N.S.S.COLLEGE OF COMMERCE AND ECONOMICS,

NSS EDUCATION COMPLEX, B WING, M.P.MILLS COMPOUNDS, BEHIND AC MARKET, TARDEO, MUMBAI -400 034

A Project on

“HEADS OF INCOME”

In the subject of

“DIRECT AND INDIRECT TAX”

Submitted to

UNIVERSITY OF MUMBAI

For

SEMESTER-III

MASTER OF COMMERCE (ACCOUNTANCY)

By

(RAHUL PRAKASH SOSA)

(GR. NO. 178)

Under the guidance of

Asst. Prof. SACHIN

YEAR

2015-16

[1]

DECLARATION BY THE STUDENT

I, RAHUL PRAKASH SOSA student of M.Com (Accountancy) Part II, GR. NO. 178 hereby declare that

the project for the subject DIRECT AND INDIRECT TAX titled “HEADS OF INCOME” submitted by

me for Semester-III during the academic year 2015-16, is based on actual work carried out by me under the

guidance and supervision of Asst. Prof. Mr. Sachin. I further state that this work is original and not

submitted anywhere else for any examination.

Signature of Student

[2]

EVALUATION CERTIFICATE

This is to certify that the undersigned have assessed and evaluated the project on DIRECT AND

INDIRECT TAX submitted by RAHUL PRAKASH SOSA Student of M.Com Part–II

(ACCOUNTANCY) GR.NO.178. This Project is original to the best of our knowledge and has been

accepted for Internal Assessment.

( ) ( )

Internal Examiner External Examiner

[3]

Index

Particulars Page NoIntroduction...

Scheme of Income Tax...

Five Heads of Income...

(a) Salaries...

(b) Income from House Property...

(c) Income & Gains From Business Or Profession...

(d) Capital Gains...

(e) Income From Other Sources...

Bibliography...

6

8

14

15

22

28

32

36

40

[4]

Introduction

An income tax is a government levy (tax) imposed on individuals or entities (taxpayers) that varies with the income or profits (taxable income) of the taxpayer. Details vary widely by jurisdiction. Many jurisdictions refer to income tax on business entities as companies’ tax or corporation tax. Partnerships generally are not taxed; rather, the partners are taxed on their share of partnership items. Tax may be imposed by both a country and subdivisions. Most jurisdictions exempt locally organized charitable organizations from tax. Income tax generally is computed as the product of a tax rate times taxable income. The tax rate may increase as taxable income increases (referred to as graduated rates). Tax rates may vary by type or characteristics of the taxpayer. Capital gains may be taxed at different rates than other income. Credits of various sorts may be allowed that reduce tax. Some jurisdictions impose the higher of an income tax or a tax on an alternative base or measure of income. Taxable income of taxpayers resident in the jurisdiction is generally total income less income producing expenses and other deductions. Generally, only net gain from sale of property, including goods held for sale, is included in income. Income of a corporation's shareholders usually includes distributions of profits from the corporation. Deductions typically include all income producing or business expenses including an allowance for recovery of costs of business assets. Many jurisdictions allow notional deductions for individuals, and may allow deduction of some personal expenses. Most jurisdictions either do not tax income earned outside the jurisdiction or allow a credit for taxes paid to other jurisdictions on such income. Non residents are taxed only on certain types of income from sources within the jurisdictions, with few exceptions. Most jurisdictions require self-assessment of the tax and require payers of some types of income to withhold tax from those payments. Advance payments of tax by taxpayers may be required. Taxpayers not timely paying tax owed are generally subject to significant penalties, which may include jail for individuals or revocation of an entity's legal existence. The concept of taxing income is a modern innovation and presupposes several things: a money economy, reasonably accurate accounts, a common understanding of receipts, expenses and profits, and an orderly society with reliable records. For most of the history of civilization, these preconditions did not exist, and taxes were based on other factors. Taxes on wealth, social position, and ownership of the means of production (typically land and slaves) were all common. Practices such as tithing, or an offering of first fruits, existed from ancient times, and can be regarded as a precursor of the income tax, but they lacked precision and certainly were not based on a concept of net increase. The Central Government has been empowered by Entry 82 of the Union List of Schedule VII of the Constitution of India to levy tax on all income other than agricultural income (subject to Section 10(1)). The Income Tax Law comprises The Income Tax Act 1961, Income Tax Rules 1962, Notifications and Circulars issued by Central Board of Direct Taxes (CBDT), Annual Finance Acts and Judicial pronouncements by Supreme Court and High Courts.The government of on taxable income of all persons including individuals, Hindu Undivided Families (HUFs), companies, firms, association of persons, body of individuals, local authority and any other artificial judicial 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 CBDT and is part of the Department of Revenue under the Ministry of Finance, Govt. of India. Income tax is a key source of funds that the government uses to fund its activities and serve the public. It is a matter of general belief that taxes on income and wealth are of recent origin but there is enough evidence to show that taxes on income in some form or the other were levied even in primitive and ancient communities. The origin of the word "Tax" is from "Taxation" which means an estimate. These were levied either on the sale and purchase of merchandise or livestock and were collected in a haphazard manner from time to time. Nearly 2000 years ago, there went out a decree from Ceaser Augustus that all the world should be taxed. In Greece, Germany and Roman Empires, taxes were also levied sometime on the basis of turnover and sometimes on occupations. For many centuries, revenue from taxes went to the Monarch. In Northern England, taxes were levied on land and on moveable property such as the Saladin title in 1188. Later on, these were supplemented by introduction of poll taxes, and indirect taxes known as "Ancient Customs" which were duties on wool, leather and hides. These levies and taxes in various forms and on various commodities and professions were imposed to meet the needs of the Governments to meet their

[5]

military and civil expenditure and not only to ensure safety to the subjects but also to meet the common needs of the citizens like maintenance of roads, administration of justice and such other functions of the State. In India, the system of direct taxation as it is known today, has been in force in one form or another even from ancient times. There are references both in Manu Smriti and Arthasastra to a variety of tax measures. Manu, the ancient sage and law-giver stated that the king could levy taxes, according to Sastras. The wise sage advised that taxes should be related to the income and expenditure of the subject. He, however, cautioned the king against excessive taxation and stated that both extremes should be avoided namely either complete absence of taxes or exorbitant taxation. According to him, the king should arrange the collection of taxes in such a manner that the subjects did not feel the pinch of paying taxes. He laid down that traders and artisans should pay 1/5th of their profits in silver and gold, while the agriculturists were to pay 1/6th, 1/8th and 1/10th of their produce depending upon their circumstances. The detailed analysis given by Manu on the subject clearly shows the existence of a well-planned taxation system, even in ancient times. Not only this, taxes were also levied on various classes of people like actors, dancers, singers and even dancing girls. Taxes were paid in the shape of gold-coins, cattle, grains, raw-materials and also by rendering personal service. The learned author K.B.Sarkar commends the system of taxation in ancient India in his book "Public Finance in Ancient India", (1978 Edition) as follows:-

"Most of the taxes of Ancient India were highly productive. The admixture of direct taxes with indirect Taxes secured elasticity in the tax system, although more emphasis was laid on direct tax. The tax-structure was a broad based one and covered most people within its fold. The taxes were varied and the large variety of taxes reflected the life of a large and composit population". However, it is Kautilya's Arthasastra, which deals with the system of taxation in a real elaborate and planned manner. This well known treatise on state crafts written sometime in 300 B.C., when the Mauryan Empire was as its glorious upwards move, is truly amazing, for its deep study of the civilisation of that time and the suggestions given which should guide a king in running the State in a most efficient and fruitful manner. A major portion of Arthasastra is devoted by Kautilya to financial matters including financial administration. According to famous statesman, the Mauryan system, so far as it applied to agriculture, was a sort of state landlordism and the collection of land revenue formed an important source of revenue to the State. The State not only collected a part of the agricultural produce which was normally one sixth but also levied water rates, octroi duties, tolls and customs duties. Taxes were also collected on forest produce as well as from mining of metals etc. Salt tax was an important source of revenue and it was collected at the place of its extraction. Kautilya described in detail, the trade and commerce carried on with foreign countries and the active interest of the Mauryan Empire to promote such trade. Goods were imported from China, Ceylon and other countries and levy known as a vartanam was collected on all foreign commodities imported in the country. There was another levy called Dvarodaya which was paid by the concerned businessman for the import of foreign goods. In addition, ferry fees of all kinds were levied to augment the tax collection.Collection of Income-tax was well organised and it constituted a major part of the revenue of the State. A big portion was collected in the form of income-tax from dancers, musicians, actors and dancing girls, etc. This taxation was not progressive but proportional to the fluctuating income. An excess Profits Tax was also collected. General Sales-tax was also levied on sales and the sale and the purchase of buildings was also subject to tax. Even gambling operations were centralised and tax was collected on these operations. A tax called yatravetana was levied on pilgrims. Though revenues were collected from all possible sources, the underlying philosophy was not to exploit or over-tax people but to provide them as well as to the State and the King, immunity from external and internal danger. The revenues collected in this manner were spent on social services such as laying of roads, setting up of educational institutions, setting up of new villages and such other activities beneficial to the community.

[6]

Scheme of Income Tax

India has a well-developed tax structure with clearly demarcated authority between Central and State Governments and local bodies.

Central Government levies taxes on income (except tax on agricultural income, which the State Governments can levy), customs duties, central excise and service tax.

Value Added Tax (VAT), stamp duty, state excise, land revenue and profession tax are levied by the State Governments.

Local bodies are empowered to levy tax on properties, octroi and for utilities like water supply, drainage etc.

Indian taxation system has undergone tremendous reforms during the last decade. The tax rates have been rationalized and tax laws have been simplified resulting in better compliance, ease of tax payment and better enforcement. The process of rationalization of tax administration is ongoing in India.

Direct Taxes

In case of direct taxes (income tax, wealth tax, etc.), the burden directly falls on the taxpayer.

Income tax

According to Income Tax Act 1961, every person, who is an assessee and whose total income exceeds the maximum exemption limit, shall be chargeable to the income tax at the rate or rates prescribed in the Finance Act. Such income tax shall be paid on the total income of the previous year in the relevant assessment year.

Assessee means a person by whom (any tax) or any other sum of money is payable under the Income Tax Act, and includes -

(a) Every person in respect of whom any proceeding under the Income Tax Act has been taken for the assessment of his income (or assessment of fringe benefits) or of the income of any other person in respect of which he is assessable, or of the loss sustained by him or by such other person, or of the amount of refund due to him or to such other person;

(b) Every person who is deemed to be an assessee under any provisions of the Income Tax Act;

(c) Every person who is deemed to be an assessee in default under any provision of the Income Tax Act.

Where a person includes:

Individual Hindu Undivided Family (HUF) Association of persons (AOP) Body of individuals (BOI) Company Firm A local authority and, Every artificial judicial person not falling within any of the preceding categories.

[7]

Income tax is an annual tax imposed separately for each assessment year (also called the tax year). Assessment year commences from 1st April and ends on the next 31st March.

The total income of an individual is determined on the basis of his residential status in India. For tax purposes, an individual may be resident, nonresident or not ordinarily resident.

Resident

An individual is treated as resident in a year if present in India:

1. For 182 days during the year or

2. For 60 days during the year and 365 days during the preceding four years. Individuals fulfilling neither of these conditions are nonresidents. (The rules are slightly more liberal for Indian citizens residing abroad or leaving India for employment abroad.)

Resident but not Ordinarily Resident

A resident who was not present in India for 730 days during the preceding seven years or who was nonresident in nine out of ten preceding years is treated as not ordinarily resident.

Non-Residents

Non-residents are taxed only on income that is received in India or arises or is deemed to arise in India. A person not ordinarily resident is taxed like a non-resident but is also liable to tax on income accruing abroad if it is from a business controlled in or a profession set up in India.

Non-resident Indians (NRIs) are not required to file a tax return if their income consists of only interest and dividends, provided taxes due on such income are deducted at source. It is possible for non-resident Indians to avail of these special provisions even after becoming residents by following certain procedures laid down by the Income Tax act.

Status Indian Income Foreign Income

Resident and ordinarily resident Taxable Taxable

Resident but not ordinary resident Taxable Not taxable

Non-Resident Taxable Not taxable

Personal Income Tax

Personal income tax is levied by Central Government and is administered by Central Board of Direct taxes under Ministry of Finance in accordance with the provisions of the Income Tax Act.Rates of Withholding Tax

[8]

To view tax rates applicable in India under Avoidance of Double Taxation (ADT) agreement Click here

Tax upon Capital Gains

Corporate tax

Definition of a company

A company has been defined as a juristic person having an independent and separate legal entity from its shareholders. Income of the company is computed and assessed separately in the hands of the company. However the income of the company, which is distributed to its shareholders as dividend, is assessed in their individual hands. Such distribution of income is not treated as expenditure in the hands of company; the income so distributed is an appropriation of the profits of the company.

Residence of a company

A company is said to be a resident in India during the relevant previous year if: o It is an Indian companyo If it is not an Indian company but, the control and the management of its affairs is situated

wholly in India A company is said to be non-resident in India if it is not an Indian company and some part of the

control and management of its affairs is situated outside India.

Corporate sector tax

The taxability of a company's income depends on its domicile. Indian companies are taxable in India on their worldwide income. Foreign companies are taxable on income that arises out of their Indian operations, or, in certain cases, income that is deemed to arise in India. Royalty, interest, gains from sale of capital assets located in India (including gains from sale of shares in an Indian company), dividends from Indian companies and fees for technical services are all treated as income arising in India. Current rates of corporate tax.

Different kinds of taxes relating to a company

Minimum Alternative Tax (MAT)

Normally, a company is liable to pay tax on the income computed in accordance with the provisions of the income tax Act, but the profit and loss account of the company is prepared as per provisions of the Companies Act. There were large number of companies who had book profits as per their profit and loss account but were not paying any tax because income computed as per provisions of the income tax act was either nil or negative or insignificant. In such case, although the companies were showing book profits and declaring dividends to the shareholders, they were not paying any income tax. These companies are popularly known as Zero Tax companies. In order to bring such companies under the income tax act net, section 115JA was introduced w.e.f assessment year 1997-98.

A new tax credit scheme is introduced by which MAT paid can be carried forward for set-off against regular tax payable during the subsequent five year period subject to certain conditions, as under:-

[9]

When a company pays tax under MAT, the tax credit earned by it shall be an amount, which is the difference between the amount payable under MAT and the regular tax. Regular tax in this case means the tax payable on the basis of normal computation of total income of the company.

MAT credit will be allowed carry forward facility for a period of five assessment years immediately succeeding the assessment year in which MAT is paid. Unabsorbed MAT credit will be allowed to be accumulated subject to the five-year carry forward limit.

In the assessment year when regular tax becomes payable, the difference between the regular tax and the tax computed under MAT for that year will be set off against the MAT credit available.

The credit allowed will not bear any interest

Fringe Benefit Tax (FBT)

The Finance Act, 2005 introduced a new levy, namely Fringe Benefit Tax (FBT) contained in Chapter XIIH (Sections 115W to 115WL) of the Income Tax Act, 1961.

Fringe Benefit Tax (FBT) is an additional income tax payable by the employers on value of fringe benefits provided or deemed to have been provided to the employees. The FBT is payable by an employer who is a company; a firm; an association of persons excluding trusts/a body of individuals; a local authority; a sole trader, or an artificial juridical person. This tax is payable even where employer does not otherwise have taxable income. Fringe Benefits are defined as any privilege, service, facility or amenity directly or indirectly provided by an employer to his employees (including former employees) by reason of their employment and includes expenses or payments on certain specified heads.

The benefit does not have to be provided directly in order to attract FBT. It may still be applied if the benefit is provided by a third party or an associate of employer or by under an agreement with the employer.

The value of fringe benefits is computed as per provisions under Section 115WC. FBT is payable at prescribed percentage on the taxable value of fringe benefits. Besides, surcharge in case of both domestic and foreign companies shall be leviable on the amount of FBT. On these amounts, education cess shall also be payable.

Every company shall file return of fringe benefits to the Assessing Officer in the prescribed form by 31st October of the assessment year as per provisions of Section 115WD. If the employer fails to file return within specified time limit specified under the said section, he will have to bear penalty as per Section 271FB.

The scope of Fringe Benefit Tax is being widened by including the employees stock option as fringe benefit liable for tax. The fair market value of the share on the date of the vesting of the option by the employee as reduced by the amount actually paid by him or recovered from him shall be considered to be the fringe benefit. The fair market value shall be determined in accordance with the method to be prescribed by the CBDT.

[10]

Dividend Distribution Tax (DDT)

Under Section 115-O of the Income Tax Act, any amount declared, distributed or paid by a domestic company by way of dividend shall be chargeable to dividend tax. Only a domestic company (not a foreign company) is liable for the tax. Tax on distributed profit is in addition to income tax chargeable in respect of total income. It is applicable whether the dividend is interim or otherwise. Also, it is applicable whether such dividend is paid out of current profits or accumulated profits.

The tax shall be deposited within 14 days from the date of declaration, distribution or payment of dividend, whichever is earliest. Failing to this deposition will require payment of stipulated interest for every month of delay under Section115-P of the Act.

Rate of dividend distribution tax to be raised from 12.5 per cent to 15 per cent on dividends distributed by companies; and to 25 per cent on dividends paid by money market mutual funds and liquid mutual funds to all investors.

Banking Cash Transaction Tax (BCTT)

The Finance Act 2005 introduced the Banking Cash Transaction Tax (BCTT) w.e.f. June 1, 2005 and applies to the whole of India except in the state of Jammu and Kashmir.BCTT continues to be an extremely useful tool to track unaccounted monies and trace their source and destination. It has led the Income Tax Department to many money laundering and hawala transactions.

BCTT is levied at the rate of 0.1 per cent of the value of following "taxable banking transactions" entered with any scheduled bank on any single day:

Withdrawal of cash from any bank account other than a saving bank account; and Receipt of cash on encashment of term deposit(s).

However,Banking Cash Transaction Tax (BCTT) has been withdrawn with effect from April 1, 2009.

Securities Transaction Tax (STT)

Securities Transaction Tax or turnover tax, as is generally known, is a tax that is leviable on taxable securities transaction. STT is leviable on the taxable securities transactions with effect from 1st October, 2004 as per the notification issued by the Central Government. The surcharge is not leviable on the STT.

Wealth Tax

Wealth tax, in India, is levied under Wealth-tax Act, 1957. Wealth tax is a tax on the benefits derived from property ownership. The tax is to be paid year after year on the same property on its market value, whether or not such property yields any income.

Under the Act, the tax is charged in respect of the wealth held during the assessment year by the following persons: -

Individual Hindu Undivided Family (HUF) Company

[11]

Chargeability to tax also depends upon the residential status of the assessee same as the residential status for the purpose of the Income Tax Act.

Wealth tax is not levied on productive assets, hence investments in shares, debentures, UTI, mutual funds, etc are exempt from it. The assets chargeable to wealth tax are Guest house, residential house, commercial building, Motor car, Jewellery, bullion, utensils of gold, silver, Yachts, boats and aircrafts, Urban land and Cash in hand (in excess of Rs 50,000 for Individual & HUF only).

The following will not be included in Assets: -

Assets held as Stock in trade. A house held for business or profession. Any property in nature of commercial complex. A house let out for more than 300 days in a year. Gold deposit bond. A residential house allotted by a Company to an employee, or an Officer, or a Whole

Time Director (Gross salary i.e. excluding perquisites and before Standard Deduction of such Employee, Officer, Director should be less than Rs 5,00,000).

The assets exempt from Wealth tax are "Property held under a trust", Interest of the assessee in the coparcenary property of a HUF of which he is a member, "Residential building of a former ruler", "Assets belonging to Indian repatriates", one house or a part of house or a plot of land not exceeding 500sq.mts(for individual & HUF assessee)

Wealth tax is chargeable in respect of Net wealth corresponding to Valuation date where Net wealth is all assets less loans taken to acquire those assets and valuation date is 31st March of immediately preceding the assessment year. In other words, the value of the taxable assets on the valuation date is clubbed together and is reduced by the amount of debt owed by the assessee. The net wealth so arrived at is charged to tax at the specified rates. Wealth tax is charged @ 1 per cent of the amount by which the net wealth exceeds Rs 15 Lakhs.

[12]

5 Heads of Income Under Income Tax Act 1961

Section 14 of the Income Tax Act is for computation of income under five heads. Here is what the provision says :

. Save as otherwise provided by this Act, all income shall, for the purposes of charge of income-tax and computation of total income, be classified under the following heads of income :—

A.—Salaries.

B.—Income from house property.

C.—Profits and gains of business or profession.

D.—Capital gains.

E.—Income from other sources

[13]

Income from salary

Section 15 to section 21 relate to income charged under the head salary. Salary includes basic salary or wages, any annuity or pension, gratuity, advance of salary, leave encashment, commission, perquisites in lieu of or in addition to salary and retirement benefits.

Allowances : An allowance is a fixed monetary amount paid by the employer to the employee for expenses related to office work. Allowances are generally included in the salary and taxed unless there are exemptions available.

Specific tax exemptions are  allowances allowed by employers as part of salary .Some of them are .

Conveyance Allowance : Upto Rs 800/- a month is exempt from tax. House Rent Allowance (HRA) : Hop over the House Rent Allowance article to check on calculation

and exemptions available. Leave Travel Allowance (LTA) : LTA accounts for expenses for travel when you and your family go

on leave. While this is paid to you, it is tax free twice in a block of 4 years. Medical Allowance : Medical expenses to the extent of Rs 15,000/- per annum is tax free. The bills

can be incurred by you or your family. Perquisites : Section 17 deals with perquisites  which are basically  benefits in addition to normal

salary to which an employee has a right by way of his employment. Examples of these are rent free accommodation or car loan. There are some perquisites that are taxable in the hands of all categories of employees, some which are taxable when the employee belongs to a specific group and some that are tax free.

[14]

. Income under the head Salaries 1.1 Salary is defined to include:

a) Wages b) Annuity c) Pension d) Gratuity e) Fees, Commission, Perquisites, Profits in lieu of or in addition to Salary or Wages f) Advance of Salary g) Leave Encashment h) Annual accretion to the balance of Recognized Provident Fund i) Transferred balance in Recognized Provident Fund j) Contribution by Central Government or any other employer to Employees Pension Account as

referred in Sec. 80CCD

1.2 Points to consider:tt

a) Salary income is chargeable to tax on “due basis” or “receipt basis” whichever is earlier. b) Existence of relationship of employer and employee is must between the payer and payee to tax

the income under this head. c) Income from salary taxable during the year shall consists of following:

i. Salary due from employer (including former employer) to taxpayer during the previous year, whether paid or not;

ii. Salary paid by employer (including former employer) to taxpayer during the previous year before it became due;

iii. Arrear of salary paid by the employer (including former employer) to taxpayer during the previous year, if not charged to tax in any earlier year;

Exceptions – Remuneration, bonus or commission received by a partner from the firm is not taxable under the head Salaries rather it would be taxable under the head business or profession.

1.3 Place of accrual of salary:

a) Salary accrues where the services are rendered even if it is paid outside India; b) Salary paid by the Foreign Government to his employee serving in India is taxable under the head

Salaries; c) Leave salary paid abroad in respect of leave earned in India shall be deemed to accrue or arise in

India.

Exceptions – If a Citizen of India render services outside India, and receives salary from Government of India, it would be taxable as salary deemed to have accrued in India.

[15]

Case Study

1. Mrs. Sneha (Age 49 yrs) is a part time lecturer in a college Chennai University. The details of her salary and other income for the previous year 2007-2008 are as follows:

Basic Salary 80,000

Dearness allowance (forming part of salary) 3,600

Education allowance for 2 children (exp being Rs. 900) 5,100

Hostel expenditure allowance for 1 child

(expenditure being 8000) 7,200

HRA 10,400

Remuneration from Bangalore University for

Being as examiner 75,650

Allowance for research which is to be completed during

Dec-April 2008(actual exp being : up to March 31-08

Rs. 2000, during April 08 Rs. 4500 ) 8000

She contributes 10% of her salary to a statutory provident fund to which the college also makes a matching contribution. She gets reimbursed of Rs. 28000 being exp incurred on medical treatment of her daughter in a private clinic. The bill for which is paid by the employer.

During the year she spends Rs. 1000 on purchase of saree for his wife (out of salary)for year 2007-08 he paid Rs. 8000 as insurance premium on his life policy for Rs. 60,000 ( date payment – 3 April 08)

Compute the total income and tax liability for the assessment year 2008-09

[16]

Solution.

Computation Of Income From Salary Of Miss. Sneha

Particulars Amount Amount

[17]

Basic Salary

DA

Education Allowance

Exemption 100 x 2 x 12

Hostel Allowances

HRA received

Research Allowances

Less: Exp incurred

Medical Allowances

Exemption

Income from salary

Income from other sources

Total Income

Exemption under sec 80c

1) 10% Provident fund 836002) (Basic + DA which comes for retirement benefit)

Taxable Income

Tax liability

Taxable Income

Less: Exemption

Income From Salary

5,100

2,400

7000

6500

28000

15000

80,000

3,600

2,700

7,200

5,560

1,500

13,000

1,09,960

75,650

1,85,610

8,360

1,77,250

1,77,250

1,45,000

32,250

2. From the following details, find out the salary chargeable to tax for the assessment year 2014-15. Mr. X is a regular employee of Rama and Co. in Nasik. He was appointed on 1-1-2013 in the scale of 20000-1000-30000. He is paid 10% D.A. & Bonus equivalent to one month pay. He contributes 15% of his pay and D.A. towards his recognized provident fund and the company contributes the same amount.

[18]

He is provided free housing facility which has been taken on rent by the company at Rs.10000 per month. He is also provided with following facilities:

1. Facility of laptop costing Rs. 50000.

2. Company reimbursed the medical treatment bill of his brother of Rs.25000, who is dependent on him.

3. The monthly salary of Rs. 1000 of a house keeper is reimbursed by the company.

4. A gift voucher of Rs. 10000 on the occasion of his marriage anniversary.

5. Conveyance allowance of Rs. 1000 per month is given by the company towards actual reimbursement.

6. He is provided personal accident for which premium of Rs. 5000 is paid by the company.

7. He is getting telephone allowance @ Rs 500 per month.

8. Company pays medical insurance premium of his family of Rs. 10000.

Solution :

Computation of Income From Salary Of Mr. X

Particulars Amount[19]

Basic Pay [(20000 * 9) + (21000 * 3)] = 180000 + 63000

Dearness Allowance (10% of Basic Pay)

Bonus [ Rs. 50000] See Note 1

Employer’s contribution to RPF in excess of 12% (15% - 12% = 3% of Rs 267300) (See note 2)

Taxable Allowance

Telephone Allowance

Taxable Perquisites

Rent-free accommodation (See note 2 & 3)

Medical Reimbursement (25000-15000) (See note 5)

Reimbursement of Salary of housekeeper

Gift Voucher (10000-5000)

243000

24300

20000 400000

8019

6000

43995

10000

12000

5000INCOME FORM SALARY 372314

Working Notes :

1. Bonus has been taken as one month basic pay upto 31-14 i.e. Rs. 20000.

[20]

2. It has been assumed that dearness allowance forms part of salary for retirement benefits and accordingly, the perquisite value of rent-free accommodation and employer’s contribution to RPF have been worked out.

3. Where the accommodation is taken on lease or rent by the employer, the value of rent-free accommodation provided to employee would be actual amount of lease rental paid or payable by the employer or 15% of salary, whichever is lower.

For the purpose of valuation of rent-free house, salary includes:

(i) Basic salary i.e. Rs.243000(ii) Dearness Allowance (assuming that it is included for calculating retirement benefits) i.e.

Rs 24300.(iii) Bonus i.e. Rs. 20000.(iv) Telephone allowance i.e. Rs. 6000

Therefore, salary work out to 243000 + 24300 + 20000 + 6000 = 293300

15% of Salary = 293300 * 15/100 = 43995

Value of rent-free house = Lower of rent paid by the employer (i.e. Rs. 120000) or 15% of salary (i.e. Rs. 43995)

Therefore, the perquisite value is Rs. 43995.

4. Facility of laptop is not taxable perquisite.5. Clause (v) of the provision to section 17(2) exempts any sum paid by the employer in respect of any

expenditure actually incurred by the employee on his medical or treatment of any member of his family to the extent of Rs. 15000.

Therefore, in this case, the balance of Rs. 10000(i.e. Rs. 25000 – Rs. 15000) is taxable perquisite. Medical insurance premium paid by employer is exempt.

6. Conveyance allowance is exempt since it is based on actual reimbursement for official purposes.7. Premium of Rs. 50000 paid by the company for personal accident policy is not liable for tax.

Income from house property

Income from any residential or commercial property are  charged to tax under section 22 to section 27 of the Income Tax Act . In fact , if one own more than one house , barring one , other properties are charged to tax despite the fact that the house may not be put on rent.

[21]

Income chargeable to tax under the head “Income From House Property” is computed as Annual Value and is the higher of the fair rental value, rent received or municipal rent. Standard deduction of 30% is allowed on the ALV . Further , one can reduce the interest on borrowed capital.

Section 24 Deductions from House Property IncomeBy clear tax-team on November 11, 2014 in Income from House Property

Income from House Property is possible in these cases –

Rental Income on a let out property Annual Value of a property which is ‘deemed’ to be let out for income tax purposes ( when you own

more than one house property) Annual Value of the property which is self occupied, which is Nil

Under section 24 of the Income Tax Act you are allowed to make certain deduction from the Net Annual Value of your House Property. Net Annual Value is Gross Annual Value less Municipal Taxes Paid. In case the property is let out, its rent received is your Gross Annual Value, whereas in case of a deemed to be let out property, a reasonable rent of a similar place is your Gross Annual Value. For a self occupied house property the Gross Annual Value is Nil.

There are only 2 deductions available under section 24

Standard Deduction – Standard Deduction is 30% of the Net Annual Value calculated above. This 30% deduction is allowed even when your actual expenditure on the property is higher or lower. Therefore this deduction is irrespective of the actual expenditure you may have incurred on insurance, repairs, electricity, water supply etc. For a self occupied house property, since the Annual Value is Nil, the standard deduction is also 0 on such a property.

Deduction of Interest on Home Loan for the property – In case you take a home loan for purchase, construction, repair, renewal or reconstruction of your house property – the interest is allowed as a deduction from the Net Annual Value. Deduction for interest on money borrowed is allowed on accrual basis (allowed even though interest may not actually have been paid), so keep claiming your interest deductions each year basis interest that is due (instead of interest that is paid). Do remember that no deduction is allowed for any brokerage or commission for arranging the loan. In case of a self occupied house property, this deduction is allowed to be claimed and therefore, you may in such a case have a loss under the head House Property. The total amount allowed towards this deduction for a self occupied house property is Rs 2,00,000 beginning assessment year 2015-16. In case of a let out or a deemed to be let out property, the entire interest is allowed as deduction under section 24. You can start claiming this interest when the construction of your property is complete.

Pre-construction interest – is allowed when you have taken a loan for purchase or construction of a house property (not allowed in case of loan for repairs or reconstruction). The deduction for this interest is allowed in 5 equal installments starting from the year in which the house is purchased or the construction is completed. For example, if construction of your property completed in FY 2014-15, on 16th June 2014, you can claim 1/5th of interest paid uptil 31st March 2014 when you file your return for FY 2014-15.

Though pre construction interest is allowed to be deducted on the basis of 1/5th each year beginning the year in which the construction is completed – the total amount that can be claimed in a year should not exceed Rs 2,00,000 in case of a self occupied house property.

[22]

Conditions for claiming Interest on home loan deduction – You need to meet all the below 3 conditions to claim this deduction

Loan has been take after 1st April 1999 for purchase or construction The acquisition or construction is completed within 3 years from the end of the financial year in

which the loan was taken There is interest certificate available for the interest payable on the loan

Note that your interest deduction may be limited to Rs 30,000 if any one of these conditions is met –

Loan is borrowed before 1st April 1999 for purchase, construction, repairs or reconstruction of house property

Loan is borrowed on or after 1st April 1999 for repairs, renovation or reconstruction of house property.

Deductions u/s 24

Serial No ParticularsAmount or Percentage Deduction

1 Standard deduction 30% of Net Annual Value

2

Property acquired/constructed after 1st April, 1999 with borrowed capital (deduction is allowed only where such acquisition or construction is completed within 3 years from the end of the financial year in which capital was borrowed)

Rs. 1,50,000

3 In all other cases except in point 2. Rs. 30,000

4 In case of let out propertyFull deduction of interest on borrowed capital.

Case Study

If Shiva has two houses than he can choose one which will minimize his tax liability. 

[23]

Particulars (If Deemed Let out) House 1 House 2

Annual Value 3,60,000 7,00,000

Less: (Municipal Taxes) (40,000) (54,000)

Net Annual Value (NAV) 3,20,000 6,46,000

Deductions u/s 24

(a)    30% of NAV

(96,000) (1,93,800)

(b)   Interest on borrowed capital

(1,75,000) (2,50,000)

Income from House Property 49000 2,02,200

 If Shiva considers House 1 as Self-occupied and House 2 as deemed to be let-out then his income from house property will be Rs. 52,200 and it will be negative Rs. (1,01,00) vice-versa. Therefore, he should consider House 1 as deemed let out and House 2 as self –occupied. (2) Joint Home Loan – If you are a Joint owner and also apply for a joint home loan then both the co-borrowers can take a maximum deduction of 150000 each. (3) First house is in a single name and planning a second home – If your first home is in single name then you can buy a second home in your spouse’s name to help you avoid tax on ‘deemed to be let-out’ property. (4) Joint Ownership – Income from house property can be divided between both the co-owners which can reduce overall tax liability. 

COMPUTATION OF INCOME FROM  “LET-OUT PROPERTY” :

[24]

After arriving at Rateable Value and Annual Value, if the property is let-out (given for rent / lease), the following deductions for which the owner is eligible :

1.  Repair Charges (restricted to 30% of Annual Value of the Property).

2.  Interest on borrowed capital for the purpose of acquisition, construction, re-construction, repairs, renovation etc.

2.3.1.   GROSS ANNUAL VALUE [ Sec. 23(1)]

Gross Annual Value is determined as follows—

Step 1 Find out reasonable expected rent  of the property

Step 2Find out Rent actually received or receivable after excluding unrealized rent but before deducting loss due to vacancy which shall be calculated as below

Step 3 Find out which one is higher – amount computed in Step 1 & Step 2Step 4 Find out Loss because of VacancyStep 5 Step 3 minus Step 4 is Gross Annual Value

Step-1: Find out reasonable expected Rent of the Property :

The reasonable expected Rent under will be computed on the basis of 3 factors, namely---

a.  Municipal Rental Value (MRV) : For collecting Municipal Taxes, Local Authorities i.e. Municipal Corporation / Committee etc. conducts a periodical survey of the house properties in their local limits. On the basis of such survey the Rental Value are fixed which serves as the basis for levying tax. The Rental Value so fixed is called Municipal Rental Value ( M.R.V.).b.  Fair Rental Value ( FRV ) :            Fair Rent of the Property can be determined on the basis of Rent fetched by a similar property in the same or similar locality. It is based on the principle that Rent prevailing

[25]

in same locality for similar sized property is almost the same . Such Rental Value is called Fair Rental Value ( F.R.V.)

c.  Standard Rent of the Property (SR) :        Standard Rent is the maximum rent which a person can legally recover from his  tenant under a Rent Control Act. If other words, if a property is covered under this Rent Control Act, its reasonable expected Rent cannot exceed the standard Rent fixed or determined under the Rent Control Act.

The higher of (MRV) and (FRV), subject to maximum of (SR) is reasonable expected Rent.

Step-2: Find out Rent actually received or receivable :Find out Rent actually received or receivable after excluding unrealized rent but before deducting loss due to vacancy which shall be calculated as below :

Rent of the previous year ( or that part of the pervious year) for which the property is available for letting out

Less : Unrealized Rent of a few conditions are satisfied

Rent received / receivable before deducting Loss due to Vacancy

Xxxx

Xxxxxxxx

 The following points should be noted ---

1. Loss due to vacancy shall not be deducted.2. Occupier’s or tenant’s share of municipal tax realized from the tenant cannot be added

to Actual Rent received or receivable.3. If the  tenant has undertaken to bear the cost of repairs, the amount spent by the tenant

cannot be added to rent received or receivable.4. A non-refundable security will be added in rent received or receivable on pro rata

basis.5. A refundable security cannot be included in rent received or receivable.6. Advance rent can not be rent received / receivable of the year of receipt.7. Commission paid by the owner of a property to a broker for rental income is not

deductible.

2.3.2    DEDUCT MUNICIPAL TAX

[26]

From Gross Annual Value computed above, deduct Municipal Taxes ( including Service Tax) levied by any local authority in respect of the house property. Municipal Taxes are deductible only if..

1. these taxes are borne by the owner , and2. are actually paid by him during the previous year.

Municipal taxes, levied by local authority but not paid by the assessee during the previous year are not deductible.The remaining amount left after deduction of Municipal Taxes is Net Annual Value (NAV)

2.3.3.   DEDUCTION UNDER SECTION 24

The following 2 Deductions are available under section 24---

a.  Standard Deduction ; and

b.  Interest on borrowed capital

In other words, no deductions can be claimed in respect of that expenditure which is not specified in Sec. 24. For instance, no deduction can be claimed in respect of expenses on insurance, ground rent, land revenue, repairs, collection charges, electricity, water supply, salary of liftman, etc.

A. Standard Deduction [ Sec. 24(a)] :           30% of net annual value id deductible irrespective of any expenditure incurred by the taxpayer.

B. Interest on Borrowed Capital [ Sec. 24(b)] : Interest on borrowed capital is allowable as deduction, if capital is borrowed for the purpose of purchase, construction, repair, renewal or reconstruction of the property.

The following points should be kept in view :-

1. If capital is borrowed for the purpose of purchasing a plot of land, interest liability is deductible even if construction is financed out of own funds.

1. Interest on borrowed capital is deductible on “accrual” basis. It can be claimed ad deduction on yearly basis, even if the interest is not actually paid during the year.

1. Interest on unpaid interest is not deductible.

1. No deduction is allowed for any brokerage or commission for arranging loan.

1. Interest on  a fresh loan, taken to repay the original loan raised for the aforesaid purposes , is allowable as deduction.

1. Interest on borrowed capital is deductible fully without any maximum ceiling.

Profits and gains of business or profession[27]

Income earned through your profession or business is charged under the head “profits and gains of business or profession”. The income chargeable to tax is the difference between the credits received on running the business and expenses incurred.

The deductions allowed are depreciation of assets used for business; rent for premises; insurance and repairs for machinery and furniture; advertisements; traveling and many more.

Business :“Business” simply means any economic activity carried on for earning profits. Sec. 2(3) has defined the term as “ any trade, commerce, manufacturing activity or any adventure or concern in the nature of trade, commerce and manufacture”.

In this connection it is not necessary that there should be a series of transactions in a business and also it should be carried on permanently. Neither repetition nor continuity of similar transactions is necessary.

Profession :“Profession” may be defined as a vacation, or a job requiring  some thought, skill and special knowledge like that of C.A., Lawyer, Doctor, Engineer, Architect etc. So profession refers to those activities where the livelihood is earned by the persons through their intellectual or manual skill.

INCOME CHARGEABLE UNDER BUSINESS/PROFESSION

The following are few examples of incomes which are chargeable under this head:-

1. Normal Profit from general activities as per profit and loss account of business entity.2. Profit from speculation business should be kept separate from business income and shown separately.3. Any profit other than regular activities of a business should be shown as casual income and will be shown

under “income from other sources” head.4. Profit earned on sale of REP License/Exim scrip, cash assistance against export or duty drawback of custom or

excise.5. The value of any benefits whether convertible into money or no from business/profession activities.6. Any interest, salary, commission etc. received by the partner of a firm will be treated as

business/professional income in hand of partner. However, the share of profit from partnership firm is exempt in hand of partner.

7. Amount recovered on account of bad debts which were already adjusted in profit in earlier years etc.

EXPENSES DEDUCTIBLE FROM INCOME FROM BUSINESS/PROFESSION

All the expenses relating to business and profession are allowed against income. Following are few examples of expenditures which are allowed against income:-

Rent rates and insurance of building. Payment for know-how, patents, copy rights, trade mark, licenses. Depreciation on fixed assets. Payment for professional services. Expenditures on scientific research for business purposes. Preliminary Expenses in case of Limited companies. Salary, bonus, commission to employees. Salary, interest and remuneration to working partners subject to certain conditions. Communication expenses.

[28]

Traveling and conveyance expenses. Membership fees etc. Advertisement expenses in respect of promotion of business products. Discount allowed to customers. Interest on loans (Whether Private of Institutional). Bank Charges /Bank Commission expenses. Entertainment/Business Promotion expenses Staff Welfare expenses . Festival Expenses. Printing and stationery expenses Postage expenses. All other expenses relating to business/profession

Note: The above expenditures are allowed on the basis of actual payment as well as on accrual basis at the date of finalization accounts.

EXPENSES WHICH ARE DEDUCTIBLE ON ACTUAL PAYMENT ONLY

Following expenses will be allowed if these expenses have been paid before or on due date or before filing of income tax return:-

1. Any tax, duty, cess or fees by whatever name called.2. Contribution to provident fund, ESI premium, gratuity fund or other funds for welfare of employees.3. Bonus or commission or leave encashment payable to employees.4. Interest on loan from public financial institutions, state financial corporation or from scheduled bank.

EXPENSES NOT DEDUCTIBLE FROM BUSINESS/PROFESSION INCOME

1. Expenditure on any type of advertisement of political party.2. Any interest, royalty, fees for technical services or other sums chargeable under this act, which is payable

out side India or in India to non-resident or a foreign company on which tax has not been deducted or after deduction, not deposited in prescribed time.

3. Any interest, commission, rent, royalty, professional or technical fees paid or payable to any resident of India or payment to contractor or sub-contractor on which TDS is not deducted, or if deducted then not deposited before the due date of filing the return.

4. Any tax calculated on the basis of profit of business.5. Any amount of Wealth Tax paid.6. Any payment of salaries payable outside India or to a non-resident on which tax is not deducted.7. Any tax actually paid by an employer on any income by way of perquisites, on behalf of the employee.8. Any remuneration paid to non working partner.9. Any remuneration paid to working partner other than specified in agreement or as per the specified limits by

income tax act.10. Any interest to partner if not specified in agreement and not more than 12%.11. Any payment in cash exceeding Rs.20000/=. (Rs.35000/= in case of payment made for plying, hiring or

leasing goods carriages) except when payments are made under circumstance specified in Rule 6DD of Indian income tax act.

12. Where a deduction has been claimed on accrual basis during an assessment year and the payment is made in a subsequent year, and the payment or aggregate of payments made to a person in a day otherwise than by way of an account payee cheque/DD, exceeds Rs.20000/= (Rs.35000/= in case of goods..

Case Study

[29]

Mr. Roshan is a proprietor of a business. Following was the Profit and Loss of his business for the year 31st March, 2014. You are required to compute his income from business for the Assessment year 2014-2015.

Particulars Amount Particulars AmountTo Opening Stock

To Purchase

To Office Salaries

To Proprietor’s Salaries

To Bad Bedts

To Advertisement

To Fire Insurance Premium

To Conveyance Expenses

To Interest on Proprietor’s capital

To Medical Expenses

To General Expenses

To Wealth Tax Paid

To Residential Telephone Expenses

To Sales Tax Penalty

To Depreciation

To Net Profit

234000

100000

57000

30000

25000

10500

4500

6000

25000

20000

35000

5000

14000

4000

30000

20000

By Sales

By Closing Stock

By Income Tax Refund

By Dividend From UTI

By Dividend From Baja Ltd.

By Interest on PFF

1240000

205000

15000

20000

25000

15000

1520000 1520000

Additional Information :

(1) The residential telephone is used half the time for office work.(2) Purchase include Rs. 80000 paid for cash purchase, exceeding the limit prescribed Under

Section 40A(3) of the Income Tax Act,1961.(3) General expense include advance income tax of Rs. 10000 paid during the year and Rs. 500

for purchase of lottery tickets..Depreciation allowable as per Income Tax Rules Rs. 25000.

Solution :[30]

Mr. ROSHAN

STATUS : INDIVIDUAL LEGAL STATUS : R & OR

PREVIOUS YEAR : 2013-14 ASSESSMENT YEAR : 2014-15

Computation of Income From Business Amount(A) Net Profit as per Profit And Loss A/c(B) Add: Expenses Disallowed

Proprietor’s Salaries (apportion) 30000

Interest on Proprietor’s Capital (apportion) 25000

Medical Expenses (personal) 20000

Wealth-tax paid [S. 40(a)(3)] 5000

Residential Telephone Expenses (1/2) 7000

Sales Tax Penalty 4000

Depreciation (as per book) 30000

Cash Purchase (100% of Rs. 80000) [U /S 40A(3) 80000

Income Tax [S.40(a)(2)] 10000

Lottery Tickets 500

(C) Less: Considered Separately / Not Taxable

Income Tax Refund (capital receipt) 15000

Dividend from UTI (Exempt u/s 10) 20000

Dividend from Bajaj Ltd. (Exempt u/s 10) 25000

Interest on PPF (Exempt u/s 10) 5000

Lottery Price 10000

Depreciation (allowable) 25000

20000

211500231500

100000

(D)Income From Business 131500

Capital gains

[31]

Section 45 is the charging section for capital gains. Any profit or gain arising from transfer of capital asset which is defined under section 2(14) held as investments are chargeable to tax under the head “capital gains”.

The capital gains are charged to tax under two sub-heads -short term capital gains or long term capital gains. Further , Income Tax Act also provide the special rate of tax for charging tax on capital gains on shares and mutual funds.

There are tax exemption from long term capital gains on sale of residential house or other capital asset or even agriculture land under section 54 or section 54F or section 54EC or section 54B of the Income Tax Act.

The specific taxes assessed on investment capital gains as determined by the U.S. Tax Code. When a stock is sold for a profit, the portion of the proceeds over and above the purchase value (or cost basis) is known as capital gains. Capital gains tax is broken down into two categories: short-term capital gains and long-term capital gains. Stocks held longer than one year are considered long term for the treatment of any capital gains, and are taxed a maximum of 15% depending on the investor's tax bracket. Stocks held less than one year are subject to short-term capital gains at a maximum rate of 35% depending again on the investor's tax bracket.

Next Up

1. Pretax Rate Of Return 2. Available-For-Sale Security 3. Gifted Stock 4. Capital Gain 5.

BREAKING DOWN 'Capital Gains Treatment'

The huge difference between the short-term and long-term rates makes it clear that paying close attention to the tax consequences of investing in stocks is a critical skill to develop. As an investor's portfolio grows, he or she should increasingly keep track of capital gains, including making adjustments near the end of the calendar year to reduce capital gains taxes as much as possible. An accountant or investment professional can assist in these efforts.

Refine Your Financial VocabularyGain the Financial Knowledge You Need to Succeed. Investopedia’s FREE Term of the Day helps you gain a better understanding of all things financial with technical and easy-to-understand explanations. Click here to begin developing your financial language with this daily newsletter.

capital gain is a profit that results from a disposition of a capital asset, suchas stock, bond or real estate, where the amount realized on the disposition exceeds thepurchase price. The gain is the difference between a higher selling price and a lowerpurchase price. Conversely, a capital loss arises if the proceeds from the sale of a capitalasset are less than the purchase price.

[32]

Capital gains may refer to "investment income" that arises in relation to real assets, suchas property; financial assets, such as shares/stocks or bonds; and intangible assets. Anincrease in the value of a capital asset that gives it a higher worth than the purchase price.The gain is not realized until the asset is sold. A capital gain may be short term or longterm and must be claimed on income taxes. A capital loss is incurred when there is adecrease in the capital asset value compared to an asset's purchase price.Profit that results when the price of a security held by a mutual fund rises above itspurchase price and the security is sold. If the security continues to be held, the gain isunrealized. A capital loss would occur when the opposite takes place. Long-term capitalgains are usually taxed at a lower rate than regular income. This is done to encourageentrepreneurship and investment in the economy. Tax conscious mutual fund investorsshould determine a mutual fund's unrealized accumulated capital gains, which areexpressed as a percentage of its net assets, before investing in a fund with a significantunrealized capital gain component. This circumstance is referred to as a fund's capitalgains exposure. When distributed by a fund, capital gains are a taxable obligation for thefund's investors.Capital gains are the profits that an investor realizes when he or she sells the capital assetfor a price that is higher than the purchase price. Capital gains taxes are only triggeredwhen an asset is realized, not while it is held by an investor. An investor can own sharesthat appreciate every year, but the investor does not incur a capital gains tax on the sharesuntil they are sold.The amount by which an asset's selling price exceeds its initial purchase price. A realizedcapital gain is an investment that has been sold at a profit. An unrealized capital gain is aninvestment that hasn't been sold yet but would result in a profit if sold. Capital gain isoften used to mean realized capital gain. For most investments sold at a profit, includingmutual funds, bonds, options, collectibles, homes, and businesses, the IRS is owed moneycalled capital gains tax.A capital gain is the difference between what you paid for an investment and whatreceived when you sold that investment. Investments include mutual funds, bonds,stocks, options, precious metals, real estate, and collectibles. If we sold an investment formore than what you paid for it, then we have a gain. If we sold an investment for lessthan what we paid for it, then we have a loss. Our capital gains and losses are reportedon IRS Form 1040 Schedule D, with the result carried to Form 1040.Capital gains are calculated as follows: Selling price Minus Selling fees & commissions Minus Buying fees & commissions Minus Purchase price Profit (or Loss if negative)

[33]

Case Study

Mr. Gavaskar purchased a residential house on 01-06-1979 for Rs 100000. He incurred expenses of Rs 50000 towards cost of improvement on 02-07-1983. The fair market value of the house on 01-04-1981 was Rs 150000. He sold the house on 10-10-2013 for Rs 30 lakhs. The cost inflation index for F.Y. 1981-82 is 100, for F.Y. 1983-84 is 116 and for F.Y. 2013-14 is 939. You are required to compute his Capital Gain for Assessment year 2014-15.

Solution :

NAME OF ASSESS : MR. GAVASKAR STATUS : INDIVIDUAL PREVIOUS YEAR : 2013-14 ASSESSEMNET YEAR : 2014-15

Computation of Capital Gains Amount AmountStatement of Long Term Capital Gains

Full value of Sale Consideration

Less : Cost

(i) Indexed cost of Purchase Price

Purchase Price 01-06-1979

Indexed cost of FMV 150000 * 939/100

(ii) Indexed cost of cost of improvement in 1983-84 50000 * 939/100

100000

150000

3000000

1408500

404741

Long Term Capital Gains 1186759

[34]

Mr. Parag purchased a residential flat on 02-05-2012 for Rs 100000. He paid on the same day the stamp duty and registration charges of Rs 48750 on purchase of flat. He sold the said flat on 17-03-2014 for Rs 1200000. The cost inflation Index for F.Y. 2011-12 is 939. Compute his Capital Gain Chargeable to tax for assessment year 2014-15.

Solution :

NAME OF ASSESSEE : MR PARAG STATUS : INDIVIDUAL PREVIOUS YEAR : 2013-14 ASSESSMENT YEAR : 2014-15

Particulars Amount AmountIncome From Capital Gains

Full Value of Flat Sold

Less : Purchase Price of Flat

Stamp Duty & Registration

1000000

48750

1200000

1048750

SHORT TERM CAPITAL GAINS 151250

Note : Since the capital asset is held for less than 36 months, it is Short Term Capital Asset hence cost inflation index is not applicable.

[35]

Income from other sources

Any income that does not fall under the four heads above is taxed under the head “income from other sources”. An example is interest income from bank deposits, winning from lottery, any sum of money exceeding Rs. 50,000 received from a person (other than from relative, on marriage, under a will or inheritance

The income, chargeable under the head 'income from other sources,' shall be computed after making the following deductions:

•In the case of interest on securities, any reasonable sum, paid by way of commission or remuneration to a banker or to any other person for the purpose of realizing such dividend or interest on behalf of the assessee; •In the case of income, received by the assessee from his employees as contributions to any provident fund or Superannuation fund or any fund set up under the provisions of the Employees'' State Insurance Act, 1948, or any other fund for the welfare of such employees, which is chargeable to income tax under the head "Income from other sources" deductions so far, as may be in accordance with provisions of S 36(1) (va). •In the case of income from machinery, plant or furniture belonging to the assessee and let on hire, if the income is not chargeable to income -- tax under the head "Profits and gains of business or profession or where an assessee lets on hire machinery, plant or furniture belonging to him and also buildings, and the letting of the buildings is inseparable from the letting of the said machinery, plant or furniture, the income from such letting, if it is not chargeable to income tax under the head "Profits and gains of business or profession", deductions, so far as may, be in accordance with the provisions of clause (a), clause (3)of Section 30, Section 31, and subsections (1) and (2) of Section 32 and subject to the provisions of S 38. •In the case of income in the nature of family pension, a deduction of a sum equal to thirty three and one third per cent of such income or fifteen thousand rupees, whichever is less. •Any other expenditure (not being capital expenditure) laid out or used wholly and exclusively for the purpose of making or earning such income.

What income is taxed under Income from Other Sources?

What is the taxability of dividends?

Would interest income be assessed as business income?

What is the taxability on family pension?

[36]

Income from Other Sources

It is residuary head of Income which must satisfy the following conditions:-

1. There must be an income; 2. This income is NOT exempt under the IT Act 1961; and 3. This income is not chargeable to tax under the other heads of income viz. "Salary", "House property",

"Business or Profession" and "Capital Gains".

Example of Income from Other Sources

Some examples of certain incomes normally taxed under this head are given below:-

Interest on bank deposits, loans or company deposits, Dividend; Family pension (received by legal heirs of an employee), Income from sub-letting of house property by a tenant, Agricultural income from agricultural land situated outside India, Interest received from IT Dept. on delayed refunds, Remuneration received by Members of Parliament, Casual receipts and receipts of non-recurring nature, Insurance commission, Examiner-ship fees received by a teacher (not from employer), Income from royalty, Director's commission for standing as guarantor to bankers, Winnings from Lotteries, Crossword Puzzles, Horse Races and Card Games, Interest on securities, Income from letting out of machinery, plant or furniture, etc. Any sum exceeding Rs. 50,000/- received without consideration shall be treated as income provided that the

sum of money is not received from any relative or on the occasion of marriage of the individual or under a will or inheritance etc.

Computation of Income from Other Sources

Income from this source is computed after deducting the following:-

1. Expenditure incurred during the previous year; 2. Expenditure incurred wholly and exclusively for the purpose of earning the said income; 3. After deducting allowances and deduction provided in Section 57 of the IT Act 1961;

And after disallowing the following:-

1. Expenditure relating to personal expenses 2. Interest, salary payable outside India on which TDS not made, 3. Income / Wealth Tax paid, excessive-payments to relatives etc. 4. Expenditure in respect of royalty and technical fees received by a foreign company; 5. Expenditure in respect of winning from

[37]

Case study

Mr. Sachin submitsthe following particulars for computation of his income chargeable under the head – income from other sources.

1. Dividend from World Cup Ltd a foreign company : Net Rs 10000. Tax deducted at Source Rs 2000. Interest paid on loam taken for the purpose of investment in shares of World Cup Ltd Rs 1500. Collection charges debited by bank for realisation of the dividend cheque Rs 100.

2. Rent for letting plant & machinery on hire – Rs 60000. Collection charges in respect of rent Rs. 3000. Fire Insurance Premium – Rs 4000. Repairs & Maintenance – Rs 2500. Depreciation as per Income tax Rules – Rs 10000.

3. Winning from Horse Races – Rs 5000.

Solution :

COMPUTATION OF INCOME OF MR. SACHIN (RESIDENT) PREVIOUS YEAR : 2013-14 ASSESSMENT YEAR : 2014-15

Particulars Amount Amount AmountDividend

World Cup Ltd. Net

Add : T.D.S.

Less : Interest

Collection

Net

Hire charges from Plant & Machinery

Rent

Less : Expenses

Collection charges

Fire Insurance

Repairs & Maintenance

Depreciation

Winning from Horse Race

10000

2000

1500

100

3000

4000

2500

1000

12000

1600

60000

19500

10400

40500

5000

[38]

INCOME FROM OTHER SOURCES 55900

Mrs. Batlibol is a professor of law in M.K. college. The particulars of her income for the year ending 31-03-2014 are as follows:-

1. Salary – Rs 320002. Royalty from book – Rs. 25000. Expenses on typing etc. Were Rs 2000.3. Honorarium received from a management Institute as a visiting lecturer – Rs. 3000.

Conveyance for visiting the Institute – Rs 200.4. Examinership fees from the University of Mumbai – Rs 1000.5. Family pension of Rs. 42000 on death of her husband from his employer.6. She received the ‘Dronacharya Award’ of Rs. 10000 for the ‘Best Teacher of the Year’ from

the State Government.

Compute Gross Taxable Income of Mrs. Batlibol for the assessment year 2014-15

Solution :

COMPUTATION OF INCOME OF MRS. BATLIBOL (RESIDENT) PREVIOUS YEAR 2013-14 ASSESSMENT YEAR : 2014-15

Particulars Amount AmountSalary

INCOME FROM OTHER SOURCES (1) Royalty from Books Less : Expenses on typing

(2) Honorarium from Management Institute Less: Conveyance

(3) Examinership Fees

(4) Family Pension Less : Standard Deduction 1/3 rd or Rs. 150000 whichever is less

(5) Dronacharya Award is Exempt u/s 10(17A)

25000 2000

30000 200

42000

14000

32000

23000

2800

1000

28000

-

GROSS TOTAL INCOME 86800

[39]

Biblography

www.icai.com

www.indiantaxsystem.com

www.scribd.com

Book : Direct And Indirect Taxes Author Dr. Varsha M. Ainapure ( Manan Prakashan )

[40]