Module 8 Income Tax Act, 1961

(A.Y. 2012-13)

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Charge of Income Tax

Income tax is charged in assessment year at rates specified by the Finance Act applicable on 1st April of the relevant assessment year. It is charged on the total income of every person for the previous year. Total Income is to be computed as per the provisions of the Act. Income tax is to be deducted at source or paid in advance wherever required under the provision of the Act.
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Important Definitions
1. Assessment Year u/s 2(9) means, the period of 12 months commencing on the 1st April every year. It is the year (just after previous year) in which income earned is charged to tax. The current Assessment is 2012-2013.

2. Previous Year u/s (Sec,3) means, the year in which income is earned.

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3. Person u/s 2(31) includes,
i. ii. iii. iv. v. An Individual, Hindu Undivided Family (HUF), A Company, A Firm, An Association of Persons(AOP) or Body of Individuals (BOI), vi. A Local Authority, vii. Every other Artificial Juridical Person

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Contd
4. Gross Total Income (G.T.I) :- The aggregate income under the 5 heads of income (viz. Salary, House Property, Business or Profession, Capital Gains & Other Sources) is termed as Gross Total Income. 5. Total Income (T.I) :- Total Income of assessee is gross total income as reduced by the amount permissible as deduction under sections 80C to 80U.

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Types of Residential Status

The different types of residential status are:Resident(R) Not Ordinarily Resident (NOR)

Non-Resident (NR)

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RATES OF INCOME TAX (Assessment Year 2012-13)

1.

In case of every Individual/ HUF/ AOP/BOI artificial juridical Person.

INCOME (A.Y. 2012-13 Up to 180,000 180,001 500,000 TAX RATE

Education cess Nil 2% of IT

SHEC

NIL 10%

Nil 1% of IT

500,001800,000
Above 800,000

20%
30%

2% of IT
2% of IT

1% of IT
1% of IT

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RATES OF INCOME TAX (Assessment Year 2012-13)

2. In case of resident women below 60 years of age.

INCOME (A.Y. 2012-13 Up to 190,000 180,001 500,000 TAX RATE

Education cess Nil 2% of IT

SHEC

NIL 10%

Nil 1% of IT

500,001800,000
Above 800,000

20%
30%

2% of IT
2% of IT

1% of IT
1% of IT

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RATES OF INCOME TAX (Assessment Year 2012-13)

3. In case of resident senior citizen i.e. age of 60 years or above

INCOME (A.Y. 2012-13) Up to 250,000 250,001 500,000 TAX RATE

Education cess Nil 2% of IT

SHEC

NIL 10%

Nil 1% of IT

500,001800,000
Above 800,000

20%
30%

2% of IT
2% of IT

1% of IT
1% of IT

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RATES OF INCOME TAX (Assessment Year 2012-13)

4. In case of resident super senior citizen i.e. age of 80 years or above
INCOME (A.Y. 2012-13) Up to 500,000 TAX RATE

Education cess Nil

SHEC

NIL

Nil

500,001800,000
Above 800,000

20%
30%

2% of IT
2% of IT

1% of IT
1% of IT

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Contd
PERSONS TAX RATE

FIRMS
DOMESTIC COMPANY FOREIGN COMPANY LOCAL AUTHORITIES CO-OPERATIVE SOCIETIES Up to 10000 10000-20000 Above 20000

30%
30% 40% 30%

10% 20% 30%

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Surcharge & Cess

PERSON Individual / AOP / BOI / HUF / Artificial Juridical Person Firm Nil RATE OF SURCHARGE

5% of tax liability, if Income exceeds Rs. 1 Crore

Domestic Company

5% of tax liability, if Income exceeds Rs. 1 Crore

Foreign company

2% of tax liability, if Income exceeds Rs. 1 Crore

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Heads of Income
Five head of income i.e., 1. Income from salary 2. Income from House property 3. Income from Business or profession 4. Income from capital gain 5. Income from other source

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Salary
Salary is the remuneration received by or accruing to an individual, periodically, for service rendered as a result of an express or implied contract. The actual receipt of salary in the previous year is not material as far as its taxability is concerned. Salary is chargeable to tax on due or receipt basis whichever is earlier
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Computation of salary income

Perquisites

{ 17 (2)}

Salary
{17(1)}

Salary

Allowances

{17(3)}

Profit in lieu of salary {17(4)}

Meaning
Salary includes [section17(1)] :i. Wages ii. Any annuity on pension iii. Any gratuity iv. Any fees, commission, bonus, perquisite on profits in lieu of or in addition to any salary on wages v. Any advance of salary vi. Any earned leave vii.Employers contribution (taxable) towards recognized provident fund.

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BASIS OF CHARGE
Income is taxable under head Salaries, only if there exists Employer Employee Relationship between the payer and the payee. The following

incomes

shall be chargeable to income-tax under the head

Salaries:1.Salary Due 2.Advance Salary [u/s 17(1)(v)] 3.Arrears of Salary Note: (i)Salary is chargeable on due basis or receipt basis, whichever is earlier. (ii)Advance salary and Arrears of salary are chargeable to tax on receipt basis only.

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Allowances
Allowance is generally defined as a fixed quantity of money or other substance given regularly in addition to salary for the purpose of meeting some particular requirement connected with the services rendered by the employee or as compensation for unusual conditions of that service. 1.Dearness Allowance - It is Always Taxable. 2.City Compensatory Allowance - It is Always Taxable.

3. House Rent Allowance 4.Entertainment allowance 5.Special allowances

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Contd
Exemption is available on the aforesaid basis in the case of following allowances
NAME OF ALLOWANCE NATURE OF ALLOWANCE

:-

Travelling Allowance/ Transfer Allowance

Conveyance Allowance

Any allowance granted to meet the cost of travel on tour or on transfer (including sum paid in connection with transfer, packing and transportation of personal effects on such transfer).

Conveyance allowance granted to meet the expenditure on conveyance in performance of duties of an office (expenditure for covering the journey between office and residence is not to be included). Any allowance whether granted on tour or for the period of journey in connection with transfer, to meet the ordinary daily charges incurred by an employee on account of absence from this normal place of duty.
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Daily Allowance
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Contd
6. When exemption does not depend upon expenditure - In the cases given below, the amount of exemption does not depend upon expenditure incurred by the employee. Regardless of the amount of expenditure, the allowances given below are exempt to the extent of
i. the amount of allowance ; or ii. the amount specified in rule 2BB,

Whichever is lower.
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Contd
Name of allowance Exemption as specifiedin rule 2BB

Special Compensatory (Hill Areas) Allowance Border area allowance Tribal areas/ scheduled areas allowance Allowance for transport employees Children education allowance Hostel expenditure allowance Compensatory field area allowance
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Amount exempt from tax varies from Rs. 300 per mount to Rs. 7,000 per month
The amount of exemption varies from Rs. 200 Per month to Rs. 1,300 per month Rs. 200 Per Month The amount of exemption isa.70 per cent of such allowance; or b.Rs. 6,000 per month, whichever is lower. The amount exempt is limited to Rs. 100 per month per child up to a maximum of two children. It is exempt from tax to the extent of Rs. 300 per month per child up to a maximum of two children.

Exemption is limited to Rs. 2,600 per month in some cases. 25

Contd
Name of Allowance Exemption as Specified in Rule 2BB

Compensatory modified area allowance Counter insurgency allowance Transport allowance Underground allowance High altitude allowance Highly active field area allowance Island duty allowance
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Exemption is limited to Rs.1,000 per month in some cases.

Exemption is limited to Rs.3,900 per month in some cases. It is exempt up to Rs. 800 per month (Rs. 1,600 per month in the case of an employee who is blind or orthopedically handicapped) Exemption is limited to Rs. 800 per month. It is exempt from tax up to Rs. 1,060 per month (for altitude of 9,000 to 15,000 feet) or Rs. 1,600 per month (for altitude above 15,000 feet). It is exempt from tax up to Rs. 4,200 per month.

It is exempt up to Rs. 3,250 per month. 26

Contd
7. Allowance to Government employees outside India [Sec. 10( 7)] - Any allowance paid or allowed outside India by the Government to an Indian citizen for rendering service outside India is wholly exempt from tax. 8. Tiffin allowance - It is taxable. 9. Fixed medical allowance It is taxable. 10.Servant allowance - It is taxable.

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Contd
11.Allowance to High Court and Supreme Court Judges - Any allowance paid to High Court Judges under section & 22C of the High Court Judges (Conditions of Service) Act, 1954 is not chargeable to tax. 12. Allowance received from a United Nations Organization - Allowance paid by a United Nations Organization to its employees is not taxable by virtue of section 2 of the UN (Privileges and Immunities) Act, 1974.
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PERQUISITES
Perquisite may be defined as any Casual Emolument or Benefit attached to an office or position in Addition to Salary or Wages. It also denotes something that benefits a man by going in to his own pocket. Perquisites may be provided in cash or in kind. Perquisites are included in salary income only if they are received by an employee from his employer.

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Perquisites as defined u/s 17 (2)

The term perquisites is defined by section 17 (2) as including the following items:
1.The value of Rent-free Accommodation provided to the assessee by his employer 2.The value of any concession in the matter of rent respecting any accommodation provided to the assessee by his employer

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Contd
3. The value of any benefit or amenity granted or provided free of cost or at concessional rate in any of the following cases :
i. ii. By a company to an employee who is a director thereof ; By a company to an employee, being a person who has substantial interest in the company ; iii. By any employer (including a company) to an employee to whom provisions of (i) and (ii) above do not apply and whose income under the head salaries exclusive of the value of all benefits or amenities not provided for by way of monetary benefits, exceeds Rs. 50,000

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Contd
4. Any sum paid by the employer in respect of any obligation which but for such payment would have been payable by the assessee. Obligation of Employee met by Employer. 5. Any sum payable by the employer, whether directly or through a fund other than a recognized provident fund or approved superannuation fund or a deposit-linked insurance fund, to effect an assurance on the life of the assessee or to effect a contract for an annuity 6. The value of any other fringe benefits or amenity as may be prescribed
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PROFIT IN LIEU OF SALARY[Sec17(4)

a) Any compensation received from present or past employer during relevant previous year on termination of service or on modification of terms of services. b) Any other payment received from present or past employer except given u/s 10(10) 10(10A) , 10(AA) , 10(10B) , 10(11) , 10(13) , 10(13A) and any payment out of provident fund to the extent it is taxable . c) Any amount due to or received whether in lump sum or otherwise by any assessee from any person : A) Before his joining any employment with that person ; or B) After cessation of his employment with that person. All above payments are fully taxable unless exempted u/s 10

TERMINAL BENEFITS
1. Gratuity [Sec.10(10)]
Gratuity is a retirement benefit. It is generally payable at the time of cessation of employment and on the basis of duration of service. Tax treatment of gratuity is given below:
Status of Employee

Government Employee

Non-government employee covered by the payment of Gratuity Act, 1972

Non-government employee not covered by the payment of Gratuity Act, 1972

It is fully exempt from tax under section 10(10)(i)

Least of following is exempt: 1) 15 days salary x Length of service 2) Rs. 3, 50, 000 3) Gratuity actually received.

Least of following is exempt: 1) month avg. salary x Length of service 2) Rs. 3, 50, 000 3) Gratuity actually received. 34

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Contd
2. PENSION [SEC. 17(1)(ii)]
follows :- Pension is chargeable tax as

PENSION

COMMUTED

UNCOMMUTED

Government Employee

Non-Government Employee
If Gratuity Received If Gratuity not Received Taxable for Government as well as Non-Government employees

Entire Commuted Pension is exempt whether or not Gratuity received.

1/3 of commuted pension is exempt

1/2 of commuted pension is exempt 35

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Contd
3.Annuity [Sec. 17(1)(ii)] An annuity payable by a present
employer is taxable as salary even if it is paid voluntarily without any contractual obligation of the employer. An annuity received from an ex-employer is taxed as profit in lieu of salary.

4.Retrenchment

Compensation received by a workman at the time of retrenchment is exempt from tax to the extent of the lower of the following:

compensation

[Sec.

10(10B)]

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Contd
5. Compensation received at the time of Voluntary Retirement [sec.10 (10C)] Compensation received at the time of voluntary retirement is exempt from tax, subject to certain conditions. Maximum amount of exemption is Rs. 500000.

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Provident Fund
Provident Fund Scheme is a welfare scheme for the benefit of employees. The employee contributes certain sum to this fund every month and the employer also contributes certain sum to the provident fund in employees A/c. the employers contribution to the extent of 12% is not chargeable to tax.

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LEAVE SALARY
Encashment of leave by surrendering leave standing to ones credit is known as leave salary.
LEAVE ENCASHMENT

During Employment

Retirement / Leaving the Job

Chargeable to Tax

Government Employee

Non-Government Employee

Fully Exempt

Least of following is exempt :1) Earned Leave on the basis of Average Salary 2) 10 x Average monthly salary 3) Rs. 300000 4) Leave Salary Received 39

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Deductions Admissible in Computing Income under head SALARIES

1. Entertainment allowance granted by employer [Sec.16(ii)]: This deduction is available in case of Government employees only. 2. Employment Tax / Professional Tax [Sec.16(iii)]: Any sum paid by assessee on account of a tax on employment within the meaning of Article 276(2). Under the said article employment tax cannot exceed Rs. 2500 p.a.

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Relief in respect of Advance or Arrears of Salary u/s 89

When an assessee is in receipt of a sum in the nature of salary, being paid in arrears or in advance, due to which his total income is assessed at a rate higher than that at which it would otherwise have been assessed, Relief is granted on an application made by the assessee to the assessing officer.

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Eligible Amount u/s 80C

Any sums paid or deposited by the assessee 1.As Life Insurance premium to effect or keep in force insurance on life of (a) self, spouse and any child in case of individual and (b) any member, in case of HUF. Insurance premium should not exceed 20% of the actual capital sum assured. 2.To effect or keep in force a Non Commutable deferred annuity contract on life of self, spouse and any child in case of individual

Eligible Amount u/s 80C

3.By way of deduction from salary payable by or on

behalf of the Government to any individual for the purpose of securing to him a deferred annuity or making provision for his spouse or children. The sum so deducted does not exceed 1/5th of the salary. 4.As contribution (not being repayment of loan) by an individual to Statutory Provident Fund

Eligible Amount u/s 80C

5.As contribution to PPF scheme, 1968 in the name of self, spouse & any child in case of individual and any member in case of HUF. 6.As contribution by an employee to a recognized provident fund. 7.As contribution by an employee to an approved superannuation fund.

Eligible Amount u/s 80C

8.Subscription to the NSC (VIII issue). 9.As a contribution to Unit-linked Insurance Plan (ULIP) of UTI or LIC Mutual Fund (Dhanraksha plan) in the name of self, spouse and child in case of individual and any member in case of HUF. 10.To effect or to keep in force a contract for such annuity plan of the LIC (i.e. Jeevan Dhara, Jeevan Akshay and their upgradations) or any other insurer 11.As subscription to any units of any Mutual Fund notified u/s 10(23D) (Equity Linked Saving Schemes).

Eligible Amount u/s 80C

12.As a contribution by an individual to any pension fund set up by any Mutual Fund notified u/s 10(23D). 13.As subscription to any such deposit scheme of National Housing Bank (NHB), or as a contribution to any such pension fund set up by NHB as notified by Central Government

Eligible Amount u/s 80C

14.As subscription to notified deposit schemes of (a) Public sector company providing long term finance for purchase/construction of residential houses in India or (b) any authority constituted in India for the purposes of housing or planning, development or improvement of cities, towns and villages.

Eligible Amount u/s 80C

15.As tuition fees (excluding any payment towards any development fees or donation or payment of similar nature), to any university, college, school or other educational institution situated within India for the purpose of full-time education of any two children of children of Individuals 16.Towards the cost of purchase or construction of a residential house property (including the repayment of loans taken from Government, Bank, LIC, NHB, assessees employer etc., and also the stamp duty, registration fees and other expenses for transfer of such house property to the assessee

Eligible Amount u/s 80C

17.As subscription to equity shares or debentures forming part of any eligible issue of capital of public company or any public financial institution approved by Board. 18 Bank Fixed Deposit with 5 Years Lock in Period 19 Subscription to Notified Bonds of NABARD 20 Deposit with Senior Citizen Saving Scheme 21 Time Deposit with Post Office of 5 Years

Contribution To Certain Pension Funds [Section 80CCC]

Amount paid or deposited by individual in the previous year
out of his income chargeable to tax to effect or keep in force a contract for any annuity plan of LIC or any other insurer for receiving pension from the fund referred to in section 10(23AAB).

Quantum of Deduction: Deduction shall be allowed to the extent of lower of the following
Amount so paid or deposited; or Rs. 1,00,000

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Contribution to Pension Scheme of Central Government or any Other Employer [Sec. 80CCD]
Deduction in respect of: Deduction is available in
respect of both of the following
Sum deposited by assessee in his account in notified pension scheme; and Contribution made by Central Govt. or any other employer to assesses A/c.

Quantum of Deduction: Deduction shall be allowed to the extent of aggregate of the following Sum paid/deposited by assessee to the credit of his a/c or 10% of salary, whichever is lower Sum contributed by the employer in assesses A/c or 10% of salary, whichever is lower
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Aggregate Limit u/s 80C, 80CCC & 80CCD The aggregate amount of deductions under section 80C, section 80CCC and section 80CCD shall not, in any case, exceed Rs.1,00,000.

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Deduction In Respect Of Health Insurance Premia [Sec. 80D]

Deduction is available in respect of the amount paid to effect or to keep in force health insurance under a scheme
made by General Insurance Corporation of India (GIC) and approved by Central Government; or made by any other insurer and approved by Insurance Regulatory and Development Authority.

Deduction shall be to the extent of lower of

Health insurance premia paid in respect of health of any member of that HUF; or Rs. 15,000 (Rs. 20,000 in case the insured is a senior citizen).
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Maintenance of A Dependant Being Person With Disability [Section 80DD]

Deduction is available in respect of
expenditure incurred for medical / treatment / nursing / training/ rehabilitation, or amount paid under scheme LIC / UTI other insurer approved by CBDT for maintenance, of a dependant, being a person with disability.

Deduction shall be allowed to the extent of

Rs. 50,000 (Rs. 75,000 in case of dependant suffering with severe disability), irrespective of expenditure incurred or sum paid.

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Deduction in respect of Medical Treatment, etc. [Sec. 80DDB]

Deduction is available in respect of sum actually paid during previous year for medical treatment of prescribed disease or ailment for the following
In case of individual: himself or his spouse, children, parents, brothers and sisters, In case of HUF: its member(s), dependant mainly on such individual or HUF for his support and maintenance.

Deduction shall be available to the extent of lower of the following

sum actually paid; or Rs. 40,000 (Rs. 60,000 in case of a senior citizen).
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Deduction in respect of Interest on Loan taken for Higher Education [Sec.80E]

Deduction in available in respect of sum paid by the assessee in the previous year, out of his income chargeable to tax, by way of interest on loan taken for his higher education, or for the higher education of his relative. 100% of the amount of interest on such loan Deduction will be admissible.
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Deduction in respect of Donations [Section 80G]

Deduction is allowed under this section to all assesses in respect of donations of sum of money in the following manner
100% deduction will be allowed if donations are given to any of the 19 specified funds. 50% deduction will be allowed if donations made to any of the 5 specified funds. 100% deduction shall be allowed subject to the qualifying amount if donations are made for promoting family planning. 50% deduction shall be allowed subject to the qualifying amount if donations are made towards any of the 5 specified purposes.
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Deductions in respect of Rents Paid [Sec.80GG]

Rent actually paid for any furnished or unfurnished residential accommodation occupied by the Individual, who is not in receipt of any House Rent Allowance (HRA). The deduction shall be allowed to the extent of least of the following Rs. 2,000 per month; 25% of adjusted total income; Rent paid less 10% of adjusted Total Income.
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Deduction in respect of person with Disability [Section 80U]

Eligible Assessee: Individual resident in India, who, at any time during the previous year, is certified by the medical authority to be a person with disability Deduction: Rs. 50,000 (Rs. 75,000 for severe disability). Severe disability means 80% or more of disability.

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Other Deductions
Deduction in respect of certain Donations for Scientific Research or Rural Development [Sec.80GGA] Deduction in respect of Contribution to Political Parties [Sec. 80GGB & 80GGC] Profits & Gains from Industrial Undertaking engaged in Infrastructure Development [Sec. 80 IA] Profits & Gains from Undertaking engaged in Development of SEZs [Sec. 80IAB] Profits & Gains from Industrial Undertaking engaged in other than in Infrastructure Development [Sec.80IB]
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Contd
Deduction available to certain Undertakings in certain Special category States [Sec.80IC] Profits & Gains from business of Hotels & Convention Centre in Specified Areas [Sec. 80ID] Special provisions in respect of certain Undertakings in North-Eastern States [Sec. 80IE] Deduction available to assessee in the business of Collecting & Processing Bio-Degradable Waste [Sec.80JJA] Deduction in respect of Employment of New Workmen [Sec. 80JJAA]
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Contd
Deduction from incomes of Off-shore Banking Units & International Financial Services Centre [Sec.80LA] Deduction in respect of income of Co-operative Society [Sec. 80P] Deduction in respect of Royalty Income, etc. of Author of certain Books other than Text Books [Sec.80QQB] Deduction in respect of Royalty Income of Patents [Sec. 80 RRB]

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