India Tax Study Material

Training manual
India Tax for New Hires: 2011-12 India tax returns April 2012
Human Capital India Tax

Training Manual
Dear participant, Welcome to your career at Human Capital - Global Shared Services, Ernst & Young Pvt. Ltd. We are excited to have you join us. This course of learning is designed to lay the foundation for your work in India individual taxation. The objective is to help you become efficient and independent preparers of India individual income tax returns. This can be achieved only by working independently and by taking personal responsibility for your own career development. The following are some of your responsibilities as a participant Be punctual. Please participate! Pay attention to what is being taught and ask relevant questions. Keep your mobile phones switched off. Make sure you keep up from Day 1. Material for each new day builds on material seen in previous days in a logical progression. If you fall behind it will be difficult to catch up. Take your course booklet home each night and read it through so you keep up and refresh your knowledge. Do not hesitate to ask for help or to say that you have not understood what is being discussed during the sessions. As a learner you will have many questions. All appropriate questions must be resolved by the person leading the session or by the Technical Mentor or Go-To person assigned to you. Make a list of all your questions and ask them once rather than going to them every time you come across a question. Theory sessions will be followed by working on case studies. These exercises need to be done independently. Mistakes are mistakes only if you do not learn from them. Please remember it is better to make a mistake now and learn from it, rather than copying another persons work. If you do not work independently right from the start, your progress in India tax will be too slow. Nurture a spirit of inquiry and research which is essential in India tax. We appreciate that you may want to help your batch mates but please note this does not help them in the long run. In fact it hinders them. Participants need to do their own work to discover in which particular areas they need additional help. Do not sit in the pantry or waste time on the internet for long periods of time. Please do not miss any sessions and plan your personal schedules accordingly. If, due to unavoidable reasons, you will not be coming to the office on a particular day, leave a voice mail to Bramar S Murthy, Deepika Hoblidar and Nagaraj Saggamagunti. Do not send the message through a friend or send a text message.

Training Manual
Basic Provisions .......................................................................................................... 1 Heads of Income .......................................................................................................... 3 Income from Salary ..................................................................................................... 4 Income from House Property ..................................................................................... 12 Income from Capital Gains ......................................................................................... 14 Income from Other Sources ....................................................................................... 20 Deductions from Gross Total Income .......................................................................... 21 Set off and carry forward of losses, Clubbing of income ............................................... 22 Modes of Payment of Taxes ....................................................................................... 23 Employee Stock Options (ESOP) ............................................................................... 26 Concept of Double Taxation Avoidance Agreements .................................................... 30 Typical Tax Compliance Cycle .................................................................................... 36 Quality and Risk Issues .............................................................................................. 42

Training Manual
Basic Provisions
Assessment Year and Previous Year (Section 3) Assessment Year means the period of 12 months commencing from the 1st day of April following the end of the respective financial year. Previous year means the financial year immediately preceding the assessment year. Therefore, for the financial year 2010-11, the Assessment Year would be April 1, 2011 to March 31, 2012 (referred to as Assessment Year 2011-12). The Previous Year would be April 1, 2010 to March 31, 2011 (referred to as Previous Year 2010-11 or Tax Year 2010-11). Residential Status (Section 6) An individual is treated as Resident in India during a tax year ie, April 1 to March 31, if he satisfies any of the following two basic conditions: He stays in India during the tax year for 182 days or more; or He stays in India for 60 days or more during the tax year and 365 or more during the 4 tax years immediately preceding the relevant tax year (in case of an Indian citizen who leaves on employment overseas, or an Indian citizen or Person of Indian Origin who being outside India, comes on a visit to India, the 60 days are replaced with 182 days).
An individual is treated as a Non-resident, if he does not satisfy all the basic conditions mentioned above. A resident individual is treated as a Not Ordinarily Resident if he satisfies either of the following additional conditions has been Non-resident in India in nine out of the ten previous years preceding that year; or has during the seven previous years preceding that year been in India for a period of seven hundred and twenty nine days or less.
Examples on residency Example 1 X, a foreign national, has come to India on June 25, 2010 and would be staying in India continuously till March 31, 2011. During the past ten tax years he has come to India for 80 days in each year. What would the individuals residential status be for the tax year 2010-11? Step 1 Determine if he is Resident Since the individual would be staying in India for more than 182 days in the tax year 2010-11 (June 25, 2010 to March 31, 2011), he satisfies one of the basic conditions and would qualify as Resident for the tax year 2010-11. Step 2 Determine if he is a Not Ordinarily Resident As the resident individual has not stayed in India for more than 729 days in the past 7 years, he satisfies one of the additional conditions. Thus, he would qualify as a Not Ordinarily Resident for the tax year 2010-11.
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Example 2 A, an Indian citizen, left India to take up employment with X Inc, USA on August 01, 2010. He has not come back to India till March 31, 2011. Prior to joining X Inc. he has never been out of India. Determine the residential status of A. Step 1 Determine if he is Resident Since A is an Indian citizen going abroad for employment, he would need to stay in India for 182 days to qualify as a Resident for the tax year 2010-11 (refer basic condition - in case of an Indian citizen who leaves on employment overseas, the 60 days are replaced with 182 days). Therefore, since A has stayed in India for less than 182 days in the tax year 2010 - 11, he would qualify as a Non Resident for the tax year 2010-11. Step 2 Determine if he is a Not Ordinarily Resident You only need to go to Step 2, if a person qualifies as Resident. In this case, since the individual qualifies as a Non-resident, Step 2 is Not Applicable. Taxability based on residential status
Resident
Non-resident
Resident
Not Ordinarily Resident
Income received in India; and Income accruing or arising in India; and Income deemed to accrue or arise in India.
Worldwide income
Income received in India; and Income accruing or arising in India; and Income deemed to accrue or arise in India; and Income from business or profession controlled wholly or partly in India.
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Heads of Income
Income is taxed under five heads of income, as follows Salaries; Income from House Property; Profits and gains from business or profession; Capital Gains; and Income from Other Sources (residuary head).
The computation mechanism as well as other provisions under the aforesaid heads (other than Income from business or profession) is discussed in the following pages. For every heads of Income three aspects are very important. They are: Chargeability (i.e. When an income can be considered under this head) Basis Of Charge (i.e. How an income is chargeable under this head) Formats & Provisions (i.e. How much is chargeable under this head)
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Income from Salary Sections 15 to 17 of the Income Tax Act, 1961, cover the provisions of income under the head Salaries. Broad overview of the provisions relating to Salaries Salary is liable to tax on due or receipt basis, whichever is earlier. In this connection, an income is considered as salary only if it results from an employer-employee relationship as opposed to that of a principal-agent. Judicial precedents1 have held that an employer-employee relationship is akin to a master-servant relationship and is different from that of a principal-agent in the following manner generally a master can tell his servant what to do and how to do it whereas a principal cannot tell his agent how to carry out his instructions; a servant is under more complete control than an agent generally, a servant is a person who not only receives instructions from his master but is subject to his masters right to control the manner in which he carries out those instructions; an agent receives his principals instructions but is generally free to carry out those instructions according to his own discretion.
Therefore, control and supervision is the key character to determine the employer-employee relationship. This especially becomes a matter of essence with regard to international assignments. In addition to the above, please note that salary earned by a partner of a firm from that firm is not regarded as income chargeable under the head Salaries. Taxability of different salary components Taxability of an individual with respect to salary income depends on the residential status of the individual. In case of an individual who qualifies as Non-resident or Not Ordinarily Resident only the income pertaining to services rendered in India is liable to tax in India. Therefore, salary received for services rendered outside India would not be taxable in India (unless the salary is directly received in India). This is based on the deeming provisions, which state that any income for services rendered in India or income for the rest period or leave period which is preceded and succeeded by services rendered in India and forms part of the service contract of employment shall be regarded as Income earned in India and therefore subject to tax in India irrespective of a persons residential status. In view of this, taxability of salary (and the various components) should be evaluated in the light of the residential status in India for the particular tax year. Further, salary is generally divided into 3 key heads Wages and allowances this generally includes all monthly cash remuneration paid by an employer to the employee like base salary, bonus, housing allowance, conveyance allowance, etc. These components are chargeable to tax in full except to the extent specifically exempt (like house rent allowance).
Lakshminarayan Ram Gopal & Sons Ltd vs Govt of Hyderabad (25 ITR 449); Piyare Lal Adishwar Lal vs CIT (40 ITR 17); Ram Prashad vs CIT (86 ITR 122).
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Perquisites this includes all benefits provided by an employer to the employee like company leased accommodation, Interest free/concessional loan, free education, etc. This represents provision of a facility rather than an allowance for expense. These components are offered to tax based on the value prescribed as per the perquisite valuation rules. Profit in lieu of salary this includes non-recurring, one-off payments received by the employee eg joining bonus, compensation for termination of employment, etc.
We have tabulated below some of the regular salary components and their related taxability Basic Salary or Base Salary Hypothetical Taxes or Hypo Tax Salary earned for services rendered in India is fully taxable in India. Hypothetical taxes are a reduction from an employees salary, wherein the notional taxes, had the assignee continued to remain in his home country, is reduced from his salary. The mechanism involved in this is that the assignee is paid salary in his home country net of hypothetical tax and the entire tax liability of the assignee in the home country as well as in the host country is borne by the employer. The employee has no right to claim the amount of Hypo-tax retained by the employer as it is a reduction from salary. The purpose of deducting the notional taxes (hypo tax) is to ensure that the assignee is not disadvantaged due to an international assignment. The same is shown in the example below Home Salary 100,000 Home Notional taxes (40,000) Net Salary 60,000 Based on the example above, had the assignee remained in the home country, the net salary would be 60,000. Even in case of an international assignment, it is ensured that the employees net salary remains the same. Thus, the assignee is protected from any additional taxation.
Tax treatment Hypothetical taxes are netted against base salary and the net amount is offered to tax as there is a reduction in salary and the employee does not have the right to receive the hypothetical tax. Bonus/Incentive pay Bonus is taxable on receipt basis if the same was not taxed earlier on due basis. Further, taxability of the bonus amount should be evaluated keeping in mind the residential status of the assignee as well as the period for which the bonus related to. This is explained further in the case study below.
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Case Study Assignee arrives into India on October 1, 2010 and qualifies as a Not Ordinarily Resident. In March 2011, the assignee receives a bonus of USD 120,000, pertaining to Calendar Year 2010.
The bonus liable to tax in India, for the tax year 2010-11 would be USD 30,000, as follows The bonus pertains to January to December 2010. The proportionate bonus period for which services have been rendered in India is October to December 2010.
Bonus calculation = (120,000*3 months)/12 months House Rent Allowance (HRA) House Rent Allowance is liable to tax in the hands of the employee, subject to the exemption as per Section 10(13A). The exemption is limited to least of the following a) b) c) Allowance actually received Rent paid in excess of 10% of salary. 50% of salary in case of metropolitan cities and 40% in case of other cities
Salary for this purpose includes basic salary as well as dearness allowance, if the terms of employment so provide. Leave Encashment Leave Salary/encashment of earned leave refers to amount received from employer for the unavailed period of earned leave. Leave encashment is liable to tax in the hands of the employee, subject to the exemption as per Section 10(10AA). The exemption is limited to least of the following a) Leave at the credit of employee*Average Salary b) 10* Average Salary c) Maximum of Rs. 3,00,000 d) Actual leave salary Average salary refers to total of Basic salary, Dearness allowance (if it enters into retirement benefits) & commission based on a fixed percentage of turnover achieved by employee for 10 months preceding the date of retirement, divided by 10. Conveyance Allowance Conveyance allowance granted to an employee for the purpose of commuting between the place of his residence and the place of his duty would be exempt upto Rs 800 per month. Amount in excess of Rs 800 would be fully offered to tax. Leave Travel Assistance provided to an employee is fully taxable except to the extent exempt under Section 10(5). The exemption is allowed twice in a
Leave Travel Assistance
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specified block of four calendar years for travel undertaken by the employee and dependent family members for proceeding on leave to any place in India. In this connection, the Leave Travel Assistance exemption is limited to For journeys performed by air - economy fare of the national carrier by the shortest route to the place of destination. For journeys performed by any mode of transport other than by air and the place of origin and destination are connected by rail - Air-conditioned first class rail fare by the shortest route to the place of destination. Where place of origin of journey and destination are not connected by rail the first class or deluxe class fare on such transport by the shortest route to the place of destination, where recognized transport system exists and, where no recognized transport system exists, the air conditioned first class rail fare for such distance.
Where Leave Travel Assistance is unavailed during a block of four calendar years, one Leave Travel Assistance claim may be availed during the first calendar year of the immediately succeeding block of four calendars years. Special Allowances Per Diem Allowances Allowances to meet ordinary daily charges, incurred by an employee, on account of absence from his normal place of duty (whether, granted on tour or in connection with transfer) can be claimed as an exemption under section 10(14) read with Rule 2BB. Relocation Allowance Allowances to meet cost of travel on tour / on transfer can also be claimed as not taxable under section 10(14) read with Rule 2BB. Cost of travel on transfer includes any sum paid in connection with transfer, packing and transportation of personal effects on such transfer However, since the above exemptions are limited to the extent of actual expenditure incurred, it is important to maintain robust documentation to substantiate the claim. As per Section 17(2) of the Act, reimbursement of medical expenses is considered as a taxable perquisite, unless the following conditions are satisfied reimbursement of medical expenses does not exceed Rs 15,000; such medical expenses are incurred by the employee on self or on family members; such reimbursements are supported adequately and appropriately; supporting documents are submitted by the employee, in original and such supporting documents are only for medical items and not for cosmetic or general items.
Medical reimbursement benefit
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Company Leased Accommodation
Company leased/owned accommodation - As per Rule 3 of Income Tax Rules, least of the following would be the value of the rent free unfurnished accommodation which is taken on lease or rent by the employera) b) 15% of the salary Actual rent paid
If the accommodation of owned by the employer following would be the value of the unfurnished accommodation a) b) c) 15% of the salary (for cities having population exceeding 25 lakhs as per 2001 census) 10% of the salary (for cities having population exceeding 10 lakhs as per 2001 census but not exceeding 25 lakhs) 7.5% of the salary (for other places)
Further, in case of transfer, if the employee is provided with an accommodation at the new place of his posting while retaining the accommodation at the other place, the value of perquisite shall be determined only in respect of one accommodation with lower value upto a period of 90 days. However, if the employee continues to retain both the accommodations even after a period of 90 days, the value of perquisite shall be charged for both such accommodations. Hotel stay/ Service apartment - In case the employer provides accommodation in hotel / service apartments, value of the perquisite would be the least of the following. a) b) 24% of the salary Actual cost incurred
However, in case of transfer, if the number of days of stay in hotel / service apartment does not exceed 15 days, the value of the perquisite shall be Nil. Salary for this purpose includes Base salary Dearness Allowance(If considered for retirement benefits) Bonus/incentives Allowances Any other monetary payments Salary for this purpose excludes Dearness allowance unless considered for retirement benefits Employers contribution to provident fund Exempted allowances The value of perquisites referred to in Section 17 of the Income Tax Act. If any amount is recovered from the employee, the same would be reduced for the vale of perquisite determined above.
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In case furnished accommodation is provided, the value of the perquisite would be required to be computed as if it is unfurnished accommodation (as per method provided above) plus 10% of the original cost of the furniture when owned by the employer or actual cost of hiring the furniture. Utilities Actual charges incurred by the employer would be computed as the value of perquisites in respect of the following utilities Electricity Water charges Gas charges Servant wages
If any amount is recovered from the employee, the aforesaid determined value shall be reduced by the amount of recovery.
Motor Car
Motor Car owned or Hired by Employer Where motor car is used partly for official and partly for private purpose and the running and maintenance expenses are met/reimbursed by the employer INR 1800 per month (plus INR 900 if driver is provided) per month if cubic capacity of car is < 1.6 litres INR 2400 per month (plus INR 900 if driver is provided) per month if cubic capacity of car is > 1.6 litres
Where motor car is used partly for official and partly for private purpose and the running and maintenance expenses are fully met by the employee INR 600 per month (plus INR 900 if driver is provided) per month if cubic capacity of car is < 1.6 litres INR 900 per month (plus INR 900 if driver is provided) per month if cubic capacity of car is > 1.6 litres
Where motor car is used only for private purpose Actual cost incurred (hire charges or 10% of actual cost of car in case owned (including chauffeur salary) Less : Recoveries from employee Car Facility for commuting between office and residence Not taxable
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Other miscellaneous perquisites
Education facilities provided by the employer Where the employer provides education facilities to any member of the employees household, the value of perquisite shall be the actual cost incurred by the employer reduced by any amount recovered from the employee. However, where the cost of education facilities provided does not exceed Rs 1000, the value of perquisite shall be Nil.
Interest free or Concessional loan Where the employer provides free or concessional loan for any purpose, the value of perquisite shall be the sum equal to the interest computed on the maximum outstanding monthly balance at the rate charged per annum by the State Bank of India as on1st day of the relevant previous year as reduced by the interest amount, if any, recovered from the employee. However, where the amounts of loans are small, not exceeding in aggregate Rs 20,000 for the year or where the loan is taken for medical treatment of certain specified diseases, the value of perquisite shall be Nil.
Use of any movable asset Where the employee uses the assets of the employer, other than laptops or computers, the value of perquisite resulting from such use shall be the following Asset owned by the employer - 10% of the actual cost of such asset. Asset not owned by the employer - The amount of rent or charge paid or payable by the employer reduced by any amount recovered from the employee.
If any amount is recovered from the employee in respect of such use, the aforesaid determined value shall be reduced by the amount of recovery. Transfer of any movable asset Where the employer transfers any movable asset to his employee, the value of perquisite resulting from such transfer shall be the amount of actual cost of such asset to the employer reduced by the cost of normal wear and tear for that asset for each completed year, during which the asset was put to use by the employer. Rate of normal wear and tear in case of computers and electronic items is 50% per annum and a motor car is 20% per annum by reducing balance method. Rate of normal wear and tear in case of other items is 10% per annum of the cost.
If any amount is recovered from the employee in respect of transfer, the
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aforesaid determined value shall be reduced by the amount of recovery. Free Food and Beverages Cost incurred by the employer in providing food and non alcoholic beverages to the employees in office premises or through non-transferable paid vouchers to be used at eating joints is taxable to the extent such cost exceeds Rs 50 per meal Gifts Value of Gifts / Vouchers / tokens received in excess of Rs 5,000 is liable to tax in the employees hands Club expenses and Credit Card Expenses Reimbursement Reimbursement of club expenses (including annual or periodical fee) and expenses (including membership and annual fees) on credit card (and an add-on card) is taxable as perquisites in the employees hands. However, where such reimbursements are made towards expenses incurred for official purposes, such amounts would not be taxable. Further, health club / sports club facilities provided uniformly to all employees are also not taxable. Special allowance/Tax perquisite Expenses on telephone and mobile phones have been specifically excluded from the purview of perquisite taxation
In case the tax payable on salary income of an employee is borne by the employer (typical for India hosted assignees), the tax liability is required to be reported to tax as income on a gross-up basis Section 195A The grossed up tax amount is typically reflected as special allowance and not tax perquisite to ensure compliance with Section 200 of the Companies Act, 1956 that does not permit an Indian company to provide a net of tax salary to its employees. Conversion of foreign income for the purpose of TDS Rule 26 specifies that for conversion of income (payable in foreign currency) for the purpose of tax deduction, the SBI Telegraphic Transfer Buying Rate as on the date on which tax is required to be deducted (in case of salary, date of payment) shall be considered. Conversion of foreign income which is liable to tax in India
Conversion of foreign income
Rule 115 specifies that the foreign income (which is chargeable under the head Salaries) shall be converted using the SBI Telegraphic Transfer Buying Rate existing on the last day of the month immediately preceding the month in which the salary is due or is paid in advance or in arrears.
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Income from House Property

Sections 22 to 27 of the Income Tax Act, 1961, cover the provisions of income under the head Income from House Property (IFHP). Broad overview of the provisions relating to Income from House Property Income is chargeable to tax under the head IFHP if the following conditions are satisfied: The individual owns a property that consists of buildings or lands appurtenant (ie, attached) thereto; and The property should not be used by the owner for the purpose of any business or profession carried on by him, the profits of which are chargeable to tax.
Therefore, ownership triggers taxability and not renting of a property. Determination of Income from House Property 1. Annual value Annual value is determined as follows a. Reasonable expected rent of a property; or b. Where the property is let and the actual rent is in excess of the reasonable expected rent, the actual rent; or c. Where the property is let but was vacant during the whole or any part of the previous year and owing to such vacancy the actual rent is less than the reasonable expected rent, the actual rent. Note: Income pertaining to property situated in a foreign country would be taxed in India if the assignee qualifies as a Resident or the income is received in India directly. Exceptions to the above valuation Where the property is used for self occupation of the owner or it cannot be self occupied due to employment, business or profession carried on at other place, and he resides in the other place in a building not belonging to him, the annual value of such property is taken as Nil. This exception is not applicable if the property has been actually let out during whole or part of the year and or if any other benefit is derived thereof by the owner. Further, the exception is only available for one property, but as per the individuals choice. The annual value of properties other than the property in respect of which the individual has exercised an option to claim the above exception shall be determined as if such house or houses has or have been let (deemed let out property).
2. Deductions available from annual value Municipal Taxes Deduction for municipal taxes actually paid, during the previous year irrespective when it is due, from the annual value.
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If a property is situated in a foreign country, municipal taxes levied by the foreign local authority are deductible on payment basis. From annual value determined municipal taxes are to be reduced before claiming any additional deductions under section 24. The resultant figure of Annual Value less municipal taxes is referred to as Net Annual Value. Standard Deduction A Standard deduction of 30 percent of the Net Annual Value is available in all cases. Interest on borrowed capital Interest on borrowed capital used for acquisition, construction, repairs, renewal or reconstruction is deductible to the following limits Upto Rs 150,000 on loan borrowed on or after April 01, 1999 for the purpose of construction or acquisition of the property which is self occupied and the construction is completed within 3 years. This limit is reduced to Rs 30,000 if loan is borrowed prior to April 1, 1999 or it is for any other purpose other than construction or acquisition. Actual interest paid (in case of properties other than referred to above).
Points to note The assessee is required to furnish a certificate from the person to whom the interest is payable stating the purpose of such loan, amount outstanding and interest payable during the financial year. Pre-EMI interest for the period prior to previous year in which the property was acquired or constructed, can be claimed equally in 5 annual installments, starting with the year in which the property is acquired/constructed.
Carry forward and set-off of loss from house property Loss from house property can be set-off against the income under other heads during the respective current year. Loss not so set-off in the respective current year can be carried forward and set-off against IFHP in subsequent years. The loss can be carried forward for 8 consecutive years.
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Income from Capital Gains

Sections 45 to 55A of the Income-tax Act, 1961, cover the provisions of income under the head Capital Gains. Charge of capital gains - Section 45 Any profits or gains arising from the transfer of a capital asset are chargeable to tax under the head Capital gains in the year in which the transfer takes place. However there are certain exceptions to taxability in the year of transfer such as compulsory acquisition of land, destruction of asset and receipt of insurance monies etc., The Capital Gains are specified as short-term or long-term depending on the period of holding. In this connection, the following terms are important to understand a. Capital asset Section 2(14) Property of any kind held by an assessee (whether or not connected with his business or profession) but does not include the following Stock in trade, raw materials, consumable stores held for the purpose of business or profession; Personal effects, excluding jewellery, archaeological collections, drawings, paintings, sculptures, or any work of art; Agricultural land; Other specified deposit or bearer bonds.
b. Short-term capital asset Section 2(42A) A short-term capital asset is defined as a capital asset held by an assessee for not more than thirty six months immediately preceding the date of its transfer. Exception Shares of a company or any other security listed in a recognised stock exchange in India, units of UTI, units of a mutual fund are considered as short-term capital assets if held for not more than twelve months immediately preceding the date of transfer. c. Long-term capital asset Section 2(29A) Any asset that is not a short-term capital asset is a long-term capital asset. d. Transfer Section 2(47) The term transfer is a very vide term and does not only mean sale. The term transfer includes Sale, exchange or relinquishment of the asset; Extinguishment of any rights in the asset; Compulsory acquisition of an asset under any law; Conversion of the asset into stock in trade;
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Any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract; Any transaction which has the effect of transferring or enabling the enjoyment of any immovable property.
Exceptions There are various transactions that are treated as transfer under the definition of the term under Section 2(47). However, as per Section 47, certain specified transactions are deemed to be not treated as transfer. Some of these transactions are discussed below Transfer of a capital asset under a gift, will or an irrevocable trust (excluding such transfer of specified securities acquired under an Employee Stock Option Plan). Any transfer or issue of shares by the Resulting Company to the shareholders of the Demerged Company as consideration for a demerger. Transfer of shares of the amalgamating company under a scheme of amalgamation provided certain conditions are satisfied. Transfer of bonds or Global Depositary Receipts made outside India by a non-resident to another non-resident. Conversion of specified bonds/debentures into shares/debentures.
Computation of capital gains Short-term capital gains Transfer of a short-term capital asset results in Short-term capital gains. A standard computation of short-term capital gains is attached below Particulars Sale Consideration Less: Expenses incurred at the time of sale Net Consideration Less: Cost of acquisition Less: Cost of improvement Short-term capital gains Amount XXXX (xx) XXXX (XXX) (XX) XXX
Short-term capital gains are not liable to tax at a fixed tax rate but included in the total income and taxed at the progressive slab tax rate of an assignee for the respective tax year. However, shortterm capital gains resulting from specified securities traded on a recognised stock exchange in
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India (and on which Securities Transaction Tax is paid) are liable to tax at a fixed rate of 15 percent. Long-term capital gains Transfer of a long-term capital asset results in long-term capital gains. A standard computation of long-term capital gains is attached below Particulars Sale Consideration Less: Expenses incurred at the time of sale Net Consideration Less: Indexed cost of acquisition Less: Indexed cost of improvement Long-term capital gains Long-term capital gains are liable to tax at a fixed tax rate as follows 10 percent in case of specified securities without indexation benefit (at the choice of the assessee); or 20 percent in other cases. Amount XXXX (XX) XXXX (XXX) (XX) XXX
With effect from October 1, 2004, long-term capital gains resulting from specified securities traded on a recognized stock exchange in India (and on which Securities Transaction Tax is paid) are not liable to tax. In this connection, please note the meaning of the following terms a. Sale consideration This is the amount that the transferor receives or is entitled to receive as consideration for the transfer of the capital asset. In case of non-monetary consideration (ie, consideration received in kind, the Fair Market Value is considered as the Sale Consideration). b. Cost of acquisition Cost of acquisition is the amount paid by the assignee to acquire the capital asset. Cost of acquisition under special cases As per Sections 49 and 55, in case of special cases, the cost of acquisition is considered as follows Self generated assets - NIL.
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Bonus shares - NIL. Rights shares - Amount actually paid for acquiring the right shares. Asset acquired prior to April 1, 1981 - Actual Cost or Fair Market Value of the asset as on 1-41981 (at the option of the assignee). Under a gift or will or transfer to a revocable or an irrevocable trust - Cost to the previous owner. By succession, inheritance - Cost to the previous owner.
c. Indexed cost of acquisition In case of long-term capital gains, the cost of acquisition is permitted to be indexed with the Cost Inflation Index specified by the Central Board of Direct Taxes each year. The Indexed Cost of Acquisition is arrived at as follows Cost of acquisition X Cost Inflation Index for the year of transfer Cost Inflation Index for the year of acquisition** **For assets acquired prior to April 1, 1981, the Cost Inflation Index as prescribed for the tax year 1981-82 shall apply. Further, in case of gifts, the indexation benefit starts from the date of receipt of gift or inheritance (ie, when the recipient becomes the owner). d. Cost of improvement Cost of improvement includes all expenditure of capital nature incurred after March 31, 1981 by an assessee in making any additions to capital assets after the date of acquisition. (Cost of improvement does not include expenditure incurred prior to April 1, 1981). It also includes any expenditure to protect or complete the title to the capital assets or cure such title. In other words, any expenditure incurred to increase the value of the capital asset is treated as cost of improvement. Cost of improvement in case of specified assets (for ex. goodwill of a business or a right to manufacture, produce or process any article or thing or right to carry on any business) is considered as NIL.
e. Indexed cost of improvement In case of long-term capital gains, the cost of improvement is permitted to be indexed with the Cost Inflation Index specified by the Central Board of Direct Taxes each year. The Indexed Cost of Improvement is arrived at as follows Cost of improvement X Cost Inflation Index for the year of transfer Cost Inflation Index for the year of improvement
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Exemption from capital gains Some of the important reinvestment schemes Capital gains arising from sale of certain capital assets can be claimed as exempt if the gains or the sale proceeds are reinvested in certain specified assets. A chart of such reinvestment schemes is provided below: Section Ref. 54 Capital Gain on sale of Residential House property Type of capital gains Long term Reinvestment of gains in Residential House property. Period and Restrictions Purchase within 1 year before or within 2 years after date of transfer. Construction within 3 years. Lock in period for new asset - 3 years Purchase within 2 years after date of transfer. Lock in period for new asset - 3 years Purchase within 6 months of date of transfer. Lock in period for new asset - 3 years. Investment in bonds limited to Rs 50 lakhs. Purchase within 1 year before or within 2 years after date of transfer. Construction within 3 years. Pending utilization amount can be invested in deposit account under Capital Gains accounts scheme. Lock in period for new asset - 3 years. No additional property (other than the new house) should be purchased within 2 years or constructed within 3 years from date of transfer of the asset.
54 B Agricultural Land used at least 2 years prior to transfer Any long term capital asset Short term/Long term Long term Agricultural land (rural or urban) Specified bonds (REC) 54F Any long term capital asset (other than residential house) Long Term Residential House (Net consideration to be invested and not gains)
54 EC
Carry forward and set-off of Capital Loss Capital Loss during the respective current year can be set off against other Capital Gains during that year as follows Long-term capital loss can only be set off against long-term capital gains. Short-term capital loss can be set off against any capital gains.
Capital Loss cannot be set-off against any other income.
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Loss not so set-off in the respective current year can be carried forward and set-off against Capital gains in subsequent years as follows Long-term capital loss can only be set off against long-term capital gains. Short-term capital loss can be set off against any capital gains.
The loss can be carried forward for 8 consecutive years provided a return of income indicating the loss is filed within the due date for filing of the return. Income tax rates
Transaction covered by STT Capital assets Long term Short term
Not covered by STT Long Term Without indexation 10% 10% 10% NA 10% NA 10% 20% 10% With indexation 20% 20% 20% 20% 20% 20% NA NA 20%
Short term
Units (equity oriented) Units (others) Equity shares (listed) any other Equity shares (not listed) Preference shares (listed) Preference shares (not listed) Debentures (listed) Debentures (not listed) Government securities
0% NA 0% NA NA NA NA NA NA
15% NA 15% NA NA NA NA NA NA
Normal Normal Normal Normal Normal Normal Normal Normal Normal
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Income from Other Sources

Sections 56 to 59 of the Income-tax Act, 1961, cover the provisions of income under the head Income from other sources. Interest Interest income (other than that exempt under Section 10) from any source is fully liable to tax in India. Section 10 exempts certain interest income from tax, few of which are Interest earned by a person resident outside India from NRE accounts. Interest earned by a Non-resident or Not Ordinarily Resident from FCNR accounts. Interest on notified securities, bonds, annuity certificates, savings certificates etc. issued by Central Government. Interest on bonds issued by local authorities and notified by the Central Government in the official gazette.
Dividend Dividend from shares in Indian companies and from specified mutual funds and units is exempt from tax as per Section 10(34) and (35) respectively. Dividends from foreign companies are fully chargeable to tax. Miscellaneous income like lottery receipts, etc Gross winnings from lotteries, crossword puzzles, races including horse races (other than income from the activity of owning and maintaining race horses), card games and other games of any sort or from gambling or betting of any nature whatsoever are chargeable to income tax at a flat rate of 30% (plus applicable cess). No allowance or expenditure is allowed to be claimed as a deduction from the gross winnings. Deductions from Income from other sources Deductions from Income from other sources are covered under Section 57, as under Any reasonable sum paid by way of commission or remuneration to a banker or any other person for the purpose of realizing dividend (other than dividend covered under Sec. 115 O) and interest on securities. Current repairs, depreciation, insurance premium in case of letting out of plant, machinery, furniture and building. In case of income in the nature of family pension, amount deductible is Rs 15,000 or one-third of the income whichever is lower. Any other expenditure (not being capital expenditure) laid out or expended wholly or exclusively for the purpose of earning such income.
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Deductions from Gross Total Income

Pursuant to calculating the Gross Total Income, based on the income heads discussed above, the assessee is allowed deductions under Section 80A to 80U, in respect of specified investments/contributions made by him during the respective tax year. The total amount of deduction, as calculated under these Sections, is limited to the Gross Total Income and the unclaimed/unutilized amount is not permitted to be carried forward. We have discussed below, few important deductions 80C Contribution to provident fund, life insurance premium, subscription to certain equity shares or debentures, repayment of principal part of housing loan, tuition fees, amount deposited in five year term deposit with any scheduled bank etc. 80CCC Contribution to pension fund upto Rs 100,000 per annum. Aggregate deductions under Section 80C, 80CCC and 80CCD (contribution to pension fund of central government) should not exceed Rs 100,000. 80CCF Subscription to long-term infrastructure bonds upto Rs 20,000 (w.e,f AY 2010-11) 80D Payment of medical insurance premium for self paid by any mode other than cash upto Rs 15,000 per annum or if taken for senior citizens upto Rs 20,000 per annum. Additionally insurance premium upto Rs 15,000 per annum for parents. 80E Repayment of interest paid on loan taken for higher education from any financial institution or approved charitable organization. Deduction would be allowed for maximum of 8 years or till the interest is paid whichever is earlier. 80G Donations made to charitable organizations, certain funds like Prime Ministers National relief fund, National Defence Fund etc. Deduction is available to the extent of 50% or 100% of sums contributed.
The annual tax withholding circular issued by the Central Board of Direct Taxes provides clarity on the deductions allowable to be considered by the employers at the time of withholding the taxes.
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Set off and carry forward of losses

Loss carried forward to the next year House property loss Business loss Speculation loss Short term capital loss Long term capital loss Loss from activity of owning and maintaining race horses Income against which loss to be set off Income from House Property Business income (non speculative / speculative) Speculation Profits Short / Long term capital gain Long term capital gain Income from activity of owning and maintaining race horses Number of years the loss is carried forward 8 Assessment years 8 Assessment years 4 Assessment years 8 Assessment years 8 Assessment years 4 Assessment years
Clubbing of income
Generally, an assessee is taxable only on his own income. However, Chapter V of the Income Tax Act, 1961 provides an exception to the above principle and provides for clubbing of income of other persons with the income of the assessee Provisions under Chapter V are known as Clubbing provisions, which are covered under Section 60 to 65 The intention of such provisions is to counteract tax evasion/ avoidance by assessee, who shift their portion of taxable income to some other persons Remuneration of spouse Any income arising directly or indirectly to the spouse of an individual, whether in cash or kind from a concern in which the assessee has substantial interest. However, no such clubbing shall be done, if the spouse possesses technical or professional qualification or experience. Income of minor child Any income arising or accruing to the minor shall be included in the income of that parent whose total income is higher. Where marriage of the parents does not subsist, the income of the minor will be clubbed in the income of that parent who maintains the minor child in the previous year. INR 1500 per annum or actual income of minor child, whichever is less is exempt under section 10 (32) However, no such clubbing shall be done, if the minor accrues or arises income on account of any manual work, any activity involving application of his skill, talent or specialised knowledge and experience.
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Modes of Payment of Taxes

The Act prescribes three modes of payment of tax for an individual Tax Deduction at Source (and Tax Collection at source for prescribed transactions); Advance tax; and Self-assessment Tax;
Tax Deduction at Source Sections 192 to 206 AA The Act prescribes that at the time of making specified payments (or credit in the books), the payer is required to deduct/withhold tax from the amount payable and deposit the same with the Government treasury. In this connection, the following points should be noted The rate of tax deduction varies depending on the nature of payment, the residential status as well as the person type of the payee and the payer. The Payer needs to obtain a specific registration with the Revenue authorities for Tax Deduction and deposit. The registration is known as Tax Deduction Account Number. The Payer is required to furnish a certificate to the payee specifying that tax has been deducted at source, the rate and the amount of tax deducted, etc. Such certificate is generally issued following the end of the year by April 30. The Payer who has deducted taxes at source is required to file a return (quarterly), by the prescribed due date, detailing the amount paid/credited and details of taxes deducted and deposited. In this connection, specific time limits have been prescribed for: Tax deduction at Source (at the time of payment or credit). Deposit of taxes with the Government treasury (generally within seven days from end of the month in which payment has been made). Issue of certificate of tax deducted at source Form 16 (by May 31 following the end of the tax year). Filing quarterly withholding returns (depending on nature of payment).
Failure to comply with the Tax Deduction at Source provisions or delay in such compliances attracts interest and penalty.
Tax Deduction at Source provisions specific to salary Section 192 (1) of the Act requires that any person responsible for making a payment that is chargeable under the head Salaries shall deduct income tax at source at the time of payment of salary. The tax is deductible at the average rate of income tax computed on the estimated salary income of the employee for the whole financial year.
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Based on this, the following points should be noted in respect of Tax Deduction at Source from salaries Any payment that could be regarded as chargeable under the head Salaries for the recipient is liable to tax deduction. Tax is deductible at the time of payment of salary. Tax is deductible at the average rate of income tax computed on the estimated salary income of the employee for the whole financial year.
Further, an employee is permitted to declare the following income (or loss as the case may be) and investments /contributions made during the tax year and the employer is required to take into account these details for the purpose of deducting taxes at source Prescribed incomes. Loss from house property.
Investments/contributions eligible for deduction from Gross Total Income Payment of tax on non-monetary perquisites by employer The Act specifies that in case an employer bears the tax on any non-monetary perquisite given to its employees, the tax so borne shall be exempt in the hands of the employee. In this connection, the following points may be noted The restriction under Section 200 of the Companies Act, 1956 is not applicable to the employer to the extent of tax borne on non-monetary perquisites. The employer will be liable to the tax payable on the same and such tax will have to be discharged at the time when such tax was otherwise deductible ie, at the time of payment of income chargeable under the head "Salaries" to the employee. Tax liability is determined at the average rate of income-tax computed on the basis of the rates in force for the financial year, on the income chargeable under the head Salaries, including the value of perquisites. Such tax paid by the employer has to be separately reported as a line item in the Form 16 issued to the employee. The tax paid by the employer is not allowed as a deduction from the income of the employer.
Advance Tax - Section 207 to 219 An individual is required to pay tax on the chargeable income in advance during the course of the respective tax year. In this connection, the Act prescribes the mode of computing advance tax as well as the due dates by which the advance tax has to be deposited into the Government treasury. Advance tax is calculated under the following steps Step 1 - Estimating the total taxable income for the tax year. Step 2 - Computing the tax liability on the estimated total taxable income.
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Step 3 - Reducing the amount of tax deductible/collectible at source (if any).
The balance tax liability is the advance tax payable by the individual. Please note that advance tax is payable only if the total amount payable as per the above computation for the respective tax year exceeds Rs 10,000. Advance tax in case of non-corporate assessees has to be discharged in three installments during the tax year, as per the table below. Installment I II Payable on or before 15th September 15th December Amount payable Not less than 30 percent of the advance tax. Not less than 60 percent of such advance tax payable during the year (as reduced by the amount, if any, paid in the earlier installments). The whole amount of such advance tax payable during the year (as reduced by the amount or amounts, if any, paid in the earlier installments).
III
15th March
In this connection, it may be noted that failure to comply with the aforesaid provisions attracts interest as follows For delay/default in payment of 90 percent of advance tax during the tax year (Section 234B) 1 percent per month from the beginning of the Assessment Year, till the tax is actually paid. For shortfall in payment of advance tax as per the prescribed installments (Section 234C) 1 percent per month for 3 months on the shortfall in payment of the first installment (ie, 3 percent of the shortfall). 1 percent per month for 3 months on the shortfall in payment of the second installment (3 percent of the shortfall). 1 percent for 1 month on the shortfall in payment of the third installment (1 percent of the shortfall).
For default in furnishing return of income (Section 234A) 1 percent per month from the beginning of the month next to filing due date of the Assessment year, till the return is actually filed.
Self-assessment tax Where the tax liability of a particular tax year is not discharged by way of tax deduction/collection at source or advance tax during the respective tax year, an individual is permitted to discharge the liability by way of self-assessment tax. While paying this tax, the individual is required to compute the interest payable for delay in filing the return, delay/default in payment of advance tax or shortfall in payment of advance tax as per the prescribed installments, and discharge the same alongwith the outstanding tax liability.
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Employee Stock Options (ESOP)

A stock option is generally a right granted to employees to purchase shares or other securities convertible into shares of the employer company, at a pre-determined price at a future date. Typically, the implementation of a stock option plan involves the following stages: Grant of options The options are granted to an employee i.e. he receives an offer from his employer to purchase the shares of the employer company at a pre-determined price after a predetermined period. Vesting of options The employee gets the right to exercise the options and purchase the securities at a predetermined rate. Exercise of options The employee exercises the options by paying the exercise price and acquires the necessary securities. Sale of securities The securities acquired pursuant to the ESOP are sold.
Taxation of Stock Options

Effective April 1, 2009, the Finance Act 2009 has abolished Fringe Benefit Tax (FBT) and reinstated the erstwhile taxation of ESOPs as perquisites in the hands of the employee instead of being subject to FBT in the hands of the employer. The current taxation regime of ESOP income is governed under section 17(2)(vi) of the Income Tax Act, 1961 which in brief states as follow: 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 assessee As a result, income arising from Employee Stock Option Plan (ESOPs) or any other equity based schemes, which was subject to FBT till March 31, 2009, will now be taxed as a benefit in the hands of the employees. The value of ESOPs for the purpose of tax is determined as the Fair Market Value (FMV) as on the date on which the options are exercised by the employee, reduced by the amount actually recovered by the employee. FMV means the value determined in accordance with the method prescribed in the rules issued by the Indian Government.
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In the case of internationally mobile employees, if the employee is in India on the date of exercise of stock options, the perquisite on the same would be fully taxable (irrespective of his stay details in India during the grant period). Grant Period has been defined as the period from the date of grant of the option to the date of vesting of the option. Since CBDT Circular No. 9 dtd December 20, 2007 has not been abolished, there is another view on taxability of ESOPs granted to internationally mobile employees. Perquisite is applicable only if the employee is based in India for any portion of the Grant Period. If an employee is based in India only for a portion of the Grant Period, perquisite will be applicable on a proportionate basis in the ratio of the period of stay in India to the length of the Grant Period. For example, a Company grants 100 options to an employee on June 1st, 2007 while he is in the US. The exercise price is Rs 25 per share. The options vest equally over 2 years i.e. 50% on May 31st 2008 and 50% on May 31st 2009. The employee is seconded to India on 1st January, 2009 for a 2 year assignment. On 30th June 2009 he exercises all 100 options by paying the exercise price. The FMV on May 31st 2008 and May 31st 2009 is Rs 60 per share and Rs 80 per share respectively. The tax on perquisites will be calculated as follows 50 options have vested prior to the employee having spent any days in India; hence there would be no tax liability upon exercise of these 50 options. Balance 50 options have vested while the employee was in India. The value of perquisites on these 50 options would be, Rs (80-25)*50 = Rs 2750. Since the employee has been in India only for a portion of the Grant Period, the taxable value of perquisites would be computed as follows: Value of Perquisites * No of days in India Days in Grant Period Rs 2750 * 151/730 = Rs 569 However, on a conservative approach, the first view is always recommended. Valuation rules for determining the FMV The Indian Government has prescribed the valuation rules to determine the FMV. Accordingly, the securities allotted/ transferred on or after 1 April 2009, will have to be valued as per these rules. The valuation rules are briefly summarized below:
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Valuation in case of shares listed on a Recognized Stock Exchange in India
Where the shares of the company are listed on a Recognized Stock Exchange in India on the date of exercise, the FMV shall be the average of the opening price and the closing price of the share on the date of exercise on the said Recognized Stock Exchange. However, if the shares are listed on more than one Recognized Stock Exchange in India, the FMV shall be the average of the opening price and closing price of the share on the Recognized Stock Exchange which records the highest volume of trading in the shares. Further, where there is no trading in the shares on any Recognized Stock Exchange in India on the exercise date, the FMV shall be the closing price on the date which is closest to the date of exercise. In case the shares are listed on more than one Recognized Stock Exchange in India, the FMV shall be the closing price on a Recognized Stock Exchange, which records the highest volume of trading in such share, on the date which is closest to the date of exercise.
Valuation of shares not listed on any Recognized Stock Exchange in India or shares listed only on overseas stock exchange(s)
Where on the date of exercise, the shares are not listed on a Recognized Stock Exchange in India, the FMV of the share would have to be determined by a Recognized Merchant Banker (category I merchant banker registered with Securities and Exchange Board of India (SEBI)). The FMV can be determined on the date of exercise or any date that falls within 180 days prior to the exercise date. Illustration: A Company granted option to its employee on 2-8-2008 to apply for 100,000 shares @ Rs 80 each. All the Options were exercised on 1-8-2010 and shares were allotted on 15-122010. The shares of the company are listed on BSE only. Share prices at various dates are as follows: Date 2-8-2008 1-8-2010 15-12-2010 Opening Price Buy 80.95 95.34 135.67 Sell 81.25 96.05 135.99 Closing Price Buy 85.10 99.86 123.82 Sell 85.90 100.52 124.41
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The taxable value of perquisite for the Assessment year 2011-12 would be calculated as below : FMV on the date of exercise of option = Opening Price + Closing Price 2 = 96.05 + 100.52 2 = Rs. 98.285 per share = 196.57 2 Value of Perquisite = (Rs. 98.285 Rs.80) x 1, 00,000 = Rs. 18, 28,500/Note: For the purpose of calculation of perquisite, date on which the option is exercised by the employee i.e., 1.8.2010 is relevant. However, taxability arises on the date of allotment i.e., 15.12.2010. Capital gains on sale/transfer of Stock Option The tax liability at the time of sale will continue to be payable by employee as capital gains (on the difference between the sale price and the cost of acquisition), however exemption would be available for gains on sale of listed company shares held for more than 12 months, subject to payment of STT. The period of holding shall be reckoned from the date of allotment or transfer of such securities. Further, for determining the capital gains arising at the time of sale of such shares, the cost of acquisition would be the FMV as on the date of exercise taken into account to determine the taxable income at the time of allotment of shares. For example, in the above illustration, if the employee sells 1000 shares on March 31, 2011 @ Rs 120 per share, the capital gains on such shares in the hands of employee would be calculated as below: Period of Holding Sales Consideration Less: Cost of acquisition Short term Capital Gain : From 15-12-2010 to 31-03-2011 : : Short term 120,000 98,285 -----------21,715 ======
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Concept of Double Taxation Avoidance Agreements

When an individual is sent on an international assignment, based on the respective domestic laws, he could be subject to tax both in home as well as the host country. Due to this there could be considerable amount of global taxes payable by an individual with respect to international assignments. We have explained the same in the case study below. Case study An individual (X), qualifying as a Resident in India, is employed in India with a local company (Ind Co) X is sent on an international assignment to US on November 1, 2010. Xs gross salary is Rs 1,200,000 per annum Tax rate in India is assumed at 30 percent and in US, 40 percent
In this example, for the period November 1, 2010 to March 31, 2011, the assignees combined India and US tax liability is 70 percent. In order to counter such problems, India has entered into Double Taxation Avoidance Agreements (Tax Treaties) with various countries that help to mitigate the double taxation of an individual in more than one country. Generally there are two methods of relief available under a tax treaty Exemption method - Under this method, income is only taxed in one of the two countries (ie, it enjoys exemption from tax in one country); and Tax credit method - Under this method, the income is taxed in both the countries, but one of the countries (ie, the country of residence) allows credit of the taxes paid in the other country.
However, before understanding these methods of relief, it is important to note the following points Before applying treaty provisions, one must always check whether the tax treaty is in force for that tax year and also, whether the person is covered under the treaty. For application of the tax treaty, the concerned individual needs to be a resident of one or both of the countries. Therefore, conducting this test is crucial to apply treaty relief. The term resident means any person who, under the laws of the respective country, is liable to tax therein by reason of his domicile, residence, citizenship, place of management, place of incorporation, or any other criterion of a similar nature. Few tax treaties provide that the term resident does not include any person who is liable to tax in a country only in respect of having income from sources in that country.
Residency under the treaty There could be situations where an individual could qualify as resident of both the countries (i.e., as per the domestic tax laws of the respective country). For instance, a foreign citizen on assignment to India could qualify as resident of his home country due to his citizenship and could also qualify as a resident in India due to his physical presence in India.
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Where an individual qualifies as a resident of two countries, it become important to ensure that there is clarity as to which country would grant the exemption relief and which would grant the tax credit relief. In order to ensure that this can be determined, treaties normally contain provisions to tie-break residency to one of the countries. The conditions to break residency are required to be applied in a chronological order and if any one of the conditions is satisfied by an individual, there is no requirement to check for applicability of any of the further conditions. The conditions are as under (a) Availability of Permanent Home: An individual is deemed to be resident of the country in which he has a permanent home available to him. A permanent home is any accommodation available at all times continuously for the individual's use. Even, a rented accommodation available to an individual continuously could be considered as permanent home. As per the treaty commentaries, permanent home is said to be available if there is an underlying intention of the individual to keep the accommodation available to him at all the times. An accommodation being available to an individual for a short duration for the purpose of business travel, holiday purposes, etc are generally not considered as permanent home. In case, the individual has a permanent home available only in one of the countries, he is deemed to be resident of that particular country and no further conditions are required to be analysed. For example, Mr. X arrived to India from US on three-year assignment. He has a rented accommodation available in India and no accommodation available in the US, during the period of his Indian assignment. Since, he has a permanent accommodation available only in India; he would qualify as a treaty resident of India.
However, if the individual does not have a permanent home available to him in either of the countries, or has a permanent home available to him in both the countries, then we need to check for applicability of the next condition centre of vital interests. (b) Centre of Vital Interests: Centre of Vital Interests refers to the individuals personal and economic interests. Personal and economic relations of an individual are linked to his family relations, his occupations, his political, cultural or other activities, his place of business, the place from which he administers his property, etc. The various personal and economic factors must be examined as a whole for determining the relationship of the individual with each country. If the personal relations are closer to one country and economic relations are stronger with the other country, then the determining factor could be which country assumes greater significance to the individual. The individual is deemed to resident of the country with which his personal and economic relations are closer. For example, Mr. X accepted a three-year assignment in India and consequently moved to India from the US, along with his family. He sold his car and cancelled his health plan and dropped all social affiliations in the US but did not sell his home in the US. In India, Mr. X rented a house, bought a car, obtained a drivers license, and joined various social clubs. He opened a bank account in India where his paychecks were deposited and paid income tax in India. Mr. X had a permanent home available to him both in the US and in India. However, his personal and economic relations were closer to India. Accordingly, he would qualify as a treaty resident of India.
If the individuals centre of vital interests cannot be determined, then the next criteria habitual abode of the individual is required to be analysed.
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(c) Habitual Abode: The term habitual abode is not specifically defined. Generally, habitual abode relates to the country where the individual spends most of his time, regardless of the purpose or a place which is regularly and repeatedly used by the individual over a period of time. In simple words, a place where the individual stays more frequently based on physical presence would be considered as the habitual abode of that individual. The individual is deemed to be a resident of the country in which he has a habitual abode. (d) Nationality: In case if the individual has a habitual abode in both countries or in neither of them, he shall be deemed to be a resident of the country of which he is a national. (e) Mutual Agreement: Finally, if the individual is a national of both countries or of neither of them, the competent authorities of the both countries shall settle the question by mutual agreement. This is initiated only if none of the above criteria are satisfied. Relief under exemption method Dependant Personal Service Clause in the tax treaty (Article 15 or 16 in most treaties) Clause 1 of the Article on Dependant Personal Services (relating to salary income) of most DTAAs typically states as follows "..salaries, wages and other similar remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable only in that Contracting State unless the employment is exercised in the other Contracting State. If the employment is so exercised, such remuneration as is derived therefrom may be taxed in that other Contracting State." Therefore, Clause 1 prescribes that an individual will be taxed only in the country of residence. The individual may also be taxed in the other country provided services have been rendered in that other country. Applying this to our case study, X, being a resident of India will be liable to tax only in India. However, since effective November 1, 2010, he has rendered services in US, he would also be liable to tax in US. Clause 2 provides that the remuneration of an individual may be treated as exempt in the other country and taxable only in the country of residence if the following conditions are satisfied 1. The individual is present in the other country for a period not exceeding 183 days in aggregate2; 2. The remuneration is paid by or on behalf of an employer who is not a resident of the other State; and 3. The remuneration is not borne by a Permanent Establishment (fixed base) of the employer in the other State. Applying this to our case, X would not be liable to tax in US, if the above conditions are satisfied in the US. In this connection, please note that since the US tax year runs from January 1 to December 31, the assignee would be exempt from tax in US for the US tax year 2010. In order to
Different treaties provide different periods during which the 183 days period is to be considered. The most
common clauses are 183 days in the fiscal year concerned and 183 days in any twelve month period.
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determine whether the assignee would be exempt from tax in US for the US tax year 2011, the same analysis would also have to be done for that year. In this connection, assuming that the assignee is exempt from tax in US in both 2010 and 2011, X would only be taxed in India. Accordingly, for the period November 1, 2010 to March 31, 2011, the assignees combined India and US tax liability will only be 30 percent. Thus, this is called the exemption method i.e., income is only taxed in one of the two countries (i.e., it enjoys exemption from tax in one country). Relief under tax credit method Elimination of Double Taxation Clause in the tax treaty (Article 23 or 24 in most treaties) Relief under the tax credit method is utilized when the relief under the exemption method is not available. Under this method, the country of residence will allow a credit of the taxes paid in the other country, against the tax liability in the residence country. The credit is available on the income that is doubly taxed (i.e. taxed in both countries). In other words, taxes paid in the other country can be set off against the tax liability of the country of residence. However, the tax credit is limited to the amount of proportionate or attributable taxes payable in the country of residence. Applying this to our case, assuming that X is liable to tax in US, tax credit would be permitted as follows Income doubly taxed - Rs 500,000 Tax paid in US @ 40 percent - Rs 200,000 Tax liability in India on the doubly taxed income - Rs 150,000 Tax credit available in India - Rs 150,000
Therefore, the assignee will only pay taxes for the period April 1 to October 31 in India. The tax liability for the period November 1 to March 31 will be set-off against taxes paid in the US. Please note that it is critical to examine the definition of taxes covered under the relevant treaty before allowing the credit (eg, under the India-US tax treaty, credit in India is allowed only for the federal taxes paid in the USA and not the US state taxes). Therefore, in this case, if out of 40 percent 15 percent is towards US State taxes, the tax credit will be limited to 25 percent ie, Rs 125,000. Further, the taxes covered do not normally include any amount payable in respect of any default or omission in relation to the above taxes or which represent a penalty imposed in relation to those taxes. Important note The above case study of treaty relief has only been provided as an example to explain the concept. Practically, when applying treaty relief, one needs to evaluate the various aspects of the tax treaty. It is a complicated exercise and should be applied after complete research and related back-up documentation as the Revenue authorities generally scrutinize such cases to ensure that the correct relief has been claimed.
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Taxability of various streams of income under the treaty Dividend Dividends received by an individual are taxable in his country of residence. However, in cases where the dividends are received from sources situated in the other country, then even the other country may tax the same (if the Company paying the dividend is a resident of the other country). Usually, the tax treaties define the maximum tax rate beyond which taxes cannot be levied in the source country on the dividend income paid to a resident of the other country. Further, where the dividends are taxed in both countries, relief could be claimed under the tax treaty, in the country of residence. For example, if an individual qualifies as treaty resident of India and receives dividend income of USD 100 from a company resident in US, the same may liable to tax in both the countries. If US taxes the dividend income at 25 percent and India at 30 percent, the individual would be able to claim foreign tax credit to the extent of USD 25 (USD 100*25%) in India against the taxes payable in India, of USD 30 (USD 100*30%). Interest Interest received by an individual is taxable in his country of residence. However, in cases where the interest is received from sources situated in the other country, then even the other country might tax the same (if the source of interest income is in the other country). Usually, the tax treaties define the maximum tax rate beyond which taxes cannot be levied in the source country on the interest income paid to a resident of the other country. In such cases, where the interest income is taxed in both countries, relief could be claimed under the tax treaties, in the country of residence. For example, if an individual receives bank interest of USD 100 from a bank situated in the US and he qualifies as a treaty resident of India, the interest income may be liable to tax in both the countries. If the tax levied on the interest income in the US is USD 15 and the tax levied in India is USD 30, the individual can claim the USD 15 paid in the US as foreign tax credit in India, against the taxes payable in India. Capital Gains Most of the treaties provide for taxation of capital gains income either in the country of residence or in the country of source. Some treaties provide that capital gains would be taxable in the respective countries, based on the domestic tax laws of each country (eg, US). However, in case the capital gains relate to certain assets like ships, shares, etc (assets which are specifically mentioned in the treaties), the same is taxable as per the provisions of the treaty. In cases where both the countries tax the capital gains income, foreign tax credit can be claimed in the country of residence, if the capital gains income arises in the other country.
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For example X, sold a house property situated in the US for USD 100,000 and the capital gains income on this transaction amounts to USD 20,000. X qualifies as a treaty resident of India. The US taxes on the capital gains income amount to USD 4,000 and India taxes amount to USD 6,000. X can claim a foreign tax credit in India to the extent of taxes paid in the US i.e. USD 4,000.
Concept of Double Taxation avoidance agreements can be summarized with the help of following table: Scenario Case 1 Case 2 Case 3 Case 4 India NR ROR NR ROR Home/Host Country NR NR ROR ROR Method N/A Tax Credit DPS Tie Breaker Rule
Note: Different treaties provide different definition for residency. Hence, residency position for NOR depends on the
treaty positions between two countries.
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Typical Tax Compliance Cycle

We shall now discuss the typical tax compliance cycle that we undertake for our clients. The same has been divided into employee related compliances and employer related compliances, and covers the following compliances a. Employee related compliances 1) Conducting tax briefing for international assignees. 2) Processing the Permanent Account Number for international assignees. 3) Preparation and filing of the Indian return of income. 4) Processing Departure Clearances from the Revenue authorities. b. Employer related compliances 1) Processing the Tax Deduction Account Number for the employer. 2) Preparation of tax withholding computations and year end withholding forms. 3) Preparation of quarterly return of salaries. In the following paragraphs, we will try to understand these compliances and the assistance that EY provides to the clients in greater detail. Employee related compliances Tax briefings In case of international assignments, it is essential that employees, who are being deputed from one country to another, understand and are familiarised with the regulatory compliances applicable to them in the home as well as in the host country. This helps the employer to ensure that there is timely compliance of regulations by the assignees. In this connection, our clients engage our services in conducting such briefings. Some of the areas/topics that we typically cover in such briefings are Brief discussion on taxability in India during the period of assignment. Appraising the assignees of the local tax registrations like obtaining Permanent Account Number, filing documents for registration with Foreign Regional Registration Office. Informing the assignees of the ongoing compliances like the India income tax return, the due dates etc. Appraising the assignees of the departure compliances prior to departure from India ie, obtaining Tax clearances from Revenue authorities. How the employer and EY will be assisting them in meeting the aforesaid compliances.
Such a briefing is also typically conducted by the other countries at the time of departure/arrival.
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Permanent Account Number The domestic tax laws require every person taxable in India (and other specified persons) to apply for a Permanent Account Number (registration with the Indian Revenue authorities). The Permanent Account Number is a 10 digit alphanumeric code allotted to each person and the number is required to be quoted in all the documents pertaining to transactions specified under Section 139A. Further, it is mandatory for every person receiving any amount from which tax is deducted at source or collected at source to intimate his/her Permanent Account Number to the person responsible for deduction or collecting such tax. In this connection, we prepare the Permanent Account Number application for the assignees deputed to India and process the same with the Indian Revenue authorities. Indian return of income We assist the individual assignees in preparation and filing of their Indian income tax return on an annual basis. Briefly, this comprises of the following steps We send an information organiser to the respective assignees for obtaining their personal information and details of their income and tax paid till date. It may be noted that generally our organiser does not include information request for compensation information as that would be made available directly by the employer. Based on the information in the organiser, we prepare a draft computation of each assignees total taxable income and the tax liability thereon. We then request the assignees for a meeting/telecon to finalise the tax computation and inform the assignees if any additional tax on their other income in India (if applicable) needs to be remitted. Subsequently, we prepare the final income tax return together with a computation of income and send it to the assignees for signatures. At this stage, we generally also provide the assignees with our basis of preparation detailing the tax positions taken while computing the taxable income. On receipt of the signed tax return, we arrange for filing of the tax return with the Revenue authorities.
In this connection, we have also provided below the provisions of the Act with respect to filing of the return of income in India. As per Section 139(1), an individual whose total taxable income for a particular year exceeds the minimum amount not chargeable to tax is required to file a return of income, reporting the total income and the tax paid thereto, with the Revenue authorities. The maximum amount not chargeable to tax is an amount that is prescribed by the respective Finance Bill for each year. For the previous year 2010-11, the minimum amount not chargeable to tax is Rs 160,000. Therefore, every individual who has taxable income of over Rs 160,000 is required to file a return of income with the Revenue authorities. In case of resident women assessee the limit is Rs 190,000 and senior citizens (persons over 65 years of age, the limit is Rs 240,000.
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There are prescribed forms in which an individual is required to file the return of income. Based on the income heads as well as the residential status for the particular tax year, the individual can prepare and file the return of income in the following forms SARAL II (ITR 1) For Individuals having Income from Salary / Pension / Income from One House Property (excluding loss brought forward from previous years) / Income from Other Sources (Excluding Winning from Lottery and Income from Race Horses. ITR 2 For individuals and HUFs not having income from business or profession ITR 3 For individuals sand HUFs being partners in firms and not carrying out business or profession under any proprietorship ITR 4 For individuals and HUFs having income from a proprietary business or profession ITR 5 For firms, AOP and BOIs ITR 6 For companies other than those claiming exemption under section 11 of the Act A return of income is required to be filed annexure-less.
A return is required to be filed within the following due dates For individuals having business income and require to have their accounts audited - September 30 following the end of the previous year. Other individuals - July 31 following the end of the previous year.
As per Section 139(4), any individual who fails to file the return of income within the aforesaid due date, may file a belated return before the end of one year from the end of the relevant assessment year (ie, before March 31, 2013 for the previous year 2010-11) or completion of assessment, whichever is earlier. However, if the return is filed after the end of the relevant assessment year, the Revenue authorities are empowered to levy a penalty of Rs 5,000 on the individual. As per Section 139(5), any individual who, after furnishing the return of income discovers any omission or wrong statement in the return, may file a revised return before the end of one year from the end of the relevant assessment year (ie, before March 31, 2013 for the previous year 2010-11) or completion of assessment, whichever is earlier. A revised return replaces the original return for all purposes of the Act. In this connection, it may be noted that while a revised return can be revised again, a belated return cannot be revised. Annual Information Return details Under the new tax returns, tax payers would also be required to disclose certain investments and expenditures made in India during the relevant tax year. The following information is required to be provided: 1. 2. 3. Cash deposits aggregating to Rs 10 lakhs or more in a savings account maintained in an Indian Bank or a banking company. Payments made in respect of a credit card aggregating to Rs 2 lakhs or more in a year. Payment made of an amount of Rs 2 lakhs or more for purchase of units of mutual fund.
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4. 5. 6. 7. 8.
Payment made of an amount of Rs 5 lakhs or more for acquiring bonds or debentures issued by a company or institution. Payment made of an amount of Rs 1 lakh or more for purchase of shares issued by a company. Purchase of any immovable property valued at Rs 30 lakhs or more. Sale of any immovable property valued at Rs 30 lakhs or more. Payment of an amount of Rs 5 lakhs or more for bonds issued by RBI.
Departure Tax Clearance Section 230 of the Act prescribes the compliances relating to obtaining tax clearances by individuals leaving India. For this purpose, individuals have been classified into two broad categories Individuals who are not domiciled in India ; and Individuals who are domiciled in India.
The term domicile has not been defined under the Act. However, we have been able to gather some clarification from the Delhi Income Tax Department Website that provides as under Normally, a person holding a foreign passport is not considered to be domiciled in India. Domicile of a person is different from his citizenship. Domicile is a place of habitation without any intention of leaving therefrom. The intention is to reside there forever. Thus, even a foreign national may be domiciled in India if he has a fixed residence and has the intention to reside forever in this country. Similarly, an Indian citizen may not be domiciled in India if he has no intention to reside forever in India. Thus, domicile in India can be understood as the intention to reside on a permanent basis in India. It may be noted that the UK tax law also relates domicile in UK to intention to stay in UK. We have discussed the compliances for non-domiciled and domiciled individuals in the chart below Type of assignee Non-domiciled individuals a) Departure compliance A non-domiciled individual is required to obtain a specific No Objection Certificate in Form 30B from the Revenue authorities, granting permission to leave India. The No Objection Certificate is granted based on filing the following documents with the concerned Assessing Officer - A cover application requesting issue of the No Objection Certificate. - An undertaking from the payer of income (in our case, the employer) in Form 30A to the effect that the employer shall be responsible for bearing taxes in India. - A declaration of the amount of taxes withheld and deposited by the payer into the Indian government treasury.
b)
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Type of assignee
Departure compliance - A copy of the individuals passport (the original passport is also sited by the Revenue authorities before issue of the No Objection Certificate).
Domiciled individuals
a)
A domiciled individual is not required to obtain a No Objection Certificate but is required to file an intimation with the concerned Assessing Officer in the prescribed Form 30C, informing the Assessing Officer of the proposed departure from India. The intimation needs to be accompanied by a copy of the individuals past year tax filings (preferably 3 years) as well a copy of the passport.
b)
It may be noted that the Revenue authorities, on the basis of the aforesaid intimation, can request the individual to obtain a specific No Objection Certificate. Employer related compliances Tax Deduction Account Number Section 203A of the Income tax Act requires every person responsible for deducting tax at source to apply for a Tax Deduction Account Number. The Tax Deduction Account Number is required to be quoted on all challans for depositing withholding taxes, the Certificates of Tax Deduction at Source and the quarterly and annual returns. We assist the clients in processing the application for such Tax Deduction Account Number with the Indian Revenue authorities. Tax withholding computations and year end withholding forms As discussed earlier, as per Section 192, any person responsible for making a payment that is chargeable under the head Salaries is required to deduct income tax at source at the time of payment of salary. In this connection, we assist the employer in estimating the withholding tax liability on each assignees salary income in India. This process comprises the following steps The employer provides us with each assignees compensation details (as per the compensation information format provided by us) together with a copy of the assignment/deputation letter, if any. Based on the information received by us, we compute the total estimated tax liability for the assignees in India and inform the client of the monthly withholding tax amount. The withholding tax computations are generally prepared by us on a quarterly basis.
In addition to the above, at the end of the year the employer is also required to issue withholding tax forms to the employees in Form 16 (ie, Certificate of Tax Deducted at Source) and Form 12BA (ie, statement of perquisites provided). The Forms are required to be issued within two months from the end of the previous year (ie May 31 following end of the respective previous year).
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We assist the employers in preparation of such withholding tax forms required to be issued to the assignees on an annual basis. Quarterly return of salaries Every employer responsible for withholding tax from salary payments is required to file four quarterly returns of Salaries with the Indian Revenue authorities by the prescribed dates. The timelines for the returns is as follows Quarterly return of salaries - Quarterly statements for the quarters ending on June 30, September 30, December 31 and the March 31, respectively in each financial year are required to be filed in Form 24Q with the Revenue authorities by July 15, October 15, January 15 and June 15 respectively.
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Quality and Risk Issues

In this section, we shall read about some of the quality and risk issues, adherence to which is extremely important to our practice. These are broadly divided into Client confidentiality; Independence; and File maintenance.
Client confidentiality It is very essential that we keep all client matters confidential and do not discuss them with any person other than the client engagement team. Even where a colleague or a senior requests access to confidential information of the client, the same should be cleared with the engagement manager of the specific client. No documents/papers of the client should be left at your desk. Care should also be taken that where documents relating to confidential data are being disposed, they should be shredded or torn into small pieces so as to not give away the content of the documents. It may be noted that even an erroneous disclosure of confidential information can expose EY and the engagement team to huge penalties. To this effect, our Job Engagement Letters with clients contain a confidentiality clause, where we confirm to the respective client that all information that is made available to us during the course of the engagement with the client shall be kept confidential and not be disclosed without a prior written consent of the client. We also submit that we shall protect the confidential information in a reasonable and appropriate manner or in accordance with the applicable professional standards and use confidential information only to perform obligations under the agreement with the client. In this connection, it may be noted that any data that is generally available to the public is not considered confidential (eg, information made available in a newspaper). Independence It is also essential that we act in an independent manner in our client servicing. Independence is essentially a fundamental requirement to our profession and is pervasive in all our dealings with clients. Essentially, this means that EY (and the servicing professionals) should be free from interests that might be regarded as being incompatible with objectivity, integrity, and impartiality. Therefore, Independence means the ability to provide an opinion without being affected by influences that compromise professional judgment. To act with integrity, and to exercise objectivity and professional scepticism, ensuring that there is no compromise. In this connection, the respective regulatory bodies in each country lay down guidelines (to ensure that independence by a professional is maintained) and boundaries (beyond which a professional would be treated as having breached independence). When servicing a client, we must ensure that we are aware of such independence requirements and study the same before commencing services. Based on the Sarbanes Oxley Act under the US independence legislations , where EY is already providing audit services to a client who is a US Securities and Exchange Commission (SEC) registrant (whether directly to the entity or to its sister concerns), there are certain restrictions placed on the kind of other services that can be provided by EY. These services are essentially divided into -
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Services not permitted at all; Services permitted only if a pre-approval is sought by EY from the audit committee of the client; and Permitted services.
Therefore, before accepting any engagement, we should check whether the client is a SEC registrant audit client (ie, Channel 1) - this can be checked through the Worldwide Independence List and the Parent Subsidiary Database. If the client is a Channel 1 client, we should ensure that we obtain a written pre-approval before commencing services. The same should also be documented and kept on files. File maintenance It is very essential that we maintain our files in an organized and uniform format. The main reason is that in future whenever there is a need to review past history or to obtain a copy of certain documents, there is a quick and reliable source available with us. Some of the best practices of file maintenance are that files should be maintained in a methodological and chronological order. Papers should be punched uniformly and neatly and there should be an index reflecting the contents of each file. It may also be preferable that a soft copy is maintained of the files maintained for each client along with the index for each file. This serves as a good search guide.
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Human Capital India Tax

Human Capital India Tax

Human Capital India Tax

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Not Ordinarily Resident

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Human Capital India Tax

Human Capital India Tax

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Leave Travel Assistance

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Medical reimbursement benefit

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Company Leased Accommodation

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Other miscellaneous perquisites

If any amount is recovered from the employee in respect of transfer, the

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Conversion of foreign income

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Income from House Property

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Income from Capital Gains

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Capital Loss cannot be set-off against any other income.

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Transaction covered by STT Capital assets Long term Short term

Normal Normal Normal Normal Normal Normal Normal Normal Normal

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Income from Other Sources

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Deductions from Gross Total Income

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Set off and carry forward of losses

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Modes of Payment of Taxes

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Step 3 - Reducing the amount of tax deductible/collectible at source (if any).

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Employee Stock Options (ESOP)

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Valuation in case of shares listed on a Recognized Stock Exchange in India

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Concept of Double Taxation Avoidance Agreements

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Typical Tax Compliance Cycle

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