INDEX

1. INTRODUCTION

2. ABSTRACT

3. NEED FOR STUDY

4 OBJECTIVES

5 SCOPE AND LIMITATIONS

6 MEANING & DEFINITION

7 HISTORY

8 OBJECTIVE OF TAXES

9 CHARACTERISTICS OF GOOD TAX SYSTEM

10 TAX DEDUCTION

11 TAX EXEMPTION

12 TAX RETURN

13 ONLINE TAX IN INDIA

14 E- FILING

15 THE PROCESS OF TAX FILLING IN INDIA

16 TAX PENALTIES

17 MERITS OF DIRECT TAX

18 DEMERITS OF DIRECT TAX

19 INCOME TAX TIMELINE IN INDIA

20 HOW ARE PERQUISITES VALUED?

21 TAX UPON ALLOWANCE

22 TAX EQUALIZATION

23 CONCLUSION

24 BIBLIOGRAPHY

5
 INTRODUCTION
The word ‘income’ has special meaning with reference to income-tax. It inter alia
includes gains derived on transfer of a capital asset. Since these are not annual accruals,
these are treated on a different footing for taxation purpose.
Income tax is levied by the Central Government under entry 82 of the Union of Schedule
VII to Constitution of India. This entry deals with ‘Tax on income other than agricultural
income’. This task is achieved by the enactment of the Income Tax Act, 1961[“The
Act”].

The Act provides for the scope and machinery for levy and collection of Income Tax in
India. It is supported by Income Tax Rules, 1962 and several other subordinate rules and
regulations. Besides, circulars and notifications are issued by the Central Board of Direct
Taxes (CBDT) and sometimes by the Ministry of Finance, Government of India dealing
with various aspects of the levy of Income tax. Unless otherwise stated, references to the
sections will be the reference to the sections of the Income Tax Act, 1961.

Section 4, which is the charging section, provides that Income tax is a tax on the total
income of a person called the assessee of the previous year relevant to the assessment
year at the rates prescribed in the relevant Finance Act

6
 Abstract

Income Tax Act, 1961 governs the taxation of incomes generated within India and of

incomes generated by Indians overseas. This study aims at presenting a lucid yet simple

understanding of taxation structure of an individual’s income in India for the assessment

year 2013-14.

Income Tax Act, 1961 is the guiding baseline for all the content in this report and the tax

saving tips provided herein are a result of analysis of options available in current market.

Every individual should know that tax planning in order to avail all the incentives

provided by the Government of India under different statures is legal.

This project covers the basics of the Income Tax Act, 1961 as amended by the Finance

Act, 2007 and broadly presents the nuances of prudent tax planning and tax saving

options provided under these laws. Any other hideous means to avoid or evade tax is a

cognizable offence under the Indian constitution and all the citizens should refrain from

such acts.

7
 Need for Study

In last some years of my career and education, I have seen my colleagues and faculties

grappling with the taxation issue and complaining against the tax deducted by their

employers from monthly remuneration. Not equipped with proper knowledge of taxation

and tax saving avenues available to them, they were at mercy of the HR/Admin

departments which never bothered to do even as little as take advise from some good tax

consultant.

This prodded me to study this aspect leading to this project during my MBA course with

the university, hoping this concise yet comprehensive write up will help this salaried

individual assesse class to save whatever extra rupee they can from their hard-earned

monies.

8
 Objectives

 To study taxation provisions of The Income Tax Act, 1961 as amended by Finance

Act, 2007.

 To explore and simplify the tax planning procedure from a layman’s perspective.

 To present the tax saving avenues under prevailing statures.

9
Scope & Limitations

 This project studies the tax planning for individuals assessed to Income Tax.

 The study relates to non-specific and generalized tax planning, eliminating the need

of sample/population analysis.

 Basic methodology implemented in this study is subjected to various pros & cons,

and diverse insurance plans at different income levels of individual assesses.

 This study may include comparative and analytical study of more than one tax saving

plans and instruments.

 This study covers individual income tax assesses only and does not hold good for

corporate taxpayers.

 The tax rates, insurance plans, and premium are all subject to AY 2013-14 only.

10
 INTRODUCTION OF INCOME TAX

Income tax in India is levied by the Government of India on taxable income of

individuals, companies, Hindu Undivided Families (HUFs), co-operative societies,
firms, and trusts (recognized as association of persons and body of individuals) and
any other artificial person. Imposition of tax is different for every individual. Income
tax imposition is regulated by the Indian Income Tax Act, 1961. The Central Board
of Direct Taxes (CBDT) has the overall responsibility of regulating the Income Tax
Department in India. It is a division of the Department of Revenue under the
Ministry of Finance, Government of India. Income tax is a tax payable, at the rate
enacted by the Union Budget (Finance Act) for every Assessment Year, on the Total
Income earned in the Previous Year by every Person.

11
 MEANING AND DEFINITION
In Income Tax in India are divided in to two types they are:
1. Direct Taxes
2. Indirect Taxes.

Income Tax, Wealth Tax, etc., where the entire burden falls in the taxpayer directly
is called as Direct Taxes, whereas like Service Tax, VAT, etc., are called as indirect
taxes as these will be passed on through a third party.

Income tax can be defined as all sources of income other than agricultural income
which Central Government collects levies on that and shares the same with the states.

As per Income Tax Act of 1961, all persons who are considered as an assessee
determined on the basis of the person’s residential status in India and their when their
income exceeds the maximum exemption in the prescribed limit and the income tax
will be levied at the prescribed rates according to finance act, such type of income
tax has to be paid on the total income in the previous year to be paid in relevant
assessment year.

12
 HISTORY

The history of taxation system shows that taxes were levied on either on the sale and
purchase of merchandise or livestock. Further it suggests that the process of levying
and the manner of tax collection were unorganized. But it suggests that all historical
leaders and head countrymen collected taxes to run its authority. In other words taxes
on income, sale, purchase and properties were collected to run the ruling
Government machineries. Further, these taxes were collected to meet their military
and civil expenditure and also to meet the common needs of the subjects like
maintenance of roads, drainage system, government buildings, administration of
justice and other functions of the region.

Although, there were no homogeneous tax rate structures but it depended on the
production capacity and commodity of that particular country and/or region. These
taxes were collected in cash or in kind and it entirely depended on the type of
commodity or service on which it was levied upon. The history of taxation suggests
these were done to store government buffer stocks to meet emergencies. Taxes were
levied on all classes of citizens. Taxes were paid in the form of gold-coins, cattle,
grains, raw-materials and even by rendering personal service.

In India, the tradition of taxation has been in force from ancient times. There was a
perfect admixture of direct taxes with indirect taxes and they were varied in nature.
India's history of taxation suggests existence of a large and composite taxable
population. With the advent of the moguls in India the country witnessed a sea of
change in the taxation system of India. Although, they also practiced the same norm
of taxation but it was more homogeneous in structure and collection.

The period of British rule in India witnessed some remarkable change in the whole
taxation system of India. Although, it was highly in favor of the British government
and its exchequer but it incorporated modern and scientific method of taxation tools

13
and systems. In 1922, the country witnessed a paradigm shift in the overall Indian
taxation system. Setting up of administrative system and taxation system was first
done in the history of taxation system in India. The period thereafter witnessed rapid
growth and modernization of the Indian taxation system and the present.

14
 OBJECTIVES OF TAXES

 Raising revenue: The primary purpose of taxes is to raise the revenue for the
government. The modern government has to perform several functions for the
welfare of the public. The performance of these functions involves substantial
amount of public expenditure.
 Regulation of consumption and production: Taxes are sometimes used to
discourage the consumption and production of unnecessary or harmful goods like
liquor, tobacco etc. This also results in the diversion of production form luxury
goods to necessities.
 Encouraging domestic industries: Taxes in the form of custom duties are
used to reduce the import of certain goods that are domestically available and thereby
the domestic industries for the production of these goods. For example, high customs
duties on goods like TV, AC etc switch over the demand for the foreign brands.
 Stimulating investments: The instrument of taxation can also be used in the
stimulating investment of the private sector. This can be done by providing various
tax-incentives in the form of tax-holidays, investment allowance and lower profits.
 Reducing income inequalities: Taxation policy of the government is often
used in reducing the income inequalities of incomes and assets. Inequality of income
can be reduced by the system of progressive taxation under which the rich people are
required to pay much more taxes than poor. The taxes collected from the rich can
further be utilized for providing social services which benefit the low income groups.
 Promoting economic growth: Taxation policy can also be used for promoting
economic development of the country. The revenue collected by the government can
be used in promoting development of industries and agriculture. The government can
also use these funds in building a better infrastructure like transport and
communication, power etc.
 Development of backward regions: Tax system can be used in ensuring the
development of backward regions. Entrepreneurs can be motivated to set up their
industries in the backward regions by providing tax concessions to them.

15
 Ensuring price stability: Direct taxes like income tax can be used to ensure
price stability. These taxes reduce the disposable income of individuals and thereby
reduce their purchasing power. This results in the fall in aggregate demand in the
economy and thereby reducing demand-pull inflation.

16
 CHARACTERISTICS OF GOOD TAX SYSTEM

A good tax system should adhere to certain principle that becomes the characteristics
of good tax system. These principles are called canons of taxation.

 Canons of equality: Canon of equality states that persons should be allowed

to pay their taxes as per their ability to pay. The burden of tax should be fair and just.
Equality of tax burden can be achieved if the rich people are taxed more than the
poor people not only in terms of tax but also in the terms of tax rate. This canon tries
to achieve the objectives of economic justice.
 Canon of certainty: The canon of certainty implies that the tax-payer should
be informed about every detail relating to the payment of each and every kind of
taxes.
 Canon of economy: Every tax has a system of cost of collection which is the
administrative cost of collection. The canon of economy should be such that the cost
of collection should be minimum . It will be useless to impose a tax that involves
huge expenditure in its collection.
 Canon of productivity: All taxes should be productive. The canon of
productivity implies two things. In the first place, the tax system should be able to
generate enough revenue to meet the required expenditure. Secondly, taxes should be
imposed in such a way as not to obstruct and discourage production.
 Canon of elasticity: The canon of elasticity implies that the taxes should be
levied that the yields of the taxes can be easily increased or decreased as per the need
of the government.

 Canon of diversity: The canon of diversity requires that the tax system should
be such that the government depends on the number of the taxes so that every class
of citizen may be called upon to contribute something towards the state revenue.

17
 Canon of simplicity: The tax system should be easy and simple so that the tax
payer can easily understand its implication, the basis and the method of calculation
etc. without the costly help of the expert

WHO IS LIABLE TO PAY INCOME TAX?

There are seven categories of persons chargeable to tax under the Act.
a) an individual
b) a Hindu undivided family
c) a company
d) a firm
e) an association of person or body of individuals ,whether incorporated or not
f) a local authority
g) every artificial juridical person not falling within any of the preceding
categories.

Therefore any person not falling in the above mentioned categories, may still fall in
the four corners of the term “person” and accordingly may be liable to tax under
section 4.
The person by whom income tax or other sum of money is payable under the Act is
the ASSESSEE
RESIDENTIAL STATUS

Residential Status

Resident but not Ordinarily

Resident Ordinarily Residents Non Residents
Residents

The three residential status, viz.,

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 Resident Ordinarily  Under this category, person
Residents
must be living in India at least 182
days during previous year Or
must have been in India 365 days
during 4 years preceding previous
year and 60 days in previous year.
Ordinary residents are always
taxable on their income earned
both in India and Abroad.

 Resident but not  Must have been a non-

Ordinarily Residents resident in India 9 out of 10 years
preceding previous year or have
been in India in total 729 or less
days out of last 7 years preceding
the previous year. Not residents
are taxable in relation to income
received in India or income
accrued or deemed to be accrue or
arise in India and income from
business or profession controlled
from India.
 Non Residents  Non Residents are exempt
from tax if accrue or arise or
deemed to be accrue or arise
outside India. Taxable if income is
earned from business or profession
setting in India or having their
head office in India.

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 INDIVIDUAL HEADS OF INCOME

Income from
Salary

Income from Income from

Other House
Sources Heads property
of
income

Income from
Income from
Business or
Capital Gains
Profession

 Income from Salary

All income received as salary under Employer-Employee relationship is taxed under
this head. Employers must withhold tax compulsorily, if income exceeds minimum
exemption limit, as Tax Deducted at Source (TDS), and provide their employees
with a Form 16 which shows the tax deductions and net paid income. In addition, the
Form 16 will contain any other deductions provided from salary such as:
1. Medical reimbursement: Up to 15,000 per year is tax free if supported by
bills.
2. Transport allowance: Up to 800 per month (9,600 per year) is tax free
if provided as transport allowance. No bills are required for this amount.
3. Conveyance allowance: is tax exempt.
4. Professional taxes: Most states tax employment on a per-professional basis,
usually a slabbed amount based on gross income. Such taxes paid are deductible
from income tax.
5. House rent allowance: the least of the following is available as exemption
Actual HRA received

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  50%/40%(metro/non-metro) of basic salary
 Rent paid minus 10% of 'salary'. basic Salary for this purpose is
basic+DA forming part + commission on sale on fixed rate.
The exemption for HRA u/s 10(13A) is the least of all the above three factors.
Perquisites and Exemptions u/s 10
The term "Perquisite" includes value of any benefit or amenity/value of any
concession provided by the employer to the employees. Perquisite Valuation does
not include certain medical benefits. Section 10 exemptions are available for the
following perquisites:
1. Leave Travel Concession u/s 10(5)
2. Perquisites paid to Indian Citizens Employed Abroad 10(7) no
3. Tax Paid on Behalf of Any Employee by the Employer 10(10CC)
4. Any sum received under Life Insurance Company
 Income from House property
Income from House property is computed by taking into account what is
called Gross Annual Value of the property. The annual value in case of a self
occupied house is to be taken as NIL. (However if there is more than one self
occupied house then the annual value of the other house/s is taxable.) From this,
deduct Municipal Tax paid and you get the Net Annual Value. From this Net Annual
Value, deduct:
 30% of Net value as repair cost (This is a mandatory deduction)
 No other deduction available
 Interest paid or payable on a housing loan against this house
In the case of a self occupied house interest paid or payable is subject to a maximum
limit of Rs.1,50,000 (if loan is taken on or after 1 April 1999 and construction is
completed within 3 years) and Rs.30,000 (if the loan is taken before 1 April 1999).
For l non self-occupied homes, all interest is deductible, with no upper limits.
The balance is added to taxable income.

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 Income from Business or Profession
Income arising from profits and gains of any Business or Profession; income derived
by a Trade/ Professional/ similar Association by performing specific services for its
members; any benefit from business whether convertible into money or not,
incentives for exporters; any salary, interest, bonus, commission or remuneration
received by Partner of a firm; any amount received under a Key man Insurance
Policy which also covers Bonus; income from managing agency and speculative
transactions; is taxable.
 Income from Capital Gains
Under section 2(14) of the I.T. Act, 1961, Capital asset is defined as property of any
kind held by an assesse such as real estate, equity shares, bonds, jewellery, paintings,
art etc. but does not consist of items like stock-in-trade for businesses or for personal
effects. Capital gains arise by transfer of such capital assets.
Long term and short term capital assets are considered for tax purposes. Long term
assets are those assets which are held by a person for three years except in case of
shares or mutual funds which becomes long term just after one year of holding. Sale
of long term assets give rise to long term capital gains which are taxable as below:
 As per Section 10(38) of Income Tax Act, 1961 long term capital gains on
shares/securities/ mutual funds on which Securities Transaction Tax (STT) has been
deducted and paid, no tax is payable. Higher capital gains taxes will apply only on
those transactions where STT is not paid.
 For other shares & securities, person has an option to either index costs to
inflation and pay 20% of indexed gains, or pay 10% of non indexed gains.
 For all other long term capital gains, indexation benefit is available and tax
rate is 20%
 Income from Other Sources
This is a residual head , under this head income which does not meet criteria to go to
other heads is taxed. There are also some specific incomes which are to be taxed
under this head.
1. Income by way of Dividends

22
2. Income from horse races
3. Income from winning bull races
4. Any amount received from key man insurance policy as donation.
5. Income from shares (dividend other than Indian company)

Personal Tax Rates:

For Individuals,HUF, Associations Of Persons(AOP) and Body Of Individuals (BOI)

The chargeability is based on nature of income, i.e., whether it is revenue or capital.

The rates of taxation of income are-:

Income Tax Rates/Slabs Rate (%) (as per A.Y.2013-2014)

→ Up to 2,00,000(for men & women) = 0%,

→ 2,00,001 – 5,00,000 = 10%,

→ 5,00,001 – 10,00,000 = 20%,

→ 10,00,001 upwards = 30%,

Up to 2,50,000 (for resident individual of 60 years or above)= 0,

Up to 5,00,000 (for very senior citizen of 80 years or above)= 0.

Education cess is applicable @ 3 per cent on income tax, surcharge = NA

23
 TAX DEDUCTION

There are various India Tax Deductions or tax exemptions provided by the Indian
Income Tax Act. The tax deductions help to deduct an amount from the taxable
income and help to save tax. Each year, one can save thousands of rupees in income
tax through income tax exemptions.

The Central Board for Direct Taxes (CBDT) governs the Indian Income Tax
department. The department is also part of the Department of Revenue which is
managed under the Indian Revenue Service (IRS) under the Ministry of finance govt.
Of india.

Income taxes are imposed by the government of India on taxable income of Hindu
Undivided Families (HUFs), companies, individuals, firms, co-operative societies
and trusts (which are identified as a body of Individuals and Association of Persons)
and any other artificial person. There are separate levy of taxes on each persons
which are governed by the Indian income tax act 1961.

Some of the income tax deductions and tax exemption limits for the financial year
2012-2013 are given below –

Income Tax deductions –

Section 80c of Section 80C is one of the most common income tax
the Indian deductions. This is quite popular as it encourages
Income Tax Act monthly savings from income. If someone has a taxable
income in the highest tax bracket, the deductions under
this section can help one reduce the taxable income by 1
lakh rupees.

24
 This deduction can be availed if one has invested money
in Life Insurance premium, Provident Funds, mutual
fund investments in ELSS (Equity Linked Savings
scheme), bank deposits (more than 5 years), National
Saving Certificate (NSC), tuition fees, principal part of
EMI on housing loan, ULIPS (Unit Linked Insurance
Plans). The maximum tax deduction or tax exemption
Limit is ‘100000.

Section 80D of This section of India Tax Deduction is helpful if there is

the Indian no coverage of health and medical expenses. It is better
Income Tax Act if one gets health and medical insurance for oneself,
spouse, dependent parents and dependent children.
Through this one can claim deduction till `15000/- per
annum for the insurance premium. The limit for senior
citizens is Rs20,000.
Section 80G of According to Section 80G in the India tax deduction
the Indian rules, donations to National Children Foundation,
Income Tax Act University or educational institution of national
importance, Prime Minister's Relief Fund, charitable
institutions etc are deductible from the taxable income.
Income tax deduction for 50% of the donated amount is
eligible for other donations. The maximum tax
deduction or tax exemption limit is 100%. For various
funds and 50% for other donations.
Section 80DDB If you have a dependent who suffers from any of the
of Income Tax ailments specified under Section 80DDB, the Income
Act: tax Act allows you to claim an annual deduction of Rs
40,000. The deduction is higher at Rs 60,000 if the
Pay lower if
patient is a senior citizen.
someone is ill

25
 Conditions: The IT Act has defined certain diseases to
claim this deduction, which include neurological
diseases, malignant cancers, full-blown AIDS, chronic
kidney failure and haematological disorders.
Dependents can include spouse, children, parents and
siblings. However, there are a few conditions.
The patient should be wholly or mainly dependent on
the taxpayer and should not have separately claimed
deduction for the disability. If the amount spent is
reimbursed by the employer or an insurance company,
there is no deduction.
Section 80GGC You can you lower your tax if you have political
(80GGB for affiliations. Amount contributed to a recognized
corporates) of political party can be claimed as a deduction without
Income Tax any ceiling under Section 80GGC (80GGB for
Act:Political corporate). The donation can also be made to the
affiliations can electoral trust which works for the purpose of
be some times conducting elections. There is a ceiling to the deduction
beneficial a taxpayer can claim in a year.
Condition: Only cash donations are taken into account.
Food, clothes and medicines do not qualify. Under
Section 80G, donations to charitable organizations get
deduction ranging from 50% to 100%. It is good to
know how much deduction you can claim before you
sign a cheque. The quantum of deduction is limited to
10% of the gross total income of the donor.
Set off Long term According to Income Tax Act if you have made any
gains by short long-term capital gains from sale of property, gold or
term capital debt funds, you can set them off against short-term
losses capital losses made on stocks and bring down your tax

26
 liability. This can be especially useful for someone who
has booked profits on gold ETFs and physical Gold for
the year.
Section 80E of The interest paid on an education loan is fully
Income Tax Act: deductible from taxable income under Section 80E. This
deduction now includes loans taken for vocational
Use education
courses. Say, if a parent or legal guardian takes the loan,
loan to lower
he can claim deduction for the interest paid for upto8
your tax
successive years, starting with the year in which interest
liabilities
is first paid.

Condition: Loans taken for siblings and other relatives

and from employers or individuals are nt qualifying for
deduction.
Disabilities can If a taxpayer suffers from a disability, he can claim
lower your tax deduction of Rs 75,000 under Sec 80U. If he has a
bracket disabled dependent, he can claim the deduction under
Sec 80DD. Disability includes blindness, low vision,
leprosy, hearing impairment, loco-motor disability,
mental retardation and mental illness and deduction is
available only if the impairment is at least 40%. If the
disability is severe (80% or above), the deduction is Rs
1 lakh a year. The dependent could include the
taxpayer's spouse, children, parents and even siblings.

Condition: Incidentally, the deduction is offered as a

lump sum and does not depend on the actual amount
that the taxpayer may spend on himself or on the
disabled dependent. However, the disabled person
should be wholly or mainly dependent on the taxpayer

27
 for maintenance, and should not have claimed deduction
for the disability under Section 80U separately.

Take unlimited When it comes to buying a second house, the taxman

deduction for can be very encouraging. Under Section 24b, one can
your second claim deduction of up to Rs 1.5 lakh for interest paid on
home loan a home loan. But if the taxpayer buys a second house
through another home loan and gives it on rent, the
entire interest paid on the home loan during a given year
can be claimed as a deduction. Also if you have more
than one house, any one is deemed to be rented out. So
the interest income on the home loan for that house can
be claimed entirely for deduction, provided the rental
income or a deemed income is charged to tax.

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 TAX EXEMPTIONS

According to Income Tax Act, 1961 there is a provision of exemptions in income

tax. Tax Exemption induces reduction of the tax burden on a specific section of the
society to achieve some level of equilibrium among all. To encourage some
economic activities through the process of reduction of the tax burden on some
organizations or individuals involved in that activity is also another cause for Tax
Exemptions.

Tax Exemptions have the authority to bring about social and economic changes
within the society followed by unprecedented consequences. However, for such
exemptions on tax some conditions are mandatory to follow. Some of them are like -

 The age of the individual taxpayer

 The public services performed by the individual taxpayers
 The type of property owned by the individual
 The geographic location of property
 The net income of the individual paying the tax
 The value of the taxable property

India tax exemptions are specified incomes on which a person can get exemptions. It
means that at the time of calculating annual income, this type of income will not
come under the purview of tax.

Some of these exempted incomes are as follows:

 Agriculture Income.
 Share of partner in total income of a firm which is assessed separately.
 Interest on securities and bonds including premium on redemption of bonds by
Non Residents.
 Interests on amounts in Non-resident (External) account in any bank in India
being maintained as per FERA, 1973.

29
 Interest on specified central Government's savings certificates which were
subscribed to in convertible foreign exchange remitted from a country outside India
as per FERA by an individual citizen.
 Income of individuals engaged in research work in India under duly approved
research schemes and remuneration received from foreign government for training in
a government office or undertaking as employee.
 Gratuity not exceeding Rs.3.5 lakh.
 Receipt in respect of commutation of pension as per specified limits.
 Leave encashment not exceeding 8 months salary and subject to specified
conditions.
 Receipt of amount on voluntary retirement up to ` 5,00,000.
 Payment on a Life insurance policy, including bonus thereon but excluding
therefrom amounts received u/s 80DDA(3).
 Receipt of Payment from Public provident fund or Statutory Provident Fund.
 Receipt of Payment from superannuation fund.
 Special benefits and allowance to employee viz., house rent allowance.
 Interest payable to any bank incorporated outside India and approved by RBI.
 Scholarships granted to meet the cost of education
 Receipt of any amount in connection with an award instituted by Government
etc.
 Income of a university or other educational institution.
 Income of a hospital or other such institution working exclusively for
philanthropic purposes.
 Income of news agency having been set up in India for the sole purpose of
collection & distribution of news.
 Income of specified mutual funds registered and/or set up under /by SEBI Act,
1992.
 Income of Exchange risk administration fund having been set up by public
financial institutions either jointly or separately as per specified conditions.
 Some other categories includes combat-pay to military officers, inheritances,
payments for personal injuries, employee discounts, and income from local bonds.

30
There are a number of protected classes like widows, people above 65, war-retired
persons, and disabled persons

However, one should not get confused with the concepts of Tax Deduction and Tax
Exemption, as when an expense received by a taxpayer is deduced from the gross
income it results in the lowering of the net taxable income it is tax deduction and not
Tax Exemption. There are many types of income and benefits being exempted from
income taxes to a limited extent.

FORMS OF INCOME TAX

ITR-1 SAHAJ This Return Form is to be used by an individual whose total
Indian Individual income for the assessment year 2013-14 includes:-
Income tax Return
(a) Income from Salary/ Pension; or
(b) Income from One House Property (excluding cases
where loss is brought forward from previous years); or
(c) Income from Other Sources (excluding Winning from
Lottery and Income from Race Horses)

This Return Form cannot be used by any resident having

any asset (including financial interest in any entity) located
outside India or signing authority in any account located
outside India.

Note: Further in a case where income of another person like

spouse, minor child, etc. is to be clubbed with the assessee
this return form can be used only if the income being
clubbed falls in to above income categories
Note:-
Those who have total income below 5 lakh rupees & those
people who have exemption under sec. 10/c is less than
5,000 Rupees they require to fill the ITR -I form
ITR-2 For This Return Form is to be used by an individual or a Hindu
Individuals and Undivided Family whose total income for the assessment
HUFs not having year 2013-14 includes:-
Income from
Business or (a) Income from Salary / Pension; or
Profession (b) Income from House Property; or
(c) Income from Capital Gains; or
(c) Income from Other Sources (including Winning from
Lottery and Income from Race Horses).

31
 Further, in a case where the income of another person like
spouse, minor child, etc. is to be clubbed with the income of
the assessee, this Return Form can be used where such
income falls in any of the above categories.

This Return Form should not be used by an individual

whose total income for the assessment year 2013-14
includes Income from Business or Profession.
Note:-
Those who have total income above 5 lakh rupees & those
people who have exemption under sec. 10/c is above than
5,000 Rupees they require to fill the ITR -II form & it is
mandatory to do E filling.

ITR-3 For Individuals/HUFs being partners in firms and not

carrying out business or profession under any proprietorship
ITR-4 SUGAM (ITR-4S)

Sugam - Presumptive Business Income tax Return

ITR-4
For individuals and HUFs having income from a
proprietory business or profession
ITR-5 For firms, AOPs and BOIs

ITR-6 For Companies other than companies claiming exemption

under section 11

ITR-7 person including a company whether or not registered under

section 25 of the Companies Act, 1956
required to file a return under sub-section (4A) or sub-
section (4B) or sub-section (4C) or sub-section (4D) of
section 139

32
 TAX RETURNS

There are five categories of Income Tax returns.

1. Normal Return
2. Belated Return
3. Revised Return
4. Defective Return
5. Returns In Response To Notices
1. Normal Return

Returns filed within the return filing due date. that is 31 July of concerned
previous year.

2. Belated Return

In case of failure to file the return on or before the due date, belated return
can be filed before the expiry of one year from the end of the relevant
assessment year.

3. Revised Return

In case of any omission or any wrong statement mentioned in the normal

return can be revised at any time before the expiry of one year from the end
of the relevant assessment year.

4. Defective Return

Assessing Officer considers that the return is defective, he may intimate the
defect. One has to rectify the defect within a period of fifteen days from the
date of such intimation. If the assessee wants more time, he can file an
application to the A O and a further 15 days can be granted at the instance of
the A O.

33
5. Returns In Response To Notices

Assessing officer in the process of making assessment, may serve a notice

under various sections like 142(1), 148(1), 153A(a) or 153C. Returns are
required to be furnished within the date specified on the respective notices.

34
 ONLINE TAX IN INDIA

In India, online tax filing has become an integral part of the process of registering tax
returns. With the increasing penetration of internet and rising levels of web
awareness and work pressure among tax payers, many people now prefer to fill the
tax according to their convenience and avoid the cues.

HOW TO FILE ONLINE TAX IN INDIA

The basic steps for filing tax returns online in India can be mentioned as below:

 Customers need to sign up with the service provider to be able to avail their
services
 After signing up, customers need to enter their financial details. The returns
will be generated on the basis of the entries.
 Once the data is entered the software reviews it.
 After the computation is done, the clients need to give the payment on the
basis of the filing plan chosen by them.
 Next, the user needs to authorize the service provider to file the tax returns on
their behalf.
 The acknowledgment will be provided via e-mail once the process is
completed and the document is signed digitally. The customer receives an
ITR-V if the document is not signed digitally.

Following are the major benefits for tax payers who use the tax filing portals:

 These companies provide the users in depth knowledge of tax laws

 The technology used by these companies is comparable to the best banks
across the world
 Tax computation services are provided free of cost. Tax payers only need to
pay when they are filing the tax returns

35
 They do not put the users off with unnecessary pop-ups or advertisements
 Majority of these sites are backed by the Income Tax Department. This
means that these companies are authorized to file tax returns with the IT
department on behalf of their customers
 Tax returns can be prepared and filed by customers from any income class.

36
 E-FILLING

A. Select appropriate type of Return.

B. Download Return Preparation Software for selected Return Form.
C. Fill your return offline and generate a XML file.
D. Register and create a user id/password AT Incomtaxindiaefiling.gov.in
E. Login and select relevant Assessment year on left panel under "Submit
Return"
F. In Next screen ,select the form Name (whichever is applicable in your case)
(i) Select digital signature NO
(ii) In next screen Browse and select XML file prepared by you and click on
"Upload" button
G. On successful upload acknowledgement details would be displayed. Click on
"Print" to generate printout of acknowledgement/ITR-V Form.
H. In case the return is digitally signed, on generation of "Acknowledgement"
the Return Filing process gets completed.
I. In case the return is not digitally signed, on successful uploading of e-Return,
the ITR-V Form would be generated which needs to be printed by the tax payers.
This is an acknowledgement cum verification form.
A duly signed ITR-V form should be mailed to
“Income Tax Department – CPC, Post Bag No - 1, Electronic City Post Office,
Bengaluru - 560100, Karnataka, ” BY ORDINARY POST OR SPEED POST ONLY
within 120 days of transmitting the data electronically.
ITR-V sent by Registered Post or Courier will not be accepted.
No Form ITR-V shall be received in any other office of the Income-tax Department
or in any other manner. In case, Form ITR-V, is furnished after the above mentioned
period, it will be deemed that the return in respect of which the Form ITR-V has
been filed was never furnished and it shall be incumbent on the assessee to
electronically re-transmit the data and follow it up by submitting the new Form ITR-
V within 120 days. This completes the Return filing process for non-digitally signed
Returns.

37
38
 THE PROCESS OF TAX FILLING IN INDIA

Many people are, naturally, unhappy to see the tax deducted at source (TDS) eroding
their salaried income. They are a bit happy too, in a way, as they feel the major task
of paying tax is finished with & they need not worry about anything. Well, they are
so wrong! Anybody who pays tax has to also file income tax returns.

Every single person who pays tax in India has to file his/her income tax. Do not
assume that just because you do not have your own business and are getting a salary
working for somebody, that you don’t need to file the tax returns. Yes, even a
salaried individual in India has to file income tax returns.

Many salaried people think that the tax is deducted at source (called TDS), but are
unaware that it is not only their income from a job that is taxed. Their income from
any other source is also liable for tax, such as if they are earning a part-time income
from an online job, are having fixed deposits in a Bank, etc. So you must file your
income tax returns before the end of the financial year.

The process of tax filing involves submission of tax along with necessary documents
declaring yearly income of the individual or company. In India the process of tax
filing is governed by the Ministry of Finance. The Ministry of Finance of
Government of India has different departments that are involved with the process of
tax collection.

The most important department that is associated with the process of tax filing in
India is the Department of Income Tax, Government of India. The corpus
accumulated from individuals and companies as income tax are forwarded to the
Ministry of Finance, Government of India. The revenue so collected is used to run
the Government of India machineries. The whole process of tax filing in India is
done in accordance with the Income tax acts and rules as promulgated by the
Department of Income Tax, Government of India. The main purpose of filing tax

39
returns in India is to have records of structured information. The tax of an individual
or a company is submitted against an account number which is an unique
combination of alpha-numeric character called Permanent Account Number (PAN).
This PAN enables the taxing authority to record each and every relevant details
pertaining to tax declaration of a particular person or company in India. This is a fool
proof process and there is no place for discrepancies.

Over the years the process of tax filing in India has made tremendous progress. Gone
are the days when one had to wait for endless hours to see his yearly tax declaration
being verified and accepted. Today, the department of Income Tax under the
government of India has facilitated its citizens with e-fling process. The procedure
involves filing of income tax returns over Internet. This has in fact simplified the
arduous mechanical tax declaration process in India. Now an individual or company
can file his tax according to his convenience by simply quoting the unique PAN. All
the required information regarding filing process and necessary documents are
mentioned therein. The concerned individual or company should fill-up the relevant
electronic form according to the instructions given therein.

The important declarations that are to be made while undertaking the process of e-
filing tax are as follows -

Information required for individual tax payer -

 A copy of last year's tax return

 Bank Statement
 TDS certificates
 Savings certificates / Deductions
 Interest statement showing interest paid to the individual throughout the year

Information required for corporate tax payer -

40
 A copy of last year's tax return
 Bank Statement
 TDS certificates
 Savings certificates/Deductions
 Interest statement showing interest paid to the corporate throughout the year
 Profit and Loss Account
 Balance Sheet

Is there a fine for not filing income tax returns in India?

Yes, there definitely is a fine for not filing income tax returns in India. For every
month delayed, you are paying 1.5% per month. If you do not file your income tax
returns before the last date of the assessment year (March 31st), you will have to pay
a fine of Rs.5000/-.
What is the last date of filing income tax returns in India?

1. For those with income above INR 40lakhs, the last date for filing income tax
returns in India is September 31st.

2. For those whose income is below INR 40lakhs, the last date for filing income tax
returns in India is July 31st.

3. For both the above groups of tax payers, they can still file their income tax returns
before March 31st; but then each month delayed means more interest to be paid on
the delayed tax.

41
 TAX PENALTIES

The major number of penalties initiated every year as a ritual by Income Tax
Authorities is under section 271(1)(c)which is for either concealment of income or
for furnishing inaccurate particulars of income.

"If the Assessing Officer or the Commissioner (Appeals) or the Commissioner in the
course of any proceedings under this Act, is satisfied that any person-

(a) has failed to comply with a notice under sub-section (1) of section 142 or sub-
section (2) of section 143 or fails to comply with a direction issued under sub-section
(2A) of section 142, or

(b) has concealed the particulars of his income or furnished inaccurate particulars of
such income,

he may direct that such person shall pay by way of penalty,-

(ii) in the cases referred to in clause (a), in addition to any tax payable by him, a sum
of ten thousand rupees for each such failure;

(iii) in the cases referred to in clause (b), in addition to any tax payable by him, a
sum which shall not be less than, but which shall not exceed three times, the amount
of tax sought to be evaded by reason of the concealment of particulars of his income
or the furnishing of inaccurate particulars of such income

42
 MERITS OF DIRECT TAX

 Economical: Direct taxes are very economical in the sense that the cost of
collecting these taxes are relatively less as they are usually collected at the source
and they are paid to the government directly.

 Certainty: Direct taxes satisfy the canon of certainty. The tax payers know that
how much they have to pay and on what basis they have to pay. The government also
knows fairly the amount of tax it is going to collect.

 Equity: Direct taxes can be made to conform to the principle of ability to pay by
choosing the most appropriate rate schedules. By making the rate structure possible
and progressive their burden can be put more on rich than poor.

 Reducing inequalities: Direct taxes are progressive in nature. Rich people are
subjected to higher taxes on the basis of their higher income and hence reduces the
inequalities of income and wealth.

 Civic consciousness: When one knows that his taxes shall be well utilized for the
benefit of the public such as the developmental and defense projects , infrastructural
development, establishment of government schools, hospitals, maternity homes etc.,
they take active part in the process of payment of taxes. They pay their dues on time
and pay it will honesty. On the other hand, the in direct taxes go in the hands of the
traders and the citizens do not have any account whatsoever in the utilization of these
taxes. Hence, it acts an disincentive for them.

43
 DEMERITS OF DIRECT TAX

 Unpopular: Direct taxes are directly imposed on the person. They cannot be
shifted. Tax payers feel their pinch directly.

 Possibility of tax evasion: Direct taxes encourage tax evasion. People conceal
their income from the tax official so as to evade taxes. In (India, there is a large scale
tax evasion on the part of the businessman.

 Inconvenience: The main drawback of the direct taxes is that they cause a lot
of inconvenience to the tax payers. Sometimes, the tax payers are required to pay the
entire tax in one instalment. Besides, the tax payers have to give and elaborate
documents on their income and expenditure.

 Adverse effects on the will to work and save: Direct taxes may have an
adverse impact on the will to work and save. Higher rates of income tax may
discourage people to work hard or work overtime. Similarly, the direct taxes may
reduce their willingness to save.

44
Income Tax Timeline in India
1860 1860 Introduced for the first time for a period of five years
to cover the 1857 mutiny expenses. It was abolished in
1873.
1877 1877 The tax system was revived as a result of the Great
Famine of 1876.
1886 1886 Introduced as Act II of 1886. It laid down the basic
scheme of income tax that continues till the present day.
1918 1918 Introduced as Act VII of 1918. It had features like
aggregation of income from various sources for the
determination of the rate, classification of income under
six heads and application of the Act to all income that
accrued or arose or was received in India from whatever
source in British India.
1922 1922 On the recommendations of the All-India Income
Tax Committee, the father of the present act was
introduced. The central government was vested with the
power to administer the tax.
1961 1961 The Act came into force from 1 April 1962, it
extended to the whole of India.
1997 1997 Establishment of the Tax Reform Committee under
the chairmanship of Dr. Raja J. Chelliah. It was followed
by restructuring the income tax with parameters like
lower taxes, fewer slabs, higher execptions, etc.
2003 The Kelkar Task Force, which was followed by
outsourcing of PAN/TAN, exemption of dividend
income, compensated by levy of the dividend distributed

45
 tax to be paid by the company.

Income Tax Rates Across the World

Country Personal Income Tax Rate

Australia 0% - 48.5%

Canada 16% - 29%

Estonia 24% - 24%

Denmark 44% - 63%

Hong Kong 0% - 33%

India 0% - 33%

Israel 10% - 49%

Malaysia 0% - 29%

Mexico 3% - 32%

Russia 13% - 13%

Singapore 0% - 22%

UK 0% - 40%

US 10% -35%

Income Tax - Taxable Heads of

Income

46
Remuneration for work done in India is taxable irrespective of the place of
receipt.

Remuneration includes:
 Tax upon salaries and wages
 Tax upon pension
 Tax upon bonus, fees & commissions
 Tax upon Gratuity
 Tax upon Annuity
 Tax upon profits in lieu of or in addition to salary
 Tax upon advance salary and perquisites
Others:
 Tax upon Allowances
 Tax upon Deferred compensation
 Tax equalisation

Tax upon salaries and wages

Salary includes the pay, allowances, bonus or commission payable monthly or
otherwise or any monetary payment, in whatever name called from one or more
employers, as the case may be, but does not include the following, namely:
a. dearness allowance or dearness pay unless it enters into the computation
of superannuation or retirement benefits of the employee concerned;
b. employer's contribution to the provident fund account of the employee;
c. allowances which are exempted from payment of tax;
d. the value of perquisites specified in sub-section (2) of section 17 of the
Income-tax Act;

It also includes the following:

47
 a. Wages;
b. Any annuity or pension;
c. Any gratuity;
d. Any fees, commissions, perquisites or profits in lieu of or in addition to
any salary or wages;
e. Any advance of salary;
f. Any payment received by an employee in respect of any period of leave
not availed of by him;
g. The annual accredition to the balance at the credit of an employee
participating in a recognized provident fund, to the extent to which it is
chargeable to tax under Rule 6 of Part A of the Fourth Schedule; and
h. The aggregate of all sums that are comprised in the transferred balance as
referred to in sub-rule (2) of rule 11 of part A of the Fourth Schedule of an
employee participating in a recognized provident fund, to the extent to
which it is chargeable to tax under sub-rule (4) thereof.

Is the allowance paid outside India by the Government to the Indian citizens
taxable?
Any allowance, paid outside India by the Government to an Indian citizen for
rendering services outside India, is fully exempt from tax u/s.10 (7) of the
Income-tax Act.

How is the tax determined on the salary received by ships crew?

Under section 10(6)(viii), salary that is received by or due to a Non-resident
foreign national, who is a member of a ships crew, is exempt from tax, provided
the total stay of the crew member in India does not exceed 90 days in the
previous year.

48
If a person foregoes his salary for any reason, would it be taxable?
Since the salary is taxable on due or receipt basis, whichever is earlier, foregoing
of salary would amount to giving up something, which is due to him. Hence,
even if a person foregoes salary, the same would still be taxable.

In the case of a Hindu undivided family, how would you determine whether
the remuneration, received by an individual is the income of the individual or
the income of the Hindu undivided family?
If the remuneration, received by the co-parcener, is compensation made for the
services rendered by the individual co-parcener, then it will be income of the
individual co-parcener. If the remuneration received by the individual co-
parcener is because of investments of the family funds, then it will be considered
as the income of the Hindu undivided family. If the income was essentially
earned as a result of the funds invested, then the fact that the co-parcener had
rendered some service will not change the character of the receipt. It will still be
regarded as income of the Hindu undivided family. However, on the other hand,
if the co-parcener has received remuneration for services rendered by him, even
if his services were availed of because he was a member of the family which had
invested funds in that business or that he had obtained qualifying shares from
out of the family funds, the receipt would be the income of the individual.

If an assessee is employed in a company where he is called Managing Agent

but is in fact, the Chief Manager of the company, under what head would the
remuneration that is paid to him be charged?
Though he may be called a Managing Agent, the remuneration earned by him
will be charged under the head of Salaries and not as Business Income. The fact
that he is actually the Chief Manager of the company will make the remuneration
earned by him chargeable to tax under the head Salaries. It is the true nature of

49
the contract that will determine the relationship between the assessee and the
company. Once it is established that the managing director functions, subject to
the control and supervision of the Board of Directors, the inevitable corollary is
that an employer - employee relationship exists and, that being so, his
remuneration is assessable under the head "salary".

Is the salary, bonus, commission or remuneration, received by a partner of a

firm from the firm regarded as salary?
No. The salary, bonus, commission or remuneration, by whatever name called,
due to or received by the partner of a firm from the firm shall not be regarded as
salary for the purpose of tax. It will be regarded as Business Income and taxable
under the head 'profits and gains from business or profession'. Accordingly, no
standard deduction, which is otherwise allowable from Salary Income, is
available.

Would the remuneration, received by a director be taxable under the head

'Income from salaries'?
The remuneration, received by a director is taxable as 'Income from salaries' or
not, would depend upon whether the director is an employee of the payer or not.
This can be determined from the nature of the relationship between the director
and the payer. If the relationship of a master and servant exists between the
payer and payee, then the director would be an employee and the remuneration
that is received would be taxable under the head 'salaries'. However, if such
relationship does not exist, then the director will not be considered an employee
of the payer and the Income would be taxable as Professional Income.

If a person is following the cash system of accounting would he be liable to

pay tax in respect of salary which is due to him but which he has not received?

50
Salary is taxable on due basis or receipt basis, whichever is earlier, irrespective of
the method of accounting that is followed by the assessee. Accordingly, advance
salary is taxable on receipt basis, though not due. Hence, the method of
accounting followed by the assessee is not of any consequence.

Explain the taxability of salary of foreign employees.

Under section 10(6)(vi), the remuneration received by An individual who is not a
citizen of India foreign national as an employee of a foreign enterprise for
services, rendered by him during his stay in India, would be exempt from tax, in
the following cases:
1. The foreign enterprise is not engaged in any business or trade in India;
2. The employee's stay in India does not exceed in the aggregate a period of
90 days in the previous year; and
3. The remuneration, paid to him, is not liable to be deducted from the
income of the employer chargeable under the Act.

Is the salary of diplomatic personnel taxable?

Under section 10(6)(ii) of the Income-tax Act, any remuneration that is received
by an individual who is not a citizen of India as an official of the Embassy, High
Commission, Legation, Commission, Consulate or Trade representative of
foreign State or, as a member of the staff of any of those officials would be
exempt from tax, if the corresponding Indian officials in that foreign country
enjoy similar exemption.

Is there any significance to the place where the services are rendered for the
taxability of salaries?
Salary is deemed to accrue or arise at the place where the service is rendered.
Even if salary is paid outside India, if the services are rendered in India, the said

51
salary is taxable in India. Leave salary, paid abroad, is also taxable in India as it is
deemed to accrue or arise out of services rendered in India.

It may be noted that salary, paid by the Indian Government to an Indian

national, is deemed to accrue or arise in India even if the services are rendered
outside India. Any pension, payable outside India to a person residing outside
India permanently, shall not be taken as income deemed to accrue or arise in
India, if the pension is payable to a person, referred to in Article 314 of the
Constitution or to a person, who has been appointed as a Judge of the Federal
Court or of the High Court, before the 15th of August, 1947 and continues to
serve as a Judge in India on or after the commencement of the Constitution.

Are there any special privileges that are enjoyed by the officials of the United
Nations Organization and other such international organizations?
Under section 2 of the United Nations (Privileges and Immunities) Act, 1947,
read with section 18 of the Schedule, thereto, exemption is granted from Income
tax in respect of salaries and emoluments that are paid by the United Nations
and other notified international organizations to its officials. Pension is also
covered under this provision and no tax is payable.

What is the taxability of the compensation, received by a person on voluntary

retirement?
Under section 10(10C) of the Income-tax Act, compensation that is received at the
time of voluntary retirement is exempt if the person satisfies the following
conditions:
 It is received at the time of voluntary retirement;
 It is received by an employee of a public sector company; or any other
company; or authority established under the Central, State or Provincial

52
 Act; or a local authority; or a co-operative society; or a University; or an
Indian Institute of Technology; or any State Government; or the Central
Government; or an institution having importance throughout India or in
any other State(s); or a notified institute of Management.
The compensation that is received should be in accordance with the scheme(s) of
voluntary retirement, or in the case of a public sector company, a scheme of
voluntary separation. Further, the schemes of the abovementioned companies
and authorities must be in accordance with such guidelines as may be
prescribed. The maximum amount of exemption, however, is restricted to Rs.5,
00,000/-. Once the employee has claimed an exemption under the above
provisions, he is not entitled to claim any further exemption for any other
assessment year.

Tax upon pension

The paying branch is responsible for deduction of Income Tax at source from
pension payments in accordance with the rates prescribed from time to time.
While deducting such tax from pension payments the paying branch also allow
deduction on account of relief available under Income Tax Act from time to time
on production of proper and acceptable evidence of eligible savings by
pensioners. The paying branch also issue the pensioner in April each year a
certificate of tax deducted in the form prescribed in the Income Tax Rules.

Under section 9(1)(iii), pension accruing is taxable in India only if it is earned in

India. Pensions received in India from abroad by pensioners residing in this
country, for past services rendered in the foreign countries, will be income
accruing to the pensioners abroad, and will not, therefore, be liable to tax in India
on the basis of accrual. These pensions will also not be liable to tax in India on

53
receipt basis, if they are drawn and received abroad in the first instance, and
thereafter remitted or brought to India.

It is only in cases where in pursuance of a definite agreement with the employer

or former employer, the pension is received directly by the pensioner in India
that the pension would become taxable in India on receipt basis.

While the pension earned and received abroad will not be chargeable to tax in
India if the residential status of the pensioner is either 'non-resident' or 'resident
but not ordinarily resident', it will be so chargeable if the residential status is
'resident and ordinarily resident'. The aforesaid status of 'ordinarily resident'
cannot, however, be acquired by a person unless he has been resident in India in
at least nine out of the preceding ten years.

Note :-
Retirement/death gratuity and the lumpsum amount received on account of commutation
of pension is not taxable under Income Tax Act.

Tax upon bonus, fees & commissions

Bonus
Bonus is taxable on receipt basis and is included in the gross salary in the year in
which the bonus is received.

Fees & Commissions

Any fees or commission received by the employee or receivable by the employee
is fully taxable and has to be included in gross salary. Commission may be a
fixed amount per annum or may be a percentage of turnover or net profit.

54
However, the same is taxable under the head "Salaries" when it is received or
receivable by the employee.

Tax upon Gratuity

Gratuity can be received by the employee at the time of his retirement or by his
legal heir in the event of death of the employee. Gratuity received by an
employee on his retirement is taxable under the head "Salary" and gratuity
received by the legal heir is taxable under the head" Income from Other Sources".

In both the above situations gratuity upto a specified limit is exempt under the
provisions of sec.10(10) of the Income Tax Act, 1961.

For the purpose of exemption of gratuity under sec.10(10) the employees are
divided under three categories:
1. Govt. employees - In the case of govt. employees the entire amount of
death-cum-retirement gratuity is exempt from tax and nothing is therefore
taxable under the head Salaries.
2. Employees covered under the Payment of Gratuity Act, 1972 - The
employees covered under the Gratuity Act who receive gratuity have been
given exemption which is the minimum of the following amounts.
Gratuity received in excess of the minimum of the amounts mentioned
below is included in the gross salary for the purposes of taxation.
o The amount of gratuity actually received.
o Fifteen days' salary (7 days in the case of seasonal employment) for
every completed year of service provided the employment is more
than six months.

55
 3. Other employees - In the case of other employees the gratuity received or
receivable on his retirement or on his becoming incapacited prior to such
retirement or termination of his employment or any gratuity received by
his heirs is exempt to the extent of the minimum of the following
amounts. The amount received in excess of the sums mentioned below is
included in the gross salary of the employee for the purposes of taxation.
o Actual amount of gratuity received.
o Half month's average salary for every completed year of service.
(Average salary means the average of the salary drawn by the
employee for 10 months immediately preceding the month in
which he retires)

Tax upon Annuity

Annuity is an annual grant received by the employee from his employer and is
covered under the definition of salary. It may be paid by the employer
voluntarily or on account of contractual agreement. A deferred annuity is not
taxable until the right to receive the same arises. Other form for annuities made
under a will or granted by a life insurance company or accruing as a result of
contract come under the head "Income from Other Sources" and are assessed u/s
56 of the I.T. Act.

Tax upon profits in lieu of or in addition to salary

The amount of any compensation due to or received by an assessee from his
employer or former employer at or in connection with the termination of his
employment or the modification of the terms and conditions relating thereto;

56
Any payment (other than any payment referred to in clause (10) clause
(10A)clause (10B, clause (11), clause (12), clause (13) or clause (13A) of section
10), due to or received by an assessee from an employer or a former employer or
from a provident or other fund, to the extent to which it does not consist of
contributions by the assessee or interest on such contributions or any sum,
received under a Keyman insurance policy, including the sum allocated by way
of bonus on such policy. The expression "Keyman Insurance policy" shall have
the meaning assigned to it in clause (10D) of section 10;

Any amount, due to or received, whether in lump sum or otherwise, by any

assessee from any person in the following cases:
 Before his joining any employment with that person; or
 After cessation of his employment with that person.

Tax upon advance salary and perquisites

According to (Sec 17 (2)) 'perquisite' includes
the following:
 The value of rent-free accommodation provided to the assessee by his
employer;
 The value of any concession in the matter of rent with respect to any
accommodation provided to the assessee by his employer;
 The value of any benefit or amenity granted or provided free of cost or at
concessional rate in any of the following cases:
 Any benefit given by a company to an employee, who is a director thereof;
 Any benefit given by a company to an employee, being a person who has
a substantial interest in the company;

57
 Any benefit given by any employer (including a company) to an employee
to whom the provisions of paragraphs (a) and (b) of this sub-clause do not
apply and whose income under the head "Salaries" (whether due from, or
paid or allowed by, one or more employer/s), exclusive of the value of all
benefits or amenities, not provided for by way of monetary payment,
exceeds Rs 50,000. However, nothing in this sub-clause shall apply to the
value of any benefit provided by a company free of cost or at a
concessional rate to its employees by way of allotment of shares,
debentures or warrants, directly or indirectly under any Employees' Stock
Option Plan or Scheme of the company offered to such employees in
accordance with the guidelines, issued in this behalf by the Central
Government. The use of any vehicle, provided by a company or an
employer for journey by the assessee from his residence to his office or
other place of work, or from such office or place to his residence, shall not
be regarded as a benefit or amenity granted or provided to him free of
cost or at concessional rate for the purposes of this sub-clause.
 Any sum, paid by the employer in respect of any obligation which, but for
such payment, would have been payable by the assessee;
 Any sum, payable by the employer, whether directly or through a fund,
other than a recognised provident fund or an approved superannuation
fund or a Deposit-linked Insurance Fund, established under section 3G of
the Coal Mines Provident Fund and Miscellaneous Provisions Act, 1948
(46 of 1948), or, as the case may be, section 6C of the Employees' Provident
Funds and Miscellaneous Provisions Act, 1952 (19 of 1952)], to effect an
assurance on the life of the assessee or to effect a contract for an annuity;
and
 The value of any other fringe benefit or amenity as may be prescribed.

58
Nothing in this clause shall apply to the following:
 The value of any medical treatment provided to an employee or any
member of his family in any hospital maintained by the employer;
 Any sum, paid by the employer in respect of any expenditure, actually
incurred by the employee on his medical treatment or treatment of any
member of his family-(a) In any hospital, maintained by the Government
or any local authority or any other hospital approved by the Government
for the purposes of medical treatment of its employees; (b) In respect of
the prescribed diseases or ailments, in any hospital approved by the Chief
Commissioner, having regard to the prescribed guidelines. In such a case,
the employee shall attach, with his return of income, a certificate from the
hospit al specifying the disease or ailment for which medical treatment
was required and the receipt for the amount paid to the hospital.
 Any portion of the premium, paid by an employer in relation to an
employee, to effect or to keep in force an insurance on the health of such
employee under any scheme approved by the Central Government for the
purposes of clause (ib) of sub-section (1) of section 36;
 Any sum, paid by the employer in respect of any premium paid by the
employee to effect or to keep in force an insurance on his health or the
health of any member of his family under any scheme, approved by the
Central Government for the purposes of section 80D;
 Any sum paid by the employer in respect of any expenditure actually
incurred by the employee on his medical treatment or treatment of any
member of his family other than the treatment referred to in clauses (i)
and (ii); so, however, that such sum does not exceed Rs 15,000 in the
previous year;
 Any expenditure incurred by the employer on the following:

59
  Medicl treatment of the employee, or any member of the family of such
employee, outside India;
 Travel and stay abroad of the employee or any member of the family of
such employee for medical treatment;
 Travel and stay abroad of one attendant who accompanies the patient in
connection with such treatment, subject to the following conditions:
 The expenditure on medical treatment and stay abroad shall be ex cluded
from perquisite only to the extent permitted by the Reserve Bank of India;
and
 The expenditure on travel shall be excluded from perquisite only in the
case of an employee whose gross total income, as computed before
including therein the said expenditure, does not exceed two lakh rupees;
 Any sum, paid by the employer in respect of any expenditure actually
incurred by the employee for any of the purposes specified in clause (vi)
subject to the conditions specified in or under that clause:
For the assessment year beginning on the 1st day of April, 2002, nothing
contained in this clause shall apply to any employee whose income under the
head "Salaries" (whether due from, or paid or allowed by, one or more
employers) exclusive of the value of all perquisites, not provided for by way of
monetary payment, does not exceed Rs 1,00,000.

Explanation
For the purposes of clause (2),
i. 'Hospital' includes a dispensary or a clinic or a nursing home;
ii. 'Family', in relation to an individual, shall have the same meaning as in clause
(5) of section 10; and
'Gross total income' shall have the same meaning as in clause (5) of section 80B;

60
How are perquisites valued?
For the purpose of computing the income chargeable under the head 'Salaries,'
the value of perquisites provided by the employer directly or indirectly to the
assessee (hereinafter referred to as employee) or to any member of his household
by reason of his employment shall be determined in accordance with Rules 3 of
the Income Tax Act.

What is the perquisite value of furnished Accommodation?

In the case of furnished accommodation, first the value of the un-furnished
accommodation is worked out and to that 10% per annum of the original cost of
the furniture is added. If the furniture is not owned by the employer, the actual
hire charge that is payable (whether paid or not) is added.

How is the perquisite value of a motorcar, provided to the employee by an

employer, computed?
Value of Perquisite per calendar month

Where cubic
Where cubic
Sl. capacity of engine
Circumstances capacity of engine
No. does not exceed 1.6
exceeds 1.6 litres
litres

1. Where the motor car is owned No value provided No value provided

or hired by the employer and- that the documents that the documents
a. a. is used wholly and specified in clause specified in clause
exclusively in the (B) of this sub-rule (B) of this sub-rule
performance of his are maintained by are maintained by
official duties. the employer. the employer.
b. Is used exclusively for
the private or personal Actual amount of Actual amount of

61
 purposes of the expenditure incurred expenditure incurred
employee or any by the employer on by the employer on
member of his house- the running and the running and
hold and the running maintenance of maintenance of
and maintenance motor car during the motor car during the
expenses are met or relevant previous relevant previous
reimbursed by the year including year including
employer. remuneration, if any remuneration, if any,
c. Is used partly in the paid by the paid by the employer
performance of duties employee or any to the chauffeur as
and partly for private or member of his increased by the
personal purposes of his house-hold and the amount representing
own or any member of running and normal wear and
his household and maintenance tear of the motor car
i. The expenses on expenses are met or and as reduced by
maintenance and reimbursed by the any amount charged
running are met employer. from the employee
or reimbursed by for such use.
the employer. Rs. 1,200 (plus Rs.
ii. The expenses on 600, if chauffeur is Rs. 1,600 (plus Rs.
running and also provided to run 600, if chauffeur is
maintenance for the motor car) also provided to run
such private or the motor car)
personal use are Rs. 400 (plus Rs. 600,
fully met by the if chauffeur is Rs. 600 (plus Rs.600,
assessee. provided by the if chauffeur is also
employer to run the provided to run the
motor car) motor car)

62
2. Where the employee owns a No value provided No value provided
motor car but the actual that the documents that the documents
running and maintenance specified in clause specified in clause
charges (including (B) of this sub-rule (B) of this sub-rule
remuneration of the chauffeur, are maintained by are maintained by
if any) are met or reimbursed to the employer. the employer.
him by the employer and
i. such reimbursement is Subject to the Subject to the
for the use of the vehicle provisions contained provisions contained
wholly and exclusively in clause (B) of this in clause (B) of this
for official purposes. sub-rule, the actual sub-rule, the actual
ii. such reimbursement is amount of amount of
for the use of the vehicle expenditure incurred expenditure incurred
partly for official by the employer as by the employer as
purposes and partly for reduced by the reduced by the
personal or private amount specified in amount specified in
purposes of the col.(1)(c)(i) above. col. (1)(c)(i) above.
employee or any
member of his
household.

3. Where the employee owns any No value provided No applicable

other automotive conveyance that the documents
but the actual running and specified in clause
maintenance charges are met or (B) of this sub-rule
reimbursed to him by the are maintained by
employer and the employer.
i. such reimbursement is

63
 for the use of the vehicle Subject to the
wholly and exclusively provisions contained
for official purposes. in clause (B)of this
ii. Such reimbursement is sub-rule, the actual
for the use of the vehicle amount of
partly for official expenditure incurred
purposes and partly for by the employer as
personal or private reduced by an
purposes of the amount of Rs.600:
employee.

Provided that where one or more motor-cars are owned or hired by the employer
and the employee or any member of his household are allowed the use of such
motor-car or all or any such motor-cars (otherwise than wholly and exclusively
in the performance of his duties), the value of perquisite shall be the amount
calculated in respect of one car in accordance with item (1)(c)(i) of the Table II as
if the employee had been provided one motor-car for use partly in the
performance of his duties and partly for his private or personal purposes and the
amount calculated in respect of the other car or cars in accordance with item
(1)(b) of the Table II as if he had been provided with such car or cars exclusively
for his private or personal purposes.

(B) Where the employer or the employee claims that the motor-car is used wholly
and exclusively in the performance of official duty or that the actual expenses on
the running and maintenance of the motor-car owned by the employee for
official purposes is more than the amounts deductible in item 2(ii) or 3(ii) of the
above Table, he may claim a higher amount attributable to such official use and
the value of perquisite in such a case shall be the actual amount of charges met or

64
reimbursed by the employer as reduced by such higher amount attributable to
official use of the vehicle provided that the following conditions are fulfilled.
i. the employer has maintained complete details of the journey undertaken
for official purpose, which may include date of journey, destination,
mileage, and the amount of expenditure incurred thereon;
ii. the employee gives a certificate that the expenditure was incurred wholly
and exclusively for the performance of his official duty;
iii. the supervising authority of the employee, wherever applicable, gives a
certificate to the effect that the expenditure was incurred wholly and
exclusively for the performance of official duties.
Explanation: For the purposes of this sub-rule, the normal wear and tear
of a motorcar shall be taken at 10% per annum of the actual cost of the
motor-car or cars.

Is the facility of a car, provided by the employer for use between the residence
and office, a perquisite?
The use of a vehicle of an employer for the journey from his residence to his
office or, from any other place of work to his residence will not be taxable as
perquisite provided the following conditions are satisfied:

1. The employer has maintained complete details of the journey undertaken

for official purpose, which may include date of journey, destination,
mileage, and the amount of expenditure incurred thereon;
2. The employee gives a certificate that the expenditure was incurred wholly
and exclusively for the performance of his official duty;
3. The supervising authority of the employee, wherever applicable, gives a
certificate to the effect that the expenditure was incurred wholly and
exclusively for the performance of official duties.

65
What is the perquisite value of gas, electricity or water supply, provided free
of cost to the employee?
The value of benefit to the employee or any member of his household, resulting
from the supply of gas, electric energy or water for his household consumption
shall be determined as the sum equal to the amount paid on that account by the
employer to the agency supplying the gas, electric energy or water. Where such
supply is made from resources, owned by the employer, without purchasing
them from any other outside agency, the value of perquisite would be the
manufacturing cost per unit incurred by the employer. Where the employee is
paying any amount in respect of such services, the amount so paid shall be
deducted from the value so arrived at.

Can the reimbursement of actual expenses be treated as a perquisite?

No. Reimbursement of actual expenses cannot be treated as a perquisite.

What is the perquisite value of rent-free unfurnished accommodation that is

provided by an employer to an employee?
Rule 3: The value of the residential accommodation, provided by the employer
during the previous year, shall be determined as below.
 Where the accommodation is provided by Union or State Government to
their employees, either holding office or post in connection with the affairs
of Union or State or, serving with any body or undertaking under the
control of such Government on deputation: Licence fee, as determined by
Union or State Government in accordance with the rules framed by that
Government as reduced by the rent, actually paid by the employee. It is to
be noted that the value of the rent-free official residence, provided to

66
 officers of Parliament, Union Ministers and the leader of the Opposition
Party in Parliament, is also exempt from tax.
 Where the accommodation is provided by any other employer and
 Where the accommodation is owned by the employer: 10% of salary in
cities having population exceeding 4 lakhs as per 1991 census;
 Where the accommodation is taken on lease or rent by the employer: 7.5 %
of salary in other cities, in respect of the period during which the said
accommodation was occupied by the employee during the previous year
as reduced by the rent, if any, actually paid by the employee. Actual
amount to lease rental, paid or payable by the employer or 10% of salary
whichever is lower as reduced by the rent, if any, actually paid by the
employee.

Tax upon Allowance

An allowance is defined as a fixed amount of money given periodically in
addition to the salary for the purpose of meeting some specific requirements
connected with the service rendered by the employee or by way of compensation
for some unusual conditions of employment. It is taxable on due/accrued basis
whether it is paid in addition to the salary or in lieu thereon.

The basic golden rule is that all such allowances are taxable as these are paid
because of direct relationship between an employer and employee. However,
there are exceptions to this rule. Some of them are given below :-

Clause (14) of Section 10 provides for exemption of the following allowances: -

67
 a) Any special allowances or benefit granted to an employee to meet the
expenses incurred in the performance of his duties.
b) Any allowance granted to an assessee either to meet his personal expenses
at the place of his posting or at the place he ordinarily resides or to
compensate him for the increased cost of living.

However, the allowance referred to in (b) above should not be in the nature of a
personal allowance granted to the assessee to remunerate or relating to his office
or employment unless such allowance is related to his place of posting or
residence.

Earlier the exempt allowances were being specified through notifications issued
by the Central Government. With effect from 1.7.95, the details of allowances
exempt is given in the Income Tax Rules.

The following allowances are exempt to the extent and subject to the conditions
indicated in the Rules :-
1) Any allowance for meeting the cost of travel on tour or on transfer.
2) Any allowance, whether granted on tour or for the period of journey in
connection with transfer (including any sum paid in connection with
transfer, packing and transportation of personal effects on such transfer).
3) Any allowance granted to meet the expenditure incurred on conveyance
in performance of duties of an office/employment of profit. Provided free
conveyance is not provided by the employer.
4) Any allowance granted to meet the expenditure incurred on a helper
where he is engaged for the performance of duties of any
Office/employment of profit.

68
 5) Any allowance granted for encouraging academic research in educational
and research institutions.
6) Any allowance for Purchase or maintenance of uniform for wear during
the performance of duties of an office/employment of profit.

Are the above allowances to be actually spent to avail of the exemption?

Yes, certainly. Any allowance (mentioned above) received but not actually spent
will be taxable.

Are there any allowances which are only exempt when received at a particular
place(s) ;pr area(s)? and do they have any upper ceilings : for exemption?
For the new amended Rules contain other allowances also .which are exempt
(subject to ceilings) in particular area(s) only. These special allowances are :-
1. Any special Compensatory Allowance, in the nature of Composite Hill
Compensatory allowance or High Altitude, Allowance or Uncongenial
Climate Allowance or Snow Bound Area Allowance or Avalanche
Allowance;
2. Any special Compensatory Allowance given which is in the nature of
border area allowance or remote area allowance or difficult area
allowance or disturbed area allowance;
3. Tribal Area Allowance;
4. Allowance granted to an employee working in any transport system to
meet his personal expenditure during his duty performed in the course of
running of such transport from one place to another place, provided that
such employee is not in receipt of daily allowance;
5. Children Education Allowance;
6. Any allowance granted to an employee to meet the hostel expenditure of
his child;

69
 7. Compensatory Field Area Allowance;
8. Compensatory Modified Field Area Allowance;
9. Any Special allowance, in the nature of counter insurgency allowance
granted to the members of armed forces operating in areas from their
permanent locations for a period of more than 30 days.

Tax upon Deferred Compensation

Deferred Compensation is an opportunity to voluntarily shelter a portion of your
wages from income taxes while saving for retirement to supplement your social
security and pension benefits. Under the Plan, income tax is not due on deferred
amounts or accumulated earnings until you receive a distribution (payment)
from your account. Presumably, distribution is at retirement when your tax rate
is expected to be lower.

OR
Deferred compensation is income to be paid at a later date, usually the end of
employment.

OR
Compensation earned by an individual, the receipt of which is postponed until a
later date, usually upon termination of employment or retirement. Typically, the
deferred amounts are invested on the recipient's behalf and may be
supplemented by contributions by the company. If the compensation
arrangement meets certain requirements, an individual may not pay income
taxes on the compensation until he or she receives a distribution of some or all of
the deferred amounts.

70
Tax equalization
The concept of tax equalization is that the expatriate should be neither better nor
worse off from a tax point of view by accepting an overseas assignment. He will
continue to be subject to the same level of tax as if he had remained at home. The
tax impact of the assignment is therefore neutralized for the expatriate.

The mechanism to ensure that the expatriate employee continues to bear the
same level of tax involves the deduction of so called "hypothetical" home country
tax. For the purposes of "hypo" tax deduction, the employer ignores items
specifically paid because the expatriate is on overseas assignment e.g. a cost of
living allowance. This hypo tax is used by the employer settle the applicable host
and home country taxes. In addition the employer will pay any taxes due over
and above the hypo tax. If the home and host country taxes are less than the
hypo tax then the employer enjoys the benefit.

The advantages of tax equalisation include the following:

 tax savings are enjoyed by the employer thus reducing overall assignment
costs;
 corporate image is protected as tax equalisation facilitates and ensures
expatriate tax compliance;
 employee geographic mobility is improved.

Note: A major disadvantage is that administration of a tax equalisation policy

tends to be time consuming and consequently expensive. Compensation earned
by an individual, the receipt of which is postponed until a later date, usually
upon termination of employment or retirement. Typically, the deferred amounts
are invested on the recipient's behalf and may be supplemented by contributions
by the company. If the compensation arrangement meets certain requirements,

71
an individual may not pay income taxes on the compensation until he or she
receives a distribution of some or all of the deferred amounts.

Besides remuneration for work, individuals may be taxed on the following

income:

Income Tax - Income from House Property

What income will be considered 'Income from House Property'?

The annual value of property, consisting of any buildings or lands appurtenant
thereto of which the assessee is the owner, other than such portions of such
property as he may occupy for the purposes of any business or profession carried
on by him, the profits of which are chargeable to income tax, shall be chargeable
to income tax under the head "Income from House Property".

Is income from any property covered under this section?

No. Only the income from buildings or part of a building, held by the assessee as
the owner and the income from land appurtenant to the buildings is covered
under this section. Income from other property such as open land is out of the
purview of this section. Income from such land will be taxed under the head,
'income from other sources.'

When the property is used by the owner for his business or profession, the
income of which business or profession is chargeable to income tax, the income
of that property is not charged in the hands of the owner. Similarly, when a firm
carries on business or profession in a building owned by a partner, no income
from such property is added to the income of the partner, unless the firm pays

72
the partner any rent for the same. If the assessee is not the owner of the building
but is a lessee and he sublets the property, he would be taxed under the head
'Income from other sources'.

What is included in the term 'buildings' for the purpose of this section?
The term 'buildings' includes any building (whether occupied or intended for
self-occupation), office building, godown, storehouse, warehouse, factory, halls,
shops, stalls, platforms, cinema halls, auditorium etc. Income arising out of the
building or a part of the building is covered under this section.

What is meant by the term "land appurtenant"?

Land appurtenant includes land adjoining to or forming a part of the building. It
would depend on the nature of the land, whether it is appurtenant to the
residential building, factory building, hotel building, club house, theatre etc. and
will include courtyards, compound, garages, car parking spaces, cattle shed,
stable, drying grounds, playgrounds and gymkhana.

Is the income arising from vacant land covered under this section?
Any income, arising out of vacant land, is not covered under this section even
though it may be received as rent, ground rent or lease rent. Such income would
be assessable as income from other sources. Even rent, arising out of open spaces,
or quarry rent, is taxed as income from other sources.

If a company is formed with the sole object of acquiring and letting out
immovable properties, what head would the rental income be taxable under?
Even if a company is formed for the sole object of acquiring and letting out
immovable properties, the rental income would be taxable as "Income from
House property" and not as "business income."

73
If a building is used as a market and the owner/landlord provides certain other
services as required by the municipal license, what head would the income fall
under?
The income from letting out shops would be considered income from house
property.

When is the income from house property wholly exempt from tax?
In the following cases, income from house property is completely exempt from
any tax liability:
i. Income from any farmhouse forming part of agricultural income;
ii. Annual value of any one palace in the occupation of an ex-ruler;
iii. Property Income of a local authority;
iv. Property Income of an authority, constituted for the purpose of dealing
with and satisfying the need for housing accommodation or for the
purposes of planning development or improvement of cities, towns and
villages or for both. (The Finance Act, 2002, w.e.f. 1.4.2003 shall delete this
provision.);
v. Property income of any registered trade union;
vi. Property income of a member of a Scheduled Tribe;
vii. Property income of a statutory corporation or an institution or association
financed by the Government for promoting the interests of the members
either of the Scheduled Castes or Scheduled tribes or both;
viii. Property income of a corporation, established by the Central Govt. or any
State Govt. for promoting the interests of members of a minority group;
ix. Property income of a cooperative society, formed for promoting the
interests of the members either of the Scheduled Castes or Scheduled
tribes or both;

74
 x. Property Income, derived from the letting of godowns or warehouses for
storage, processing or facilitating the marketing of commodities by an
authority constituted under any law for the marketing of commodities;
xi. Property income of an institution for the development of Khadi and
village Industries;'
xii. Self-occupied house property of an assessee, which has not been rented
throughout the previous year;
xiii. Income form house property held for any charitable purposes;
xiv. Property Income of any political party.

How is the annual value of the property determined?

Under S 23 (1) of the Income tax Act, annual value of property shall be deemed
to be the following:
i. The sum for which the property might reasonably be expected to be let
out from year to year;
ii. Where the property or any part of the property is let and the actual rent
received or receivable by the owner in respect thereof is in excess of the
sum referred to in clause (a), the amount so received or receivable;
iii. Where the property or part of the property is let and was vacant during
the whole or any part of the previous year and, owing to such vacancy,
the actual rent received or receivable by the owner in respect thereof is
less than the sum referred to clause (a) the amount so received or
receivable.
The taxes levied by any local authority in respect of the property shall be
deducted while determining the annual value of the property of that previous
year in which such taxes are actually paid by him. Further, the amount of actual
rent received or receivable by the owner shall not include the amount of rent,
which the owner cannot realize.

75
Sub-section 2: The annual value of a house or part of a house shall be taken as nil
if the property consists of such house or part of the house and is occupied by the
owner himself for the purpose of his own residence or, if such house or part
thereof cannot be occupied by him because his employment, business or
profession is carried on at any other place and, he has to reside at that other place
in a building that does not belong to him.

Nevertheless, the above provision would not apply if the house or part thereof is
actually let during the whole or any part of the previous year; or if any benefit
therefrom is derived by the owner.

If the property consists of more than one house, the provisions of the sub-section
(2) shall apply in respect of only one of such houses, which the assessee may at
his option specify. The annual value of the house(s), other than the house in
which the assessee has exercised an option, shall be determined under sub-
section (1) as if the house (s) had been let out

What are the deductions permitted to be made from Income from house
property"?
S 24 lays down that 'income chargeable under the head 'Income from house
property' shall be computed after making the following deductions:
1. A sum equal to 30% of the annual value;
2. If the property has been acquired, constructed, repaired, renewed or
reconstructed with borrowed capital, the amount of any interest payable
on such capital. Where such property has been acquired, constructed,
repaired, renewed or reconstructed with borrowed capital, on or after 1st

76
 April 2003, the amount of deduction under this clause shall not exceed Rs
1, 50,000.
The amount of deduction shall not exceed Rs 30,000 where the property consists
of a house or part of a house, which the owner occupies for his own residence or
which cannot be occupied by him because his employment, business or
profession is carried on at any other place and he has to reside at that other place
in a building which is not his own.

Can rental income be treated as business income?

The main criteria for deciding whether the rent is assessable as income from
property or as business income depends upon the assets are exploited
commercially or whether the same are let out for enjoying the rent.

Income Tax - Tax upon Income from business or professions

What conditions must be satisfied for an income to fall under the head of
income from profits and gains of business?
For charging the income under the head "Profits and Gains of business," the
following conditions should be satisfied:
 There should be a business or profession.
 The business or profession should be carried on by the assessee.
 The business or profession should have been carried on by the assessee at
any time during the previous year.

What income will be chargeable to income tax under the head 'Profits and
gains of business or profession'?

77
The following income would be chargeable under the head "Profits and gains of
business or profession":
 The profits and gains of any business or profession, which was carried on
by the assessee at any time during the previous year;
 Any compensation or other payment, due or received by the following:-
o Any person, by whatever name called, managing the whole or
substantially the whole of the affairs of an Indian company, at or in
connection with the termination of his management or the
modification of the terms and conditions relating thereto;
o Any person, by whatever name called, managing the whole or
substantially the whole of the affairs in India of any other company,
at or in connection with the termination of his office or the
modification of the terms and conditions relating thereto;
o Any person, by whatever name called, holding an agency in India
for any part of the activities relating to the business of any other
person, at or in connection with the termination of any agency or
the modification of the terms and conditions relating thereto;
o Any person, for or in connection with the vesting in the
Government, or in any corporation owned or controlled by the
Government, under any law for the time being in force, of the
management of any property or business;
 Income, derived by a trade, professional or similar association from
specific services performed for its members;
 Profits on sale of a license granted under the Imports (Control) Order,
1955, made under the Imports and Exports (Control) Act, 1947;
 Cash assistance (by whatever name called), received or receivable by any
person against exports under any scheme of the Government of India;

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  Any duty of customs or excise repaid or repayable as drawback to any
person against exports under the Customs and Central Excise Duties
Drawback Rules, 1971;
 The value of any benefit or perquisite, whether convertible into money or
not, arising from business or the exercise of a profession;
 Any interest, salary, bonus, commission or remuneration, by whatever
name called, due to, or received by, a partner of a firm from such firm.
However, it is provided that where any interest, salary, bonus, commission or
remuneration, by whatever name called, or any part thereof has not been
allowed to be deducted under Clause (b) of section 40, the income under this
clause shall be adjusted to the extent of the amount not so allowed to be
deducted.

Would the interest income be assessed as ''business income'' or as ''income

from other sources''?
Interest Income is either assessed as ''Business Income'' or as ''Income from other
sources'' depending upon the activities carried on by the assessee. If the
investment yielding interest were part of the business of the assessee, the same
would be assessable as ''business income'' but where the earning of the interest
income is incidental to and not the direct outcome of the business carried on by
the assessee, the same is assessable as ''Income from other sources''. Business
implies some real, substantial and systematic or organized course of activity with
a profit motive. Interest generated from such an activity is considered Business
Income. Otherwise, it would be interest from other sources.

What deductions are allowed in computing income from profits and gains of
business or profession?
A number of other deductions under Section 36 of the Income-Tax Act are

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allowed while computing income from profits and gains of business or
profession:
 S36 (i): The amount of any premium, paid in respect of insurance against
risk of damage or destruction of stocks or stores, used for the purposes of
the business or profession;
 (ia) The amount of any premium, paid by a federal milk co-operative
society to effect or to keep in force an insurance on the life of the cattle
owned by a member of a co-operative society, being a primary society
engaged in supplying milk, raised by the members of such federal milk
co-operative society;
 (ib) The amount of any premium, paid by cheque by the assessee as an
employer to effect or to keep in force an insurance on the health of his
employees under a scheme, framed in this behalf by the General Insurance
Corporation of India, formed under section 9 of the General Insurance
Business (Nationalization) Act, 1972 (57 of 1972) and approved by the
Central Government;
 (ii) Any sum, paid to an employee as bonus or commission for services
rendered, where such sum would not have been payable to him as profits
or dividend if it had not been paid as bonus or commission;
 (iii) The amount of the interest paid in respect of capital borrowed for
acquisition of the asset from the date it is put to use for the purposes of the
business or profession;
 (iv) Any sum, paid by the assessee as an employer by way of contribution
towards a recognized provident fund or an approved Superannuation
fund, subject to such limits as may be prescribed for the purpose of
recognizing the provident fund or approving the Superannuation fund, as
the case may be; and subject to such conditions as the Board may think fit
to specify in cases where the contributions are not in the nature of annual

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 contributions of fixed amounts or annual contributions, fixed on some
definite basis by reference to the income chargeable under the head
"Salaries" or to the contributions or to the number of members of the fund;
 (v) Any sum, paid by the assessee as an employer by way of contribution
towards an approved gratuity fund created by him for the exclusive
benefit of his employees under an irrevocable trust;
 (va) Any sum, received by the assessee from any of his employees to
which the provisions of sub-clause (x) of clause (24) of section 2 apply, if
such sum is credited by the assessee to the employee's account in the
relevant fund or funds on or before the due date.
 (vi) In respect of animals which have been used for the purposes of the
business or profession, otherwise than as stock-in-trade and have died or
become permanently useless for such purposes, the difference between
the actual cost to the assessee of the animals and the amount, if any,
realized in respect of the carcasses or animals;
 (vii) Subject to the provisions of sub-section (2), the amount of any bad
debt or part thereof which is written off as irrecoverable in the accounts of
the assessee for the previous year;
 (viia) in respect of any provision for bad and doubtful debts made by the
following:
o A scheduled bank or non -- scheduled bank, an amount not
exceeding five per cent of the total income and an amount not
exceeding ten per cent of the aggregate average advance made by
the rural branches of such bank computed in the prescribed
manner;
o A bank, being a bank incorporated by or under the laws of a
country outside India, an amount not exceeding five per cent of the
total income;

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 o public financial institution or a State financial corporation or a State
industrial investment corporation, an amount not exceeding five
per cent of the total income.
 (viii) In respect of any special reserve created by a financial corporation
which is engaged in providing long term finance for industrial or
agricultural development in India or, by a public company formed and
registered in India with the main object of carrying on the business or
providing long - term finance for construction or purchase of houses in
India for residential purposes, an amount not exceeding forty per cent of
the total income can be carried to the reserve account;
 (ix) Any bona fide expenditure incurred by a company for the purpose of
promoting family planning amongst its employees;
 (x) Any sum, paid by a public financial institution by way of contribution
towards any Exchange Risk Administration Fund, set up by public
financial institutions, either jointly or separately.
 (xi) Any expenditure, incurred by the assessee on or after the 1st day of
April 1999 but before the 1st day of April 2000, wholly and exclusively in
respect of a non-Y2K compliant computer system, owned by the assessee
and used for the purposes of his business or profession, so as to make
such computer system Y2K compliant.
 (xii) Any expenditure (not being in the nature of capital expenditure)
incurred by a corporation or a body corporate, by whatever name called,
constituted or established by a Central, State or Provincial Act for the
objects and purposes authorized by the Act, under which such
corporation or body corporate was constituted or established.
It is important to note that deductions are subject to certain conditions being
satisfied.

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What deductions are allowable in respect of rent, rates, taxes, repairs and
insurance for premises, which are used for the purpose of business or
profession?
S 30: The deductions that are allowed while computing income from 'profits and
gains from business or profession' in respect of rent, rates, taxes, repairs and
insurance for premises, which are used for the purpose of business or profession
while computing income from 'profits and gains from business or profession' are
as follows:
 Where the premises are occupied by the assessee:
1. As a tenant, the rent paid for such premises; and further if he has
undertaken to bear the cost of repairs to the premises, the amount
paid on account of such repairs; excluding expenditure in the
nature of capital expenditure.
2. Otherwise than as a tenant, the amount paid by him on account of
current repairs to the premises; excluding expenditure in the nature
of capital expenditure.
 Any sums, paid on account of land revenue, local rates or municipal taxes;
 The amount of any premium, paid in respect of insurance against risk of
damage or destruction of the premises.

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 CONCLUSION

At the end of this study, we can say that given the rising standards of Indian individuals

and upward economy of the country, prudent tax planning before-hand is must for all the

citizens to make the most of their incomes. However, the mix of tax saving instruments,

planning horizon would depend on an individual’s total taxable income and age in the

particular financial year.

This thesis examines the process of defining a taxpayer from a specific point of view,

namely the issue that has to be dealt with beforehand: classifying the legal structure by

means of which the taxable income is acquired. Only in recent decades the fiscal

legislator has become aware of the technique of fiscal transparency and the possibilities

and consequences of conflicting classifications of a single entity under two or more legal

systems. The matter of classifying an entity has, to this very day, hardly been integrated

into Belgian legislation. This thesis is an attempt, by means of a general framework of

concepts, to clarify this issue. However, the way in which an entity is classified, as well

as the extent to which foreign taxation under possibly divergent classifications is taken

into consideration, remains ultimately a matter of government policy. It is for that reason

that we have limited ourselves in this thesis to formulate some proposals. They may or

may not be adopted in both internal national legislation and in double tax conventions

that have already been concluded or may be concluded in the future. It is the hope of the

author that this work may serve to contribute to a further 22 awakening to the outlined

problems and the proposal of suitable techniques that may be helpful in the realization of

new policies in an efficient and effective way

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 BIBLIOGRAPHY

Books:

 T. N. Manoharan (2007), Direct Tax Laws (7th edition), Snowwhite Publications

P.Ltd., New Delhi.

 Dr. Vinod K. Singhania (2007), Students Guide to Income Tax, Taxman

Publications, New Delhi

 Income Tax Ready Reckoner – A.Y. 2007-08, TaxMann Publications, New Delhi

Websites:

 http://in.taxes.yahoo.com/taxcentre/ninstax.html

 www.efiling.incometaxofinfia.gov.in

 emudra

 http://in.biz.yahoo.com/taxcentre/section80.html

 http://www.bajajcapital.com/financial-planning/tax-planning

 http://www.incometaxindia.gov.in

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1. Income Tax Act was passed in the year……….

A) 1934

B) 1956

C) 1961

D) 1972

2. Income Tax Act came into force on…………

A)1 st April 1935

B) 1 st April 1961

C) 1 st April 1962

D) 1 st April 1956

3. Income tax is a………………….

A) Professional tax

B) Direct tax

C) Indirect tax

D) Service tax

4. Income tax rates are fixed in……………..

A) Income tax Act

B) Finance Act

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C) Income tax rules

D) Finance rules

5. There are …………… heads of income

A) 3

B) 4

C) 5

D) 2

6. A person with the age of ………… or more is considered as a super senior

citizen as per Income tax Act.

A) 56

B) 60

C) 80

D) 85

7. The minimum exceptional limit of income is……………….

A) 250,000

B) 200,000

C) 300,000

D) 500,000 \

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8. Rebate of Income tax is defined as per section ……………..

A) 81A

B) 87A

C) 81C

D) 87C

(9) of Income tax deals with…………..

A) Person

B) Assessee

C) Previous Year

D) Assessment Year

10. Assessment year is the period of 12 months commencing from …………….

Every year.

A) 1st March

B) 31st March

C) 1st April

D) 30 th April

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11. When the income earned in an year is taxed in the same year, it is called
…………………..

A) Advanced Assessment

B) Super Assessment

C) Accelerated Assessment

D) None of the above

12. Surcharge is levied when the total income exceeds …………………..

A) 5 Crore

B) 10 Crore

C) 1 Crore

D) 2 Crore

13. Educational cess is charges at the rate of ……..

A) 2%

B) 1%

C) 3%

D) 5%

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14. As per Income tax Act, Person includes ……………

A) Individual

B) HUF

C) Local Authority

D) All of the above

15. CBDT stands for …………………………..

A) Central Bureau of Direct Taxes

B) Central Board of Direct Taxes

C) Citizen’s Board of Direct Taxes

D) Citizen’s Bureau of Direct Taxes

16. 4. CBDT is control by …………………………………..

A) Central Government

B) State Government

C) Both (A) and (B)

D) None of this above

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17. To be an Ordinarily resident in India, an individual must satisfy
……………………….

A) Both Basic Conditions and One Additional Condition

B) One Basic Condition and Both Additional Conditions

C) One Basic Condition and One Additional Condition

D) Both Basic Conditions and Both Additional Conditions

18. A Company has …………. types of residential status.

A) 2

B) 3

C) 1

D) 4

19. A citizen of India who goes abroad for the purpose of employment, he must
stay in India in the previous year for at least ............................. days to become a
resident

A) 90 days

B) 162 days

C) 180 days

D) 182 days

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20. Who is assessee in case of a HUF?

A) Karta

B) Coparceners

C) Deemed Karta

D) None of these

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