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Income tax for Commerce students, Study notes of Business Taxation and Tax Management

This material covers the chapters such as Introduction, Income from Salary, Income from House Property, Income from PGBP, and more.

Typology: Study notes

2022/2023

Available from 05/16/2023

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PRESIDENCY COLLEGE (AUTONOMOUS), CHENNAI 600005.
INCOME TAX I STUDY MATERIAL
UNIT I: INTRODUCTION TO INCOME TAX
Meaning of Income and tax Features of Income Tax Types Important definitions under
the Income Tax Act Assessee Types Rates of Tax Residential Status Scope of Total
Income Incomes Exempt from tax.
UNIT II: INCOME FROM SALARIES
Definition of salaries Allowances Valuation of perquisites Deductions from Salary
Gratuity Pension Commutation of Pension Leave Salary Profits in lieu of Salary -
Provident Funds Deductions under Sec. 80s relating to salaries Computation of income
from salaries.
UNIT III: INCOME FROM HOUSE PROPERTY
Meaning of Annual Value Let out Property, Self-Occupied Deductions from annual value
- Computation of Income from House Property.
UNIT IV: PROFITS AND GAINS FROM BUSINESS OR PROFESSION
Income from Business or Profession Allowable expenses Not allowable expenses -
General deductions Provisions relating to Depreciation Deemed Business Profits -
Undisclosed incomes Investments Compulsory maintenance of Books of accounts Audit
of Accounts of certain persons Special provisions for Computing Incomes on estimated
basis Computation of Income from Business or Profession.
UNIT V: E-FILING & SUBMISSION OF RETURNS
E-filing Procedure - 26AS TDS Traces Types of Returns Filing of Return
Permanent Account Number (PAN) Usage of PAN Concepts of transfer pricing and its
fundamentals.
UNIT 1: INTRODUCTION TO INCOME TAX
INCOME TAX
Income tax is a direct tax that a government levies on the income of its citizens. The
Income Tax Act, 1961, mandates that the central government collect this tax.
WHAT IS INCOME?
Under Section 2(24), Income includes
Profits & gains
Dividend
Voluntary contribution received by trust
Perquisites in the hands of employees
Any special allowances or benefit
City compensatory allowances / dearness allowances
Any perquisites or benefits to a directions
Capital gains
Insurance benefits
Banking income of co-operative society
Winning from lottery
Employer contribution to provident fund
COMPUTATION OF TOTALINCOME (u/s 14)
Income from salary
Income from house property
Income from business/profession
Income from capital gain
Income from other sources
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PRESIDENCY COLLEGE (AUTONOMOUS), CHENNAI – 600005.

INCOME TAX – I STUDY MATERIAL

UNIT – I: INTRODUCTION TO INCOME TAX

Meaning of Income and tax – Features of Income Tax – Types – Important definitions under the Income Tax Act – Assessee – Types – Rates of Tax – Residential Status – Scope of Total Income – Incomes Exempt from tax. UNIT – II: INCOME FROM SALARIES Definition of salaries – Allowances – Valuation of perquisites – Deductions from Salary – Gratuity – Pension – Commutation of Pension – Leave Salary – Profits in lieu of Salary - Provident Funds – Deductions under Sec. 80s relating to salaries– Computation of income from salaries. UNIT – III: INCOME FROM HOUSE PROPERTY Meaning of Annual Value – Let out Property, Self-Occupied – Deductions from annual value

  • Computation of Income from House Property. UNIT – IV: PROFITS AND GAINS FROM BUSINESS OR PROFESSION Income from Business or Profession – Allowable expenses – Not allowable expenses - General deductions – Provisions relating to Depreciation – Deemed Business Profits - Undisclosed incomes – Investments – Compulsory maintenance of Books of accounts – Audit of Accounts of certain persons – Special provisions for Computing Incomes on estimated basis – Computation of Income from Business or Profession. UNIT – V: E-FILING & SUBMISSION OF RETURNS E-filing Procedure - 26AS – TDS – Traces – Types of Returns – Filing of Return – Permanent Account Number (PAN) – Usage of PAN – Concepts of transfer pricing and its fundamentals.

UNIT 1: INTRODUCTION TO INCOME TAX

INCOME TAX

Income tax is a direct tax that a government levies on the income of its citizens. The Income Tax Act, 1961, mandates that the central government collect this tax. WHAT IS INCOME? Under Section 2(24), Income includes

  • Profits & gains
  • Dividend
  • Voluntary contribution received by trust
  • Perquisites in the hands of employees
  • Any special allowances or benefit
  • City compensatory allowances / dearness allowances
  • Any perquisites or benefits to a directions
  • Capital gains
  • Insurance benefits
  • Banking income of co-operative society
  • Winning from lottery
  • Employer contribution to provident fund COMPUTATION OF TOTALINCOME (u/s 14) ➢ Income from salary ➢ Income from house property ➢ Income from business/profession ➢ Income from capital gain ➢ Income from other sources

MAIN FEATURES OF TAX

The main characteristic features of a tax are as follows: (1) A tax is a compulsory payment to be paid by the citizens who are liable to pay it. Hence, refusal to pay a tax is a punishable offence. (2) There is no direct quid-pro-quo between the tax payers and the public authority. (3) A tax is levied to meet public expenditure incurred by the government in the general interest of the nation. (4) A tax is payable regularly and periodically as determined by the taxing authority. (5) A tax is a legal correction. SCOPE, OBJECTIVES AND SIGNIFICANCE OF TAXATION

  1. Raising revenue
  2. Equal distribution of income
  3. Regulation
  4. Higher growth
  5. Pushing up rates of savings and investments ASSESSEE An income tax assessee is a person who pays tax or any sum of money under the provisions of the Income Tax Act, 1961. TYPES OF ASSESSEE Normal Assessee An individual who is liable to pay taxes for the income earned during a financial year is known as a normal assessee Representative Assessee There may be a case in which a person is liable to pay taxes for the income or losses incurred by a third party. Such a person is known as a representative assessee. Representatives come into the picture when the person liable for taxes is a non-resident, minor, or lunatic. Deemed Assessee An individual might be assigned the responsibility of paying taxes by the legal authorities and such individuals are called deemed assessees. Assessee-in-default Assessee-in-default is a person who has failed to fulfil his statutory obligations as per the income tax act such as not paying taxes to the government or not file his income tax return. INCOME TAX ACT 1961 ✓ Income Tax Act, 1961 is an act to levy, administrate, collect & recover Income-tax in India. It came into force from 1st April 1962. ✓ Income Tax including surcharge (if any) & cess is charged for any person at the rate as prescribed by Central Act for that assessment year. ✓ Income-tax Act has provided separate provisions with respect to levy of tax on income received in advance as well as the income with respect of which the amount has not yet been received. ✓ A person also has to keep track of his TDS deducted while calculating his final tax liability at the end of the year. PREVIOUS YEAR Under section 3 of IT Act 1961. the previous year is defined as the financial year which immediately precedes the assessment year. ASSESSMENT YEAR Assessment year is the 12 months’ period commencing on 1st of April till 31st March of next year. It is the year in which the income of the previous year is assessed.

individual acquires or earns during the course of a financial year that is deemed to be non- taxable is referred to as 'Exempt Income'.

UNIT 2: INCOME FROM SALARIES

SALARY

The term 'salary' has been defined under section 17(1) of the Income Tax Act to include salary, perquisites and profits in lieu of salary. Hence, to calculate the income under the head salaries, the total amount of salary, perquisites and profits in lieu of salary received in a year must be calculated. ALLOWANCES An allowance is a financial benefit given to the employee by the employer over and above the regular salary. These benefits are provided to cover expenses that may be incurred to facilitate the discharge of service for example Conveyance Allowance is paid to foot expenses incurred for commuting to the workplace. Taxable Allowances Partially-Taxable Allowances Non-Taxable Allowances

  • Dearness allowance
  • Entertainment allowance
  • Overtime allowance
  • City compensatory allowance
  • Interim allowance
  • Project allowance
  • Tiffin/meals allowance
  • Uniform allowance
  • Cash allowance
  • Non-practicing allowance
  • Warden allowance
  • Servant allowance
    • HRA except when it qualified as exempt under Section 10
    • Fixed medical allowance
    • Special allowance (including children education allowance, children hostel allowances)
    • Conveyance allowance above ₹ 19,200 per annum under section 10 (14) (ii) of income tax act
    • Entertainment allowance - deduction of 1/5 of salary or ₹ 5, whichever is less under section 16 (ii) of income tax act - HRA up to 40% of basic salary (50% in case of employees staying in 4 metros - Delhi, Mumbai, Chennai and Bangalore) subject to actual rent paid being more than HRA plus 10% of basic - Conveyance allowances up to ₹ 1,600 per month or ₹ 19,200 per annum - Payments to government employees posted abroad - Allowance for UN employees - Sumptuary allowance paid to judges of Supreme Court and High Courts - Compensatory allowance paid to judges of Supreme Court and High Courts EXEMPTIONS OF ABOVE LISTED ALLOWANCES GIVEN IN – 103120000000006985 (1).htm PERQUISITES “Perquisite” may be defined as any casual emolument or benefit attached to an office or position in addition to salary or wages. “Perquisite” is defined in the section 17(2) of the Income tax Act as including:
  • Value of rent-free/accommodation provided by the employer.
  • Obligation of employee met by employer
  • Interest free loan
  • Sale of movable assets (org cost – dep)
  • Usage of movable assets (10% of cost / hire charges)
  • Free holiday home facility
  • Free lunch & gift
  • Travelling & touring facility
  • Credit card facility
  • Club facility
  • Sweat equity shares
  • Free gift (gift exceed Rs. 5000 is taxable) PROFITS IN LIEU OF SALARY Profits in lieu of salary are payments received by an employee in addition to the regular salary. The profits in lieu of salary can include both monetary and other forms of compensation. Profits in lieu of salary is taxable under the Income Tax Act and must be declared while filing income tax return. STANDARD DEDUCTIONS The standard deduction is available as a flat deduction from the total salary earned by the employee in a particular financial year. It does not depend on the number of jobs changed by the employee. Hence one flat deduction is available for the cumulative salary earned from all the employers. For FY 2020-21, standard deduction remains same as the previous year at Rs.50,000. LEAVE ENCASHMENT TAX CALCULATION: Accumulated leave can either be encashed during service or at the time of retirement or resignation. Any leave encashed during service is fully taxable and forms part of ‘income from Salary’. However, relief under Section 89 can be claimed.
  • Leave encashment received at the time of retirement / resignation is fully exempt for Central or State Government employee.
  • Leave encashment received by non-Government employee is exempt to the extent of lower of the following:
  1. Amount notified by the Government- Rs 3 lakh
  2. Actual leave encashment amount
  3. Average salary of last 10 months
  4. Salary per day x unutilised leave (considering maximum 30 days leave per year) for every year of completed service GRATUITY Gratuity is a financial component offered by an employer to an employee in recognition of his/her service rendered to an organisation. It is a part of the salary an employee receives and can be viewed as a benefit plan designed to aid an individual in his/her retirement. TAX ON GRATUITY The taxation process for gratuity depends upon the employee who is receiving the gratuity amount. Two standard cases arise for the calculation of tax on gratuity: Government Employee Receiving Gratuity Amount: In case any employee under the state government, central government or local authority receives gratuity amount than the amount is fully exempt from Income Tax. Any Other Salaried Individual Receiving Gratuity Amount from an Employer who is Covered by Payment of Gratuity Act: In case of gratuity received by any employee whose employer is covered under the Gratuity Act, the following amount is exempt from tax.
  • 15 days salary as per the last drawn salary of the individual Any Other Salaried Individual Receiving Gratuity Amount from an Employer who is not Covered by Payment of Gratuity Act: In such a case the least of the following three amounts is exempt from tax.

If the commissioner of income tax does not approve the provident fund program established by the employer and employee (as described in Recognized Provident Fund), the scheme is considered unrecognized. TAXABILITY OF PROVIDENT FUND

UNIT – 3 : INCOME FROM HOUSE PROPERTY

INCOME FROM HOUSE PROPERTY

Rental income from a property being building or land appurtenant thereto of which the taxpayer is owner is charged to tax under the head “Income from house property”. SELF-OCCUPIED HOUSE PROPERTY A self-occupied house property is used for one’s own residential purposes. This may be occupied by the taxpayer’s family – parents and/or spouse and children. A vacant house property is considered as self-occupied for the purpose of Income Tax. LET OUT HOUSE PROPERTY A house property which is rented for the whole or a part of the year is considered a let out house property for income tax purposes DEEMED TO BE LET OUT PROPERTY According to the Income tax rules of India, when a person has more than one residential property in his name, he is considered to be living in only one property and the rest of his residential properties are deemed to be let out property.

COMPUTATION OF TAXABLE INCOME FROM HOUSE PROPERTY

VACANCY PERIOD

If the property or any part of property is let out and was vacant during the whole or part of the year and due to such vacancy, the actual rent is less than the expected rent, then the actual rent will be considered as Gross Annual Value of the property. UNREALISED RENT According to section 22 of the Income-tax Act, when a tenant doesn't pay the rent i.e. defaults on the rental payment , it is known as unrealised rent in income tax. This amount cannot be realised by the owner. PRE-CONSTRUCTION INTEREST Pre-construction interest is the interest that an assessee pays while the residential house is under construction. This pre-construction interest can be claimed only after the construction is finished. The deduction for this interest is allowed in 5 equal instalments starting from the year in which the house is purchased or the construction is completed.

UNIT – 4: PROFIT AND GAINS FROM BUSINESS & PROFESSION

SEC. 2(13) BUSINESS :

Business means the purchase and sale or manufacture of a commodity with a view to make profit. It includes any trade, commerce or manufacture or any adventure (Doing activity for the first time without knowing the outcome) or concern in the nature of trade, commerce and manufacture. SEC. 2(36) PROFESSION: Profession means the activities for earning livelihood which require intellectual skill or manual skill , e.g. the work of a lawyer, doctor, auditor, engineer and so on are in the nature of profession. SEC. 43(5) SPECULATIVE TRANSACTION : Speculative transaction means a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrip.

4.Acknowledgement and verification After uploading return on site you'll receive an acknowledgement in the form of ITR-V .In case Aadhar details are not updated on Income Tax site you will have to submit a physical signed copy of ITR-V to the Income Tax Department on the address mentioned on ITR-V to complete the e-filing process within next 120 days via ordinary post or speed post.

5. Tax refund A tax refund is a refund on taxes when the tax liability is less than the taxes paid. Taxpayers can often get a tax refund on their income tax if the tax they owe is less than the sum of the total amount of the withholding taxes and estimated taxes that they paid. UNDER SECTION 26AS A Form 26AS contains all tax-related information of a taxpayer such as tax deducted at source (TDS), tax collected at source (TCS), advance tax paid by the assessee, self-assessment tax payments, details about income tax refunds, and the details of tax deducted on the sale of immovable property, among other details. PERMANENT ACCOUNT NUMBER PAN is a ten-digit unique alphanumeric number issued by the Income Tax Department. PAN is. issued in the form of a laminated plastic card as given below (commonly known as PAN card): Permanent Account Number (PAN) Various aspects of PAN to be covered. USAGE OF PAN HELPS TO START A BUSINESS There are several PAN card uses when it comes to starting a business. As per norms laid down by the Government of India, the PAN is mandatory for every business in the country. DEDUCTION IN TAXATION One of the primary reasons to have a PAN card is for the purpose of taxation. If an individual with annual interest earnings exceeding ₹10,000 on savings deposits has not linked his or her PAN with the bank account, the concerned bank will deduct TDS at a rate of 30% instead of 10%. OPENING A DEMAT ACCOUNT OR BANK ACCOUNT According to the current norms, an individual will not be able to open a bank account if he/she does not possess a PAN card. INCOME TAX RETURNS FILING As you may know, every individual eligible for income tax must file their income tax returns. And for doing so, a PAN card is necessary. BUYING FOREIGN CURRENCY As per the Foreign Exchange Management Act, a PAN card is necessary for purchasing foreign currency amounting to ₹50,000 or higher. PURCHASING OR SELLING IMMOVABLE PROPERTY An individual needs to provide PAN details while selling or purchasing immovable property, such as a house, the worth of which is higher than ₹10 lakhs. PURCHASING OR SELLING A FOUR-WHEELER VEHICLE A PAN card is also mandatory if an individual sells or purchases a four-wheeler vehicle. Even in cases where an individual wants to acquire a loan for buying a car, having a PAN card is a must. CASH DEPOSITS, PAY ORDERS, BANKER’S CHEQUE, BANK DRAFTS The PAN card needs to be shown if one intends to opt for pay orders, banker’s cheque, bank drafts, and cash deposits of more than a limit of ₹50,000.