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. The 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.

Individual Income Tax

Heads of Income

There are five heads of income that are taxable:

1. Income from Salary
2. Income from House Property
3. Income from Business and Profession
4. Income from Capital Gains
5. Income from Other Sources

Income from Salary

All income received as a salary is taxed under this head. This includes all monies paid by a company to its employees. Employers must withhold tax compulsorily, as Tax Deducted at Source (TDS), and provide their employees with a Form 16 (this is not required from 2007)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. (Company pays Fringe Benefit Tax on this amount)
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 allowance.
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.

Income from salary is net of all the above deductions.

Capital Gains

Sale of capital asset gives rise to capita gains.Capital asset is defined under section 2(14) of the I T Act in following terms : capital asset means property of any kind held by an assesse, whether or not connected with his business or profession, but does not include (i) any stock-in-trade, consumable stores or raw materials held for the purposes of his business or profession ;

(ii) personal effects, that is to say, movable property (including wearing apparel and furniture) held for personal use by the assessee or any member of his family dependent on him, but excludes

(a) jewellery;

(b) archaeological collections;

(c) drawings;

(d) paintings;

(e) sculptures; or

(f) any work of art.

Explanation.For the purposes of this sub-clause, jewellery includes

(a) ornaments made of gold, silver, platinum or any other precious metal or any alloy containing one or more of such precious metals, whether or not containing any precious or semi-precious stone, and whether or not worked or sewn into any wearing apparel;

(b) precious or semi-precious stones, whether or not set in any furniture, utensil or other article or worked or sewn into any wearing apparel;(From) the Finance Act, 2007, w.e.f. 1-4-2008 )

(iii) agricultural land in India, not being land situate

(a) in any area which is comprised within the jurisdiction of a municipality41 (whether known as a municipality, municipal corporation, notified area committee, town area committee, town committee, or by any other name) or a cantonment board and which has a population41 of not less than ten thousand according to the last preceding census of which the relevant figures have been published before the first day of the previous year ; or

(b) in any area within such distance, not being more than eight kilometres, from the local limits of any municipality or cantonment board referred to in item (a), as the Central Government may, having regard to the extent of, and scope for, urbanisation of that area and other relevant considerations, specify in this behalf by notification in the Official Gazette42;]

(iv) 6 per cent Gold Bonds, 1977,or 7 per cent Gold Bonds, 1980, or National Defence Gold Bonds, 1980, issued by the Central Government ;

(v) Special Bearer Bonds, 1991, issued by the Central Government ;

(vi) Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 notified by the Central Government ; Long term capital gains tax stands at 20% (for gold, real estate and such) with indexation benefits provided for inflation. All short term gains are clubbed with income in the year the gains occur. Long term is defined as 3 years for some assets (gold, real estate, for instance) and one year for others (Mutual funds, shares).

There are two types of capital assets for the purpose of taxation under I T Act.Long term asset and short term asset. Long term asset is one which is held by a person for three years except in case of shares, mutual funds or securities 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. In case of long term capital gains on shares or securities or mutual fund which are done through Indian stock exchange and on which securities transaction tax (STT) has been deducted and paid ,the tax is NIL.. 2. In case of other shares and securities, person has an option either to take indexation benefit or without indexation benefit. In case indexation benefit is taken, tax rate is 20% on the gains and in case no indexation benefit has been taken, tax rate is 10%.

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. 3.In case of all other long term capital gains, indexation benefit is available and tax rate is 20%.

Short term capital assets sale gives rise to short term capital gains. In this case also there are two types of rates available 1. In case shares or mutual fund or other securities sold and STT paid on it ,tax rate is 10% . 2. In other case , it is part of gross total income and normal tax rate is applicable.[1] source

For companies abroad, the tax liability is 20% of such gains (since STT is not paid).

The effect of indexation is also allowed.

Income Exempt from Tax

Dividends

Dividends paid by Companies and Mutual Funds are exempt from tax. A 15% dividend distribution tax 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.

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 :

  1. (a) any sum received under sub-section (3) of section 80DD or sub-section (3) of section 80DDA; or
  2. (b) any sum received under a Keyman insurance policy; or
  3. (c) any sum received under an insurance policy issued on or after the 1st day of April, 2003 in respect of which the premium payable for any of the years during the term of the policy exceeds twenty per cent of the actual capital sum assured

• Maturity proceeds of a Public Provident Fund (PPF) account.[source with permission [2]]

Deductions

Section 80 C Deductions

Section 80C of the Income Tax Act allows certain investments and expenditure to be tax-exempt. The total limit under this section is Rs. 100,000 (Rs. 1 lakh) 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 (which usually have "Tax Saving" in their names)
• 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 80C 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)

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

Deduction u/s 80D

Medical insurance premium ,popularly known as Mediclaim Policy , gives another deduction up tp Rs 15000 . In case of senior citizen, the deduction upt Rs 20000 is allowable from Asst Year 2008-09.One can avail of this deduction for premium paid on medical insurance on Self, Spouse,Parents or children. interesting article on this section is here

Interest on Housing Loans

In case the property that is a self occupied property ('SOP'), payment of interest on a housing loan up to Rs 150,000 per year is exempt from tax. However, this is only applicable for a residence constructed within three financial years after the loan is taken.

In case of a property that is a Let out property ('LOP') payment of interest on a housing loan is allowed deduction of interest u/s 24 of the I T Act without any upper limit.

It is also provided that even if the house is not occupied on account of employment , even then the house will be taken as self occupied and deduction of interest upto Rs 150,000 shall be allowed.

==== Income From House property Income from House property is computed by taking what is called Annual Value. The annual value may be maximum of the following 1.Rent received or ; 2.Municipal Valuation; 3.Market Value.

From this , deduct Municapal Tax paid

That will give you , Net Annual Value

From the Net Annual Value , Deduct

1. 30% of Net value as repiar cost(This is mandatory dedcution) 2.Interest paid or payable on the fund borrowed for the purpose of purchase/construction of house

The balance is charged to tax source

Tax Rates

In India, Individual income tax is a progressive tax with three slabs.

• No income tax is applicable on all income up to Rs. 110,000 per year. (Rs. 145,000 for women and Rs. 195,000 for senior citizens)
• From 110,001 to 150,000 : 10% of amount greater than Rs. 110,000 (Lower limit Rs. 145,001 for women and n/a to senior citizens)
• From 150,001 to 250,000 : 20% of amount greater than Rs. 150,000 + Rs. 4,000 (For women: Rs. 500) (For senior citizens, the lower limit is Rs. 195,000)
• Above 250,000 : 30% of amount greater than Rs. 250,000 + Rs. 24,000 (Rs. 20,500 for women and Rs. 11,000 for senior citizens)
• Above 1,000,000 : 10% surcharge is also levied on tax paid, bringing the effective rate to 33%

5% taxation required

Surcharge

A 10% surcharge (tax on tax) is applicable for incomes above Rs. 10 lakh (Rs. 1 million). Deductions and rebates are provided for housing purchases, rent, long term savings and insurance.

Education Cess

All taxes in India are subject to an education cess, which was 2% of the total tax payable till FY 2006-07.However Finance Bill 2007 has imposed another 1% of education cess for higher secondary . The new education cess is applicable from date of getting assent of President of India .He gave his assent on 11 may 2007.The controversy regarding the applicability of tax rates or any provision of the I T Act during the period when the Finance Bill is introduced and yet to get President's assent is quite common.However , the best answer to such confusion is hidden in the I T Act only.Visit section 294 of the I T Act and it is found that as long as the new Finance Bill does convert in finance Act either the last Finance Act or the proposed provision in the Finance Bill whichever is beneficial shall be applicable . There is nice article [3]here .Service tax will also be applicable with enactment of finance bill.

Fringe Benefit Tax

Newly added to safegaurd against companies paying salary in the form of Fringe Benefits. Applicable to all entities paying out salaries.Now from 1/4/2007 , Employees Stock Option Plan or Sweat Equity has also been brought within ambit of fringe benefit tax. From Asst Year 2008-09, a new section 115WB(1)(d) has been inserted to define that following benefit shall be fringe benefit taxable under FBT "any specified security or sweat equity shares allotted or transferred, directly or indirectly, by the employer free of cost or at concessional rate to his employees (including former employee or employees". The valuation of such fringe benefit has been given in section 115WC(1)(ba) in following words" the fair market value of the specified security or sweat equity shares referred to in clause (d) of sub-section (1) of section 115WB, on the date on which the option vests with the employee as reduced by the amount actually paid by, or recovered from, the employee in respect of such security or shares.". There is nice FAQ here

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 33.99% for domestic companies and 41.2% for foreign companies.

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

See Also

• Service tax in India
• Central Excise (India)

External links

• Corporate & Individual Tax Rates in India, including for Foreign Companies Doing Business in India
• Indian Income Tax Department
• Latest Indian judicial decisions on Income Tax
• Quick help to compute tax liability from taxable income
• All these incomes are tax-free for FY 2007-08
• Ask Questions on Indian Income Tax For Free!