1.

BASIC INCOME TAX CONCEPTS

1. INTRODUCTION

Government needs money to finance defense, welfare, health, education, sanitation and infrastructural development
such as construction of roads, dams, power projects, railways etc. The primary source of Govt. funds is taxes,
followed by borrowing from India and abroad. Tax is a financial charge or levy upon an individual or an entity, by a
Government. Any failure to pay such tax is punishable by law.

Basically, taxes are collected and used by a Govt. for the following functions –

 Public welfare,
 Expenditures on defence,
 Enforcement of law and order,
 Economic infrastructure
 Education systems,
 Health care systems, pensions for the elderly,
 Unemployment benefits,
 Transportation, energy, water and waste management systems etc. and
 Operations of government itself.

2. DEFINITIONS OF TAX

 “A tax is compulsory contribution from the person to the government to defray the expense incurred in the
common interest of all without reference to special benefits conferred”. Prof Seligman
 “A tax as a compulsory contribution of the wealth of a person, or body of persons for the service of public
powers.” Bastable
 “A tax as a share of the income of citizens which the state appropriate in order to procure for itself the means
necessary for the production of general public services.” Deviti De Marco
 “A tax is a compulsory charges imposed by a public authority irrespective of the exact amount of service
rendered to the tax payer in return and not imposed as a penalty for legal offence.” Hugh Dalton
 “A pecuniary burden imposed for support of the government, the enforced proportional contribution of persons
and property of the government and for all public needs” Jom Bouvier
 “The essence of Tax as distinguished from other charges by government is the absence direct quid pro quo-
tit for tat between the tax payers and the public authority”. Trussing

3. EVOLUTION OF TAX

o Income Tax Act, 1860 – Income Tax was introduced in India for the first time by the British in the year 1860.
o Income Tax Act, 1886 – The Act of 1886 levied a tax on the income of residents as well as non-residents.
The Act defined agricultural income and exempted it from tax liability.
o Income Tax Act, 1918 – The Act of 1918 brought receipts of casual nature under tax bracket.
o Income Tax Act, 1922 – This Act laid down the mechanism of administering the tax and the rates at which
the tax was to be levied would be laid down in annual finance acts.
o Income Tax Act, 1961 – The present law of income tax in India is governed by the Income Tax Act, 1961,
came into force on April 1, 1962.

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4. NATURE OF TAXES

1) Tax is compulsory – Any tax is imposed by the law, making it a compulsory payment to the Govt. Hence, any
refusal to pay tax is an offence and punishable as per the law.

2) Tax is contribution – Tax is a contribution from members of a country towards the Government. Paying tax is
the duty of every citizen for availing benefits such as security, welfare, infrastructure etc.

3) Tax is for Public Benefit – Tax is levied for the common good of society without any benefit to specific
individual. Government spends the amount on rehabilitation from a natural disaster, defense of the country etc.

4) No direct benefit – There is no direct benefit to a tax-payer. There is no direct quid-pro-quo. Taxes are for
common benefits to all the members of the society.

5) Government has the power to levy tax – Government as a sovereign authority has the power to levy and
collect taxes from the people.

6) Tax is for the economic growth and public welfare – The main objectives of a Govt. are to maximize
economic growth and social welfare. Taxes are collect to fulfill these objectives.

5. CANONS OF TAXES

Adam Smith proposed the canons of taxes, pertaining to the administration aspects of tax. They are related to the
rate, amount, method of levy, and collection of a tax. Following are the canons of taxes –

a) Canon of Equity – Tax system to be based on principle of social justice. Taxes shall be linked to ability to pay.

b) Canon of Certainty – Tax rules, regulations and procedures shall be certain, creating trust in tax-payers.

c) Canon of Convenience – Easy compliances, in payment of taxes as well as frequency of payment.

d) Canon of Economy – low administration cost of tax collection, principle of simplicity

6. CLASSIFICATION OF TAXES

TAXES

Direct Taxes Indirect Taxes

Income Tax Property Tax Custom Duty Goods & Services Tax (GST)

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Sr. Basis Direct Tax Indirect Tax

1. Meaning Direct Tax is directly levied on income Indirect taxes are imposed on price
or wealth of a person or organization of goods /services.
2. Passing of tax Person paying the tax cannot recover Person paying the indirect tax can
burden from any other person shift the burden to another person
3. Nature Direct tax are linked to income earning Indirect tax are payable, irrespective
ability, i.e. progressive in nature of income earning ability, i.e.
regressive in nature
4. Collection cost Administration cost of collection is much Lower administration cost for tax
more than indirect taxes collection as compared to direct tax
5. Tax evasion High chances of evasion Lower chances of evasion

Direct Tax
Merits Demerits
Equity – based on level of income Tax Evasion on a very large scale
Certainty – tax-payers are aware of the tax rates, Unpopular with public, since hard earned money
dates of payment, mode of payment etc. to be paid to Govt., unsuitable for poor nations
Progressive in nature High administration cost of collection
Set rules, regulations, procedures Arbitrary mechanism, computations etc.

Indirect Tax
Merits Demerits
Very high revenue source for the Govt. Regressive nature i.e. rich and poor pay same tax
Very low chances of tax evasion May give rise to inflationary conditions
Convenient and easy to collect taxes Difficult to estimate annual tax collection
Covers larger population, low admin costs. Reduces savings due to high cost of goods

7. INTRODUCTION TO INCOME TAX

Article 265 of the Constitution provides that tax shall be levied or collected only by authority of law. The power to levy
Income tax appears in the Union List of the Constitution, i.e. Central Govt. Entry 82 of List I to the Seventh (VII)
Schedule of the Constitution of India confers power on Parliament to levy taxes on income other than agricultural
income. The State Govt. has the power to levy tax on agricultural income, along with excise on alcohol, entry tax,
octroi duty, tax on professionals etc.

The Income Tax law in India consists of the following components.

A) Income Tax Act, 1961

B) The Finance Act
C) Income Tax Rules
D) Circulars and Notifications
E) Legal Decisions (Judicial Precedents)

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st
A) Broad Structure of the Income-tax Act, 1961 (came into force on 1 April 1962)

Chapter Title Content Sections

I Preliminary Title & Definitions 1-3
II Basis of charge Charge & Scope of Total Income 4-9
III Income not forming part of total Income Exemptions 10 - 13B
IV Computation of total income Provisions for income computation 14 - 59
V Incomes of others persons included in Clubbing provisions 60 - 65
assessee’s income
VI Aggregate Income, set-off/ carry forward Provisions of set-off, carry forward 66 - 80
VI-A Deductions in computing total income Deductions provisions 80A - 80U
VIII Rebates and Reliefs Rebate 87 - 89A
IX Double Taxation Relief Provisions relating to DTAA 90 - 91
X Provisions relating to avoidance of tax Transfer pricing 92 - 94
XII Determination of tax in certain cases Non-resident taxation, MAT, DDT, 110-
Income from shipping companies 115VZC
XIII Income-Tax Authorities Appointment & Powers 116 - 138
XIV Procedure for assessment Return & Assessment 139 - 158
XV/XVI Liability in Special Cases Representative assessee, Firms, AOP, 159 - 189A
BOI
XVII Collection and Recovery of Tax TDS & Advance tax 190 - 234D
XIX Refunds Refunds & Interest 237 - 245
XIX-A Settlement of Cases Settlement Commission 245A - 245L
XIX-B Advance Rulings Authority, Procedural aspects 245N - 245V
XX Appeals and Revision Different appellate levels 246 - 269
XXI Penalties Imposable Penalties 270 - 275
XXII Offences and Prosecutions Consequences for non-compliance 275A - 280
The Income Tax Act, 1961 contains XIV schedules and 298 sections, further bifurcated into sub-sections.

B) The Finance Act

 Every year, the Finance Minister of the Govt. of India introduces the Finance Bill in Parliament budget
session. When the bill is passed by both the houses of Parliament and after it gets the assent of the
President of India, it becomes the Finance Act.
 Every year, the tax rates are fixed by the annual Finance Act and not by the Income Tax Act. Sometimes, on
the first day of April of the AY, the new Finance Bill is not enforced by the Parliament. In such cases, the
provisions of the preceding AY or the provisions of the proposed Finance Act, whichever are more beneficial
to the assessee, shall apply until the new provisions become effective.
 The first schedule of the Finance Act contains the following –
o Part I – specifies the rates of tax applicable for the current Assessment Year,
o Part II – specifies the rates at which tax is deductible at source for the current Financial Year,
o Part III – provides computation of income tax for salary income and computation of advance tax, and
o Part IV – specifies rules for computing net agricultural income.

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C) Income Tax Rules, 1962 (‘Rules’)

 Section 295 empowers the Central Board of Direct Taxes (CBDT) to make rules for carrying out the purpose
of the Income Tax Act.
 These Rules supplement the provisions of the Act, i.e. Rules are subordinate to the Act
 Generally, the Rules relevant to a particular section is referred to in the footnotes to the section
 Basically, the Rules –
o provide the procedural aspects of the tax machinery (system)
o prescribe the formats of various documents, certificates and returns, methods of perquisite valuation,
manner to be adopted for conversion, rates of depreciation etc.

D) Notifications / Circulars / Instructions

 The Central Board of Revenue or Department of Revenue is the apex body charged with the administration
of taxes. It is a part of Ministry of Finance. It is bifurcated into Central Board of Direct Taxes (CBDT) and
Central Board of Indirect Taxes and Customs (CBIC)
 CBDT is empowered to issue notifications, circulars, instructions, directions etc. to the Income tax authorities
 Such notifications, circulars, instructions etc. are mandatory (binding effect) on the Revenue authorities

o Instructions – Internal guidelines to the Income Tax Department

o Circulars – Clarify any doubts about applicability, scope of any provisions (not binding on assessee)

o Notifications – To give information / notify certain schemes (changes made from time to time)

E) Legal Decisions / Case Laws

 Case laws form a vital part for law. They serve as judicial precedents for future references
 These judgments help in better interpretation of the statute (the Act).
 The Supreme Court decisions are binding on everyone, i.e. it is treated as a law of the land.
 Further, the High Court judgments apply in respective states, under their jurisdictions. Hence, decision of
one High Court does not bind another High Court of different State.

8. BASIC CONCEPTS

1) India [Section 2(25A)]

India means the territory of India as per Article 1 of the Constitution, its territorial waters (upto 12 nautical miles),
seabed and subsoil underlying such waters, continental shelf, exclusive economic zone (upto 200 nautical
miles) or any other specified maritime zone and the air space above its territory and territorial waters.

2) Assessment Year (‘AY’) [Section 2(9)]

 Assessment Year (AY) is a year in which income is charged to tax or year in which income tax is payable.
 In other words, income earned during a certain period is taxed during the immediate next Assessment Year.
 An Assessment Year is always a period of 12 months commencing on 1st April every year and ending on 31st
March of the next year.
 Example – income earned in FY 2019-20 shall be taxed in the Assessment Year (AY) 2020-21.

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3) Previous Year (‘PY’) [Section 3]

 Previous year (PY) is the year in which income is earned.

 It is same as Financial Year, i.e. income / revenue is generated in the previous year, expenses are incurred.
 Previous Year is a period always ending on 31st March every year. But, for the first time, PY may not be a
period of 12 months. Thus, for an individual who started business on 1st Jan 2020, his PY shall be 3 months
ending 31st March 2020.
 Example: income earned in Previous Year 2019-20 is taxable in the immediately following AY 2020-21.

Cases where Income of PY is Taxable in the same year, and not in the next AY –

In certain cases, the income earned in previous year is not taxed in the AY, but in the same financial year. The
logic behind these exceptions is administrative convenience, ease of collection of taxes and reducing tax
evasion. Following are such cases –

× Income of non-resident from shipping (Sec 172)

× Income of person leaving India (permanently / a long period) without intention of returning to India (Sec 174)
× Income of bodies formed for short duration (Sec 174A)
× Person likely to transfer property to avoid tax (Sec 175)
× Income of discontinued business at discretion of Assessing Officer (AO) may be taxed in the PY (Sec 176)

4) Assessee [Section 2(7)]

Assessee means a person by whom any income tax or other sum of money (interest, penalty etc.) is payable
under this Act. It includes the following persons –

i. Every person in respect of whom any proceeding under the Income Tax Act has been taken for the
assessment of his income or to determine loss suffered by him or to determine the amount of refund due,
ii. Representative assessee, i.e. a person who is assessable for the income / loss of some other person, and
iii. Every person who is deemed to be assessee in default under any provision of this Act. Example – a person
who does not deduct tax at source, or after deducting fails to pay such tax to the Govt. is deemed to be an
assessee in default. Also, a person whose income is taxable, but does not pay tax is assessee in default.

5) Assessment [Section 2(8)]

Assessment is the procedure by which the income of an assessee is determined by the Assessing Officer.

6) Person [Section 2(31)]

The income tax rates varies as per status of the assessee. The term ‘person’ includes the following (7 types) –

1. An Individual

An Individual means a natural person i.e. a human being. It includes a male, female, and even a minor child

2. A Hindu Undivided Family (‘HUF’)

A Hindu Undivided Family has not been defined under the tax laws. However, as per Hindu law, it means a
family, which consists of all individuals lineally descended from a common ancestor, including their wives
and unmarried daughters. Dayabhaga school – Assam & West Bengal whereas Mitakshara – rest of India.

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3. A Company

Company includes any Indian Company, Foreign Company and any institution, association or a body which
is declared by general or special order of the CBDT as a Company. An Indian company means a company
formed and registered under the Company Act, 2013 (or earlier Acts). A Foreign company means a
company formed and registered outside India, i.e. under foreign country laws.

4. A Firm

The Indian Partnership Act, 1932 defines partnership as “relationship between persons who have agreed to
share the profits of business, carried on by all or any of them acting for all”. For the purpose of taxation, a
firm also include Limited Liability Partnership (‘LLP’) under the LLP Act, 2008.

5. An Association of Person (‘AOP’) or Body of Individuals (‘BOI’)

An AOP means two or more persons who join for common purpose whether or not with a view to earn profit.
Thus, if two or more persons come together to carry on a business but do not constitute a partnership, they
are assessed as AOP. On the other hand, Body of Individuals (BOI) consist of Individuals only.

Basic difference between AOP and BOI

An AOP may consist of non-individuals but BOI has to consist of individuals only. If two or more persons (like
firm, company, HUF, individuals etc.) join together, it is called as AOP. But if only individuals join together, it
is called a BOI. The difference between AOP and BOI is that whereas an association implies a voluntary
getting together for a definite purpose, a body of individuals would be just a body without an intention to get-
together. Example – If Sam, Yan, Zen join together, it is called as BOI. But, if Joe, ABC Ltd. and PQ Firm
join together for particular venture, they are referred as an AOP. Profit motive not necessary for AOP & BOI

6. A Local Authority

A Local Authority means a municipal corporation, district board, or other authority legally entitled to or
entrusted by the Govt. with control and management of a municipal or a local fund. A local authority is not
taxable for the income which arises from the supply of commodities / services within its own jurisdiction area.

7. Artificial Juridical Persons (AJP)

An Artificial Juridical Person (‘AJP’) is a person not falling within any of the previous categories. Artificial
Juridical Persons are the entities, which are not natural persons, but they are separate entities in the eyes of
law, i.e. deity, charitable institution etc. Profit motive is not necessary for an Artificial Juridical Person. E.g. a
charitable institution, Bar Council, Temple, and University etc.

Example to understand concept of Person

Sr. Examples Status

1 Mr. Sunil Joshi Individual
2 A joint family consist of Mr. P, Mrs. P and their sons R & S HUF
3 Reliance Industries Ltd Company
4 BKC & Co. (Company Secretaries) Firm
5 Infy Pvt. Ltd and Amit Kumar Sharma AOP
6 A and B are legal heirs of C, carry business without entering BOI
into a partnership
7 Municipal Corporation of Pune Local Authority
8 Pune University Artificial Juridical Person

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9. CHARGE OF INCOME TAX (SECTION 4)

Following principles are followed while charging income tax –

 Income tax is an annual tax on income.

 Income of PY is chargeable in the next following AY at tax rate applicable for that AY.
 Rates are fixed by the Finance Act (every budget session) and not by Income tax Act.
 Tax is charge on every person.
 Tax is charged on total income of every assessee computed in accordance with the provisions of the Act.

10.INCOME (SECTION 2(24))

Basically, income is a monetary return with some sort of regularity. The definition of income given in Section 2(24) of
the Act is inclusive and not exhaustive. Following points should be considered –

 Income may be regular and definite source

 Income may be recurring in nature or a one-time income
 Income may be received in cash or kind
 Income arises either on due or receipt basis whichever is earlier
 Income Tax Act does not make difference between legal and illegal income
 Reimbursement of expenses is not treated as income
 Income tax does not make any difference between temporary and permanent income.
 Lump sum receipts are also treated as income.
 One cannot make taxable profit out of transaction with himself. Income must come from the outside.
 Income includes loss, i.e. losses represent negative income
 Receipt of money on account of dharmada, gaushala and pathshala is not income (charitable cause)
 Extra amount received due to devaluation of currency is treated as income and hence taxable.
 Pin money received by wife and savings made out of money received from husband is not income
 Source of income may not exist in the assessment year, still it is treated as income

Under Section 2(24) of the Act, income includes –

Profits and gains of any business
Perquisites recd. by employees
Gain from sale of land
Winning from lottery, races, games
Gift recd exceeding Rs 50,000 p.a.
House Rent received
Dividends received
Allowances recd. by employees
Money for not doing business
Employers’ contribution to PF
Advance money forfeited
Machinery given on rent
Contributions recd. by Trust
Benefits recd. by Directors / relatives
Income of a co-operative society
Money from employer voluntarily
Profit on sale of shares
Retrenchment compensation etc.

11.GROSS TOTAL INCOME (SECTION 14)

As per section 14, income of a person is computed under the following five heads:

1. Income from Salary

2. Income from House Property
3. Profits and Gains from Business or Profession (PGBP)
4. Capital Gains
5. Income from Other Sources
The aggregate (total) income under these heads is termed as Gross Total Income (‘GTI’)

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12. EXEMPTION

Income which is ‘exempted’ does not form part of the total income, i.e. not included in total income. In other words,
exempted income is an income which is not chargeable to tax. Exemption can never exceed the amount of income.
Examples of exempted income include agricultural income, interest on PPF, NSC etc.

13. DEDUCTION

‘Deduction’ is an amount allowed by the Act to be reduced (i.e. deducted) from the income chargeable to tax. The
amount of deduction can be equal to the income or less than income or even more than the income. For example
interest paid on loan is allowed as a deduction while computing business profits.

14. REBATE

Rebate is an amount to be reduced from income tax payable. It is a reduction from income tax amount.

15. ROUNDING-OFF OF TOTAL INCOME (Section 288A)

The total income as computed above shall be rounded off to the nearest multiple of ten rupees.

Income Rounded off

Rs 79464.90 Rs 79460
Rs 79478 Rs 79480
Rs 79475 Rs 79480

16. ROUNDING-OFF OF INCOME TAX (Section 288B)

The income tax on payable shall be rounded off to the nearest multiple of ten rupees (after surcharge & cess)

Income Tax Rounded off

Rs 5664.75 Rs 5660
Rs 478 Rs 480
Rs 795 Rs 800

17. TOTAL TAX LIABILITY (Section 2(45))

Total income of an assessee is GTI, as reduced by amount deductible under sections 80C to 80U.

Computation mechanism (for an Individual)

PARTICULARS Rs.
Income from Salary XXXX
Income from House Property XXXX
Income from Business or Profession XXXX
Capital Gains XXXX
Income from other Sources XXXX
__________
XXXXX
Less Set off & Carry Forward of losses XXX
__________
= GROSS TOTAL INCOME XXXXX

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Less Deduction under Section 80C to 80U
XXX
= Total Taxable Income [Net Income] (R/off) ___________
XXXXX
Computation of Tax Liability:

Tax on Net Income ___________

Less Rebate u/s 87A XXXXX
= Income Tax after Rebate u/s 87A XX
XXXX
Add Surcharge
= Tax and Surcharge XXX
Add Health & Education Cess @ 4% of (Tax + Surcharge) XXXXX
XX

= Tax Liability (R/off) _______

XXXXX
Less Rebate under section 86, 89, 90 & 91
Less Tax Deducted at source XX
Less Advance Tax paid XX
XX
= Net Tax Payable ___________
XXXXX
Add Interest under section 234A, 234B, 234C (for any delays)
XX
Total Tax and Interest payable XXXXX

18. TAX RATES

As per Category of Person / Amount of Income / Residential Status / Age of Individual / Type of Income

a) Individual of Age below 60 years (during the PY) as well as any HUF / AOP / BOI / AJP

AY 2020-21 TAX RATES

Total Income upto Rs 2,50,000 Nil

Rs 2,50,001 to 5,00,000 5 % of [ Total income – Rs. 250,000 ] (less) Rebate u/s 87A*

Rs 5,00,001 to Rs 10,00,000 20 % of [ Total Income – Rs. 500,000 ] + Rs. 12,500

Rs 10,00,001 & above 30 % of [ Total Income – Rs. 10,00,000 ] + Rs. 112,500

Surcharge 10 % (if net income > Rs. 50 lakhs and upto Rs. 1 crore)

15 % (if net income > Rs. 1 crore and upto Rs. 2 crores)

25 % (if net income > Rs. 2 crores and upto Rs. 5 crores)

37 % (if net income > Rs. 5 crores)

Health and Education Cess 4 % of Total of income tax plus surcharge (if any)

Compute total tax liability in the following incomes –

a) Rs. 480,000 b) Rs. 720,000 c) Rs. 950,000 d) Rs. 12,00,000
e) Rs. 58,00,000 f) Rs. 125,00,000 g) Rs. 245,00,000 h) Rs. 600,00,000

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b) Resident Senior Citizen Individual of age 60 years or more but less than 80 years (anytime during
the PY, i.e. upto 31st March 2020)

AY 2020-21 TAX RATES

Total Income upto Rs 3,00,000 Nil

Rs 3,00,001 to 5,00,000 5 % of [ Total income – Rs. 3,00,000 ] (less) Rebate u/s 87A*

Rs 5,00,001 to Rs 10,00,000 20 % of [ Total Income – Rs. 500,000 ] + Rs. 10,000

Rs 10,00,001 & above 30 % of [ Total Income – Rs. 10,00,000 ] + Rs. 110,000

Surcharge 10 % (if net income > Rs. 50 lakhs and upto Rs. 1 crore)

15 % (if net income > Rs. 1 crore and upto Rs. 2 crores)

25 % (if net income > Rs. 2 crores and upto Rs. 5 crores)

37 % (if net income > Rs. 5 crores)

Health and Education Cess 4 % of Total of income tax plus surcharge (if any)

Compute total tax liability in the following incomes –

a) Rs. 400,000 b) Rs. 850,000 c) Rs. 10,00,000 d) Rs. 18,00,000
e) Rs. 76,00,000 f) Rs. 200,00,000 g) Rs. 415,00,000 h) Rs. 750,00,000

c) Resident Super Senior Citizen of age 80 years or above (anytime during the PY, i.e. upto 31-Mar-20)

AY 2020-21 TAX RATES

Total income upto Rs 5,00,000 Nil

Rs 5,00,001 to Rs 10,00,000 20 % of [ Total Income – Rs. 500,000 ]

Rs 10,00,001 & above 30 % of [ Total Income – Rs. 10,00,000 ] + Rs. 100,000

Surcharge 10 % (if net income > Rs. 50 lakhs and upto Rs. 1 crore)

15 % (if net income > Rs. 1 crore and upto Rs. 2 crores)

25 % (if net income > Rs. 2 crores and upto Rs. 5 crores)

37 % (if net income > Rs. 5 crores)

Health and Education Cess 4 % of Total of income tax plus surcharge (if any)

Compute total tax liability in the following incomes –

a) Rs. 500,000 b) Rs. 810,000 c) Rs. 900,000 d) Rs. 15,00,000
e) Rs. 100,00,000 f) Rs. 180,00,000 g) Rs. 300,00,000 h) Rs. 950,00,000

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d) Non-Resident Individual of ANY AGE, i.e. age does not matter

AY 2020-21 TAX RATES

Total Income upto Rs 2,50,000 Nil

Rs 2,50,001 to 5,00,000 5 % of [ Total income – Rs. 250,000 ]

Rs 5,00,001 to Rs 10,00,000 Rs. 12,500 + 20 % of [ Total Income – Rs. 500,000 ]

Rs 10,00,001 & above Rs. 112,500 + 30 % of [ Total Income – Rs. 10,00,000 ]

Surcharge 10 % (if net income > Rs. 50 lakhs and upto Rs. 1 crore)

15 % (if net income > Rs. 1 crore and upto Rs. 2 crores)

25 % (if net income > Rs. 2 crores and upto Rs. 5 crores)

37 % (if net income > Rs. 5 crores)

Health and Education Cess 4 % of Total of income tax plus surcharge (if any)

e) Partnership Firm / LLP (AY 2020-21)

Flat tax rate of 30%

Surcharge - 12% (if net income exceeds Rs. 1 crore)

Health and Education Cess @ 4 % of total of income tax and surcharge

f) Local Authority (AY 2020-21)

Flat tax rate of 30%,

Surcharge - 12% (if net income exceeds Rs. 1 crore)
Health and Education Cess @ 4% of total of income tax and surcharge
g) Domestic Company (AY 2020-21)

Flat tax rate of 30%

(A domestic company whose total turnover or gross receipts in the PY 2017-18 does not exceed Rs. 400 crores shall
be taxable at a rate of 25%)

Surcharge @ 7% on income tax if net income > Rs.1 crore and upto Rs. 10 crores, and

Surcharge @ 12% on income tax if net income > Rs. 10 crores

Health and Education Cess @ 4% of total of income tax and surcharge

h) Foreign Company (AY 2020-21)

Flat tax rate of 40%

Surcharge @ 2% on income tax if net income > Rs. 1 crore and upto 10 crores and
Surcharge @ 5% on income tax if net income > Rs. 10 crores
Health and Education Cess @ 4% on Tax plus Surcharge

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i) Co-operative Society (AY 2020-21)

AY 2020-21 TAX RATES

Up to Rs 10,000 10% of Total Income
Rs 10,001 to Rs 20,000 20% of [ Total Income – Rs, 10,000 ] + Rs. 1000
Rs 20,001 & above 30% of [ Total Income – Rs, 20,000 ] + Rs. 3000
Surcharge 12% (if net income > Rs. 1 crore)
Health and Education Cess 4% total of income tax and surcharge

j) Special Tax Rates (AY 2020-21) [in these cases, the above slabs do not matter]

Long Term Capital Gains – 20 %

Long Term Capital Gains on equity shares, equity MF – 10 % (where LTCG is above Rs. 1 lakh)
Short Term Capital Gains (Equity Shares, Equity MF) – 15 %
Winnings from Lottery, crossword, races, card games – 30 %
Aggregate Dividend income received > Rs. 10 lakhs – 10 %
Unexplained money, investment, expenditure – 60 %
Alternate Minimum Tax (AMT) for non-corporate assessees – 18.50%
Minimum Alternate Tax (MAT) for corporate assessees – 18.50%

19. REBATE U/S 87A

ONLY RESIDENT INDIVIDUALS whose taxable income does not exceed Rs. 500,000 can claim a rebate u/s 87A
from income tax. Amount of rebate is lower of –

i) 100% of tax before adding surcharge and cess or whichever is

ii) Rs. 12,500 less

20. SUMMARY OF SURCHARGE

Income Status of Assessee

Individual, Firm, LLP, Domestic Foreign

HUF, AOP, Local Auth., & Company Company
BOI and AJP Co-op Society

Total Income upto Rs. 50 lakhs NA NA NA NA

Total income > Rs. 50 lakhs, and 10 % of NA NA NA

upto Rs. 1 crore income tax

Total income > Rs. 1 crore, and 15% of 12% of 7% of 2% of

upto Rs. 2 crores income tax income tax income tax income tax

Total income > Rs. 2 crores, and 25% of 12% of 7% of 2% of

upto Rs. 5 crores income tax income tax income tax income tax

Total income > Rs. 5 crores 37% of 12% of 7% of 2% of

income tax income tax income tax income tax

Total income > Rs. 10 crores 37% of 12% of 12% of 5% of

income tax income tax income tax income tax

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21. MARGINAL RELIEF

 For an individual tax payer, if net income exceeds Rs. 50 lakhs then surcharge is applicable. To avoid
hardship to the tax payer whose income is slightly higher than Rs. 50 lakhs, a provision has been made to
provide for relief in such cases.

 Such marginal relief is available to all other assessees (non-individual) having income above Rs. 1 crore.

 Companies (domestic and foreign) having income exceeding Rs. 10 crores, can claim marginal relief.

The marginal relief is computed as follows:

1. Compute amount of income tax and surcharge on total income without adding education cess
2. Compute tax on 1 crore without adding education cess
3. Excess tax = Step 1 – step 2
4. Excess income = total income – 1 crore
5. Marginal relief = Step 3 – Step 4 (i.e. excess tax – excess Income)

Compute Marginal Relief in following cases

a. Anuj (age below 60 years.) - Income Rs. 1,01,00,000

b. Onkar (age 65 years) - Income Rs. 1,02,20,200
c. Cab Ltd (Indian Company) - Income Rs. 1,03,00,000
d. ABC Inc. (Foreign Company) - Income Rs. 1,01,00,000
e. Mr. Ashay (non-resident below 60 years) - Income Rs. 1,01,10,100
f. Mrs. Bobby (age 82 years) - Income Rs. 5,10,00,000.

Average Rate of Income Tax means the rate computed by dividing the amount of income tax calculated on the total
income, by such total income.

Maximum Marginal Rate of Income Tax means the rate of income tax (including surcharge, if any) applicable in
relation to the highest slab of income in the case of an individual, AOP, BOI.

22. ACCOUNTING METHOD

The method of accounting selected by the assessee matters only for the following heads of income –

a) Profits and gains of business or Profession (PGBP)

b) Income from Other Sources

An assessee may select cash or mercantile system of accounting in respect of above income. In case of remaining
heads (i.e. Salary, House property and capital gains) accounting method adopted by the assessee is irrelevant.

Mercantile System – Under mercantile system, income and expenditure are recorded at the time of occurrence
during the PY. For example, income accrued during the PY is recorded irrespective of whether paid or not. Thus,
under the mercantile system of accounting profit is calculated as actually earned / due during the PY, even though not
necessarily realized in cash.

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Cash system – Under cash system of accounting, income and expenses are recorded only when actually received or
paid. For example, income received during the previous year is included in taxable income irrespective of whether it
was due in PY or not. Similarly, the expenditure is deductible from taxable income only when it is paid during the PY
irrespective of whether it relates to PY or not. Hence, under cash system of accounting, income is calculated with the
excess of receipt and over disbursements during the PY.

23. CAPITAL RECEIPT vs. REVENUE RECEIPT

The distinction between capital receipt and revenue receipt is vital as –

 Capital receipts are exempt from tax unless they are expressly taxable.
 Whereas revenue receipts are taxable unless expressly exempt from tax.

The terms are not defined hence natural meaning and relevant cases need to be considered. A receipt on account of
a circulating capital is a revenue receipt whereas a receipt on account of a fixed capital is a capital receipt. A receipt in
lieu of a source of income is a capital receipt.

Difference between Capital Receipt and Revenue Receipt

Capital Receipt Revenue Receipt

Capital Receipt is a receipt on account of Revenue Receipt is a receipt on account of

fixed capital circulating capital

Capital Receipt is exempt from tax unless Revenue Receipt is always taxable unless
specified as taxable specified as exempt

e.g. receipt of loan on installment basis e.g. salary income, interest income

Sale of land is taxable under the act even Agricultural income is exempt from tax under
though it’s a capital receipt the act even though it is a revenue receipt.

Examples –

Transaction Nature of Receipt

Compensation for loss of trading asset Revenue receipt
Interest on refund Revenue receipt
Loan payable in installments Capital receipt
Dividends received Revenue receipt
Interest free security deposit from tenants Capital receipt
Sale of loom hours Capital receipt
Pension received Revenue receipt
License to dig land Capital receipt
Received compensation for pre-mature termination of agency Capital receipt
contract (in lieu of source of income)
Sales tax collected from the buyer Revenue receipt
Lumpsum royalty received (instead of monthly royalty) Revenue receipt
Amount received for not resigning from the company Revenue receipt
Compensation received in lieu of any source of income Capital receipt
Compensation received in lieu of income Revenue receipt
Govt. grant received for general business purpose Revenue receipt

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 Basic Income Tax Concepts

Govt. grant received for a specific purpose (e.g. research) Capital receipt
Liquidated Damages (related to procurement of asset) Capital receipt
Reimbursement of capital outlay (even if more than outlay) Capital receipt
Compensation received for damage or loss of trading asset Revenue receipt
Conversion of capital asset into stock and selling such stock Revenue receipt
Gift received by a person Capital receipt

24. ROLE OF COMPANY SECRETARY – DIRECT TAX

Company Secretaries as experienced tax professionals can assist in resolving various challenges related to complex
tax regulations and efficiently manage compliances. Following are the key areas where a Company Secretary can
play an important role –

Advisory Role Compliance Role

Establish tax efficient Indian business presence for MNC Advising on withholding tax obligations on payments

Assisting an entrepreneur in establishing business Obtaining no-objection certificates

Expanding into new sectors Filing various tax returns and adequate disclosures.

Planning a heavy capital outlay in the existing business Tax diagnostic reviews

Addressing Cash flow and examining tax inefficiencies Enhancing ERP system for better tax management

Ensuring tax function is aligned with the business plan Tax implications on payments (local or overseas)

Impact of any tax and regulatory changes/ amendments Reporting of multi-layered tax issues

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