Income Tax

Basic Terms
1. Person an individual, Hindu undivided family, company,
firm, Association of persons, Body of individuals, local
authority, every artificial juridical person not falling in the
mentioned categories (god).
2. Assessment process of determining tax.
3. Assessee for whom tax is assessed.
4. Income Periodically monetary returns, cash or kind, lawful
& unlawful means, accrual or receipt basis gifts, loss, awards,
interest, dividend etc.
5. Assessment year financial year
6. Previous year computation of tax period (existing or new
firm).

Basis of Charges
Charge of Income Tax
1. Income tax charged for previous years assessment.
2. Charged to every body.
3. Income tax is calculated on the basis of residential status.
4. Residential status depends on the stay of the assessee in India.
Residential Individual (S. 6(1))
If the individual is in India for period or periods totaling to 182
days or more.
If the individual is in India excluding the previous year his stay
in 4 years for period or periods totaling to 365 days or more OR
60 days or more (in previous year).
Individual not satisfying the condition stated in Residential
Individual (S. 6(1)) is Non resident Individual (S. 2(30)).

Basis of Charges

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2.

Residential Status divided into Resident & Ordinary resident (R & OR) &
Resident But Not Ordinary resident (R BUT NOR).
Resident But Not Ordinary resident (R BUT NOR)
If the individual is non resident in India at least 9 out of 10 years (preceding
previous assessment year). OR
If the individual is non resident in India at least for period or periods totaling
to 729 days or less during 7 years preceding previous assessment year.
If the individual does not satisfy conditions of R But NOR R & OR.
Residential status company and Indian company (registered in India),
company with control & management affairs from in India (previous assessment
year).
Scope of Income chargeable based on residential status, place and time of
accrual or receipt of income Income received or deemed to be received in India,
Income accrued or deemed to be accrued in India, Income accruing and received
outside India (foreign Income).

Income exempted from Tax

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Agriculture Income
Gains from property of HUF.
Interest to non-resident (specified by Central government notification)
Interest to NRI on specified saving certificates
Leave travel concession or LTA employees.
Remuneration received by foreign diplomat.
Remuneration received by foreign national as an employee of foreign
enterprise not engaged in trade or business in India.
8. Salary of the Non-resident employee of a foreign government.
9. Gratuity gift for employees services rendered government employees
(fully exempted) & others (calculated as per Gratuity Act 1972) for exemption.
10. Pension calculations differ for government & non government employees.
11. Leave salary calculations differ for government & non government
employees 10 days average superannuation etc.

Income exempted from Tax

Retrenchment compensation changes in ownership leading to cuts in
salary or loosing of job.
Payments under the Bhopal Gas Leak disaster .
Compensation on retirement of an employee of a public sector.
Amounts received under a Life Insurance Policy Keyman Insurance
policy bonuses.
Payments from provident fund & accumulated balance from it.
House Rent Allowance HRA.
Certain income by way of interest, bonuses, premium etc. securities
issued by central government post office saving bank.
Scholarships
Allowance received by the members of the parliament or state.
Awards cash or kind central or state government in public interest.

Heads of Income
Heads of income Salaries, Interest on securities, Income from House
Property, Profit & Gains of business or Profession, Capital Gains, Income from
other sources.
Income is classified in to different heads to apply provisions
1. what income is chargeable of tax?
2. What are deductions allowed ?
3. What amount are not deductable.

Salary employer employee relation past present of future employer

surrendered to central government (non taxable) wages, pension, gratuity,
fees, commission profit (in addition to salary), provident funds &
Prerequisites (Exempted from tax).
Deductions from Salary entertainment tax calculation different for
government & Non government employees not on actual amount (1/5 part
of spent).

Profit & Gain of Business & Profession

Income tax on the basis of business, commerce, profession and vocation.

Deductions
1. Rent, rate, Taxes , Repairs & Insurance of building.
2. Repairs & insurance of machinery, plant and furniture.
3. Depreciation Block of Assets WDV method additional 20%
depreciation on new machinery (after 31/03/2005).
4. Expenditure on R & D.
5. Amortization of preliminary expenses.
6. Insurance (paid by cheque) employees.
7. Bonuses or commission paid to employee
8. Interest on borrowed capital.
9. Contribution to a recognized Provident fund, gratuity fund.
10. Bad debts
11. Expenditure.

Capital Gains
Capital Gains arise capital assets & its transfer any property other than sock of
raw material, jewellery, drawings, paintings, gold bonds.
Capital assets of company short term (less than 36 months) & Long term (more than 36
months) period of holding Long term gains & Short term gains.
Calculation of capital gains cost of acquisition, improvement, up gradation of asset less
values received after transfer of assets (sales, rights, title etc).

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2.

Deductions to be made in computing total income

Deductions from Gross Income to encourage savings & contribution to the national
funds.
Exemption not part of total income.
Deduction part of income allowed to calculate taxable income.
Deductions are charged under section 80 of income tax act.
Types of deductions
Deductions to be made in computing total income S. 80A
Deductions in respect of Life insurance premia, contributions to Provided funds,
subscriptions of equity shares or debentures S. 80C.

Deductions (cont)

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Deductions in respect to contribution to Pension fund S. 80CCC

Limits of Deductions S. 80C, 80CCC, & 80CCD.
Deductions in respect of medical insurance premia S. 80 D.
Deductions in respect of maintenance including medical treatment of a
dependent who is disable S. 80 DD.
7. Deductions in case of totally blind or physically handicapped resident
person S. 80U.

Computation of Total Income

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Format for computation of Total Income

Name of the assessee
Assessment year
Previous year
Legal Status
Residential status
Computation of Total Income

I. Income from salary

II. Income from House Property
a)
b)

Let out property

Self occupied property.

III. Income from Business / Profession

IV. Income from Capital Gains
a)
b)

Long term capital gains

Short term capital gains.

Computation of Total Income

V. Income from other sources
Gross Total Income (I + II + III + IV + V )
Less : Deduction under chapter VI A
i. U / S 80 C
ii. U / S 80 CCC
iii. U / S 80 D
iv. U / S 80 DD
v. U / S 80 E
vi. U / S 80 U

Net Taxable Income