Workshop file on income tax law

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WORKSHOP

ON

“INCOME TAX LAW”

ASSESSMENT YEARS

2012 to 2013

Submitted To: Submitted By:

Pg Department of Commerce Name :Sukhchain Aggarwal

Class : B.A.F. 2nd

Roll No. : 9007

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DECLARATION

I hereby declare that the Workshop on “Provisions of Salaries” is bonafide work done

by ‘Sukhchain Aggarwal’ a student of B.com (Accounting & Finance) 2nd and is submitted to

“Prof. Amandeep Kaur” in partial fulfillment of the requirement for the degree.

This work has never been submitted to any Educational Institution as per good of my

knowledge.

Sukhchain Aggarwal

B.com (Accounting & Finance) 2nd

9007

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ACKNOWLEDGEMENT

With great pleasure we are presenting this report on the basis of the “Provisions of Salaries”.

We are highly grateful to “Prof. Bikramjit Singh Sandhu” & “Prof. Amandeep Kaur” for

giving us the time, encouragement and guidance for the report. Their critical and detailed

comments and full support helped and benefited us in carrying out the report.

Thanking you,

Sukhchain Aggarwal

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CONTENTS

Serial No. Headings Page No.

1 Introduction 5

2 Income Tax in India 5

3 History 6

4 Income Tax Slabs 7

5 Computation of Total Income 8

a. Income From Salary 9

b. Income From House Property 9

c. Income From Business or Profession 10

d. Income From Capital Gains 10

e. Income From Other Sources 11

6 Provisions of Salary 12

7 Bibliography 19

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INTRODUCTION:

An Income Tax is a tax levied on the income of individuals or businesses (corporations

or other legal entities). Various income tax systems exist, with varying degrees of tax incidence.

Income taxation can be progressive, proportional, or regressive. When the tax is levied on the

income of companies, it is often called a corporate tax, corporate income tax, or profit tax.

Individual income taxes often tax the total income of the individual (with some deductions

permitted), while corporate income taxes often tax net income (the difference between gross

receipts, expenses, and additional write-offs). Various systems define income differently, and

often allow notional reductions of income (such as a reduction based on number of children

supported).

INCOME TAX IN INDIA:

A tax that is applicable on income that has been generated from any source is termed as

Income tax. The central board of direct tax (CBDT) is the governing body that takes care of the

Indian Income tax. Income tax is imposed by the government on an individual, company,

business, Hindu undivided families (HUFs), co-operative organization and trusts. The

tax structure is different on different commodities and products. Indian income tax is regularized

under income tax act 1961.

HISTORY OF INCOME TAX:

In India Income tax comes into existence in the year 1860. Initially at the time when it

was imposed it had taken almost five years to regularize and implement the income tax however

income tax act lapsed in the year 1865. Again after a gap of so many years it again comes into

force. Act of 1886 was again came into force it defines the full fledged law of income tax it

includes the exemption in various agricultural professions, income tax rules on industries and

corporation. In the year Act of 1918 was launched that reforms the income tax law in a new way.

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This new act scrutinized the new industries that come under income tax bracket. This new act

tries to expand the horizon to generate large revenue for the country.

In the year 1922 another income tax act came into existence as a result of

recommendation by the all India income tax committee. With this act a new clause was

introduced under which unlike earlier where the collection of income tax in the current

assessment year depends on the estimated collection of income tax of previous year. After the

income tax act of 1922 there will be no important provision came however the income tax later

on comes under the provision of finance act. Every assessment year the new tax structure is

decided by the finance department of the country that is released with the union budget. The

income tax act of 1922 existed till 1961 however government had handed over the income tax

clause to the law commission to review and recast it in a logical way so that the tax amended in

an easier way without changing the basic tax structure.

The income tax laws hold many industries and it has diversified clauses for different

industries. There are various industries where government offers wavers in subsidies time to

time. The present income tax act is same as of 1961 income tax act of India. As per the

constitution of India every individual is bound to pay income tax for the progress of the nation.

Any individual or an organization if earning any income in the country has to pay income tax.

Although in the present day tax structure there is a different slab for man and women. As per

Indian income tax law senior citizens are exempted from the regular income tax slab, similarly

income generated through the agriculture is not subjected to the income tax. For the calculation

of Income tax rate, the Rates of Tax slabs are given as under.

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INCOME TAX SLABS:

Below are the income tax slabs and rates applicable for the assessment year 2012-13.

Tax Slabs for Male Assesses (less than 65 years)

Income : Up to 1.8 lakhs No Tax

Income : 1.8 lakhs to 5 lakhs 10 %

Income : 5 lakhs to 8 lakhs 34000 + 20 %

Income : above 8 lakhs 94000 + 30 %

Tax Slabs for Women Assesses (less than 65 years)

Income : up to 1.9 lakhs No Tax

Income : 1.9 lakhs to 5 lakhs 10 %

Income : 5 lakhs to 8 lakhs 31000 + 20 %

Income : above 8 lakhs 91000 + 30 %

Tax Slab for Senior Citizens

Income : up to 2.5 lakhs No Tax

Income : 2.5 lakhs to 5 lakhs 10 %

Income : 5 lakhs to 8 lakhs 26000 + 20 %

Income : above 8 lakhs 86000 + 30 %

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COMPUTATION OF TOTAL INCOME:

According to section 4 of the Income tax act 1961 tax is to be charged on total

income of an assessee relating to previous year in the assessment year. Total Income is defined

in section 5 and to be computed in the manner as laid down in section 14 of the act. Section 15

provides the basis for the computation of total income and which is based upon residential status

of assessee in relevant previous year.

Section 14 of Income Tax Act 1961 provides for the computation of total income of

an assessee which is divided under five heads of income. Each head of Income has its own

method of computation. These five heads are:

I. Income from ‘Salaries’ ;

II. Income from ‘House Property’ ;

III. Income from ‘Business or Profession’ ;

IV. Income from ‘Capital Gains’ ; and

V. Income from ‘Other Sources’.

Income from all these heads shall be computed separately according to the

provisions given in this Act. Income computed under these heads shall be aggregated after

adjusting past and present losses and the total so arrived at is known as ‘Gross Total Income’.

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INCOME FROM SALARY:

Under this head, income received as salary under Employer-Employee relationship is taxed.

If income exceeds minimum exemption limit, then Employers must withhold tax compulsorily as

Tax Deducted at Source (TDS). Under section 15, the following incomes are chargeable to

income tax under the head ‘Salaries’.

a. Any salary due from an employer or former employer to an assessee in the previous year

whether paid or not;

b. Any salary paid or allowed to him in the previous year by or on behalf of an employer or

a former employer thought not due or before it becomes due to him;

c. Any arrears of salary paid or allowed to him in the previous year by or on behalf of an

employer or a former employer if not charged to income tax for any earlier previous year.

INCOME FROM HOUSE PROPERTY:

Income from House property is calculated by considering the Annual Value. The annual

value (for a let out property) will be maximum of the following:

HRA Rent received

Municipal Valuation

Fair Rent (as determined by the I.T. department)

However if a house is not let out and not self-occupied, then annual value is assumed to have

accrued to the owner. In case of a self occupied house, annual value is to be taken as NIL. But if

there is more than one self occupied house then the annual value of the other house/s is taxable.

From this, Municipal Tax paid is deducted to arrive at the Net Annual Value. From this Net

Annual Value, the following are deducted:

30% of Net value as repair cost - mandatory deduction.

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Interest paid or payable on a housing loan for the house.

INCOME FROM BUSINESS OR PROFESSION:

Income arising from profits and gains of any Business or Profession; income derived by a

Trade/ Professional/ similar Association by performing specific services for its members; any

benefit from business whether convertible into money or not, incentives for exporters; any

salary, interest, bonus, commission or remuneration received by Partner of a firm; any amount

received under a Key man Insurance Policy which also covers Bonus; income from managing

agency and speculative transactions; is taxable.

INCOME FROM CAPITAL GAINS:

Under section 2(14) of the I.T. Act, 1961, Capital asset is defined as property of any kind

held by an assessee such as real estate, equity shares, bonds, jewellery, paintings, art etc. but

does not consist of items like stock-in-trade for businesses or for personal effects. Capital gains

arise by transfer of such capital assets.

Long term and short term capital assets are considered for tax purposes. Long term assets are

those assets which are held by a person for three years except in case of shares or mutual funds

which becomes long term just after one year of holding. Sale of long term assets give rise to long

term capital gains which is taxable as below:

As per Section 10(38) of Income Tax Act, 1961 long term capital gains on

shares/securities/ mutual funds on which Securities Transaction Tax (STT) has been

deducted and paid, no tax is payable. Higher capital gains taxes will apply only on those

transactions where STT is not paid.

For other shares & securities, person has an option to either index costs to inflation and

pay 20% of indexed gains, or pay 10% of non indexed gains.

For all other long term capital gains, indexation benefit is available and tax rate is 20%

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INCOME FROM OTHER SOURCES:

There are some specific incomes which are to be taxed under this category such as

income by way of dividends, horse races, winning of bull races, winning of lotteries, amount

received from key man insurance policy.

So as we can see the Indian Income Tax law is a subject which is filled with legal jargons

and complexities that keep on changing every new financial year and the importance of this law

in our routine life simply cannot be ignored. Whether it is filing of Income Returns on due dates

or whether it's a financial investment decision to be taken, every where the Income Tax

provisions play a major role in driving of the cost factor.

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PROVISIONS OF SALARIES:

For any payment to be made taxable under the head ‘Salaries’ it must fulfill the

following provisions. The provisions of the Salaries are as follows:

1. Basic Pay:

Basic Pay is a fixed amount of money paid to an employee by an employer in return for

work performed. It is also known as Base Salary. Base salary does not include benefits,

bonuses or any other potential compensation from an employer.

Basic Pay is determined by market pay rates for people doing similar work in similar

industries in the same region. Base salary is also determined by the pay rates and base salary

ranges established by an individual employer. Base salary is also affected by the number of

people available to perform the specific job in the employer’s employment locale.

2. Grade Pay:

In some organization like Government offices, Bank, Post Offices, Railways,

Universities, Colleges etc. salary to employees is paid as per pay scales or salary grades. It is

called as ‘Grade Pay’. The pay scale fixes the starting salary of an employee and also the annual

increment in future years of employment.

The annual increment is granted to employee after completion of one full year of service

e.g. if an employee joins his service/job on 1st September 2010, he will be granted 1st annual

Increment w.e.f. 1st September 2011.

3. Recognised Provident Fund:

As the name suggest, it is a fund to which the commissioner of Income Tax has given the

recognition as required under the income tax act. Generally this fund is maintained by industrial

undertakings, business houses, banks, etc.

The employer’s contribution toward this fund will fully qualify for deduction u/s 80C.

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Interest on provident fund credit balance up to prescribed rate (9.5%) is exempted, but

interest credited over and above such rate is deemed to employee’s salary income and is included

in salary income of that previous year.

4. Dearness Allowance:

Dearness allowance (D.A.) is part of a person's salary D.A. is calculated as a percent of

the basic salary. This amount is then added to the basic salary along with house rent allowance to

get the total salary. Rates vary as per rural/urban areas etc.

Pensioners and the family pensioners are granted D.A. against the price rise. During the

reemployment under Central or State Government, Government undertaking, Autonomous body

or Local Body, they are not eligible to draw D.A., in which case D.A. is allowed in addition to

fixed pay or time scale. In other cases of reemployment D.A. is allowed subject to the limit

of emoluments last drawn. D.A. is not allowed while the pensioner stays abroad and also in case

of employees absorbed in public undertaking or bodies. If the pensioner stayed abroad without

reemployment, he shall be eligible to draw D.A. on pension.

5. House Rent Allowance:

House Rent Allowance (HRA) is generally paid as component of salary package. This

allowance is given by an employer to an employee to meet the cost of renting which is increased

very much. Order for HRA the following condition should be meet.

1. Rental House

2. Not owned by you or your spouse.

3. Rent Slips

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I. Assumptions:-

Minimum of the following three is exempt:

-Actual HRA received

- Rent paid minus 10% of Salary

- 50% of salary if you live in Metros, otherwise 40% of Salary

6. Entertainment Allowance:

This Allowance is fully taxable irrespective of any expenditure incurred or entertainment

of guests or customers. But in case any amount is reimbursed against any expenditure incurred

by employee on entertainment of guests or customers it shall be fully exempted. The deduction is

admissible only to Government employees for an amount equal to least of following:

1. Statutory Limit Rs. 5,000;

2. 1/5 of basic salary only; or

3. Actual entertainment allowance received during the previous year.

A deduction is also allowed under clause (ii) of section 16 in respect of any allowance in

the nature of an entertainment allowance specifically granted by an employer to the assessee,

who is in receipt of a salary from the Government, a sum equal to one-fifth of his salary

(exclusive of any allowance, benefit or other perquisite) or five thousand rupees whichever is

less. No deduction on account of entertainment allowance is available to non-government

employees.

7. Transport Allowance:

Transport Allowance (popularly known as Conveyance Allowance) is exempt U/s 10(14)

read with rule 2BB is Rs. 800/- p.m. It is granted to an employee (exception mentioned below) to

Meet his Expenditure for purpose of Commuting between place of his residence & place of duty.

Exception:- If Transport Allowance is granted to an employee, who is blind or orthopedically

handicapped with disability of ,lower extremities to meet his expenditure for personal

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commuting between the place of his residence & place of his duty then the exemption limit will

be Rs. 1,600/- p.m.

8. Children Education Allowance:

If any amount is given by employer to employee as education allowance for the education

of own children in India, it shall be exempted up to Rs. 100 p.m. per child.

Exemption is allowed for any two children of the employee. The term child includes all

the legal children including a step child and a legal adopted child but does not include

grandchild.

Exemption shall be allowed irrespective of the actual expenditure incurred by the

employee on the education of the children.

In case employee is getting both education as well as hostel allowance; he is allowed

separate exemption for education and hostel allowance but for only two children.

9. Hostel Expenditure Allowance:

Any allowance granted by employer to meet the hostel expenditure of employee’s

children it shall be exempted up to Rs. 300 p.m. for per child maximum for two children only.

10. Rent Free House:

The government had repealed Fringe Benefit Tax (FBT) during the current financial year

and specified that new perquisite rules would be notified. After much wait, the new perquisite

rules have now been notified this month, which are effective retrospectively from April 1, 2009.

Before calculating the value of rent free house, following information is collected:

I. Nature of employment: Govt., Semi Govt. or any other.

II. Place where rent free house is provided:

All cities, towns have been divided into three categories depending upon their population

as per census of 2001 as under-

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11. Gratuity:

Any sum Received by employee from his past employer as a token of gratitude for

services rendered in past is called gratuity. This amount is exempted up to certain limits given

u/s 10(10) and it is dealt with in this very chapter at a later stage.

12. Leave Encashment:

In this provision Employers are discussing issues related to Leave Encashment /Leave

salary given to employees and Tax due on it and how much of such amount is taxable or

exempted under Income Tax Act.

Normally in pay package of the employee two day or so is allowed as leave per

month and if this leave is not availed then it will be accumulated subject to certain maximum

limit and at the time of retirement/otherwise or on leaving the employer, pay equivalent to leave

remaining unutilized in the employee account will be paid to employee. (Rules varies from

organization to organization).This type of leave is called Earned Leave and amount received in

lieu of this unutilized amount is called leave salary/leave encashment.

13. Deduction out of gross salaries (u/s 16):

From the ‘Gross Salary’, the following three deductions are allowed under Section 16 of

the Act to arrive at the figure of Net Salary:

1. Standard deduction - Section 16 (i)

2. Deduction for entertainment allowance – Section 16 (ii)

3. Deduction on account of any sum paid towards tax on employment – Section 16(iii).

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14. TDS (Tax Deducted at Source):

TDS or best known Tax Deducted at Source is one of the modes of collecting Income-

tax from the assessees in India. This is governed under Indian Income Tax Act, 1961, by the

Central Board for Direct Taxes (CBDT) and is part of the Department of Revenue managed by

Indian Revenue Service (IRS), Ministry of Finance, and Govt. of India. In simple terms, TDS is

the amount of tax getting deducted from the person (Employee/Deductee) by the person paying

(Employer/Deductor).

15. Deductions (u/s 80C, 80CCC, 80CCD, 80CCE):

Deductions Under section 80 are as follows:

(i) Income Tax Deductions u/s 80C: One can get following income tax deductions with

qualified investments u/s 80C are as appended below:

Section Details Quantum of Deduction

80C

Life Insurance Premium, PPF, NSC, EPF, 5-year Fixed

Deposit, Post Office Senior Citizen Saving Scheme, ELSS,

Tuition Fees including Admission fees or college fees paid

for full time education of any two children’s, Housing Loan

Principal Repayment

Maximum Rs 100000

(ii) Income Tax Deductions u/s 80CCC: One can get following income tax deductions

with qualified investments u/s 80CCC and same are as appended below:

80CCD Notified pension scheme like NPS Max 10% of salary or

10% of GTI, as case

may be

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(iii) Income Tax Deductions u/s 80CCD: One can get following income tax deductions

with qualified investments u/s 80CCD and same are as appended below:

80CCC Deduction in respect of contribution to certain pension

funds

Max Rs 100000

(iv) Income Tax Deductions u/s 80CCE: One can get following income tax deductions with

qualified investments u/s 80CCE and same are as appended below:

80CCE Includes section 80C,80CCC &80CCD Deduction u/s 80C,80CCC & 80CCE

cannot exceed Rs 100000

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BIBLIOGRAPHY:

Workshop of Provisions of Salaries.

“Income Tax Law & Practice”, “Narang. D.B.”, “Ghai. Puja”, “Puri. Rajeev”& “Gaur. V.P.”,

“KALYANI PUBLISHERS”. “2012-2013”.

http://en.wikipedia.org/wiki/Salaries_Provisions

http://www.simpletaxindia.net/2009/01/leave-salary-encashment-exemption.html