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Taxation Practical Notes .

The document provides an overview of the Income Tax Act, 1961, detailing its objectives, definitions, and key concepts related to direct taxation in India. It explains the classification of income, types of taxes, and the assessment process, along with specific provisions regarding income from salary and house property. Additionally, it outlines tax-saving options for salaried professionals and the calculation of income from house property.

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0% found this document useful (0 votes)
26 views23 pages

Taxation Practical Notes .

The document provides an overview of the Income Tax Act, 1961, detailing its objectives, definitions, and key concepts related to direct taxation in India. It explains the classification of income, types of taxes, and the assessment process, along with specific provisions regarding income from salary and house property. Additionally, it outlines tax-saving options for salaried professionals and the calculation of income from house property.

Uploaded by

sayalipanchal137
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Practical No.

-01
Basic Concepts of Income Tax Act,1961

Objective of the Practical:-

To make the students understand the basic concepts, definitions and terms
related to direct taxation.

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:

For Income Tax Act 1961, the previous year is defined as the financial year
which immediately precedes the assessment year. In case the source of income
is new or the business set up is new, the previous year for that entity will start
from the date of setting up of that business or profession or from the date when
the source of income of this new existence starts and ends in the said financial
year.

The exception to Previous Year:


These incomes are taxed as the income of the year immediately preceding the
assessment year at the rates applicable to such person.

1.
1. Income of a person who is leaving India for a long period or
permanently
2. Income of a person who is trying to alienate his assets with an
intention to avoid taxes
3. Income of a discontinued business
4. Income of non-resident shipping companies who don’t have any
representative in India

Scope to Total Income:

As per the Income Tax Act 1961, the total income of the previous year for a
person who is a resident of India will include all his income irrespective of the
source of that income which is either received or has accrued in India in the
previous year.

However, if a person is not an ordinarily resident in India as per Section 6 of


Income Tax Act, 1961, income from the sources which accrues or arises for him
outside India shall not be included in total income. In respect of non-residents,
any income which is received or arises in India is taxable in India.

Heads of Income Tax:


Every income arising to any person will always be classified under one of
the following headers provided by the Act: –

1.
1. Salaries
2. Income from house property
3. Profit and gains of business or profession
4. Capital gains
5. Income from other sources

Types of Taxes:
Income Tax holds its importance for it is the money that tends to support the
running of our government. It is one of the major sources of revenue for the
government and thus is inevitable not to impose it on the income earned or
utilized in the country. It helps meet the funds required to develop the country
and other defense-related needs of a nation.

There are basically two kinds of taxes-

1. Direct Tax
Direct Tax is a tax that is paid by an individual or any other person on the basis
of his Income. It is a form of tax that is directly paid by the person to the
government, i.e., the liability to pay the tax, and the burden of the tax falls on
the same person.

2. Indirect Tax.

Indirect taxes are the types of taxes where the person depositing the tax with the
government and the person actually having been burdened by the tax are
different. Generally, these taxes are included in the prices of the goods or
services which are provided to the people, and then such taxes are deposited by
the person collecting the same from their customers. GST is one of the most
popular types of indirect tax.

Some Important Definition under Income Tax Act 1961:

1. Income Tax

It is the tax that is collected by the Central Government for each financial year
levied on the total taxable income of an assessee during the previous year.

2. Assessee
As per Income Tax Act 1961 section 2(7), an assessee is a person who is liable
to pay the taxes under any provision of the Income Tax Act 1961. Assessee can
also be a person with respect to whom any proceedings have been initiated or
whose income has been assessed under the Income Tax Act 1961 Assessee is
any person who is deemed assessee under any of the provisions of this act or an
assessee in default under any provisions of this Act.

3. Assessment:

Assessment is primarily a process of determining the correctness of income


declared by the assessee and calculating the amount of tax payable by him and
further procedure of imposing that tax liability on that person.

4. 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.
5. Person:
As per section 2(31) of the Income-Tax Act 1961, a Person would be anyone
who is-

 An Individual
 A HUF (Hindu Undivided Family)
 A Company
 A Firm
 An association of person or body of individuals
 A Local Authority
 Every artificial and juridical person who is not included in any of the above-
mentioned categories.

6. Income:
The definition of Income as per section 2 (24) is inclusive but not exhaustive
of the below-mentioned items:

 Any illegal income arising to the assessee
 Any income that is received at irregular intervals
 Any Taxable income that has been received from a source outside India
 Any benefit that can be measured in money
 Any subsidy or relief or reimbursement
 Gift the value of which exceeds INR 50,000 without any consideration by an
individual or HUF.
 Any prize
 Causal incomes like winning from lotteries or horse race gambling etc

Outcomes

Students will be able to identify the technical terms related to


income tax

***************************************************
Practical No. -02
Income From Salary
Objective of the Practical:-

Understanding the provisions of salary income and


its taxability

Employment provides a regular compensation more commonly called ‘income


from salary’. Salary is one of the most basic motivations behind the qualified
workforce and employers. However, it is not an informal understanding. In fact,
your salary income is a part of a legitimate contract between you as an
employee and your employer.

What is Income from Salary?

Salary means the money received by a person, referred to as an “employee”


from an organization, referred to as an “employer” for offering specific services
in connection with employment. What are the components, such as allowances,
of this income received through salary and how are they calculated? You can
find all these components listed in your salary slip.
Salary Vs CTC

If you are a salaried person, the total expense incurred by your employer to
avail your services for a year is called Cost to Company (CTC). CTC includes a
basic salary, allowances, perquisites, a performance-linked-variable component,
health insurance, provident fund, gratuity, etc

Components of Salary
i. Basic Salary:
This is a mandatory component of salary income and generally comprises 35%-
50% of the gross salary. It is a fixed component and excludes bonuses,
incentives, overtime and allowances. The amount earmarked for gross or basic
salary depends on the designation, seniority, functional area and industry. The
basic salary is fully taxable.
ii. Allowances:
There are a variety of allowances that employees/employers can pick from,
basis respective organization policies and/or mutual understandings. Some of
the standard allowances offered by a vast majority of employers are listed
below:
a. Dearness Allowance (DA):
DA, a certain percentage of basic salary, is linked to movement in inflation
rates. DA is generally paid by the government to employees working in
government departments and public sector undertakings.
b. House Rent Allowance (HRA:
The HRA component is paid so that you can pay your rent with that amount.
You can claim exemption from taxes for rent paid to your landlord/landlady.
c. Conveyance Allowance:
Conveyance Allowance, also called Transport Allowance, is paid to help you
cover your costs of travel from your home to your workplace. Rs 1,600 per
month or Rs 19,200 per annum is exempt from taxes. With effect from 2018,
the conveyance (Rs 19,200) and medical (Rs 15,000) allowances have been
replaced with a standard deduction of Rs 40,000.
d. Leave Travel Allowance (LTA):
If you are planning to go on a vacation, anywhere in India, the cost of travel via
air, rail or road (public transport), subject to given limits, is exempt from tax.
This exemption is offered under section 10(5) of the Indian Income Tax Act,
1961.
e. Books and Periodicals Allowance:
If you love reading, the government supports your hobby by exempting your
expended amount from any taxes. Expenses incurred for buying newspapers,
periodicals and/or books are exempt from taxation.
iii. Provident Fund (PF)

a. Contributions made both by you and your employer are deposited in a PF


account.
b. PF is a savings account that offers guaranteed returns on deposits.
c. A minimum of 12% of your basic salary is deducted and deposited
d. The rate of interest is higher than the bank term deposits
e. The amount deposited is deductible from taxable income.
f. If the money is withdrawn after 5 years from the date of
resignation/retirement, the amount withdrawn is also exempt from tax
iv. Taxes
a. Income Tax:
Depending on your investment declaration, your employer would compute your
annual tax liability and deduct the same in equated amounts each month in that
financial year. The tax deduction may be more if you do not furnish evidence of
investments made as declared by you at the beginning of the financial year.
b. Professional Tax:
Professional tax is levied by the state government and all salaried employees,
self-employed professionals such as chartered accountants, doctors, and lawyers
are liable to pay the same. The maximum professional tax deducted from your
salary, each financial year, would be Rs 2,500.
Perquisites, called perks in common parlance, refer to fringe benefits that are
offered by organizations to their key employees. Perks are generally not paid as
money but as provisions to use certain facilities for personal use. For example,
company car with driver, company accommodation or membership to premium
clubs etc. The value of such perks gets added to the taxable income.

i. Form 16:
Form 16 is issued by your employer and is a statement mentioning salary
income and certifying that taxes have been deducted from your salary income.
When you receive your Form 16, check whether your PAN is mentioned
correctly so that the TDS reflects against your PAN in the income tax records.
ii. 26AS:
You may log in to either the TRACES website or your income tax filing
account to check your 26AS Form or Annual Information Statement. You must
validate whether the deducted amount has been deposited with the government.

Tax Saving Options for Salaried Professionals

There is a plethora of options for you, to save taxes if you earn through salary
income. You may consider a few of them listed below:

i. Term Insurance:
A term life plan pays out the sum assured to the beneficiary in case of your
unfortunate, untimely demise. Term life plans are safety nets and will give you
peace of mind that your family will continue to sustain you even if you are not
around. Amounts paid towards premiums can be deducted from taxable income
under section 80C.
ii. Health Insurance:
Health insurance is much needed in today’s times when healthcare costs are
increasing by the day. You may cover yourself and your family with a family
floater Mediclaim/health insurance plan that will cover most hospitalization
expenses. You do not have to dip into your savings to pay those exorbitant
medical bills. Health insurance premium payments are deductible, from taxable
income, under section 80D
iii. Unit Linked Insurance Plans (ULIPs):
The returns from ULIPs are exempt from tax under section 10(10D). The
money paid towards premium can be deducted, under section 80C, from taxable
income. ULIP investments offer the following added benefits:

a. Bonus additions for long-term investments (5 years+)


b. Diversified portfolio investment without affecting taxability
c. Tax-free partial withdrawals after five years
d. Invest up to the age of 99 (option available in Invest 4G ULIP from
Canara HSBC Life Insurance). You can use the same plan to build a
corpus until 60, then have a tax-free pension income for life. Upon your
demise higher of the corpus or sum assured it passed to your legal heirs.

iv. Public Provident Fund (PPF):


PPF is a Central Government guaranteed investment cum tax saving
instrument, offering a 7.1% rate of interest. The amount deposited in PPF
accounts is deductible, under Section 80C, from taxable income whereas all
withdrawals are exempt from taxes. Partial withdrawals are permitted only from
the 7th year onwards.
v. National Pension Scheme (NPS):
You must try and invest at least 10% of your income into NPS to build a corpus
for your retirement. On retirement, you can withdraw 60% of this corpus and
opt to get a pension from the balance of 40%. Contributions to NPS are also
deductible, under sections 80C section 80CCD(1B), from taxable income.

Outcomes

Application of correct provision of salary and


determination of tax liability and its impact on his
annual income
Practical No. -03

Income From House Property.

Objective of the Practical:-


Understanding the provisions of House property income
and its taxability

Basics of House Property Tax

A house property could be your home, an office, a shop, a building or some land
attached to the building like a parking lot. The Income Tax Act does not
differentiate between commercial and residential property. All types of properties
are taxed under the head ‘income from house property’ in the income tax return.
An owner for the purpose of income tax is its legal owner, someone who can
exercise the rights of the owner in his own right and not on someone else’s behalf.

When a property is used for the purpose of business or profession or for carrying
out freelancing work – it is taxed under the ‘income from business and profession’
head. Expenses on its repair and maintenance are allowed as business
expenditure.

a. 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.

Prior to FY 2019-20, if more than one self-occupied house property is owned by


the taxpayer, only one is considered and treated as a self-occupied property and
the remaining are assumed to be let out. The choice of which property to choose
as self-occupied is up to the taxpayer.

For the FY 2019-20 and onwards, the benefit of considering the houses as self-
occupied has been extended to 2 houses. Now, a homeowner can claim his 2
properties as self-occupied and remaining house as let out for Income tax
purposes.

b. 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

c. Inherited Property

An inherited property i.e. one bequeathed from parents, grandparents, etc. again,
can either be a self-occupied one or a let-out one based on its usage as discussed
above.

How to calculate Income From House Property

Here is how you compute your income from a house property:


a. Determine Gross Annual Value (GAV) of the property: The gross annual
value of a self-occupied house is zero. For a let out property, it is the rent collected
for a house on rent.

b. Reduce Property Tax: Property tax, when paid, is allowed as a deduction


from GAV of property.

c. Determine Net Annual Value(NAV) : Net Annual Value = Gross Annual


Value – Property Tax

d. Reduce 30% of NAV towards standard deduction: 30% on NAV is allowed


as a deduction from the NAV under Section 24 of the Income Tax Act. No other
expenses such as painting and repairs can be claimed as tax relief beyond the 30%
cap under this section.

e. Reduce home loan interest: Deduction under Section 24 is also available for
interest paid during the year on housing loan availed.

f. Determine Income from house property: The resulting value is your income
from house property. This is taxed at the slab rate applicable to you.

g. Loss from house property: When you own a self occupied house, since its
GAV is Nil, claiming the deduction on home loan interest will result in a loss
from house property. This loss can be adjusted against income from other heads.

Note: When a property is let out, its gross annual value is the rental value of the
property. The rental value must be higher than or equal to the reasonable rent of
the property determined by the municipality.

Tax Deduction on Home Loans


a. Tax Deduction on Home Loan Interest: Section 24

Homeowners can claim a deduction of up to Rs 2 lakh on their home loan interest,


if the owner or his family resides in the house property. The same treatment
applies when the house is vacant. If you have rented out the property, the entire
home loan interest is allowed as a deduction.

However, your deduction on interest is limited to Rs. 30,000 instead of Rs 2 lakhs


if any of the following conditions are satisfied:

A. Condition I

 The loan is taken on or after 1 April 1999, and

 The purchase or construction is not completed within 5 years from the end
of the FY in which loan was availed.

B. Condition II

 The loan is taken before 1 April 1999.

C. Condition III

 The loan is taken on or after 1 April 1999 for the purpose of repairs or
renewal of the house property.

When is the deduction limited to Rs 30,000?


As already mentioned, if the construction of the property is not completed within
5 years, the deduction on home loan interest shall be limited to Rs. 30,000. The
period of 5 years is calculated from the end of the financial year in which loan
was taken. So, if the loan was taken on 30th April 2015, the construction of the
property should be completed by 31st March 2021. (For years prior to FY 2016-
17, the period prescribed was 3 years which got increased to 5 years in Budget
2016). Note: Interest deduction can only be claimed, starting in the financial year
in which the construction of the property is completed.

How do I claim a tax deduction on a loan taken before the construction of


the property is complete?

Deduction on home loan interest cannot be claimed when the house is under
construction. It can be claimed only after the construction is finished. The period
from borrowing money until construction of the house is completed is called pre-
construction period. Interest paid during this time can be claimed as a tax
deduction in five equal instalments starting from the year in which the
construction of the property is completed. Understand pre-construction interest
better with this example.

b. Tax Deduction on Principal Repayment

The deduction to claim principal repayment is available for up to Rs. 1,50,000


within the overall limit of Section 80C. Check the principal repayment amount
with your lender or look at your loan instalment details.

Conditions to claim this deduction-


 The home loan must be for purchase or construction of a new house
property.

 The property must not be sold in five years from the time you took
possession. Doing so will add back the deduction to your income again in
the year you sell.

Stamp duty and registration charges Stamp duty and registration charges and
other expenses related directly to the transfer are also allowed as a deduction
under Section 80C, subject to a maximum deduction amount of Rs 1.5 lakh.
Claim these expenses in the same year you make the payment on them.

c. Tax Deduction for First-Time Homeowners: Section 80EE

Section 80EE recently added to the Income Tax Act provides the homeowners,
with only one house property on the date of sanction of loan, a tax benefit of up
to Rs 50,000.

Outcomes
Students should be able to compute income from House
property
Practical No. -04
Income from Business or profession

Objective of the Practical:-


To make students understand the procedure of
computation of income from business or profession

Meaning of Business: The meaning of the Business has been


defined in Section 2(13) of the Income-tax Act. According to
this definition, business includes any trade, commerce or
manufacture or any adventure or concern in the nature of
trade, commerce or manufacture. The concept of business
presupposes the carrying on of any activity for profit, the
definition of business given in the Act does not make it
essential for any taxpayer to carry on his activities
constituting business for a considerable length of time.
Example: If a person purchases a piece of land, gets it
surveyed, lays down a scheme of development, divides it into
a number of building plots and sells some of the plots from
time to time, he would be chargeable to tax not only on the
notion profits made on individual sale of plots but also on the
surplus, if any, remaining after the sale of all plots and after
the venture had come to an end.

Buisenss : The term business defined in section 2(13) to


"includes any trade, commerce or manufacture or any
adventure or concern in the nature of trade, commerce or
manufacture.” The definition of “business” is an inclusive
one. It includes “business” in its general commercial sense
but also several other activities, namely- trade, commerce,
manufacture and any adventure in the nature of trade,
commerce or manufacture. Business, trade and commerce
refer to buying and selling of goods orservices for profit and
other incidental activities. Manufacturing means producing
new goods or articles. Thus business is any activity carried
out with the intention to earn profit, whether such an activity
is continuous or temporary is immaterial. Meaning of
Profession: The term Profession has been defined in Section
2(36) of the Act to include any vocation. In the case of a
profession, the definition given in the Act is very much
inadequate since it does not clearly specify what activities
constitute profession and what activities do not. Profession
involves the concept of an occupation requiring either
intellectual skill or manual skill controlled and directed by
the intellectual skill of the operator. For example an auditor
carrying on his practice, the lawyer or a doctor, a painter, an
actor, an architect or sculptor, would be persons carrying on
a profession and not a business. The common feature in the
case of both profession as well as business isthat the object
of carrying them out is to derive income or to make profit.
The process of making the profit would be the main area of
difference between the two while the ultimate object is
common to both. Profession : The term profession has been
not defined in the Act. It means an occupation requiring to
some degree of learning. Profession requires intellectual skill
or manual skill or both. The examples are doctor, advocate,
chatered acountanat, engineers etc The term profeesion
include vocations as well.[Section 2(36)] “Profession’ in
common parlance means rendering of skilled services like as
those of doctors, architects, lawyers, chartered accountants or
other professionals. In short “Profession” may be defined as
a vacation, or a job requiring some thought, skill and special
knowledge like that of C.A., Lawyer, Doctor, Engineer,
Architect etc. So profession refers to those activities where
the livelihood is earned by the persons through their
intellectual or manual skill.
Features of Income from Business / Profession

1. Business or Profession carried on by assessee: It is must


that business or profession must be carried out by assessee
himself during the previous year.
2. Business or profession should have been carried on the
previous year.
3. Aggregate income of different businessesis assessed to
tax.
4. Profits from speculation business are also taxed under the
head income from business.
5. Income from previous year should be taxed for the current
assessment year.
6. The real profit i.e. the profit received or receivable during
the previous year are taxed.

Basis of charge: Section 28: Following are the income


chargeable to tax under the head Profits or Gains from
Business or profession: ‐

1) Profit and Gains of any business or profession that is


carried on by the assessee at any time during the previous
year.
2) Any compensation or other payment due to or received by
an assessee for loss of agency due to termination or
modification of terms.
3) Income derived by a trade, professional or a similar
association for specific services performed for its members.
4) Any profit on sale of a license granted under Imports
(controls) Order 1955 made under Imports &
Exports(control) Act of 1947.
5) Any cash assistance (by whatever name called) received
or receivable against exports under any scheme of
Government of India.
6) Any duty of customs or excise repaid or repayable as
drawback to any person against exports under the Customs
and Central Excise Duty’s Drawback Rules 1971.
7) Any profit on the transfer of the Duty entitlement pass
book scheme under export import policy.
8) Any profit on the transfer of the Duty free replenishment
certificate under export import policy.
9) The value of any benefit or perquisite whether convertible
into money or not arising from business or exercise of a
profession e.g. A gift received by the lawyer from his client.
10) Any interest, salary, bonus, commission or remuneration
due to or received by partner of a firm from such firm.
11) Sum received or receivable in cash or in kind under an
agreement for not carrying out any activity in relation to any
business or not sharing any know how, patent, copyright,
trade mark, license franchise or any other business or
commercial right of similar nature or information or
technique likely to assist the manufacture or processing of
goods or provision of services.
12) Any sum received including bonus under Key man
Insurance Policy.
13) Any sum received (or receivable) in cash or kind, on
account of any capital asset (Other than land or goodwill or
financial instrument) being demolished, destroyed, Discarded
or transferred, if the whole of the expenditure on such capital
asset has been allowed as a deduction undersection 35AD.
14) Income from a speculative business.

Outcomes
Students should be able to compute income from
Businness or profession

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