Arts and Commerce College Kasegaon Well Come to B.Com. III Deptt. Of Commerce Arts and Commerce College Kasegaon

Prepared By : Dr. Shivaji R.Pawar Arts and Commerce College Kasegaon Income Tax Prepared By : Dr. Shivaji R.Pawar M.Com.,M.Phil.,G.D.C.& A.,Ph.D. Head Dept. of Commerce, Arts and Commerce College Kasegaon Mob:8275377365 Email: srpawar65@gmail.com

Introduction of Income Tax & Important Definition Before commencing the study of the law of income tax, it is absolutely essential to understand some of the terms and expressions used under the income-tax Act, 1961.The important terms used in income tax have been defined in section to 2 & 3 of the income tax Act-1961. These are as follows. Definitions: 1. Person – Sec-2 [31] The person includes –i) An individual, ii) A Hindu undivided family [HUF],iii) A firm, iv) A Company, v) An Association of Person [AOP], vi) A Local Authority, vii) Every artificial juridical person. The tax Liability of person depends upon his legalstatus. Different rate of taxes are applicable to the assesse according to the status. An Individual : It refers to a natural human beings. It includes minor insane also. A Hindu Undivided Family : A HUF means joint Hindu family it includes a person, theirwives&unmarrieddaughters. A joint family of Christians or Muslimscan not be called HUF. Firm : It includes a partnership firm which is established under partnership act. An Association of person –[AOP]:It refers to a body of persons whether incorporated or not. They have joint together to serve common interest .e.g :- Trade union, trust, co-operative societies, Indian medical association etc.  Local Authority :The local self governing bodies are included in this head. e.g. municipalities, gram panchayat, panchayat samities, district boards, municipal corporation etc. Every Artificial Juridical Person : The entities which are covered under six head above are included in this head. e.g. deity , idol, public corporations established under special act.

An assessee is a person- i] from whom any tax is payable under the act Conti….. 2) An Assessee : Sec. 2 (7) An assessee is a person- i] from whom any tax is payable under the act ii]from whom any other sum of money [interest or penalty as] is payable under the act. iii] who is deemed to bean assessee. e.g:- guardian of a minor iv] who is deemed to be an assessee in default. e.g:- A person who is failed to pay tax. V] Against whom any proceeding is initiated.

3) Assessment: Sec.2 [8] Assessment consist of two stages- i] computation of total income as per income tax act-1961. ii]Determination of tax liability on such income according to the finance act of year. Assessment includes reassessment also. 4) Assessment Year [A.Y]: Section-2 [9] Assessment year means the period of 12 months commencing on1st April every year and ending on 31st march of the next year. The income earned in the previous year is brought to tax in the assessment year. A.Y. is also known as income tax year. The current assessment year is 2015-16. 5) Previous Year:- The year in which income is earned is known as previous year. It is the financial year immediately preceding the assessment year. For the assessment year 2015-16 , the previous year is 2014-15. P.Y. is also starting on 1st April of the subsequent year. In newly starting business the P.Y. may be started on the date of business started. The current P.Y. is 2014-15.  

Conti……. 6) Income- Section-2 [24] Income tax is tax on income of a person. In income tax the term income has not clearly defined generally income includes.- Profit &gains. Dividend. Salary. Business income. Capital gains. Any allowances. Willing form lotteries, horse race, gambling etc. cash gift received from non relatives more than Rs.50,000. Voluntary contribution received by charitable trust etc.

Conti…… 7) Agricultural Income:- Section-2 [1A] Agricultural Income means- Any rent or revenue derived from land which is situated in India and is used for agricultural purpose. i.e.:- The basic operations such as tilling, sowing and planting etc. involving, human skill. It also includes weeding , digging ,cutting, pruning etc. The following income is also included in agriculture income. Income from the performances of a process normally employed by farmer to make the produced fit for market ginning of cotton curing of tobacco. Income from building or land situated on or in the immediate vicinity. The following income is not including in agricultural income. Income from forest trees, grass, bamboos etc. of spontaneous growth. Income from markets, ferries & fisheries. Income from stone quarries. Income from mining royalties. Income from sale of earth for brick making. Income from poultry or dairy farming. Income from supply of water for irrigation. Income from dividend received from a company engaged in agriculture. Agriculture income is not taxable u/s 10(1) of I.T. Act.

8) A Company:- Section-2 [17] A company means:- Any Indian company. Any body corporate registered under the law of foreign country. Any institution which is assessed as a company for any assessment year before 1970-71. Any institution declared by central board of direct taxes[C.B.D.T.]as a company.

9) Indian Company : Sectiopn-2 [26] Indian company means a company formed and registered under company act 1956. It also includes the following, the registered office of the company in India. Any institution declared by the CBDT as a company. A company established under Govt. act. A company formed under any law in force in India. A company Formed under the law in force in the state of Jammu & Kashmir, Dadara and Nagar Havely, Daman& Diu , Pondicherry. 10) Business-Section.2 [13] Business includes trade, commerce or manufacture or adventures in the nature of trade ,commerce or manufactures. In general sense business means any activity carried out for profit that means any transaction involves the purchase sale or service and intension of which is to earn is included in business. 11) Capital Assets:- Section:-2 [14] Capital assets means property of any kind movable or immovable held by an assessee it may be conceded with his business &profession or not . It includes lease hold property partners share in a firm is also considered as capital asset However, following assets are not included in capital assets:- Any stock or raw material held for business purpose. Agricultural land which is not situated in urban area. Gold bonds national defense bond 3year IDBI capital bonds. Personal property.

Residential Status and Tax Liability Personal (Assessee) Resident (R) Resident and Ordinarily Resident (ROR) Resident but not Ordinarily Resident (RNOR) Non-Resident

INDIVIDUALS: The rules for the determination of residential status of an individual are as under Resident:[sec.6(1)] (1)Basic condition An individual’s becomes ,Resident in India , in any previous year, if he satisfies any one of the basic conditions and both the ‘additional conditions‘ as given below : 1. He has been in India for a period of 182 days or more during the previous year, OR 2.He has been in India for period of 365 days or more during the four years preceding the previous year AND he has been in India for a period of 60 days or more during the previous year (2)Additional conditions (1) that he has been resident in India in 2 or more out of the 10 years, preceding the previous year AND (2)Hi has been in India for 730 days or more in the 7 years preceding the previous year It should be noted that the period of stay to be consider as above need not be continuous , only the aggregate stay is to be considered as per the passport

Not Ordinarily Resident [section 6(6)] A resident is said to be ‘not ordinarily” resident in India in any previous year if such person is- An individual who has been a non-resident in India in nine out of the ten previous years precedent that years, or has during the seven previous years preceding that year been in India for a period of, or periods amounting in all to, seven hundred and twenty-nine days (729) or less, or A Hindu undivided family whose manager has been non-resident in India in nine out of the ten previous years president that year, or has during the seven previous years president that been in India for a period of ,or periods amounting in all to ,seven hundred and twenty-nine days (729) or less . Non-Resident [section2(3)] An individual who does not satisfy any of the above basic conditions is said to non-resident in India

Hindu undivided families : Resident [section 6 (2)] A Hindu Undivided family (H,U,F) is said to be resident in India, in any previous year, if whole or part of control and management of its affairs is situated in India in that year . That its manager has been resident of India in 2 or more out of 10 previous years immediately preceding the previous year. That its manager has been in India for a period or periods amounting to 730 days or more during the previous years Not Ordinarily Resident [Section6(60] A H.U.F after satisfying the basic conditional stated above fails to satisfy both the additional conditions , is said to be Not Ordinarily Resident in India . Non-Resident [Section 2(30)] A H.U.F is said to be Non-Resident if the control and management of its affairs is situated entirely outside India.

Firm and Association of Person : Resident : A Firm or an Association of Person (A.O.P)is said to be Resident India , in any previous year ,if whole or part of control and management of its affairs is situated in India in that year. Non-Resident [Section 2 (30)] :A firm or A.O.P is said to be ‘Non-Resident if the control and management of its affairs is situated entirely outside India. Companies : Resident [Section 6(3)] : A company is said to be resident in India in any previous year, If It is an India Company ,or During that year ,the control and management of its affairs is situated wholly in India Thus, (a)An “Indian Company” is always resident in India wherever it may have its business or control and management; (b) A Foreign company will be treated as resident in a previous year, if during that year the control and management of its affairs is WHOLLY situated in India Non-Resident[Section 2{300}] A company which fails to satisfy above referred conditions is said to be Non-Resident . In other words , a Non-Indian Company whose Part of the control and management of affaires is situated outside India ,is treated as Non-Resident company

Income Exempt from Income Tax Interest on certain Govt. securities :Sec. 10(15) Section 10 of the Act shows the income on which income tax is not chargeable. They are also called as tax free incomes or the income exempt from income tax. This income is not included in total income of the assesse and no income tax is payable 9n such income. They are as follows Agricultural income Receipts by a member out of HUF income Share of profit from partnership firm Casual income Amount received under Insurance policy Payment from Provident Fund (PF) Interest on certain Govt. securities Daily allowance to M.P. and M.L.A. Scholarship for education Awards and rewards Income of a Minor Child Dividend and interest from UTI, Mutual fund Travel concession to an employee Gratuity 15. Perquisites and allowances paid outside India HRA (As per Rules)

Interest on certain Govt. securities :Sec. 10(15) Interest received by the assesse on the following securities is exempt from income tax as per the notification issued by the Central Govt. 12 years National Saving certificates National Defense Gold Bonds 1980 Post Office Cash Certificates 10 years Post Office National Saving Certificates 7 & 12 years Post Office Saving Bank Account Post Office Cumulative Time Deposit (CTD) National Plan Certificates 10 years National Plan Saving Certificates 12 years Deposit Scheme for retiring Govt. employees Resurgent India Bonds 7% capital Investment Bonds Special Deposit Scheme 1981

Death Cum Retirement Gratuity Gratuity means a gift or present for service. It is a gratuitous payment made by an employer to an employee. Now a days it is almost compulsory amount paid to the employees. The tax treatment of gratuity u/s 10(10) is as under Government Employees : Any gratuity received by the employees of Central Government or State Government or local authority, and members of the defense service and employees of LIC are totally exempt from income tax. Non-Government employees : Non-Government employees governed by the payment of gratuity Act 1972 is exempt up to the following limit whichever is less. Actual gratuity received Maximum up to Rs. 10,00,000 15 days salary (7 days in case of seasonal employees) based on salary last drawn for every completed year of service or part thereof in excess of 6 months. Other Employees : The exemption limit is the least of the following items Maximum up to Rs. 10,00,00 Half months average salary for every completed year of service.

Commuted Pension : u/s 10 (10A) Pension is a periodical payment made by the employer after the retirement / death of employees. Pension is fully taxable in the hands of employees. However the certain employers allow the pension to be commuted fully or partly . Commuted of pension means in lieu of pension a lump sum amount is made to the employee. In such case ,uncommuted part of pension is taxable, but commuted value of pension is exempt from tax as follows Government Employees : ForGovernment Employees the commuted value of pension is totally exempt Non-Government employees :i) if the employee is not in receipt of the gratuity benefit, the commuted value of 1/2 of the pension is exempt. and ii) if the employee is in receipt of the gratuity benefit, the commuted value of 1/3 of the pension is exempt.

Deductions and Exemptions : (U/S 80C to 80U) The total income from all the heads of income before making any deductions or deductions allowed u/s 80 C to 80U is called as Gross Total Income. These deductions are specified in the income tax rules while computing income under different heads of income. Thus, after making deductions allowed u/s 80C to 80U from Gross Total Income, the balance of income is called as Total Income or Total Taxable Income.These deductions are as follows. Deduction in respect of LIC Premium, Contribution to PF: (u/s 80C) Out of amount paid or deposited under this scheme maximum Rs. 150000 allowed to an individual or an HUF to be deducted from GTI. Some important schemes are as under LIC Premium paid not more than 20% of sum assured. Contribution to PF Subscription to National Saving Certificates Subscription to any units of a Mutual Fund Tuition Fees (Excluding developing fees or donations) Repayment of Principal amount of Housing loan Fixed deposits for at least 5 years , with a scheduled Bank

Deduction in respect of Medical Insurance Premium :(u/s 80D) A sum of Rs. 25000 (In case of senior citizen Rs. 30000) paid by an assesse during the previous year as a Medical Insurance Premium i.e. health policy is allowed for deduction. It is allowed for his health or his spouse or dependent parents and children. Deduction in respect of maintenance including Medical Treatment of Handicapped dependent: (u/s 80DD) The expenditure incurred by way of maintenance or medical treatment of handicapped dependent, such amount shall not exceed Rs. 75000 is allowed for deduction. In case of serious disability it shall be allowed up to Rs.125000  

Deduction in respect of Medical Treatment: (u/s 80DDB) The expenses incurred during the year for the medical treatment of specified diseases for himself or a dependent relatives is allowed as a deduction from GTI. The maximum amount of deduction is Rs. 40000 (In case of senior citizen Rs.60000) or actual expenditure whichever is less. Some specified diseases are AIDS, Chronic renal failure, Thalassaemia etc.) Deduction in respect of Permanent Physical Disability : (u/s 80U) A resident individual who is totally or partly blind or suffers from permanent physical disability is entitled to deduction of Rs. 75000 (in case of severe disability Rs.125000) while computing his total income.

Deduction in respect of Donation: (u/s 80G) The donation given by assesse during previous year for any specified fund or institution is allowed for deduction. it is as follows.  100% deduction is allowed in respect of contribution to following funds National Defense Fund PM’s National Relief Fund PM’s Earthquake Relief Fund CM’s Earthquake Relief Fund CM’s Relief Fund National Sports Fund National Foundation for Communal Harmony Zila Saksharta Samiti Central Welfare Fund for Army, navy and Air Force 50% deduction is allowed for following donations PM’s Draught Relief Fund Jawahalal Neharu National Memorial Fund Indira Gandhi Memorial Trust Rajiv Gandhi Foundation Any Temple, Mosque, Gurudwar, Church etc. National Children Fund Some of the donations should not exceed 10% of the GTI. The donation made in kind do not qualify for deduction.

Income from Salary   The statute enjoins every employer to estimate the liability of tax deductible at source and to deduct tax at an average rate. For this the employer is required to determine the salary payable to the employee and accordingly compute the tax liability. “Salary means any payment made by the employer to the at regular intervals for manual or non-manual services rendered as per the written or oral contract of employment”. Salary   is   said   to   be   the remuneration received by or accruing to an individual for service rendered as a result of an express or implied contract. The statute, gives an inclusive but not exhaustive definition  of salary. As  per  sec   17(1),   salary  includes therein: (i) Basic , DA, DP, Wages; Taxable Allowances- Entertainment allowance, Education allowance, Medical allowance, HRA, CCA, Warden allowance, Project Allowance, Lunch Allowance,Family Allowance etc. (iii)   Gratuity; Annuity or pension (iv)  Fees, commission, perquisites or profits in lieu of salary; (v) Advance salary; (vi) Receipt from provident fund;   (vii)    Contribution   of employer   to   a   RPF in excess of prescribed limit; (viii) Leave encashment; (ix) Compensation as a result of variation of service contract etc.

Allowances : There are various other receipts besides the above given regularly in addition to salary for meeting specific requirements of the employee. It is a fixed monetary amount given periodically by the employer to meet certain expenses related to performance of duties. These are referred to as allowances, in common parlance and taxability of some of these are discussed here. A) Taxable Allowances D.A. Medical Allowance Servant Allowance Non Practicing Allowance Warden Allowance Overtime Allowance City Compensatory Allowance Project Allowance Lunch Allowance Family Allowance

B) Allowances Exempt up to specified limits 1. HRA (House Rent Allowance) The least of the following amount is exempted amount of HRA Actual amount received Excess of House Rent paid over 10% of salary 40% of the salary (For Mumbai, Delhi, Kolkata, Chennai it is 50% ) Here, salary means Basic + D.P. or D.A. (If, taken in to retirement benefit) Whichever is less is the amount of exemption. 2. Entertainment Allowance For Non Govt. employee – Entertainment allowance given to any Non Govt. employee is totally taxable and not allowed for deduction from salary income. For Govt. employees–In case of Govt. employees least of the following amount is allowed as deduction from salary income i) Actual amount received ii) 20% of salary iii) RS. 5000 First full amount of this allowance is added to salary income and then deduction is allowed. Here, salary means only basic pay.  

3. Transport Allowance : Allowance granted to an employee to meet the expenditure for commuting between place of residence and his place of employment maximum amount of Rs.1600 p.m. is exempt. However, in case of handicapped person it is Rs.3200 p.m. 4. Children Education Allowance : The maximum limit is Rs. 100 p.m. per child or actually received whichever is less and up to children only. (i.e. 100x12x2) 5. Children Hostel Allowance : The maximum limit is Rs. 300 p.m. per child or actually received whichever is less and up to children only. (i.e. 300x12x2)

C ) Allowances exempt u/s 10(14) : Certain allowances given by the employer to the employee are exempt u/s 10(14) , all these exempt allowance are briefly given below : Travelling Allowance: It is granted to meet cost of travel on tour or transfer. Allowance granted to tour or journey in connection with transfer to meet the daily charges incurred by the employee. Conveyance Allowance: It is granted to meet conveyance expense incurred in performance of duty, provided no free conveyance is provided. Allowance granted to meet expenses incurred on a helper engaged for performance of official duty. Academic, research or training allowance granted in educational or research institutions. Uniform Allowance : Uniform purchase or maintenance allowance.

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