Taxation For Everyone PDF

Taxation For Everyone Open Elective 2 Income tax slabs What is the meaning of tax? Tax is considered as the cost of living in society. It includes imposition of liability on people after crossing a certain limit of earning. Commonly tax is imposed by Government authorities to meet common welf...

Taxation For Everyone Open Elective 2 Income tax slabs What is the meaning of tax? Tax is considered as the cost of living in society. It includes imposition of liability on people after crossing a certain limit of earning. Commonly tax is imposed by Government authorities to meet common welfare needs of society. There are two types of taxes i.e. Direct & Indirect. Tax which is charged directly on Direct Tax income or wealth of people A person who pays tax cannot recover it from someone else.  Indirect Tax Tax levied on prices of goods & services. The burden of indirect tax could be shifted to the ultimate consumer. Why are taxes levied? The revenues generated by the form of income taxes will be utilized by the government to offer better amenities for the public, such as roads and housing. All individuals earning above a certain threshold should mandatorily file their income tax returns in order to stay tax-compliant. Who has authority to impose taxes? Central & State Governments are empowered to levy tax as per the Income Tax Act 1961 which came into force on 1 st April 1962. The CBDT (Central Board of Direct Tax) is a part of the Department of Revenue in the Ministry of Finance. It has been charged with all the matters relating to various direct taxes in India and is responsible for the administration of direct tax laws through the Income Tax Department.  Basic terminologies The period of twelve months commencing on the first Assessment year day of April every year The financial year immediately preceding assessment Previous year year Assessment Process of determining, and computing the amount of income & tax due of a person. A person who is liable to pay tax or any other sum Assessee payable under Income Tax Act.  Person Income Income earned by every person is 1. Profits, Dividends, allowances taxed. A person is classified in different 2. Perquisites like rent free categories. accommodation 1. Individual 3. Remuneration to partner 2. Hindu Undivided Family 4. Winning from lotteries 3. A Company 5. Contribution to P.F 4. Firm 6. Money (Non exceeding Rs.50,000) 5. Association of Person: two or more or property received without persons coming together for a consideration common purpose. Club, Trust, etc. 7. Subsidy or grants 6. Body of Individuals: Team of 8. Sum received under keyman individuals working together to earn insurance policy profit. 9. Salaries 7. Local Authority 10. Rents from house, etc. 8. Artificial Juridical person  Computation of Income The scope of income means what items are to be included in the income, and what items are to be excluded. The scope of income depends upon three factors - (a) whether the person earning the income is resident in India or not, (b) whether the income arises during the previous year and ( c ) whether the income arises in India or outside.  Residential Status A person can be further classified on the basis of residential status into (a) a Resident in India or (b) Non-resident in India. Resident Individuals are further classified into (a) Ordinarily Resident or (b) Not Ordinarily resident. Points to be considered 1. Residential status is determined for every previous year as it may change from year to year. 2. Residential status is different from citizenship. 3. Residential status is important in deciding whether foreign income of person is taxable or not.  Residential Status Resident Non-Resident Basic conditions If not able to Sec 6(1)(a): P.Y. stays for 182 days or fulfill basic more conditions OR then Sec 6(1)(a): P.Y. Stays 60 days or more + Non-resident 4 PPY stays 365 days or more  Exception A citizen leaving India for employment or an Indian Crew member of Indian ship, who had left India A citizen of India or a person of Indian origin, who, being outside India, visits India during P.Y.  If Resident Ordinarily Resident Not Ordinarily Resident Basic conditions If not able to Sec 6(6)(a): Resident in India for at least 2 fulfill years of 10 years immediately preceding conditions P.Y. then NoT AND ORDINARILY Sec 6(6)(a): Must be India for 720 days or more during the 7 years immediately resident preceding P.Y. 1. Mr. Lobo, a Canadian citizen but of Indian origin come to India on 1 st October 2018, for first time. His stay in India was as under 31/03/2019 : 25 days 31/03/2020: 80 days 31/03/2021 : 180 days 31/03/2022: 100 days 31/03/2023: 25 days He informs that he was in India from 1st April, 2023 to 28th June 2023, both days inclusive. Determine residential status of Mr. Lobo 2. Mr. Ramesh shah, an American citizen, staying in Mumbai leaves Mumbai on 16th July, 2023 for joining an American firm as an employee. He was in India since 1st January 2006 till he left for U.S.A on 16th July for purpose of employment. Determine residential status for year 2023-24 Professor Rajendra Bhatt, a UK citizen (not a person of Indian origin) is a visiting faculty at JNO university, provides you the following information of his visit to India during the last 7 years. Previous year No of Day 2023-24 179 2022-23 195 2021-22 15 2020-21 130 2019-20 190 2018-19 100 2017-18 125 Prior to 1-4-17 he did not visit India. Determine residential status  RESIDENTIAL STATUS & TAXABILITY OF INCOME RESIDENT & RESIDENT & NOT PARTICULARS ORDINARILY ORDINARILY NON RESIDENT RESIDENT RESIDENT Income received in India Taxable Taxable Taxable Income which accrues or arise in India Taxable Taxable Taxable Income deemed to be received in India Taxable Taxable Taxable Income deemed to be accrued in India Taxable Taxable Taxable Income which accrues and arise outside India Taxable Taxable from a business controlled from India/Profession set in India Any other income which accrues or arise outside Taxable Non Taxable Non Taxable India  Heads of Income Income from House Property Income from Capital Gain Income from Salary Income from Business & Income from Other Sources Profession  Overview of Heads of Income 1. Income from Salary Definition: Includes wages, pensions, gratuity, commission, and other benefits received by an employee from an employer. Tax Treatment: Taxable under the head "Income from Salary" after allowing standard deductions, exemptions (like HRA, LTA), and applicable reliefs. 2. Income from House Property Definition: Income earned from owning a house property. It can be either self-occupied or let out. Tax Treatment: Taxable under the head "Income from House Property". For let-out properties, the rental income after standard deductions and municipal taxes is taxable. For self-occupied properties, a notional rent value is considered.  Overview of Heads of Income 3. Profits and Gains of Business or Profession Definition: Income earned from any business or professional activity. Tax Treatment: Taxable under the head "Profits and Gains of Business or Profession". All expenses incurred to earn the income are allowed as deductions. 4. Capital Gains Definition: Income from the sale or transfer of capital assets like property, shares, bonds, etc. Tax Treatment: Taxable under the head "Capital Gains". Capital gains are classified into short-term and long-term, with different tax rates and exemptions applicable.  Overview of Heads of Income 5. Income from Other Sources Definition: Any income that does not fall under the other heads, such as interest income, dividends, winnings from lotteries, and gifts. Tax Treatment: Taxable under the head "Income from Other Sources". Specific deductions are allowed based on the nature of the income. Each of these sources of income has specific provisions for deductions, exemptions, and tax rates under the Income Tax Act, which can impact the total taxable income and the amount of tax payable. Name of Income R & OR R & NOR NR PROFESSIONAL FEES RECEIVED IN INDIA INCOME EARNED IN INDIA BUT RECEIVED IN FRANCE DIVIDEND OF INDIAN BANK RECEIVED IN INDIA SALARY EARNED & RECEIVE IN JAPAN Income earned from business in London controlled from India Interest from Bank in USA  INCOME FROM SALARY Who is taxable under salary? Remuneration received by an employee from his employer for service rendered. Only an individual can earn salary since only an individual can render service. For a payment to be regarded as as salary, it is essential that the relationship between between payer & payee is that of an employee and employer or master & servant. The payee must be working under a contract of service not contract for service. salary ,bonus,commission or remuneration due to or received by partner from firm is not to be considered as salary. It is taxable under business & profession. Salaries & allowances received by M.P. & M.L.A. are taxable under income from other sources as they are not employees of Government.  INCOME FROM SALARY When salary is taxable? Salary earned on due basis or receipt basis in previous year to be taxed under income from salary. Any salary paid or allowed, in previous year, by or on behalf of employer or former employer is taxable Any arrears of salary paid or allowed in the previous year, by or on behalf of employer or former employer, if not charged to income tax in any earlier previous year.  What is included in salary? 1. Wages & salary including advance salary 2. Annuity or pension 3. Gratuity (Lump sum amount paid to an employee, on the basis of the duration of service on termination of service due to retirement, resignation, death etc.) 4. Fees & commission 5. Perquisites (Extra benefits attached to an office or position in addition the salary. ) 6. Contribution by government or employee towards pension 7. Amount received for any leaves which are not availed.  Exemption 1. Leave travel allowance: Any value of travel concession or assistance received by employee from current or former employer for himself/herself & family(spouse, children, parents, brother & sister mainly dependent on him/her.) Exemption is available for 2 journeys in a block of 4 years. (23-26) 2. Gratuity: Lump sum amount received on basis of duration of employment after termination of service due to retirement, resignation, death. If gratuity is received during service, it is taxable to all. If it is received after retirement or death then fully exempt for Government employee, taxable to non-Government employee depending they are covered under Payment of gratuity act or not. 3. Pension: if pension is paid in lump sum, it is known as commuted which fully exempt to Government employees, however for non-Government employees is taxable depending on whether they are receiving gratuity (1/3rd exempt) or not (½ exempt). If pension is paid on monthly basis, it is known as uncommuted which taxable to all. (Pension given to Gallantry award winners is exempted like “Param Vir chakra”, “Maha Vir Chakra”, “Vir Chakra”. 4. Leave encashment: cash received by an employee against leaves earned but not taken and accumulated. Leave encashment received during service is fully taxable to all employees. If received after retirement, fully exempt to Government employee and taxable to Non-Government employees. 5. Retrenchment compensation received because of dismissal of job, closure of company, transfer of services due change in management/ownership. Exemption given is least of following, i. 15 days average salary x number of years of service, ii. Rs.500,000, iii. Actual amount received.  What is deducted from salary 1. Standard deduction [S. 16(ia)] under old regime : Rs. 50,000 Standard deduction [S. 16(ia)] under new regime: Rs. 75,000 2. Entertainment allowance: Fully taxable for non-government employee. Non taxable for Government employee Deduction allowed to least of the following - ⅕ of basic salary - Rs.5000 - Amount of allowance actually received 3. Professional tax paid Mr. C who is currently employed with JSM ltd. details of his monthly income given below calculate taxable amount Basic salary Rs.5,000 pm Dearness allowance Apr - dec 25% of basic Jan - march 32% of basic Professional tax deducted pm Rs.120 Taxable conveyance Rs.3,500 Bonus @20% on basic + DA Mediclaim premium paid by employer Rs.2,800  Income from House Property Introduction Income from House Property is one of the five heads of income under the Income Tax Act, 1961, in India. This head deals with the income earned from any residential or commercial property owned by the taxpayer. 2. Basis of Charge The income is charged to tax under the head "Income from House Property" only if the property is owned by the taxpayer. The property must consist of any building or land appurtenant (attached) thereto. Property must not be occupied by the owner for the purpose of any business or profession carried on by owner, the profits of which are taxable. 3. Types of Properties Self-occupied Property: The property used by the owner for residential purposes. Let-out Property: The property that is rented out. Deemed Let-out Property: A second property, which is not rented out but is considered as let-out for tax purposes. Vacant Property: Property that is neither let out nor self-occupied. 4. Computation of Income from House Property Step 1: Determine Gross Annual Value (GAV) For Let-out Property: ○ GAV is the higher of the actual rent received or receivable and the Reasonable Lettable Value ○ Reasonable Lettable Value: Higher of Municipal Valuation or Fair Rent, but not exceeding the Standard Rent. For Self-occupied Property: NAV is NIL. Step 2: Less: Municipal Taxes Paid Municipal taxes include property taxes or other taxes levied by local authorities. Deduction is allowed only if the municipal taxes are actually paid by the owner during the financial year. Step 3: Net Annual Value (NAV) NAV = GAV - Municipal Taxes Paid Step 4: Deduct: Standard Deduction Standard deduction is allowed at 30% of NAV. This is a flat deduction irrespective of the actual expenditure incurred. Step 5: Deduct: Interest on Borrowed Capital Interest on loans taken for the purchase, construction, repair, renewal, or reconstruction of the property is allowed as a deduction. For Self-occupied Property: ○ Deduction is limited to ₹2,00,000 per annum if the loan is taken on or after April 1, 1999, and the construction is completed within 5 years. ○ For loans taken before April 1, 1999, or if the conditions are not met, the limit is ₹30,000. For Let-out Property: Entire interest is deductible without any limit. Step 6: Compute Income from House Property Income from House Property = NAV - (Standard Deduction + Interest on Borrowed Capital) 5. Treatment of Losses Self-occupied Property: If the interest on the loan exceeds ₹2,00,000, the loss can be carried forward. Let-out Property: Loss can be set off against other heads of income in the same financial year. If not fully set off, it can be carried forward for 8 years. 6. Exemptions and Special Provisions Sec 54F: Exemption on the capital gains arising from the transfer of a long-term capital asset, other than a residential house, if the net sale consideration is invested in a residential house property. Sec 10(1A): Exemption for income derived from any farmhouse or building forming part of agricultural income. 7. Taxability in Special Cases Co-ownership: If the property is co-owned, each owner is taxed on their share of the income from the property. Deemed Ownership: Certain persons, though not the legal owners, are treated as deemed owners under the Income Tax Act, such as in cases of transfer to a spouse or minor child. 8. Deductions not Allowed Deductions for any personal expenses like insurance, utilities, or maintenance are not allowed under this head. Illustration: Ram owned a house property at Madras which was occupied by him for the purpose of his residence. He was transferred to Delhi in march 2023 & thereafter he let out the property with effect from April 1, 2023 on a monthly rent of Rs.3000. The municipal tax payable in respect of property @25% of the reasonable lettable value was Rs.6000 of which 50% was paid by him before 31/03/2024. Fair rent of the property is Rs.20,000. Interest on money borrowed for the construction of property amounted to Rs.20,000.compute the income house property for the assessment year 2024-25. Income from Capital Gains Capital Gains refer to the profit or gain arising from the sale or transfer of a capital asset. The Income Tax Act of India categorizes capital gains as a separate head of income and taxes them accordingly. 1. Definition of Capital Asset A capital asset includes: Property of any kind held by an assessee, whether or not connected with business or profession. Examples: Land, buildings, shares, mutual funds, jewelry, trademarks, lease rights, etc. However, the following are not considered capital assets: Stock-in-trade, consumable stores, or raw materials held for business or profession. Personal movable effects such as clothes, furniture, and vehicles (except jewelry, archaeological collections, drawings, paintings, etc.). Agricultural land in rural areas. Gold bonds issued by the government, special bearer bonds, etc. 2. Types of Capital Gains Short-Term Capital Gain (STCG): ○ Arises when a capital asset is held for 36 months or less (12 months or less for certain assets like shares, mutual funds, etc.) before transfer. ○ STCG is taxed as per the applicable income tax slab rates of the individual. Long-Term Capital Gain (LTCG): ○ Arises when a capital asset is held for more than 36 months (more than 12 months for specific assets like shares, mutual funds, etc.). ○ LTCG is taxed at 20% with the benefit of indexation for most assets. However, LTCG on certain equity-oriented investments exceeding INR 1 lakh is taxed at 10% without indexation. 3. Computation of Capital Gains Short-Term Capital Gains: STCG=Full Value of Consideration−(Cost of Acquisition+Cost of Improvement+Expenses on Transfer) Long-Term Capital Gains: LTCG=Full Value of Consideration−(Indexed Cost of Acquisition+Indexed Cost of Improvement+Expenses on Transfer) Indexed Cost of Acquisition/Improvement: Cost adjusted for inflation using the Cost Inflation Index (CII) provided by the Income Tax Department. Exemptions under Capital Gains Section 54: Exemption for LTCG on the sale of a residential house if invested in purchasing or constructing another residential house within a specified period. Section 54EC: Exemption for LTCG if invested in specified bonds (e.g., NHAI, REC) within 6 months of transfer, subject to a limit of INR 50 lakh in a financial year. Section 54F: Exemption for LTCG on the sale of any capital asset other than a residential house if the proceeds are invested in a residential house. Section 54B: Exemption on LTCG from the transfer of agricultural land if the sale proceeds are used to buy another agricultural land within two years. Set-Off and Carry Forward of Capital Losses Capital losses can be set off against capital gains. However, long-term capital losses (LTCL) can only be set off against long-term capital gains (LTCG), whereas short-term capital losses (STCL) can be set off against both STCG and LTCG. Any unabsorbed capital loss can be carried forward for 8 assessment years immediately succeeding the assessment year in which the loss was first computed.