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INCOME TAX DAY-1 BASIC CONCEPTS TAXATION: Taxation is the system by which a government takes money from people so that it can pay for public services. CLASSIFICATION OF TAX:...
INCOME TAX DAY-1 BASIC CONCEPTS TAXATION: Taxation is the system by which a government takes money from people so that it can pay for public services. CLASSIFICATION OF TAX: 1) Direct Tax 2) Indirect Tax DIRECT TAX: 1) Income Tax 2) Wealth Tax 3) Professional Tax INDIRECT TAX: 1) Goods & Services Tax About Income Tax: The term “Income tax” means tax on income. Now we have to understand the meaning of income. The definition of the term income in section 2(24) is inclusive and not exhaustive. Therefore, the term” not only includes those things which are included in section 2(24) but also includes such things. The respective act of Income tax was made in 1961 and the provision of income tax Act 1961 which came into force on 13th September 1961 but the first income tax Act introduced in 1860. At present the Income tax department is under the department of Revenue in the Ministry of Finance Administers. Assessment Year: [Sec.2 (9)] Assessment year' means a period of twelve months commencing on 1st April of every year and ending on 31st march of the next. Income of previous year of an assessee is taxed during the next following assessment year at the rates prescribed by the relevant Finance Act. So we can say that Assessment year is a period in which the income of the previous year is to be assessed. Previous Year: [Sec. 3] 'Previous Year' means the financial year immediately preceding the assessment year. This is a period of 12 months starting from 1St April and ending on 31St March of the following year. Income earned in the previous year is assessed in the following assessment year and as such previous year also is known as 'Income year'. Assessee: [Sec. 2(7)] Assessee means- a. A person whom any tax or any other sum of money including interest and penalty payable under this act. b. Any person against whom any processing under this act has been taken for assessment of his or anybody else income or loss or refund. c. Any person who is deemed to be an assessee. Deemed to be an assessee including legal representative, agent of non-resident, guardian, or manager of infant lunatic, trustees etc. d. Demand to be an assessee in default includes persons who have deducted tax at source and not deposited it to the government. Person: [Sec. 2(31)] The term "Person" includes: 1. a n I n d iv id u a l; 2. a Hindu Undivided Family; 3. a Co m p a n y ; 4. a F i r m ; 5. an association of person or a body of individuals, weather incorporated or not; 6. a loc al a uthor ity 7. every artificial judicial person not falling within any of the preceding category. These are seven categories chargeable to tax under the Act. Individual: An individual means a natural person i.e., a human being. Hindu Undivided Family: A Hindu undivided family is a separate taxable entity and consists of all persons lineally descending from a common ancestor including their wives and unmarried daughters. Company: A company may be defined as an incorporated association which is an artificial person, having an independent legal entity, with a perpetual succession, a common seal, a common capital comprised of transferable shares carrying limited liability. Firm: A firm refers to a partnership firm. Partnership has been defined under the Partnership Act, 1932 as “relationship between persons who have agreed to share the profits of a business carries on by all or any of them acting for all". Association of person or body of individuals: An association person of two or more persons who have joined together for a common purpose or common action. Body of individuals means a mass of individuals who carry on some activity with the objective of earning some income. It would consist only of individuals. Local authority: A local authority may be a municipality, district board, body, body of port commissioners or other authorities, legally entitled to or entrusted by the Government with the control and management of a municipal or local fund. Every artificial judicial person not falling within any of the preceding category: Artificial persons, who are not natural persons but are separate entitles in the eyes of law. Though they may not be sued directly in a court of law but they can be sued through persons managing them. Therefore, God, idols and deities are artificial persons. Though they may not be sued directly, they can be legally sued through the priests or the managing committee of the place of worship. They are persons and their incomes, like offerings, are taxable. Assessment: [Sec. 2(8)] In general, assessment may be defined as the process of computation of total income of the assesse and computation of tax payable as well as scrutiny of the returns filed by the assesse and also determination of income or loss and further charge or levy of tax, interest, penalty, if any. In other words, Assessment is a process by which the income and the tax liability of an assesse is determined by the assessing officer. Income: [Sec. 2(24)] The definition of the term "income" in section 2(24) is inclusive and not exhaustive. Therefore, the term "income" not only includes those things which are included in section 2(24) but also includes such things which the term signifies, according to its general and natural meaning. So, income is a periodically monetary return with some sort of regularity. It may be recurring in nature. It may be broadly defined as the true increase in the amount of wealth which comes to a person during a fixed period of time. Casual Income and Non-recurring Income: [Sec. 10(3)] A casual income means a receipt which is casual and non-recurring in nature. A casual receipt usually means a receipt which occurs almost accidentally or fortuitously. Where the expression 'non-recurring' implies that there is no expectation of being repeated. e.g., winning from lotteries, races, etc. Heads of Income: As per section 14, income of a person is computed under the following five heads: 1. Income from Salary; 2. Income from House Property; 3. Income from Profits or Gains of business or profession; 4. Income from Capital Gains; 5. Income from other sources. Gross total income: 'Gross total income' refers to the aggregate of income assessed under each head of income as specified in section 14 of the act. In other words, aggregate of income of an assesse under the head 'salaries', 'Income from house property', 'Profits and gains of business or profession', 'Capital gains' and 'Income from other sources' computed in accordance with the provision of Act is the gross total income of the said assesse. 'Gross total income' may also be interpreted as the total income or taxable income of the assesse before making any deduction admissible under chapter VIA of the Act. Total income: Total income of an assesse is gross total income as reduced by the amount permissible as deduction under section 80C to 80U. The taxable income shall be rounded off to the nearest multiple of ten rupees and the amount of tax, penalty or interest payable under the Act shall be rounded off to the nearest rupee. Casual income: Any receipts of casual and non-recurring nature, like winning from races, lotteries, etc., are known as casual income. Tax Rebate: A deduction from the amount of tax payable availed when the assesse makes the specified investments. Tax planning: COMPUTATION OF INCOME FORM ASSESSMENT YEAR Particulars Amount Rs Amount Rs. 1. Income from salaries Basic salary xx Income by way of allowances xx Taxable value of perquisites xx Gross total Less: Deduction under section16 Entertainment allowance 16(i) xx Professional tax 16(ii) xx Income from salaries xxx. Income from house property Adjusted net annual value xx Less: Deduction under section 24 xx Income from House property. xxx. Profits and gains of business or profession Net. profit as per profit and loss account. Add: Amount which are debited to P & L a/c but are Not xx allowable as deduction under the Act. Less: Expenditure which are not debited in PF & L a/c but allowable as deduction under the Act. xx Less: Income which are credited to P & L a/c but Exempt under Sec. 10 or are taxable under other heads of income xx Add: Those income which are not credited to P & L a/c are Taxable under the head "profits and gains of business or profession". xx Profits and gains of business or profession. xxx Capital Gains Amount of capital gain xx Less: Amount exempt Under section 54, 54B, 54C,54EC, 54ED, 54F, 54G, 54GA, xx and 54H. Income from capital gains xxx Gross income xx Less: Deduction Under section 57 xx Income from other sources xxx Total [ 1+2+3+4+5] xxx Less: Adjustment on account of set-off and xx carry forward of losses Gross Total Income Less: Deduction under section 88C to 88U xx Total Income or Net Income [Rounded off] xxx Arranging affairs in such a manner so as to minimize tax liability within the limits of law. Tax planning is legal.] Subsidy: It is the cash assistance received during the course of business from any number of agencies weather the amount so received is taxable will depend upon the purpose for which the subsidy is granted. Revenue nature-given to supplement the income granted to recoup the revenue expenditure during the course of business, refund of sales tax or power tariff. Capital nature of subsidy given for acquiring a capital asset, incentive to set up industry. Minimum Alternative Tax (MAT): Minimum amount of tax payable by a company where the taxable profit of a company is less than the specified amount. ESOP: Employees Stock option- where the employee is offered shares and stock of the company in which he is employed, normally at a discounted rate. Total income and Tax liability thereon: COMPUTATION OF TAX LIABILITY COMPUTATION OF TAX LIABILITY PARTICULARS Amount Rs. Net Taxable Income xx Less: Rebate under section 88E* xx Balance xx Add: Surcharge xx Tax + Surcharge xx Add: Educational Cess xx Less: Rebate under section 86, 89 90 and 91 xx Gross Tax Liability xx Less: Prepaid taxes Less: Tax paid on self-assessment xx Less: Tax deducted or collected at sources xx Less: Tax paid in advance xx Net Tax liability xx *Section 88E - Rebate in respect of securities transaction tax Where the total income of an assessee in a previous year includes any income, chargeable under the head Profits and gains of business or profession , arising from taxable securities transactions, he shall be entitled to a deduction, from the amount of income-tax on such income arising from such transactions Rounding-off income. [Sec.288A] Income before rounding offIncome after rounded off Rs. Rs. 6,50,314.99 6,50,310 6,50,315.00 6,50,320 6,50,316.00 6,50,320 Rounding-off tax. [Sec.288B] The amount of interest, penalty, fine or other sum payable and the amount of refund due, under the provisions of act shall be rounded off to the nearest rupee. And the cut off value is fifty paise. Example: Tax liabilityTax liability (rounded off) Rs. Rs. 2,382.49 2,382 2,382.50 2,383 2,382.99 2,383 Made of Computation of Income & Tax Liability Name of the Assesse: Assessment Year: Residential Status: Previous Year: Particulars Rs. 1 Income from Salaries ( Chapter 2) *** 2 Income from house property (Chapter 3) *** 3 Profits and gains of business of profession (Chapter 4) *** 4 Income from capital gains (Chapter 5) *** 5 Income from other sources (Chapter 6) *** Gross Total Income *** Less: Deductions under section 80C 80U (Chapter 9) *** Total/ Taxable Income *** Computation of Tax Liability: *** Tax on total income *** Less: Tax rebate u / s 87 A *** Balance tax after rebate *** Add: Surcharge (if applicable) *** Balance tax after surcharge *** Add: Education Cess @ 2% and Secondary and Higher Education Cess @ 1% *** Tax including EC & SHEC *** Less: Tax paid on self – assessment ** *** TDS ** Advance Tax Paid ** Tax Payable / Tax Refundable *** Tax Rates (For Assessment Year 2024-25) For Individual / HUF/ AOP/ BOI/ Artificial Juridical person Income Tax Income Rate of Tax Upto Rs. 2,50,000* Nil Rs. 2,50,001 – Rs. 5,00,000 5% Rs. 5,00,001 – Rs. 10,00,000 20% Above Rs. 10,00,000 30% Surcharge Income Rate of surcharge Rs. 50,00,000 – R.s 1,00,00,000 10% Above Rs. 1,00,0000 15% Cess Particulars Rate of Cess Education Cess 2% Secondary and Higher Education Cess 1% Rs. 3,00,000 if age of the individual is more than 60 years but less than 80 years at any time during the previous year (Senior Citizen) Rs. 5,00,000 if age of the individual is more then 80 years at any time during the previous year ( Super Senior Citizen) Note: The amount of Rs. 2,50,000 or Rs. 3,00,000 or Rs. 5,00,000 is called “ maximum amount not chargeable to tax” or “ basic exemption limit”. Under Section 87A – In case of resident individual whose total income does not exceed Rs. 5,00,000, rebate shall be allowed from income tax @ 100% of income tax or Rs. 12,500 whichever is less. Total income of Mr. Bhutoria (age 36 Years) for the Assessment Year2024-25 Solution is Rs. 60,50,000. Calculate the amount of tax payable by him. Income Rate of Tax Amount in slab (Rs.) Amount of Tax (Rs.) Upto Rs.2,50,000 Nil 2,50,000 Nil 2,50,001 – 5,00,000 5% 2,50,000 12,500 5,00,001 – 10,00,000 20% 5,00,000 1,00,000 Above 10,00,000 30% 50,50,000 15,15,000 60,50,000 16,27,500 Add: Surcharge 10% 1,62,750 Balance tax after surcharge 17,90,250 Add: Education Cess 2% 35,805 Add: SHE Cess 1% 17,903 Tax Payable 18,43,958 4. Fill in the blanks: a. Age of Mr. Radhe is 45 years – From (Rs.) To (Rs.) Rate of Tax Nil Nil 5,00,000 5% 5,00,001 20% 30% b. Age of Mr. Problem is 66 Years – From (Rs.) To (Rs.) Rate of Tax Nil Nil 5,00,000 5% 5,00,001 20% 30% c. Age of Mr. Solution is 89 years – From (Rs.) To (Rs.) Rate of Tax Nil Nil 10,00,000 20% 10,00,001 30% d. Total Income of Mr. Right is Rs. 70,00,000. Rate of surcharge is________________%. e. Total Income of Mr. Wrong is Rs. 1,50,00,000. Rate of surcharge is_______________%. f. Rate of Education Cess is____________%. G. Rate of________________________________________________________ Cess is 1%. 5. Calculate the amount of tax payable (including E Cess) for the Assessment Year 2018-19: Particulars Amount of Tax (Rs.) a. Total income of Mr. Akash (age 36) is Rs. 3,45,000 b. Total Income of Mr. Shalini (Age 32) is Rs. 8,50,000 c. Total Income of Mr. Sameer (Age 44) is Rs. 12,60,000 d. Total Income of Ms Pooja (Age 40) is Rs. 70,60,000 e. Total Income of Mr. Siddharth (Age 50) is Rs. 1,20,50,000 f. Total Income of Ms Tara (Age 66) is Rs. 9,04,000 g. Total Income of Mr. Rohit (Age 81) is Rs. 60,60,600 6. Download the Excel Template named “DT Assignment – Chapter 1” and calculate the amount of tax payable (including E Cess) for the Assessment Year 2018-19 in each of the following case: a. Total income of Mr. Bhahubali (age 36 years) is Rs. 8,50,000; b. Total income of Ms Devasena (age 30 years) is Rs. 4,90,000; c. Total income of Mr. Bhallaladeva (age 42 years) is Rs. 10,50,000; d. Total income of Ms Avantika (age 35 years) is Rs. 50,50,000; e. Total income of Mr. Kattappa (age 68 years) is Rs. 7,50,000; f. Total income of Ms Sivagami Devi (age 82 years) is Rs. ,120,50,000; Specific Rates of Tax In respect of certain types of income, the Income Tax Act has prescribed specific rates – Sl No. Nature of Income Rate of Tax a Long Term Capital Gains 20% b Short Term Capital Gains on transfer of – Equity shares in a company Unit of an equity oriented fund Unit of business trust Conditions: 15% a) Such shares or units sold on or 1/10/2004 b) Securities Transactions Tax has been charged on such sale c Winnings from – Lotteries Crossword Puzzles Race including horse races 30% Card game and other game of any sort Gambling or betting of any from d Income by way of dividend exceeding Rs. 10 Lakhs in aggregate 10% e Unexplained money, investment, expenditure etc. deemed as 60% income Incomes exempt from Tax [Section 10] There are certain incomes which are absolutely exempt from tax and they do not form part of total income. Following are the incomes, which are exempt from tax – ✓ Agricultural Income TAX EXEMPTIONS ✓ Share of income from Partnership Firm JUST AHEAD ✓ Amount received by a member from HUF Income ✓ Gratuity ✓ Payment to MPs and MLAs ✓ Income of registered trade unions This list is illustrative only may include some more incomes. Interview Questions 1. Your total income for the Assessment Year 2018-19 is Rs. 5,40,000. What is the amount of tax rebate available to you under section 87A? Ans: Nil 2. My total income for the Assessment Year 2018-19 is Rs. 3,40,000. What is the amount of tax rebate available to me under section 87A? Ans: Rs-4,500 3. Your friend’s total income for the Assessment Year 2018-19 is Rs. 2,80,000 and tax payable. What is the amount of rebate available to me under section 87A? Ans: RS - 1,500 4. What is the rate of surcharge in case the total income is Rs. 46 lakhs? Ans: Nil 5. What is the rate of surcharge in case the total income is Rs. 76 lakhs? Ans: 10% 6. What is the rate of surcharge in case the total income is Rs. 106 lakhs? Ans: 15% 7. My total income for the previous year 2017-18 is Rs. 80,50,000. I do not have to pay surcharge as I am a Super Senior Citizen – True or False? Ans: True 8. Education Cess @ 3% is payable when the income exceeds Rs. 5 lakhs – True or False? Ans: False 9. You have won a lottery prize money of which is Rs. 10,00,000. You have to pay tax of Rs. 1,00,000 on it – True/ False? Ans: 10. Income of my father who is 89 years old is having total income of Rs. 89 lakhs during the previous year 2017-18. Calculate the amount of tax payable by him. Ans: Rs -24,70,000 Add E.cess @3% -74,100 Total- Rs -25,44,100 ANNEXURE [For self – study and not to be covered in class] MARGINAL RELIEF In case the total income of an individual exceeds Rs. 50 lakhs, the total amount of income tax (including surcharge) on such income should not exceed the amount of income tax payable on Rs. 50 lakhs by more than amount of income that exceeds Rs. 50 lakhs. Total income of Mr. X (aged 53 years) is Rs. 51 lakhs for the assessment year 2023-24. His tax liability can be calculated as follows: A) Tax payable including surcharge @ 10% on total income of Rs. 51 lakhs. = Rs. 14,76,750 B) Tax payable on total income of Rs. 50 lakhs = Rs. 13,12,500 Excess tax payable (A-B) = Rs. 1,64,250 Marginal Relief (Rs. 1,64,250 – Rs. 1,00,000 being the amount in excess of Rs. 50 lakhs = Rs. 64,250 Tax Payable = Rs.14,12,500 Add; E Cess @ 3% = Rs. 42,375 Tax Liability (rounded off) = Rs. 14,54,880 Note: The same rule is applicable in case the total income exceeds Rs. 1 crore and other assesses also. TAX RATES FOR OTHERS (ASSESSMENT YEAR 2023-24) Partnership Firms 30% + Education Cess @ 2% and Secondary & Higher Education Cess @ 1% (+) Surcharge – 10.20% if net income exceeds Rs. 1 crore Domestic Companies 30% (25% where the total turnover or gross receipts during the previous year 2015-16 does not exceed Rs. 50 crore) + Education Cess @ 2% and Secondary & Higher Education Cess @ 1% (+) Surcharge – 7% if net income is between Rs. 1 crore and Rs. 10 crore 12%, if net income exceeds Rs. 10 crore RESIDENTIAL STATUS- Whether a person will be charged to a particular income or not, depends on this residential status. The Residential Status of the assessee may be of three types namely: Residential Status Resident and Resident but not Ordinarily Resident Ordinarily Resident Non- resident Residential Status of an Individual: It is determined on the basis of the following conditions: a) Primary conditions- 1. Has stayed in India for 182 days or more during the previous year, or 2. Has stayed in India for at least 60 days during the previous year and for 365 days more during the last four years preceding the relevant previous year. b) Secondary conditions- 1. He must be resident for 2 out of last 10 years preceding the relevant previous year, and 2. Has stayed in India for at least 730 days in the last 7 years immediately preceding the relevant previous year. An individual, satisfying any one or more of the basic conditions and all the secondary conditions, will be considered to be a Resident and ordinarily resident. However an individual satisfying any one or more of the basic conditions but only one or none of the secondary conditions will be considered as a Resident but not ordinarily resident. Lastly, any individual who is satisfying none of the primary conditions will be considered to be a Non-Resident. There are 2 exceptions to the above rule of classification of Residential Status:- 1. In case of an individual, who is a citizen of India and who leaves India in any financial year for the purpose of employment outside India, the 2nd condition stated above shall not be applicable and only the 1st condition of 182 days or more would be applicable. 2. In case of an individual who is a citizen of India or is a person of Indian origin and who being outside India comes on a visit to India in any financial year, the 2nd conditions stated above shall not be applicable and only the 1st condition of 182 days or more would be applicable. Note: While calculating the number of days of stay in India both the days on which an individual left and the day on which he come to India is to be taken into consideration. Biman provides the details of his stay in India for the following assessment year- 2004-05 – 365 days 2005-06 – 365 days 2006-07 – 366 days 2007-08 – 115 days 2008-09 – 080 days 2009-10 – 050 days 2010-11 – 150 days 2011-12 – 150 days 2012-13 – 067 days 2013-14 – 160 days 2014-15 – 059 days 2015-16 – 105 days 2016-17 – 120 days 2017-18 – 120 days Detemine the residential status of Prakash for the Assessment Year 2018-19. SOLUTION Mr. Prakash has been in India for more than 60 days during the previous year and for 444 days during 4 years just preceding the previous year. As such, he is Resident in India. However, as he is in India for a total period of 811 days in 7 years just preceding the previous year and was a resident for 2 years out of 10 year just preceding the previous year, he is a Resident and Ordinary Resident of India. Residential Status of a HUF: If the control and management of the affairs of HUF is situated wholly or partly in India then HUF is said to be Resident in India. If the control and management of the affairs or HUF is situated wholly outside India, then HUF is said to be Non-Resident in India. A resident HUF is said to be ‘not ordinarily resident’ in India if Karta or manager thereof satisfies anyone or both the following additional conditions: He has been non-resident in India in 9 out of the 10 years immediately preceding the relevant previous year, or He has been present in India for 729 days or less during the seven years immediately preceding the previous year. Residential status of a company: A company would be resident in India in any previous year if- a) it is an Indian company; or b) Its place of effective management in that year is in India. A foreign company would be resident in India if its place of effective management (POEM) in that year is in India. “Place of Effective Management” to mean a place where key management and commercial decisions that are necessary for the conduct or the business of an entity as a whole are in substance made. CHAPTER-2 RESIDENTIAL STATUS Residential status of an assesse is an important factor for determining the basis of change of his income that, in its turn, affects his liability. The following norms one has to keep in mind while deciding residential status of an assesse. Different taxable entities: All taxable entities are divided in the following categories for the purpose of determining residential status a. An individual b. A H i n du U n di v i d e d Fa m i l y c. A firm or an association of persons d. A jo i n t s t o c k c o m pa ny e. E v e r y o t h e r p e rs o n. Different residential status: An assesse is either;(a) resident in India, or (b) non-resident in India. However, a resident individual or a Hindu Undivided Family has to be (a) resident and ordinarily resident, or (b) resident but not ordinarily resident. Therefore, an individual and a Hindu undivided family can either be: a. Resident and ordinarily resident in India; or b. Resident but not ordinarily resident in India; or c. Non-resident in India All other assesse (viz., a firm, an association of person, a joint stock company and every other person) can either be: a. Res i den t i n In di a ; or b. N o n - r es i d en t i n I n di a. The table given below highlights the same: Category. Individual/Hindu undivided family Firm, association of persons, joint stock company and every other person Resident in India Category 1. Resident and ordinarily resident in India Resident but not ordinarily resident in India Category 2. Not-ordinarily Non-resident resident in India Non-resident in India Residential status of an individual: Resident: An individual is said to be resident if he satisfies the following conditions; a) He is in India in the previous year for a period of 182 days or more. b) He is in India for a period of 60 days or more during the previous year and 365 days or more during 4 years immediately preceding the previous year. Additional condition: Resident and ordinarily resident: A resident is treated as "resident and ordinarily resident" in India if he satisfies the following two additional conditions; I. He has been resident in India in at least 2 out of 10 previous years [according to the basic condition noted above] immediately preceding the relevant previous year. II. He has been in India for a period of 730 days or more during 7 years immediately preceding the relevant previous year In brief it can be said that an individual becomes resident and ordinarily resident in India if he satisfies at least one of the basic conditions [i.e., (a) or (b) and the two additional conditions [i.e., (i) and (ii)] Resident but not ordinarily resident: An individual who satisfies at least one of the basic conditions but not satisfy the two additional conditions treated as a resident but not ordinarily resident in India. In other words, an individual becomes resident but not ordinarily resident in India in any of the following circumstances: Case 1. If he satisfies at least one of the basic conditions but none of the additional conditions Case 2. If he satisfies at least one of the basic conditions and one of the additional conditions. Non-resident: An individual is said to be non-resident in India if he satisfies none of the basic conditions. In this case additional conditions are irrelevant. Residential status of Hindu Undivided Family: Resident: A HUF is said to be resident in India if control and management of its affairs is wholly or partly situated in India. Resident and ordinarily resident: A HUF is an ordinarily resident in India if the Karta or manager of the family satisfies the following two additional conditions: 1. Karta or manager has been resident in India in at least 2 out of 10 previous years [according to the basic condition noted above in "residential status of an individual"] immediately preceding the relevant previous year. 2. Karta or manager has been in India for a period of 730 days or more during 7 years immediately preceding the relevant previous year Resident but not Ordinarily resident: If the Karta or manager of the resident HUF does not satisfy the two additional conditions, the family is treated as "Resident but not ordinarily resident" in India. Non-Resident: A HUF is said to be non-resident in India if control and management of its affairs is wholly situated outside India. Residential status of a company Resident: A company is said to be resident in India if 1. It is an Indian company 2 During the previous year its control and management is situated wholly in India. Residential status of Firm and Association of person: Resident: A firm and Association of person is resident in India if control and management of its affairs is situated wholly or partly in India and partly outside India. In brief it can be said that an individual becomes resident and ordinarily resident in India if he satisfies at least one of the basic conditions [i.e., (a) or (b) and the two additional conditions [i.e., (i) and (ii)] Resident but not ordinarily resident: An individual who satisfy at least one of the basic conditions but not satisfy the two additional conditions treated as a resident but not ordinarily resident in India. In other words, an individual becomes resident but not ordinarily resident in India in any of the following circumstances: Case 1. If he satisfies at least one of the basic conditions but none of the additional conditions Case 2. If he satisfies at least one of the basic conditions and one of the additional conditions. Non-resident: An individual is said to be non-resident in India if he satisfies none of the basic conditions. In this case additional conditions are irrelevant. Residential status of Hindu Undivided Family: Resident: A HUF is said to be resident in India if control and management of its affairs is wholly or partly situated in India. Resident and ordinarily resident: A HUF is an ordinarily resident in India if the Karta or manager of the family satisfies the following two additional conditions: 1. Karta or manager has been resident in India in at least 2 out of 10 previous years [according to the basic condition noted above in "residential status of an individual"] immediately preceding the relevant previous year. 2. Karta or manager has been in India for a period of 730 days or more during 7 years immediately preceding the relevant previous year Resident but not Ordinarily resident: If the Karta or manager of the resident HUE does not satisfy the two additional conditions, the family is treated as "Resident but not ordinarily resident" in India. Non-Resident: A HUF is said to be non-resident in India if control and management of its affairs is wholly situated outside India Residential status of a company Resident: A company is said to be resident in India if 1. It is an Indian company 2 During the previous year its control and management is situated wholly in India. Residential status of Firm and Association of person: Resident: A firm and Association of person is resident in India if control and management of its affairs is situated wholly or partly in India and partly outside India. Chapter 3 Income from salaries Income from Salaries Income Income from from Other Capital sources Gains Heads of Income Profit and Income Gains of from House Business or Property Profession Salary under section 17(1): Under section 17(1), salary is defined to include the following: a. Wa g e s ; b. Any annuity or pension; c. Any gra tuity ; d. Any fees, commission, perquisites or profits in lieu of or in addition to any salary or wages; e. Any advance of salary; f. Any payment received by an employee in respect of any period of leave not availed by him; g. The portion of annual accretion in any previous year to the balance at the credit of an employee participating in a recognized provident fund to the extent it is taxable; h. Transferred balance in a recognized provident fund to the extent it is taxable; and i. The contribution made by the Central Government to the account of an employee under a pension scheme referred to in section 80CCD. Basis of Charge Due Earlier of Receipt Salary is chargeable to tax on due basis (accrued) or on receipt basis (advance) whichever is earlier. a) Mr. Govinda draws his salary for the month of April 2023 in advance in the month of March 2023. It is chargeable to tax as income of the previous year 2022-2023 i.e. assessment year 2023-24 on receipt basis. However, the same will not be taxable in the assessment year 2024-25. b) If the salary for the March 2023 is received in the month of April 2023, it is still chargeable as income of the previous year 2022-23 i.e. assessment year 2023-24 on due basis and in this case also, the same will not be taxable in the assessment year 2024-25. Taxability of Allowances Fully Taxable Allowances Allowance Type Particulars Extra amount given to an employee to meet the burden Dearness Allowance (DA) of inflation or increased cost of living Compensation for the high cost of living in metropolitan City Compensatory Allowance and large cities Fixed allowance paid to the employees on a monthly basis Fixed Medical Allowance irrespective of whether they submit the bills to substantiate the expenditure or not Partly Taxable Allowances 1. Exempt to the extent of amount expended for the purpose for which they are given Allowance Type Particulars Granted to meet the cost incurred by the employee on travelling, tour Travelling Allowance or transfer Granted to meet the cost incurred by the employee on conveyance for Conveyance Allowance performance of official duties. Daily Allowance Granted to meet daily charged incurred on tour 2. Exempt to the extent of amount notified Allowance Type Amount Exempt Upto ₹ 1,600 per month (₹ 3,200 per month in case of a blind/ deaf/ dumb/ Transport Allowance orthopedically handicapped) Children Education ₹ 100 per month per child for a maximum of 2 children Allowance Hostel Expenditure ₹ 300 per month per child month per child for a maximum of 2 children Allowance Note: These lists are not exhaustive. We have mentioned the most common allowances only. 1. Fill in the blanks: a. Dearness Allowance is _______________ (Fully Taxable/ Partly Taxable); b. Travelling Allowance is exempt to the extent of ____________________; c. Transport Allowance is exempt to the extent of ₹ __________ per month; d. Fixed Medical Allowance is _______________ (Fully Taxable/ Partly Taxable); e. Children Education Allowance is exempt to the extent of ₹ ___________ Per month for a maximum of ___________ children; f. Conveyance Allowance is exempt _______________________________. Particulars ₹ Basic Pay, Fees, Commission, Bonus xxx Add: Taxable Allowances xxx Taxable perquisites xxx Gross Salary xxx Less: Deductions u/s 16 a) Entertainment Allowance xxx b) Professional tax xxx Taxable income from Salary xxxx HOUSE RENT ALLOWANCE (HRA) Least of the following is exempt from tax: a) Actual HRA received b) Rent paid minus 10% of salary* c) 50% of salary (40% of salary if the house is not in Mumbai, Delhi, Kolkata or Chennai) *Salary = Basic Pay + DA + Fixed Percent – wise commission on turnover Conditions: ֎ The employee must stay in a rented house ֎ Must have actually incurred expenditure on payment of rent ֎ HRA exemption is available for one house only. What you have to do as an accountant? 1. Obtain rent receipt/ rent agreement from the employees (no rent receipt if monthly rent is less than ₹ 3,000); 2. Obtain PAN of the landlord if rent payment is more than ₹ 1,00,000 per year; 3. Ensure one rupee revenue stamp is fixed with the signature of the person who has received the rent if receipt of more than ₹ 5,000 is made in cash. Example Calculate the amount of taxable house rent allowance from the information given below: Mr. Zee, a resident of Ranchi, received the following during the previous year 2022-23: a) Basic salary – ₹ 4,80,000; b) Dearness Allowance – 48,000; c) Commission on sales @ 7% (Sales = ₹ 9,00,000); d) House Rent Allowance – ₹ 5,000 per month. e) He paid ₹ 6,000 per month as house rent. Computation of Taxable HRA Particulars Amount ₹ Amount ₹ House Rent allowance received 60,000 Less: Exemption – being least of the following: a) Actual amount received as HRA 60,000 b) 40% of salary (40% of ₹ 5,91,000) (Working Note) 2,36,400 c) Rent paid minus 10% of salary [₹ 72,000 – ₹ 59,100] 12,900 12,900 Taxable HRA 47,100 Working Note Computation of Salary: Particulars ₹ Basic Salary 4,80,000 DA 48,000 Commission (7% of ₹ 9,00,000) 63,000 5,91,000 2. Mr Phantom is employed with Paramount Ltd. On a basic salary of ₹ 5,000 p. m. He is also entitled to a dearness allowance of ₹ 250 p.m. He is entitled to HRA of ₹ 3,000 p.m. He takes an accommodation on rent in Kolkata and pays ₹ 2,500 p.m as rent for the accommodation. Compute taxable HRA for the Assessment Year 2023-24. 3. From the following information extracted during the year, compute Income from Salaries of Ms Nix for the Assessment Year 2023-24. a) Basic Salary ₹ 20,000 p.m.; b) Bonus ₹ 10,000; c) Travelling Allowance – ₹ 2,000 p.m. [expenditure incurred ₹ 1,8000 p.a.]; d) Medical Allowance – ₹ 400 p.m. [expenditure incurred ₹ 300 p.m.]; e) Children Education Allowance ₹ 300 p.m. per child [he has 3 children]. Leave Travel Allowance When a person goes for a personal tour, lots of expenses are there like travel, hotel, car fare, sight-seeing, food etc. Under the Income Tax Act, only the travelling expenses paid by the employer for leave to any place in India for himself and his family is exempt from tax. Foreign Travel fully taxable LTA Exemption can be claimed only twice in a block of 4 years. Current block is 2022-23 (Calender year) No statutory obligation to collect documentary proof from employee Amount of exemption- LTA Exemption Travel by Travel by Air other modes If train Both Train If train and Bus do does not goes there not go there go there First Class/ Economy class 1st class AC 1st class AC fare of Air Deluxe Class Train fare Train fare India Bus Fare Note: If the actual amount of expenses incurred by the employee is less than the above- mentioned amount, actual amount incurred will be exempt. Family – Spouse, children (maximum 2), parents, dependent brothers and sister. Example Mr. Kushal, an employee of ABC Pvt Ltd. Travelled from Kolkata to Goa and back through business class flight. Total expenses on air ticket was ₹ 70,000. His employer reimbursed ₹ 1,00,000 which includes ₹ 20,000 for hotel booking and ₹ 10,000 sight-seeing. The economy class air fare from Kolkata to Goa is ₹ 35,000. How much LTA is exempt from tax? Solution The economy class air fare is exempt from tax. Amount expensed for hotel booking and sight- seeing is not exempt. So, the amount of exemption is ₹ 35,000 i.e. the economy class air fare only. Perquisites (Perks) Any extra benefit granted to the employee in addition to his salary. It may be in cash or in kind. Perquisites include: For details, please refer annexure a) Rent Free Accommodation b) Sale of movable asset to employees c) Use of Movable asset belonging to the employer d) Car facility e) Gas, electricity, water facility f) Free servant g) Education facility h) Medical facility i) Interest free or concession loan facility Taxability of perquisites – Normally the cost of the facility provided by the employer (or specific amount in some cases) is taxable in the hands of the employee. Amount paid, if any, by the employee is deducted from such amount. Example Salary of an employee (based in Mumbai) consists of (i) Basic Salary ₹ 1,00,000 p.a. (ii)Dearness Allowance ₹ 50,000 p.a. and (iii) a rent free accommodation is provided in Mumbai alongwith furniture costing ₹ 60,000. Compute the value of rent-free accommodation provided to him for the Assessment Year 2023-24: SOLUTION As per the Income Tax Act, if rent free accommodation is provided to a non-govt. Employee in a having a population exceeding 25 lakhs, 15% of salary will be the value of perquisite. If alongwith the accommodation, furniture is also provided then 10%b of the cost of furniture will be added with the cost of rent-free accommodation. As the population of Mumbai is more than 25 lakhs, value of perquisite is respect of unfurnished accommodation will be 15% of salary. Salary for the purpose of computation of perquisite is- ₹ 1,00,000+ ₹ 50,000 = ₹ 1,50,000 Value of unfurnished accommodation = 15% of ₹ 1,50,000 = ₹ 22,500 Value of furnished = 10% of ₹ 60,000 = ₹ 6,000 Value of rent-free accommodation = ₹ 22,500 + ₹ 6,000 = ₹ 28,500 Example On 1/6/2022, Mr. Vikram took an interest free loan of ₹ 1,00,000 from his employer for his personal purpose. The loan is to be repaid after 5 years. The rate of interest charged by State Bank of India on similar loan is 15% on 1/6/2022 and 14.75% on 1/4/2022. What will be the taxable value of perquisite in respect of interest free loan granted by the employer? SOLUTION Rate of interest charged by SBI on similar loan as on 1/4/2022 i.e. the first day of the previous year is 14.75%. Hence the value of perquisite = ₹ 1,00,000 x 14.75% x 10 months (1/6/2022 – 31/3/2023) = ₹ 12,292. Deductions from Salary Entertainment Allowance u/s 16(ii) Deduction for entertainment allowance is allowed only to the Government employees. Least of the following is to be deducted: i. ₹ 5,000 p.a. ii. 20% of basic salary iii. Actual amount received. Example Sahil is a Government employee. He receives entertainment allowance of ₹ 4,000 p.m. His Basic Salary is ₹ 10,000 p.m. and D.A is ₹ 5,000 p.m. Compute the amount deduction available from entertainment allowance received. SOLUTION Deduction available – least of the following: a) ₹ 5,000 b) 20% of Basic Salary: ₹ 24,000 (₹ 10,000 x 12 x 20%) c) ₹ 48,000 (₹ 4,000 x 12) Therefore, deduction available = 5,000 (least amount) Professional Tax u/s 16(iii) You can find this amount in Salary Slip or Form 16 of the employee. REMEMBER From the financial year 2023-24, standard deduction of ₹ 50,000 will be allowed to an employee irrespective of the actual Expenses incurred. It will be allowed in lieu of Transport Allowance and reimbursement of medical expenses allowed earlier. The employee is not required to submit any bill/proof to the employer for claiming this deduction. Example Mr. Krishna is working with Wipro Ltd. of Mumbai. He receives the following emoluments (including perquisites) during the financial year 2022-23: i. Basic pay: ₹ 96,000, ii. Dearness allowance (not forming part of retirement benefit): ₹ 44,000. iii. Bonus: ₹ 10,000 iv. Other allowances: ₹ 20,000, v. Entertainment Allowance: ₹ 6,000. He is provided with a rent-free furnished accommodation in Mumbai, the rent of which is ₹ 36,000 p.a. original cost of furniture is ₹ 24,000 and the hire charges for air – conditioning appliance is ₹ 10,000. The company also pays electricity charges of ₹ 6,000 in respect of his accommodation. Professional tax deducted – ₹ 1,200. 1 Taxable salary of Mr. Krishna for the Previous year 2022-23 Assessment year 2023-24 will be computed as follows: 2 3 Particulars ₹ ₹ 4 Basic Pay 96,000 5 Dearness Allowance 44,000 6 Bonus 10,000 7 Other Allowances 20,000 8 Entertainment Allowance 6,000 9 Add: Perquisites 10 Value of rent-free furnished accommodation- 11 15% of salary (15% of ₹ 1,32000) 19,800 12 Add: 10% of original cost of furniture 2,400 13 Hire charges for air – conditioning appliances 10,000 32,200 14 Free electric charges 6,000 15 Gross Salary 2,14,200 16 Deductions u/s 16 17 Entertainment Allowance Nil 18 Professional Tax 1,200 1,200 19 Taxable Salary 2,13,000 Exmaple: Mr. Khurana is working at Central Government service. Details of his salary are as under: Basic Salary – ₹ 6,000 per month. Entertainment Allowance – ₹ 1,000 per moth The employer has deducted an amount of ₹ 1,200 from his salary as professional tax. a) Calculate the amount of deductions available to Mr. Khurana for the Assessment Year 2023- 24. b) If Mr. Khurana is not a Government Employee, will your calculations be different? SOLUTI 1 Computation of deductions available to Mr. Khurana for the Assessment Year 2023-24: 2 3 Particulars ₹ ₹ 4 Basic Salary 72,000 5 Entertainment Allowance 12,000 6 Gross Salary 84,000 7 Deductions u/s 16: 8 Entertainment Allowance (Working Note 1) 5,000 9 Professional Tax 1,200 6,200 10 Taxable Salary 77,800 Working Note 1 The amount of deductions for entertainment allowance u/s 16(ii) will be least of the following- a. ₹ 5,000 b. Actual amount received i.e. ₹ 12,000 c. 20% of Salary of ₹ 72,000 i.e. ₹ 14,4000 As ₹ 5,000 is the least amount, the same will be deducted from salary. d. If Mr. Khurana is not a Government employee, the deduction for entertainment allowance will not be available to him. In other words, the entertainment allowance will be fully taxable. Example Rishi Agarwal is working with ABC Ltd., New Delhi. He has the following salary structure for the year 2022-23. Calculate his taxable salary for the relevant Assessment year. Amount Particulars (₹) Baic pay 66,000 Bonus 9,000 Education allowance for 3 children 30,200 Entertainment allowance 6,000 Transport allowance 12,000 Free car (1200 cc) facility for performing journey between office to home and vice versa (the car is owned by the employer) Medical Allowance 18,000 Free gas & electricity and water supply 4,500 Lunch Allowance 18,000 Gift on Diwali 7,500 Rent free unfurnished accommodation – lease rent 14,000 Employer’s contribution to RPF 12,000 Interest credited in RPF Account @8.5% 1600 Professional tax paid by the employer 1,200 SOLUTION 1 Computation of taxable salary of Rishi Agarwal for the Assessment Year 2023-24 relating to the previous year 2022-23 2 Particulars ₹ ₹ 3 Basic pay 66,000 4 Bonus 9,000 5 Education Allowance for 3 children 30,200 6 Less: Exemption (₹100 x 2 x 12) 2,400 27,800 7 Entertainment allowance 6,000 8 Transport allowance 12,000 9 Less: Exemption (upto ₹1,600 per month) 12,000 10 Medical Allowance 18,000 11 Lunch Allowance 18,000 12 Perquisites 13 Free use of car- exempt (not a perquisite) Nil 14 Free gas & electricity and water supply 4,500 15 Rent free unfurnished accommodation (Lower of the following-) 16 Rent paid by the employer 14,000 17 15% of salary (15% x ₹1,44,800 (Working Note 1)) 21,720 14,000 18 Gift on Diwali 7,500 19 Less: Exemption 5,000 2,500 20 Employer’s contribution to RPF 12,000 21 Less: Exemption (12% of ₹ 66,000) 7,920 4,080 22 Interest credited to RPF (exempt upto 9.5% p.a.) Nil 23 Professional Tax paid by the employer 1,200 24 Gross Salary 1,71,080 25 Less: Deductions- Professional Tax 1,200 26 Taxable Salary 1,69,880 Working Notes: Salary for the purpose of computation of value of perquisite in respect of rent-free accommodations: ₹ Basic 66,000 Bonus 9,000 Children Education Allowance 27,800 Transport Allowance Nil Entertainment Allowance 6,000 Medical Allowance 18,000 Lunch Allowance 18,000 Total 1,44,800 ASSIGNMENT 4. Mr. Karan submits the following information regarding his salary income which he gets from ABC Ltd. of New Delhi: Basic salary- ₹15,000pm; DA-40% of basic salary; City Compensatory Allowance- ₹300 pm; Children Education Allowance-₹ 400 p.m. (for 3 children); Transport allowance – ₹ 1,000 p.m.; Reimbursement of Medical Expenses- ₹25,000. He is entitled to HRA of ₹ 6,000 p.m. He pays rent of Rs.7,000 p.m. for a house in Delhi. Compute his taxable salary for the assessment year 2023-24. 5. Compute Income from Salary of Mr. X from the following details. a) Basic Salary ₹ 5,000 p.m. b) Dearness Allowance ₹ 4,000 p.m. c) Children Education Allowance ₹ 1,000 p.m. per child. He has two children and spends ₹ 350 p.m. on their education. d) Conveyance Allowance ₹ 1,000 p.m. Mr. X spent ₹ 800 p.m. on conveyance for official use. e) He received ₹ 1,000 p.m. as Medical Allowance. f) Mr. X also received ₹ 3,000 during the year as commission and ₹ 5,000 as Bonus during the year. His employer provided him with a rent-free accommodation for which the employer pays a rent of ₹ 5,000 p.m. g) His employer gave him a loan of ₹ 1,00,000 [SBI Rate of Interest as on 1/4/2017 is 14.75%] 6. Download “DT Assignment – Chapter 2” from Student Homepage and calculate the taxable income and tax liability of the employees for the Assessment Year 2018-19. Type of Particulars Details Taxability Provident Fund Periodic Employer’s Contribution Exempt Contribution and Employer’s Contribution Eligible for Interest deduction u/s 80C Statutory Interest on Employer’s Contribution Exempt Providend Fund Interest on Employer’s Contribution Exempt (SPF) Lump sum receipt Employer’s Contribution Exempt on Employer’s Contribution Not taxable retirement/death Interest on Employer’s Contribution Exempt Interest on Employer’s Contribution Exempt Periodic Employer’s Contribution Exempt upto Contribution and 12% of salary Interest Employer’s Contribution Eligible for deduction u/s Recognised 80C Providend Fund Interest on Employer’s Contribution Exempt upto (RPF) Interest on Employer’s Contribution 9.5% p.a. Lump sum receipt Employer’s Contribution Exempt on Employer’s Contribution Not taxable retirement/death Interest on Employer’s Contribution Exempt Interest on Employer’s Contribution Exempt Periodic Employer’s Contribution Not taxable Contribution and Employer’s Contribution Not taxable Interest Interest on Employer’s Contribution Not taxable Interest on Employer’s Contribution Not taxable Unrecognised Lump sum receipt Employer’s Contribution Taxable as on Salary Providend retirement/death Employer’s Contribution Not taxable Fund (URPF) Interest on Employer’s Contribution Taxable as Salary Interest on Employer’s Contribution Taxable as Income from other sources Chapter 4 Income from House Property House Property Have you hired out your house on rent? If yes, calculate taxable income from house property for are two reasons- a) If you have hired out your house, you may have to pay tax. b) If you have not hired out your house and taken a home loan, you can save tax. House Property = Building or land appurtenant thereto Office Building Building includes Residential Building Shop Conditions to be fulfilled for the purpose of charging income under this head Rent of vacant land is not taxable under this head but taxable under the head “Income from Other Sources”. Assessee must be the owner of such property during the previous year. Property should not be used for the purpose of business or profession of the owner. Income from Sub-letting of house is not taxable under this head but taxable under the head “Income from Other Sources” House Property Let Out (given on rent) Self-Occupied (use as own residence) Computation of Income from House Property Self – occupied Particulars Let Out Property Property Gross Annual Value* xxx Nil Less: Municipal Taxes paid by the assesse during the previous year xxx Nil Net Annual Value xxx Nil Less: Deductions u/s 24- a) 30% of Net Annual Value xxx b) Interest on borrowed capital/Loan xxx xxx Income from House property xxxx xxxx LET OUT PROPERTY Gross Annual Value To calculate the Gross Annual Value of a house property, you should have figures of the following: Municipal Value Value assigned to property by a municipality for the purpose of municipal tax assessment Fair Rental Value Rent which a similar property in the same locality would have fetched Standard Rent Rent of the property fixed by Rent Control Act Actual Rent Received / Receivable Actual rent received / receivable as per agreement between owner & tenant Computation of Gross Annual Value of Let out Property- (A) Higher of- Municipal Value Fair Rental Value (B) Lower of- (A) Standard Rent Higher *of (B) Actual Rent Received/Receivable *If the property remains vacant during the whole or any part of the previous year and due to such vacancy, the actual rent received or receivable is less than (b) above, Actual rent received / receivable will be taken as Gross Annual Value. Example Rahul is the owner of three houses and all the houses are let out. From the following particulars, find out the Gross Annual Value: Particulars House I ₹ House II ₹ House III ₹ Municipal Value 60,000 52,000 70,000 Fair Rental Value 72,000 56,000 60,000 Standard Rent 60,000 70,000 72,000 Actual Rent Received 42,000 72,000 60,000 Solution Computation of Gross Annual Value Particulars House 1 ₹ House II ₹ House III ₹ Step 1: Higher of Municipal Value and Fair Rental Value 72,000 56,000 70,000 Step 2: Lower of Step 1 value and Standard Rent 60,000 56,000 70,000 Step 3: Higher of Step 2 value and Actual Rent Received 60,000 72,000 70,000 Gross Annual Value 60,000 72,000 70,000 Example Pradip Verma owns three houses in New Delhi. The particulars of the houses are as under: Particulars House 1 ₹ House II ₹ House III ₹ Municipal Value 1,20,000 1,70,000 2,00,000 Fair Rent 1,60,000 2,00,000 2,40,000 Standard Rent 1,40,000 2,20,000 - Actual Rent (per month) 12,000 22,000 21,000 Period of vacancy Nil 1 Month 6 Months Municipal taxes (20% on municipal value) Municipal taxes paid during the year 24,000 35,000 30,000 Compute the income under the head house property. Solution Computation of Income from House Property of Pradip Verma for the Assessment Year 2018-19 relating to the previous year 2017-18 Particulars House 1 ₹ House II ₹ House III ₹ Step 1: Higher of Municipal Value and Fair Rental Value 1,60,000 2,00,000 2,40,000 Step 2: Lower of Step 1 value and Standard Rent 1.40,000 2,00,000 2,40,000 Step 3: Higher of Step 2 value and Actual Rent Received 1,44,000 2,42,000 2,40,000 Gross Annual Value 1,44,000 2,42,000 1,26,000 Less: Municipal tax paid during the previous year 24,000 35,000 30,000 Net Annual Value 1,20,000 2,07,000 96,000 Less: Statutory Deduction @30% of Net Annual Value 36,000 62,100 28,800 Income from House Property 84,000 1,44,900 67,200 INTEREST ON BORROWED CAPITAL/LOAN Interest on borrowed capital is allowed as deduction if capital is borrowed for the purpose of purchase, construction, repair, renewal of reconstruction of the house property. Pre-construction Period ❖ Starts from the date of borrowing; and ❖ Ends on- 31st March preceding the year of completion of construction/acquisition Date of repayment of loan whichever is earlier. Example Interest payable relating to pre-construction period is allowed as deduction in 5 equal instalments beginning with the previous year in which the house is completed and 4 succeeding years. Mr. Sethupathi started construction of a house on 1/9/2016. He raised a loan of ₹10,00,000 at 12% interest for this purpose. The construction was completed on 31/3/2018. Calculate the amount of interest allowable under section 24 for the Assessment Year 2018-19. Solution Solution Pre-construction period- ❖ Starts on the date of borrowing i.e. 1/9/2016 ❖ Ends on- 31st March preceding the year of completion of construction/ acquisition i.e. 31/3/2017 Date of repayment of loan, whichever is earlier. The loan has not been repaid yet so we should ignore it. Pre-construction period interest= ₹ 10,00,000 x 12% x 7/12 = ₹70,000 Interest allowable u/s 24 for the Assessment Year 2018-19 Pre-construction period interest = ₹70,000/5 =₹ 14,000 Current year interest =₹10,00,000 x 12% =₹ 1,20,000 Total Interest =₹ 1,34,000 Maximum deduction for interest on borrowed capital u/s 24 Type of Maximum Loan taken purpose property deductions (₹) Let Out - No limit On or after 1/4/1999 Purchase or construction of house 2,00,000 On or after 1/4/1999 Repair, renewal or reconstruction of Self- occupied house 30,000 Before 1/4/1999 Purchase, construction, repair, renewal or reconstruction of house TAX TREATMENT IN DIFFERENT SITUATIONS Let out for certain period Property is be treated as let out and actual and self-occupied for rent for let out period is compared remaining period Let out for certain portion Annual value of the property will be computed and self-occupied for separately for let out portion and self-occupied remaining portion portion Assessee owns two or more Two houses at the option of assessee shall be houses and all are self- treated as self-occupied and remaining will be occupied deemed as let out Arrear rent or Unreaslied Deemed to be income from house property in rent received respect of the financial year in which such rent is received subject to standard deduction @30% Amount received for use of property – Taxable under Composite Rent Income from House Property Amount received for other services – Taxable under PGBP/ Income from Other Sources Example Mr. Chandler is the owner of three houses particulars of which are as under: House C House D House E (Self- occupied) (Self- occupied) (Let out) 1. Fair rent 36,000 24,000 30,000 2. Municipal valuation 30,000 22,000 25,000 3. Municipal taxes 3,000 2,200 2,500 Solution House C was constructed on a loan of ₹2,00,000 raised from the LIC at an interest of 10% p.a. and House E was constructed on the mortgage of House D for ₹1,00,000 at an interest of 12% p.a. The annual value of these houses for the Assessment Year 2018-19 will be calculated as under: House C House D House E ₹ ₹ ₹ Gross Annual value 36,000 24,000 30,000 Less: Municipal taxes 3,000 2,200 2,500 Net Annual Value 33,000 21,800 27,500 Less: Standard deduction (30% of NAV) 9,900 6,540 8,250 Annual Value before deduction for Interest 2 15,260 19,250 (Chosen as Self occupied) (Deemed to be let out) Annual Value Nil 15,260 19,250 (-) Interest on loan for construction 20,000 Nil 12,000 Taxable Income (-)20,000 15,260 7,250 Taxable Income from House Property for the Assessment Year 2018-19 is ₹ 2,510 (- 20,000 + 15,260 + 7,250) Note: Fair rent, begin higher than the municipal value, will be the Gross annual value. Out of the two self-occupied houses, only one is to be allowed as exemption and the other will be deemed to be let out. Here the annual value of House C being higher is taken as self-occupied. Example Particular Amount ₹ Amount ₹ Unit 1 (Self-occupied) Gross Annual value Nil Less: Municipal Tax Nil Net Annual Value Nil Less: Interest on borrowed capital 30,000 (1/2 of ₹63,000 subject to a maximum of ₹30,000 as the loan was taken before 1st April, 1999) Income from Unit 1 (-)30,000 Unit 2 (Let-out) Gross: Annual Value (125000/2) (since for 1 unit only) 62,500 Less: Municipal Tax (50% x 12% x ₹1,30,000) 7,800 Net Annual value 54,700 Less: Deduction u/s 24 Standard deduction (30% of ₹54,700) 16,410 Interest on borrowed capital (50% of ₹63,000) 31,500 47,910 Income of Unit 2 6,790 Income from House Property (Unit 1 + Unit 2) (-)23,210 Mr. Joy owns a house property having two residential units – Unit 1 and Unit 2. Unit 1 is self-occupied and Unit 2 is let out (rent – ₹6000 per month, rent of 2 months could not be recovered). Municipal value of the property expenses were: repairs ₹ 250, insurance ₹ 600, interest on capital borrowed in 1998 for construction ₹63,000. Solution Computation of Income from House Property of Mr. Joy for the Assessment Year 2018-19 relating to the previous year 2017-18 1. Ms Chiku owns a house property the particulars of which are as given below- Fair rent- ₹2,00,000 Municipal Value- ₹1,90,000 Standard Rent- ₹1,75,000 Actual Rent received- ₹16,000 per month Municipal Taxes paid- ₹69,000, which includes arrear taxes for the previous year 2015-16 and 2016-17 amounting to ₹33,000. 2. Mr. Chauka owns a property particular of which are as given below- Municipal Value – ₹45,000 Fair Rental Value – ₹70,000 Standard Rent – ₹60,000 Actual Rent agreed – ₹6,000 p.m. Municipal Taxes paid – ₹20,000 Calculate the Income from House Property for the Assessment Year 2018-19 assuming that it remained vacant during the year for a period of i) 1 month or ii) 3 months. 3. Mr. Anshul owns a house in Pune. Construction of this house was completed in 1997. 50% of the house was let out for residential purposes at a monthly rent of ₹14,000 but this portion remined vacant for a period of 4 months from May 2017 to August 2017. Municipal valuation of the property is ₹45,000. Mr. Anshul used 25% of the property for this practice as Company Secretary and used balance 25% for his own residence throughout the year. Other expenses incurred for the property are as below: ₹ Municipal Taxes paid 16,000 Repairs 8,000 Interest on loan borrowed for renovation of the house 50,000 Insurance premium 2,500 He has received the following amount s from his employer: Basic pay – ₹ 4,80,000, House Rent Allowance – ₹ 1,20,000. Entertainment Allowance – ₹ 50,000. Professional tax deducted – ₹2,400. Calculate the taxable income of Mr. Anshul for the Assessment Year 2018-19. Chapter 5 Profit and Gains of Business or Profession Business and Profession Business includes – Profession requires – ❖ any trade, commerce, manufacture or ❖ purely intellectual or manual skill on the any adventure or concern in the nature of basis of some special learning and trade, commerce or manufacture. ❖ qualification gathered through past ❖ e.g. a lady is running a shop (as shown training or experience in the above picture) ❖ e.g. Doctor, Lawyer, Chartered Accountant Computation of Business Income In Business Accounting module, we have learnt how to compute income of a business. But that computation was as per accounting rule. Computation of business income under taxation on is different because of different rules of taxation. For example, following is the Profit & loss Account of a business for the year ended 31st March, 2018.Dr. Profit & Loss A/c for the year ended…. Particulars Amount Particulars Amount To, Salary 5,00,000 By, Gross Profit b/d 15,00,000 To, Carriage Outward 1,02,000 By, Commission Received 1,25,000 To, Commission paid 20,000 By, Dividend received 8,000 To, Office Rent 7,000 To, Depreciation 7,500 To, Bad Debt 10,000 To, Net Profit 9,86,000 16,33,000 16,33,000 The abovementioned net profit has been computed following the accounting rule. Net Profit as per taxation rule may be different due to the following reasons: a) If commission of ₹20,000 has been paid by cash, it will not be deducted while calculating taxable income; b) Amount of depreciation may differ under accounting rule. Net Profit as per taxation rule may be different due to the following reasons: c) If the commission received is not related to business, it will not be taxable under the head “PGBP” d) Dividend received will not be taxable under this head. So, before computing taxable income under this head, you should know the prevailing rules or provisions of income tax. Basic principles governing assessment of business income You should keep in mind the following general principles while computing taxable income under this head: Business or profession should be carried on by the assessee at any time during the previous year. Profit and gains of different businesses or professions carried on by the assessee are not separately chargeable to tax. Anticipated profit or losses which may occur in future are not considered. Mode of book entries not relevant. A trading receipt will remain a trading receipt even if it is shown as capital receipt. Income from illegal business or profession is also taxable. Trading losses of revenue nature incurred in carrying out the business are deductible; Expenses Expressly Allowed RENT, RATES, TAXES, REPAIRS AND INSURANCE Nature of expense Particulars Deductibility Rent If the assessee has occupied the premises as tenant Deductible Repairs Revenue in nature Deductible Land revenue, local rates Deductible & municipal taxes Insurance Premium Against risk of damage or destruction of premises Deductible DEPRICIATION (Section 32) The following conditions must be satisfied in order to claim deprecation on assets: ✓ Depreciation is available on “Block of Assets”; ✓ Asset must be owned by the Assessee; ✓ It must be used for the purpose of the business or profession; ✓ It should be used during the previous year; ✓ It is mandatory for an assesse to claim depreciation. Block of Assets – A group of assets falling within a class of assets which comprises of- ✓ Tangible Assets- Buildings, Machinery, Plant or Furniture; ✓ Intangible Assets- Know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature. No depreciation to be charged on Land Goodwill. Depreciation is charged in the following manner: The written down value of a block of asset shall be computed as follows: Opening WDV (Written down value of the block at the beginning of the Previous Year) ** Add: Purchased of Assets during the year falling under the same block ** Less: Sale value of assets sold during the year under the same block ** Balance (Closing WDV before depreciation) ** Less: Depreciation ** Closing Written Down Value ** Rate of depreciation: Block Assets Rates Residential building 5% Building Temporary construction 40% Others 10% Any furniture/fittings including electrical fittings Furniture & Fittings 10% Motor buses, motor lorries, motor taxis used in the business of Plant & Machinery running them on hire 30% Aeroplanes, Specified pollution control equipments, Energy saving devices, Compuers including computer software, Books, 40% and publications, Life saving medical equipments Others 15% Ships Ocean-going ships, Vessels, Speed Boats 20% Know-how, patents, copyrights, trademarks, licence, franchises Intangible Assets or any other business or commercial rights of similar nature 25% Rate of Depreciation based on use of asset in the previous year: Rate of Depreciation First year of acquisition Subsequent year Put to use 180 days or more less than 180 days Full rate of depreciation (provided it is used for atleast 1 day) Full rate of depreciation half the normal rate Example From the following data, calculate the amount of admissible depreciation: Amount in ₹ Factory Building (WDV) 10,00,000 Plant and Machinery 16,00,000 Purchased on 31/07/2017 2,00,000 Purchase on 31/01/2018 2,00,000 Sale on 31/12/2017
