Income Tax In India - Income Tax India

Constitution of India â†' Schedule VII â†' Union List â†' Entry 82 has given power to the Central Government to levy a tax on any income other than agricultural income which is defined in Section 10(1) of the Income Tax Act, 1961. The Income Tax Law consists of The Income Tax Act 1961, Income Tax Rules 1962, Notifications and Circulars issued by Central Board of Direct Taxes (CBDT), Annual Finance Acts and Judicial pronouncements by the Supreme Court and High Courts.

The government imposes a tax on taxable income of all persons who are individuals, Hindu Undivided Families (HUFs), companies, firms, association of persons, body of individuals, local authority and any other artificial judicial person. Levy of tax is different on each person. Indian Income Tax Act, 1961 levies and governs income tax. The Indian Income Tax Department is administered by CBDT which is part of the Department of Revenue under the Ministry of Finance, Govt. of India. Income tax is a key source of funds that the government uses to fund its activities and serve the public.

The Income Tax Department is the biggest revenue mobilizer for the Government. The total tax revenues of the Central Government increased from ₹1,392.26 billion (US$21 billion) in 1997-98 to ₹5,889.09 billion (US$88 billion) in 2007-08.

Amnesty scheme

Government of India allowed the people to declare their undisclosed incomes in Income Declaration Scheme, 2016 and pay a total of 45% tax for one time settlement. 64,275 disclosures were made amounting to ₹652.5 billion (US$9.7 billion).

Residential status and Scope of Income

For Income tax purpose, tax payers or persons are classified into 3 categories:

1. Resident and Ordinarily Resident (ROR)
2. Resident but Not Ordinarily Resident (RNOR)
3. Non-Resident (NR)

Every category has different treatment regarding taxing their Indian incomes and Foreign incomes. For example, income from London is taxable to ROR, but not to NR.

Charge to income-tax

For the assessment year 2016-17, Individuals earning an income up to ₹2.5 lakh (US$3,700) were exempt from Income Tax.

About 1% of the national population, called the upper class, fall under the 30% slab. It grew 22% annually on average during 2000-10 to 0.58 million income taxpayers. The middle class, who fall under the 10% and 20% slabs, grew 7% annually on average to 2.78 million income taxpayers.

Residential status of a person other than an individual

Scope of total income

Indian income¹ is always taxable in India not withstanding residential status of the taxpayer.
Foreign income¹ is not taxable in the hands of a non-resident in India. For resident (in case of firm, association of persons, company and every other person) or resident & ordinarily resident (in case of an individual or an HUF), foreign income is always taxable. For resident but not ordinarily resident foreign income is taxable only if it is business income and business is controlled wholly or partly in India or it is a professional income and profession is set up in India.

Heads of income

The total income of a person is segregated into five heads:-

• Income from salaries
• Income from house property
• Profits and gains of business or profession
• Capital gains
• Income from other sources

Income from salaries

All income received as salary under employer-employee relationship is taxed under this head, on due or receipt basis, whichever arises earlier. Employers must withhold tax compulsorily (subject to Section 192), if income exceeds minimum exemption limit, as Tax Deducted at Source (TDS), and provide their employees with a Form 16 which shows the tax deductions and net paid income. The Act contains exemptions including (the list isn't exhaustive):-

The Act contains list of perquisites which are always taxable in all cases and a list of perquisites which are exempt in all cases (List I). All other perquisites are to be calculated according to specified provision and rules for each. Only two deductions are allowed under Section 16, viz. Professional Tax and Entertainment Allowance (the latter only available for specified government employees).

Income from house property

Income under this head is taxable if the assessee is the owner of a property consisting of building or land appurtenant thereto and is not used by him for his business or professional purpose. An individual or a Hindu Undivided Family (HUF) is eligible to claim any one property as Self-occupied if it is used for own or family's residential purpose. In that case, the Net Annual Value (as explained below) will be nil. Such a benefit can only be claimed for one house property. However, the individual (or HUF) will still be entitled to claim Interest on borrowed capital as deduction under section 24, subject to some conditions. In the case of a self occupied house deduction on account of interest on borrowed capital is subject to a maximum limit of ₹2,00,000(1,50,000 for A/Y 2014-15 and before) (if loan is taken on or after 1 April 1999 and construction is completed within 3 years) and ₹30,000 (if the loan is taken before 1 April 1999). For let-out property, all interest is deductible, with no upper limits. The balance is added to taxable income.

The computation of income from let-out property is as under:-

Profits and Gains of business or profession

The income referred to in section 28, i.e., the incomes chargeable as "Income from Business or Profession" shall be computed in accordance with the provisions contained in sections 30 to 43D. However, there are few more sections under this Chapter, viz., Sections 44 to 44DA (except sections 44AA, 44AB & 44C), which contain the computation completely within itself. Section 44C is a disallowance provision in the case non-residents. Section 44AA deals with maintenance of books and section 44AB deals with audit of accounts.

In summary, the sections relating to computation of business income can be grouped as under: -

The computation of income under the head "Profits and Gains of Business or Profession" depends on the particulars and information available.

If regular books of accounts are not maintained, then the computation would be as under: -

However, if regular books of accounts have been maintained and profit and loss account has been prepared, then the computation would be as under: -

Income from capital gains

Transfer of capital assets results in capital gains. A Capital asset is defined under section 2(14) of the I.T. Act, 1961 as property of any kind held by an assessee such as real estate, equity shares, bonds, jewellery, paintings, art etc. but does not include some items like any stock-in-trade for businesses and personal effects. Transfer has been defined under section 2(47) to include sale, exchange, relinquishment of asset extinguishment of rights in an asset, etc. Certain transactions are not regarded as 'Transfer' under section 47.
Computation of Capital Gains:-

For tax purposes, there are two types of capital assets: Long term and short term. Transfer of long term assets gives rise to long term capital gains. The benefit of indexation is available only for long term capital assets. If the period of holding is more than 36 months, the capital asset is long term, otherwise it is short term. However, in the below mentioned cases, the capital asset held for more than 12 months will be treated as long term:-

• Any share in any company
• Government securities
• Listed debentures
• Units of UTI or mutual fund, and
• Zero-coupon bond

Also, in certain cases, indexation benefit is not available even though the capital asset is long term. Such cases include depreciable asset (Section 50), Slump Sale (Section 50B), Bonds/debentures (other than capital indexed bonds) and certain other express provisions in the Act. There are different scheme of taxation of long term capital gains. These are:

1. As per Section 10(38) of Income Tax Act, 1961 long term capital gains on shares or securities or mutual funds on which Securities Transaction Tax (STT) has been deducted and paid, no tax is payable. 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.
2. In case of other shares and securities, person has an option to either index costs to inflation and pay 20% of indexed gains, or pay 10% of non indexed gains. The cost inflation index rates are released by the I-T department each year.
3. In case of all other long term capital gains, indexation benefit is available and tax rate is 20%.

All capital gains that are not long term are short term capital gains, which are taxed as such:

• Under section 111A, for shares or mutual funds where STT is paid, tax rate is 10% from Assessment Year (AY) 2005-06 as per Finance Act 2004. With effect from AY 2009-10 the tax rate is 15%.
• In all other cases, it is part of gross total income and normal tax rate is applicable.

For companies abroad, the tax liability is 20% of such gains suitably indexed (since STT is not paid).
Besides exemptions under section 10(33), 10(37) & 10(38) certain specific exemptions are available under section 54, 54B, 54D, 54EC, 54F, 54G & 54GA.

Income from other sources

This is a residual head, under this head income which does not meet criteria to go to other heads is taxed. There are also some specific incomes which are to be always taxed under this head.

1. Income by way of Dividends.
2. Income from horse races/lotteries.
3. Employees' contribution towards staff welfare scheme/ provident fund/ superannuation fund or any fund set up under the provisions of ESIC Act, received from the employees by the employer.
4. Interest on securities (debentures, Government securities and bonds).
5. Any amount received from keyman insurance policy including the sum allocated by way of bonus on such policy.
6. Gifts (subject to certain conditions and exemptions).
7. Interest on compensation/enhanced compensation.
8. Income from renting of other than house property.
9. Family pension received by family members after the death of the pensioner.
10. Income by way of interest on other than securities.

Agricultural income

Agricultural income is exempt from tax by virtue of section 10(1). Section 2(1A) defines agricultural income as  :-

• Any rent or revenue derived from land, which is situated in India and is used for agricultural purposes.
• Any income derived from such land by agricultural operations including processing of agricultural produce, raised or received as rent-in-kind so as to render it fit for the market or sale of such produce.
• Income attributable to a farm house (subject to some conditions).
• Income derived from saplings or seedlings grown in a nursery.

Income partly agricultural and partly business activities

Income in respect of the below mentioned activities is initially computed as if it is business income and after considering permissible deductions. Thereafter, 40,35 or 25 percent of the income as the case may be, is treated as business income, and the rest is treated as agricultural income.

Permissible deductions from Gross Total Income

Ministry of Finance has notified certain deductions from Gross Total Income of an assessee. Below are deductions as updated by finance act, 2015

Due date of submission of return

The due date of submission of return shall be ascertained according to section 139(1) of the Act as under:-

If the Income of a Salaried Individual is less than ₹ 500,000 and he has earned income through salary or Interest or both, such Individuals are exempted from filing their Income Tax return provided that such payment has been received after the deduction of TDS and this person has not earned interest more than ₹ 10,000 from all source combined. Such a person should not have changed jobs in the financial year.

CBDT has announced that all individual/HUF taxpayers with income more than ₹ 500,000 are required to file their income tax returns online. However, digital signatures won't be mandatory for such class of taxpayers.

Advance tax

Under this schemes, every assessee is required to pay tax in a particular financial year, preceding the assessment year, on an estimated basis. However, if such estimated tax liability for an individual who is not above 60 years of age at any point of time during the previous year and does not conduct any business in the previous year, and the estimated tax liability is below ₹ 10,000, advance tax will not be payable. The due dates of payment of advance tax are:-

Any default in payment of advance tax attracts interest under section 234B and any deferment of advance tax attracts interest under section 234C.

Tax deducted at source (TDS)

The general rule is that the total income of an assessee for the previous year is taxable in the relevant assessment year. However, income-tax is recovered from the assessee in the previous year itself by way of TDS. The relevant provisions therein are listed below. (To be used for reference only. The detailed provisions therein are not listed below.¹)

In most cases, the tax deducted should be deposited within 7 days from the end of the month in which tax was deducted.

Corporate income tax

For companies, income is taxed at a flat rate of 30% for Indian companies(24.99% as per Budget 2015-16). Foreign companies pay income tax at the rate of 40%. An education cess of 3% (on both the tax and the surcharge) are payable. From 2005-06, electronic filing of company returns is mandatory.

Surcharge¹

Non Corporate Assessee : 10% of Income Tax where taxable income exceeds 1 crore. Corporate Assessee :

Tax returns

Categories

There are five categories of Income Tax returns.

Normal return u/s 139(1)

In business, "normal" is any gained revenue that exceeds the cost, expenses, and taxes needed to sustain the business or an activity.

Belated return

In case of failure to file the return on or before the due date, belated return can be filed before the expiry of one year from the end of the relevant assessment year.

Revised return

In case of any omission or any wrong statement mentioned in the normal return can be revised at any time before the expiry of one year from the end of the relevant assessment year.

Defective return

Assessing Officer considers that the return is defective, he may intimate the defect. One has to rectify the defect within a period of fifteen days from.

Returns in response to notices

Statistics

As of January 2016, a total of more than 3.27 crore returns were e-filed for the financial year 2014-15.

Annual information return and statements

Annual information return

Those who are responsible for registering, or, maintaining books of account or other documents containing a record of any specified financial transaction, shall furnish an annual information return in Form No.61A.

Statements By producers

Producers of a cinematographic film during the financial year shall, prepare and deliver to the Assessing Officer a statement in the Form No.52A,

• within 30 days from the end of such financial year or
• within 30 days from the date of the completion of the production of the film,

whichever is earlier.

Statements by non-resident having a liaison office in India

With effect from 01,June 2011, Non-Resident having a liaison office in India shall prepare and deliver a statement in Form No. 49C to the Assessing Officer within sixty days from the end of such financial year.

Assessments

Self-assessment is done by the assessee himself in his Return of Income. The department assess the tax of an assessee under section 143(3) (scrutiny), 144 (best judgement), 147 and 153A (search and seizure). The notices for such assessments are issued under section 143(2), 148 and 153A respectively. The time limits are prescribed under section 153.

Tax penalties

The major number of penalties initiated every year as a ritual by I-T Authorities is under section 271(1)(c) which is for either concealment of income or for furnishing inaccurate particulars of income.

"If the Assessing Officer or the Commissioner (Appeals) or the Commissioner in the course of any proceedings under this Act, is satisfied that any person-

(b) has failed to comply with a notice under sub-section (1) of section 142 or sub-section (2) of section 143 or fails to comply with a direction issued under sub-section (2A) of section 142, or

(c) has concealed the particulars of his income or furnished inaccurate particulars of such income,

he may direct that such person shall pay by way of penalty,-

(ii) in the cases referred to in clause (b), in addition to any tax payable by him, a sum of ten thousand rupees for each such failure;

(iii) in the cases referred to in clause (c), in addition to any tax payable by him, a sum which shall not be less than, but which shall not exceed three times, the amount of tax sought to be evaded by reason of the concealment of particulars of his income or the furnishing of inaccurate particulars of such income.

Appeals

When taxpayers dispute the income tax demands raised on them, a structured appeal process has to be followed. The first level of appeals lies with the CIT (A). The next level of appeal lies with the Income Tax Appellate Tribunal - an independent body, which is the final fact finding authority. Courts can subsequently be approached by the aggrieved party only if a question of law is involved.