What is Income Tax?

1
What is Income Tax?

• It is tax on Income.
• It is revenue for government indicates outflow
  of cash for a person who is liable to pay the tax

2
How the income tax act look like?

• Summary of important sections
• Section2 definations
• Section3 computation of total income
• Section 6 Residential status of a person
• Section10 incomes exempted from Tax
• Section 15-17 salary income
• Section 24 Income from house property
• Section 28 -44 income from business or
  profession
• Section 54 -income from capital gain
• Section 56 Income from other sources
• Section 80 deductions from gross total income

3
How the income tax act look like?

• Section 139 Provisions of filing income tax
  return.
• Section 194 Tax deducted at source
• Section 210 Provisions of Advance Tax
• Section 234Provisions of not filing of income
  tax return.
• Section 246 onwards appeals provisions

4
Direct Tax

• Every person has to pay tax , person includes
  following
• Individuals, Hindu undivided family, association
  of persons or body of individuals, partnership
  firm,company,society or charitable trust, local
  authority, every artificial person has to pay tax.

5
Income Tax liability of a person

• Residential status of a person decides income tax
  liability.
• Previous year is the year in which income is
  earned .
• Assessment year is the year which consist of 12
  months which commences on the1st day of April
  immediately after the previous year. for the
  previous year ending on 31.03.2006, the
  assessment year is 2006-07.

6
Tax is of two types(direct tax vs. indirect tax)

• Direct tax is the tax which is charged
  collected from the same person.
• Indirect tax is that tax which is charged on one
  person collected from other person.
• For example excise duty, value added tax, service
  tax, custom duty. It is collected from final
  consumer.

7
Basic concepts under income tax Act Sec2

• Previous Year The year in which income is earned
  is called as previous year.
• Assessment year the income of the previous year
  is charged in the next year called as assessment
  year.
• Example X joins an Indian company on January
  23,2007.Prior to January 23,2007,he is not in
  employment, What is the previous year for the
  assessment year 2007-08 2008-09?

8
Assessee

• Assessee means a person by whom any Tax or any
  other sum of money(i.e Penalty or interest) is
  payable under the actsec2(7)

9
Who is liable to pay Tax?

• A person is liable to pay Tax.
• Sec2(31) of the act defines the person.
• The person includes
• An Individual
• A Hindu undivided family
• A company
• A Firm
• An association of persons or body of individuals
  whether incorporated or not
• A local Authority
• Every artificial juridical person

10
Example

• Determine the status of the following
• Pune university
• DCM Ltd
• Mumbai municipal corporation
• Taxman publications Ltd
• Laxmi commercial bank
• XYCO.,Firm of XY
• Joint family of X,Mrs. X their sons A B

11
Heads of Income

• There are 5 heads of Income
• Income from Salary
• Income from house property
• Income from profits gains of business
• Income from other sources
• Capital gains short term long term capital
  gain.

12
What constitutes salary

• There are 3 groups that constitute your salary
• Group 1 Basic salary, advance salary, arrears of
  salary, all types of bonus, service award,pension
• Group 2Allowances group It includes dearness
  allowance, conveyance allowance, children
  education allowance, overtime allowance, leave
  travel allowance, city compensatory allowance
• Group 3 Perquisites It means facilities given
  by Employer to Employee Rent free
  accomodation,domestic servant facility,
  reimbursement of medical facility,Motar car
  facility, benefits derived by stock option scheme.

13
Income from house property

• If the house property is self occupied then value
  of property is taken as nil for income tax
  purpose . However if the loan is taken for the
  purpose of purchasing the house property
  deduction is available to the extent of
  Rs.1,50,000 for interest on house property. It
  is treated as negative income deducted while
  calculating gross total income. For the principal
  amount, deduction is available under 80C

14
Example of Income from house property

• Mr. X is having house property value of the same
  is Rs.10,00,000. Loan taken for the purchase of
  house property is Rs.6,00,000. Mr. X paid
  interest on loan Rs.42500, Principal repayment
  Rs.15,000.
• He has salary income Rs.3,00,000 during the
  period .Calculate his taxable income for the
  assessment year2006-07.

15
Income from house property

• Total income of Mr.X can be calculated as
  follows salary incomeRs.3,00,000
• Interest pd on housing loanRs.(42,500)
• Gross Total IncomeRs.2,57,500
• Less deduction under sec80CRs15,000
• Taxable income Rs.2,42,500

16
Capital Gain short term long term capital gain

• Capital gain means the gain which arises because
  of transfer of capital asset.
• Capital gain on account of transfer of shares is
  calculates as follows
• It is divided into 2 parts short term gain
  long term gain. short term gain means if the
  shares are sold within a period of one year from
  the date of purchase. Short term capital gain tax
  is 10

17
Long Term Capital Gain for shares

• If the shares are transferred not within a period
  of one year from its date of purchase in other
  words hold by the assessee for a period of more
  than a year treated as long term capital gain on
  which assessee should not pay any tax Long Term
  capital gain arising on transfer of shares
  /units on equity mutual fund on or after
  1.10.2004 chargable to security transaction tax
  shall be fully exempted from tax u/s 10(38)

18
Illustration

• Purchase 100 shares of tata tea on 1.10.2006 _at_723
  per share. Sold the same shares on 21.12.2006_at_760
  per share. Calculate the capital gain income
  tax liability on transfer of shares.
• Short term capital gain100373700
• Tax on Rs.3700 is 10Rs.370

19
Income exempted from Tax

• Section 10 of income tax act, gives the list of
  income which are exempted from Tax. Some of the
  examples are as follows
• Agricultural income
• Dividend on shares
• Gratuity (limits given u/s 10(10)
• Pension leave salary to the extent given under
  section (10A), (10AA)
• Share of a partner in the partnership firm.

20
Tax rates applicable for resident woman (below
65 years)are as follows







Net Income Range Income tax Rate Surcharge Education cess
Upto Rs.1,35,000 Nil Nil Nil
Rs.1,35,000 -1,50,000 10 of total Income-1,35,000 Nil 2 of I.T.
Rs.1,50,000 -2,50,000 150020 of T.I-1,50,000 Nil 2 of I.T.
Rs.2,50,000 -10,00,000 21500300f T.I-2,50,000 Nil 2 of I.T.
Above rs.10,00,000 2,46,000300f T.I.-10,00,000 10 0f I.T. 2 of I.T.

21
Illustration

• Calculate income tax liability for assessment
  year 2007-08 in case of following
• Income of Mrs. X(age 40 years)1,95,000
• Income of Miss Priya (age 26 years)2,90,000
• Income of Mrs.Y(age-54) 10,50,000

22
Tax Rates applicable for senior citizen above 65
years
Net Income Range Income tax Rate Surcharge Education cess
Upto Rs.1,85,000 Nil Nil Nil
Rs.1,85,000 -2,50,000 20 of total Income-1,85,000 Nil 2 of I.T.
Rs.2,50,000 -10,00,000 13,000300f T.I-2,50,000 Nil 2 of I.T.
Above rs.10,00,000 2,38,000300f T.I.-10,00,000 10 0f I.T. 2 of I.T.





23
Examples

• Calculate income tax liability in case of
  following
• Mr.X (age 66 years) income Rs.175000 per year
• Mr. Z(age 70 years) income Rs.2,10,000
• Mr. S (age 68 years) income Rs.2,75,000
• Mr. B (age 66 years) income Rs.10,50,000

24
For any other individual-Tax rates
Income I.Tax surchg Edu.cess




Upto Rs.1,00,000 Nil Nil Nil
Rs.1,00,000 -1,50,000 10 of total Income-1,00,000 Nil 2 of I.T.
Rs.1,50,000 -2,50,000 500020 of T.I-1,50,000 Nil 2 of I.T.
Rs.2,50,000 -10,00,000 25000300f T.I-2,50,000 Nil 2 of I.T.
Above rs.10,00,000 2,50,000300f T.I.-10,00,000 10 0f I.T. 2 of I.T.
25
Example

• Calculate income tax liability in the following
  cases
• Mr.X income Rs.2,10,000 (age 29 years)
• Mr.Y(age 36 years) income Rs.3,50,000
• Mr.P (age 40 years) income of Rs.10,10,000

26
Deductions from gross total income to Individuals

• Deduction under sec80C
• contribution for life insurance premium
• contribution towards Provident Fund
• contribution towards public provident fund
• Payment of loan (principal amount) taken for the
  purchase of house property
• Amount of term deposit for a period of 5 years or
  more in accordance with a scheme framed by
  government

27
Deductions

• Contribution towards National saving certificates
• Any sum paid as tuition fees whether at the time
  of admission to any university, college,
  educational institution in India for full time
  education.
• Deduction under this section is available to the
  maximum of Rs.1,00,000

28
Deduction under section 80CCC 80CCD

• This deduction is available for the amount which
  is paid for pension fund. The maximum amount
  deductible under sections 80C,80CCC 80CCD
  cannot exceed Rs.1,00,000.
• Deduction for Medical insurance policy(80D)
• This deduction is available to the extent of
  Rs.10,000 or the actual amount of premium
  whichever is less.

29
Illustration

• X is employed by the central government in the
  ministry of labour. During the previous year
  2006-07 basic salary Rs.16,000 per month plus
  D.A10 of basic salary. He annually contributes
  Rs.70,000 for PPF,Rs.20,000 or life insurance
  premium Rs.20,000 for notified pension policy.
  His income from other sources Rs.16,000.Mediclaim
  paid Rs.8000.compute the income tax liability for
  assessment year 2007-08

30
Illustration

• Basic salary1,92,000(1600012)
• Plus D.A 19,200
• Gross salary2,11,200
• Income from other sources16,000
• Gross Total Income2,27,200
• Deduction u/s 80C 80CCC1,00,000
• Deduction u/s 80D 16,000
• Net Income1,19,200
• Tax on Rs.1,19,200Rs.2,304

31
Tax Deducted at Source

• Payment on which Tax is deducted at source are as
  follows( some of the examples)
• Payment of salary Employer will deduct tax.
• Interest on time deposits if it exceeds Rs.5,000
  Bank will deduct tax _at_10.2
• T.D.S on fees for professional technical
  services _at_5.1
• Winning from Lotteries cross word puzzles if it
  exceeds Rs.5000_at_30.6
• Winning from horse races if exceeds
  Rs.2,500_at_30.6
• Payment of brokerage _at_5.1 if amount of brokerage
  exceeds Rs.2,500