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Income Tax in India

Dr Sarbesh Mishra
Finance Area

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Backdrop
1. A tax that is levied on income of individuals /
corporations / legal entities is known as
Income Tax.
2. The Central Board for Direct Taxes (CBDT)
governs the Indian Income Tax department.
3. 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.
4. Levy of tax is different for different entities
and it is governed by the Indian Income
Tax Act, 1961. Dr Sarbesh Mishra 2
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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Contd….
 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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Contd….
 However if a house is not let out and not self-
occupied, 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
1. 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;
2. 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;
3. 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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Contd….
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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Contd….
 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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Contd….
 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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Practical Problems
1. 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) 320,000
Income from house property (b)* 120,000
Gross total income (c) (c = a - b) 200,000
Home loan principal repayment 80,000
NSC investment 30,000
Section 80C investments 1,10,000
Limit for Section 80C deduction (d) 1,00,000
Taxable income (c - d) 100,000
Tax on taxable income Nil

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Corporate Income tax
1. 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).
2. 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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Minimum Alternate Tax u/s 115JB
This section is applicable from assessment year 2001-
02. 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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MAT Calculation
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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