Taxation

As individuals, we earn money from different sources.

Our sources of income can be in the form of:

Salary from employment

Profits from business

Gains from selling assets

Interest from deposits etc.

For the income that we earn, we will have to pay an income tax.

Heads of Income

For the purpose of taxation, income for individuals are grouped into different called "heads of income".

Each "heads of income" groups several sources of income that are to be used in computing tax.

The various heads of income are:

1. Income from salary

2. Income from house property

3. Profits and gains from business or profession

4. Capital gains

5. Income from other sources (such as dividends, lottery wins, contributions from PF, superannuation etc)

All forms of incomes are to be presented under the above heads of incomes when computing income tax and when filing our tax returns.

Exemptions and Deductions

Now that we have put income under different "heads", we need to know which incomes are taxable and what are not taxable.

This means, certain incomes are not accessible.

Right !?

Exemptions

Not all income is taxable.

There are some sources from where income is not taxable.

This is called an *Exemptions*.

Popular exemptions are agricultural income, share of income from HUF, income representing the share of a partner in a firm etc.

Retirement benefits such as annuity, commutation of pension, leave encashment, retrenchment compensation and voluntary retirement compensation.

Receipts from provident funds, superannuation funds and on account of house rent allowance up to prescribed limits.

Dividends received from a company or mutual funds, on which dividend distribution tax has already been paid. etc.

These are all incomes which are exempted.

Deductions

Along with "exemptions", certain "deductions" that can be claimed for certain expenses or payments made by the assessee from his total income.

i.e The tax payer has the option to claim a "deduction" if he made a certain transaction during the financial year.

The most popular of these is *Section 80 C*.

Every tax payer already knows of these.

Some popular 80c exemptions are:

Life insurance premium paid

Payment towards a deferred annuity contract

Contribution towards statutory provident funds

Contribution towards Public Provident Fund Scheme

Subscription to the NSC

Subscription to units of mutual fund Equity Linked Savings Scheme

Contribution by an individual to any pension fund set up by any Mutual Fund

Tuition fees for the purpose of full-time education of any two children of individual.

Towards the cost of purchase or construction of a residential house property etc.

Section 80CCC* allows deduction from total income for premium paid for an annuity plan of LIC or other insurers within the overall limit of Rs. 1,50,000

Section 80CCD* provides deduction for contribution to pension account

Section 80TTA* provides deduction for interest earned from savings bank account up to a limit of Rs. 10000

Section 80U* allows deductions for persons with disabilities of Rs. 50,000 for normal disability and Rs. 1,00,000 for severe disability.

Types of Assessees

A person who is liable or likely to be liable to pay tax is called an "assessee".

It is a taxation term.

So, technically, we are all "assessees". ie. tax payers

The residential status of the assessees is determined for each "previous year" for the purpose of taxation.

There are two terms used in regard to time frame

1. Financial Year

2. Assessment Year / Previous Year

Simply said:

If FY is 2017-18

AY is 2018-19

There is actually some differences.. we need not be so specific for now.

The various types of assessees are:

1. Individuals 2. Hindu Undivided Family 3. Company 4. Firm 5. Association of persons 6. Local authority 7. Other persons not included above

So, all assessees have to fall in one or the above categories.

Most of us are "individual" assessees.

If I run a partnership firm, the firm is a different assessee even though I am its managing partner.

In this case, I, as an individual am an individual assessee. I sign the tax forms of the firm in the role of its Managing Partner for the firm which is a different assessment.

Separate tax treatment is applicable for Non Resident Individuals and Person of Indian Origin (PIO)

Tax Payments

Certain items of income are liable for tax deduction at the prescribed rates at the time of payment thereof.

Some examples are: Commission, interest, professional fees, rent, contractors’ payments etc.

The payers of such amount are responsible for deducting tax in respect of such payments and deposit the same in the Government treasury.

Advance Tax

Some income tax payers have to compute tax by making estimates and pay tax in advance in four installments in the year.

This tax payment is called *Advance Tax*.

Assessees who pay an income tax of Rs 10k is liable to pay the tax in the form of four installments.

It is not optional actually. You need to pay and if you fail to pay as advance tax, you need to pay with interest and penalty.

However, some type of assessees are exempted from paying advanced tax.

Senior Citizen who do not have Income from Business are exempted.

Presumptive Business Income under section 44AD.

Others having Tax Liability less than Rs 10,000/- after considering TDS and Tax Relief on Income.

Self-assessment Tax

Where any tax is payable by the assessee on the total taxable income after taking into account the TDS and advance tax...

the same has to be paid by way of self-assessment, along with interest, if any.

This is usually paid after the financial year but just before filing of the income tax return.

Example

Assume that your tax for the FY comes out to 15k

The tax amount is more than 10k

So u need to pay the tax in four installments during the FY

If the amount you need to pay tax is less than 10k... for example, 5k, you can pay the 5k as Self-assessment tax.

Alternate Minimum Tax (AMT)

Any person, other than a company, who has claimed deduction under chapter VI-A shall be liable to pay AMT if the regular income tax payable by them is less than the AMT.

AMT is calculated on the adjusted total income at the rate of 18 ½ %.

Return filing procedures

Last date for filing returns by Companies: 30 September of the assessment year

Last date for filing returns by Non-corporate under audit: 30 September of the assessment year

Last date for filing returns by Non-corporate, non-audit: 31 July of the assessment year

Belated return

In case the return is not filed within due date, a belated return can be filed at any time before the expiry of 1 year from the end of the relevant assessment year.

Revised return

In case of any error or omission, the assessee is entitled to revise the return, provided the return has been filed within the aforementioned due date.

Signing of return

In case of an individual’s return, by the individual himself/ herself; however in case s/he is absent from India, by some person duly authorized in this behalf.

In case of a HUF, by the karta and in his absence by any other adult member.

In case of a firm, by the managing partner and in his absence by any other partner not being a minor.

In case of a company, by the managing director and in his absence by any other director.

Types of tax benefits

Exemption

Certain types of income are exempted from tax.

In other words, one need not pay any tax on such income.

For example, Dividend received from equity shares and mutual funds is fully exempt from tax.

Deduction

Either the investment made, or the income received on the investment, or both, can be deducted (usually up to a certain limit) from the taxable income.

In other words, the income on which tax will be calculated gets reduced to the extent that some income received or investment made.

There is a list of eligible investments provided under Section 80C.

Investments in these instruments made up to a maximum limit of Rs. 1,50,000 in a financial year, are available as deduction.

Rebate

After income tax is computed, the actual tax payable is reduced, if a rebate is allowed on account of specific investment that was made. In other words, based on a pre-defined formula, the amount of tax payable is reduced, since the investor has made certain investments that are eligible for such rebate.

Exempt-Exempt-Exempt (EEE)

In EEE taxation,

the security / product in which money is put for the purpose of taxation provides:

1. Exemption at the time of investment / deposit

2. Exemption at the time of getting intermediate interest / dividends / returns

3. Exemption at the time of exit / redemption / sale

National Pension Scheme] (NPS) is an EEE product because:

1. Initial subscription gives tax exemption under Section 80C and 80CCD

2. Intermediate withdrawl for some select occasions (such as marriage etc) is tax exempt

3. Returns at the time of exit / vesting at the time of retirement is exempted.

Exempt-Exempt-Taxable (EET) Regime

Investment made is Exempt

Income earned is Exempt

Redemption or sale proceeds are Taxable

Capital Assets

Now comes the interesting concept: *Capital Gains*

Before that, we need to discuss about a term called *Capital Assets*

What is a *Capital Assets*?

Capital asset is defined under Section 2(14) of the Income Tax Act as ..

a property of any kind,

whether connected with the business or not,

movable or immovable,

tangible or intangible

except for the following, which are not capital assets:

Any stock-in-trade

Consumable stores or raw materials held for the purpose of business or profession

Certain personal effects that are movable and are held for personal use

Agricultural land in India

Certain gold bonds

Special bearer bonds issued in 1991

Investments in securities will classify as capital assets, as per the above definition.

Gold, jewellery, paintings, sculptures and immovable property are also classified as capital assets.

A *capital gain (or loss)*

from the sale or transfer of an asset

can be a short term capital gain (or loss)

or long term capital gain (or loss)

depending upon the period for which it was held by the investor.

Short and Long Term Capital Gains

I hope all of you are already aware of STCG and LTCG

Thanks to our FM, this year, everyone got awareness about them

Indexation

Another important term: *Indexation*

If investors held an investment for the long term

they could claim that

the increase in the price of the investment was from the effect of inflation

and that no real gains have been made.

This is called *indexation*

Some capital gains are allowed to be "indexed".

i.e the investor has to compute the capital gain in accordance to an indexation table that is being released.

Let us take an example.

I feel, we will get a mathematical problem on this topic in the exam.

Anil bought listed debentures at Rs. 100 in the year 2011

He sold them at Rs.120 in the year 2014.

What is his capital gain?

The normal practise is:

long term capital gain without indexation is (Rs.120 – Rs.100) = Rs.20 per unit.

Now let us use the concept of indexation in this.

The cost of acquisition adjusted for inflation is

= 100 x (939 / 785)

= 119.6

Here, the cost of inflation index for 2011 was 785 and for 2014 it was 939

His indexed capital gain is

Rs. 120 – Rs. 119.6

= *Rs. 0.04*

I hope you can understand the big difference in indexation

Rs 20 vs Rs 0.04

Rates of Taxation

You already know how to use it. So i am skipping

Set off and Carry forward of Losses

The topic is self evidentary.

All you have to remember is that, to claim for set off or carry forward, you need to file your IT return on time.

Securities Transaction Tax

The exemption provided to long term capital gains from taxation led to the introduction of a new tax for equity shares and equity-oriented mutual funds, called the securities transaction tax (STT).

STT is applicable irrespective of the tax status of the investor.

It is computed on the amount of redemption or sales value and is reduced from the redemption or sales proceeds paid to the investor.

STT is paid to the government and the redemption or sale proceeds are paid to the investor.

Wealth Tax Act

Wealth Tax* is charged for every assessment year ..

in respect of net wealth of the corresponding valuation date ..

of every individual, HUF and company,

at the rate of 1% on the amount by which the net wealth exceeds Rs. 30,00,000/-.

Estate Planning

Now one more new term: *Estate planning*

Estate Planning covers the ..

structural, financial, legal and tax aspects of ..

transferring & managing wealth ..

in the interest of the intended beneficiaries.

What is an "estate"?

The term ‘estate’ includes

all assets and liabilities

belonging to a person at the time of their death.

If person dies without making a will, he is said to have died “intestate”.

One important definition in Estate planning is the concept of *Will*

A *will* is defined as a “legal declaration of the intention of the testator with respect to his property, which he desires to be carried into effect after his death.”

The person *making the will* is the *testator*, ..

and his rights extend to what are legally his own.

The will comes into effect *only after the death* of the testator.

A will can be made by any person competent to do so.

It can be changed any number of times in the lifetime of the testator.

A term similar but actually different to *will* is *gift*

A *gift* is a ..

transfer of movable or immovable property ..

made *voluntarily* and

without consideration*.

A gift is usually an irrevocable transfer, but it can however be revoked if the donee agrees to do so.

If you give me a gift, do not ask me back. I will not return.

Nomination* is the right ..

conferred upon the holder of an investment product ..

to appoint the person entitled to ..

receive the monies in case of the death.

What can we do when two sons are fighting for property after the death of the parent?

Answer is "settlement"

A *family settlement* is ..

an instrument ..

used to settle dispute ..

or rival claims to property.

We have heard the term: POA right?

Where?

Hint: We signed a POA when opening demat account.

In property dealings

A *Power of Attorney* (POA) is an instrument ..

by which a person may *formally authorize another person*

to act on his behalf or as his agent

on all matter or for a specific transaction or particular types of transactions

Finally, one more term: *Mutation*

Mutation* refers to a

significant alteration or

substitution of the name of a person

by the name of another

in relation to the record showing the

right or title to the property.

Questions

1. What is the rate of DDT on dividend paid on debt funds?*

25%

2. Can Short or long term capital losses be set-off against any other source of income?*

No

3. Commission received from business forms part of income from ___________.*

a. Business and profession

b. Capital Gains

c. Salary

d. Other sources

Answer is *A*

4. How many witness are essential to sign for a will to be a valid will?*

Answer: 2

5. Changes made to a will are called _____*

Answer: Codacil

6. Which legislation defined the term: Will*

a. Income Tax Act

b. Wealth Tax Act

c. Transfer of Property Act

d. Indian Succession Act

7. Losses from house property can be carried forward and set-off against income from other house properties or other income for a period of _____ years.*

Answer: 8 years

8. Resident mutual fund investors are not subjected to TDS. Is TDS applicable for NRIs?*

Answer: Yes

9. Certain income is subjected to tax in one country and again subjected to tax in another country. What is this called?*

Hint: Double Taxation

Last question:

10. What is the last date for companies to file their tax returns?*

30 September of the assessment year

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