Steps to calculate taxable income by an individual

Given the different sources of income, depending upon the nature of income the tax treatment of the income of the individual varies :-​​

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• In case of the income earned by the tax payer, all incomes shall be subject to taxation except:-

1. The incomes subject to exemption and
2. incomes to be included in the income of others.

• If individual is a part of a firm, in case of his share in the profits of the firm, his income is exempt (under section 10(2A) of the Act) from taxation. But with respect to his salary and interest from the firm, these are taxable as business income of the individual.
• If individual is a part of association of persons(AOP) or body of individuals(BOI), if the association or body is taxable at the maximum marginal rate (or at a higher rate), then the individuals share of profit is not taxable under the Act.

Steps to find out the taxable income of individuals:-​

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Find out the income under the different ‘heads of income’, which include:-

• Salaries
• Income from House property
• Profits and gains of business or profession
• Capital Gains
• Income from other sources
• The income is subjected to ‘adjustment of losses’ of the current years and earlier years. The income after the adjustment of losses is the “gross total income”.
• From the gross total income the prescribed ‘deductions’ under the Income Tax Act are made.
• The balance so obtained is known as “Net Income” or Taxable Income.

 

Sources of Income – Income from Other Sources

Under the Income Tax act, income of every kind which is not to be excluded from the total income shall be chargeable to income tax under the head ‘Income from other sources’, if it is not chargeable to income tax under any of the other heads of income. Thus, income from other sources is a residuary head of income i.e. income not chargeable under any other head is chargeable to tax under this head. All income other than income from salary, house property, business and profession or capital gains is covered under ‘Income from other sources’.

The following incomes are chargeable to tax :-

• Dividend received from any entity other than domestic company. This is because dividend received from a domestic company has been made exempt in the hands of the receiver. Accordingly dividend received from a cooperative bank or dividend received from a foreign company will be taxable as income from other sources.

• Any pension received by the legal heirs of an employee.

• Any winnings from lotteries, crosswords, puzzles, races including horse races, card games or other games of any sort or gambling or betting of any form or nature.

• Income from any plant, machinery or furniture let out on hire where it is not the business of the assessee to do so.

• Income from securities by way of interest.

• Any sum received by the assessee from his employees as contribution to any staff welfare scheme. However when the assessee makes the payment of such contribution within the time limit under the scheme of welfare, then the payment will be allowed as a deduction and only the balance amount will be taxable.

• Income from subletting.

• Interest on bank deposits.

Allowable Deductions

The following deductions are available to the assessee in obtaining the taxable amount:-

• In case of taxable dividend income and interest from securities, any reasonable sum paid by way of remuneration or commission for the purpose of realizing such income including interest on borrowed capital if such borrowed capital is used for making investment in shares or securities.

• In case of income from plant, machinery or furniture given out on hire, the following expenses will be allowed as deduction:

• Current repairs to building

• Current repairs to machinery, plant or furniture

• Insurance premium paid for insuring the plant, machinery, building or furniture.

• Depreciation on building, machinery, plant or furniture

• In case of any expenditure other than capital expenditure or personal expenditure which has been incurred wholly, necessarily and exclusively for earning income like revenue expenditure, such expenditure will also be allowed as a deduction.

• In case of family pension received by legal heirs of an employee, a standard deduction of 1/3rd of such amount or Rs 15,000 whichever is less will be allowed by way of deduction.

The following amounts are not deductible under Section 58 while computing the taxable amount :-

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• Personal expenses of the assessee.

• Any interest which is payable outside India on which income tax has not been paid or deducted at source.
• Any sum paid on account of wealth tax in India or abroad.

• Any amount not allowable by virtue of it being unreasonable.

• Any expenditure in connection with income from winning form lotteries, crosswords, cross puzzles, races including race horses, car race and other games of races, gambling, betting of any form. However expenses are allowed as a deduction in computing the income of an assessee who earns income from maintaining as well as holding race horses.
  

 

Sources of Income – Income from House Property

The term ‘House property’ consists of buildings or land appurtenant to such buildings. The existence of a building is, therefore, an essential prerequisite for taxation of income from house property. ‘Building’ will include residential house (whether let out or self-occupied), office building, factory building, godowns, flats etc. But, the purpose for which the building is used by the tenant is also immaterial. It does not make any difference at all if the property is owned by a limited company or a firm. However, if the building or part thereof is used by the owner himself for the purpose of his own business then there will be no income from such portion of the house property.

Under the Income-tax Act, the basis of calculating income from House property is the ‘Annual Value’. This is the inherent capacity of the property to earn income and it has been defined as the sum for which the property might reasonably be expected to let from year to year. Where the actual rent received is more than the reasonable return, it has been specifically provided that the actual rent will be the annual value. Where, however, the actual rent is less than the reasonable rent , the latter will be the annual value.

The annual value of property consisting of any buildings or lands appurtenant thereto of which the assessee is the owner shall be subjected to Income Tax under the head ‘Income from property’ after claiming deductions (under section 24) provided such property, or any portion of such property is not used by the assessee for the purposes of any business or profession, carried on by him, the profits of which are chargeable to income tax.

 

Sources of Income – Income from Capital Gains

Under the Income Tax Act, any profits or gains arising from the transfer of a capital asset effected in the previous year, shall be chargeable to income tax under the head ‘capital gains’ and shall deemed to be the income of the previous year in which the transfer took place unless such capital gain is exempted under the prescribed exemptions.

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‘Capital gains’ means any profit or gains arising from transfer of a capital asset. If any Capital Asset is sold or transferred, the profits arising out of such sale are taxable as capital gains in the year in which the transfer takes place. Capital gains is the difference between the price at which the capital asset was acquired and the price at which the same asset was sold. In technical terms, capital gain is the difference between the cost of acquisition and the fair market value on the date of sale or transfer of asset.

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Under the existing provisions of Section 2(14), a ‘capital asset’ means, property of any kind held for personal use by the assessee, whether or not connected with his business or profession, personal effects held for personal use by the assessee or any number of his family dependent on him are excluded from the ambit of the definition of capital asset. The only asset that is in the nature of personal effects, but is included in the definition of capital asset is jewellery and ornaments. However, with effect from assessment year 2008-09, archeological collections, drawings, paintings, sculptures or any work of art have also been excluded from the meaning of personal effects and transfer of such personal effects will also attract capital gains tax.

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Capital Assets are of two types i.e., long term and short term. A capital asset held for 36 months or less before it is sold or transferred.is called as a short-term capital asset and if the period exceeds 36 months, the asset is known as a long-term capital asset. In case of shares, debentures and mutual fund units the period of holding required is only 12 months.  Transfer of a short term capital asset gives rise to “Short Term Capital Gains” (STCG) and transfer of a long capital asset gives rise to “Long Term Capital Gains” ( LTCG). Different rates of tax apply for gains on transfer of the long term and short-term capital assets. Gains on short-term capital asset are taxed as regular income.

 

Sources of Income – Income from Salaries

Salary is the remuneration received by or accruing to an individual periodically for service rendered as a result of an express or implied contract. The existence of employer-employee relationship is the sine-qua-non for taxing a particular receipt under the head “salaries.” No, payment can be taxed under this section unless the relationship of employer and employee exists. Thus, There should be contractual employer-employee relationship. The contract may be express, oral or implied. For instance, the salary received by a partner from his partnership firm carrying on a business is not chargeable as “Salaries” but as “Profits & Gains from Business & Profession”. Similarly, salary received by a person as MP or MLA is taxable as “Income from other sources”., but if a person receives salary as Minister of State/Central Government, the same shall be charged to tax under the head “Salaries”. Pension received by an assessee from his former employer is taxable as “Salaries” whereas pension received on his death by members of his family (Family Pension) is taxed as “Income from other sources”.

Under the Income-tax Act “Salary” includes :-

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• Wages
• Annuity or pension
• Gratuity
• Fees, commission, perquisites or profits in lieu of salary
• Advance of Salary
• Receipt from Provident Fund
• Contribution of employer to a Recognised Provident Fund in excess of the prescribed limit
• Leave Encashment
• Compensation as a result of variation in Service contract etc.
• The deductions from salary income admissible under the Income-tax Act are :-
• Standard Deduction
• Professional/Employment tax levied by the State Govt.
• Entertainment Allowance

 

What are the sources of income for an individual?

The term ‘Income’ in the Income Tax Act connotes a periodical monetary return ‘coming in’ with some sort of regularity, or expected regularity, from definite sources. The Income Tax Act provides that for the purpose of charge of income tax and for computation of total income all income shall be classified under five sources of income.

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Income of a person from each of these sources is calculated to find out the gross total income of the person. The total income from all the above heads of income is calculated in accordance with the provisions of the Act as they stand on the first day of April of any assessment year. Permissible deductions are reduced and then income-tax payable is calculated at the prescribed rates. If income of a person is derived from various heads, the person is entitled to claim deduction permissible under respective head whether or not computation under each head results in taxable income.

The definition of income under the Income Tax Act is inclusive in nature i.e. apart from the items listed in the definition, any receipt which satisfies the basic condition of being income is also to be treated as income and charged to income tax accordingly.

Five sources of Income being: 

1. Income from Salaries
2. Income from Capital Gains
3. Income from House Property
4. Income from Profits & gains of Business & Profession
5. Income from other sources

 

How are individuals taxed?

Individuals are subject to income tax. Income tax is a direct tax levied on the income earned by individuals, corporations or on other forms of business entities. The Indian constitution has empowered only the Central Government to levy and collect income tax. The Income Tax department set up by the Government, is governed by the Central Board for Direct Taxes (CBDT). The CBDT is a part of Department of Revenue in the Ministry of Finance. It has been charged with all the matters relating to various direct taxes in India. It provides essential inputs for policy and planning of direct taxes in India and is also responsible for administration of direct tax laws through the Income Tax Department.

The Income Tax Act provides that in respect of the total income of the previous year of every person, income tax shall be charged for the corresponding assessment year at the rates laid down by the Finance Act for that assessment year. In other words, the income earned in a year is taxable in the next year and the income-tax rates prescribed for an assessment Year are applicable in respect of income earned during the previous Year.

Note that :- The financial year in which the income is earned is known as the previous year. The financial year following a previous year is known as the assessment year. The assessment year is the year in which the salary earned in the previous year is taxable. Any financial year begins from 1st of April of every year and ends on 31st of March of the subsequent year.

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In case of a business or profession which is newly started, the previous year commences from the date of commencement of the new business or profession up to the next 31st March, unless the person is an existing assessee.

The Income Tax Act is subjected to annual amendments by the Union Budget every year presented on 28th February normally. The Finance Bill in the budget contains various amendments which are sought to be made in direct and indirect taxes levied by the Central Government. The bill also mentions the rates of income tax and other taxes. The bill once approved becomes a Finance Act and provisions in it are incorporated in the Income Tax Act.

Tax Structure in India

India has a well developed tax structure. The power to levy taxes and duties is distributed among the three tiers of Government, in accordance with the provisions of the Indian Constitution. Main taxes/duties that the Union Government is empowered to levy are:- Income Tax (except tax on agricultural income, which the State Governments can levy), Customs duties, Central Excise, Sales Tax and Service Tax. The principal taxes levied by the State Governments are:- Sales Tax (tax on intra-State sale of goods), Stamp Duty (duty on transfer of property), State Excise (duty on manufacture of alcohol), Land Revenue (levy on land used for agricultural/non-agricultural purposes), Duty on Entertainment and Tax on Professions & Callings. The Local Bodies are empowered to levy tax on properties (buildings, etc.), Octroi (tax on entry of goods for use/consumption within areas of the Local Bodies), Tax on Markets and Tax/User Charges for utilities like water supply, drainage, etc.

In the wake of economic reforms, the tax system in India has under gone a radical change, in line with the liberal policy. Some of the changes include:- rationalization of tax structure; progressive reduction in peak rates of customs duty ; reduction in corporate tax rate; customs duties to be aligned with ASEAN levels; introduction of value added tax ; widening of the tax base; tax laws have been simplified to ensure better compliance. Tax policy in India provides tax holidays in the form of concessions for various types of investments. These include incentives to priority sectors and to industries located in special area/ regions. Tax incentives are available also for those engaged in development of infrastructure.

ST – Changes in Mega Exemption List W.E.F April 1, 2013

CHANGES IN MEGA EXEMPTION LIST W.E.F APRIL 1, 2013 VIDE NOTIFICATION NO. 3/2013-ST DATED. 1-3-2013 AMENDING NOTIFICATION NO. 25/2012-ST DATED. 20-6-2012:

• Sl. No. 9 – Exemption by way of auxiliary educational services and renting of immovable property provided by specified educational institutes will not be available i.e. Exemption of auxiliary educational services and renting of immovable property Services provided to an educational institution will continue.

• Sl. No. 15 – The benefit of exemption in relation to copyrights for cinematograph films will now be available only to films exhibited in a cinema hall or theatre. This will allow service providers to pass on input tax credits to taxable end-users;

• Sl. No 19 – Service tax would be applicable on restaurants, eating joint or a mess providing service in relation to food or beverages, having facility of air-conditioning or central air-heating in any part of the establishment, at any time during the year.

For the sake of clarity, the exemption from service tax to restaurants, eating joints, mess etc. will be available only when such restaurant doesn’t have the facility of air conditioning or central air heating in any part of the establishment, at any time during the year.

• Sl. No. 20 – Earlier exemptions withdrawn of Services by way of transportation by rail or a vessel from one place in India to another of the following goods –
Petroleum and petroleum products falling under Chapter heading 2710 and 2711 of the First Schedule to the Central Excise Tariff Act, 1985 (5 of 1986);

1. Postal mail or mail bags;
2. Household effects;

• Sl. No. 21 – Services provided by a goods transportation agency (GTA) are being harmonized i.e. the benefit of transportation of agricultural produce, foodstuffs, relief materials for specified purposes, chemical fertilizers and oilcakes, registered newspapers or magazines and defence equipments will be available to GTAs;

• Sl. No. 24 – The exemptions for vehicle parking to general public are being withdrawn so that all type of parking facility whether by way of reserved or unreserved parking will be liable to service tax.

• Sl. No 25 – Exemption for repair or maintenance service provided to Government, a local authority or governmental authorities of aircrafts are being withdrawn but for vessel, exemption will continue.

• Sl. No. 4 – The definition of “charitable activities” is being changed by deleting the portion listed in sub-clause (v) of clause (k).   Thus the benefit to charities providing services for advancement of “any other object of general public utility” up to Rs. 25 Lakh will not be available. However the threshold exemption will continue to be available up to Rs 10 lakhs in terms of Notification No. 33/2012-ST dated 20-6-2012.

How do I file Income Tax Returns?

Simply put, Income Tax refers to the tax paid directly on the income earned, to the government, within a given financial year (April-March).

When the total income of a person from all sources of income exceeds the maximum amount permissible which is not chargeable to income-tax by the government, then that person is liable to file the Income Tax Return.

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Section 139(1) of the Income Tax Act was amended a few years back with a view to bring a larger number of persons in the tax net. Now if any person satisfies any one of the following six conditions:

• owns a vehicle
• occupies a specified floor area of an immovable property
• incurs expenditure for himself or for any other person on foreign-travel
• subscribes to a telephone
• subscribes to a Credit Card
• is a Club member
• then he/she is required to file an Income Tax Return.

The slabs to file Income Tax Returns vary, depending upon the total income earned during a year and the various exemptions for which the individual/entity is eligible for. In the case of an assessee earning income primarily from salary, the due date for filing the Income Tax Return is normally 31st July of the assessment year, unless extended by the Income Tax Department.

Individuals can file their Income Tax Returns by filling the requisite forms ITR 1, ITR 2, ITR 3, ITR 4 or ITR 4S.

The return form, along with copies of necessary supporting documents, has to be filed at the appropriate income tax office or special counters set up for this purpose, the details of which are available on the Income Tax Department website. It is also mandatory to quote the Permanent Account Number (PAN) while filing the return.

Under Electronic Furnising of Return of Income Scheme, 2004, eligible assessees can file their returns of income electronically through persons authorised to act as e-return intermediaries. The intermediaries digitises the data of such returns and transmit the same electronically to the e-filing server of the Income Tax Department under the digital signatures.

Following are the forms for filing income tax returns:

Income tax Return SAHAJ (ITR-1):  For Individuals having Income from Salary/ Pension/ family pension & Interest

Income Tax Return Form 2:  For Individuals and HUFs not having Income from Business or Profession
Income Tax Return Form 3: For Individuals/HUFs being partners in firms and not carrying out business or profession under any proprietorship
Income Tax Return Form 4: For individuals & HUFs having income from a proprietary business or profession
Income Tax Return Form 4S: For individuals & HUFs having income from salary, other sources, house property or presumptive business.