Basic Concepts Release 1

8/3/2019 Basic Concepts Release 1

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BASIC CONCEPTS-INCOME TAX


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Taxation in India

Taxes in India are levied by the CentralGovernment and the State Governments. Someminor taxes are also levied by the local authoritiessuch the Municipality or the Local Council.

The authority to levy a tax is derived fromthe Constitution of India which allocates the powerto levy various taxes between the Centre and the

State

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An important restriction on this power is Article265 of the Constitution which states that "No taxshall be levied or collected except by theauthority of law." Therefore each tax levied or

collected has to be backed by an accompanyinglaw, passed either by the Parliament or the StateLegislature.

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Constitutionally established scheme of Taxation

Article 246 of the Indian Constitution, distributeslegislative powers including taxation, betweenthe Parliament and the State Legislature.

List - I entailing the areas on which only theparliament is competent to make laws,

List - II entailing the areas on which only thestate legislature can make laws, and

List - III listing the areas on which both theParliament and the State Legislature can makelaws upon concurrently.

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Separate heads of taxation are provided underlists I and II.

There is no head of taxation in the ConcurrentList (Union and the States have no concurrentpower of taxation).

The list of thirteen Union heads of taxation andthe list of nineteen State heads are given below

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Major taxation laws enacted by the Parliament :Income Tax Act 1961

Wealth Tax Act

Service Tax 1994

Central Excise Act 1944

Customs Act, 1962Central Sales Tax, 1956

Transaction Tax

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The major taxation enactments passed bythe State Legislatures are in the nature of thefollowing;

Excise duties on tobacco, alcohol and narcotics;

Sales tax, on sale of goods within the State;

Stamp duties, on sale of property situated within

the State;Entertainment taxes

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TAX REVENUE : GOVT

2010-11 2009-10

Direct and

Indirectcollection

Rs 7.92 lakh

crores

Rs 5.72 lakh

crores

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Of the total, the direct tax mop up was about Rs 4.50 lakh crore andindirect tax, about Rs 3.42 lakh crore.


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Central Board of Direct Taxes

The Central Board of Direct Taxes (CBDT) is apart of the Department of Revenue in the Ministryof Finance, Government of India.

The CBDT provides essential inputs for policyand planning of direct taxes in India and is alsoresponsible for administration of the direct taxlaws through Income Tax Department.

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A DIRECT TAX is one paid directlyto thegovernment by the persons on whom it isimposed (often accompanied by a tax return filedby the taxpayer).

Examples Income tax, Gift tax, Wealth tax

AN INDIRECT TAX ( Sales tax, value added tax(VAT), service tax , excise duty custom duty) is a

tax collected by an intermediary (such as a retailstore) from the person who bears the ultimateeconomic burden of the tax.

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An excise duty on motor cars is paid in the firstinstance by the manufacturer of the cars;ultimately the manufacturer transfers the burdenof this duty to the buyer of the car in form of a

higher price. Thus, an indirect tax is such whichcan be shifted or passed.

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INCOME TAX ACT 1961

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BASIC CONCEPTS

ASSESSMENT YEARPREVIOUS YEAR

PERSON

ASSESSE

CHARGE OF INCOME TAX

INCOMEGROSS TOTAL INCOME

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ASSESSMENT YEAR

Assessment year means the period of twelvemonths commencing on 1st April every year andending on 31st March of the next year.

Income of previous year of an assessee is taxed

during the following assessment year at the ratesprescribed by the relevant Finance Act.

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Previous year

Income earned in a year is taxable in the nextyear.

The year in which income is earned is known asprevious year and the next year in which income

is taxable is known as assessment year .

In other words , it can be said that incomeearned during the previous year 2008-09 is

taxable in the immediately following assessmentyear (i.e, 2009-10)

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Person

The income tax is charged in respect of the totalincome of the previous year of every 'person'.Here the person means

an individual

a Hindu undivided family (HUF)

a company

a firm i.e a partnership firm

an association of persons or a body of individualswhether incorporated or not

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a local authority-- means a municipal committee,district board, body of port commissioners, orother authority legally entitled to or entrusted bythe government with the control and management

of a municipal or local fund.every artificial person, not falling within any of the

above categories

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Assessee

Assessee means a person by whom any tax orany other sum of money ( penalty or interest ) ispayable under the Act. The term includes thefollowing persons.

FirstCategory A person ( i.e, individual ;a Hinduundivided family ; a company ; a firm ; anassociation of persons or body of individuals ; alocal authority and every artificial person ) bywhom any tax or any other sum of money ispayable under the Act.

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Second Category A person in respect of whomany proceeding under the Act has been taken.Proceeding may be taken;

Either for the assessment of the amount of his

income or of the loss sustained by him. ; or

Of the income ( or Loss) of any other person inrespect of whom he is assessable ;or

Of the amount of refund due to him to such otherpersons.

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Third Category Every person who is deemed tobe an assesee

Fourth Category Every assesse who is deemedto be in default under any provisions of the Act.

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CHARGE OF INCOME TAX ( Sec 4)

BASIC PRINCIPLESAnnual Tax : Income tax is an annual tax on

income

Tax rate for assessment year : Income ofprevious year is chargeable in the next followingassessment year at the tax rates applicable forthe assessment year.

Rates fixed by Finance Act : tax rates are fixedby the annual finance Act and not by Income taxAct

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Tax on person : Tax is charged on every person

Tax on total income : the tax is levied on thetotal income of every assessee computed in

accordance with the provisions of the Act.

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INCOME : Sec 2 (24)

There is no specific definition of income but forstatutory purposes there are certain items whichare listed under the head income.

These items include those heads also which

normally will not be termed as income but fortaxation we consider them as income.

As per the definition in section 2(24), the term

income means and includes:

Profits and gains

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Dividends

Capital gains

Voluntary contributions received by a trust

created wholly or partly for charitable orreligious purposes

The value of any perquisite in lieu of salary

Any special allowance or benefit.

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Any allowance granted to the assessee either tomeet his personal expenses at the place wherethe duties of his office or employment of profitsare ordinarily performed by him or at a place

where he ordinarily resides or to compensate himfor the increased cost of living.

Any winnings from lotteries, crosswordpuzzles, races, including horse races, cardgames and games of any sort or from gamblingor betting

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Any amount received as contribution to theassessee's provident fund or superannuationfund .

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GROSS TOTAL INCOME

As per section 14 , income of a person iscomputed under the following five heads :

1. Salaries

2. Income from house property3. Profits and gains of business or profession

4. Capital Gains

5. Income from other sources

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Important points

The aggregate income under these heads istermed as gross total income

The several heads into which income is dividedunder the Act do not make different kinds of

taxes.

Tax is always one ; it may arise under differentheads to which the different rules of computation

have to be applied

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Total Income and tax liability

The total income of an assesse is gross totalincome as reduced by amount deductible undersections 80C to 80U .

The scheme of computation of total income and

tax liability thereon can be understood with thehelp of following chart. :

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Computation of Income for the assessmentyear

1 INCOME FROM SALARIES Rs. Rs

- Income from salary

- Income by way of allowance

- Taxable value of perquisite

GROSS SALARY

Less deductions under sec 16

-Entertainment allowance

- Professional Tax

TAXABLE INCOME UNDER THEHEAD SALARIES

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2 INCOME FROM HOUSEPROPERTY Rs Rs

Net annual income

Less : Deductions under sec 24

Taxable income under the head

income from house property

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3 PROFITS AND GAINS OF BUSINESS ORPROFESSION Rs Rs

Net profit as per P & L account

Add : amounts which are debited to P & L a/c butare not allowable under the Act

Less : Expenditure which are which are not debitedTo P & L a/c but are allowable as deduction underthe Act

Less : Incomes which are credited to P & L a/c butare exempt 10 to 13 or are taxable under otherheads of income

Add : Those incomes which are not credited to P &L but are taxable under the head profits and gains

of business or profession

TAXABLE INCOME UNDER THE HEAD PROFIT AND GAINS OF BUSINESS ORPROFESSION

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4 CAPITAL GAINS Rs Rs

Amount of capital gains

Less : Amount exempt undersec 54 , 54B , 54D, 54EC, 54ED,

54F, 54G and 54GA

Taxable income under the head

income from house property

TAXABLE INCOME UNDER THEHEAD CAPITAL GAINS

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5 INCOME FROM OTHERSOURCES Rs Rs

Gross Income

Less : Deductions under sec 57

TAXABLE INCOME UNDER THEHEAD Income from other

sources

TOTAL ( i,e, (1) +(2)+(3)+(4)+(5)

Less Adjustments on accountof set -off and carry forward oflosses

GROSS TOTAL INCOME

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Rs

GROSS TOTAL INCOME

Less : Deductions under sections 80C to 80U

TOTAL INCOME OR NET INCOME LIABLE TO TAX

Computation of tax liability

TAX on net income

Add : Surcharge

Tax and surcharge

Add Education cess and secondary and higher education cess

TAX

Less prepaid taxesTAX paid on self assessment

Tax deducted or collected at source

Tax paid in advance

Tax liability 35


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TAX RATES

Provisions for computation of taxable income aregiven by the Income tax Act .

Tax rates are not given by the Income tax Act, butby the Finance Act which is passed by the

Parliament along with Budget for the CentralGovernment every year.

For instance , the Finance Act 2011 , provides in

the first Schedule ( part 1,II and III) as follows

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Part I of the first Schedule to the Finance Act ,2011 - It gives income tax rates for differentassesses for the assessment year 2011-12

Part II of the First Schedule to the Finance Act

2011 It gives rates for deduction of tax atsource applicable for financial year 2011-12.

Part III of the First Schedule to the Finance Act

2011- It gives rates for different assesses for thepayment of advance tax during financial year2011-12 ( i.e., for assessment year 2011-12)

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Generally part III of the First Schedule of theFinance Act becomes part I of the First Scheduleof the subsequent Finance Act . For instance ,part III of the First Schedule to the Finance Act

2011 will become Part I of the First Schedule ofthe Finance Act , 2012 ( which is yet to be passedby Parliament)

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For individuals HUF Association of Persons (AOP) and Body of


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For individuals, HUF, Association of Persons (AOP) and Body of

individuals (BOI):

Income Tax Rates/Slabs Rate (%)

Upto 1,60,000Upto 1,90,000 (for women)Upto 2,40,000 (senior citizens)

NIL

1,60,001 5,00,000 10

5,00,001 8,00,000 20

8,00,001 and above 30

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Income Tax Rates/Slabs for) Assessment Year 2011-12 (FY 2010-11

For individuals HUF Association of Persons (AOP) and Body of


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For individuals, HUF, Association of Persons (AOP) and Body of

individuals (BOI):

Income Tax Rates/Slabs Rate (%)

Upto 1,80,000Upto 1,90,000 (for women)Upto 2,50,000 (senior citizens)

NIL

1,80,001 5,00,000 10

5,00,001 8,00,000 20

8,00,001 and above 30

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Income Tax Rates/Slabs for Assessment Year 2012-13 (FY 2011-12)


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Rates in A.Y. 2012-13 (Accounting Year ending31-3-2012):

Income slab

(Rs. in lakh)

Very seniorcitizens (80years and

above)(Residents)

Senior citizens(60 years and

above)(Residents)

Women (below60 years)

(Residents)Others

Up to 1.80 Nil Nil Nil Nil

1.80 to 1.90 Nil Nil Nil 10%

1.90 to 2.50 Nil Nil 10% 10%

2.50 to 5.00 Nil 10% 10% 10%

5.00 to 8.00 20% 20% 20% 20%

Above 8.00 30% 30% 30% 30%

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Income Tax Rates/Slabs for Assessment Year 2012 13


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Income Tax Rates/Slabs for Assessment Year 2012-13(FY 2011-12)

PERSONS TAX RATE

FIRMS 30%

DOMESTIC COMPANY 30%

FOREIGN COMPANY 40%

LOCAL AUTHORITIES 30%

CO-OPERATIVE SOCIETIESUp to 1000010000-20000Above 20000

10%20%30%

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S h & C


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Surcharge & CessAssessment Year 2011-12 (FY 2010-11..

PERSON RATE OF SURCHARGE

Individual / AOP / BOI / HUF / ArtificialJuridical Person NIL

Firm Nil

Domestic Company7.5% of tax liability, if Income exceedsRs. 1 Crore

Foreign company2.5% of tax liability, if Income exceedsRs. 1 Crore

Co-operative Society N.A.

Local Authority N.A.

Education Cess and Secondary & Higher Education Cess is applicable on everyperson @ 2% & 1% respectively on tax liability and surcharge applicable, if any.

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S h & C


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Surcharge & Cess..Assessment Year 2012-13 (FY 2011-12)

PERSON RATE OF SURCHARGE

Individual / AOP / BOI / HUF / ArtificialJuridical Person NIL

Firm Nil

Domestic Company5% of tax liability, if Income exceeds Rs.1 Crore

Foreign company2.% of tax liability, if Income exceedsRs. 1 Crore

Co-operative Society N.A.

Local Authority N.A.

Education Cess and Secondary & Higher Education Cess is applicable on everyperson @ 2% & 1% respectively on tax liability and surcharge applicable, if any.

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Special ta rates


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Special tax rates

Tax rates are given in the Finance Act , Besidesthese tax rates , some incomes are taxable atspecial rates given under the Income Tax Act

For instance , long term capital gains are taxable

at rate of 20% ( sec112)

Winning from lotteries , races , card games aretaxable at the rate of 30% ( Sec 115BB)

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TDS Rates Chart assessment year 2012-13 or financial


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TDS Rates Chart assessment year 2012-13 or financialyear 2011-12 (AY 12-13 / FY 11-12)

RelevantSection

Nature ofPayment (toresident)

ThresholdLimit

Individual HUF(Resident inIndia)

CompanyFirm/Co-op Sec.Local Authority(DomesticCompany)

192 Payment of salary

to a resident/non-resident

Normal Income

Tax Rates:See Income TaxSlab

193 Interest onsecurities

10 10

194 Deemeddividends u/s2(22)(e)

10 10

194A Interest otherthan Interest onsecurities

5000 10 10

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194B Lottery or

crosswordpuzzle or cardgame or othergame of anysort.

10000 30 30

194BB Horse races 5000 30 30

194C Contracts/sub-contracts

30000 1 2

194D InsuranceCommission

20000 10 10

194EE Payment inrespect of

deposits underNSS

2500 20 -

194F Payment onaccount ofrepurchase ofunits of MF orUTI

1000 20 10

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194G Commission 1000 10 10


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194G Commissionon sale oflottery tickets

1000 10 10

194H Commission orbrokerage

5000 10 10

194-I Rent of Plantand Machinery

180000 2 2

Rent of Land orBuilding orFurniture andFitting

180000 10 10

194J Fees forprofessional or

technical

services

30000 10 10

194LA Payment ofcompensationto a resident onacquisition ofcertainimmovableproperty

100000 10 10

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Back up slides

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Amounts which are debited to P & L a/c butare not allowable under the Act sections40/40A/43B

TDS provisions not complied

Payments to relative

Payments exceeding Rs 20000 not paid byaccount payee cheque

Disallowance of unpaid liability..Tax/duty/contribution to PF/SAF/Interest

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Tax on perquisite paid by employer

FBT

Income Tax

Wealth Tax

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Expenditure which are which are not debited

To P & L a/c but are allowable as deductionunder the Act section 30/31/32/33/35/36

Rent , rates, taxes , repairs and insurance ofbuilding

Repairs and insurance of machinery, plant andfurniture

Depreciation

Expenditure on scientific resarch

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Incomes which are credited to P & L a/c butare exempt 10 to 13 or are taxable under otherheads of income

Agriculture income

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Those incomes which are not credited to P &L but are taxable under the head profits and

gains of business or profession

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Cost of inflation Index


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FINANCIAL YEAR COST INFLATIONINDEX

FINANCIAL YEAR COST INFLATIONINDEX

1981-1982 100 1992-1993 2231982-1983 109 1993-1994 2441983-1984 116 1994-1995 2591984-1985 125 1995-1996 2811985-1986 133 1996-1997 3051986-1987 140 1997-1998 3311987-1988 150 1998-1999 3511988-1989 161 1999-2000 3891989-1990 172 2000-2001 4061990-1991 182 2001-2002 4261991-1992 199 2002-2003 447 57



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FINANCIAL YEAR COST INFLATION INDEX

2003-2004 4632004-2005 4802005-2006 4972006-2007 5192007-2008 5512008-2009 5822009-2010 6322010-2011 7112011-12 785

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Indexed PurchasePrice = Purchase Price * (CPI forcurrent year / CPI for year of

purchase)

Computation of long term capital gain


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Computation of long term capital gain

AMOUNT

1 Find out full of consideration

2 Deduct the following

Expenditure incurred in connection with suchtransfer /sale

Index cost of acquisition

Index cost of improvement

3

From the resulting sum deduct the exemptions u/ssection 54., 54B, 54D,54EC,54F, 54G, 54GA

The balancing amount is long term capital Gain

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Computation of short term capital gain


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Computation of short term capital gain

1 Find out full of consideration

2 Deduct the following

a Expenditure incurred in connection with such tranfer /sale

b cost of acquisition

c cost of improvement

3 From the resulting sum deduct the exemptions u/s section 54B,

54D, 54G, 54GA

4 The balancing amount is short term capital Gain

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HUF


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HUF

Hindu Undivided Family (HUF) which is sameas joint Hindu family is a body consisting ofpersons lineally descendant from acommon ancestor, including their wives and

unmarried daughters, who are staying togetherjointly.

The daughter, on her marriage, ceases to be amember of her fathers HUF and becomes a

member of her husbands HUF.

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The Income-tax Act, 1961 recognise HUF as anindependent assessable or taxable entity.

This is done by specifically includingHinduUndivided Family in the definition of

person, in section 2(31) of the Income-tax Act.

As such, the income earned by such HUF willenjoy all exemptions and deductions; including

the basic exemption from income-tax, so far asapplicable.

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HUF is a creature of law. It cannot be createdby act of parties, except in rare cases of adoptionand reunion.

Birth of a son in a Hindu joint family automatically

makes him a member of the HUF.

In view of this, all male members automaticallybecome members of the HUF.

In addition to that, if a child is adopted, then healso becomes a member of the HUF.

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Upon marriage, wife becomes a member of herhusbands joint family.

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SECTION 80 C


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SECTION 80 C

Under section 80C of the Income Tax Act, certain

investments are deductible (up to a maximum ofRs 1 lakh) from gross total income.

This tax exemption is available across individual

tax slabs.

If you earn Rs 4 lakhs per annum and makeinvestments of Rs 1 lakh in 80c instruments then

the taxable amount will be Rs 3 lakhs. It is not at all complicated and the following chart

simplifies even more.

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Section 80C benefit has been provided to

encourage long term savings and investments.

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HRA


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HRA

As per section 10(13A) read with rule 2A ,least of

following three will be exempted

An amount equal to 50 per cent of salary, whereresidential house is situated at Mumbai, Kolkata,

Delhi or Chennai and an amount equal to 40 percent of salary, where residential house is situatedat any other place.

House rent allowance received by the employee. Rent paid minus 10 per cent of salary

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Where the accommodation provided to the employee is owned by the

employer, the rate is 15% of 'salary' in cities having populationexceeding 25 lakh as per the 2001 census.

The rate is 10% of salary in cities having population exceeding 10lakhs but not exceeding 25 lakhs as per 2001 Census.

For other places, the perquisite value would be 7 1/2% of the salary. Where the accommodation so provided is taken on lease/ rent by the

employer, the prescribed rate is 15% of the salary or the actualamount of lease rental payable by the employer, whichever is lower,as reduced by any amount of rent paid by the employee.

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Section 54


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Section 54

Section benefit can be availed only by Individiual

/HUF

Sale should be of long term residential building.

To claim the exemption the tax payer will have to

purchase a residential house property (old or new)or construct a residential house property.

The new residential house property should bepurchased or constructed within the time limit

given in the next slide

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Time Limit

For purchasing a newresidential property

It should be purchased withinone year before or within 2yearsafter , the date of transfer of

residential house property

For constructing a newresidential property

The construction should becompleted within 3 years fromthe date of transfer of residential

house property

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If the new residential property is transferred within 3 years from the dateOf its acquisition , the amount of given earlier would be taken back

Section 54 EC


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Section 54 EC

Assesee- the assesee may be an individual , firm

, company or any other person.

The asset transferred should be long term capitalasset.

The assessee should invest the whole or any partof the capital gain in long term specified assetswithin 6 months from the date of transfer of asset.

The long term asset means bonds issued byNHAI and REC

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Amount of exemption- the amount under section

54ec is as follows.

- The amount of capital gains generated ontransfer of capital asset ; or

- the amount invested in specified asset statedabove

Which ever is lower.

The investment in specified asset cannot exceedRs 50 lakhs.

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Section 54 EC


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Section 54 EC

Capital gain arising from the transfer of a long-

term capital asset shall not be charged to tax tothe extent such gains are invested in any bond,redeemable after three years and issued byNHAI and REC and notified by the CentralGovernment in the Official Gazette for thepurposes of said section within a period of sixmonths after the date of such transfer.

Deduction u/s 54EC is available upto Rs. 50 lacsin each Financial Year

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Sec 54F Capital gain on transfer of LTCA other than a house property


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Allowed Assessee Conditions to be satisfied Quantum of exemption

Individual/HUF The asset transferred should

be a long-term capital asset,not being a residentialhouse.

Within a period of I year

before or 2 years after thedate of transfer, aresidential house should bepurchased or constructedwithin a period of 3 yearsafter the date of transfer.

The assessee should notown more than one residential house on the date oftransfer.

LTCA= Long termcapital asset

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Sec 54F


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Allowed Assessee Conditions to be satisfied Quantum of exemption

Individual/HUF The assessee should notwithin a periodof one year purchase orshould notwithin a period of 3 yearsconstruct any

residential house other thanthe newasset.

If the cost of the newresidential house isnotless than the netconsideration then the

whole of the capitalgain.Otherwise,COST OF NEWHOUSE XCAPITAL GAINS / NET

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