Basic Concepts

Assessment: This is the procedure by which the income of an assessee is determined by the Income Tax Assessing Officer. Assessee- Section 2 (7): Assessee means a person by whom any tax or any other sum of money is payable under the Income Tax Act. Person Section 2(31): The term person includes: (i) an individual (ii) a !indu "ndivided #amily (!"#) (iii) a company (iv) a firm (v) an association of persons (AO$) or body of individuals (%OI) (vi) a local authority (vii) any other artificial &udicial person not falling in any of the above categories Assessment Year -Section 2 (9): Assessment 'ear means the period of () months starting from (st April and ending on *(st +arch in the next year. e.g The Assessment 'ear ),,-.,/ begins on (st April ),,- and ends on *(st +arch ),,/ Previous Year Section 3: $revious 'ear is financial year immediately preceding assessment year. e.g. #or the Assessment 'ear ),,-.,/ $revious 'ear shall be the #inancial 'ear ),,0.,-. !owever in case of a newly started business $revious 'ear shall begin from the date of setting up of the business and end on immediately following *(st +arch. Char e o! "ncome #a$ Section %: The following basic principles are followed while charging tax: (i) Income Tax is an annual charge on income. (ii) 1enerally income of previous year is charged to income tax in the immediately following Assessment year. (iii) Income tax rates are fixed by the #inance Act every year. (iv) Income Tax is charged on every person. &ross #ota' "ncome : 1ross Total Income means total income computed in accordance with the provisions of the Income Tax Act before allowing any deductions under sections 2, 333 to 4ection 2, ". In other words aggregate of the income under following heads is 1ross Total Income. (. 4alaries ). Income from !ouse $roperty *. 5et profit from business.profession 0. 3apital 1ains -. Income from other sources

(esi)entia' status un)er "ncome #a$ Act

4ection / of the Income Tax Act lays down the test of residence for the different persons.

Assessees

Individuals and !"#s 6esident in India 5on 6esident in India 6esident in India

Other Assessees 5on 6esident in India

6esident and Ordinary 6esident

6esident but not Ordinary 6esident

(esi)entia' status o! an in)ivi)ua'7 4ection (/): An individual may be i) resident and ordinary resident ii) resident but not ordinary resident iii) non resident. Basic con)itions to test whether an individual is resident in India: "nder 4ection / if an individual satisfies any of the following basic conditions he is said to be resident in India a) b) !e is in India in the previous year for a period of at least (2) days or !e is in India for a period of at least /, days during the previous year and at least */- days during the 0 years immediately preceding the previous year.

6elaxations: The explanation to 4ection /(() ma8es following relaxation in regard to above (b): (i) In case of Indian citi9ens who leave India in any previous year as a member of a crew of an Indian ship or for purposes of employment outside India they will be treated as residents only if the period of their stay during the relevant previous year amounts to (2) days. In other words even if such persons were in India during 0 preceding years for an aggregate period of */- days or more they will be not be treated as residents unless during the relevant previous year they were in India for (2) days or more. (ii) In case of Indian 3iti9en or person of Indian Origin engaged outside India either in an employment or a business or profession or in any other vocation who comes on a visit to India in any previous year such persons will be treated as residents only if they are present in India for period or periods amounting in all to (2) days or more in the relevant previous year. In other words even if such persons were in India during the 0 preceding years for an aggregate period of */- days or more they will not be treated as resident in relevant previous year unless they were present in India for a period of (2) days or more in the relevant previous year.

A))itiona' Con)itions to test when a resident individual is ordinarily resident in India: A resident individual is treated as resident and ordinarily resident if he satisfies following two additional conditions. () !e has been resident in India in at least ) out of (, previous years immediately preceding the relevant previous year and )) !e has been in India for a period of at least :*, days during : years immediately preceding the relevant previous year. (esi)ent *ut not or)inari'+ resi)ent: An individual who satisfies at least one of the basic conditions but does not satisfy both the additional conditions is treated as resident but not ordinarily resident. ,on (esi)ent: An individual is a non resident in India if he satisfies none of the basic conditions. In case of 56 additional conditions do not have any relevance. ,otes: ( It is not essential that the stay should be continuous ) It is not essential that the stay should be at the same place. * ;here a person is in India only for a part of a day the calculation of physical presence in India in respect of such bro8en period should be made on an hourly basis. A total of )0 hours of stay spread over a number of days is to be counted as being e<uivalent to stay of one day. !owever if data is not available to calculate the period of stay of an Individual in India in terms of hours then the day on which he enters India or departs India shall be ta8en in to account as his stay in India. 0 $lace of stay and purpose of stay in India is immaterial.

(esi)entia' status o! -./:

An !"# can be either I) resident and ordinarily resident ii) resident but not ordinarily resident or iii) non resident. An !"# is said to be resident in India if control and management of it=s affairs is wholly or partly situated in India. An !"# is said to be non resident in India if control and management of it=s affairs is situated wholly outside India. A resident !"# is said to be ordinarily resident in India if the 8arta or the manager (or 4uccessive 8arta or manager) satisfies the following two additional conditions. ( he has been resident in India in at least ) out of (, previous years (according to basic conditions laid down above) immediately preceding the relevant previous year ) he has been in India for a period of :*, days or more during : years immediately preceding the previous year If the 8arta or manager of the resident !"# does not satisfy the two additional conditions the !"# is said to be resident but not ordinarily resident in India.

(esi)entia' status o! Compan+:

An Indian 3ompany is always resident in India. A foreign company is resident in India if during the previous year control and management of its affairs is situated wholly in India. A 3ompany can never be >resident but not ordinarily resident? or > resident and ordinarily resident?.

(esi)entia' Status an) inci)ence o! ta$:

Incidence of tax on 6esident and Ordinarily 6esident assessees: A resident and ordinarily resident in India is assessable to tax in respect of (. income which is received or deemed to be received in India in previous year by him or on his behalf@ ). income which accrues or arises or deemed to accrue or arise to him in India during the previous year@ *. income which accrues or arises to him outside India during the relevant previous year. Incidence of tax on 6esident but not Ordinarily 6esident assessees: A resident but not ordinarily resident in India is assessable to tax in respect of (. income which is received or deemed to be received in India in previous year by him or on his behalf@ ). income which accrues or arises or deemed to accrue or arise to him in India during the previous year@ *. income which accrues or arises to him outside India from a business controlled or profession set up in India@ 0. income which received outside India from a business controlled or profession set up in India@ Incidence of tax on 5on 6esident assessees: A non resident assessable to tax in respect of ( income which is received or deemed to be received in India in previous year by him or on his behalf@ ). income which accrues or arises or deemed to accrue or arise to him in India during the previous year@ ,otes: " (eceipt o! "ncome ( 6eceipt As 6emittance ) 3ash As Bind * 6eceipt As Accrual 0 6eceipt As Ceemed 6eceipt - 6eceipt by agent / 6eceipt in case of sale by commission agent : 6eceipt by che<ue 2 +ere boo8 entry is not sufficient D %urden of proof that the income is received by the assessee is on the 6evenue

"" Accrua' o! "ncome: Income is said to be received when it reaches to the assessee@ when the right to receive the income become vested in the assessee. ( Accrual is generally unconditional ) If income is taxable at the time of accrual it can not be again taxed on receipt basis. * 3ommission payable for services accrues at the place where service is rendered. 0 Interest accrues where money is lent. - 5o profit arises on valuation of closing stoc8. / $rofit does not arise on transfer from head office to branch or from branch to head office.

"ncome e$empt !rom "ncome #a$ Section 10

The various items of income referred to in the different clauses of 4ection (, are not only excluded from the taxable income of an assessee but also from his total income. The following incomes are exempt under different clauses from Income tax on fulfilling certain conditions under the concerned clause. 1 A ricu'ture "ncome -Section 10(1):

Agriculture Income is not included in the total income of the assessee. The 3onstitution does not give powers to the parliament to levy Income Tax on agricultural income. Indirect way of charging income tax on agricultural income: !owever the scheme of partial integration of tax on non7agricultural income with agricultural income has been introduced by #inance Act (D:*. The 4cheme is applicable on satisfaction of following conditions. (I) ( II ) The Tax payer is an individual an !"# a %OI an AO$ or artificial &uridical person. The tax payer has non agricultural income of amount exceeding the amount of exemption limit

( III ) The agricultural income exceeds 6s.- ,,, The above scheme is not applicable to firm company 3o7operative society. 3omputation of tax under the scheme ( ) * 0 / 2 3ompute 5et Agricultural Income 4um the Agricultural Income and 5on Agricultural Income 3ompute income Tax on the aggregated income as computed in 4tep ) above. Add 6s. Exempt Fimit Income to 5et Agricultural Income 3ompute income tax on the aggregated sum as computed in 4tep 0 above. Ceduct Income tax computed in 4tep - from the Income tax computed in step * above. This will be the income tax payable by the assessee sub&ect to rebate u.s 2o 3. Amounts receive) *+ a mem*er !rom the income o! the -./ Section 10 (2):

An !"# is a separate entity under the Income Tax Act paying tax on its income. ;hen the income of the !"# is paid to the member such payments are exempted from Income Tax i.e. the member of the !"# does not have to pay any tax in respect of the amounts received from the !"# income. 3 Share o! income o! a partner Section 10(2A):

"nder section (, (*) partner=s share in the total income of the firm is exempts from tax. In other words the partner=s share in the total income of the firm determined in accordance with the profit sharing ratio will be exempt from tax.

1$emptions to non resi)ents Section 10 (%):

This clause provides that in case of a non resident any income by way of interest on central government securities as may be prescribed will be exempt. Even income by way of premium on redemption of such securities is exempt. 2 "nterest on savin s certi!icates Section 10 (%B):

An individual being citi9en of India or a person of Indian origin who is non resident shall be entitled for exemption in respect of interest on such savings certificates issued by the central 1overnment and notified by it in the Official 1a99ette. 3 4eave #rave' Concession Section 10(2):

The amount of exemption under section (,(-) is the value of any travel concession or assistance received or due to the assessee #rom his employer for himself and his family in connection with his proceeding on leave to any place in India #rom his employer or previous employer for himself and his family in connection with his proceeding to any place in India after his retirement or termination of service. The amount of exemption can not exceed expenditure actually incurred by the assessee for the purpose of such travel.

"ncome !rom -ouse Propert+ (Section 23 to27) An income to be charged under the head >Income from !ouse $roperty? should satisfy following * conditions. ( The !ouse $roperty must consist of a %uilding or land appurtenant thereto. ) The Assessee must be owner of the !ouse $roperty. * The property must not have been occupied by the assessee the purpose of carrying on his business or profession. If all the above conditions are satisfied income from house property shall be charged under the head >Income from !ouse $roperty? otherwise under any other head depending upon the circumstances and facts of the case. Basis o! computin "ncome !rom 'et out -ouse Propert+: 1ross Annual Aalue: xxx Fess: +unicipal Taxes xxx 77777 5et Annual Aalue xxx Fess:( 4tandard Ceduction u.s )0 ) Interest on borrowed capital Income #rom !ouse $roperty &ross Annua' 5a'ue: Step 1 6easonable Expected 6ent of $roperty Step 2 If the rent received or receivable is more than the expected rent the rent actually received or receivable shall be the 1ross Annual Aalue Step 3 If the property remains vacant and because of such vacancy the rent actually received or receivable is less than the expected rent than rent actually received . receivable shall be the 1ross Annual Aalue 4tep ) "! rent actua''+ receive) 6receiva*'e is more than the e$pecte) rent Section 23(1)(*) If the rent actually received . receivable (after excluding unreali9ed rent and rent pertaining to vacancy) is more than the amount determined under 4tep ( above then rent actually received.receivable shall be the 1ross Annual Aalue. 5otes: ( ) * If actual rent received.receivable is lower than amount determined under step ( then step no ) is not applicable. 4tep ) is applicable only in case of let out property. If a property is >Ceemed? let out step ) is not applicable 4o if the actual rent received .receivable is more than expected rent as mentioned in step ( the amount so received.receivable shall be the 1ross Annual Aalue. xxx xxx 7777777 xxx GGGGG

4tep * "! rent actua''+ receive)6receiva*'e is 'ess than the e$pecte) rent o7in to propert+ remainin vacant Section 23(1)( c ) 4tep * shall be applicable when the following * conditions are satisfied. ( ) ( ) The property is let out The property is vacant during any part of the previous year. The actual rent received.receivable is less than the amount of expected rent as computed under step ( and the decline in actual rent is caused by the vacancy and not by any other factors If the loss is partly because of vacancy and partly due to other factors then loss due to vacancy shall be deducted from the amount of expected rent as computed in step (

8unicipa' #a$es : #rom the 1ross Annual Aalue as computed above municipal taxes levied by the local authority shall be deducted. !owever municipal taxes shall be deducted only if following ) conditions are satisfied. ( +unicipal Taxes are borne by the owner and ) +unicipal taxes are actually paid during the previous year Ceductions u.s )0 A 4tandard Ceduction % Interest on borrowed capital A 4tandard Ceduction 7777 4ection )0(a) *,H of net annual value is deductible as standard deduction whether the owner has incurred any expenditure or not. % Interest on borrowed capital 777 4ection )0(b) Interest on capital borrowed for purchase construction repairs renewal or reconstruction of house property shall be allowed as deduction on accrual basis. Interest on pre I construction period: Interest payable by the assessee for the period prior to the previous year in which the property is ac<uired or constructed shall be deducted in five e<ual annual instalments commencing with the previous year in which the house is ac<uired or constructed. "ncome !rom Se'! 9ccupie) -ouse Propert+: ( Annual Aalue of one self occupied property: ;here the property consists of onr house in occupation of the owner for his residence the annual value of such house shall be ta8en as 5IF if ( a ) The property is not actually during the previous year and ( b ) 5o other benefit is derived therefrom. 1ross Annual Aalue: 5IF Fess: +unicipal Taxes 5IF 7777777777 5et Annual Aalue 5IF Fess: Ceductions u.s )0 4tandard Ceduction 5IF Interest on borrowed capital JJJ 7777777777 Income from !ouse $roperty JJJ GGGGGG

Interest on borrowed capital: Interest (for the current previous year and pre construction period) on capital borrowed is deductible ( as above) sub&ect to the maximum ceiling as follows. ( ( ) +aximum ceiling if capital is borrowed on or after (707(DDD If the following * conditions are satisfied interest on borrowed capital is deductible up to 6s. ( -, ,,, ( a ) capital is borrowed on or after (707(DDD for ac<uiring or constructing a house property and ( b ) ac<uisition or construction should be completed within * years from the end of the #inancial 'ear in which the capital was borrowed ( c ) The person extending the loan certifies that such interest is payable in respect of the amount advances for ac<uisition or construction of the house 5ote: If the capital is borrowed for any other purpose say reconstruction repairs or renewals of the house property then the maximum deduction on account of interest shall be 6s. *, ,,, ( ) ) +aximum ceiling in any other case: If the above conditions are not satisfied then interest on borrowed capital is deductible up to a maximum of 6s. *, ,,,. In following cases interest on borrowed capital is deductible up to 6s. *, ,,, ( a ) If the capital is borrowed before (st April (DDD for purchase construction reconstruction repairs or renewals of a house property ( b ) If capital is borrowed on or after (707(DDD for reconstruction repairs or renewals of a house property .nrea'ise) (ent Section 22A : ;here deduction is allowed in respect of unreali9ed rent for the assessment year ),,(.,) or earlier years and subse<uently the assessee has reali9ed any amount in respect of such unreali9ed rent the amount so reali9ed will be chargeable to tax under the head >Income from !ouse $roperty?.

"ncome un)er the hea) :Capita' &ains; Any profit or gain arising from the transfer of capital asset is chargeable to tax under the head >3apital 1ains? in the previous year in which transfer too8 place. In other words if the following conditions are satisfied an assessee shall be liable for 3apital 1ains Tax. (a) (b) (c) (d) (e) There is a 3apital Asset The 3apital Asset is transferred by the assessee The transfer ta8es place during the previous year $rofit or gain arises as a result of such transfer 4uch profits or gains are not exempted u.s -0 -0% -0C -0E3 -0EC -0# or -01

>3apital Asset? is defined to include property of any 8ind fixed or circulating movable or immovable tangible or intangible. !owever the following assets are excluded from the definition of >3apital Asset? ( 4toc8 in Trade ) $ersonal Effects of assessee * Agricultural Fand in India 0 /(.) H 1old %onds (D:: :H 1old %onds (D2, national Cefence 1ol@d %onds (D2, 4pecial %earer %onds (DD( / 1old Ceposit %onds issued under 1old Ceposit 4cheme (DDD #+pe o! Capita' Assets Short #erm or 4on #erm >4hort Term 3apital Asset? means a capital asset held by the assessee for not more than */ months immediately prior to its date of transfer. !owever in the following cases an assets held for not more than () months is treated as short term capital asset a E<uity or $reference share of a company b "nits of "TI c "nits of +# A capital asset which is not a short term capital asset is a long term capital asset Computation o! Short #erm Capita' &ains A % 3 C E # #ind out full value of consideration Ceduct expenditure wholly and exclusively in connection with the transfer Ceduct cost of ac<uisition Ceduct 3ost of Improvement Ceduct exemption u.s -0% and -01 The %alancing amount is short term capital gain

Computation o! 4on #erm Capita' &ains A #ind out full value of consideration % Ceduct expenditure wholly and exclusively in connection with the transfer 3 Ceduct indexed cost of ac<uisition C Ceduct indexed cost of Improvement E Ceduct exemption u.s -0 -0% -0C -0E3 -0EC -0# and -01 # The %alancing amount is long term capital gain

Capita' &ains arisin !rom trans!er o! resi)entia' house propert+ Section 2% 3apital 1ains arising from transfer of residential house property shall be exempt if following conditions are satisfied A 6esidential house property should be transferred by an individual . an !"# % It should be a long term capital asset 3 A new house should be purchased or constructed 77 The assessee has purchased a residential house within a period of one year before the transfer or within ) years after the transfer or the assessee has constructed a residential house property within a period of * years from the date of transfer Amount o! e$emption: The amount of exemption shall be the cost of the new house or full amount amount of capital gain whichever is lower. Capita' &ain arisin !rom trans!er o! 'an) use) !or a ricu'tura' purpose Section 2%B 1$emption u6s 2%B is avai'a*'e on trans!er o! a ricu'tura' 'an). 3onditions A The tax payer is an individual % !e transfers an agricultural land. It may be Fong term capital asset or short term capital asset 3 The agricultural land was used by the tax payer or his parents for agricultural purposes for a period of ) years immediately prior to date of transfer C The tax payer has purchased another land for agricultural purposes within a period of ) years from the date of such transfer Amount o! e$emption: The amount of exemption shall be the amount of capital gain or investment in new agricultural land whichever is lower. Capita' &ains on compu'sor+ ac<uisition o! 'an) an) *ui')in !ormin part o! in)ustria' un)erta=in Section 2%> 3onditions: A The tax payer may be an individual !"# #irm 3ompany or any other person % The asset may be short term capital asset or long term capital asset 3 3apital 1ains arise on transfer by way of compulsory ac<uisition of land or building which forms part of an industrial underta8ing belonging to the tax payer. C 4uch land or building was used by the assessee for the purpose of the industrial underta8ing for at least ) years prior to the date of compulsory ac<uisition E Assessee has purchased any other land or building within a period of * years from the date of receipt of compensation or constructed a building within such time # 5ewly ac<uired land or building should be used for the purposes of shifting or re establishing the said underta8ing or setting up another industrial underta8ing Amount o! 1$emption: The amount of exemption shall be e<ual to the cost of new land or building or the amount of capital gain whichever is lower

Capita' &ain not to *e char e) on investments in certain *on)s Section 2%1C #eatures ( ) A long term capital asset is transferred by an assessee who may be an individual an !"# a firm a company or any other person ;ithin / months from the date of transfer of the asset the assessee should invest the whole or any part of capital gain in long term specified assets

Amount of Exemption: If the cost of specified is not less than the capital gain the whole of capital gains shall be exempt from tax. If however the amount invested in specified assets is less than the capital gain the exemption is e<ual to the amount invested in specified asset. In other words the amount of exemption shall be the amount of capital gain or amount of investment whichever is lower. 3apita' &ains on trans!er o! a 'on term capita' asset other than a house propert+ Section 2%/ 3onditions: ( ) * 0 The assessee is an individual or an !"# The asset transferred is a long term capital asset other than a house property The assessee has purchased within ( year before the date of transfer or ) years after the date of transfer or constructed within * years after the transfer a residential house The assessee should not own on the date of transfer of the original asset more than one residential house (other than the new house). +oreover he should not purchase within period of ) years after such date any residential house

Amount of Ceduction: ( If the cost f the new house is not less than the net consideration in respect of the capital asset transferred the entire capital gain arising from the transfer shall be exempt from tax ) If the cost of the new house is less than the net consideration in respect of the asset transferred the exemption from long term capital gain shall be granted proportionately on the basis of investments of net consideration either fro purchase or construction of the residential house i.e 3ost of new house K 3apital 1ains . 5et 3onsideration