The Course Coverage

2. Framework & Basic Principles Taxability of Income from Salaries Taxability of Business Incomes Taxability of Capital Gains Deductions & Exemptions Allied Tax Concepts The Course Coverage

3. Section 4 as charging section

4. INDIVIDUAL HINDU UNDIVIDED FAMILY COMPANY relevant for Income Tax Department ? P E R S O N FIRM AOP / BOI LOCAL AUTHORITY ASSESSEE Person & Assessee ARTIFICIAL JURIDICAL PERSON

5. Person - Individual • From birth till death • Incomes of minors are clubbed with parent • After death, income is assessed as “Estate” • Slab-wise Tax Rates depending on the nature of the assessee (summarised in next slide)

6. Individuals – Tax Rates

7. Person – HUF - Concept • Mr. A - Mrs. A • Mr B (son) & Mrs. B • Mr C (grandson) & Mrs. C • Mr D (greatgrandson) & Mrs D • Mr E (greatgreatgrandson) & Mrs E • Ms. F (unmarried grand-daughter) • Karta – Mr. A (manages the property & business) • Co-parceners – B, C & D (can enforce partition) • Members – all (can claim maintenance)

8. Person – HUF - Nucleus • Through ancestral property (property inherited from any of three immediate male ancestors) • If son is single when inherited – assessed as individual income till he is married • No need for more than one co-parcener • Through gifts for the family • Family denotes plurality of co-parceners

9. Person – HUF – Income & Taxation • Nucleus can be invested in businesses to derive profits or in securities to derive investment incomes • Incomes purely of a personal character cannot be attributed to a HUF – eg. Salaries, commission, etc • Incomes taxed similarly as “Individuals” • Any payments by HUF to members not treated as income

10. Person – Company • Distinct entity from shareholders/ directors • Directors’ remuneration deductible • Dividend liable for double taxation • Dividend Distribution Tax @ 12.50% • Flat rate of tax • Indian companies 30% • Foreign companies 40%

11. Person – Firm • Distinct entity for taxation but no separate legal status • “Agreement” & “Business” are necessary conditions • Payments to partners deductible subject to conditions • Flat Firm Tax Rate 30% • Share of profits exempt in hands of the partner

12. Person - Others • Local Authority • Artificial Juridical Person • AOP/ BOI • Co-operative Society

13. Section 4 as charging section

14. Charged annually • Each year an independent year • Common Financial Year • Assessment Year • period of twelve months starting from the 1st April of every year and ending on 31st March of the next year • Denoted as 2002-2003 , etc • We are concerned with the law for Asst Year 2006-2007 • Previous Year • Generally 1st April to 31st March

15. Section 4 as charging section

16. Taxability of IncomesGeneral Propositions • Capital receipts not taxable unless specified • Personal receipts not taxable • Mutual Activities do not result in income • Income from illegal sources liable to be taxed • Income diverted at source not taxable

17. Scope of Income --Residential Nexus-- Person Income Resident Non Resident --Territorial Nexus-- In India Taxable Taxable Outside India Taxable Non Taxable (To be refined later)

18. Residential Status - Individuals • 182 day test OR • 60 day test & 365 days in 4 years test • Indian citizens taking employment abroad • Indian citizens/PIO visiting India • 730 days test in 7 years AND • Resident in 2 out of 10 years

19. Residential Status - Others • Companies • Indian companies • Always resident in India • Other companies • Resident in India if control & management wholly in India • Other Assessees • Resident in India if control & management partly in India

20. Scope of Income (refined)

21. Scope of Income • Income Accrued in India (General Principles) • Income Received in India (General Principles) • Income Deemed to receive in India • Annual Accretion in RPF • Transferred Balance to RPF • Bad Debts Recovered • Unexplained Investments • Tax Deducted at Source

22. Income Deemed to Accrue in India • Income from Business Connection in India • Property, Asset, Source in India • Salaries earned in India • Salary paid by Government to Indian citizen • Dividend by Indian company • Interest • Royalties • Fees for Technical Services Base Erosion Approach

23. Scheme of the Act Income Exemption • Concept of Income • Capital vs. Revenue • Exemptions • Heads of Income H1 H2 H3 H4 H5 • Aggregation Rules Aggregation Deductions • Deductions Income • Tax Liability Person TAX

24. Heads of Income

25. Salaries: The Starters.. • Test: Employer – Employee Relation • Basis of Charge: Accrual or Receipt whichever is earlier • Scheme (Taxation): Primarily Gross Basis

26. Scheme of Taxation • Basic Salary • Add Allowances (to the extent not exempt) • Add Perquisites (as valued) • Add Retirement Benefits (to the extent not exempt) • Less Profession Tax • Entertainment Allowance

27. Allowances • Exemption based on expenditure and multiple limits • House Rent Allowance • Entertainment Allowance • Leave Travel Concession/Allowance • Exemption based on expenditure • Exemption based on monetary limits

28. Expenditure Allowances • Allowance is based on expenditure • Tour Allowance • Transfer Allowance • Daily Allowance while on tour • Helper Allowance • Research Allowance • Uniform Allowance • Conveyance Allowance (does not include from residence to office and back)

29. Hill Area Allowance Border Area Allowance Tribal Area Allowance Allowance for Transport Employees Compensatory Field Area Allowance Compensatory Modified Area Allowance Counter Insurgency Allowance Underground Allowance High Altitude Allowance Active Field Allowance Island Duty Allowance Children Education Allowance Rs. 100 Hostel Allowance Rs.300 Conveyance Allowance (from residence to office & back) Rs. 800 Monetary Allowances

30. House Rent Allowance • Exemption is least of • Excess of Rent Paid over 10% of Salary • 50% of salary for metro cities, 40% for others • Actual Receipt • Salary means Basic, DA(if it forms a part of retirement benefits) & Commission (if it is paid as a specific percentage of sales achieved by the employee)

31. Leave Travel Concession • Fare • Based on the mode of travel • for self or family • Spouse, children*, dependents • For travel to any place in India • For 2 journeys in a block of 4 calender years • From 1986 • Carry Forward to 5th year if unused

32. Entertainment Allowance • Exemption only to Government employees • 20 % of salary (excluding allowances) • Rs. 5,000/- • Actual Receipt

33. Perquisites • Value of benefits received in kind • If purely for official purposes, cannot be taxed even though it might result in some value addition • Perquisites • Taxable in all cases • Taxable in case of specified employees • Exempt in all cases

34. Perquisites Taxable in all cases • Rent Free/ Concessional Accommodation • 15% of salary or actual hire charges if lower • Additional 10% of the cost of furniture or actual higher charges • If accommodation in hotel, 24% of the salary or charges paid to hotel whichever is lower • If employee is paying some rent, deduct from the value

35. Perquisites Taxable in all cases • Use of an Asset • 10% of the actual cost or hire charges paid • Exempt in case of laptops and computers, telephones and mobiles • Transfer of an Asset • Sale price less the depreciated value • Depreciation Rates for this purpose • Computers & Electronic Items 50% WDV • Motor Cars 20% WDV • Others 10% SLM • Depreciation for completed year

36. Perquisites taxable for specified employees • Medical Facilities Exempt if • In a hospital maintained by the employer • In a Government hospital • In an approved hospital for prescribed diseases • Mediclaim Premium, Group Mediclaim • Other Medical Treatment upto Rs. 15,000/- • Overseas Medical Treatment • Treatment Cost • Cost of Travel & Stay for self & family • Cost of Travel & Stay for one attendant • Cost of Travel excluded only if gross income < 2 lakhs

37. Retirement Benefits • Provident Fund • Superannuation Fund • Pensions • Gratuity • Encashment of unutilised leave • Retrenchment Compensation • Voluntary Retirement Compensation

38. Provident Fund

39. Approved Superannuation Fund • Employers’ Contribution exempt upto 27% of salary • Employees’ Contribution eligible for rebate • Interest is exempt • Pension on retirement is taxable • Commutation on retirement partly exempt • Payment on death totally exempt • In all other cases, taxable

40. Pensions • Uncommuted Pensions • Received by the retired employee Salaries • Received by the legal heir I.O.S • Commuted Pensions on retirement • If receiving gratuity also, 1/3rd of non commuted value is exempt • If not receiving gratuity, ½ is exempt • For Government employees, totally exempt

41. Gratuity • Government Employees – Exempt • Covered by the Payment of Gratuity Act • 15 days salary for each year of service • Rs. 350000/- • Actual Receipt • Not Covered by the Payment of Gratuity Act • ½ months’ average salary for each completed year of service • Rs. 350000/- • Actual Receipt

42. Encashment of Leave Salary • Government Employees – Exempt • Others • Cash Equivalent of earned unused leave • Earned 30 days for each completed year of service • Salary is average of last 10 months • 10 months average salary • Rs. 300000/- • Actual Receipt

43. Other Retirement Benefits • Retrenchment Compensation • Upto Rs. 5,00,000 • Amount calculated under Industrial Disputes Act • Voluntary Retirement Compensation • Applies to all employees, Results in reduction of workforce which is not filled up • Completed 10 years of service/ 40 years of age, Employee is not re-employed in same company/group • Not to exceed 3 months for each completed year or uncompleted months

44. Taxability of Business Income • Tax on Net Income from Business • Net Income = (+) Gross Receipts (-) Expenses • Role of Accounting for both (+) & (-) • Net Income is therefore as determined by the books of accounts & method of accounting followed • Expenses related to non-taxable businesses cannot be adjusted against incomes of taxable businesses

45. Format of determining net income

46. Need for Adjustments • Net Profit as per Profit & Loss Account • Add: • Items debited but not allowed • Items not credited but taxable • Less: • Items credited but exempt/ taxable elsewhere • Items not debited but allowed • Taxable Income

47. What are these adjustments? • Expenses specifically allowed • Expenses disallowed • Residuary Category • Not Capital • Not Violation of Law • For the Purposes of Business • Depreciation

48. Expenses specifically allowed:Social Angle of Income Tax Act • Expenditure on Scientific Research • Revenue Expenditure related to business • Capital Expenditure related to business (excluding cost of land) • Donation to Scientific Research Associations/National Laboratory/University/IIT (1.25 times weighted deduction) • Revenue & Capital Expenditure (not being land & building) on approved in-house projects (1.5 times weighted deduction) • Expenditure on family planning • Capital Expenditure allowed over 5 years

49. Expenses specifically allowed • Insurance Premiums • for stocks & employees health • Bonus & Commission to employees • Interest on Borrowed Capital • Used for the purposes of business • Contributions to Recognised Provident Fund, Superannuation Fund, Gratuity Fund, Staff Welfare Scheme

50. Expenses specifically allowed • Bad Debts • If income already considered/ loan in ordinary course of money-lending business • Written off in books of accounts • Subsequent Recovery taxable