Theme: Income Tax

Form 16/16A for TDS Certificate is the certificate of deduction of tax at source.(( Section 203, Income Tax Act, 1961.)) This means that tax is collected from the very source of income of the person receiving it. It is issued by the employer on behalf of the employee to state that tax has been deducted. These certificates provide details of TDS/TCS for various transactions between deductor and deductee. These details include the particulars of income paid to the employee and the tax deducted from it. It will also mention whether the same has been paid to the government.

Form 26AS(( Rule 31 AB, Income Tax Rules, 1962.)) is a consolidated tax deduction statement, which keeps an annual record of any tax paid by you or on your behalf by a deductor, like a bank or an employer. It also details the following information about your tax profile:

• Names of your tax deductors and the Tax Deduction Account Number (TAN) associated with them
• Tax refunds, if any, received in the particular financial year
• If you have sold immovable property in the financial year, details of the TDS deducted by the purchaser
• TDS deducted by the tenant on the payment of rent exceeding INR 50,000 (if applicable)
• Details of all high-value transactions (reported by the banking and financial institutions that they are conducted through)

Direct Tax

Direct tax is a tax you pay on your income directly to the government. Direct Taxes are broadly classified as:

Income Tax: Income tax is a tax levied by the Government of India on the income of every person.

Corporate Tax: Tax paid by companies on the profits made from the business is known as corporate tax.

Indirect Taxes (Goods and Services Tax)

Indirect tax is a tax levied on goods and services that is paid to the government. For instance, restaurants recover taxes from you on the food you purchase or a service you avail and pay this to the government. Most indirect taxes have been replaced in India by the Goods and services tax (GST), which has recently been introduced as a unified tax that has replaced all the indirect taxes that business owners have to deal with.

Some indirect taxes apart from GST which are still collected include taxes on petroleum products, alcoholic drinks and electricity are separately collected by each state government.

You are considered to be a resident in India, under the law in the following conditions:

• Residence in India for a period amounting to 182 days or more in total.
• You have been in India for 365 days or more in any of the four years preceding the year of assessment, plus is living in India for 60 or more days in the current financial year.
• Similarly, every person is a resident of India with regard to the previous year, unless the management of his affairs is situated completely out of India.
• A person will be deemed ‘not ordinarily resident’ in India if he has not been residing in India for 9 out of 10 years preceding the year of assessment.

A HUF (Hindu Undivided Family), firm or association is said to be resident in India, unless its management is situated completely out of India for the year of assessment. In case of a Hindu Undivided Family, you are a resident if:

• the manager of the HUF has not been residing in India for 9 out of 10 years before the year of assessment, or
• In the preceding 7 years, the manager has been living in India for 729 days or less.

The Permanent Account  Number or PAN Card is issued by the Income Tax Department, to all those who are eligible to pay taxes in India.  It is used by the department to keep a tab on the financial transactions conducted by taxpayers in order to verify information regarding your tax profile.

If you have to file taxes in India, having a PAN Card is mandatory. A PAN card may also necessary for entering into certain specific financial transactions. These include:

• Payment in cash to a hotel or restaurant against a bill/bills at any one time exceeding fifty thousand rupees.
• Payment in cash in connection with travel to any foreign country or payment for the purchase of any foreign currency at any one time exceeding fifty thousand rupees.
• Sale or purchase of any immovable property exceeding ten lakh rupees.
• Sale or purchase of goods or services of any nature exceeding two lakh rupees per transaction.

Read here for more information on PAN Card while filing taxes.

You have a duty to pay tax under the Constitution in India.(( Article 265, Constitution of India, 1950.)) Payment of tax is compulsory and penalty will be levied on any taxpayer who deliberately violates the provisions of a tax law.(( Central Excise, Puducherry v. M/s Pondicherry Paper Limited (1984) ))

The Constitution declares that ‘ no tax shall be levied or collected except by authority of law’. Taxes that are legally imposed by the Central and State Governments in India have been enumerated in Schedule VII of the Constitution. The Parliament of India has also been empowered(( Article 248(2), Constitution of India, 1950.)) to enact laws imposing taxes which have not been listed. For instance, taxes which may be required in the future.

There are two types of taxes collected in India:

• Direct taxes: tax on income, wealth, corporates, capital gains.
• Indirect taxes: taxes that are levied on goods and services

Out of these, State Governments are empowered to collect some of the indirect taxes. They include:

• Tax on agricultural income(( Schedule VII, entry 46 under State List, Constitution))
• Tax on lands and buildings(( Schedule VII, entry 47 under State List, Constitution))
• Professional tax(( Schedule VII, entry 60 under State List, Constitution))
• State excise duty
• Tax on electricity(( Schedule VII, entry 53 under State List, Constitution))
• Excise duty on alcohol(( Schedule VII, entry 51 under State List, Constitution))
• Toll tax(( Schedule VII, entry 69 under State List, Constitution))

In 2017, the Goods and Services Tax (GST) was introduced which subsumed several indirect taxes under it, including:

• VAT or value added tax
• Sales Tax
• Entertainment Tax
• Octroi
• Purchase Tax
• Service Tax

Since these taxes accrued to the State Government, the new structure introduced the SGST (State GST) category to compensate for their share. The SGST is levied by the State Government on intrastate supply of goods and services.

A firm(( Section 2(23)(i), Income Tax Act, 1961.)) refers to persons who have entered into partnership with one another. The persons are called individually “partners” and collectively “a firm”, and the name under which their business is carried on is called the “firm name”.

Keyman Insurance Policy(( http://www.licindiaagent.com/keyman-insurance-from-lic.php)) is a type of life insurance policy for a ‘keyman’ or a valuable employee. The objective of this policy is to safeguard the company in case of untimely death of an important employee. Since employees are assets for a company, Keyman Insurance Policy helps the business recover after the loss of a valued asset.  Its salient features are:

• During the lifetime of such an employee, the premium on a Keyman Insurance Policy is paid by the employer.
• In case the employee dies untimely, the employer becomes the claimant of the insurance benefits.
• To qualify as a ‘keyman’, the employee should hold less than 51% shares in the company

The premium that the employer pays in this life insurance is treated as ‘business expenditure’ for taxation purposes; the proceeds of the policy are therefore taxable as business income.

No Indian law gives a concrete definition of the term ‘Hindu Undivided Family’. For the purpose of Hindu Law, HUF is an entity identified by the following features:

• Members of the HUF must be ‘Hindu’ as defined under Hindu Law, which includes Sikhs, Jains, and Buddhists along with Hindus.
• Members should form a family, i.e. they should be related to each other through blood or marriage. Therefore, an HUF cannot be contractually created.
• The family should be ‘undivided’, i.e. it should be a joint Hindu family where partition has not been affected.  

For the purpose of taxation, a HUF is considered a ‘person’ under the Income Tax Act.(( Section 2(31), Income Tax Act, 1961.)) This means that an HUF’s tax liabilities are computed separately from those of its individual members. An HUF’s taxable property consists of:

• Ancestral property
• Property acquired with the aid of ancestral property
• Property transferred by members of HUF

Limited liability partnership (LLP) is a partnership formed and registered under the Limited Liability Partnership Act, 2008.​ An LLP is a legally separated entity from that of its individual partners. As a corporate body, an LLP is legally liable to the full extent of its assets, but the liability of its partners is limited to their contribution in the LLP. There is no personal liability of a partner except in the case of a fraud. Moreover, a partner is not responsible or liable for another partner’s misconduct or negligence as there is no joint liability in the case of LLP.

An association of persons (AOP) or a body of individuals (BOI), whether incorporated or not, is treated as a ‘person’ under the Income Tax Act.(( Section 2(31)(v), Income Tax Act, 1961.)) Hence, AOP or BOI is treated as a separate entity for the purpose of assessment under the Act. An AOP or BOI shall be deemed to be a person whether or not they were incorporated with the object of deriving income, profits or gains.

Advance tax(( Section 207, Income Tax Act, 1961.)) refers to income tax that should be paid in advance during the financial year, instead of as a lump sum payment at the end of the year. It is also known as pay-as-you-earn tax. Advance tax shall be payable when your tax liability is Rs 10,000 or more. Advance tax does not apply when you don’t have an income source from business/profession, or if you are a senior citizen in India (60 years and above).(( Section 207, Income Tax Act, 1961.))

Calculating Advance Tax

You can calculate your advance tax on the income tax website. 

Payment of Advance Tax

Advance tax payments have to be made in installments throughout the financial year, as per due dates provided by the Income Tax Department. It is usually paid in four installments(( Section 211, Income Tax Act, 1961.)) during each financial year, and the due date of each installment and the amount of such installment is specified below:

When any tax is payable on any income tax return, before submitting the return, you as the assessee have to pay such tax, along with interest and fee for delay in submitting the return or default in payment of advance tax. The income tax return will be accompanied by proof of payment of such tax , interest and fee.(( Section 140A, Income Tax Act, 1961.)) Self-assessment tax refers to any balance tax that you have to pay on your income after the TDS and advance tax have been taken into account, before filing the return of income. The ITR cannot be submitted till all taxes have been paid.

A taxpayer engaged in business or profession is required to maintain regular books of account under certain circumstances.(( Section 44AA, Income Tax Act, 1961.)) To give relief to small taxpayers from this tedious work, the Income Tax Act has provided for a presumptive taxation scheme.​ A person adopting the presumptive taxation scheme can declare income at a prescribed rate and, in turn, is relieved from the tedious job of maintaining account books.

The presumptive taxation scheme can be adopted by following persons :

• Resident Individual
• Resident Hindu Undivided Family
• Resident Partnership Firm (except a Limited Liability Partnership Firm).

This Scheme cannot be adopted by a person who has made any claim towards deductions under certain sections(( Sections 10A, 10AA, 10B, 10BA, 80HH to 80RRB, Income Tax Act, 1961)) of the Act in the relevant year.

Any business which has a total turnover of less than Rs 2 crore can opt for presumptive taxation. Income will be computed on a presumptive basis and the business must declare profits of 8% for non-digital transactions or 6% for digital transactions for the relevant year. In other words, income will not be computed in the normal manner (Turnover minus Expense) but will be computed at 8% or 6% of the turnover. A professional having a gross revenue upto 50 lakhs can opt to be taxed presumptively, and must declare 50% of gross receipts of profession as his presumptive income.

If you file an incomplete income tax return without giving all the necessary information, your return will be considered as defective and will not be accepted. You will have to file your income tax returns once again providing complete details.

Yes, the income of a minor (child below 18 years of age) can be taxed in India. The income of a minor (except a child suffering from a disability)(( Section 80U, Income Tax Act, 1961.)) is included as part of the total income of the child’s parent.(( Section 64, Income Tax Act, 1961.)) The term ‘parent’ here refers to the parent who has the greater income, and the child’s income will not be included in the other parent’s total income. For example if the father earns more income than the mother, then the child’s income will be clubbed with the fathers income. If the parents are not married, then the child’s income will be included in the income of the parent who maintains the child.

A child’s income will not be clubbed with the parent when:

• the child gets income from manual work or
• income from an activity involving application of the child’s skill, talent or specialised knowledge and experience.

All gifts received, whether in cash or kind, are taxable under the Indian law. For example, if a grandmother gifts property to the granddaughter. Tax on gifts is to be paid by the person receiving it, in the year in which it is received. It is taxed under the head ‘income from other sources’.(( Section 56, Income Tax Act, 1961.)) To be considered a taxable gift, the item exchanged should be(( Section 56(2)(vi) (vii), Income Tax Act, 1961.)):

• Without any consideration
• Of value more than INR 50, 000

However, some gifts are tax-exempt, if they qualify the following grounds:

• They have been received  from specific relatives, i.e. parents, siblings, spouse
• Gift received in marriage, from relatives or in a will, regardless of value
• Gift received in contemplation of death of the payer
• Received from a local authority, fund, university, or medical institution

Capital assets((  Section 2(14), Income Tax Act, 1961.)) are property of any kind that a taxpayer holds, regardless of whether or not it is related to the business or profession that he practices. The following are not included under capital assets:

• Consumables or raw materials, possessed by a taxpayer for the purpose of his business or profession.
• Movable property like clothes and furniture that count as personal effects of the taxpayer or his family, valuables like jewellery, archaeological collections and artworks are considered as capital assets.
• Agricultural land
• Gold bonds
• Special bearer bonds
• Gold deposit bond

Depending on how long they are held by the taxpayer, capital assets may be classified as –

• Short-term capital asset: An asset held for 36 months or less, right before it is transferred. For immovable property, this time limit is 24 months.((  Section 2(42A), Income Tax Act, 1961.))

Long-term capital asset: An asset held for any time longer than 36 months is considered so.((  Section 2(29A), Income Tax Act, 1961.))

According to the Income Tax Act(( Section 15, Income Tax Act, 1961.)), the following types of income will be considered salary:

• Any salary due from an employer (or former employer,) whether paid or not.
• Any salary paid or allowance made by the employer (or former employer or somebody on their behalf) though not due or before it was due to the taxpayer. For example, a salary paid in advance for a project.
• Arrears on salary

Further, the income tax law(( Section 17, Income Tax Act, 1961.)) clarifies that the term ‘salary’ includes:

• Wages
• Any annuity or pension
• Gratuity
• Fees, commissions, profits
• Any advance of salary
• Provident Fund amount (on yearly basis)

Following are the basic components of an employee’s salary:

• Basic income: It is the base remuneration which exists before any deduction or increment is made and is a fixed amount.
• Allowances: Above the basic income, an employee may be given monetary benefit to meet expenses in the form of allowances. These may be:
  • Housing rent allowance
  • Dearness allowance
  • Medical or conveyance allowance.
• Provident Fund (PF): This is in the form of pension, where equal contributions from the employer and employee are collected in a PF fund throughout the latter’s service tenure. Currently, the Government of India makes the contribution on behalf of the employer for the first 3 years of service of a new employee, to boost employment in India.
• Gratuity: This is also a retirement benefit payable to those who have been employed by a company for at least 5 years. This is also deducted from the employee’s salary throughout their service tenure.
• Professional Tax: This tax is payable to the State Government for practising a certain profession. It is levied on the monthly salary.

The gross salary of an employee is the total of their basic salary and allowances, before any deductions are made. The Cost to Company (CTC) or ‘package’ offered to an employee includes this gross salary and the PF and gratuity. The in-hand income or salary is therefore always lesser than CTC.

For filing returns manually, you need to go to the Income Tax Department’s office to physically file returns. You can locate your nearest tax office here.

The government has set up Aaykar Sampark Kendras in some income tax offices. These are centers where taxpayers can file income tax returns and address tax related grievances. You can locate your nearest ASK center here.

Tax refers to any  amount charged by the government on income, any activity, or any goods or services. Taxes in India are levied or charged by the Central Government as well as the State Governments. Some minor taxes are also levied by the authorities such as the Municipality and the Local Governments. 

Major Central Taxes

• Income Tax: Income tax is levied by the Government of India on the income of every person.(( The Income Tax Act, 1961.)) 
• Central Goods & Services Tax (CGST): CGST or Central Goods and Service Tax(( The Central Goods and Services Tax Act, 2017.)) is levied and collected by the central government on every supply of goods and services within the state.
• Customs Duty: Customs duty(( Ice Gate, e-commerce portal, Customs National Trade Portal, available at https://www.icegate.gov.in/; The Customs Tariff Act, 1975)) is applicable on all goods imported and a few goods exported out of the country. Duties levied on import of goods are termed as import duty while duties levied on exported goods are termed as export duty.
• Integrated Goods & Services Tax (IGST): IGST(( The Integrated Goods and Services Tax Act, 2017)) is tax levied on inter-state supply of goods. IGST will be applicable on any supply of goods and services in both cases of import into India and export from India.

Major State Taxes

State Goods & Services Tax (SGST): SGST(( State Goods and Services Tax Act, GST Council, available at http://www.gstcouncil.gov.in/sgst-actGST)) is a tax levied on intra-state (within a state) supplies of both goods and services by the State Government. You can find more details on the tax levied by each state here. States also levy other taxes such as taxes on petroleum and alcohol. Some other examples of state taxes are entertainment tax, excise duty, etc.

Direct and Indirect Tax

Taxes are classified on the basis of who has to pay – direct or indirect tax. If tax is levied directly on personal or corporate income, then it is known as direct tax. Some examples are personal income tax, corporate tax, etc. If tax is levied on the  good or service, then it is called an indirect tax. Some examples are goods and services tax(GST), excise duty, etc.

The Finance Act is enacted to give effect to the financial proposals of the Central Government for a given financial year.(( Rule 219, Rules of Procedure of the Lok Sabha, 2014.)) During the Budget presentation each year, the Government puts before the Parliament its proposed plans for the country and the expenditure to be accrued for achieving them. After they are debated and passed by the Parliament, the Finance Act is enacted by assent of the President. It gives legal sanction to the expenditure that the government may make. This process begins in February, during the Budget Session of the Parliament. 

The First Schedule of a Finance Act has four parts and contains the following information for that financial year:

• Part I: Income tax rates and surcharges on income tax
• Part II: Rates of TDS
• Part III: TDS on income from ‘salaries’ 
• Part IV: rules for calculating net agricultural income

Trusts formed for charitable or religious purposes which are intended to provide relief to the poor, education, yoga or for advancement of any object of general public utility are allowed various benefits under the Income Tax Act, like tax exemption under section 11.

The term religious purpose is not defined under the Act. However, “charitable purpose”(( Section 2(15), Income Tax Act, 1961.)) includes relief of the poor, education, medical relief, preservation of the environment (including watersheds, forests and wildlife) and preservation of monuments or places or objects of artistic or historic interest, and supporting any other object of general public utility.