Basics of Income Tax of India

DIRECT TAX – I DIBRUGARH UNIVERSITY BCOM SEMESTER 5 DISCLAIMER: Tax laws are subjected to amendments Unit 1: INCOME TAX LAW INTRODUCTION - CONCEPT OF TAX Tax is a compulsory payment to be made by every eligible individual to the government. Evasion of tax, resistance to pay tax or avoidance of payment of tax is punishable offence. Payment of tax by an individual does not bring back any kind of direct benefit in return to him. The public authorities and government require funds for various social welfare activities such as defense, development of nation and provision of infrastructural facilities. They collect tax to finance them. All the taxes can be divided into two categories – A. Direct Taxes – Tax levied by government on income and wealth of household of individual and business B.Indirect Taxes – Tax levied by government on goods and services which are passed on to ultimate consumer. DIBRUGARH UNIVERSITY BCOM 5th Semester DISCLAIMER: Tax laws are subjected to amendments OVERVIEW OF INCOME TAX LAW IN INDIA Under the constitution of India, Central Government has been empowered to levy and collect Income Tax under ‘The Income Tax Act, 1961’. ‘The Income Tax Act, 1961’ is applicable to whole of India and it became applicable from 1/4/1962. Income Tax is a direct tax, i.e, it is to be paid by the person on whom it is imposed. In India, Income Tax is payable by every person on his total Income which is calculated on the basis of residential status. Income Tax is payable at the rate of tax applicable for assessment year on the income earned during previous year. ‘The Income Tax Act, 1961’ has 23 chapters and 298 sections in all. LEVY OF INCOME TAX Taxes in India are levied by Central Government and State Government. Income Tax is levied by Central Government. GST is levied simultaneously by Central and State Government in case of Intra State transactions. The authority to levy a tax is derived from the Constitution. DIBRUGARH UNIVERSITY BCOM 5th Semester DISCLAIMER: Tax laws are subjected to amendments Levy of Income tax on the basis of nature of Income – a. Indian Income – Indian Income is an : Income which is earned in India whether or not received in India Income which is received in India whether or not earned in India Indian Income is taxable for Resident and ordinary resident [ROR], Resident and non ordinary resident [NOR] and Nonresident [NR]. b. Foreign Income – Income which is earned and received outside India. Foreign Income is taxable for Resident and ordinary resident [ROR]. For Non-Resident [NR] foreign income is not taxable in India. For Resident and non ordinary resident [NOR] only the income of Business and Profession is taxable in India if Business is controlled from India or Profession is setup in India. To avoid the situation of double taxation, India has entered into Double Taxation Avoidance Agreement [DTAA] with the government of foreign countries. DIBRUGARH UNIVERSITY BCOM 5th Semester DISCLAIMER: Tax laws are subjected to amendments INCOME Income refers to the amount earned by an individual. As per the provisions of relevant sections of Income Tax Act, 1961, Income includes – A. Profits and Gains B. Dividend C. Capital Gains D. Voluntary contributions received by trust E. Salary and benefits given to an employee and partner F. Gifts received from person other than relative above the amount of rupees 50000 G. Interest Income H. Commission I. Amount of winnings from lottery, betting, card games, horse race or any other similar sort DIBRUGARH UNIVERSITY BCOM 5th Semester DISCLAIMER: Tax laws are subjected to amendments J. Subsidy, grant or cash incentive other than those received from Government K. Donations by nonprofit organization L. Earnings from Rent, royalty, amount received by keyman insurance policy and others DEFINITION: ASSESSEE Assessee means a person by whom any tax or any other sum of money is payable under the Income Tax Act, 1961. Assessee shall include the following – A. Representative Assessee B. Every person whose assessment has been started either for his own income or of any other person from whom he is liable. C.Assessee in default Assessment is the procedure by which income of assessee is ascertained by the assessing officer. DIBRUGARH UNIVERSITY BCOM 5th Semester DISCLAIMER: Tax laws are subjected to amendments ASSESSMENT YEAR Assessment Year [AY] is a period of 12 months commencing from 1st date of April every year. According to the Income Tax Act, 1961, Income is earned during one financial year is disclosed to the Income Tax Department in another financial year. The year in which the income is disclosed to the Income Tax Department is called Assessment Year. Tax is paid at the rate of tax applicable for Assessment Year. For Example – Mr. M earned Rs.600000 during 2017-2018 and discloses the same during 2018-19 then Assessment year is 2018-19 PREVIOUS YEAR [PY] Previous Year [PY] means the financial year immediately preceding the Assessment Year [AY]. Income is earned during one financial year is disclosed to the Income Tax Department in another financial year. Thus, the year in which income is earned is called Previous Year [PY] DIBRUGARH UNIVERSITY BCOM 5th Semester DISCLAIMER: Tax laws are subjected to amendments For Example – Mr. M earned Rs.600000 during 2017-2018 and discloses the same during 2018-19 then Previous year is 201718. PERSON As per the provisions of relevant sections of the Income Tax Act, 1961, persons shall include the following – A. Individual – Individual means a natural person, i.e, human being. It shall include males and females, major and minor, human being with sound or unsound mind. It shall also include Sole Proprietor. B. Hindu Undivided Family [HUF] – HUF is family business controlled by the head of the family called the Karta. C. Company – Company is an artificial person having legal entity. Company shall include both Indian company and foreign company. D. AOP and BOI – AOP [Association of Persons] is a voluntary association of two or more persons who come together for a particular activity or particular time period for a particular venture. BOI [Body of Individuals] is a group of individual formed by Income Tax Officer for the purpose of Income and tax liability calculation. It must be noted that BOI cannot be formed voluntarily. DIBRUGARH UNIVERSITY BCOM 5th Semester DISCLAIMER: Tax laws are subjected to amendments E. Local Authority – Local Authority includes municipality, Municipal Corporation, panchayat or any other body which has the responsibility of maintaining the area and control and management of funds of government. F. Artificial Judicial Persons – It includes all the categories of persons not included in the above categories. It shall include – a. Political Parties b. Religious Organizations c. Not for Profit Organizations CONCEPT OF INCOME The concept of Income is inclusive and not exhaustive. Thus apart from definition, there are some more concepts which will fall under the category of Income. Thus it includes – a. Cash Income and Kind Income – Cash Income is the income earned which is received in monetary form generally cash. Kind Income is the income earned which is not received in monetary form but in the form of benefits through goods and services Both Cash and Kind income are taxable. DIBRUGARH UNIVERSITY BCOM 5th Semester DISCLAIMER: Tax laws are subjected to amendments b. Legal Income and Illegal Income – Legal Income is the income earned through operations and activities which are permitted by law. Illegal Income is income earned through illegal activities and operation such as black marketing, smuggling, etc. Both legal and illegal incomes are taxable. c. Receipt and Accrual – If income is taxed on accrual basis than it is not taxed when it is received and vice versa. d. Diversion of Income and Application of Income – Diversion of Income is not taxable. Application of Income is taxable. Diversion of Income means when the income of assessee is handed over to some other person and that person hands over the income to assessee. Application of Income means the when the income received on the first instance by the assessee. e. Capital Income and Revenue Income – Revenue receipts refer to circulating capital. For example, Sale of stock in trade is revenue receipt, payment received to compensate loss of earnings, service charge etc. Capital receipts refer to receipts from sale or extinction of source of income. For example, Sale of parking lot in a mall, sale of debenture, etc. DIBRUGARH UNIVERSITY BCOM 5th Semester DISCLAIMER: Tax laws are subjected to amendments CHARGE OF INCOME TAX Section 4 is Charging Section of Income Tax under Income Tax Act, 1961. It gives the right of collection of taxes to Central Government. The provision of this section provides that tax will be charged on total income earned by an individual during previous year at the rate of tax applicable for assessment year after allowing deduction and exemptions. RETURN OF TAX / TAX RETURN Income Tax Returns must be filled every year by individuals and business. Return of Income contains the details regarding the income earned by individual or business classified and categorized in a proper manner. The last dates of filling income tax return as per Income Tax Act, 1961 is 31 August for Companies, Political Parities, Schools, Colleges, HUF and Partnership firm whose accounts were required to be audited during the previous financial year and 30 September, for individual and others. DIBRUGARH UNIVERSITY BCOM 5th Semester DISCLAIMER: Tax laws are subjected to amendments GROSS TOTAL INCOME Gross Total Income means the aggregate of incomes under the five heads of income – A. Income from House Property B. Income from Business and Profession C. Income from Salary D. Income from Capital gains E. Income from Other sources Gross Total Income means sum total of income under five sources of income. SCOPE OF TOTAL INCOME Total Income means the total amount of income computed after allowing deduction/deductions from gross total income. In other words, the amount arrived at after allowing deductions under Sections 80C to 80U from the gross total income is known as Total Income. Total Income is also called Taxable Income. The amount of total income is rounded off to the nearest of rupees of 10 under Section 288A. Tax Liability is calculated on the basis of total income. DIBRUGARH UNIVERSITY BCOM 5th Semester DISCLAIMER: Tax laws are subjected to amendments RESIDENTIAL STATUS The tax incidence of an assessee does not depend upon his/her citizenship but on the basis of residential status during the Previous Year [PY]. We use residential status for two purposes – A. B. To calculate the total income To determine the rate of tax to be used for calculation of tax liability Residential status of various types of Assessee – A. Individual – An individual can be either resident or nonresident. Individual is resident if any one of the following basic condition are satisfied: Stay in India during the relevant previous year is equal to or more than 182 days ; OR Stay in India during the relevant previous year is equal to or more than 60 days and stay in India during 4 previous years preceding relevant previous year is equal to or more than 365 days; Individual can either be further Resident and ordinary resident [ROR] or Resident and non ordinary resident DIBRUGARH UNIVERSITY BCOM 5th Semester DISCLAIMER: Tax laws are subjected to amendments [NOR]. Individual is Resident and ordinary resident [ROR] if he satisfies one of the basic conditions and two additional conditions: Individual is resident of India in atleast 2 out of 10 Previous Year [PY] from relevant Previous Year [PY] AND Individual stays in India is more than or equal to 730 days in 7 previous years preceding the relevant previous year. Individual is Resident and non ordinary resident [NOR] is he is unable to satisfy any one or both of the additional conditions. B. Hindu Undivided Family [HUF] – Hindu Undivided Family [HUF] is resident of India if full or partial control and management of the business affairs of the HUF is located in India. Management and control of HUF is in hands of Karta and in some cases Defacto Karta. If Karta or Defacto Karta has taken atleast one decision in India than HUF is resident of India. HUF is Resident and ordinary resident [ROR] if Karta satisfies both the additional conditions: DIBRUGARH UNIVERSITY BCOM 5th Semester DISCLAIMER: Tax laws are subjected to amendments Karta is resident of India in atleast 2 out of 10 Previous Year [PY] from relevant Previous Year [PY] AND Karta stays in India is more than or equal to 730 days in 7 previous years [PY] preceding the relevant previous year. C. Company – Company is resident of India if following are satisfied: If it is an Indian Company. Indian company can never be non-resident. It is a foreign company having place of effective management [POEM] located in India. Place of effective management [POEM] means the location where decisions are taken regarding working of the company. Decisions are taken by the Board of Directors. Thus, place of effective management [POEM] means the place where board meetings are held. If all the Board meetings are done in India than Company is resident of India but if atleast one DIBRUGARH UNIVERSITY BCOM 5th Semester DISCLAIMER: Tax laws are subjected to amendments decision is taken outside India than it is a Non Resident. D. Firm, Association of Person [AOP] and Body of Individual [BOI]: Firm, Association of Person [AOP] and Body of Individual [BOI] is resident of India if full or partial control and management of the business affairs is located in India. Firm, Association of Person [AOP] and Body of Individual [BOI] is non-resident of India if full control and management of the business affairs is located outside India. TAX LIABILITY Tax Liability is the amount of debt by the individual, corporation or any other entity to a taxing authority, i.e., the Income Tax Department. Tax Liability arises due to earning of profit, salary, rental income and gain on sale of capital asset, etc. Tax Liability is rounded off to nearest of Rupees 10 under Section 288B. Tax Liability of an individual can be calculated on the basis of slabs. DIBRUGARH UNIVERSITY BCOM 5th Semester DISCLAIMER: Tax laws are subjected to amendments EXEMPT INCOME U/S 10 Income that does not form part of Total income is also called income exempt from Tax. Exempt income under section 10 is as follows – A. Agricultural Income [Section 10(1)] – Agricultural income from land located in India is totally exempt but shall be included in case of certain companies for the purpose of determining the rate of tax on non agricultural income. B. Sum received by members from HUF [Section 10(2)] – Share of profit received by members of HUF from HUF shall be exempt. C. Share of profit of a partner from the firm [Section 10(2A)] – The partners share in the total income shall be exempt from tax if the firm is being assessed. D. Exemption on Interest [Section 10(4)] – A non resident who earns income from interest on government securities and bonds including income by the way of premium on redemption shall be exempt from tax. Also, any income by the way of interest on money standing in credit in a Non Resident External Account [NRE A/c] in any bank of India. DIBRUGARH UNIVERSITY BCOM 5th Semester DISCLAIMER: Tax laws are subjected to amendments E. Interest on Securities [Section 10(15)] – Followings interest earned are exempt: • Interest on Gold Deposits Bonds issued under the Gold Deposits Schemes, 1999 • Interest on Deposits Certificates issued under the Gold Monetization Scheme • Interest on Post office Savings Bank Account upto rupees 3500 in case of individual account and rupees 7000 in case of joint account • Payment from Sukhanya Samriddhi Account [Section 10(11A)] – Interest accruing on deposits in and withdrawal from any account from this scheme would be exempt from tax. F. Approved Superannuation funds transferred to national pension scheme [Section 10(13)] – Any payment from an approved superannuation fund which is transferred to the NPS account of the employee shall be exempt from tax. G. Income from Awards [Section 10(17A)] – Any payment in cash or kind as an award, which is in public interest, is given by Central Government and State Government shall be exempt from tax. DIBRUGARH UNIVERSITY BCOM 5th Semester DISCLAIMER: Tax laws are subjected to amendments H. Dividend from the units of Mutual Funds [Section 10(35)] – Dividend from mutual funds and Dividends from UTI are exempt. I. Any Capital Gains earned from the compulsory acquisition of urban agricultural land [Section 10(37)] Any Capital Gains earned from the compulsory acquisition of urban agricultural land by the government for which compensation has been received by individual or HUF shall be exempt from tax. J. Dividends [Section 10(34)] – Dividends earned by shareholders from domestic company are exempt. DIBRUGARH UNIVERSITY BCOM 5th Semester