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What is Income Tax?

What is Income Tax?. It is tax on Income. It is revenue for government & indicates outflow of cash for a person who is liable to pay the tax. How the income tax act look like?. Summary of important sections: Section:2 definations Section:3 computation of total income

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What is Income Tax?

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  1. What is Income Tax? It is tax on Income. It is revenue for government & indicates outflow of cash for a person who is liable to pay the tax

  2. How the income tax act look like? • Summary of important sections: Section:2 definations Section:3 computation of total income Section 6: Residential status of a person Section:10 incomes exempted from Tax Section 15-17: salary income Section 24: Income from house property Section 28 -44: income from business or profession Section 54 -income from capital gain Section 56 Income from other sources Section :80: deductions from gross total income

  3. How the income tax act look like? • Section 139: Provisions of filing income tax return. • Section 194: Tax deducted at source • Section 210: Provisions of Advance Tax • Section 234:Provisions of not filing of income tax return. • Section 246 onwards: appeals & provisions

  4. Direct Tax: • Every person has to pay tax , person includes following: • Individuals, Hindu undivided family, association of persons or body of individuals, partnership firm,company,society or charitable trust, local authority, every artificial person has to pay tax.

  5. Income Tax liability of a person • Residential status of a person decides income tax liability. • Previous year is the year in which income is earned . • Assessment year is the year which consist of 12 months which commences on the1st day of April immediately after the previous year. for the previous year ending on 31.03.2006, the assessment year is 2006-07.

  6. Tax is of two types:(direct tax vs. indirect tax) • Direct tax is the tax which is charged & collected from the same person. • Indirect tax is that tax which is charged on one person & collected from other person. • For example excise duty, value added tax, service tax, custom duty. It is collected from final consumer.

  7. Basic concepts under income tax Act: Sec:2 • Previous Year: The year in which income is earned is called as previous year. • Assessment year: the income of the previous year is charged in the next year called as assessment year. Example: X joins an Indian company on January 23,2007.Prior to January 23,2007,he is not in employment, What is the previous year for the assessment year 2007-08 &2008-09?

  8. Assessee: • Assessee means a person by whom any Tax or any other sum of money(i.e Penalty or interest) is payable under the act:sec:2(7)

  9. Who is liable to pay Tax? • A person is liable to pay Tax. • Sec:2(31) of the act defines the person. • The person includes: • An Individual • A Hindu undivided family • A company • A Firm • An association of persons or body of individuals whether incorporated or not • A local Authority • Every artificial juridical person

  10. Example: • Determine the status of the following: • Pune university • DCM Ltd • Mumbai municipal corporation • Taxman publications Ltd • Laxmi commercial bank • XY&CO.,Firm of X&Y • Joint family of X,Mrs. X & their sons A &B

  11. Heads of Income: • There are 5 heads of Income • Income from Salary • Income from house property • Income from profits & gains of business • Income from other sources • Capital gains: short term & long term capital gain.

  12. What constitutes salary • There are 3 groups that constitute your salary: Group 1: Basic salary, advance salary, arrears of salary, all types of bonus, service award,pension Group 2:Allowances group: It includes dearness allowance, conveyance allowance, children education allowance, overtime allowance, leave travel allowance, city compensatory allowance Group 3: Perquisites: It means facilities given by Employer to Employee: Rent free accomodation,domestic servant facility, reimbursement of medical facility,Motar car facility, benefits derived by stock option scheme.

  13. Income from house property: • If the house property is self occupied then value of property is taken as nil for income tax purpose . However if the loan is taken for the purpose of purchasing the house property deduction is available to the extent of Rs.1,50,000 for interest on house property. It is treated as negative income & deducted while calculating gross total income. For the principal amount, deduction is available under 80C

  14. Example of Income from house property • Mr. X is having house property value of the same is Rs.10,00,000. Loan taken for the purchase of house property is Rs.6,00,000. Mr. X paid interest on loan Rs.42500, Principal repayment Rs.15,000. He has salary income Rs.3,00,000 during the period .Calculate his taxable income for the assessment year2006-07.

  15. Income from house property Total income of Mr.X can be calculated as follows: salary income=Rs.3,00,000 Interest pd on housing loan=Rs.(42,500) Gross Total Income=Rs.2,57,500 Less: deduction under sec:80C=Rs15,000 Taxable income Rs.2,42,500

  16. Capital Gain: short term & long term capital gain: • Capital gain means the gain which arises because of transfer of capital asset. • Capital gain on account of transfer of shares is calculates as follows: • It is divided into 2 parts: short term gain & long term gain. short term gain means if the shares are sold within a period of one year from the date of purchase. Short term capital gain tax is 10%

  17. Long Term Capital Gain for shares • If the shares are transferred not within a period of one year from its date of purchase in other words hold by the assessee for a period of more than a year treated as long term capital gain on which assessee should not pay any tax Long Term capital gain arising on transfer of shares /units on equity mutual fund on or after 1.10.2004 & chargable to security transaction tax shall be fully exempted from tax u/s 10(38)

  18. Illustration • Purchase 100 shares of tata tea on 1.10.2006 @723 per share. Sold the same shares on 21.12.2006@760 per share. Calculate the capital gain & income tax liability on transfer of shares. • Short term capital gain=100*37=3700 • Tax on Rs.3700 is 10%=Rs.370

  19. Income exempted from Tax: Section 10 of income tax act, gives the list of income which are exempted from Tax. Some of the examples are as follows: • Agricultural income • Dividend on shares • Gratuity (limits given u/s 10(10) • Pension & leave salary to the extent given under section (10A), (10AA) • Share of a partner in the partnership firm.

  20. Tax rates applicable for resident woman (below 65 years)are as follows:

  21. Illustration Calculate income tax liability for assessment year 2007-08 in case of following: • Income of Mrs. X(age 40 years)=1,95,000 • Income of Miss Priya (age 26 years)=2,90,000 • Income of Mrs.Y(age-54) =10,50,000

  22. Tax Rates applicable for senior citizen above 65 years

  23. Examples: • Calculate income tax liability in case of following: • Mr.X (age 66 years) income Rs.175000 per year • Mr. Z(age 70 years) income Rs.2,10,000 • Mr. S (age 68 years) income Rs.2,75,000 • Mr. B (age 66 years) income Rs.10,50,000

  24. For any other individual-Tax rates

  25. Example: Calculate income tax liability in the following cases: Mr.X income Rs.2,10,000 (age 29 years) Mr.Y(age 36 years) income Rs.3,50,000 Mr.P (age 40 years) income of Rs.10,10,000

  26. Deductions from gross total income to Individuals Deduction under sec:80C: • contribution for life insurance premium • contribution towards Provident Fund • contribution towards public provident fund • Payment of loan (principal amount) taken for the purchase of house property • Amount of term deposit for a period of 5 years or more in accordance with a scheme framed by government

  27. Deductions: • Contribution towards National saving certificates • Any sum paid as tuition fees whether at the time of admission to any university, college, educational institution in India for full time education. Deduction under this section is available to the maximum of Rs.1,00,000

  28. Deduction under section 80CCC & 80CCD • This deduction is available for the amount which is paid for pension fund. The maximum amount deductible under sections 80C,80CCC & 80CCD cannot exceed Rs.1,00,000. Deduction for Medical insurance policy(80D) This deduction is available to the extent of Rs.10,000 or the actual amount of premium whichever is less.

  29. Illustration • X is employed by the central government in the ministry of labour. During the previous year 2006-07 basic salary Rs.16,000 per month plus D.A=10% of basic salary. He annually contributes Rs.70,000 for PPF,Rs.20,000 or life insurance premium & Rs.20,000 for notified pension policy. His income from other sources Rs.16,000.Mediclaim paid Rs.8000.compute the income tax liability for assessment year 2007-08

  30. Illustration…… • Basic salary=1,92,000(16000*12) • Plus D.A= 19,200 • Gross salary=2,11,200 • Income from other sources=16,000 • Gross Total Income=2,27,200 • Deduction u/s 80C & 80CCC=1,00,000 • Deduction u/s 80D= 16,000 • Net Income=1,19,200 • Tax on Rs.1,19,200=Rs.2,304

  31. Tax Deducted at Source: • Payment on which Tax is deducted at source are as follows:( some of the examples) Payment of salary: Employer will deduct tax. Interest on time deposits if it exceeds Rs.5,000 Bank will deduct tax @10.2% T.D.S on fees for professional & technical services @5.1% Winning from Lotteries & cross word puzzles if it exceeds Rs.5000@30.6% Winning from horse races if exceeds Rs.2,500@30.6% Payment of brokerage @5.1% if amount of brokerage exceeds Rs.2,500

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