Heads of Income
 
Income from salaries
All income received as salary under employer-employee relationship is taxed under this head, on due or receipt basis, whichever arises earlier. Employers must withhold tax compulsorily (subject to Section 192), if income exceeds minimum exemption limit, as Tax Deducted at Source (TDS), and provide their employees with a Form 16 which shows the tax deductions and net paid income. The Act contains exemptions including:-
Particulars
Relevant section for computing exemption
Leave travel concession
10(5)
Death-cum-Retirement Gratuity
10(10)
Commuted value of Pension (not taxable for specified Government employees)
10(10A)
Leave encashment
10(10AA)
Retrenchment Compensation
10(10B)
Compensation received at time of Voluntary Retirement
10(10C)
Tax on perquisite paid by employer
10(10CC)
Amount received from Superannuation Fund to legal heirs of employee
10(13)
House Rent Allowance
10(13A)
Some Special Allowances
10(14)
The Act contains list of perquisites which are always taxable in all cases and a list of perquisites which are exempt in all cases (List I). All other perquisites are to be calculated according to specified provision and rules for each. Only two deductions are allowed under Section 16, viz. Professional Tax and Entertainment Allowance (the latter only available for specified government employees).
 
Computation of exemption for gratuity [Section 10(10)]
In case of Government employee it is fully exempt from tax.
In case of non-government employee covered by Payment of Gratuity Act, 1972 it is exempt from tax up to the least of the following:-
·         15 days’ salary for each year of service or part thereof exceeding six months(i.e., 15/26*last drawn salary*completed year of service or part thereof exceeding 6 months), or
·         ₹ 1 million, or
·         Gratuity actually received
In case of non-government employee not covered by Payment of Gratuity Act, 1972 it is exempt from tax up to the least of the following:-
·         ₹ 1 million, and
·         Half month’s salary for each completed year of service(i.e.,15/30*Average salary*completed year of service), or
·         Gratuity actually received
Average salary for above purpose is average salary drawn during 10 months immediately preceding the month in which the employee retired or ceased to exist.
 
Computation of exemption of House Rent Allowance(HRA) [Section 10(13A)]
The least of the following is exempt:-
·         HRA received by the employee in respect of the period during which rental accommodation is occupied by the employee during the previous year; or
·         50%/40% of salary where residential house is situated in metro/non metro city respectively.
·         Excess of rent paid over 10% of salary.
Salary for this purpose means basic plus dearness allowance (if terms of employment so provide) plus fixed percent commission on turnover.
 
Computation of exemption for pension [Section 10(10A)]
Uncommuted pension is taxable in all cases. Commuted pension is exempt for specified Government employees. In any other case, commuted pension is exempt to the extent given below:-
1/3 of normal pension is exempt if the employee is in receipt of gratuity
1/2 of normal pension is exempt if the employee is not in receipt of gratuity
 
Income from house property
Income under this head is taxable if the assessee is the owner of a property consisting of building or land appurtenant thereto and is not used by him for his business or professional purpose. An individual or an Hindu Undivided Family (HUF) is eligible to claim any one property as Self-occupied if it is used for own or family’s residential purpose. In that case, the Net Annual Value (as explained below) will be nil. Such a benefit can only be claimed for one house property. However, the individual (or HUF) will still be entitled to claim Interest on borrowed capital as deduction under section 24, subject to some conditions. In the case of a self occupied house deduction on account of interest on borrowed capital is subject to a maximum limit of ₹150,000 (if loan is taken on or after 1 April 1999 and construction is completed within 3 years) and ₹30,000 (if the loan is taken before 1 April 1999). For let-out property, all interest is deductible, with no upper limits. The balance is added to taxable income.
The computation of income from let-out property is as under:-
Gross annual value (GAV)
xxxx
Less:Municipal Taxes paid
(xxx)
Net Annual value (NAV)
xxxx
Less:Deductions under section 24
(xxx)
Income from House property
xxxx

The GAV is higher of Annual Letting Value (ALV) and Actual rent received/receivable during the year. The ALV is higher of fair rent and municipal value, but restricted to standard rent fixed by Rent Control Act.

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Only two deductions are allowed under this head by virtue of section 24, viz.,
·         30% of Net annual value as Standard deduction
·         Interest on capital borrowed for the purpose of acquisition, construction, repairs, renewals or reconstruction of property (subject to certain provisions).
 
Profits and Gains of business or profession
The income referred to in section 28, i.e., the incomes chargeable as “Income from Business or Profession” shall be computed in accordance with the provisions contained in sections 30 to 43D. The computation of income under the head “Profits and Gains of Business or Profession” depends on the particulars and information available.
If regular books of accounts are not maintained, then the computation would be as under: –
Income (including deemed income) chargeable as income under this head
xxx
Less: Expenses deductible (net of disallowances) under this head
(xx)
However, if regular books of accounts have been maintained and profit and loss account has been prepared, then the computation would be as under: –
Net Profit as per profit and loss account
xxx
Add : Inadmissible expenses debited to profit and loss account
xx
Add: Deemed incomes not credited to profit and loss account
xx
Less: Deductible expenses not debited to profit and loss account
(xx)
Less: Incomes chargeable under other heads credited to Profit & Loss A/c
(xx)
Capital Gains
Capital gains arise when an individual sells at a profit certain assets like property or shares or mutual funds or bonds etc  The treatment of such income is not the same as income from other sources.    There are two types of capital gains, viz Short Term Capital Gains or Long Term Capital Gains.
(a) Short Term Capital Gains :  Capital gain is considered as Short Term Capital Gain, if immovable property is sold / transferred within three years of acquiring the same.   Similarly, if shares or other financial securities such as mutual funds are sold within one year of purchase, the profit earned is treated as Short Term Capital Gain.
Short term capital gain is included in the gross taxable income and normal tax rates are applicable.  However, w.e.f. 1st October, 2004, the short term capital gains from sale of equity shares or units of equity oriented mutual fund schemes are taxed only at a flat rate of 10%, irrespective of the tax slab on other sources of income, provided securities transaction tax is paid on such sale.
(b) Long Term Capital Gains : Capital gain is considered as the Long Term, if the immovable property is sold after three years from purchse, or financial securties such as shares, deep discount bonds, units of open ended or close ended schemes of mutaula funds are disposed (i.e. sold / redeemed / transferred) after holding the same for more than twelve months, then the gain is considered to be long term capital gain.
Long term capital gains on transfer of listed shares / units of equity oriented mutual funds schemes has been exempted from tax w.e.f. 1st October, 2004, provided securities transaction tax has been paid on such sale.  For assets other than the listed shares / units of mutual funds schemes, tax is payable in respect of long term capital gains at a flat rate of 20% and the amount of gain has to be adjusted for inflation through indexation benefit.
Long term capital gains tax in respect of bonds and debt securities or debt oriented mutual fund schemes listed on stock exchanges is payable at a flat rate of 10% of the capital gains amount. In case an individual wishes to avail the benefits of indexation, then tax has to be paid at normal long term capital gains tax rate of 20%.
Income from other sources
This is a residual head, underthis head income which does not meet criteria to go to other heads is taxed. There are also some specific incomes which are to be always taxed under this head.
1.    Income by way of Dividends.
2.    Income from horse races/lotteries.
3.    Employees’ contribution towards staff welfare scheme.
4.    Interest on securities (debentures, Government securities and bonds).
5.    Any amount received from keyman insurance policy as donation.
7.    Interest on compensation/enhanced compensation.
8.    Income from renting of other than house property.
9.    Family pension received by family members after the death of the pensioner.
10. Income by way of interest on other than securities.

11. Gifts received by the assessee.

 

For any queries related to this article can contact – Prof. Vipin Saboo @ 9820779873

 

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Education Qualification: BMS- N M College (University Rank Holder) PGDBM- Sydenham College M Com- College topper Mr Vipin Saboo has been associated with the following institutes as a visiting faculty Lords college, Malad Patkar College, Goregoan Saraf college, Malad Dalmia college, Malad St Andrews College, Bandra Wilson College, Grant Road Thakur college, Kandivili L N College, Kandivili N K College, Malad Dhanukar College, Vile Parle St Xaviers College, Marine Lines Shroff College, Kandivili KES College, Khar Mr.Vipin Saboo also has more than 5 years of industry expertise with corporate like CRISIL, Motilal Oswal Investment Banking and Yes Bank. Mr. Saboo has also published a text book on Logistics and Supply Chain Management for TYBMS Students.
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