INCOME TAX ACT- 1961

INTRODUCTION

According to the Income Tax Act 1961:

The Indian constitution has empowered only the central govt to levy and collect the income tax.

The act come into force from 1st April 1962 & extends to whole of India It consists of 400 sections and 12 schedules

This act determines which persons are liable to pay tax & in respect of which income.
These rates are prescribed by every year by the finance act known as budget .

This is done mainly to give incentives for investment in priority sectors, to discourage tax evasion, to remove loopholes in the law n to synchronize the law with existing economic situation.

WHAT IS INCOME TAX?

Tax is charged at the rates applicable for assessment year on the Total Income earned during the previous year by an assessee , who is a person.
Similarly every person who is an assessee has to pay any other sum levied on him as per Income tax act. Eg. Surcharge, cess, Interest, Penalty, Prosecution Commutations etc. Income-tax is levied annually.

It is levied at the tax rates fixed by Finance Acts of every year for the respective Assessmet Year (Budget presented on 28th of February, 2008) on the Total Income earned in the previous year, on every person who is an assessee.

BASIC CONCEPT UEDER THIS LAW

ASSESSEE: A person by whom any tax or any other sum of money(for eg. Interest, penalty, fine) is payable under the Income tax act. ASSESSMENT YEAR(AY): the period of 12 months commencing on the 1st day of April each year. PREVIOUS YEAR(PY): The financial year immediately preceding the assessment year. In case of business or profession which is newly started, the previous year commence from the date of commencement of the new business or profession upto the next 31 day of march, unless the person is an existing assessee.

ASSESSMENT: the process of determining the income of an assessee earned during any previous year and finding out the income tax, interest or the other sum payable under the Act.

INCOME AND TOTAL INCOME

Income: Either received or accrued during the year, ie

Accrued and received Accrued and not received Received but not accrued Gross Total Income: which is the total of incomes under different Heads of Income

Exclude the exempted Income

Reduce Deductions (Allowables) The net result is the Total Income which means the taxable income, on which tax is worked out.

PERSON INCLUDES
An Individual
Hindu Undivided Family- HUF Firm Company Association Of Person(AOP) Or Body of Individuals(BOI) Local Authority Artificial Juridical Person

HEADS OF INCOME
I.

Salaries Income From House Property

II.

III.

Profits & Gains From Business or Profession

Capital Gains Income from other sources

IV.

V.

1) SALERY INCOME
Salary includes:

Wages annuity or pension Gratuity Fees, commission, perquisite or profits in lieu of or in addition to salary or wages Advance of salary Leave Encashment Contribution by employer to pension scheme; etc. Any salary due during the previous year, whether paid or not
Salary paid or allowed, whether due or not Arrears of salary, paid or allowed. Leave salary is taxable

GRATUITY & COMMUTED PENSION

The following amounts of gratuity is exempt. Anything other than the following is taxable:

A) Death-cum-Retirement gratuity received by a Government employee; B) Employees where Gratuity Act, 1972 is applicable:- a) 15 days salary for every completed year of service or part of it if exceeds six months (b) Rs.3,50,000/- or the (c) gratuity actually received, whichever is lower; C) Where Gratuity Act is not applicable:- a) 15 days salary for every completed year of service any fraction of the year to be ignored (b) Rs.3,50,000/- or the (c) gratuity actually received, whichever is lower; In the case of B & C, the maximum of Rs.3,50,000/- is from gratuity received from all the employers put together, during the life. Commuted Pension of Government Employees, employees of local authority or statutory corporation are exempt from tax. In the case of others, if gratuity is received/receivable, 1/3 of pension if commuted is exempt. If gratuity is not receivable, of pension if commuted is exempt

ALLOWANCES

Allowances are fixed quantity of money paid in addition to salary to meet a specific purpose. It is taxable, unless otherwise provided. Various popular allowances are, City Compensatory Allowance(CCA), House Rent Allowance(HRA), Entertainment Allowance; Special Allowance; Foreign Allowance; Tiffin/Food Allownce, Fixed Medical Allowance, Servant Allowance, etc House Rent Allowance is generally taxable, the least of the following is exempt

- 50% of Salary in Mumbai, Calcutta, Delhi or Chennai and 40% elsewhere in India; or
- HRA actually received by the employee; or - Excess of rent paid over 10% of salary.

- Exemption is not available if the employee resides at his own residence or house to which he need not pay rent.
- Salary means basic salary + Dearness Allowance and fixed % commission.

OTHER ALLOWANCES

PERQUISITES

Perquisite is a benefit offered by an employer in addition to salary and allowances, which otherwise would have been an expenditure of the employee. The perquisite value is calculated at specific rates as prescribed in the Income-tax Rules. Rent free accommodation; Concessional accommodation LIP paid by employer; Certain benefits or amenities provided to a specified employee; Any sum paid by the employer in respect of any obligation which but for such payment, would have been payable by the employee;

2) HOUSE PROPERTY INCOME

The annual value of the property is taxed as House property income; Property means building or land appurtenant thereto, It should be owned by the assessee; It should not be occupied by him for the purpose of business or profession.

HOUSE PROPERTY INCOME

Net Annual value less the following is the income from house property. Standard deduction u/s.24(a) which is fixed 30% of the Net Annual Value, to meet the expenses of maintenance of the property. Please note, no further deduction is available for insurance, ground rent, land revenue, repairs, collection charges, electricity & water charges, salary of liftman,watchman etc. Interest on borrowed capital u/s.24(b) Interest on capital borrowed for purchase, construction, repairs, renewal or reconstruction of house property, allowable on accrual basis.

IN WHOSE HANDS

House Property income is taxed in the hands of the owner or deemed owner; Owner is the person who has the legal title of the property. Deemed Owner: a) a person who has transferred the property without adequate consideration to the spouse (but not if it is on agreement to live apart) or to a minor child; b) a holder of an impartible estate; c) a member of coop.Society d) a person who has taken a property on a long lease, say 12 years or more.

METHOS OF WORKING INCOME FROM HOUSE PROPERTY

Gross Annual Value (Reasonable rent/Expected Rent) ******* Less: Municipal tax ******* Net Annual value ******* Less: Deduction u/s.24 ******* Interest on borrowed capital ******* Income from House Property *******

3) Profits & Gains From Business or Profession

Under the Income Tax Act, 'Profits and Gains of Business or Profession' are also subjected to taxation. The term "business" includes any (a) trade, (b)commerce, (c)manufacture, or (d) any adventure or concern in the nature of trade, commerce or manufacture.

CHARGABLE INCOME FROM BUSINESS

Profits and Gains of any business or profession; Compensation received by management or other agencies; Income of trade; Profit on sale of import licenses; Cash assistance for exports received from Govt./and Cent. Excise duty paybacks; Benefits from exercise of business or profession; Interest, salary, bonus commission etc. by partner;

GENERAL EXPENSES ALLOWED

Any other expenses incurred wholly and exclusively for the purpose of business, during the previous year, which is not of capital nature, are also allowable under sec.37 of the Act. For Example, Expenses on imparting training

GENERAL EXPENSES ALLOWED

Replacement of fluroscent lights & lamps; Loss through embezzlement of an employee; Professional tax paid; Rebate or bonus granted by Consumer Co-op.Soc. to their members. Expenditure on maintenance of a tea Garden; Deposit paid on OYT (Own Your Telephone); Annual Listing fee of Stock Exchange; Expenses incurred on specified civil defence measures

AUDITABILITY
Every assessee whose turnover of business exceeds Rs.40,00,000/- or turnover of profession exceeds Rs.10,00,000/- or persons claiming a lower profits u/s.44AD.44AE, 44AF, 44BB, 44BBB, should get their books of accounts by a qualified accountant, i.e. a Chartered Accountant and the Audit Report in the prescribed form has to be furnished by 31st October of AY. Failure to maintain books of accounts, or get it audited attracts penalty.

4) Capital Gains

Capital Gain is a part of the taxable income. Capital Gain is the profit earned on sale of capital asset or an investment. Thus to invoke the provisions of capital gains there should be: Existence of capital asset Transfer of such asset Profits and gains from transfer of such asset.

1. 2. 3.

Meaning of Capital Asset u/s.2(47)

Capital asset is the property of any kind held by an assessee, whether movable or immovable, tangible or intangible. For instance: land, buildings, goodwill, tenancy rights. Following are the assets excluded from the definition of capital assets:

any stock in trade, consumables or raw materials for the purpose of business or profession
7% Gold bonds ,National defense gold bonds 1980 issued by the central government

Special bearer bonds, 1991

Gold deposit bonds under Gold deposit scheme, 1999

TYPES OF CAPITAL ASSETS

There are two types of capital assets:

long term capital assets (held by an assessee for mare than 36 months)
short term capital assets (held by an assessee for less than 36 months) Long term capital gains [sec.2(29B)]: It is the capital gain arises from transfer of a long term capital asset. Any losses arising from transfer of a long term capital asset is called as long term capital loss.

Short term capital gains [sec.2(42B)]:

It is the capital gain which arises from transfer of a short term capital asset. Any loss arising from transfer of a short term capital asset is a called short capital loss.

INDEXATION

Indexation means the increase in the cost or improvement, on account of inflation. Cost multiplied by the index on the date of sale divided by the index on the date of acquisition is the indexed cost. Indexation is not applicable to shares, debentures, bonds and Units. Cost of acquisition/improvement x Index on date of Index on date of acquisition/ transfer improvement

RATES OF INDEXATION
YEAR INDEX RATE 100 109 116 125 133 140 150 161 172 YEAR INDEX RATE 182 199 223 244 259 281 305 331 351 YEAR INDEX RATE 389 406 426 447 463 480 497 519 556

1981-82 1982-83 1983-84 1984-85 1985-86 1986-87 1987-88 1988-89 1989-90

1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99

1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08

Computation of short term Capital Gain

Find out full value of consideration Deduct the following: Expenditure incurred wholly and exclusively in connection with such transfer Cost of acquisition Cost of improvement Deduct the exemption provided by sec 54B, 54D and 54G The balancing amount is short term capital gain

Computation of long term Capital Gains

Find out full value of consideration Deduct the following: Expenditure incurred wholly and exclusively in connection with such transfer Indexed cost of acquisition Indexed cost of improvement Deduct the exemption provided by sec 54B, 54D The balancing amount is long term capital gain

DEPRECIABLE ASSETS

In the case of Depreciable assets, the net sale proceeds on transfer of any asset, is reduced from the relevant block of assets. If the net sale proceeds of a part of the block, exceeds the written down value + the cost of new asset in the same block acquired, the excess is taxed as short term capital gain. If total block is transferred, the excess of net sales proceeds over the wdv + cost of new

WHAT IS EXEMPTED INCOMES

The incomes specifically mentioned as exempt under the Income-tax Act, 1961 are not subjected to tax. Sec.10, sec.10A, sec.10B, sec.11 and sec.12 specifies the exempted incomes.

SOME EXEMPTIONS U/s.10

Agricultural Income; Amount received by a member of HUF or partner of a Firm, out of income of the HUF/Firm which has been subjected to tax. (that is; the proportionate share in the firms total income) Any income specifically exempted by the Govt.(Tax-free interest on securities etc.) The salary of any foreign official of a foreign Embassy, High Commission, Consulate, etc. in India. (Provided that he has no other income as professional etc. in India) Salary of a merchant navy official of a foreign ship, unless his stay in India during the year is less than 90 days; Remuneration of an employee of a foreign state during his training in India under Govt. or Govt. Company/society.

EXEMPTION U/S.10 (Contd)

Royalty or fees for technical services received from Govt. or on account of an agreement with Govt. Allowance or perquisite paid outside India by the Govt. to a citizen of India for rendering service outside India; Remuneration received by a an individual from a foreign state, for services rendered in India, as per agreement with the Indian or state Govt. Gratuity (Death-cum-Retirement) from Govt., or under Payment of Gratuity Act or any other Gratuity to an extent of months average salary for the years of service or Rs.3,50,000/- whichever is less; (Aggregate from all the employers) (Max. EL 30 days)

EXEMPTION U/S.10 (Contd)

Perquisites of an employee, if employer paid the FBT; Insurance Policy paid. (If employer pays premium, not to exceed 20% of salary); Any amount received from Provident Fund or approved Superannuation Fund; Interest or premium on securities if the Govt. so specifies; Scholarships to meet the cost of education; Daily allowance and Constituency allowance of an MP or MLA/MLC or Legislative Committees Awards and Rewards given by the Govt. or institute or body approved by Central Govt.

EXEMPTION U/S.10 (Contd)

Pension or family pension of an awardee of a gallantry award (eg.Param Vir Chakra, Maha Vir Chakra or Vir Chakra etc.) ; Family pension of a member of Armed forces if the death in the course of duty Income of a local authority which Panchayat, Municipality, Municipal Committee, District Board, or Cantonment Board; Income of an approved Scientific Research Association (Conditions apply); Income of approved News Agency; or agency to control, supervise, regulate or encourage profession of law, medicine, accountancy, engineering or architecture etc;

EXEMPTION UNDER OTHER SECTIONS

Income of newly established undertaking in free trade zones, etc.- u/s.10A Income of newly established undertaking in Special Economic Zones, etc. u/s.10AA Income of newly established undertaking in 100% export oriented undertakings.-u/s.10B; Income of an undertaking engaged in export of certain articles or things u/s.10BA. Income of certain Industrial Undertakings in North Eastern Region u/s.10C. Income from property held for charitable or religious purposesu/s.11.

5) INCOME FROM OTHER SOURCES

All residual income, which do not fall in any other heads.

Some of the examples aredividends u/s.2(22), interest on securities, interest on bank deposits and loans winning from lotteries, crossword puzzles, horse races, card games etc, income from hire of machinery, plant or furniture. gifts,

income from royalty, directors fees, examination fee received, rent of a plot of land, insurance commission, mining rent and royalties, interest on foreign Govt. Securities, KVP, casual income, annuity under will, etc.

DIVIDEND

The dividend income is exempt from tax in the hands of the recipient, but the deemed dividend as defined in sec.2(22) would be taxable Sec.56(2)(i).

U/s.2(22), the following payments by a company to its shareholders are deemed as dividends to the extent of accumulated profits of the company:
a) any distribution entailing the release of companys assets; b) any distribution of debentures, debenture stock, deposit certificates and bonus to preference shareholders; c) distribution on liquidation of the company; d) distribution on reduction of capital; e) any payment by way of advance or loan to: i) a shareholder, being a beneficial shareholder, holding not less than 10% of voting power or a director; or ii) any concern in which such shareholder is a member owner or partner or in which he has substantial interest.

WINNINGS & GIFTS

1. 2.

Tax charged at flat rate of 30%

Conditions in case of GiftsThe recipient is an Individual or HUF. Any sum of money or property is received without consideration on or after Oct. 1 2009.

3.

an Individual or HUF receives gift (any amount without consideration) during financial year over Rs.50,000/- (aggregate) entire amount is taxable
Exceptions to sec.56(2): Money received

(i) from a relative,

(iii) on will or inheritance payer,

(ii) on the occasion of marriage,

(iv) in contemplation of the death of the (v) from a local authority,

(vi) from any fund, foundation, university, hospital, etc.

(vii) registered charitable institute.

EXAMPLE
Mr. X receives the following gifts:

1. 01.04.07 Rs.25,000/- from a friend;

2. 01.05.07 Rs.500/- from another friend; 3. 01.06.07 Rs.26,000/- from a cousin of father; 4. 18.07.07 Rs.5000/- from brother of grandfather; 5. 20.07.07 Rs.41,000/- from grandmother; 6. 31.07.07 Rs.1,39,000/- on marriage out of which Rs.1,00,000/are from relatives of Mr.X & Mrs.X

7. 01.05.07 A computer worth Rs.40,000/- from employer;

8. 01.10.07 Rs.80,000/- from a registered Public Charitable Trust; 9.01.10.07 Rs.5,40,000/- under a will from a distant relative

ANSWER
Sr.No. 1 2 3 4 5 6 7 8 9 Total 56,500 Taxable Rs. 25,000 500 26,000 5,000 Exempt Rs. Gift from friend is not exempt Gift from friend is not exempt Cousin of father is not a relative. Brother of grandfather is not relative 41,000 Grandmother is relative 1,90,000 Gifts on marriage is exempt 40,000 Gifts in kind is not taxable 80,000 Gifts from Recognized Charitable Institution is exempt. 5,40,000 Gift on will not taxable Since the total taxable gift is more than Rs.50,000/- , Rs.56,500/- taxable Reason

DEDUCTION

Any reasonable sum paid by way of remuneration or commission for the purpose of realizing dividend or interest. Deduction in respect of employees contribution towards staff welfare scheme. Income in the nature of family pension, 1/3rd or Rs.15,000/whichever is less. Income from hire of machinery, plant or furniture: - repairs to the building - current repairs to machinery, plant and furniture and insurance premium -depreciation on building, machinery, plant & furniture; - unabsorbed depreciation.

WHAT CANNOT BE DEDUCTED

Personal expenses;
Any interest or salary paid/payable outside India unless tax has been deducted at source; Any wealth-tax paid/payable;

Expenditure in respect of royalty and technical fees received by a foreign company;

Any expenditure incurred in case of winning from Lottery, Crossword puzzles, races including horse race, card games gambling or betting etc.