BASIC CONCEPTSINCOME TAX

Taxation in India
Taxes in India are levied by the Central Government and the State Governments. Some minor taxes are also levied by the local authorities such the Municipality or the Local Council. The authority to levy a tax is derived from the Constitution of India which allocates the power to levy various taxes between the Centre and the State

An important restriction on this power is Article 265 of the Constitution which states that "No tax shall be levied or collected except by the authority of law." Therefore each tax levied or collected has to be backed by an accompanying law, passed either by the Parliament or the State Legislature.

Constitutionally established scheme of Taxation Article 246 of the Indian Constitution, distributes legislative powers including taxation, between the Parliament and the State Legislature. List - I entailing the areas on which only the parliament is competent to make laws, List - II entailing the areas on which only the state legislature can make laws, and

List - III listing the areas on which both the Parliament and the State Legislature can make laws upon concurrently.
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Separate heads of taxation are provided under lists I and II. There is no head of taxation in the Concurrent List (Union and the States have no concurrent power of taxation). The list of thirteen Union heads of taxation and the list of nineteen State heads are given below

Major taxation laws enacted by the Parliament :

Income Tax Act 1961

Wealth Tax Act Service Tax 1994 Central Excise Act 1944 Customs Act, 1962 Central Sales Tax, 1956 Transaction Tax
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The major taxation enactments passed by the State Legislatures are in the nature of the following; Excise duties on tobacco, alcohol and narcotics;

Sales tax, on sale of goods within the State;

Stamp duties, on sale of property situated within the State; Entertainment taxes

TAX REVENUE : GOVT

2010-11 Direct and Indirect collection Rs 7.92 lakh crores 2009-10 Rs 5.72 lakh crores

Of the total, the direct tax mop up was about Rs 4.50 lakh crore and indirect tax, about Rs 3.42 lakh crore.
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Central Board of Direct Taxes

The Central Board of Direct Taxes (CBDT) is a part of the Department of Revenue in the Ministry of Finance, Government of India. The CBDT provides essential inputs for policy and planning of direct taxes in India and is also responsible for administration of the direct tax laws through Income Tax Department.

A DIRECT TAX is one paid directly to the government by the persons on whom it is imposed (often accompanied by a tax return filed by the taxpayer). Examples Income tax, Gift tax, Wealth tax AN INDIRECT TAX ( Sales tax, value added tax (VAT), service tax , excise duty custom duty) is a tax collected by an intermediary (such as a retail store) from the person who bears the ultimate economic burden of the tax.
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An excise duty on motor cars is paid in the first instance by the manufacturer of the cars; ultimately the manufacturer transfers the burden of this duty to the buyer of the car in form of a higher price. Thus, an indirect tax is such which can be shifted or passed.

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INCOME TAX ACT 1961

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BASIC CONCEPTS
ASSESSMENT YEAR

PREVIOUS YEAR
PERSON ASSESSE CHARGE OF INCOME TAX INCOME GROSS TOTAL INCOME

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ASSESSMENT YEAR
Assessment year means the period of twelve months commencing on 1st April every year and ending on 31st March of the next year. Income of previous year of an assessee is taxed during the following assessment year at the rates prescribed by the relevant Finance Act.

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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 . In other words , it can be said that income earned during the previous year 2008-09 is taxable in the immediately following assessment year (i.e, 2009-10)

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Person
The income tax is charged in respect of the total income of the previous year of every 'person'. Here the person means an individual

a Hindu undivided family (HUF)

a company a firm i.e a partnership firm an association of persons or a body of individuals whether incorporated or not
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a local authority-- means a municipal committee, district board, body of port commissioners, or other authority legally entitled to or entrusted by the government with the control and management of a municipal or local fund. every artificial person, not falling within any of the above categories

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Assessee
Assessee means a person by whom any tax or any other sum of money ( penalty or interest ) is payable under the Act. The term includes the following persons. First Category A person ( i.e, individual ;a Hindu undivided family ; a company ; a firm ; an association of persons or body of individuals ; a local authority and every artificial person ) by whom any tax or any other sum of money is payable under the Act.

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Second Category A person in respect of whom any proceeding under the Act has been taken. Proceeding may be taken; Either for the assessment of the amount of his income or of the loss sustained by him. ; or Of the income ( or Loss) of any other person in respect of whom he is assessable ;or

Of the amount of refund due to him to such other persons.

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Third Category Every person who is deemed to be an assesee Fourth Category Every assesse who is deemed to be in default under any provisions of the Act.

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CHARGE OF INCOME TAX ( Sec 4)

BASIC PRINCIPLES

Annual Tax : Income tax is an annual tax on income

Tax rate for assessment year : Income of previous year is chargeable 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 the annual finance Act and not by Income tax Act
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Tax on person : Tax is charged on every person

Tax on total income : the tax is levied on the total income of every assessee computed in accordance with the provisions of the Act.

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INCOME : Sec 2 (24)

There is no specific definition of income but for statutory purposes there are certain items which are listed under the head income. These items include those heads also which normally will not be termed as income but for taxation we consider them as income. As per the definition in section 2(24), the term income means and includes: Profits and gains

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Dividends

Capital gains
Voluntary contributions received by a trust created wholly or partly for charitable or religious purposes The value of any perquisite in lieu of salary Any special allowance or benefit.

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Any allowance granted to the assessee either to meet his personal expenses at the place where the duties of his office or employment of profits are ordinarily performed by him or at a place where he ordinarily resides or to compensate him for the increased cost of living. Any winnings from lotteries, crossword puzzles, races, including horse races, card games and games of any sort or from gambling or betting

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Any amount received as contribution to the assessee's provident fund or superannuation fund .

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GROSS TOTAL INCOME

As per section 14 , income of a person is computed under the following five heads : 1. Salaries 2. Income from house property 3. Profits and gains of business or profession 4. Capital Gains

5. Income from other sources

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Important points
The aggregate income under these heads is termed as gross total income The several heads into which income is divided under the Act do not make different kinds of taxes. Tax is always one ; it may arise under different heads to which the different rules of computation have to be applied

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Total Income and tax liability

The total income of an assesse is gross total income as reduced by amount deductible under sections 80C to 80U . The scheme of computation of total income and tax liability thereon can be understood with the help of following chart. :

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Computation of Income for the assessment year

1 INCOME FROM SALARIES - Income from salary - Income by way of allowance - Taxable value of perquisite Rs. Rs

GROSS SALARY
Less deductions under sec 16 -Entertainment allowance - Professional Tax TAXABLE INCOME UNDER THE HEAD SALARIES

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INCOME FROM HOUSE PROPERTY Net annual income Less : Deductions under sec 24 Taxable income under the head income from house property

Rs

Rs

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PROFITS AND GAINS OF BUSINESS OR PROFESSION

Rs

Rs

Net profit as per P & L account

Add : amounts which are debited to P & L a/c but are not allowable under the Act Less : Expenditure which are which are not debited To P & L a/c but are allowable as deduction under the Act Less : Incomes which are credited to P & L a/c but are exempt 10 to 13 or are taxable under other heads of income Add : Those incomes which are not credited to P & L but are taxable under the head profits and gains of business or profession

TAXABLE INCOME UNDER THE HEAD PROFIT AND GAINS OF BUSINESS OR PROFESSION

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CAPITAL GAINS

Rs

Rs

Amount of capital gains

Less : Amount exempt under sec 54 , 54B , 54D, 54EC, 54ED, 54F, 54G and 54GA Taxable income under the head income from house property TAXABLE INCOME UNDER THE HEAD CAPITAL GAINS

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INCOME FROM OTHER SOURCES Gross Income Less : Deductions under sec 57 TAXABLE INCOME UNDER THE HEAD Income from other sources TOTAL ( i,e, (1) +(2)+(3)+(4)+(5) Less Adjustments on account of set -off and carry forward of losses

Rs

Rs

GROSS TOTAL INCOME

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Rs Rs

GROSS TOTAL INCOME

Less : Deductions under sections 80C to 80U TOTAL INCOME OR NET INCOME LIABLE TO TAX Computation of tax liability TAX on net income Add : Surcharge Tax and surcharge Add Education cess and secondary and higher education cess

TAX
Less prepaid taxes TAX paid on self assessment Tax deducted or collected at source

Tax paid in advance

Tax liability
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TAX RATES
Provisions for computation of taxable income are given by the Income tax Act . Tax rates are not given by the Income tax Act, but by the Finance Act which is passed by the Parliament along with Budget for the Central Government every year. For instance , the Finance Act 2011 , provides in the first Schedule ( part 1,II and III) as follows

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Part I of the first Schedule to the Finance Act , 2011 - It gives income tax rates for different assesses for the assessment year 2011-12 Part II of the First Schedule to the Finance Act 2011 It gives rates for deduction of tax at source applicable for financial year 2011-12. Part III of the First Schedule to the Finance Act 2011- It gives rates for different assesses for the payment of advance tax during financial year 2011-12 ( i.e., for assessment year 2011-12)
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Generally part III of the First Schedule of the Finance Act becomes part I of the First Schedule of the subsequent Finance Act . For instance , part III of the First Schedule to the Finance Act 2011 will become Part I of the First Schedule of the Finance Act , 2012 ( which is yet to be passed by Parliament)

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For individuals, HUF, Association of Persons (AOP) and Body of

individuals (BOI):

Income Tax Rates/Slabs for) Assessment Year 2011-12 (FY 2010-11

Income Tax Rates/Slabs Rate (%)

Upto 1,60,000 NIL Upto 1,90,000 (for women) Upto 2,40,000 (senior citizens)

1,60,001 5,00,000 5,00,001 8,00,000 8,00,001 and above

10 20 30

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For individuals, HUF, Association of Persons (AOP) and Body of

individuals (BOI):

Income Tax Rates/Slabs for Assessment Year 2012-13 (FY 2011-12)

Income Tax Rates/Slabs Rate (%)

Upto 1,80,000 NIL Upto 1,90,000 (for women) Upto 2,50,000 (senior citizens)

1,80,001 5,00,000 5,00,001 8,00,000 8,00,001 and above

10 20 30

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Rates in A.Y. 2012-13 (Accounting Year ending 31-3-2012):

Income slab (Rs. in lakh) Very senior Senior citizens citizens (80 Women (below (60 years and years and 60 years) above) above) (Residents) (Residents) (Residents) Others

Up to 1.80
1.80 to 1.90 1.90 to 2.50 2.50 to 5.00

Nil
Nil Nil Nil

Nil
Nil Nil 10%

Nil
Nil 10% 10%

Nil
10% 10% 10%

5.00 to 8.00
Above 8.00

20%
30%

20%
30%

20%
30%

20%
30%

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Income Tax Rates/Slabs for Assessment Year 2012-13 (FY 2011-12)

PERSONS FIRMS DOMESTIC COMPANY FOREIGN COMPANY LOCAL AUTHORITIES CO-OPERATIVE SOCIETIES Up to 10000 10000-20000 Above 20000 TAX RATE 30% 30% 40% 30%

10% 20% 30%

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Surcharge & Cess Assessment Year 2011-12 (FY 2010-11..

PERSON RATE OF SURCHARGE Individual / AOP / BOI / HUF / Artificial NIL Juridical Person Firm Domestic Company Foreign company Co-operative Society Local Authority Nil 7.5% of tax liability, if Income exceeds Rs. 1 Crore 2.5% of tax liability, if Income exceeds Rs. 1 Crore N.A. N.A.

Education Cess and Secondary & Higher Education Cess is applicable on every person @ 2% & 1% respectively on tax liability and surcharge applicable, if any.

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Surcharge & Cess.. Assessment Year 2012-13 (FY 2011-12)

PERSON RATE OF SURCHARGE Individual / AOP / BOI / HUF / Artificial NIL Juridical Person Firm Domestic Company Foreign company Co-operative Society Local Authority Nil 5% of tax liability, if Income exceeds Rs. 1 Crore 2.% of tax liability, if Income exceeds Rs. 1 Crore N.A. N.A.

Education Cess and Secondary & Higher Education Cess is applicable on every person @ 2% & 1% respectively on tax liability and surcharge applicable, if any.

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Special tax rates

Tax rates are given in the Finance Act , Besides these tax rates , some incomes are taxable at special rates given under the Income Tax Act For instance , long term capital gains are taxable at rate of 20% ( sec112) Winning from lotteries , races , card games are taxable at the rate of 30% ( Sec 115BB)

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TDS Rates Chart assessment year 2012-13 or financial year 2011-12 (AY 12-13 / FY 11-12)
Relevant Section Nature of Payment (to resident) Threshold Limit Individual HUF (Resident in India) Company Firm/Co-op Sec. Local Authority (Domestic Company)

192

Payment of salary to a resident/nonresident Interest on securities Deemed dividends u/s 2(22)(e) Interest other than Interest on securities 5000

Normal Income Tax Rates: See Income Tax Slab 10 10 10 10

193 194

194A

10

10

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194B

194BB 194C
194D

Lottery or 10000 crossword puzzle or card game or other game of any sort. Horse races 5000

30

30

30 1
10

30 2
10

194EE

194F

Contracts/subcontracts Insurance Commission Payment in respect of deposits under NSS Payment on account of repurchase of units of MF or UTI

30000
20000

2500

20

1000

20

10

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194G

194H 194-I

194J

194LA

Commission on sale of lottery tickets Commission or brokerage Rent of Plant and Machinery Rent of Land or Building or Furniture and Fitting Fees for professional or technical services Payment of compensation to a resident on acquisition of certain immovable property

1000

10

10

5000 180000 180000

10 2 10

10 2 10

30000

10

10

100000

10

10

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Back up slides

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Amounts which are debited to P & L a/c but are not allowable under the Act sections 40/40A/43B TDS provisions not complied

Payments to relative
Payments exceeding Rs 20000 not paid by account payee cheque Disallowance of unpaid liability ..Tax/duty/contribution to PF/SAF/Interest
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Tax on perquisite paid by employer

FBT
Income Tax Wealth Tax

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Expenditure which are which are not debited

To P & L a/c but are allowable as deduction under the Act section 30/31/32/33/35/36
Rent , rates, taxes , repairs and insurance of building Repairs and insurance of machinery, plant and furniture Depreciation Expenditure on scientific resarch
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Incomes which are credited to P & L a/c but are exempt 10 to 13 or are taxable under other heads of income Agriculture income

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Those incomes which are not credited to P & L but are taxable under the head profits and gains of business or profession

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Cost of inflation Index

FINANCIAL YEAR COST INFLATION INDEX FINANCIAL YEAR COST INFLATION INDEX

1981-1982
1982-1983 1983-1984

100
109 116

1992-1993
1993-1994 1994-1995

223
244 259

1984-1985
1985-1986 1986-1987 1987-1988 1988-1989 1989-1990 1990-1991 1991-1992

125
133 140 150 161 172 182 199

1995-1996
1996-1997 1997-1998 1998-1999 1999-2000 2000-2001 2001-2002 2002-2003

281
305 331 351 389 406 426 447
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Cost of inflation Index

FINANCIAL YEAR COST INFLATION INDEX

2003-2004 2004-2005 2005-2006 2006-2007

463 480 497 519

2007-2008
2008-2009 2009-2010

551
582 632

Indexed Purchase Price = Purchase Price * (CPI for current year / CPI for year of purchase)

2010-2011
2011-12

711
785
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Computation of long term capital gain

AMOUNT 1 Find out full of consideration

2 Deduct the following a Expenditure incurred in connection with such transfer /sale b Index cost of acquisition c Index cost of improvement 3 From the resulting sum deduct the exemptions u/s section 54., 54B, 54D,54EC,54F, 54G, 54GA 4 The balancing amount is long term capital Gain
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Computation of short term capital gain

1 Find out full of consideration

2 a b c 3

Deduct the following Expenditure incurred in connection with such tranfer /sale cost of acquisition cost of improvement From the resulting sum deduct the exemptions u/s section 54B, 54D, 54G, 54GA The balancing amount is short term capital Gain

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HUF
Hindu Undivided Family (HUF) which is same as joint Hindu family is a body consisting of persons lineally descendant from a common ancestor, including their wives and unmarried daughters, who are staying together jointly. The daughter, on her marriage, ceases to be a member of her fathers HUF and becomes a member of her husbands HUF.

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The Income-tax Act, 1961 recognise HUF as an independent assessable or taxable entity. This is done by specifically including Hindu Undivided Family in the definition of person, in section 2(31) of the Income-tax Act. As such, the income earned by such HUF will enjoy all exemptions and deductions; including the basic exemption from income-tax, so far as applicable.

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HUF is a creature of law. It cannot be created by act of parties, except in rare cases of adoption and reunion. Birth of a son in a Hindu joint family automatically makes him a member of the HUF. In view of this, all male members automatically become members of the HUF.

In addition to that, if a child is adopted, then he also becomes a member of the HUF.

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Upon marriage, wife becomes a member of her husbands joint family.

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SECTION 80 C
Under section 80C of the Income Tax Act, certain investments are deductible (up to a maximum of Rs 1 lakh) from gross total income. This tax exemption is available across individual tax slabs. If you earn Rs 4 lakhs per annum and make investments of Rs 1 lakh in 80c instruments then the taxable amount will be Rs 3 lakhs. It is not at all complicated and the following chart simplifies even more.
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Section 80C benefit has been provided to encourage long term savings and investments.

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HRA
As per section 10(13A) read with rule 2A ,least of following three will be exempted An amount equal to 50 per cent of salary, where residential house is situated at Mumbai, Kolkata, Delhi or Chennai and an amount equal to 40 per cent of salary, where residential house is situated at any other place. House rent allowance received by the employee. Rent paid minus 10 per cent of salary

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 Where the accommodation provided to the employee is owned by the employer, the rate is 15% of 'salary' in cities having population exceeding 25 lakh as per the 2001 census. The rate is 10% of salary in cities having population exceeding 10 lakhs but not exceeding 25 lakhs as per 2001 Census. For other places, the perquisite value would be 7 1/2% of the salary. Where the accommodation so provided is taken on lease/ rent by the employer, the prescribed rate is 15% of the salary or the actual amount of lease rental payable by the employer, whichever is lower, as reduced by any amount of rent paid by the employee.

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Section 54
Section benefit can be availed only by Individiual /HUF Sale should be of long term residential building. To claim the exemption the tax payer will have to purchase a residential house property (old or new )or construct a residential house property. The new residential house property should be purchased or constructed within the time limit given in the next slide

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Time Limit

For purchasing a new residential property

It should be purchased within one year before or within 2years after , the date of transfer of residential house property The construction should be completed within 3 years from the date of transfer of residential house property

For constructing a new residential property

If the new residential property is transferred within 3 years from the date Of its acquisition , the amount of given earlier would be taken back
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Section 54 EC
Assesee- the assesee may be an individual , firm , company or any other person. The asset transferred should be long term capital asset.

The assessee should invest the whole or any part of the capital gain in long term specified assets within 6 months from the date of transfer of asset. The long term asset means bonds issued by NHAI and REC

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Amount of exemption- the amount under section 54ec is as follows. - The amount of capital gains generated on transfer of capital asset ; or

- the amount invested in specified asset stated above

Which ever is lower. The investment in specified asset cannot exceed Rs 50 lakhs.
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Section 54 EC
Capital gain arising from the transfer of a longterm capital asset shall not be charged to tax to the extent such gains are invested in any bond, redeemable after three years and issued by NHAI and REC and notified by the Central Government in the Official Gazette for the purposes of said section within a period of six months after the date of such transfer.

Deduction u/s 54EC is available upto Rs. 50 lacs in each Financial Year

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Sec 54F Capital gain on transfer of LTCA other than a house property
Allowed Assessee Individual/HUF Conditions to be satisfied The asset transferred should be a long-term capital asset, not being a residential house. Within a period of I year before or 2 years after the date of transfer, a residential house should be purchased or constructed within a period of 3 years after the date of transfer. The assessee should not own more than one reside ntial house on the date of transfer. LTCA= Long term capital asset Quantum of exemption

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Sec 54F
Allowed Assessee Individual/HUF Conditions to be satisfied The assessee should not within a period of one year purchase or should not within a period of 3 years construct any residential house other than the new asset. Quantum of exemption If the cost of the new residential house is not less than the net consideration then t he whole of the capital gain. Otherwise, COST OF NEW HOUSE X CAPITAL GAINS / NET SALE CONSIDERATION

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