Income Tax in India
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Dr Sarbesh Mishra
A tax that is levied on income of individuals / corporations / legal entities is known as Income Tax. The Central Board for Direct Taxes (CBDT) governs the Indian Income Tax department. Income tax is imposed by Govt. of India on taxable income of individuals, Hindu Undivided Families (HUFs), companies, firms, co-operative societies and trusts (Identified as body of Individuals and Association of Persons) and any other artificial person. Levy of tax is different for different entities and it is governed by the Indian Income Tax Act, 1961.
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Tax Rates 2009 – 10 (A.Y 2010 – 11)
The new tax slabs applicable from April 1, 2009 are as follows: On all incomes up to Rs. 1,60,000 per year. (For women -Rs. 1,90,000 and for senior citizens - Rs. 2,40,000), no Income Tax is applicable. From 1,60,001 - 3,00,000 : 10% of amount more than Rs. 1,60,000/- ( The lower limit differs appropriately for women as well as senior citizens) From 3,00,001 to 5,00,000 : 20% of amount more than Rs. 3,00,000 + 14,000 (slightly less for women and further less for senior citizens) Above 5,00,000 : 30% of amount more than Rs. 5,00,000 + 54,000 (for women – slightly less and for senior citizens - further less)
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Income from Salary
Under this head, income received as salary under Employer-Employee relationship is taxed. If income exceeds minimum exemption limit, then Employers must withhold tax compulsorily as Tax Deducted at Source (TDS). The employees should also be provided with a Form 16 which shows the tax deductions and net paid income. Form 16 also contains any other deductions provided from salary as follows:
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Medical reimbursement up to Rs. 15,000 per year is tax exempt provided bills are given Conveyance allowance up to 9600 per year is tax free Professional taxes which are usually a slabbed amount based on gross income are deductible from income tax. House rent allowance: the minimum of the following is available as deduction
• The actual HRA received • 50%/40 % (metro/non-metro) of 'salary' • Rent paid minus 10% of 'salary'
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Income from House Property
Income from House property is calculated by considering the Annual Value. The annual value (for a let out property) will be maximum of the following:
• HRA Rent received • Municipal Valuation • Fair Rent (as determined by the I-T department)
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However if a house is not let out and not selfoccupied, then annual value is assumed to have accrued to the owner. In case of a self occupied house, annual value is to be taken as NIL. But if there is more than one self occupied house then the annual value of the other house/s is taxable. From this, Municipal Tax paid is deducted to arrive at the Net Annual Value. From this Net Annual Value, the following are deducted:
• 30% of Net value as repair cost - mandatory deduction • Interest paid or payable on a housing loan for the house
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Income from Business or Profession
Income arising from profits and gains of any Business or Profession; income derived by a Trade/ Professional/ similar Association by performing specific services for its members; Any benefit from business whether convertible into money or not, incentives for exporters; any salary, interest, bonus, commission or remuneration received by Partner of a firm; Any amount received under a Key man Insurance Policy which also covers Bonus; income from managing agency and speculative transactions; is taxable.
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Income from Capital Gains
Under section 2(14) of the I.T. Act, 1961, Capital asset is defined as property of any kind held by an assessee such as real estate, equity shares, bonds, jewellery, paintings, art etc. but does not consist of items like stock-in-trade for businesses or for personal effects. Capital gains arise by transfer of such capital assets.
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Long term and short term capital assets are considered for tax purposes. Long term assets are those assets which are held by a person for three years except in case of shares or mutual funds which becomes long term just after one year of holding. Sale of long term assets give rise to long term capital gains which are taxable as below:
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As per Section 10(38) of Income Tax Act, 1961 long term capital gains on shares/securities/ mutual funds on which Securities Transaction Tax (STT) has been deducted and paid, no tax is payable. Higher capital gains taxes will apply only on those transactions where STT is not paid. For other shares & securities, person has an option to either index costs to inflation and pay 20% of indexed gains, or pay 10% of non indexed gains. For all other long term capital gains, indexation benefit is available and tax rate is 20%
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Income from other sources
There are some specific incomes which are to be taxed under this category such as income by way of dividends, horse races, winning of bull races, winning of lotteries, amount received from key man insurance policy.
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All about Sec – 80C
Section 80C replaced the erstwhile Section 88 with more or less the same investment mix available in Section 88 but with a major change in the method of providing a tax benefit.
The limit The limit under this section is Rs 1,00,000. This is irrespective of how much you are earn and under which tax bracket you fall. Also, there are no sub-limits under this overall Rs 1,00,000 amount.
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So if you choose, you can invest the entire amount in ELSS or infrastructure bonds. The choice is entire up to you as to how you want to reach this limit. Or, if you are repaying a home loan and the principal repayment amounts to Rs 100,000, then you can claim the entire amount as a deduction. Education Cess - All taxes in India are subject to an education cess, which is 2% of the total tax payable. With effect from assessment year 2008-09, Secondary and Higher Secondary Education Cess of 1% is applicable on the subtotal of taxable income.
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Investments under u/s 80C & 80D
The investments that fall under Section 80C. Provident Fund Public Provident Fund Life insurance premium Pension plans Equity Linked Saving Schemes of mutual funds Infrastructure bonds National Savings Certificate Besides these investments, the payments towards the principal amount of your home loan are also eligible for an income deduction. Section 80D (Medical Insurance Premiums) - This deduction is additional to Rs.1,00,000 savings. For senior citizens, the deduction up to Rs. 20,000 is allowable and for non senior citizens, the limit is Rs. 15000. This deduction is available for premium paid on medical insurance for oneself, spouse, parents and children. It is also applicable to the cheques paid by proprietor firms.
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Let's take an example to better explain the tax working: Salary income: Rs 3,20,000 Home loan interest payment: Rs 1,20,000 Home loan principal repayment: Rs 80,000 NSC investment: Rs 30,000
Solution - Salary (a) Income from house property (b)* Gross total income (c) (c = a - b) Home loan principal repayment NSC investment Section 80C investments Limit for Section 80C deduction (d) Taxable income (c - d) Tax on taxable income
320,000 120,000 200,000 80,000 30,000 1,10,000 1,00,000 100,000 Nil
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Corporate Income tax
For companies, income is taxed at a flat rate of 30% for Indian companies, with a 10% surcharge applied on the tax paid by companies with gross turnover over Rs. 1 crore (10 million). Foreign companies pay 40%.An education cess of 3% (on both the tax and the surcharge) are payable, yielding effective tax rates of 33.99% for domestic companies and 41.2% for foreign companies.
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This section is applicable from assessment year 200102. If tax liability of a company under normal provisions is lower than 10 per cent (7.5% for the assessment years 2001-02 to 2006-07) of "book profit", book profit shall be deemed as total income and 10 per cent (7.5% for the assessment years 2001-02 to 2006-07) of book profit should be deemed as tax liability. Book profit is a profit which is demonstrated on paper, but not yet actually real. The best way to think about book profit is in terms of stock value; if someone purchases a stock and the value goes up, he or she has made a book profit. By selling the stock, the investor can turn the book profit into an actual profit. Exception: There is an exception for companies in SEZ.
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Minimum Alternate Tax u/s 115JB
If tax payable @30% (at present) by business units as per provisions of IT Act and if it is less than 10% of the book profits, tax payable will be 10% of the book profits plus surcharge plus cess... as per provisions of Section 115JB of income tax act.
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