Income Tax

(A.Y. 2011-12 )

INDEX
1. Introduction 2. Residential Status 3. Tax Rates 4. Income from Salary 5. Income from House Property 6. Income from Business & Profession 7. Capital Gains 8. Income from Other Sources 9. 4/13/2012 Clubbing of Income

Contd
10.Set-off Carry Forward 11.Deductions from Gross Total Income 12.Agricultural Income

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Charge of Income Tax

Income tax is charged in assessment year at rates specified by the Finance Act applicable on 1st April of the relevant assessment year. It is charged on the total income of every person for the previous year. Total Income is to be computed as per the provisions of the Act. Income tax is to be deducted at source or paid in advance wherever required under the provision of the Act.
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Important Definitions
1. Person u/s 2(31) includes,
a. b. c. d. e. f. g. An Individual, Hindu Undivided Family (HUF), A Company, A Firm, An Association of Persons(AOP) or Body of Individuals (BOI), A Local Authority, Every other Artificial Juridical Person

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Contd
2. Assessment Year u/s 2(9) means, the period of 12 months commencing on the 1st April every year. It is the year (just after previous year) in which income is earned is charged to tax. The current Assessment is 2011-2012.

3. Previous Year u/s 2(34) means, the year in which income is earned.

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Contd
4. Gross Total Income (G.T.I) :- The aggregate income under the 5 heads of income (viz. Salary, House Property, Business or Profession, Capital Gains & Other Sources) is termed as Gross Total Income. 5. Total Income (T.I) :- Total Income of assessee is gross total income as reduced by the amount permissible as deduction under sections 80C to 80U.

Index
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4/13/2012

Types of Residential Status

The different types of residential status are:Resident(R) Not Ordinarily Resident (NOR)

Non-Resident (NR)

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Residential Status of Individual

The residential status of individual will be determined as underAssessee

Basic Condition

Additional Condition

Resident

He must satisfy at one of the basic Not required. conditions. He must satisfy either one or both He must satisfy at least one of the the additional conditions given u/s basic conditions. 6(6).

Not Ordinarily Resident

Non-Resident

Should not satisfy any of the basic Not required. conditions.

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Contd
Basic Conditions u/s 6(1):
i. He must be in India for a period of 182 days or more during the previous year; or ii. He must be in India for a period of 60 days or more during the previous year and 365 days or more during the four years immediately preceding the previous year.

Additional Conditions u/s 6(6):

i. He must be a non-resident in India in nine out of the ten previous years preceding that year; or ii. He must be in India during 7 preceding previous years for aggregate period of 729 days or less.
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Residential Status of HUF

The residential status of HUF depends upon the control and management of its affairs.
Resident HUF: If the control and management of the affairs of HUF is situated wholly or partly in India then HUF is said to be Resident in India. Non- Resident HUF: If the control and management of the affairs of HUF is situated wholly outside India then HUF is said to be Non- Resident in India. Not Ordinarily Resident HUF: A resident HUF is said to be Not Ordinarily Resident in India if Karta or manager thereof, satisfies any of the additional conditions u/s 6(6).

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Residential Status
According to section 6(3) an Indian Company is always Resident in India. A foreign Company will be resident in India if Control or Management of its affairs is wholly situated in India. Residential Status of a firm or AOP or other person depends upon control and management of its affairs.
Resident: If the control and management of the affairs of a firm or AOP or other person is situated wholly or partly in India then such a firm or AOP or other person is said to be resident in India. Non-Resident: If the control and management of the affairs of a firm or AOP or other person is situated outside India then such a firm or AOP or other person is said to be non-resident in India.
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Incidence of Tax
Tax Incidence Particulars R NOR NR

Income received in India by or on behalf of assessee Income deemed to received in India by or on behalf of assessee

Yes Yes

Yes Yes

Yes Yes

Income accruing or arising in India Income deemed to accrue or arise in India

Yes Yes

Yes Yes

Yes Yes

Income which accrues or arise outside India

Yes

No

No

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RATES OF INCOME TAX (Assessment Year 2011-2012)

1.

In case of every Individual/ HUF/ AOP/BOI artificial juridical Person.

S.No INCOME TAX RATE

Up to 180000

NIL

180010-500000

10%

500010-800000

20%

Above 800000

30%

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Contd
2. In case of resident women below 65 years of age.

S.No

INCOME

TAX RATE

Up to 190000

NIL

2 3 4

190010-500000 500010-800000 Above 800000

10% 20% 30%

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Contd
3. In case of resident senior citizen i.e. age of 65 years or above

S.No

INCOME

TAX RATE

Up to 250000

NIL

250010-500000

10%

500010-800000

20%

Above 800000

30%

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4/13/2012

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Meaning
Salary includes [section17(1)] :i. Wages ii. Any annuity on pension iii. Any gratuity iv. Any fees, commission, bonus, perquisite on profits in lieu of or in addition to any salary on wages v. Any advance of salary vi. Any earned leave vii.Employers contribution (taxable) towards recognized provident fund.

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BASIS OF CHARGE
Income is taxable under head Salaries, only if there exists Employer Employee Relationship between the payer and the payee. The following

incomes

shall be chargeable to income-tax under the head

Salaries:1.Salary Due 2.Advance Salary [u/s 17(1)(v)] 3.Arrears of Salary Note: (i)Salary is chargeable on due basis or receipt basis, whichever is earlier. (ii)Advance salary and Arrears of salary are chargeable to tax on receipt basis only.

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Allowances
Allowance is generally defined as a fixed quantity of money or other substance given regularly in addition to salary for the purpose of meeting some particular requirement connected with the services rendered by the employee or as compensation for unusual conditions of that service. 1.Dearness Allowance - It is Always Taxable. 2.City Compensatory Allowance - It is Always Taxable.

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Contd
3. House Rent Allowance
Exemption In Respect Of House Rent allowance is regulated by rule 2A. The least of the three given below is Exempt from Tax.

An Amount Equal to 50 % of Salary. Where Residential House in situated at Bombay, Calcutta, Delhi or Madras and An Amount Equal to 40 % of Salary where Residential House is situated at any Other Place.

House Rent Allowance Received by The Employee in Respect of The Period during which Rental Accommodation is Occupied by the Employee during the Previous Year.

The Excess of Rent Paid over 10 % of Salary.

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Contd
4. Entertainment allowance [sec.169(ii)]Entertainment allowance is first included in salary in come under the head salaries and thereafter a deduction is given on the basis enumerated below:
Status of Employee

Non- Government

Government

Nothing is deductible

Least of the Following is deductible : 1. Rs. 5000 2. 20 % of basic salary 3. Amount of entertainment allowance grated during the previous year
25

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Contd
5. Special allowances prescribed as exempt under section 10(14) In the cases given below the amount of exemption under section 10(14) is :
i. ii. The amount of the allowance ; or The amount utilized for the specific purpose for which allowance is given. Whichever is lower.

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Contd
Exemption is available on the aforesaid basis in the case of following allowances

:-

NAME OF ALLOWANCE Travelling Allowance/ Transfer Allowance

NATURE OF ALLOWANCE Any allowance granted to meet the cost of travel on tour or on transfer (including sum paid in connection with transfer, packing and transportation of personal effects on such transfer).

Conveyance Allowance

Conveyance allowance granted to meet the expenditure on conveyance in performance of duties of an office (expenditure for covering the journey between office and residence is not to be included).

Daily Allowance

Any allowance whether granted on tour or for the period of journey in connection with transfer, to meet the ordinary daily charges incurred by an employee on account of absence from this normal place of duty.

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Contd
Name of allowance Special Compensatory (Hill Areas) Allowance Border area allowance Tribal areas/ scheduled areas allowance Allowance for transport employees Children education allowance Exemption as specifiedin rule 2BB Amount exempt from tax varies from Rs. 300 per mount to Rs. 7,000 per month The amount of exemption varies from Rs. 200 Per month to Rs. 1,300 per month Rs. 200 Per Month The amount of exemption isa.70 per cent of such allowance; or b.Rs. 6,000 per month, whichever is lower. The amount exempt is limited to Rs. 100 per month per child up to a maximum of two children. It is exempt from tax to the extent of Rs. 300 per month per child up to a maximum of two children.

Hostel expenditure allowance

Compensatory field area allowance 4/13/2012

Exemption is limited to Rs. 2,600 per month in some cases.

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Contd
Name of Allowance Compensatory modified area allowance Exemption as Specified in Rule 2BB Exemption is limited to Rs.1,000 per month in some cases.

Counter insurgency allowance

Transport allowance Underground allowance High altitude allowance Highly active field area allowance

Exemption is limited to Rs.3,900 per month in some cases.

It is exempt up to Rs. 800 per month (Rs. 1,600 per month in the case of an employee who is blind or orthopedically handicapped) Exemption is limited to Rs. 800 per month. It is exempt from tax up to Rs. 1,060 per month (for altitude of 9,000 to 15,000 feet) or Rs. 1,600 per month (for altitude above 15,000 feet). It is exempt from tax up to Rs. 4,200 per month.

Island duty allowance

It is exempt up to Rs. 3,250 per month.

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Contd
7. Allowance to Government employees outside India [Sec. 10( 7)] - Any allowance paid or allowed outside India by the Government to an Indian citizen for rendering service outside India is wholly exempt from tax. 8. Tiffin allowance - It is taxable. 9. Fixed medical allowance It is taxable. 10.Servant allowance - It is taxable.
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Contd
11.Allowance to High Court and Supreme Court Judges - Any allowance paid to High Court Judges under section & 22C of the High Court Judges (Conditions of Service) Act, 1954 is not chargeable to tax. 12. Allowance received from a United Nations Organization - Allowance paid by a United Nations Organization to its employees is not taxable by virtue of section 2 of the UN (Privileges and Immunities) Act, 1974.
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PERQUISITES
Perquisite may be defined as any Casual Emolument or Benefit attached to an office or position in Addition to Salary or Wages. It also denotes something that benefits a man by going in to his own pocket. Perquisites may be provided in cash or in kind. Perquisites are included in salary income only if they are received by an employee from his employer.

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Perquisites as defined u/s 17 (2)

The term perquisites is defined by section 17 (2) as including the following items:
1.The value of Rent-free Accommodation provided to the assessee by his employer 2.The value of any concession in the matter of rent respecting any accommodation provided to the assessee by his employer

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Contd
3. The value of any benefit or amenity granted or provided free of cost or at concessional rate in any of the following cases :
i. ii. By a company to an employee who is a director thereof ; By a company to an employee, being a person who has substantial interest in the company ; iii. By any employer (including a company) to an employee to whom provisions of (i) and (ii) above do not apply and whose income under the head salaries exclusive of the value of all benefits or amenities not provided for by way of monetary benefits, exceeds Rs. 50,000

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Contd
4. Any sum paid by the employer in respect of any obligation which but for such payment would have been payable by the assessee. Obligation of Employee met by Employer. 5. Any sum payable by the employer, whether directly or through a fund other than a recognized provident fund or approved superannuation fund or a deposit-linked insurance fund, to effect an assurance on the life of the assessee or to effect a contract for an annuity 6. The value of any other fringe benefits or amenity as may be prescribed
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TERMINAL BENEFITS
1. Gratuity [Sec.10(10)] Gratuity is a retirement benefit. It is generally payable at the time of cessation of employment and on the basis of duration of service. Tax treatment of gratuity is given below:

Status of Employee

Government Employee

Non-government employee covered by the payment of Gratuity Act, 1972

Non-government employee not covered by the payment of Gratuity Act, 1972

It is fully exempt from tax under section 10(10)(i)

Least of following is exempt: 1) 15 days salary x Length of service 2) Rs. 3, 50, 000 3) Gratuity actually received.

Least of following is exempt: 1) month avg. salary x Length of service 2) Rs. 3, 50, 000 3) Gratuity actually received. 36

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Contd
2. PENSION [SEC. 17(1)(ii)] - Pension is chargeable tax as follows :PENSION

COMMUTED

UNCOMMUTED

Government Employee

Non-Government Employee
If Gratuity Received If Gratuity not Received Taxable for Government as well as Non-Government employees

Entire Commuted Pension is exempt whether or not Gratuity received.

1/3 of commuted pension is exempt

1/2 of commuted pension is exempt 37

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Contd
3.Annuity [Sec. 17(1)(ii)] An annuity payable by a present employer is taxable as salary even if it is paid voluntarily without any contractual obligation of the employer. An annuity received from an ex-employer is taxed as profit in lieu of salary. 4.Retrenchment compensation [Sec. 10(10B)] Compensation received by a workman at the time of retrenchment is exempt from tax to the extent of the lower of the following:
a. an amount calculated in accordance with the provisions of sec. 25F(b) of the Industrial Disputes Act, 1947; or b. such amount as notified by the Government (i.e., Rs, 5, 00, 000); or c. the amount received.
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Contd
5. Compensation received at the time of Voluntary Retirement [sec.10 (10C)] Compensation received at the time of voluntary retirement is exempt from tax, subject to certain conditions. Maximum amount of exemption is Rs. 500000.

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Provident Fund
Provident Fund Scheme is a welfare scheme for the benefit of employees. The employee contributes certain sum to this fund every month and the employer also contributes certain sum to the provident fund in employees A/c. the employers contribution to the extent of 12% is not chargeable to tax.

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LEAVE SALARY
Encashment of leave by surrendering leave standing to ones credit is known as leave salary.
LEAVE ENCASHMENT

During Employment

Retirement / Leaving the Job

Chargeable to Tax

Government Employee

Non-Government Employee

Fully Exempt

Least of following is exempt :1) Earned Leave on the basis of Average Salary 2) 10 x Average monthly salary 3) Rs. 300000 4) Leave Salary Received 41

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Deductions Admissible in Computing Income under head SALARIES

1. Entertainment allowance granted by employer [Sec.16(ii)]: This deduction is available in case of Government employees only. 2. Employment Tax / Professional Tax [Sec.16(iii)]: Any sum paid by assessee on account of a tax on employment within the meaning of Article 276(2). Under the said article employment tax cannot exceed Rs. 2500 p.a.

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Relief in respect of Advance or Arrears of Salary u/s 89

When an assessee is in receipt of a sum in the nature of salary, being paid in arrears or in advance, due to which his total income is assessed at a rate higher than that at which it would otherwise have been assessed, Relief is granted on an application made by the assessee to the assessing officer.

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Index

43

INCOME TAX

---------------------------------------------------EDITED BY MANJEET KAUR GILL

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