Income tax in India

The government of India imposes an income tax on taxable income of

individuals, Hindu Undivided Families (HUFs), companies, firms, co-operative
societies and trusts (Identified as body of Individuals and Association of
Persons) and any other artificial person. Levy of tax is separate on each of
the persons. The levy is governed by the Indian Income Tax Act, 1961. The
Indian Income Tax department is governed by the Central Board for Direct
Taxes (CBDT) and is part of the Department of Revenue under the Ministry
of Finance, Govt. of India.

Contents
• 1 Overview
o 1.1 Charge to Income-tax
o 1.2 Residential Status
o 1.3 Departmental Structure
o 1.4 Heads of Income
• 2 Individual Heads of Income
o 2.1 Income from Salary
o 2.2 Income From House property
o 2.3 Income from Business or Profession
o 2.4 Income from Capital Gains
o 2.5 Income from Other Sources
• 3 Income Exempt from Tax
o 3.1 Dividends
o 3.2 Other Exempt Income
• 4 Deduction
o 4.1 Section 80C Deductions
o 4.2 Section 80D: Medical Insurance Premiums
o 4.3 Interest on Housing Loans Section 80 E
• 5 Tax Rates
o 5.1 Surcharge
o 5.2 Tax Rate for non-Individuals
o 5.3 Refund Status for Salaried tax payers
• 6 Corporate Income tax
o 6.1 Tax Penalties

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Overview
Charge to Income-tax

Every Person whose total income exceeds the maximum amount which is
not chargeable to the income tax is an assessee, and shall be chargeable to
the income tax at the rate or rates prescribed under the finance act for the
relevant assessment year, shall be determined on basis of his residential
status.

Income tax is a tax payable, at the rate enacted by the Union Budget
(Finance Act) for every Assessment Year, on the Total Income earned in the
Previous Year by every Person.

The changeability is based on nature of income, i.e., whether it is revenue or

capital. The principles of taxation of income are-:

Residential Status

Residential status, viz.

(i) Ordinarily Residents (Residents)

(ii) Resident but not Ordinarily Residents and

(iii) Non Residents. There are several steps involved in determining the
residential status of a person

All residents are taxable for all their income, including income outside India.
[
Non residents are taxable only for the income received in India or Income
accrued in India. Not ordinarily residents are taxable in relation to income
received in India or income accrued in India and income from business or
profession controlled from India.

Heads of Income

The total income of a person is divided into five heads, viz., taxable;

1. Salaries
2. Income from House Property
3. Profits and Gains of Business or Profession
4. Capital Gains
5. Income from Other sources

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Individual Heads of Income
Income from Salary

All income received as salary under Employer-Employee relationship is taxed

under this head. Employers must withhold tax compulsorily, if income
exceeds minimum exemption limit, as Tax Deducted at Source (TDS), and
provide their employees with a Form 16 which shows the tax deductions
and net paid income. In addition, the Form 16 will contain any other
deductions provided from salary such as:

1. Medical reimbursement: Up to Rs. 15,000 per year is tax free if

supported by bills.
2. Conveyance allowance: Up to Rs. 800 per month (Rs. 9,600 per year)
is tax free if provided as conveyance allowance. No bills are required
for this amount.
3. Professional taxes: Most states tax employment on a per-professional
basis, usually a slabbed amount based on gross income. Such taxes
paid are deductible from income tax.
4. House rent allowance: the least of the following is available as
deduction
1. Actual HRA received
2. 50%/40%(metro/non-metro) of basic 'salary'
3. Rent paid minus 10% of 'salary'. Basic Salary for this purpose is
basic+DA forming part+commission on sale on fixed rate.

Income from salary is net of all the above deductions.

Income from House property

Income from House property is computed by taking what is called Annual

Value. The annual value (in the case of a let out property) is the maximum of
the following:

• Rent received
• Municipal Valuation
• Fair Rent (as determined by the I-T department)

If a house is not let out and not self-occupied, annual value is assumed to
have accrued to the owner. Annual value in case of a self occupied house is
to be taken as NIL. (However if there is more than one self occupied house
then the annual value of the other house/s is taxable.) From this, deduct

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Municipal Tax paid and you get the Net Annual Value. From this Net Annual
Value, deduct:

• 30% of Net value as repair cost (This is a mandatory deduction)

• Interest paid or payable on a housing loan against this house

In the case of a self occupied house interest paid or payable is subject to a

maximum limit of Rs,1,50,000 (if loan is taken on or after 1 April 1999 and
construction is completed within 3 years) and Rs.30,000 (if the loan is taken
before 1 April 1999). For all non self-occupied homes, all interest is
deductible, with no upper limits.

The balance is added to taxable income.

Income from Business or Profession

Carry forward of losses

An example... An architect works out of home and co-ordinates work for his
clients. All the following expenses would be deductible from his professional
fees.

• he uses a computer,
• he travels to sites in his car,
• he has a peon to help him collect payments
• He has a maid who comes in daily
• part of the society maintenance bills
• Entertainment expenses incurred..
• Books and magazines for his professional practice.

The income referred to in section 28, i.e, and the incomes chargeable as
"Income from Business or Profession" shall be computed in accordance with
the provisions contained in sections 30 to 43D. However, there are few more
sections under this Chapter, viz., Sections 44 to 44DA (except sections
44AA, 44AB & 44C), which contain the computation completely within itself.
Section 44C is a disallowance provision in the case non-residents. Section
44AA deals with maintenance of books and section 44AB deals with audit of
accounts.

In summary, the sections relating to computation of business income can be

grouped as under: -

1. Deductible Expenses - Sections 30 to 38 [except 37(2)].

2. Inadmissible Expenses - Sections 37(2), 40, 40A, 43B & 44-C.

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 3. Deemed Incomes - Sections 33AB, 33ABA, 33AC, 35A, 35ABB & 41.
4. Special Provisions - Sections 42 & 43D
5. Self-Coded Computations - Sections 44, 44A, 44AD, 44AE, 44AF, 44B,
44BB, 44BBA, 44BBB, 44-D & 44-DA.

The computation of income under the head "Profits and Gains of Business or
Profession" depends on the particulars and information available.

If regular books of accounts are not maintained, then the computation would
be as under: -

Income (including Deemed Incomes) chargeable as income under this head

xxx Less: Expenses deductible (net of disallowances) under this head xxx
Profits and Gains of Business or Profession xxx

Income from Capital Gains

Transfer of capital assets results in capital gains. A Capital asset is defined

under section 2(14) of the I.T. Act, 1961 as property of any kind held by an
assessee such as real estate, equity shares, bonds, jewelers, paintings, art
etc. but does not include some items like any stock-in-trade for businesses
and personal effects. Transfer has been defined under section 2(47) to
include sale, exchange, relinquishment of asset, extinguishment of rights in
an asset, etc. Certain transactions are not regarded as 'Transfer' under
section 47.

For tax purposes, there are two types of capital assets: Long term and short
term. Long term asset are held by a person for three years except in case of
shares or mutual funds which becomes long term just after one year of
holding. Sale of such long term assets gives rise to long term capital gains.
There are different scheme of taxation of long term capital gains. These are:

1. As per Section 10(38) of Income Tax Act, 1961 long term capital gains
on shares or securities or mutual funds on which Securities
Transaction Tax (STT) has been deducted and paid, no tax is payable.
STT has been applied on all stock market transactions since October
2004 but does not apply to off-market transactions and company
buybacks; therefore, the higher capital gains taxes will apply to such
transactions where STT is not paid.
2. In case of other shares and securities, person has an option to either
index costs to inflation and pay 20% of indexed gains, or pay 10% of
non indexed gains. The indexation rates are released by the I-T
department each year.
3. In case of all other long term capital gains, indexation benefit is
available and tax rate is 20%.

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All capital gains that are not long term are short term capital gains, which
are taxed as such:

• Under section 111A, for shares or mutual funds where STT is paid, tax
rate is 10% From Asst Yr 2005-06 as per Finance Act 2004. For Asst Yr
2009-10 the tax rate is 15%.
• In all other cases, it is part of gross total income and normal tax rate is
applicable.

For companies abroad, the tax liability is 20% of such gains suitably indexed
(since STT is not paid).

Income from Other Sources

This is a residual head; under this head income which does not meet criteria
to go to other heads is taxed. There are also some specific incomes which
are to be taxed under this head.

1. Income by way of Dividends

2. Income from horse races
3. Income from winning bull races
4. Any amount received from key man insurance policy a donation.
5. Income from shares (dividend)

Income Exempt from Tax

Sections 10,10A, 10AA, 10B, 10BA, and 13A deal with income which does not
form part of an assessee total income. While section 10 provides a list of
income absolutely exempt from tax, sections 10A, 10AA, 10B, 10BA, and
13A deal with specific exemptions available to newly established industrial
undertakings in free trade zones, and political parties. These exemptions are
provided from social, political, Constitutional considerations, for avoiding
double taxation, on the basis of casual and non-recurring nature ,on the
basis of non-residents and non-citizens status, on the basis of Certain
specific securities, bonds, certificates, funds and the like, on the basis of
Education, science, research, achievements, rewards, sports, charity, on the
basis of certain types of bodies, funds and institutions, Subsidies to promote
business, and international, economic, and other considerations. Sikkim is
the only state of India where citizens do not pay income tax. Residents of
Sikkim are eligible for this exemption but excluding the non-Sikkimese
spouse of a Sikkimese .that’s why Center Gov. does not pay any revenue to
Sikkim State from Income tax. Gujrat is number state who collect maximum
revenue from Center report of 2007.center Gov is now may change
revenue % of state in coming year. Center Gov Is liable to pay minimum fix
revenue to state before next year from income tax collected from state.. [5].

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Agricultural Income [Section 10(1)] Eligible Assesses:- All assesses Exempt
income :- Agricultural income Other points :- Agricultural income means as
it is defined in Section 2(1A) In case of individual, HUF, AOP, BOI,
unregistered firms and artificial juridical persons, agricultural income is to be
aggregated for the purpose of determining the rate of tax on Non-
Agricultural income and they would get tax rebate or relief.

Dividends

Dividend income (as referred u/s 115-O of the I.Tax Act) paid by Companies
and Mutual Funds are exempt from tax. A 15% dividend distribution tax and
surcharge of 3% is paid by companies before distribution. Equity mutual
funds (with more than 65% of assets invested in equities) do not pay a
dividend distribution tax, though other funds do. Liquid and Money Market
funds pay 25% dividend distribution tax.01123

Other Exempt Income

The Indian Income tax act specifically exempts certain income from tax:

• Money received from an Insurance company as proceeds of an

insurance policy (by way of an insurance claim, or by maturity) is
generally exempt. However there are three types of payments under
life insurance policy that are not tax free. These are :

• any sum received under sub-section (3) of section 80DD or

sub-section (3) of section 80DDA - this refers to specific policies
for disabled dependants; or
• any sum received under a Keyman insurance policy; or
• any sum received under policies issued on or after 1 April
2003 where premium paid is greater than 1/5th the sum assured

• Maturity proceeds of a Public Provident Fund (PPF) account.

Deduction
While exemptions are on income some deduction in calculation of taxable
income is allowed for certain payments.

Section 80C Deductions

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Section 80C of the Income Tax Act [1] allows certain investments and
expenditure to be tax-exempt. The total limit under this section is Rs.
100,000 (Rupees One lac) which can be any combination of the below:

• Contribution to Provident Fund or Public Provident Fund

• Payment of life insurance premium
• Investment in pension Plans
• Investment in Equity Linked Savings schemes (ELSS) of mutual funds
• Investment in National Savings Certificates (interest of past NSCs is
reinvested every year and can be added to the Section 80 limit)
• Payments towards principal repayment of housing loans. Also any
registration fee or stamp duty paid.
• Payments towards tuition fees for children to any school or college or
university or similar institution. (Only for 2 children) or towards
coaching fee of various competitive exams.

Post office investments the investment can be from any source and not
necessarily from income chargeable to tax.

From April, 1 2010, a maximum of Rs. 20,000 is deductible under

section 80CCF provided that amount is invested in infrastructure
bonds.

Section 80D: Medical Insurance Premiums

Health insurance, popularly known as Medi-claim Policies, provides a

deduction of up to Rs. 35,000.00 (Rs. 15,000.00 for premium payments
towards policies on self, spouse and children and (read as in addition to) Rs.
15,000.00 for premium payment towards non-senior citizen dependant
parents or Rs. 20,000.00 for premium payment towards senior citizen
dependant parents). This deduction is in addition to Rs. 1,00,000 savings
under IT deductions clause 80C. For consideration under a senior citizen
category, the incumbent's age should be 65 years during any part of the
current fiscal, eg. For the fiscal year 2010-2011, the incumbent should
already be 65 as on March 31st, 2011). This deduction is also applicable to
the cheques paid by proprietor firms.

Interest on Housing Loans Section 80 E

For self occupied properties, interest paid on a housing loan up to Rs

150,000 per year is exempt from tax.(Excluding Rs.1,00,000/p.a. u/s 80c
Saving) However, this is only applicable for a residence constructed within
three financial years after the loan is taken and also the loan if taken after
April 1, 1999.

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If the house is not occupied due to employment, the house will be
considered self occupied.

For let out properties, the entire interest paid is deductible under section 24
of the Income Tax act. However, the rent is to be shown as income from
such properties. 30% of rent received and municipal taxes paid are available
for deduction of tax.

The losses from all properties shall be allowed to be adjusted against salary
income at the source itself. Therefore, refund claims of T.D.S. deducted in
excess, on this count, will no more be necessary.

Tax Rates
In India, Individual income tax is a progressive tax with three slabs. About 10
per cent of the population meets the minimum threshold of taxable income

From April 1, 2010 new tax slabs apply, which are as follows:

• No income tax is applicable on all income up to Rs. 1,60,000 per year.

(Rs. 1,90,000 for women and Rs. 2,40,000 for senior citizens of 65 and
above and must be resident of india)
• From 1,60,001 to 5,00,000 : 10% of amount greater than Rs. 1,60,000
(Lower limit changes appropriately for women and senior citizens)
• From 5,00,001 to 8,00,000 : 20% of amount greater than Rs. 5,00,000
+ 34,000 ( Rs. 31,000 for women and Rs. 26,000 for senior citizens)

• Above 8,00,000 : 30% of amount greater than Rs. 8,00,000 + 94,000

( Rs. 91,000 for women and Rs. 86,000 for senior citizens)

Surcharge

Surcharge has been abolished for Personal income tax in the financial year
2009-10.

A 15% surcharge (tax on tax) is applicable if the taxable income (taking into
consideration all the deductions) is above Rs. 10 lakh (Rs. 1 million). The
limit of 10 laces was increased to Rs. 1 crores (Rs. 10 million) with effect
from 1 June 2007

All taxes in India are subject to an education cess, which is 3% of the total
tax payable. With effect from assessment year 2009-10, Secondary and
Higher Secondary Education Cess of 1% is applicable on the subtotal of

Vikram Pratap Singh/ PGDM 2009-11 / Finance Batch/ Regd. No 5088

taxable income. Mainly education cess is applicable on excise duty and
service tax

Tax Rate for non-Individuals

There are special rates prescribed for Firms, Corporate, Local Authorities &
Co-operative Societies.

Refund Status for Salaried tax payers

The Income Tax Department has put on its website the list of income tax
refunds of all salary tax payers which could not be sent to the concerned
persons for want of correct address. (Link to check refund)

Salary taxpayers who have not received refunds for assessment years
2003\04 to 2006\07 can click on the link below and query using the PAN
number and assessment year whether any refund due to them has been
returned undelivered.

Corporate Income tax

For companies, income is taxed at a flat rate of 30% for Indian companies,
with a 10% surcharge applied on the tax paid by companies with gross
turnover over Rs. 1 crores (10 million). Foreign companies pay 40%.[11].An
education cess of 3% (on both the tax and the surcharge) is payable,
yielding effective tax rates of 33.99% for domestic companies and 41.2% for
foreign companies.

From 2005-06, electronic filing of company returns is mandatory.[12]

Tax Penalties

"If the Assessing Officer or the Commissioner (Appeals) or the Commissioner

in the course of any proceedings under this Act, is satisfied that any person-

(b) has failed to comply with a notice under sub-section (1) of section 142 or
sub-section (2) of section 143 or fails to comply with a direction issued under
sub-section (2A) of section 142, or

(c) Has concealed the particulars of his income or furnished inaccurate

particulars of such income,

He may direct that such person shall pay by way of penalty,-

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(ii) In the cases referred to in clause (b), in addition to any tax payable by
him, a sum of ten thousand rupees for each such failure;

(iii) in the cases referred to in clause (c), in addition to any tax payable by
him, a sum which shall not be less than, but which shall not exceed three
times, the amount of tax sought to be evaded by reason of the concealment
of particulars of his income or the furnishing of inaccurate particulars of such
income.

Vikram Pratap Singh/ PGDM 2009-11 / Finance Batch/ Regd. No 5088