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Ayushi
AyushiCurious
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  2. AbhishekBatabyal Helpful Pursuing CA, BCOM (HONS)

    Introduction Income tax means the tax charged on the income of a person which the person has earned during a financial year. As per the Income-tax act, 1961, the income tax on income earned during a financial year is assessed in the following financial year and tax is to be paid on the assessed incoRead more

    Introduction

    Income tax means the tax charged on the income of a person which the person has earned during a financial year. As per the Income-tax act, 1961, the income tax on income earned during a financial year is assessed in the following financial year and tax is to be paid on the assessed income if payable.

    The year in which the income is earned is called the Previous Year and the following year in which the previous year’s income is assessed is known as the Assessment Year

    Steps involved in the computation of Income-tax of a person:

    1. Determination of residential status of the person
    2. Classification and computation of income under the five heads of income
    3. Clubbing of income of spouse, minor child etc
    4. Set-off or carry forward of losses
    5. Computation of Gross Total Income
    6. Deductions from Gross Total Income to arrive at Total Income
    7. Application of the rates of taxes on total income
    8.  Advance tax and tax deducted at source
    9. Arrival  at Tax payable/ Tax refundable
    10. Determination of residential status of the person

    Determination of residential status of the person

    The residential status of a person is of great significance for ascertaining the taxability of a person’s income as per the Income-tax act, 1961. As per the act, a person can fall into one of the following criteria:-

    1. Resident and Ordinarily Resident in India
    2. Resident but Not Ordinarily Resident in India
    3. Non-Resident

    Classification and computation of income under the five heads of income

    Now, a person’s income can be from various sources. As per section 14 of the Income-tax act, there are five main heads of income for computation of income tax:

    1. Income from Salary
    2. Income from House Property
    3. Profits and Gains from Business or Profession
    4. Capital Gains
    5. Income from other sources

    Income under each head is to be computed as per provisions of the Income-tax Act, 1961.

    Clubbing of income of spouse, minor child etc

    Some individual taxpayers divert some portion of their income to their spouses and minor child in order to reduce their tax liability as the slab rate of income tax for individuals is progressive.

    Such diverted income is to be clubbed with the income of the assessee as per the provisions of the Income-tax act.

    Set-off and carry forward of losses

    Losses suffered under the heads of the income like ‘Profit and Gains from Business and Profession’, ‘Income from House property’ can be set off against the income earned under other heads as per provision of the act.

    If set off is not possible in the current assessment year then the loss can be carried forward to the next assessment year.

    Computation of Gross Total Income

    Gross Total Income is arrived at by computing the total of income under all five heads of income after giving necessary deductions as applicable under each head of income.

    Deductions from Gross Total Income to arrive at Total Income

    Income tax act, 1961 allows specific deduction from the Gross Total Income under sections 80C to 80U. These deductions are provided to encourage certain kinds of investments like life insurance premiums etc and provide relief on certain spending like medical expenses, interest expenses on home loans etc which leads to the overall welfare of the people.

    After allowing the deductions from Gross Total Income, we arrive at Total Income.

    Application of the rates of taxes on total income

    Tax is calculated at a rate on the total income. The rate and calculation of income tax depend on the type of assessees.

    Individuals and HUFs

    For individuals who are below the age of 60 years and HUFs:

    For individuals over 60 years and 80 years of age, the basic exemption limit is ₹3,00,000 and ₹5,00,000 respectively.

    Also, as per section 115BAC, individuals and HUFs have the option to choose an alternative slab rate of tax as per which the income tax is charged at concessional rates. But, the various exemptions and deductions like housing rent allowance, leave travel concession, standard deduction on salary income cannot be availed. This slab rate system was introduced recently to reduce the complexity of filling IT returns by small taxpayers.

    Rates of tax related to other types of assessees is not provided for sake of simplicity.

    Advance tax and tax deducted at source

    After calculating the tax on total income as per specified rates, the income tax amount is to be reduced by the advance tax and tax deducted at the source.

    Tax payable/ Tax refundable

    After performing all the steps above, we arrive at Income tax payable or tax refundable.

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Ayushi
AyushiCurious
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  2. AbhishekBatabyal Helpful Pursuing CA, BCOM (HONS)
    This answer was edited.

    TDS stands for Tax Deducted at Source It is the tax deducted on certain incomes as specified under sections 192 to 194N of the Income Tax Act,1961 by the person who is responsible to pay such income. For example, an employer is liable to deduct the TDS on the salary paid to the employee subject to tRead more

    TDS stands for Tax Deducted at Source

    It is the tax deducted on certain incomes as specified under sections 192 to 194N of the Income Tax Act,1961 by the person who is responsible to pay such income.

    For example, an employer is liable to deduct the TDS on the salary paid to the employee subject to the provisions of the Income Tax Act, 1961.

    TDS is deducted either,

    • at the time of payment

    OR

    • At time of credit to the account of the payee or at the time of payment; whichever is earlier

    We know that Income tax liability is calculated after the income for a year is earned. In the next year, which is called the Assessment Year, income tax payable is calculated on the income earned in the Previous Year

    For example:

    Year 2021-2022 – This year (Previous Year) – Income is earned here.

    Year 2021-2022 – Next Year (Assessment Year) – Income tax is assessed here.

    But, the government collects the income tax from the income of the assessee in the Previous Year itself by the following ways:

    1. TDS – Tax Deducted at Source
    2. TCS – Tax Collected at Source
    3. Advance Tax

    Some of the most common sections are given below:

    1. Section 192 – Salary
    2. Section 194A – Interest other on securities deposits with the bank, post office etc) –  @10%
    3. Section 194B and 194BB – Winning from lotteries, crossword puzzle – @30%
    4. Section 194 – DA – Payment in respect of Life Insurance Policy – @5%.

    So, according to sections 192 to 194N, some amount of income tax is deducted from the income of the assessee in the Previous Year itself.

    In the Assessment Year, the assessee also gets a tax credit for the TDS i.e. the Income Tax liability gets reduced by the amount of Tax Deducted at Source in the Previous Year.

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AbhishekBatabyal
AbhishekBatabyalHelpful
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  2. Ayushi Curious Pursuing CA

    By the name, it can be easily deduced that Advance tax means the tax paid in advance. Advance tax is the tax paid by an assessee in the Previous Year itself based on his estimated income. We know that Income tax liability is known in the Assessment Year based on the income of the Previous Year. But,Read more

    By the name, it can be easily deduced that Advance tax means the tax paid in advance.

    Advance tax is the tax paid by an assessee in the Previous Year itself based on his estimated income.

    We know that Income tax liability is known in the Assessment Year based on the income of the Previous Year. But, the government encourages the taxpayers to pay the tax in the Previous Year itself based on the estimated income.

    As per section 208 of the Income Tax 1961, if the total income liability on the estimated income comes up more than Rs. 10,000, then advance tax has to be paid.

    The advance tax has to be paid according to the following schedule for the individual and corporate assessees [Other than the assessee who computing profits on a presumptive basis under section 44AD(1) and 44ADA(1)]:

    Due date of Instalment Amount Payable
    On or before 15th June No less than 15% advance tax liability.
    On or before 15th September No less than 45% of tax liability, as reduced by any amount if any paid in the earlier instalment.
    On or before 15th December No less than 75% of tax liability, as reduced by any amount or amounts if any paid in the earlier instalments.
    On or before 15th March No less than 100% of tax liability, as reduced by any amount or amounts if any paid in the earlier instalments.

     

    Any amount paid by the way of advance tax on or before 15th March shall be treated as advance tax paid during each financial year on or before 15th March.

    Also as per section 219, the tax credit is given for the advance tax paid in the regular assessment of income tax.

    In case of non-payment or short payment of the advance tax,  interest is payable as per section 234B. Interest is also attracted in case of delayed payment of advance tax as per section 234C.

    That’s all, I would conclude my answer hoping that it was helpful in making the concept of advance tax easy to grasp.

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Ayushi
AyushiCurious
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  2. Rahul_Jose Aspiring CA currently doing Bcom
    This answer was edited.

    To determine if a person is a resident in India as per the Income Tax Act 1961, he has to fulfil any of the 2 following conditions; Condition A Stay in India for 182 days or more in the previous year, or Stay in India for 60 days or more in the previous year and another 365 days or more in the 4 yeaRead more

    To determine if a person is a resident in India as per the Income Tax Act 1961, he has to fulfil any of the 2 following conditions;

    Condition A

    • Stay in India for 182 days or more in the previous year, or
    • Stay in India for 60 days or more in the previous year and another 365 days or more in the 4 years immediately preceding the previous year.

    The second condition above is not applicable if he is an Indian citizen leaving India for the purpose of employment, or he is a member of the crew of an Indian ship, or he is only coming to India on a visit.

    If he fails to fulfil either of the two conditions, then he is termed as a non-resident.

    In India, a resident person can be classified into two:

    • Resident and ordinarily resident
    • Resident but not ordinarily resident

     

    Condition B

    A resident is a resident and ordinarily resident if (B):

    • He has been a resident in India for at least 2 out of the previous 10 years immediately preceding the relevant previous year, and
    • He has been in India for a period of 730 days or more during 7 years immediately preceding the relevant previous year.

    If a person satisfies any one condition of (A) but does not follow all conditions of (B), then he is termed as a resident but not ordinarily resident.

     

    EXAMPLE

    If Nithin is living in India for 190 days in the previous year and was a resident for the previous two years only staying for 400 days in the previous 7 years, then he fulfils condition (A) but not both conditions of (B) and hence he is a resident but not ordinarily resident.

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AbhishekBatabyal
AbhishekBatabyalHelpful
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  2. PriyanshiGupta Graduated, B.Com
    This answer was edited.

    Income derived from farming land, building constructed or associated with farming land, and commercial products from farming land is called agricultural income. According to Section 10(1) of the Income Tax Act, agricultural income is exempt from tax. However, the government can levy tax if agricultuRead more

    Income derived from farming land, building constructed or associated with farming land, and commercial products from farming land is called agricultural income.

    According to Section 10(1) of the Income Tax Act, agricultural income is exempt from tax. However, the government can levy tax if agricultural income is above Rs 5,000.

    Following are the sources to be considered for agricultural income according to the conditions mentioned in Section 2 (1A) of the Income Tax Act:

    • Revenue generated through rent or lease of land in India that is used for agricultural purposes.
    • Revenue generated through the commercial sale of produce gained from agricultural land.
    • Revenue generated through the renting or leasing of buildings in and around the agricultural land subject to the following conditions:
    • The cultivator or farmer should have occupied the building, either through rent or revenue.
    • The building is used as a residential place, storeroom, or outhouse.
    • The agricultural land or the land where the building is located, is being assessed for land revenue or subject to a local rate assessed.

    If the land does not fall under the provisions stated above, the Income Tax Act requires a separate evaluation to calculate tax.

    The Income-tax Act has laid down a method to indirectly tax such income.
    This method or concept is called the partial integration of agricultural income with non-agricultural income. It aims at taxing the non-agricultural income at higher rates of tax.

    Partial integration of agricultural income with non-agricultural income involves the following steps:

    1.  For example, the base income of the individual is Rs. 20,000 and agricultural income is Rs 10,000, then we first have to calculate tax on Rs 30,000. For convenience, we can call this tax T(30,000)
    2. Assuming that the income falls under tax slab A, this tax slab A has to be added to the agricultural income and tax has to be calculated on it as well and it is called T(S+10,000).
    3. The final tax on the individual’s income will be T(30,000)- T(A+10,000)

    The important step to keep in mind is to aggregate the agricultural income while calculating tax otherwise it can lead to double taxation, extra tax, or interest on tax.

     

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Ayushi
AyushiCurious
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  2. AbhishekBatabyal Helpful Pursuing CA, BCOM (HONS)
    This answer was edited.

    Brief Introduction Alternate Minimum Tax or AMT as the name suggests, is an alternate tax that an assessee has to pay, subject to certain conditions, instead of the income tax liability which is computed as per normal provisions of the Income-tax law. Alternate Minimum Tax is levied to impose higherRead more

    Brief Introduction

    Alternate Minimum Tax or AMT as the name suggests, is an alternate tax that an assessee has to pay, subject to certain conditions, instead of the income tax liability which is computed as per normal provisions of the Income-tax law.

    Alternate Minimum Tax is levied to impose higher tax liability on non-corporate assessees who have claimed various profit-link deductions or investment-linked deductions in the relevant previous year.

    My answer is based on the Indian Income law i.e. Income Tax Act, 1961.

    The concept behind Alternate Minimum Tax

    Let’s start our discussion with MAT i.e. Minimum Alternative Tax. It applies to corporate entities or companies.

    Before MAT, it was seen that companies used to declare huge dividends to their shareholders. But when it came to filing income tax returns, they used to claim various profit linked and investment-linked deductions to report very low profits and even losses to arrive at negligible tax or nil tax whereas their financial statements would report huge profits.

    It is true that the government provides such profit linked or investment linked deductions to encourage business and investments, but it also needs a sufficient and regular flow of revenue in the form of tax to fund its expenditure.

    Hence, to prevent misuse of deductions to evade taxes by corporates, government introduce Minimum Alternate Tax to charge such assessees a minimum rate of tax.

    Alternate Minimum Tax is the same as Minimum Alternate Tax in terms of concept.  The provisions related to AMT are given under section 115JC of the Income Tax Act, 1961.

    Scope of AMT as per section 115JC

    Alternate Minimum Tax applies to all non-corporate assessees who claimed have claimed

    • Deduction claimed if any under Chapter VI-A from section 80H to 80RRB except section 80P
    • Exemption under section 10AA
    • Deduction under section 35AD (Investment-linked deduction)

    However, there is a threshold limit for certain non-corporates.

    By non-corporate assessees we mean:

    1. Individual
    2. Hindu Undivided Family (HUF)
    3. Firms (partnership firms)
    4. Co-operative societies
    5. Association of Persons (AOP)
    6. Body of Individuals (BOI)
    7. Artificial Juridical Person (AJP)
    8. Limited Liability Partnership (LLP)

    AMT is applicable to all except

    • Individuals
    • HUF
    • AOP
    • BOP
    • Artificial Juridical Person

    If their total adjusted income does not exceed Rs 20,00,000  in the previous year.

    Therefore, AMT is applicable to all other non-corporate assessees like LLP, firms and cooperative societies irrespective of their total adjusted income.

    Calculation of Alternate Minimum Tax

    The rate of AMT is 18.5% of the adjusted total income. This adjusted total income and the AMT on it is calculated in the following manner:

    The higher of the following becomes the tax liability of the assessee:

    • Alternate Minimum Tax calculated on adjustment income plus surcharges u/s 87A (4% Health and education cess)
    • Income Tax calculated on taxable income (as per normal provisions)

    Numerical example

    Mr X is a businessman who has earned the following income and expenditure in P.Y 2020-2021:  (Amount in Rupees)

    Income from manufacturing business                             25,00,000

    Interest on saving bank account                                               8,000

    Dividend from ABC ltd                                                              10,000

    Insurance premium paid                                                       1,00,000

    Capital expenditure made as per section 35AD               5,00,000

    Mr X  is eligible to claim a profit linked deduction of Rs 6,00,000.

    Also, the depreciation allowed (other than under 35AD) as per Income-tax Act,1961 amounts to Rs. 3,00,000.

    Following is his computation of both AMT and Income tax liability as per normal provisions.

     

     

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