Simplified and Latest version of Basic Concepts of Income Tax (Including amendments up to 26/9/2019).

The Topics included are  Income-tax: Basic concepts; Residential status and tax incidence; Exempted incomes; Agricultural income; Computation of taxable income under various heads; Deductions from Gross total income; Assessment of Individuals; Clubbing of incomes

I. CONCEPTS OF INCOME TAX.

A. Current Previous Year       —-2019-2020

Current Assessment Year      —-2020-2021

Previous year and assessment year are same in the following cases

i. If a person leaving India permanently in previous year

ii. Discontinued business

B. Income-

Examples

a. Tax free salary from the private sector employer

b. Awards received by the sports person

c. Loss incurred by the assesses

d. Perquisites received by employees

C. Residential status —-sec 6(1)

A. Basic conditions.

i. He is in India in the previous year for a period of 182 days or more

ii. He has been in India for at least 365 days during the previous year preceding the previous year and is the in India for at latest 60 days during the previous year.

B. Additional conditions

i. He has been resident in India at latest two out of the ten previous years preceding the relevant previous years and

ii. He should have been in India for at least 730 days in all during the seven previous years preceding the relevant previous year

Determination of residential status

1. Resident and ordinarily resident

 If Satisfies any one Basic condition and two additional conditions.

2. Resident but not ordinarily resident

If satisfies any one Basic condition and does not satisfy two additional conditions

3. Non-resident

Dose not satisfies any one basic condition

Question

1. Mr James ,a citizen of US, arrived in India for the first time on 1st July 2018 and left for Nepal on I5 th  December 2018.He arrived to India again on first January 2019 and stayed till the end of the financial year 2018-2019.His residential status for the assessment year 2019-2020 is

Answer-—Resident but not ordinarily resident.

2.Mr.X. A non-resident earned 36,000 as interest on German development bond. Of this, he received 1/6 th in India. The amount to be included as interest for the remuneration of his gross total income.

Ans-6000.

II. Income

I. Income from Salaries

II. Income from House Property

III. Income from Business or Profession

IV. Income from Capital Gains.

V. Income from other sources

III. Income from salary

Important points

Compensation received by an employee from his employer on termination of job–Profits in lieu of salary

Pension received by the widow of an employee—income from other sources

Foreign allowances for rendering services abroad—Fully exempt from tax

Children hostel allowance—Exemption up to specified limit

Maximum amount of exemption of compensation received at the time of voluntary retirement-500,000

Salary, bonus, commission, et received by a working partner from the firm-income from business or profession

Pension received by the widow of a government employee-income from other sources.

Profits on the sale of machinery used in business-income from short term

Capital gains

Compensation received from the government on compulsory acquisition of land and profit earned-income from capital gain

Examiner’s remuneration received by a Govt. college professor from university is taxable under the head income from other source. Since there is no employer employee relationship.

Fees received by a doctor from the patients is taxable under the head – income from business and profession.

Partners salary from the partnership firm is taxable under the head Profits and gains of business and profession.

Pension is taxable under the head – Salary

Family pension is taxable under the head income from other source.

Pension from UNO and pension to gallantry awardees are exempted from tax

A part of D A is converted in to pay is called Dearness Pay- It is always forming part of salary.

Death cum retirement gratuity received by Govt. employees and employees of local authority- Fully exempt from tax.

Salary includes allowances

A. Fully Taxable Allowances:

a) DA

b) Fixed Medical Allowance

c) Tiffin Allowance

d) Servant Allowance

e) Non practicing Allowance

f) Hill allowance

g) Warden Allowance and Proctor allowance

h) Non practicing allowance

i) Deputation Allowance

j) Overtime allowance

k) CCA

l) Telephone allowance

m) Project allowance

n) Education allowance

o) Dinner allowance

p) Health allowance

q) Holiday allowance

r) Special qualification allowance.

B. Fully exempted allowance:

a) Foreign allowance

b) Sumptuary allowance

c) Allowances from UNO

C.HRA-     House Rent Allowance

Exempted is least of the following

a) Actual HRA received

b) Rent paid less 10% salary

c) 50% salary if house is in metros otherwise 40%

 Salary for HRA includes the following

Basic Salary

DA (DA is taken only if it is as per terms of employment)

DP

Fixed commission on turnover.

Question

X is employed in a private company at a salary OF 70,000 per month and 10,000 per month as dearness pay. He received a 2,000 per month as HRA. He paid 2,500 per month as house rent. What is the exempted portion of HRA?

Answer

A. Actual HRA-2000

B. NIL

C. 40% of salary-80000*0.40=32000.

Exempted HRA-Nil

D. Special Allowances for meeting the personal expenses of employees –sec 10(14)(ii).

i. Children educational allowance- 

Exempted up to 100 per month per child for two children

ii. Children Hostel allowance

Exempted to 300 per month per child for a maximum of two children.

iii. Transport allowance:

Exempted up to 1600 pm  

In the case of blind ,deaf and dump or orthopedically handicapped- 3200 per month exempted.

E. Special allowances for meeting official expenditures of employees –Sec 10(14)(i)

a) Traveling allowance

b) Daily allowance

c) Conveyance allowance

d) Helper allowance

e) Academic Allowance

f) Uniform allowance.

Salary includes Perquisites

F. Perquisites

i. Perquisites taxable in case of all employees:

a) Value of rent free house accommodation.

i. Government Employees—Amount determined by Government +10% of cost of Furniture less Amount Collected from Employee.

ii. Other Employees—15 % of Salary (Population exceeding 25 Lakhs) +10% of cost of Furniture less Amount Collected from Employee.

iii. Other Employees—10% of Salary (Population below 25 lakhs) +10% of cost of Furniture less Amount Collected from Employees

iv. Other Employees -7.5 % of salary (other places ) +10% of cost of Furniture less Amount Collected from Employee.

The value of free accommodation in Delhi provided by employer in the private sector is–15% of salary.

b) Expenditures of Employees paid by Employer

c) Interest free loan at concessional rate

d. Holiday enjoyment.

e. Free food

f. Club Expenses.

ii. Perquisites taxable in case of specified employees. Following facilities provided by employer to employees

a. Motor car

b. Facility of Sweeper,watchmen , Gardner, Personal attendant

c. Gas, water , electricity

d. Education facility

e. Transport facility.

iii. Tax free perquisites:

a) Medical benefits

b) Tea or snacks provided at office or factory

c) Residential accommodation provided at site

d) Expenses of telephone including mobile phone.

e) Employer’s contribution to staff insurance scheme

f) Facility of conveyance from the place of residence to office and vice-versa.

g) Scholarship to employees and their children paid by employer.

h) Refresher courses

i) Tax paid by employer on the value of perquisites

j) Perquisites to Govt. employees posted abroad

k) Rent free house and conveyance facility provided to high court judges and supreme court judges.

l) Laptops provided by employer.

m) Leave travel concession

G. Retirement Benefits .

A. GRATUITY

i. Govt. Employees fully exempted

ii. Non Govt.Employees:

a) 1972 Gratuity Act Covered Employees

Exempted portion is least among

1. 15 days salary for every completed year of service or part thereof in excess of 6 months.

2. Rs 20,00,000

3. Gratuity actually received. 

Salary – Basic+ DA (always taken)

15 days  salary=  salary of last month*15/26

b) Employees not covered by payment of gratuity Act 1972

Least of the following is exempted:

a) ½ months average salary for every completed year

b) Rs. 20,00.000

c) Actual gratuity received

Salary= Basic+ DA (as per terms of employment)+ Fixed commission on turn over

B. Encashment of Earned Leave:

During service – fully taxable.

Encashment after retirement:

Maximum Amount exemption -300,000

C. Commuted pension:

                Govt. Employees – Fully exempted.

Private employees, Exemption will be as follows

i. 1/3 of Normal pension –If gratuity receives

ii. ½ of Normal pension —If does not receive Gratuity

H. Deductions from salary: section 16

1. Entertainment allowance

For Govt. employees:   least of the following is the deduction:

1. Amount received

2. 1/5 of salary

3. Rs 5000

Non govt. employees: No deduction.

2. Professional Tax 

It means tax paid to local self-Governments.

3.Standard Deduction

40,000-2019-2020

50,000-2020-2021

IV.Income from house property .

Question

Given is the information related to a house.

Municipal value-150,000

Fair rent—180,000

Standard rent—160,000

Actual rent—20,000 p.m

Municipal tax paid by owner is 20percent of M.V .Unrealized rent rs.40,000 .What is annual value of the house?

Solution

Expected rent—160,000

Actual rent-200,000

Gross Annual value-200,000

Less :Municipal tax-30,000

Net Annual Value-170,000.

Important points

Rent from vacant plot of land is assessable under the head – income from other sources

Rent from subletting is chargeable under the head income from other sources.

Rent from paying guest accommodation is assessable under the head profit sand gains from business or profession.

Question

Calculate the gross annul value from the following details

Municipal value-45,000

Fair rental value-50,000

Standard rent-48000

Actual rent-42,000.

Solution

Gross annual value-48,000

Income from Two Self Occupied House property will be NIL from 2020-2021

One will Nil in 2019-2020

Deductions from House property

1. 30% of Net Annual Value

2. Interest on loan paid in previous Year

3. 1/5 of pre-construction period loan

4. Interest on loan in case of self -occupied property -200,000

V. Income from business or profession

Important points

A.Diminishing balance method of charging depreciation has been permitted under the income Tax Act , 1961for claiming depreciation

B. Allowable expenses

Loss due to embezzlement by an employee

Legal expenses paid to protect the building of the business

Cost of installing a new telephone

Under the income tax act, 1961  unabsorbed depreciation can be carried forward for set-off purpose.

Answer—for unspecified period .

Use maximum Electronic mode of payments

VI. Income from capital gains

Important points are as follows

Cost indexation benefits is not allowed on

Debentures issued by a company

Self- generated  goodwill of the company

Bonus shares allotted 01/4/2000

Long term capital gain set off-long term capital gain only

Stock in trade is not a capital asset

Income from sale of household furniture is exempt

Deduction under Sec 54 F Shall not allowed if the assesse ,on the date of transfer owns more than one residential house

Sec 54 EC-Maximum deduction -50 lakhs

V.INCOME FROM OTHER SOURCES

It includes incomes from the following

Horse races.

Lotteries.

Dividends

Interests

VI. TDS

Under section 194IB of the Income tax act ,1961an individual or HUF (Who is not required to get his accounts audited U/S 44 AB ) who is responsible for paying to a resident any rent ,shall deduct income tax ,for the use of any land and building or both ,if the rent exceeds 50,000per month.

TDS and sections

Salaries-sec 192

Dividends-sec 194

Winnings from horse races-sec 194BB.

From 2020-2021

. If your Gross Total Income (Including Interest) is less than Rs.500,000 ,You may deposit in banks /Post-Offices (Term /Fixed/Recurring) as such:-

a. Total annual Interest on such accounts is less than Rs.40,000.

Banks and Post Offices did not deduct TDS upto Rs.40,000. Banks and Co-operative Societies will deduct TDS when Interest more than 40,000.other Cases 5000

VII.Agriculture income

It includes the following

Rent or revenue from land

Income from agricultural operations

Income from making the produce fit for market

Income from sale of produce

Income from saplings or seedings

Income from the sale of replanted trees where denuded parts of the forest are replanted and subsequent operations in forestry are carried out

Interest on capital received by a partner from the firm engaged in agricultural operations

PARTLY AGRICULTURE INCOME

Income from growing and manufacturing tea

60% -Deemed to be agriculture income and 40% is business income

VIII.Exempted inmcomes

Special economic zones-sec 10AA- Allowed for-15 years

Dividend decleared by Unit trust of India or by mutual fund.

IX. Advance tax

Advance tax is payable in previous year

However ,an individual resident in India shall not liable to pay advance tax if

i. He dosenot have any income chargeable under the head profit and gains of business or profession

ii. He is of the age of sixty years or more at any time during the previous year

Due dates in respect of Advance Tax are as follows:-

15/6/2019—–15%

15/9/2019——45%

15/12/2019—-75%

15/3/2020——-100%

X. Deductions

A. SEC 80 C  

LIC premium paid by the You in respect of self ,spouse and son and daughter can be deducted up to Rs. 150,000. In case of an individual, deduction is available in respect of policy taken in the name of taxpayer or his/her spouse or his/her children.  No deduction is available in respect of premium paid in respect of policy taken in the name of any person, other than given above. Other deductions under Sec 80C are as follows

i. Tuition fees

ii.Contribution to SLI

iii.Contribution to GIS

iv. Contribution to Government Providenf Fund

B. An additional deduction of Rs. 50,000/- under Section 80CCD(1B) is available to     assesse over and above the benefit of Rs. 1.50 Lakhs available as a deduction under Sec 80CCD(1). Thereby, raising the maximum limit of exemption to Rs. 2.00 Lakhs.

.Closure or Opting out of the NPS did not attract tax up to 60% of the total amount payable.

 Please contribute upto14% of your Salary to NPS (If you are Covered under NPS scheme)

C. Sec 80 D

a.. Health Insurance Premium

Following are the important points

i. Self and family (Including Senior Citizen)-Maximum Rs.50,000

ii. Parents –Maximum Rs. 25,000

iii. Parents (Senior) –Maximum-50,000

iv. Self and Family including Parents –Maximum Rs. 50,000

v. Self and Family including Senior citizen Parents –Maximum Rs. 75,000

vi. Self (Senior Citizen ) and including Senior Citizen Parents –Maximum Rs. 100,000

b.. Medical Expenditure

Following are the important points

i. Self and family (Senior Citizen)-Maximum Rs.50,000

ii. Parents (Senior) –Maximum Rs.50,000

iii. Self and Family including Parents –Maximum Rs. 50,000

Payment through cash mode is not allowed for Sec 80 D Payments except the following preventive medical checkup

 c..Preventive Medical checkup

Maximum Rs. 50,00 deduction is allowed for Preventive Medical checkup

D. Sec 80DD Maintenance including medical treatment of a dependant.

E. Sec 80DDB Medical treatment of Specified diseases

F. Sec 80E Interest on loan taken for Higher Education.

.FA. Sec 80EEA-Interest Up to 150,000 on loan taken for Residential House Property (Loan should be taken from 01/4/2019 to 31/03/2020)

Subject to conditions

FB. Section 80EEB –Tax Incentives for Electric Vehicles

Maximum deduction on Interest on loan taken for purchase of an electric vehicle –Rs.150,000

(Loan Should be taken from 01/04/2019 to 31/03/2023 )

G. Sec80G—Donations to certain funds and charitable Institutions

Following points are important in this respect

a. Pay any mode other than cash

b. Visit Income Tax Department Website and check eligibility of Institution Donations are as follows

a. Without qualifying Limit -100%

Donation to national childrens fund

b. Without qualifying Limit- 50%

Example-donation to Jawaharlal Nehru memorial fund

c. With qualifying Limit -100%

d. With qualifying  Limit-50

Question

X donated 20,000 to a chartable institution ,which is eligible for deduction u/s 80 G, during the financial year 2018-2019.his total income during the period was 15,0000.How much deduction he can claims u/s 80G ?

Solution

Ans-7500/-

Donation to Kerala Chief Minister Draught Relief Fund can be included in Donation as 100% without limit menu.

H. Sec 80 GG-Section 80GG Deduction for Rent Paid —Rs 5,000 per month

I. Deduction in respect of Contributions Given by any Person to Political Parties or an Electoral Trust (Section 80GGC)

Any amount of contribution made by an assessee being any person to a a political party or an electoral trust except local authority and every artificial juridical person wholly or partly funded by the Government shall be allowed as deduction while computing the total income of such person.

Note : Sum contributed by way of cash shall not be allowed as deduction

J SEC 80TTA Income from interest on Saving bank Accounts

Maximum amount of Rs. 10,000 can be deducted income from interest on savings bank accounts of Banks and Post Offices included in the above Income from other sources

K. SEC 80TTB   Interest on deposit in case of senior citizens.

Maximum interest of Rs,50,000 can be deducted by a senior citizen from interest on deposit income included in the above Income from other sources.

L. SEC 80QQB-Authors of books of literacy, artistic or scientific nature-300,000

M. SEC 80U In case of person with disability

Following are the important points

a. Self with disability –Maximum-Rs.75,000

b. Self with severe Disability –Maximum -125,000.

XI.Assessment –Individuals

Tax rates

1. A. Rates are the same as those specified in Part III of the First Schedule to the Finance Act2018

Upto Rs. 250,000                                          Nil

Rs. 250,001   to Rs. 500,000                5 percent

Rs. 500,001 to Rs. 10,00,000              20 percent

Above Rs. 10,00,000                            30 percent

B. In the case of every individual, being a resident in India, who is of the age of sixty years or more but less than the age of eighty years at any time during previous year

Up to Rs. 300,000                             Nil

Rs.300,001 to Rs. 500,000           5 percent

Rs. 500,001 to Rs. 10,00,000       20 percent

Above Rs. 10,00,000                   30 percent

C. in the case of every individual ,being resident in india ,who is of the age of eighty years or more at any time during the previous year

Upto-500,000                                             Nil

500,001 to 10,00,000                         5 percent 

500,001 to 10,00,000                        20 percent

Above Rs.10,00,000                           30 percent

New surcharge rules-

2019-2020

10 percent if total income 50 lakhs but does not exceed one crore

15 percent if total income exceeds 1 crore 

2020-2021

Same surcharge 

Cess 4% on Income Tax plus Surcharge 

XII. Assessment

Partnership Firm

Important points

i. All partnership firms formed under the Indian partnership act,1932 are assessed as

a. Under sec 184 Assessment

b. Not under Sec 184 Assessment

ii.. Income of a firm is taxble at flat rate of 30% without any exemption 

iii. Partners’s share in the income of a firm is not chargeable to tax in the hands of partners

iv. Remuneration paid to patners of a firmis allowed as deduction subject to statutory limit

v. Interest bon capital paid by affirm to its partners under the income tax act 1961 is allowed-12%.

Question

If the book profits of a partnership firm is 1,10,000,the remuneration admissible to the working partners under section 40(b) of the Income Tax act ,1961 is—- 

Answer. 

150,000 

XIII. Return and Assessments.

1.You may pay Your tax at any time using e-Pay facility through the following Website

httpps://www.Incometaxindiaefiling .gov.in.

Only, the following details are required.

i. Selection of relevant Challan No

ii. Net Banking Facility/Debit Card

iii. PAN Card Details and Address details.

For example, Challan No 280 is used for the following purposes

a. Payment of Advance tax,

b. Self-Assessment tax,

c. Tax on Regular Assessment,

d. Surcharge,

e. Tax on Distributed Profits of Domestic Company

f. Tax on Distributed income to unit holders.

2. File tax return within the due dates. As far as individual Assessees are concerned ,due date has expired .But Due date means the following to the other type of Assessees

i. A company -30/9/2019

ii. Accounts need to be audited –30/9/2019

iii. Assessee need to furnish report under sec 92E by 30/11/2019.

iv. The audit report shall be submitted to the department electronically.

3. If you do not file return within Aug 31,2019, then you may file belated return as follows. (Due date August 31 persons)

i. Before March 31,2020

ii. Before the completion of the assessment

Whichever is earlier

4. A belated return attracts late filing fees under section 234F of the Income Tax Act.

Rs. 5,000 is required to be paid if return is furnished on or before the December 31 ,2019.

5. The penalty increases to 10,000 if the asseesee file the return next year between January 1 and March, 2020.

6. However, late filing fee cannot exceed 1,000 if the total income of an assessee does not exceed Rs. 5 lakh.

7. Besides this, a delay in filing ITR also makes one liable to pay interest u/s 234A

8. If one discovers any omission or wrong statement in the earlier return including in the  belated return, you may file revised return  as follows:-

i. Before March 31,2020

ii. Before the completion of the assessment

iii. Whichever is earlier.

9. Deliberate false return will attract imprisonment u/s 277.

10. Assessment means the following-

i. Self Assessment.

You need to self assess your tax and file return within due dates. Ordinary return filing is known as Self Assesment. ITR 1 is used for this purpose

ii. Assessment on the basis of return.

Centralized Processing Centre processes your return .That is known as Assessment on the basis of return.

iii. Regular Assessment by Assessing Officer.

Regular assessment means the assessment made on the basis of evidence u/s 143(3) or Best Judgement assessment u/s 144.

iv. Re assessment.

If the assessing officer has reason to believe that any income chargeable to tax has escaped assessment, he may assess or re-assess such income.

v. Precautionary Assessment. 

Where it is not clear as to who has received the income,the assessing officer can commence proceedings against any or all of them to determine as to who is responsible to pay tax

11. You may get notices as follows after the return filing:-

i. Faults in the return, notice u/s 139(9)

Solution- 

Assessee has an opportunity to rectify the defect within a period of 15 days from the date of such intimation .If the defect is not rectified within the period ,the return shall be invalid return.

Next solution.

Then apply for Condonation in the following website

httpps://www.Incometaxindiaefiling .gov.in.

12.You may use Service request functionality under My account menu.

ii.Correct Tax Notice u/s 143(1) .No action is needed from your side

iii. Mis match in TDS-Notice u/s 143(1)(a)

Whenever notice is issued u/s 143(1)(a) of Income Tax Act, Department will give an opportunity to the taxpayers before making any adjustment to the returned income filed by him.

The taxpayer will be given an opportunity through the “e-proceeding” to respond to the findings made by the department during the course of processing of the returns submitted

13. Under section 119(2) (b) of the Income Tax Act CBDT can admit an application or claim in respect of

i. any exemption

ii. deduction

iii. refund

iv. any other relief

after the expiry of the period specified under the Act.

Therefore, such powers of wide authority should include the powers to condone the delay in specific cases of failure to submit ITR-V. 

As per the current tax laws, there is no specific time limit to file a condonation request if you missed the deadline of verifying your filed ITR. However, you should file the request as soon as you notice your mistake.

XIV. Other Important Provisions

 1. A person may not have assessable income but still be an assesse

2. In some cases ,the assessment year and previous year can be same

3. An Indian company is always resident assesse.

3A-Important Sections

a. Residential status of an individual—sec6

b. Agricultural income—sec10(1)

c. HRA—sec 10(13A)

d. Gratuity—sec 10(10)

4. Easy Application of Sec.89 is possible in the Assessment Year if you have received arrears of Salary (Easy Procedure).

5. Use PAN Card. Avoidance of PAN CARD attract TDS@20%. Aadhaar Card can be used as PAN CARD for certain transactions.

6. Link PAN with Aadhaar .It is most urgent

7.You cannot hide your transactions from 2020-2021 on words . CBDT will introduce Pre-filled Tax Returns in the Assessment Year 2020-2021 on words.

8. Contribute to NPS even if you are not coming under NPS Scheme. You may take NPS in Banks or Post offices. Besides, You may deduct the following deductions from your Gross Total Income (Chapter VIA)

9. Following are the important documents to file income tax return for an employed person in India

a. PAN CARD

B. form no 16 issued by employer

XV. Rebate

If your Gross Total Income is less than 5 lakhs, no special tax planning is needed from yourself. You may claim Rebate under Section 87A which amounts to a maximum of Rs.12500 in the Assessment Year 2020-2021.Gross Total Income means total of the following Income.

XVI.Assessment companies

MAT is applicable for certain  companies

Tax on income of certain domestic companies

“115BAA. (1) The income-tax payable in respect of the total income of a person, being a domestic company, for any previous year relevant to the assessment year beginning on or after the 1st day of April, 2020, shall, at the option of such person, be computed at the rate of twenty-two per cent.

NO MAT for above companies

Amendment of section 115JB

In section 115JB of the Income-tax Act, with effect from the 1st day of April, 2020,—

(a) in sub-section (1), the following proviso shall be inserted, namely:—

“Provided that for the previous year relevant to the assessment year commencing on or after the 1st day of April, 2020, the provisions of this sub-section shall have effect as if for the words “eighteen and one-half per cent.”, occurring at both the places, the words “fifteen per cent.” had been substituted.”;

Question

If the taxable income of a domestic company for the asseseement year 2019-2020 is 900,000 ,its tax liability will be

900,000*30%

=270,000

Add :Cess @3 %=8100

Total=278100

XVII.Penalty

Sec 271C

Amount of penalty for failure to deduct tax at source—100 percent to the amount of tax which such person failed to deduct

BY CMA SIVAKUMAR.A, ACMA.

ASSISTANT PROFESSOR OF COMMERCE,

SREENELAKANTA GOVERNMENT SANSKRIT COLLEGE, PATTAMBI.

Mainly focused on UGC DEC 2019 COMMERCE NET Examination.

Author Bio

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