Syllabus Basic terms concepts How to calculate income

Syllabus: • • Basic terms & concepts How to calculate income tax liability for an individual? Income exempted from tax(Sec: 10) Income from salary & Income from house property (Detail Discussion) • Deductions from gross total income • Assessment, Return, Advance Payment , Tax deducted at source • Introduction to new concepts in Income Tax like FBT, STT.

Basic concepts under income tax Act: Sec: 2 • Previous Year: The year in which income is earned is called as previous year. • Assessment year: the income of the previous year is charged in the next year called as assessment year. Example: X joins an Indian company on January 23, 2007. Prior to January 23, 2007, he is not in employment, What is the previous year for the assessment year 2007 -08 &2008 -09?

Assessee: • Assessee means a person by whom any Tax or any other sum of money(i. e Penalty or interest) is payable under the act: sec: 2(7)

Who is liable to pay Tax? • • • ü ü ü A person is liable to pay Tax. Sec: 2(31) of the act defines the person. The person includes: An Individual A Hindu undivided family A company A Firm An association of persons or body of individuals whether incorporated or not ü A local Authority ü Every artificial juridical person

Example: • Determine the status of the following: Ø Pune university Ø DCM Ltd Ø Mumbai municipal corporation Ø Taxman publications Ltd Ø Laxmi commercial bank Ø XY&CO. , Firm of X&Y Ø Joint family of X, Mrs. X & their sons A &B

Heads of Income: • There are 5 heads of Income Ø Income from Salary Ø Income from house property Ø Income from profits & gains of business Ø Income from other sources Ø Capital gains: short term & long term capital gain.

What constitutes salary • There are 3 groups that constitute your salary: Group 1: Basic salary, advance salary, arrears of salary, all types of bonus, service award , pension Group 2: Allowances group: It includes dearness allowance, conveyance allowance, children education allowance, overtime allowance, leave travel allowance, city compensatory allowance Group 3: Perquisites: It means facilities given by Employer to Employee: Rent free accomodation, domestic servant facility, reimbursement of medical facility, Motar car facility, benefits derived by stock option scheme.

Exemption limit for certain items of salary & allowances: • Ø Ø Leave salary or Leave encashment: (sec: 10(10 AA) Leave salary is the salary i. e received at the time of retirement or termination of service is exempt to the extent of following: For central or state government employees the entire amount is tax free, for other employees the least of following is exempted from tax: Leave salary actually received Ten months average salary Amount specified by government i. e Rs. 3, 000 Cash equivalent to earned leave not exceeding 30 days for each year of completed service. In all cases salary means salary + dearness allowance

Example of leave encashment • Mr. X is an employee of Y ltd. receives 80, 000 as leave salary at the time of his retirement on Feb, 2006. average salary drawn during last 10 months Rs. 3, 000. Duration of service is 24 years, leave taken in service is 9 months. Leave entitlement as per employers rule is one month for each completed year of service. Calculate Taxable leave salary for Mr. X?

Calculation for leave salary • Cash equivalent of leave at the time of retirement=3000*15 months(24 -9)=45, 000 • 10 months average salary=10*3000=30000 • Amount notified by government=3, 000 The least of above 3 i. e. Rs. 30, 000 will be deducted from actual leave salary received. It means taxable salary would be Rs. 50, 000(80, 000 -30, 000)

Gratuity: • Gratuity received by the employee of central or state government & local authority is exempt without any limit. • Gratuity received under payment of gratuity act is exempt to the extent it does not exceed 15 days wages for every year of completed service to a maximum of Rs. 3, 50, 000 • When the employee is not covered by payment of gratuity act, It is average salary for each year of completed service subject to a maximum of Rs. 3, 50, 000

Employee covered by payment of gratuity act • Example: An employee receives gratuity Rs. 1, 80, 000 as gratuity on his retirement. Period of service is 36 years 4 months. The last drawn salary were Rs. 7, 800. The amount of gratuity exempt shall be minimum of (a), (b)& (c) (a) Gratuity actually received Rs. 1, 80, 000 (b) Amount calculated on the basis of 15 days salary for completed year of service=(7800*15/26*36)=1, 62, 000 (c) Maximum amount of gratuity Rs. 3, 50, 000 Thus, Rs. 1, 62, 000 shall be exempt & Rs. 18, 000 will be taxable.

Employee not covered under payment of gratuity act: • An employee receives Rs. 3, 20, 000 as gratuity on his retirement; Period of salary is 40 years. Average salary in the immediately preceding 10 months is Rs. 12, 600 per month. The amount of gratuity exempt will be as follows: • Actual amount received Rs. 320, 000 • ½ month average salary for 40 completed years(12, 600/2*40)=Rs. 2, 52, 000 • Maximum monetary limit Rs. 3, 50, 000 Thus Rs. 2, 52, 000 is exempt & Rs. 68, 000 is taxable.

Compensation received under VRS • Under the approved VRS, the maximum exemption is Rs. 5, 000.

Deduction from salary • Conveyance allowance is Rs. 800 per month is exempted from tax. • Pension can be commuted pension or it can be uncommuted pension. Un-commuted pension refers to pension received periodically to the employee. Commuted pension means lump sum amount received, it is tax free for government employees, for non government employees 1/3 rd amount is tax free if the employee is in receipt of gratuity otherwise ½ of the amount is exempted from tax.

Allowances • Allowances referred to the fixed quantity of money given regularly in addition to salary for meeting a particular requirement connected to services rendered by the employee. It is fixed, predetermined & given irrespective of actual expenditure. It is based on due or receipt basis whichever is earlier.

Allowances which are fully taxable • • Dearness allowance City compensatory allowance Medical allowance Lunch/Tiffin allowance Overtime allowance Servant allowance Warden allowance Family allowance

Allowances exempted in case of certain persons • Allowances to a citizen of India who is government employee rendering services outside India • Allowances to HC & SC judges • Allowances received by employee of UNO from his employer

House Rent Allowance House is in House is any other city • House Rent allowance: This (D, K, M, C) allowance is taxable if an Allowance Assessee lives in his house actually got or in the house for which he Rent pd in does not pay any rent excess of 10% otherwise the exemption of salary limits are as follows: Least of 3 is exempted from Tax. 50% of salary 40% of salary

Example for calculating HRA • Mr. Z staying in Chennai receives Rs. 12500 as basic salary, Rs. 1, 500 as D. A. & commission Rs. 60, 000 P. A. Total salary Rs. 2, 28, 000. House rent paid by him Rs. 2, 500 p. m. H. R. A. per month is Rs. 1800 per month. Calculate taxable H. R. A. Excess of rent paid over 10% of salary=7200(30000 -22800) 50% of salary i. e Rs. 1, 14, 000, Actual HRA recd. Rs. 21, 600. Therefore exempted HRA will be least of 3 i. e Rs. 7200.

Perquisites which are taxable in the hands of all employees: • Rent free accommodation at concessional rate: • If the accommodation is provided by the employer which is owned by the Employer, 20%of salary during which accommodation was occupied by the employee is the value of taxable perquisite • If accommodation is taken on lease or rental the actual amount of rent paid by the employer or 20% of salary whichever is less is the value of perquisite. For example: Mr. X is a regular employee in A ltd. With effect from December 1 , 2006 , Mr. X provided unfurnished flat for which Employer is paying rent of Rs. 7500 per month. Salary earned during this period by Mr. is Rs. 55, 520. Calculate taxable value of this perquisite? (Ans: 11, 104)

Valuation for furnished accommodation: • If the accommodation is furnished perquisite value of such accommodation is to be increased by the value which is equal to 10%per annum of the cost of furniture. Example: In the same example if the furniture is also provided by the employer the cost of which is equal to Rs. 36000. calculate the value of furnished accommodation. (ans: 12, 304)

Perquisites: • If accommodation is provided in a Hotel, it is 24% of salary or actual hotel charges whichever is less. For example: Mr. X is a managing director of ABC(P) Ltd. Salary for the purpose of calculating taxable perquisite Rs. 1, 79, 000. Rent paid for hotel accommodation is Rs. 1, 20, 000. Calculate Taxable value of this perquisite • The value is nil if the accommodation is provided only for 15 days on transfer of employees from one place to another. • Accommodation provided at specified remote area or mining site or oil exploration, project execution site, dam site , power generation site.

Perquisites: • Monetary obligation of employee discharged by the employer is taxable to the extent of actual amount spent by the employer. e. g. : Gas, Electricity bill, children education exp. • Life insurance paid by the Employer is Taxable to the extent of actual amount spent by the Employer.

Perquisites: • Interest free or concessional loans: Ø If the loan is given to the Employee only to the extent of rs. 20, 000 there is no tax liability. Ø If loan is applied to specified diseases, the perquisite value is nil. Ø In any other case for valuation purpose, interest rate applicable by SBI for that previous year on the maximum outstanding monthly balance – interest recovered from customers.

Perquisites (illustrations) • 1. 2. 3. Determine the taxable value of perquisites in the following cases: X is employed by A ltd. On June 06, the company gives an interest free loan of Rs. 14, 000 repayable in 5 yrs. The lending rate of SBI for similar loans 8. 5% per annum(ans: 99167) C ltd. gives the following interest free loans to Z an employee of the company-Rs. 15, 000 for a child's education & Rs. 5, 000 for the purchase of refrigerator. No other loan is given to C ltd. Y is employed by B Ltd. On April 1, 2006, he takes a personal loan of Rs. 25, 000 from B Ltd. recovers interest @ 7%p. a. Lending rate of SBI for similar loans is 12. 5%. (ans: Rs. 1438)

Perquisites: • Use of movable Assets: Ø Use of Laptop & computer value is Nil Ø In case of any other Asset 10%per annum of the value or the actual rent paid by the Employer.

Taxable Perquisites for movable Property: Calculate the value of taxable perquisites in the following cases: • Mr. X is given laptop by the employer company for office & private purpose. cost of the laptop to the Employer is Rs. 96, 000. • On Oct 15, 2006 the company give its Music System to Y for domestic use. (Ownership is not transferred) Cost of the music system to the Employer is Rs. 15, 000.

Transfer of movable assets: • Movable assets belonging to Employer transferred to Employee valuation is as under: Ø Computer & Electronic items: Actual cost to the Employer 50% cost for each year of completed service on W. D. V. basis less any amount recovered from employee. Ø Motor car: Actual cost to the Employer-20% for each year of completed service on W. D. V basis less any amount recovered from employee. Ø Any other Asset: Actual cost to the Employer-10%of cost for each year of completed service based on SLM less any amount recovered from Employer.

Perquisites which are Taxable in the hands of specified Employees: • Who is specified Employee? Employee comes under the following category: Ø He is Director of the company Ø He is having substantial interest in the working of the company. i. e 20% or more voting power Ø His income from Salary from one or more Employer excluding all the benefits provided by way of monetary payment exceeds Rs. 50, 000

Taxable Perquisites : Specified Employees • Provisions by Employer of services of a sweeper, gardner, watchman or personal attendant. Value = Actual cost to employer • Supply of gas, electricity or water for household consumption Value is equal to (a) From own source value=Mfg. cost per unit (b) In any other case value paid by employer

Taxable Perquisites: • Free or concessional education facility to any member of Employee Educational Institute owned & maintained by Employer Value=Cost of education in similar institute in nearby locality Value= Nil up to 1000 p. m. per child of employee (not others)

Tax Free Perquisites( For all employees) • Medical treatment to employee or his family member in a hospital maintained by the Employer. • Reimbursement of Medical treatment of Employee or his family members up to Rs. 15, 000 • Health Insurance paid by employee under a scheme approved by GIC • Any Food or beverages provided by Employer in office or factory or through paid vouchers which are not transferable.

Tax free perquisites for all employees • Perquisites which are payable by govt to its employees for rendering services outside India. • Rent free house /conveyance facility to H. C. & S. C. Judges. • Residence provided to officer of parliament, union Minister or Leader of opposition in Parliament • Employers contribution to Pension policy, deferred annuity, staff group insurance plan • Accident insurance policy premium paid by the Employer • Recreation facility to all Employees.

Following perquisites are tax free but subject to FBT: • Conference cost includes tour travel hotel exp. Relating to conference(30% 0 f 20% 0 f the value) • Use of Health/sports club provided by Employer(30% 0 f 50% 0 f the value) • Expenses on Telephones (incl. mobiles) by Employer(30% of 20% of the value)

ANY OTHER INDIVIDUAL BELOW 65 YEARS AGE RATES OF INCOME-TAX A. Normal Rates of tax: 1. Where the total income does not exceed Rs. 1, 000/-. Nil 2. Where the total income exceeds Rs. 1, 000 but does not exceed Rs. 1, 50, 000/-. 10 per cent, of the amount by which the total income exceeds is. 1, 000/3. Where the total income exceeds Rs. 1, 50, 000/- but does not exceed Rs. 2, 50, 000/-. Rs. 5, 000/- plus 20 per cent of the amount by which the total income exceeds Rs. 1, 50, 000/-. 4. Where the total income exceeds Rs. 2, 50, 000/-. Rs. 25, 000/- plus 30 per cent of the amount by which the total income exceeds Rs. 2, 50, 000/-.

Resident Women below 65 years age B. Rates of tax for a woman, resident in India and below sixty-five years of age: 1. Where the total income does not exceed Rs. 1, 35, 000/-. Nil 2. Where the total income exceeds Rs. 1, 35, 000 but does not exceed total income exceeds Rs. 1, 50, 000/-. 10 per cent, of the amount by which the Rs. 1, 35, 000/3. Where the total income exceeds Rs. 1, 50, 000/- but does not exceed Rs. 2, 50, 000/-. Rs. 1, 500/- plus 20 per cent of the amount by which the total income exceeds Rs. 1, 50, 000/-. 4. Where the total income exceeds Rs. 2, 50, 000/-. Rs. 21, 500/- plus 30 per cent of the amount by which the total income exceeds Rs. 2, 50, 000/-.

C. Rates of tax for an individual, resident in India and of the age of sixtyfive years or more at any time (Senior citizen) during the financial year: 1. Where the total income does not exceed Rs. 1, 85, 000/-. Nil 2. Where the total income exceeds Rs. 1, 85, 000 but does not exceed Rs. 2, 50, 000/-. 20 per cent, of the amount by which the total income exceeds Rs. 1, 85, 000/3. Where the total income exceeds Rs. 2, 50, 000/-. Rs. 13, 000/- plus 30 per cent of the amount by which the total income exceeds Rs. 2, 50, 000/-. Surcharge on income tax: • The amount of income-tax computed in accordance with the preceding provisions of this paragraph shall be increased • by a surcharge at the rate of ten percent of such income tax where the total income exceeds ten lakh rupees. • additional surcharge ( Education Cess on Income Tax) at the rate of two percent of the income-tax and surcharge.

Deduction under CH. VI-A are not allowed for the following incomes: Ø Long Term Capital Gain Ø Short term capital gain on securities for which STT is paid Ø Winning from Lotteries Ø Deduction is not allowed if GTI is nil.

Deduction under Sec: 80 C • • Allowed to Individuals & HUF Maximum deduction allowed is rs. 1, 000 Tuition fees paid for children Subscription to any units of Mutual fund mentioned u/s 10(23 D) Repayment of housing loan (principal Amount) Subscription to Equity & Debentures for infrastructure company. Notified deposit scheme of public sector company providing long term finance for housing Contribution to NSC, NSS, PPF

Deduction under Sec: 80 C • Payment to notified annuity plan of any insurance company • Term deposit equal to 5 years or more in accordance with a scheme framed by the Government. • Life insurance premium maximum 20% of policy which is for self /spouse/any child. • For participation in unit linked insurance plan • Employees contribution to statutory fund

Example: X (age 42 years ) is a salaried employee (salary being Rs 40, 000 per Month) during the previous year 2006 -07, he makes the following investment deposits or payments a) Life insurance premium on life of his married daughter : Rs 6, 000 Sum assured Rs 20, 000) b) Life insurance premium on his own life Rs 2, 700 (sum assured 60, 000) c) Life insurance premium on the life of his dependent sister Rs 10, 000 d) Contribution towards recognized PF Rs 9, 000 e) Contribution towards PPF Rs 30, 000 f) Repayment of lone taken from LIC for purchase of residential house property Rs 30, 000 g) Contribution towards notified equity Linked saving scheme of UTI (i. e. MEP 2007 : - Rs 14, 000 Find out the tax liability of X for the assessment year 2007 -08 assuming that income from house property is 18, 000/-

Find out the Tax Liability in the cases given below for assessment year 2007 -08 X Y Z A 42 31 25 55 260000 196000 310000 426000 Investment Contribution for deduction under 80 C Public Provident Fund - 70000 50000 40000 Recognized Provident Fund - 40000 16000 Notified Equity Linked Saving scheme MEP 07 - - 15000 100000 - 26000 2000 Age Gross Total Income Notified bonds of Infrastructure company

Sec: 80 CCC & Sec: 80 CCD • Sec: 80 CCC & 80 CCD are meant for pension policy. • Section 80 CCC for the contribution towards pension fund set up by the private organization. • Section 80 CCD is pension scheme to new Entrants to Government Service. As per the scheme it is mandatory for every person entering the service of Central Government on or after Jan. 1, 2004 to contribute 10% of salary every month towards their pension account • The aggregate amount of deduction under section 80 C, 80 CCC&80 CCD cannot exceed Rs. 1, 000.

Sec: 80 D Medical Insurance: in • Insurance premium paid by the Taxpayer in accordance with the scheme framed in this behalf by central government. The scheme is known by the name of Mediclaim insurance policy. Amount deposited under a similar scheme of any other insurer who is approved by IRDA shall be eligible for deduction. • This premium is paid by cheque. • If all the conditions are satisfied , deduction is equal to insurance premium actually paid or Rs. 10, 000 whichever is less.

Deduction under Sec: 80 DD • Deduction is available for the amount incurred or amount deposited under any scheme framed by LIC or any other insurer for the purpose of medical treatment of dependent. • If it is minor disability deduction is available for the fixed amount which is equal to Rs. 50, 000 & for the severe disability the deduction available is equal to Rs. 75, 000. • Sec: 80 DDB is for medical treatment of specified disease maximum to the extent of rs. 40, 000.

Deduction under sec: 80 E • Deduction is available for an individual who has taken loan for the purpose of higher education for any full time graduation or post graduation course. • Deduction is available for the interest amount paid on Loan.

Illustration for deduction under Sec: 80 E Particulars Loan 1 Loan 2 Loan 3 X X Daug of X Amount of Loan 6 L 3 L 5 L Annual repayment of Loan during the period 1 L 0. 5 L 1 L Annual payment of interest during the previous year 0. 6 0. 3 For whom education loan is taken Purpose of Loan Find out the amount of deduction under sec: 80 E for assessment year 2007 -08 0. 55

Donations: U/S 80 G: • It is for different types of Donation. This deduction is available when proof of Donation is attached with the return. • The amount of donation should not exceed 10% of adjusted total income of the business except the donation which is eligible for 100% donation under this section. • Adjusted income is after considering the deductions u/s 80 C to 80 U

Deduction under Sec: 80 GG • The tax payer is an individual not getting any HRA from the company or he is a self employed person. • The deduction will be least of the following: Ø Rs. 2, 000 per month Ø 25% of total income Ø The excess of 10% of total income.

Deduction U/S 80 U • Person with physical disability • For severe disability deduction is available for a fixed amount of Rs. 75, 000 or Rs. 50, 000. • The assessee has to give a certificate by the Medical authority. • If assessee is claiming deduction u/s 80 U , the person on whom he is dependant should not claim any deduction under sec: 80 DD

Income from House Property: • If the property is self occupied annual value of this property is NIL. • If the property is purchases after 1. 4. 99, & if the loan is taken for the purchase & construction of house property , deduction is available for the interest amount to the extent of Rs. 150, 000. For the principal amount individual will get deduction u/s 80 C • In case of repairs of self occupied property deduction is available to the extent of Rs. 30, 000

If the house property is let out…. . • Gross annual value of the property is the actual amount of rent received or the standard rent given under rent control act or fair rent whichever is high. • From this gross value municipal taxes paid are deducted. • From net annual value Repairs deduction is equal to the 30% of the value & Interest on borrowed capital is allowed maximum to the extent of Rs. 30, 000 for let out property.

Short term & Long term capital gain • Short term capital gain on transfer of equity shares or units of an equity oriented mutual fund on or after 1. 10. 2004 i. e. , the date on which security transaction tax has come into force shall be subject to a flat rate of 10% u/s 111 A. • Long term capital gain on transfer of equity shares of a company or units of equity oriented fund arising on or after 1. 10. 2004 & subject to security transaction tax is fully exempted u/s 10(38)

Example: • Mr. X is Assistant Manager in a leasing co. at Delhi has the following incomes, expenses & investments during 2006 -07. Calculate his taxable income & tax payable (a) Gross Salary Rs. 2, 30, 000 (b) Rent for commercial house property Rs. 51, 000, house tax paid during the period is Rs. 4, 000 (c) The assessee has self occupied property, Interest on this loan is Rs. 31, 000 availed in March, 98.

Example……. • (e) Sale consideration for shares sold during the period is Rs. 2, 000(cost of acquisition in June 2003 Rs. 84, 740)(f) short term capital gain Rs. 5000 on which security transaction tax paid is 0. 125%(g) Interest on debentures. Rs. 3, 000 (h) Bank Interest/post office monthly income Rs. 12, 000(i)Dividends from UTIRs. 4, 000(j)int on relief bond tax free)Rs. 5, 400(k)dividend on shares in companies rs. 5, 000 (l) Premium on life insurance policy, contribution to PF, Repayment of housing loan total Rs. 1, 000.

Compulsory filing of return under one by six scheme: • Person residing in a specified area & fulfilling one of the following six criteria's shall liable to pay income tax return • Occupying an immovable property exceeding specified floor area. • Owner or Lessee of a 4 wheeler motor vehicle • Subscriber to a cellular phone • Incurred expenditure foreign tour for himself or any other person. • Holding a credit card • Holding membership of a club for membership fee is Rs. 25, 000 • Incurred expenditure Rs. 50, 000 or more towards electricity.

Time for filing of return(due dates) 1 Companies 31 st October 2 Assessee other than company whose accounts are required to be audited uner i income tax act or any other law 31 st October 3 A working partner of a firm whose accounts are required to be audited 31 st October 4 Assessee other than company covered under one by six scheme 5 all other assessee 31 st October 31 st July

Annual Information Return: form 65 Nature & value of Persons responsible for Sr no transactions furnishing A. I. R. 1 Cash Deposit of Rs. 10, 000 or more in a year in a saving Bank account 2 Payment of credit card holder of Rs. 2, 000 or more during in a year 3 Receipt from any person of Rs. 2, 000 for acquiring units of a mutual fund Bank, company, institution issuing such credit card Trustee, authorised person of mutual fund

Annual Information Return. 4. Receipt from any person Rs. 5, 000 for or more for acquiring shares Company, Institution issuing bonds acquiring bonds or debentures 5. Receipt from any person of 100000 or more for acquiring shares Company issuing shares through Public/ right issue 6. Purchase or sale of immovable property of Rs. 30, 000 or Registrar / Sub Registrar more 7. Receipts from any person of Rs 500000 or more in a year for acquiring RBI Bonds Authorized Person of RBI bonds

Advance Tax: • All assessee including salaried Employees if tax payable by the person (after deducting rebates, TDS, Deduction) exceeds Rs. 5, 000.

Advance Tax Installments & due dates: Due date for payment of Advance Tax For non company For company assessee By 15 th June Nil 15% of advance tax By 15 th Sept 30% of advance tax By 15 th December 30% of advance tax By 15 th March 40% of advance tax 25% of advance tax

Tax Deducted at Source • Tax deducted at source means before getting any source of income tax is deducted on such payments. • Following persons are liable to deduct tax at source: • Individuals (incl. sole proprietary concern) & HUF carrying the business or profession whose turnover exceeds Rs. 40 lacs or 10 lacs if it is income from Profession.

Payment on which tax is to be deducted at Source: Name of the payment How tax is deducted at source Salary Sec: 192 Interest on securities If it exceeds Rs. 2, 500 TDS is 10. 2% If it exceeds Rs. 5, 000 TDS is 10. 2% Interest on time deposits Winning from lotteries 30. 6% if it exceeds Rs. 5000 Insurance Commi. 10. 2%

Tax deducted at source Payment to advertising ag. 1. 02% Payment to Contractor Payment to sub contractor Payment of repurchase of units under ELSS Payment on withdrawal from NSS 2. 04% 1. 02% 20. . 4% Payment of rent to any person other than ind, huf 20. . 4%