Dr.RANM ARTS AND SCIENCE COLLEGE�Affiliated to Bharathiar University , Accredited with “ B+” NAAC

Mrs.S.Sangeetha M.Com.,Mphil.,Bed

Head & Assistant Professor,

Department of Commerce (B&I)

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Course Name : Income Tax Law and Practices

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Welcome You All

INCOME TAX

Meaning :

All individuals earning above a certain amount are required to pay income tax on their earned income. The income Tax rates, income slabs, and rules are regulated by the government and are subject to change from time to time.

Definition :

Income tax is a tax charged on the annual income of an individual or business earned in a financial year. The Income Tax system in India is governed by The Income Tax Act, 1961, which lays out the rules and regulations for income tax calculation, assessment, and collection. 

The Indian Income Tax system also includes various deductions and exemptions that can be used to lower the tax liability for a given financial year.

Income Tax Act

• Income Tax Act :

The Income Tax Act, 1961 is the primary law governing the collection, computation, and administration of income tax in India.

• Definition of Income:

There are different terms for income, depending on the quantity being measured. Gross income is the total value of your salary or payments, without accounting for any cash outflows. Net income refers to the income left over after subtracting taxes or fees.

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Assessment Year & Previous Year

Assessment Year :

The assessment year starts immediately after the previous year ends and runs from April 1st to March 31st of the subsequent calendar year.

Previous Year :

The previous year starts on April 1st and ends on March 31st of the following calendar year. It is the year in which financial transactions take place, and income is generated.

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Assessee

Assessee :

An assessee is any individual who is liable to pay taxes to the government against any kind of income earned or any losses incurred by him for a particular assessment year. Each and every person who has been taxed in the previous years for income earned by him is treated as an Assessee under the Income Tax Act, 1961.

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Types Of Assessee

• Local Authority.
• Artificial Judicial Body(not covered under any of the above-mentioned categories)
• Individual.
• Hindu Undivided Family.
• Partnership Firm.
• Company.
• Association of Persons(AOP) or Body of Individuals(BOI)

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Who Want to Pay Income Tax

• Any individual earning more than 2.5 lakh annually in a financial year is required to pay income tax to the Government of India. Here are the different types of taxpayers in India:

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• Individuals (Further divided as individuals under 60 years, individuals between the ages of 60 and 80 years (Senior Citizen), and individuals aged over 80 years(Super Senior Citizen)

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• Hindu Undivided Family (HUF)

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• Association of Persons (AOP)

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• Artificial Juridical Person

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• Firms

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• Companies

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HEADS OF INCOME TAX

• Income from salary.
• Income from house property.
• Income from profits and gains from business or profession.
• Income from capital gains.
• Income from other sources.

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Scope of Income

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Section 5 provides the scope of total income in terms of the residential status of the assessee because the incidence of tax on any person depends upon his residential status in India. The scope of total income of an assessee depends upon the following three important considerations:

• the residential status of the assessee;
• the place of accrual or receipt of income, whether actual or deemed; and
• the point of time at which the income had accrued to or was received by or on behalf of the assessee.
• The ambit of total income of the three classes of assessees would be as follows:
• (1) Resident and ordinarily resident (ROR)
• The total income of an ROR would, under section 5(1), consist of:
• income received or deemed to be received in India during the previous year;
• income which accrues or arises or is deemed to accrue or arise in India during the previous year; and
• income which accrues or arises outside India even if it is not received or brought into India during the previous year.
• In simpler terms, an ROR has to pay tax on the total income accrued or deemed to accrue, received or deemed to be received in or outside India during the relevant previous year.

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(2) Resident but not ordinarily resident (RNOR)

• Under section 5(1), the total income of an RNOR would consist of –
• income received or deemed to be received in India during the previous year;
• income which accrues or arises or is deemed to accrue or arise in India during the previous year; and
• income derived from a business controlled in or profession set up in India, even though it accrues or arises outside India.
• Note – All other income accruing or arising outside India which is not received or deemed to be received or deemed to accrue or arise in India would not be included in his total income.

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3) Non-resident

• (A non-resident’s total income under section 5(2) includes:
• income received or deemed to be received in India in the previous year; and
• income which accrues or arises or is deemed to accrue or arise in India during the previous year.
• Note: All assessees, whether resident or not, are chargeable to tax in respect of their income accrued, arisen, received or deemed to accrue, arise or to be received in India whereas a resident alone (resident and ordinarily resident in the case of individuals and HUF) is chargeable to tax in respect of income which accrues or arises outside India.

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Residential Status for Individual

• Resident
• A taxpayer would qualify as a resident of India if he satisfies one of the following 2 conditions :
• 1. Stay in India for a year is 182 days or more or
• 2. Stay in India for the immediately 4 preceding years is 365 days or more and 60 days or more in the relevant financial year

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• Resident Not Ordinarily Resident
• If an individual qualifies as a resident, the next step is to determine if he/she is a Resident ordinarily resident (ROR) or an RNOR. He will be a ROR if he meets both of the following conditions:
• 1. Has been a resident of India in at least 2 out of 10 years immediately previous years and
• 2. Has stayed in India for at least 730 days in 7 immediately preceding years

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• Non-resident
• An individual satisfying neither of the conditions stated in (a) or (b) above would be an NR for the year.

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Income From Salary

Salary (section 15,16& 17)

Add:

Salary [17(1) ] + Allowances [17(3)(ii)] + Perquisites[17(2)] + [profit in lieu of salary[17(3)]

Less:

Standard deduction u/s 16 (ia) + Entertainment allowance 16(ii) + Tax on Employment16(iii)

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Formula for Calculating Salary Income

Particulars Rs.

Basic salary , Bonus , Commission XXXX

Allowance , Perquisites XXXX

Profit in lieu of salary ( arrears or advance of salary) XXXX

Retirement Benefits: (Gratuity, Pension, Leave encashment XXXX

Gross Salary XXXX

Less:

Deduction: u/s 16 (SD, EA, Professional Tax) XXXX

Income From Salaries XXXX

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Income From House Property

Meaning:

Income from house property is the income earned by an individual (mainly rent) through the ownership of a property which may consist of a residential building, flat, shop or land attached to it. This act is mainly governed by Section 22-27 of Income Tax Act, 1961. Section. Details. Section 22.

Computation

• All the building properties are divided into the following four categories for the purpose of knowing the principles involved in computation:
• 1. Let-out property
• 2. Self-occupied property (including deemed let-out)
• 3. Part let-out/ self-occupied property
• 4. Only one house and kept vacant
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• The provisions of section 23 deal with the computation of annual value of a building property. After computation of the annual value, deductions prescribed under section 24 are required to be allowed so as to arrive at the taxable income from house property.

Calculation of GAV

• Calculation of GAV:

  Step : 1

• Step: I 1. Municipal Renal Value – MRV XXX

2. Fair Rental Value – FRV XXX

(Which ever is Higher is value to be considered)

• Step: II 1.Higher Value ( step:1) XXX

2.Standard Rent – SR XXX

(Which ever is Less is Expected Rental value – ERV)

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• Step: III 1. Expected Rental value – ERV XXX
• 2. Actual Rent Value - ARV XXX
• (Which ever is more is value is GAV)

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Meaning of Values for GAV

Municipal value – It is the valuation by the Municipal authorities for charging taxes on house property.

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Fair rent – It is the rent, a similar property in the same or similar locality can fetch.

Standard rent – It is fixed under the Rent Control Act where a higher rent than the standard rent cannot be expected by the owner.

Actual rent – It is the actual rent received/receivable by the owner by renting out the property.

Expected rent – Higher value between municipal value and fair rent subjected to a maximum of Standard rent is expected rent.

There can be three cases for the Gross Annual Value of a let-out property to be calculated.

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Income from Profits and Gains of Business or Profession

Meaning: Profits and Gains of any business or profession that is carried on by the assessee at any time during the previous year. 2) Any compensation or other payment due to or received by an assessee for loss of agency due to termination or modification of terms.

Business Icome :

• Business, in simple words, means an occupation carried on by a person with a view to earn a profit. Business does not include income from the Profession or partnership firm. The business includes any –
• Trade,
• Commerce,
• Manufacturing,
• Even rendering services to others is considered as business.
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• For example: Owning a shop, running a hotel, transportation, travel agency, share broking, etc.

Professional Income :

• Profession may be defined as a vocation, or a job requiring some thought, skill, and special knowledge. So profession refers to those activities where the livelihood is earned by the persons through their intellectual or manual skill like:
• Legal
• Medical
• Engineering
• Chartered Accountant
• Architectural etc.

Formula for Calculating Business Income

Particulars Rs. Rs.

Profit a sper P&LA/c XXX

Add:

i)Expenses or losses disallowed but charged in P&L A/c xxx

ii)Incomes taxable as business income but not credited to the P&L A/c xxx 

iii) Expenses inexcess of the allowed amount charged to P&L A/c xxx

iv) Under valuation of closing stock or over valuation of opening stock xxx XXX

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Deduct

i)Expenses or losses allowed but not debited to P&L A/c xxx 

ii)Incomes not taxable as business income but credited to the P&L A/ xxx  

iii) Income exempt from tax but credited in P&L A/c xxx

iv)Over valuation of closing stock and undervaluation of opening stock. Xxx XXX

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• Taxable income from Business xxx

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Calculation of Profession Income

• Particulars Amout (Rs.)
• i) Professional Receipts:
• 1. Consultation fees XXX
• 2. Operation fees XXX
• 3. Visiting fees XXX
• 4. Sale of Medicines XXX
• 5. Value of Perquisites XXX
• 6. Examiner’s fees XXX
• 7. Nursing home receipts XXX
• 8. Gift from patients XXX
• XXX
• Less:
• 1. Dispensary expenses XXX
• 2. Cost of medicines XXX
• 3. Depreciation on surgical equipments XXX
• 4. Nursing home expenses XXX
• 5. expenditure incurred for professional XXX
• Income from Profession XXX

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�Income from Capital Gain

Meaning:

• Capital gain is the profit one earns on the sale of an asset like stocks, bonds or real estate. It results in capital gain when the selling price of an asset exceeds its purchase price. It is the difference between the selling price (higher) and cost price (lower) of the asset.
• Sec.45(1):BasisofCharge:
• Any profit or gain arising from transferof capitalasset shallbe charged to taxunderthe head capital gain in the same previous year in which transfer took place.
• [CapitalAsset+Transfer=CapitalGain/Loss(Accrualbasis)] Sec. 2(14) : Capital Asset :
• Capital asset means : a) Any kind of property held by an assessee, whether or notconnected with business or profession of the assessee. b) Any securities held by a FII which has invested in such securities in accordance with the regulations made under the SEBI Act, 1992.

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Types of Capital Gain

Long Term Capital Asset

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• On transfer of Long Term Capital Asset
• LongTermCapitalGain(LTCG)
• More than 36 months

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Short Term Capital Gain (STCG)

• On tranfer of Short Term Capital Asset
• Short Term Capital Asset
• Not More than 36 months

Computation of Short Term Capital Gain

Particulars Amount(Rs.)

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Full value of consideration xxx

(-)Selling expenses/Cost of Transfer (xxx)

Net Value of Consideration xxx

(-)Cost of acquisition (xxx)

(-)Cost of Improvement (xxx)

Short Term Capital Gain xxx

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Computation of Long Term Capital Gain

Particulars Amount (Rs.)

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Full value of consideration xxx

(-)Selling expenses/Cost of Transfer (xxx)

Net Value of Consideration xxx

(-)Indexed Cost of acquisition (xxx)

(-)Indexed Cost of Improvement (xxx)

Long Term Capital Gain xxx

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Income from Other Sources

Meaning:

• Income from other sources is one of the five heads of income that the Income Tax Act, 1961 broadly classifies income under. This category includes earnings that can't be accounted for under any of the other heads of income viz. Income from Salary, Income from House Property, Profits, and Gains from Business or Profession and Income from Capital Gains.
• All taxable income under this head is calculated according to the accounting method the assessee follows viz. accrual or cash basis. The exceptions to this are dividend and interest income i.e. whatever the accounting method, assessees will have to declare and pay income tax on dividend and interest earned during the previous year.

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Dividends

Income by way of dividend is shown under this head. Deemed dividend as under section 2(22)(e) is fully taxable as is a dividend from cooperative societies and foreign companies.�Dividend not chargeable to tax includes dividends exempt U/S 10(34) i.e. dividend from Indian companies, dividend liable to corporate dividend tax, income on mutual fund units, or income from UTI unit holder.

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Winnings

This includes winnings over Rs.10,000 from lotteries, puzzles, races, games, and all forms of gambling and betting. E.g. card games, horse races, game shows, etc.

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Interest received

All interest income earned in the previous year (on compensation/enhanced compensation) is taxable. However, 50% of this income can be claimed as a deduction.

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Provisions for Income from Other Sources

• Gifts from relatives means gifts from the assessee's
• parents, parents' brothers or sisters (i.e. aunts, uncles)
• any lineal predecessor/successor
• brother, sister; brothers' or sisters' spouses (i.e. brothers or sisters- in-law)
• spouse, spouse's parents (i.e. in-laws), spouse's brothers or sisters (i.e. brothers or sisters- in-law), spouse's lineal predecessor/successor and their brothers or sisters.

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Provisions for Income from Other Sources

• from relatives or a local authority or a trust, fund, educational/medical institution, body or any such institution outlined under section 10(23C) and section 12AA
• as a wedding gift
• by way of being named in a Will or as inheritance
• from a dying donor
• Gifts include monetary gifts, immovable property and specified property.
• Monetary gifts - sums of money received without any consideration or without adequate consideration.
• Immovable property as gifts - Property value will be the stamp duty value. Inadequate consideration will be if the property value is lower than stamp duty value.
• Specific movable property - Property here are shares, jewellery, securities, paintings, archaeological collections, sculptures and drawings and other artwork. As of 1st June 2010, bullion also forms a part of this list. Property value will be the fair market value. In

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• Thank you