supreme Court has also ordered the IT department to refund. , .

decision will boost the investors confidence globally re-establishing

the independence of Indian Judiciary. The aspect of whether a transaction between 2 non-residents can

be taxed in India was dealt in detail by the Bombay High Court.The High Court held that the jurisdiction of a State to Tax a non-resident is based on the nexus connecting the person sought to be

taxed with the jurisdiction which seeks to tax. The question as towhether the sum paid to a non-resident or a foreign companypursuant to a transaction is chargeable to tax is determined bysections 5(2), 9(1) and 195 of the Income Tax act, 1961.



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FIVE HEADS OF INCOME TAX


HEADS OF INCOME (Section 14)


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HEADS OF INCOME (Section 14)

ncome rom a ary ncome rom ouseProperty

ncome romProfit/Gain of

Business or Profession

Income from CapitalGain

Income from othersource


Heads of Income

1 Income nder Head Salaries Thi h d t th i d


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1. Income under Head Salaries: This head taxes the income earned

by an individual as salary from any firm or organisation. 2. Income from House Property: This head taxes rental income

received by any person from way of renting of any immoveableproperty.

3. Profits and Gains of Business or Profession: This head of incomebroadly covers income earned by a person as a result of somebusiness or professional set-up by him.

4. Ca ital Gains: This head of income taxes the income earned onsale of any investment in form of gold, precious ornaments, shares,

etc or immoveable property. 5. Income from other Sources: This head of income covers any

income which is not chargeable to tax under any of the above headsof income. Any income including gambling or profit/loss on runningof race horses, camels, interest income , etc are chargeable to taxunder this head of income.



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1. Income from salaryBasic salary or wages

Any annuity or pension

Gratuity, advance of salary

Any fees, commission, perquisites

Leave encashment

Commission

Retirement benefits

The aggregate of the above incomes, afterexemptions available, is known as Gross Salaryand this is charged under the head income fromsalary.


INCOME FROM SALARY


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(Section 15 to 17)


Rules applied for salary income


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Rules applied for salary income

1 .Those income are taxable as salary income wherethe relationship between the receiver & giver of

salary is employee & employer.2 .Salary is taxable on due or receipt basis

.

3. Advance salary is taxable in the year of receipt.4. Arrears of salary are taxable on receipt basis if

they are not taxed earlier on due

basis.5.Bonus is taxable on actual receipt basis only.


Perquisites In Indian Tax System


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as per Section 17(2) of the Income-tax Act.

A perquisite is any casual emolument, fee or

profit attached to an office or position inaddition to the salary or wages. In other

,

to normal salary to which the employee has aright by virtue of his employment.


Perquisites include


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q

1) Value of rent free accommodation provided byemployer

2) Value of amenity or benefit granted or provided free ofcost.

3) Perquisites are paid only during the continuance ofemployment and directly based on service and they ceasewith the cessation of employment.

4) It is an additional monetary benefit for enriching theemployee.


ALLOWANCE


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Allowance is a fixed monetary amount paid by theemployer to the employee (over and above basic salary)

for meeting certain expenses, whether personal or forthe performance of his duties. These allowances are

unless specific exemption is provided in respect of suchallowance. For the purpose of tax treatment, we dividethese allowances into 3 categories:

I. Fully taxable cash allowances

II. Partially exempt cash allowances

III. Fully exempt cash allowances


Allowances


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FULLY TAXABLE ALLOWANCES PARTIALLY

EXEMPT

ALLOWANCES

FULLY EXEMPT ALLOWANCES

Dearness Allowance House RentAllowance (H.R.A.)

Foreign Allowance

City Compensatory Allowance

n er a nmen

Allowance

owance o g our an

Supreme Court Judges of

whatever nature are exempt

from tax

Tiffin / Lunch Allowance

Special Allowances

to meet personal

expenses

Allowances from UNO

organisation to its employees

are fully exempt from tax.

Overtime Allowance

Special Allowances

for meeting official

expenditureProf. Mayur Malviya - NCRD's SIMS

House rent allowance [Sec.10(13A)]


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Least of the foll. Is exempt from tax:

50% of salary in metros and 40% if situated atanother place

Actua amount receive y t e emp oyee

Rent paid more than 10% of the salary.


Gratuity


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y

Amount paid by Employer in appreciation of

the past services of the employee. ( 5 yrs) Gratuity paid during continuation of salary is

Exemption would be granted to theemployees covered under gratuity act and

Government employees u/s 10(10)



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Government employee- Entire amount

Other employees covered or not covered in theact-

Least of the foll.-

1) Rs.3,50,0002) Actual amount

3) 15 days salary for every completed year of

service. (4 Last salary x 15/26 x Completed yearsof service)


Leave salary


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Fully taxable if received during the continuation of service. Received at the time of Retirement:

Exempted to Govt. employeesFor others exempt to the least of the foll.

1. Actual amt.

2. 10 months avg. salary

3. Cash equivalent to unavailed leave maximum of 30 daysfor every year of actual service rendered.[(Completed yrof service leave actually taken in terms of months) x Avgsalary per month]

4. 3,00,000


Pension


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Uncommuted or Periodical pension fully

taxable to all employees. Commuted pension exempted to the extent

For Govt. emp oyees u y exempte

For other the extent is:

i) 1/3 if employee receives gratuity

ii) if employee does not receives gratuity.


Entertainment allowance [Sec.16(ii)]


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Exemption to Government employees:

Actual amount 20% of salary (Basic salary)

Rs.5,000


COMPUTATION OF INCOME FROMCOMPUTATION OF INCOME FROMCOMPUTATION OF INCOME FROMCOMPUTATION OF INCOME FROM

SALARIESSALARIESSALARIESSALARIES


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Rs Rs



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Now Standard deduction is not applicable.

Students are advised to refer the notesprovided with these slides.


2. Income from house property


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Any residential or commercial property that

you own will be taxed as well.

In case of let-out property, income will be fairannual value

Annual Value or Property is the sum for whichthe property could reasonably be expected to

let from year to year

Annual Value of a self-occupied property istaken as Nil


Computation of GROSS ANNUAL VALUE (GAV):


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Step 1: Select higher of fair rent or municipalrent.

Step 2: Select lower of the standard rent oramount derived in Step 1.*

Standard rent) Step 3: Select higher of actual rent

received/receivable or amount derived inStep 2.

We get the Gross Annual Value (GAV)


Computation of Net Annual Value and

h d d


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the deductions over it. However it should be noted that GAV for self-

occupied property & let out vacant house

should be taken as NIL. Municipal taxes only if paid by the owner

30% of Net Annual Value will be the standarddeduction Full amount of interest on housing loan paid

would be deductible. For self occupiedproperty, interest would be deductible only tothe extent of Rs. 1.50 lakhs only.


Deductions under income from house property


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Municipal taxes paid by the owner wouldbe deductible

30% of Net Annual Value will be thestandard deduction for re airs

Full amount of interest on housing loanpaid would be deductible. For selfoccupied property, interest would be

deductible only to the extent of Rs. 1.50lakhs only.


COMPUTATION OF INCOME FROMCOMPUTATION OF INCOME FROMCOMPUTATION OF INCOME FROMCOMPUTATION OF INCOME FROM

HOUSE PROPERTYHOUSE PROPERTYHOUSE PROPERTYHOUSE PROPERTY


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Income from house property is determined asunder :-

Gross Annual Value xxxxxxx

owner)

Net Annual Value xxxxxxx

Less: Deductions under Section 24

- Statutory Deduction (30% of NAV) xxxxxxx

- Interest on Borrowed Capital xxxxxxx

INCOME FROM HOUSE PROPERTY xxxxxxx


3Income from Business or Profession.


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Business

Sec. 2(3) has defined the term as any trade,

commerce, manufacturing activity or anyadventure or concern in the nature of trade,

.

Profession

Profession refers to those activities where thelivelihood is earned by the persons throughtheir intellectual or manual skill.


Income from Business or Profession


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Profits and gains from any business of profession

Income derived from any trade or profession

Any salary, interest, bonus received by a partnerof a firm from such a firm

Sum received under Key Man insurance policy Income from a speculative transaction

Value of any benefit or any perquisite whether

convertible into money or not arising frombusiness or the exercise of a profession


INCOME FROM BUSINESS OR PROFESSION

Net profit or loss as per P&L A/c xxx


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Net profit or loss as per P&L A/c xxx

Add; items disallowable fully/partly

Personal expenses

Capital expenditure

DonationIncome tax /wealth tax

Transfer to reserves

De reciation as er books

Xxx

Xxx

XxxXxx

Xxx

xxx

xxx

Less ;items exempt /not taxable under this headDividends

Salary received

Income from house property

Income tax refund

Depreciation allowable under income tax law

Xxx

Xxx

Xxx

Xxx

Xxx

xxx

Income from business or profession xxxxxxx


Computation of income from business or

profession


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profession The profit and loss account of Raman for the

year ending 31st march 2010.

To Rs By Rs

General expenses

Bad debtsReserve for bad debts

Insurance premium (Personal life)

Advertising

Interest on bank loan

Interest on capitalDepreciation

Net profit

,

25000

2000030000

5000

20000

50000

1000020000

2,45,000

Commission

DiscountTrade

receipts

, ,

35,000

10,00080,000

Total Rs 4,75,000 Rs 4,75,000


Problem to solve


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Note:The amt of depreciation allowable as perincome tax rules is Rs.17,500.

Compute the income of Ram for the-


Computation of income from business or profession


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Particulars Rs Rs

Profit as per profit and loss account 2,45,000

Add items disallowable;Reserve for bad debts

Personal insurance

30,000

5,000

Interest on capital depreciation 10,000

20,000

65,000

Less ;

Depreciation allowable as per income tax Rules;

3,10,000

(17,500)

Profits and gains of business 2,92,500


Income from Capital Gains


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An increase in the value of a capital asset thatgives it a higher worth than the purchase price.

A Capital asset is defined under section 2(14) ofthe I.T. Act, 1961 as property of any kind held byan assesses such as real estate, equity shares,

bonds, jewellery, paintings, art etc. but does notinclude some items like any stock-in-trade forbusinesses and personal effects.

A capital gain may be short term or long term andmust be claimed on income taxes.


Capital asset u/s 2(14) include


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Any stock in trade, consumable stores and raw materials held forthe purpose of business or profession

Personal effects, foll. movable property may be held for personal

use-- Jewellery

- Archeolo ical collections

- Drawings

- Paintings- Sculptures

- Any work of Art

Agricultural land, which is not a urban agri. Land, i.e rural agri. Land

6.5% Gold bonds 1977, 7% Gold bonds 1980, National Defence Goldbonds 1980, Special bearer bonds 1991, Gold deposit bonds, 1999


Income from Capital Gains


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Any Income derived from a Capital assetmovable or immovable is taxable under the

head Capital Gains under Income Tax Act1961.

The Capital Gains have been divided in twoparts under Income Tax Act 1961.

short term capital gain

long term capital gain .


Conditions for capital gains


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There should be a capital asset.

Such capital asset should be transferred.

Such transfer should take place during the

prev ous year.

Profits and gains should accrue as a result of

such transfer.


Short term capital gain


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If any taxpayer has sold a Capital asset within 36months and Shares or securities within 12

months of its purchase then the gain arising outof its sales after deducting therefrom theex enses of sale Commission etc and the cost ofacquisition and improvement is treated as short

term capital gain and is included in the income ofthe taxpayer.

The deduction u/s 80C to 80U can be taken from

the income from short term capital gain apartfrom the short term capital gain u/s111A


Long Term Capital Gain


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A Capital Asset held for more than 36 monthsand 12 months in case of shares or securities

is a long term capital asset and the gain arisingtherefrom is a long term capital gain.

Long term capital gains are arrived at afterdeducting from the net sale consideration ofthe long term capital asset the indexed cost ofacquisition and the indexed cost ofimprovement of the asset.


Cost inflation index


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It is a measure of inflation that findsapplication in tax law, when computing long-

term capital gains on sale of assets. Section 48

-

what is notified by the Central Governmentevery year, having regard to 75 per cent of

average rise in the consumer price index (CPI)

for urban non-manual employees for theimmediately preceding previous year


Cost inflation index


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Formula for computing indexed cost is

-

(Index for the year of sale/ Index in the year of acquisition) x cost.

,for Rs 20 lakh were to be sold in A.Y. 2009 -10 forRs 80 lakh,

indexed cost = (582/199) x 20 = Rs 58.49 lakh.

long-term capital gains = Rs 21.51, (Rs 80 lakh - Rs 58.49 lakh.)


Cost Inflation Index


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Income from capital gain


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Consideration received on sale xxx

(less) Expenses incurred in relation to sale (-) xx

NET CONSIDERATION xxx

(less) Cost / Indexed cost of acquisition (-) xx

Long term / Short term capital gain xxx

(less) Exemption u/s 54 of the I.T act (-) xx

TAXABLE LONG / SHORT TERM CAPITAL

GAIN / LOSS

xxx




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X purchased a house property for Rs. 1, 00,000on 31st July 2000.He constructed the first

floor in March 2003 for 1, 10,000. The house

. , ,

2005. The expenses incurred on transfer ofasset were Rs. 10,000. Find the capital gain.




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Solution: Since the house property is a capitalAsset therefore the capital gain will be

computed. The house property was sold after

capital gain will be long term capital gain(LTCG). Date of improvement (i.e., additional

construction of first floor) is irrelevant.




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5. Income from Other Sources

This is a residual head, under this head income which doesnot meet criteria to go to other heads is taxed There are also


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not meet criteria to go to other heads is taxed. There are alsosome specific incomes which are to be taxed under thishead.

Dividends

, .

Interest on securities, bank deposits

Gifts - Gifts in a year exceeding Rs 50,000, except gifts fromcertain relatives and gifts on certain specified occasions willbe taxable [section 56(2)(vi) of Income Tax Act]

Income from letting - Income from letting of furniture,machinery, plant and building is taxable as other income.


DEDUCTION u/s. 80C

Life Insurance Premium for self wife & children & also


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Life Insurance Premium for self, wife & children & alsocontribution to Unit Linked Insurance Plan (ULIP).

Contributions to Provident Fund. Contributions to Public Public Provident Fund.

Contribution to Equity Linked Savings Scheme- may e com na on o more an one p an.

full time education of any two children Term Deposit/Fixed Deposit with a bank for 5 years or more Subscription to certain Equities and debentures


Sec 80 CCC Contribution to certain pension funds 1 lac

Deductions Under Section 80C to 80U


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Sec.80 CCC Contribution to certain pension funds 1 lac Sec.80 CCF Subscription to long-term infrastructure bonds

20000

Sec.80 CCG Investment in listed equity shares 50% or 25000 Sec.80 D Medical insurance premia - 15000 .

dependent who is a person with disability 50000 or 100000

Sec. 80 DDB Medical treatment, etc. Sec. 80 E For entire amount of interest paid on a loan taken for

pursuing higher education

Sec 80 G Donation to certain funds, charitable institutions, etc.

Sec 80 U Person with disability 40%:50000; 80%:100000Blindness, low vision, leprosy, Hearing impairment,

Mental retardation.


DEDUCTIONS UNDER SALARY INCOME

Payment for Purchase or Construction of


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yresidential house so arrived at by looking at thebreakup of your EMI Payments but no deductionfor repayment of loans to all but only for loansfrom em lo er, banks, LIC, National Housin Bank,etc. If would also include stamp duty & payment of

registration fee of the house. Deposit in Senior Citizens Savings Scheme may be

in one lot or different lots.

Investments in National Savings Certificates (NSC)& Post Office Time Deposit Scheme.


COMPUTATION OF TOTAL INCOME

1. Income from salaries


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1. Income from salaries ___

2. Income from House property ___ 3. Profits and Gains of Business and Profession ___

4. Income from capital gains ___

5. Income from other sources ___ ____________

Gross Total Income = ____ ____________

Less deduction under Chapter VI-A(80C TO 80U)(-) ------

____________ Total income ___

____________



Mr Pankaj aged 58 years who retired from the services of the Central


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Mr. Pankaj, aged 58 years, who retired from the services of the CentralGovernment on

30.6.06, furnishes particulars of his income and other details as under:

Salary @ Rs.6,000 p.m.

Pension @ Rs.3,000 p.m. for July 06 to Nov 06.

On 1.12.2006, he got 1/3rd of his pension commuted for Rs.1,20,000.

A house plot at Ernakulam sold on 1.2.07 for Rs.5,00,000 had beenpurchased by him on 3.11.79 for Rs.10,000. The stamp valuation authority

had assessed the value of said house plot at Rs.6,00,000 which was

neither disputed by the buyer nor by him. The value of this house plot as

on 1.4.81 was Rs.15,000 (The cost inflation index for the year 2006-07 is

519).



Received interest on bank FDRs of Rs 72 500 dividend on mutual fund


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Received interest on bank FDRs of Rs.72,500, dividend on mutual fund

units ofRs.15,000 and interest on maturity of NSC of Rs.50,000 out of

which an amount ofRs.40,000 was already disclosed by him on accrual

basis in the returns upto Asst. Year2006-07.

. ,

insurance forself and wife of Rs.12,500. Made investment in Tax Magnum

units of Mutual Fund of SBIof Rs.80,000.

Compute the total income of Mr. Pankaj for A.Y. 2007-08.



The provisions of the Income tax Act 1961


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The provisions of the Income-tax Act, 1961relevant for Assessment Year 2011-12 should

betaken into consideration while solving the

. ,

maybe taken as relating to financial year 2010-11.



Particulars Rs


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Income from salaries

Capital gainsIncome from other sources

41,000

5,05,20082,500

Gross Total Income

Less: Deductions under Chapter VI-A

6,28,700

1,12,500

Total Income 5,16,200




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For Computation and understanding of the


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For Computation and understanding of the

other relevant terms students are advised to

refer notes provided to you.



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Best of luck for your exams!!


5.taxation slides

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