Know How to Calculate Your Tax Under Various Heads of Incomes

This article has been edited by Mansi Bathija and written by Ayushi Yadav , a fourth-year law student from Banasthali Vidhyapith, Rajasthan. In this article, she has discussed the heads of income under the Income Tax Act.

Introduction

Section 14 of the income tax lays down that there can be various modes of income for a person. These modes are classified into 5 broadheads for the purposes of computation and determination of total income and tax rates apply thereafter.

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

Income from salary

Section 15 of the act lays down the conditions under which an income falls under the head of ‘salaries.’

1. Any remuneration is due from the employer to any former employee(assessee) for the due course of his employment in the previous year, whether paid or not.
2. Salary paid to an employee by the employer or former employer in the previous year even though it was not due to him.
3. Salary paid to an employee by the employer or former employer in the previous year which was not charged under income tax in any other previous years.

The key element of this head is that it mandates a relationship between employer and employee. If an employer-employee relationship is not there, the income will not be accessible under the head of salaries.

Section 17 of the Act has mentioned the term ‘salary’, which included-

1. Wages;
2. Any annuity or pension;
3. Any gratuity;
4. Any charges, commissions, perquisites or benefits in lieu of or notwithstanding any compensation or wages;
5. any advance of salary;
6. Any payment received by a worker in regard to any time of leave not benefited by him;
7. The yearly accumulation to the balance at the employee partaking in a perceived Provident Fund, to the degree to which it is chargeable to assess under Rule 6 of Part A of the fourth schedule;
8. The total of all wholes that are included in the transferred parity as alluded to in sub-rule 2 of Rule 11 of PartA of the Fourth schedule of an employee partaking in a perceived Provident Fund, to the degree to which it is chargeable to assess under sub-rule 4 thereof; and
9. The contribution made by the Central Government or any other employer in the previous year, to the account of an employee under a pension scheme, referred to in Section 80CCD

Allowances

The employer pays allowances to his employees in order to fulfill his personal expenses. Allowances can be fully taxable or partly taxable. Partly taxable allowances include house rent allowance and special allowances under section 10(14) (i)&(ii).

Fully taxable allowances are:

• Dearness Allowance
• Overtime allowance
• Fixed Medical Allowance
• Tiffin Allowance
• Servant Allowance
• Non-practicing Allowance
• Hill Allowance
• Warden and Proctor Allowance
• Deputation Allowance

Perquisites

In addition to their salary, the employees are often given some other benefits which may or may not be in cash form. For example, rent-free accommodation or car given by the employer to the employee.

Reimbursement of bills is not a perquisite. Perquisites are only given during the continuance of employment.

Taxable perquisites include

• Rent free accommodation
• Interest free loans
• Movable assets
• Educational expenses
• Insurance premium paid on behalf of employees

Exempted perquisites include:

• Medical benefits
• Leave travel concession
• Health Insurance Premium
• Car, laptop etc. for personal use.
• Staff Welfare Scheme

Profits in Lieu of Salary

Section 17(3) gives a comprehensive meaning of profits in lieu of salary. Any payment due or accrued to be paid to the employee by the employer. Payment to be valid under section 17(3), there are two essential features-

• There must be compensation received by an assessee from his employer or former employer;
• It is received at or in connection with the termination of his employment or adjustment of terms and conditions.

‘Profit in lieu of Salary’ is taxable on ‘due’ or ‘receipt’ basis. Payment from unrecognized provident or superannuation fund is taxable as “profit in lieu of salary” if that balance consists employer’s contribution or interest on an employer’s contribution.

Exceptions to section 17(3) (exempted under section 10)

• Death cum retirement gratuity;
• House rent allowances;
• Commuted value of pension;
• Retrenchment pay received by an employee;
• Payment received from a statutory provident fund or recognized provident fund;
• Any payment from an approved superannuation fund;
• Payment from the recognized provident fund.

Computation of income tax on salary

Let’s take an example –

1. An individual, let’s say, Mr. A, receives the following pay –

Basic salary – Rs. 2,50,000 per annum;

Dearness Allowance – Rs. 10,000 per annum;

Entertainment Allowance – Rs. 3,000 per annum;

Professional Tax – Rs. 1,500 per annum;

then how much amount will be taxable from his salary?

Ans . Find out total gross salary = basic salary + Dearness Allowance + Entertainment Allowance, i.e., 2,50,000 + 10,000 + 3,000 = 2,63,000.

As per deduction under section 16(iii) = 2,63,000 – 1500 = Rs. 2,61,500

Income tax rate on income Rs. 2,61,500 is 5%, which will be equal to Rs. 13,075 and this much amount will be taxable.

Income from house property

The total net assessable estimation of property, comprising of any buildings/lands/flats belonging to the assessee, when assessee is the owner apart from the property which is under the use for any business or profession undertaken by him, the proceeds of which are taxable under the income tax act, falls under the ambit of income from house property. (section 22)

The income from house property includes lease-hold and deemed ownership.

The income from house property is taxable after considering the deductions under Section 24 of the act. In the case of repairing and maintenance of the property, thirty percent of the Net Annual Value is deductible. This deduction is not allowed on a self-occupied property.

For the purpose of computation of income from house property, house properties are divided into three categories. House property which :

1. Were let out during the whole previous year
2. Were partly vacant but partly let out.
3. Let out for some time and then used for personal residence.

Deemed ownership-

Section 27 provides that certain persons are not legal owners of a property but are still considered to be deemed owners under certain conditions.

Condition 1 – Transfer of property to a child or spouse, without consideration.

Condition 2 – Holder of an impartible estate is deemed to be the owner of the entire estate.

Condition 3 – Members of a co-operative society or company or association of person

Condition 4 – Person in possession of a property on lease for more than 12 years as per Section 269UA(f).

Co-owners of a property – Section 26

If there are two or more owners of a property and if the share of co-owners is determinate, the income generated from such property is calculated as income from one property and it is divided amongst co-owners. They are entitled to relief under section 23.

Unrealized rent (rent not paid by the tenant for some reason)

The unrealized rent is not included while calculation of net annual value. If the rent is received in the subsequent years, then the amount will be added to the income from house property of that particular year.

Set-off and carry forward of losses

Under Section 70 of the Income Tax Act, if a person has incurred losses from house property, he is allowed to set them off from the income of any other house property.

Section 71 of the Act lays down the provision of setting off the losses from house property from any other heads of Incomes but not casual income (income which might not arise again)

The unadjusted losses are allowed to be carried forward for a maximum period of 8 years starting from the year succeeding to the year in which loss has occurred. In the subsequent years, the set-off is allowed only from the head ‘Income from House Property’.

The amount of losses that can be set-off on the house property from other income heads is restricted to Rs 2 lakh either house is a self-occupied or let out property.

Computation of Income from House Property

Step 1 – deduct the municipal taxes paid during the year from the Gross Annual Value, which will be Net Annual Value.

Step 2 – deduct the amount under section 24(a) and under section 24(b) for which deduction is provided.

An individual, let’s say Mr. X owned three properties and give it on rent. What will the Gross Annual Value of all the Properties? Details of the properties provided below-

Amount at Step 1

Ans : Step 1: reasonable expected rent, higher values of municipal rent or fair rent.

Amount at Step 1

Step 2: deduct unrealised rent (e.g. 8,00,000-1,00,000)

Amount at step 2

Step 3: higher values computed from step 1 and step 2 will be Gross Annual Income.

Amount at step 1

Amount at step 2

Amount at step 3

Income from capital gains

Any profit or gain emerging from the exchange of capital assets held as investments are chargeable under the head capital gains. The gain can be because of short-and long term gains. A capital gain emerges just when a capital asset is transferred. This implies if the asset moved is certainly not a capital asset; it won’t fall under the head of capital gains. Profits or gains emerging in the previous year in which the transfer occurred will be considered as income of the previous year and chargeable to IT under the head Capital Gains and indexation will apply, if applicable.

To fall under the ambit of income from capital gains, there must be –

1. A capital asset
2. Which is transferred by the assessee
3. The transfer has taken place during the final year
4. Gain or loss has arisen from it

Capital assets include all kinds of properties whether tangible or intangible, movable or unmovable, which are owned by the assessee, may or may not be for business and professional purposes.

Capital assets do not include assets like stock in trade, goods of used personal effects, agricultural land, etc.

Capital gains are of two types

1. Short term capital assets – those assets held by an assessee for at most 36 months, immediately prior to its date of transfer.

ITO v. Narayana K Shah 2000 74 ITD 419 Mum .

In this case Court held that where the assessee held certain shares in a company by virtue of which a right of occupancy in a flat is conferred on him, these shares cannot be treated as a ‘share’ mentioned in proviso to section 2(42A) and as such where such shares are sold after being held for a period of fewer than 36 months, gain arising therefrom is to be treated as short-term capital gain.

2. Long term capital assets – those assets held by an assessee for more than 36 months. Long-term capital gains are generally taxable at a lower rate.

There are some cases where long term capital assets do not require a term of 36 months, assets held for more than 12 months is valid for long term capital assets. Those conditions are –

1. Listed Equity or preference shares;
2. Securities listed in a recognized stock exchange, like debentures, security exchange;
3. Units of UTI;
4. Units of Mutual Funds;
5. Zero coupon bond;
6. Unlisted equity or preferential shares;
7. Units of equity oriented fund.

Tax on long-term capital assets is 20 percent.

Exemptions under section 54 :

Exemptions in regards to the transfer of a long-term capital asset, only when the assessee is an individual or a Hindu Undivided Family. A capital gain arises from the transfer of residential property, where the assessee has purchased another house property within a period of one year before or two years after the date of transfer or transfer took place within a period of three years after the date of construction.

The amount of exemption available will be whichever is lesser of capital gains and the cost of the new house.

Computation of Capital Gains

Long-term Capital Gain-

Problem – Mr. Shah has a gross total income of Rs. 4,00,000 and has invested Rs. 1,50,000 in tax-saving instruments. After applying all the deductions total taxable income would be Rs. 2,00,000. And exemption tax limit as per the income tax slab is Rs.2,50,000. By the sale of gold, he has a long-term capital gain of Rs. 5,00,000.

Solution- total taxable income = 2,00,000, which is less than 2,50,000;

Long-term capital gain @ 20% = 4,50,000 (difference between exemption tax limit and actual taxable income) = 10,000

This much mount can be save from tax.

Tax rates are the same for short-term capital gain.

Income from Profit and Gain from business and profession

Business and Profession has been defined under Section 2(13) and Section 2(36) respectively.

Business. It includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce, or manufacture.

Profession. “Profession” includes vocation.

Section 28 of the Income Tax Act covers the “Profits and gains of Business or Profession”, and there is following income which shall be chargeable under the head “Profits and Gains of Business or Profession” :

1. Profits and Gains of any business or profession;
2. Any compensation or other payments due to or received by any person specified in section 28(ii), who is managing the whole affairs of an Indian Company or other than an Indian company at the termination of his management;
3. Pay determined by a trade, professional or comparable association from explicit services performed for its members;
4. Benefit on sale of import entitlement license, incentive by way of cash compensatory support and drawback of duty;
5. Any benefit on an exchange of the Duty Entitlement Pass Book Scheme;
6. Any benefit on the exchange of the Duty-Free Replenishment Certificate;
7. The estimation of any benefit or perquisite, regardless of whether convertible into money or not, emerging from business or the activity of a profession;
8. Any interest, pay, reward, commission or compensation received by a partner of a firm from such firm;
9. Any amount received under a Keyman insurance policy including Bonus;
10. Income from speculative transactions;
11. Any total received in real money or kind, by virtue of any capital asset being devasted, destroyed, discarded or transferred, if the exhaustive expenditure on such capital asset has been permitted as a deduction under section 35AD.

Deduction under the heads of “Profits and Gains from Business or Profession” has been mentioned under Section 30 to 37.

• Section 30. A deduction shall be permitted if the lease, rates, taxes, fixes, and insurance for premises used for the purpose of business or profession.

• Section 31. A deduction shall be permitted on the repairs and insurance of apparatus, plant or furniture used for the purposes of business or profession and the sum paid on the present repairs shall not include any expenditure in the nature of capital expenditure.

• Section 32. Deterioration of buildings, hardware, plants or furniture, being tangible assets, know-how, licenses, copyrights, trademarks, patents, establishment or some other business or business privileges of comparative nature, being intangible assets owned, completely or somewhat, by the assessee for the purposes of the business or professions.

• Section 32AC. Deduction in respect of investment in new plant or hardware where the organization being an assessee occupied in business assembling or production of any article or thing after 31st March 2013 or if any new asset procured or installed by the assessee is sold within five years of its establishment etc.

• Section 33AB. where an assessee carrying on business of developing and assembling tea or coffee or rubber in India has, before the expiry of six months from the end of the previous year or before the due date of furnishing the return of his income, kept in a record affirmed by the Tea Board or Coffee Board or rubber Board or Central Government and should be audited by an accountant.

• Section 33ABA. Any amount or amounts in an account deposited with the State Bank of India by an assessee who is carrying on business consisting of the prospecting for, or extraction or generation of petroleum or natural gas or both in India and consented to an arrangement with the Central Government for such business and that account must be audited by an accountant.

• Section 33AC. Carrying on the business of the ship by the government organization or public company, deduction shall be permitted not surpassing 50% of benefits derived from the business of operation of a ship.

• Section 35. If any expenditure laid out or expanded on scientific research related to the business, deduction shall be permitted but the organization has to enter in concurrence with the prescribed authority for co-operation in such a research and development facility and satisfies such conditions as to support the maintenance of accounts and audit.

• Section 35ABB. Expenditure for obtaining the license for media transmission services before the commencement of the business or thereafter at any time during the previous year and for which installment has really been made for acquiring the license.

• Section 35AC. Where an assessee incurs any expenditure by method for an installment of any amount to public sector company or a local authority or to an affiliation or establishment endorsed by the National Committee for carrying out any qualified venture or plan.

• Section 35AD. A deduction shall be allowed in the case of capital expenditure incurred, wholly or exclusively, for the purpose of specified business.

• Section 35CCA. Expenditure by method for installment to affiliations and establishment for carrying out rural development Programmes.

• Section 35CCC. Expenditure incurred on any agricultural extension project notified by the Board then deduction shall be allowed on the sum equal to one and one-half times of expenditure.

• Section 35CCD. When an organization causes expenditure on any ability advancement program advised by the Board then the sum shall be allowed for the deduction of a total equivalent to one and one-half times of expenditure.
• Section 35D. Amortisation of certain preliminary expenses.
• Section 35E. Deduction for expenditure on prospecting for, or extraction or production of certain minerals, for which deduction shall be allowed to the one-tenth of the amount of such expenditure.
• Section 36. Other deductions are-
• under section 36 (1)(i), the amount of any premium paid in regard to insurance against the danger of harm or annihilation of stocks or stores utilized for the purposes of the business or profession.
• under section 36 (1)(ib), the amount of any premium paid by any mode of payment other than cash by an assessee as an employer towards the health of the employee.
• under section 36 (1)(ii), any sum paid to an employee as bonus or commission for the services he rendered
• under section 36 (1)(iii), the amount of the interest paid in respect of capital borrowed for the purpose of business or profession.
• under section 36 (1)(iiia) the pro rata amount of discount on a zero coupon bond having regard to the period of life of such bond calculated in the manner as may be prescribed.
• under section 36 (1)(iv) employer’s contribution to recognized provident fund an approved superannuation fund.
• under section 36 (1)(iva) employer’s contribution to the notified pension scheme.
• under section 36 (1)(v) contribution towards approved gratuity fund.
• under section 36 (1)(va) employee’s contribution towards staff welfare scheme.
• under section 36 (1)(vi) write off allowance for animals which are used for the purpose of business or profession and have died or turned out to be for all time futile.
• under section 36 (1)(vii) bad debt amount incidental to the business or profession of the assessee must have been written off in the books of account of the assessee.
• under section 36 (1)(viia) provisions for bad and doubtful debts relating to rural branches of commercial banks.
• under section 36 (1)(viii) transfer to the special reserve.
• under section 36 (1)(ix) family planning expenditure.
• under section 36 (1)(x) contribution towards exchange risk administration fund.
• under section 36 (1)(xii) revenue expenditure incurred by entities established under any Central, State or Provincial Act.
• under section 36 (1)(xiv) contribution to credit guarantee trust fund.
• under section 36 (1)(xvi) Commodities Transaction Tax.
• Section 37 (2B). The expenditure acquired by an assessee on a commercial in any gift, leaflet, tract, handout or something like that, published by a political party, is not deductible.

Computation of income under the heads of “Profits & Gains of Business or Profession”

The amount of net profit is Rs. 4,00,000 of M/s D Ltd. and other information provided are:

Advance income tax debited to profit and loss account = Rs. 30000

Printing of brochures of a political party = Rs. 5000

The amount that has not to deposit till the date of filing of return = Rs. 50,000

What can be the taxable income of M/s D Ltd.?