Income Tax in India:
August 10, 2009
The government of India imposes an income tax on taxable income of individuals, Hindu Undivided Families (HUFs), companies (firms), co-operative societies and trusts. The Income Tax department is governed by the Central Board for Direct Taxes (CBDT) and is part of the Department of Revenue under the Ministry of Finance.
Individual Income Tax:
Heads of Income
There are five heads of income that are taxable:
Income from Salary:
All income received as a salary is taxed under this head. This includes all monies paid by a company to its employees. Employers must withhold tax compulsorily, as Tax Deducted at Source (TDS), and provide their employees with a Form 16(this is not required from 2007)which shows the tax deductions and net paid income. In addition, the Form 16 will contain any other deductions provided from salary such as:
- Medical reimbursement: Up to Rs. 15,000 per year is tax free if supported by bills. (Company pays Fringe Benefit Tax on this amount)
- Conveyance allowance: Up to Rs. 800 per month (Rs. 9,600 per year) is tax free if provided as conveyance allowance. No bills are required for this amount.
- Professional taxes: Most states tax employment on a per-professional basis, usually a slabbed amount based on gross income. Such taxes paid are deductible from income tax. The states which tax generally recover Rs 2500/- per annum. As a result, all employees get their salaries deducted Rs 200/- per month for the year except February where Rs 300/- gets deducted.
Income from salary is net of all the above deductions.
Income from House property
Income from House property is computed by taking what is called Annual Value. The annual value (in the case of a let out property or a deemed let out property) may be maximum of the following:
- Rent received
- Municipal Valuation
- Market Value
Annual value in case of a self occupied house is to be taken as NIL. From this, deduct Municipal Tax paid and you get the Net Annual Value. From this Net Annual Value, deduct :
- 30% of Net value as repair cost (This is mandatory deduction)
- Interest paid or payable on a housing loan against this house
In the case of a self occupied house interest paid or payable is subject to a maximum limit of Rs,1,50,000 (if loan is taken on or after 1st April 1999) and Rs.30,000 (if the loan is taken before 1st April 1999)
The balance is added to taxable income.
Income from Capital Gains
Sale of capital assets results in capital gains. A Capital asset is defined under section 2(14) of the I T Act as property of any kind held by an assessee such as real estate, equity shares, bonds, jewellery, paintings, art etc. but does not include some items like any stock-in-trade for businesses and personal effects.
For tax purposes, there are two types of capital assets: Long term and short term. Long term asset 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 such long term assets gives rise to long term capital gains. There are different scheme of taxation of long term capital gains. These are :
- As per Section 10(38) of Income Tax Act, 1961 long term capital gains on shares or securities or mutual funds on which Securities Transaction Tax (STT) has been deducted and paid, no tax is payable. STT has been applied on all stock market transactions since October 2004 but does not apply to off-market transactions and company buybacks; therefore, the higher capital gains taxes will apply to such transactions where STT is not paid.
- In case of other shares and securities, person has an option either to index costs to inflation and pay 20% of indexed gains, or pay 10% of non indexed gains. The indexation rates are released by the I-T department each year.
- In case of all other long term capital gains, indexation benefit is available and tax rate is 20%.
All capital gains that are not long term are short term capital gains, which are taxed as such:
- Under section 111A, for shares or mutual funds where STT is paid, tax rate is 10% .
- In all other cases, it is part of gross total income and normal tax rate is applicable.
For companies abroad, the tax liability is 20% of such gains suitably indexed (since STT is not paid).
Income Exempt from Tax
Sections 10,10A, 10AA, 10B, 10BA, and 13A deal with income which does not form part of an assessee’s total income. While section 10 provides a list of income absolutely exempt from tax, sections 10A, 10AA, 10B, 10BA, and 13A deal with specific exemptions available to newly established industrial undertakings in free trade zones, and political parties. These exemptions are provided from social, political, Constitutional considerations, for avoiding double taxation, on the basis of casual and non-recurring nature ,on the basis of non-residents and non-citizens status, on the basis of Certain specific securities, bonds, certificates, funds and the like, on the basis of Education, science, research, achievements, rewards, sports, charity, on the basis of certain types of bodies, funds and institutions, Subsidies to promote business, and international, economic, and other considerations.
Agricultural Income [Section 10(1)] Eligible Assesses :- All assesses Exempt income :- Agricultural income Other points :- Agricultural income means as it is defined in Section 2(1A) In case of individual, HUF, AOP, BOI, unregistered firms and artificial juridical persons, agricultural income is to be aggregated for the purpose of determining the rate of tax on Non-Agricultural income and they would get tax rebate or relief.
Dividends paid by Companies and Mutual Funds are exempt from tax. A 15% dividend distribution tax is paid by companies before distribution. Equity mutual funds (with more than 65% of assets invested in equities) do not pay a dividend distribution tax, though other funds do. Liquid and Money Market funds pay 25% dividend distribution tax.01123
Other Exempt Income
The Indian Income tax act specifically exempts certain income from tax:
- Money received from an Insurance company as proceeds of an insurance policy (by way of an insurance claim, or by maturity) is generally exempt. However there are three types of payments under life insurance policy that are not tax free . These are :
ￂﾷ any sum received under sub-section (3) of section 80DD or sub-section (3) of section 80DDA – this refers to specific policies for disabled dependants; or
ￂﾷ any sum received under a Keyman insurance policy; or
ￂﾷ any sum received under policies issued on or after 1 April 2003 where premium paid is greater than 1/5th the sum assured
- Maturity proceeds of a Public Provident Fund (PPF) account.
Section 80 Deductions
Section 80C of the Income Tax Act allows certain investments and expenditure to be tax-exempt. The total limit under this section is Rs. 100,000 (Rs. 1.0 lakh) which can be any combination of the below:
- Contribution to Provident Fund or Public Provident Fund
- Payment of life insurance premium
- Investment in pension Plans
- Investment in Equity Linked Savings schemes (ELSS) of mutual funds
- Investment in specified government infrastructure bonds
- Investment in National Savings Certificates (interest of past NSCs is reinvested every year and can be added to the Section 80 limit)
- Payments towards principal repayment of housing loans.Also any registration fee or stamp duty paid.
- Payments towards tuition fees for children to any school or college or university or similar institution. (Only for 2 children)
The investment can be from any source and not necessarily from income chargeable to tax.
Section 80D: Medical Insurance Premiums
Medical insurance, popularly known as Mediclaim Policies, provide deduction up to Rs 15000 . This deduction is additional to Rs.1,00,000 savings. For senior citizens, the deduction up to Rs. 20,000 is allowable. This deduction is available for premium paid on medical insurance for oneself, spouse, parents and children.
Interest on Housing Loans
For self occupied properties, interest paid on a housing loan up to Rs 150,000 per year is exempt from tax. However, this is only applicable for a residence constructed within three financial years after the loan is taken and also the loan if taken after April 1, 1999.
For let out properties, the entire interest paid is deductible under section 24 of the Income Tax act.
If the house is not occupied due to employment, the house will be considered self occupied.
In India, Individual income tax is a progressive tax with three slabs.
- No income tax is applicable on all income up to Rs. 1,10,000 per year. (Rs. 1,45,000 for women and Rs. 1,95,000 for senior citizens)
- From 1,10,001 to 1,50,000 : 10% of amount greater than Rs. 110,000 (Lower limit Rs. 1,45,001 for women and 1,95,000 to senior citizens)
- From 1,50,001 to 2,50,000 : 20% of amount greater than Rs. 1,50,000 & less than Rs.2,50,00(Rs 4,000+20% above amount 1,50,000 for Individual, For women: Rs. 500+20% above Rs 1,50,000 & 20% on above amount 1,95,000 to 2,50,000 For senior citizens, the lower limit is Rs. 195,000)
- Above 2,50,000 : 30% of amount greater than Rs. 2,50,000 + Rs. 24,000 (Rs. 20,500 for women and Rs. 11,000 for senior citizens)
A 10% surcharge (tax on tax) is applicable if the taxable income (taking into consideration all the deductions) is above Rs. 10 lakh (Rs. 1 million). The limit of 10 lacs was increased to Rs. 1 crore with effect from 1st June 2007
All taxes in India are subject to an education cess, which is 3% of the total tax payable.
Corporate Income tax
For companies, income is taxed at a flat rate of 30% for Indian companies, with a 10% surcharge applied on the tax paid by companies with gross turnover over Rs. 1 crore (10 million). Foreign companies pay 40%.An education cess of 3% (on both the tax and the surcharge) are payable, yielding effective tax rates of 33.99% for domestic companies and 41.2% for foreign companies.
From 2005-06, electronic filing of company returns is mandatory.
Fringe Benefit Tax
Fringe Benefit Tax is a tax payable by companies against benefits that are seen by employees but cannot be attributed to them individually. This tax is paid as 33.99% of the benefit, which is only a percentage of the actual amount paid.
Some fringe benefits and their taxable rates are mentioned:
Effective Tax Rate
Employee Stock Options (Difference between market value and purchase price on vesting date)
“If the Assessing Officer or the Commissioner (Appeals) or the Commissioner in the course of any proceedings under this Act, is satisfied that any person-
(b) has failed to comply with a notice under sub-section (1) of section 142 or sub-section (2) of section 143 or fails to comply with a direction issued under sub-section (2A) of section 142, or
(c) has concealed the particulars of his income or furnished inaccurate particulars of such income,
he may direct that such person shall pay by way of penalty,-
(ii) in the cases referred to in clause (b), in addition to any tax payable by him, a sum of ten thousand rupees for each such failure;
(iii) in the cases referred to in clause (c), in addition to any tax payable by him, a sum which shall not be less than, but which shall not exceed three times, the amount of tax sought to be evaded by reason of the concealment of particulars of his income or the furnishing of inaccurate particulars of such income”.