Module 1

Basic Concepts
Assessment Year Previous Year
 Uniform Previous Year  Previous year in case of newly set up

business/profession

Income of previous year not taxable in assessment year
 Income of nonresidents from shipping  Income of persons leaving India permanently or for a long period of time.  Income of bodies formed for short duration  Income of persons trying to alienate his assets with a view to avoiding payment of tax.  Income of discontinued business.

Person [Sec 2(31)]
 Individual  Hindu undivided Family  A company  A Firm  An Association of persons or body of individuals, whether incorporated or not  A local authority  Artificial judicial person

Assessee [Sec 2(7)]
 Assessee means a person by whom income-tax or any other sum of money is payable under the Act.  Every person in respect of whom any proceeding under the Act has been taken for the assessment of his income or loss or the amount of refund due to him.  A person who is assessable in respect of income or loss of another person.  A person who is deemed to be an assessee, or an assessee in default under any provision of the Act.

Income under Income tax Act u/s 2(24)
 Profits and Gains  Dividend  Voluntary Contributions received by a Trust  Perquisites in the hands of employee  Any Special Allowance or benefit  City Compensatory or Dearness Allowance  Any benefit or perquisite to a director  Any benefit or perquisite to a representative assessee

Income under Income tax Act u/s 2(24
 Any sum chargeable under Sections 28, 41 and 59  Capital Gains under Section 45  Insurance Profit under Section 44  Winnings from Lottery  Employees Contribution towards Provident Fund  Amount received under Keyman Insurance Policy  Gift of an Amount exceeding Rs. 25,000

Gross Total Income
Salaries Income from house property Profits and gains of business or profession Capital gains Income from other sources

Total Income
Rounding-off Exemption Vs Deduction Capital receipts Vs Revenue receipts

Types of Accounting methods
 Mercantile system  Cash system

Method of Accounting
 Income chargeable under the head “Profits and Gains of business or profession” or “Income from other sources” shall be computed only in accordance with either cash or the mercantile system of accounting regularly employed by an assessee.  In case of income chargeable under other heads, one has to follow the statutory provisions of the income tax act which expressly provide whether revenue (expenditure) is taxable (deductible) on accrual basis or cash basis.

Tax Rates

Different Residential Status
 For Individual and Hindu undivided family: Resident and Ordinarily Resident in India  Resident but not Ordinarily Resident in India  Non-resident in India  All other assessees : Resident in India  Non-resident in India

Conditions for resident in India
 At least one of the following conditions to be satisfied a. He is in India in the previous year for a period of 182 days or more b. He is in India for a period of 60 days or more during the previous year and 365 days or more in 4 years immediately preceding the previous year.

Exceptions
 The period of 60 days in (b) is extended to 182 days for an Indian citizen who leaves India during the previous year for the purpose of employment outside India or an Indian citizen who leaves India during the previous year as a member of the crew of an Indian ship.  The period of 60 days in (b) is extended to 182 days for an Indian citizen or a person of Indian origin who comes on a visit to India during the previous year.

Ordinarily Resident
A person is ordinarily resident if following two conditions are satisfied :
 He has been resident in India in at least 2 out of 10 previous years immediately preceding the relevant previous year.  He has been in India for a period of 730 days or more during 7 years immediately preceding the relevant previous year.

Residential status of HUF
Place of control Residential status

Control and management of the affairs of a HUF is -

Wholly in India

Resident

Wholly out of India

Non-resident

Partly in India and partly outside India

Resident

Ordinarily Resident (HUF)
A residential HUF is ordinarily resident if following two conditions are satisfied :
 Karta has been resident in India in at least 2 out of 10 previous years immediately preceding the relevant previous year.  Karta has been in India for a period of 730 days or more during 7 years immediately preceding the relevant previous year.

Residential status of firm and Association of persons
Place of control Residential status

Control and management of the affairs of a Firm/association of persons is -

Wholly in India

Resident

Wholly out of India

Non-resident

Partly in India and partly outside India

Resident

Residential status of NonIndian Company
Place of control Residential status

Control and management of the affairs of a Company is-

Wholly in India

Resident

Wholly out of India

Non-resident

Partly in India and partly outside India

Non-Resident

Indian Income & Foreign Income
Whether income is received (or deemed to be received) in India during the relevant year Whether income accrues (or arises or is deemed to accrue or arise) in India during the relevant year Status of Income

Yes

Yes

Indian Income

Yes

No

Indian Income

No

Yes

Indian Income

Incidence of tax for different taxpayers
Individual and Hindu Undivided Family

Resident and ordinarily resident in India

Resident but not ordinarily resident in India

Non-resident in India

Indian income

Taxable in India Taxable in India Taxable in India

Foreign income

Taxable in India Taxable if it is business income and business is controlled

Not taxable in India

Income deemed to be received in India


Interest credited to recognized PF account of an employee in excess of 9.5%



Excess

contribution

of

employer

in

case

of

recognized PF.


Contribution by the central government or any other employer to the account of an employee under a notified pension scheme.



TDS Deemed profit



Income deemed to accrue or arise in India
 Income from business connection in India.  Income through or from any property, asset or source of income in India.  Income through the transfer of capital asset situated in India.  Income under the head salary if service is rendered in India.  Salary payable abroad by the Government to a citizen of India.  Dividend paid by an Indian Company.  Income by way of interest, royalty or technical fees. – Received from Government – Received from resident – • Interest received on money borrowed for business or profession carried outside India. • Interest received on money borrowed for making or earning any income from any source outside India. – Received from Non-resident only if business is carried on by the payer in India.

Self Study
 Income that is exempted from tax.  New undertakings in SEZ  New units in SEZ  Exemption to EOU.

New Undertakings in SEZ Conditions
 

Production should start in free trade zone. Should not have been formed by splitting or reconstruction of a business.



Should not have been formed by transfer of a new business of machinery or plant previously used for any purpose.



Sale proceeds must be received in convertible foreign exchange during the previous year or within a period of six months from the end of the relevant previous year.

 

The assessee should have audit report. Return of income should be submitted on or before the due date of submission of return of income.

Deduction
Profits

of the business * Export Turnover / Total turnover of the business carried on by the undertaking. 10 consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce such articles or things or computer software. Deuction not allowed from the AY 2012-13.

Deduction – Special Provisions
If

production started between April 1, 2002 and March 31, 2005 – First 5 years – 100% of profit and gains. – Next 2 years – 50 % of Profit & Gains – Next 3 years – 50% of Profit & Gains (provided same amount transferred to special reserve account)

New Units in SEZ Conditions


The unit in SEZ begins to manufacture or produce articles or things or provide services during the financial year 2005-06 or any subsequent year. Should not have been formed reconstruction of a business. by splitting or





Should not have been formed by transfer of a new business of machinery or plant previously used for any purpose. The assessee has exported goods or provided services out of India from SEZ by land, sea, air or by any other mode. Books of accounts of the tax payer should be audited. Deduction shall be claimed in the return of income.



 

Deduction
Profits

First

5 years – 100% of profit and gains. Next 5 years – 50 % of Profit & Gains Next 5 years – 50% of Profit & Gains (provided same amount transferred to special reserve account)

of the business * Export Turnover / Total turnover of the business carried on by the undertaking.

Conditions- Special Reserve Account
Should be used only for the purpose of acquiring new Plant & Machinery.  New P&M should be put to use before the expiry of 3 years from the end of the year.  Can be used for any purpose except distribution of dividends or profits or for remittances outside India as profits or for creation of any assets outside India.  If the Special Reserve Account is misutilized, then the deduction will be taken back.


Exemption to EOU conditions


It must manufacture or produce any article or thing or computer software. It should not be the requirement of Section 10B that the assessee company should itself own plant, machinery or equipment and manufacture or produce the same in order to be eligible for the exemption. It should not be formed by splitting / reconstruction of business. It should not be formed by transfer of old machinery. There must be repatriation of sale proceeds into India. Books of accounts should be audited. Return of income should be submitted before the due date of submission of return of income.



    

Salary
 

Basis of charge – Due or Receipt Different Forms of Salary
  





Basic Salary – Taxable Dearness Allowance – Taxable Advance Salary – Taxable in the year of receipt Arrears of Salary – Taxable in the year of receipt, if not taxed earlier on due basis. Leave Encashment while in service - Taxable

Leave Encashment at the time of Retirement or Leaving a job
Government Employees – Fully Exempted from tax. Non-Government Employees – Exempted to the extent of least of the following 

Period of earned leave to credit* Avg. Monthly pay  10 * avg. Monthly Pay  Amount specified by the Govt i.e. 3,00,000  Leave Encashment actually received on retirement


Forms of Salary
Salary in Lieu of Notice – Taxable  Salary to partner – chargeable under the head “Profits & Gains of Business or Profession”  Fees & Commission – Taxable  Bonus – Taxable  Gratuity – Government Employees – Fully Exempted


Gratuity – Non Government Employees


Payment of Gratuity Act, 1972
  

15 days salary ( 7 days in seasonal works ) Rs. 3,50,000 Gratuity actually received



Not covered by Payment of Gratuity Act
 



Rs. 10,00,000 Half Months salary for each completed year of service. Gratuity actually received.

Pension
• Uncommuted pension is a periodical payment taxable for Govt. and Non-Govt. employees • Commuted pension is a lump sum payment in lieu of periodical payment • One-third of the commuted pension is exempt from tax when gratuity is received; otherwise one-half of commuted pension is exempt from tax

New Pension Scheme
• Employees joining on or after January 1, 2004. • Employer's contribution is first included in salary and then a deduction is available (to the extent of 10% of salary) under section 80CCD. • When pension is received out of the aforesaid amount, it will be taxable in the year of receipt.

Forms of salary
• Annuity from employer – taxable • Contribution to PF account
– – – – Excess of employer's contribution over 12% of salary is taxable. Excess of interest over notified rate is taxable. Amount calculated under Industrial Dispute Act. Maximum limit 5,00,000

• Retrenchment compenstion

• Remuneration for extra duties – Fully taxable. • Salary from UNO – Not chargeable to tax.

Forms of salary
• Compensation received under VRS – – Exempt upto Rs. 5 lakh. The amount payable does not exceed
• The amount equivalent to three months' salary service. • Salary service at left the time the of retirement of his for each completed year of

multiplied by the balance months of before date

Different Allowances
• City Compensatory Allowance – Fully Taxable • House Rent Allowance • Entertainment allowance • Children education allowance • Hostel expenditure allowance • Transport allowance • Allowance for transport employees
– – 70% of the allowance Rs 6,000 per month.

Different Allowances
• Tribal area allowance – Rs 200 per month. • Travelling allowance, conveyance allowance, helper /

research / uniform allowance – exempted to the extent of amount utilized. • Transfer allowance – exempted to the extent of

expenditure incurred in connection with transfer, packing and transportation. • Foreign allowance – exempted. • Tiffin allowance – taxable. • Fixed medical allowance – taxable.

Perquisites


It is a casual emolument or benefit attached to an office or position in addition to salary or wages



They are included in salary income only if they are received by an employee from his employer



In case of perquisites being received from a person other than an employer, they are taxable under ‘profits and gains of business & profession’ or ‘income from other sources’



Perquisite needs to have a legal origin, any unauthorized advantage by an employee is not taken as perquisite taxable under the act

Types of Perquisites


Value of any rent-free accommodation Value of any concession in the matter of rent Value of any benefit or amenity granted or provided free of cost or at concessional rate







Any sum paid by the employer for an obligation which would have to be paid by the employee



Any sum payable by employer through a fund not being recognised provident fund or approved superannuation fund or effect contract for an annuity

Rent free unfurnished accommodation
 

Government Employee : License fees of the house. Non-Government Employee


If the house is owned by the employer
  

Population less then 10 lakh : 7.5% 10 lakh – 25 lakh : 10% Above 25 lakh : 15%



If the house is taken on lease by employer : 15% of salary or lease rent, whichever is lower

Rent free furnished accommodation


Value of unfurnished accommodation +10 per cent per annum of cost of furniture to the employer or rent paid by the employer

Concession in Rent


Value of unfurnished / Furnished house – rent charged by the employer.

Rent free / concessional furnished / unfurnished house in special cases


Remote area – not chargeable tot ax. Hotel accomodation – 15 days immediately after transfer at the new location – taxfree – In other cases, 24% of salary or hotel tariff whichever is lower.





In case of two houses due to transfer – only one house considered upto 90 days.

Other perquisites


Free domestic servants – actual expenditure of the employer – amount recovered from the employee.



Gas, electricity or water – actual expenditure of the employer – amount recovered from the employee.



Leave travel concession – 2 journeys in a block of 4 years.



Employee's obligation met by the employer – taxable.

Free education facility


Training to employees – Taxfree. Family members of the employee – expenditure incurred by the employer.





Institute owned or managed by the employer
– Cost of education in a similar institute in or near the locality. – Upto Rs 1000 per month per child exempted if the facility provided to employee's children.

Interest free / Concessional loan


Taxable amount is SBI lending rate – Interest charged from the employee.



Not taxable if the loan amount is less than Rs 20,000.



Not taxable if for medical treatment of the employee or his family members.

Movable assets


Use – 10% of actual cost or higher charges reduced by amount recovered from the employee.



Sale – Actual cost – normal wear and tear- sale consideration paid by the employee.



Normal wear and tear – – – Computer / electronic items – 50% by WDV method. Car – 20% by WDV method. Any other asset – 10% of cost.

Medical facility Medical facility in India
 Not taxable if provided in hospital owned / maintained by the employer, Government hospital, private hospital if it is also recommended by the Government of the treatment of Government employees.  Medical insurance premium – Not chargeable to tax.  Any other expenditure – Exempted upto Rs 15,000.

Medical facility outside India


Expenditure on medical treatment (including boarding and lodging) – Not taxable.



Travelling expenditure – Taxable.

Motor car


Car owned or hired by the employer, expenses incurred by employer, used for partly official and partly personal purpose.
– – – 1600 cc or less – Rs 1800 per month. Above 1600 cc – Rs 2400 per month. Rs 900 per month for driver.



Car owned or hired by the employer, expenses incurred by employer, used for partly official and partly personal purpose.
– – – 1600 cc or less – Rs 600 per month. Above 1600 cc – Rs 900 per month. Rs 900 per month for driver.

Motor car
Car owned or hired by the employer, used for partly official and partly personal purpose, expenses for private purposes incurred by employee . – – – 1600 cc or less – Rs 600 per month. Above 1600 cc – Rs 900 per month. Rs 900 per month for driver.

Car owned or hired by the employee, expenses incurred by employer, used for partly official and partly personal purpose.


Taxable amount = Actual expenditure incurred by employer – expenditure pertaining to official use- anything recovered from employee.



Calculation of expenditure pertaining to official use. – – – 1600 cc or less – Rs 1800 per month. Above 1600 cc – Rs 2400 per month. Rs 900 per month for driver.

Other perquisites


Free transport – Taxable – value at which the employer offers such benefit to the public as reduced by any amount recovered from the employee. – Tax free for employees of railways / airlines.



Lunch, refereshment etc – Food and non-alcoholic drinks provided in working hours at remote area – Fully exempted – Any other place • Cost to the employer – Rs 50 – amount recovered from the employee. • Tea and snacks in working hours – Tax-free

Other perquisites


Specified securities
– – Taxable if alloted on or after April 1, 2009. Fair MV on the date on which option is exercised – amount recovered form the employee.



Approved superannuation fund – Employer's contribution in excess of Rs 1 lakh is taxable.



Any other facility = Actual expenditure – Amount recovered from the employee.

Employer's PF
Particulars Employer's contribution Deduction under sec 80C for employee's contribution Interest Payment at the time of retirement Statutory PF Exempt Available Recognized PF Exempt upto 12% of salary Available Unrecognized PF Exempt Not available

Exempt Exempt

Exempt upto 9.5% Exempt

Exempt Employee's contribution – Exempt Employer's contribution & Interest Taxable

Meaning of salary for different calculations


HRA, Gratuity (not covered by payment of gratuity act), Leave encashment, RPF – Basic+DA (if forming part of retirement benefits) +Commission (if as a % of turnover).



Gratuity – Salary + DA



Rent free / concessional house – Basic, DA (if forming part of retirement benefits), bonus, commission, fees, taxable allowances and any monetary benefits chargeable to tax.