Project_report_m.com_2_khushal.doc.pdf

Taxation’s in India A Project On “Taxations In India” BACHELOR OF MANAGEMENT STUDIES Semester VI (2018 – 2019) Submitted By Name: Khushal Devendar Parmar. T.Y.BMS (Marketing) Roll No. 55 Project Guide Prof.: Ravi Ahuja. Submitted to University Of Mumbai

Laxman Devram Sonawane College Bhiwandi - Murbad Road, Wadeghar, Opp. Fire Station, Near DurgadiKilla, Kalyan West, Kalyan, Maharashtra 421301

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Taxation’s in India

“Taxations In India” Bachelor of Management Studies Semester VI (2018 – 2019) Under the Partial of the Requirements for Award of Degree of Bachelor of Management Studies Submitted By Name: Khushal Devendar Parmar. Roll No.: 55 Project Guidance Prof: Ravi Ahuja. Submitted to University Of Mumbai

Laxman Devram Sonawane College Bhiwandi - Murbad Road, Wadeghar, Opp. Fire Station, Near DurgadiKilla, Kalyan West, Kalyan, Maharashtra 421301

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Taxation’s in India

DECLARATION I Khushal Devendar Parmar the Student of T.Y.BMS Semester VI (2018 – 2019) hereby declare that I have completed the Project on “Taxations In India” As required by the university rules, I state that the work presented in this is original in nature and to best of my knowledge. Wherever references have been made to work of others, it is clearly indicated in the sources of information.

-------------------------------------------Name Roll No. 55 Laxman Devram Sonawane College Bhiwandi - Murbad Road, Wadeghar, Opp. Fire Station, Near DurgadiKilla, Kalyan West, Kalyan, Maharashtra 421301

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Taxation’s in India

CERTIFICATE

This is to certify that Mr. Name: Khushal Devendar Parmar., Roll No. 55 Of Third Year B.M.S Semester VI (2018 – 2019) has successfully completed the project on “Taxations In India” under the guidance of Prof: Ravi Ahuja

Course Coordinator

Project Guide/Internal Examiner

External Examiner

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Principal

Taxation’s in India

ACKNOWLEDGEMENT To list who all have helped me is difficult because they are so numerous and the depth is so enormous. I would like to acknowledge the following as being idealistic channels and fresh dimensions in the completion of this project. I take this Opportunity to thanks the University of Mumbai for giving me chance to do this project I would like to thanks my Principal MS. ANNIE ANTONY for providing the necessary facilities required for completion of this project. I take this opportunity to thanks our Coordinator Ms. ANNIE ANTONY for her moral support and guidance. I would also like to express my sincere gratitude towards my project guide Prof : Ravi Ahuja whose guidance and care made the project successful. Lastly, I would like to thanks each and every person who directly or indirectly helped me in the completion of the project especially my Parents and Peers who supported me throughout my project.

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Taxation’s in India

INDEX Serial No.

Chapters

Page No.

1.

Introduction of Taxation in India

7-10

2.

Types of Taxation in India

11-20

3.

Exclusive and Inclusive Definition

21-28

4.

Resident and scope of total Income

29-34

5.

Direct Tax

35-44

6.

Set-off And carry forward of losses

45-49

7.

Steps to computation of total income

50-54

8.

Salaries

55-61

9.

Tax Deductions

62-80

10.

Computation of Gross Total Income

81-84

11.

News collection of Taxation of India

84-87

12.

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Suggestions for Future Researchers

88

Taxation’s in India

Chapter 01

Introduction of Taxation in India Government important

has role

to in

play all

an

rounds

development of society in modern era. It has not only to perform its traditional

functions

(defense,

maintenance of law and order) but also to undertake welfare and development activities such as health, education, sanitation, rural development, water supply etc. It has also to pay for its own administration. All these functions require huge public finance. Taxes constitute the main source of public finance whereby government raises revenue for public spending. Taxes have been broadly categorized into direct and indirect taxes. ‗Direct taxes‘ include those taxes which are paid by the person on whom these are levied like income tax, wealth tax etc. On the other hand, ‗indirect taxes‘ are levied on one person, but paid by another e.g. sales tax, excise duty, custom duty etc. Income tax is the most important of all direct taxes and with the application progressive rate schedule, provision of exemption limit and incorporation of a number of incentive provisions. It can be used not only to satisfy all the canons of A sound tax system but may also go a long way in realizing variety of socio economic objectives set out by the economic system. It also helps in bringing distributional justice through higher rate of tax on the rich class of the society. It may also act as a tool for controlling inflation. Due to all these factors, income tax has assumed great importance in the structure of direct taxation. Therefore, all politically advanced democracies impose some form of personal taxation, generally based on income.

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Taxation’s in India

 Meaning: ―… A Business who stays aloof of tax matters cannot remain competitive. Tax laws are an economic reality in the Business world. A Tax Dollar is just as real one derived from other source.‖Tax Management is now an integral part of business management. It involves not only due compliance of law in timely and regular manner, but also arranging the affairs in such a manner that it reduces the tax liability burden. Specifics are: 

Filling of Return



Maintenance of Accounts



Getting the Accounts Audited.



Complying with the notices of Income Tax Department.



Payment of Advance Tax

 Importance: There are many responsibilities of state to its countrymen. State is represented by the government. Hence, the government of any country performs a number of activities in order to maintain law and order, peace and security, satisfying with the requirement of basic needs and public utilities etc. It also initiates various development programmers and maintains diplomatic and friendly relation with other nations in the world. In order to carry out all these activities and discharge its overall responsibilities towards the people, it needs sufficient revenue. Such revenue is known as government revenue. It is also known as public revenue. Government revenue is collected through various sources according to the provisions of the financial acts and rules and regulations. Such sources of revenue are taxes, fees and charges, fines and penalties, foreign grants etc. Among them, tax is the main sources of collecting the government revenue. The concept of tax was initiated from Great Britain in 1799 to collect revenue for the government to manage the war against France. It didn't come into practice after that for a long time. Income tax system was regularly begun from 1840 onwards in different countries in the world. It was begun from 1840 in

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Taxation’s in India Switzerland, 1849 in Austria, 1860 in England and India, 1862 in USA, 1864 in Italy and 1959 in Nepal as a regular source of government revenue.

 Objective: The primary purpose of taxation is to raise revenue to meet huge public expenditure. Most governmental activities must be financed by taxation. But it is not the only goal. In other words, taxation policy has some non-revenue objectives. Truly speaking, in modern world, taxation is used as an instrument of economic policy. It affects the total volume of production, consumption, investment, choice of industrial location and techniques, balance of payments, distribution of income, etc. Here we will discuss the objectives of taxation in modern public finance: 1.

Economic Development

2.

Full Employment

3.

Price Stability

4.

Control of Cyclical Fluctuations

5.

Reduction of BOP Difficulties

6.

Non-Revenue Objective

1. Economic Development : One of the important objectives of taxation is economic development. Economics development of any country is largely conditioned by the growth of capital information. It is said that capital formation is the kingpin of economic development. But LDCs usually suffer from the shortage of capital. To step up both public and private investment, government taps tax revenues. Through proper tax planning, the ratio of savings to national income can be raised. By raising the existing rate of taxes or taxes or by imposing new taxes, the process of capital formation can be made smooth. One of the important elements of economic development is the raising of saving-income ratio which can be effectively raised through policy.

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Taxation’s in India

2. Full Employment: Second objective is the full employment. Since the level of employment depends on effective demand, a country desirous of achieving the goal of full employment must cut down the rate of taxes. Consequently, disposable income will rise and, hence, demand for goods and services will rise.

3. Price Stability: Thirdly, taxation can be used to ensure price stability-a short run objective of taxation. Taxes are regarded as an effective means of controlling inflation. By raising the rate of direct taxes, private spending can be controlled. Normally, the pressure on the commodity market is reduced. But indirect taxes imposed on commodities fuel inflationary tendencies. High commodity prices, on the one hand, discourage consumption and, on the other hand, encourage saving. Opposite effect will occur when taxes are lowered down during deflation.

4. Control of cyclical fluctuations: Fourthly, control of cyclical fluctuations- periods of boom and depression-is considered to be another objective of taxation. During depression, taxes are lowered down while during boom taxes are increased so that cyclical fluctuations are tamed.

5. Reduction of BOP Difficulties: Fifthly, taxes like custom duties are also used to control imports of certain goods with the objective of reducing the intensity of balance of payments difficulties and encouraging domestic production of import substitutes.

6. Non-Revenue objective:

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Taxation’s in India Finally, another extra-revenue or non-revenue objective of taxation is the reduction of inequalities in income and wealth. This can be done by taxing the rich at higher rate than the poor or by introducing a system of progressive taxation.

Chapter 02

Taxation in INDIA

TYPE O S F

Taxes are of two distinct types, direct and indirect taxes. The difference comes in the way these taxes are implemented. Some are paid directly by you, such as the dreaded income tax, wealth tax, corporate tax etc. while others are indirect taxes, such as the value added tax, service tax, sales tax, etc. 1.

Direct Taxes

2.

Indirect Taxes

But, besides these two conventional taxes, there are also other taxes that have been brought into effect by the Central Government to serve a particular agenda. ‗Other taxes‘ are levied on both direct and indirect taxes such as the recently introduced Swachh Bharat Cess tax, Krishi Kalyan Cess tax, and infrastructure Cess tax among others.

 Direct Tax: Direct tax, as stated earlier, are taxes that are paid directly by you. These taxes are levied directly on an entity or an individual and cannot be transferred onto anyone else. One of the bodies that overlook these Direct taxes is the Central Board of Direct Taxes (CBDT) which is a part of the Department of Revenue.

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Taxation’s in India

Some of these acts are: 

Income Tax Act:

This is also known as the IT Act of 1961 and sets the rules that govern income tax in India. The income, which this act taxes, can come from any source like a business, owning a house or property, gains received from investments and salaries, etc. This is the act that defines how much the tax benefit on a fixed deposit or a life insurance premium will be. It is also the act that decides how much of your income can you save through investments and what the slab for the income tax will be. 

Wealth Tax Act:

The Wealth Tax Act was enacted in 1951 and is responsible for the taxation related to the net wealth of an individual, a company or a Hindu Unified

Family.

The

simplest

calculation of wealth tax was that if the net wealth exceeded Rs. 30 lakhs, then 1% of the amount that exceeded Rs. 30 lakhs was payable as tax. It was abolished in the budget announced in 2015. It has since been replaced with a surcharge of 12% on individuals that earn more than Rs. 1 crore per annum. It is also applicable to companies that have revenue of over Rs. 10 crore per annum. The new guidelines drastically increased the amount the government would collect in taxes as opposed the amount they would collect through the wealth tax.

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Taxation’s in India

 Gift Tax Act: The Gift Tax Act came into existence in 1958 and stated that if an individual received gifts, monetary or valuables, as gifts, a tax was to be to be paid on such gifts. The tax on such gifts was maintained at 30% but it was abolished in 1998. Initially if a gift was given, and it was something like property, jewellery, shares etc. it was taxable. According to the new rules gifts given by family members like brothers, sister, parents, spouse, aunts and uncles are not taxable. Even gifts given to you by the local authorities are exempt from this tax. How the tax works now is that if someone, other than the exempt entities, gifts you anything that exceeds a value of Rs. 50,000 then the entire gift amount is taxable.  Expenditure Tax Act:

This is an act that came into existence in 1987 and deals with the expenses you, as an individual, may incur while availing the services of a hotel or a restaurant. It is applicable to all of India except Jammu and Kashmir. It states that certain expenses are chargeable under this act if they exceed Rs. 3,000 in the case of a hotel and all expenses incurred in a restaurant.  Interest Tax Act: The Interest Tax Act of 1974 deals with the tax that was payable on interest earned in certain specific situations. In the last amendment to the act it was stated that the act does not apply to interest that was earned after March 2000.

 Indirect Tax: By definition, indirect taxes are those taxes that are levied on goods or services. They differ from direct taxes because they are not levied on a person who pays them directly to the government; they are instead levied on products and are collected by an intermediary, the person selling the product. The most common examples of indirect tax Indirect tax can be VAT (Value Added Tax), Taxes on Imported Goods, Sales Tax, etc. These taxes are levied by adding them to the price of the service or product which tends to push the cost of the product up.

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Taxation’s in India

Examples of Indirect Taxes: These are some of the common indirect taxes that you pay.  Sales Tax: As the name suggests, sales tax is a tax that is levied on the sale of a product. This product can be something that was produced in India or imported and can even cover services rendered. This tax is levied on the seller of the product who then transfers it onto the person who buys said product with the sales tax added to the price of the product. The limitation of this tax is that it can be levied only ones for a particular product, which means that if the product is sold a second time, sales tax cannot be applied to it.  Service Tax: Like sales tax is added to the price of goods sold in India, so is service tax added to services provided in India. In the reading of the budget 2015, it was announced that the service tax will be raised from 12.36% to 14%. It is not applicable on goods but on companies that provide services and is collected every month or once every quarter based on how the services are provided. If the establishment is an individual service provider then the service tax is paid only once the customer pays the bills however, for companies the service tax is payable the moment the invoice is raised, irrespective of the customer paying the bill. GST - Goods and Service Tax: The Goods and Services Tax (GST) is the largest reform in India‘s indirect tax structure

since

the

market

started

opening up about 25 years ago. The GST is a consumption-based tax, as it is applicable where consumption takes place. The GST is levied on value-added

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Taxation’s in India goods and services at each stage of consumption in the supply chain. The GST payable on the procurement of goods and services can be set off against the GST payable on the supply of goods and services, the merchant will pay the applicable GST rate but can claim it back through the tax credit mechanism.  Value Added Tax: VAT, also known as commercial tax is not applicable on commodities that are zero rated (e.g. food and essential drugs) or those that fall under exports. This tax is levied at all the stages of the supply chain, right from the manufacturers, dealers and distributors to the end user. The value added tax is a tax that is levied at the discretion of the state government and not all states implemented it when it was first announced. The tax is levied on various goods sold in the state and the amount of the tax is decided by the state itself. For example in Gujarat the government split all the good into various categories called schedules. There are 3 schedules and each schedule has its own VAT percentage. For Schedule 3 the VAT is 1%, for schedule 2 the VAT is 5% and so on. Goods that have not been classified into any category have a VAT of 15%.  Custom duty & Octroi: When you purchase anything that needs to be imported from another country, a charge is applied on it and that is the customs duty. It applies to all the products that come in via land, sea or air. Even if you bring in products bought in another country to India, a customs duty can be levied on it. The purpose of the customs duty is to ensure that all the goods entering the country are taxed and paid for. Just as customs duty ensures that goods for other countries are taxed, Octroi is meant to ensure that goods crossing state borders within India are taxed appropriately. It is levied by the state government and functions in much the same way as customs duty does.

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Taxation’s in India

 Excise Duty: This is a tax that is levied on all the goods manufactured or produced in India. It is different from customs duty because it is applicable only on things produced in India and is also known as the Central Value Added Tax or CENVAT. This tax is collected by the government from the manufacturer of the goods. It can also be collected from those entities that receive manufactured goods and employ people to transport the goods from the manufacturer to them. The Central Excise Rule set by the central government provide suggest that every person that produces or manufactures any 'excisable goods', or who stores such goods in a warehouse, will have to pay the duty applicable on such goods in. Under this rule no excisable goods, on which any duty is payable, will be allowed to move without payment of duty from any place, where they are produced or manufactured.

 Other Taxes: While direct and indirect taxes are the two main types of taxes, there are also these small cess taxes that are also seen in the country. Although, they aren‘t major revenue generators and are not considered to be as such, these taxes help the government fund several initiatives that concentrate on the improving the basic infrastructure and maintain general well being of the country. The taxes in this category are primarily referred to as a cess, which are taxes levied by the government and the funds generated through this are used for specific purposes as per the Finance Minister‘s discretions.

Examples of Other taxes: Below are some of the examples of other taxes that are seen most commonly in India.  Professional Tax: Professional Tax, or employment tax, is another form of tax levied only by state governments in India. According to professional tax norms, individuals earning income or practicing a profession such as a doctor, lawyer, chartered accountant, or company secretary etc. are required to pay this tax. However, not all states levy professional tax and the rate differs across all the states that levy the tax.

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Taxation’s in India

 Property Tax - Municipal Tax: Also known as Property Tax or Real Estate Tax, this is one of the taxes levied by local municipal bodies of every city. These taxes are levied in order to provide and maintain for the basic civic services. All owners of residential or commercial properties are subject to Municipal Tax.  Entertainment Tax: Entertainment Tax is yet another type of tax commonly seen in India. It is levied by the government on feature films, television series, exhibitions, amusement, and recreational parlous. This tax is collected taking into account a business entity‘s gross collection collected from earnings based on commercial shows, film festival earnings, and audience participation.  Stamp Duty, Registration Fees, Transfer Tax: Stamp duty, registration fees, and transfer taxes are collect as a supplement of property tax. For instance, when an individual purchases a property, they also have to pay for the cost of stamps (stamp duty), registration fees (fee charged by local registrar to legalize a property transaction), and transfer tax (tax paid to transfer the ownership of a commodity.  Education Cess/Surcharge: Education cess is a tax in India primarily introduced to help cover the cost of government-sponsored educational programs. This tax is collected independently of other taxes and is applicable to all Indian citizens, corporations, and other people living in the country. The effective rate of education cess currently stands at 2% of an individual‘s income.  Gift Tax: An individual receives a gift from another person. It is considered to be a part of their income generated through ―other sources‖ and the relevant tax is levied. This tax is applicable if the gift amount is more than Rs. 50,000 in a year.

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Taxation’s in India

 Wealth Tax: Wealth Tax was another tax levied by the government, which was charged based on the net wealth of the Assessee. Wealth tax is chargeable with respect to the net wealth of a property. Net wealth is equal to all the assets an individual owns minus the cost of acquiring them (any loan taken to acquire them). Wealth tax is no longer operational as it was abolished during the Union Budget of 2015. The wealth tax, governed by the Wealth Tax Act, allows the government to impose a tax on the net wealth of a person, an HUF or a company. This tax is set to be abolished in 2016 but until then the tax levied on the net wealth is about 1% of the wealth that exceeds Rs. 30 lakhs. There are exceptions to this tax which are organizations that don‘t have to pay wealth tax. These organizations could be trusts, partnership firms, social clubs, political parties, etc.  Swachh Bharat Cess:This is a cess imposed by the government of India and was started from 15 November 2015. This tax is applicable on all taxable services and the cess currently stands at 0.5%. Swachh Bharat cess is levied over and above the 14% service tax that is prevalent in the present times. One thing worth noting here is that this cess is not applicable on services that are fully exempt of service tax or those services covered under the negative list of services. It is collected by the Consolidate Fund of India and will be used to funding and promoting any government campaigns concerning the Swachh Bharat initiatives.  Krishi Kalyan Cess: This is yet another cess brought about by the government of India since the June of 2016. It is basically introduced in order to extend welfare to all the farmers and to the improvement of agricultural facilities in the country. Like Swachh Bharat cess, this tax is also applicable on all taxable services with an effective rate of 0.5% and is charged over and above the service tax and Swachh Bharat cess.

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Taxation’s in India

 Infrastructure Cess : Infrastructure cess is another tax brought into effect from the 1st of June 2016. Under this tax, a cess of 1% is applicable on petrol/LPG/CNG-driven motor vehicles which are 4 meters or less in length and 1200cc or less in engine capacity. In case the diesel motor vehicles which don‘t exceed the 4 meter length and have engines with capacities less than 1500cc, a tax of 2.5% is to be paid. For big sedans and SUVs, the cess stands at 4% of the overall cost of the vehicle.  Entry Tax: Entry tax is a tax levied in select states across the country like Uttarakhand, Madhya Pradesh, Gujarat, Assam, and Delhi. Under this, all items entering the state ordered via e-commerce establishments are taxed. The rate for this tax varies "between‖ 5.5% to 10%. These are all the types and kinds of taxes that are present in India‘s current economic scenario. The funds collected from these methods don‘t just fuel the country‘s revenues but also provides the much-needed impetus to help the lower classes prosper.

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Taxation’s in India

 Benefits of Taxes: Even though most people are always at odds with the idea of taxation, there are some advantages to taxes, the least of which is that it provides the government the resources it needs for economic development. Some of the other benefits of taxes are: 

It encourages savings and investments because if a person invests in certain

instruments, then the amount invested is reduced from their taxable income thus bringing down the tax they have to pay. This investment is subject to certain limits that are detailed in the IT Act. 

Paying taxes means that you have to file your tax return which in turn

means that when you apply for a home loan for that home loan, it‘s easier to get it because one of the things many banks require is proof that you have been filing taxes regularly.

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Taxation’s in India

Chapter 02

EXCLUSIVE AND INCLUSIVE DEFINITIONS  PERSON {Section 2(31)} The income earned by every person is taxed. A ―Person‖ is classified different categories as follow:  Individual: It refers to a natural human being whether male or female, minor or major.

i

 Hindu Undivided Family (HUF): It is a relationship created due to operation of Hindu Law. The Manager of Hindu undivided family (HUF) is called ―Karta‖ and its member is called ‗Coparceners‘.  Company: It is an artificial person registered under Indian Companies Act 1956 or any other law.

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Taxation’s in India  Firm: It is an entity which comes into existence as a result of partnership agreement. The Income Tax accepts only these entities which come into accessed as Firms under Section 184 of the Act.  Association of Persons (AOP): Co-operative societies, MARKFED, NAFED, etc are the example of such persons. When persons combine together to carry on a joint enterprise and they do not constitute partnership under the ambit of law, they are assessable as an Association of Persons. An A.O.P. can have firms, companies, associations and individuals as its members.  A Body of Individual (B.O.I.): A Body of Individual (B.O.I.) cannot have non-individuals as its members. Only natural human being can be members of a Body of Individuals.  Local Authority: Municipality Panchayat, Cantonment Board, Port Trust etc. are called Local Authority.  Artificial Judicial Person: Statutory Corporations like Life Insurance Corporation, University etc. are called Artificial Judicial Persons.

These are seven categories of person chargeable to tax under the Act. The aforesaid definition is inclusive and not exhaustive. Therefore, any person, not falling in the above-mentioned seven categories, may still fall in the four comers of the term ―Person‖ and accordingly may be liable to tax under Sec.4. Example: Determine the status of the following: 

Delhi University



Microsoft Ltd.



Delhi Municipal Corporation

ABC Group Housing Co-operative Society DC & Co., firm of Mr. Dust and Mr. Clean 

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A Joint family of Mr. Dirty and their sons Mr. Dust and Mr. Clean

Taxation’s in India Solutions: 

Artificial Judicial Person



A Company



A Local Authority



An Association of Person



A Firm



A Hindu Undivided Family

 ASSESSEE {Section 2(7)} ‗Assessee‘ means a person by whom any tax or any other sum of money is payable under this Act. And this is divided into 3 categories.  Ordinary Assessee: It includes... Any person against whom some processing‘s under this act are going on. It is immaterial whether any Tax or other amount is payable by him or not; any person who has sustained loss and filed return of loss u/s 139 (3). Any person by whom some amount of Interest, Tax or Penalty is payable under this Act; or Any person who has entitled to refund of Tax under section Act.  Representative Assessee or Deemed Assessee: A person may not be liable only for his own income or loss but also on the income or loss of other persons e.g. Guardian of Minor Lunatic, Agent of a NonResident etc. in such case the person responsible for the assessment of income of such person are called Representative Assessee. Such person is deemed to be an Assessee.  Assessee-in-default: A person is deemed to be an Assessee-in-default if he fails to fulfill his statutory obligations. In case of an employer paying Salary or a person who is paying interest it is their duty to deduct tax at source and deposit the amount of tax so collected in Government treasury. If he fails to deduct tax at source or deducts tax but does not deposit it in the treasury, he is known as Assessee-in-default.

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Taxation’s in India Example: Income of Mr. You (age: 30 years) is Rs.1,45,000 for the assessment year 2009-10. He does not file his return of income because his income is not more than the amount of exempted slab. Income-Tax Department does not take any action against him. He is not an ―Assessee‖ because no tax or any other sum is due from him. Income of Mr. Me (age: 35 years) is Rs.1, 60,000 for the assessment year 2009-10. He does not file his return of income. Since he is supposed to file his return of income (income being more than exempted slab of Rs.1,50,000). He is an ―Assessee‖

 INCOME {Section 2(24)}  Meaning: The Definition given u/s 2 (24) is inclusive and not exclusive. According to English dictionary, term ―Income‖ means ―periodical monetary return coming is regularly from define source like one‘s business, Land, Work, Investments etc.‖. It‘s nowhere mentioned that ―Income‖ refers to only monetary return. It includes value of Benefits and Perquisites. The term ―Income‖ includes not only what is received by using the property but also the amount saved by using it himself. Anything which is convertible into can be regarded as source of accrual of income. ―Income includes‖: Profit and Gains: For instance, Profit generated by a businessman is taxable as ―income‖. Dividend: For instance, ―Dividend‖ declared /paid by a company to shareholders is taxable as ―income‖ in the hands of shareholders. Voluntary Contribution received by a Trust: In the hands of a Trust, income includes voluntary contribution received by it. This rule is applicable in the following cases. 

Such contribution is received by a trust created wholly or partly for

charitable or religious purposes ; or 

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Such contribution is received by a scientific research association ; or

Taxation’s in India 

Such contribution is received by any fund or institution established for

charitable purpose ;or 

Such contribution is received by any university or other educational

institutions or hospital. Example: ABC Trust is created for public charitable purposes. On Dec, 15, 2008 it receives a sum of Rs. 2lakh as voluntary contribution from a business house. Rs. 2lakh would Be included in the income of the Trust. 

The value of any Perquisites or Profit in lieu of salary taxable in the hand of

employee. Example: Mr. You is employed by XYZ Ld. He gets Rs.5,000 per month as conveyance allowance other than Salary Rs. 5,000 per month is treated as ―Income‖. 

Value of any Benefit or amenity, whether convertible into money or not.



Any Capital Gain taxable u/s 45 is treated as ―income‖.

 FEATURES OF “INCOME” The following feature of income can help a person to understand the concept of income. 

Definite Source: Income has been compared with a fruit of a tree or a crop

from the field. Fruit comes from a tree and crop from fields. This source of income is definite in both cases. The existence of a source for income is somewhat essential to bring a receipt under the charge of tax. 

Income must come from Outside: No one can earn income from himself.

These can be no income from transaction between head office and branch office. Contributions made by members for the mutual benefit and found surplus cannot be termed as income of such group. 

Tainted Income: Income earned legally or illegally remains income and it

will be taxed according to provisions of the Act. Assessment of illegal income of a person does not grand him immunity from the applicability of the provisions of

25

Taxation’s in India other Act. Any expenditure incurred to earn such illegal income is allowed to be deducted out of such income only. 

Temporary or Permanent: Whether the income is permanent or

temporary, it is immaterial from the tax point of view. 

Voluntary Receipt: The receipts which do not arise from the exercise of a

profession or business or do amount to remuneration and are made for reasons purely of personal nature are not included in the scope of total income. 

Share of income received by a member of an association of persons provide

the total income of such AOP is assessed to tax at the rates applicable to an individual. 

Share of income received by a partner of a firm assessed as an association

of persons (PFAOP) provided the total income of such PFAOP is assessed to tax at the rates applicable to an individual.

 GROSS TOTAL INCOME (GTI) & TOTAL INCOME: U/s 14 the term ―Gross Total Income‖ [GTI] means aggregate of incomes computed under following five heads:  Income under the head ―Salaries‖  Income under the head ―House Property‖  Income under the head ―Profit and Gains of Business or Profession‖.  Income under the head ―Capital Gain‖  Income under the head ―Other Source‖. After aggregating income under various heads, losses are adjusted and the resultant figure is called ―Gross Total Income‖ [GTI] From Gross Total Income, Deductions u/s 80 is allowed. The resultant figure is called ―Total Income‖.

 ASSESSMENT YEAR {Section 2(9)} ―Assessment Year‖ means the period of 12 months commencing on the 1 st day of April every year. In India, the Govt. maintains its accounts for a period of 12 months i.e. 1 st April to 31st March every year. As such it is known as Financial Year. The Income Tax department has also selected same year for its Assessment procedure. The Assessment Year is the Financial Year of the Govt. of India during which income a person related to the relevant previous year is assessed to tax. Every

26

Taxation’s in India person who is liable to pay tax under this Act. File Return of income by prescribed dates. These Returns are processed by processed by the income Tax Department Officials and Officers. This processing is called Assessment. Under this Income Returned by the assesses is checked and verified. Tax is calculated and compared with the amount paid and assessment order is issued. The year in which whole of this process is under taken is called Assessment Year. At present the Assessment Year 2008-2009(1-4-2008 to 31-3-2009) is going on.  PREVIOUS YEAR {Section 3} As the word ‗Previous‘ means ‗coming before‘, hence it can simply said that the previous Year is the Financial Year preceding the Assessment year e.g. for Assessment Year 2008-2009 the previous year should be the financial year ending 31st March 2008.

 Previous Year in case of a continuing Business: It is the financial year the preceding the assessment year. As such for the assessment year 2008-2009. The Previous Year for continuing business is 2007-08 i.e. 1-4-2007 to 31-3-2008.

 Previous Year in case of newly set up Business: The Previous Year in case of newly started business shall be the period between commencement of business and 31 st March next following. E.g. in case of a newly started business commencing its operations on Diwali 2007, the previous year in relation to assessment year 2008-09.

27

Taxation’s in India  Previous Year in case of newly created source of income : In such case the previous Year shall be the period between the day on which such source come existence and 31st March next following:

Income

Section

Previous Year

Cash Credit

[68]

Financial Year in which found to be entered.

[69]

Unexplained Investment

Year

preceding

the

Assessment Year.

Unexplained Bullion,

Financial

[69A]

cash,

Financial Year in which found in the possession of the Assessee.

jewellery Partly explained

[69B]

Investment

was made.

Unexplained

[69C]

Expenditure Payment

28

Financial

Year

in

which

expenditure was incurred. of

Hindu, Money in cash

Financial Year in which Investment

[69D]

Financial Year in which such payment was made.

Taxation’s in India

Chapter 04 Resident and Scope of Total income  RESIDENTIAL STATUS & SCOPE OF TOTAL INCOME {Sec. 5 to 9}  Scope of Total Income/Incidence of Tax [Sec 5] Scope of total income is according to residential status of Assessee.  Resident in India/ ordinarily resident in India: A person is assessable to tax in respect of income which i.

Is

received

or

deemed to be received in India by him or on his behalf ii.

Accrues or arise or

deemed to accrue or arise to him in India iii.

Accrues or arises to

him outside India  Resident but not ordinarily resident in India A person is assessable to tax in respect of income which i.

Is received or deemed to be received in India by him or on his behalf

ii.

Accrues or arise or deemed to accrue or arise to him in India

iii.

Accrues or arises to him outside India from a business controlled in or profession set up in India.  Non-resident in India

A person is assessable to tax in respect of income which

29

i.

Is received or deemed to be received in India by him or on his behalf

ii.

Accrues or arises or deemed to accrue or arise to him in India

Taxation’s in India Other points: Income received in India means first receipt in India. If an income is received first outside India and then subsequently remitted to India, it shall be treated as received outside India.

Past untaxed profits shall not be considered to be income of the current year in any case. Resident & Ordinary Resident – ROR Resident but Not Ordinary Resident – NROR Non Resident - NR Particular of income

ROR

RNOR

NR

Income received or deemed

Taxable

Taxable

Taxable

Taxable

Taxable

Taxable

Taxable

Taxable(only

Not

which

Taxable

to be received in India Income accrue or arises or deemed to accrue or arises in India Income earned outside India

is

earned

from

a

business/profession controlled

from

India)

 Residential Status of an Individual Sec. 6 (1) An individual is resident in India if he satisfies any one of the following two conditions: 1.

He is India, during that previous year, for a period of 182 days or more ;

2.

(i) He is in India, for 365 days or more during the 4 years immediately preceding the previous year; AND (ii) He is in India during the previous year for a period of 60 days or more.

30

OR

Taxation’s in India If he does not satisfy any one of the conditions above, he shall be nonresident. Condition (ii) above is not applicable in following cases (means in following cases a person shall be resident of India only when he is in India for 182 days or more in the previous year): 

If India Citizen leaves India during the previous year for employment outside India or as a member of crew of an Indian Ship.



If Indian citizen or person of Indian origin visits Indian during previous year.

Other Points: 

Residential status is determined for every year separately.



Indian includes territorial waters of India.



Employment includes self-employment



In computing the period of 180days, the day of entry into and the day of exit from India shall be included.



Person of Indian origin is a person who himself or any of his parents or any of his grandparents was born in undivided India before 15 th August 1947.

After determining the residential status of individual/HUF, these persons are further checked whether they are ordinarily resident or nor ordinarily resident.

An individual who is resident in India shall be resident and ordinarily resident (ROR) in India if he satisfies both the following conditions: 1.

He has been resident in India for at least 2 out of 10 previous years immediately preceding the relevant previous years; AND

2.

He has been in India for 730 days or more during 7 previous years immediately preceding the relevant previous year.

If he does not satisfy any or both of the above conditions, he shall be resident but not ordinarily resident (RNOR) in India.

31

Taxation’s in India  Residential Status of HUF – Sec 6(2) A HUF is said to be resident in India when during that year control and management is situated wholly or partly in India. In other words it will be nonresident in India if no part of the control and management of affairs are situated in India. Control and management lies at the place where decision regarding the affairs of the HUF are taken. A resident HUF is said to be resident and ordinarily resident in India if the Karta of the HUF satisfies both the following condition: 3. He has been resident in India for at least 2 out of 10 previous years immediately preceding the relevant previous years; AND 4. He has been in India for 730 days or more during 7 previous years immediately preceding the relevant previous year. If the Karta of HUF does not satisfy any or both of the above conditions, then HUF shall be Resident but not Ordinarily Resident (RNOR) in India.

 Residential Status of firms, AOP, BOI etc – Sec 6(2), 6(4) A Firm, AOP, BOI etc is said to be resident in India when during that year control and management is situated wholly or partly in India. In other words it will be nonresident in India if no part of the control and management of affairs are situated in India. Control and management lies at the place where decision regarding the affairs of the firms etc are taken.

 Residential Status of Companies – Sec 6(3) Indian Company is always resident in Indian. Foreign Company is resident in India if control and management of its affairs is situated wholly in Indian during relevant previous year i.e. if all the board meetings of the foreign company are held in Indian, then it shall be resident, otherwise nonresident.

 Income received or deemed to be received in India [Sec 7]

32

Taxation’s in India Income received in India: Any income which is received in India is liable to tax in India, whether the person receiving income is resident or non-resident. ‗Received in India‘ means first receipt. Income deemed to be received in India: Following incomes shall be received in India even in the absence of actual receipt. i.

Contribution by employer to recognized provident fund in excess of 12% of salary of employee

ii.

Interest credited to RPF in excess of 9.5%

iii.

Transferred balance from unrecognized PF to RPF

iv.

Contribution by Government/Employer to notified pension scheme

 Dividend Income [Sec 8] Dividends from India Company shall always be deemed to accrue or arise in India. However, as per Sec 10(34), such dividend is exempt in the hands of shareholder.

 Income deemed to accrue or arise in India (Sec 9) Following income shall be deemed to accrued or arise in India: 1. Income from any property, asset or source of income in India 2. Income from the transfer of any capital asset situated in India 3. Any income from salary if it is payable for services rendered in India 4. Salary (not allowance) payable by the government of India to an India citizen for services rendered outside India 5. Interest payable by a. Government or b. Resident in India if money is used by the borrower for the purpose of business or profession or earning any income from any source in India or c. Non-resident in India if services are utilized for the purpose of business or profession in India. 6. Royalty payable by i.

Government or

ii.

Resident in India if money is used by the borrower for the purpose of business or profession or earning any income from any source in India or

iii.

Non-resident in India if services are utilized for the purpose of business or profession or earning any income from any source in India.

33

Taxation’s in India 7. Fee for technical services payable by iv.

Government or

v.

Resident in India if money is used by the borrower for the purpose of business or profession or earning any income from any source in India or

vi.

Non-resident in India if services are utilized for the purpose of business or profession or earning any income from any source in India.

8.

Income from a business connection in India

Any income which arises, directly or indirectly, from any activity or a business connection in India is deemed to be earned in India. If all business activities are not carried out in India, then only such part of income. As is reasonable attributable to the operations carried out in India, is taxable.

Example of business connection includes  Branch office in India,  Agent of non-resident entering into contracts,  Subsidiary in India,  Maintaining stocks etc.

However in case of non-resident, following shall not be treated as business connection in India: 1. Purchase of goods in India for purpose of exports 2. Collection of news and views for transmission outside India by nonresident who is engaged in business of running news agency or of publishing newspapers, magazines or journals 3. Shooting of him in India if i.

In case of Individual – he is not a citizen or resident of India

ii.

In case of Firm – none of the partner is citizen or resident of India

iii.

In case of Company – none of the shareholder citizen or resident of India

34

Taxation’s in India

Chapter 05

Direct Tax  Definition or Meaning: Direct taxes are those which are paid directly to the government by the taxpayer. These taxes are not paid deducted and paid on behalf of the taxpayer. It‘s imposed on the people and organizations directly by the government. This tax liability has to be paid by the taxpayer in question and cannot be transferred to any other entity for payment.

 Examples of Direct Taxes in India: Key examples of direct taxes are Income tax Wealth tax 

Corporation tax

 The Central Board of Direct Taxes in India (CBDT) : Direct taxation in India is overseen by the Central Board of Direct Taxes or the CBDT, which was formed as a result of the Central Board of Revenue Act, 1924. The CBDT is a part of the Department of Revenue in the Ministry of Finance and is responsible for the administration of the direct tax laws. It also provides inputs and suggestions for policy and planning of the direct taxes in India. The CBDT is the hub and nexus of all direct taxation policy and enforcement. It is headed by a CBDT Chairman, and comprises of six members who are also Special Secretary to the Government of India.

35

Taxation’s in India The

Direct Tax Cod

What is Direct Tax Code? In a move to establish a more efficient, effective and equitable direct tax system, the Direct Taxes Code or DTC has been drafted to replace the existing Indian Income Tax Act of 1961. It aims

to

consolidate

and

amend all laws relating to the direct

taxes

in

order

to

facilitate voluntary compliance and increase the tax-GDP ratio. With its 319 Sections and 22 Schedules, the DTC aims to replace the old Income Tax Act and provide a more stable, efficient and overall better code for taxation incorporating the best taxation principles and proven international practices.

The Direct Tax Code Explained With Examples: The DTC is explained in this section by delving into its key features. Key examples of DTC are income tax, corporate tax, wealth tax and Capital Gain Tax. These are explained in detail below. 

Single code for direct taxes: By bringing all direct taxes under a single code with

unified compliance features, a single unified taxpayer reporting system can be facilitated. 

Eliminates the problem of constant litigation: Special care has been taken to

avoid contradictory and ambiguity in the code, to avoid misinterpretation and misuse. 

Flexibility: The statute has been structured in a way that can accommodate the

changes and requirement of a growing economy without having to constantly resort to amendments. 

Eliminates regulatory functions: Regulatory functions are to be carried out by

other regulatory authorities, keeping it simple. 

Stability: In the current system, the tax rates are formed in the Finance Act of the

relevant year. All rates of taxes under the DTC, however, are proposed to be prescribed in the First to Fourth schedule of the DTC itself, and any amendments to the same will be brought before Parliament as an Amendment Bill. 

Political contributions of up to 5% of the gross total income will be eligible for

deduction. 

36

Fringe benefits tax will be charged to the employee rather than the employer.

Taxation’s in India 

Annual investments in approved funds and insurance proposed at Rs.1,50,000,

instead of Rs.1,20,000. What

are the Types of Direct Taxes One Pays?

Direct taxes come in many shapes and forms. All of the below mentioned tax headings have two things in common – they are imposed directly and apply to every Indian citizen.

List of Direct Taxes in India:  Income Tax 1. Income tax is the most common and most important tax that an Indian must pay. 2. It is charged directly on the income of a person. 3. The rate at which it is charged varies, depending on the level of income. 4. It‘s charged to individuals, co-operative societies, firms, companies, Hindu Undivided Families (HUFs), trusts and any artificial judicial person. 5. Income tax is charged on an income known as ―taxable income‖, which is:

Taxable income = (total income) – (applicable deductions and exemptions). The different heads of income under which income tax is chargeable are: 1.

Income from house and property.

2.

Income from business or profession.

3.

Income from salaries.

4.

Income in the form of capital gains.

5.

Income from other sources.

It is levied differently for different people depending on their residency status.  Wealth Tax 1.

Wealth tax is charged on the benefits derived from property ownership.

2.

The same property will be taxed every year on its current market value. 3.

Wealth tax is charged

whether the property in earning an income or not. 4.

The tax is levied on the

individuals, HUFs, and companies alike. 5.

Chargeability depends

on residential status.

The following will not be taxed as they are ―working assets‖: 1.

37

Assets held as stock in trade.

Taxation’s in India 2.

Property held as a commercial complex.

3.

Gold deposit bonds.

4.

House property held for business or profession.

5.

House property let out over 300 days in a year.  Corporate Tax



Levied on companies who exist as separate entities from their shareholders. 

Foreign companies are

taxed on income that arises, or is deemed to arise, in India. 

It

is

charged

on

royalties, interest, gains from sale of capital assets located in India, fees for technical services and dividends. 

Includes

Minimum

Alternative Tax (MAT) which was introduced to bring Zero Tax companies under the income tax net, whose accounts were made in accordance with the Companies Act. 

Includes Fringe Benefit Tax (FBT) which is a tax that companies pay on the fringe benefits provided (or deemed to have been provided) to employees.



Includes Dividend Distribution Tax (DDT) which is a tax levied on any amount declared, distributed or paid as dividend by any domestic company. International companies are exempt from this tax.



Includes Securities Transaction Tax (STT) which is a tax levied on taxable securities transactions. There is not surcharge applicable on this.



Capital Gains Tax Taxed on the income derived from the sale of assets or investments. 

Capital

investments

cover homes, farms, businesses, works of art, etc. 

Capital

gains

=

(money received from sale) – (cost of capital investment). 

Categorized as short-

term gains (gains on assets sold within 36 months of acquisition) and long-term gains (gains on assets sold after 36 months of acquisition and holding).

38

Taxation’s in India 

Voluntary tax that is paid by the taxpayer when the asset it sold.

Tax Rates for Different Types of Direct Taxes:  Income Tax

In India, Income Tax is charged according to slabs which outline the details for different tax rates for different

levels

of

income.

For individual residents under 60 years of age:

Income Slabs

Tax Rates

Taxable income under Rs. 2,50,000.

Nil

Taxable income between Rs. 2,50,000

10% of the amount by which the

& Rs. 5,00,000.

taxable income exceeds Rs. 2,50,000. Less: Tax credit u/s 87A-10% of taxable income (up to a max. of Rs.2,000).

Taxable income above Rs. 5,00,000&

Rs. 25,000 plus 20% of the amount by

Rs.10,00,000.

which the taxable income exceeds.

Taxable income above Rs. 10,00,000.

Rs. 1,25,000 plus 30% of the amount by which the taxable income exceeds Rs. 10,00,000.

39

Taxation’s in India

For individual residents between 60 and 80 years of age:

Income Slabs

Tax Rates

Taxable income under Rs. 3,00,000.

Nil

Taxable income between Rs. 3,00,000

10% of the amount by which the

& Rs. 5,00,000.

taxable income exceeds Rs. 3,00,000. Less: Tax credit u/s 87A-10% of taxable income (up to a max. of Rs.2,000).

Taxable income above Rs. 5,00,000&

Rs. 20,000 plus 20% of the amount by

Rs.10,00,000.

which the taxable income exceeds Rs.5,00,000.

Taxable income above Rs. 10,00,000.

Rs. 1,20,000 plus 30% of the amount by which the taxable income exceeds Rs. 10,00,000.

For Individual residents above 80 years of age: Income Slabs

Tax Rates

Taxable income under Rs. 5,00,000.

Nil

Taxable income above Rs. 5,00,000&

20% of the amount by which the

Rs.10,00,000.

taxable income exceeds Rs.5,00,000.

Taxable income above Rs. 10,00,000.

Rs. 1,00,000 plus 30% of the amount by which the taxable income exceeds Rs. 10,00,000.

*Amount invested in certain specific investments like EPF, PPF, NSC, Tax Saving FDs, etc. are eligible for deductions under section 80C up to Rs. 1,50,000 per year.

40

Taxation’s in India  Corporate Tax. For domestic companies: 

The Corporate Tax rate for domestic companies is 30%.



If the company does not have an income of over Rs.1 crore, then it does not have to pay any corporate income tax.



If the net income of the company is in the range of Rs.10 crore, a surcharge of 5% is applicable on the net income.



If the net income of the company exceeds Rs.10 crore, a surcharge of 10% is applicable on the net income.

For international companies: That

are earning less than 1 crore rupees, a corporate tax of 41.2% is

applicable – inclusive of 40% basic tax and an education cess of 3%. 

That are earning more than 1 crore rupees, a corporate tax of 42.024% is applicable – inclusive of 40% basic tax, 3% education cess and a 2% surcharge.



That are earning more than 10 crore rupees, a surcharge of 5% is applicable in addition to basic tax.

Minimum Alternative Tax (MAT) is presently charged at 19.05%. Dividend Distribution Tax (DDT) is charged at a rate of 16.995% on declared dividends.  Wealth Tax. 

Is charged on the net wealth, which is sum total of all taxable assets

clubbed together, minus the amount of debt owed. 

Net wealth = (All assets) – (all debt).



The valuation date for net wealth is 31st March immediately preceding the

assessment year. 

Wealth tax is charged at 1% of the amount by which the net wealth exceeds

Rs.15,00,000 (15 lakhs). 

Wealth tax has been abolished (with effect from April 1, 2016 for wealth

held as on March 31, 2016).

41

Taxation’s in India  Capital Gains Tax. 

Short term capital gains are taxed as per the normal income tax slab rates. 

indexation

Method using

the

of cost

inflation index will be done to the cost of acquisition and the cost of improvement, and the resultant figures will be used for computation. 

Long term capital gains are taxed at 20% if computed with the benefit of

indexation. 

Long term capital gains are taxed at 10% if computed without the benefit of

indexation.

Benefits of Direct Taxation: 

Equitable: The burden of direct taxes can‘t be shifted, and an equitable

sacrifice of income and wealth can be achieved from all sections of society through progressive taxation . 

Economical: Income tax and most other forms of direct taxation are done

at source with the help of TDS (Tax Deduction at Source), and are hence not a problem for the government to collect. 

Certainty: There is a sense of certainty from the taxpayer and the

government, as each know how much to pay and how much to expect to collect respectively. 

Productivity: Direct taxes are very productive in the sense that as the

working population and community grows, so do the returns from direct taxation. 

Consciousness of duty: When people consciously pay their taxes, they can

claim the right to know how their money is being spent by the government

42

Taxation’s in India

 Difference between Direct Tax and Indirect Tax Direct Tax

Indirect Tax

1. Direct tax is referred to the type of

1. Indirect

tax

is

levied

on

an

tax that is levied on an individual‘s

individual who consumes produ ct

wealth and income and is paid to the

and services and is paid indirectly s

government directly.

the government as the price of t to particular

product

or

he

servi comprises of the tax amount ce 2. Direct Tax is progressive in nature

as we tax is regressive. 2. Indirect

ll.

3. Examples of Direct Tax include

3. Example of Indirect Tax

es

Wealth Tax, Property Tax, Income

includ VAT or Value Added

Tax, Import and Export Duties and

Tax, Servi Tax, Central Sales m

Corporate Tax.

tax, Custo Duty, Excise Duty, it Secur Transaction Tax

4. Tax evasion is possible with Direct Tax

ce

y

andTax so on. 4. But evasion is not the case with Indirect Tax.

5. Direct Tax helps to reduce inflation

5. Indirect tax promotes inflation.

6. Direct Tax is collected from and

6. Indirect Tax is collected from those

imposed on Assessee Individuals,

Hindu

such

as

consumers of products and services

Undivided

but is deposited and paid by the

Family, Firm, and Company and so

Assessee.

on.

7. Burden of Direct Tax cannot be shifted 8. Direct taxes help in reducing

43

7. But Burden can be shifted in case of Indirect tax. 8. Indirect taxes enhance inequalit ies

inequalities and are considered to

and are considered to be

be progressive.

regressiv

e.

Taxation’s in India 9.

Dissuades

over-consumption,

9. Additional indirect taxes levied on

thereby helping the country in a

harmful

social context.

cigarettes, alcohol etc

10. Direct taxes are collected only from people in respective tax brackets.

commodities

such

as

10. Indirect taxes have a wider coverage as all members of the society re a taxed through the sale of goods nd a services

44

Taxation’s in India

Chapter 06

SET-OFF AND CARRY FORWARD OF LOSSES  Concept of set-off and carry forward of losses: As stated in Section 14 of the Act computation of total income is made under certain heads viz. 1)

Salaries

2)

Incomes

from

House

Property 3)

Profits

and

Gains

of

Business or Profession 4)

Capital Gains and Income

from Other Sources. In case computation results into a negative figure, it is ―Loss‖. There cannot be loss from the head ‗Salary‘. Loss can occur from all the

remaining

heads.

Specific

provisions have been made in the income-tax Act, 1961 for the set- off and carry forward of losses. In simple words, ―Set-off‖ means adjustment of losses against the profits from another source/head of income in the same assessment year. The maximum period for which different losses can be carried forward for set-off has been provided in the act.

 Inter-source Adjustment:  Provision: 1. Reason and Example: Under this section, the losses incurred by the assessee in respect of one source shall be set- off against income from any other source under the same head of income. This is because the income under each head is to be computed by grouping together the net result of the activities of the entire source covered by that head. Thus, Loss from one house property can be set off against the income from another house property.

45

Taxation’s in India

2. Capital Loss: i.

Short-term: Where the net result in respect of any short term capital asset is a loss, such loss shall be allowed to be set-off against income, if any, for that assessment year under the head ―capital gains‖ in respect of any other capital asset, and

ii.

Long-term: Where the net result in respect of any long term capital asset is a loss, such loss shall be allowed to be set-off against income, if any, for that assessment year under the head ―capital gains‖ in respect of any other capital asset not being a short-term capital asset.

Thus, short capital loss is allowed to be set off against both short-term capital gain and long-term capital gain. However, long-term capital loss can be set-off only against long-term capital gain and not short-term capital gain. iii.

Loss from Exempt Source: Loss from an exempt source cannot be set-off against profits from a taxable source of income. For example, long-term capital loss on sale of share sold through a recognized stock exchange cannot be set-off against long-term capital gains on sale of land.

iv.

Lottery, etc.: Vide S. 58(4), a loss cannot be set-off against winnings from lotteries, crossword puzzles, races including horse races, card games, gambling or betting.

 Inter head Adjustment: Loss under one head of income can be adjusted or set off against income under another head subject to the following rule:1. Non-Capital: Where the net result of the computation under any head of income (other than ‗Capital Gains‘) is loss, the assessee can set-off such loss against his income assessable for that assessment year under head, including ‗Capital Gain‘. 2. Business Loss: Where the net result of the computation under the head ―Profit and gains of business or profession‖ is a loss, such loss cannot be set-off against income under the head ―Salaries‖.

46

Taxation’s in India 3. Capital Loss: Where the net result of computation under the head ‗Capital Gains‘ is a loss, such capital loss cannot be set-off against under any other head.

 Loss from house property:  Provision: 1. Current Assessment Year: In any assessment year, if there is a loss under the head ‗Income from house property‘, such loss will first be set-off against income from any other head during the same year. 2. Subsequent Assessment Year: If such loss cannot be any set-off, wholly or partly, the unabsorbed loss will be carried forward to the following assessment year to be set-off against income under the head ‗Income from house property‘. 3. 8 Assessment Year: The loss under this head is allowed to be carried forward up to 8 assessment years immediately succeeding the assessment year in which the loss was first computed.

 Business losses: Under the Act, the assessee has the right to carry forward the loss in cases where such loss cannot be set-off due to the absence of inadequacy of income under any other head in the same year. The loss so carried forward can be set-off against the profits of subsequent previous years. Section 72 covers the carry forward and setoff of losses arising from a business or profession. The assessee right to carry forward business losses under this section is however, subject to the following conditions:1. The loss should have been incurred in business, profession or vocation. 2. The loss should not be in the nature of a los in the business of speculation. 3. The loss may be carried forward and set-off against the income from business or profession though not necessarily against the profit and gains of the same business or profession in which the loss was incurred. 4. A business loss can be carried forward for a maximum period of 8 assessment years immediately succeeding the assessment year in which the loss was incurred.

47

Taxation’s in India 5. Carry forward of unabsorbed depreciation [sec.32 (2)] and unabsorbed capital expenditure on scientific research [Sec.35 (4)] is governed by the conditions laid down in those respective sections.

 Loss in speculation Business: 1. Meaning: Section 43(5) states that ―Speculative transaction‖ means a transaction in which a contract for the purchase or sale of any commodity including stocks and shares, is periodically or ultimately settled otherwise that by the actual delivery or transfer of the commodity or scrip. 2. Basis: Since speculation is deemed to be a business distinct and separate from any other business carried on by the assessee, the losses incurred in speculation can be neither set off in the same year against any other nonspeculation income nor be carried forward and set off against other income in the subsequent years. 3. Carry Forward: therefore, if the losses sustained by an assessee in a speculation business cannot be set-off in the same year against any other speculation profit, they can be carried forward to subsequent years and setoff only against income from any speculation business carried on by the assessee. 4. 4 Year: The loss in speculation business can be carried forward only for a maximum period of 4 years from the end of the relevant assessment year in respect of which the loss was computed. 5. Purchase and sale of shares: The Explanation to this section discourages companies from indulging in speculation business or dealing in share otherwise than in the ordinary course of their business. However, both investment or banking or finance companies would not be treated as carrying on speculation business in case where they purchase and sell shares of other companies. For this purpose, an investment company means a company whose Gross Total income consists mainly of income which is chargeable under the heads ―Income from house property‖, ―Capital gains‖ and ―Income from the other sources‖.

48

Taxation’s in India  Loss under the head „Capital Gain‟: Section 74 provides that the loss under the head ‗Capital Gains‘ shall be carried forward to the following assessment year to be off in the following manner: 1. Short Term: Where the loss so carried forward is a short term capital loss, it shall be set-off against any capital gains, short term or long term, arising in that year. 2. Long Term: Where the loss so carried forward is a long term capital loss, it shall be sat-off only against long term capital gain arising in the year. 3. Set Off: Net loss under the head capital gains cannot be set off against income under any other head. 4. Carry Forward: Any unabsorbed loss shall be carried forward to the following assessment year up to a maximum of 8 assessment years immediately succeeding the assessment year for which the loss was first computed.

49

Taxation’s in India

Chapter 07

STEPS TO COMPUTATION OF TOTAL INCOME  Steps

to

Computation of Total Income: Income-tax is levied on an assessee total income. Such total income has to be computed as per the provisions contained in the Income-tax Act, 1961. Let us go step by step to understand the procedure of computation of total income for the purpose of levy of income-tax.

Step 1 – Determination of residential status The residential status of a person has to be determined to ascertain which income is to be included in computing the total income. The residential statues as per the Income-tax Act are shown belowIn the case of an individual, the during for which he is present in India determines his residential status. Based on the time spent by him, he may be (a) Resident and ordinarily resident, (b) Resident but not ordinarily resident, or (c) Non-resident. The residential status of a person determines the taxability of the income. For e.g. Income eared outside India will be taxable in case of a resident and ordinary resident. Step 2 – Classification of income under different heads The Act prescribes five heads of income. These are shown below Heads of Income  Salaries

50

Taxation’s in India  Income from profit and gains capital Income  House property of business or gains  Profession sources These heads of income exhaust all possible types of income that can accrue to or be received by tax payer. Salary, pension earned is taxable under the head ―Salaries‖. Rental income is taxable under the head ―Income from house property‖. Income derived from carrying on any business or profession is taxable under the head ―Profits and gains from business or profession‖. Profit from sale of a capital asset (like land) is taxable under the head ―Capital Gains‖. The fifth head of income is the residuary head under which income taxable under the first four heads will be taxed. The tax payer has to classify the income earned under the relevant head of income. Step 3 – Exclusion of income not chargeable to tax There are certain incomes which are wholly exempt from income-tax e.g. agricultural income. These incomes have to be excluded and will not from part of Gross Total Income. Also, some incomes are partially exempt from income-tax e.g. House Rent Allowance, Education Allowance. These incomes are excluded only to the extent of the limits specified in the Act. The balance income over and above the prescribed exemption limits would enter computation of total income and have to be classified under the relevant head of income. Step 4 – Computation of income under each head Income is to be computed in accordance with the provisions governing a particular head of income. Under each head of income, there is a charging section which defines the scope of income chargeable under that head. There are deductions and allowances prescribed under each head of income. For example, while calculating income from house property, municipal taxes and interest on loan are allowed as deduction similarly, deductions and allowances are prescribed under other heads of income. These basic concept deductions etc. have to be considered before arriving at the net income chargeable under each head. Step 5 – Clubbing of income of spouse, minor child etc.

51

Taxation’s in India In case of individuals, income-tax is levied on slab system on the total income the tax system is progressive i.e. as the income increase, the applicable rate of tax increases. Some tax payers in the higher income bracket have a tendency to divert some portion of their income to their spouse, minor child etc. to minimize their tax burden. In order to prevent such tax avoidance, clubbing provisions have been incorporated in the Act, under which income arising to certain persons (like spouse, minor child etc.) have to be included in the income of the person who has diverted his income for the purpose of computing tax liability.

Step 6 – Set-off or carry forward and set-off of losses An assessee may have different sources of income under the same head of income. He might have profit from one source and loss from his other. For instance, an assessee may have profit from his textile business and loss from his printing business. This loss can be set-off against the profits of textile business to arrive at the net income chargeable under the head ―Profit and gains of business or profession‖. Similarly, an assessee can have loss under one head of income, say, Income from house property and profit under another head of income, say, profit and gains of business or profession. There are provisions in the Income-tax Act for allowing inter-head adjustment in certain cases. Further, losses which cannot be set-off in the current year due to inadequacy of eligible profits can be carried forward for set-off in the subsequent years as per the provisions contained in the Act. Step 7 – Computation of Gross Total Income The final figures of income or loss under each head of income, after allowing the deductions, allowances and other adjustments, are then aggregated, after giving effect to the provision for the clubbing of income and set off and carry forward of losses, to arrived at the gross total income. Step 8 – Deductions from Gross Total Income There are deductions prescribed from Gross Total Income. These deductions are of three types-

52

Taxation’s in India

Step 9 – Total income The income arrived at, after claiming the above deductions from the gross Total Income is known as the Total Income. It is also called the Taxable Income. It should be rounded off to the nearest Rs.10.

Step 10 Application of the rates of tax on the total income The rates of tax for the different classes of assesses are prescribed by the Annual Finance Act. Taxation for individuals, HUFs etc., there is a slab rate and basic exemption limit. At present, the basic exemption limit is Rs.1,00,000 for individuals. This no tax is payable by individuals with total income of up to Rs.1,00,000. Those individuals whose total income is more than Rs.1,00,000 but less than Rs.1,50,000 have to pay tax on their total income in excess of Rs. 1,00,000 @ 10% and so on. The highest rate is 30%, which is attracted in respect of income in excess of Rs.2,50,000. For firms and companies, a flat rate of tax is prescribed. At present, the rate is 30% on the whole of their total income. The tax rates have to be applied on the total income to arrive at the income-tax liability.

Step 11 - Surcharge Surcharge is an additional tax payable over and above the income-tax. Surcharge is levied as a percentage of income-tax. At present, the rate of surcharge for firm and domestic companies are 10% and for foreign companies is 2.5%. For individuals, surcharge would be levied @ 10% only if their total income exceeds Rs. 10 lakhs. Step 12 – Education cess The incomes-tax, as increased by the surcharge, is to be further increased by an additional surcharge called education cess @ 2%. The Education cess on incometax is for the purpose of providing universalized quality basic education. This is payable by all assessee who are liable to pay income-tax irrespective of their level of total income. Step 13 – Advance tax and tax deducted at source

53

Taxation’s in India Although the tax liability of an assessee is determined only at the end of the year, tax is required to be paid in advance in certain installments on the basis of estimated income. In certain case, tax is required to be deducted at source from the income by the payer at the rates prescribed in the Act. Such deduction should be made either at the time of accrual or the time of payment, as prescribed by the Act. For example, in the case of salary income, the obligation of the employer to deducted source has to be remitted to the credit of the Central Government through any branch of the RBI, SBI or any authorized bank. If any tax is still due on the basis of return of income, after adjusting advance tax deducted at source, the assessee has to pay such tax (called self-assessment tax) at time of filling of the return taxation.

54

Taxation’s in India

Chapter 08

Direct compensation House Rent Allowance Sec.10(13A) Leave Encashment Sec.10(10AA)

Basic Salary Sec.17(1) Direct Compensation

Gratuity Sec.10(10)

Pension Sec.10(10A)

Special Allowance Sec.10(14)(I)

Special Allowance Sec.10(14)(II)

 House Rent Allowance [Section 10(13A)]  Scope of House Rent Allowance [Section 10(13A)] a) Scope special allowance granted to an employee by his employer to specially meet expenditure actually incurred on the payment of rent for residential accommodation occupied by him, b) To such extent as way be presided, having regard to the area or the place and such other consideration; c) Provided that no exemption is available if – i.

Such accommodation occupied by the Assessee is owned by him, or

ii.

The Assessee has not actually incurred any expenditure on payment of rent in respective of such accommodation occupied by him.

 Amount Exempt : 1. 50% of salary / 40% of salary expect by mention other the cities. 2. House Rent Allowance Received 3. Rent paid 10% of salary

55

Taxation’s in India  Formula: Salary = Basic salary + Dearness Allowance + Commission on fixed Transfer

 Basic salary17(1): ―Salaries‖ for this purpose, means basic salary, dearness allowance (if it is considered for calculation of terminal benefit like P.F. etc.); and commission based on a fixed percentage of turnover, as per the terms of the contract of employment.

 Salary Due for period of Occupation: Salary is to taken on the basic in respect of the period during which the rental house is occupied by the employee. Hence a. Salary or advance of salary received during such period is to be ignored; b. Salary in respect of the period in which rental house was not occupied is not be considered.

 Annual or Monthly Basis : The amount of exemption can be worked out on annual basis if there is no charge in any of the following four factories during the entire years: a. Salary b. House Rent allowance c. Rent paid; and d. City in which house is situated. However, if there is any charge in any of the above factors, the exemption is to be worked out from month to month.

 Special Allowance 10(14)(I) Special allowance to may expansion includes only, necessary and Stamp duty and office or employment (no limit on the amount which employee can receive from employer but should be use fully for the purpose for which it was given.

56

Taxation’s in India  Travelling Allowance:[Allowance granted to the cost of

transfer] include any sum payment with

collection transfer packing & transfer of personal effect on such transfer.

 Conveyances Allowance:Expender on convince in performs of duty of an office or employment  Helper Allowance:Allowance Grant ender to meet expenditure incurred on helper in performance of duties on employment Allowance garneted for insure research and training.

 Special Allowance 10(14)(II)  Special compensatory Allowance [Hilly area]: Rs.800/- or Rs.800/- or Rs.700/- or Rs.300/- per month depending upon specific location.

 Special compensatory Allowance: [Boarder Area allowance remote locate, deflect allowance, distributed area allowance] Rs.1300/- or Rs.110/- or Rs.1050/- or Rs.750/- or Rs.300/- or Rs.200/- p.m. depending upon specific location.  Special compensatory Allowance [Area, schedule area]: Only Rs.200 p.m.  Employee working: In any transport system to meet his personal expenditure during his duties performance provides such employee is not in receipt daily allowance. 70% of such allowance up to maximum of 10,000 p.m.

57

Taxation’s in India  Children education allowance: Rs. 100 p.m. per child up to maximum 2 children.

 Hostel expenditure on children: - Rs.300 per month per child up to maximum 2 children.  Underground Allowance: Working in underground mind 800 per month (applicable to whole in India

 Pension [Section 10(10A) Pension means annuity equal to salary. Payable in particular year if a personal invest some money at to equal annual sum such annual sum are in heads investors.  Annuity = present Employee = taxable  Annuity = Past employer = taxable as profit in lieu of salary  Annuity = for on other employee = taxable = income from other source.  Pension = periodic payment = by government or company = after retirement

58

Taxation’s in India

PENSION

Uncomputed

Computed Pension

Pension

Government

Government Employment

Employment

(Taxable)

(Full Exempt)

Gratuity Not-Received

Gratuity Received

1 ×Computed person receive 3 Computed persentage 1 ×Computed person receive 2 Computed persentage

 Gratuity [Section 10(10) : Gratuity is a lump-sum amount paid to an employee, on the basis of the duration of his employment, on termination of service due to retirement, death etc. It is exempt from tax, either fully or partly, depending on the types of employee receiving it. Gratuity received while still in service is not exempt; it is taxable as salary. 

Exemption [Section 10(10)] :1. Member of depend service = fully exempt 2. Central and state government employee gratuity = fully exempt. 3. Non-government Employee.

59

Taxation’s in India

GRATUITY

Government

Government Employment

Employment

(Taxable)

(Full Exempt)

Covered under Act of

Non-covered under

Gratuity 1972

Act of Gratuity 1972

1. 10,00,000

1. 10,00,000

2. Gratuity Received

2. Gratuity Received

3. 15 days salary on last drawn

3.

Salary for each competed years. Month = 26 days.

Half month salary

(Based on last 10month average salary immediately preceding the month of retirement or

Salary = Basic salary + Dearness Allowance

death) for each completed years. Month = 30 days. Salary = Basic salary + Dearness (forming

part

of

retirement

+turnover)

 Leave Encashment of Salary [Section 10(10AA) Leave encashment means cash received by an employee against leave earned but not taken and accumulated. Leave encashment while in service is taxable. Leave encashment on leaving a job (by retirement, superannuation, resignation etc) is exempt is explained below

60

Taxation’s in India

Leave Salary (Encased after leaving Job-exempt)

Government

Non-Government

Employee

Employee

Central / State

1.

Earned leave (not exceeding 30 days each years of completed service) standing

Exempt

to the time of retirement. 2. 10 months average Salary drawn for the 10 months immediately preceding the date of retirement. 3.

3,00,000

4.

Actual leave salary Received.

Salary = Basic Salary + Dearness Allowance (forming part of retirement) + Commission turnover.

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Taxation’s in India

Chapter 09 Tax deductions  Income

Tax

deductions Tax deduction refers to claims made to reduce your taxable income, arising from various investments and

expenses

taxpayer.

Thus,

incurred income

by

a tax

deduction reduces your overall tax liability. It is a kind of tax benefit which helps you save tax. However, the amount of tax you can save depends on the type of tax benefit you claim.

 Tax Exemption Vis Tax Deduction Both the terms ‗tax deduction‘ and ‗tax exemption‗ refer to a lowering of taxable income; they are forms of tax relief or tax breaks provided by the government. However, tax exemptions may also include complete relief from taxes, reduced rates and tax on only a portion of income. Tax exemption means you don‘t have to pay tax for a particular income. E.g. you may get a tax exemption for donating to charitable institutions and various relief funds. In order to encourage investments, the government generally offers tax exempt entities to invest in. Such entities are exempted from a single or multiple taxation laws. For example, investments in the Sukanya Samriddhi Scheme are fully tax

62

Taxation’s in India exempt. Money deposited under this scheme will be exempted from tax at the time of investment, accumulation of interest and payout of returns (EEE). In case of tax deduction, your income tax liabilities decrease by a specified amount for spending money in particular avenues. You invest in various schemes to reduce your taxable income. For example, you can get tax deduction by paying life insurance premiums and home loan EMI. Tax deductions are offered by government to tempt taxpayers to participate in programs carrying societal benefits.

 What is Tax Deducted at Source? To collect tax efficiently and quickly, the Income Tax department of the Government of India has introduced a system called TDS (tax deducted at source). Using TDS, tax can be deducted /collected at source of income. TDS is an indirect method of collecting tax by the government. It ensures a regular source of revenue for the government by ensuring the tax is collected as income is earned and not when a taxpayer files returns at the end of the year. Any authorized person /institution on which the responsibility of collecting tax is entrusted collects tax and pays it to the government on behalf of an individual payer. In return, the individual taxpayer gets a TDS certificate stating that the tax has been paid on his/her behalf. Thus, tax is deducted at source and is forwarded to the government on behalf of the payer. This provision of deduction of tax at source is applicable to several payments such as salary, commission, interest on fixed deposits, brokerage, professional fees, contract payments, and royalty etc.

 Benefits of Tax Deductions: There are a number of benefits associated with tax deduction which include: 

Tax deductions help you reduce an amount from your taxable income and

save tax. When you claim an income tax deduction, it reduces the amount of your income that is subject to tax. 

Reduced taxable income helps you save and invest money in other areas.



Tax deduction first reduces the income subject to the highest tax brackets.

So, you can claim deduction for the amounts spent in tuition fees, medical expenses, and charitable contributions.

63

Taxation’s in India Income tax return is mandatory and you cannot completely avoid paying tax. But with proper planning, you can reduce your taxable income.

 19 Types of Tax Deductions in India

 Section 80c: You can reduce income

by

your taxable

increasing

your

deductions. There are many investment options and forms of expenditure which can help you get reductions on your taxable income. The Indian Income Tax Act provides many provisions for this. Mentioned below are a number of different tax deductions.

Section 80c allows Deductions up to maximum of Rs. 1,50,000.



Employee Provident Funds (EPF):

Employee Provident Fund (EPF) is implemented by the Employees Provident Fund Organization (EPFO) of India. In a previous post we have explored the Laws concerning Employee Provident Funds . If your company employees more than 20 individuals, then you will need to create an employee provident account. 

Public Provident Fund (PPF):

By contributing to your PPF account, you can get tax deduction under Section 80C, the Indian Income Tax Act, 1961. 

Tuition Fees:

Tuition fee paid for your children‘s education qualifies for income tax deduction under section 80C. However, the fee needs to be paid for full-time education in an Indian university, college and school for any two children. Tuition fee does not include any donations or development fee towards education institutions.

64

Taxation’s in India



Home Loan Principal Repayment:

The Equated Monthly Installment (EMI) that you pay every month to repay your home loan consists of two components – Principal and Interest. The principal component of the EMI qualifies for deduction under Sec 80C. Even the interest component can save you significant income tax – but that would be under Section 24 of the Income Tax Act. Please read ―Income Tax (IT) Benefits of a Home Loan / Housing Loan / Mortgage‖, which presents a full analysis of how you can save income tax through a home loan.-Income Tax Benefits from House Property and Loan. 

National Saving Certificate (NSC):

The amount invested in NSC is eligible for tax deduction under section 80C of the Indian Income Tax Act, 1961. National Saving Certificates is one of the highly secured modes of investments in India. But, the interest earned from NSC is taxable. As an NSC is a cumulative scheme, interest is reinvested and qualifies for tax deduction. 

Senior Citizen Savings Scheme (SCSS):

Senior citizens can get tax deduction by investing in Senior Citizen Savings Scheme offered by banks. These schemes are eligible for tax deduction under Section 80C of the same act. The interest earned from these schemes is entirely taxable. 

Unit-linked Insurance Plans (ULIP):

Investing in ULIPs for yourself, spouse and your children, you can get tax deductions under Section 80C. 

Bank Fixed Deposits (FDs):

You can get tax deduction by investing in fixed deposits for a tenure of 5 years, under section 80C of the Indian Income Tax Act, 1961. Many banks in India offer tax saving fixed deposits. However, the interest accrued on FDs is subject to tax.

65

Taxation’s in India



Life Insurance Premiums:

You can get income tax deduction for paying premium towards life insurance policies for self, spouse and child under section 80C of the Indian Income Tax Act, 1961. The amount received on maturity of the policy is free from tax. However, it is subject to the terms and conditions mentioned in your policy. 

Equity Linked Savings Scheme (ELSS):

After the above, if you have not reached the limit of Rs. 1,50,000, then you should invest the remaining amount in Equity Linked Savings Scheme (ELSS). Equities provide the best, inflation-beating return in the long term, and should be a part of everyone‘s portfolio. After all, what can be better than something that gives great return and helps save tax at the same time?

 When to invest for 80C deduction? Many of us start looking for investment avenues only in February or March, just before the Financial Year is getting over. This is a big mistake! One, you would end up investing your money without putting proper thought to it. And secondly, you would end up losing the interest / appreciation for the whole year. Instead, decide where you want to make the investments, and start investing right from the beginning of the financial year – from April. This way, you would not only make informed decisions, but would also earn the interest for the full year from April to March.

 Section 80D: The Section 80D of the Income Tax Act, 1961 deals with tax deductions on medical insurance. This section allows you to receive tax deductions on premiums made for medical insurance for yourself and on behalf of your family. The Section 80D offers deductions over and above the exemptions derived from the more popular Section 80C.

66

Taxation’s in India Deductions under Section 80D: As mentioned before, Section 80D will help you in getting tax deductions on medical insurance premiums only. The deductions allowed are as follows:  For Self and Family: 

Maximum deduction of Rs.25,000 per year on health insurance premium for self and family.



Maximum deduction of Rs.30,000 per year if you are a senior citizen.  For Parents:



Maximum deduction of Rs.25,000 per year on health insurance premium paid on behalf of parents.



Maximum deduction of Rs.30,000 per year on premium payments for senior citizen parents.  Additional Deduction:



A deduction of Rs.5,000 can be claimed every year on expenses related to health check-ups. This limit includes the check-up expenses of all members in a family, including spouse, kids and parents.





 Eligibility for Tax Benefits u/s 80D: A taxpayer can claim the deductions u/s 80D. The health insurance premium paid for the following members in a family are eligible for deductions: 

Self



Spouse



Children



Parents

Hindu Undivided Families (HUF) can also claim deductions under this section. Premium payments of any member in a HUF can be used for tax deduction subject to upper limit as per the act.

67

Taxation’s in India

Section 80D Limit: As per Section 80D, a taxpayer can claim deductions on health insurance premiums paid for self/family and parents, apart from deductions on expenses related to health check-ups. The overall deduction limits are as follows: Health

Persons

Persons

Covered

Covered

Self

Rs.(25,000 +

family

and +

family

Total

Exemption

=

Rs.5,000

Rs.55,000

Rs.5,000

Rs.60,000

Rs.5,000

Rs.65,000

Rs.50,000

parents Self

25,000)

Check-Up

and +

Rs.(25,000 +

senior

30,000)

citizen

Rs.55,000

=

parents Self (senior citizen) and family senior citizen

+

Rs.(30,000 + 30,000)

=

Rs.60,000

parents

Example: Suppose you are 60 years old paying an yearly premium of Rs.32,000 for yourself and your dependents. Apart from this, you are also paying a health premium of Rs.35,000 for your parents‘ policy, who are 80 years old. As per Section 80D terms, you are eligible for: 

Tax deduction of Rs.30,000 on Rs.32,000 paid as health insurance premium

for you and your dependents.

68

Taxation’s in India 

Tax deduction of Rs.30,000 for your parents (senior citizens) out of the

overall payment of Rs.35,000. 

Total tax deduction that can be claimed is Rs.60,000 out of the overall

premium payment of Rs.67,000.

Section 80D and 80C: Section 80D is sometimes confused with its more visible cousin, Section 80C. Section 80C provides deductions up to Rs.1.5 lakhs per year while Section 80D offers deductions up to Rs.65,000, subject to conditions. Another differentiating point is that Section 80C includes investments made in a wide range of financial instruments such as small savings schemes, life insurance premium, mutual funds etc., while Section 80D is meant exclusively for deductions on health insurance premiums paid.

Deduction for Med claims under Section 80D: The deduction of Med claim under Section 80D happens so that your insurance policy stays active. This insurance can be for the policy holder or for the spouse of the policy holder. Med claim is of utmost importance as it takes care of your medical bills, if you fall ill and require medical assistance.

 Section 24B: There are two sections of the “Income Tax Act” of India which will allow you to get a deduction if you have taken a home loan; this, of course, ignores home loans from ―private sources‖ (Friend, Family, etc). The two sections are here under. 1.

Sec 24(b) of the Income Tax Act, 1961

2.

Sec 80(c) of the Income Tax Act, 1961

The Section 24(b) is with respect to the ―Interest Paid‖ on the Home Loan and Section 80(c) is with respect to the ―Principal Repayment‖ of the Home Loan. The Section 24(b) of the Income Tax Act, 1961 is applicable to Home loan for purchase of house or construction of the house property. You can avail a deduction of up to Rs. 1,50,000 of your total tax liability. Also reconstruction, renewal or repairs are eligible for deductions under the said section.

 MAXIMUM LIMIT OF DEDUCTION UNDER SECTION 24B: 69

Taxation’s in India These limits of deduction are applicable assessee wise and not property wise. Therefore if an assessee owns two or more house property then the total deduction for that assessee remains same. 1) In Let Out Property/Deemed to be Let Out – No maximum limit 2) Self Occupied House (SOP) – Rs. 2,00,000. (1,50,000 for Assessment year 2014-15 and before) In the following cases the above limit of Rs 2,00,000 for SOP shall be reduced to Rs. 30,000 – Loan borrowed before 01-04-1999 for any purpose related to house property. – Loan borrowed after 01-04-1999 for any purpose other than construction or acquisition. – If construction/acquisition is not completed within 5 years from the end of the financial year (3 years till financial year 2015-16) in which capital was borrowed. For example, a loan is obtained for construction/acquisition on 28 Oct 2011 then the deduction limit should reduced to Rs 30,000 if the construction/acquisition completes after 31 March 2017.

 Section 80EE:  Deduction on Home Loan Interest Section 80EE is applicable for claiming deductions on home loan interest payments for first time home buyers only. This is a very exclusive scheme that was introduced by the then Finance Minister Mr. P. Chidambaram in the national budget for FY 2013-14. The benefits of the scheme can only be claimed by first time home buyers who have purchased a property through a home loan in the fiscal 2013-14. The limit of this tax deduction is set at Rs.1 lakhs in the form of a onetime tax relief. The deductions u/s 80EE was introduced as a means to help home buyers in the lower income group through tax reliefs. Terms for Claiming Section 80EE Deductions: 

Home loans sanctioned within the time frame of 1 st April 2013 to 31st

March 2014 (FY 2013-14). 

Loan amount limited to a maximum of Rs.25 lakhs can be used to claim

deductions.

70

Taxation’s in India 

The overall value of the purchased residential property is capped at Rs.40

lakhs. 

The home loan in question pertains to the first house property owned by the

applicant. 

The amount of deduction is limited to Rs.1 lakhs on interest payments on

home loans availed in the fiscal 2013-14. 

Eligible taxpayers can claim the benefit only for the fiscal 2013-14.



If the interest payments are less than Rs.1 lakhs for FY 2013-14, the

remaining deduction balance may be claimed in the next year, i.e. FY 2014-15. 

Any balance of the deduction limit available after FY 2014-15 cannot be

claimed as deductions. 

The property in question can be either self-occupied or non self-occupied.

Eligibility for Claiming Section 80EE Deductions: The deductions under this section can be claimed only by individual taxpayers on properties purchased either singly or jointly. The deduction is not applicable for Hindu Unified Families (HUF), companies, trusts, Association of Persons (AOP) etc.

Points to Note: 

Section 80EE is applicable on a per person basis instead of a per property

basis. 

Properties purchased jointly will be eligible for deductions to the tune of

Rs.1 lakhs per owner. 

You do not necessarily have to reside in the purchased property.



Borrowers staying in a rented apartment can claim deductions under

Sections 80EE, 80C and 24. 

Borrowers can claim 80EE deductions on top of the Rs.1.5 lakhs

deductions applicable on self-owned properties.

Section 80EE and 80C: The Section 80C allows for tax deductions up to Rs.1.5 lakhs per year while Section 80EE provides a one-time tax deduction of Rs.1 lakhs for FY 2013-14, with the balance deduction amount having the option of being claimed in the next fiscal year. Section 80C offers cumulative deduction on a wide range of investments ranging from small savings instruments to home loan interest

71

Taxation’s in India repayment, whereas Section 80EE is exclusively meant for home loan interest repayments on loans sanctioned in the FY 2013-14. Claiming 80EE Tax Deductions: To claim the deductions under this section, you need to fill in the respective field in your IT returns form specifying the amount of interest paid in the fiscal 2013-14. In addition, you will have to furnish a document from the lender stating the interest and principal amounts on your home loan as well as the amount paid till date. Example:

Suppose you were sanctioned a home loan of Rs.20 lakhs in FY 2013-14 towards a property valued at Rs.35 lakhs. If you pay an interest amount of Rs.45,000 for the same fiscal, you can claim the full amount as deduction u/s Section 80EE. The remaining Rs.55,000 of the deduction limit can be claimed for tax payments in the next year, i.e. FY 2014-15.

 Section 80GG Deduction for Rent Paid: Usually HRA forms part of your salary and you can claim deduction for HRA. If you do not receive HRA from your employer, and make payments towards rent for any furnished or unfurnished accommodation occupied by you for your own residence, you can claim deduction under section 80GG towards rent that you pay. Here are a few conditions that must be fulfilled – 

You are self employed or salaried



You have not received HRA at any time during the year for which you are

claiming 80GG 

You or your spouse or your minor child or HUF of which you are a

member – do not own any residential accommodation at the place where you currently reside, perform duties of office, or employment or carry on business or profession. 

In case you own any residential property at any place, for which your

Income from house Property is calculated under applicable sections (as a self occupied property), no deduction under section 80GG is allowed. You will be required to file Form 10BA with details of payment of rent.

72

Taxation’s in India Deduction –the lowest of these will be considered as the deduction under this section(a)

Rs 5,000 per month

(b) 25% of total Income (income to exclude long term capital gain, short term capital gain under section 111A and Income under section 115A or 115D and deductions 80C to 80U. Also income is before making deduction under section 80GG). (c)

Actual Rent less 10% of Income (income to exclude long term capital gain,

short term capital gain under section 111A and Income under section 115A or 115D and deductions 80C to 80U. Also income is before making deduction under section 80GG).

 Section 80E Deduction for Interest on education loan: The deduction under section 80E for Interest on educational loan is available to an individual if following conditions are satisfied: 1. Section 80E Deduction for educational loan available only to Individual not to HUF or other type of Assessee. 2. Deduction amount under Section 80E: – The amount of interest paid is eligible for deduction and moreover there is no cap on the amount to be deducted. You can deduct the entire interest amount from your taxable income. However there is no benefit available on the repayment of principal amount of the loan.

3. Section 80E Deduction available if Interest is been paid during the previous year and was paid out of income chargeable to tax which means if repayment is made from income not chargeable to tax than deduction will not available. Deduction will be allowed only when actual interest is paid.

4. Interest on educational loan should have been paid on loan taken by him from any financial institution or any approved charitable institution for the purpose of

73

Taxation’s in India pursuing his higher education. Interest on Loan taken from relatives or friends will be eligible for deduction under section 80E. (a) ―Approved charitable institution‖ means an institution established for charitable purpose of approved by the prescribed authority section 10(23C), or an institution referred to in section 80G (2)(a); (b) ―Higher education‖ means any course of study pursued after passing the Senior Secondary Examination or its equivalent from any school, board or university recognized by the Central Government or state Government or local authority or by any other authority authorized by the Central Government or State Government or local authority to do so.

5. Educational loan should have been taken for the purpose of pursuing higher studies of Individual, Spouse, Children of Individual or of the student of whom individual is legal guardian. Hence parents are eligible to claim deduction of interest paid by them on loan taken for their children‟s education.

Income tax department has added (I.e. Assessment year 2010-11) additional fields of studies (including vocational studies) pursued after passing the Senior Secondary Examination or its equivalent from any school, Board or University recognized by the Central or State Government will also be covered under deduction in respect of interest paid on loan taken for higher education.

Definition of Higher education is substituted by making a amendment as per Finance (No. 2) Bill 2009. After the amendment Higher education would means any course of study pursued after passing the Senior Secondary Examination or its equivalent from any school, Board or University recognized by the Central Government or State Government or local Authority or by any other authority authorized by the Central Government or State Government or local Authority to do.

6. Interest on educational loan should have been paid for the loan taken for the purposes of pursuing his higher education or of the spouse and children. From

74

Taxation’s in India Assessment year 2010-11 Relative also includes student for whom the individual is the legal guardian.

7. Deduction period of Section 80E Deduction: - Deduction shall be allowed in computing the total income in respect of the Initial assessment year* and seven assessment years immediately succeeding the initial assessment year or until the interest is paid by the assessee in full, whichever is earlier. *Initial assessment year means the assessment year relevant to the previous year which the assessee starts paying the interest on the loan. 8. Education Loan should be in the name of Individual: - Deductions on education loan can only be claimed if the loan has been taken in your own name. If your parents, spouse or sibling has taken the loan for your studies, then you are not entitled to get tax benefit.

9. The loan includes not only tuition or college fees but also other incidental expenses for pursuing, such studies like hostel charges, transport charges etc.

10. Repayments of education loan NOT covered under Section 80C.

11. There is no condition that the course should be in India.

12. Document required to Claim Deduction under Section 80E- You need to obtain a certificate from your Bank / financial institution or approved charitable institution from whom such education loan is been taken. Such certificate should segregate the principal and interest portion of the education loan paid by you during the financial year. The total interest paid will be allowed as deduction. No Tax benefit is allowed for the principal repayment.

75

Taxation’s in India

 Section 80A  The Companies Act, 1956 80A. 4 Redemption of irredeemable preference shares, etc. 1. Notwithstanding anything contained in the terms of issue of any preference shares, every preference share issued before the commencement of the Companies (Amendment) Act, 1988 ,a) which is irredeemable, shall be redeemed by the company within a period not exceeding five years from such com- mincemeat, or b) which is not redeemable before the expiry of ten years from the date of issue there- on in accordance with the terms of its issue and which had not been redeemed before such com- mincemeat, shall be redeemed by the company on the date on which such share is due for redemption or within a period not exceeding ten years from such commencement, whichever is earlier: Provided that where a company is not in a position to redeem any such share within the period aforesaid and to pay the dividend, if any, due thereon (such shares being hereinafter referred to as unredeemed preference shares), it may, with the consent of the Company Law Board, on a petition made by it in this behalf and notwithstanding anything contained in this Act, issue further redeem- able preference shares equal to the amounts due (including the dividend thereon), in respect of the unredeemed preference shares, and on the issue of such further redeemable preference shares, the unredeemed shares shall be deemed to have been redeemed. 2. Nothing contained in section 106 or any scheme referred to in sections 391 to 395, or in any scheme made under section 396, shall be deemed to confer power on any class of shareholders by resolution or on any court or the Central Government to vary or modify the provisions of this section. 3. If any default is made in complying with the provisions of this section,a) The company making such default shall be punishable with fine which may extend to one thousand rupees for every day during which such default continues; and

76

Taxation’s in India b) Every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to three years and shall also be liable to fine.] Further issue of Capital

 Section 80CCD (1B)  Should you Invest Rs 50,000 in NPS to Save Tax u/s 80CCD (1B)? Budget 2015 had introduced a new section 80CCD (1B) which gives deduction up to Rs 50,000 for investment in NPS (National Pension Scheme) Tier 1 account This new deduction can help you save tax up to Rs 15,450 in case you are in the 30% tax slab. The question is should you take advantage of this new tax deduction and invest in NPS? NPS has not taken off as expected and finance minister by giving this additional tax saving option is trying to give it a push. We all know how many people invest blindly in poor schemes just to save tax. This post is to analyze if it makes sense for us to invest in NPS to save additional tax.

Assumptions: For our calculation we assume that Amit is 30 year old and would retire at the age of 60. So he would make investment for 30 years. 

NPS Investment Option: Most Aggressive i.e. 50% investment in equity and 50% investment in debt



Amount Invested Annually: Rs 50,000



Return on Equity: 12%



Return on Debt: 8%



Tax Bracket: 30.9%



Also the tax bracket remains 30.9% at the time of withdrawal at the age of 60.

Alternatively, Amit can pay tax on this Rs 50,000 and invest the remaining amount (i.e. 50,000 * (1-30.9%) = Rs 34,550) in Equity Mutual fund which gives return of 12% annually.

77

Taxation’s in India

 Section 80TTA  Interest on Bank saving deposit Who can claim deduction under section 80TTA? Deduction u/s 80TTA is applicable to individual taxpayers and HUF only. This benefit is not available to a firm, an Association of Persons, a Body of Individuals, LLP or Company Assessee. Eligible savings account for claiming deduction under section 80TTA Saving accounts with any of following entities will qualify:  

Bank or banking company;  Co-operative

society engaged in carrying on the banking business and as

specified. 

Post office savings account .

Section 80TTA deduction not available on FD Interest This deduction is NOT applicable to the interest you received on your FDs/time deposit or term deposit. Term deposit means a deposit received by the bank for a fixed period and can be withdrawn only after the expiry of the predefined fixed period.

Maximum Deduction under section 80TTA 

The deduction allowed is interest received on eligible saving accounts or Rs. 10,000 whichever is lower.



If interest earned is more than 10,000 then balance amount will be taxable as before i.e. considered as Income from Sources and taxed as per your slab rate.



The deduction is in addition to deduction of Rs. 1.50 Lakhs of section 80C of the Income Tax Act-1961.

Applicable from A.Y. 2013-14 Onwards The section is applicable from April 01, 2012 and will apply from AY 2013-14 and onwards. TDS Provisions not applicable on Saving Bank Interest

78

Taxation’s in India The interest earned on savings account is exempted from TDS under Section 194A of Income Tax Act i.e. No TDS is deducted on interest from saving account.

Post office savings bank interest exemption under section 10(15)(i) Post office savings bank interest is exempt up to Rs. 3500 (in an individual account) and Rs. 7000 (in a joint account) under section 10(15)(i) by virtue of Notification No. 32/2011, dated June 3rd 2011 read with Notification No. GSR 607, dated June 9, 1989. The cumulative impact of section 10(15)(i) and 80TTA as follows:

Interest on Post Office saving Bank (exemption under section 10(15)(i) Interest on savings account with a bank, cooperative bank and Post office (deduction under section 80TTA)

Up to the Assessment year 2011-12 Rs. Full Exemption, nothing is taxable

For the Assessment year 2012-13 Rs

From the Assessment Year 2013-14 Rs.

Exemption up to Rs. 3500 in a single account and Rs. 7000 in a joint account

Exemption up to Rs. 3500 in a single account and Rs. 7000 in a joint account

No deduction

No deduction

Deduction up to Rs. 10000

The insertion of this new section has been a relief to individual or Hindu undivided family as interest on saving bank account was always a taxable income with no corresponding tax benefits. It would also help in avoiding inclusion of small savings bank interest in the taxable income, which was required to be done after deletion of section 80L.

79

Taxation’s in India

 Extract of Section 80TTA  Deduction in respect of interest on deposits in savings account. 80TTA. 1. Where the gross total income of an assessee, being an individual or a Hindu undivided family, includes any income by way of interest on deposits (not being time deposits) in a savings account with— (a) A Banking company to which the Banking Regulation Act, 1949, applies (including any bank or banking institution referred to in section 51 of that Act); (b) A Co-Operative society engaged in carrying on the business of banking (including a co-operative land mortgage bank or a co-operative land development bank); or (c) A Post Office as defined in clause (k) of section 2 of the Indian Post Office Act, 1898, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee a deduction as specified hereunder, namely:— (I) in a case where the amount of such income does not exceed in the aggregate ten thousand rupees, the whole of such amount; and (II) In any other case, ten thousand rupees. 2. Where the income referred to in this section is derived from any deposit in a savings account held by, or on behalf of, a firm, an association of persons or a body of individuals, no deduction shall be allowed under this section in respect of such income in computing the total income of any partner of the firm or any member of the association or any individual of the body. Explanation.—for the purposes of this section, ―time deposits‖ means the deposits repayable on expiry of fixed periods.‘

80

Taxation’s in India

Chapter 10

Computation of Gross Total Income  Format Particular

₹

₹

[A] INCOME FROM SALARY 1. Gross Taxable Salary

XX

2. Deduction U/s 16 a. Profession Tax

XX

b. Entertainment Allowance

XX

c. Total Deduction [a+b]

XX

3. Net Taxable Salary[1-2]

XX

[B] INCOME FROM HOUSE PROPRTY a. ALV [Higher of FV & MV; Not <SR]

XX

b. Annual Rent [Gross- Vacancy – Unrealizable]

XX

1. Gross Annual Value (GAV)

XX

2. Less: Municipal tax Paid by Owner

XX

3. Net Annual Value (NAV) [1-2]

XX

4. Standard Deduction [30%*(3)]

XX

5. Interest

XX

6. Unrealized Rent (taxed)

XX

7. Net Arrears Taxed

XX

8. Final Income from HP [3-4-5+6+8] 9. Income From All HPs

81

XX XX

Taxation’s in India [C]

INCOME

FROM

BUSINESS/

PROFESSION I.

Receipt & Payments Account

XX

1. Business Receipts vide R & P A/c

XX

2. Less: Payments vide R & P A/c

XX

3. Net Business Income [1-2] II.

XX

Profit & Loss Account 1. Net Profit vide Profit & Loss A/c

XX

2. Total Additions

XX

3. Total Deductions

XX XX

4. Net Business Income [1+2-3]

XX [D] SHORT TERM CAPITAL GAINS 1. Consideration

XX

2. Transfer Expenses

XX

3. Cost (Original + Improvement)

XX XX

4. Short Term Capital Gain [1-2-3] [E] INCOME FROM OTHER SOURCES 1. Lottery/ Races/ Betting /Game Prizes

XX

2. Interest on NSC (eligible u/s 80C)

XX

3. Other Interest

XX

4. Misc. Income

XX

5. Income from Other Sources [1+2+3+4]

XX

[F] GROSS TOTAL INCOME (Excluding

XX

LTCG) [G] DEDUCTIONS U/CH VIA

XX

1. Deduction U/S 80C [1,50,000]

XX

2. Deduction U/S 80D [up to Rs.25,000+ 25,000+ 5,000 for self + parent + senior citizen] 3. Deduction U/S 80DD [up to Rs.75,00/1,25,000]

XX

4. Deduction

XX

U/S.80DDB

80,000] 5. Deduction U/S 80E

82

XX

[40,000/

60,000/

XX XX

Taxation’s in India 6. Deduction U/S 80U [up to Rs. 75,000/ 1,25,000]

XX

7. TOTAL DEDUCTION U/CH VIA

XX

8. Deduction Limited to AGTI less Lottery etc. [F-E1]

[H] NET INCOME (GTI Less Deductions)

XX

[F-G] [I] Add: Long Term Capital Gains [D5] 1. Consideration

XX

2. Transfer Expenses

XX

3. Indexed Acquisition Cost

XX

[AC * 1081/CII] 4. Indexed Improvement Cost [IC * 1081/CII]

XX

5. Long Term Capital Gains [LTCG] [1-2-3-4]

XX

[J] NET TAXABLE INCOME[H-I]

XX

[K] COMPUTATION OF TAX 1. Tax on Income Charged at Special Rates a. Long Term Capital Gains i.

With indexation @ 20%

ii.

Or, in some cases, without indexation @ 10%

XX

b. Short Term Capital Gains, subject to STT, @ 10%

XX

c. Lottery, Crossword, Races, Card Games, etc. @ 30%

XX

2. Tax on Income Charged at Normal Rates

XX XX

a. Tax on [ Normal Income + Agricultural Income, if any]

XX

b. Tax on [Exempt slab + Agricultural Income, if any] 3. Tax on Total Income [a+b]

83

XX XX

4. Education Cess @ 3% on [3]

XX

5. Tax Payable [3+4]

XX

Taxation’s in India 6. Less: Pre-paid Taxes a. Advanced Tax

XX

b. Tax Deducted at Source

XX

c. Tax paid on Self-assessment

XX XX

Total Pre-paid Taxes 7. Tax Due or Refund Receivable [6 -7]

XX

Chapter 11

News collection of Taxation in India

Demonetization: Money deposited in banks has lost its earlier anonymity

says

Finance

minister Arun Jaitley

New

Delhi:

Describing

the

currency being deposited in banks following

last

month's

demonetization of high-value notes as money that has lost its earlier "anonymity",

Finance

Minister

Arun Jaitley on Sunday said these funds now available with the banks have strengthened the Indian banking system.

"The money that is being deposited in cash form after demonetization, now the anonymity of that money is gone," Jaitley said at the DigiDhan Mela event here to promote cashless transactions. File photo of Arun Jaitley. PTI

84

Taxation’s in India "When this money comes into the system, the banking system becomes stronger and there are funds available for rural development, social welfare programmers," he said."Money in the system becomes part of the taxation system too The long-term benefit of this move is that the shadow, the parallel economy, which was not taxed, of which there was no accounting, which was not answerable, that is now becoming part of the economic system," the Finance Minister said.

Finance Ministry working to

„unwanted

remove

discretions‟ in taxation New Delhi, Feb 28: Finance Ministry

is

removing

certain

discretions‖

contemplating

as

―unwanted part

of

an

exercise to streamline taxation structure

and

improve

the

country‘s image as attractive investment destination, sources said. The objective of the exercise, they said, was to come out with ―clear cut guidelines‖ on taxation with a view to prevent controversies pertaining to retrospective amendment of tax laws. The stress will be on transparency, predictability and stability in the Indian taxation system. All eyes would be on Finance Minister Arun Jaitley who is presenting the Union Budget tomorrow. In the last Budget, he had announced phased reduction in corporate tax to 25 per cent from the current 30 per cent and elimination of tax exemptions to companies. Regime of exemptions has led to pressure groups, litigation and loss of revenue, and also leaves room for discretion (which many times have lead to controversies). ―Following recommendations from various departments, there is a need to have a fresh look at the existing tax exemption structure. ―The exercise holds importance as it will help in reducing discrepancies and discretions in the exemptions as well as introduce the much needed transparency in taxation,‖ the source added. The retrospective tax laws have adversely impacted India‘s image globally as an attractive investment destination, sources said. ―Experts are of the view that lack of

85

Taxation’s in India transparency and unwanted discretion in existing tax laws is solely responsible for such episodes. There is an urgent need to address these issues as unnecessary exemptions also lead to loss of revenue.‖

Rationalize taxation to boost investment culture: BSE CEO New Delhi, Jan 19: Government needs to rationalize taxation policies to promote investments through stock markets, by giving greater benefits for investment focused trades rather than for speculative trading, top exchange BSE‘s chief Ashish Chauhan said. Currently, the taxation structure in the stock market is tilted in favors of intra-day trades and the derivatives trading, while tax rates tend to be higher for delivery-based trades and the equity market trading. ―The way Indian markets are structured, there is a kind of penalty to delivery and also to the trading in the cash market, which is basically the market for investments. ―If you do intra-day trading in stock futures, you pay 40 per cent less STT (Securities Transaction Tax), vis-a-vis the intra-day trading in the equity trading. So, what is happening is that equity market liquidity has dried up and no investors want to come in and invest,‖ Chauhan told PTI in an interview. ―Also, the maximum STT is for delivery-based transactions that are investment transactions and there is less STT for intra-day transactions which is not delivery based. The STT is even lesser for futures. ―So, effectively, we are penalizing in our STT structure the investment activity. This is happening when India requires more money to be raised for PSUs and also for SMEs and large companies that would come to the market,‖ he said.Speaking about his expectations from the Union Budget next month, Chauhan said, ―Even if you want to have a revenue neutral framework, it should be to promote investment and may be to penalize the speculations a little bit more. ―Even if we take the total traded volumes, cash market is today close to 5 or 10 per cent of derivatives volumes. ―If you have a framework where you can support investment by charging less transaction tax and

86

Taxation’s in India get the balance from derivatives trades, it would be in the fitness of change for the government that is trying to promote investments.‖ Chauhan said that besides structural changes in STT, the exchanges would also need to change their business model. ―Today, a large part of revenue for exchanges comes from trading and therefore they also focus a lot on trading. That takes away their focus away from the capital formation. ―So, the exchanges also need to change their business models, while the government needs to make some policy changes such as providing tax benefits,‖ he added. When asked whether the BSE, which is present across 2,000 cities and towns, was ready for such transformational changes, he said, ―The BSE has been there for 140 years and it has helped India create as a catalyst wealth of USD 1.6 trillion or over Rs 100 core. ―In some sense, it could have done much more. The BSE has to exist for the nation and it cannot be thinking for itself alone. So, the BSE must work for capital formation to arrange funds for investment and to contribute to nation building, rather than just for doing trading for the sake of trading,‖ he added.

87

Taxation’s in India

Chapter 12

Suggestions for Future Researchers

The present study tried to do an extensive analysis of different aspects of Income Tax System in India. But, still there is a scope for further research in the following fields: 

A comparative study of different aspects of Income Taxation in India may

be undertaken with respect to other countries. 

An intensive study may be conducted to examine one of the various aspects

of Income Tax System in India. 

The present study examines the perception of tax professionals with respect

to Income Tax System in India. Similarly perception of Income Tax officials and taxpayers may be studied.

i

88