Income Tax

What do you know about Tax?

• A tax may be defined as a pecuniary burden laid upon individuals or property owners to support the government.

TAX ???• A tax is not a voluntary payment or donation,

but an enforced contribution , i.e. any contribution imposed by government , whether under the name of toll, duty, custom, excise, subsidy, aid, supply, or other name.

Why are Taxes important?• The collection of taxes provides funds to

support the infrastructure of government, which allows for the delivery of public services to individual states and the nation as a whole.

Tax System in India• The system of taxation is divided between the central and

state government in India. • The taxes levied by the central government are known as

direct taxes while the taxes levied by the state government are termed as Indirect taxes.

• Indirect taxes are applicable on goods and services. In case of indirect taxes customers pay taxes by paying higher prices. Indirect taxes actually increase the price of a particular product for which the customers eventually pays a higher price. Some of the principle indirect taxes are sales tax, stamp duties, VAT (Value Added Tax), excise duty and expenditure tax.

Tax System in India

• Direct Taxes : Wealth Tax, Corporate Income Tax, Individual Income Tax.

• Indirect Taxes : Sales Tax, Custom duty etc.

What is Income Tax?• An income tax is a tax levied on the income of

individuals or businesses (corporations or other legal entities).

• When the tax is levied on the income of companies, it is often called a corporate tax corporate income tax, or profit tax.

The Income Tax Act, 1961• The provisions of income tax are contained in

the Income Tax Act, 1961 which extends to the whole of India and became effective from 1/4/1962 (Section 1)

• Scope of Income Tax Act: The IT Act contains provisions for determination of taxable income, determination of tax liability, procedure of assessment, appeals, penalties and prosecutions . It also lays down the powers and duties of various income tax authorities.

The Income Tax Act, 1961• Income Tax Act is a revenue law, there are

bound to be amendments from time to time in this law. Therefore the IT Act has undergone innumerable changes from the time it was originally enacted.

• These amendments are usually brought in annually along with the Union Budget.

• Besides these amendments, whenever it is found necessary the Government introduces various amendment acts and ordinances.

The Income Tax Act, 1961• Every year a Budget is presented before the

parliament by the Finance Minister.• One of the most important components of the

Budget is the Finance Bill, which declares the financial proposals of the Central Government.

• The Finance Bill also mentions the rates of income tax and other taxes.

Basic Concepts That One Must Know ?

• Before one can embark on a study of the law of income tax, it is absolutely vital to understand some of the expressions found under the Income Tax Act, 1961.

What is an Assessment Year ?

• “Assessment Year” Section 2 (9)means the period starting from April 1 and ending on March 31 of the next year. For instance the assessment year 2011-12 will commence on 1/4/2011 and end on 31/3/2012.

• Income of previous year of an assesse is taxed during the next following assessment year at the rates prescribed by the Finance Act.

Previous Year• Income earned in a year is taxable in the next

year. The year in which income is earned is known as previous year and the next year in which income is taxable is known as assessment year.

• Illustration: Income earned by an individual during the previous year 2010-11 is taxable in the following assessment year 2011-12 at the rates applicable for the assessment year 2011-12

Assessment Year/ Previous Year

Assessment Year Previous Year

2010-11

2011-12

2009-10

2010-11

Illustration • X sets up a new business on March 3, 2011.

What is the previous year for the assessment year 2011-12 ?

- Previous year for the assessment year 2011-12 is the period commencing on March 3,2011 and on March 31, 2011.

Who are included in “person”?• The term “person” includes [Section 2(31)]:- An individual- A Hindu Undivided Family- A Company- A Firm- An association of persons or a body of

individuals, whether incorporated or not- A local authority- Every artificial person not falling within any of

the preceding categories.

Q. Determine the status of the following?

• Allahabad University • DCM Ltd.• Noida Authority• Taxman Publications P (Ltd)• East End Apartments Group of Housing Society• A joint family of X, Mrs. X and their sons A & B

Who is regarded as an Assessee?

• “Assessee”, [Section 2(7)] means a person by whom income tax or any other sum of money is payable under the Act.

• It includes:- Every person in respect of whom any

proceeding under the Act has been taken for the assessment of his income.

- Every person who is deemed to be an Assessee.

How to charge tax on income?

• Annual Tax: Income Tax is an annual tax on income

• Tax Rate of Assessment Year: Income of previous year is chargeable to tax in the next following assessment year at the tax rates applicable for the assessment year.

• Rates fixed by Finance Act: Tax rates are fixed by annual Finance Act and not by Income Tax Act

What is regarded as “income” under the Income Tax Act

• Meaning of Income as generally understood-- Regular & Definite Source- Different forms of Income- Receipt v/s Accrual- Illegal income- Disputed Title- Reimbursement of expenses is not treated as income

What is regarded as “income” under the Income Tax Act

• Temporary and permanent income• Lump sum receipt• Receipt on account of dharmada, gaushala

and pathshala is not income and therefore, not liable to tax

• Devaluation of currency• Income includes losses• Same income can not be taxed twice

What is regarded as “income” under the Income Tax Act

• Income should be real and not fictional• Pin money received by wife for her

dress/personal expenses and small savings made by a woman for meeting household expenses is not treated as her income

• Award received by a sportsperson will be taxable. In case a non professional sportsman receives a gift or an award. It will be taxable only if the gift received is more than Rs.50,000

What is regarded as “income” under the Income Tax Act

• Revenue Receipt Vs Capital Receipt• Prize on winning a motor rally

Extended meaning of “income” under Section 2(24)

• Profits & Gains• Dividend• Voluntary contribution received by a Trust• Perquisites in the hands of employee• Any special allowance or benefit• City compensatory allowance/ Dearness

Allowance• Any benefit or Perquisite to a Director

Extended meaning of “income” under Section 2(24)

• Any benefit or perquisite to a representative assesse

• Capital Gain (Section 45)• Banking Income of a co-operative society• Winnings from lottery • Employees contribution to provident fund• Amount exceeding Rs.50,000 received by way

of gift

What is Gross Total Income?

• As per Section 14, income of a person is computed under the following five heads :- Salaries- Income from house property- Profits & Gains of business or profession- Capital Gains- Income from other sources

What is Gross Total Income?

• The aggregate income under these heads is termed as “gross total income”.

• In other words “gross total income”, means total income computed in accordance with the provisions of the Act before making any deduction under sections 80C to 80U.

What is total income?

• Total income of an assessee is gross total income as reduced by the amount permissible as deduction under sections 80C to 80U.

Computation of income for an assessment year

• Income from salaries • Income from house property• Profits and gains from business or profession• Capital gains• Income from other sources• Total [i.e. 1+2+3+4+5]• Less: Adjustment on account of set off or carry

forward losses• Gross Total Income

Computation of income for an assessment year contd..

• Less: Deductions under sections 80C to 80U• Total Income or net income• Computation of tax liability• Tax on net income• Add: Surcharge• Tax & Surcharge• Add: Education cess• Add: Secondary and higher education cess• Less: Rebate under various sections• Tax• Less: Pre-paid tax• Tax liability rounded off

Agricultural Income

• Agriculture income is exempt under the Indian Income Tax Act. This means that income earned from agricultural operations is not taxed.

• The reason for exemption of agriculture income from Central Taxation is that the Constitution gives exclusive power to make laws with respect to taxes on agricultural income to the State Legislature.

What does agricultural income mean?

• As per Income Tax Act income earned from any of the under given three sources meant Agricultural Income;

• (i) Any rent received from land which is used for agricultural purpose.

• (ii) Any income derived from such land by agricultural operations including processing of agricultural produce, raised or received as rent in kind so as to render it fit for the market, or sale of such produce.

• (iii) Income attributable to a farm house subject to the condition that building is situated on or in the immediate vicinity of the land and is used as a dwelling house, store house etc.

Agricultural Income• Certain income which is treated as Agriculture

Income; (a) Income from sale of replanted trees. (b) Rent received for agricultural land. (c) Income from growing flowers and creepers. (d) Share of profit of a partner from a firm engaged in agricultural operations. (e) Interest on capital received by a partner from a firm engaged in agricultural operations. (f) Income derived from sale of seeds.

Agricultural income• Certain income which is not treated as Agricultural Income;• (a) Income from poultry farming.• (b) Income from bee hiving.• (c) Income from sale of spontaneously grown trees.• (d) Income from dairy farming.• (e) Purchase of standing crop.• (f) Dividend paid by a company out of its agriculture income.• (g) Income of salt produced by flooding the land with sea

water.• (h) Royalty income from mines.• (i) Income from butter and cheese making.• (j) Receipts from TV serial shooting in farm house is not

agriculture income.

Exemption Vs Deduction• If an income is exempted from tax, it is not

included in computation of income. Exemptions are given in the Income Tax Act which are the thrust areas of the government i.e. the area which the government wishes to boost the particular segments/ or the earning body is the weaker section of the society.

• Deductions are provided to boost savings for social welfare and other activities with which the government will be able to get strength in desired areas.

What is Surcharge• A surcharge may mean an extra fee added

onto another fee or charge. – Fuel Surcharge, sky freight charges which represents additions due to jet fuel prices.– Bunker adjustment factor, sea freight charges which represents additions due to oil prices.

• Surcharge has been abolished for personal income tax in the financial year 2009-10.

What is Cess?

• Cess is used as rider to a tax for collecting additional revenue for

a specific purpose. For instance we have Education Cess @ 2% which we pay along on service tax or income. The % of cess is calculated as per the rate prescribed in the Act dealing with levy of that specified cess.

Casual income

• Casual income is a non recurring income that is not likely to occur again in a

year. It is an income which is earned by chance. Such income is neither anticipated nor provided for in any agreement. Such incomes are received at uncertain times.

Casual income contd..

• Any receipts which are of casual or non-recurring nature are exempt upto a sum of Rs. 5000 ( Rs. 2500 in case of winnings from races ) in each previous year. Casual income is income which is accidental, received without stipulation or a receipt which is of a fortuitous nature and which cannot be foreseen. for example Prize won for taking part in a competition, reward for finding a lost child, etc