Accounting for management vtu module 8 Income tax

Accounting for Management

Subj. Code 12MBA14Module VIII- Income Tax

Contents

• Income Tax (only theory)• Heads of Income• Salary• Profit in lieu of salary• Perquisites• Deductions u/s 80C• Income Tax Rates (individuals only)-

Questions to ponder…

• Why study Taxation in accounting?• What is Tax?• What are its types?• What are the various heads of income of an

individual?• What are the tax rates applicable to an

Individual for AY 2013-14?

Taxation and Accounting

• Rules and treatment of various items in Accounting and Taxation are slightly different from each other

• Accountant- basic knowledge- to present his/firm’s business position before tax authorities in proper perspective

• Accounting- basis/reference for tax computations

Tax

• A compulsory contribution (not voluntary)• Made by a person• To the state’s treasury

Types of Taxes

• Direct- incidence and impact- same person Ex: Income Tax, Wealth Tax etc• Indirect – incidence and impact- different

persons Ex: Sales tax, Excise duty, Customs duty, VAT

etc

Income of an Individual- various heads

• Income from Salary • Income from House property • Income from Capital gains• Income from Business/ profession• Income from Other sources Concept of GTI (Gross Total Income) and

Taxable Income

AY and PY

• Period of 12 months starting from 1st April and ending on 31st March every year is called the Assessment year.

• The financial year immediately preceeding the AY is the Previous year.

• The income of the PY is assessed to tax in the AY.

• For AY 2013-14 i.e. 01/04/2013 to 31/03/2014, PY is 01/04/2012 to 31/03/2013.

Exercise- What is the PY for the AY 2013-14 in the following cases…

• Mr Kutty runs a Honda showroom since 2010• Ans.: 01/04/2012 to 31/03/2013• Mrs Laxmi joins a company on 23rd Jan 2013• Ans.: 23/01/2013 to 31/03/2013• Mr Lal starts a new business on 5th July 2012• Ans.: 05/07/2012 to 31/03/2013• Mr Neel starts a cloth business on 3rd March’13• Ans.: 03/03/2013 to 31/03/2013

Deductions u/s 80C• Insurance premium on own life/ spouse’s life/ children

life (dep / indep / minor / major / married / unmarried) – subject to a max of 20% on Sum assured (SA).

• Contribution towards RPF, PPf, SPF, EPF etc• Purchase of NSC VIII issue cert• Purchase of ULIP of UTI, LIC- Mutual fund etc• Payment of notified annuity plan of LIC or other

insurers• Subscription towards notified units of MFs• Subscription to any notified bonds of NABARD

80C deductions (contd..)• Any sum paid (incl. interest accrued) as subscription to

Home Loan account scheme of National housing bank• Any public deposit scheme of HUDCO• Any sum paid as tuition fees for full time education of

any 2 children (Indian insti)• Principal amt paid towards cost of

purchase/construction of residential property• Amount deposited as term deposits (5 years or more)

in accordance with a scheme framed by the Govt• 5 years Term deposits scheme of post officeGross qualifying amount or Rs.100000- whichever is

lower.

Exercise- compute the amount qualified to be deducted u/s 80C

Sl No

Particulars Rs.

1. Insurance premium paid on own life (SA Rs.22500) 6500

2. Insurance prem paid on life of mother 3800

3. Insurance prem on life of father (SA 10000) 2000

4. Insu prem on life of his wife (SA 100000) 4000

5. Insu prem on life of married daughter 2000

6. Contribution towards EPF 50000

7. Contri towards PPF 15000

8. Repayment of loan taken from LIC for housing 22000

9. Tuition fee of his son 12500

10. Investments in tax shield mutual fund scheme of ICICI 10000

11 Investment in 12 month RD scheme of corporation bank 5000

Solutions for the exercise discussed….

Income from Salary

• There must be an employer employee relationship for an income to be charged under the head Salaries

Ex: lecturer- college: salary MP- Govt: Other source Partner- Firm: Business income

Salaries

Salaries include:• Wages• Any annuity or pension• Any advance of salary• Any gratuity• Any fees, commission, perquisites or profits in lieu of salary

or wages• Any leave encashment recd Certain payments are fully taxed, partially taxed or fully

exempted according to the rules mentioned in the Income Tax Act.

Fully taxable items- some examples

• Basic pay• Dearness Pay• Bonus• Commission• Tiffin allowance• Medical allowance• Servant allowance• Overtime allowance• Warden allowance etc

Fully exempted allowances

• Foreign allowance to government employee• Allowances from UNO• Allowances paid to high court judges

Partially taxable/exempted allowances

• Special allowances (to the extent used for official purpose)- Conveyance, uniform allowance, helper allowance etc

• Allowances to meet personal expenses- Children Education allowance- Rs.100pm per child upto 2 children is exempt.

• Partially taxed/exempted under certain conditions: HRA, Gratuity, Encashment of leave etc

Taxable HRA – an example• House rent allowance received by an employee is partially taxable.• It is fully taxed if he lives in his own house or lives in a house for which he

doesn’t pay rent.

Particulars Rs. Rs

HRA actually recd XXX

Less: Exempt- least of the following

1. Actual HRA XXX

2. Rent paid in excess of 10% of salary XXX

3. 40% of salary (50% in case of D,M,K,C) XXX XXX

Net Taxable HRA XXX

Salary= Basic + DA if considered for retirement benefits)

Case

• Mr Monty earns a basic salary of Rs.10000pm in a co in Bangalore. Further he receives a DA of Rs.2000pm(100% enter into retirement benefit). HRA Rs.1000pm. Rent paid by him Rs.18000pa. Compute his taxable HRA

Perquisites

• Benefits given to employee in addition to salary (given in kind)

Ex Club facility, RFA- rent free accomodation, interest free loan, free lunch and gifts, obligation of the employee met by employers.

• Some are exempted while some are taxed.• Ex for exempted/tax free perquisites: medical

insurance premium paid by employer, scholarships to employee’s children, laptops given for official/ personal use etc

RFA- case- house rented by e/r• Computation of taxable value of RFA

Particulars Rs.

Lease rent or 15% of salary- whichever is lessRent 1000pm / salary Rs.100000pa

12000

(+) 10% of original cost of asset (100000x10% 10000

(+) Hire charges paid by employer 1200

(-) Rent paid by employee- 500pm (6000)

17200

Profits in lieu of salary

• Includes:- Voluntary retirement compensation recd- Retrenchment compensation recd- Compensation recd for modification of terms

and conditions of employment- Refund from unrecognised provident fund- Share of keyman insurance policy recd by

employee

Choice between HRA and RFA-case

• Mr Gupta is offered an employment at basic salary of Rs.5000pm and DA of Rs.1000pm (forming part of salary).

The company gives him an option to take RFA in Blore for which the company would pay rent of Rs.1500pm (hire charges Rs.2000 additional paid by co) or to accept HRA of Rs.1500 and find an accommodation of his own.

He chose to received HRA and live in a house at Rs.1200 rent pm. Has he made a wise choice from tax viewpoint?

Computation of taxable HRA and RFAHRA RFA

Particulars Rs Rs Particulars Rs Rs

HRA recd (1500x12) 18000 House rent-(1500x12)15% of salary(72000x15%) (WIL)

18000

10800 10800

Less:1. HRA actual 18000

(+) Hire charges 2000

2. Rent paid minus 10% of salary(1200x12)- (72000*10%)

7200

(there’s no rent paid by e/e and no assets furnished)

3. 40% of salary(72000x40%) 28800

7200 Taxable RFA (2) 12800

Taxable HRA (1) 10800 Taxable HRA< Taxable RFA- wise choice made by Mr Gupta.

Salary= Basic +DA

Taxable income and Tax liabilityTaxable Income: Rs.

1. Income from salaries XXX

2. Income from House property XXX

3. Income from Capital Gains (excl. LTCG and STCG liable for STT) XXX

4. Income from Business/ Profession XXX

5. Income from other sources (Excl Casual income) XXX

GTI XXX

-Deductions u/s 80 C to 80 U XXX

Total income XXX

+ Casual income xxx LTCG xxx STCG xxx

XXX

Taxable income XXX

Tax liabilityParticulars Rs.

Tax on casual income at 30% XXX

Tax on LTCG at 20% XXX

Tax on STCG at 15% XXX

Tax on other incomes at slab rates applicable for Ays XXX

Total Tax (1) XXX

+ Education cess at 2% on (1) XX

Secondary and higher education cess at 1% on (1) XX

Total tax payable (2) XXX

+ interest or penalty (if any) XX

XXX

-Tax paid on self assessment X-Advance income tax X-TDS X XXXTax payable/ refundable XXX

Tax rates for AY 2013-14Individuals (Males and

Females)Senior citizen (aged 60yrs am and above, less than

80 yrs)

Super senior citizen (aged 80 yrs and above)

Upto Rs.2lac Nil Upto 2.5lac Nil

2lac-5lac 10% 2.5lac-5lac 10% Upto 5 lac Nil

5lac-10lac 20% 5lac-10lac 20% 5 lac – 10lac 20%

>10lac 30% >10 lac 30% >10 lac 30%

Education cess at 2% and Sec and higher edu cess at 1% in all cases to be added

Thank you!!