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.

Overview

Charge to Income-tax

Every Person whose total income 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 changeability is based on nature of income, i.e., whether it is revenue or capital. The principles of taxation of income are:

Residential Status

The inclusion of a particular income in the Total Income of a person for income-tax in India is based on his residential status. There are three residential status, viz., (i) Resident & Ordinarily Residents (Residents) (ii) Resident but not Ordinarily Residents and (iii) Non Residents. There are several steps involved in determining the residential status of a person

All residents are taxable for all their income, including income outside India. Non residents are taxable only for the income received in India or Income accrued in India. Not Ordinarily residents are taxable in relation to income received in India or income accrued in India and income from business or profession controlled from India.

Departmental Structure

Chairman

Board Members of Direct Taxes

Chief Commissioner

Commissioner

Additional Commissioner

Joint Commissioner

Deputy Commissioner

Assistant Commissioner

Income Tax Officer

Tax Inspector

Tax AssistantT

Constable

Heads of Income

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

1. Salaries
2. Income from House Property
3. Profits and Gains of Business or Profession
4. Capital Gains
5. Income from Other sources

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 Rs. 15,000 per year is tax free if supported by bills.
2. Conveyance allowance: Up to Rs. 800 per month (Rs. 9,600 per year) is tax free if provided as conveyance allowance. No bills are required for this amount.
3. 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.
4. 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 net of all the above deductions.

Income From House property

Income from House property is computed by taking what is called Annual Value. 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)
• 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

• • carry forward of losses

An example .. An architect works out of home and co-ordinates work for his clients. All the following expenses would be deductible from his professional fees.

• he uses a computer,
• he travels to sites in his car,
• he has a peon to help him collect payments
• He has a maid who comes in daily
• part of the society maintenance bills
• entertainment expenses incurred..
• books and magazines for his professional practice.

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 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 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).

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 an donation.

.....

Income Exempt from Tax

Sections 10,10A, 10AA, 10B, 10BA, and 13A deal with income which does not form part of an assessee's total income. While section 10 provides a list of income absolutely exempt from tax, sections 10A, 10AA, 10B, 10BA, and 13A deal with specific exemptions available to newly established industrial undertakings in free trade zones, and political parties. These exemptions are provided from social, political, Constitutional considerations, for avoiding double taxation, on the basis of casual and non-recurring nature ,on the basis of non-residents and non-citizens status, on the basis of Certain specific securities, bonds, certificates, funds and the like, on the basis of Education, science, research, achievements, rewards, sports, charity, on the basis of certain types of bodies, funds and institutions, Subsidies to promote business, and international, economic, and other considerations. Sikkim is the only state of India where citizens do not pay income tax. Residents of Sikkim are eligible for this exemption but excluding the non-Sikkimese spouse of a Sikkimese.

Agricultural Income [Section 10(1)] Eligible Assesses :- All assesses Exempt income  :- Agricultural income Other points :- Agricultural income means as it is defined in Section 2(1A) In case of individual, HUF, AOP, BOI, unregistered firms and artificial juridical persons, agricultural income is to be aggregated for the purpose of determining the rate of tax on Non-Agricultural income and they would get tax rebate or relief.

Dividends

Dividend income (as referred u/s 115-O of the I.Tax Act) paid by Companies and Mutual Funds are exempt from tax. A 15% dividend distribution tax and surcharge of 3% is paid by companies before distribution. Equity mutual funds (with more than 65% of assets invested in equities) do not pay a dividend distribution tax, though other funds do. Liquid and Money Market funds pay 25% dividend distribution tax.01123

Other Exempt Income

The Indian Income tax act specifically exempts certain income from tax:

• Money received from an Insurance company as proceeds of an insurance policy (by way of an insurance claim, or by maturity) is generally exempt. However there are three types of payments under life insurance policy that are not tax free . These are :

• any sum received under sub-section (3) of section 80DD or sub-section (3) of section 80DDA - this refers to specific policies for disabled dependants; or
• any sum received under a Keyman insurance policy; or
• any sum received under policies issued on or after 1 April 2003 where premium paid is greater than 1/5th the sum assured

• Maturity proceeds of a Public Provident Fund (PPF) account.

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 [2] allows certain investments and expenditure to be tax-exempt. The total limit under this section is Rs. 100,000 (Rupees One lac) which can be any combination of the below:

• Contribution to Provident Fund or Public Provident Fund
• Payment of life insurance premium
• Investment in pension Plans
• Investment in Equity Linked Savings schemes (ELSS) of mutual funds
• Investment in specified government infrastructure bonds
• Investment in National Savings Certificates (interest of past NSCs is reinvested every year and can be added to the Section 80 limit)
• Payments towards principal repayment of housing loans.Also any registration fee or stamp duty paid.
• Payments towards tuition fees for children to any school or college or university or similar institution. (Only for 2 children)or towards coaching fee of various competitive exams.

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

From April, 1 2010, additional limit of 20,000 is included in 80C provided that amount is invested in infrastructure bonds.

Section 80D: Medical Insurance Premiums

Health insurance, popularly known as Mediclaim Policies, provides a deduction of upto Rs. 35,000.00 (Rs. 15,000.00 for premium payments towards policies on self, spouse and children and (read as in addition to) Rs. 15,000.00 for premium payment towards non-senior citizen dependant parents or Rs. 20,000.00 for premium payment towards senior citizen dependant parents). This deduction is in addition to Rs. 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, eg. for the fiscal year 2010-2011, the incumbent should already be 65 as on March 31st, 2011). This deduction is also applicable to the cheques paid by proprietor firms.

---

Interest on Housing Loans Section 80 E

For self occupied properties, interest paid on a housing loan up to Rs 150,000 per year is exempt from tax.(Excluding Rs.1,00,000/p.a. u/s 80c Saving) 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.

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, 2010 new tax slabs apply, which are as follows:

• No income tax is applicable on all income up to Rs. 1,60,000 per year. (Rs. 1,90,000 for women and Rs. 2,40,000 for senior citizens of 65 and above)
• From 1,60,001 to 5,00,000 : 10% of amount greater than Rs. 1,60,000 (Lower limit changes appropriately for women and senior citizens)
• From 5,00,001 to 8,00,000 : 20% of amount greater than Rs. 5,00,000 + 34,000 ( Rs. 31,000 for women and Rs. 26,000 for senior citizens)

• Above 8,00,000 : 30% of amount greater than Rs. 8,00,000 + 94,000 ( Rs. 91,000 for women and Rs. 86,000 for senior citizens)

Surcharge

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

A 10% surcharge (tax on tax) is applicable if the taxable income (taking into consideration all the deductions) is above Rs. 10 lakh (Rs. 1 million). The limit of 10 lacs was increased to Rs. 1 crore (Rs. 10 million) with effect from 1 June 2007

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 taxable income. Mainly education cess is applicable on excise duty and service tax

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. .

Before an individual can get the refunds, based on the investments and declarations, he/she has to file the income tax return. This helps is calculating the income tax payable in actual and refunds the rest of the amount to the person.

The income tax department has initiated various measures to attract individuals file their income tax return on time by 31st July every year for the previous financial year which ends on 31st march every year. One of the recent initiatives was to attract individuals to file income tax returns online. This has many benefits including environment friendly. This initiative is also facilitated by by many private organizations to promote e filing as the new way to file your income tax returns. One of the major contributors to this initiative is Taxsmile.

Corporate Income tax

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). Foreign companies pay 40%..An education cess of 3% (on both the tax and the surcharge) are payable, yielding effective tax rates of 30.99% for domestic companies and 41.2% for foreign companies.

From 2005-06, electronic filing of company returns is mandatory.

Tax Penalties

"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

• Indian Income Tax Department
• Electronic Filing of Income Tax Returns