Income Tax Act

The Indian Income Tax law is a highly complicated and confusing piece of document. For the common man the task of understanding the procedure and provisions of law is daunting, to say the least. Not only is the process of tax calculation very difficult, its practical implementation is tedious and cumbersome. However, under the law, the taxpayer is legitimately entitled to plan his taxes in such a manner that his tax liability is minimal. Tax Planning can be defined as an arrangement of the financial affairs within the scope of law in a manner that derives maximum benefit of the exemptions, deductions, rebates and relief and reduces the tax liability to minimal. As long as you are within the framework of law, you can plan your financial affairs. However, in the name of tax planning, you can not indulge in Tax Avoidance or Tax Evasion. And the line between Tax Planning and Tax Avoidance is very thin, so you need to tread carefully. When financial transactions are arranged in a way that it becomes obvious that they were entered with a malafide intention of either not paying taxes or with a view to defeat the genuine spirit of law, they can not be accepted as legitimate Tax Planning. Twisting of facts or taking a very strict and literal interpretation of law without understanding the basic purpose of the law can only lead to punishable Tax Avoidance and not Tax Planning.

An attempt is made in the following pages to present a bird eye's view of the Indian Income Tax laws so that you can avoid making trips to your chartered accountant and by taking advantage of the available legal avenues for tax planning, reduce your tax liability. This material does not deal in procedural matters such as assessment, appeals and revisions.

To begin with lets understand the structure of tax regime in the country. Taxes are the basic source of revenue to the government. Revenue so raised is utilised for meeting the expenses of government as well as to carry out developmental works.

There are basically two types of taxes, Direct and Indirect taxes. Direct taxes are those, which are, collected by the government directly from the tax payer through levies such as income tax, wealth tax and interest tax. Whereas indirect taxes comprise of excise duty, sales tax, customs duty and value added tax. While direct taxes form 30 per cent of government's revenue indirect taxes contribute a larger chunk of 70 per cent. Gift tax and estate duty were part of the direct tax revenue. As an ongoing process of simplification and rationalisation of the direct tax structure in India, the government repealed the Gift Tax Act in 1998 and the Estate Duty Act in the late eighties.

To understand Income Tax law in India, the first step is to identify what constitutes Income Tax law. Income Tax law in India consists of the following:-

1. The Income Tax Act, 1961

The Indian constitution has empowered only the Central Government to levy and collect Income Tax. The Income Tax Act was enacted in 1961. The Act come into force from the 1st of April 1962 and extends to the whole of India. It consists of over 400 sections and 12 schedules. The Income Tax Act determines which persons are liable to pay tax and in respect of which income. The various sections lay down the law of income tax and the schedules elucidate certain procedures and give certain lists, which are referred to, in the sections. However, the Act does not prescribe the rates of Income Tax.

These rates are prescribed every year by the Finance Act (popularly known as "The Budget") This is done mainly to give incentives for investment in priority sectors, to discourage tax evasion, to remove loopholes in the law and to synchronise the law with the existing economic situation.

2.The Income Tax Rules, 1962

The Income Tax Act empowers the Central Board of Direct Taxes (CBDT) to formulate rules for implementing the provisions of the Act. Income Tax Rules have been kept separate from the Act as the rules can be amended more easily than the Act. Rules can be amended by merely publishing a notification in the Official Gazette of the Government of India whereas to amend the Income Tax Act, Amendment to the Bill has to be passed in the Parliament. However, in case of conflict between the Act and the Rules, the provisions of the Act shall prevail.

3.Circulars issued by the CBDT

For the guidance of the Income Tax Officers and the general public, the CBDT issues circulars on certain taxation matters. These circulars are binding on the Income Tax Officers. However, circulars cannot change the provisions of law; they can merely clarify the law or relax certain provisions in favour of the taxpayers. In event of a dispute, the Courts are not bound by the circulars.

4.Case Laws and Doctrine of Precedents

Decisions of the tax tribunals and courts on disputes pertaining to aspects of the income tax law form case laws. Case laws result in formation of precedents in law. ie in case a similar dispute arising in future, the decision of the court on that point may be used to decide the current dispute. The decisions of the Supreme Court, however, are binding on all lower Courts and tax authorities in India. High Court decisions are binding only in the states, which are within the jurisdiction of that particular High Court. However, decision on one High Court has persuasive power over other High Courts when deciding similar issues.

Basic Concepts

It is essential to understand certain basic concepts in order to understand Income Tax law in India. The Act has defined certain terms, which have been used in the law. The meaning of the terms defined may differ from the commonly understood meaning of that particular term.

For example in ordinary parlance, the meaning of the term "person" would mean an individual. However, under the Income Tax Act, the definition of the term "person" is much wider. U/s 2(31) person includes an individual, a Hindu Undivided Family, a Partnership Firm, a Company, an Association of Persons, a Body of Individual, a Local Authority and every other Artificial Juridical Entity. Obviously, the definition of person is much wider under the income tax law in India as compared to its ordinary meaning and for the purposes of the income tax law, the definition under the Act shall be paramount and not its common meaning. However, in respect of terms not defined in the Act, the ordinary meaning of the term shall prevail.

Let us take up some of the more important and commonly used definitions:-

1.Assessee An Assessee is a person by whom any tax or any other sum of money (for example interest, penalty, fine, etc) is payable under the Income Tax Act and includes:-

i A person in whose respect proceedings for determining income has commenced by the Income Tax Department. Thus, a person may become assessee even if no amount is payable by him under the Income Tax Act.

ii A Deemed assessee ie a person who is himself not an assessee but is treated as an assessee for the purposes of the Income tax Act. for example the trustee of a trust is a deemed assessee in respect of the trust. The income earned is the income of the trust but is assessed in the hands of the trustee as his income.

iii An assessee in default ie. a person on whom certain obligations have been imposed under the Income Tax Act but who has failed to carry out those obligations. for example any person who employees another person has to deduct income tax at source from the taxable salary of the employee and pay the tax deducted at source to the government within the prescribed time as income tax paid on behalf of the employee. In case the employer fails to carry out these obligations, he becomes an assessee in default.

2.Assessment Year

Assessment year (AY) means the period of 12 months commencing on the 1st day of April each year.

3.Previous Year

Previous year (PY) means the financial year immediately preceding the assessment year. In case of a business or profession which is newly started, the previous year commences from the date of commencement of the new business or profession upto the next 31st day of March, unless the person is an existing assessee.

It is essential to understand the difference between assessment year and previous year. The income, which is earned in the previous year, is charged to income tax in the assessment years at the rates applicable for that assessment year. Thus if income of Rs1,00,000 is earned in PY. 1997-98 (which commences on 1/4/97 and ends on 31/3/98), this income is charged to income tax in AY 1998-99 at the rates applicable for AY 1998-99. Similarly income earned in PY. 1998-99 is charged to income tax in AY. 1999-2000, at the rates applicable for that AY.

3.Assessment

Assessment includes re-assessment. It is the process of determining the income of an assessee earned during any previous year and finding out the income tax, interest or other sum payable under the Act.

4.Income

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

Having established the `source of income of the `person, the next step is to define the residential status.

Residential Status

Residential status of an assessee is important in determining the scope of income on which income tax has to be paid in India. Broadly, an assessee may be resident or non-resident in India in a given previous year. An individual or HUF assessee who is resident in India may be further classified into (1) resident and ordinarily resident and (2) resident but not ordinarily resident.

Under the Income Tax Act, the incidence of tax is highest on a resident and ordinarily resident and lowest on a non-resident. Therefore, it is in the assessees advantage that he claims non-resident status if he satisfies the conditions for becoming a non-resident.

Residential Status of an Individual

Under section 6(1), an individual is said to be resident in India in any previous year if he satisfies any one of the following basic conditions:-

a. He is in India in the previous year for a period of at least 182 days or,

b. He is in India for a period of at least 60 days during the relevant previous year and at least 365 days during the four years preceding that previous year.

The aforesaid rule of residence is subject to the following exceptions:-

1. Where an individual, who is a citizen of India, leaves India in any year for the purpose of employment ( or where an individual, who is a citizen of India, leaves India as a member of the crew of an Indian ship), he is not to be treated as resident in India in that year unless he has been in India in that year for at least 182 Days.

2. Where an Indian citizen or a person of Indian Origin, who has settled abroad, comes on a visit to India in the previous year, he is not to be treated as resident in India in that year unless he has been in India in that year for at least 182 Days.

In other words, such individuals do not become resident in India if they are less than 182 days in India. For such individuals, the conditions mentioned in clause (b) above do not apply. Therefore, such individuals may stay in India upto 181 days in a given previous year without becoming resident in India for that previous year.

An individual who does not satisfy neither condition (a) nor condition (b) is non-resident for that previous year.

A resident individual may either be an "Ordinarily Resident" OR "Not Ordinarily Resident" in India for a given previous year. In order to determine whether a resident individual is ordinarily resident (ROR) or not ordinarily resident (RNOR), the tests laid down under section 6(6) have to be applied.

A resident individual is treated as ROR in India in a given previous year if he satisfies the following additional conditions:-

1. He has been resident in India in at least 9 out of 10 previous years (according to basic conditions noted above) preceding the relevant previous year; and

2. He has been in India for a period of at least 730 days during 7 years preceding the relevant previous year.

In brief it can be said that an individual becomes resident and ordinarily resident in India if he satisfies at least one of basic conditions and both the two additional conditions.

An individual who is resident in India but does not satisfy both the additional conditions is RNOR for that previous year.

Let us understand the above provisions with the help of a simple example. Mr. X, resident of Mumbai left India for the first time for USA for higher studies on 7th June, 1996 and returned on 25th March, 1997. For the previous year 1996-97 (Assessment Year 1997-98), X was in India for 73 days ( From 1st April, 96 to 6th June, 96 and 26th March, 97 to 31st March, 97) X has satisfied the condition of being at least 60 days in India in P. Y. 1996-97 and of being at least 365 days in the preceding four previous years (i.e. P. Y. 1992-93, 1993-94, 1994-95 and 1995-96) Therefore, he is resident in India for previous year 1996-97. Since he has gone outside India for the first time, he satisfies the additional two conditions also for becoming ROR. Accordingly, he is resident in India for P. Y. 1996-97.

Let us take another example. Mr. X, a citizen of India goes abroad for employment on 15th August, 1996 and comes back on 10th June, 1997. For the previous year 1996-97, X was in India for 136 days ( From 1st April, 1996 to 14th August, 1996) Since X was not in India for at least 182 days in PY. 1996-97, he is non-resident in India for PY. 1996-97. The second condition of 60 days in the relevant PY and 365 days in the preceding four previous years is not applicable to him since he is an Indian 2citizen who has gone abroad for employment.

The following points are very important in determining the residential status of an assessee:-

1.The residential status may change from year to year depending on whether the condition for residency is satisfied in that year or not.

2.The residential status under the Income Tax Act, 1961 have no connection with the provisions for residency under the Foreign Exchange Regulation Act or any other law in India. A person may be resident under FERA and yet be non-resident under the Income Tax Act and vice versa.

3.Residential status must not be confused with the nationality or citizenship of the assessee. These are entirely different concepts.

Residential Status of a Hindu Undivided Family (HUF)

A Hindu undivided family is said to be resident in India if control and management of its affairs is wholly or partly situated in India.

A resident Hindu undivided family is ordinarily resident in India if the karta or manager of the family is a ROR in India in the relevant previous year.

If karta or manager of a resident Hindu undivided family does not satisfy the two additional conditions, the family is treated as resident but not ordinarily resident in India.

By implication, an HUF becomes non-resident if the control and management of its affairs is entirely from outside India in the given previous year.

Residential Status of Partnership Firms or Association of Persons

A partnership firm or an association of persons are is said to be resident in India if control and management of their affairs are wholly or partly situated within India during the relevant previous year. By implication, they will be treated as non-resident in India if control and management of their affairs are situated wholly outside India.

Residential Status of company

An Indian company is always resident in India irrespective of where the control or management of the company is situated.

A foreign company is resident in India only if, during the previous year, control and management of its affairs is situated wholly in India.

By implication, a foreign company is treated as non-resident if, during the previous year, control and management of its affairs is either wholly or partly situated out of India.

Residential status of "every other person"

Every other person is resident in India if control and management of his affairs is wholly or partly situated within India during the relevant previous year. On the other hand, every other person is non-resident in India if control and management of its affairs is wholly situated outside India.

Scope of Total Income and Incidence of Tax

As already discussed, the incidence of income tax is highest in the case of ROR and lowest in case of NR. While the residential status of an assessee will determine the scope of his income the legal status (i.e. individual, HUF, firm, company, AOP, etc) will determine the rate of income tax applicable to the assessee. The following chart indicates the tax incidence on income in different situations depending on the residential status of the assessee:-

Whether tax incidence arises in the case of

B.Remuneration of foreign state representatives [section 10(6)(ii)]

Remuneration received by an individual who is a citizen of the foreign country as an official of an embassy, high commission, legation, commission, consulate or trade representation of a foreign state or as a member of the staff of any of these offices, for services in such capacity is exempt provided Indians are accorded similar benefits in that foreign country.

C.Remuneration of employees of a foreign enterprise [section 10(6)(vi)]

Remuneration received by such non-citizen individual as an employee of a foreign enterprise for service rendered in India during stay in India is exempt, subject to the following conditions:

*The foreign enterprise is not engaged in any trade or business in India.

*His stay in India does not exceed in all a period of 90 days in the previous year, and

*Such remuneration is not deductible in obtaining the employer's taxable income.

D.Certain income of a foreign technician [services commencing on or after 1/4/1993] [section 10 (5B)]

This exemption is available only in respect of the tax paid by the employer on the salaries of the technician upto a period of 48 months from the date of his arrival in India. It is not available after the expiry of such 48 months. This exemption is available to an individual who renders services as a technician as an employee of the government or of a local authority or of any corporation set up for carrying on approved scientific research or in any business carried on in India. This is subject to the following conditions :

*The services should have commenced after 31st March 1993;

*The individual should be a non-resident in India in all the four financial years immediately preceding the financial year in which he arrived in India. The Central Government, however, has the power of waive this condition.

The word "technician" used above means :

A person having a specialised knowledge and experience in

*constructional or manufacturing operations or in the generation of electricity or any other form of power,

*agriculture, animal husbandry, dairy farming, deep sea fishing or ship building,

*any other notified field and

who is employed in a capacity in which such specialised knowledge and experience is actually utilised.

E.Remuneration on foreign ship : [Section 10 (6) (viii)]

Salaries received by any non-resident individual for services rendered in connection with employment on a Foreign Ship are exempt provided that his total stay in India does not exceed 90 days in the aggregate in the previous year.

F.Remuneration of foreign government employee during training in India [section 10(6)(xi)]

Any remuneration received by any individual, who is not a citizen of India, as an employee of the Government of a foreign state during his stay in India is exempt, if the stay is in connection with his training in any establishment, office or undertaking which is owned by:

*the Government, or

*any company in which the entire paid-up capital is held by the Central Government or by State Government or by both, or

*any company, which is subsidiary of (ii) or

*any statutory corporation, or

*any society which is registered under Societies Registration Act, 1860 or any corresponding law, and which is wholly financed by the Central Government or by State Government or by both.

G.Tax on royalty and technical fees paid to a foreign company. [section (10)(6A)]

Where, under an agreement entered after 31 March 1976 between a foreign company and the Government or an Indian concern, the tax on royalty or fees payable to them for technical services, is to be borne by the Government or the Indian concern the tax so paid is exempt.

H.Tax on other payments :[section 10(6B)]

Where under an approved agreement between the Central Government and the Foreign Government or an international organisation, the tax on income (other than salary, royalty or fees for technical services) derived by a non-resident or a foreign company from the government or the Indian concern, is borne by the said government or Indian concern, the tax so borne is exempt.

I.Tax on income derived by the government of a foreign state or a foreign enterprise as consideration for acquiring an aircraft or an aircraft engine on lease [section 10 (6BB)]

Where the government of a foreign state or a foreign enterprise derives income from an Indian company as a consideration for acquiring an aircraft or an aircraft engine on lease and tax on such income is payable by the Indian company, the tax so paid is exempt from tax. The other conditions to be satisfied for getting this exemption are :

*the Indian company should be engaged in the business of operation of aircrafts;

*the consideration should not be for providing spares, facilities or services in connection with the operation of leased aircraft;

*the payment should be made under an agreement entered into after 31-3-1997 but before 1-4-1999 and should be approved by the Central Government.

J.Income of notified foreign companies. [section 10(6C)]

Any income of a notified foreign company, by way of fees for technical services received under an agreement for providing services in or outside India in the projects connected with the security of India, is exempt.

Exemptions in respect of salary incomes

A.Travel concession to a citizen of India :[section 10(5)]

Any travel concession or assistance received by an individual,

*from his employer for himself and his family for proceeding on leave to any place in India,

*from his employer or former employer for himself and his family for proceeding to any place in India after retirement or termination of his service.

will be exempt to the following extent:-

1.In case of journey by air, air economy fare of the national carrier by the shortest route will be exempt.

2.In case of journey by rail, air-conditioned first class rail fare by the shortest route will be exempt.

3.In case of journey by other means where rail link exists between place of origin of journey and place of destination, air-conditioned first class rail fare by the shortest route will be exempt.

4.In case of journey by other means where rail link does not exists between place of origin of journey and place of destination, but a recognised public transport system exists, first class or deluxe class fare on such transport system will be exempt. Where no such public transport system exists, air-conditioned first class rail fare by the shortest route will be exempt.

For this purpose, family means:-

*Spouse and children, and

*Parents, brothers and sisters, if they are wholly or mainly dependent on him.

The exemption will be available to an individual in respect of 2 journeys performed in a block of 4 calendar years. Where such travel concession is not availed of by the employee during such block of 4 calender years, he will be entitled to additional exemption of travel concession in the first year of the next block of 4 years. eg an employee has undertaken 3 journeys between 1994 and 1998. He is entitled to travel concession exemption only in respect of 2 journeys. However, if he had not performed any journey during this period, then for the next block 1999 to 2003, he would be entitled to exemption in respect of 3 journeys provided the first journey takes place in 1999.

B.Allowances and perquisites outside India : [section 10(7)]

Any allowances or perquisites which are paid outside India by the Indian government to a citizen of India for rendering services outside India are exempt from Income Tax in India. It must be carefully noted that this exemption is available only to the Government employees.

C.Retrenchment compensation [section 10(10B)]

Any compensation received by a workmen under the Industrial Dispute Act, 1947 or under any other Act or Rules thereunder or under any agreement, at the time of his retrenchment is exempt.

This exemption is limited to,

*an amount calculated under the Industrial Dispute Act, 1947; or

*such notified amount which is not less than Rs. 50,000

whichever is less.

It has been provided that the above-referred limit will not apply at all, in respect of any compensation received by a workman in accordance with the scheme approved by the Central Government.

D.Payments to persons under the Bhopal Gas Leak Disaster (Processing of claims) Act [section 10(10BB)] are exempt.

E.Amounts received on voluntary retirement by certain employees [section 10(10C)]

Any amount received on voluntary retirement by an employee under any scheme of voluntary retirement is exempt from tax. This exemption is available only to employees of :

*a public sector company

*any other company

*a statutory corporation

*a local authority

*a co-operative society

*a recognized university

*an Indian Institute or Technology

*such institute of Management which the Central government may notify.

This exemption is limited to a maximum of Rs. 5 lakhs only. This exemption is available only once to any individual employee.

The scheme for voluntary retirement to avail this exemption should be framed in accordance with the guidelines, which may be prescribed by the Central Government. The scheme should also approved by the chief Commissioner.

It may be noted here that the above exemption is not available to any employee other than those specified above. Thus if an employee of a partnership firm receives any amount on voluntary retirement, the same shall not be exempt under this clause.

The mains conditions for such a scheme are as follows:-

1. It applies to an employee who has completed 10 years of service or completed 40 years of age;

2. It applies to all employees including workers and executives of a company or of an authority or of a co-operative society, as the case may be, excepting directors of a company or of a co-operative society;

3. The scheme of voluntary retirement has been drawn to result in overall reduction in the existing strength of other employees;

4. The vacancy caused by the voluntary retirement is not be filled up;

5. The retiring employee of a company shall not be employed in another company or concern belonging to the same management;

6. The amount receivable on account of voluntary retirement of the employee does not exceed the amount equivalent to three months salary for each completed year of service or salary at the time of retirement multiplied by the balance months of service left before the date of his retirement on superannuation.

F.Payments from Provident Funds [section 10(11)]

Any payment from a Provident Fund to which Provident Fund Act, 1925, applies is exempt. The principal as well as interest is exempt from tax.

Payments from recognised Provident Fund: [section 10(12)]

Receipts from a recognised provident fund are exempt from income tax.

Exemptions in respect of Institutions and Associations

A.Income of a local authority [Section 10(20)]

The following incomes of a Local authority are exempt :

i Income which is taxable under the head

*Income from house property.

*Capital gains,

*Income from other sources, or

ii Income from a trade or business carried on by it and which accrues or arises from

*the supply of a commodity or service (except water and electricity) within the area of its own jurisdiction.

*the supply of water or electricity in any area.

B.Income of a Housing Authority [section 10(20A)]

Any income of an authority constituted in India by or under any law enacted for the purpose of dealing with and satisfying the need for housing accommodation or for the purpose of planning, development or improvement of cities, towns and villages is exempt.

C.Income of a Scientific Research Association [section 10(21)] is exempt provided it satisfies the following conditions:-

a. it applies its income or accumulates it for application wholly and solely for the objects for which it is established.

b. it invests or deposits its funds in the prescribed manner.

This exemption will not be available in relation to any business income unless the business is incidental to the attainment of its objectives and separate books of accounts are maintained for such business.

D.Income of a News Agency in India [section 10(22B)]

Any income of a notified news agency set up in India solely for collection and distribution of news is exempt. The exemption is available for the period which shall be notified. The maximum period which the government can notify at any one time is three years.

The exemption is further subject to the conditions that the news agency applies its income or accumulates it solely for collection and distribution of news and does not distribute its income in any manner to its members.

E.Income of a Sports Association [section 10(23)]

Any income of a notified association or institution established in India, which has its object the control, supervision, regulation or encouragement in India of the games of cricket, hockey, football, tennis or other notified games. However, this is subject to the following conditions:-

*It should apply its income or accumulate it for application wholly and exclusively for the object for which it is established.

*It should invest or deposit its funds in the prescribed manner.

*It should not distribute any part of its income to its members except as grants to affiliated bodies.

This exemption will not be available in relation to any business income unless the business is incidental to the attainment of its objectives and separate books of account are maintained for such business.

F.Income of a professional association :[section 10(23A)]

Any income of an association or institution established in India for control, supervision, regulation or encouragement of the profession of law, medicine, accountancy, engineering, architecture or such other profession, as the Central Government may specify from time to time is exempt.

The following two conditions must be satisfied for availing of this exemption:-

*The association should apply or accumulate its income solely for the objects for which it was established and

*The association should be approved by the Central Government.

*The above exemption is not available to :

*income taxable under the head, "income from house property", or

*any income received for rendering any specific services, or

*income by way of interest or dividends from its investments.

G.Income of Regimental Fund or Non-Public Fund established by Armed Forces. [section 10(23AA)].

Any income of any Regimental Fund or Non-Public Fund established by the armed forces for the welfare of the past and present members of such forces or their dependents is exempt.

H.Income of any person on behalf of a Notified Fund for Welfare of Employees or their Dependents. [section 1023AAA)]

Any income of any person on behalf of a fund (notified by the CBDT) for welfare of employees or their dependents (if the employees are members of such a fund) is exempt from tax.

The following two conditions must be satisfied for availing this exemption:-

*The fund applies or accumulates its income wholly and exclusively for the objects for which it was established.0

*The fund invests its funds and contributions received in the prescribed manner.

I.Income of a fund set up by the Life Insurance Corporation of India under a Pension Scheme. [section 10(23AAB)]

Any income of a fund set up by the LIC of India on or after 1st August, 1996 under a Pension Scheme is exempt. The fund should be such:-

*to which contribution is made by any person for the purpose of receiving pension from such fund;

*which is approved by the Controller of Insurance.

*J.Income of Khadi and Village Industries Institutions [section 10(23B)]

*Any income of institution established for the purpose of development of Khadi and Village Industries from the production, sale or marketing of Khadi or products of village industries is exempt.

*However, for availing this exemption the following conditions must be satisfied :

*The institution must be constituted as Public Charitable Trust or registered under the Societies Registration Act, 1860 or under any similar act in force.

*The institution should exist solely for the development of Khadi and / or Village Industries, and not for profit motive.

*The institution should apply its income of accumulate if for the application, solely for the development of Khadi and Village Industries.

*The institution should be approved by the Khadi and Village Industries Commission for the purpose. Such approval can be only for three years at a time.

K.Income of Khadi and Village Industries Board [section 10(23BB)]

Any income of an authority, whether known by the above name or any other name, established in a state or under a State Act for the development of Khadi and Village Industries in the state, is exempt.

L.Income of certain funds and institutions [section 10(23C)]

Income of the following types of funds and institutions is exempt provided certain conditions are satisfied:-

1. Prime Minister's National Relief Fund

2. Prime Minister's Fund (Promotion of Folk Art)

3. Prime Minister's Aid to Students Fund

4. National Foundation for Communal Harmony

5. Approved University or Educational Institution

6. Approved Hospital

7. Approved Charitable Fund or Institution

8. Approved Public Religious Trust or Charitable Trust

M.Income of Mutual Fund and Unit Trust of India [section10(23D)] is exempt subject to the provision that the Mutual Fund or UTI shall pay tax on income distributed by it at the rate of 10per cent if it is a debt oriented fund. In case of open ended equity oriented fund, such taxes need not be paid.

N.Income of a Venture Capital fund [section 10(23FA)]

Any income by way of dividends or long-term capital gains of a venture capital fund or a venture capital company from investments made by way of equity shares in a venture capital undertaking is exempt from tax.

Venture Capital Fund or Company refers to the entity which is making the investment and which is entitled to the exemption in this section. For this purpose, the venture capital fund or venture capital company has to be approved by the Central Government on application made in the prescribed manner in accordance with rules made in this behalf. Such approval shall not be for a period exceeding 3 years at a time. Venture Capital Fund means a fund operating under a trust registered under the Registration Act, 1908 established to raise monies for investments mainly by way of acquiring equity shares of a venture capital undertaking in accordance with the prescribed guidelines. Venture Capital Company means a company which has made investments by way of acquiring equity shares of a venture capital undertaking in accordance with the prescribed guidelines.

Venture Capital Undertaking refers to the entity in which investment is made. Venture Capital Undertaking means a domestic company whose shares are not listed on a recognised stock exchange in India and which is engaged in:-

1.The business of software, information technology, production of basic drugs in the pharmaceutical sector, bio-technology, agriculture and allied sectors and other notified sectors; or

2.The production or manufacture of any article or substance for which patent has been granted to the National Research Laboratory or any other scientific research institution approved by DoT.

O.Income of an Infrastructure Capital Fund or an Infrastructure Capital Company [section 10(23G)]

Any income by way of dividends, interest or long term capital gains of an infrastructure capital fund or an infrastructure capital company from investments made by way of shares or long term finance in any enterprise wholly engaged in the business of (i) developing, (ii) maintaining and operating, (iii) developing, maintaining and operating any infrastructure facility approved by the Central Government in this connection is exempt from tax.

Infrastructure Capital Company means a company which has made investments in shares or long term finance to an enterprises wholly engaged in the business of developing, maintaining and operating infrastructure facility.

Infrastructure Facility means:-

*a road, highway, bridge, airport, port, rail system, water supply project, irrigation project, sanitation and sewerage system or any other public facility of a similar nature as may be notified;

*an industrial undertaking set up in any part of India for the generation or generation and distribution of power if it begins generation of power between 1/4/1993 and 31/3/2003;

*an industrial undertaking which starts transmission or distribution by laying a network of new lines for this purpose between 1/4/99 to 31/3/2003

*a project for providing telecommunication services on or after 1/4/1995.

*a specified housing project

*an undertaking for developing, developing and operating or maintaining and operating a notified industrial park

P.Income of trade union [section 10(24)]

Any income taxable under the head "Income from house property," and "Income from other sources," of a Trade Union registered under the Indian Trade Union Act, 1926 or an association of such Trade Unions and formed primarily for the purpose of regulating the relations between workmen and employers or between workmen and workmen, is exempt.

Q.Income of a marketing authority : [section 10(29)]

In the case of an authority constituted under any law for the marketing of commodities, any income derived from letting of godowns or warehouses for storage, processing or facilitating the marketing of commodities is exempt.

R.Income of the Coffee Board, Rubber Board, Tea Board, Tobacco Board, Marine Products Export Development Authority, Agricultural and Processed Food Products Export Development Authority and Spices Board. [Section 10(29A)]. is exempt.

Income of units in Free Trade Zones [Section 10A].

Income of an industrial undertaking situated in a Free Trade Zone such as Kandla Free Trade Zone, Santacruz Electronics Export Processing Zone, Falta Export Processing Zone, Madras Export Processing Zone, Cochin Export Processing Zone, Noida Export Processing Zone, or situated in an Electronic Hardware Technology Park or in a Software Technology Park is exempt provided it is a new unit and exports at least 75per cent of its production. This exemption is available for a period of five consecutive years falling within a block of eight years beginning from the year in which the unit commenced production.

Income of 100per cent Export Oriented Units [Section 10B].

Income of 100per cent Export Oriented Units is exempt provided it is a new unit and exports at least 75per cent of its production. This exemption is available for a period of five consecutive years falling within a block of eight years beginning from the year in which the unit commenced production.

Salaries Previous Next Main

Introduction

The term "Salaries" includes remuneration in any form for personal service, under an expressed or implied contract of employment or service. Section 17 of Income Tax Act defines salary to include:-

*Wages

*Pensions or Annuities

*Gratuities

*Advance of Salary

*Any cess, commission, perquisites or profits in lieu of or in addition to salary or wages

*Any encashment of leave salary

*Any amount of credit to provident fund of employee to the extent it is taxable.

Therefore "salary" includes basic salary, encashment of leave salary, advance of salary, arrears of salary, various allowances such as dearness allowance, entertainment allowance, house rent allowance, conveyance allowance and also includes perquisites by way of free housing, free car, free schooling for children of employees, etc.

The following are the essential conditions for income to be treated as salary income:-

*There must be relation of employer and employee between the payer of income and receiver of income

*Salary may be from more than one employer

*Salary may be received from not just the present employer but also a prospective employer and in some cases even from a former employer for example pension received from a former employer

*Salary income must be real and not fictitious there must an intention to pay and receive salary.

*Forgoing of salary ie if an employee surrenders his salary to the central government, then the salary so surrendered will not be treated as taxable income of the employee.

*Salary paid tax free - Tax free salary means the salary on which income tax is borne not by the employee but by the employer. Tax free salary is also taxable in the hands of the employee.

Salary is taxable in the year of receipt or in the year of earning of the salary income, whichever is earlier. i.e. if the salary has been received first, then it will be taxable in the year of receipt. If it has been earned first but not yet received then it will be taxable in the year of earning. Salary income is taxable in the hands of individuals only. No other type of person such as a firm or HUF, companies can earn salary income.

Encashment of Leave Salary

Encashment of leave salary is fully taxable in the year of receipt in the hands of the employee. However, when encashment of leave salary is received at the time of termination from employment on account of retirement or superannuation, etc, from the total leave salary encashment received, certain exemptions are made available to the employee. According in the case of a Central or State Government employee, the amount of leave salary encashment received as per service rules at the time of termination of employment is fully exempt from income tax. In case of other employees, the least of the following is exempt and only the balance is taxable:-

1. Notified Amount (Currently Rs2,40,000)

2. 10 months average salary

3. Leave encashment salary received on termination

4. (Leave Entitlement - Leave Availed) * Average Monthly Salary

Salary for the purpose of calculating the exempt leave encashment is the total of basic salary, dearness allowance and commission on sales achieved by salesmen. Average salary is 10 months average salary.

Determine the amount of exemption of encashment of leave salary in the following cases:-

Therefore, amount exempt will be Rs45,000 and the balance Rs37,500 will be taxable. Please note tat in calculating exception amount, service rendered in fractions of a year are ignored (24 years are taken instead of 24.75 years) Also note that under income tax rules, leave entitlement cannot exceed one month.

Would it make any difference in the above case if the employee was a Central Government employee. In such a case, since Rs82,500 would be the amount payable under the rules of employment, the entire amount would be exempt.

Gratuity

Gratuity received by employees on termination of employment is taxable. However, the following exemptions are available to employees in this connection:-

In case of employees of Central or State Government employees or employees of a local authority, the total gratuity received on termination as per service rules will be exempt.

In case of other employees where the Payment of Gratuity Act is applicable, from the total gratuity received on termination, the least of the following will be exempt:-

*Rs. 2,50,000

*Amount of gratuity actually received.

*15 days salary based on salary last drawn for every completed year of service or part thereof in excess of 6 months.

In case of other employees where the Payment of Gratuity Act is not applicable, from the total gratuity received on termination, the least of the following will be exempt:-

*Rs350,000

*Amount of gratuity actually received.

*1/2 month's average salary for every completed year of service.

For example A retired on 15/6/99 and got a sum of Rs400,000 as gratuity. The Payment of Gratuity act is not applicable to him. His average salary for the last 10 months was Rs35,000 and he had rendered service for 22 years. Amount of exempt gratuity is the least of the following:-

*Rs 350,000

*Rs 400,000

*Rs 385,000(350,00/2*22)

Therefore, Rs350,000 would be exempt and Rs50,000 would be taxable gratuity.

Pensions

Pensions paid on a recurring basis, whether monthly or annually are taxable in the hands of all employees. However, where such recurring pensions are commuted into a lumpsum one time receipt certain exemptions are available to employees.

In case employees of the Central or State Government or employees of a Local Authority or employees of a Statutory Corporation such lumpsum pensions received in accordance with service rules is exempt from Income-tax.

In case of other employees receiving such lumpsum pension, half of the total value of pension will be exempt if the employee had not received any gratuity on termination of employment. Besides one third of the total value of pension will be exempt if he had received gratuity on termination of employment.

Determine the amount of taxable pension in the following cases:-

1.A received a monthly pension of Rs50,00 from the government. In this case a sum of Rs60,000 will be taxable.

2.A retires from government service on 1/6/99. He gets a pension of Rs2,000 p.m. till 31/12/99. Latter on he opts for commutation of 40 per cent of the value of his pension for Rs400,000 and continues receiving Rs1,200 (60 per cent of 2,000) on a monthly basis upto 31/3/2000.

In such a case, recurring pension of Rs17,600 (2,000*7 + 1,200*3) will be taxable. However, the commuted pension will not be taxable in his hands.

3.A retires from XYZ Ltd, a private sector company on 1/6/99. He gets a pension of Rs2,000 p.m. till 31/12/99 whereafter he opts for commutation of 60 per cent of the value of his pension for Rs100,000 and continues receiving Rs. 800 (40 per cent of Rs2,000) on a monthly basis upto 31/3/2000. He does not get any gratuity on retirement. Would it make any difference if he gets a gratuity of Rs50,000 also.

In such a case, recurring pension of Rs16,400 (2,000*7 + 800*3) will be taxable. He will be entitled to an exemption of Rs83,333 (i.e. amount received of Rs100,000 or 1/2 of full value of pension, whichever is less. Full value of pension is Rs166,667 i.e. 100,000/60per cent ) and the balance Rs16,667 will be taxable.

In case gratuity is also given, exemption of pension will be Rs. 55556 (i.e. amount received of Rs. 100000 or 1/3 of full value of pension, whichever is less)

The employer pays allowances to the employee for meeting certain specific expenses. The employer may give different types of allowances to the employee in the course of his employment. Some of the more common allowances and their tax treatment are as follows:-

Dearness Allowance

Dearness Allowance, as the name suggests is the allowance given by the employer to the employee to meet the increased cost of living. In the hands of the employee, such dearness allowance is taxable as salary income.

House Rent Allowance

Such allowance is given by employer to the employee to meet the housing expenses of the employee. Such HRA is also taxable in the hands of the employee. However certain exemptions have been made in the Income Tax Act in calculating the amount of taxable HRA. The least of the following 3 will be allowed at a deduction in calculating taxable HRA:

HRA actually received.

Rent paid by employee in previous year - 10per cent of salary

50per cent of salary, if employee is residing in the 4 metro cities of Mumbai, Delhi, Chennai or Calcutta and 40 per cent of salary, if the employee is residing at any other place.

Salary for the purpose of calculating the amount of deduction from HRA means the aggregate of Basic Salary, Dearness Allowance and Commission received by salesman on sales achieved by him. It does not#include other receipts such as overtime pay, conveyance allowance, etc.

For example: Basic Salary is Rs100,000, HRA received Rs25,000 and the employee has paid a rent of Rs15,000 in Delhi. Exemption of HRA will be the least of Rs25,000, Rs5,000 and Rs50,000. ie Rs5,000. Consequently, taxable HRA will be Rs20,000.

Entertainment Allowance

Entertainment allowance is given by an employer to the employee for entertaining various business relations of the employer. Such entertainment allowance is also taxable in the hands of the employee in the year of receipt. However, here again certain benefits and exemption are given by the Income Tax Act to the employee. If the employee is a government servant, the least of following 3 will be allowed as a deduction from total entertainment allowance by the employer:-

*Rs5,000 per annum.

*20per cent of Basic Salary

*The amount of entertainment allowance actually received

If the employee is a non-government employee, the amount of exemption will be the least of the following:-

*Rs7,500 per annum.

*20per cent of basic salary

*Entertainment allowance actually received

*The amount of entertainment allowance received in previous year 1954-55, provided the employee was in continuous employment with the same employer for all these years and in each year entertainment allowance was given by the employer to the employee.

Transport Allowance

Transport allowance is given in order to meet conveyance expenses of the employee from place of residence to place of work and back. Such transport allowance is also taxable in the hands of the employee. However a sum of Rs800 per month is allowed as an exemption from the taxable transport allowance. For example if the amount of transport allowance is Rs1,000 per month, the amount taxable will not be Rs1,000 but will be Rs1,000 -Rs800 i.e. Rs200 per month. Therefore in a year of 12 month, the taxable amount will be Rs2,400 only.

Education Allowance

Such allowance is given by an employer to employees to meet the education expenses of his children. It is taxable in hands of employee. Here again certain exemptions have been made available to the employee. Accordingly, a sum of Rs50 per month per child subject to maximum of 2 children is allowed as exemption from total education allowance received by the employee in a given year. If the children of the employee are residing in a hostel, an additional exemption of Rs150 per month per child subject to maximum of 2 children is made available to the employee. Therefore if the employee has 2 children and who are residing in a hostel and the employee is giving total education allowance of Rs500 per month, the taxable amount will be (500-200) ie Rs300 per month only.

Other Allowances

All other allowances received by the employee from the employer are taxable in the hands of the employee. However if those allowances are given for official purposes, deduction of amount actually spent from those allowances by the employee in meeting the official expenses will be allowed at a deduction from the total amount of allowances received. For example if the employer pays uniform allowance to an employee for meeting the cost of uniform and the employee has actually spent the allowance for purchasing the uniform, then no amount of such uniform allowance will be taxable in the hands of the employee. If say the allowance granted is Rs500 and the employee has spent only Rs400, then Rs100 will be taxable in the hands of the employee.

Perquisites

Perquisites (commonly known as "perks") may be defined as casual remuneration or benefits attached to an office or position in addition to the salary and allowance. Perquisites are normally given in kind and not in cash.

Perquisites may broadly be divided into 3 categories:-

*Perquisites taxable in all cases

*Perquisites not taxable at all

*Perquisites taxable only in the hands of specified employee

The following perquisites are taxable in the hands of all type of employees:-

a. Value of rent-free housing accommodation provided by the employer to employee

b. Value of Concessional housing accommodation provided by employer to employee.

c. Amount paid by an employer in respect of an obligation which had the employer not paid, the employee would be liable to pay i.e. where the primary liability of payment is that of the employee and not of the employer. For example School fees of employee's children are the primary liability of the employee and not the employer. However if the employer pays the school fees of the employees children, it will be taxable perquisite in the hands of the employee concerned.

d. Amount paid by employer, directly or indirectly, to effect a life insurance policy of the employee or for obtaining the benefits of an annuity in favour of the employee.

e. Difference between fair market value and actual cost in the hands of the employee of any shares or other securities alloted free or at a concessional rate to an employee under a stock option or sweat equity scheme. This amount will be taxable in the year in which the option is exercised by the employee.

Perquisites not taxable at all.

The following perquisites are not taxed at all in the hands of any employee i.e. they are exempt from income tax:-

a. Refreshment provided by an employer to the employee during working hours in office environment

b. Recreational facilities extended not to a particular employee but to a class of employees

c. Amount spent on training of employee or fees paid for refresher course

d. Telephone provided to an employee at his residence

Perquisite taxable only in the hands of specified employees.

Before understanding such perquisites, let us understand who specified employees are. The following employees will be treated as specified employees:-

a. A Director employee ie an employee who is also a director of the employer company.

b. An employee who has substantial interest in the employer company. A person who has more than 20per cent voting power in the company is said to have substantial interest in the employer company.

c. An employee who is drawing more than Rs24,000 per annum in cash ie. any employee whose monetary remuneration other than perquisites is more than Rs24,000 will be treated as specified employee.

In the hands of specified employees, all perquisites, whether by way of free housing or confessional housing or whether the primary liability of payment is that of employee or employer and any other perquisites other than those perquisites covered in paragraph 2 above will be taxable income in the hands of employee.

Perquisites are taxable in the hands of the employee. However since they are paid in kind, notional monetary the value of the perquisites must be determined in order to get the taxable amount of perquisites. There are several rules for determining the method of calculation of value of taxable perquisites. In brief theses rules may be stated as follows:

Rule 1 - If the perquisite is entirely for personal benefits, then whatever the employer has spent for providing those perquisites will be added to the salary income of the employee.

Rule 2 - If the perquisite is given by employer to employee for official purposes only, then such perquisites are not be treated as taxable perquisites in the hands of employee.

Rule 3 - Perquisites which are partly used for personal purposes and partly for official purposes - In such cases a reasonable amount of the value of perquisites which is used for personal purposes only will be added to the salary income of the employee.

These are the broad rules for valuation of perquisites. However there are certain specific rules for valuation of specified perquisites: -

Valuation of Housing Accommodation

In case of government employees, the value of free house provided will be the value as determined by the government service rules.

If the employer is a semi-government employee, e.g., an employee of a statutory corporation or of the RBI, then the amount of taxable value of such free housing accommodation is the lower of the following: -

*Fair rental value of that property and

*10 per cent of salary.

For example if the fair rental value of property is Rs50,000 and the employee's salary during previous year is Rs100,000, then the value of house is Rs50,000 or Rs10,000, whichever is less i.e. Rs10,000

In case of a private sector employee, the valuation of housing perquisite depends on where the house has been provided. If the house is provided in a non-metro city, the taxable value will be as follows :

- If the fair rental value of the house is not more than 10 per cent of salary, then the fair rental value of house will be treated as taxable perquisite.

- If the fair rental value of the house is more than 10per cent of salary but not more than 50 per cent of salary, then 10 per cent of salary will be treated as taxable value of that house.

- If the fair rental value is more than 50per cent of the salary, then the amount of taxable perquisite will be fair rental value less 40per cent of salary. However in case the house is located in any of the four metros Mumbai, Delhi, Chennai or Calcutta, then instead of 50per cent of salary we will have to substitute 60per cent of salary and accordingly the perquisite value of the house will be fair rental value of the house less 60per cent of salary.

For the purpose of valuation of housing accommodation, Salary means the sum total of the following only:-

*Basic Salary

*Dearness Allowance if the allowance is part of retirement benefits

*Bonus

*Commission

*Fees

*All allowance to the extent they are taxable

*Income Tax and Profession Tax paid by the employer on behalf of the employee and

*Gas, Water, electricity expenses paid by the employer on behalf of the employee

If along with the house, the employee has been provided free furnishings have been provided by the employer, then to the value the housing perquisite, the following sums will be added to get the perquisite value of furnished housing accommodation.

a. If the furnishings are owned by the employer then 10per cent of the cost will be added to the house value

b. In case the furnishings are not owned by the employer but are obtained by the employer on rent, then the rent paid by the employer for obtaining those furnishings will be added to the perquisite value of empty house.

Furnishing for this purpose#included furniture and fixtures, kitchen utensils and all other electronics and other items provided by the employer to the employee for personal use such as TV, Audio system, VCR etc.

In case the employer recovers from the employee any sum or amount on account of the house provided, then from the value of the housing accommodation calculated by the above aforesaid provisions, the amount paid by the employer to employee will have to be deducted in order to get the value of concessional housing accommodation provided by the employer to the employee.

Valuation of perquisites of car provided by the employer to the employee

a. If a common transport is provided for all the employees, eg a bus, then there is no perquisite in the he hands of the individual employees.

b. If a car is provided only for official use or for the purpose of travel from residence to office there is no perquisite in the hands of the employee and accordingly no such amount will be added to the taxable income.

c. If the car has been provided for personal uses only, then the taxable amount is reasonable expenses on the car maintenance plus depreciation on the car as per income tax rules if the car is owned by the employer.

d. If the car is used for private as well as for official purposes then a reasonable proportion of the above is the valuation of the car perquisite in the hands of the employee. If however it is not possible to find out what proportion of the car has been used for personal and what is used for official purposes, then the following rates will be used for valuation of perquisites of car.

If the horse power of the car is up to 16 or less or if the engine capacity of car is up to 1.88cc or less, a sum of Rs.600 per month will be added to the taxable perquisite value of the car (if the maintenance expenses have been met by the employer) or sum of Rs.200 per month will be treated as perquisite value of car (if the maintenance expenses of the car have been met by the employee)

In case of car having horse power of greater than 16 or engine capacity of greater than 1.88cc, a sum of Rs.800 per month will be the value of car perquisite if the maintenance expense have been met by the employer and Rs.300 per month if the maintenance expenses have been borne by the employee.

In case, a driver has also been provided, to the value of car as per the above rules, a sum of Rs.300 per month will be added to get the perquisite value of car plus chauffeur.

Valuation of perquisite of domestic servant

When a gardener or sweeper or watchman is provided by the employer to the employee for his residence and the salary is borne by the employer, an amount of Rs120 per month per servant will be added to the taxable value of the employees salary.

In case of any other type of servant, such as a cook, whatever is the salary paid by the employer to the servant will be treated as taxable perquisite value of that particular servant in the hands of the employee.

Valuation of perquisite of gas, water or , electricity provided by the employer to the employee The following are the rules applicable in this connection:-

1.If the employer himself is engaged in the business of providing supply of gas, water, or electricity, then there will not be any taxable perquisite in the hands of the employee in respect of such facilities.

2. If the employer is not in the business of supply of gas, water or electricity, then the amount spent by the employee in providing the facilities to the employee will be the taxable value of perquisites in the hands of the employee provided the entire facilities are for the personal use of the employees only. If such facilities are used partly used for official purposes and partly for personal purposes, then 6.25per cent of salary or the amount actually spent by the employer for provision of such facilities to the employee, whichever is less, will be added to as taxable perquisite in the hands of the employee.

Valuation of educational facilities The following are the rules in this connection:-

1. If the employer himself is a school, collage or educational institution, then there will not be any perquisites taxable in the hands of any employee

2. If the employer is not a school, college or educational institution, but is engaged in some other business or profession, the value of school fees or colleges fees of the children of the employee paid by the employer will be the taxable value of perquisites in respect if such facility.

3.If the children of the employee are allowed free education in an institute run by the employer where the employer is engaged in other activities, then the value of the perquisites is reasonable cost of education and deemed by the income tax officer in the hands of specified employees.

Valuation of transport facility The following are the rules in this connection:-

1.If the employer is in the transport business, then no perquisite will be added to the taxable salary of the employee.

2. In other cases a reasonable cost of such transport facilities will be treated as taxable value of perquisites in respect of such facilities.

Valuation of medical facilities provided The following are the rules in this connection:-

1. A sum of up to Rs15,000 paid by the employer to the employee by way of reimbursement of medical expenses of the employee and his family will be exempt perquisite in the hand of the employee. Any payment made in excess of Rs15,000 will be taxable.

2.If the treatment is made in a government approved hospital or recognized hospital, or in government hospital, then no value will be taken as the perquisite value in respect of such medical treatment reimbursement.

3. If the medical treatment is done outside India, then up to the amount approved by the RBI for such treatment, no perquisite value will be added to the taxable income of the employee. If payments made by the employer to the employee in this connection exceed the amount approved by the RBI, then such excess will be treated as taxable salary in the hands on of the employee

4. If the employer himself is a medical institution, then provision of medical facilities will not attract any tax in the hands of the employee.

The sum total of taxable amount in respect of salary, various allowances and perquisites will give us the value of gross salary. From the amount of gross salary, there are certain deductions which are available to the employee in order to get the taxable amount of salary. The following are the deduction available to the employee:-

Standard Deduction

Every employee is entitled to standard deduction from his salary income. The following are the provisions in this connection:-

- If the gross salary of the employee is less than Rs100,000 per annum, then a sum of Rs25,000 or 1/3rd of the salary is allowed as a deduction.

- If the salary is more than Rs100,000 per annum but less than Rs500,000 per annum, then a sum of Rs.20,000 is allowed by way of standard deduction

-In case the salary exceeds Rs500,000 per annum, no standard deduction is allowed to the employee

Standard deduction is allowed to the employee mainly on account of expenses, which he has incurred, for carrying out his employment. For routine expenses such as pen, paper, pencil, conveyance etc.

Profession Tax

PT is levied by state government on employment. The PT, which an employee has paid in a given previous year, will be deducted from the gross salary in order to get the taxable amount of salary.

Entertainment Allowance

EA exempt as calculated in the paragraph dealing with allowances above will be deductible from gross salary in order to get the amount of taxable salary.

Hints for Tax Planning

1.The employee should ensure that dearness allowance forms part of basic salary or is considered for determining retirement benefits under the terms of employment. This will reduce tax liability on items such as house rent allowance, gratuity, employer's contribution to a recognised provident fund, etc

2.Since recurring pension is always taxable, employees should get their pension commuted. Accordingly, the employee can take the benefit of exemption of commuted pension.

3.Instead of obtaining medical allowance on a monthly basis, the employee should opt for reimbursement of medical expenses against bill upto Rs15,000 per annum since such reimbursements are not taxable.

4.Since the perquisite of housing accommodation in the 4 metro cities is taxed at 10 per cent of salary, as long as the fair rent does not exceed 60 per cent of salary, the employee may bargain for a better accommodation within the range of 10 per cent to 60 per cent of salary without increasing his tax liability. Similarly, since the perquisite of housing accommodation at other places is taxed at 10per cent of salary, as long as the fair rent does not exceed 50per cent of salary, the employee may bargain for a better accommodation within the range of 10per cent to 50per cent of salary without increasing his tax liability.

5.The employee may obtain a part of his remuneration by way of employer's contribution to a provident fund since such contributions are not taxed in the hands of the employee. In case of a recognised provident fund, such contribution should not exceed 12 per cent of salary.

6.The employee may obtain a part of his remuneration by way of subsidised lunch or provision of telephone at residence since such perquisites are not taxable.

7.Generally, it is more advantageous to obtain perquisites than to obtain allowance for the same benefit. eg Free housing accommodation vis-a-vis house rent allowance.

For example X is an employee of ABC Ltd at Mumbai. He is offered the following salary structures. Which one should he opt for?

Accordingly, he should opt for option I.

Income from house property Previous Next Main

Basic Concepts: Section 22 to 27 of the Income Tax Act deal with taxability of income in respect of house property. The following basic conditions must be satisfied for income to be taxed under this head:-

*The property consists of buildings or land adjacent thereto

*The assessee must own property

*The property must not be used for the purpose of business or profession of the assessee. It must be used only for renting out so as to derive rental income.

Therefore any income from a property which is not owned by the assessee will not be treated as "income from house property" but as other income and other provisions of the Income Tax Act will apply in this connection.

Deemed Owner - In certain cases, the assessee, though not the owner of the property, is deemed to be the owner of the property i.e. he is treated as owner of the property and income from that property will be treated as income from house property. The following are such situations:-

1. The individual who transfer any property for inadequate consideration or who gifts that property of his spouse or to a minor child other than a married daughter will be treated as deemed owner of that property. ie though legally the owner of the property is spouse or minor child, the income from that property will be treated as income of this person who has transferred such property.

2. The holder of an impartable estate will be treated as the owner of that entire property for example where an HUF jointly holds property on behalf of all its members, then joint HUF will be treated as the owner though legally the property in the name of an individual member of family.

3. A member of co-op society, company or other association of persons to whom a building has been allotted under a house building scheme of society will also be treated as deemed owner of that property

4. A person who has satisfied the provisions of section 53A of the transfer of property act will be treated as deemed owner of that property. Section 53A of the Transfer of Property Act deals with situations where though the agreement for buying of property has not been registered with the appropriate authority, the person who has purchased the property will be treated as the owner of the property.

5. A person who has acquired right by way of long term lease of property will be treated as the owner of that property and income from that property will be taxable in his hands as under house property income. For this purpose long term lease means lease for period of more than 12 years.

Income form House Property which is exempt ie Though there is income from house property, such income will not be taxable under the Indian Income Tax Law. The following are such situations:-

*Income from a farmhouse used for agricultural purposes

*Property income earned by a local authority

*Income from property earned by trade union or association of trade union

*Income from house property earned by a political party

*Income from property held for charitable purposes

*Property used for own business or profession. If such property yields any income, such income will be treated as business income and not house property income

*One property which is used by an individual assessee or an HUF assessee for purpose of self occupation only and not for renting out to any person will be treated as exempt property and income from that property will not be treated as taxable income.

For the purposes of understanding the provisions of this chapter, let us divide the house properties into different categories:-

*Self Occupied Properties (SOP)

*Let Out Properties

If an individual or HUF assessee has only one property, that property will be treated as self occupied. Accordingly, there will not be any taxable income in respect of such property. However, if the assessee owns more than one property all of which are not rented out but are self occupied, then the assessee, at his option, may choose any one property as self occupied by him and the remaining properties though not actually let out, will be deemed to be let out ie they will be assumed to have been let out and a notional rental value will be treated as taxable income in the hands of the owner of such property. Such properties are known as properties deemed to have been let out. In respect of properties deemed to have been let out, a notional rental value will be treated as taxable income even if no rent has actually been received by the assessee. In order to determine the notional rental value, the highest of the following will be treated as taxable income:-

*Municipal Rental Value

*Fair Rental Value of a similar property in a similar locality.

However if the higher of the above two exceeds the standard rent of the property determined in accordance with the Rent Control Act applicable at the concerned locality, then the standard rent will be treated as taxable rental value of such property.

Therefore in respect of self-occupied property, one property will be treated as an exempt property and in respect of other properties, a notional rental value will be treated as taxable income in the hands of the owner of the property.

In respect properties, which have been let out, the amount of rent received will be treated as taxable rental income of the property. However the following are the provisions in this connection:-

Taxable rental value will be the highest of the following:-

*Municipal Rental Value of the Property

*Fair Rental Value of a similar Property in a similar locality

*Rent actually received by the assessee in respect of the property in given previous year.

However if Rent Control Act is applicable in the locality where the house is situated, then the taxable value cannot exceed the standard rent fixed in accordance with the Rent Control Act except where the rent actually received exceeds the standard rent.

Compute the rental value in the following cases:-

The following are the different situations which may arise in computing the value of income from house property:-

1. Where the self occupied property is treated as an exempt property and has been self occupied through out the year. In such a case since this property is treated as an exempt property no taxable income will arise from such property.

2. Where a property has been self occupied for part of the year and let out for part of the year, one must calculate the annual rental value of the property in accordance with the above provisions and take a proportion of that annual value depending upon the period for which the property has been self occupied and has been let out as taxable income.

3. Where property has been let out throughout the previous year in such a case, the annual rental value will be calculated in accordance with the above provisions.

4. A property which is not actually let out but which is deemed to be let out. In such a case this property will be treated as if the property has been actually let out and the same provisions which as are applied to the property which is actually let out will apply.

5.Where the assessee has only one property which cannot be occupied by him because he has to reside at some other place on account of his employment, business or profession carried on at some other place. Such a property will be deemed to be self-occupied though not actually self occupied and all the provisions of self-occupied property apply.

From the amount of annual rental value, there are certain deductions, which are available to the assessee to get the amount of taxable income from house property. The following are such deductions:-

*Under section 23, municipal taxes paid by the owner of the property will be allowed as a deduction form the annual value in order to get the amount of taxable income.

*Under section 24, the following expenses will be allowed as deductions from the amount arrived at after deducting municipal taxes from the annual rental value:-

i Repairs and Collection Charges. +th of the net adjusted annual rental value is allowed as deduction for repair and collection charges irrespective of whether the assessee has actually incurred the expenses or not. However if the repairs are borne by the tenant, this deduction will not be allowed in the hands of the owner of the property.

ii Insurance Premium paid during the previous year to insure the property against risk, or damage or destruction is allowed as a deduction. However such expenses will be allowed only if they have been paid during the relevant previous year and not otherwise.

iii Ground Rent paid or payable by the assessee in respect of the house property will be allowed as a deduction.

ivLand Revenue or any other tax levied by state government in respect of such property will be allowed as a deduction in computing the taxable income. However such payment must be paid during the relevant previous year if the benefit of deduction is to be claimed by the assessee.

v Annual Charge : If there is any amount which is payable on a charge created on house property for discharge of liability, the amount so payable is deductible provided the charge

*is not created by the assessee voluntarily

*is not a capital charge

vi Interest on Borrowed Money: Interest paid or payable on monies borrowed for purchase, construction, repair, renewal or reconstruction of house property will be allowed as a deduction. In case of a self occupied property treated as such, maximum deduction will be restricted to Rs30,000 and if the borrowing is made after 1 April 1999 upto 31 March 2001, instead of Rs30,000, Rs75,000 will be deductible.

Where the house property has been acquired or constructed with borrowed money, the interest on such borrowed money for the period prior to the previous year in which the property had been acquired or constructed shall be deductible in five equal annual installments starting from the previous year in which the house has been acquired or constructed. In case of the exempt of self occupied property, maximum interest to be allowed as a deduction will be Rs30,000 per year.

vii Vacancy Allowance: In case of a let out property, vacancy allowance is deductible if the house property remains vacant during any part of the year. This will be allowed only if the house has been left out for some period during the previous year. It is equal to that part of net adjusted annual value which is proportionate to the period during which the property remains vacant. for example if a let out house property whose net adjusted annual value is Rs12,000 remains vacant of three months during the previous year, then Rs3,000 ie +th of Rs12,000 is allowed as a deduction on account of vacancy allowance

viii Unrealized Rent : If any rent on account of house property cannot be recovered on account of various reasons, such unrealized rent is allowed as a deduction in getting the amount of taxable income from house property. However such bad rent will be allowed as deduction only if the assessee has taken steps to get the property vacated from the tenant.

Apart from the above mentioned deductions, no other expenses can be claimed as a deductions in obtaining the income from house property ie expenses such as maintenance expenditure, salary of watchman, water supply charges, electricity charges etc. cannot be claimed as a deduction in obtaining the taxable income from house property. Another important point is that in case of house property which is claimed to be self occupied, none of the above expenses except interest upto Rs15,000 per annum will be allowed as a deduction.

Hints for Tax Planning

1.In case a person has more than one house properties, all of which are self-occupied, he should opt for that property whose rateable value as per municipal records is highest to be treated as self occupied. The other properties may be treated as deemed to be let out and taxed at a lower figure.

2.Expenses such as municipal taxes, insurance premium, land revenue and property taxes which are allowed as a deduction only on payment basis must be paid during the relevant previous year.

3.Since interest paid outside India is allowed as a deduction only if tax has been deducted at source, adequate tax must be deducted on such payments in order to claim deduction.

For example A owns two houses, I & II. House I is let out throughout the previous year. House II is self occupied for nine months and let out for three months on a monthly rent of Rs5,000. Determine Taxable income, given the following details:-

In respect of certain specified assets used in the generation or generation and distribution of power, depreciation will be allowed on straight line basis i.e. at a fixed percentage of the actual cost for a specified number of years.

Scientific Research Expenditure: Expenditure incurred by the assessee on scientific research will be allowed as a deduction in determining taxable business income. The term "scientific research" has been defined as any activity for the extension of knowledge in the field of natural or applied sciences including agriculture, animal husbandry, fisheries and similar fields. Scientific research may be carried out by the assesee himself or may be carried out by some other institutions. In both cases deductions will be allowed under section 35. Let us understand the different provisions in this connection.

1. Expenditure on scientific research carried out by the assessee himself will be allowed as deduction provided the following conditions are satisfied:-

*The scientific research must relate to the assessee's business.

*Expenditure incurred within three years prior to the commencement of business will be allowed as a deduction in the year in which business has started.

*The amount of deduction must be certified by the prescribed authority.

*Any expenditure incurred by the asses for acquiring a capital asset other land to be used for the purpose of scientific research will also be allowed as deduction in the year in which such expenditure has been incurred. If such capital assets have been acquired three years prior to the commencement of business, then the cost will be allowed as a deduction in the year in which the business has commenced.

2. Where the assesee himself does not carry out the scientific research but the scientific research or social research is carried out by a recognised institution and the assessee gives a donation to such institution, then 1.25 times the amount of donation will be allowed as a deduction from business income in the year in which the donation has been made. If the donation has been to National Laboratory or to any Indian Institute of Technology, then a weighted deduction of 1.25 times of the amount of donation will be allowed as deduction in the year of donation.

3.Scientific Research Expenditure on approved In-House research and development facility developed by the assessee will also allowed as a deduction upto 1.25 times the ampunt of expenditure in the case of a company engaged in the business or production of any drug, pharmaceutical electronic equipment, computers, telecommunication equipments, chemicals or any other notified articles provided the company enters into an agreement with the prescribed authority for cooperation and audit of the accounts of the research and development facilities.

Donation for Social Welfare Projects Any expenditure by way of payment to a public sector company, local authority or approved association or institution for carrying out an eligible project or scheme for economic development or for social welfare or for the upliftment of public in general will be allowed as deduction in the year of such expenditure.

Donations for Rural & Urban Development The following donations made by the assessee are eligible for deduction from business or professional income:-

*Donations made to any association or institution to be used for carrying out any program of rural development.

*Donations made to any association or institution which has as it objects the training of persons for implementation of rural development programme.

*Donations made to the National Fund for Rural Development set up by the government

*Donations made to the National Urban Poverty Eradication Fund set up and notified by the central government.

Donations for Environmental Purposes Donations made to an association and institution carrying out programmes for conservation of natural resources or for carrying out any afforestation programme will be allowed as a deduction in the year in which such payments are made.

Preliminary Expenses are expenses which are incurred by the assesee prior to the commencement of business or profession. examples of such expenses are legal expenses for forming a company, public issue expenses, project report expenses, feasibility report expenses, etc. One of the important principles of claiming any expenses as a deduction is that expenditure will be allowed as a deduction only if the business / profession has been carried out in the relevant previous year.

However, generally when preliminary expenses are incurred, business activity has not yet commenced and therefore under the general rule, such expenses cannit be allowed as a deduction. To avoid such a situation, section 35D has been inserted so that a certain amount of preliminary expenses can also be claimed as a deduction.

Accordingly, one-fifth of the total preliminary expenses are allowed as a deduction each year for five years starting from the year in which the business has commenced. The benefit of this deduction can however be claimed only by resident assessees and not by non-resident assessees.

Expenses on prospecting for, extraction or production of minerals specified in the Seventh Schedule to the Act A resident assessee may claim expenditure incurred only and exclusively on any operation relating to prospecting for or extraction or production of minerals specified in VII th Schedule during five years preceeding the year of commercial production as a deduction in 10 equal installments from profits arising from commercial exploitation of any such mine or deposit.

Expenditure for obtaining license for operating any telecommunication service in India This deduction can be claimed only by those assesses who are operating a telephone network, paging network, or a cellular mobile phone network in India. An assesee who incurs any expenditure of capital nature for acquiring any rights or licence to operate such telecommunication services in India and of which payment has been made to obtain a license will be eligible to claim a deduction of such expenditure in equal annual installments spread over the life of the licence.

Expenditure for Amalgamation or Demerger If an Indian company incurs any expenditure for amalgamation or demerger, one-fifth of such expenditure will be allowed as a deduction for five years begining with the year in which amalgamation or demerger took place.

Other Deductions under section 36

There are various other expenses which are allowed as deduction for obtaining the taxable profits. They are briefly described below:-

1. Insurance premium paid for risk or damage or destruction of stock or stores or other inventories used for the business or profession will be deductible.

2. Insurance of life of cattle - Insurance premium paid by Federal Milk Co-operative Society on the life of any cattle owned by any member of a primary milk co-operative society affiliated to it will be allowed as a deduction

3. Employees Health Insurance Premium paid by cheque by an employer-assessee to effect or keep in force insurance of the health of his employees under an approved scheme will be avowed as a deduction in computing his business income.

4. Bonus and Commission paid to an employee for services rendered by him will be allowed as a deduction subject to a primary condition that the amount has not been distributed by way of profits or dividends and such bonus or commission has been paid in the relevant previous year or on or before the due date of filing of the return of income of the assesee.

5. Interest on money borrowed - Interest paid in respect of money borrowed for the purposes of business or profession is deductible provided the following conditions are satisfied:-

*Money must have been borrowed by the assesee

*It must be borrowed for the purpose of business or profession.

*Interest is paid or is payable on such borrowing

6. Employer's contribution to a recognised provident fund or approved superannuation fund is allowed as deduction subject to the limit laid down for such payments and provided these payments have been made on or before the due date of making such payments by the employer

7. Employer's contribution to an approved gratuity fund will be allowed as a deduction provided these payments have been made on or before the due date of making such payments by the employer.

8. Employee's contribution to approved or statutory staff welfare schemes will be allowed as a deduction from the income of the employer provided such amounts have been paid on or before the due date of making such payments.

9. Animals written off - In the case of animals used for the purpose of business or profession otherwise than a stock-in-trade, if such animals have died or have become permanently useless for the purpose of such business or profession, the difference between their actual cost and the amount realised on sale of those animals or their carcasses will be allowed as a deduction.

10. Bad debts or part thereof which is written off as irrevocable in the books of accounts of the assessee will be allowed as a deduction provided the bad debt has been incurred in respect of a debt which was taken into account in computing the income of the previous year or of any earlier previous year.

11. Provision for bad and doubtful debt made by a bank or a recognised public financial institution or a state financial institution is allowed as a deduction subject to a maximum of five per cent of total income. An additional deduction of provision of ten per cent of the aggregate average advances made by the rural branches of the banks is also allowed to non-foreign banks.

A bank is entitled to claim a deduction of provision made for any assets classified as doubtful or loss assets in accordance with RBI Guide Lines for an amount not exceeding five per cent of the amount of such assets in the books of accounts.

12 . Transfer to a special reserve - A public financial corporation engaged in long term finance for industrial or agricultural developments or infrastructure development in India and a public company formed and registered in India with the main object of providing long term finance for construction or purchase residential housing in India are entitled for deduction of the amount transferred by them to a special reserve account subject to a maximum of 40 per cent of profit from such business.

13. Family Planning Expenditure - any expenditure bonafide incurred by the company for the purpose of promoting family planning among the employees is allowed as a deduction. If such expenditure is of a revenue nature, the entire amount will be allowed as a deduction. If it is of a capital nature (such as purchase of equipment or construction of a clinic or dispensary), 1/5 th of the expenditure will be allowed as a deduction in each of the five years from the year in which such expenditure has been incurred in equal installments.

14. Y2K Compliance Expenditure - Any expenditure incurred by the assessee for making a computer system owned by him and used for the purpose of his business or profession into a Y2K compliant computer system.

Deductions under section 37

General deductions are allowed ie expenses which are not covered by any other section will be allowed as a deduction under section 37 provided the following conditions are satisfied:-

1. Expenditure should not be covered specifically by any of the provisions of section 30 to 36.

2. Such expense should be in respect business carried out by the assesee and the profits of which are to be computed and assessed and should be incurred after the business set up.

3. It should not be in the nature of personal expenses of the assesee.

4. Such expenses should not be in the nature of capital expenditure.

5. Such expenses should have been incurred only and exclusively only for the purpose of such business.

6. Such expenses should be incurred in the previous year only.

Under this section, therefore expenses by way of cost of raw materials, tools, spares etc, cost of labor, salary and various expenses incurred by the assesee will be allowed as a deduction.

Expenses Expressly Disallowed

Certain expenses will not be allowed as a deduction in obtaining the amount of taxable income. The following expenses have been expressly disallowed:-

1. Any interest, royalty or fees paid for technical services chargeable to tax under the Income Tax Act which is payable outside India will not be allowed as a deduction if tax has not been paid on those amounts or deducted at source in accordance with the provisions of the Income Tax Act. If however at a later date, tax on such amounts is paid or deducted at source such amounts will be allowed as deduction in the year in which the tax has been paid or deducted.

2. Income Tax payable or paid will not be allowed as a expenditure in computing the amount of taxable income

3. Wealth tax payable or paid on the wealth of the assessee will not be allowed as a deduction.

4. Salaries payable outside India on which tax has to be deducted but on which tax has not actually been deducted will not be allowed as a deduction. However such salaries will be allowed as a deduction in the year in which the tax has been paid in respect of the salary.

5. Payments of provident fund or other funds established for the benefits of the employees of the assesee will not be allowed as a deduction unless the provident fund is recognised or is a statutory provident fund or the other fund for welfare of the employees is recognised under any law for the time being in force. Such payment will not be allowed as a deduction if tax has not been deducted in the year in which such payments have been made. However these payments will be allowed as a deduction in the year in which tax has been paid.

6. Any expenditure incurred by way of advertisement expenses for giving an advertisement in any publication of a political party will not be allowed as a deduction.

7. Any expenditure resulting in any payment to any specified person will be disallowed to the extent it is excessive or unreasonable, having regard to the market value of the goods or services and the benefit to the business or profession. The specified persons stated above include the relatives of the assesee or persons who have substantial interest in the assesses's business or profession.

8. Payments exceeding Rs20,000 other than by way of crossed cheque or demand draft. Where in respect of any expenditure, payment exceeding Rs20,000 is made otherwise than by way of crossed bank cheque or draft, 20per cent of this expenditure will be disallowed and only the balance 80 per cent will be allowed as a deduction. This provision has been inserted with a view to encourage cheque payments. However, Rule 6D provides that in the following cases, no disallowance will be made even if the payment exceeds Rs20,000 and is made otherwise than by way of crossed cheque or crossed bank draft:-

*Payments made to bank or financial institutions

*Payments made through the banking system i.e. by letters of credit or mail or telegraphic transfer or through book adjustment in an account in the bank with any other account in that or any other bank or through bills of exchange payable only to a bank.

*Payments by way of book adjustment against payee's liabilities to the assessee for goods supplied or services rendered.

*Payments for purchase of agriculture or forestry products or produce of animal husbandry, dairy or poultry farming, or fish or fish product or product of horticulture or sericulture provided the payment is made to the cultivator, grower or producer of such articles and not to a trader or dealer in such products.

*Payments to the producer for purchase of products manufactured or produced in a cottage industry without the aid of power.

*Payment to a person ordinarily residing or carrying on business in a village which does not have any branch of a bank.

*Payment of gratuity, retrenchment, compensation or other similar terminal benefits to an employee whose salary income does not exceed Rs7,500 in the year of retirement.

Important provision

No person can take or accept from any other person any loan or deposit in excess of Rs20,000 in cash or by bearer cheque. Such loans or deposits in excess of Rs20,000 must be by way of an account payee cheque or an account payee bank draft.

Similarly no company or co-operative society or firm shall repay a deposit in excess of Rs20,000 in cash or by bearer cheque.

Contravention of the above provision may lead to penalty of upto the amount of such loan taken or repaid in cash or by bearer cheque.

Deduction only on payment basis

Under Section 43B, certain expenses will be allowed as a deduction only if they are paid on or before the due date of filing the return of income. These include:-

*Any sum payable by way of any tax, duty, cess, or fee under any law.

*Any sum payable by way of bonus or commission to employee, provided such bonus or commission is not by way of distribution of dividend so profits.

*Any interest on borrowings from public financial institutions as per terms and conditions of the borrowings.

*Any interest on term loans taken from scheduled banks.

However in respect of the above expenses, if payment is made at a later date, then deduction will be allowed in the year of payment.

If paymnets are made by cheque on or before the due dates as speciied above, the cheque must be realised within 15 days from the due date ; otherwise the payments will not be allowed as a deduction.

For example A Ltd. shows the following expenses which have been due but are outstanding on March, 31, 1999.

Notes:

1) To claim deduction of excise duty, sales tax, bonus, interest to financial institution, in the year in which expenses are incurred, the payment should be actually made in that year or it should be made on or before the dates of furnishing of return of income. Since in this case due date of furnishing of return of income is November 30, 1999, payments made up to November 30, 1999 are qualified for deduction while computing business income of the previous year 1998-99.

2) If the aforesaid payments are made after the due date of furnishing of return of income, then deduction is available only in year of payment.

Maintenance of books of accounts and other records by certain persons Under Section 44AA, certain records and books of accounts have to be maintained by the assessee. A person carrying on the profession in legal, medical, engineering, architecture, accountancy or technical consultancy or interior decoration or authorised representative or film artist or company secretary is required to keep and maintain books of accounts and other documents as specified under:-

*Cash Book i.e. records of all cash receipts and payment maintained from day to day basis and giving the cash balance at the end of each day.

*A journal if the accounts are maintain according to the mercantile system of accounting.

*A ledger

*Carbon copy of machine numbered or serially numbered bills and receipts over Rs25 wherever such bills or receipts are issued.

*Original bills wherever issued to the person and receipts in respect of expenditure incurred by the person or where the bills or receipts are not issued and the expenditure exceeds Rs50, such payment voucher must be prepared and signed by the person authorising the same.

The books of accounts and other relevant documents are required to be kept and maintained at a principal place of business. These documents must be preserved for a period of eight years from the end of relevant assessment year. However cash book and ledger are required to be preserved on for a period of 15 years.

Any person carrying on profession other than above mentioned professions is required to maintain books of accounts and documents only if his annual income from the profession or business exceeds Rs120,000 or the gross receipts and turnover from the business or profession exceeds Rs one million in any one of the three years immediately preceding the previous year. If the income or the turnover is below the prescribed limits then only reasonable records need be maintained so as to determine his income.

Failure to keep, maintain and retain such records or documents invite penalty of Rs2,000 minimum or a maximum of Rs100,000.

Audit of accounts of certain persons Under Section 44AB, it is obligatory for a person to get his accounts audited before the specified date by a chartered accountant if the total sales turnover or gross receipts from the business for the accounting year exceeds Rs four million. A person carrying on profession also has to get his accounts audited if his gross receipts from the profession in that accounting year exceeds Rs one million. Specified date in this connection means the 31st of October of the relevant assessment year in case of a non corporate assesee and 30th of November in case of a corporate assesee.

Special provisions for computing profits and gains of business of civil construction and supply of labour for civil constructions Under Section 44AD, notwithstanding anything to the contrary contained in the other sections of the Income Tax Act, in case of an assesee engaged in business of civil construction or supply of labor for civil construction, a sum equal to eight per cent of gross receipts paid or payable to the assesee in the relevant previous year on account of such business will be treated as taxable income of the assesee from such business. The assesee may, at his option, however disclose a higher amount than the eight per cent if he earns greater income.

However, these provisions apply only if the gross receipts or turnover do not exceed Rs four million in the relevant previous year. ie if the amount of gross turnover or receipts exceeds Rs four million, then normal books of accounts will have to be maintained and from the gross receipts all the valid expenses will be allowed as a deduction and the balance will be the taxable income. However, if the turnover is less than Rs four million, without maintaining any books of accounts or having the books of accounts audited, a notional figure of eight per cent may be treated as the taxable income from such business. For the purposes of this section, the expression "civil construction" includes the construction or repair of any building, bridge, dam or any structure or any canal or road. It also includes the execution of any works contract. If income lower than the amount calculated as per this section is disclosed, the proper books of accounts have to be maintained and they have to be compulsorily audited.

Special provisions for computing profits and gains from the business of plying, hiring or leasing goods carriages Under Section 44AE, notwithstanding anything contained to the contrary in the other provisions of Income Tax Act, in the case of an assesee who owns not more than ten goods carriages and who is engaged in the business of plying, hiring and leasing of such goods carriages, his taxable income from such business may, at his option be calculated at the following rates:-

*In respect of heavy goods vehicle, income will be treated at Rs2,000 per month or part of a month per vehicle and

*In respect of any other vehicle it will be treated at Rs1,800 per month or part of a month per vehicle.

For the purpose of this section, the goods carriages must be owned by the assesee in the relevant previous year. If the assesee claims the benefits under this section, then he need not maintain any books of accounts nor get the accounts audited. However if the number of vehicles exceeds 10 in the relevant previous year, the above provisions do not apply and the normal books of accounts have to be maintained and they have to be audited in accordance with provisions of law. An assesee who is in possession of a goods carriage, whether taken on hire purchase or on installment, and for which the whole or part amount payable is still due shall be deemed to be the owner of such goods carriage.

If income lower than the amount calculated as per this section is disclosed, the proper books of accounts have to be maintained and they have to be compulsorily audited.

Special provisions for computing profits and gains of business of operations of aircraft in the case of non-resident s Under Section 44BB, in the case of an assesee, being a non-resident and engaged in he business of operation of aircraft, a sum equal to five per cent of the aggregate of the following amounts will be deemed to be the business income from such business:-

*The amount paid or payable, whether in or out of India, to the assesee or to any person on his behalf on account of the carriage of passengers, livestock, mail or goods from any place in India.

*The amount received or deemed to be received in India by or on behalf of the assesee on account of carriage of passengers, live stock, mail or goods from any place outside India

If income lower than the amount calculated as per this section is disclosed, the proper books of accounts have to be maintained and they have to be compulsorily audited.

Special provisions for computing profits and gains of a foreign company engaged in the business of civil construction in certain turnkey power projects Under Section 44BBB, in case of an assesee, being a foreign company, engaged in the business of civil construction or erection of plant or machinery or testing or commissioning thereof in connection with a turn key power project approved by the Central Government in this behalf and financed under any international aid program, a sum equal to 10 per cent of the amounts paid or payable, whether in India or out of India, to the said assesee or to any person on his behalf on account of such civil construction, erection, testing or commissioning shall be deemed to be the business income of the assesee in respect of such business. If income lower than the amount calculated as per this section is disclosed, the proper books of accounts have to be maintained and they have to be compulsorily audited.

Special provisions for computing business income from retail business Under Section 44AF, notwithstanding anything contained to the contrary in the other provisions of the Income Tax Act, in the case of an assesee engaged in retail trade in any goods or merchandise, a sum equal to five per cent of the total turnover in the previous year on account of such business or, as the case may be, at the option of the assessee, a sum higher than the aforesaid five per cent as declared by the assesee in his returns of income shall be deemed to the profits and gains of such business chargeable to Income Tax. However this provisions will apply only if the turnover of the assesee during the relevant previous year does not exceed Rs four million. If the assesee is claiming the benefit under this section, he need not maintain any other books of account or need not have to get his books of accounts audited. If income lower than the amount calculated as per this section is disclosed, the proper books of accounts have to be maintained and they have to be compulsorily audited.

Special provisions for computing profits and gains of shipping business in the case of non-resident s Under Section 44B, notwithstanding anything to the contrary contained in other sections of the Income Tax Act, in the case of an assessee who is non-resident and who is engaged in the business of operation of ships, a sum equal to 7.5 per cent of the aggregate of the following terms will be treated as taxable business income of that assesee:-

*Amount paid or payable, whether in or out of India, to the assesee or any person on his behalf on account of carriage of passengers, live stock, mail or goods shipped at any port in India.

*The amount received or deemed to be received in India by or on behalf o the assesee on account of carriage of passengers, live stock, mail or goods shipped at any port outside India.

If income lower than the amount calculated as per this section is disclosed, the proper books of accounts have to be maintained and they have to be compulsorily audited.

Special provision applicable only to Partnership Firm

A partnership firm may be assessed either as a partnership firm or as an association of persons (AOP) If the firm satisfies the all the following conditions, it will be assessed as a partnership firm; otherwise it will be assessed as an AOP:-

*The firm is evidenced by an instrument i.e. there is a written partnership deed.

*The individual shares of the partners are very clearly specified in the partnership deed.

*A certified copy of partnership deed must a company the return of income of the previous year in which the partnership was formed or assessment as partnership firm is first sought.

*Whenever during a previous year, a change takes place in the constitution of the firm or in the profit sharing ratio of the partners, a certified copy of the revised partnership deed shall be submitted along with the return of income of the previous years in question.

*There should not be any failure on the part of the firm while attending to notices given by the Income Tax Officer for completion of the assessment of the firm.

Generally, it is more beneficial to be assessed as a partnership firm than as an AOP, since a partnership firm can claim the following additional deductions which the AOP cannot claim:-

*Interest paid to partners on their capital account @ 18 per cent pa provided such interest is authorised by the partnership deed.

*Any salary, bonus, commission, or remuneration to a partner will be allowed as a deduction if it is paid to a working partners who is an individual, the remuneration paid to such a partner must be authorised by the partnership deed and the amount of remuneration must not exceed the following limits:-

A. In case of a firm carrying on specified profession (see para on maintaining books of account above) on the first Rs100,000 book profit or loss, Rs50,000 or 90 per cent of book profit, whichever is higher.

On the next Rs100,000 of book profit, 60 per cent of the book profit will be allowed as a deduction by way of remuneration to partners

On the balance book profit, only 40 per cent of book profit will be allowed as a deduction by way of remuneration to partners.

B. In case of other firms, on the first Rs75,000 of book profit or loss, Rs50,000 or 90 per cent of book profit, whichever is higher will be allowed as deduction by way of remuneration to partner.

On the next book profit of Rs75,000, 60 per cent of book profit will be allowed as a deduction to such partner

If there is any balance of book profit, only 40 per cent of such profit will be allowed as a deduction by way of remuneration to partners.

For example

Profit and Loss Account of ABC & Co. (a partnership firm of lawyers) for year ending March 31, 1999 is as follows :

	ROR	RNOR	NR
Income received in India	Yes	Yes	Yes
Income deemed to be received in India	Yes	Yes	Yes
Income accruing or arising in India	Yes	Yes	Yes
Income deemed to accrue or arise in India	Yes	Yes	Yes
Income received/ accrued outside India from a business in India	Yes	Yes	No
Income received/ accrued outside India from a business controlled outside India	Yes	No	No

	ROR	RNOR	NR
Interest from Bank Deposit in UK	6000	2000	2000
Rent from property in UK	12000	0	0
Pension from Indian employer	50000	50000	50000
Income from business in UK and controlled from UK	25000	0	0
Income from business in UK but controlled from India	50000	50000	0
Total income	143000	102000	52000

Date of retirement	1/6/99
Basic Salary for 10 months preceding 1/6/99	Rs5, 000 p.m.
Duration of service	15 years 9 months
Leave entitlement as per service rules	2 months p.a.
Actual leave availed	15 months
Leave encashment paid [5000((15.752)-15)]	Rs82,500

	Option I	Option II
Basic Salary	50,000	50,000
HRA (Rent paid by X Rs20,000)	25,000	0
Free House provided. Fair Rental Value	0	25,000
Education Allowance for 1 child	5,000	0
Free Education for 1 child. Amount spent	0	5,000
Gardener Allowance	6,000	0
Gardener's Salary paid by employer	0	6,000
Transport Allowance	10,000	0
Free Car. Amount Spent	0	10,000
Total	96,000	96,000

Basic Salary	50,000
Free House Value
(Since Fair rent is between
10 per cent and 60 per cent of salary,
value of house is 10 per cent of salary)	5,000
Free Education for 1 child	5,000
Gardener's Salary
(120 * 12)	1,440
Free Car	10,000
Total	71,440

Amount received	Rs82,500
Notified amount	Rs2,40,000
10 months average pay	Rs50,000
[5000((241)-15)]	Rs45,000

	I	II	III	IV	V
Municipal Value	50	50	50	50	50
Rent Receivable	52	52	57	57	60
Fair Rental Value	56	56	56	58	61
Standard Rent under Rent Act	NA	55	55	55	73
Rental Value will be	56	55	57	57	61

	House I	House II
Municipal Value	40,000	50,000
Fair Rent	50,000	48,000
Rent Received	48,000	15,000
Municipal Taxes paid	4,000	5,000
Insurance Premium (not yet paid)	2,000	2,500
Ground Rent	1,000	1,500
Maintenance Charges	3,000	3,500
Electricity Bill	5,000	6,000

		House I		House II
Gross Rental Value
(For House II @ 5000 * 12)		50,000		60,000
Less : Municipal Taxes paid	-4,000		-5,000
Net Rental Value		46,000		55,000
Less : Adjustment for Self-occupation
(55000/12*9)	0		-41,250
Net Adjusted Value		46,000		13,750
Less : Deduction u/s 24
Repairs & Collection Charges(1/4)	-11,500		-3,438
Ground Rent	-1,000		-1,500
	-12,500		-4,938
Taxable Income		33,500		8,812

WDV as on 1/4/99		100000
Add : Purchases	50,000
Less: Sales	-25,000
		125,000
Depreciation @ 25 per cent	-31,250
WDV as on 31 /3/00		93,750

Payment outstanding on March 31, 1999	First Payment		Second Payment
	Date of payment	Amount	Date of payment	Amount
Excise Duty payable:
Rs20,000	15/7/99	3,000	14/12/99	11,000
Sales Tax payable:
Rs.40,000	5/11/99	40,000	-	-
Bonus Payable to employees:
Rs.40,000	4/4/99	20,000	30/11/99	20,000
Interest payable to GIC on
loan: Rs. 50,000	12/4/99	10,000	11/2/00	40,000
Interest payable to Bank of
Baroda on term loan:Rs.35,000	10/5/99	15,000	20/1/00	20,000

Expenses	Date of payment	Amount of payment	Previous year in which it is deductible	Reason
Excise duty	15/7/99	3,000	1998-99	Note-1
Excise duty	14/12/99	11,000	1999-00	Note-2
Sales tax	5/11/99	40,000	1998-99	Note-1
Bonus	4/4/99	20,000	1998-99	Note-1
Bonus	30/11/99	20,000	1998-99	Note-1
Interest GIC	12/4/99	10,000	1998-99	Note-1
Interest GIC	11/2/00	40,000	1999-00	Note-2
Int-Bank of Baroda	10/5/99	15,000	1998-99	Note-1
Interest Indian Bank	20/1/00	20,000	1999-00	Note-2

Expenses	150,000	Receipts from clients for advice	200,000
Depreciation	20,000
Remuneration to partners	150,000	Other fees	80,000
Interest on Capital to	20,000	Net Loss	60,000
partners @ 20 per cent	34,0000		340,000

Net profit as per profit and loss account		(-) 60,000
Add: Expenses (other than remuneration) not
deductible	(+) 30,000
Interest on capital to partners	(+) 2,000
		(-) 28,000
Less: Depreciation as per section 32
(ie Rs40,000-Rs20,000 debited in		(-) 20,000
profit and loss account)
		(-) 48,000
Add: Remuneration to partners debited to profit		(+)150,000
and loss account
Book Profit		(+)102,000
Maximum permissible remuneration
(ie 90 per cent of Rs100,000 or Rs50,000,
whichever is more + 60 per cent of balance Rs.2,000)		(-) 91,200
Income of the Firm		(+) 108,00

Sales	25,00,000
Amount withdrawn from general reserve	3,00,000
	28,00,000
Total
Less: Expenses
Materials	6,00,000
Depreciation	4,00,000
Salary and Wages	2,00,000
Income-tax	3,00,000
Proposed dividend	75,000
Loss of subsidiary company	25,000
Net Profit	12,00,000

Net profit as per profit and loss account		12,00,000
Add:
Income-tax	3,00,000
Proposed dividend	75,000
Loss of subsidiary company	25,000	4,00,000
Less:
Depreciation
[i.e. Rs.11,00,000-Rs.4,00,000]	-7,00,000
Amount withdrawn from general reserve	-3,00,000	10,00,000
Balance		6,00,000
Less: Deductions under section 80HHC	4,00,000
Net income (rounded off)		2,00,000
BOOK PROFIT UNDER SECTION 115IA
Net profit as per profit and loss account		12,00,000
Add:
Income-tax	3,00,000
Loss of subsidiary company	25,000
Proposed dividend	75,000	4,00,000
Less:
Amount withdrawn from general reserve	-3,00,000
Amount deductible u/s 80 HHC	-4,00,000	7,00,000
Book Profit		9,00,000
Computation of tax liability
Net income		2,00,000
30 percent of book profit
(30per cent of 9,00,000)		2,70,000
Therefore, Taxable Income is Rs.		2,70,000
Tax on Rs. 2,70,000 (35per cent )(Surcharge extra)		94,500