1. INCOME TAX LAW OF INDIA by : DR. T.K. JAIN AFTERSCHO ☺ OL centre for social entrepreneurship sivakamu veterinary hospital road bikaner 334001 rajasthan, india FOR – PGPSE PARTICIPANTS mobile : 91+9414430763
2. My words .... Ours is a great country with immense entrepreneurial potential. However, our legal system and taxation system is so cumbersome that our creativity and talent is wasted / unnecessarily diverted in these sectors. I wish that these are simplified so that an ordinary entrepreneur can understand these without help from any expert. I wish that more people should become entrepreneurs, rather than becoming an expert in avoiding taxation. Let us wish that some likeminded person is able to reach policy making level and is able to change these. I have tried to simplify Indian legal system and taxation system for Indian entrepreneurs – but it is so complicated that even if you simplify it, it will remain complicated. An ordinary Indian entrepreneur wishes to remain an honest entrepreneur and contribute to the development of nation, but our systems and processes force him to adopt unfair means ..
3. For whom ? ? ? Primarily for those who have basic understanding of accounting, bookkeeping, Indian legal system, and Income tax Act. We believe that this document will help our future entrepreeurs (PGPSE participants) to gain basic understanding of Income tax law in India.
4. Links for basic understanding http://www.scribd.com/doc/11629358/Income-Tax-Law-of-India http://www.scribd.com/doc/24555340/Basics-of-Accounting-Book-Keeping http://www.scribd.com/doc/11629083/Factories-Act-1948 http://www.scribd.com/doc/11629283/Funds-Flow-Statement http://www.scribd.com/doc/11953668/The-Employees-State-Insurance-Act-ESI-Act
5. WHO IS A PERSON ? Sec. 2 (31) : person includes individual, HUF, local authority, firm, company, artificial person etc. For determining the tax liability, we have to see its location / residential status
6. Who is assessee? Sec. 2(7) : a person by whom any tax is payable
7. What is year? Assessment year as per sec. 2(9) : the year in which inome is being assessed for tax – it is of 12 months. Previous year as per sec. 3 : the year for which inome is being assessed for tax – it is the year just before assessment year.
8. What is income ? Sec. 2(24) : any profit, dividend, salary, profit in lieu of salary, perquisites, benefits, voluntary contributions received by trusts, cash benefits under various provisions of sec 28, capital gain etc. (it is a very wide definition and includes income from all the sources including income from lottery, speculative business etc. )
9. Income heads There are 5 heads of income : salary house property capital gain business and profession other income
10. Residential status of individual There 3 possibilities : resident and ordinary resident resident and not ordinary resident non-resident
11. 2 basic Conditions for Residents 1. at least 182 days of stay in India during previous year OR 2. at least 60 days of stay in India during previous year + 365 days of stay in 4 years preceeding the previous year
12. 2 additional conditions for ordinary residents 1. resident in at least 2 out of previous 10 years AND 2. stay of at least 730 days during last 7 years before the previous year.
13. HOW TO DETERMINE RESIDENTIAL STATUS OF ARTIFICIAL PERSONS For companies and other artificial persons, you have to see where their management and control is located. Residential status depends on their management and control at the time of income .
14. What is taxable out of the following : 1. income acrued and received in India : taxable for all 2. income earned and received out of India : taxable only incase of ROR (resident and ordinary resident) 3. Income acrued / received out of India from a business controlled in India : not taxable for NR only
15. Vivek has been in India as under : 2001 : 20 days 2002: 30 days 2003 : 40 days 2004 : 50 days and so on till 2009. answer : he is a resident because he remained for 100 days during 2009 and for >365 days during past 4 years, but he will not be ROR as he stayed for less than 730 days in 7 years.
16. Rohit has been in India as under : 2009 : 20 days 2008: 30 days 2007 : 40 days 2006 : 50 days and so on . answer : he is a non-resident because he remained for only 20 days during 2009
17. Special circumstances regarding basic conditions If an individual leaves India for employment or as a member of crew - then instead of 60 we have to take 182 days. A person of Indian origin settled abroad and comes to India for a visit only – in that case also take 182 days instead of 60 days.
18. Rohit's friend Jenifer is from Indian origin. She comes to visit India from 1 March to 31 October, determine her residential status From 1/3 to 31/10 – we have : 245 days, thus she is resident but not ordinary resident
19. Which of these are taxable ? 1. amount received under keyman insurance policy and under Sec. 80 DD 2. Bonus received from notified govt. Securities 3. educational scholarship 4. daily allowance received by MP
20. Solution None is taxable the are tax free under sec. 10D, 10(15), 10(16), 10(17) respectively
21. Vivek opens a trade union and has lots of earning in that union. Is the income taxable ? No – it is tax free as per sec. 10(24)
22. Vivek sets up a new business on May 15, 2008.What is the previous year for the assessment year 2009-10. The previous year will be 15 May 2008 to 31 March 2009
23. What are included in salary ? Salary include all pay, allowances, bonus, perquisites (facilities provided to employees, which can be evaluated in money), commission, etc. By what ever name called. In salary head, we add the following to salary : employer's contribution to PF, taxable perquisites under sec. 17(2) , ESOPs, DA, other allowances
24. What is taxable HRA? HRA is exempt to the extent of the least of the following : 1.Rent paid - 10% of salary (basic+DA+commission) 2. 40% salary (50% in case of 4 Metros) 3. Actual allowance received
25. Is PF taxable ? There are 3 types of PF : 1. statutory (govt.) 2. recognised 3. unrecognised statutory PF is fully exempt employer's contribution in recognised PF is tax free to the extent of 12%, rest are exempt. Unrecognised PF is taxed only when the employee collects payment (employee's contribution is exempt, but interest is taken in income from other sources)
26. Superannuation fund Tax free under sec. 10(13)
27. Ravi works in a non-govt. Office. He retires on 31 March after 15 years of service . His salary in Jan – March was 24000 pm, but before that it was 20000 pm. He gets Rs. 2 lakhs as leave encashment. How much is taxfree? 1. average for 10 months : (24*3 + 20*7) = 21,200 for 10 months : 212000 2. for 1month for each year of service 15*21200= 318000 3. Rs. 3 lakhs. 4. actual amount 2 lakh So the least of above Rs. 2 lakhs is taxfree.
28. Arun joined on 1/1/85, but fixation was done on 1/7/06 @ 26600 in payscale of 25000-800-33000. He retires on 1/12/6. He was paid 3.3 lakhs as gratuity. Determine taxability. Average for 10 months : (5 * 25800 + 5*26600)/10 =26200 The least of following is taxfree : 1. 15/26* 22*26200 = 332538 2. Rs. 3.5 lakhs 3. actual amount : 3.3 lakhs thus Rs. 3.3 is taxfree (if gratuity act was not applicable – the 1 st amount will be 1/2*21*26200 =275100, which will be taxfree – here we will take 21 years, as only completed years will be counted.)
29. Retrenchment compensation It is paid at the time of retrenchment (leaving the employee) following is tax free (least of the following ) : 1. 5 lakhs 2. 15 days's wages for number of years worked (round of to greater amount, if more than 6 months. )
30. V.R.S. PAYMENTS LEAST OF THE FOLLOWING IS EXEMPT : 1. 5 LAKHS 2. Last salary * 3 * number of completed years of service (sec. 10(10c)
31. Earned Leave As usual free for govt. Employees for others least of the following : 1. 3 lakhs 2. 10 month's salary 3. : 30 days credit for each year of service (salary = average for the last 10 month – salary = salary+DA+commission)
32. Pension Uncommuted : monthly payments – it is taxable for all commuted : - lump sum payment As usual free for govt. Employees for others : commuted pension is taxfree to the following levels : 1/3 rd if gratuity is paid ½ if gratuity is not paid
33. Gratuity ? It is a lumpsum payment at the time of retirement and it is taxfree for govt. Employee. For others it is taxfree to the least of the following : 1. 3.5 lakhs (this has increase now, checkout) 2. 15/26 for each year of service
34. How to value furnished accommodation ? If it is owned by employer, - 10% of cost of furnishing if it is hired – the actual expenses paid by employer as rental charges
35. How to value domestic servant facility :? If the employer has provided domestic servant facility to employee, the actual amount spent by employer is perquisite of employee.
36. How to value educational facility ? Actual money spent by employer is taken as perquisite – when the employer is providing education to the children of the employees. If the educational instituiton is being managed by employer, then it is taken as NIL (provided the expenditure by employer is upto Rs. 1000 per month per child ).
37. Interest free loans When employer provides interest free loan – the perquisite is taken at specified rates. If it is concessional rate – the difference of rates is taken as perquisite. The rates are : personal loan : 12.75%, car loan 7.5%, housing loan : 8% (these rates are regularly updated – you have to know the latest slabs).
38. Medical facility Annaul reimbursement of medical bills upto Rs. 15000 is tax free. Free medical facility in employer's hospital is tax free. Treatment abroad for employee / his family is taxfree upto Rs. 2 lakhs. (these limits are revised by govt, so check the latest limits).
39. Free lunch ? It is taxfree – provided the value of lunch is not more than Rs. 50 similarly tea, refreshments etc. Provided free to employee are tax free. Money spent by employer on training of employee is also tax free.
40. Professional tax ? ? Money spent by employer as professional tax is once added and then its deduction can be claimed. So once add it as perquisite and then claimits deduction under sec. 16 (iii)
41. Who is specified employee? Who is director or who has 20% voting power in company or who gets salary (including perquisites ) of Rs. 50000 or more per annum. Car, gas, and other facilities are taxable only on Specified Employees.
42. Deduction for : Entertainment allowance (sec. 16(ii) It is exempt for govt. Employees to the least of following : 1. 5000 2. 1/5 th of salary 3. actual allowance
43. Rohit opens a venture capital fund to promote entrepreneurs and has lots of earning in that fund. Is the income taxable ? No (sec. 10(23fb)
44. Gautam sets up a unit in Noida export processing zone. Is the income taxable? No (sec. 10A )
45. Vivek launches a mutual fund and get it registered with RBI and AMFI. Is the income of mutual fund taxable ? No (sec. 10 (23D)
46. Bothra and Surana Carpets is a 100% export oriented unit. Is the income taxable ? No (subject to some conditions) Sec. 10 B
47. Rohit launches Bachao Political Party and earns huge money by way of donations from people and by renting out office premises. Is the income taxable ? No (sec. 13A)
48. What is agriculture income? As per sec. 2(1a) : any income from land used for agriculture purpose including income from farm house. Calculate total income of a person including agriculture income and then reduce the amount of tax by the amount of tax which is worked out only on agriculture income.
49. Example : Rohit's income from agriculture is 2 lakhs and other income is 360000, what is his tax liability? First add these : = 560000 Suppose Tax on this amount is Rs. 10000 now calculate tax on only agriculture income ( 2 lakh + 1,60,000 – as minimum base tax free income) : suppose tax on this is Rs. 6000 so Rohit will have to pay : 10000-6000 = 4000 so Agriculture income is the best means to avoid tax.
50. Ashok retires from government service. He gets following : Gratuity Pension VRS compensation HRA Super annuation fund LTC which of these are taxable ?
51. Solution All these are tax free subject to some limitations – read sec. 105, 10(10), 10(10A, and 10AA, 13A) for details.
52. What is a gratuity ? When an employee retires, he receives gratuity from his employer. If he has worked for minimum 5 years, he may get gratuity. The amount of gratuity is exempt to the least of the following : 1. Rs. 350000 2. 15/26 * number of years worked 3. actual gratuity for government employee the gratuity is tax free.
53. What is Payment of Gratuity Act 1972 It is the main law regarding payment of gratuity. If an employee is not working in govt. Department, then payment of gratuity should be as per this act. However, in some cases this law is not applicable and in that case – the calculation of tax free gratuity is little bit different (instead of 15/26, we have to take half month salary).
54. For the assessment year 2007-8, Vivek has agriculture income of Rs. 58000 and non-agriculture income of 120000 what is his tax liability? First calculate income tax on (120+58) = 178000 first 1 lakhs = free next 50000 = 10% so 5000, 28000 * 20% 5600 now calculate on 58000 add 1 lakh, (free limit) : 158000 tax on 50000= 5000, 20% on 8000 = 1600 net tax liability : (5000+5600-5000-1600)= 4000 answer
55. While retiring Man Mohan gets Rs. 4 lakhs as earned leave. He worked for 25 years. His average salary during last 10 month = 20000. Tax free (sec. 10(10AA) : least of the following : 1. 20000*10 = 2 lakhs (10 months) 2. 3 lakhs 3. 30 days for each year worked : 25*20000 = 5 lakh the minimum is 2 lakh, so it will be taxfree.
56. Sharukh Khan retired from SBI on VRS. He got Rs. 10 lakhs. His salary = 20000, DA = 20000. He worked for 20 years with SBI He had 20 more years of service left. Min. Of the following is taxfree (sec. 10(10c)) 1. 3months for number of years : 20*3*40 = 2400000 2. 5 lakhs 3. No. Of month's salary : 20 * 40000 = 8 lakh 4. actual amount = 10 lakh thus only 5 lakh will be taxfree.
57. Nandan Nilekani gets HRA of 2 lakhs per month in Delhi, his monthly salary is Rs. 20 lakhs. He pays Rs. 1 lakh as monthly house rent. Find taxability? Least of the following is taxfree : (sec. 10(13A) rule 2A) 1. rent paid – 10% salary = 1 – 2 lakh = zero 2. 50% of salary = 10 Lakhs * 12 3. actual allowance : 2 Lakhs per month. So Zero is tax free – all is taxable.
58. Income from House Property Calculate the following in the same sequence : 1. Actual rent / receivable rent (A) 2. Municipal value (b) 3. fair rent (c) 4. standard rent (d), compare b with c and take higher amount and let us call it E. Now compare E with D, take the lower amount. This is ERR (expected reasonable rent). Let us call it F. Compare it with actual rent, take higher amount. Deduct municipal tax, get gross annual value, deduct interest paid and other deduction, get net annual value.
59. Municipal value 40, fair rent 40, standard rent 40, rent received 80, what is gross annual value. Higher of municipal value and fair rent = 40 lower of standard rent and 40 = 40 compare 40 with actual rent and take higher = 80 this is the answer.
60. MV = 96, FR = 80, SR = 82, AR = 79, WHAT IS GROSS VALUE Higher of MV & FR = 96 Lower of this and SR = 82, higher of this and AR = 82 answer = 82 answer
61. MV = 96, FR = 98, SR = 97, AR = 97.5, WHAT IS GROSS VALUE Higher of MV & FR = 98, lower of this and SR = 97, higher of this and AR = 97.5 answer
62. MV = 84, FR = 80, SR = 60, AR = 79, WHAT IS GROSS VALUE Higher of MV and FR = 84 lower of this and SR = 60 higher of this and AR = 79 answer
63. What are the deductions from Gross value in house property? First of all deduct municipal taxes, to find NAV. Then deduct statutory deduction @30% interest on borrowed capital. Interest on prior period (period before construction of property) is also allowed in 5 instalments. These deductions are given in sec. 24. (a & b)
64. Inadmissible deductions Following deductions are not permitted : 1. unrealised rent – realised later. Suppose you didnt realise rent of Rs. 5000 in year 2000, now you realise it, this amount will be added back this year in house income. (because it was allowed as deduction earlier). 2.
65. Amitabh has 2 houses, one is SOH and the other is rented. He gets Rs. 20000 p.m. As rent. MV = 2 lak, FR =3 SR=4 municipal tax = 10000, He got AR for 10 months, interest paid : 50000, total preconstruction interest Rs. 4 lakh. Higher of MV & FR = 3, compare this with SR = 3, compare with AR = 3 Less municipal tax = 10000 Annual value = 2,90,000 less statutory deduction (24a) 87000 interest deduction (24b) 50000+80000 =1.3 (this is allowed upto Rs. 1.5 lakhs) net value = 73000 answer
66. Can housing income have negative value ? Yes, because exemption in interest is granted. Suppose your House income is 20000, but interest deduction allowed (sec. 24) is Rs. 40000, so it will be negative . But it cant be negative due to statutory deduction or deduction due to repairs of house property.
67. BJP gives its building on rent. Can congress ask BJP to give tax on housing income? No – it is exampt for political parties, it is tax free.
68. Can an assessee claim rebate for repairs, colouring of building? No = Sec. 24 provides for rebates. This is an exhaustive list – only two rebates are permitted : 1. standard deduction (30%) 2. Interest for loans No other rebate is allowed – however, if the government allows other rebate – it will be permitted.
69. Rohit has 3 identical buildings. 1. for residence 2. for business 3. for rent (residential). Total fair rent 60000, total rent received Rs. 30000Total municipal tax 18000 – but only 9000 paid. Total interest on housing loan : 6000 FR = 20000 (only for let out building) AR = 30000 higher of FR & AR = 30000 less municipal tax = 3000 less sec 24 ded. 8100 interest = 2000 net = 16900 answer
70. Income from business and profession 4 conditions : 1. business must be carried out by assesee 2. business must be carried out during previous year 3. profit has to be calculated as per accounting system (mercantile or cash) 4. all the profits from all the units to be combined to arrive at income from business
71. What is business ? Very wide meaning – includes all professions, trade, manufacture, services, vocation etc.
72. Is illegal business taxable here? Yes - in the same way as a legal business
73. If business is not carried out in the previous year then .... It is essential condition that business should be carried out during previous year – even if for 1 day. Some exceptions are like : recovery of old bad debts. Etc.
74. Which is not allowed expenditure / deduction ? Capital expenditure payments out of India / consultancy fees / interest / commission etc. – which has been made without making TDS expenditure not related to business cash payments above Rs. 20000 (other than banks and specified govt institutions) read sec. 40 A and 43 B for details
75. You have to pay Rs. 5000 as excise duty, but you have not yet paid it, can you claim deduction? No – for such expenses (govt. Dues etc. ) only after payment you can claim it (even if you are following mercantile system – based on accruel)
76. You have paid Rs. 50 lakh for buying a patent, can it be claimed as deduction? No – it is capital expenditure you can claim depreciation on this.
77. You purchased a Van of Rs 3 lakhs to promote family welfare of employees, is it allowed as deduction? It is again capital expenditure as per sec. 36(1)ix) – it is allowed in 5 instalments – so 60000 each year is allowed
78. In order to pay income tax you take loan and pay interest of Rs. 1000, is it allowed as deduction? No
79. You spend Rs. 3000 for issue of debentures, is it allowed ? Yes – it is related to business
80. You spend Rs. 4 lakh as VRS compensation to director, is it allowed? Yes - it is related to business however as per sec. 35DD, it is allowed in 5 equal instalments
81. You sold out your import licence in market, is this a income under business ? Yes
82. You take a building on rent and for that pay stamp duty and registration charges, is it allowed? Yes - it is related to business
83. You pay huge amount of money as entertainment expenditure and travel expenditure – is it allowed? Yes – if it is for business there is no limit
84. You receive Rs. 3 lakhs as duty drawback – when you export, is it taxable ? Yes – it is revenue receipt as per Income tax act.
85. A manager died. The company received Rs. 5 lakh under keyman insurance policy. Is it a revenue of company? Yes – it is treated as revenue.
86. You spend Rs. 2 lakhs to defend a case relating to protection of your trademark. Is it allowed? Yes
87. A cashier embezzles Rs. 5 lakhs. Is it allowed as deduction? Yes – it is a business related loss
88. A CA firm pays Rs. 40000 as professional tax. Is it allowed as deduction? Yes
89. You make a provision of Rs. 5 lakh for gratuity payment (it is non-recognised gratuity fund) No – it will not be allowed as deduction
90. You pay Diwali bonus to employees, is it allowed? Yes
91. You pay bonus as per payment of bonus act, is it allowed? Yes
92. You give Rs. 5 lakhs as advertisement for pamplets published by a political party. Is it allowed? No but if you give your own advertisements, it is allowed without limit.
93. Your company maintains a guest house for VIPs. The expenditure of Rs. 5 lakhs have been made. Is it allowed? Yes – without limit.
94. You make cash payment of 7 lakhs – in a village – where there is no bank. Is it allowed? Generally cash payments above Rs. 20000 are not allowed. But exceptions are provided – as per rule 6DD, cash payment is allowed if there is no bank in that place or banks are closed due to strikes etc.
95. You pay Rs. 3 lakhs for breach of contract. Is it allowed ? No if it is related to capital assets / building etc. If it is related to goods that you buy or day to day business, it is allowed
96. You pay Rs. 4000 for legal fees when you dismiss a worker, is it allowed? Yes
97. You shift your business place and pay Rs. 10 lakhs. Is it allowed It is a capital expenditure - not a revenue expenditure – so not allowed
98. Expenses in new issue of share / rights issue / bonus issue of shares? These are all capital expenses – hence not allowed
99. Expenses on preparation of project report for a new product launch? Not – capital expenses – unless it is just an extension of your existing product
100. You increase authorised capital and for that pay rs. 5 lakhs as fees etc. Not allowed – as it is capital expenditure
101. You spend Rs. 4 lakhs on personal travel. Is it allowed? No – not related to business
102. You spend Rs. 10 lakhs 5 years back but claim for that now? Not allowed – as expenditure should have been incurred in the previous year (subject to some exceptions)
103. You pay Rs. 3000 as municipal taxes on your office building? Yes
104. You pay insurance premium on goods, is it allowed? Yes
105. You provide for Depreciation of Rs. 10 lakhs, is it allowed Yes – but depreciation has to be calculated as per the provisions in Sec. 32 of Income tax act. So the amount allowed may differ – the depreciation rates have to be the same as provided in income tax act.
106. Can you charge depreciation on straight line method ? No – as per Income tax act – only WDV is allowed
107. What are the blocks of assets? As per sec. 2(11) there are 4 blocks : 1. buildings 2. plant 3. furniture 4. intangible assets. Again each of these can be of various sub-blocks – for example rate of depreciation is different for residential building from office building
108. Buildings : ? There are 5 types of buildings : a. residence 5% b office 10% c. hotels : 20% d New office buildings et.c 40% e temporary : 100%
109. Plants It is of 6 types : general 25% cars 20% bus 40% containers 50% computer 60% pollution control : 100%
110. Furniture It is of 2 types : office 15% others 10%
111. Intangile assets Rate of depreciation : 25%
112. You pay Rs. 20000 penalty due to your failure to deduct TDS from salary of employee? It is also not allowed
113. You spend Rs. 5000 on litigation expenses – for an outstanding loan – which is not related to your regular business? No – not allowed
114. You spend Rs. 2000 to defend employee in a criminal case related to your business? Yes it is allowed
115. You spend interest for borrowing money to buy shares in another company ? Yes it is allowed
116. You delay tax payment and pay interest on the payment, is it allowed? Yes
120. You pay Rs. 3000 as income tax penalty, is it allowed? Not allowed
121. What is the rate of depreciation on the following : Computers used in office Bus for employees office furniture Factory Machine House of MD Guest House Patent
122. Solution Computers used in office 60% Bus for employees 20% office furniture 10% Factory Machine 15% House of MD 5% Guest House 10% Patent 25%
123. Capital gain Appreciation in value of assets come as capital gain. Sec. 45 : it is of 2 types : short term and long term short term : upto 3 years long term : - more than 3 years (except shares, securities etc. - where it is 12 months)
124. What is capital assets? All assets, excluding the following : 1. stock 2. movable property excluding jewellery 3. agriculture land not located in municipality 4. gold bond / special bearer bond / gold deposit scheme
125. How to compute capital gain? 1. find sale price (transfer price) date of transfer and date of acquisition (date will be the date of registration / delivery / possession as per Transfer of property act / relevant law) 2. find cost of acquisition, cost of improvement and cost of transfer, undertake necessary indexation 3. find net benefit
126. What is notional cost of acquisition ? If someone has gifted you a car, what is your cost of acquisition, (nil) – but we will take here notional cost of acquisition. The cost incurred by the person who gifted you will become your cost of acquisition.
127. What is indexed cost of acquisition ? Rohit bought a house in 1984 in 1 lakhs and sold it in 2004 in 5 lakhs, what is the capital gain? Index in 1984 was 125 and in 2004 it was 480 so use the following formula to find indexed cost : 480/125 * 1lakh= 3.8 lakh, capital gain = 5-3.8 = 1.2 lakhs.
128. How to find index factor ? It is called cost of inflation index. Its base is 1981-82 you can find it : http://incometax.indlaw.com/display.aspx?791408D0-A994-4972-B1AC-852C578ADE17 so find it out for the year of purchase and for the year of sale. Formula : index in year of sale / index in year of purchase
129. Deductions from capital gain ? Sec. 54 : if you sale a residential house and have capital gain, your capital gain will be taxfree if you buy anothe residential house within 2 years after or 1 year before the sale or construct a new house in 3 years after date of sale of equivalent amount (otherwise it will be proportionately).
130. What is capital gains account scheme 1988? If you have yet to decide about which house to buy, then you can deposit your sale proceeds in a capital gains account scheme so that you may avoid payment of capital gain.
131. Agriculture land Sec. 54B If you sale an agriculture land and buy another agriculture land in a period of 2 years, your capital gain is taxfree. (available only to individual)
132. Sec. 54EC : invest inspecified bonds If you buy specified investments – you can avoid capital gain. It is for long term capital gain the investments must be made for a minimum period of 3 years. The list of securities / investments are prescribed (for example bonds issued by NABARD) .
133. A constructed house in 31December 2006. he took loan of Rs. 3 lakh @ 12% on 1/6/5 and Rs. 2 lakh on 1/4/6 @ 14%. Municipal value of house 1 lakh. M. Tax. 12000. he resides in that house Value of the house : Nil (it is self occupied) deduction (for interest ) preconstruction period : (19 month interest on 3 @12%: =57000 9 month interest on 2 @14% =21000) = 78000 * 1/5= 15600 Now : 36000+28000 = 64000 total : 79600 this will be adjusted with income from other head or with income of this head next years.
134. Explanation Pre construction period interest is divided in 5 instalments and spread out in 5 years. The preconstruction interest in the previous case was 78000 which we will allow in 5 years eqully. The income in the head income from house property is negative here.
135. Std. Rent 36, Fair rent 45, municipal value 30, actual rent 20 what will you take a Gross annual value ? Higher of MV and FR = 45 lower of this and SR = 36 Higher of this and AR = 36 so Gross annual value = 36 answer
136. Ravi Borrowed Rs. 5 lakh @ 10% on 1/4/99 and construction of house was done on 1/4/1. what is the interest deduction allowable now? Preconstruction period : 2 years : interest is 10000, which would be allowed from 2001-2 to 2005-6 (Rs. 20000 each year) So now it will not be allowed. Interest for 2008-9 : 50000 per annum will be available.
137. What are the popular deductions ? Investment 80C Medican insurance sec 80D PF / Pension funds Sec. 80 CCC Medical payments : 80DD & DDB repayment of loan 80E donation 80G Rent paid 80GG Scientific research association 80GGA
138. What is 80C If you invest in LIC premium / approved insurance premiums / mutual funds / infrastructure bonds etc. You get deductions upto Rs. 1 lakhs (in some cases more than Rs. 1 lakhs also for example infrastructure bonds). See the list of specified securities / investments for this. The primary purpose is to encourage individual / HUF to save money and invest.
139. How much can you claim on medical expenses as deduction? If you spend money on a person dpeendent on you and that person has disability : from Rs. 50000 to 75000 is available depending on diability (sec. 80DD) if you spend on your own treatment upto Rs. 60000 is available as deduction (sec. 80DDB)
140. Can loan for higher education help you in tax deduction? Yes : Sec. 80E : upto 40000 is allowed or loan for higher education in 8 instalments.
141. How does 80C help in encouraging people to invest? As per this section, you can claim upto Rs. 1 lakh (in some cases more than Rs. 1 lakh) if you invest in LIC premium / insurance premium, mutual funds / fresh issues / specified securities – thus this section is primarily to encourage people to invest.
142. How does income tax encourage people to go for medical insurance? In India most people dont go for medical insurance (unlike west), so in order to encourage people to go for it, there is 80D, which gives deduction of Rs. 10000/15000 for medical insurance premiums.
143. How does income tax encourage private pension schemes? There is no pension scheme in private sector and govt. Is also now withdrawing pension schemes. Thus in order to encourage people to plan for future / old age, there is 80ccc - if you invest in pension plan of any insurance company, you get deduction upto Rs. 10000.
144. How does income tax encourage people to contribute to national relief and rehabilitation? There is sec. 80G, which gives a list of institutions where you can donate and avail upto 100% deductions. In this list National defence fund and PM's national relief fund are also there, thus if you donate money there, you can claim upto100% deductions for the donated amount.
145. Can you claim deduction for house rent paid ? Yes – sec. 80GG - the minimum of the following is deductible : 1. rent paid – 10% total income 2. 25% of adjusted total income 3. Rs. 2000 per month.
146. How does income tax encourage you to go for rural development / science? If you set up a rural development organisation / science research organisation, then all the donations given to your organisation will be eligible as deductions in the hand of donor as per Sec. 80GGA
147. How does income tax encourage units to go for sustainable development If you set up a unit to process biodegradable wastes – this unit will be able to enjoy 100% income tax benefits as per sec. 80JJA. So 100% profits are tax free.
148. Income tax as encouraging employments? Companies can claim 30% deductions for wages paid for new employees hired during the year. Sec. 80JJAA
149. Support to physically challenged Deduction upto Rs. 75000 is available to physically challenged persons (sec. 80U)
150. How does income tax act encourage infrastructure sector? 100% tax free profits for 10 years – if you set up an infrastructure development unit – like for power generation, telecom, industrial park etc.
151. How does sec. 80IB help entrepreneurs ? There are special deductions available for various units : 100% tax free profit for 5 years in backward area – any unit (additional deductions also available). Tax free 30% profit for ship operation company for 10 years taxfree 50%/30% for hotels for 10 years 50% profit for multiplex/ convention centres for 5 years 100% profit for housing projects etc.
152. How does income tax promote health care ? There are many deductions / facilities availalbe : Sec. 80IB : 100% taxfree profit for 5 years if you set up a 100 bed (or more) hospital in rural areas.
153. How does income tax encourage food processing industry? 100% taxfree profit for 5 years and 25/30 % taxfree profit for next 5 years if you set up food processing / fruit packing unit (sec. 80IB)
154. Rajiv's salary is Rs. 1.8 lakhs. He deposits Rs. 30000 in medical insurance, and takes LIC jeewan suraksha policy for Rs. 10000. Discuss his tax liability. He also spends Rs. 30000 on medical treatment of his wife? He will get deductions for all these : 10000 for medical insurance (sec. 80D) 30000 for medical expenses (sec. 80DD) 10000 for lic Jewan suraksha (Sec. 80CCC)
155. What are rules regarding TDS? It is the responsibility of every company / firm to collect TDS. Following payments can be made only after TDS: 1 salary 2. interest 3 insurance commission 4. professional fees 5. income of lottery / games etc.
156. Salary payment As per sec. 192 – employer has to collect TDS before payment of salary. If the employee gives form no. 13 – then salary can be paid without TDS. If salary payment is less than the maximum amount not chargeable to tax, then no TDS is required.
157. Rules regarding HRA Employer should collect hourse rent receipts if house rent is more than Rs. 3000 (check out the latest rules).
158. Donations by employees... If employee has made donations to approved funds under 80G (like PM's national relief fund), then the employer has to keep that in mind while making deductions.
159. Rouding off of salary The total salary need to be rounded off to multiple of 10. for example 233222 will be 233220
160. Other income of employee As per sec. 192 (2b) employee may be asked to give details of his other income, which shall also be taken into account while collecting TDS. (rule 26B)
161. Income from interest Every bank / company / instutitons will collect TDS at specified rates while making payment of interest (sec. 193) TDS rate is 10% for listed debentures 20% for non-listed debentures etc. Or collect form no 13 (for nil TDS)
162. When can you make payment without TDS? If the other person submits the following : form no. 13 form No. 15G
163. Interest payment limits without TDS As per sec. 194A, interest payment by any person above Rs. 5000 and Rs. 10000 (in case of banks) annually will require TDS / form no. 13/ form no. 15G
164. Is TDS required on govt. Bonds also? This is where our law is lopsided. No TDS is required in case of National Defence bonds , NSC, Gold Bonds etc. (most of the govt. Securities).
165. TDS on insurance premium ? Sec. 194D requires TDS @ 10% / 20% or form no. 13 if there is insurance premium payment above Rs. 5000. 20% incase of companies
166. TDS for rent.. As per sec. 194I – if rent payment annually is more than Rs. 1.2 lakhs, then TDS @15% is required (check out the latest rates). In case of companies, the rate is 20%. or form. NO. 13 is required
167. TDS on brokerage Any amount of brokerage above 2500 requires TDS @ 10% (sec. 194H)
168. TDS on mutual funds If investor sells back his units, there is TDS (sec. 194f)
169. National savings scheme If payment in NSS is more than 2500, TDS @20% has to be collected
170. Payment to sports associations etc. Requires TDS Sec. 194E : you have to collect TDS while making payments to non-resident sports associations etc.
171. What is penalty if TDS is not collected? Interest @1% per month + tax as required. (sec. 201 )
172. Forms to be filled up Form no. 24 / 26 has to be filled as online tax accounting system – giving details of TDS collected. This has to be done quarterly. Penalty for delay : Rs. 100 per day.
173. Penalties ... relating to TDS Imprisonment upto 7 years + fine (sec. 276B) 100 per day fine (Sec. 272A (2)) Rs. 10000 – if TAN is not obtained (sec. 272BB) 100 per day if TDS certificate is not issued (sec. 272A(2))
174. Service tax.. Service tax was introduced in 1994 on the recommendation of Dr. Raja C. Chelliah committee report. Initially the rate was 5%, but now it is more than 10% more and more services are put in the ambit of service tax every year. Excise Department administers this tax.
176. ADVANCE TAX - companies Upto 15% - 15 june upto 45% - 15 september upto 75% - 15 Dec. Upto 100% - 15 March
177. Advance tax-non-corporates Nil - 15 june upto 30% - 15 september upto 60% - 15 Dec. Upto 100% - 15 March
178. Failure to pay advance tax If assessee doesnt pay advance tax or the advance tax paid is less than 90% of assessed tax, the assessee will have to pay interest as per Sec. 234A,B,C. - which is 1% per month.
179. What happens if there is excess payment of advance tax? There will be refund. If there is excess refund, there is a provision of interest @.5% p.m. on this excess amoount. Read sec. 234D and 143(1) for details
180. Which are the important tax authorities? Sec. 116 : CBDT Directors / commissioners of Income tax additional director / joint directors/ deputy directior / asst. Director ITO recovery officers
181. Powers of income tax officers As per section 132, they can search documents and seize them for a period upto 30 days (sometimes even more than 30 days). They can call for additional information (sec. 133) they can carry out detailed investigation and these will be equal to judicial proceedings (sec. 136)
182. What is the last date for filing income tax return ? For companies / partners of a firm / an individual whose accounts have to be audited – 30 October for others (individuals) : 31 July .
183. Who should sign the income tax return ? In case of individual – himself in case of companies – MD in case of other bodies : the principal officer responsible for this.
184. What is assessment The income tax department can undertake assessment after examination of documents / enquiry as per sec. 142 or they can make assessment as per sec. 143 or they can make best judgement assesment as per sec. 144 – if assesee has failed to furnish return.
185. What is the rate of tax on partnership? 30% + surcharge as applicable for capital gain : 20% +surcharge there must be a partnership deed and the partnership should actually be there to get the status of partnership in income tax act.
186. What are rules regarding partnership taxation? You have to follow partnership rules, which are little bit different from partnership act. For example : there is a maximum limit to the remuneration that you can pay to a partner as per Income tax act. This amount is specifiedin Sec. 44A. There is also a maximum rate of interest on capital that can be paid to partners. (12%)
187. What is maximum remuneration for partnership in profession? For first 1 lakh of profit – Rs. 50000 or 90% of profit (whichever is more) for next 1 lakh: 60% for remaining profit : 40%.
188. What is maximum remuneration for partnership in business – other than profession? For first 75000 of profit – Rs. 50000 or 90% of profit (whichever is more) for next 75000 lakh: 60% for remaining profit : 40%.
189. Taxation of companies .... Company (sec. 2(17) has wide meaning here and includes foreign companies (sec. 2(23A) and public companies (2(18) also.
190. What is a publicly held company It is defined in sec. 2(18) :; at least 50% capital is distributed to common public or it is registered under sec. 25 of companies act.
191. What is amalgamation and demerger ? Amalgamation (sec. 2(1b) is merger of two companies – after merger, at least 75% shareholders should become holder of new company demerger is the situation when a company splits into two.(sec. 2(19AA)
192. What is MAT Minimum alternate tax – when a company is not liable to pay tax, it has to pay MAT at least as per rules rate of MAT is 7.5% sec. 115Jb : when 7.5% of book profit exceeds tax, then tax will be 7.5% of these book profits.
193. How to compute book profit Adjust the following in profit : add these back 1. income tax 2. dividend 3. reserves 4. provision for loss of subsidiary reduce these : 1. losses brought forward 2. amount withdrawn from reserves and provisions
194. Is foreign company also liable to pay MAT ? Yes – they have to maintain accounts as per sec. 594 (Indian company has to maintain as per sec. 209) . only companies from Netherlands dont have to pay MAT.
195. WHAT ABOUT EXCESS MAT? If excess MAT is paid, the company gets credit for this and it can carry forward such credit for 5 years.
196. Which losses cannot be adjusted with other heads of income? Loss from speculation business / race horses long term capital loss
197. What is limitation regarding interhead loss adjustment (sec. 71)? Loss from business and profession cant be adjusted with salary these cant be adjusted with other head : Loss from speculation business / race horses long term capital loss
198. What loss can you carry forward infinitely ? Loss of banking company (72aa) or of a firm succeeded by a company (sec. 72A6) and of demerged company or of unabsorbed depreciation of amalgamated company other losses can generally be carry forward for 8 years.
199. Loss from speculation business and race horses These losses cant be adjusted with other profits they can be carried forward for 4 years only.
200. What are deemed income? Cash credits (sec. 68) unexplained investments (sec. 69) unexplained jewellery, expenditure, money, etc. Investment not fully disclosed amount borrowed / repaid on hundi.
201. Presumptive income If the business is small, income tax department takes presumptive income (it assumes that business has some % of total receipt as profit). For example : civil construction work (sec 44AD) : 8% income from total receipt Transport vehicles for rent (sec 44AE) : 3500 Per month per heavy vehicle / 3150 for light vechicle retail store (sec 44AF) : 5% from total receipt
202. How to carry forward losses from house property You can carry forward it for 8 years and adjust it with income in this head. (71b)
203. Loss from speculation business – carry forward Carry forward it and adjust with income from this head in 8 years.
204. Loss from ordinary business Unabsorbed depreciation – it can be carried forward infinitely - there is no time limit other business loss – 8 years
205. Loss from capital gain - carry forward Carry forward it for 8years short term can be adjusted with short term / long term but : long term capital loss can be adjusted only with long term capital gain
206. Loss from race horses Sec. 74A : carry forward and adjust in next 4 years with gain from this head
207. FORM NO 3A,3B,3D These are forms of audit statements to be subimtted audit by a Chartered Accountant failure – penalty Rs. 1 lakh / .5% of turnover audit form has to be submitted by 31 october
208. What are specified professions ? Medicine (doctor), lawyer, chartered accountants etc. Are specified professions. They alsohave to maintain accounts as per sec. 44AA some of the essential documents required are : cash book, ledger, journal, vouchers, bills, receipts,
209. What can be method of accounting as per Income tax law ? Either cash system or mercantile (accruel) system Sec. 145 clause 11
210. How to value : closing stock Add all excise and other govt. Dues that have been paid.
211. Depreciation .... Charge depreciation as per income tax rules. Give proper disclosures clause : 14
212. Credits in P & L accounts... Business and profession income includes following credits : 1. duty drawback 2. sale of import licence 3. cash assistance received from govt. All these incomes are chargeable to tax. They have to be added to income from business and profession (sec. 28, clause 13 )
213. Tea / coffee / rubber Read sec.33AB : - there is a tea / coffee / rubber development account – to be opened with NABARD. 40% turover or actual amount deposited in that account is allowed as deduction (whichever is less). Your tea turnover is 30 cr you deposit Rs. 3 lakh in deposit account, how much deduction under 33AB : Rs. 3 lakhs (lower of 3 lakh / 12 crore).
214. Petroleum / natural gas exploration Sec. 33ABA : 20% of turnover / money deposited in development account (as per scheme of government of India) – is allowed as deduction.
215. Promotion of scientific research Sec. 35 : money spent on research as per this section – 150% is allowed as deduction. It is for both capital and revenue expenditure if instead of carrying out research, the assessee gives donation to a national research organisation / laboratory – 125% of expenditure is allowed as deduction.
216. Social / rural development promotion by income tax law... Sec. 35AC : money spent through PSU for public development allowed as deduction Sec. 35CCA : money spent through national fund for rural development / poverty removal- allowed as deduction
217. Preliminary expenses ... When you start a new project, you have to prepare feasibility report and carry out market research / survey. You also have to prepare MOA and AOA and other documents to start the company. These come in preliminary expenses. They are allowed in 5 instalment. It can be upto 5% of the project cost / capital employed – whichever is higher (sec. 35D)
218. Exploration of minerals Money spent on exploration of minerals (upto 4 years before commercial operations) is allowed – in 10 equal instalments as per sec. 35E.
219. EXPENSES NOT ALLOWED ......(from business and profession) Personal expeses capital expenses expenses on pamplets / brochures etc. Penalties / fine expenses on clubs (see details)
220. Expenses allowed ONLY if actually spent (even if acruel system followed) Leave encashment gratuity / superannuation fund contribution bonus / commission paid interest on loan taken from financial institutions any tax / duty / cess / charge / govt. Levy etc. (sec. 43B clause 21)
221. Auditor to give details of following : Brought forward losses (cl. 25) TDS (cl. 27) cost audit report (sec. 233 B of company act, cl.30) GP / NP to turnover ratios , stock turonver ratio, material consumed / finished goods (cl.32)
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