KDF2B Income Tax Law & Practice. Unit: I to V

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1 KDF2B Income Tax Law & Practice Unit: I to V

2 Unit 1: Income Tax Law and Tax Planning Basic Concepts Residential Status and Tax Incidence Exempted Incomes and its related Tax planning implications Tax evasion and tax avoidance, and methods of tax planning KDF2B INCOME TAX LAW & PRACTICE 2

3 Tax Planning, Tax avoidance vs Tax evasion hugy sz7o KDF2B INCOME TAX LAW & PRACTICE 3

4 BASIC CONCEPTS Assessment year : The tax payer s income of previous year is assessed to tax in the assessment at the rates prescribed in Finance Act. Previous year : Income earned in a year is taxable in the next year. The year in which income is earned is known as previous year. Person : Includes an individual,huf, Company, Firm, AOP, BOI. KDF2B INCOME TAX LAW & PRACTICE I 4

5 content: font size 20 KDF2B INCOME TAX LAW & PRACTICE I 5

6 Basic & Additional conditions Basic or Conditions (i) An individual is in India during the relevant previous year for a period amounting in all to 182 days or more. (ii) An individual is in India for a period amounting in all to 365 days or more during four years preceding the relevant previous year & he is in India for a period of 60 days or more during the previous year. Additional Condition (i)he has been resident in India in at least Two out of Ten P.Y (ii) He has been in India atleast 730 days in all during 7 preceding P Y KDF2B INCOME TAX LAW & PRACTICE 6

7 INCIDENCE OF TAX content: font size 20 KDF2B INCOME TAX LAW & PRACTICE I 7

8 FEATURES OF INCOME Definite source Legal or Illegal income Income may be received in cash or in kind Income being considered on receipt basis or accrual basis Dispute regarding title Mere relief or reimbursement of expenses Income may be permanent or temporary Gifts of personal nature PIN money Diversion of income vs Application of Income KDF2B INCOME TAX LAW & PRACTICE 8

9 Link below appends exempted income. v=2yqwb3axbho KDF2B INCOME TAX LAW & PRACTICE I 9

10 Heading: font size 32 content: font size 20 KDF2B INCOME TAX LAW & PRACTICE 10

11 Heading: content: font size 20 Link below explains capital and revenue items tc0 KDF2B INCOME TAX LAW & PRACTICE 11

12 UNIT 2: Income from salary Income from House property Income from business or profession Income from capital gains Income from other sources KDF2B INCOME TAX LAW & PRACTICE 12

13 INCOME UNDER THE HEAD SALARIES Salaries Sec 15 to 17 Features of Salary Employer Employee Relationship Salaries and Business Profit Salaries and Professional Income Tax free Salary Leave Salary KDF2B INCOME TAX LAW & PRACTICE 13

14 TREATMENT OF PROVIDENT FUND EMPLOYER S CONTRIBUTION SPF content: RPF font size 20 URPF Fully exempt from tax Exempt upto 12% of salary ( Basic + DASB + Commission on turnover) Ignore for the time being KDF2B INCOME TAX LAW & PRACTICE 14

15 Fully Exempted Allowance Foreign Allowances of Govt employees working outside India Allowances of U.N.O employees working in India. Allowances received by judges of high court. KDF2B INCOME TAX LAW & PRACTICE 15

16 Fully Taxable Allowance DA CCA MEDICAL ALLOWANCE LUNCH ALLOWANCE content: font size 20 DOG ALLOWANCE OVERTIME ALLOWANCE CAPITAL COMPENSATORY ALLOWANCE SERVANT ALLOWANCE MARRIAGE ALLOWANCE FAMILY ALLOWANCE WATER & ELECTRICITY ALLOWANCE DEPUTATION ALLOWANCE TIFFEN ALLOWANCE E.A FOR NON GOVT EMPLOYEES NON PRACTISING ALLOWANCE WARDEN ALLOWANCE PROJECT ALLOWANCE KDF2B INCOME TAX LAW & PRACTICE 16

17 HRA - PROVISIONS Least of following is exempt : (i) HRA actually received (ii) 50% of salary or 40% of salary (iii) Excess of rent paid over 10% of salary SALARY = basic salary + DA (forming part) + Commission based on sales KDF2B INCOME TAX LAW & PRACTICE 17

18 PERQUISITES View the following link to acquire knowledge about perquisites KDF2B INCOME TAX LAW & PRACTICE 18

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21 1. DA is taxable in the hands of. 2. Children education allowance is exempted upto. 3. Exempted limit of HRA in non metropolitan cities is. 4. Interest on RPF balance is exempted upto. 5. Statutory limit for exemption of gratuity received by Non Govt employees is. KDF2B INCOME TAX LAW & PRACTICE 21

22 Particulars Let out house Self occupied house Deemed to be let out house GAV xxx NIL xxx Less : Municipal Tax paid by owner xxx NIL xxx NAV XXX NIL XXX Less : Deduction u/s 24 Std Int on loan for construction xxx NIL xxx xxx xxx xxx Net income from HP xxx (xxx) xxx KDF2B INCOME TAX LAW & PRACTICE 22

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25 EXEMPTED INCOMES Income from farm house Property used for own business or profession Property income of hospital Property income of resident of Ladakh Income from HP owned by political party Income from HP owned by Trade union One self occupied property Annual value of any one palace of ex-indian ruler KDF2B INCOME TAX LAW & PRACTICE 25

26 Following video link illustrates calculation of GAV with unrealised rent KDF2B INCOME TAX LAW & PRACTICE 26

27 DEFINITION OF BUSINESS Business includes any trade, commerce, manufacture or any adventure or concern in the nature of trade, commerce or manufacture FEATURES OF BUSINESS Importance of Profit motive Business to involve two or more persons Rendering Service Business includes trade, manufacture & commerce Length of time not an essential factor Export incentives being revenue receipts. KDF2B INCOME TAX LAW & PRACTICE 27

28 COMPUTATION OF BUSINESS INCOME PARTICULARS AMOUNT BALANCE AS PER P & L ACCOUNT XXX ADD : INADMISSIBLE EXPENSES XXX LESS : EXPENDITURE ALLOWED BUT NOT DEBITED LESS : INCOME CREDITED TO P&L WHICH IS TAXABLE UNDER OTHER HEADS XXX xxx KDF2B INCOME TAX LAW & PRACTICE 28

29 INADMISSIBLE EXPENSES Drawings by the proprietor Rent paid to self All provisions and reserves All taxes Household and personal expenses Gifts and presents (Non advertisement) Bad debts still recoverable Undervaluation of closing stock Personal LIC Capital expenses Excess depreciation Interest on Capital KDF2B INCOME TAX LAW & PRACTICE 29

30 INCOME CREDITED TO P&L WHICH IS TAXABLE UNDER OTHER HEADS Gifts from relatives Agricultural receipts Any Capital receipt Part time salary Dividend income Part time salary Rent from let out property Capital gains Winning from Lotteries Withdrawal from PPF Income tax refund Interest on Bank deposit KDF2B INCOME TAX LAW & PRACTICE 30

31 Professional income is computed by taking the professional receipts of the previous year and deducting professional expenses incurred during that year. KDF2B INCOME TAX LAW & PRACTICE 31

32 Preliminary expenses are deductible in 5 equal installments Expenditure exceeding Rs 20,000, shall be paid by an account payee cheque or an account payee demand draft otherwise 100% amount is disallowed. Know how acquired on or after is subject to 25% rate of depreciation. KDF2B INCOME TAX LAW & PRACTICE 32

33 CAPITAL GAINS As per section 45 any profit or gain arising from transfer of a capital asset effected in the previous year shall, save as otherwise provided in specified sections, be chargeable to income-tax under the head Capital Gain. Capital gains attract tax liability only when the following essentials are satisfied: CAPITAL ASSET : Assessee should have a capital asset.. TRANSFER OF CAPITAL ASSET: Capital asset held by the assessee. TRANSFER DURING THE YEAR : Transfer of capital asset should have taken place during the financial year. PROFITS OR GAINS ON TRANSFER : Asset transfer should have resulted in gain or profit KDF2B I INCOME TAX LAW & PRACTICE 33

34 EXEMPTION UNDER SPECIFIRED SECTIONS: Such Capital Gains arising are not exempted under sections 54,54B,54D,54EC,54F,54G and 54GA Meaning of Capital Assets Capital asset is defined to include property of any kind, whether fixed or circulating, movable or immovable tangible or intangible. Except a few specified items, all other properties are capital assets. Ignore repairs, since it is not a capital expenditure The following assets are excluded from the definition of Capital Assets. KDF2B INCOME TAX LAW & PRACTICE 34

35 EXEMPTED ASSETS: 1.Stock in trade held for business or profession 2. Assets held for personal use 3. Rural Agricultural land 4.Gold Bonds issued by the Government 5. Special Bearer Bonds 6. Gold Deposit Bonds. Short Term Capital Assets: Capital Asset held by an assessee for not more than 36 months/ 3 years immediately preceding the date of transfer is a Short Term Capital Asset. All depreciable assets and fixed assets which are used by the organisation for official purpose are treated as short term capital assets irrespective of its holding List of Short Term Capital Assets: Financial assets, are also shortterm capital assets if they are not held for more than 12 months. 1. Shares held in a company 2. Debentures held in a company 3. Units of Unit Trust of India KDF2B INCOME TAX LAW & PRACTICE 35

36 4. Units of a Mutual fund 5. Any other securities listed in a stock exchange like Government securities 6. Zero coupon bonds Long Term Capital Asset Capital asset held by an assessee for more than 36 months/ 3 years immediately preceding the date of transfer is a Long Term Capital Gain. Determination of period of holding Shares and securities purchased through stock exchange Share and securities purchased and sold directly Shares and securities purchased and sold in several lots Transfer of securities by a depository Shares held in a company in liquidation When an asset is acquired by gift or will Shares becoming property in a scheme of Amalgamation Shares held in a demerged company Period of holding of bonus shares Period of holding of rights shares. KDF2B INCOME TAX LAW & PRACTICE 36

37 Indexed cost of acquisition: Indexed cost of acquisition means an amount which bears to be the cost of acquisition the same proportion as cost inflation index for the year in which, the assets is transferred bears to the cost inflation index for the first year in which the asset was held by the assessee of for the year beginning on the 1 st day of April, 1981, whichever is later. Indexed Cost of Improvement Indexed Cost of Improvement means an amount which bears to the cost of improvement the same proportion as cost inflation index for the year in which the asset is transferred bears to the cost inflation index for the year in which the improvement to the asset took place. Any additions or improvement made before should be ignored KDF2B INCOME TAX LAW & PRACTICE 37

38 Exemption of Capital Gains Exemption applicable to different assessee Individuals Sec.54, 54B,54D,54EC And 54G HUF Sec.54,54B, 54, 54EC,54F and 54G All assessee Sec. 54D,54EC and 54G KDF2B INCOME TAX LAW & PRACTICE 38

39 Exemptions TM 1. Capital gain on transfer of residential house property (Sec.54) 2. Capital Gain arising from the transfer of agriculture land (Sec.54) 3. Capital gain on compulsory acquisition of lands and buildings (Sec.54D) 4. Capital gain not to be charged on investment in certain bonds (Sec.54EC 5. Investment of capital gain arising from transfer of long-term listed securities or units, in specified equity shares (Sec.54ED) 6. Exemption from tax on long term capital gain arising out of sale of an asset other than residential house property and investment of the consideration in residential house(sec.54f) 7. Capital gain arising on transfer of asset in cases of shifting of industrial undertaking from urban area(sec.54g) 8. Exemption of capital gains on transfer of assets incase of shifting of industrial under taking from urban area to any special economic zone (Sec. 54GA).) KDF2B INCOME TAX LAW & PRACTICE 39

40 Income From Other Sources Income chargeable under IFOS U/S 56(2) Dividends from co-operative societies and foreign companies. Interest on securities Winnings from lotteries, crossword puzzles, other games of any sort or from gambling or betting of any form. Income from letting of plant, machinery or furniture along with the building Any sum received by the assessee from his employees as contribution to any staff welfare scheme. Any sum received under key man insurance policy. KDF2B INCOME TAX LAW & PRACTICE 40

41 Fees or commission received by an employee from a person other than his employer Annuity paid under the provisions of the Annuity Deposit scheme Interest on bank deposits Directors fees Remuneration for examination work Rent of land Agricultural income Royalty income Interest on own contribution to URPF. Remuneration received for writing. Interest from co-operative society. Family pension NSS Deposit withdrawn Director s commission Gratuity received by a director contd KDF2B INCOME TAX LAW & PRACTICE 41

42 Income by subletting Income from undisclosed sources. a) Unexplained cash credits b) Unexplained Investments c) Unexplained Receipts by cricketers money d) Unexplained expenditure e) Amount borrowed or repaid on Hundi Kinds of Securities Government Securities These securities are issued by state or central Govt. The amount received or due, shall be included in the total income. No tax is deducted at source. Non government securities. a) Tax free commercial securities are issued by a local authority or statutory corporation or a company. These securities are called tax free, because the assessee is not to pay tax on the interest, since tax is paid by the company on assessee s behalf. Hence interest received by the assessee is grossed up. KDF2B INCOME TAX LAW & PRACTICE 42

43 b) Less tax commercial securities Less tax securities are also called taxable securities. Tax is deducted at source from the interest and balance of interest after deduction of the income tax is paid to the security holder. Casual Income Lottery winnings. Winnings from race including horse races. Winnings from card games. Winnings from crossword puzzles. Gambling or betting of any other nature. Grossing up: Net winnings * 100/ Casual incomes are subject to TDS at 30% if the income exceeds Rs.5,000. Race winnings are subject to TDS at 30% if the income exceeds RS. 2,500. No TDS on other race winnings, gambling and betting. Family pension received by widows or heirs of deceased employees. Standard deduction of a sum equal to 33.33% of such pension or Rs. 15,000 whichever is less, is allowed as deduction. KDF2B INCOME TAX LAW & PRACTICE 43

44 Income from subletting. Income from sub letting of house property or rent of vacant land is income from other sources Gifts Gifts received from relatives are fully exempted. Gifts received from unrelated persons are taxable as income from other sources.gifts received in kind is exempted Property purchased for less than stamp duty value is taxable. (stamp duty value more than consideration Deduction U/S 57 Bank commission on collection of taxable dividends and interest on securities in deductible. Interest on loan to acquire investment whose income is taxable is deductible. Standard of family pension or Rs.15,000 which ever is deductible. Depreciation, repairs, fire insurance premium, local taxes relating to letout plant and machinery along with building and furniture. KDF2B INCOME TAX LAW & PRACTICE 44

45 UNIT-III Computation of Taxable Income of Individuals and firms Deduction of Tax Tax planning by taking advantage of various deductions Exempted incomes KDF2B INCOME TAX LAW & PRACTICE 45

46 (a) Determination of Gross Total Income - It is ascertained by aggregating the net income under each head. (b) Deductions from Gross Total Income - The deductions are u/s 80C 80CCD 80CCC Gross total income minus these deductions will be his total income. (c)taxable Income - It is said to be total income or net income or taxable income KDF2B INCOME TAX LAW & PRACTICE 46

47 Rebate of Rs 5000 for individual having total taxable amount not exceeding Rs 5,00,000. KDF2B INCOME TAX LAW & PRACTICE 47

48 Link given below explains the types of assessment. KDF2B INCOME TAX LAW & PRACTICE 48

49 Deduction from Gross total income KDF2B INCOME TAX LAW & PRACTICE 49

50 Unit 4 : Clubbing of Income Set off & carry forward of losses KDF2B INCOME TAX LAW & PRACTICE 50

51 Clubbing of income Income of other persons to be included in an assessee s total income. (Sec 60) Transfer of income without transfer of an asset. Such income is clubbed in the hands of the transferor Revocable transfer of assets by an assessee to another person. It is clubbed in the hands of transferor. Irrevocable transfer of assets. Income arises out of such transfer is taxable in the hands of transferee. KDF2B INCOME TAX LAW & PRACTICE 51

52 Income of an individual to include spouse income Remuneration of spouse:- Substantial interest is required. Husband and wife relationship should exist. Remuneration should be received in same concern. Remuneration should not be received out of professional qualification. KDF2B INCOME TAX LAW & PRACTICE 52

53 Income from asset transferred to spouse Direct or indirect transfer Transfer made without adequate consideration. Relationship of Husband and wife. Change in the identity of asset- taxable in the hands of transferor. Sale or transfer of transferred asset- capital gain is taxable in the hands of transferor. Transferred Asset being invested in a business. Transferred asset being invested in a firm Acquisition of asset out of pin money Taxable in the hands of transferee. Transfer of asset in connection with an agreement to live apart not taxable in the hands of transferor. Income arising to the spouse from the accretion to transferred asset cannot be clubbed with transferor. KDF2B INCOME TAX LAW & PRACTICE 53

54 Income of minor not to be clubbed Handicapped or disabled minor s income. Income earned by a minor out of any manual work. Income earned out of his skill, talent, or specialized knowledge and experience. Exemption granted to parent u/s 10(32) Rs is exempted in the hands of parent of each minor child income. Income of Minor child Income of a minor child shall be clubbed in the hands of parents. Minor s income should include with the income of parent whose total income is greater. KDF2B INCOME TAX LAW & PRACTICE 54

55 Conversion of self acquired property into Joint family property If a member of HUF transfers self acquired property to HUF without adequate consideration. Income arising out of transferred asset is clubbed in the hands of transferor. Deemed Incomes Cash credits Unexplained investments. Unexplained money. Amount of investment not fully disclosed. Unexplained expenditure. Amount borrowed or repaid on Hundi KDF2B INCOME TAX LAW & PRACTICE 55

56 Set-off and carry forward of losses Inter source set off Loss under a particular head of income can be adjusted against income from any other source under the same head for the same assessment year. Exemptions to Inter source set off Loss from speculation business. Long term capital loss. Loss from the activity of owning and maintaining race horses. No loss can be set off against winning from lotteries, crossword puzzles, card games, etc. Loss from a source which is exempted. KDF2B INCOME TAX LAW & PRACTICE 56

57 Inter head set-off Loss from one head of income can be set off against income from other heads of income. Exemption: Loss from speculation business Long term capital loss Loss from the activity of owning and maintaining race horses. Business loss cannot be setoff against salary income. Loss cannot be set off against casual income. KDF2B INCOME TAX LAW & PRACTICE 57

58 Carry forward of loss If a loss cannot be adjusted in the same year, it may be carried forward and set off against the income of the subsequent years. House property loss can be carried forward for 8 years against income under the head house property. Speculation loss can be carried forward for 4 years to be set off against speculation income. Non speculation business loss can be carried forward for 8 years to be set off against any business income Loss on account of unabsorbed depreciation, capital expenditure on scientific research and family planning expenditure can be carried forward for any number of years to be set off against any income (other than salary) KDF2B INCOME TAX LAW & PRACTICE 58

59 Unit 5: Tax considerations in specific business decisions, viz., make or buy; own or lease, retain or replace; export or domestic sales; shutdown or closure; expand or contract; invest or disinvest. Computer Application in Income tax and tax planning KDF2B INCOME TAX LAW & PRACTICE 59

60 INTRODUCTION Tax planning is the arrangement of financial activities in such a way that maximum tax benefit are enjoyed by making use of all beneficial provisions in the tax laws. It entitles the assesse to avail certain exemptions, deductions, rebates and reliefs, so as to minimize his tax liability KDF2B INCOME TAX LAW & PRACTICE 60

61 BUSINESS DECISIONS Make or buy Invest or disinvest Own or lease Expand or contract Retain or replace Shutdown or closure Export or domestic sales KDF2B INCOME TAX LAW & PRACTICE 61

62 MAKE OR BUY A make-or-buy decision is the act of choosing between manufacturing a product in-house or purchasing it from an external supplier. In a make-or-buy decision, the most important factors to consider are part of quantitative analysis, such as the associated costs of production and whether the business has the capacity to produce at required levels. KDF2B INCOME TAX LAW & PRACTICE 62

63 OWN OR LEASE Assets may purchased or taken on lease. Apart from tax angle other factors also are important in taking lease or buy decisions like rate of change in technology. Depreciation on specified assets can be claimed as deduction u/s 32. the Assets may be purchased out rightly or may be taken on loan. Where the asset is taken on loan interest amount can either be claimed as revenue expenditure or can be capitalized. But where interest is paid after the asset is first put us use, the deduction on account of interest shall be claimed as revenue expenditure, i.e. such interest cannot be capitalized. KDF2B INCOME TAX LAW & PRACTICE 63

64 RETAIN OR REPLACE Repair implies the existence of a thing has malfunctioned and can be set right by effecting repairs which may involve replacement of some parts, thereby making the thing as efficient as it was before or close to it as possible. After repair the thing to which the repair was carried out continues to be available for use. Replacement is different from repair. Replacement implies the removal or discarding of the things that was in use, by a different or new thing capable of performing the same function with the same or greater efficiency. KDF2B INCOME TAX LAW & PRACTICE 64

65 SHUT DOWN / CLOSURE KDF2B INCOME TAX LAW & PRACTICE 65

66 EXPORT/DOMESTIC SALE When idle capacity exists, exporting is usually the more profitable strategy. The great advantage with exports to foreign countries is that the export price will not adversely affect the local price Companies which have already recovered their fixed cost from local sales can export just above their variable cost and still make good profits KDF2B INCOME TAX LAW & PRACTICE 66

67 INVEST /DISINVEST Purchasing plant involves long-term expenditure decision involving investment and the required return on investment If a particular machine is cheaper in terms of both variable and fixed cost it can be automatically chosen Otherwise disinvest decision should be taken KDF2B INCOME TAX LAW & PRACTICE 67

68 EXPAND/CONTRACT The owners of real options have the right, but not the obligation, to expand or contract their investment in a real asset (i.e., physical things rather than financial contracts) at some future date when uncertainties exist regarding the future value of the real asset has been resolved. Strategic investment and budget decisions within any organisation are decisions to acquire, exercise (e.g., expand, contract, or switch), abandon (e.g., temporarily or permanently), or let expire real options. The ability to delay the decision to invest introduces flexibility into this financial instrument. KDF2B INCOME TAX LAW & PRACTICE 68

69 Computer application in Income tax As per Explanation 3 to section 9 (1) (vi) of Income Tax Act, Computer software means any computer programme recorded on any disc, tape, perforated media or other information storage device and includes any such programme or any customized electronic data. USAGE OF COMPUTER APPLICATIONS IN IT DEPARTMENT sed_in_income_tax_department?#slide=2 KDF2B INCOME TAX LAW & PRACTICE 69

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71 Tips for tax planning RECAP OF INCOME TAX KDF2B INCOME TAX LAW & PRACTICE 71