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Direct Tax-Fundamentals

Contents
Contents

WIDGET1: BASIC CONCEPTS WIDGET 2: SALARIES WIDGET 3: INCOME FROM HOUSE PROPERTY WIDGET 4: PROFIT & GAINS FROM BUSINESS OR PROFESSION WIDGET 5: CAPITAL GAINS WIDGET 6: INCOME FROM OTHER SOURCES WIDGET 7: CLUBBING OF INCOME WIDGET 8: SET-OFF & CARRY FORWARD OF LOSSES WIDGET 9: DEDUCTIONS FROM GROSS TOTAL INCOME WIDGET 10: TDS AND ADVANCE TAX

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OVERVIEW OF INCOME-TAX LAW IN INDIA:


Components of Income Tax Law Law

Income Tax Act

Annual Finance Act

Income Tax Rules

Circulars / Notifications

Legal Decisions of Courts

CONCEPT OF ASSESSMEN T YEAR & PREVIOUS YEAR: Sec.2 (9): Assessment year: Assessment year means the period of twelve months starting from April 1st of every year and ending on March 31st of the next year. Sec. 2(34): Previous year: Previous year means the year immediately preceding the assessment year. Simply, the year in which income is earned is known as previous year. SPECIAL ASSESSMENTS There are certain exceptions to the concept of assessment year & previous year. In the following cases income of the previous year is not taxable in the immediately following assessment year: 1. Sec.172: Non-resident shipping business 2. Sec.174: Persons leaving India 3. Sec.174A: Bodies formed for shorter existence 4. Sec.175: Person likely to transfer property to evade tax 5. Sec.176: Discontinued business 1. Sec.172: Non-resident shipping business: This section is applicable if the following conditions are satisfied: i. There is a non-resident ii. He owns a ship or ship is chartered by the non-resident iii. The ship carries passengers, livestock, mail or goods shipped at a port in India iv. The may/may not have an agent/representative in India If the above provisions are satisfied 7.5% of amount paid on account of such carriage shall be deemed to be the income of the non-resident.

2.

Sec.174: Persons leaving India:

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If it appears to the assessing officer that an individual may leave India during the current assessment year He has no present intention of returning to India. Then, the total income of such individual up to the probable date of his departure from India shall be chargeable to tax in that assessment year.

3.

Sec.174A: Bodies formed for shorter existence: There is an association of persons or a body of individuals or an artificial juridical person formed or established or incorporated for a particular event or purpose. It appears to the assessing officer that such association of persons or body of individuals or artificial juridical person will be dissolved in the assessment year in which such association of persons or body of individuals or artificial juridical person is formed, established or incorporated or immediately after such assessment year.

4.

Sec.175: Person likely to transfer property to evade tax: It appears to the assessing officer that during any current assessment year that a person is likely to, charge, sell, transfer, dispose of (or otherwise part with) any of his asset. Such asset may be movable or immovable The tax payer is likely to part with the asset with a view to avoid or evade payment of any liability under the Income tax act, 1961. The total income of such person from the first day of the assessment year to the date when proceedings is started under the Sec.175 is taxable in that assessment year.

5.

Sec.176: Discontinued business: A business or profession is discontinued in any assessment year Income of business / profession from 1st April of the assessment year to the date of discontinuation may be taxable in the assessment year in which the business / profession is determined Here, it is at the discretion of the assessing officer to charge tax on the same assessment year or at the normal assessment year. If it is charged to tax at same assessment year, then tax is charged at the rate applicable to that assessment year.

Note: It may be noted that in the first four cases, tax should be charged compulsorily and in the last case it is at the discretion of the assessing officer. PREVIOUS YEAR FOR UN DISCLOSED SOURCE OF INCOME: The following are the undisclosed sources of income discussed by the Act: Sec. 68: Cash Credits Sec. 69: Unexplained Investments Sec. 69A: Unexplained Money Sec. 69B: Investments not fully disclosed in the books.
Such amount shall be charged as income of the assessee of that previous year if the explanation given by the assessee is not satisfactory

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Sec. 69C: Unexplained Expenditure Such expenditure which is deemed to be the income of the assessee shall not be allowed as deduction under any head of income. Sec. 69D: Amount borrowed or repaid on hundi

DEFINITION OF ASSESSEE: SEC. 2 (7): Assessee means a person by whom any tax or any other sum of money is payable under the Act. DEFINITION OF PERSON : SEC. 2 (31) The term person includes (Inclusive definition) a) An individual b) A Hindu undivided family c) A company d) A firm e) An association of person, body of individuals whether incorporated or not f) A local authority g) Every artificial juridical person, not falling within any of the preceding categories.

1. 2. 3. 4. 5. 6.

An individual: A natural person i.e. a human being A Hindu undivided family: A Hindu undivided family consists of all persons lineally descendent from common ancestors and includes wives & unmarried daughters. A company: As defined u/s 2(17) of the act A Firm: Firm is a taxable separate entity distinct from its partners. As defined u/s 4 of the Indian partnership act, 1932. An association of persons or Body of individuals: Association of persons means any association in which two or more persons join for a common purpose or action. Local Authority: As defined u/s 3(31) of the General clauses act, 1897.

Further, provided that an association of persons or body of individuals or a local authority or an artificial juridical person shall be deemed to be a person, whether or not, such person or body or authority or juridical person, is formed or established or incorporated with the object of deriving income, profits or gains. CHARGE OF INCOME-TAX: SEC. 4 Every person whose total income during the previous year exceeds the maximum amount not chargeable to tax shall be taxed at the rates prescribed by the Finance Act. This is based on the residential status of the person. DETERMINATION OF RESIDENTIAL STATUS: SEC. 6 The taxability of a particular receipt would depend upon not only the nature of income and the place of its accrual or receipt but also upon the assessees residential status. Different kinds of residential status: Resident

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o o Resident and ordinarily resident Resident but not ordinarily resident

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Non-Resident

Sec. 6: Residential status of individuals o U/s 6(1), an individual is said to be resident in India in any previous year, if he satisfies any one of the following basic conditions: The assessee should have been in India for 182 days or more during the previous year OR The assessee should have been in India for 60 days or more in the previous year and for 365 days or more in the 4 years immediately preceding the relevant previous year. Note: The second condition will not be applicable to an Indian citizen leaving India for the purpose of employment and persons of Indian origin visiting India*. The term Stay in India includes stay in the territorial water of India (i.e. 12 nautical miles into the sea from the Indian coastline. It is not necessary that the period of stay must be continuous or active nor it is essential that the stay should be at the usual place of residence, business or employment. For the purpose of counting the days stayed in India, Both the date of departure as well as the date of arrival is considered to be in India.

*A person is said to be of Indian origin if he or either of his parents or either of his grandparents were born in undivided India. Additional conditions u/s 6 (6): o The assessee should have been a Non-Resident in 9 out of 10 years immediately preceding the relevant previous year. o The assessee should have been in India for a period of not more than 729 days in the 7 years immediately preceding the relevant previous year. Identification of residential status: 1 Basic+0 additional 1 Basic+1 additional 1 Basic+2 additional 0 Basic =ROR =RNOR =RNOR =NR

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BASIC 1 N Y N Y Y Y BASIC 2 N N Y N N N Add1 NEED NOT VERIFY N N Y N Y Add2 NEED NOT VERIFY N N Y Y N

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STATUS NR ROR ROR RNOR RNOR RNOR

Note: Only individuals and HUF can be resident but not ordinarily resident in India. All other assessees can be either a resident or non-resident. Sec. 6(2): Residential status of a HUF o A HUF (like an individual) is either resident in India or non-resident in India. A resident HUF is either ordinarily resident or not ordinarily resident. o A HUF = resident in India - if control and management of its affairs is wholly or partly situated in India. = non-resident in India if control and management of its affairs is wholly situated outside India. o A resident HUF is ordinarily resident in India if the Karta or manager of the family satisfies the following two additional conditions: The assessee should have been a Non-Resident in 9 out of 10 years immediately preceding the relevant previous year. The assessee should have been in India for a period of not more than 729 days in the 7 years immediately preceding the relevant previous year. If the Karta or manager of a resident HUF does not satisfy the two additional conditions, the resident is treated as resident but not ordinarily resident in India.

Sec. 6(2) & (4): The residential status of a partnership firm, AOP, every other person depends upon the control & management. If the control and management is situated in India, wholly or partly: Resident If the control and management is situated outside India: Non- resident.

Sec. 6 (3): Residential status of a company: o An Indian company is always resident in India o A foreign companies residential status depends upon the control and management of the company: If the control and management is situated in India, wholly or partly: Resident If the control and management is situated outside India: Non- resident.

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RECEIPT OF INCOME: Income received in India is taxable in all cases irrespective of residential status of the assessee. Receipt vs. Remittance: The receipt of income refers to the first occasion when the recipient gets the money under his control. Once an amount is received as income, any remittance or transmission of the amount to another place does not result in receipt at another place. Cash vs. Kind: It is not necessary that income should be received in cash; Income may be received in cash or kind. Receipt vs. Accrual: Receipt is not the sole test of chargeability to tax. If an income is not taxable on receipt basis, it may be taxable on accrual basis. Accrual vs. Deemed receipt: It is not necessary that an income should be actually received in India in order to attract tax liability. An income deemed to be received in India, in the previous year, is also included in the taxable income of the assessee. The words accrues and arises are used in contradiction to the word receive. Income is said to be received when it reaches the assessee; when the right to receive the income becomes vested in the assessee, it is said to accrue or arise.

SCOPE OF TOTAL INCOM E: All assessees, whether resident or not, are chargeable to tax in respect of their income accrued, arisen, received or deemed to accrue, arise or to be received in India whereas residents alone are chargeable to tax in respect of income which accrues or arises outside India.

Particulars Income received or deemed to have been received In India Income accrued or deemed to have been accrued in India Income received outside India from a business controlled from India Income received outside India Remittances(money brought into India)

ROR T T T NT NT

RNOR T T T NT NT

NR T T NT NT NT

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Provisions to understand: Which income to be charged under this head? Salary which is not treated as salary. Which allowances are taxable and its rate? What are retirement benefits who are they taxable? What are perquisites who are they taxable?

Standard deductions. Introduction: This is the first head of income where the income should be from employment i.e. in the form of salary. What is salary? 1. Salary means any payment by employer to his employee for his services then such payments are treated as salaries. 2. Salaries paid may be I. Monetary payments or II. Non monetary facilities. Note: Special cases: There must be Employer-employee relationship It can be full time or part time.

A. Forgoing of salary: It means salary has been accrued but due to some reason employee is waiving it. But also it is chargeable to tax because it only an application. B. Surrender of salary: When an employee surrenders his salary to Central Govt. then such income is not taxable. C. Salary paid tax-free: This means tax burden is paid by employer for the salary received by employee. If employer doesnt pay tax then employee is liable to pay it. D. Place of accrual Place of accrual refers to the place where service rendered and deeming provisions (Please Refer Section 9). The salary income originates in India or Deemed to Originate in India will be chargeable to tax. Example Salary paid by Government of India to a foreign citizen shall be chargeable to tax if service is done in India. Salary paid by Government of India to a citizen of Indian orgin in respect of service rendered outside India chargeable to tax.

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SALARY AS PER ACT: 1. 2. As per income tax act the term salary has a wider scope. It is different in several contexts. As per Sec 17(1), salary includes: a. Wages, b. Annuity or pension, c. Allowances, d. Gratuity, e. Perquisites, f. Commission or Profit in lieu of salary, g. Advance salary paid, h. Retirement benefits, i. Contribution to recognized provident fund.

CHARGING SECTION As per Sec 15 salary is taxed based on 1. Due or receipt basis whichever is earlier. 2. However, if salary is received in advance then it is attracted in the year of receipt only and not taxed when it is due. 3. If arrears of salary is already tax on due basis, then is not taxed when it is received. ALLOWANCES: Allowances are normally paid to employees to meet some particular requirements like house rent, expenses on uniform, conveyance etc. Under the Income-tax Act Allowances are classified into: Fully taxable allowances Partly taxable allowances

Fully exempt allowances The following is the detailed tabulation: Fully Taxable Entertainment Allowance Dearness Allowance Overtime allowance City Compensatory Allowance Servant Allowance Project Allowance Tiffin/ Lunch/ Dinner Allowance Any other cash Allowance Partly Taxable House Rental Allowance U/s 10(13A). Fully Exempt Allowances granted to government employees outside India Sumptuary allowance granted to High Court or Supreme Court judges Allowances Paid by the UNO Compensatory allowance received by a judge

EXEMPTIONS

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Section 10 (5) to 10 (14) deal with various exemptions.

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VALUE OF LEAVE TRAVEL CONCESSION 10(5) AND RULE 2 (B): Value of leave travel concession or Assistance received by an individual from his employee or former employee in connection with the following 1. On leave to any place in India 2. Any place in India after retirement from service or after termination of the service. Note Any allowance received from Foreign Company will not be eligible for deductions. Family Include: Spouse and children Brothers and sisters wholly dependent on individual Number of trips qualifies for exemption Exemption is available in respect of 2 journey performed in a 4 block of calender year commencing from 1986. Block of 4 calendar year Runs from 1986 to 1989, 1990 to 1993, 1994 to 1997 so forth.

One journey can be carrying forwarded and can be claimed as a deduction in the succeeding block of calendar year. Quantum of deduction 1. If Journey performed by Air Amount does not exceed the air economy fair of national carrier to the shortest destination of place of Journey. 2. Other than Air Option 1. Rail service is available Amount does not exceed A/C First class to the shortest destination of place of Journey. Option 2. Rail service is not available and Recognized Public service does not exist. Amount does not exceed A/C First class to the shortest destination of place of Journey Option 3. Rail service is not available and Recognized Public service exist Amount does not exceed First class or deluxe class of such public transport to the shortest destination of place of Journey.

2. EXEMPTION IN CASE OF FOREIGN NATIONAL 10(6): In case of an Individual who is not a citizen of India following shall be exempt. 1. Remuneration received by him as an employee of following category or staff member of the following categories shall be allowed as an exemption. a) Official of Embassy b) High Commission c) Consulate d) Staff member of Above

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2.

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3. 4.

Remuneration received by him as an employee of the foreign enterprise during his stay in India if the following conditions were met. a) foreign enterprise does not engaged in any trade or Business in India b) His stay does not exceed 90 days in aggregate during the previous year. c) Such remuneration shall not be deductible from income chargeable in India. Remuneration received by him as an employee of the foreign ship provided his stay does not exceed 90 days in aggregate during the previous year. Remuneration received by him as an employee of the foreign Government during his stay in India in connection with his training in any enterprise owned and controlled by Government of India or Government company or any subsidiary owned by Government company.

Perquisite and allowance to Indian Citizen Employed Abroad 10 (7) Any perquisite or allowance paid to a citizen of India in connection with abroad employment is exempt from Tax.

GRATUITY 10 (10): 1. Government servant Any death cum retirement gratuity is wholly exempt from tax Employees covered under payment of Gratuity Act 1976 Least of the following is exempt from tax. 1) Rs 10,00,000/2) 15 days salary out of 26 days salary based on last drawn salary 3) Actual gratuity received Salary for this purpose include basic pay and DA

Employees not covered under payment of Gratuity Act 1976 4) Rs 10,00,000/5) Half month days salary based on last 10 month average 6) Actual gratuity received Salary for this purpose include basic pay and DA and commission as a % of Turn over achieved by the employee Notes Gratuity received during the period of service is always taxable If the employee receives gratuity from more than 2 employers then aggregate amount of Gratuity exempt does not exceeds the limits prescribed In case where an employee receives gratuity in earlier year in former employer and received gratuity in another employer then the limit of Rs 3.5 lakhs will be proportionately reduced by the amount of tax exempt in earlier year.

COMMUTED PENSION 10 (10) (A): Uncommuted pension means the pension which is received by the employee periodically and which is chargeable to tax u/s 15 in the hand of both Government and Non Government employee.

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Commuted pension refers to taking lump sum amount by commuting the whole or part of the pension Where an employee had commuted his pension then the remaining portion will be received periodically Any commuted pension received by the government employee is wholly exemempt from tax Judges of High court and supreme court also entitled for this exemption ( Vide circular (623 Dt 6/1/92)

In case of Non government employees following shall be exempt from tax 1. If the employee is in receipts of Gratuity 1/3 of commuted pension which we would have received had he commuted the whole pension (100%) 2. 2. If the employee is in not receipts of Gratuity 1/2 of commuted pension which we would have received had he commuted the whole pension (100%)

LEAVE SALARY SEC 10 (10 AA): 1. Government servant Any amount received as cash equivalent to earned leave to the credit of the employee is wholly exempt from tax. 2. Non-government servant Least of the following shall be exempt from tax 1. 2. 3. 4. Notes Leave encashment received during the period of service is always taxable If the employee receives Leave encashment from more than 2 employers then aggregate amount of Gratuity exempt does not exceeds the limits prescribed In case where an employee receives Leave encashment in earlier year in former employer and received gratuity in another employer then the limit of Rs 3 lakhs will be proportionately reduced by the amount of tax exempt in earlier year. Cash equivalent of leave ( on the basis of average of last 10 month salary) to the credit of the employee at the time of retirement( calculated 30 days credit for each completed year of service 10 month salary based on average of last 10 month salary Amount notified by the Government Rs 300000 Leave encashment actually received

Salary for this purpose include basic pay and DA and commission as a % of Turn over achieved by the employee

RETRENCHMENT COMPENSATION 10 (10 B): Any compensation received by a workman is exempt to the extent of following 1. 2. Rs 500000 Amount specified under Industrial Dispute Act

VOLUNTARY RETIREMENT OR SEPARATION 10 (10C) AND RULE 2 (BA): Amount received or receivable by the following employees 1. Public sector company 2. Any other company

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3. 4. 5. 6. 7. 8. 9. 10. 11.

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Any authority established under central state or provincial Act local authority Cooperative society University IIT Any state government Any Central government Institution having importance throughout India or in any state on the Central government may specify Any institute of Management as Central Government may specify in this connection. At the time of VRS or termination of service under voluntary retirement or in the case of Public company under voluntary separation is exempt up to Rs 500000. The scheme must be framed under Rule 2 BA Condition under Rule 2 BA 1. 2. 3. 4. 5. 6. It applies to an employee of the company who has completed 10 year of service or completed 40 years of age whichever is earlier. It applies to all the employees including workers and executive of the company and excluding the directors of the company The scheme of Voluntary retirement or separation has been drawn up to result in overall reduction in the existing strength of the employee of the company The Vacancy caused by Voluntary retirement or separation is not to be filled up The retiring employee shall not be employed in another company or concern belonging to the same management. The amount receivable on account of Voluntary retirement or separation does not exceed the amount equivalent to 3 month salary for each completed year of service or salary at the time of retirement multiplied by the balance month of services left before the date of retirement.

Note The condition that an employee of the company who has completed 10 year of service or completed 40 years of age whichever is earlier is not applicable to Voluntary separation scheme framed by Public Sector Company. Salary for this purpose include basic pay and DA and commission as a % of Turn over achieved by the employee

PROVIDENT FUND: The provident fund represents an important source of small savings available to the Government. Hence, the Income-tax Act gives certain deductions on savings in a provident fund account. There are four types of provident funds : i. Statutory Provident Fund (SPF) ii. Recognised Provident Fund (RPF) iii. Unrecognised Provident Fund (UPF) iv. Public Provident Fund (PPF) The tax treatment is given below:

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Particulars Employers Contribution Employees Contribution Interest * Credited

Recognized PF Amount in excess of 12% of salary is taxable Eligible for deduction u/s 80C 8.5% p.a. (from 1.9.2010) is taxable

Unrecognized PF Not taxable yearly

Statutory PF Fully exempt

Public PF Not applicable as there is only assessees own contribution Eligible for deduction u/s 80C Fully exempt Fully exempt U/S 10(11)

Not eligible for deduction Not taxable yearly

Eligible for deduction u/s 80C Fully exempt Fully exempt U/S 10(11)

Amount received on Note 1 Note 2 retirement, etc. *Amount in excess of 9.5% p.a. ( upto 31.8.2010) Note: 1.

Amount received on the maturity of RPF is fully exempt in case of an employee who has rendered continuous service for a period of 5 years or more. In case the maturity of RPF takes place within 5 years then the amount received would be fully exempt only if the service had been terminated due to employees ill-health or discontinuance or contraction of employers business or other reason beyond control of the employee. In any other case, the amount received will be taxable in the same manner as that of an URPF. If, after termination of his employment with one employer, the employee obtains employment under another employer, then, only so much of the accumulated balance in his provident fund account will be exempt which is transferred to his individual account in a recognised provident fund maintained by the new employer. In such a case, for exemption of payment of accumulated balance by the new employer, the period of service with the former employer shall also be taken into account for computing the period of five years continuous service.

2.

APPROVED SUPER ANNUATION FUND 10 (13): Any payment from an approved superannuation fund is exempt from tax if it is made on the following situations 1. 2. 3. on the death of a beneficiary to an employee in lieu of or in commutation of an annuity on his retirement at or after a specified age or on his becoming in capacitated prior to such retirement By way of refund of contribution on the death of beneficiary

HOUSE RENT ALLOWANCE 10 (13 A): HRA is allowed as an exemption to the extent of least of the following 1. 2. 3. Excess of rent paid over 10 % of salary If the accomodation is in CCDM, then 50% of the salary and 40% of salary in other cases Actual HRA

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SPECIAL ALLOWANCE 10 (14) AND RULE 2BB1: Following are allowed as an allowance under CBDT rules 2 BB 1. Any allowance granted and spend to meet the cost of a) Travel on tour or transfer b) Ordinary daily charges which is incurred on account of absent from place of employment c) Conveyance allowance granted to meet the expenditure incurred on conveyance in the performance of duties provided free conveyance is not provided by the employer d) Expenditure incurred on a helper in the performance of duties e) The academic, research and training pursuit in educational and research institute f) Purchase or maintance of uniform for wear during the performance of duties. 2. Composite hill Allowance Rs 300/- Pm provided the place is located at a height of 1000 meters above from sea level. Rs 800/- Pm in certain notified areas

Rs 700 Pm in Siachen area of Jammu and Kashmir 3. Tribal Area Allowance Rs 200 Pm is exempt (Assam, Bihar, Karnataka, Madhya Pradesh, Orissa, Tripura, Tamil Nadu, UP) 4. Special allowance Border area Allowance Rs 200 Remote area Allowance Rs 300 Difficult area Allowance Rs 750 Distributed area Allowance Rs 1050 5. Employee working in a public transport system: Rs 6000/- Pm or 70 % of such allowance whichever is lower. 6. Children Education Allowance - Exempt up to Rs 100/- subject to a maximum of Two children 7. Children hostel allowance Exempt Up to Rs 300/- subject to a maximum of two children 8. Counter insurgency allowance Exempt up to Rs 3900/- Pm to the members of armed force operating in an areas away from their permanent locations for a period of more than 30 days SECTION 17 (2) PERQUISITE: 1. 2. 3. 4. 5. 6. 7. 8. 9. Value of rent free accommodation provided by the employer to the employee. Value of concession in the matter of rent in respect of any accommodation provided by the employer to the employee Value of any amenity or benefit provided free of cost or at concessional rate in case of specified employee Any sum paid by the employer in respect of any obligation on behalf of the employee Any sum payable by the employer to effect an assurance on the life of the employee or to effect a contract for annuity The value of any other fringe benefit or amenity as may be prescribed. The value of specified sweat equity shares transferred or allotted directly or indirectly at free of cost or at concessional rate to the assessee Any contribution to superannuation fund by the employer in respect of assessee to the extent it exceed Rs one lakh Perquisites relating to car

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A SUMMARY OF PERQUISITES S No Type of perquisite Condition 1 Unfurnished accommodation Government employees

Valuation of perquisite as per guidelines issued from time to time 1) 15% of salary in cities having population of more than 25 laks 2) 10% of salary in cities having population lies between 10laks and 25laks 3) 7.5% of salary if population is below 10 laks 1) actual amount of lease paid by the employer during the relevant period 2)20% of salary

Misc Salary here includes basic pay, DA which forms part of retirement benefits, all taxable allowances to the extent taxable, bonus or commission or any monetary payment, by whatever name called from one or more of the employers

Private employees -Owned by the employer

-Leased by the employer(least of the following) 2 Furnished accommodation Accommodation Furniture -Owned by the employer -Leased by the employer 3 Accommodation provided in a hotel Supply of gas, electricity etc (least of the following)

Valuation of accommodation is undertaken as mentioned above 10% of cost of furniture Lease charges paid by the employer towards hiring such furniture 1.24% of salary 2.Actual hire charges paid by the employer taxable in the hands of all employees taxable in the hands of specified employees

Free or concessional educational facilities

-Facility in the name of employer -Facility in the name of employee -In a school owned by the employer -In any other school

Cost of such education in a similar school with an exemption of Rs.1000p.m p.c for two children Cost of such education with an exemption of Rs.1000p.m p.c for two children Interest computed as per SBI rate-Interest recovered from the employee NIL 10% of actual cost of such asset

6 7

Interest free/Concessional Loans Use of moveable assets -Laptop -other than laptops

SBI rate as on 1st day of relevant previous year

Depreciated value @50% for every completed year(WDV) 8 Transfer of moveable assets -Computers & elec. items Depreciated value @20% for every completed year(WDV) -Motor cars -Any other asset Depreciated value @10% for every completed year(SLM)

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9a

Medical facilities (within India)

-provided in a hospital owned and maintained by the employer/State government/Central government -provided elsewhere

Exempt Exempt up to Rs.15000

9b

Medical facilities (outside India)

Transport allowance to the person who is suffering Blindness Rs 1600/-Pm 9. Transport allowance to the person who is suffering Blindness Rs 800/- Pm 10. Underground allowance Exempt Rs 800 pm 11. High altitude allowances Exempt Rs 1060 Pm for the altitude of 9000 to 15000 Ft Exempt Rs 1600Pm for the altitude above 15000 Ft 12. Special Allowance of members of armed force 12. Special compensatory allowance highly active field allowance Rs 4200 pm 13. Island duty allowance of Rs 3250/14.

PERQUISITES RELATING TO CAR: owned by maintained by Used for Office Employer Personal Both purpose Office Employer Employee Personal Both purpose Office Personal Employee Employer Both purpose Any Taxable value NIL Maintenance + 10% dep 1800/2400 p.m NIL 10% Dep 600/900 p.m NIL Maintenance ACTUAL exp (-) 1800/2400 p.m (+ drivers salary of 900 p.m) NIL specified employee Tax on NP specified employee NP specified employee NP

Employee

NP

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SUMMARY OF EXEMPTION IS GIVEN BELOW FOR EASY REFERENCE: Particulars Section Exemption 10(10) If covered under POGA (least of the foll.) Actual receipt Rs.1000000 15/26*last drawn salary*completed year of service or part thereof in excess of 6 months If not covered under POGA (least of the foll.) Actual receipt Rs.350000 Gratuity Pension 10(10A) If in receipt of gratuity 1/3 of full value If not in receipt of gratuity of full value Leave Salary 10(10AA) (Least of the foll.) 300000 Leave salary*Avg salary 10 months Avg salary Actual Leave salary Retrenchment compensation 10(10B) Least of the foll. 500000 Compensation awarded Voluntary Retirement Scheme 10(10C) * Least of the foll. 500000 Compensation awarded Conditions: Scheme should be approved by CBDT. VRS should be brought into all classes of employees. Vacancies created by VRS should be replaced by the internal sources only.

Govt Ee

15/30*avg salary*completed year of service. Fully Exempt

Fully exempt

* (for employees who have completed 10 years of service/40 years of age)

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A special feature of this head is Notional income will also be taxed Provisions to understand: When is Income from house property chargeable? What are the conditions to avail exemptions under this head. Difference between Gross and Net annual value. Tax treatment of unrealized rent. Who are deemed owners.

Cases in which income not treated as house property. Provisions: CHARGING SECTION: Sec (22): The annual value of any property composing of buildings (or) land appurtenant thereto, of which assessee is owner is chargeable to tax under head income from house property. INTERPRETATION: Income from house property is named Annual value Income should be from Buildings (or) land appurtenant thereto Of which assessee is the owner

Such income is charged to tax under head IHP.Coverage of sections Section 23 DETERMINATIONOF ANNUAL VALUE This involves 3 steps:

Step 1 Step 2 Step 3

Determination of gross annual value Sec (23) less: Municipul tax paid for property Net annual value as per IT Act

DETERMINATION GROSS ANNUAL VALUE SEC 23(1A,1B,1C,2,3) Sec 23(1)(a)/(b): This provision is for house property which has been let out

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Gross annual value will be least of the following 1. Annual letting value (ALV) 2. Actual amount received or receivable during the year.

WHAT IS ANNUAL LETTING VALUE?

Fair rent (or) Municipal valuation which is Higher Step 1 Step 2


Note: 1. 2. 3. 4.

Step 1 (or) Standard rent which ever is Lower

Fair rent: Rent received from a similar property Municipal valuation: value determined by municipality authorities. Standard rent: Rent fixed as per Rent control Act Net annual value: Gross annual value Municipal taxes paid

Sec 23(1c):

Step 1

Rent as per Sec 23(1a/1b)

If rent in step 1 is grater due to vacancy during whole Step 2 or part year then Step 2 is gross annual value If rent in step 1 is not grater due to vacancy during Step 3 whole or part year then Step 1 is gross annual value

Sec 23(2): This provision is for house property which is self-occupied. What is meant by SELF OCCUPIED? 1. Where the property is occupied by the assessee during previous year (or) 2. Due to employment reasons assessee is residing at other than his property.

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Provision:

Widget 3: Income from House property

If a property is treated as self-occupied then NET ANNUALE VALUE can be taken as ZERO. No deduction of municipal taxes is allowed for such property.

Sec 23(3): If a property is self-occupied for part of year and let out for rest of the year and vice-versa. The annual value will be taken as ANNUAL LETTING VALUE as per Sec23 (1). ALV will be compared with actual rent for period whichever is higher will be taken for GAV. Property taxes for the whole year can be taken.

Sec 23(4): This provision is for house property which is to be treated as Deemed to be let out. NOTE: In case of a house property in which a part is self-occupied and other is let out There is no need to take the property as single unite Municipal tax can be apportioned If a assessee is having more than one self occupied house then he can take one house at his option as self occupied and the other will be treated as DEEMED TO BE LET OUT. The option can be changed every year. For deemed to be let out GAV will be ALV.

TREATMENT OF UNREALIZED RENT: 1. 2. Actual rent received /receivable should not include arrear of rent which is unrealized. But the following conditions should be satisfied. A. On defaulting tenant there has to be steps taken to make him vacate. B. See that the tenant is not occupied in any other place of assessee. C. The assessee has taken all reasonable steps to make him vacate. & D. Assessee must be bona fide;

PROPERTY TAX: 1. This is allowed as deduction from GAV It should be actually paid during the year. Only paid taxes can be allowed as deductions. Deduction is allowed only on payment basis but not accrual basis. Property taxes paid outside India can also be deducted. It should be borne by assessee &

2. 3. 4.

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Widget 3: Income from House property

SEC 24: This provision is about DEDUCTIONS from Annual value, they are: SEC 24(A): This is flat deduction of 30% irrespective of expenditure incurred. There will be no standard for self occupied house where NAV is Nil. 30% of Annual value Sec24(a) & Interest on barrowed capital Sec24(b) .

SEC 24(B): Deductions for other than self-occupied property: Interest payable on loan borrowed for the purpose of o Acquisition o Construction o Repairs and renewal (or) o Reconstruction. Such interest can be claimed as deduction. Interest raised on fresh loan to pay old loan is admissible for deduction Interest payable on barrowed capital for period prior to previous year in which the property is acquired or constructed can be claimed as deduction over a period of 5 years in equal installments commencing from the year of acquisition or completion of construction.

Deductions for self occupied property: Conditions to be satisfied If loan barrowed 1. On or after 01.04.1999 2. Loan taken for acquisition or construction and 3. Construction should be completed within 3 Yrs Others kind of loan taken Amount allowed as deduction Rs.150000/- is allowed as deductions

Rs. 30000/- is allowed as deductions

Note: a. Interest is allowed on accrual basis. b. Interest paid on arrears of interest is not allowed as deductions.

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SEC 25: Taxability of Recovery of Unrealized rent and Arrears of rent received. S.No Unrealized rent Sec{25AA} 1 2 3 4 Taxable in hands of assessee even he is not owner of the property. Amount is taxable in the PY in which it is received No deductions shall be allowed Unrealized rent means rent which has been deducted from actual rent in any PY Arrears of rent Sec{25B}

Taxable in hands of assessee even he is not owner of the property. Amount is taxable in the PY in which it is received 30% standard deduction is allowed Arrears of rent means a rent not charged to income tax in PY

TREATMENT OF INCOME FROM CO-OWNED PROPERTY: SEC 26 1. Where a property is owned by 2 or more persons which is definitely admissible then The share of income of each co-owner will be computed as per Sec 22-25 Note: If property is self occupied both of them can avail interest of 30000 or 150000 as the case may be. If property is owned partnership then it will be taxable in hands of firm only. PROVISIONS FOR DEEMED OWNER: SEC 27

Sec 27(i): a. Transfer to spouse- Then assessee will be the owner of house property. b. Transfer to minor child- Then assessee will be the owner of house property. Exemption: if property is transferred for Adequate price or For contract to live apart or Minor is married Sec 27(ii): a. Holder of impartible estate: Impartible estate is a property which is not legally divisible. The holder of impartible will be deemed as owner. b. Member of co-operative society. c. A person who is allowed to take or retain property in part performance of contract. d. Persons having right in a property for a period not less than 12 years. Cases where INCOME FROM HOUSE PROPERTY is not taxable: S.No 1 2 3 4 5 Section 10(1) 10(19A) 10(20) 10(24) 13A Provision Income from farm house forming part of agriculture. Annual value of any one palace in the occupation of Ex-ruler. Income from house property of Local property. Property income of Regd. Trade union. Property income of any political party.

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Widget 4: Profit & Gains from Business or Profession

Widget 4: Profit & Gains from Business or Profession Provisions to understand: What is Business or Profession? Method of accounting Maintenance of books. What is tax audit? Deductions o On actual expenditure. o Depreciation ( WDV & SLM) Special deductions. Over a period of time. General deduction Weighted deductions.

Disallowances. Deemed profits. Presumptive taxation.

DEFINITION: Section 2 (13) define business to include, trade, commerce or manufacture or adventure in the nature of trade commerce or manufacture. Manufacture: Manufacture is a process of creating a new product which is different from the basic raw materials. 2 (36) define profession to include Vocation. Profession require academic degree diploma where as for carrying out vocation in-born skills and talent is only required Isolated transaction can be construed as Business But following factors taken in to consideration for determining: Nature of items dealt with; Intention of parties; The periodicity of transactions The effort taken which culminate in to the transactions.

CHARGEABILITY [SEC. 28] 1. 2. 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 to or received by, -

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3. 4. 5. 6. 7. 8.

9.

(a) 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; (b) 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; (c) 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 the agency or the modification of the terms and conditions relating thereto; (d) 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 (18 of 1947); Cash assistance (by whatever name called) received or receivable by any person against exports under any scheme of the Government of India; Any duty of customs or excise re-paid or re-payable 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 : (a) 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; Any sum received under a key-man insurance policy including the sum allocated by way of bonus on such policy. (a) For the purposes of this clause, the expression "key-man insurance policy" shall have the meaning assigned to it in clause (10D) of section 10. (b) Where speculative transactions carried on by an assessee are of such a nature as to constitute a business, the business (hereinafter referred to as "speculation business") shall be deemed to be distinct and separate from any other business.

SPECULATIVE BUSINESS: Where an Assessee who carries on any transaction which constitute speculative business, it shall be regarded as separate and distinct business by the Assessee. According to section 73 Loss from the speculative business cannot be set off against a) Any other regular business; b) Any other head of Income.

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DEFINITION OF SPECUL ATIVE BUSINESS [SEC. 43(5)]: It is a transaction in which a contract for purchase or sale of any commodity Including shares and scrip. It is periodically or ultimately settled otherwise than by actual delivery or transfer

Common books for both speculative business and non-speculative business: Determine income and loss separately and distinctly for such business by allocating or apportioning the expense incurred separately for speculative and non-speculative business. Basis of apportionment is may be either actual basis or some other basis. Exception to speculation business: Contract in respect of raw material and merchandise in the normal course of business to guard against Price fluctuation. A Contract in respect of stores or stock entered in to by a dealer or investor to guard against the loss due to the price fluctuation.

A contract entered in to by a member of stock exchange or forward market in a course of jobbing or arbitrage to guard against the loss due to the price fluctuation. Income referred to section 28 shall be computed on the basis of provisions contained in sec 30 to 43 D.

METHOD OF ACCOUNTING [SEC.145 & 145A]: Income Under the Head Profits and Gains of Business or Profession Other Sources Method of Accounting Cash or mercantile system of accounting regularly employed by the assessee

Claim of depreciation will not depend upon any of the above two method.

MAINTENANCE OF ACCOUNTS: Books or Books of Accounts [Sec.2(12A)]: o Ledgers; o Day-Books; o Cash Books; o Account-Books; o Other books; In written or printed form of data in Floppy, Disc, Tape or any other form of electro-magnetic data storage devise. Document includes an Electronic Record as defined u/s 2(1)(t) of the Information Technology Act, 2000. The following assessees are obliged to compulsory maintenance of books of accounts [Sec.44AA]: Others Where Income from Business or Profession exceeds Rs. 1,20,000/- in any of the 3 preceding years or likely to exceed during

Specified Professionals Assessees carrying on profession of: Law;

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current year, or Where the Turnover or sales or Gross Receipts exceeds Rs. 10,00,000/- in any of the 3 preceding years or likely to exceed during the current year, Where the assessee carry on the business and profession referred to section 44AD, 44AE or 44AF or section 44BB or section 44BBB and claims that income from such business is lower than the amount prescribed in those provisions.

Medicine; Accountancy; Architecture; Technical Consultancy; Interior Decoration; Authorised Representative; Film Artist;

Information Technology Professionals Whose gross receipts exceed Rs. 1,50,000/-, in all the prior three years or during current previous year in which business is commenced.

BOOKS REQUIRED TO BE MAINTAINED: Cash Book Ledger Journal ( if and only if the mercantile basis of accounting is followed) Copies of the bills for value exceeding Rs 25/Original bills for expenditure exceeding Rs 50/In case of medical practitioner following books required to be maintained o Daily case register o Inventory of first and last day of the previous year, showing the stock of medicine

NUMBER OF YEAR OF MAINTENANCE: The books of account are required to be maintained at the place of business. If there is more than one place of business, then it shall be maintained @ the principal place of business. Should be maintained for 6 years from the assessment year relevant to the previous year.

Consequence of non-maintenance [Sec. 271A]: FAILURE TO KEEP / MAINTAIN / RETAIN BOOK S OF ACCOUNTS, DOCUMENTS, ETC. IN ACCORDANCE WITH SEC. 44A WILL ATTRACT A PENALTY OF RS. 25,000/-. In cases where assessment has been re-opened u/s 147, within the period u/s 149, all books of account and other documents shall be continued to be kept and maintained till the completion of such assessment.

TAX AUDIT [SEC. 44AB ]: In case of an assessee carrying on: Business Total Sales Turnover Gross Receipts Exceeds Rs. 60 Lakhs Profession Gross Receipts exceeds Rs. 15 Lakhs

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IN CASE OF PRESUMPTIVE BUSINESS: Where assessee carry on the business and profession referred to section 44 AD, 44AE or section 44 BB or section 44 BBB and claims that income from such business is lower than the amount prescribed in those provisions. Audit: Tax Audit shall be conducted by an Accountant as explained u/s 288 of the Income Tax Act. Specified Date for Filing of Report: September 30th of the relevant Assessment Year. Forms of Report: Nature of Person Audit Report Statement of Particulars In case of a person who carries on business or profession Form 3CA Form 3CD and whose books are required to be audited by or under any law In case of a person who carries on business or profession Form 3CB Form 3CD but not being a person referred to above

Notes: Turnover / Receipts considered for declaration of presumptive income u/s 44AD / AE shall not be considered for determining the prescribed turnover limit u/s 44AB. In case of agents, this section is applicable only if the gross commission exceeds Rs. 60,00,000/This section does not apply to person who derive income referred u/s 44BBA & 44B.

CONSEQUENCE OF NON-COMPLIANCE: Defective Return: If Audit Report u/s 44AB not filed along with Return of Income then, AO may treat the return as Defective Return. However, due to e-filing nowadays Audit report u/s 44AB need not be filed along with the return of income. Penalty u/s 271B: o Failure To get accounts audited To obtain an audit report Penalty @ 0.5% of the gross turnover / Receipt or Rs. 150,000/- whichever is less subject to Sec. 273B

To furnish the said report before the due date

EXPENDITURE RELATING TO BUILDING AND PLANT & MACHINERY [SEC.30]: Condition: Building should be used for business or profession during the relevant PY. Deduction: o As tenant: Cost of repair, provided the same has been undertaken by Him As Owner: Rent paid by him

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Insurance premium in respect of property Notes: Expenditure in the nature of capital shall not be claimed as a deduction. The reason being, the same has been allowed as a deduction under the head capital gains.

Land revenue, local rates, and property taxes

EXPENDITURE RELATING TO MACHINERY, PLANT & FURNITURE [SEC.31] : Condition: It should be used for business or profession during the relevant PY. Deduction: o Current repairs o Insurance premium Even if used for part of the year, full expenses can be claimed. Current repairs of capital nature shall not be allowed. If it is taken on hire then rent paid or payable on that can be claimed as deduction U/s 37(1). Explanation to Current repairs: If by incurring certain expense, an existing asset restored to its normal or original condition then it is regarded as current repair (Normally maintaining the asset).

Notes: o o o o

It is the expenditure on Building, plant, machinery or furniture which is only for the purpose of preserving an existing asset is termed as current repairs. Capital expense: If by incurring certain expense, the capacity of the asset had changed or enhancing its efficiency beyond the original efficiency, then it is a capital expenditure in nature. If an additional advantage is created in an asset also regarded as Capital expense. This type of expense is mainly for the purpose of renewal or restoration of the asset.

DEPRECIATION [SEC.32]: o Eligible Assets: Two Categories Tangible Assets such as Building, Machinery, Plant and Furniture. Intangible Assets such as Know-how, patent, License, franchise, trademarks or any other rights of similar nature. Conditions: Assessee must be owner of the asset. Fractional ownership will also be taken in to account for the purpose of claiming depreciation. The asset must be used by the Assessee for the purpose of Business and profession carried on by him

The asset must be used during the previous year o It shall fall within the classification of Block of Assets. Notes: If the asset is put to use for less than 180 days then only 50 % of the allowable depreciation is allowed and 100% depreciation will be allowed for more than 180 days.

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Widget 4: Profit & Gains from Business or Profession

DEPRECIATION FOR POWER SECTOR: Undertaking engaged in generation or generation or distribution of the asset can depreciate their individual asset on Straight line method.

Rate: As per Appendix I. Notes: Only the method of depreciation which is prescribed by Income Tax Act is written down value method and above mentioned is relaxation of the above provision. Option for changing the method: o The above undertaking can claim depreciation under WDV method on block of asset basis. Such option need to be exercised on or before filing return of income Assessment relevant to the previous year. o Capital Gains on transfer of Depreciable Assets [Sec.50A] Circumstance Condition Treatment 1 Net Consideration < WDV Terminal Depreciation u/s 32 = WDV less Net Consideration. 2 Net Consideration > WDV Balancing Charge u/s 41(2) = Net Consideration less WDV 3 Net Consideration > OG Cost Capital Gain = Net Consideration less OG Cost Balancing Charge [Sec.41(2)] = OG cost less WDV.

Plant [Sec.43(3)]: Includes: Ships, Vehicles, Books, Scientific Apparatus & Surgical Equipment used for the purpose of business or profession. Excludes: Tea Bushes, or live stock, or buildings, or furniture and fittings. Sanitary & pipeline fittings installed in a hotel is a plant.

Note: Depreciation is a mandatory deduction. o Block of Assets: For which same rate of depreciation shall be charged under WDV method as per IT rules. Actual Cost: Purchase Price Add: Interest on loan for the period up to the date of usage of the asset; Freight & Insurance; Loading, unloading charges; Less: Group of assets falling within the same class of assets.

Installation & Erection charges; Amount met by Government or other person in the form of grant or subsidy.

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Widget 4: Profit & Gains from Business or Profession

WDV Calculation: Particulars Opening value of Block Add: Actual cost of asset acquired and belonging to the same Group Less: Monies payable in respect of the same block WDV for the purpose depreciation Money payable means the following items of expense: Insurance; Salvage; Compensation money; which is payable in respect of Asset.

Amount XXX XXX XXX XXX

Additional Depreciation [Sec.32(1)]: Applicability: Assessees engaged in the business of manufacture / production. Eligible Assets: Machinery or Plant acquired and installed after 31st March 2005. Ineligible Assets: Ships & Aircraft, Second-Hand machineries or plants used anywhere, Machinery or plant used in guest houses etc., Office Appliances & Road Transport Vehicles, or Machinery or plant for which whole cost is allowed as deduction. Rate: 20% of Actual Cost. Usage < 180 Days: 50% Depreciation i.e. 10%.

Unabsorbed depreciation: Unabsorbed depreciation is allowed and carried forward for setting off in the subsequent year. There is no limitation as far as period of carry forward. It is treated as a part of current year depreciation. Unabsorbed depreciation bought forwarded during the current year shall be regarded as current year depreciation and can be claimed as expense of current year. Even a discontinued business can claim unabsorbed depreciation. It can be set off not only against the income under the head profit and gains from business and profession but also any other head of income also. It can be carried forward by the same assessee, except in case of Amalgamation, Demerger, & Business reorganization. It can be claimed during the current period, even if no valid return was filed for the previous assessment years.

SPECIAL DEDUCTIONS TEA, COFFEE & RUBBER BUSINESS [SEC.33AB]: Applicability: All assesses who carry on the business of growing & manufacturing Tea / Coffee / Rubber in India. Pre-Conditions:

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o

Widget 4: Profit & Gains from Business or Profession

Should deposit the amount in NABARD / Special Deposit Account: Within 6 months from the end of the relevant previous year, or Before the due date of filing return of his Income.

Whichever is earlier.

Quantum of Deduction: o to the extent of profit utilised as above o 40% of profit computed under the head profit and gains from business and profession. Utilization of Deposits: o Purpose of business, other than for declaration of dividend or distribution of profits. o Purchase of eligible assets.

Withdrawal: Amount can be withdrawn on the following occasions: o Closure of the business o Partition of H U F o Dissolution of partnership firm o Liquidation of company If an Assessee uses the amount which was deposited for non eligible asset then the amount so utilized shall be charged to tax under the head profit and gains from business and profession. List of non-eligible asset Plant and machinery installed and used in any office or residential accommodation including guest house; Office appliance excluding computer ( Amount can be used for purchase of computer); Any new machinery or plant installed in an industrial undertaking for the purpose of any article or things specified in the eleventh schedule; Any plant and machinery in respect of which cost is allowed to be written off in one year.

Amount withdrawn and not utilized will not be charged to tax under the following situation withdrawal on account of death of Assessee; withdrawal on account of partition of HUF;

Withdrawal on account of Liquidation of the company. Asset in respect of which deduction is claimed will not be transferred for a period of 8 years. Following are the exemption: o Transfer to Government / Government company/Local authority o Transfer at the time of transfer or takeover of a firm by a company Audit requirement: The accounts of the Assessee must be audited by a chartered Accountant and the report in form 3 AC shall be furnished along with the return of income.

SITE RESTORATION FUN D [SEC. 33ABA]: Applicability: Assessee carrying on the following business:o Prospecting for petroleum and natural gas in India o Extraction or production of petroleum and natural gas in India o Central government must enter in to an agreement with the Assessee for above business. Deposit: Shall be made within the end of the previous year with:o SBI Scheme approved by ministry of petroleum and natural gas.

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o Site Restoration Fund A/c.

Widget 4: Profit & Gains from Business or Profession

Quantum of Deduction: o Amount deposited, or o 20% of current year profits. Note: Any interest credited to the Account shall also be a deposit. Utilization of Deposit: o Purpose of business, other than for declaration of dividend or distribution of profits. o Purchase of eligible assets. Note: Such expenditure shall not be allowed as a deduction in computation of income under the head Profits & Gains from Business of Profession. Audit Requirement: The account of the Assessee must be audited by a chartered Accountant and the report in prescribed form shall be furnished along with the return of income. Tax Treatment: o Amount withdrawn in any of the previous year on account of closure of account shall be charged to tax. o Amount withdrawn less amount that may be payable to the government as per the agreement shall be deemed as Profits and Gains from Business or Profession. o If the amount is not utilized in accordance with the scheme, it shall be deemed to be the income which is chargeable to tax under the head profit and gains from business. o Amount cannot be utilized for non-eligible asset. o The following are the non-eligible assets: o Plant and machinery installed and used in any office or residential accommodation including guest house; o Office appliance excluding computer ( Amount can be used for purchase of computer); o Any new machinery or plant installed in an industrial undertaking for the purpose of any article or things specified in the eleventh schedule; o Any plant and machinery in respect of which cost is allowed to be written off in one year. o Asset in respect of which deduction is claimed should not be transferred for a period of 8 years. Following are the exceptions: Transfer to Government / Government company/Local authority; Transfer at the time of transfer or takeover of a firm by a company. SCIENTIFIC RESEARCH EXPENDITURE [SEC.35] : The following expenses met by the Assessee in relation to the business shall be allowed: Deduction Allowable Restriction o Current Year Expenditure: Revenue & o Expenditure on acquisition of land. Capital Expenditure. o Depreciation on Capital Expenditure o Prior Period Expenditure: In the year of allowed as deduction. commencement Prior Period Revenue & Capital Expenditure incurred during 3 preceding years are allowed. o Deduction for companies in special business: Company engaged in bio-technology or manufacture or productions of any article or thing not specified in XI th Schedule shall get a deduction of 200% of the scientific research. Land: Not allowed. Building: Allowed @ 100% only.

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o

Widget 4: Profit & Gains from Business or Profession

Payment to Scientific Research Company: 125% of the amount paid to a company registered in India for the purpose of scientific research, shall be allowed as a deduction if: o If the company is approved by prescribed authority. o Main object should be scientific research & development. o Contribution to research institutions: 175% of the contribution made to any research association or to any university, college or other institution for scientific research approved by Central Govt. In a Nutshell: Particulars General Specific All Company Engaged Applicability Revenue Expenditure Capital Expenditure i) Land ii) Building iii) Others Prior Period Expenditure (Certified by prescribed authority) 100% NIL 100% 100% 100% 200% NIL 100% 200% 100%

Payment to Scientific Research Company: 125% Deduction. Contribution to research institutions: 175% Deduction. Social / Statistical Research: 125% Deduction.

Unabsorbed Capital Expenditure on Scientific Research: Shall be carried forward as same as unabsorbed depreciation.

TELECOMMUNICATION BUSINESS [SEC.35ABB]: Condition: o Expenditure should be of capital nature; o It should be for right to operate telecommunication service; o Actual payment should be made; o Incurred before or after commencement . Amount of Deduction: o Paid before commencement: License Fees paid / (No. of years from year of commencement to Year in which license expires) Paid after commencement: License Fees paid / (No. of years from year in which actual payment made to Year in which license expires) Consequences in case of transfer: o Compute un-allowed amount =Actual Cost (-) Deduction already allowed. o Treatment of consideration received: Whole license is trfd. & Net consideration is less than Un-allowed Amount: o Business Expenditure = Un-allowed amount (-) Net Consideration Part license is trfd. & Net consideration is less than Un-allowed Amount: o Amount of deduction = (Un-allowed amount (-) Net Consideration) / Remaining period of license.

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Whole or part of license is trfd. & Net consideration is more than Un-allowed Amount: Situation Treatment Net Consideration > Un-allowed amount, Business Income = Net Consideration (-) Un-allowed but < OG cost amount Net Consideration > OG cost Business Income = OG cost (-) Un-allowed amount Capital Gain = Net Consideration (-) OG Cost Treatment in the hands of transferee: Shall be allowed in equal installments over the balance license period. No further deduction for transferor: If whole or part of license is trfd. for a consideration more than the un-allowed amount, no deduction shall be allowed in the hands of transferor. No Depreciation allowable on such assets.

EXPENDITURE ON ACQUISITION OF COPY / PAT ENT RIGHT OR KNOW-HOW [SEC.35A & 35AB]: This provision applies with respect of capital expenditure incurred for acquiring copy/patent right or know-how up to 31/03/1998. From 01/04/98 onwards the Assessee is required to constitute the above block as intangible asset and avail the depreciation.

EXPENDITURE ON ELIGIBLE PROJECTS / SCHEM ES [SEC.35AC]: Payment of any sum to the below entities qualifies for exemption for approved eligible projects: For all assesses: Payment to o Public Sector Company; o Local Authority; o Approved Association; o Institute, if form no. 58A from the entity for which contribution is made should be furnished. o For Companies only: Direct Expenditure incurred on eligible project / scheme, Chartered Accountants Certificate in Form No. 58B should be furnished. Amount of Deduction: Actual payment or actual expenditure incurred. Withdrawal of approval: o If the national committee is satisfied that the association or institution is not carrying out the project or Scheme. o An opportunity being heard shall be given to the association or Institution. Consequence of withdrawal: o After withdrawal of the approval, such contribution shall be treated as income under the head profit and gains from business and profession. No Deduction for any other section, in respect of expenditure incurred u/s 35AC.

CONTRIBUTION TO RURAL DEVELOPMENT PROGRAM [SEC.35CCA]: Applicability: All Assessees.

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Nature of Expenditure: o Contribution made to approval association / institution for implementation of Rural Development Program o Contribution to: National Fund for Rural Development, National Urban Poverty Fund. Deduction: Actual Expenditure Incurred. Subsequent Withdrawal of Approval: If approval granted for the university, college, etc. is withdrawn also assessee is eligible to get the deduction.

AMORTIZATION OF PRELIMINARY, AMALGAMATION AND DEMERGER EXPENSES [SEC.35D & 35DD]: Applicability: The Assessee should be ano Indian Company, or o Non-Corporate Resident Assessee. Purpose of preliminary expenses: o Time of Incurring: Before commencement: for setting up of any undertaking or business. List of Specified expenditure: Non-Corporate Resident Assessee Preparation of feasibility report, project report, or Conducting Market Survey or Any other survey or Engineering services relating to the business. Legal charges for drafting any agreement for setting-up for conduct of any business. After commencement: extension of existing undertaking or setting-up of new unit Indian Company The same as specified for Non-Corporate Resident Assessee & the following: o Legal Charges for drafting & printing MOA & AOA. o Fees for registering the company under the Companies Act, 1956. o Issue of shares and debenture of company, underwriting commission, brokerage & charges for drafting, typing, printing and advertisement of prospectus.

Maximum Ceiling: o Indian Company: 5% of cost of project or 5% of capital employed @ the option of the company o Other Assessees: 5% of cost of project. Amount of Deduction: Actual expenditure, restricted to maximum ceiling and Allowed in 5 equal installments. Capital Employed: Issued Share Capital + Debentures + Long Term Borrowings. Cost of the Project: Actual cost of fixed assets as shown in the books on the last day of the PY in which: o Business is commenced, or o Extension is completed, or o New industrial unit commences production.

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Audit Report: Form No. 3AE along with return to be furnished for assessees other than Companies and Co-operative societies. Amalgamation / Demerger of Indian Company [Sec.35DD]: The amalgamated or resulting company is eligible for deduction from the PY in which Amalgamation / Demerger take place. No deduction is entertained under any other section in respect of expenditure incurred u/s 35D.

EXPENDITURE BY WAY OF VRS COMPENSATION [ SEC.35DDA]: Applicability: All Assessees. Conditions: o Retirement should be in accordance with Voluntary retirement. o Payment shall be made in any year, each such payment shall be independently amortized over a period of 5 years. No deduction is entertained under any other section in respect of expenditure incurred u/s 35DDA.

EXPENDITURE ON EXTRACTION OF MINERALS [SEC.35E]: Applicability: The Assessee should be ano Indian Company, or o Non-Corporate Resident Assessee. Eligible Expenditure: o Expenditure incurred wholly for: Operation relating to prospecting of such mineral or group of minerals specified in Schedule VII, or On development of Mines or other Natural Deposits of such mineral or group of minerals. (Less): Expenditure met by any other person Ineligible Expenditure: o Expenditure on acquisition: of deposits of such mineral or rights in or over such site; Capital expenditure on which depreciation is allowable u/s 32. of site of the source of any mineral or rights in or over such site; Sale, Salvage, Compensation or Insurance Money realized.

Period of incurring expenditure: Incurred any time during the commercial production and any one or more of the 4 years immediately preceding the year of commercial production. Period of Amortization: 10 years commencing with the PY of commercial production. Maximum Ceiling of deduction in a PY: Least of the followingo Amount of installment (1/10th of Eligible expenditure) o Income arising from commercial exploitation.

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Audit Report: Form No. 3AE along with return to be furnished for assessees other than Companies and Co-operative societies. Amalgamation / Demerger: O/s amount will be allowed to the amalgamated or resulting company. No deduction is entertained under any other section in respect of expenditure incurred u/s 35E.

OTHER DEDUCTIONS [SEC.36]: Following are the list of such expenses: 1. Insurance premium paid in respect of insurance against the risk of damage of stock or stores, Insurance premium paid by Federal Co-operative society for insurance of the life of cattles owned by the member of primary society; 2. Bonus or commission paid to the employees in respect to the service rendered. Such sum would not be payable as profit or dividend; 3. Interest paid in respect of capital borrowed for the purpose of business and profession, Interest on loan borrowed from public financial institutions or state financial institution & Interest on term loan borrowed from schedule bank also be allowed as deduction; 4. Contribution to recognized provident fund or approved superannuation fund subject to section 43 B; 5. Contribution to any approved gratuity fund, Any contribution received from the employees towards their welfare fund, if such sum remitted on or before the due date specified under the relevant due date; 6. In respect of animal used for the purpose of business and profession otherwise than stock in trade and have died and become permanently useless for such purpose, the difference between the actual cost and the amount if any realized in respect of the carcasses or animals; 7. Amount of bad debt written off but subject to the following conditions: a. Bad Debts: i. The debt should be incidental to the business, ii. It should be taken in to account in computing the income of the assessee or it should represent money lent in the ordinary course of banking or money lending business, iii. It should be written off in the books of accounts, iv. The business in respect of which the debt is incurred is continued during the relevant previous year; b. In respect of provision for bad and doubtful debt made by following entity: i. A scheduled or non scheduled bank incorporated in India, then an amount not exceeding 7.5% of gross total income(before giving the effect of this deduction) and 10% of the aggregate average advance made by the rural branch of such banks, ii. A bank incorporated outside India, an amount not exceeding 5% of Gross total income; c. A public financial institution or a state financial co operation or a state industrial development co operation, an amount not exceeding 10% of gross total income. 8. Amount transferred to special reserve: In the case of:a. Financial corporation engaged in providing long term finance for industrial or agricultural development or development of infrastructure facility in India, or b. Public company providing long term finance for construction or purchase of residential house in India, c. An amount least of the following shall be the deduction:

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9.

10. 12.

13. 14. 15.

i. 40% of profit of such business carried to a special reserve account created and maintained, or ii. 20% of profits of business, d. Where the aggregate amount of reserve account exceeds twice the paid up capital and free reserve then there is no deduction for such excess amount; Any expenditure incurred by the company for promoting family planning among the employees. If the expenditure is in the nature of capital expenditure, then, deduction is allowed over a period of 5 year period; Any sum paid by a public financial institution by way of contribution towards exchange risk premium; Payment under Governing Statute: a. Entity should have been established by or constituted under Central / State / Constitution Act, b. It should be notified by central Govt., c. Expenditure should be incurred for objects and purposes authorized by the governing Act, d. Capital Expenditure will not be allowed as deduction; Banking Transaction Tax: a. Actual Amount paid shall be allowed; Contribution to Credit Guarantee Fund Trust for small industries: The fund should be notified by the Central Govt; Securities Transaction Tax paid: a. Taxable Securities Transactions should be entered into during the PY, b. Income arising from such transaction is included under the head PGBP.

GENERAL EXPENDITURE [SEC.37]: Any Expenditure: Not being expenditure of the nature described in the section 30 to 36; Not being in the nature of capital expenditure; Not being in the nature of personal expenditure of the assessee; Laid out or expanded wholly or exclusively for the purpose of business or profession shall be allowed as a deduction in computing the income under the head profit and gains from business and profession.

ADVERTISEMENT IN PUB LICATION OF A POLITICAL PARTY [SEC.37(2B)]: No allowance shall be made in respect of expenditure incurred by an assessee on any advertisement in a souvenir, brochure, pamphlet, or the like publication by a political party. Amount In-admissible: Amount Incurred / paid towards advertisement.

DISALLOWANCES IN ALL THE CASES [SEC.40(A)]: Sec.40(a)(i): Interest, salary, royalty, fee for technical service or any other sum payable outside India or payable in India to a NRI or a foreign company is not deductible unless tax is deducted at source The same shall be allowed as a deduction while computing the Income of the PY in which such tax as been paid within the time limit u/s 200 & provisions of Chapter XVII-B.

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Sec.40(a)(ii): Salary payable outside India or in India, to a Non-Resident, without deduction of tax Amount Inadmissible: Amount paid. Sec.40(a)(ia):Payment to Residents: Interest, Commission or Brokerage, Rent, Royalty, Fees for Professional / Technical Services payable to a Resident, or amounts credited or paid to a Resident Contractor, on which tax is deductible, but tax has not been deducted or after deduction, tax has not been paid within the time limit u/s 139(1). - Amount paid without deduction of tax, or where tax has been deducted, amount not remitted to the Govt. Will be allowed while computing the Income of the PY in which such tax has been paid. Sec.40(a)(ii): Rates or Taxes levied on profits or gains of any business or profession: Amount Inadmissible: Amount paid including tax paid abroad eligible for relief u/s 90 / 90A or deduction from Income Tax payable u/s 91. Sec.40(a)(iia): Wealth tax: Amount Inadmissible: Amount paid. Sec.40(a)(iv): Payment to Provident Funds / Other Funds established for the benefit of the Employees, for which no effective arrangements are made to secure or deduct tax @ source: Amount Inadmissible: Amount paid. Sec.40(a)(v): Ant tax of the employee paid by the employer u/s 10(10CC): Amount Inadmissible: Amount paid.

DISALLOWANCES IN THE CASE OF A PARTNERSHIP FIRM [SEC.40(B)]: Interest paid to the partner of the firm is not deductible unless the following conditions are satisfied: o It should be authorized by and in accordance with the partnership deed o It should be relate to the period falling after the partnership deed o It should not exceed 12% of p.a. similar rate of interest. Disallowance of interest is subject to the following condition: o If a person is a partner in his representative capacity and receive interest in the firm and if he receives the interest in his individual capacity from the firm such interest should not be disallowed. o If a person who is a partner in his individual capacity and receive interest for and on behalf of someone else from the firm in which he is a partner such interest should not be disallowed. Any amount paid by way of Salary, Bonus, Commission or Remuneration by a firm to a partner is not deductible in the computation of income of the firm unless the following condition are satisfied: o It should be authorized by and in accordance with the partnership deed. o It should be relate to the period falling after the partnership deed. o It should be paid to a working partner. The maximum permissible remuneration is derived on the basis of the book profits of the firm. Maximum Remuneration Rs. 1,50,000/- or 90% of the Book Profits, whichever is higher. 60% of books profits.

Maximum permissible remuneration: Book Profits On the first Rs. 3 Lakhs On the balance of the book profits

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DISALLOWANCES IN THE CASE OF AOP OR BOI [ SEC.40(BA)]: Any amount paid by way of interest salary, bonus, commission or remuneration by association of person or body of person to its members is not deductible in the computation of income of AOP or BOI. If a member pays interest to AOP or BOI and also receive the interest from such AOP or BOI then net excess interest only disallowed in computation of income or loss. If a person is member in his representative capacity and receive interest in the firm and if he receives the interest in his individual capacity from the firm such interest should not be disallowed. If a person who is member in his individual capacity and receive interest for and on behalf of someone else from the AOP or BOI in which he is a member such interest should not be disallowed.

EXCESSIVE AND UNREASONABLE EXPENSES [SEC.40A(2)]: If any expense incurred by the assessee for goods supplied, service rendered, or facility provided from the specified person, then Assessing officer can disallow such expense to the extent it is unreasonable or excessive. Amount Disallowed: The excessive or unreasonable sum. Specified persons: o Individual Relative, Person in whose business the individual or his relative has substantial interest. o Company Director, Relative of the director, Person in whose business the Company, Director or any Relative of such Director has substantial interest. o Firm Partner, Relative of the partner, Person in whose business the Firm, any Partner or any relative of such Partner has substantial interest. o AOP Member, Relative of the Member, Person in whose business the AOP, any Member or any Relative of such member has substantial interest. o HUF - Member, Relative of the Member, Person in whose business the HUF, any Member or any Relative of such member has substantial interest. o Any other Assessee: Individual who has a substantial interest in the assessees business or profession, A HUF / AOP / Firm / Company / having substantial interest in the assessees business or profession. Relative to an Individual: Spouse, Brother, Sister or any lineal ascendant or descendant of the individual Substantial Interest: A person is said to have substantial interest, if he is beneficial owner of at least 20% of Equity Capital or entitled to 20% of the profits of the concern @ ant time during the PY. Determination of Unreasonableness or excessiveness by the AO: o Fair market value of goods and services. o Legitimate need of business or profession. o Benefit derived there from.

PAYMENTS IN EXCESS OF RS.20,000/-[SEC.40A(3)]: Nature of Expenditure: o Where an assessee incurs any expenditure,

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o

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for which, payment or aggregate of payments is made to a person in a day is in excess of Rs. 20,000/- (Rs. 35,000/- in case of payment made for plying made for plying, hiring or leasing goods carriages), The whole of such expenditure shall not be allowed as a deduction.

Payment of O/s liabilities: o If an expenditure is allowed as a deduction on due basis, and the liability is settled after the end of the PY otherwise than by a Account Payee Cheque or Draft, by payment or aggregate of payments in excess of Rs. 20,000 to a single person on a day, then the expenses so allowed shall be treated as business income of the PY in which such payment was made. Applicability: o This rule does not apply in respect of an expenditure, which is not claimed as deduction u/s 30 to 37. o This rule is not meant for purchase of capital assets not meant for resale or repayment of loan. o This rule is applicable for advance paid for an expenditure covered u/s 30 to 37. For exemptions refer rule 6DD.

PROVISION FOR PAYMENT OF GRATUITY [SEC.40A(7)]: Any provision in the books for payment of Gratuity shall not be allowed as a deduction unless:o the provision is made for any contribution towards an Approved Gratuity Fund, or o The provision for Gratuity, which has become due and payable during the PY.

NON-STATUTORY OR UNRECOGNIZED WELFARE FUNDS [SEC.40A(9)]: Any contribution made by the assessee, as an Employer to any Unrecognized or Non-Statutory Welfare Fund is not allowable as a deduction.

DEDUCTION BASED ON ACTUAL PAYMENTS [SEC.43B]: Nature of Expenses: o Any sum payable by the Employer by way of contribution to PF or Superannuation Fund or other Fund for the welfare of the employees. o Tax, Duty, Cess, or Fees payable under any Law in force.

Time Limit for payment: o Payment shall be made during the relevant previous year or on or before the due date for filing of return u/s 139(1). o If payment is made after the due date of filing the return, it shall be allowed in the year of payment only. Deemed Profit [Sec.41 Where deduction has been made in respect of any loss, expense or trading liability and subsequently assessee or successor of the business has obtained any amount in respect such loss or expenditure, or Any benefit in respect of such trading liability by remission or cessation thereof, The amount so obtained or value so accrued shall be deemed to be the income of the assessee. Example:

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o o o

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Travelling expenditure incurred by the assessee and later re-imbrued by the manufacturer or any other persons. It shall be deemed to be the income of the assessee. Stock is destroyed by fire and debited as a loss in profit and loss account and later any claims received from the insurance company. Credit purchase is made and later some discount allowed by the supplier. In this case there is a remission or cessation of the liability.

In case of an undertaking engaged in generation and distribution of power where assessee can claim depreciation in SLM method. Where any asset is sold for a price which is more than the depreciable value the surplus to the extent of depreciation already allowed shall be deemed to be the income of the assessee. Any amount realized on transfer of asset used for scientific research is taxed as income of the assessee to the extent of deduction which is already availed U/s 35. Any amount recovered by the assessee against the bad debt which is earlier allowed as deduction is deemed to be the income of the assessee. Any amount transferred to the special reserve by the financial institution prescribed by 36(viii) (1) is allowed as deduction. But any amount subsequently withdrawn by the assessee shall be deemed to be the income of the assessee. Any assessee who is chargeable to tax in respect of discontinued business, then any loss incurred after the discontinuation of the business shall be allowed to be set off against the deemed profit.

BUSINESS OF PROSPECTING OR EXTRACTION OF MINERAL OIL [SEC.42]: Eligible Assessees: Any assessee who is carrying on the business of prospecting for or extraction of minerals and with whom government of India has entered in to an agreement.

Following Deductions shall be spelled out: o Expenditure in respect of in fructuous or abortive exploration expense in respect of area surrounded prior to beginning of commercial productions. o Expenditure incurred in respect of drilling or exploration activity or any service obtained in respect of such drilling or exploration. This expense can be claimed before or after commencement of business. o Depletion of mineral oil in respect of mining area in respect of Assessment year relevant to the previous year commercial production begun. Where there is any transfer of business whether partially or wholly or any interest in such business is transferred then following treatment shall be occurred. o Where the proceeds of the transfer are less than the expense incurred remains un allowed, the balance expenditure arrived at by reducing the proceeds from the expenditure remains un allowed shall be allowed as deduction in the previous year in which business or interest thereof is transferred. o Where the proceeds of the transfer are more than the expense incurred remains un allowed, the deduction already allowed shall be treated as income from business or profession in the year in which transfer take place. Exchange Rate Fluctuation [Sec.43A]: Where any asset acquired from abroad and in terms of exchange rate variation, liability in terms of payment towards such asset increase or decrease, then, actual cost of the asset shall be increased or decreased accordingly.

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Provision for Bad Debts of Banking Companies & Financial Institutions [Sec.43D]: Following assessee can claim interest on bad and doubtful debt: Public Financial institution Scheduled bank State financial corporation State industrial development corporation.

Public company carrying the business of providing long term finance for construction or purchase of house in India. These companies should be registered with National Housing board. Interest shall be in accordance with the guidelines issued by RBI or guidelines prescribed by the national housing board. SPECIAL PROVISIONS: GENERAL INSURANCE BUSINESS [SEC.44]: Any person carrying on insurance business their income shall be chargeable to tax under the head profit and gains from business and profession as per the First Schedule of the Income Tax Act. Amount set apart by the insurance company for redeeming preference shares shall be treated as expense. These are not the expense which is covered from section 30 to 36 of the income tax Act. (General Insurance Corporation of Indi a V/s CIT)

TRADE, PROFESSION OR SIMILAR ASSOCIATIONS [SEC.44A]: Applicability: Applies to Trade, Profession or Similar Associations which does not distribute any part of income to its members. Exception: Association for the purpose of Control, Supervision, Regulation or Encouragement of the profession. Any amount received from the members by way of contribution or subscription which is fall short of expenditure, then the deficit shall be allowed as deduction while computing the income under the head profit and gains from business and profession. Such deficit can be set off against any other head of income of above association. While setting off such deficit, priority shall be given for carry forward loss of earlier year. Deduction permissible under this provision does not exceed 50% of income of the previous year. Income of the above mentioned association is not distributed to its members except as grant to any of the association affiliated to it.

Presumptive Income Residents: Particulars Sec.44AD Applicability Any business except the business of plying, hiring or leasing goods carriages specified u/s 44AE, and Amount of Presumptive Whose total turnover or gross receipts in the PY does not exceed Rs.60 Lakhs. 8% of the total turnover or such higher sum as declared by the assessee.

Sec.44AE Person carrying business of plying, hiring, and leasing goods carriages and not owning more than 10 goods carriages at any time during the PY.

In case of-

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Income

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Heavy Goods Vehicle Rs. 5,000 pm. or part of a month, or more.

Others Rs. 4,500 pm. or part of a month, or more. Income shall be considered from the date of ownership. Here ownership = possession. Note: Presumptive income u/s 44AD, 44AE, or a higher sum declared by the assessee, will be deemed to be the profits and gains of business or profession. Presumptive Income Non-Residents [Sec.44B to Sec.44C]: Sec 44B 44BB 44BBA 44BBB 44D 44C Nature of Business Shipping Business Business of providing services or facilities in connection with supply of plant / machinery on hire for extraction of mineral oil Operation of Aircraft Foreign companies engaged in Civil Construction Business, in connection with Power Projects approved by Central Govt. Royalty or Technical Fees derived by a Foreign Company from Govt. or Indian Concern Head Office Expenditure Note: ATI means TI computed before giving deduction for unabsorbed depreciation, unabsorbed business loss and deduction under chapter VIA Profit on Turnover 7.5% of Gross Turnover 10% of Gross Turnover 5% of Gross Turnover 10% of Gross Turnover Rate of tax @ 20% Amount of Deduction = Least of 5% of ATI, or HO expenses attributable to Indian Business.

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Provisions to understand: What is the scope of income chargeable under Capital gains. Year in which Capital gains are taxable. What are capital assets, short term capital gains, and long term capital gains. Computation of capital gains. Computation of capital gains for depreciable assets. Computation of capital gains for slump sales. Tax treatment of STCG and LTCG w.r.t sale of equity shares Exemptions allowed. Transfer which is not considered as transfer. Rates for LTCG and STCG.

CHARGING SECTION: Sec 45(1): Any profits or gains arising from transfer of capital assets effected in the previous year will be chargeable to tax under head income from capital gains. Definitions of key words: Profits or gains: Under this head there is no definition for profits or gains but calculation of such profits or gains are explained under Sec 48. TRANSFER: As per Sec 2(47) TRANSFER means:1. 2. 3. 4. 5. 6. 7. Sales, Exchange, relinquishment of assets; or Extinguishment of any right there in; or Compulsory acquisition under law or Conversion of capital asset into stock in trade or The maturity or redemption of zero coupon bonds or Part performance of a contract or Any transaction whether by way of acquiring shares in or by way of becoming member of co operative society, company or association of person or by way of any arrangement or agreement or any other manner which has the effect of transferring or enabling enjoyment of any immovable property

CAPITAL ASSET: As per section 2(14) capital asset means property of any kind held by assessee weather or not connected with business or profession. But does not include:-

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a. b.

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c. d. e. f. Note: 1. Jewelry:

Any stock in trade, Consumables and raw materials held for sales Personal effects:- The movable property held by assessee or members of family for personal use but excludes: I. Jewellery1 II. Archeological collections III. Drawings IV. Painting V. Sculptures or VI. Anny work of art. 2 Rural agricultural land in India which is not in specified area. 61/2% gold bonds, 1978, 7% gold bonds,1980, or National defenses gold bond issued by CG. Special bearer bonds Gold deposit bonds under gold deposit scheme.

2.

It includes a. Ornaments made of Gold, Silver, Platinum etc., b. Precious or semi-precious stones weather studded or not Rural agricultural land: Only rural agricultural land in other than specified area is exempted Specified area: 1. Agricultural land satiated within the limit of municipality or cantonment board with a population more than 10000 according to last census. 2. An agricultural land satiated within 8 Kms from local limits of municipality or cantonment board.

In capital asset there are 2 types they are:

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Capital asset

Short term Sec 2(42a)

Long term Sec 2(42b)

For shares

Other than shares Which is not short term capital assets

It includes:

Shares, Listed securities, Units of UTI


Zero coupon bonds etc. The above held for not more than 12 months

Capital asset held by an assessee for not more than a period of 36 months immediately preceding to the period of transfer

Capital gains arising from above are treated as short term capital gains

Capital gains arising from above are treated as Long term capital gains

Sec 45(1A): Where a person receives compensation from insurance company for destruction of capital asset due to floods, Tycoons, earthquakes, riots, fire or natural calamities. Then the profits or gains arising from such receipts are taxed under capital gains in the year of receipt of money. Sec 45(2): Conversion of capital asset to STOCK IN TRADE the profit or gain arising from it will be taxed under head capital gains. Income chargeable under CG Fair market value on date of transfer Less: Historical cost Long/short term capital gain Note: In this tax is attracted in year of sales of stock in trade. COMPUTATION OF CAPIT AL GAINS SEC 48: A) Short term capital gain computation Particulars Full Value of consideration Less: Expense incurred in connection with transfer Net Consideration Amount XXX (XXX) XXX Income chargeable under PGBP Sales consideration Less: Fair market value on date of transfer Income from business or profession.

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Less: Cost of acquisition Less: Cost of improvement Less: Exemptions U/s 54B,54D,54G,54GA,10(37) Taxable STCG B) Long term capital gain Particulars Full Value of consideration Less Expense incurred in connection with transfer Net consideration Less Indexed cost of acquisition less Indexed cost of improvement Less Exemption U/s 54, 54B,54D,54EC,54EC,54F, 10(37), 10(38) Taxable LTCG Full value of consideration: (XXX)

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XXX

Amount XXX (XXX) XXX (XXX) (XXX) (XXX) XXX

Total value of consideration received from transfer of capital asset is called full value of consideration. Expenses incurred in connection with transfer: Expenses incurred in connection with transfer i.e., 1. 2. 3. 4. Stamp duty, Advertisement fee, Broker commission, Consultancy fees.

COST OF ACQUISITION AS PER SEC 49, 51: Sec 49: Cost of acquisition for specified mode referred to section 49 (1) Following are the list of specified mode: Partition of HUF Gift Inheritance

Amalgamation or Demerger Cost to the previous owner shall be adopted as cost of acquisition. If the capital asset acquired to any other mode, then, the cost incurred to him shall be adopted as cost of acquisition to the assessee In any of the above methods, the asset was acquired before 1st April 1981 then, the following are the cost of acquisition: FMV as on 1st April 1981 or Actual cost of asset Whichever is greater

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PROVISIONS RELATING TO RECEIPT OF ADVANCE MONEY: SEC 51 If any of the capital asset was subject matter of negotiation and advance received in respect thereof , transfer of the asset was not taken place, then, such advance need to be deducted from any of the below component for the purpose of computing capital gain Cost of acquisition FMV

WDV Depends upon the nature of capital asset In case of shares allotted by amalgamated company in lieu of shares held in amalgamating company The cost of acquisition of above share shall be value of shares allotted by the amalgamated company. In case of conversion of debenture, debenture stock or deposit certificate in to shares and debenture of the same company

Cost of acquisition shall be the cost of debenture, debenture stock or deposit so obtained on such conversion.

SPECIAL PROVISION FOR FULL VALUE OF CONSIDERATION IN CERTAIN CASES SEC.50 C Scope This provision is applies to transfer of capital asset being land or building or both. This provision deeming as stamp duty value as full value of consideration if the actual consideration is less than stamp duty value.

Provision:

Full value of consideration (higher of)

Stamp valuation
Note : a. b.

FMV

If stamp valuation is high and solicited by the assessee then the Valuation officer will be appointed. If not solicited then Stamp valuation will be FVC.

Conditions for reference to valuation officer: Reference shall be made if and only if stamp duty value has not been in dispute in any appeal or revision before any authority or court or High court.

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Where such reference had made then provision of section 16 A shall apply with suitable modification.

Valuation by valuation report If the value as per valuation report exceeds stamp duty value, then such stamp duty value shall be taken as full value of consideration.

REASSESSMENT Subsequent to the making of assessment in case of adopting the stamp duty calue as the full value of consideration, if such value is revised in any appeal or revision etc, then the Assessing Officer shall amend the order of assessment to re compute the capital gain on the basis of revised value. COST OF IMPROVEMENT AS PER SEC 55: Any capital expenditure incurred for improvement of capital asset and not allowed as deduction under any other head of income shall be allowed as deduction. Cost of improvement incurred on or after 1st April, 1981 is eligible for deduction Cost of improvement of following shall be taken as NIL i) Goodwill of the business ii) Right to manufacture, produce or process any articles or things iii) Right to carryon any business. Cost of acquisition of special cases Note: If cost of acquisition and cost of improvement should be indexed for long term capital assets If self generated good will is transferred then cost of acquisition is adopted as Nil In case of acquired good will then actual cost incurred for acquiring the same shall be taken as cost of acquisition In both the above case, cost of improvement shall be taken as Nil

At present following case of capital asset, the cost of acquisition can be taken to be Nil Self generated goodwill Tenancy right Stage carriage permit Loom hours Bonus share Right to subscribe to right shares Any right to manufacture, produce or process any articles and things A trade name or brand name associated with the business Right to carry on any business Trading or clearing right of the recognized stock exchange under a scheme of corporatization or demutualization.

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Indexation:

Widget 5: Capital gains

Indexing is a process of converting the cost of acquisition and cost of improvement to the current date. Cost Inflation Index Table Year Index Year Index Year Index Year Index 81-82 82-83 83-84 84-85 85-86 86-87 87-88 100 109 116 125 133 140 150 88-89 89-90 90-91 91-92 92-93 93-94 94-95 95-96 161 172 182 199 223 244 259 281 Cost of Acquisition Index of Year of Acquisition 96-97 97-98 98-99 99-00 01-02 01-02 02-03 305 331 351 389 406 426 447 03-04 04-05 05-06 06-07 07-08 08-09 09-10 10-11 463 480 497 519 551 582 632 711

Indexed Cost of Acquisition =

X Index of Year of Transfer

Indexed Cost of Improvement =

Cost of Improvement Index of Year of Improvement

X Index of Year of Transfer

Exemptions from capital gains: There are 2 types of exemptions they are: 1. Requires reinvestment 2. No reinvestment is required. Exemptions which requires reinvestment as follows:

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Sec 54 Caption Sale of residential property & purchase of another Sale of agricultural land & purchase of another Compulsory acquisition of land & building belonging to an individual undertaking Investment in bonds Applicability Individual & HUF Property sold Property as in IHP, LTCA Time limit for investment i) Purchase 1 year before or 2 years after the date of transfer ii) Construction 3 years from the date of transfer Within 2 years from the date of transfer Within 3 years from the date of transfer

Widget 5: Capital gains


Lock In Period 3 Yrs Minimum Investment Capital gain Quantum of deduction Amount invested/ LTCG whichever is less Amount invested/ LTCG whichever is less Amount invested/ LTCG whichever is less Amount invested/ LTCG whichever is less Amount invested/ LTCG whichever is less Amount invested/ LTCG whichever is less Amount invested/ LTCG whichever is less

54B

Individual

Agricultural land

3 Yrs

Capital gain

54D

Any person

Land & Building forming part of an industrial undertaking LTCA

3 Yrs

Capital gain

54EC

Any person

Within 6 months from the date of transfer i) Purchase 1 year before or 2 years after the date of transfer ii) Construction 3 years from the date of transfer 1 year before or 3 years from the date of transfer

3 Yrs

Capital gain

54F

Sale of any Capital asset & purchase of residential property Shifting of industrial undertaking from urban to non-urban Transfer of an industrial undertaking from any area to SEZ

Individual & HUF

LTCA

3 Yrs

Entire sale consideration

54G

Any person

54GA

Any person

Land & building, plant and machinery forming part of the industry Land & building, plant and machinery forming part of the industry

3 Yrs

Capital gain

1 year before or 3 years from the date of transfer

3 Yrs

Capital gain

Exemptions which requires no reinvestment as follows: Section 10(37) 10(38) Applicability Individual & HUF All assessee Provision Compensation on agricultural land acquired by law/RBI/SG LTCG arising on transfer of listed securities , equity shares

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Widget 5: Capital gains

COMPUTATION OF CAPIT AL GAIN IN CASE OF DEPR ECIABLE ASSET SEC.50 Two conditions must be full filled under section 32 There must be some value for the block on which prescribed percentage can be applied Where any of the above conditions are not applicable then section 32 cease to apply and section 50 will be applicable resulting in short term capital gain or loss There must be at least one asset in the block ; and

SLUMP SALES SEC.50 B Section 2 ( 42 C) Transfer of one or more undertaking as a result of lump sum consideration without value being assigned to individual assets and liability on such sales. Notes: Determination of asset and liability for the purpose of payment of stamp duty or registration fee shall not be regarded as assignment of individual value to assets and liability. Taxability: Any profit and gains arising from the slump sales affected during the previous year shall be charged to income tax as capital gains If the undertaking held for more than 36 month then such gains shall be regarded as long term capital gain else it is regarded as short term capital gain. The net worth of the division so transferred shall be regarded as cost of acquisition and cost of improvement. Meaning of net worth: It shall be the aggregate value of total asset of the undertaking or division as reduced by the value of liability of such undertaking or division as appearing in the books of accounts. Any changes in the value of asset on account of revaluation of asset and liability shall be ignored for the purpose of computing net worth. Value of asset for the purpose: Depreciable assets WDV of block of assets Other assets - Book value of such assets

Report from CA A report from the chartered Accountant indicating computation of net worth and certifying the correctness of net worth is required.

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Widget 5: Capital gains

TAX ON LONG-TERM CAPITAL GAINS [ SECTION 112] Where the total income of an assessee includes long-term capital gains, tax is payable by the assessee @20% on such long-term capital gains. The treatment of long-term Capital gains in the hands of different types of assessees are as follows (1) Resident individual or HUF: (Total Income WITHOUT LTCG) X Tax Rate + 20% on LTCG. (2) Domestic Company: Long-term capital gains will be charged @ 20%. (3) Non-corporate non-resident / foreign company: Long-term capital gains will be charged @20%. (4) Residents (other than included in (i) above) Long-term capital gains will be charged @20%.

SHORT TERM CAPITAL GAINS TAX IN RESPECT OF EQUITY SHARES / UNITS OF AN EQUITY ORIENTED FUND [SECTION 111A] (i) This section provides for a concessional rate of tax (i.e. 15%) on the short-term Capital gains on transfer of (1) An equity share in a company or (2) A unit of an equity oriented fund. (ii) The conditions for availing the benefit of this concessional rate are (1) The transaction of sale of such equity share or unit should be entered into on or after 1.10.2004, being the date on which Chapter VII of the Finance (No. 2) Act, 2004 came Into force; and (2) Such transaction should be chargeable to securities transaction tax under the said Chapter.

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Widget 6: Income from Other sources


Widget 6: Income from Other sources

Provisions to understand: Which income is chargeable under this head. What is Bond washing transactions & Dividend stripping. What rate is applicable on casual income. Admissible deductions. Inadmissible deductions.

Relevant accounting system for calculation of Income. Introduction: I. II. Income, Profits or gains of an Assessee which is not chargeable in above 4 heads will be chargeable to tax under this head. So, this is a residuary head of income to bring within the scope of taxable income.

CHARGING SECTIONS & ITS COVERAGE (SEC 56): Income chargeable under this head is as follows: 1. 2. Dividend income {covered under Sec2(22)(a) to (e)} Casual income from Winning of lotteries Crossword puzzles Horse races Gambling

3. 4. 5. 6. 7. 8.

Card games Etc., Such income chargeable to tax at a flat rate of 30% U/S 115BB Employees contribution towards staff welfare scheme Interest on securities Rental income of machinery, plant or furniture Sum received under Keyman insurance policy Gift Interest on compensation or enhanced compensation

1. Dividend income: Normally Dividend income from Indian Company shares is not taxable. But dividend received as per Sec 22(a) to 22(e) is taxable under this head. What is dividend as per Sec 22:

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Section: 22(a) 22(b) Distribution of Anything in cash or kind Anything in cash or kind Source Accumulated profit (capitalized or not) Accumulated profit (capitalized or not)

Widget 6: Income from Other sources


Remarks From release of part or all assets of the company In way of 1. Debentures or deposit certificates with or without interest 2. Bonus shares to preference share holders 1. Distribution done on occasion of Liquidation Note: Here liquidation means compulsory of acquisition by the govt or a corporation owned or controlled by the govt. Any distribution by the company on account of reduction of share capital Applicable for a company in which public is not substantially interested 1. To share holder who holds beneficial part of Equity which is not less than 10% 2. To concern in which share holder holds substantial interest i.e., 20% or more share and 3. Payment on behalf of or for the individual benefit of any such share holder made to any person.

22(c)

Anything in cash or kind

Accumulated profit (capitalized or not) Note 1

22(d) 22(e)

Anything in cash or kind Any part payment made by company of

Accumulated profit (capitalized or not) Loans and advances

Note: 1.

Accumulated profit shall not include any profit prior to 3 consecutive previous years immediately preceding the previous year in which acquisition taken place.

Exceptions: Any advance or loan to a shareholder or the concern in which such share holder had substantial interest shall not be deemed as dividend ifThe loans and advance is given during the normal course of the business provided lending of money is substantial part of the business of the company. Any payment made by a company on purchase of its own shares from a share holder in accordance with the provisions of section 77 A of the companies Act, 1956 shall not be regarded as dividend. Any distribution of shares pursuant to a demerger by the resulting company to the shareholder of the demerged company shall not be treated as dividend

SEC 115BB TAX INCIDENCE ON CASUAL INCOME: Casual income: It means income derived from Winning of lotteries Crossword puzzles Horse races Gambling Card games Etc.,

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Provision:

Widget 6: Income from Other sources

Casual income derived will be chargeable to tax with a flat rate of 30% plus SURCHARG if applicable, plus EDUCATION CHESS. NOTE: 1. 2. 3. 4. No expenditure or allowance can be allowed for deduction. Deductions under Chapter VIA are not allowed. No set-off, depreciation losses are also not allowed. Adjustment of this income with unexhausted basic exemption limit is not permitted.

TAX INCIDENCE ON GIFT RECEIVED: The objective of this provision is to bring in to tax net the bogus transaction in the name of gift from unknown person Any gift from non relative shall be subject to tax u/s 56 (2)

Following four categories must be satisfied are: Received by a individual or HUF Received on or after Oct 1, 2009 The sum of money or property falls in any of the following four categories It does not fall in the exempted category Tax Treatment For the ceiling of Rs. 50,000 whether a single transaction would be examined or all transactions of the PY will be considered All Transactions

Category

Category 1 Any sum of money (Cash/ Cheque/ DD)

If amount received exceeds Rs. 50,000 form one or more persons during a PY whole of such aggregate value will be chargeable to tax If any immovable property received and the stamp duty exceeds Rs. 50,000, stamp duty will be chargeable to tax. If aggregate FMV of movable property received without consideration exceeds Rs. 50,000, the whole of the aggregate FMV of the movable property will be chargeable to tax If received for a consideration less than the aggregate FMV of the property by an amount exceeding Rs. 50,000 then the difference between the aggregate FMV and

Category 2 Immovable property without consideration

Single Transaction

Category 3 Movable property without consideration

All Transactions

Category 4 Movable property for a consideration less than the FMV

All Transactions

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Widget 6: Income from Other sources

the consideration is chargeable to tax The benefit of basic exemption limit is not available for the following: Immovable property being land and building or both Shares and securities Jewellery Archaeological collection Drawing and painting Sculpture Any art work

SEC 57: PROVISIONS R ELATING TO ADMISSIBLE DEDUCTIONS Admissible Deductions: Deductions are expenses allowed to be deducted from income earned in which EXPENSES are deemed or incurred actually.

Expenses allowed for deduction are called admissible deductions. Income earned or source of income Admissible deductions Any reasonable expenditure incurred for realization of Dividend income other than exempted dividend & such income. Interest income In respect to funds collected from EMPLOYEES for Deduction shall be allowed to the extent the amount is welfare fund contribution. remitted within the relevant due date Family Pension Least of the following: 1/3rd of pension amount or In respect of income earned by way of lease rental on letting of machinery, and furniture with or without building Other deductions ` 15000/i) Repairs ii) Insurance iii) Depreciation

Any other expenditure incurred by the Assessee other than i) capital expenditure ii) Personal expense 50% of such interest is allowed

interest received on compensation or enhanced compensation

No other deductions are allwed

SEC 58: PROVISIONS R ELATING TO INADMISSIBLE DEDUCTIONS Inadmissible Deductions: Deduction which is not Admissible deduction, which are as follows: Personal expense Wealth tax Interest and salary payable outside India, if tax has not been paid or deducted at source. Expense of the nature referred to in Section 40 A

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Widget 6: Income from Other sources

METHOD OF ACCOUNTING: Income chargeable under this head is computed in accordance with the method of accounting regularly employed by the assessee. If books are maintained on: Mercantile Basis:- Income is taxable and expenditure is deductible on due basis Cash Basis:- Income is taxable on receipt basis and expenditure is deductible on payment basis

BOND WASHING TRANSACTION: 1. 2. 3. A transaction where securities are sold before due date of interest and reacquiring after the due date is called Bond washing transaction. This adopted by a person with huge income to avoid tax in such cases transferee will be taxable. In order to discourage such transactions, the interest derived will be deemed to be income of transferor and taxable under his hands U/S 94(1)

DIVIDEND STRIPPING: 1. 2. It means sale of securities with cum interest If an assessee who has beneficial interest in selling such securities in such a manner that either no income is received or income received is less than the sum he would have received if such has accrued from day to day. Then such income will chargeable to tax in the hands of transferor U/S 94(2).

3.

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Widget 7: Clubbing of income


Widget 7: Clubbing of income

Provisions to understand: See what all income can be clubbed. Introduction: Normally till now in this act tax is charged on income earned by assessee but is this is the chapter where income of other persons will be included in his income. Such inclusion is called clubbing of income Coverage of this topic: Section Sec 60 Sec 61 Sec 62 Sec 63 Sec 64 Sec 65 Provisions Transfer of income without transfer of assets Revocable transfer Irrevocable transfer Definition of transfer & revocable transfer Spouse, minor child Etc., Liability of a person in respect of income included in income of another person What is clubbing of income?

Sec 60: Transfer of income by one person without transferring the asset to another person then such income will clubbed in the hands of person who is holding the property. Example: Interest from fixed deposit is transferred by son to his Mother but FD is in Sons name then such income will be clubbed in hands of son Sec 63: 1. 2. Transfer: Transfer includes any settlement, trust, Covenant, Agreement or arrangement. Revocable transfer: Transfer in which a. Transferor has a right to transfer directly or indirectly on whole or part of income or asset. b. Here right means re-acquire power directly or indirectly on whole or part of income or asset. Sec 61: All income arising to a person by virtue of a revocable transfer of asset will be included in the income of transferor. Example: Mr. Arun transfers a house property and its income to Mr. Lela on a condition that he should MARRY his sister. In this cause income from such house property is taxable in hands of Mr. Arun. Sec 62: Non applicability of Sec 61 Transfer by way of trust Any other reason Sec 64:

Not revocable during life time of beneficiaries. Not revocable during life time of transferee.

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Widget 7: Clubbing of income

a.

b.

Remuneration to spouse from a concern in which individual has substantial interest Applicability of Sec 64(1)(ii) Non applicability of Sec 64(1)(ii) There is a income to spouse from concern a. If spouse has professional or technical inform of qualification 1. Salary b. And income is attributable to such qualification. 2. Commission or 3. Fees Etc., Where assessee has a substantial interest

Substantial interest: Company Assessee or assessee along with relatives are beneficially entitled for not less than 20% of shares with voting rights IN ANY TIME DURING PY Assessee or assessee along with relatives are beneficially entitled for not less than 20% of profits of the concern IN ANY TIME DURING PY

Any others

Note:Clubbing of income when both spouse having substantial interest: I. II. In such cases income shall be clubbed in individual who is having grater income. If there income is also same then clubbing of income will not be applicable.

Inclusion of in subsequent year: If such income is included in total income of either spouse, any income in succeeding year will also be charged under same spouse only. Sec 64(1)(iv): Income arising or acquiring from a asset transfer by one spouse to another without adequate consideration Applicability of Sec 64(1)(iv) Non applicability of Sec 64(1)(iv) A. Asset is transferred directly or indirectly to If transfer is for:spouse of individual. I. For adequate consideration. B. Where transfer is not for adequate II. Transfer covered under Sec 27(i). consideration. III. For a agreement to live apart. Note: 1. 2. Clubbing of income included capital contributed also Income from accretions asset cannot be included in hands of transferor Example: There were some shares transferred on which bonus shares were allotted then such income arising from bonus shares will not be included in hands of transferor. Income includes loss also. Income on income cannot be included in hands of transfer. If spouse invest assets then proportionate income will be included. Income is calculated as under,

3. 4. 5.

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6.

Widget 7: Clubbing of income

If spouse invest as capital then proportion interest will also be included. Comparison between clubbing of income and Deemed owner U/S 27 Clubbing of income u/s 64(1)(iv) Deemed owner u/s 27 A. Provisions applicability and non applicability A. Provisions applicability and non applicability are same are same B. Income arising from transfer of house property B. Income arising from transfer of house property does not have option to take the house as self has option to take the house as self occupied. occupied.

Sec 64(1)(vi): Income arising or acquiring from a asset transfer sons spouse without adequate consideration Applicability of Sec 64(1)(vi) Non applicability of Sec 64(1)(vi) A. Asset is transferred directly or indirectly to If transfer is for:sons spouse after 31-5-1973. i. For adequate consideration. B. Where transfer is not for adequate ii. Made before marriage. consideration. C. Notes give in sec 64(1)(iv) are applicable

Sec 61(1A): Income of MINOR CHILD (including minor married daughter): General: All income arising or accruing to minor child will be included. If marriage of parents subsists Parent whose total income is grater If marriage of parents not subsists Parent who maintaining the child Non applicability: Income is arising from a. Manual work done by child b. Application of skill, talent, experience Etc., c. He is disabled person in nature as specified in sec 80U Exemption: If income included in hands of parents they can claim exemption 1500/- per child. Inclusion after 1st year: If income is clubbed in total income of any parent in any AY then it will be included in same parent in subsequent years Note: a. Minor income from manual work cannot be clubbed but income on investment of such income can be clubbed. b. If parents are Nonresident and child is resident then clubbing of income will not arise . Meaning of minor child for purpose of Sec 27(i) & 64(1A) Conditions 27(i) 64(1A) Minor married daughter Not applicable Applicable Physically disabled child u/s 80u Applicable Not applicable

S.no 1 2

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Widget 8: Set-Off & Carry Forward of Losses


Widget 8: Set-Off & Carry Forward of Losses

The provisions of Set-off, carry forward and set off enables an assessee to set off losses incurred under one head with that of the income in the same head or some other head, in the same year or subsequent year. The below mentioned table gives the details of set off, carry forward and set off: Current year loss & Brought forward of Losses: Sec. Nature of Loss Details of Set-Off Conditions / Exceptions 70 Current year loss within Sett-off within the same Exceptions: Loss fromthe same source of source / Head of Income 1. Activity of owing or maintaining of race Income / Head of Income. horses. 2. Speculation Business. 3. STCL set-off against CG 4. LTCL set-off only against LTCG. 71 Current year loss under Set-off against income Exceptions: any head. under any other head. Loss fromActivity of owing or maintaining of race horses. Speculation Business & CG. 1. Loss under the head PGBP cannot be set-off against Income from Salaries. 2. Loss from specified business u/s 35AD can be set-off only against Income from any other specified business. [Sec.73A] 71B Brought forward Set-off only against Permissible for 8 AYs immediately succeeding the unabsorbed loss from income from House AY for which loss was computed. house property Property. 72 Brought forward Set-off only against Carry forward & set-off is permissible for 8 AYs unabsorbed business loss income under the head immediately succeeding the AY for which the loss other than speculation PGBP was computed. loss Loss can be carried forward, only if the return is filed u/s 139(1) and it is determined and communicated us/ 157. 32(2) Brought forward Set-off against any head Shall be carried forward for any no. of years until unabsorbed depreciation. of income fully set-off. 73 Brought forward Set-off only against Carry forward & set-off is permissible for 4 AYs unabsorbed speculation income under speculation immediately succeeding the AY for which the loss business loss business was computed. Loss can be carried forward, only if the return is filed u/s 139(1) and it is determined and communicated us/ 157. 73A Brought forward loss of Set-off only against Shall be carried forward for any no. of years until specified business u/s income from any other fully set-off. 35AD specified business 74 Brought forward Set-off only against 1. Carry forward & set-off is permissible for 8 unabsorbed loss under Income under head CG. AYs immediately succeeding the AY for the head CG. which the loss was computed. 2. STCL can be set-off against any CG. However, LTCL can be set-off only against LTCG. 3. Loss can be carried forward only if the return is filed u/s 139(1), and it is determined & communicated u/s 157.

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74A Brought forward unabsorbed loss from activity of owing & maintaining race horses. Set-off only against Income from owing and maintaining race horses.

Widget 8: Set-Off & Carry Forward of Losses


1. Carry forward & set-off is permissible for 4 AYs immediately succeeding the AY for which the loss was computed. Loss can be carried forward only if the return is filed u/s 139(1), and it is determined & communicated u/s 157.

2.

Simply, LOSS UNDER HEAD 1. 2. 3. 4. 5. 6. 7. Salary IHP PGBP Speculation business STCL LTCL Owning and maintaining horses SET OFF AGAINST NA All other heads All heads other than salary Speculative income only Capital Gains only LTCG Income from similar nature CARRY FORWARD & SET OFF No of years Against NA NA 8 IHP 8 PGBP only 4 8 8 4 Speculative income only Capital gains only LTCG Income from similar nature

Order of set-off: Even though the losses can be set off against income as mentioned above, there is a specific order that exists with respect to set off of losses: 1. 2. 3. 4. 5. 6. Expenses incurred towards scientific research during the current year. Depreciation for the current year. Unabsorbed business losses of previous years. Unabsorbed family planning promotion expenses of previous years. Unabsorbed depreciation of previous years. Unabsorbed scientific research capital expenditure of previous years.

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Widget 9: Deductions from Gross Total Income


Widget 9: Deductions from Gross Total Income

Provisions to understand: Understand what are all the deductions Why is this separate chapter? Differentiate between general provisions & deductions What is gross total income? Some special terminology such as adjusted total income Etc.,

General provisions: Sec 80A and B speaks about general points such as a. Deductions starts from Sec 80C to 80U b. Deductions cannot be more than gross total income. c. If deductions are availed U/S 10A, 10AA or 10B the same cannot be taken under any provisions under Chapter VI A d. Any deductions Under Sec 80G,GGA,IA/AB/IC/ID to an AOI/BOI then the same is not allowed for members of it. DEDUCTIONS: ON CERTAIN PAYMENTS SEC 80C: Eligibility: For Individual or HUF Qualifying payments: Following are eligible for deductions 1. Life insurance premium paid on life of a. In case of individual, individual, Spouse, Children. b. In case of HUF any member. 2. Payment to annuity fund on life of individual, spouse, children provided it is Non Commutable. 3. Contribution to SPF, RPF and Approved superannuation fund 4. Contribution to Public provident fund of individuals, spouse, children. 5. Subscription and Interest from NSC VIII can be deducted. 6. Subscription to mutual fund approved by board. 7. Tuition fee paid to any university, College, School in India deduction for 2 children excluding Donation, Development fee etc., 8. Term deposit for fixed term more than 5 years with scheduled banks. Interest accrued will be treated as reinvestment. 9. Any investment in infrastructure bonds of IDBI/ICICI 10. Subscription any national savings scheme. 11. Any subscription to bonds of NABARD 12. Amount deposited in post office under 10/15 year account of post office savings bank.

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Widget 9: Deductions from Gross Total Income

DEDUCTION FOR CERTAIN PENSION FUNDS: SEC 80CCC Eligibility: Individuals Qualifying payments: Contribution to any annuity plan of LIC or any other insurer approved by IRDA for receiving pension Amount of deduction: Amount contributed or 100000 whichever is less Note: Pension amount received by individual or his nominee is taxable in the year of receipt

DEDUCTION FOR PAYMENT IN PENSION FUND OF CG: SEC 80CCD Eligibility: Central Govt. employees and other employees from 1st April 2004. Qualifying payments: Contribution to any pension scheme notified or as may be notified by central Govt. Amount of deduction: 1. Paid by assessee: amount paid OR 10% of salary whichever is less 2. Paid by other than assessee: amount by CG OR 10% of GTI whichever is less Note: 1. Pension amount received by individual or his nominee is taxable in the year of receipt 2. Salary= Basic + Dearness allowance.

SEC 80CCE: Deduction under Sec 80C,CCC,CCD shall not exceed RS 1,00,000. Deductions for payment related to health: SEC 80D: MEDICAL INSURANCE PREMIUM Eligibility: Individuals or HUF Qualifying payments: 1. Medical insurance paid on health of individual, spouse, children, Parents, spouse of dependent children or 15000 whichever is less. 2. For Senior citizens 15000 is substituted by 20000 Note: Payment should be made by other than cash. SEC 80DD: MAINTENANCE AND MEDICAL TREATM ENT OF DEPENDENT HAN DICAPPED Eligibility: Individuals or HUF

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Widget 9: Deductions from Gross Total Income

Qualifying payments: 1. Expenditure for medical treatment, Rehabilitation or 50000 whichever is less. 2. Any amount paid to a scheme in LIC or UTI approved by Board for such maintenance or 50000 whichever is less Note: In case of sever disability it is 100,000. Deduction allowed here cannot be claimed U/S 80U.

SEC 80DDB: MEDICAL T REATMENT Eligibility: Individuals or HUF Qualifying payments: 1. Amount spent for individual, Dependent relative incase of individual OR 2. Any Member of in case of HUF. 3. The above spent amount or 40000 whichever is less 4. For senior citizen 40000 can be substituted by 50000 Note: Medical treatment should taken for diseases or ailment specified under rule 11DD Any amount recover from insurance company should be reduced.

DEDUCTION FOR REPAYM ENT OF EDUCATIONAL L OAN: SEC 80E Eligibility: Individuals or his relative. Qualifying payments: Interest paid by the individual during PY on loan taken for higher education. Amount of deduction: Any amount paid as interest for 8 AY starting from payment of interest of loan taken begins Note: 1. Relative means spouse, children of that individual. 2. Loan should be taken from Approved charitable institutions, Financial Institutions only.

DONATIONS TO CERTAIN FUNDS: SEC 80G Eligibility:For all assessee Qualifying payments: There are three deduction rate which is specified according to its categories Segment 1 100% of deduction without having restriction Segment 2 50 % of deduction without having restriction Segment 3 Donation eligible for 100% of the restricted amount And Donation eligible for 50% of the restricted amount Steps for computing adjusted total income Step no 1 Compute gross total income before giving effect of the above deduction and reduce the following

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Widget 9: Deductions from Gross Total Income

i) All the deduction under Chapter VI A ii) Short term capital Gain u/s 112 iii) Long term capital gain u/s 11A iv) Income of a non resident chargeable to tax in respect of interest and dividend Step no 2 Compute 10 % of above (which is called adjusted total income) Step no 3 Compute the actual donation qualifying for the restricted amount (100% or 50 % as the case may be) Step no 4 Maximum permissible deduction is given for deduction qualifying 100 % of restricted amount and after that 50% of the restricted amount Note: Donations in kind are not eligible for deductions.

DEDUCTION IN RESPECT OF RENT PAID: SEC 80GG Eligibility: Individuals Qualifying payments: Rent paid. Amount of deduction: Least of the following a. Excess or rent over 10% of adjusted total income. b. 25% adjusted total income c. 2000/- per month Note: 1. Assessee should not be in receipt of HRA 2. No claims for self occupied house to be made.

DEDUCTIONS IN RESPECT OF DONATION TO SCIENTIFIC RESEARCH: SEC 80GGA Eligible Assessee: All the assessee who does not have income chargeable under the head profit and gains from business and profession. Qualifying amount for deduction: Donation to i) Approved scientific research institution or association ii) University or college iii) Institution for scientific research or statistical research or research in social science. iv) Public sector company, local authority or an institution or association approved by the national committee for carrying out any eligible project or scheme or v) National Fund for Rural Development are fully deductible Notes: Where a deduction is allowed and claimed under this section then no deduction for the same is allowed under any other section. In case a person making contribution to institution or association, which was granted approval under section 80 GGA is eligible to claim contribution even if the same was withdrawn later.

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Widget 9: Deductions from Gross Total Income

DEDUCTION IN RESPECT OF CONTRIBUTION TO POLITICAL PARTIES: Particulars Eligibility Qualifying payment Deduction allo. Note: Sec 80GGB For Indian companies Any sum contributed to political party 100% deduction allowed Political party mean a party registered under representation of people act 1951 Sec 80GGC Any person except local authority, Artificial judicial person funded by CG. Any sum contributed to political party 100% deduction allowed Political party mean a party registered under representation of people act 1951

SECTION 80 IA: DEDUCTION IN RESPECT OF INDUSTRIAL UNDERTAKIN G ENGAGED IN INFRASTRUCTURE DEVELOPMENT Eligibility: Type of business eligible for deduction 1) Infrastructure facilities 2) Telecommunication service 3) Developer of any industrial undertaking or SEZ 4) Power generation.

Infrastructure facilities Eligible business Any enterprise carrying on i) Developing or ii) Maintaining and operating or iii) Developing, maintaining and operating any infrastructure facility Conditions to be complied with i) The enterprise should be owned by the following entity i) A company registered in India or consortium of such companies ii) An authority or board or corporation or any other body or corporation established or constituted under Central or state Act. ii) The enterprise should enter in to an agreement with Central or state Government or a local authority or any other statutory body fora) Developing or b) Maintaining and operating or c) Developing, maintaining and operating any infrastructure facility iii) The enterprise should start operation on or before 1st April 1995

Meaning of infrastructure facility a) A road including toll road, bridge or a rail system b) Highway project being housing and other activity being an integral part of the high way project c) A water supply project

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Widget 9: Deductions from Gross Total Income

Water treatment system Irrigation project Sanitation system Sewage system Solid waste management system. d) A port ,airport, inland port or navigational channel in the sea Quantum of deduction 100% profit derived from such business for 10 assessment year out of 20 assessment years beginning from the year of operation. Telecommunication service Eligible business: Any enterprise providingi) Telecommunication service whether basic or cellular including radio paging , ii)domestic satellite service network of trunking , iii) Broad band network and internet services. Conditions to be complied with The enterprise should start its operation on or after 1st April 1995 but before 31st march 2005. Quantum of deduction 100% profit derived from such business for 5 asseseement year and 30 % of profit in the next 5 assessment year out of beginning from the year of operation. Developing, maintaining and operating any infrastructure facility Eligible business Any undertaking whichi) Develops ii) Develops and operates iii) Maintain and operates an industrial park or SEZ notified by the Central Government. Conditions to be complied with: The enterprise should start its operation on or after 1st April 1997 but before 31st march 2009. st In case of an industrial undertaking the enterprise should start its operation on between 1 April 2006 but st before 31 march 2009 Quantum of deduction 100% of profit derived from such business for a period of 15 year beginning from the year of operation. Power generation Eligible business 1) An enterprise setup in any part of India for generation or generation and distribution of power. 2) An undertaking, which starts transmission or distribution of power by laying a network of new transmission or distribution lines.

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Direct Tax-Fundamentals

Widget 9: Deductions from Gross Total Income

3) An undertaking which undertake substantial renovation or modernization of existing network of transmission or distribution of lines. Conditions to be complied with In respect of enterprise setup in any part of India for generation or/ and distribution of power The enterprise should have start its operation on or after 1st April 93 but before 31st march 11. In respect of enterprise which starts transmission or distribution of power by laying a network of new transmission or distribution lines The enterprise should have start its operation on or after 1st April 99 but before 31stmarch 11. In respect of enterprise which undertake substantial renovation or modernization of existing network of transmission or distribution of lines. The enterprise should have start its operation on or after 1st April 04 but before 31st march 11 Substantial renovation or modernization means An increase in the plant and machinery in the network of transmission or distribution line by at least 50% of the book value of plant and machinery. PROVISIONS FOR SHORT REVIEW Sections 80C 80CCC 80CCD 80CCE 80D 80DD 80DDB 80E 80G 80GG 80GGA Applicability Individuals Individuals Central Govt. employees and other employees from 1st April 2004 Not applicable Individual or HUF Individual or HUF Individual or HUF Individuals or his relatives All assessee Individual All the assessee who does not have income chargeable under the head profit and gains from business and profession Indian companies Any person except local authority, Artificial judicial person funded by CG Type of business eligible for deduction 1) Infrastructure facilities 2) Telecommunication service 3) Developer of any industrial undertaking or SEZ Power generation Provisions Certain Investments Pension fund Pension scheme of central Govt. Deduction Limit of 100000 Medical insurance premium Medical treatment of dependent handicapped Amount spent for medical treatment Repayment of Educational loan Donations to certain funds Rent paid Donations for scientific research

80GGB 80GGC 80IA

Contribution to Political party. Contribution to Political party. Industrial undertaking in respect of infrastructure development.

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Direct Tax-Fundamentals

Widget 10: TDS and Advance Tax


Widget 10: TDS and Advance Tax

Provisions to understand: What is TDS. What is Advance Tax. What are Due dates.

Need for TDS and Advance tax. Provisions for TDS 1. It helps to widen the tax base as more and more people are covered. 2. With such wider tax base, Tax rates can come down. 3. It helps in reporting correct income. 4. It helps in checking of tax evasion. 5. Govt. gets it revenue much earlier than otherwise. TDS(tax deducted at Source) Rate chart For Financial Year 2011-12 Nature of payments Threshold Limit Company, Firm, AOP , BOI up to wef TDS Rates 30.06.10 01.07.10 Interest from a Banking company Interest other than from a Banking Co Winning from Lotteries winning from Horse races Payment to Contractors , Pay to Adv. / Sub Contractor, Payment to Transporter Insurance Commission Commission/Brokerage Rent-property Rent-Plant / Machinery Professional Fees 10000 5000 5000 2500 20000 (50000 p.a) 5000 2500 120000 120000 20000 10000 5000 10000 5000 30000 (75000 p.a) 20000 5000 180000 180000 30000 10% 10% 30% 30% 2% 10% 10% 10% 2% 10%

Made To Resident SEC 194A 194A 194B 194BB 194C 194D 194H 194I 194I 194J

HUF , Individual TDS Rates 10% 10% 30% 30% 1% 10% 10% 10% 2% 10%

ADVANCE TAX: Section 207-Liability of payment of Advance tax: Tax shall be payable in advance during the financial year in accordance with the provisions of Sec 208 to 219, In respect to income chargeable to tax in the assessment year immediately following that financial year. Section 208-Conditions to pay advance tax:

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Direct Tax-Fundamentals

Widget 10: TDS and Advance Tax

Advance tax is to be paid during financial year in every case where amount of such tax payable calculated as per provisions is Rs 10000 or more. Section 209-Computation of advance tax: 1. Estimate correct income on which advance tax is to be paid 2. Calculate tax as per Part iii of First schedule of Finance act on estimated current income. 3. Calculate Education cess, Surcharge, Relief U/s 89 4. Deduct TDS and TCS. 5. Balance will be advance tax payable. Section 211-Instalments and due dates of advance tax: Minimum amount payable Due date in relevant Previous year Corporate Assessee 15th June 15% of advance tax th 15 September 45% of advance tax less Amount paid earlier 15th December 75% of advance tax less Amount paid earlier 15th March 100% of advance tax less Amount paid earlier Interest chargeable in certain cases: Section 234 A 234 B 234 C 234 D Note: 1. 2.

Non Corporate Assessee Not applicable 30% of advance tax less Amount paid earlier 60% of advance tax less Amount paid earlier 100% of advance tax less Amount paid earlier

Provision Interest in default in furnishing return of income Interest in default in payment of advance tax Interest in deferment of advance tax Interest on excess refund

Interest rates 1% simple interest for every month or part of month 1% simple interest for every month or part of month Note 1 & 2 0.5% simple interest on every month

No interest will be applicable if 90% of advance tax is paid If 1st condition is not satisfied then following interest will be applicable Short fall in amount payable Corporate Assessee Interest payable For both assessee

Due date in relevant Previous year th 15 June 15 September 15th December 15th March
th

Non Corporate Assessee

15% of advance tax - amount paid till 15th June 45% of advance tax - Amount th paid till 15 Sept. 75% of advance tax - Amount paid till 15th December 100% of advance tax - Amount paid till 15th March

Not applicable 30% of advance tax - Amount th paid till 15 Sept. 60% of advance tax - Amount paid till 15 December 100% of advance tax - Amount paid till 15th March

1% per month for 3 month 1% per month for 3 month 1% per month for 3 month 1% per month for 1 month

For corporate assessees, if amount paid in the first and second installment is at least 12% and 36% then No interest is payable under sec 234C

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