Income Tax in India

DR SARBESH MISHRA
FINANCE AREA
 Backdrop
2
1. A tax that is levied on income of individuals /
corporations / legal entities is known as Income Tax.
2. The Central Board for Direct Taxes (CBDT) governs
the Indian Income Tax department.
3. Income tax is imposed by Govt. of India 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.
4. Levy of tax is different for different entities and it is
governed by the Indian Income Tax Act, 1961.
Tax Rates 2009 – 10 (A.Y 2010 – 11)
3
The new tax slabs applicable from April 1, 2009 are as
follows:
 On all incomes up to Rs. 1,60,000 per year. (For women
-Rs. 1,90,000 and for senior citizens - Rs. 2,40,000), no
Income Tax is applicable.
 From 1,60,001 - 3,00,000 : 10% of amount more than Rs.
1,60,000/- ( The lower limit differs appropriately for
women as well as senior citizens)
 From 3,00,001 to 5,00,000 : 20% of amount more than Rs.
3,00,000 + 14,000 (slightly less for women and further less
for senior citizens)
 Above 5,00,000 : 30% of amount more than Rs. 5,00,000
+ 54,000 (for women – slightly less and for senior citizens
- further less)
 Income from Salary
4
Under this head, income received as salary under
Employer-Employee relationship is taxed. If
income exceeds minimum exemption limit, then
Employers must withhold tax compulsorily as
Tax Deducted at Source (TDS). The employees
should also be provided with a Form 16 which
shows the tax deductions and net paid income.
Form 16 also contains any other deductions
provided from salary as follows:
 Contd….
5
 Medical reimbursement up to Rs. 15,000 per year is tax
exempt provided bills are given
 Conveyance allowance up to 9600 per year is tax free
 Professional taxes which are usually a slabbed amount
based on gross income are deductible from income tax.
 House rent allowance: the minimum of the following is
available as deduction
 The actual HRA received
 50%/40 % (metro/non-metro) of 'salary'
 Rent paid minus 10% of 'salary'
 Income from House
6
Property
Income from House property is calculated by
considering the Annual Value. The annual value
(for a let out property) will be maximum of the
following:
 HRA Rent received
 Municipal Valuation
 Fair Rent (as determined by the I-T department)
 Contd….
7
However if a house is not let out and not self-
occupied, then annual value is assumed to have
accrued to the owner. In case of a self occupied
house, annual value is to be taken as NIL. But if there
is more than one self occupied house then the annual
value of the other house/s is taxable. From this,
Municipal Tax paid is deducted to arrive at the Net
Annual Value. From this Net Annual Value, the
following are deducted:
 30% of Net value as repair cost - mandatory deduction
 Interest paid or payable on a housing loan for the house
 Income from Business or
Profession
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1. Income arising from profits and gains of any Business

or Profession; income derived by a Trade/
Professional/ similar Association by performing
specific services for its members;
2. Any benefit from business whether convertible
into money or not, incentives for exporters; any
salary, interest, bonus, commission or remuneration
received by Partner of a firm;
3. Any amount received under a Key man Insurance
Policy which also covers Bonus; income from
managing agency and speculative transactions; is
taxable.
 Income from Capital Gains
9

Under section 2(14) of the I.T. Act, 1961, Capital asset

is defined as property of any kind held by an
assessee such as real estate, equity shares, bonds,
jewellery, paintings, art etc. but does not consist of
items like stock-in-trade for businesses or for
personal effects. Capital gains arise by transfer of
such capital assets.
 Contd….
10

Long term and short term capital assets are

considered for tax purposes.
Long term assets are those assets which are 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 long term assets give rise to long term
capital gains which are taxable as below:
 Contd….
11
 As per Section 10(38) of Income Tax Act, 1961 long term
capital gains on shares/securities/ mutual funds on
which Securities Transaction Tax (STT) has been
deducted and paid, no tax is payable. Higher capital gains
taxes will apply only on those transactions where STT is
not paid.
 For other shares & securities, person has an option to
either index costs to inflation and pay 20% of indexed
gains, or pay 10% of non indexed gains.
 For all other long term capital gains, indexation benefit is
available and tax rate is 20%
 Income from other sources
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There are some specific incomes which are to be

taxed under this category such as income by way of
dividends, horse races, winning of bull races,
winning of lotteries, amount received from key
man insurance policy.
 All about 13Sec – 80C
Section 80C replaced the erstwhile Section 88 with more
or less the same investment mix available in Section
88 but with a major change in the method of providing
a tax benefit.
The limit
The limit under this section is Rs 1,00,000.
This is irrespective of how much you are earn and
under which tax bracket you fall.
Also, there are no sub-limits under this overall Rs
1,00,000 amount.
 Contd….
14
So if you choose, you can invest the entire amount in
ELSS or infrastructure bonds. The choice is entire up
to you as to how you want to reach this limit.
Or, if you are repaying a home loan and the principal
repayment amounts to Rs 100,000, then you can claim
the entire amount as a deduction.
Education Cess - All taxes in India are subject to an
education cess, which is 2% of the total tax payable.
With effect from assessment year 2008-09, Secondary
and Higher Secondary Education Cess of 1% is
applicable on the subtotal of taxable income.
 Investments under u/s 80C & 80D
15 80C.
The investments that fall under Section
 Provident Fund
 Public Provident Fund
 Life insurance premium
 Pension plans
 Equity Linked Saving Schemes of mutual funds
 Infrastructure bonds
 National Savings Certificate
Besides these investments, the payments towards the principal amount of
your home loan are also eligible for an income deduction.
Section 80D (Medical Insurance Premiums) - This deduction is additional to
Rs.1,00,000 savings. For senior citizens, the deduction up to Rs. 20,000 is
allowable and for non senior citizens, the limit is Rs. 15000. This deduction
is available for premium paid on medical insurance for oneself, spouse,
parents and children. It is also applicable to the cheques paid by proprietor
firms.
 Practical16Problems
1. Let's take an example to better explain the tax working:
Salary income: Rs 3,20,000
Home loan interest payment: Rs 1,20,000
Home loan principal repayment: Rs 80,000
NSC investment: Rs 30,000
Solution - Salary (a) 320,000
Income from house property (b)* 120,000
Gross total income (c) (c = a - b) 200,000
Home loan principal repayment 80,000
NSC investment 30,000
Section 80C investments 1,10,000  
Limit for Section 80C deduction (d) 1,00,000
Taxable income (c - d) 100,000
Tax on taxable income Nil
 Corporate 17Income tax
1. For companies, income is taxed at a flat rate of
30% for Indian companies, with a 10% surcharge
applied on the tax paid by companies with gross
turnover over Rs. 1 crore (10 million).
2. Foreign companies pay 40%.An education cess of
3% (on both the tax and the surcharge) are
payable, yielding effective tax rates of 33.99% for
domestic companies and 41.2% for foreign
companies.
 Minimum Alternate Tax u/s 115JB
This section is applicable from assessment year 2001-02. If tax
18
liability of a company under normal provisions is lower than
10 per cent (7.5% for the assessment years 2001-02 to 2006-
07) of "book profit", book profit shall be deemed as total
income and 10 per cent (7.5% for the assessment years 2001-
02 to 2006-07) of book profit should be deemed as tax
liability.
Book profit is a profit which is demonstrated on paper, but not
yet actually real. The best way to think about book profit is in
terms of stock value; if someone purchases a stock and the
value goes up, he or she has made a book profit. By selling
the stock, the investor can turn the book profit into an
actual profit.
Exception: There is an exception for companies in SEZ.
 MAT Calculation
19

If tax payable @30% (at present) by business units as

per provisions of IT Act and if it is less than 10% of
the book profits, tax payable will be 10% of the book
profits plus surcharge plus cess... as per provisions of
Section 115JB of income tax act.