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A tax levied on the income of an individual or business (corporations or other legal entities) is called income tax. An individual is liable to pay income tax on his/her total income with some deductions while corporate income tax often tax net income (the difference between gross receipts, expenses and additional write offs).
Income tax in India is governed by Income Tax Act 1961.
Here only income tax applicable to individuals is mentioned.
Income tax is a tax payable, at the rate enacted by the Union Budget (Finance Act) for every Assessment Year, on the Total Income earned in the Previous Year by every Person.
The chargeability is based on nature of income, i.e., whether it is revenue or capital. The rates of taxation of income are-:
Income Tax Rates/Slabs Rate (%)
→ Up to Rs. 2,00,000 = 0%,
→ Rs. 2,00,001-5,00,000 = 10%,
→ Rs. 5,00,001-10,00,000 = 20%,
→ Rs. 10,00,001 upwards = 30%,
Up to Rs. 2,50,000 (for resident individual of 60 years or above)= 0,
Up to Rs. 5,00,000 (for very senior citizen of 80 years or above)= 0.
Education cess is applicable @ 3 per cent on income tax,
Resident Status
Resident Ordinarily Residents
A person living in India for at least 182 days during previous year Or must have been in India 365 days during 4 years preceding previous year and 60 days in previous year. Ordinary residents are always taxable on their income earned both in India and Abroad.
Resident but not Ordinarily Residents
Must have been a non-resident in India 9 out of 10 years preceding previous year or have been in India in total 729 or less days out of last 7 years preceding the previous year. Not residents are taxable in relation to income received in India or income accrued or deemed to be accrue or arise in India and income from business or profession controlled from India.
Non Residents
Non Residents are exempt from tax if accrue or arise or deemed to be accrue or arise outside India. Taxable if income is earned from business or profession setting in India or having their head office in India
Heads of Income
The total income of a person is divided into five heads:
1. Salary income,
2. Income from house property,
3. Income from business or profession,
4. Capital Gain,
5. Income from other sources.
Income from Salary
All income received as salary under Employer-Employee relationship is taxed under this head. Employers must withhold tax compulsorily, if income exceeds minimum exemption limit, as Tax deducted at source (TDS) and provide their employees with a Form 16 which shows the tax deductions and net paid income. In addition, the Form 16 will contain any other deductions provided from salary such as:
- Medical reimbursement: Up to Rs. 15,000 per year is tax free if supported by bills.
- Transport allowance: Up to Rs. 800 per month (Rs. 9,600 per year) is tax free if provided as transport allowance. No bills are required for this amount.
- Conveyance allowance is tax exempt.
- Professional taxes: Most states tax employment on a per-professional basis, usually a slabbed amount based on gross income. Such taxes paid are deductible from income tax.
- House rent allowance: the least of the following is available as exemption
a) Actual HRA received
b) 50% 40% (metro/non-metro) of basic salary
c) Rent paid minus 10% of 'salary'. basic Salary for this purpose is basic +DA forming part +commission on sale on fixed rate.
The exemption for HRA u/s 10 (13A) is the least of all the above three factors.
Perquisites and Exemptions u/s 10
The term "Perquisite" includes value of any benefit or amenity/value of any concession provided by the employer to the employees. Perquisite Valuation does not include certain medical benefits. Section 10 exemptions are available for the following perquisites:
- Leave Travel Concession u/s 10(5)
- Perquisites paid to Indian Citizens Employed Abroad 10 (7) no
- Tax Paid on Behalf of Any Employee by the Employer 10 (10CC)
- Any sum received under Life Insurance Company
- Dividend from Domestic company
Income from House property
Income from House property is computed by taking into account what is called Gross Annual Value of the property. The annual value (Annual value in case of a self occupied house is to be taken as NIL. (However if there is more than one self occupied house then the annual value of the other house/s is taxable.) From this, deduct Municipal Tax paid and you get the Net Annual Value. From this Net Annual Value, deduct :
- 30% of Net value as repair cost (This is a mandatory deduction)
- No other deduction available
- Interest paid or payable on a housing loan against this house
In the case of a self occupied house interest paid or payable is subject to a maximum limit of Rs. 1,50,000 (if loan is taken on or after 1 April 1999 and construction is completed within 3 years) and Rs. 30,000 (if the loan is taken before 1 April 1999). For l non self-occupied homes, all interest is deductible, with no upper limits. The balance is added to taxable income.
Income from Business or Profession
The income referred to in section 28, i.e., the incomes chargeable as "Income from Business or Profession" shall be computed in accordance with the provisions contained in sections 30 to 43D. However, there are few more sections under this Chapter, viz., Sections 44 to 44DA (except sections 44AA, 44AB & 44C), which contain the computation completely within itself. Section 44C is a disallowance provision in the case non-residents. Section 44AA deals with maintenance of books and section 44AB deals with audit of accounts.
In summary, the sections relating to computation of business income can be grouped as under: -
- Deductible Expenses – Sections 30 to 38 [except 37(2)].
- Inadmissible Expenses – Sections 37(2), 40, 40A, 43B & 44-C.
- Deemed Incomes – Sections 33AB, 33ABA, 33AC, 35A, 35ABB & 41.
- Special Provisions – Sections 42 & 43D
- Self-Coded Computations – Sections 44, 44A, 44AD, 44AE, 44AF, 44B, 44BB, 44BBA, 44BBB, 44-D & 44-DA.
The computation of income under the head "Profits and Gains of Business or Profession" depends on the particulars and information available.
Capital Gains
Transfer of capital assets results in capital gains. Property of any kind held by an assessee such as real estate, equity shares, bonds, jewellery, paintings, art etc. but does not include some items like any stock-in-trade for businesses and personal effects fall under this category.
For tax purposes, there are two types of capital assets: Long term and short term. Long term asset is that which is held by a person for three years except in case of shares or mutual funds which becomes long term just after one year of holding. Sale of such long term assets gives rise to long term capital gains. There are different scheme of taxation of long term capital gains. These are:
- As per Section 10(38) of Income Tax Act, 1961 long term capital gains on shares or securities or mutual funds on which Securities Transaction Tax (STT) has been deducted and paid, no tax is payable. STT has been applied on all stock market transactions since October 2004 but does not apply to off-market transactions and company buybacks; therefore, the higher capital gains taxes will apply to such transactions where STT is not paid.
- In case of other shares and securities, person has an option to either index costs to inflation and pay 20% of indexed gains, or pay 10% of non indexed gains. The indexation rates are released by the I-T department each year.
- In case of all other long term capital gains, indexation benefit is available and tax rate is 20%.
All capital gains that are not long term are short term capital gains, which are taxed as such:
- Under section 111A, for shares or mutual funds where STT is paid, tax rate is 10% From Asst Yr 2005-06 as per Finance Act 2004. For Asst Yr 2009-10 the tax rate is 15%.
- In all other cases, it is part of gross total income and normal tax rate is applicable.
For companies abroad, the tax liability is 20% of such gains suitably indexed (since STT is not paid).
Income from Other Sources
This is a residual head, under this head income which does not meet criteria to go to other heads is taxed. There are also some specific incomes which are to be taxed under this head.
- Income by way of Dividends
- Income from horse races
- Income from winning bull races
- Any amount received from key man insurance policy as donation.
- Income from shares (dividend other than Indian company)
Deduction
While exemptions is on income some deduction in calculation of taxable income is allowed for certain payments.
Section 80C Deductions
Section 80C of the Income Tax Act [1] allows certain investments and expenditure to be deducted from total income up to the maximum of Rs. One lac. The total limit under this section is Rs. 100,000 ) which can be any combination of the below:
- Contribution to Provident Fund or Public Provident Fund. PPF provides 8.8% return compounded annually. Maximum limit to contribute in it is Rs. 100,000 for each year. It is a long term investment with complete withdrawal not possible till 15 years though partial withdrawal is possible after 5 years. The interest earned on PPF investments is not taxable.
Besides, there is employee providend fund which is deducted from the salary of the person. This is about 10% to 12% of the BASIC salary component. Recent changes are being discussed regarding reducing the instances of withdrawal from EPF especially when one changes the job. EPF has the option of full settlement on leaving the job, taking VRS, retirement after 58. It also has options of withdrawal for certain expenses related to home, marriage or medical. EPF contribution includes 12% of basic salary from employee and employer. It is distributed in ratio of 8.33:3.67 in Pension fund and Providend fund
- Payment of life insurance premium. It is allowed on premium paid on self, spouse and children even if they are not dependent on father or mother.
- Investment in pension plans. National Pension Scheme is meant to save money for the post retirement which invests money in different combination of equity and debt. depending upon age up to 50% can go in equity. Annuity payable after retirement is dependent upon age. NPS has six fund managers. Individual can make minimum contribution of Rs. 6000/-. It has 22 point of purchase (banks).
- Investment in Equity Linked Savings schemes (ELSS) of mutual funds. Among other investment opportunities, ELSS has the least lock-in period of 3 years. However, one should note that after the Direct Tax Code is in place, ELSS will no longer be an investment for 80C deduction.
- Investment in National Savings Certificates (interest of past NSCs is reinvested every year and can be added to the Section 80 limit)
- Tax saving Fixed Deposits provided by banks for a tenure of 5 years. Interest is also taxable.
- Payments towards principal repayment of housing loans. Also any registration fee or stamp duty paid.
- Payments towards tuition fees for children to any school or college or university or similar institution (Only for 2 children)
- Post office investments
The investment can be from any source and not necessarily from income chargeable to tax.
Section 80CCF: Investment in Infrastructure Bonds
From 1st April, 2011, a maximum of Rs. 20,000 is deductible under section 80CCF provided that amount is invested in infrastructure bonds. This is in addition to the Rs. 100,000 deduction allowed under Section 80C.
Section 80D: Medical Insurance Premiums
Health insurance, popularly known as Mediclaim Policies, provides a deduction of up to Rs. 35,000.00 (Rs. 15,000.00 for premium payments towards policies on self, spouse and children and Rs. 15,000.00 for premium payment towards non-senior citizen dependent parents or Rs. 20,000.00 for premium payment towards senior citizen dependent). This deduction is in addition to Rs. 1,00,000 savings under IT deductions clause 80C. For consideration under a senior citizen category, the incumbent's age should be 60 years during any part of the current fiscal, e.g. for the fiscal year 2010-11, the incumbent should already be 60 as on March 31, 2011), This deduction is also applicable to the cheques paid by proprietor firm.
Interest on Housing Loans Section
For self occupied properties, interest paid on a housing loan up to Rs. 150,000 per year is exempt from tax. This deduction is in addition to the deductions under sections 80C, 80CCF and 80D. However, this is only applicable for a residence constructed within three financial years after the loan is taken and also the loan if taken after April 1, 1999.
If the house is not occupied due to employment, the house will be considered self occupied.
For let out properties, the entire interest paid is deductible under section 24 of the Income Tax act. However, the rent is to be shown as income from such properties. 30% of rent received and municipal taxes paid are available for deduction of tax.
The losses from all properties shall be allowed to be adjusted against salary income at the source itself. Therefore, refund claims of T.D.S. deducted in excess, on this count, will no more be necessary.
Section 80DDB : Deduction in respect of Medical Treatment, etc
Deduction is allowed to resident individual or HUF in respect of expenditure actually during the PY incurred for the medical treatment of specified disease or ailment as specified in the rules 11DD for himself or a dependent relative or a member of a HUF.
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