INCOME TAX

TAX

• A fee charged (“levied”) by a government on a product, income,or activity.

• The purpose of taxation is to finance government expenditure.

TYPES OF TAXES

DIRECT TAX INDIRECT TAXEXAMPLES: EXAMPLES:1. INCOME TAX 1.EXCISE DUTY2.WEALTH TAX 2. CUSTOMS DUTY3.CORPORARE TAX 3.SALES TAX4.GIFT TAX

INCOME TAX

• Income tax is one of the direct tax and it is levied on the incomes of individuals, HUF, unregistered firms and other associations of peoples.

• Income tax act was passed in Sep 1961 and came into force in 1st April 1962.

Charge of Income Tax

Income tax is charged in assessment year at rates specified by the Finance Act applicable on 1st April of the relevant assessment year.

It is charged on the total income of every person for the previous year.

Total Income is to be computed as per the provisions of the Act.

Income tax is to be deducted at source or paid in advance wherever required under the provision of the Act.

INCOME TAX RELATED TERMS

• ASSESSEE.

• PREVIOUS YEAR.

• ASSESSMENT YEAR.

• PERSON.

• GROSS TOTAL INCOME.

• TOTAL INCOME.

Important Definitions

1. Person u/s 2(31) includes,a. An Individual,

b. Hindu Undivided Family (HUF),

c. A Company,

d. A Firm,

e. An Association of Persons(AOP) or Body of Individuals (BOI),

f. A Local Authority,

g. Every other Artificial Juridical Person

2. Assessment Year u/s 2(9) means, the period of 12 months commencing on the 1st April every year. It is the year (just after previous year) in which income is earned is charged to tax. The current Assessment is 2011-2012.

3. Previous Year u/s 2(34) means, the year in which income is earned.

4. Gross Total Income (G.T.I) :- The aggregate income under the 5 heads of income (viz. Salary, House Property, Business or Profession, Capital Gains & Other Sources) is termed as “Gross Total Income”.

5. Total Income (T.I) :- Total Income of assessee is gross total income as reduced by the amount permissible as deduction under sections 80C to 80U.

Types of Residential Status

The different types of residential status are:-

Resident(R) or Ordinary resident

Not Ordinarily Resident (NOR)

Non-Resident (NR)

Residential Status of IndividualThe residential status of individual will be determined as under-

Assessee Basic Condition Additional Condition

ResidentHe must satisfy at one of the basic conditions.

Not required.

Not Ordinarily ResidentHe must satisfy at least one of the basic conditions.

He must satisfy either one or both the additional conditions given u/s 6(6).

Non-ResidentShould not satisfy any of the basic conditions.

Not required.

Basic Conditions u/s 6(1): i. He must be in India for a period of 182 days or more during

the previous year; or

ii. He must be in India for a period of 60 days or more during the previous year and 365 days or more during the four years immediately preceding the previous year.

Additional Conditions u/s 6(6):

i. He should be resident in India in at least 2 out of 10 years immediately preceding the current previous year.

ii. AND

iii.A stay of 730 days or more during the 7 years immediately preceding the current previous year.

Residential Status of HUFThe residential status of HUF depends upon the control and management of its affairs.

– Resident HUF: If the control and management of the affairs of HUF is situated wholly or partly in India then HUF is said to be Resident in India.

– Non- Resident HUF: If the control and management of the affairs of HUF is situated wholly outside India then HUF is said to be Non- Resident in India.

– Not Ordinarily Resident HUF: A resident HUF is said to be ‘Not Ordinarily Resident’ in India if Karta or

manager thereof, satisfies any of the additional conditions u/s 6(6).

Residential StatusAccording to section 6(3) an Indian Company is always Resident in India. A foreign Company will be resident in India if Control or Management of its affairs is wholly situated in India.

Residential Status of a firm or AOP or other person depends upon control and management of its affairs.

Resident: If the control and management of the affairs of a firm or AOP or other person is situated wholly or partly in India then such a firm or AOP or other person is said to be resident in India.

Non-Resident: If the control and management of the affairs of a firm or AOP or other person is situated outside India then such a firm or AOP or other person is said to be non-resident in India.

Incidence of Tax

ParticularsParticularsTax IncidenceTax Incidence

RR NORNOR NRNR

Income received in India by or on behalf of assesseeIncome received in India by or on behalf of assessee YesYes YesYes YesYes

Income deemed to received in India by or on behalf of assesseeIncome deemed to received in India by or on behalf of assessee YesYes YesYes YesYes

Income accruing or arising in IndiaIncome accruing or arising in India YesYes YesYes YesYes

Income deemed to accrue or arise in IndiaIncome deemed to accrue or arise in India YesYes YesYes YesYes

Income which accrues or arise outside IndiaIncome which accrues or arise outside India YesYes NoNo NoNo

Que -: Mr. Balaji an Indian Citizen and a professional cricketer toured south Africa, Australia, U.K., West Indies and Zimbabwe on various dates. The details of departure from and arrival to India are as under .

Country Date of Departure Date of Arrival

South Africa ( for the first time) 01-03-2006 25-03-2008

Australia 15-04-2008 01-05-2008

U.K. 05-05-2008 11-07-2008

West Indies 31-08-2008 14- 09-2008

Zimbabwe 01-01-2009 23-03-2009

Determine his residential status for the assessment year 2009-2010. Give your working and explaination.

INCOME TAX SLAB RATES (APPLICABLE FOR ASSESSMENT YEAR 2013 – 2014).

The new and revised income tax slabs and rates applicable for the financial year (FY) 2012-13 and assessment year (AY) 2013-14 are mentioned below:

FOR INDIVIDUAL MALE,AGE LESS THAN 65 YEARS

• Up to 200000 :    Nil

• 200001-500000 : 10%

• 500001-1000000 : 20%

• 1000001 & above : 30%

 

FOR INDIVIDUAL FEMALE,AGE LESS 65 YEARS

• Up to 200000 :    Nil

• 200001-500000 : 10%

• 500001-1000000 : 20%

• 1000001 & above : 30%

FOR INDIVIDUAL, AGE MORE THAN 65 YEARS ( SENIOR CITIZEN)

• Up to 250000 :    Nil

• 250001-500000 : 10%

• 500001-1000000 : 20%

• 1000001 & above : 30%

HEADS OF INCOME

1. Income from Salary.

2. Income from House property.

3. Income from Business / Profession.

4. Income from Capital Gains.

5. Income from Other Sources.

MeaningSalary includes [section17(1)] :-

i. Wages

ii. Any annuity on pension

iii. Any gratuity

iv.Any fees, commission, bonus, perquisite on profits in lieu of or in addition to any salary on wages

v. Any advance of salary

vi.Any earned leave

vii.Employers contribution (taxable) towards recognized provident fund.

BASIS OF CHARGEIncome is taxable under head “Salaries”, only if there exists Employer - Employee Relationship between the payer and the payee. The following

incomes shall be chargeable to income-tax under the head “Salaries”:-

1.Salary Due

2.Advance Salary [u/s 17(1)(v)]

3.Arrears of Salary

Note:

(i)Salary is chargeable on due basis or receipt basis, whichever is earlier.

(ii)Advance salary and Arrears of salary are chargeable to tax on receipt basis only.

AllowancesAllowance is generally defined as a fixed quantity of money or other substance given regularly in addition to salary for the purpose of meeting some particular requirement connected with the services rendered by the employee or as compensation for unusual conditions of that service.

1.Dearness Allowance - It is Always Taxable.

2.City Compensatory Allowance - It is Always Taxable.

Contd…3. House Rent Allowance

Exemption In Respect Of House Rent allowance is regulated by rule 2A. The least of the three given below is Exempt from Tax.

1An Amount Equal to 50 % of Salary. Where Residential House in situated at Bombay, Calcutta, Delhi or Madras and An Amount Equal to 40 % of Salary where Residential House is situated at any Other Place.

2House Rent Allowance Received by The Employee in Respect of The Period during which Rental Accommodation is Occupied by the Employee during the Previous Year.

3 The Excess of Rent Paid over 10 % of Salary.

Contd…4. Entertainment allowance [sec.169(ii)]-

Entertainment allowance is first included in salary in come under the head “salaries” and thereafter a deduction is given on the basis enumerated below:

GovernmentGovernmentNon- GovernmentNon- Government

Least of the Following is deductible :Least of the Following is deductible :1. 1. Rs. 5000Rs. 50002. 2. 20 % of basic salary 20 % of basic salary 3. 3. Amount of entertainment allowance Amount of entertainment allowance grated during the previous yeargrated during the previous year

Nothing is deductibleNothing is deductible

Status of EmployeeStatus of Employee

Contd…

5. Special allowances prescribed as exempt under section 10(14) – In the cases given below the amount of exemption under section 10(14) is :–

i. The amount of the allowance ; or

ii. The amount utilized for the specific purpose for which allowance is given.

Whichever is lower.

Contd…Exemption is available on the aforesaid basis in the case of following allowances :-

26

NAME OF ALLOWANCE NAME OF ALLOWANCE NATURE OF ALLOWANCENATURE OF ALLOWANCE

Travelling Allowance/ Transfer Travelling Allowance/ Transfer AllowanceAllowance

Any allowance granted to meet the cost of travel on tour or on transfer Any allowance granted to meet the cost of travel on tour or on transfer (including sum paid in connection with transfer, packing and transportation (including sum paid in connection with transfer, packing and transportation of personal effects on such transfer).of personal effects on such transfer).

Conveyance AllowanceConveyance Allowance Conveyance allowance granted to meet the expenditure on conveyance in Conveyance allowance granted to meet the expenditure on conveyance in performance of duties of an office (expenditure for covering the journey performance of duties of an office (expenditure for covering the journey between office and residence is not to be included).between office and residence is not to be included).

Daily Allowance Daily Allowance Any allowance whether granted on tour or for the period of journey in Any allowance whether granted on tour or for the period of journey in connection with transfer, to meet the ordinary daily charges incurred by an connection with transfer, to meet the ordinary daily charges incurred by an employee on account of absence from this normal place of duty.employee on account of absence from this normal place of duty.

04/21/23

Contd…

6. When exemption does not depend upon expenditure - In the cases given below, the amount of exemption does not depend upon expenditure incurred by the employee. Regardless of the amount of expenditure, the allowances given below are exempt to the extent of –

i. the amount of allowance ; or

ii. the amount specified in rule 2BB,

Whichever is lower.

Contd…Name of allowanceName of allowance Exemption as specifiedin rule 2BBExemption as specifiedin rule 2BB

Special CompensatorySpecial Compensatory

(Hill Areas) Allowance(Hill Areas) AllowanceAmount exempt from tax varies from Rs. 300 per mount to Rs. 7,000 per Amount exempt from tax varies from Rs. 300 per mount to Rs. 7,000 per

monthmonth

Border area allowanceBorder area allowanceThe amount of exemption varies from Rs. 200 Per month to Rs. 1,300 per The amount of exemption varies from Rs. 200 Per month to Rs. 1,300 per

monthmonth

Tribal areas/ scheduled areas Tribal areas/ scheduled areas

allowanceallowanceRs. 200 Per MonthRs. 200 Per Month

Allowance for transport Allowance for transport

employeesemployees

The amount of exemption is-The amount of exemption is-

a.a.70 per cent of such allowance; or 70 per cent of such allowance; or

b.b.Rs. 6,000 per month, whichever is lower.Rs. 6,000 per month, whichever is lower.

Children education allowance Children education allowance The amount exempt is limited to Rs. 100 per month per child up to a The amount exempt is limited to Rs. 100 per month per child up to a

maximum of two children.maximum of two children.

Hostel expenditure allowanceHostel expenditure allowanceIt is exempt from tax to the extent of Rs. 300 per month per child up to a It is exempt from tax to the extent of Rs. 300 per month per child up to a

maximum of two children.maximum of two children.

Compensatory field area Compensatory field area

allowanceallowanceExemption is limited to Rs. 2,600 per month in some cases.Exemption is limited to Rs. 2,600 per month in some cases.

Contd…

Name of AllowanceName of Allowance Exemption as Specified in Rule 2BBExemption as Specified in Rule 2BB

Compensatory modified area Compensatory modified area

allowance allowance Exemption is limited to Rs.1,000 per month in some cases.Exemption is limited to Rs.1,000 per month in some cases.

Counter insurgency allowance Counter insurgency allowance Exemption is limited to Rs.3,900 per month in some cases.Exemption is limited to Rs.3,900 per month in some cases.

Transport allowance Transport allowance It is exempt up to Rs. 800 per month (Rs. 1,600 per month in the case of It is exempt up to Rs. 800 per month (Rs. 1,600 per month in the case of

an employee who is blind or orthopedically handicapped)an employee who is blind or orthopedically handicapped)

Underground allowance Underground allowance Exemption is limited to Rs. 800 per month.Exemption is limited to Rs. 800 per month.

High altitude allowance High altitude allowance It is exempt from tax up to Rs. 1,060 per month (for altitude of 9,000 to It is exempt from tax up to Rs. 1,060 per month (for altitude of 9,000 to

15,000 feet) or Rs. 1,600 per month (for altitude above 15,000 feet).15,000 feet) or Rs. 1,600 per month (for altitude above 15,000 feet).

Highly active field area Highly active field area

allowanceallowanceIt is exempt from tax up to Rs. 4,200 per month.It is exempt from tax up to Rs. 4,200 per month.

Island duty allowanceIsland duty allowance It is exempt up to Rs. 3,250 per month.It is exempt up to Rs. 3,250 per month.

Contd…

7. Allowance to Government employees outside India [Sec. 10( 7)] - Any allowance paid or allowed outside India by the Government to an Indian citizen for rendering service outside India is wholly exempt from tax.

8. Tiffin allowance - It is taxable.

9. Fixed medical allowance – It is taxable.

10.Servant allowance - It is taxable.

Contd…11.Allowance to High Court and Supreme Court

Judges - Any allowance paid to High Court Judges under section & 22C of the High Court Judges (Conditions of Service) Act, 1954 is not chargeable to tax.

12. Allowance received from a United Nations Organization - Allowance paid by a United Nations Organization to its employees is not

taxable by virtue of section 2 of the UN (Privileges and Immunities)

Act, 1974.

PERQUISITES

Perquisite may be defined as any Casual Emolument or Benefit attached to an office or position in Addition to Salary or Wages. It also denotes something that benefits a man by going in to his own pocket. Perquisites may be provided in cash or in kind. Perquisites are included in salary income only if they are received by an employee from his employer.

“Perquisites” as defined u/s 17 (2)

The term “perquisites” is defined by section 17 (2) as including the following items:1.The value of Rent-free Accommodation provided to the assessee by his employer

2.The value of any concession in the matter of rent respecting any accommodation provided to the assessee by his employer

Contd…3. The value of any benefit or amenity granted or provided

free of cost or at concessional rate in any of the following cases :

i. By a company to an employee who is a director thereof ;

ii. By a company to an employee, being a person who has substantial interest in the company ;

iii. By any employer (including a company) to an employee to whom provisions of (i) and (ii) above do not apply and whose income under the head “salaries” exclusive of the value of all

benefits or amenities not provided for by way of monetary benefits, exceeds Rs. 50,000

Contd…4. Any sum paid by the employer in respect of any

obligation which but for such payment would have been payable by the assessee. Obligation of Employee met by Employer.

5. Any sum payable by the employer, whether directly or through a fund other than a recognized provident fund or approved superannuation fund or a deposit-linked insurance fund, to effect an assurance on the life of the assessee or to effect a contract for an annuity

6. The value of any other fringe benefits or amenity as may be prescribed

TERMINAL BENEFITS1. Gratuity [Sec.10(10)] – Gratuity is a retirement benefit. It is generally

payable at the time of cessation of employment and on the basis of

duration of service. Tax treatment of gratuity is given below:

Status of EmployeeStatus of EmployeeStatus of EmployeeStatus of Employee

Government EmployeeGovernment Employee Non-government employee covered by the payment of

Gratuity Act, 1972

Non-government employee covered by the payment of

Gratuity Act, 1972

Non-government employee not covered by the payment of

Gratuity Act, 1972

Non-government employee not covered by the payment of

Gratuity Act, 1972

It is fully exempt from tax under section

10(10)(i) Least of following is exempt:1)“15 days’ salary” x “Length of service”2)Rs. 3, 50, 000

3)Gratuity actually received.

Least of following is exempt:1)“½ month avg. salary” x “Length of service”2)Rs. 3, 50, 000

3)Gratuity actually received.

Contd…

2. PENSION [SEC. 17(1)(ii)] - Pension is chargeable tax as follows :-

PENSIONPENSION

Taxable for Government as well as Non-Government

employeesEntire Commuted Pension is exempt

whether or not Gratuity

received.

UNCOMMUTEDCOMMUTED

Government Employee

Non-Government Employee

1/3 of commuted pension is

exempt

If Gratuity Received

If Gratuity not Received

1/2 of commuted pension is

exempt

Contd…3.Annuity [Sec. 17(1)(ii)] – An annuity payable by a present

employer is taxable as salary even if it is paid voluntarily without any contractual obligation of the employer. An annuity received from an ex-employer is taxed as profit in lieu of salary.

4.Retrenchment compensation [Sec. 10(10B)] – Compensation received by a workman at the time of retrenchment is exempt from tax to the extent of the lower of the following:

a. an amount calculated in accordance with the provisions of sec. 25F(b) of the Industrial Disputes Act, 1947; or

b. such amount as notified by the Government (i.e., Rs, 5, 00, 000); or

c. the amount received.

Contd…

5. Compensation received at the time of Voluntary Retirement [sec.10 (10C)] - Compensation received at the time of voluntary retirement is exempt from tax, subject to certain conditions. Maximum amount of exemption is Rs. 500000.

Provident Fund

Provident Fund Scheme is a welfare scheme for the benefit of employees. The employee contributes certain sum to this fund every month and the employer also contributes certain sum to the provident fund in employees A/c. the employers contribution to the extent of 12% is not chargeable to tax.

LEAVE SALARY Encashment of leave by surrendering leave standing to one’s credit is

known as “leave salary”.

LEAVE ENCASHMENT

During EmploymentRetirement / Leaving the Job

Chargeable to Tax

Non-Government Employee

Government Employee

Fully Exempt

Least of following is exempt :-1)Earned Leave on the basis of Average Salary2)10 x Average monthly salary3)Rs. 3000004)Leave Salary Received

Deductions Admissible in Computing Income under head ‘SALARIES’

1. Entertainment allowance granted by employer [Sec.16(ii)]: This deduction is available in case of Government employees only.

2. Employment Tax / Professional Tax [Sec.16(iii)]: Any sum paid by assessee on account of a tax on employment within the meaning of Article 276(2). Under the said article employment tax cannot exceed Rs. 2500 p.a.

Relief in respect ofAdvance or Arrears of Salary u/s 89

When an assessee is in receipt of a sum in the nature of salary, being paid in arrears or in advance, due to which his total income is assessed at a rate higher than that at which it would otherwise have been assessed, Relief is granted on an application made by the assessee to the assessing officer.

PARTICULARS AMOUNT AMOUNT (RS) (RS)

I. Income from Salary Basic Salary (Rs.7,500 x 12) 90,000II. Income from house property Gross Annual Value (GAV) 27,000 Less : Municipal taxes paid 2,000 Net Annual Value (NAV) 25,000 Less : Deduction under section 24 (@ 30% of Rs. 7500 17500 25,000)III. Income from profession Net profit 366950IV. Income from other sources Interest on income-tax refund 450 Winnings from the game show on T.V. 50000 50450

Gross Total Income 5,24,900

COMPUTATION OF TOTAL INCOME OF M. NIRANJAN FOR A.Y. 2013-14

Gross Total Income 5,24,900

Less: Deductions under Chapter VI A (a) Deduction under section 80C Tuition fee paid to university for education 1,00,000 (b) Deduction under section 80D Medical insurance premium (maximum allowable upto Rs.15,000) 15,000 (c) Deduction under section 80E Interest on loan taken for higher education is deductible 55,000 170000

Total income 3,54,900

So the total income of DR. NIRNJAN is RS.3,54,900

COMPUTATION OF TAX LIABILITY OF DR.NIRANJAN

PARTICULARS (%) AMOUNT (RS)

Total income =RS. 3,54,900

Upto RS.200000 NIL NIL

NEXT RS 200001-500000 10 15,490(200001-354900)=RS.154900

Add: Education cess @ 2% 309.8 Add: Secondary and higher education cess @ 1% 154.9

TAX PAYABLE (17618.8)ROUNDED OFF 17,620

Thus ,The Total TAX LIABILITY of M.NIRANJAN for A.Y 2013-2014 is RS.17620