Income tax in India

The government of India imposes an income tax on taxable income of individuals, Hindu Undivided Families (HUFs), companies, firms, co-operative societies and trusts (identified as body of individuals and association of persons) and any other artificial person. Levy of tax is separate on each of the persons. The levy is governed by the Indian Income Tax Act, 1961. The Indian Income Tax Department is governed by the Central Board for Direct Taxes (CBDT) and is part of the Department of Revenue under the Ministry of Finance, Govt. of India. There are close to 35 million income tax payers in India.

Overview

Charge to Income-tax

Everyone exceeds the maximum amount which is not chargeable to the income tax is an assesse, and shall be chargeable to the income tax at the rate or rates prescribed under the finance act for the relevant assessment year, shall be determined on basis of his residential status.

Income tax is a tax payable, at the rate enacted by the Union Budget (Finance Act) for every Assessment Year, on the Total Income earned in the Previous Year by every Person.

The chargeability is based on nature of income, i.e., whether it is revenue or capital. The rates of taxation of income are-:

Income Tax Rates/Slabs Rate (%) (as per budget 2012)

→ Up to 2,00,000 = 0,

→ 2,00,001 – 5,00,000 = 10%,

→ 5,00,001 – 10,00,000 = 20%,

→ 10,00,001 upwards = 30%,

Up to 2,50,000 (for resident individual of 60 years or above)= 0,

Up to 5,00,000 (for very senior citizen of 80 years or above)= 0.

Education cess is applicable @ 3 per cent on income tax, surcharge = NA

Residential Status

The three residential status, viz.,

• Resident Ordinarily Residents

• Under this category ,person must be living in India at least 182 days during previous year Or must have been in India 365 days during 4 years preceding previous year and 60 days in previous year. Ordinary residents are always taxable on their income earned both in India and Abroad.

• Resident but not Ordinarily Residents

• Must have been a non-resident in India 9 out of 10 years preceding previous year or have been in India in total 729 or less days out of last 7 years preceding the previous year. Not residents are taxable in relation to income received in India or income accrued or deemed to be accrue or arise in India and income from business or profession controlled from India.

• Non Residents

• Non Residents are exempt from tax if accrue or arise or deemed to be accrue or arise outside India. Taxable if income is earned from business or profession setting in India or having their head office in India.

Heads of Income

The total income of a person is divided into five heads, viz., taxable:

Individual Heads of Income

Income from Salary

All income received as salary under Employer-Employee relationship is taxed under this head. Employers must withhold tax compulsorily, if income exceeds minimum exemption limit, as Tax Deducted at Source (TDS), and provide their employees with a Form 16 which shows the tax deductions and net paid income. In addition, the Form 16 will contain any other deductions provided from salary such as:

1. Medical reimbursement: Up to ₹15,000 per year is tax free if supported by bills.
2. Transport allowance: Up to ₹800 per month (₹9,600 per year) is tax free if provided as transport allowance. No bills are required for this amount.
3. Conveyance allowance:is tax exempt.
4. Professional taxes: Most states tax employment on a per-professional basis, usually a slabbed amount based on gross income. Such taxes paid are deductible from income tax.
5. House rent allowance: the least of the following is available as deduction
   1. Actual HRA received
   2. 50%/40%(metro/non-metro) of basic 'salary'
   3. Rent paid minus 10% of 'salary'. basic Salary for this purpose is basic+DA forming part+commission on sale on fixed rate.

Income from salary is the least of all the above deductions.

Income from House property

Income from House property is computed by taking into account what is called Gross Annual Value of the property. The annual value (in the case of a let out property) is the maximum of the following:

• Rent received
• Municipal Valuation
• Fair Rent (as determined by the I-T department)

If a house is not let out and not self-occupied, annual value is assumed to have accrued to the owner. Annual value in case of a self occupied house is to be taken as NIL. (However if there is more than one self occupied house then the annual value of the other house/s is taxable.) From this, deduct Municipal Tax paid and you get the Net Annual Value. From this Net Annual Value, deduct :

• 30% of Net value as repair cost (This is a mandatory deduction)
• No other deduction available
• Interest paid or payable on a housing loan against this house

In the case of a self occupied house interest paid or payable is subject to a maximum limit of Rs,1,50,000 (if loan is taken on or after 1 April 1999 and construction is completed within 3 years) and Rs.30,000 (if the loan is taken before 1 April 1999). For all non self-occupied homes, all interest is deductible, with no upper limits.

The balance is added to taxable income.

Income from Business or Profession

The income referred to in section 28, i.e., the incomes chargeable as "Income from Business or Profession" shall be computed in accordance with the provisions contained in sections 30 to 43D. However, there are few more sections under this Chapter, viz., Sections 44 to 44DA (except sections 44AA, 44AB & 44C), which contain the computation completely within itself. Section 44C is a disallowance provision in the case non-residents. Section 44AA deals with maintenance of books and section 44AB deals with audit of accounts.

In summary, the sections relating to computation of business income can be grouped as under: -

1. Deductible Expenses - Sections 30 to 38 [except 37(2)].
2. Inadmissible Expenses - Sections 37(2), 40, 40A, 43B & 44-C.
3. Deemed Incomes - Sections 33AB, 33ABA, 33AC, 35A, 35ABB & 41.
4. Special Provisions - Sections 42 & 43D
5. Self-Coded Computations - Sections 44, 44A, 44AD, 44AE, 44AF, 44B, 44BB, 44BBA, 44BBB, 44-D & 44-DA.

The computation of income under the head "Profits and Gains of Business or Profession" depends on the particulars and information available.

If regular books of accounts are not maintained, then the computation would be as under: -

Income (including Deemed Incomes) chargeable as income under this head xxx Less: Expenses deductible (net of disallowances) under this head xxx Profits and Gains of Business or Profession xxx

However, if regular books of accounts have been maintained and Profit and Loss Account has been prepared, then the computation would be as under: -

Net Profit as per Profit and Loss Account                                      xxx
Add : Inadmissible Expenses debited to Profit and Loss Account                 xxx
      Deemed Incomes not credited to Profit and Loss Account                   xxx
                                                                               xxx 
Less: Deductible Expenses not debited to Profit and Loss Account          xxx
      Incomes chargeable under other heads credited to Profit & Loss A/c  xxx
                                                                               xxx
Profits and Gains of Business or Profession                                    xxx

Income from Capital Gains

Transfer of capital assets results in capital gains. A Capital asset is defined under section 2(14) of the I.T. Act, 1961 as property of any kind held by an assessee such as real estate, equity shares, bonds, jewellery, paintings, art etc. but does not include some items like any stock-in-trade for businesses and personal effects. Transfer has been defined under section 2(47) to include sale, exchange, relinquishment of asset, extinguishment of rights in an asset, etc. Certain transactions are not regarded as 'Transfer' under section 47.

For tax purposes, there are two types of capital assets: Long term and short term. Long term asset is that which is held by a person for three years except in case of shares or mutual funds which becomes long term just after one year of holding. Sale of such long term assets gives rise to long term capital gains. There are different scheme of taxation of long term capital gains. These are:

1. As per Section 10(38) of Income Tax Act, 1961 long term capital gains on shares or securities or mutual funds on which Securities Transaction Tax (STT) has been deducted and paid, no tax is payable. STT has been applied on all stock market transactions since October 2004 but does not apply to off-market transactions and company buybacks; therefore, the higher capital gains taxes will apply to such transactions where STT is not paid.
2. In case of other shares and securities, person has an option to either index costs to inflation and pay 20% of indexed gains, or pay 10% of non indexed gains. The indexation rates are released by the I-T department each year.
3. In case of all other long term capital gains, indexation benefit is available and tax rate is 20%.

All capital gains that are not long term are short term capital gains, which are taxed as such:

• Under section 111A, for shares or mutual funds where STT is paid, tax rate is 10% From Asst Yr 2005-06 as per Finance Act 2004. For Asst Yr 2009-10 the tax rate is 15%.
• In all other cases, it is part of gross total income and normal tax rate is applicable.

For companies abroad, the tax liability is 20% of such gains suitably indexed (since STT is not paid). For charging the income under the head "Profits and Gains of business," the following conditions should be satisfied: There should be a business or profession. The business or profession should be carried on by the assessee. The business or profession should have been carried on by the assessee at any time during the previous year. What income will be chargeable to income tax under the head 'Profits and gains of business or profession'?

The following income would be chargeable under the head "Profits and gains of business or profession": 

The profits and gains of any business or profession, which was carried on by the assessee at any time during the previous year;

Any compensation or other payment, due or received by the following:- 

Any person, by whatever name called, managing the whole or substantially the whole of the affairs of an Indian company, at or in connection with the termination of his management or the modification of the terms and conditions relating thereto; Any person, by whatever name called, managing the whole or substantially the whole of the affairs in India of any other company, at or in connection with the termination of his office or the modification of the terms and conditions relating thereto; Any person, by whatever name called, holding an agency in India for any part of the activities relating to the business of any other person, at or in connection with the termination of any agency or the modification of the terms and conditions relating thereto; Any person, for or in connection with the vesting in the Government, or in any corporation owned or controlled by the Government, under any law for the time being in force, of the management of any property or business; Income, derived by a trade, professional or similar association from specific services performed for its members; Profits on sale of a license granted under the Imports (Control) Order, 1955, made under the Imports and Exports (Control) Act, 1947; Cash assistance (by whatever name called), received or receivable by any person against exports under any scheme of the Government of India; Any duty of customs or excise repaid or repayable as drawback to any person against exports under the Customs and Central Excise Duties Drawback Rules, 1971; The value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession; Any interest, salary, bonus, commission or remuneration, by whatever name called, due to, or received by, a partner of a firm from such firm.

However, it is provided that where any interest, salary, bonus, commission or remuneration, by whatever name called, or any part thereof has not been allowed to be deducted under Clause (b) of section 40, the income under this clause shall be adjusted to the extent of the amount not so allowed to be deducted. 

Would the interest income be assessed as business income or as income from other sources?

Interest Income is either assessed as Business Income or as Income from other sources depending upon the activities carried on by the assessee. If the investment yielding interest were part of the business of the assessee, the same would be assessable as business income but where the earning of the interest income is incidental to and not the direct outcome of the business carried on by the assessee, the same is assessable as Income from other sources. Business implies some real, substantial and systematic or organized course of activity with a profit motive. Interest generated from such an activity is considered Business Income. Otherwise, it would be interest from other sources. 

What deductions are allowed in computing income from profits and gains of business or profession?

A number of other deductions under Section 36 of the Income-Tax Act are allowed while computing income from profits and gains of business or profession: 
S36 (i): The amount of any premium, paid in respect of insurance against risk of damage or destruction of stocks or stores, used for the purposes of the business or profession; 

(ia) The amount of any premium, paid by a federal milk co-operative society to effect or to keep in force an insurance on the life of the cattle owned by a member of a co-operative society, being a primary society engaged in supplying milk, raised by the members of such federal milk co-operative society; (ib) The amount of any premium, paid by cheque by the assessee as an employer to effect or to keep in force an insurance on the health of his employees under a scheme, framed in this behalf by the General Insurance Corporation of India, formed under section 9 of the General Insurance Business (Nationalization) Act, 1972 (57 of 1972) and approved by the Central Government; (ii) Any sum, paid to an employee as bonus or commission for services rendered, where such sum would not have been payable to him as profits or dividend if it had not been paid as bonus or commission; (iii) The amount of the interest paid in respect of capital borrowed for acquisition of the asset from the date it is put to use for the purposes of the business or profession; (iv) Any sum, paid by the assessee as an employer by way of contribution towards a recognized provident fund or an approved Superannuation fund, subject to such limits as may be prescribed for the purpose of recognizing the provident fund or approving the Superannuation fund, as the case may be; and subject to such conditions as the Board may think fit to specify in cases where the contributions are not in the nature of annual contributions of fixed amounts or annual contributions, fixed on some definite basis by reference to the income chargeable under the head "Salaries" or to the contributions or to the number of members of the fund; (v) Any sum, paid by the assessee as an employer by way of contribution towards an approved gratuity fund created by him for the exclusive benefit of his employees under an irrevocable trust; (va) Any sum, received by the assessee from any of his employees to which the provisions of sub-clause (x) of clause (24) of section 2 apply, if such sum is credited by the assessee to the employee's account in the relevant fund or funds on or before the due date. (vi) In respect of animals which have been used for the purposes of the business or profession, otherwise than as stock-in-trade and have died or become permanently useless for such purposes, the difference between the actual cost to the assessee of the animals and the amount, if any, realized in respect of the carcasses or animals; (vii) Subject to the provisions of sub-section (2), the amount of any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee for the previous year;

(viia) in respect of any provision for bad and doubtful debts made by the following: 

A scheduled bank or non -- scheduled bank, an amount not exceeding five per cent of the total income and an amount not exceeding ten per cent of the aggregate average advance made by the rural branches of such bank computed in the prescribed manner; A bank, being a bank incorporated by or under the laws of a country outside India, an amount not exceeding five per cent of the total income; public financial institution or a State financial corporation or a State industrial investment corporation, an amount not exceeding five per cent of the total income. (viii) In respect of any special reserve created by a financial corporation which is engaged in providing long term finance for industrial or agricultural development in India or, by a public company formed and registered in India with the main object of carrying on the business or providing long - term finance for construction or purchase of houses in India for residential purposes, an amount not exceeding forty per cent of the total income can be carried to the reserve account; (ix) Any bona fide expenditure incurred by a company for the purpose of promoting family planning amongst its employees; (x) Any sum, paid by a public financial institution by way of contribution towards any Exchange Risk Administration Fund, set up by public financial institutions, either jointly or separately. (xi) Any expenditure, incurred by the assessee on or after the 1st day of April 1999 but before the 1st day of April 2000, wholly and exclusively in respect of a non-Y2K compliant computer system, owned by the assessee and used for the purposes of his business or profession, so as to make such computer system Y2K compliant. (xii) Any expenditure (not being in the nature of capital expenditure) incurred by a corporation or a body corporate, by whatever name called, constituted or established by a Central, State or Provincial Act for the objects and purposes authorized by the Act, under which such corporation or body corporate was constituted or established. It is important to note that deductions are subject to certain conditions being satisfied.

What deductions are allowable in respect of rent, rates, taxes, repairs and insurance for premises, which are used for the purpose of business or profession?

S 30: The deductions that are allowed while computing income from 'profits and gains from business or profession' in respect of rent, rates, taxes, repairs and insurance for premises, which are used for the purpose of business or profession while computing income from 'profits and gains from business or profession' are as follows: 
Where the premises are occupied by the assessee: 

As a tenant, the rent paid for such premises; and further if he has undertaken to bear the cost of repairs to the premises, the amount paid on account of such repairs; excluding expenditure in the nature of capital expenditure. Otherwise than as a tenant, the amount paid by him on account of current repairs to the premises; excluding expenditure in the nature of capital expenditure.

Any sums, paid 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. 

What deductions shall be allowed in respect of repairs and insurance of machinery, plant and furniture?

S 31: The following deductions shall be allowed in respect of repairs and insurance of machinery, plant and furniture: 

The amount paid on account of current repairs thereto; excluding expenditure in the nature of capital expenditure.

The amount of any premium, paid in respect of insurance against damage or destruction thereof

Income from Other Sources

This is a residual head, under this head income which does not meet criteria to go to other heads is taxed. There are also some specific incomes which are to be taxed under this head.

1. Income by way of Dividends
2. Income from horse races
4. Income from winning bull races
5. Any amount received from key man insurance policy as donation.
6. Income from shares (dividend otherthan Indian company)

Deduction

While exemptions is on income some deduction in calculation of taxable income is allowed for certain payments.

Section 80C Deductions

Section 80C of the Income Tax Act [1] allows certain investments and expenditure to be deducted from total income up to the maximum of 1 lac. The total limit under this section is ₹100,000 ) which can be any combination of the below:

• Contribution to Provident Fund or Public Provident Fund. PPF provides 8.6% return compounded annually. Maximum limit to contribute in it is 100,000 for each year. It is a long term investment with complete withdrawal not possible till 15 years though partial withdrawal is possible after 5 years. Besides, there is employee providend fund which is deducted from the salary of the person. This is about 10% to 12% of the BASIC salary component. Recent changes are being discussed regarding reducing the instances of withdrawal from EPF especially when one changes the job. EPF has the option of full settlement on leaving the job, taking VRS, retirement after 58. It also has options of withdrawal for certain expenses related to home, marriage or medical. EPF contribution includes 12% of basic salary from employee and employer. It is distributed in ratio of 8.33:3.67 in Pension fund and Providend fund
• Payment of life insurance premium. It is allowed on premium paid on self, spouse and children even if they are not dependent on father or mother(Tax On Maturity of LIfe Insurance Policy
• Investment in pension Plans. National Pension Scheme is meant to save money for the post retirement which invests money in different combination of equity and debt. depending upon age up to 50% can go in equity. Annuity payable after retirement is dependent upon age. NPS has six fund managers. Individual can make minimum contribution of Rs6000/- . It has 22 point of purchase (banks).
• Investment in Equity Linked Savings schemes (ELSS) of mutual funds. Among other investment opportunities, ELSS has the least lock-in period of 3 years. However, one should note that after the Direct Tax Code is in place, ELSS will no longer be an investment for 80C deduction.
• Investment in National Savings Certificates (interest of past NSCs is reinvested every year and can be added to the Section 80 limit)
• Tax saving Fixed Deposits provided by banks for a tenure of 5 years. Interest is also taxable.
• Payments towards principal repayment of housing loans. Also any registration fee or stamp duty paid.(Read more about House Loan deduction 80C
• Payments towards tuition fees for children to any school or college or university or similar institution (Only for 2 children)Read read FAQ about Tuition Fees
• Post office investments

The investment can be from any source and not necessarily from income chargeable to tax.

Section 80CCF: Investment in Infrastructure Bonds

From April, 1 2011, a maximum of ₹20,000 is deductible under section 80CCF provided that amount is invested in infrastructure bonds. This is in addition to the 100,000 deduction allowed under Section 80C.

Section 80D: Medical Insurance Premiums

Health insurance, popularly known as Mediclaim Policies, provides a deduction of up to ₹35,000.00 (₹15,000.00 for premium payments towards policies on self, spouse and children and (read as in addition to) ₹15,000.00 for premium payment towards non-senior citizen dependent parents or ₹20,000.00 for premium payment towards senior citizen dependent). This deduction is in addition to ₹1,00,000 savings under IT deductions clause 80C. For consideration under a senior citizen category, the incumbent's age should be 65 years during any part of the current fiscal, e.g. for the fiscal year 2010-11, the incumbent should already be 65 as on March 31, 2011), This deduction is also applicable to the cheques paid by proprietor firm. This Deduction is not available if Paid through CASH.read more

Interest on Housing Loans Section

For self occupied properties, interest paid on a housing loan up to Rs 150,000 per year is exempt from tax. This deduction is in addition to the deductions under sections 80C, 80CCF and 80D. However, this is only applicable for a residence constructed within three financial years after the loan is taken and also the loan if taken after April 1, 1999.

If the house is not occupied due to employment, the house will be considered self occupied.

For let out properties, the entire interest paid is deductible under section 24 of the Income Tax act. However, the rent is to be shown as income from such properties. 30% of rent received and municipal taxes paid are available for deduction of tax.

The losses from all properties shall be allowed to be adjusted against salary income at the source itself. Therefore, refund claims of T.D.S. deducted in excess, on this count, will no more be necessary.

Use of Deductions

While the use of the above sections helps one to make savings for the long-term, one should look at this more as an investment-return opportunity. One should still file income tax return, even if one doesn't fall into the bracket of paying tax, if there are sources of income as defined by Income Tax rules. Except ELSS (Equity Linked Savings Scheme) and the NPS (National Pension Scheme), other schemes under 80C typically offer a relatively risk-free investment and guaranteed returns.

Tax Rates

In India, individual income tax is a progressive tax with three slabs. About 10 per cent of the population meets the minimum threshold of taxable income

From April 1, 2012 new tax slabs apply, which are as follows:

• No income tax is applicable on all income up to ₹2,00,000 per year. (₹2,00,000 for women, ₹2,50,000 for senior citizens of 60 till 80 yrs (excluding 80) and ₹5,00,000 for very senior citizens of 80 yrs and above and must be resident of India)
• From 2,00,001 to 5,00,000 : 10% of amount greater than ₹2,00,000 (Lower limit changes appropriately for women and senior citizens)
• From 5,00,001 to 10,00,000 : 20% of amount greater than ₹5,00,000 + 30,000 ( ₹29,000 for women and ₹25,000 for senior citizens)

• Above 10,00,000 : 30% of amount greater than ₹10,00,000 + 130,000 ( ₹129,000 for women and ₹85,000 for senior citizens)

Surcharge

Surcharge has been abolished for personal income tax in the financial year 2009-10.

A 7.5% surcharge (tax on tax) is applicable if the taxable income (taking into consideration all the deductions) is above ₹10 lakh (₹1 million). The limit of 10 lacs was increased to ₹1 crore (₹10 million) with effect from 1 June 2009

All taxes in India are subject to an education cess, which is 3% of the total tax payable. With effect from assessment year 2009-10, Secondary and Higher Secondary Education Cess of 1% is applicable on the subtotal of income tax. The education cess is mainly applicable on excise duty and service tax

From income tax year 2010-11, education cess would be 3% and no surcharge would be levied.

Tax Rate for non-Individuals

There are special rates prescribed for Firms, Corporates, Local Authorities & Co-operative Societies.

Refund Status for Salaried tax payers

The Income Tax Department has put on its website the list of income tax refunds of all salary tax payers which could not be sent to the concerned persons for want of correct address. (link to check refund)

Salary taxpayers who have not received refunds for assessment years 2003-04 to 2006-07 can click on the link below and query using the PAN number and assessment year whether any refund due to them has been returned undelivered. . 123

Corporate Income tax

For companies, income is taxed at a flat rate of 30% for Indian companies, with a 5% surcharge applied on the tax paid by companies with gross turnover over ₹1 crore (10 million). Foreign companies pay 40%. An education cess of 3% (on both the tax and the surcharge) are payable, yielding effective tax rates of 32.5% for domestic companies and 41.2% for foreign companies. From 2005-06, electronic filing of company returns is mandatory.

Tax Penalties

The major number of penalties initiated every year as a ritual by I T Authorities is under section 271(1)(c) which is for either concealment of income or for furnishing inaccurate particulars of income.

"If the Assessing Officer or the Commissioner (Appeals) or the Commissioner in the course of any proceedings under this Act, is satisfied that any person-

(b) has failed to comply with a notice under sub-section (1) of section 142 or sub-section (2) of section 143 or fails to comply with a direction issued under sub-section (2A) of section 142, or

(c) has concealed the particulars of his income or furnished inaccurate particulars of such income,

he may direct that such person shall pay by way of penalty,-

(ii) in the cases referred to in clause (b), in addition to any tax payable by him, a sum of ten thousand rupees for each such failure;

(iii) in the cases referred to in clause (c), in addition to any tax payable by him, a sum which shall not be less than, but which shall not exceed three times, the amount of tax sought to be evaded by reason of the concealment of particulars of his income or the furnishing of inaccurate particulars of such income.

See also

• Service tax in India
• Central Excise (India)

External links

• Finance Bill & Budget Speech 2012
• Income Tax Rates,Deduction,Exemption Free Ready Reckoner Fy 2011-12
• Indian Income Tax Department
• Electronic Filing of Income Tax Returns
• Another site for Electronic Filing of Income Tax Returns
• Saving income tax using section 80C deductions