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I 1.3
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Basic concepts and Income Tax Structure
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1.4 Significance of various heads of Income under Income Tax Act, 1961
1998-1999 To 2006-07 ;
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1.9 Rates of Income Tax of Foreign Countries ^
“ANALYTICAL STUDY OF PROBLEMS FACED BY INDIVIDUAL
INCOME TAX PAYERS IN PUNE CITY AND PIMPRI-CHINCHWAD
AREA
FROM 1997 TO 2003”.
CHAPTER - I
Introduction & Theory of Income Tax Act, 1961
4
Table No. 1.1
PCMC has played a pivotal role in developing this area into one of the
most progressive industrial centres in the country. The PCMC has spent the
last few years tackling problems like excessive industrial pollution, poor
hygiene and poor infrastructure with a grim determination. The corporation is
also working on developing a large medical herb plantation field within one of
its green belts. It has completed many slum rehabilitation projects.
The PCMC area also has the facility of providing water for 24 hours.
There are a number of historical places in PCMC area. One of them is the
Samadhi of Moraya Gosavi, located in Chinchwad, Appu Ghar is an
entertainment park at Nigdi. Many educational institutes, colleges, schools
have also been established. In the PCMC Industrial area there are a number
of professional as well as business houses.
This area is very useful in terms of having a dialogue with taxpayers
from various fields. The comparative study of different tax payers forms an
essential part of statistical methodology. This will also enables me to
conclude with my research work in a more systematic manner. The policy
implication of the study is important not only for the common people, but also
for the ‘Government’ and Tax Consultants’.
The study is mainly based upon direct dialogues with the tax payers. A
detailed questionnaire has enabled me to collect first hand information on all
the dimensions of my study. Scientific tabulation and statistical analysis of
primary data have ensured accurate and logical inferences in the area of
various aspects of the problem.
Direct
)irect Taxes Indirect ITaxes
T T
Personal Corporate MODVAT
Inconne Tax Income Tax (Modified Excise Duty)
Direct Taxes:
Direct Taxes, which are nomrially levied on persons, are assessed or
determined on the basis of their income or property. This tax is directly paid
by persons to the Govemment treasury, thus directly contributing to the
national exchequer.
The Constitution of India provides for the division of tax powers
between the Centre and the States. The Centre is allocated income tax,
wealth tax, excise duty, customs duty & service tax, while sales tax is
allocated under the division of tax powers of the States,
b) History Of the Income Tax Act :
Taxation in Ancient India :
It is a general matter of 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 other were levied even in primitive and ancient communities.
The origin of the word “Tax” is from “Taxation” which means an estimate.
‘ Thoughts of “Kalidas” in Raghuvansh Eulogizing King Dalip was :
“It was only for the good of his subjects that he collects taxes from them, just
as the sun draws moisture from the earth to give it back a thousand fold”.
This just shows the importance of tax.
10
Nearly 2000 years ago, there went out a decree from Caesar Augustus
that all the world should be taxed’ . In Greece, Germany and Roman empires,
taxes were to be also levied sometimes on the basis of tumover and
sometimes on occupation.
In India, the system of direct taxation as it is known today, has been in
force in one fonn or other even from ancient times. There are references both
in ‘Manu Smruti’ and ‘Arthashastra’ to a variety of tax measures. ‘Manu’, the
ancient sage and law-giver stated that king could levy taxes, according to
Shastras. According to him the king should arrange the collection of taxes in
such a manner that the subject did not feel the pinch of paying taxes. He laid
down that traders and artisans should pay 1/5*'’ of their profits in silver and
gold, while the agriculturists were to pay 1/6*'’, 1/8*'’ and 1/10*^ 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.
Mr. B.E.V. Sabine , A History of Income Tax Published by George Allen & Unwin Ltd.,
Gr. Bretain, (1966)(Pg. No. 42)
11
Origin of Income Tax :
Income Tax is a direct tax. As per history of Income Tax, it was a “War
Tax”, it had been born of the war. And it had sustained the war. But when the
war was over, it was understandable that the government should be subject to
the strongest pressure to redeem an implied promise, that war tax should not
continue in time of peace and repeal the Income Tax Act. “The opposition in
the House of Commons to its retention was led by Henry Broughom, a lawyer
with a restless talent and an all pervading energy. The Govemment was not,
however, prepared to repel it automatically and Hansord tells of a desperately
interesting struggle over the issue in the last six weeks or so of the winter of
1816” *.
The principle of the tax itself had been accepted as a necessary war
time evil. But this was peace, and patriotism no longer provided a check to
full-blooded assaults.
“George Rose followed with a reasoned defiance of tax. It had saved
the national credit and sooner or later, if it were repealed, other taxes would
have to be raised to secure equivalent revenue. The tax bore hard on certain
classes of people. The anticipation that within a few weeks the tale would be
covered with petitions against the tax was fully realized, one of these was
from the Lord Mayor, Alderman and Commons of the city of London which
seems, by its language, to have been drafted by the same hand as that of
May 1,1815”**.
12
c) Taxation in British India :
Income Tax has been in force in India from 1860. During British times
the deficit and sterling debt necessitated new sources of revenue. The British
Government specially sent “Mr. James Wilson” an experienced British
Treasury official to restore order in Indian finances. Mr. Wilson introduced a
tax on income of all kinds, a system of licenses of arts trades and professions
and a tobacco tax. Income Tax Act was closely modelled after British Income
Tax Law. The tax was levied on all income and profits arising from property
and professions. In short, it undenwent major changes in 1886, 1922 and
1936.
The attainment of Independence, adoption of the democratic
constitution and commencement of an era of planning necessitated a change
in India’s tax policy. The Taxation Inquiry Commission was appointed to
make a detailed study on implementation and repercussion on Taxation
policy. The main objective of the commission was the development of various
economic sections of the society both as revenue and an instrument of social
economic welfare.
After several experiments the first Income Tax Act passed in 1886.
The Act had features like the levy of taxes at a flat rate and the introduction of
the concept of agricultural income as well as its exclusion from taxation.
Though the tax levy was done with the main objective of “addition to revenue”,
after some time the objective of ‘Reduction of Economic Disparity’ also
assumed importance and hence in 1916, tax rates were made progressive.
Such changes and repealing existing laws became inevitable with changing
times. In 1918, a new Act was passed which advocated aggregating income
from all sources to determine tax rates and it also prescribed tax rates in
Income Tax Schedules. Various committees were set up to review the tax
system.
In the light of recommendations of Mahabir Tyagi committee in 1961,
Income Tax Act 1961 was presented and passed in September 1961. It came
into force from 1®' April 1962. Since then various committees have been
13
appointed by the government to review the taxation structure. Thus the
present scheme of Income Tax is as amended by many such schemes. The
Income Tax Act is a direct tax enactment, which forms the fiscal scheme of
our country along with direct taxes like wealth tax. It is a Centre enactment,
the Central Govemment administers the enactment and collects its proceeds,
which are then shared by Central and State governments on the basis fixed
by the Finance Commission. The Income Tax Act, 1961 extends to the whole
of India and consists of more than 450 sections, numerous sub-sections and
twelve schedules. The administration of all direct taxes is done through an
apex body called as ‘Central Board of Direct Taxes’(CBDT) for administration
of the Act. The Board has passed various rules, which form the scheme of
Income Tax Rules,1962. In addition to these, from time to time various
circulars are issued by the Board to guide the Income Tax Department official,
assessee and the public in general.
14
a| Income Tax:
Income Tax is levied on the income of different categories of persons
as per the provisions of the Income Tax Act, 1961, after computing the
income the rates of Income Tax applicable of that assessment year is applied
to find out the tax liability. The collection of Income Tax is mainly through
personal Income Tax and corporate Income Tax, the share of corporate tax
being the largest one. In other words Income Tax is one of the major source
of revenue for the Government. The responsibility for collection of Income
Tax vests with central Govemment.
The act of 1922 remained in force till 1961, meanwhile in 1956 the
govemment had referred the Act to the law commission in order to recast it on
logical lines and to make it simple with out changing the basic tax structure.
Based on the law commissions report, the income tax bill giving effect to its
recommendations was submitted in the Lok Sabha in April 1961. The bill
received the assent of the president on 13*^ Sep. 1961. The present income
tax Act is the Act 1961. According to section 1 of the income tax Act 1961,
extends to the whole of India including the state of Jammu Kashmir, it came
into force on 1®* April 1962. The liability of tax is detennined by total income in
the previous year, limits of taxation, rates, status of assessee (e.g. individuals,
HUF, fimn, company etc.)residential status and various heads of income
(salary, house property, business, capital gains and other sources). The
income tax scheme also provides for detection of offences and penalization
also justice to aggrieved assesses.
IJ
contribute more than poor income group. Secondly, it also refers equal tax
burden for all persons.
The canon of convenience : the tax should be levied in such a
manner that it should be convenient to all tax payers. It should not be so
complicated and so cumbersome in their operation as to cause needless
inconvenience and hardship to the people. In India this objective has been
wholly overiooked by the union and by the State.
The canon of economy : This is almost important canon laid down by
Adam Smith “It means tax system should have economical object, the cost of
tax collection should be minimum. Secondly the Government must economic
and levy only the minimum tax which is necessary for the national growth.
The Fourth canon of certainty and clarity : All the taxation policies
ought to be certain and clear. To avoid confusion and hardship caused to
taxpayers and to prevent exploitation of taxpayers taxation policies should be
precise and clear.
The canons of taxation in modem times have been stated to be social
justice, consistency with economic goals easy to administration and
compliance and revenue adequacy. Although the amendments are made with
a view to attain one or all the objectives mentioned above, but every time
such objective many not have been necessarily achieved. This is because
criticizing the law maker is very easy but making a full proof law is extremely
difficult. The moment an amendment is made or a new section is introduced
in the Income Tax Act, the legal brains in the country start wori<ing on them
with a view to find out some loopholes by which their clients can save tax. It
is a natural attitude on the part of every assessee to keep his tax liability to a
minimum. After all, nobody will like to unnecessarily pay extra tax than what
is legally due from him. Naturally, such a study of the legal Pandits becomes
quite rewarding to them. So the picture which has emerged over the years in
India is that of the lawyers finding out controversies and the amendments
being made to plug the loopholes or to end the controversies. The lawyers or
the assessees applying their brains in trying to find out new loopholes in fresh
amendments with the result, again and again, the amendments are being
made.
1$
The author Palkhiwala stated in his book that “there have been more
than 3300 amendments in less that thirty years after the Income-Tax Act,
1961 came into force. Most of the times, the amendments are made to
simplify the law, to plug the loopholes, to end the controversies or to find out a
way to get more revenue. All these aspects have compelled the legislature so
far to make these many amendments to the Income-Tax Act. Ultimately, it is
the goal of every govemment to make an ideal taxation system. In his book
‘We, the People’ the noted jurist and authors”* Shri. N. A. Palkhiwala has
nicely mentioned about the objectives behind any tax system.
Kanga and Plakhiwala The Law and Practice of Income Tax ‘Eighth Edition-Volume I Published by N. M.
Tripathis Pvt. Ltd., Bombay (1990). N. A. Palkhiwala We, the people - India - The largest Democracy -
Published by T. N. Shanbhag. Strand Book stall, Dhannur, Sir Pherozeshah Mehta Road, Fort Bombay
(1984) (P. 89,90)
if
Definitions:
Income [sec.2(24)]*
The definition of the term ‘Income’ u/s 2 (24) is inclusive and not
exhaustive. Therefore, it includes not only those terms which are included in
sec.2(24) but also includes such things which the signifies,, according to its
general and natural meaning. Thus one can say that Income Tax Act, 1961
does not want to left anything which suggest that it is income out of its
bracket.
“Meaning”; Income is a periodically monetary return with some sort of
regularity. It may be recurring in nature. It may be broadly defined as the true
increase in the amount of income which comes to a person during a fixed
period of time.
Income includes all the receipts in the form of cash /any kind.
Profits & Gains,
(if) Dividends,
(iii) Voluntary contributions received by a trust,
(iv) Perquisites in the hand of employee
(v| Any special allowance or benefit
1^1 City compensatory allowance/dearness allowance
' Income Tax Act, A.Y. 2004-05 - Vinod Sighania - Page No. 4 & 5
li
(vii) Any benefits or perquisites to a Director
(viii) Capital Gains
(ix) Any benefits or perquisite to a representative assessee
(x) Any sum chargeable u/s 28,41 & 59
(xi) Insurance profit
(xii) Winnings fomri lottery
(xiii) Employees contribution towards provident fund
As per definition the given list is not exhaustive. All sorts of receipts
other than above mentioned comes under the meaning of income.
The concept of “Total Income” has been defined in Section 2(45) of the
income tax act. Logically, for a resident assessee ‘Income’ means total of all
income of a person from whatever sources received or not received but
accrued in India & outside India. But the definition of Income under the
Income Tax Act sometimes, we have also to take into account the income
earned by minors or other persons, whose income is liable to be clubbed.
Certain provision under the Income Tax Act postulate, that in
computing the total income of any individual, as arises directly or indirectly to
the spouse or minor child or from assets transferred directly or indirectly to
them other wise than for adequate consideration is also required to be added
in the hand of such person. These provisions thus do not leave any doubt
that the ‘total income’ of any individual has to be computed by the considering
such income, which is also liable to be clubbed in his hands. These
provisions, thus have broadened the scope to ‘total income’ considerably and
income, which is deemed to be received by or on behalf of an assessee, is
also required to be included in his hands.
19
Any person whose total income in the previous year exceeds the
maximum amount which not chargeable tax (i.e. Rs. 50,000) & who is
covered under the scheme of 1/6 of the IT Act, is an assessee. The income
tax is chargeable at the rate prescribed in the finance Act, for the relevant
assessment year. Following are the important temris of the income tax act.
a) Person b)Assessee c)Assessment Year d)Previous Year
111)
Person [Sec. 2(31)]
20
2. any institution, association or body which is or was assessable or
was assessed as a company for any assessment year under the
Indian Income- tax Act, 1922 (11 of 1922), or which is or was
assessable or was assessed under this Act as a company for any
assessment year commencing on or before the 1®* day of April,
1970. or
3. any institution, association or body, whether incorporated or not and
whether Indian or non-Indian, which is declared by general or
special order of the Board to be a company.
4. A firm refers to a Partnership firm. Partnership means relationship
between two persons who have agreed to share the profits of a
business carried on by all or any of them acting for all. Persons
who have entered in to a partnerships with one another are referred
as partners and the under which the business is carried on is called
the fimn’s name.
5. An association of a person means two or more persons join
together for common purpose with a view to eam income. AOP is
distinct from partnership and it is not necessary that of any contract
between the persons who have joined together.
6. The body of individual means a conglomeration of individuals who
carry on some activity with the objective of earning of some income.
It would consists of only individuals. Entities like company, fimn
cannot be a member of body of individuals.
7. A Local Authority means Panchayat as referred to in clause (d) of
article 243 of the Constitution; or Municipality as referred to in
clause (e) of article 243 of the Constitution; or Municipal committee
and District Board, legally entitled to, or entrusted by the
Govemment with, the control or management of a Municipal or local
fund; or Cantonment Board as defined in section 3 of the
Cantonments Act 1924 (2 of 1924).
8. Artificial juridical persons are not natural persons but are entities in
the eyes of law. The artificial persons include a juridical personality
and also deities.
As the given definition is inclusive any person not falling in the above
21
mentioned categories, may still fall in the four comers of the term “person”
and accordingly may be liable to tax u/s 4.
' Students Guide to Income Tax, A. Y. 2004-05 by Dr. V.K.Singhania (Pg. No. 4)
22
W) Assessment Year [A.Y] [u/s.2(9)]*
Assessment Year means the period of 12 months commencing on the
1®* of April immediately after the previous year[P.Y]
Assessment is the year in which the income of the previous year is
assessed to tax. The Income earned during a particular year is assessed to
tax in the following year.
The following year in which the tax of previous year is assessed known
as Assessment Year. For e.g. Previous Year
Assessment Year
1. 31.3.2003-04 31.3.2004-05
2. 31.3.2002-03 31.3.2003-04
3. 31.3.2001 -02 31.3.2002-03
VI) Previous Year(P.Y.)[u/s 3]**
Previous Year for the purpose of Income Tax Act,1961 is financial year
In which the income is eamed. This year is known year as ‘laxed year or
Financial Year”. The Previous Year starts from 1®^April and concludes on 31®*
March, It is compulsory to follow the Financial Year as the uniform Previous
Year for all the Assessee and for all sources of income. The Previous Year
period of 12 months. According the section 3 of the Income Tax Act, 1961
Previous Year means the Financial Year immediately preceding the
Assessment Year. But in some cases Previous Year may not be of 12
months period as in the case of business or profession, newly setup or source
of income newly coming into existence. The Previous Year shall be the year
beginning the date of setting up of the business of quotation or the date on
which the new source of income comes into existence.
For e.g. Previous Year Assessment Year
1. 31.3.2003-04 31.3.2004-05
2. 31.3.2002-03 31.3.2003-04
3. 31.3.2001-02 31.3.2002-03
' & ** Students Guide to Income Tax, A. Y. 2004-05 by Dr. V.K.Singhania (Pg. No.1 )
Generally income of the Previous Year is assessable as the income of
immediately following Assessment Year. This rule has certain exceptions
which are enumerated as follows :
(i) Income of the non-resident from shipping business;
(ii) Income of persons leaving India either permanently or for a long
period of time;
(iii) Income of the bodies formed for shot duration;
(iv)Income of a person trying to alienate his assets with a view to
avoiding payment of tax; and
Income of a discontinued business.
Thus under these provisions Income Tax Act, 1961 tries to ensure
smooth collection is income tax from the aforesaid taxpayer who may not be
traceable if tax Assessment procedure is postponed till the commencement of
the normal Assessment.
Classification of Assesses:
The Indian Income Tax is a tax on a person in relation to his income.
Assessee i.e., persons by whom the tax is payable, are classified as :
individual, Hindu Undivided family; companies; Local Authorities; Firms and
Other Association of Person. They are further divided in to three categories
with reference to their residence viz. (i) Residents and Ordinarily Residents;
(ii) Residents but not Ordinarily Residents; and (iii) Non-residents in India.
The incidence of taxation varies with the residential status of an
Assessee, while the classification according to the legal status of assessee is
necessary for the following reasons :
There are different rates of income tax for assesses of different legal
status. There are different maximum exemption limits in the case of different
classes of assesses, e.g. individuals. Hindu undivided families, finns,
companies, co-operative societies etc. There are different provisions for
allowances and investment.
There are different tests for residence. Basic conditions determining
an individual is Resident:
u/s 6(1) an individual is said to be resident in India in any Previous
Year, if he satisfies at least one of the following basic conditions :
i) he is in India in the Previous Year for a period if 182 days or more or
ii) he is in India for a period of 60 days or more during the Previous
Year and
iii) 365 days or more during 4 years immediately preceding the
Previous Year.
Basic conditions to test as to when a Resident *
Individual is ordinarily resident in India [Additional Conditions) [R-O-R]
u/s 6(6), a resident individual is treated as “Resident and ordinarily resident” in
India if he satisfies the following 2 additional conditions :
i) he has been resident in India in at least 2 out of 10 Previous
Year [according to basic conditions noted above] immediately
preceding the relevant Previous Year; and
ii) he has been in India for a period of 730 days or more during 7
years immediately preceding the relevant Previous Year.
25
Non-Resident [NR]:
An individual is a Non Resident in India if he satisfies none of the basic
conditions. Additional conditions are not applicable in this case.
Exception to basic conditions :
By virtue of explanation (a) to Section 6(1), the period of “60 days”
referred to in basic condition No. ii, has been extended to “182 days”. In
following two conditions the above exception is applicable.:
An Indian citizen who leaves Indian during the previous year for the
purpose of employnnent outside Indian or an Indian citizen who leaves India
during the previous year as a nriennber of the crew of an Indian ship.
Indian citizen or a person of Indian origin who comes on a visit to India
during the previous year.
Indian Origin : A person is of Indian Origin, if he, or either of his parents or
any of his grand parents was bom in undivided India. [Grand parent include
both maternal as well as paternal grand-parents.]
The liability of the persons who are resjdent but not ordinarily resident
^ - •
is the same as in the case of persons who are resident and ordinarily resident
except that the income which accrues or arises outside India is not includible
in their total income unless it is derived from a business controlled in or a
profession set up in India.
Non-residents are liable in respect of income received or deemed to be
received in India or which accrues or arises or is deemed to accrue or arise in
India. They are not at all liable in respect of income accruing or arising
outside India even if it is remitted to India.
26
Table No. 1.7
Students Guide to Income Tax, A. Y. 2004-05 by Dr. V.K.Singhania (Pg. No. 11)
28
a) Rent derived from the agricultural land includes rent received either in
cash or in kind. However for any payment which can be considered as rent
derived from agricultural land, one basic condition needs to be satisfied that
there must be an established relationship as a landlord and a tenant.
b) Any income derived from such land by way of carrying out agriculture
activity or by way of perfomriing the activity of processing of agricultural
produce.
Agricultural activity includes certain basic operations such as tilling of
the land, sowing of the seeds, planting. These operations are thereafter
followed by subsequent operations such as weeding, digging of the soil
around the crop, removal of the undesirable growth, use of pesticides etc.
c) Any income from farm Building.
The building in this case must be in the immediate vicinity of the land
used for agricultural purpose. The building should be owned and occupied by
the land holder if he is in receipt of rent or revenue from the land. And the
land must be assessed to land revenue or local rate.
d) Where income is derived partly from Agriculture and partly from
manufacture It has to be apportioned. The portion referable to manufacture
would be taxable income; while the balance referable to agriculture would be
non taxable.
e) Capital Receipts, expenditure and Revenue Receipts and expenditure:
For income Tax purpose income is considered to be receipts, which
are arising with certain regularity or expected regularity from a definite source.
The receipts which are of capital nature are generally not taxable on the other
hand revenue receipts are fully taxable. In the Income Tax Act does not
mention about the distinction between capital receipt and revenue receipt.
Still these temris are very important, for example, if a tree is referred as capital
income, then income by way of sale of fruit is termed as a revenue receipt. In
other words, an amount received as fixed capital or from sale of fixed asset is
capital receipt, while an amount received as circulating capital or floating
assets is revenue receipt.
m
Study of capital expenditure is also important Act does not define
capital and revenue expenditure but capital expenditure is not deductible u/s
37(1). In order to detemiine whether expenditure is capital or revenue in
nature, the fact that is lump sum payment or periodic payment is not
important. Surrounding circumstances of each case can be distinct. The
distinction between the two is vital because capital receipts are exempt from
tax, unless they are expressly taxable u/s 45 even if they are capital receipts
and revenue receipts are also taxable unless they are expressly exempt from
tax u/s 10.
Under Income tax Act Section 10 is very beneficial for the tax payer’s
point of views. Section 10 highlights on totally exempted incomes. The list of
income given in Section 10 of the Income Tax Act, 1961 is absolutely exempt
from tax. Certain important exempted incomes which are applicable to
Individuals are mentioned below:
Agriculture income - Income from the agriculture is totally exempted
from the tax however person having agricultural income along with non-
agricultural income is charged at a higher rate on incomes, which are non-
agricultural.
f) Incomes Which Do Not Form Part Of An Assessee’s Total Income*
(Exempted Income U/S 10):
U/s 10 following incomes are absolutely exempted from tax as it does
not form part of total income. The burden of proving that a particular item of
income falls within this Section is on the Assessee.
Here as per topic’s requirement only those sections are included which
are applicable to Individuals only.
Students Guide to Income Tax, A. Y. 2004-05 by Dr. V.K.Singhania (Pg. No. 50-51)
30
Receipts by a member from a Hindu Undivided Family sec 10(2):
Any sum received by an individual out of income of HUF or out of
Income of estate belonging to the family is exempt from tax, even if tax is not
paid or payable by the family on its total income. The exemption is based
upon the principle of avoidance of double taxation. Income of HUF is taxable L'
in its own hand. Only those members of Hindu Undivided Family can claim
exemption under this clause, who are entitled to demand share on partition or
are entitled to maintenance under Hindu Law.
•r-'
Shareof profit from partnership finn[Section.10(2A)]: ^
Share of profit received by partners from a firm (which is assessed as
such) is not taxable in the hand of partners. Interest to Non-
residents[Section.10(4), (4B):
The following interest income is exempt from tax:
(i) Interest on notified Govemment securities [including premium on
redemption of such bonds];
(li) Income from interest on money standing to the credit of a Non-
resident(Extend) Account in India in accordance with the foreign
Exchange Regulation Act, 1973(The exemption is available to
“person resides outside India” u/s 2(9) of the foreign Exchange
Regulation Act or a person who has been permitted by Reserve
Bank of India to maintain the aforesaid account);
(iii) In the case of an Indian citizen (or a person of Indian origin) who
is a non-resident, the interest from notified savings certificates
(i.e. NSC vi & vii lssues)if such certificates are subscribed in
convertible foreign exchange remitted from outside through
official channels.
The joint holder of Non-resident (Exchange) Account do not continue
an ‘Association of Persons’ by merely having these accounts in joint names.
The benefit of exemption u/s 10(4) will be available to such a joint account
holders, subject to fulfilment of other conditions by each of the individual joint
account holder.
31
Leaves Travel concession in India [Section.10(5)]:
The exemption in respect of value of leave travel concession and
passage money is available to Indian as well as foreign citizen. Following
points should be noted in this regard.
1. Journey should be performed while in service or after retirement.
Exemption cannot be more than expenditure.
Family:
The employee can claim amount of expenditure from employer with
regard to travel of his family. For this purpose “family” means:
(I) The spouse and children of the individuals:
The parents, brothers and sisters of the individual who are wholly
dependent on him. ,
Exemption as prescribed by board:
Ar,-
The exemption u/s 10(5) has been made subject to conditions, which
the Board may prescribe including conditions as to number of joumeys and
the amount which will be exempt per head.
Condition prescribed by Board: [confirm from mod whether to include
or not]
Remuneration received by foreign diplomats and nationals
[Section. 10(6)(ll)to(vi)]:
It is not changeable to tax.
Salary received by a ships crew [Section. 10(6)(viii)]:
If total stay in India does not exceed 90 days, then salary of a non
resident in connection with employment on a foreign ship is not taxable.
Salary received by a foreign trainee (Remuneration) [Sec.10(6)()]:
The remuneration received by an employee of a foreign Govemment
during his stay in India in connection with his training in India is not taxable (if
a few conditions are satisfied).
Tax paid on behalf of non-residents / foreign companies in respect of
other income [Section. 10(6B)]:
The amount of tax paid by Government or an Indian concern on behalf
of a non-resident or a foreign company in respect of it’s income (other than
salary, royalty or technical fees) is not included in computing the total income
of such non-resident or foreign company.
32
I) Fees for technical services [Section. 10(6c)]: Only for companies.
ii) Allowance to Government employees outside lndia]Section.10(7):
iii) Any allowance paid or allowed outside India by the Govemment to an
India citizen for recurring services outside India is wholly exempt from
tax.
if) Income of a foreign Govemment employee under co-operative
technical assistance programmes[Section.10(8)]:
v) Income of an individual, sen/icing in India in connection with any co
operative technical assistance programmes, in accordance with an
agreement entered into by a Central Government and a foreign
government. Is exempt from tax.
Remuneration on fees received by non-resident consultants and their
foreign employees [Section. 10(8a),(8b)]:
vii) Income of family members of an employee serving under co-operative
technical assistance programmes[Section.10(9)]:
viii) Gratuity[Section. 10(10)]:
Gratuity is a retirement benefit. It is generally payable at the time of
cessation of employment and on the basis of duration of service. Tax
treatment is as follows:
(i) In the case of Govemment employees:
Any death cum retirement gratuity received by Govemment
employees is wholly exempt from tax.
(ii) In case of employees covered by the payment of Gratuity Act,
1972:
It is exempt from tax to the extent of the least of the following:
(a) 15 days salary based on salary last drawn for every
completed year of service or part there of in excess of six
months:
(b) Rs. 3,50,000;
(c) Gratuity actually received.
Gratuity in excess of the aforesaid limits is taxable in the
hands of the assessee. however the assessee can claim
u/s 89.
33
(iii) In the case of any other employee:
It is exempt from tax to the extent of least of the following:
(a) Rs. 3,50,000.
(b) Half months average salary for each completed year of
service: or
(c) Gratuity actually received.
vi) Pension and leave salary [Section 10(10a), (10aa)]:
Any payment received by way of commutation of pension by an
individual out of annuity plan of the LIC of India from a fund set up by that
corporation shall be exempt u/s10(10A). Pension received from
employer[Section. 17(1)(ii)]:
Uncommuted Pension:
It is periodical payment of pension C taxable as salary u/s 15 in
the hands of Government as well as non-Govemment
employee.
I) Commuted Pension:
It is a lump sum payment in lieu of periodical payment.
Any such payment received by Govemment employee is
exempted from tax.
Non-Government Employee:
In a case where the employee receives gratuity, the commuted
value of of the pension which he is normally entitled to receive;
and In any other case. The commuted value of one half of such
pension.
Such amount is exempt from tax.
^ Leave salary [Section 10(AA)]:
Encashment of leave by surrendering leave standing to one’s credit is
known as “leave salary”.
Leave encashment during continuity of employment:
If leave encashment is received during the continuity of employment, it
is chargeable to tax, irrespective of the fact whether the employee is in
Govemment service or private service. The employee can, however, claim
relief in temris of Section 89.
Leave encashment of the time of retirement or leaving the job:
34
(i) Government employees: Exempt from tax.
(ii) Non-Govemment employees:
Leave salary is exempt from tax to the extent of the least of the
following:
(i) cash equivalent to leave salary; or
(ii) 10 months “Average salary”; or
(iii) Amounts specified by Govemment; or
(i) Leave encashment actually received.
xi) Retrenchment Compensation [Section 10(1 OB)]:
Compensation received by a workmen at the time of retrenchment is
exempt from tax to the extent of lower of the following:
(i) On amount calculated in accordance withprovisions of Section
25f(b) of the Industrial Dispute Act, 1947; or
(ii) Amount specified by Government (4.5,00,000); or
(iii) The amount received.
xii) Compensation received by victims of Bhopal gas leak disaster[S.10
(10BB)]:
xiii) Compensation received of the time of voluntary retirement [S.
lO(IOC)]:
Such compensation received is exempt if certain condition are
satisfied:
(i) Maximum amount exempt is Rs. 5,00,000.
(ii) Compensation is received of the time of voluntary retirement or
separation.
(iii) Compensation is received by an employee of the following
undertaking: State Government, Central Government,
University, I l l ’s, public sector companies, any co-operation
society or any company.
xiv) Tax on perquisite paid by employer [Section 10(1 OCC)]:
Clause 10(10CC)is inserted with effect from A.Y. 2003-04 to exempt
the amount of tax actually paid by an employer.
XV) Amount paid on life insurance policies [Section 10(10D)]
xvi) Payment from provident fund[Section 10(11 ),(12)]
xvii) Payment from an approved super annuation fund[Section 10(13)]
35
xviii) House Rent Allowance[Section 10(13A)]:
Exemption in respect of House Rent Allowance is regulated by rule 2A.
the least of the following is exempt from tax:
i) an amount equal to 50% of salary, where residential house is
situated in any of the metro cities and an amount equal to 40%
of salary where residential house is situated at any other place,
house rent allowance received by the employee in respect of the
period during which rental accommodation is occupied by
employee during the previous year; or
III) the excess of rent paid over 1 0 % of salary.
xix) Special Allowance[Section 10(14)]
Exemption depends upon actual expenditure by the employee:
In the cases given below the amount of exemption u/s 10(14) is
i) the amount of allowance; or
I1| the amount utilised for the specific purpose for whichallowance
is given whichever is less.
The cases one enumerated as follows:
Travelling allowance / transfer allowance.
Conveyance allowance.
« Daily allowance.
Helper allowance.
^ Research allowance.
Uniform allowance.
II) When exemption does not depend upon expenditure.
In these cases, regardless of the amount of expenditure, the
allowances given below are exempt to the extent of:
i) the amount of allowance; or
ii) the amount specified In rule 2BB, whichever is lower.
m
Table No. - 1 . 8
37
I) any other allowance received by Member of Parliament
under the member of Parliament (constituency allowance)
Rules, 1986; and
iii all allowances (to the extent of Rs.2000p.m.) received by
any person by reason of his membership of any state
legislature or any committee threat.
V) Awards[Section 10(17A)]:
Any award paid in cash or land by central or State Government.
ab) Pension to gallantry award winner.[Section 10(18)]:
It is exempt if following conditions are satisfied:
ij pension is received by a taxpayer;
ii) the taxpayer was an employee ofthe Central
Govemment or State Government; and
iii) the taxpayer has been awarded Param Vir Chakra or
Mahavir Chakra or any other notified gallantry award.
Exemption is also available, if family pension is received by any
member of the family of an individual (who satisfies condition (ii) & (iii)
above).
ac) Farmer Ruler of Indian states [Section 10(19A)]:
The exemption u/s 10(19A) is limited to a portion of any one place in
occupation of a ruler & does not extend to annual value of the entire
balance of the assessee , where part of it are rented out by him.
ad) Income of member of scheduled Tribe [Section 10(26)]:
Exemption is available if following conditions are satisfied.
1) The taxpayer is a member of a scheduled Tribe .
ii) The taxpayer resides in any area in the state of
Nagaland, Manipur, Tripura, Arunachal Pradesh,
Mizoram a district of North Cacher Hills, Mikir Hills, Khasi
Hills, Jaintia Hills and Garo Hills or Ladkh region of State
of Jammu& Kashmir.
Exemption is available in respect of income which accrues or arises to
him from any source in the area or States specified above. Exemption is
available in respect of income by way of dividend/interest on securities even if
it arises from a source in the areas not specified above.
m
ae) Income of resident of Ladakh [Section 10(26A)]: Not applicable.
af) Subsidy received by planters [Section 10(31)]:
Subsidies received by assessee engaged in the business of growing &
manufacturing rubber, coffee, cardamom or such other commodities as the
Central Govemment may, by notification, specify is exempt.
ag) Income of minor[Section 10(32)]:
In case the income of an individual includes the income of his minor
child in terms of Section 64(1 A), such individual shall be entitled to exemption
of Rs. 1,500 or such income whichever is lower.
ah) Capital gain on transfer of Us 64 [Section 10(33)]:
Any income arising from transfer of capital asset being a unit of Us64 is
not chargeable to tax where the transfer of such assets takes place on or after
April 1, 2002.
ai) Dividends & Interest on units [Section 10(34)1(35)]:
Clauses (34) & (35) have been inserted in Section 10 from the
assessment year 2004-05. Following will not be chargeable to tax from
the A.Y 2004-05.
i) Any income by way of dividend referred to in Section 115-0[i.e.
dividend: not being covered by Section 2(22)ee), from a domestic company.
ii) Income from units received by a unit holder from the administrator of
the specified undertaking as defined in the unit Trust of India (Transfer of
Undertaking & Repeal) Act, 2002 or Mutual Fund or the specified company on
or after Aprill, 2003.
For nullifying the effect of this provision Govemment had amended
Section SOL & SOM. as. No deduction will be available in respect of dividends
and interest on units u/s SOL & SOM. The person paying dividends on shares
or interest on units will have to pay additional tax on dividqj
distributed u/s 115-0 115-R.
aj) Long term capital gains on transfer of listed equity shares
[Section 10(36)]:
Clause (36) has been inserted in Section 10 with effect from the
assessment year 2004-05. By virtue of this clause, capital gains is not
chargeable to tax if the 2004-06. Following conditions are satisfied :
i) The asset which is transferred is a long term capital asset being an
39
eligible equity share in company.
9V»N£
1.4 Significance of Various Heads Of Income under Income Tax \
1961: k l
The concept of heads of income is very important under the income-t^^/N
Act. An income which is to be properly charged under one particular head
cannot be charged under any other head of income. This is because the Act
contains self-contained provisions in respect of each head of income.
Specific deductions are permissible under each head of income. Therefore if
an income is charged under a wrong head of income, the assessee will lose
the benefit of deductions available to him. For example, for the purpose of
computing salary income, standard deduction, deduction towards
entertainment allowance and deduction towards professional tax are
available.
We have to bring various types of incomes under their specified heads
and compute the same under each head. After such computation we have to
add the income under various heads. This will constitute the gross total
income. From the gross total income we have to allow the certain deductions
permissible by the Act net figure after allowing the above deductions will
constitute the total income, which is the taxable income.
40
Sources of Income:
Income Tax Act, 1961 determines 5 heads / sources of income. These
are as follows:
a. Income under the head salary.
b. Income under the head House Property.
e. Profit & Gains of Business & Profession.
4 Capital Gains.
Income from other sources.
Detailed discussion of the above sources are as follows :
41
is only an application and hence chargeable.
Surrender of salary : However, if an employer surrenders his salary to
the Central Government under section 2 of the Voluntary Surrender of
Salaries(Exemption from Taxation) Act, 1961, the salary so surrendered
would be exempt while computing his taxable income.
Salary paid tax-free : This, in other words, means that the employer
bears the burden of the tax on the salary of the employee. In such a case, the
income from salaries in the hands of the employee will consists of not only his
salary income but also tax paid by the employer.
Voluntary payment: Whether the payment from an employer is based
on a contract or not, it constitutes salary in the hands of the employee.
However, many employers give personal gifts and testimonials to the
employees. For example, employees who complete 20 years of service may
be given a wrist watch. The question arises whether the value of the watch
can be taxed in the hands of the employee. Courts have taken the view that
such gifts are not taxable. However in these cases it is important that such
gifts must be given to employees pursuant to a scheme applicable to
employees in general. If gifts are given purely on a selective basis they may
well become chargeable in the hands of the recipient.
Under Section 15, the following income is chargeable to income-tax
under the head ‘Salaries’.
Any salary due from an employer or a former employer to an assessee
in the previous year, whether paid or not.
Any salary paid or allowed to him in the previous year by or on behalf
of an employer or a former employer, though not due or before it becomes
due to him.
Any arrears of salary paid or allowed to him in a previous year by or on
behalf of an employer or a former employer if not charged to income tax for
any earlier previous year.
Thus salary has been made taxable on due basis, as well as on receipt
basis whether due or not, e.g. advance of salary where any salary paid in
advance is included in the total income of any person for any previous year, it
shall not be included again in the total income of the person when the said
salary becomes due.
The word ‘employer’ would included every type of employer -
42
Government, a local authority, a company, any other public body or
association, a foreign Govemment, any private employer and so on. Not only
the income from present employer is taxable under the head ‘Salaries’, but all
income from former employer is also similarly taxable, provided the same
arises out of the former employment, e.g. pension, gratuity, arrears of salary,
payment of salary in lieu of notice, retrenchment compensation etc.
A) Salary as defined u/s 17(1) of the Income Tax Act, 1961, which includes^ :
wages;
any annuity or pension;
any gratuity;
any fees, commission, perquisites or profits in lieu of or in
addition to any salary or wages;
any advance of salary;
any payment received by an employee in respect of any
period of leave not availed by him;
The portion of the annual accretion in any previous year to the balance
of the credit of an employee participating in a recognised provident fund to the
extent it is taxable, and transferred balance in a recognised provident fund to
the extent it is taxable.
Basis of charge of salary income :
Basis of charge u/s 15. As per Section 15 salary consists i f :
• any salary due from on employer (or a former employer) to on
assessee in the previous year, whether actually received or not.
« Any salary paid or allowed to him in the previous year by or on
behalf of an employer (or a former employer), though not due or
before it became due; and
• Any arrears of salary paid or allowed to him in the previous year
by or on behalf of an employer (or a fomrier employer), if not
charged to income tax for an earlier previous year.
In simple words above provisions can be summarised as follows :
Salary due during the year, although it is received in a subsequent
year.
Salary which is received during the year, but which will became due in
43
a subsequent year.
Any arrears of salary received during the year, although it pertains to
one of the earlier year.(and same were not taxed earlier on due basis.)
Some Important points:
Salary is taxable on “due” “receipt” basis whichever is earlier.
Accounting method of employee is not relevant. The Central Board of Direct
Taxes has at last cleared the air on tax deducted at source or TDS as it is
popularly known. Everyone who is responsible for income chargeable under
the head salaries, shall deduct income-tax on the estimated income of the
assessee under the head ‘salaries’ for every financial year.
The income-tax is required to be calculated on the basis of the rates as
per the Finance Act. and shall be deducted on monthly average at the time of
each payment. No tax will, however, be debited at source in any case unless
the estimated salary income including the value of perquisites. Thus the tax
on the salary payment to employees have to be deducted by all employers
including the individuals, fimns, companies, religious and social organizations
as well as government organizations.
In case an individual works for two employers or has changed from one
employer to another. Section 192(2) provides for deduction of tax at source by
such employer (as the tax payer may choose) from the aggregate salary of
the employee who is or has been in receipt of salary from more than one
employer. The employee is now required to fumish to the present/chosen
employer details of the income under the head ‘salary’ due, or received from
the former/other employer and also tax deducted at source therefrom, in
writing and duly verified by him and by the former/other employer. The
present employer will be required to deduct tax at source on the aggregate
amount of salary (including salary received from the former or other
employer). It is provided in the above circular that option is available with the
employer to make payment of the tax himself on non monetary perquisites
given to an employee without making TDS deduction from the salary of the
employee. However, the employer will have to pay such tax the time when
such tax was otherwise deductible. For this purpose, average of income-tax
is to be computed on the basis of rates in force for the financial year.
If an employee desire relief of tax as per Section 89(1) in respect of
44
arrears salary then he or she will have to submit to the employer relevant
particulars in Form No. 10E.
ALLOWANCES:
Allowances is defined as a fixed quantity of money or other substance
given regularly in addition to salary for the purpose of meeting some particular
requirement connected with the services rendered by the employee or as
compensation for unusual conditions of that service. Under the Act, it is
taxable under Section 15 on ‘due’ or ‘receipt’ basis, irrespective of the fact
that it is paid in addition to or in lieu of salary.
Tax Treatment is different for each allowance :
* House Rent Allowance : section 10(13a)
* City Compensatory Allowances.
* Entertainment Allowance : Section 16(ii)
Conveyance Allowance : (Special Allowance) Section 10(14)
* Dearness Allowance.
* Allowance to Govemment Employees Outside India : Section
10(7)
* Fixed Medical Allowance, Tiffin Allowance, Sen/ant Allowance -
Taxable as a perquisite.
Children’s Education Allowance : Section 17(2) (iv)
PERQUISITiES:
The word ‘Perquisites’ in the ordinary sense means any casual
emolument attached to an office. Or position in addition to salary or wages.
It may take various fonns. It is a gain or profit which incidentally arises from
employment in addition to regular salary or wages. A perquisite is something
which arises by reason of a personal advantage. Under the general law. A
benefit which is not convertible into money is treated as a perquisite. Rent-
free accommodation and free educational facilities for children provided by the
employer are examples of benefits not convertible into money as they are not
saleable. But the income-tax law does not recognise such a distinction. For
income-tax purposes, it is immaterial whether perquisites are voluntary or
obligatory.
45
Tax Treatment of Provident Funds
Table No.-1 .9
following information is useful while computing the taxable income
under the head “Salary” :
Statutory Recognised Provident Unrecognised Public Provident
Provident Fund Provident Fund Fund
Fund
Employer’s Wholly Wholly exempt upto Exemption from No contribution
Contribution exempt from 12% of salary, any Tax is made by
to Tax excess over it, is employer
taxable under
“Salaries”
Interest Wholly Wholly exempt upto Exempt from Tax Wholly exempt
credited to exempt from 8.5% p.a. Any excess from Tax
Provident Tax over it, is taxable
Fund under “Salaries”
Refund of Wholly Wholly exempt from Employer’s Wholly exempt
accumulated exempt from Tax Subject to certain contribution and from Tax
balance on Tax conditions. interest thereon is
retirement taxable under
“Salaries”.
Employee’s own
contribution is
exempt. Interest
thereon is taxable
under “Income
from other
sources”.
46
Rental income is chargeable to tax under the head “Income from
House Property” if following three conditions are :
i) ’The Property should consist of any building or lands
appurtenant thereto;
ii) The assessee should be the owner of the property: and
iii) The property should not be used by the owner for the
purpose of any business or profession carried on by him, the
profits of which are chargeable to tax.”*
If all the aforesaid conditions are satisfied, property income is taxable
u/s 22 under the head “Income from House Property”. It makes no difference
if the assessee is a company which has been incorporated with the object of
buying or developing land properties.
Thus, any person having building or land appurtenant thereto, has to
pay tax an income from such house property.
In case the employee wants the employer to deduct tax at source in
respect of income other than salary income, then the employee must submit
the particulars of other income of the employer in the prescribed Form No.
12C. Such income should not be a loss under any such head other than the
loss under the head income from ‘House Property’ for the same financial year.
While taking into the account the loss from house property, the DDO shall
ensure that the assessee files the declaration in the said Form No. 12C
enclosing therewith a computation of such loss from house property.
The deduction in respect of interest on loan for self occupied house is
allowed upto Rs. 30,000 p.a. in case of housing loans taken on or before 1-4-
1999. If the loan is taken on or after 1-4-1999 the maximum interest on loan
allowed as a deduction is Rs. 1,50,000. Such higher deduction is not
allowable in respect of interest on capital borrowed for the purpose of repairs
or renovation of an existing residential house. To claim the higher deduction
in respect of interest up to Rs. 1,50,000, the employee should fumish a
certificate from the person to whom any interest is payable on the capital
borrowed, specifying the amount of interest payable by such employee for the
purpose of construction or acquisition of the residential house or for
conversion of a part whole of the capital borrowed, which remains to be repaid
as a new loan.
Students Guide to Income Tax, A. Y. 2004-05 by Dr. V.K.Singhania (Pg. No. 225)
47
c. Profits & Gains of Business or Profession :
It is that source of income which ranks second after salary in terms of
assessees. It is the highest source of income to the Government in terms of
amount collected from tax payers,
a) What is the basis of charge[Section 28]:
U/s 28, the following income is chargeable to tax under the head,
“Profits & Gains of business or profession”.
i) profit & Gains of any business or profession;
II) any compensation or other payments due to orreceived by any
person specified in Section 28(ii);
iii) income derived by a trade, professional or similar association
from specific services perfomried for its members;
iv) the valve of any benefit or perquisite, whether convertible into
money or not, arising from business or the exercise of a
profession;
^ export incentive available to exporters.
vi) any interest, salary, bonus, commission or remuneration
received by a partner from firm;
vii) any sum received for not carrying out any activity in relation to
any business or not to share any know-how, patent, copy right,
trademark etc.;
viii) any sum received under a keyman insurance policy including
any bonus;
ix) profits and gain of managing agency; and
x) income from speculative transaction.
Income from the aforesaid activities is computed in accordance with
the provision laid down in section 29 to 44D.
Meaning of Business*;
U/s 2(13) business include any a)trade, b)commerce, c)manufacture, or d)any
adventure or concem in the nature of trade commerce or manufacture.
Though definition is not exhaustive, it covers every face of occupation carried
on by a person with a view earn profit.
* Students Guide to Income Tax, A. Y. 2004-05 by Dr. V.K.Singhania (Pg. No. 271)
48
Meaning of Profession :
A professional person like a Doctor, Lawyer, Architect, Engineer,
Chartered Accountant, Musician, Film star etc. must know certain basic
concepts of Income-tax Law before trying to understand the specific
provisions relating to the determination of taxable income and income-tax
payable by him.
The most important source of income tax of a business, profession,
vocation is obviously “Profit and Gains”. Gross receipts are not chargeable to
tax but only the ‘profit’ or ‘gain’ is subject of charge. The important maxim to
be remembered in this connection is that income-tax is charged an income
not an receipt. The words ‘profit and gains’ should be understood in the
natural and proper sense as the real profits ascertained on ordinary principals
of commercial trading and commercial accounting. Out of gross receipts of
business or profession certain allowances expenditure and losses are allowed
to be deducted in order to amve at the net profits or gains of business or
profession chargeable to income-tax. .In fact the expression “profits and
gains” implies something in the nature of credit and debit account, in which
the receipts appear on one side and the costs and expenditure necessary for
eaming these receipts appear on the other side. Without such an account it
would be impossible to ascertain whether there were really any gains on
which the tax could be assessed. The profits and gains have to be computed
in accordance with the method of accounting regularly. Any loss which is
incidental to the carrying on is an admissible deduction in computing the net
chargeable profits or gains. Besides, there are certain items of business
expenditure, which are allowed as a deduction in computing taxable profits
and gains. It may be noted that the expression “paid” in relation to any
expenditure means the amount actually paid or incurred according to the
method of accounting upon the basis of which the profits or gains of a
businessman or professional person are computed. The detailed provisions
regarding the method of accounting etc are described in the act. Thus, where
a person follow the mercantile system of accounting it is not necessary that he
should have actually paid the expenditure. It would suffice if he incurs a
liability in respect of the expenditure in order to become entitled to claim a
deduction in respect thereof. However, where a professional person follows
49
the cash system of accounting the expenditure actually incurred or actually
paid by him alone will be allowed as a deduction.
The Act, however, contains certain provisions for determining how the
income is to be assessed. These must be followed in every case of business
or profession. The illegality of a business, profession or vocation does not
exempt its profits from tax; the revenue is not concerned with the taint of
illegality in the income or its source. Income is taxable even if the assessee is
carrying on the business, profession or vocation without any profit motive.
The liability to tax arises once income arises to the assessee; the motive or
purpose of earning the income is immaterial. Thus profit motive is not
essential for describing the income from that activity as income from business
or profession.
The profits of each distinct business must be computed separately but
the tax chargeable under this Section is not on the separate income of every,
distinct business but on the aggregate of the profits of all the business carried
on by the assessee. Profits should be computed after deducting the losses
and expenses incurred for earning the income in the regular course of the
business, profession, or vocation unless the loss or expenses is expressly or
by necessary implication, disallowed by the business.
Income arising from business assets which are temporarily out e.g., an
oil mill, cinema theatre, hotel, ginning or textile factory, rice mill or jute press
would be assessable as business income. But if the commercial asset is
permanently let the income is taxable as income from house property or
income from other sources, depending on the facts and circumstances of th e ^ _ „ ^
case. f f tr
Normally a professional person is liable to tax on the net profits a M \
gains arising out of a profession only. However, under the Act there are^-*'’ "
certain deeming provisions under which certain receipts are deemed or
considered as taxable income. For example, where an assessee has been
granted an allowance or a deduction in respect of any loss, expenditure or
any liability incurred by him in the assessment for any year and subsequently
during any previous year he receives, whether in cash or in any other manner
whatsoever, any amount of such loss or expenditure or some benefit by way
of remission and cessation of any such trading liability, the amount received
50
or the value of the benefit accruing is chargeable as taxable income of that
year. Similarly, where a assessee is able to recover more than the written
down value of an asset sold, etc. the excess amount recovered over the total
depreciation granted in the past is taxable under the Act as “Balancing
charge”. Similarly where any bad debt amount already allowed earlier, is
received by the assessee, the amount realised is considered as taxable
income of the year concerned.
Allowable Deductions[u/s 30 to 40 D]:
Following are the various deductions, which are specifically allowed as
deductions while computing the income from business or profession.
A. Rent, Rates, Taxes, Repairs and Insurance of Building[u/s30]:
In respect of rent, rates, taxes, repairs and insurance for premises
used for the purpose of the business or profession, the following deduction
shall be allowed:
If the assessee has occupied the premises as tenant, the rent of the
premises; and if he has undertaken to bear the cost of repairs, the amount of
repairs; If the assessee has occupied the premises, othen/vise than as a
tenant, the amount of current repairs.
Any sums on account of Land Revenue, Local Rates or Municipal
taxes. The amount of any premium paid in respect of insurance against risk
of damage or destruction of the premises.
B. Repairs and Insurance of Machinery, Plant and Fumiture[u/s31]:
The actual expenditure incurred on repairs and insurance of
machinery, plant or furniture used for the purpose of the business or
profession are pemnissible deductions.
C. Depreciation [u/s 32]:
Depreciation means loss or fall in the value of an asset. It arises due
to wear & tear of asset. Major repairs or capital expenditure is not allowed. It
is allowed only when expenditure should be related to;
0 The assessee is the owner of the asset,
ip The asset is used for the business purpose,
ill The asset is used in relevant previous year.
Depreciation rates are prescribed in the Income Tax Act, 1961
D. Expenditure on Scientific Research [u/s 35]:
31
The deduction in respect of scientific research is allowed for any
activities for the expansion of knowledge in the fields of natural or applied
science including agriculture, animal husbandry or fisheries. But it should be
used for the business of the assessee.
E. Expenditure on acquisition of patent rights & copyrights [u/s 35A]:
The capital expenditure incurred before 1®' April 1998; on acquisition of
patent rights and copyrights is written off in 14 equal annual installments
beginning with the previous year in which the expenditure was incurred. The
patents or copyrights are used for a business only.
F, Tea development Account:
An assessee carrying on business of growing and manufacturing tea in
India can claim deduction U/S 33AB in respect of amount deposited by him in
account with ‘NABARD’ within the period of 6 months from the end of the
previous year. This deduction is a available 20% of the profits of such
business.
©. Insurance Premium:
The amount of Insurance premium paid in respect of insurance against
risk of damage of destruction of stocks or store, used for the purpose of
business or profession is allowable as deduction.
H. Bonus or Commission paid toEmployee[u/s 36(1 )(ii)]:
If bonus or commission is paid to an employee. Than it is allowable as
deduction but it should not been paid as profit or dividend.
I. Interest on Borrowed Capital;
If capital is borrowed for the purpose of business or profession then
interest paid on such borrowed capital is allowed.
J. Bad debts [Section 36(1)(vii)]:
The amount of bad debts or part there of isallowable as deduction
subject to the following conditions.
a| The debts must be Incidental to the business transaction, which
have been considered at the time of computation of the income
of the previous year or an earlier to the previous year.
It has been written off as irrecoverable in the accounts of the
assessee for that previous year.
m
K. Family planning expenditure [Section 36(v)IX]:
This deduction is allowed only to the company assessee. Such
expenses should be of revenue nature. If expenses are of capital nature then
deduction is allowed over a period or five years in equal instalments.
L Advertisement expenses [Section 37(2B)]:
Expenses incurred by assessee on advertisement in any souvenir,
brochure, track, pamphlet, etc. published by a political party is not allowed.
Other remaining expenses on advertisement are allowed.
Deductions U/S37:
This is residuary Section. It is not possible to mark full list of allowable
expenses. Hence expenses not covered by Section 30 to 36 mentioned in
Section 37. Subject to following conditions.
Any expenditure not covered U/S 30 to 36.
i. It should not be in the nature of capital expenditure.
ii. It should be incurred in the previous year.
iii. It should not be personal expenses of the assessee.
iv. Expense should be incurred for the purpose of business or
profession
V. wholly and exclusively.
vi. It should not been incurred for any purpose which is an offence
or is
vii. prohibited by any other law.
Expenses not allowable[u/s 40]:
Following expenses are disallowed while computing the business
income.
i) Interest, salary, royalty, fees for technical services or any other
sum payable outside India is not allowable unless tax is
deducted at source or tax is paid.
ii) Income tax and Wealth tax are not allowed.
iii) Salary paid out of India if tax has not been paid or deducted at
source.
iv) Any amount to a provident fund or other fund established for the
benefit of employee’s of the assessee, if the assessee has not
made effective arrangement to secure that tax shall be deducted
53
at source from any payment made from the fund.
Following payments are disallowed [u/s 40(b)]:
i) Salary to non-working partners.
ii) Unauthorized payment to partners.
iii) payment to partner for a period preceding authorization.
iv) payment of remuneration to partner’s pemnissible limits are
mentioned in Section 44(AA).
v) expenditure exceeding Rs. 20,000 u/s 40A(3).
vi) provision for Gratuity made by the assessee to his employees
contribution
vii) by the employer to the Non-Statutory funds [U/S 40A(9)(10)].
Procedure for Computing Taxable profit from business when profit and
loss account is available :
Take Net Profit or Loss as per Profit and Loss account.
• See expenses written to the debit side of profit and loss account.
• Assessment-Disallowed expenses in the Net Profit, which are
written in the profit and loss account.
• Expenses allowed but not written in profit and loss account
deduct from Net Profit.
• Then see credit side of profit and loss account. If any item not
related to business is found then deduct this from Net Profit.
• Some adjustments may be given under the profit and loss
accounts then these items should be consider while computing
taxable income from business.
d) Capital Gains*:
Basis of charge [Section 45]:
Any profits or gains arising from the transfer of a capital asset effected
in the previous year shall, save a otherwise provided in Section 54, 54B, 54D,
54EC. 54ED, 54F & 54G be chargeable to income tax under the head “capital
gains”, and shall be deemed to be income of the previous year in which
transfer took place.
Students Guide to Income Tax, A. Y. 2004-05 by Dr. V.K.Singhania (Pg. No. 408)
54'
Capital gains tax liability arises only when the following conditions are
satisfied;
There should be a capital asset.
* The capital asset is transferred by the assessee.
^ Such transfer takes place during the previous year.
* Any profits or gain arises as a result of transfer.
* Such profit or gains is not exennpt from tax u/s 54, 54B,
54D, 54EC.54ED, 54f, 54G.
If the aforesaid condition are satisfied them capital gain is taxable in
the assessment year relevant to the previous year in which capital asset is
transferred.
e. Income from other Sources*:
i) Basis of charge[Section 56(1)]:
This is the last & residual head of charge of income. A source of
income which does not specifically fall under any one of the other four heads
of income, is to be computed and brought to charge u/s 56 under the head,
“Income from other sources.
As per the provisions of S.56(1) income of every kind, which is
excluded in other four specific heads of income mention above, is charged to
income tax under this head of income.
Provisions of S.56(2) are more specific and enlists various incomes
which are taxable under the head of ‘Income from Other Source’.
This list includes;
Dividend,
Casual income such as winning from lotteries, crossword, puzzles,
horse races, etc.
Any sum received by the assessee from his employers as contributions
to any provident fund, super annuation fund or any other fund for the
welfare of the employees.
Interest on securities.
Income from letting out on hire of machinery, plant or furniture.
* Students Guide to Income Tax, A. Y. 2004-05 by Dr. V.K.Singhania (Pg. No. 499)
m
Any sum received under the Keyman insurance policy including the
sum allocated by way of loans on such policy.
ii) Deductions Allowable [Section 57]:
The following expenditure can be claimed as deductions from gross total
income. - Collection Charges.
Interest on Loan.
Any other expenditure which is not of capital nature, but
expended wholly and exclusively for the purpose of
earning of such income.
iii) Deductions not Allowable [Section 58]:
The following expenses are not allowable as expenditure while
computing Income from Other Sources.
i) Any personal expenses of the assessee;
I) Any interest paid outside India on which tax has not been paid
or deducted at source,
ill Salaries paid outside India on which tax has not been paid or
deducted at source.
iv) Any expenditure incurred in cash above Rs.20,000/- and any
payments made to near relatives which are excessive or
unreasonable, according to the Assessing offer.
v) Income tax/Wealth tax payment.
vi) Any expenditure incurred in connection with Winning of Lottery,
crossword puzzles etc.
IV) Deemed Income Chargeable to Tax [Section 59]:
Provisions of S59 are similar to that of S.41(1) of the Income Tax Act.
These provisions are related to the recovery against any deduction. If any
deduction is allowed in respect of loss, expenditure, etc. During any previous
year while computing the income from business/profession and in subsequent
year such amount of deduction is recovered, them the amount so recovered
shall be treated as income under the head of Income from Other Source
‘Chargeable to tax’.
Conditions;
There is an “income”.
That income is not exempt from tax u/s 10 to 13A.
S6
That income neither salary income, not rented income from house
property, nor income from business or profession and not capital gains.
Under direct Taxes, income from salary and income from Business or
profession are the major sources, which generate funds to the Govemment.
Individual can eam income from more than one source of income, for that
purpose total tax liability is considered by calculating all taxable income after
allowing various deduction from Gross total income, which mention under
Section 80.
Tax Liability —
57
incompleting various formalities regarding Income Tax. It may be useful even
for framing the new assessee friendly policy.
1.6 Tax Planning:
There are several matters which affect the assessee’s ability to deduct
various expenses for income tax purpose some of the principal considerations
to be borne in mind while planning for tax. With help of tax planning we can
reduce the tax liability so it is an important area for every assessee. Tax
planning means we have to take maximum advantage of different section
given under section 80, 88, 89. In short with help of savings or certain
deductions we can reduce our tax liabilities.
You can plan you financial affairs with in the frame-work of law means
tax planning. But it does not mean that in the name of tax planning, you can
indulge in Tax Avoidance or Tax Evasion.
Tax planning under the different heads of income.
Tax planning in respect of residential status :
To enjoy non residential status, individuals who are visiting India on a
business trip or in some other connection, should not stay in India for more
than 181 days during one previous year and their total stay In India during any
four previous year preceding the relevant previous year should in no case
exceed 364 days.
If individuals, having been in Indian for more than 365 days during four
years preceding the relevant previous year, wish to stay in India for more 60
days, they should plan their visit to India in such manner that their total stay in
India falls under two previous year.
To illustrate, such persons can come to Indian any time in the first
week of February and stay up to May 29 without incurring any risk of losing
their non-resident status.
An Indian citizen or a person of Indian origin (whether rendering
service outside India or not) can stay for maximum period of 181 days on a
visit to India without losing his non-resident status. If, however, such persons
wish to stay in India for more than 181 days, they should plan their visit in
such a manner that their maximum stay of 362 days fall under 2 previous
year, stay in each previous year being less than 181 days.
Indian citizens going abroad for employment can stay in India for 181
58
days without becoming resident in that year, even if they were in India for
more than 365 days during four preceding years. This concession is available
only to those who want to leave India for employment.
A non-resident can escape tax liability in respect of income earned if he
first receives it out of India and then remits the whole or part of it to India even
though the business is controlled from India.
A person, who is not ordinarily resident, eaming income outside India
from a business controlled outside India, can avoid tax liability, if he first
receives such income in foreign country and then remits the whole or part of it
to India, either in the same year or in the following year(s).
Non ordinarily resident can claim set-off of losses sustained in the
business controlled outside India against their income taxable in India,
provided they shift the control of the business in India,
a. Tax planning in respect of salary income.
The scope for tax planning from the angle of employees is limited. The
definition of salary is very wide and includes not only monetary salary but also
benefits and perquisites in kind. The only deductions available in respect of
salary income are the standard deduction, the deduction for entertainment
allowance and deduction for professional tax. Apart from the above
deductions, deductions like depreciation for car etc. is not available for a
salaried assessee. Therefore, the scope for tax planning in respect of salary
income is severely limited. However, the following are some ideas of tax
planning in regard to salary income.
For the purpose of tax planning under the head ‘Salaries’ the following
propositions should be borne in mind. However, these propositions would
good only in the context in which they have been made :
1, It should be ensured that the terms of employment, deamess
allowance and
% dearness pay form part of basic salary. This will minimise tax
incidence on house rent allowance, gratuity and commuted
pension. Likewise, incidence of tax on employer’s contribution
to recognised provident fund will be lesser if deamess allowance
forms a part of basic salary.
59
“The Supreme Court held in Gestener Duplicators (p)Ltd. VCIT]1979]
Taxman 1/117ITR 1 that commission, payable as per the terms of contract of
employment at a fixed percentage of tumover achieved by an employee, falls
within the expression “salary” as defined in rule 2(h) of Part A of the Fourth
Schedule, Consequently, tax incidence on house rent allowance,
entertainment allowance, gratuity and commuted pension will be lesser if
commission is paid at a fixed percentage of tumover achieved by the
employee” *.
As Uncommuted pension is always taxable, employees should get their
pension commuted. Commuted pension is fully exempt from tax in the case
of Government employees and partly exempt from tax in the case of non-
Government employees who can claim relief under Section 89.
An employee, being a member of a recognised provident fund, who
resigns before completing five years of continuous service, should ensure that
he joins a fimn which maintains a recognised provident fund for the simple
reason that the accumulated balance of provident fund with the fomier
employer will be exempt from tax, provided the same is transferred to the new
employer who also maintain a recognised provident fund.
Since employer’s contribution towards recognised provident fund is
exempt from tax up to 12 percent of salary, employer may give extra benefit to
their employees by their contribution to 12 percent of salary without increasing
any tax liability.
While medical allowance payable in cash is taxable, provision of
ordinary medical facilities is not taxable if some conditions are satisfied.
Therefore, employees should go in for free medical facilities instead of fixed
medical allowance.
Since incidence of tax on retirement benefits like gratuity, commuted
pension, accumulated balance of unrecognised provident fund is lower if they
are paid in the beginning of the financial year, employer and employees
should mutually plan their affairs in such a way that retirement, termination or
resignation, as the case may be, takes place in the beginning of the financial
year.
*R.N. Lakhotia - How Tax Planning for 2004, Vision Bool^s Pvt. Ltd. New Delhi, India. (Pg No. 72)
m
An employee should take the benefit of relief available under Section
89 wherever possible. Relief can be claimed even in the case of a sum
received from unrecognised provident fund so far as it is attributable to
employer’s contribution and interest thereon. Although gratuity received
during the employment is not exempt from tax under section 10(10), relief
under section 89 can be claimed. It should, however be ensured that the
relief is claimed only when it is beneficial.
As the perquisite in the respect of leave concession is not taxable in
the hands of the employee if certain conditions are satisfied, it should be
ensured that travel concession should be claimed to the maximum possible
extent without attracting any incidence of tax.
As the perquisite in respect of leave concession is not taxable in the
hands of the employee if certain conditions are satisfied, it should be ensured
that the travel concession should be claimed to the maximum possible extent
without attracting any incidence of tax.
As the perquisite in the respect of free refreshments during office
hours, free residential telephone, providing use of computer/laptop, gift of
movable assets (other than computer, electronic items, car) by employer after
using for 10 years or more are not taxable, employees can claim these
benefits without adding to their tax bill.
Since the term “salary” includes basic salary, bonus, commission, fees
and all other taxable allowances for the purpose of valuation of perquisite in
respect of rent free house, it would be advantageous if an employee goes in
for perquisites rather for taxable allowances. This will reduce valuation of
rent-free house, on one hand, and, on the other hand, the employee may not
fall in the category of specified employee. The effect of this ingenuity will be
that all the perquisite specified will not be taxable as the employee will be
outside the mischief of section 17(2)(iii).
b. Income under head ‘House Property’.
For the purpose of tax planning, the following broad propositions
should be borne in mind. However, these propositions would hold good in the
context in which they have been made:
1. If a person has occupied more than one house for his own
residence, only one house of his own choice is treated as self
61
occupied and all other houses are deemed to be let out. The tax
exemption applies only in the case of one self-occupied house
and not in the case of deemed to be let out properties. Care
should, therefore, be taken while selecting the house to be
treated as self-occupied in order to minimise the tax liability.
2. As interest payable out of India is not deductible if tax is not
deducted at source (and in respect of which there is no person
who may be treated as an agent under section 163), care should
be taken to deduct tax at source in order to avail exemption
under section 24(b).
3. As amount of municipal tax is deductible on “payment” basis and
not on “due” or “accrual” basis, it should be ensured that
municipal tax is actually paid during the previous year if the
assessee wants to claim deduction.
As a member of co-operative society to whom a building or a part
thereof is allotted or leased under a house building scheme is the deemed
owner of the property, it should be ensured that interest payable (even if not
paid) by the assessee, on outstanding installments of the cost of the building,
is claimed as a deduction under section 24.
If in individual makes a cash gift to his wife who purchases a house
property with the gifted money, the individual will not be deemed as fictional
owner of the property under section 27(i) - K.D.Thakur vCIT[1979]
120ITR190(Guj). Taxable income of the wife from the property is. however,
including in the income of individual in terms of section 64(1 )(iv). Such
income is to computed under section 23(2) if she uses the house property for
her own residential purpose. It can therefore be advised that if an individual
transfers an asset, other than house property, even without adequate
consideration, he can escape the deeming provision of section 27(i) and
consequent hardship.
Under section 27(i), if a person transfers a house property without
consideration to his/her spouse (not being a transfer in connection with an
agreement to live apart), or to his minor child (not being a married daughter),
the transfer is deemed to be the owner of the house property. This deeming
provision was found necessary in order to bring this situation in line with the
62
provision of section 64. But when the scope of section 64 was extended to
under section 27(i), but income earned from the property by the transferee will
Gulati [1982] 11 Taxman 167(AII)”*. For the purpose of sections 22 to 27, the
under section 64. Such income is to be computed under section 23(2) if the
One of the important aspects of tax planning would be to see that the
consider the tax treatment of such expenditures and the period within which
estimate and work out cash flow position over a period of time. While tax
consideration play a major role in investment decisions, the general principles
of financial management and their effect on investment decisions should not
be ignored.
* Tax Sever Monthly Journal, Feb., 2004 (Pg. No. 4) Published by Lakhotiya
63
The tax planner should keep in mind the advantage arising out of
the profits may be maximised and the assessee may be in a position to avail
also the tax holiday provisions. The question of expenditure being capital or
* Rate of depreciation.
* Since long-temri capital gains bear lower tax, tax payers should
asset is one, which became the property of the tax payers in any
of the manner under section 49(1), the period for which it was
36 months.
64
54B, 54D, 54EC, 54ED, 54F and 54G the tax payer should
sections 54, 54B, 54D, 54F and 54G into money, the tax payer should
the exigency.
transferred.
As per section 54, long term capital asset is eligible for exemption to
is constructed.
65
Quantum of exemption : If the cost of new residential house is greater than
capital gain then the whole of the capital gain. Othenwise to the extent of the
parent.
* Within two tears from the date of transfer another agricultural land is
purchased.
gain, then the entire capital gain. Othenwise capital gain to the extent of the
cost of the new agricultural land.
As per section 54D, Short term/long term capital asset is eligible for
exemption to any assessee on following conditions :
* The asset must have been used in the two years immediately
preceding the date of transfer of the assessee for the purpose of the
business.
Quantum of exemption: If the cost of new asset is not less than the capital
gain then the whole of the capital gain. Othenwise capital gain to the extent of
the cost of new asset.
As per section 54EC, long term capital asset is eligible for exemption to any
assessee on following conditions :
A long term capital gain asset is transferred by the assessee .
66
Corporation Ltd., National Housing Banl< or Small Industries
than the capital gain, the entire capital gain should be exempt. Otherwise
As per section 54F, long term capital asset not being a residential house,
* Within a period of one year before or two years after the date of
transfer, a residential house is purchased or a within a period of three
* The assessee does not own more than one residential house of the
transfer.
* The assessee does not within a period of one year purchase or does
not within a period of three years construct any residential house other
than the new asset.
Quantum of exemption: If the cost of the new residential house is not
less than the net consideration then the whole of the capital gain. Othenwise,
67
the capital gain in the same proportion as the cost of the new residential
* Within a period of one year before or three years after the date
area.
Quantum of exemption: If the cost of the new assets and expenses incurred
for shifting are greater than the capital gain, the whole of such capital gain.
Otherwise capital gain to the extent of the cost of the new asset.
Clubbing of income
bome in mind. However, these propositions would hold good in the context
on which they have been made.
individual.
a case this section will not be attracted, even if a close relative of the
m
mischief of section 64(1 )(iv) even if the property is transferred subject
the transferor even after marriage -Philip John Plasket Thomas v CIT
consideration. The spouse within higher marginal tax rate can transfer
t If trust is created for the benefit of minor child and income during
thereon for the benefits of his Hindu undivided family, with a stipulation that
income shall accrue for a specified period and the corpus going to the trust
aftenwards, provisions of section 64(2) are not applicable.
If gifts are made by a Hindu undivided family to the wife, minor child, or
69
transferor. If however an individual transfers property without consideration to
partitioned amongst the members of the family, income derived from the
family members is not are under the Hindu law and it does not amount to
given out of the transferred property to son’s wife or son’s minor child, the
transaction would be outside the scope of section 64(1 )(vi) and section64(2)”*.
such (PFAS)
iv. Sec. 10 (5) read with Rule 2 8 ; Value of leave travel concession
in India received by an individual.
V. Sec.10 (7) : Allowances or perquisites outside India paid by the
Government to India citizens employed abroad by govemment
of India.
70
vi. Sec. 10 (10): Gratuity.
vi. Sec. 10 (10A) : Commutation of pension (Lumpsum payment in
workman.
xvii. Sec.10 (14): read with Rule 2BB : Special allowances or benefit
or employment of profit.
71
80DDB Medical Rs.40,000 if all conditions are Lower of the following : Amount
treatment of satisfied or the expenditure actually paid or Rs.40,000(Rs.60,000 for
specified incurred whichever is lower. Where senior citizens). Amount
diseases or the expenditure incurred is in respect received from an insurer or
ailment of of the assessee or his dependant reimbursed by employer for the
dependant relative or any member of an HUF of medical treatment is to be
relative or an assessee and who is a senior reduced.
remember of citizen then Rs.60,000 or actual
HUF. expenditure incurred whichever is
lower.
80E Repayment of Amount paid during the year by way Aggregate of installment and
loan taken for of repayment of loan or interest interest subject to a limit of
higher education. thereon or Rs.40,000 whichever is Rs.40,000p.a.
lower. The first year in which the
deduction is available is the year in
which the person starts repaying the
loan. The deduction is available for a
maximum period of 8 years or till the
principal amount of such loan
together with interest is liquidated,
whichever is earlier.
80G Donation to Amount of donations generally not 1. 50% generally: and 2.100%
certain funds, exceeding 10% of Gross Total in cases of specified funds.
charitable Income (As reduced by other
institutions, etc. deduction).
80GG Deduction in N.A. Least of the following - i)Rs.
respect of rent 2,000 p.m. ii)25% of adjusted
paid. total income(i.e. gross Total
Income, excluding Long term
capital gain and income referred
to in Sec.115A or 115D, but
before making any deduction
under this section). iii)The
excess of actual rent paid over
10% of adjusted total income
(i.e. Gross Total Income
excluding Long term capital gain
and income referred to in
Sec.115A or 115D but before
making any deduction under this
section).
80GGA Donations for N.A 100% of donation.
scientific
research or rural
development
SOL interest on General deduction : Rs. 12,000 Rs.12,000 plus additional
certain securities, Special deduction : Rs. 3000 for deduction upto Rs.3,000 for
dividends etc. interest on any security of the interest on Government security.
Central Government or a State
Government.
80QQB Royalty income Royalty paid to authors being an Lower of the following:
of authors individual resident in India or an i)Rs.3,00,000; or ii)royalty
Indian citizen or foreign citizen or he actually received.
may be a resident and ordinarily
resident or resident but not ordinarily
resident in India. But he should not
be a non-resident.
80R Remuneration Remuneration received by him 15% of such remuneration as is
received from outside India from any University or brought in India in convertible
72
foreign sources in other Educational Institution or other foreign exchange within the
case of Association or Body, for any services stipulated time limit(six months).
professors, rendered during his stay outside
teachers etc. India in his capacity as a professor,
teacher or research worker.
80RR Professional Income derived by an author, 15% of such remuneration as is
income of playwright, artist, musician, actor, brought in India in convertible
resident author, sportsman (including athelete) in the foreign exchange within the
playwright, artist, exercise of his profession from the stipulated time limit(six months).
musician, actor, Government of a foreign State or any
sportsman from person not resident of India.
foreign source.
80RRA Remuneration Remuneration received in foreign 15% of such remuneration as is
received by an currency from any employer (being a brought in India in convertible
Indian citizen for foreign employer or an Indian foreign exchange within the
approved Concern) for any service rendered stipulated time limit(six months).
services with an outside India by Government
employer outside employee or Technician.
India(Technician)
80RRb Royalty on Royalty on patents received by an Lower of the following:
patents individual (maybe an Indian citizen i)Rs.3,00,000; or ii)royalty
or a foreign citizen)_____________ actually received
80u/s Deduction in 1.Rs.50,000 for ordinary
Rule 11D respect of an disability. 2.Rs.75.000for severe
individual with disability.
permanent
physical
disability.
of Lie mutual fund (Dhanraksha Plan of LIC mutual fund), in the name
i) Purchase of National Savings Certificates VI, VII and VIII issue (VI and
Rs,. 10,000.
Bank or
p) Any sum paid as tuition fees (not including any payment towards
development fees / donation / payment of similar nature) whether at the
Conditions
n
two years of the date of commencement of insurance, the
the expiry of 5 years from the end of the financial year in which
If* Payment should not exceed the total income chargeable to tax
during the previous year.
employees.
An individual shall be entitled to a rebate of an amount equal to
qualifying amount,
iv) If the gross total income exceeds Rs. 5,00,000 tax rebate will be
‘Nil’.
Notes:
a. Qualifying amount cannot exceed the taxable income.
tax allowed earlier in any previous year shall be treated as tax payable in
but it is available from tax other income including winning from lottery,
With a view to channelise the saving of the tax payers in the infrastructural
sector, additional tax rebate is provided for the amount invested in :
the board.
- Assessee : Individual.
- Conditions:
The assessee is a resident of India has attained the age of 65 years or
Tax Rebate:
i. The amount of income tax before giving any rebate under Sec.88,
Sec.88C and
Sec.89(1)relief; or
b, Rs. 15,000
whichever is less.
76
Notes:
I, The rebate is available to all senior citizens irrespective of income
level.
ii. Tax rebate under Sec.88B is available even from tax on long term
Conditions:
Tax Rebate:
I The amount of income tax before giving any rebate under Sec.88,
ii. RS 5,000
whichever is less.
Notes:
I* Tax rebate under Sec.88C is available even from tax on long term
capital gain or tax on winning from lotteries, races etc.
can avail the benefit of both these sections because the precondition
for availing the benefit of Sec.88B is that the individual should be of the
age of 65 years or more at anytime during the previous year and the
77
1 .7 STUDY OF B U D G E T S FROM 1 9 9 7 - 2 0 0 3
MEANING O F B U D G E T :
Every year in the month of February citizens of the country eagerly wait
for presentation of the budget by the Government in the Loksabha. India has
a dual structure of functioning. The central govemment lays the union budget
and the respective states decide their state budgets. Income tax is a direct
tax which is collected by the central govemment. The rates and other features
of the tax are decided by the Central govemment and always declare in
78
reflection of ideas and suggestions, presented by the economics experts,
corporate sectors, financial institutions etc. The revenue collected by the
Government is utilised for meeting the expenditure of Defence developments
of different activities. Finance Act presented at the time of Union Budget
enables the government to introduce amendments in fiscal Laws along with
the Finance Act. Tax rate of taxes are also announced through Finance Bill.
Disrenders flexibility which are again due to changing needs of Government
Tax rate has been rationalised and non-compared with other countries.
A N N U A L FINANCE ACT -
of every year to 31®* March of next year, the rates of all direct and Indirect
taxes which are prescribed in annual finance Act are therefore made
C. TECHNIQUES OF BUDGETING
Capital Budgeting
Manpower Budgeting
Laying down objective:
The first thing to be done while drawing up a budget is to lay down the
broad objectives to the achieved during the given period. In context with the
79
prevailing economic situation prevailing in the country the objectives are
selected to be achieved.
FIXING T A R G E T :
quantitative tenns by fixing the main targets of output in the various sectors.
There targets are guide posts and help in the preparation of policies to be
perused for achieving them.
to lay down the rate of growth of the economy for the period of the Budget.
the basis of what the country needs in the privileging economic situation, or it
growth rate must match or to the capital available or the financial resources
mobilised. It will be necessary to make projections for each year of the
budget.
The planners of the budget must carefully check up that all stages of
the budget, the demand for commodities and the supply of commodities are
in overall balance. If there is a disparity between the two, there will be either
must proceed both from the bottom and from the top. The planning of budget
the bottom takes into account the local requirement and potentialities; while
planning of budget from the top may be more precise and co-ordinated
through it may be in conformity which the local needs.
M AN P O W E R BUDGETING:
While assuming the resources available for the execution of the
budget, the planners of budget should not confine themselves mainly to
financial resources. They should also undertake an exercise for assessing the
manpower resources, taking into account both skilled and unskilled labour.
81
Stability
Terms of Trade
Adjusting to major economic changes
Co -Ordination
Optimal Resources Utilization
Capital Formation
SUPERIORITY O F THE STATE :
Budgeting is advocated on the ground that the judgement of the state
is superior to that of citizen , however wise and able he may be. As Aurther
Lewis remarks “ the state now claims to know better than its citizens for how
many years they should send their children to school, between what hours
they should drink, what proportion of income should be saved, whether cheap
houses are better then cigarettes and so on. Economic development is more
EQUITABLE DISTRIBUTION :
Budgeting is also necessary for equitable distribution of economic
rewards people according to their resources, they poses, but contains in itself
and have notes which seriously offend against sense of social justice.
Budgeting is thus advocated for reducing any qualities of income, wealth and
opportunities.
STABILITY
82
foreign trade in a country admittedly plays a very important part not only in
are not to be thrown away and this objective is achieved by proper budgeting.
ADJUSTING T O M A JO R E C O N O M IC C H A N G E S
Without the aid of budgeting no country can cope with major economic
movement, are bound to tum the economy. Topsy - tamey. The market
and with speed, which a major change may necessitate. Only a planned
budget can eliminate bottlenecks, planned action in other words, and planned
imperative.
COORDINATION
safety. A planning authority, an the other hand, can take far - sighted
decisions and produce a balanced economy.
OPTIMAL R E S O U R C E UTILISATION
budgeting authority is able - lay down what is essential and what is not
essential activity, encouraging the former and sharply cutting down the latter.
On the other hand, private enterprises are guided solely by the profit motive
regardless of social benefits or evils. Only a planning authority can be lipstick
and face-powder, otherwise valuable national resources will be directed
towards the production of useless luxuries far the rich and stan/e the masses
private persons and get spent on consumption goods. That is why, through
CO N C LU SION
It is said that an unplanned economy is like a ship moving rudderless
any. Such an economy works blindly and haphazardly. It caters for the rich
and make them still richer. It ignores the real wants of the people and fails to
promote general well being. In such an economy it is the profit motive rather
than service of the masses which is the main spring of economic activity. How
it operates is not guarantee of economic progress. The economically
advanced countries may not feel enamoured of the idea of budgeting, But for
is new regarded as intrinsic. As Glabrith Says “ There is much that market can
usefully encourage and accomplish. But the market cannot reach forward and
take grate strides when these are called for. As it cannot put a man in space ,
So it cannot bring into existence a steel industry when there was little or no
84
TABLE NO. 1.11
98 99 00 01 02
i 9
7 6
8 a 7 0
85
TABLE NO. 1 .1 2
2. Center
3. States
Note: Net Fiscal Deficit is Calculated by adding gross fiscal deficit of both
Center and States and subtracting there from the gross loans from center to
states and Union Territories.
Above Table presents different measures of fiscal deficit. Gross fiscal deficit
of both the Centre and the States have deteriorated substantially during this
m
TABLE No. 1.13
ANALYSIS O F TAX REVENU E O F LAST TEN YEARS
In crores of Rupees
! i
Actuals i Actuals ; Actuals Actuals Actuals i Actuals j? Actuals ; Accounts Revised [ Budget
i 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 1 2001-02 2002-03 2003-04 j 2004-05
A. Tax '4 1 ;
! i I
Revenue
1 Gross Tax ! 111224 ' 128762 ! 139221 :1 143797 f 171752 ■
■ 188603 ' ; 187060 'I 216266 254923 317733 {
1 Revenue i ..... ......... i______ __ _ 5___ ___ _ j__ ______ t ............
1 1- ’
Corporation i 16487 I 18567 20016 24529 30692 i 35696 i 36609 46172 62986 88436
Tax !
2. Taxes on
Income
other 15592 1 18231 17097 20240 25654 1 31764 32004 36858 40269 50929
than
Corporation
Tax
Ref: www.budgetindia.nic.in.
From the above table Income Tax increased from 15592 crores to 50929
crores.
87
IMPLICIT RATE OF INTEREST
Centre
14.00%
13.00%
12.00%
11.00%
10.00%
9.00%
8.00%
1996-97 1997-98 1998-99 1999-00 2000-01 2001-02
R e f: Tenth five year plan 2002-07 page - 61 published by Academic foundation New Delhi.
Above Figure presents the implicit rate of interest for the Centre. For the
Centre, the rate has increased from 9.8 per cent in the year 1996-97 to
10.1 per cent in the year 1999-2000. The increasing trend in the implicit
interest rate continues for the Centre during the first four years and
crosses 10 per cent. The last two years shows a downtrend in the
88
TABLE NO. 1 .1 4
BUDG ET 1 9 9 9 - 2 0 0 0 R s. In C ro res
No
treasury bills / draw down of cash balances. The Capital receipts, fiscal
deficits etc. on comparable basis, excludes transfer of state’s share of small
saving collections.
TABLE N O .- 1 . 1 5
receipts
Foreign trade
1. Budgetary deficit represents borrowing through issue of 91 days
90
TABLE N O .- 1 . 1 6
No
m
TABLE N O .-1.17
Rs. In Crores
No Budget
Estimate
m
TABLE NO. 1.18
B U D G E T AT G LA N C E
Rs. In Crores
5) (4.4) (4.3)
21 Prinnary deficit 20-11 -816 7907 13326 17199
(0.0) (0.3) (0.4) (0.5)
Ref: www.budgetindia.nic.in. Based on provisional actual for 2003-04
KELKAR R E P O R T :
Finance ministry had constituted a task force on tax reforms under the
chaimianship of l\/lr. Vijay Kelkar who submitted his final report to the Ministry.
This report was made public on December 27, 2002. The task force has
Above Rs 4 Lac 30 %
65 years of age.
04
• the deductions for handicapped under 80 DD and 80 U should
continue
M. R E C O M M E N D A T IO N S O N INDIRECT TAXES :
• Excise Duty should be 14% for most of the items, 2 0 % for motor
vehicles, air conditioners and aerated water uniform duty of 16%
for textile fibre and yarn which should be reduced to 1 4 % by
lire
95
• Duty exemption for SSI with turnover up to Rs. 50 lakhs
divided into : Taxes on income , Taxes on property and capital transition and
taxes on commodities and services non tax revenue has been sub-divided
into : Fiscal and other service. Interest receipts and dividends and profits.
TA BLE N O .-1 .1 9
Crore)
1999-2000 1,81,482
2000-2001 1,92,624
2001-2002 2,12,572
2002-2003 2,45,105
2003-2004 2,63,878
2004-2005 3,00,904
2005-2006 ( B E) 3,51,200
Ref: www.budgetindia.nic.in.
96
TOTAL REVENUE OF THE CENTRAL GOVERNMENT
400000
350000
300000
250000
200000 Series2
150000
100000
50000
0
This chart reveals that the total revenue of the central Government has
been rising quite fast partly on account of more taxes and highest rates of tax
and partly due to inflation.
EXPENDITURE O F CENTRAL G O V E R M E N T S :
In Crore)
1999-2000 298053
2000-2001 325611
2001-2002 364436
2002-2003 400396
2003-2004 471368
2004-2005 505791
2005-2006 ( B E) 514344
Ref; www.budgetindia.nic.in.
97
TOTAL EXPENDITURE O F C EN TR AL G O V E R N M E N T
600000
500000
400000
300000
200000
100000
0
would be forced to borrow to meet the revenue gap increasingly and gate into
through 1) Borrowing from the market 2) Borrowing from RBI 3) Drawing from
Government cash Bal. with RBI.
TYPES O F DEFICIT:
a) Revenue deficit:
b) Budget deficit:
c) Fiscal deficit:
( Budget deficit + Government market borrowing and Liabilities )
d) Primary deficit:
( Fiscal deficit -Interest payment)
98
FISCAL DEFICIT AS P E R C E N T A G E O F G D P
The fiscal deficit has been growing rapidly and dangerously from 1988-
1990 and to 2003-04 budget. The world bank and IMF objected to the high
rate of fiscal deficit ( 7 .7 % of GDP) 1990-91. and asked the Government of
debt.
Table No. 1.21
Debt. Position of Indian Government
( Rs. Crore)
Position ( RE)
99
INTEREST PAYMENT
(Rs. In Crore)
M l
I
.V .
I
I
1. *JE
B
M i i
According to table No. 1.18 page no. 93 point 11.
It shows that interest of payment have been increased though the rate of
interest is decreased (as per graph page 88) it means liabilities increased due
The Finance Minister has an opportunity to play innings that will herald
us a position from where we can be counted in the arena of world economy.
Clouds of the Iraq war are looming large. He has to play on a difficult wicket.
sides. On the other hand he has a burgeoning fore reserves. Select sectors
are showing positive growth. FDI is still trickling in. Credit ratings have
improved. He has the benefit of the recommendations of experts like
100
“Dr. Kelkar & Shri. Naresh Chandra Above all he has the full backing of his
skipper; the PM. All -in all a challenging situation to play attacking innings”*.
He has played few strokes in the areas of the fann sector,
has shown us the direction in which he wishes to drive the economy; “India
a) The total revenues of central Governments has been rising quite fast,
partly on account of more taxes and higher rates of taxes and partly
due to inflation.
b) The total expenditure on I) interest payment; II) Defence; III) Subsides
and IV) General Services these four items alone account for nearly
T h 1 0 5 6 3
101
1.8 COMPARITiVE S T U D Y O F INCOME TAX RATES & C H A N G E S
F O R THE A. Y. 1997-1998
102
Table No. 1.24
Rs. 60,000/- but does not exceed amount by which the total
Rebate U/s 88D = Tax on Net Income minus (Net Income - Rs. 1,00,000)
103
TABLE NO. 1.26
Rs. 1,35,000)
10,00,000)
Ref: www.incometaxindia.gov.in.
For resident senior citizen (who is 65 years or more at any time during
No
Rs. 1,85,000)
10,00,000)
Ref: www.incometaxindia.gov.in.
104
For any other individual, every HUF/AOP/BOI/artificial juridical person.
Rs. 1,00,000)
10,00,000)
Ref: www.incometaxindia.gov.in.
Direct Taxes -
10% surcharge will apply if taxable income exceeds Rs. 10 lakhs.
2 % Education Cess.
No standard deduction will be allowable.
Tax rebate u/s 88, 88B, 88C and 88D withdrawn.
Deduction u/s 80L withdrawn.
Saving upto Rs. 1 lakh will be eligible for deduction from gross total
income under proposed section 80C. the aggregate deduction under
Section 80C, 80CCC, 80C C D will not exceed Rs. 1 lakh.
Interest on account maintained by NRIs will be exempt.
Fringe Benefit Tax at 3 0 % to be levied on employers.
Domestic companies to be taxed at 3 0 % with surcharge at 10%. -
Depreciation at15% with initial depreciation at 20%.
Tax rate applicable to foreign companies remains unchanged.
Credit for MAT to be allowed.
Securities Transaction Tax marginally raised from 0.015 to 0.02%.
Trading in derivatives will not be treated as speculative transactions.
Mobile phone taken out of one-by-six criterion for filing retum.
However, a person paying electricity bill of more than Rs. 50,000 will
be covered.
Withdrawal of cash on a single day of over Rs. 50,000 from banks to
be taxed at 0.1%.
105
TD S certificates in Form Nos. 1 6 ,16A.16AA will continue for one more
year.
Salaried * Nil tax for income upto Rs. 1.5 Lakhs for senior
deduction to continue.
Standard Deduction:
All Salaried employees are entitled for standard deduction. From Assessment
106
Exceptions :The aforesaid rule will be subject to the following two exceptions-
For the Assessment Year 99-00 to 2001-02, standard deduction u/s 16(1)
is as under -
professional tax
More than Rs. 1 lakh but not more than Rs. 20,000
Rs. 5 lakh
107
From the Assessment Year 2002-03 to 2005-06 :
Table N o .-1.28
More than Rs. 1.5 lakh but Rs. 25,000 Rs. 30,000
not more than Rs. 3 lakh
More than Rs. 3 lakh but not Rs. 20,000 Rs. 25,000
more than Rs. 5 lakh
Note: There are some changes in perquisites and allowances which effected
on tax liability slightly. But major effect for salaried people is related to
108
Insurance premium paid, Annual charges paid, Ground Rent paid.
Rent, there are expenses paid for that particular House allowed to deduct
accrual basis (even if books of account are kept on cash basis), if capital is
year. Deduction is available even if neither the principal nor the interest is a
is allowed for any brokerage or commission for arranging the loan. Interest on
a fresh loan, taken to repay the original loan raised for the aforesaid
Any interest chargeable under the Act, in the hands of recipient and
payable out of India, on which tax has not been paid or deducted at source,
for the Assessment Year 2001-02 Rs. 75,000/- and Rs. 1,00,000 respectively]
109
Capital is borrowed on or after April 1, 1999 for acquiring or
constructing a property;
extending the loan certifies that such interest is payable in respect of the
amount advanced for acquisition or construction of the house or as re-finance
of the principal amount outstanding under as earlier loan taken for such
acquisition or construction,
If the above three conditions [(a),(b) and (c)] are not satisfied, then
15,000 for the Assessment years 1997-98 and 1998-99). In other words in
30,000/-.
If capital is borrowed before April 1,1999 for the purchase,
Winnings from lotteries, cross word etc. exempted amount Rs. 5,000
u/s 10(3) upto A.Y. 2002-03 -40% , From 2003-04 on words -3 0 % -flat rate
and Sec. 10(3) omission w.e.f. 1.4.2003.
110
Surcharge:
ForA.Y. 1998-1999
To A. Y. 1999-2000 NIL
Rs. 60,000/-
Rs. 60,000/-
For A.Y. 2003-2004 5 % for the Assessee having income above
Rs. 60,000/-
ForA.Y. 2004- 2005 10 % above income of Rs. 8,50,000 and Education
Cess @ 2 % on Tax
ForA.Y. 2005-2006 1 0 % for the Assessee having income above
Rs. 50,000/-
ForA.Y. 2006-2007 10 % for the Assessee having Income above Rs.
10.00.000/- and 2 % Education Cess Exceed Rs.
1 .0 0 .0 0 0 /- .
T A B L E N O .- 1 . 2 9
TA BLE SH O W ING A V ER A G E TAX LIABILITY
FOR 1998-99 TO 2000-01
Income A.Y. 1998-99 A.Y. 1999-2000 A.Y. 2000-01
Income Average Income Average Income Average
Tax (Rs) Tax (%) Tax (Rs) Tax (%) Tax (Rs) Tax (%)
50,000 1,000 2.00 — — — —
111
Table No. -1.30
Table showing Average Tax Liability for 2001-02 to 2003-04
of income
Tax (Rs) Tax (%) Tax (Rs) Tax (%) Tax (Rs) Tax (%)
50,000 — — — — — —
112
TABLE NO. 1.32
FOR 2006-07
of income
50,000 — — — — — —
1,00,000 — — — — — —
113
There are many other new taxes introduced in the recent past years
service Tax, MAT,FBT,VAT etc. Service Tax many services brought under
Service Tax.
SERVICE TAX
Finance Act 2004 brought into Service Tax net inter alia Constmction
Court has held that “telephone rentals” can be taxed under Sales Tax Act as
right to use goods, Sen/ice Tax is required to be paid after receipt of payment
provision for allowance of such credit for tax paid under Section 115JB. Such
credit will be available only in respect of tax paid for A.Y. 2006-07 and
accordance with the other provisions. The tax credit will be allowed to be
accordance with provisions other that Section 115JB. Set off will be to the
extent of difference between tax on total income and tax which would have
been payable under Section 115JB(1). Carry forward of the credit will be
MAR is paid in accordance with Section 115JB” **.
114
iii. Fringe Benefit Tax (FBT)
Charge of Tax -
Clause 37 of F.B.2005 proposes to insert Chapter Xll-H (containing
Section 115WL) for levying additional income tax in respect of fringe benefits
(aggregate tax of 33.66%). Section 4 of the Act has not been amended and
person incurring losses or having tax free income (on account of exemption or
deductions) would still be liable to FBT. A charitable trust having its entire
income exempted u/s 11 would be liable to pay FBT. The class of persons
liable to FBT is very wide and probably with exception of only Union
charitable trusts who are not carrying on any business and engaged only in
pure charity, even specific trusts formed to provide succour in time of natural
calamities, like, Tsunami or earthquake would be liable to FBT on amounts
spent by it, if it employs even one employee.
115
iv. IMPACT O F VALUE A D D E D TAX *-
a tax on value addition. This value addition is subjected to tax at each stage
of the production distribution chain. At each stage of trade value addition is
taxed and tax paid on all purchase including on capital investment is rebated.
It is a pass through till goods reach to the ultimate consumer.
VAT will be charged in accordance with the provision of the Act on
every sale of taxable goods within the state made by a taxable person whose
116
Registration under the VAT Act may be obligatory for the following
categories of dealers:
Importers, who import goods into the state
Manufacturers
C S T dealers
Dealers with turnover greater that the general threshold which may be at Rs.
5 lakhs.
TIN :
the registered dealers on the line of PAN which is being issued by the Income
Tax Department. It is a code to identify a taxpayer. Each tax payer will have
a single unique TIN following are the main objects of the TIN.
SRILANKA-
117
T a b le N o. 1 .3 4
T a b le s h o w in g In c o m e T ax R a te s o f d iffere n t C o u n tr ie s
A.Y. 2 0 0 3 - 0 4 (A v era g e)
China 45% 5%
Thiwan 40% 6%
U K 40% 0%
Thiland 37% 5%
Japan 37% 5%
Argentina 35% 5%
U SA 35% 0%
India 33% 0%
Singapore 22% 3%
60
50
40 --
30 -
liit i
2 0 --
1 0 --
0
From the above table Indian Income Tax rate is high as compared to
118
CONCLUSION :
Table No. 30, page 120 shows average taxes from A.Y. - 1998-99 to
A.Y. 2004-05. It means tax liability is not much changed in last 5 to 6 years,
but new taxes are introduced and hence, tax burden is highly increased.
Income Tax has remained stable for last 6 to 7 years slabs and income
tax rates have not changed from the A.Y. 1998-99. The point is appreciated
that the lower limit is increased in budget 2004 i.e. there is no Income Tax up
to Rs. 1,00,000/- but after 6 years this limit is increased. This demand was
there from last 5 to 6 years. They have changed the slabs in budget 2005 for
the A.Y. 2006-07but at the same time they have withdrawn many tax rebates
u/s 88, 88B, 880, 88D e.g. important for all tax payer - u/s 80L deduction
standard deduction is withdrawn. Income upto Rs. 1,00,000 tax free no doubt
this is appreciated, but Rebate u/s 88 is cancelled and Rs. 1 lakh only allowed
to deduct u/s 800 from the Gross Total Income. This is including Section
800, 8 0 0 0 0 , 8 0 0 0 D that is -
80000]
Deduction in respect of contribution to pension scheme of
8 0 0 0 0 and 8000D .
Previously u/s 88 there was rebate upto Rs. 1,00,000/- (including
Infrastructure) 800, 8 0 0 0 0 , 8 0 0 0 D were also allowed to be deducted.
For the senior citizens income upto Rs. 1,85,000/- is tax free and for
119
Women were getting Rs. 5,000/- deductions from tax liability now Rs.
standard deduction from the gross salary and this is cancelled. It means, they
have got only Rs. 20,000/- (i.e. Rs. 1,00,000 - Rs. 50,000.00 tax NIL & Rs.
30,000.00 standard deduction) tax free amount package but at the same time
SOL removed, this Section was very useful to common middle class people
upto Rs. 12,000/-. Again if you consider this amount their only Rs. 8,000/-
amount is tax free (i.e. Income Rs. 1,00,000 minus 50,000 tax free, minus
these slab rates and for higher income group also u/s 80C they have got the
benefit previously u/s 88 this was not allowed for higher income group that is
above Rs. 5,00,000/-. Secondly this is appreciated that after six years slab
rates have changed upto Rs. 1,50,000/- -10 % and upto Rs. 2,50,000/- -2 0 %
above this 30% , but if you consider last six years inflation rates and then
divide this rate to tax liability then really speaking to tax payers’ point of view
they got zero benefit.
the year 2002 by Dr, Kelkar Committee it means this was expected in that
year but Government has given in 2005. When we compare the inflation rate
1997 — with 2005 Government has not given much more to the tax payers.
Sections 88, 88B, 88C, 88D withdrawn made easy for the computation
of tax liability. This change is very good change.
120