Taxation System in IndiaIndia has a well-developed tax structure with clearly demarcated authority between Central and State Governments and local bodies.Central Government levies taxes on income (except tax on agricultural income, which the State Governments can levy), customs duties, central excise and service tax.Value Added Tax (VAT), stamp duty, state excise, land revenue and profession tax are levied by the State Governments.Local bodies are empowered to levy tax on properties, octroi and for utilities like water supply, drainage etc.Indian taxation system has undergone tremendous reforms during the last decade. The tax rates have been rationalized and tax laws have been simplified resulting in better compliance, ease of tax payment and better enforcement. The process of rationalization of tax administration is ongoing in India.

Direct Taxes In case of direct taxes (income tax, wealth tax, etc.), the burden directly falls on the taxpayer.Income taxAccording to Income Tax Act 1961, every person, who are an assessee and whose total income exceeds the maximum exemption limit, shall be chargeable to the income tax at the rate or rates prescribed in the Finance Act. Such income tax shall be paid on the total income of the previous year in the relevant assessment year.Assessee means a person by whom (any tax) or any other sum of money is payable under the Income Tax Act, and includes -(a) Every person in respect of whom any proceeding under the Income Tax Act has been taken for the assessment of his income (or assessment of fringe benefits) or of the income of any other person in respect of which he is assessable, or of the loss sustained by him or by such other person, or of the amount of refund due to him or to such other person;(b) Every person who is deemed to be an assessee under any provisions of the Income Tax Act;(c) Every person who is deemed to be an assessee in default under any provision of the Income Tax Act.Where a person includes: Individual Hindu Undivided Family (HUF) Association of persons (AOP) Body of individuals (BOI) Company Firm A local authority and, Every artificial judicial person not falling within any of the preceding categories.Income tax is an annual tax imposed separately for each assessment year (also called the tax year). Assessment year commences from 1st April and ends on the next 31st March. The total income of an individual is determined on the basis of his residential status in India. For tax purposes, an individual may be resident, nonresident or not ordinarily resident.

1. Resident An individual is treated as resident in a year if present in India: For 182 days during the year or For 60 days during the year and 365 days during the preceding four years. Individuals fulfilling neither of these conditions are nonresidents. 2. Resident but not Ordinarily Resident A resident who was not present in India for 730 days during the preceding seven years or who was nonresident in nine out of ten preceding years is treated as not ordinarily resident.3. Non-Residents Non-residents are taxed only on income that is received in India or arises or is deemed to arise in India. A person not ordinarily resident is taxed like a non-resident but is also liable to tax on income accruing abroad if it is from a business controlled in or a profession set up in India.Non-resident Indians (NRIs) are not required to file a tax return if their income consists of only interest and dividends, provided taxes due on such income are deducted at source. It is possible for non-resident Indians to avail of these special provisions even after becoming residents by following certain procedures laid down by the Income Tax act.StatusIndian IncomeForeign Income

Resident and ordinarily residentTaxableTaxable

Resident but not ordinary residentTaxableNot taxable

Non-ResidentTaxableNot taxable

Personal Income TaxPersonal income tax is levied by Central Government and is administered by Central Board of Direct taxes under Ministry of Finance in accordance with the provisions of the Income tax actCorporate taxDefinition of a companyA company has been defined as a juristic person having an independent and separate legal entity from its shareholders. Income of the company is computed and assessed separately in the hands of the company. However the income of the company, which is distributed to its shareholders as dividend, is assessed in their individual hands. Such distribution of income is not treated as expenditure in the hands of company; the income so distributed is an appropriation of the profits of the company.Residence of a company A company is said to be a resident in India during the relevant previous year if: It is an Indian company If it is not an Indian company but, the control and the management of its affairs is situated wholly in India A company is said to be non-resident in India if it is not an Indian company and some part of the control and management of its affairs is situated outside India.Corporate sector taxThe taxability of a company's income depends on its domicile. Indian companies are taxable in India on their worldwide income. Foreign companies are taxable on income that arises out of their Indian operations, or, in certain cases, income that is deemed to arise in India. Royalty, interest, gains from sale of capital assets located in India (including gains from sale of shares in an Indian company), dividends from Indian companies and fees for technical services are all treated as income arising in India. Current rates of corporate tax.Different kinds of taxes relating to a companyMinimum Alternative Tax (MAT)Normally, a company is liable to pay tax on the income computed in accordance with the provisions of the income tax Act, but the profit and loss account of the company is prepared as per provisions of the Companies Act. There were large number of companies who had book profits as per their profit and loss account but were not paying any tax because income computed as per provisions of the income tax act was either nil or negative or insignificant. In such case, although the companies were showing book profits and declaring dividends to the shareholders, they were not paying any income tax. These companies are popularly known as Zero Tax companies. In order to bring such companies under the income tax act net, section 115JA was introduced w.e.f assessment year 1997-98.A new tax credit scheme is introduced by which MAT paid can be carried forward for set-off against regular tax payable during the subsequent five year period subject to certain conditions, as under:- When a company pays tax under MAT, the tax credit earned by it shall be an amount, which is the difference between the amount payable under MAT and the regular tax. Regular tax in this case means the tax payable on the basis of normal computation of total income of the company. MAT credit will be allowed carry forward facility for a period of five assessment years immediately succeeding the assessment year in which MAT is paid. Unabsorbed MAT credit will be allowed to be accumulated subject to the five-year carry forward limit. In the assessment year when regular tax becomes payable, the difference between the regular tax and the tax computed under MAT for that year will be set off against the MAT credit available. The credit allowed will not bear any interest

Fringe Benefit Tax (FBT)The Finance Act, 2005 introduced a new levy, namely Fringe Benefit Tax (FBT) contained in Chapter XIIH (Sections 115W to 115WL) of the Income Tax Act, 1961.Fringe Benefit Tax (FBT) is an additional income tax payable by the employers on value of fringe benefits provided or deemed to have been provided to the employees. The FBT is payable by an employer who is a company; a firm; an association of persons excluding trusts/a body of individuals; a local authority; a sole trader, or an artificial juridical person. This tax is payable even where employer does not otherwise have taxable income. Fringe Benefits are defined as any privilege, service; facility or amenity directly or indirectly provided by an employer to his employees (including former employees) by reason of their employment and includes expenses or payments on certain specified heads.The benefit does not have to be provided directly in order to attract FBT. It may still be applied if the benefit is provided by a third party or an associate of employer or by under an agreement with the employer.The value of fringe benefits is computed as per provisions under Section 115WC. FBT is payable at prescribed percentage on the taxable value of fringe benefits. Besides, surcharge in case of both domestic and foreign companies shall be leviable on the amount of FBT. On these amounts, education cess shall also be payable.Every company shall file return of fringe benefits to the Assessing Officer in the prescribed form by 31st October of the assessment year as per provisions of Section 115WD. If the employer fails to file return within specified time limit specified under the said section, he will have to bear penalty as per Section 271FB.The scope of Fringe Benefit Tax is being widened by including the employees stock option as fringe benefit liable for tax. The fair market value of the share on the date of the vesting of the option by the employee as reduced by the amount actually paid by him or recovered from him shall be considered to be the fringe benefit. The fair market value shall be determined in accordance with the method to be prescribed by the CBDT.Dividend Distribution Tax (DDT)Under Section 115-O of the Income Tax Act, any amount declared, distributed or paid by a domestic company by way of dividend shall be chargeable to dividend tax. Only a domestic company (not a foreign company) is liable for the tax. Tax on distributed profit is in addition to income tax chargeable in respect of total income. It is applicable whether the dividend is interim or otherwise. Also, it is applicable whether such dividend is paid out of current profits or accumulated profits.The tax shall be deposited within 14 days from the date of declaration, distribution or payment of dividend, whichever is earliest. Failing to this deposition will require payment of stipulated interest for every month of delay under Section115-P of the Act.Rate of dividend distribution tax to be raised from 12.5 per cent to 15 per cent on dividends distributed by companies; and to 25 per cent on dividends paid by money market mutual funds and liquid mutual funds to all investors.Banking Cash Transaction Tax (BCTT)The Finance Act 2005 introduced the Banking Cash Transaction Tax (BCTT) w.e.f. June 1, 2005 and applies to the whole of India except in the state of Jammu and Kashmir.BCTT continues to be an extremely useful tool to track unaccounted monies and trace their source and destination. It has led the Income Tax Department to many money laundering and hawala transactions.BCTT is levied at the rate of 0.1 per cent of the value of following "taxable banking transactions" entered with any scheduled bank on any single day: Withdrawal of cash from any bank account other than a saving bank account; and Receipt of cash on encashment of term deposit(s).However, Banking Cash Transaction Tax (BCTT) has been withdrawn with effect from April 1, 2009.Securities Transaction Tax (STT)Securities Transaction Tax or turnover tax, as is generally known, is a tax that is leviable on taxable securities transaction. STT is leviable on the taxable securities transactions with effect from 1st October, 2004 as per the notification issued by the Central Government. The surcharge is not leviable on the STT.Tax Rebates for Corporate TaxThe classical system of corporate taxation is followed in India Domestic companies are permitted to deduct dividends received from other domestic companies in certain cases. Inter Company transactions are honored if negotiated at arm's length. Special provisions apply to venture funds and venture capital companies. Long-term capital gains have lower tax incidence. There is no concept of thin capitalization. Liberal deductions are allowed for exports and the setting up on new industrial undertakings under certain circumstances. There are liberal deductions for setting up enterprises engaged in developing, maintaining and operating new infrastructure facilities and power-generating units. Business losses can be carried forward for eight years, and unabsorbed depreciation can be carried indefinitely. No carry back is allowed. Dividends, interest and long-term capital gain income earned by an infrastructure fund or company from investments in shares or long-term finance in enterprises carrying on the business of developing, monitoring and operating specified infrastructure facilities or in units of mutual funds involved with the infrastructure of power sector are proposed to be tax exempt.Capital Gains TaxA capital gain is income derived from the sale of an investment. A capital investment can be a home, a farm, a ranch, a family business, work of art etc. In most years slightly less than half of taxable capital gains are realized on the sale of corporate stock. The capital gain is the difference between the money received from selling the asset and the price paid for it.Capital gain also includes gain that arises on "transfer" (includes sale, exchange) of a capital asset and is categorized into short-term gains and long-term gains.The capital gains tax is different from almost all other forms of taxation in that it is a voluntary tax. Since the tax is paid only when an asset is sold, taxpayers can legally avoid payment by holding on to their assets--a phenomenon known as the "lock-in effect."The scope of capital asset is being widened by including certain items held as personal effects such as archaeological collections, drawings, paintings, sculptures or any work of art. Presently no capital gain tax is payable in respect of transfer of personal effects as it does not fall in the definition of the capital asset. To restrict the misuse of this provision, the definition of capital asset is being widened to include those personal effects such as archaeological collections, drawings, paintings, sculptures or any work of art. Transfer of above items shall now attract capital gain tax the way jewellery attracts despite being personal effect as on date.Short Term and Long Term capital GainsGains arising on transfer of a capital asset held for not more than 36 months (12 months in the case of a share held in a company or other security listed on recognized stock exchange in India or a unit of a mutual fund) prior to its transfer are "short-term". Capital gains arising on transfer of capital asset held for a period exceeding the aforesaid period are "long-term".Section 112 of the Income-Tax Act, provides for the tax on long-term capital gains, at 20 per cent of the gain computed with the benefit of indexation and 10 per cent of the gain computed (in case of listed securities or units) without the benefit of indexation.Double Taxation ReliefDouble Taxation means taxation of the same income of a person in more than one country. This results due to countries following different rules for income taxation. There are two main rules of income taxation i.e. (a) Source of income rule and (b) residence rule.As per source of income rule, the income may be subject to tax in the country where the source of such income exists (i.e. where the business establishment is situated or where the asset / property is located) whether the income earner is a resident in that country or not.On the other hand, the income earner may be taxed on the basis of the residential status in that country. For example, if a person is resident of a country, he may have to pay tax on any income earned outside that country as well.Further, some countries may follow a mixture of the above two rules. Thus, problem of double taxation arises if a person is taxed in respect of any income on the basis of source of income rule in one country and on the basis of residence in another country or on the basis of mixture of above two rules.In India, the liability under the Income Tax Act arises on the basis of the residential status of the assessee during the previous year. In case the assessee is resident in India, he also has to pay tax on the income, which accrues or arises outside India, and also received outside India. The position in many other countries being also broadly similar, it frequently happens that a person may be found to be a resident in more than one country or that the same item of his income may be treated as accruing, arising or received in more than one country with the result that the same item becomes liable to tax in more than one country.Relief against such hardship can be provided mainly in two ways: (a) Bilateral relief, (b) Unilateral relief.Bilateral ReliefThe Governments of two countries can enter into Double Taxation Avoidance Agreement (DTAA) to provide relief against such Double Taxation, worked out on the basis of mutual agreement between the two concerned sovereign states. This may be called a scheme of 'bilateral relief' as both concerned powers agree as to the basis of the relief to be granted by either of them.Unilateral reliefThe above procedure for granting relief will not be sufficient to meet all cases. No country will be in a position to arrive at such agreement with all the countries of the world for all time. The hardship of the taxpayer however is a crippling one in all such cases. Some relief can be provided even in such cases by home country irrespective of whether the other country concerned has any agreement with India or has otherwise provided for any relief at all in respect of such double taxation. This relief is known as unilateral relief.Double Taxation Avoidance Agreement (DTAA)List of countries with which India has signed Double Taxation Avoidance Agreement: DTAA Comprehensive Agreements - (With respect to taxes on income) DTAA Limited Agreements With respect to income of airlines/ merchant shipping Limited Multilateral Agreement DTAA Other Agreements/Double Taxation Relief Rules Specified Associations Agreement Tax Information Exchange Agreement (TIEA)Indirect TaxationSales taxCentral Sales Tax (CST)Central Sales tax is generally payable on the sale of all goods by a dealer in the course of inter-state trade or commerce or, outside a state or, in the course of import into or, export from India.The ceiling rate on central sales tax (CST), a tax on inter-state sale of goods, has been reduced from 4 per cent to 3 per cent in the current year.Value Added Tax (VAT)VAT is a multi-stage tax on goods that is levied across various stages of production and supply with credit given for tax paid at each stage of Value addition. Introduction of state level VAT is the most significant tax reform measure at state level. The state level VAT has replaced the existing State Sales Tax. The decision to implement State level VAT was taken in the meeting of the Empowered Committee (EC) of State Finance Ministers held on June 18, 2004, where a broad consensus was arrived at to introduce VAT from April 1, 2005. Accordingly, all states/UTs have implemented VAT.The Empowered Committee, through its deliberations over the years, finalized a design of VAT to be adopted by the States, which seeks to retain the essential features of VAT, while at the same time, providing a measure of flexibility to the States, to enable them to meet their local requirements. Some salient features of the VAT design finalized by the Empowered Committee are as follows: The rates of VAT on various commodities shall be uniform for all the States/UTs. There are 2 basic rates of 4 per cent and 12.5 per cent, besides an exempt category and a special rate of 1 per cent for a few selected items. The items of basic necessities have been put in the zero rate brackets or the exempted schedule. Gold, silver and precious stones have been put in the 1 per cent schedule. There is also a category with 20 per cent floor rate of tax, but the commodities listed in this schedule are not eligible for input tax rebate/set off. This category covers items like motor spirit (petrol), diesel, aviation turbine fuel, and liquor. There is provision for eliminating the multiplicity of taxes. In fact, all the State taxes on purchase or sale of goods (excluding Entry Tax in lieu of Octroi) are required to be subsumed in VAT or made VATable. Provision has been made for allowing "Input Tax Credit (ITC)", which is the basic feature of VAT. However, since the VAT being implemented is intra-State VAT only and does not cover inter-State sale transactions, ITC will not be available on inter-State purchases. Exports will be zero-rated, with credit given for all taxes on inputs/ purchases related to such exports. There are provisions to make the system more business-friendly. For instance, there is provision for self-assessment by the dealers. Similarly, there is provision of a threshold limit for registration of dealers in terms of annual turnover of Rs 5 lakh. Dealers with turnover lower than this threshold limit are not required to obtain registration under VAT and are exempt from payment of VAT. There is also provision for composition of tax liability up to annual turnover limit of Rs. 50 lakh. Regarding the industrial incentives, the States have been allowed to continue with the existing incentives, without breaking the VAT chain. However, no fresh sales tax/VAT based incentives are permitted.Roadmap towards GSTThe Empowered Committee of State Finance Ministers has been entrusted with the task of preparing a roadmap for the introduction of national level goods and services tax with effect from 01 April 2007.The move is towards the reduction of CST to 2 per cent in 2008, 1 per cent in 2009 and 0 per cent in 2010 to pave way for the introduction of GST (Goods and Services Tax).Excise DutyCentral Excise duty is an indirect tax levied on goods manufactured in India. Excisable goods have been defined as those, which have been specified in the Central Excise Tariff Act as being subjected to the duty of excise.There are three types of Central Excise duties collected in India namelyBasic Excise DutyThis is the duty charged under section 3 of the Central Excises and Salt Act, 1944 on all excisable goods other than salt which are produced or manufactured in India at the rates set forth in the schedule to the Central Excise tariff Act, 1985.

Additional Duty of ExciseSection 3 of the Additional duties of Excise (goods of special importance) Act, 1957 authorizes the levy and collection in respect of the goods described in the Schedule to this Act. This is levied in lieu of sales Tax and shared between Central and State Governments. These are levied under different enactments like medicinal and toilet preparations, sugar etc. and other industries development etc.Special Excise DutyAs per the Section 37 of the Finance Act, 1978 Special excise Duty was attracted on all excisable goods on which there is a levy of Basic excise Duty under the Central Excises and Salt Act, 1944.Since then each year the relevant provisions of the Finance Act specifies that the Special Excise Duty shall be or shall not be levied and collected during the relevant financial year.Customs DutyCustom or import duties are levied by the Central Government of India on the goods imported into India. The rate at which customs duty is leviable on the goods depends on the classification of the goods determined under the Customs Tariff. The Customs Tariff is generally aligned with the Harmonised System of Nomenclature (HSL).In line with aligning the customs duty and bringing it at par with the ASEAN level, government has reduced the peak customs duty from 12.5 per cent to 10 per cent for all goods other than agriculture products. However, the Central Government has the power to generally exempt goods of any specified description from the whole or any part of duties of customs leviable thereon. In addition, preferential/concessional rates of duty are also available under the various Trade Agreements.Service TaxService tax was introduced in India way back in 1994 and started with mere 3 basic services viz. general insurance, stock broking and telephone. Today the counter services subject to tax have reached over 100. There has been a steady increase in the rate of service tax. From a mere 5 per cent, service tax is now levied on specified taxable services at the rate of 12 per cent of the gross value of taxable services. However, on account of the imposition of education cess of 3 per cent, the effective rate of service tax is at 12.36 per cent.

Need of taxation in developing country like IndiaIn developing countries the government has to play an active role in promoting economic growth & development because private initiative & capital are limited.

Fiscal policy or budget has become important instrument in promoting growth and development in such economies.Taxation is an important part of fiscal policy which can be used effectively by governments of developing economies.Role of Direct and Indirect Taxes The role of taxation in developing economies is stated as follows:1. Resource MobilizationTaxation enables the government to mobilise a substantial amount of revenue. The tax revenue is generated by imposing: Direct Taxes such as personal income tax, corporate tax, etc., Indirect Taxes such as customs duty, excise duty, etc.In 2006-07, it is estimated that the tax revenue of the central government (India) was 81% of the total revenue receipts, whereas, non tax revenue was only 19%.2. Reduction in Inequalities of IncomeTaxation follows the principle of equity. The direct taxes are progressive in nature. Also certain indirect taxes, such as taxes on luxury goods are also progressive in nature. This means the rich class has to bear the higher incidence of taxes, whereas, the lower income group is either exempted from tax (direct taxes) or has to pay lower rate of duty (indirect taxes) on goods consumed by the masses. Thus, taxation helps to reduce inequalities of income and wealth.3. Social WelfareTaxation generates social welfare. The social welfare is generated due to certain undesirable products like alcoholic products, tobacco products and such other products are heavily taxed, which restricts their consumption, which in turn facilitates social welfare.A part of the tax revenue is utilised for social development activities, such as health, education and family welfare, which also improve social welfare as well as social order in the society.4. Foreign exchangeTaxation encourages exports and restricts imports. Generally, developing countries and even the developed countries do not impose taxes on export items. For instance, in India, exports are exempted from excise duty, VAT, customs duty and other duties.However, there is customs duty on imported goods. Therefore, taxation helps to: Earn foreign exchange through the promotion of exports.5. Regional DevelopmentTaxation plays an important role in regional development; Tax incentives such as tax holiday for setting up industries in backward regions, which induces business firms to set up industries in such regions, Tax revenue collected by government is also utilised for development of infrastructure in backward regions.6. Control of InflationTaxation can be used as a tool of controlling inflation. Through taxation, the Government can control inflation as follows:-1. If inflation is due to high rise in prices of essential items, then the Government may reduce the rate of indirect taxes.2. If inflation is due to increase in demand, the Government may try to cut down the effective demand by increasing the tax rate. Increase in tax rate may restrict consumption, which may reduce demand, and subsequently inflation may be controlled.

Why Indirect Taxes are more suitable in Developing Countries?Indirect taxes have become an important source of development funds in developing countries. Many developing economies that have adopted economic planning use indirect taxes as important source of funds.These taxes are found to be better suited in developing countries because they have much wider coverage as compared to direct taxes. Both rich and poor pay indirect taxes in form of commodity price.High rate of taxes on luxury goods will take away resources from the rich and such resources re-distributed among the poor in the form of subsidies besides taxes on product like alcohol, cigarettes can have beneficial effect on consumption pattern.Indirect taxes are used to divert resources from less desired use to more desired one in developing countries. Taxes on goods considered to be luxuries will make them more expensive, lower their demand and profitability. This will divert their resources from the production of these goods to more essential ones.Taxes on imported goods have been used by developing countries for reducing imports and promoting domestic industries.On other hand in developing economies collection of direct taxes is not very significant. Only a small proportion of population pays such taxes. Direct taxes are primary used in such economies to reduce inequalities of income distribution. High degree of progression is used in case of direct taxes in developing countries. This discourages savings done by high income group and adversely effects investment and capital formation. Highly progressive taxation leads to tax evasion and black money.Thus direct taxes have a limited role to play in developing countries and indirect taxes have become an important source of development funds in developing countries.In this way we can say both direct and indirect taxes are essential to bring adequate revenue to the state for meeting the increasing public expenditure. Both taxes are essential to promote economic growth, fill employment and economic stability. Direct and indirect taxes should side by side & balance each other. However in developing countries, direct taxation has limited scope and hence indirect taxation plays a more significant role. A well oriented system of taxation requires combination of direct & indirect taxes in different proportions.

Introduction to Income Tax in IndiaThe Central Government has been empowered by Entry 82 of the Union List of Schedule VII of the Constitution of India to levy tax on all income other than agricultural income. The Income Tax Law comprises The Income Tax Act 1961, Income Tax Rules 1962, Notifications and Circulars issued by Central Board of Direct Taxes, Annual Finance Acts and Judicial pronouncements by Supreme Court and High Courts.The government of on taxable income of all persons including individuals, Hindu Undivided Families, companies, firms, association of persons, body of individuals, local authority and any other artificial judicial person. Levy of tax is separate on each of the persons. The levy is governed by the Indian Income Tax Act, 1961. The Indian Income Tax Department is governed by CBDT and is part of the Department of Revenue under the Ministry of Finance, Govt. of India. Income tax is a key source of funds that the government uses to fund its activities and serve the public.INTRODUCTIONIncome tax is an annual tax on income. The Indian Income Tax Act (Section 4) provides that in respect of the total income of the previous year of every person, income tax shall be charged for the corresponding assessment year at the rates laid down by the Finance Act for that assessment year. Section 14 of the Income tax Act further provides that for the purpose of charge of income tax and computation of total income all income shall be classifiedUnder the following heads of income:A. SalariesB. Income from house propertyC. Profits and gains of business or profession.D. Capital gainsE. Income from other sources.The total income from all the above heads of income is calculated in accordance with the provisions of the Act as they stand on the first day of April of any assessment year. In this booklet an attempt is being made to discuss the various provisions relevant to the salaried class of taxpayers as well as pensioners and senior citizenSalariesWHAT IS SALARYSalary is the remuneration received by or accruing to an individual, periodically, for service rendered as a result of an express or implied contract. The actual receipt of salary in the previous year is not material as far as its taxability is concerned. The existence of employer-employee relationship is the sine-qua-non for taxing a particular receipt under the head salaries. For instance, the salary received by a partner from his partnership firm carrying on a business is not chargeable as Salaries but as Profits & Gains from Business or Profession. Similarly, salary received by a person as MP or MLA is taxable as Income from other sources, but if a person received salary as Minister of State/ Central Government, the same shall be charged to tax under the head Salaries. Pension received by an assesse from his former employer is taxable as Salaries whereas pension received on his death by members of his family (Family Pension) is taxed asIncome from other sources.WHAT DOES SALARY INCLUDESection 17(1) of the Income tax Act gives an inclusive and not exhaustive definition of Salaries including therein 1. Wages2. Annuity or pension3. Gratuity 4. Fees, Commission, perquisites or profits in lieu of salary 5. Advance of Salary6. Amount transferred from unrecognized provident fund to recognized provident fund Contribution of employer to a Recognised Provident Fund in excess of the prescribed limit 7. Leave Encashment 8. Compensation as a result of variation in Service contract etc. (x) Contribution made by the CentralDEDUCTION FROM SALARY INCOMEThe following deductions from salary income are admissible as per Section 16 of the Income-tax Act.(a) Professional/Employment tax levied by the State Govt.(b) Entertainment Allowance- Deduction in respect of this is available to a government employee to the extent of Rs.5000/- or 20% of his salary or actual amount received, whichever is less.PERQUISITESPerquisite may be defined as any casual emolument or benefit attached to an office or position in addition to salary or wages.Perquisite is defined in the section17 (2) of the Income tax Act as including:1. Value of rent-free/concessional rent accommodation provided by the employer.2. Any sum paid by employer in respect of an obligation which was actually payable by the assesse.3. Value of any benefit/amenity granted free or at concessional rate to specified employees etc.4. The value of any specified security or sweat equity shares allotted or transferred, directly or indirectly, by the employer, or former employer, free of cost or at concessional rate to the assesse.5. The amount of any contribution to an approved superannuation fund by the employer in respect of the assesse, to the extent it exceeds one lakh rupees.6. The value of any other fringe benefit or amenity as may be prescribed.

VALUATION OF PERQUISITESAs a general rule, the taxable value of perquisites in the hands of the employees is its cost to the employer. However, specific rules for valuation of certain perquisites have been laid down in Rule 3 of the I.T. Rules. These are briefly given below.Valuation of residential accommodation provided by the employer:-(a) Union or State Government Employees- The value of perquisite is the license fee as determined by the Govt. as reduced by the rent actually paid by the employee.(b) Non-Govt. Employees- The value of perquisite is an amount equal to 15% of the salary in cities having population more than 25 lakhs, (10% of salary in cities where population as per 2001 census is exceeding 10 lakhs but not exceeding 25 lakhs and 7.5% of salary in areas where population as per 2001 census is 10 lakhs or below). In case the accommodation provided is not owned by the employer, but is taken on lease or rent, then the value of the perquisite would be the actual amount of lease rent paid/payable by the employer or 15% of salary, whichever is lower. In both of above cases, the value of the perquisite would be reduced by the rent, if any, actually paid by the employee.Value of Furnished Accommodation- The value would be the value of unfurnished accommodation as computed above, increased by 10% per annum of the cost of furniture (including TV/radio/ refrigerator/AC/other gadgets). In case such furniture is hired from a third party, the value of unfurnished accommodation would be increased by the hire charges paid/payable by the employer.However, any payment recovered from the employee towards the above would be reduced from this amount.Value of hotel accommodation provided by the employer- The value of perquisite arising out of the above would be 24% of salary or the actual charges paid or payable to the hotel, whichever is lower. The above would be reduced by any rent actually paid or payable by the employee. It may be noted that no perquisite would arise, if the employee is provided such accommodation on transfer from one place to another for a period of 15 days or less.

Perquisite of motor car provided by the employer- if an employer providing such facility to his employee is not liable to pay fringe benefit tax, the value of such perquisite shall be:a) Nil, if the motor car is used by the employee wholly and exclusively in the performance of his official duties.b) Actual expenditure incurred by the employer on the running and maintenance of motor car, including remuneration to chauffeur as increased by the amount representing and tear of the motor car and as reduced by any amount charged from the employee for such use (in case the motor car is exclusively for private or personal purposes of the employee or any member of his household).c) Rs. 1800- (plus Rs. 900-, if chauffeur is also provided) per month (in case the motor car issued partly in performance of duties and partly for private or personal purposes of the employee or any member of his household if the expenses on maintenance and running of motor car are met or reimbursed by the employer). However, the value of perquisite will be Rs. 2400- (plus Rs. 900-, if chauffeur is also provided) per month if the cubic capacity of engine of the motor car exceeds 1.6 litres.d) Rs. 600- per month (in case the motor car is used partly in performance of duties and partly for private or personal purposes of the employee or any member of his household if the expenses on maintenance and running of motor car for such private or personal use are fully met by the employee). However, the value of perquisite will be Rs. 900 per month if the cubic capacity of engine of the motor car exceeds 1.6 litres.If the motor car or any other automotive conveyance is owned by the employee but the actual running and maintenance charges are met or reimbursed by the employer, the method of valuation of perquisite value is different.Perquisite arising out of supply of gas, electric energy or water: This shall be determined as the amount paid by the employer to the agency supplying the same. If the supply is from the employers own resources, the value of the perquisite would be the manufacturing cost per unit incurred by the employer. However, any payment received from the employee towards the above would be reduced from the amount. Free/Concessional Educational Facility: Value of the perquisite would be the expenditure incurred by the employer. If the education institution is maintained & owned by the employer, the value would be nil if the value of the benefit per child is below Rs. 1000/- P.M. or else the reasonable cost of such education in a similar institution in or near the locality. Free/Concessional journeys provided by an undertaking engaged in carriage of passengers or goods: Value of perquisite would be the value at which such amenity is offered to general public as reduced by any amount, if recovered from the employee. However, these provisions are not applicable to the employees of an airline or the railways. Provision for sweeper, gardener, watchman or personal attendant: The value of benefit resulting from provision of any of these shall be the actual cost borne by the employer in this respect as reduced by any amount paid by the employee for such services. (Cost to the employer in respect to the above will be salary paid/payable).Value of certain other fringe benefits: (a) Interest free/concessional loans- The value of the perquisite shall be the excess of interest payable at the prescribed interest rate over, interest, if any, actually paid by the employee or any member of his household. The prescribed interest rate would be the rate charged by State Bank of India as on the 1st Day of the relevant Previous Year in respect of loans of the same type and for same purpose advanced by it to general public. Perquisite to be calculated on the basis of the maximum outstanding monthly balance method. However, loans up to Rs. 20,000/-, loans for medical treatment specified in Rule 3A are exempt provided the same are not reimbursed under medical insurance. (b) Value of free meals- The perquisite value in respect of free food and non-alcoholic beverages provided by the employer, not liable to pay fringe benefit tax, to an employee shall be the expenditure incurred by the employer as reduced by the amount paid or recovered from the employee for such benefit or amenity. However, no perquisite value will be taken if food and non-alcoholic beverages are provided during working hours and certain conditions specified under are satisfied.(c) Value of gift or voucher or token- The perquisite value in respect of any gift, or voucher, or taken in lieu of which such gift may be received by the employee or member of his household from the employer, not liable to pay fringe benefit tax, shall be the sum equal to the amount of such gift, voucher or token. However, no perquisite value will be taken if the value of such gift, voucher or taken is below Rs. 5000/- in the aggregate during the previous years.(d) Credit card provided by the employer- The perquisite value in respect of expenses incurred by the employee or any of his household members, which are charged to a credit card provided by the employer, not liable to pay fringe benefit tax, which are paid or reimbursed by such employer to an employee shall be taken to be such amount paid or reimbursed by the employer. However, no perquisite value will be taken if the expenses are incurred wholly and exclusively for official purposes and certain conditions mentioned in are satisfied. (e) Club membership provided by the employer- The perquisite value in respect of amount paid or reimbursed to an employee by an employer, not liable to pay fringe benefit tax, against the expenses incurred in a club by such employee or any of his household members shall be taken to be such amount incurred or reimbursed by the employer as reduced by any amount paid or recovered from the employee on such account. However, no perquisite value will be taken if the expenditure is incurred wholly any exclusively for business purposes and certain conditions mentioned in are satisfied. The value of any other benefit or amenity provided by the employer shall be determined on the basis of cost to the employer under an arms length transaction as reduced by the employees contribution. The fair market value of any specified security or sweat equity share, being an equity share in a company, on the date on which the option is exercised by the employee, shall be determined as follows:- (a) In a case where, on the date of exercising of the option, the share in the company is listed on a recognized stock exchange, the fair market value shall be the average of the opening price and closing price of the share on the date on the said stock exchange. (b) In a case where, on the date of exercising of the option, the share in the company is not listed on a recognized stock exchange, the fair market value shall be such value of the share in the company as determined by a merchant banker on the specified date. (c) The fair market value of any specified security, not being an equity share in a company, on the date on which the option is exercised by the employee, shall be such value as determined by a merchant banker on the specified date. PERQUISITES EXEMPT FROM INCOME TAX Some instances of perquisites exempt from tax are given below:Provision of medical facilities:- Value of medical treatment in any hospital maintained by the Government or any local authority or approved by the Chief Commissioner of Income-tax. Besides, any sum paid by the employer towards medical reimbursement other than as discussed above is exempt up to Rs.15,000/-.Perquisites allowed outside India by the Government to a citizen of India for rendering services outside India.Rent free official residence provided to a Judge of High Court or Supreme Court or an Official of Parliament, Union Minister or Leader of Opposition in Parliament.No perquisite shall arise if interest free/concessional loans are made available for medical treatment of specified diseases in Rule 3A or where the loan is petty not exceeding in the aggregate Rs.20, 000/-No perquisite shall arise in relation to expenses on telephones including a mobile phone incurred on behalf of the employee by the employer.

ALLOWANCESAllowance is defined as a fixed quantity of money or other substance given regularly in addition to salary for meeting specific requirements of the employees. As a general rule, all allowances are to be included in the total income unless specifically exempted. Exemption in respect of following allowances is allowable to the exempt mentioned against each:-House Rent Allowance: - Provided that expenditure on rent is actually incurred, exemption available shall be the least of the following: HRA received. Rent paid less 10% of salary. 40% of Salary (50% in case of Mumbai, Chennai, Kolkata, and Delhi) Salary here means Basic + Dearness Allowance, if dearness allowance is provided by the terms of employment. Leave Travel Allowance: The amount actually incurred on performance of travel on leave to any place in India by the shortest route to that place is exempt. This is subject to a maximum of the air economy fare or AC 1st Class fare (if journey is performed by mode other than air) by such route, provided that the exemption shall be available only in respect of two journeys performed in a block of 4 calendar years.Certain allowances given by the employer to the employee are exempt u/s 10(14). All these exempt allowance are detailed in Rule 2BB of Income-tax Rules and are briefly given below: For the purpose of this, following allowances are exempt, subject to actual expenses incurred: Allowance granted to meet cost of travel on tour or on transfer. Allowance granted on tour or journey in connection with transfer to meet the daily charges incurred by the employee. Allowance granted to meet conveyance expenses incurred in performance of duty, provided no free conveyance is provided. Allowance granted to meet expenses incurred on a helper engaged for performance of official duty. Academic, research or training allowance granted in educational or research institutions. Allowance granted to meet expenditure on purchase/ maintenance of uniform for performance of official duty.

The following allowances have been prescribed as exempt, according to the act:-

Type of AllowanceAmount exempt

(i) Special CompensatoryRs.800 common for various

Allowance for hillyareas of North East, Hilly areas

areas or high altitudeof U.P., H.P. & J&K and Rs.

allowance or climate7000 per month for Siachen area

Allowance.of J&K and Rs.300 common

for all places at a height of 1000

mts or more other than the

Above places.

(ii)Border area allowanceVarious amounts ranging from

or remote areaRs.200 per month to Rs.1,300

allowance or a difficultper month are exempt for

area allowance orvarious areas specified in

disturbed areaRule 2BB.

Allowance.

(iii)Tribal area/ScheduleRs.200 per month.

area/Agency area

allowance available in

M.P., Assam, U.P.,

Karnataka, West

Bengal, Bihar, Orissa,

Tamilnadu, Tripura

(iv)Any allowance granted70% of such allowance upto a

to an employee workingmaximum of Rs. 10,000 per

in any transport systemMonth.

to meet his personal

expenditure during duty

performed in the course

of running of such

transport from one

Place to another place.

Type of AllowanceAmount exempt

(i)Special CompensatoryRs.800 common for various

Allowance for hillyareas of North East, Hilly areas

areas or high altitudeof U.P., H.P. & J&K and Rs.

allowance or climate7000 per month for Siachen area

Allowance.of J&K and Rs.300 common

for all places at a height of 1000

mts or more other than the

Above places.

(ii)Border area allowanceVarious amounts ranging from

or remote areaRs.200 per month to Rs.1,300

allowance or a difficultper month are exempt for

area allowance orvarious areas specified in

disturbed areaRule 2BB.

Allowance.

(iii)Tribal area/ScheduleRs.200 per month.

area/Agency area

allowance available in

M.P., Assam, U.P.,

Karnataka, West

Bengal, Bihar, Orissa,

Tamilnadu, Tripura

(iv)Any allowance granted70% of such allowance upto a

to an employee workingmaximum of Rs. 10,000 per

in any transport systemMonth.

to meet his personal

expenditure during duty

performed in the course

of running of such

transport from one

Place to another place.

(v)Children educationRs.100 per month per child upto

Allowance.a maximum 2 children.

(vi)Allowance granted toRs.300 per month per child upto

meet hostel expenditurea maximum two children.

on employees child.

(vii)Compensatory fieldRs.2600 per month.

area allowance

available in various

areas of Arunachal

Pradesh, Manipur

Sikkim, Nagaland,

H.P., U.P. & J&K.

(viii)Compensatory modifiedRs.1,000 per month

field area allowance

available in specified

areas of Punjab,

Rajasthan, Haryana,

U.P., J&K, H.P., West

Bengal & North East.

(ix)Counter insurgencyRs.3,900 Per month

allowance to members

of Armed Forces.

(x)Transport AllowanceRs.800 per month.

granted to an employee

to meet his expenditure

for the purpose of

commuting between the

place of residence &

Duty.

(xi)Transport allowanceRs.1600 per month.

granted to physically

disabled employee for

the purpose of commutingbetween place of duty and residence

Types of allowance Amount exempt(xii)Underground allowanceRs.800 per month.

granted to an employee

working in under ground

Mines.

(xiii)Special allowance in theRs.1,060 p.m. (for altitude of

nature of high altitude9000-15000 ft.) Rs.1,600 p.m.

allowance granted to(For altitude above 15000 ft.)

members of the armed

Forces.

(xiv)Any special allowanceRs. 4,200/- p.m.

granted to the members

of the armed forces in

the nature of special

compensatory highly

active field area

allowance

(xv)Special allowanceRs. 3,250/- p.m.

granted to members of

armed forces in the

nature of island duty

Allowance.

(in Andaman & Nicobar

& Lakshadweep Group

of Islands)

OVERVIEW OF INCOME FROM HOUSE PROPERTYUnder the Income Tax Act what is taxed under the head Income from House Property is the inherent capacity of the property to earn income called the Annual Value of the property. The above is taxed in the hands of the owner of the property.

COMPUTATION OF ANNUAL VALUE

(i) GROSS ANNUAL VALUE(G.A.V.) is the highest of

(a) Rent received or receivable

(b) Fair Market Value.

(c) Municipal valuation.

(If however, the Rent Control Act is applicable, the G.A.V. is the standard rent or rent received, whichever is higher).

It may be noted that if the let out property was vacant for whole or any part of the previous year and owing to such vacancy the actual rent received or receivable is less than the sum referred to in clause (a) above, then the amount actually received/receivable shall be taken into account while computing the G.A.V. If any portion of the rent is unrealisable, (condition of unrealisability of rent is laid down in Rule 4 of I.T. Rules) then the same shall not be included in the actual rent received/receivable while computing the G.A.V.

(ii) NET VALUE (N.A.V.) is the GAV less the municipal taxes paid by the owner. Provided that the taxes were paid during the year.

(iii) ANNUAL VALUE is the N.A.V. less the deductions available u/s 24.

DEDUCTIONS U/S 24:- Are exhaustive and no other deductions are available:- (i) A sum equal to 30% of the annual value as computed above. (ii) Interest on money borrowed for acquisition/construction/ repair/renovation of property is deductible on accrual basis. Interest paid during the pre construction/acquisition period will be allowed in five successive financial years starting with the financial year in which construction/acquisition is completed. This deduction is also available in respect of a self occupied property and can be claimed up to maximum of Rs.30000/-. The Finance Act, 2001 had provided that w.e.f. A.Y. 2002-03 the amount of deduction available under this clause would be available up to Rs.1,50,000/- in case the property is acquired or constructed with capital borrowed on or after 1.4.99 and such acquisition or construction is completed before 1.4.2003. The Finance Act 2002 has further removed the requirement of acquisition/ construction being completed before 1.4.2003 and has simply provided that the acquisition/construction of the property must be completed within three years from the end of the financial year in which the capital was borrowed.

SOME NOTABLE POINTSIn case of oneself occupied property, the annual value is taken as nil. Deduction u/s 24 for interest paid may still be claimed there from. The resulting loss may be set off against income under other heads but cannot be carried forward.If more than one property is owned and all are used for self occupation purposes only, then any one can be opted as self occupied, the others are deemed to be let out.Annual value of one house away from workplace which is not let out can be taken as NIL provided that it is the only house owned and it is not let out.If a let out property is partly self occupied or is self occupied for a part of the year, then the value in proportion to the portion of self occupied property or period of self occupation, as the case may be is to be excluded from the annual value.From Assessment year 1999-2000 onwards, an assessee who apart from his salary income has loss under the head Income from house property, may furnish the particulars of the same in the prescribed form to his Drawing and Disbursing Officer who shall then take the above loss also into account for the purpose of TDS from salary.A new section 25B has been inserted with effect from assessment year 2001-2002 which provides that where the assessee, being the owner of any property consisting of any buildings or lands there to which may have been let to a tenant, receives any arrears of rent not charged to income tax for any previous year, then such arrears shall be taxed as the income of the previous year in which the same is received after deducting there from a sum equal to 30% of the amount of arrears in respect of repairs/collection charges. It may be noted that the above provision shall apply whether or not the assessee remains the owner of the property in the year of receipt of such arrears.PROPERTY INCOME EXEMPT FROM TAX Annual value of any one palace of an ex-ruler Property income of a local authority university/ educational institution approved scientific research association political party Property used for own business or profession. One self occupied property House property held for charitable purposes

OVERVIEW OF CAPITAL GAINSCAPITAL GAINS

Profits or gains arising from the transfer of a capital asset during the previous year are taxable as Capital Gains of the Income Tax Act. The taxability of capital gains is in the year of transfer of the capital asset.

CAPITAL ASSET

As defined in section 2(14) of the Income Tax Act, it means property of any kind held by the assessee except:

(a) Stock in trade, consumable stores or raw materials held for the purpose of business or profession.

(b) Personal effects, being moveable property (excluding Jewellery, archaeological collections, drawings, paintings, sculptures or any other work of art) held for personal use.

(c) Agricultural land, except land situated within or in area upto 8 kms, from a municipality, Municipal Corporation, notified area committee, town committee or a cantonment board with population of at least 10,000.

(d) Six and half percent Gold Bonds, National Defence Gold Bonds and Special Bearer Bonds.

TYPES OF CAPITAL GAINS

When a capital asset is transferred by an assessee after having held it for at least 36 months, the Capital Gains arising from this transfer are known as Long Term Capital Gains. In case of shares of a company or units of UTI or units of a Mutual Fund, the minimum period of holding for long term capital gains to arise is 12 months. If the period of holding is less than above, the capital gains arising there from are known as Short Term Capital Gains.

COMPUTATION OF CAPITAL GAINS Capital gain is computed by deducting from the full value of consideration, for the transfer of a capital asset, the following:-(a) Cost of acquisition of the asset(COA):- In case of Long Term Capital Gains, the cost of acquisition is indexed by a factor which is equal to the ratio of the cost inflation index of the year of transfer to the cost inflation index of the year of acquisition of the asset. Normally, the cost of acquisition is the cost that a person has incurred to acquire the capital asset. However, in certain cases, it is taken as following: (i) When the capital asset becomes a property of an assessee under a gift or will or by succession or inheritance or on partition of Hindu Undivided Family or on distribution of assets, or dissolution of a firm, or liquidation of a company, the COA shall be the cost for which the previous owner acquired it, as increased by the cost of improvement till the date of acquisition of the asset by the assessee.

(ii) When shares in an amalgamated Indian company had become the property of the assessee in a scheme of amalgamation, the COA shall be the cost of acquisition of shares in the amalgamating company.

(iii) Where the capital asset is goodwill of a business, tenancy right, stage carriage permits or loom hours the COA is the purchase price paid, if any or else nil.

(iv) The COA of rights shares is the amount which is paid by the subscriber to get them. In case of bonus shares, the COA is nil.

(v) If a capital asset has become the property of the assessee before 1.4.81, the assessee may choose either the fair market value as on 1.4.81 or the actual cost of acquisition of the asset as the COA. (b) Cost of improvement, if any such cost was incurred. In case of long term capital assets, the indexed cost of improvement will be taken.

(c) Expenses connected exclusively with the transfer such as brokerage etc.

DEDUCTIONS UNDER INCOME TAXThe Income Tax Act provides that on determination of the gross total income of an assessee after considering income from all the heads, certain deductions there from may be allowed. These deductions detailed in chapter VIA of the Income Tax Act must be distinguished from the exemptions provides in Section 10 of the Act. While the former are to be reduced from the gross total income, the latter do not form part of the income at all.

The chart given below describes the deductions allowable under chapter VIA of the I.T. Act from the gross total income of the assesses having income from salaries.

The Income Tax Act allows various Income Tax Exemptions for Salaried Employees which are very effective in saving taxes. A salaried employee would be required to intimate his employer that he is claiming these income tax exemptions available for Salaried Employees and then the Employer would compute the Tax on the balance income as per the Income Tax Slabs and deduct TDS on Salary accordinglyThe TDS deducted from Salary Income is reflected in the Form 16 which is required to be given by the employer to all his employees for deduction of TDS during the financial year. The TDS so deducted is also reflected in the Form 26AS which can be downloaded online by the employees themselves:-

1. HRA Exemption for Salaried EmployeesMany employers give House Rent Allowance (HRA) to their employees for them to reside at a good place. A portion of the House Rent Allowance given by an employer to an employee is exempted from the levy of the Income Tax and Income Tax is only levied on the remaining part.HRA Exemption is one of the most useful income tax exemptions for Salaried Employees as it can be easily claimed and the amount of exemption allowed is also large.

2. Income Tax Exemption on Leave Travel AllowanceMany employers also give allowances to their employees to go on a vacation with their respective families. The amount given by the employer to an employee to go on a vacation is exempted from the levy of tax to a certain extent provided that the amount given was for a vacation in India only.Leave Travel Allowance is also an effective income tax exemption for Salaried Employees. However, this amount can only be claimed if the employee actually goes on a vacation as bills for the same would be required to be furnished.

3. Exemption on Encashment of Leaves for Salaried EmployeesMost employers give all their employees a certain no. of days which can be claimed as leaves. However, in case a person does not claim these leaves, many employers also give their employees the option for en-cashing these leaves i.e. the employers pays extra to the employees for the leaves which were allowed to be taken but were not taken.This amount received as Leave Encashment is also allowed to be claimed as an exemption up to a certain extent.

4. Tax Exemption from Pension Income for Salaried EmployeesOn retirement of an employee, many employers pay a pension to their employees. Sometimes, the employer pays pension from his own pocket and in some cases, the employer purchases an annuity and then the pension is being paid by the organization from whom the annuity has been purchased.The Pension can be of 2 types i.e. Commuted and Uncommuted. In commuted pension, the whole amount of pension is received in lump-sum whereas in Uncommuted Pension, the amount is paid in installments at regular intervals.Irrespective of the type of Pension, Income Tax Exemption is given in both types of pensions up to a certain limit.

5. Income Tax Exemption on Gratuity for Salaried EmployeesGratuity is a gift made by the employer to his employee in appreciation of the past services rendered by the employee. Gratuity can either be received by:-1. The employee himself at the time of his retirement2. The legal heir at the time of the death of the employeeFor the purpose of computing Income Tax Exemptions for Salaried Employees who have received gratuity, the employees can be segregated into 3 parts and then the exemption is allowed depending on the category they are into:-1. Govt. Employees and employees of Local Authorities2. Employees covered under the Payment of Gratuity Act, 19723. Employees not covered in any of the 2 above.

6. Income Tax Exemption on VRS ReceivedMany employees opt for Voluntary Retirement before the actual age of retirement (i.e. 60 years). In such cases, the employer sometimes gives some money to the employee on his voluntary retirement.The amount received or receivable by the employee on voluntary retirement under the golden handshake scheme is exempted under Section 10(10C)

7. Income Tax Exemption for PerquisitesSome employers also give their employees various perquisites/facilities like Car, Mobile phones, Rent Free accommodation.Such perquisites are not fully tax free. A specific value of such facilities is allowed as an exemption and value of the balance facilities allowed is allowed as an exemption.

8. Exemption of Various AllowancesVarious other allowances like Transport Allowance, Children Education Allowance are also allowed as Income Tax Exemptions to Salaried Employees but only up to a certain limit.

RELIEF UNDER SECTION 89 It is available to an employee when he receives salary in advance or in arrear or when in one financial year, he receives salary of more than 12 months or receives profits in lieu of salary. W.e.f. 1.6.89, relief u/s 89(1) can be granted at the time of TDS from employees of all companies, co-operative societies, universities or institutions as well as govt./public sector undertakings, the relief should be claimed by the employee in Form No. 10E and should be worked out as explained in Rule 21A of the Income Tax Rules.

The following investments/payments are inter alia eligible for deduction u/s 80C:-

NATURE OFREMARKS

INVESTMENT

Life Insurance PremiumFor individual, policy must be in

the name of self or spouse or

Any childs name.

Sum paid under contract forFor individual, on life of self,

deferred annuityspouse or any child of such

Individual.

Sum deducted from salaryPayment limited to 20% of

payable to Govt. Servant forSalary.

securing deferred annuity for

self, spouse or child

Contribution made under

Employees Provident Fund

Scheme

Contribution to PPFFor individual, can be in the

name of self/spouse, any child

Contribution by employee to a

Recognized Provident Fund.

Subscription to any notified

securities/notified deposits

Scheme.

Subscription to any notifiedE.g. NSC VIII issue.

Savings certificates.

Contribution to Unit Linkede.g. Dhanrakhsa 1989

Insurance Plan of LIC Mutual

Fund

Contribution to notified deposit

scheme/Pension fund set up by

The National Housing Bank.

Certain payment made by way Condition has been laid that in

of installment or part paymentcase the property is transferred

of loan taken for purchase/before the expiry of 5 years

construction of residentialfrom the end of the financial

House property.year in which possession of

such property is obtained by him,

the aggregate amount of

deduction of income so allowed

for various years shall be liable

To tax in that year.

Subscription to units of a

Mutual Fund notified u/s

10(23D)

Subscription to deposit scheme

of a public sector company

engaged in providing housing

Finance.

Subscription to equity shares/

debentures forming part of any

approved eligible issue of

capital made by a public

company or public financial

Institutions.

Tuition fees paid at the time ofAvailable in respect of any two

admission or otherwise to anyChildren.

school, college, university or

other educational institution

situated within India for the

purpose of full time education.

Any term deposit for a fixedThis has been included in

period of not less than five yearsSection 80C by the Finance Act,

With the scheduled bank.2006.

Subscription to notified bondsThis has been included in

issued by NABARDSection 80C by the Finance Act,

2007 and has come into effect

from 1.4.2008.

Payment made into an accountThis has been introduced by

under the Senior CitizensFinance Act, 2008 and shall

Savings Scheme Rules, 2004Come into effect from 1.4.2009.

Payment made as five yearThis has been introduced by

time deposit in an account underFinance Act, 2008 and shall

the Post Office Time DepositCome into effect from 1.4.2009.

Rules, 1981

PERMANENT ACCOUNT NUMBER

WHAT IS P.A.N.

P.A.N. or Permanent Account Number is a number allotted to a person by the Assessing Officer for the purpose of identification. P.A.N. of the new series has 10 alphanumeric characters and is issued in the form of laminated card.

WHO SHALL APPLY FOR P.A.N.

Section 139A of the Income Tax Act provides that every person whose total income exceeds the maximum amount not chargeable to tax or every person who carries on any business or profession whose total turnover or gross receipts exceed Rs.5 Lakhs in any previous year or any person required to file a return of income u/s 139(4A) shall apply for PAN. Besides, any person not fulfilling the above conditions may also apply for allotment of PAN. With effect from 01.06.2000, the Central Government may by notification specify any class/classes of person including importers and exporters, whether or not any tax is payable by them, and such persons shall also then apply to the Assessing Officer for allotment of PAN.

W.e.f. 01.04.2006 a person liable to furnish a return of fringe benefits under the newly introduced section 115WD of the I.T. Act is also required to apply for allotment of PAN. Of course, if such a person already has been allotted a PAN he shall not be required to obtain another PAN.

The Finance Act, 2006 has provided that for the purpose of collecting any information, the Central Govt. may by way of notification specify any class or classes of persons for allotment of PAN and such persons shall apply to the Assessing Officer within the prescribed time. Provision for allotment of PAN has also been introduced w.e.f.1.6.2006 as per which the assessing officer may allot a Permanent Account No. to any person whether or not any tax is payable by him having regard to the nature of transactions.TRANSACTIONS IN WHICH QUOTING OF PAN IS MANDATORY

Purchase and sale of immovable property. Purchase and sale of motor vehicles. Transaction in shares exceeding Rs.50000. Opening of new bank accounts. Fixed deposits of more than Rs.50000.

Application for allotment of telephone connections. Payment to hotels exceeding Rs.25000. Provided that till such time PAN is allotted to a person, he may quote his General Index register Number.

HOW TO APPLY FOR PAN

Application for allotment of PAN is to be made in Form 49A. Following points must be noted while filling the above form:-

i) Application Form must be typewritten or handwritten in black ink in BLOCK LETTERS.

ii) Two black & white photographs are to be annexed.

iii) While selecting the Address for Communication, due care should be exercised as all communications thereafter would be sent at indicated address. iv) In the space given for Fathers Name, only the fathers name should be given. Married ladies may note that husbands name is not required and should not be given. v) Due care should be exercised to fill the correct date of birth.

vi) The form should be signed in English or any of the Indian Languages in the 2 specified places. In case of thumb impressions attestation by a Gazetted Officer is necessary.

TAXABILITY OF RETIREMENT BENEFITSINTRODUCTION

On retirement, an employee normally receives certain retirement benefits. Such benefits are taxable under the head Salaries as profits in lieu of Salaries as provided in Section 17(3). However, in respect of some of them, exemption from taxation is granted u/s 10 of the Income Tax Act, either wholly or partly. These exemptions are described below:-

GRATUITY (Sec. 10(10)):

(i) Any death cum retirement gratuity received by Central and State Govt. employees, Defence employees and employees in Local authority shall be exempt.

(ii) Any gratuity received by persons covered under the Payment of Gratuity Act, 1972 shall be exempt subject to following limits:-

(a) For every completed year of service or part thereof, gratuity shall be exempt to the extent of fifteen days Salary based on the rate of Salary last drawn by the concerned employee.

(b) The amount of gratuity as calculated above shall not exceed Rs.3, 50,000(w.e.f.24.9.97).

(iii) In case of any other employee, gratuity received shall be exempt subject to the following limits:-

(a) Exemption shall be limited to half month salary (based on last 10 months average) for each completed year of service.

(b) Rs.3.5 Lakhs whichever is less.

Where the gratuity was received in any one or more earlier previous years also and any exemption was allowed for the same, then the exemption to be allowed during the year gets reduced to the extent of exemption already allowed, the overall limit being Rs. 3.5 Lakhs.

Gratuity payment to a widow or other legal heirs of any employee who dies in active service shall be exempt from income tax(Circular No. 573 dated 21.8.90). Payment of Gratuity (Amendment) Bill, 2010 has proposed to increase the limit to Rs. 10, 00,000.

COMMUTATION OF PENSION (SECTION 10(10A)):

(i) In case of employees of Central & State Govt. Local Authority, Defence Services and Corporation established under Central or State Acts, the entire commuted value of pension is exempt.

(ii) In case of any other employee, if the employee receives gratuity, the commuted value of 1/3 of the pension is exempt, otherwise, the commuted value of of the pension is exempt.

Judges of S.C. & H.C. shall be entitled to exemption of commuted value upto of the pension (Circular No. 623 dated 6.1.1992).

LEAVE ENCASHMENT (Section 10(10AA)):

(i) Leave Encashment during service is fully taxable in all cases, relief u/s 89(1) if applicable may be claimed for the same. (ii) Any payment by way of leave encashment received by Central & State Govt. employees at the time of retirement in respect of the period of earned leave at credit is fully exempt.

(iii) In case of other employees, the exemption is to be limited to the least of following: (a) Cash equivalent of unutilized earned leave (earned leave entitlement cannot exceed 30 days for every year of actual service) (b) 10 months average salary. (c) Leave encashment actually received. This is further subject to a limit of Rs.3, 00,000 for retirements after 02.04.1998.

(iv) Leave salary paid to legal heirs of a deceased employee in respect of privilege leave standing to the credit of such employee at the time of death is not taxable.

RETRENCHMENT COMPENSATION:-Retrenchment compensation received by a workman under the Industrial Disputes Act, 1947 or any other Act or Rules is exempt subject to following limits:-

(i) Compensation calculated @ fifteen days average pay for every completed year of continuous service or part thereof in excess of 6 months.

(ii) The above is further subject to an overall limit of Rs.5, 00,000 for retrenchment on or after 1.1.1997 (Notification No. 10969 dated 25.6.99).

COMPENSATION ON VOLUNTARY RETIREMENT OR GOLDEN HANDSHAKE (Sec. 10(10C)):

(i) Payment received by an employee of the following at the time of voluntary retirement, or termination of service is exempt to the extent of Rs. 5 Lakh

(a) Public Sector Company.

(b) Any other company.

(c) Authority established under State, Central or Provincial Act.

(d) Local Authority.

(e) Co-operative Societies, Universities, IITs and Notified Institutes of Management.

(f) Any State Government or the Central Government.

(ii) The voluntary retirement Scheme under which the payment is being made must be framed in accordance with the guidelines prescribed in Rule 2BA of Income Tax Rules. In case of a company other than a public sector company and a co-operative society, such scheme must be approved by the Chief Commissioner/Director General of Income-tax. However, such approval is not necessary from A.Y. 2001-2002 onwards.

(iii) Where exemption has been allowed under above section for any Assessment year, no exemption shall be allowed in relation to any other Assessment year. Further, where any relief u/s 89 for any Assessment year in respect of any amount received or receivable or voluntary retirement or termination of service has been allowed, no exemption under this clause shall be allowed for any Assessment year.

PAYMENT FROM PROVIDENT FUND

Any payment received from a Provident Fund, (i.e. to which the Provident Fund Act, 1925 applies) is exempt. Any payment from any other provident fund notified by the Central Govt. is also exempt. The Public Provident Fund (PPF) established under the PPF Scheme, 1968 has been notified for this purpose. Besides the above, the accumulated balance due and becoming payable to an employee participating in a Recognized Provident Fund is also exempt to the extent provided in Rule 8 of Part A of the Fourth Schedule of the Income Tax Act.

PAYMENT FROM APPROVED SUPERANNUATION FUND:-Payment from an Approved Superannuation Fund will be exempt provided the payment is made in the circumstances specified in the section viz. death, retirement and incapacitation.

EXPATRIATES WORKING IN INDIA

In case of foreign expatriate working in India, the remuneration received by him, assessable under the head Salaries, is deemed to be earned in India if it is payable to him for service rendered in India as provided in of the Income Tax Act. The explanation to the aforesaid law clarifies that income in the nature of salaries payable for services rendered in India shall be regarded as income earned in India. Further, from assessment year 2000-2001 onwards income payable for the leave period which is preceded and succeeded by services rendered in India and forms part of the service contract shall also be regarded as income earned in India. Thus, irrespective of the residential status of the expatriate employee, the amount received by him as salary for services rendered in India shall be liable to tax in India being income accruing or arising in India, regardless of the place where the salary is actually received. However, there are certain exceptions to the rule which are briefly discussed below:-

Remuneration of an employee of a foreign enterprise is exempt from tax if his stay in India is less than 90 days in aggregate during the financial year. This is subject to further relaxation under the provisions of Double Taxation Avoidance Agreement entered into by India with the respective country. Remuneration received by a foreign expatriate as an official of an embassy or high commission or consulate or trade representative of a foreign state is exempt on reciprocal basis Remuneration from employment on a foreign ship provided the stay of the employee does not exceed 90 days in the financial year Training stipends received from foreign government.

DOUBLE TAXATION AVOIDANCE AGREEMENT The Central Government acting under the authority of Law has entered into DTAAs with more than 85 countries. Such treaties serve the purpose of providing protection to the tax payers from double taxation. As per section 90in relation to an assesse to whom any DTAA applies, the provisions of the Act shall apply only to the extent they are more beneficial to the assesse. The provisions of these DTAAs thus prevail over the statutory provisions.INDIAN RESIDENTS POSTED ABROADIndian residents who have taken up employment in countries with which India has got DTAA are entitled to the benefit of the DTAA entered into by India with the country of employment. Accordingly, their tax liability is decided.Indian expatriates working abroad have been granted several special tax concessions under the Act. Professors, teachers and research workers working abroad in any university or any educational institutions are entitled to deduction of 75% of their foreign remuneration provided the same is brought into India in convertible foreign exchange within a period of 6 months from the end of the previous year or such extended time as may be allowed(Sec. 80-R). Similarly, in case of an Indian Citizen having received remuneration for services rendered outside India, 75% of his foreign remuneration is deductible from his taxable income provided such remuneration is brought to India in convertible foreign exchange within the time specified above.From assessment year 2001-2002 onwards, there has been a change in the amount of deduction available under sections 80R/ 80RRA. For details, reference may be made to the sections concerned of the Income Tax Act. No deduction u/s 80R/80RRA shall be allowed in respect of A.Y. 2005-06 onwards.It may also be mentioned here that as per section income chargeable under the head Salary payable by the Government to a citizen of India for services rendered outside India is deemed to accrue or arise in India. However, allowances or perquisites paid or allowed outside India by the Govt. to a citizen of India for rendering services abroad is exempt from taxation u/s.INCOME TAX CLEARANCE CERTIFICATE

An expatriate before leaving the territory of India is required to obtain a tax clearance certificate from a competent authority stating that he does not have any outstanding tax liability. Such a certificate is necessary in case the continuous presence in India exceeds 120 days. An application is to be made in a prescribed form to the Income Tax Authority having jurisdiction for assessment of the expatriate to grant a tax clearance certificate. This is to be exchanged for final tax clearance certificate from the foreign section of the Income Tax Department. Tax Clearance certificate is valid for a period of 1 month from the date of issue and is necessary to get a confirmed booking from an airline or travel agency and may be required to be produced before the customs authorities at the airport.

INCOME TAX ON FRINGE BENEFITSINTRODUCTION:-

The Finance Act, 2005 has introduced a new tax called Income-tax on fringe benefits w.e.f. 01.04.2006. This shall be in the form of additional income tax levied on fringe benefits provided or deemed to have been provided by an employer to his employees during the previous year.

RATE OF TAX:-

The tax on fringe benefits shall be levied at the rate of 30% on the value of fringe benefits provided.

LIABILITY TO PAY:-

The liability to pay this tax is to be borne by the employer including:-

i) A company

ii) A firm

iii) An association of persons or body of individuals excluding any fund or trust or institution eligible for exemption u/s 10(23C) or 12AA.

iv) a local authority

v) an artificial juridical person

WHAT IS INCLUDED IN FRINGE BENEFITS:-

Fringe benefits have been defined as including any consideration for employment provided by way of

1. Any privilege, service, facility or amenity provided by an employer directly or indirectly including reimbursement2. Any free or concessional ticket provided by the employer for private journeys of his employees or their family members.

3. Any contribution by the employer to an approved superannuation fund for employees.

4. Any specified security or sweat equity shares allotted/ transferred, directly or indirectly by the employers free of cost or at concessional rate to his employees. The detailed provisions in respect of this are included in Chapter XII H of the I.T. Act.

Further, fringe benefits shall be deemed to have been provided if the employer has incurred any expenses or made any payments for various purposes namely, entertainment, provision of hospitality, conference, sales promotion including publicity, employees Further, fringe benefits shall be deemed to have been provided if the employer has incurred any expenses or made any payments for various purposes namely, entertainment, provision of hospitality, conference, sales promotion including publicity, employees welfare, conveyance, tour & travel, use of hotel, boarding & lodging etc.Various provisions relating to income tax on fringe benefits have been modified by the Finance Act, 2006. Exceptions in respect of certain expenditures have been introduced including expenditure incurred on distribution of free/concessional samples and payments to any person of repute for promoting the sale of goods or services of the business of the employer. Similarly, it has been proposed that expenditure incurred on providing free or subsidized transport or any such allowance provided by the employer to his employees for journeys from residence to the place of work shall not be part of fringe benefits. Another significant amendment is regarding the contribution by an employer to an approved superannuation fund to the extent of Rs.1 lakh per employee which shall not be liable to fringe benefit tax. Further, in the case of some other expenses incurred such as expenses incurred on tour and travel, lower rates for valuation of fringe benefits @ 5% have been provided for. The Finance Act, 2008 has introduced further exemption in respect of certain expenditures from the purview of Fringe Benefit Tax. These include payments through non-transferable electronic meal cards, provision of crche facility, organizing sports events or sponsoring a sportsman being an employee. These provisions shall come into effect from A.Y. 2009-10 onwards.The Finance act, 2009 has withdrawn the Fringe Benefit Tax. Thus, the FBT stands abolished w.e.f. A.Y. 2010-11 and now such perquisites are taxable in hands of employees.