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  Tax Planning

 
home > Tax Planning > Nuts & Bolts of IT > Heads of Income
logo   MATTER OF HEADS OF INCOME
   
  Your income is taxable under the IT Act under 5 basic heads of income. You need to understand the basics of these heads of income, to have more clarity as to how your taxable income and tax payable is computed.
   
bullet Gross total income
  The income earned by any person is computed under the following categories:
  A.  Income from Salary
 
Important Concepts:
  • Income under the head salaries covers all possible remuneration due/paid to a person in respect of services rendered by him in an express or implied contract of employment
  • Payment received by an individual other than an employer cannot be termed as salary and consequently cannot be taxed under this head
  • Salary is taxed on due basis or receipt basis whichever is earlier
  • If the employer pays the salary tax free the employee has to include in his taxable income not only the salary but also the amount of tax paid by the employer
Salary includes the following items:
  • Wages
  • Any annuity or pension
  • Any gratuity
  • Any fees, commission, perquisite or profits in lieu of or in addition to any salary or wages
  • Any advance salary
  • Any payment received for any leave not availed by him
  • Transferred balance in a RPF to the extent it is taxable
Format of computation of taxable salary.
1 Basic salary p.m
2 Dearness allowance p.m
3 Commission
4 Advance salary
5 Arrears of salary
Fully taxable allowances
1 City compensatory allowance
2 Fees
3 Bonus
4 Lunch/tiffin allowance
5 Overtime allowance
6 Servant allowance
7 Warden allowance
8 Family allowance
Partly taxable allowances
1 House Rest Allowance
2 Children Education Allowance
3 Children Hostel Allowance
4 Transport Allowance
5 Travelling Allowance
6 Conveyance Allowance
7 Helper Allowance
8 Academic Allowance
9 Uniform Allowance
Other payments received
1 Gratuity
2 Uncommuted Pension (taken periodically)
3 Commutation of Pension
4 Retrenchment Compensation
5 Leave encashment during service
6 Leave encashment upon retirement
7 Voluntary retirement compensation
8 Leave travel concession
9 Employer's contribution to RPF
10 Interest on RPF received
Perquisites
1 Service of Sweeper, Gardener, Watchman etc.
2 Supply of Water, Gas, Electricity for household purposes
3 Educational facilities to the members of household of employee
4 Transportation of Goods/Passengers
5 Housing/Vehicle Loan (not for repairs)
6 Total Salary
7 (Less) Professional tax
Taxable Salary

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  B.  Income from House Property
 

Fundamental conditions for taxing income under this head:

  • The property should consist of any buildings or lands or apertuned thereto
  • The assessee should be the owner of the property
  • The property should not be used by the owner for the purpose of carrying on any business or profession the profits of which are chargeable to tax

Format for computation of House property income:

Gross annual value
(-) Municipal taxes
NET ANNUAL VALUE
(-) Repairs
(-) Interest
TAXABLE ANNUAL VALUE.

Computation of GROSS ANNUAL VALUE (GAV):

  • Step 1: Select higher of fair rent or municipal rent
  • Step 2: Select higher of standard rent or amount derived in Step 1
  • Step 3: Select higher of actual rent received/receivable or amount derived in Step 2
However it should be noted that GAV for self-occupied property & let out vacant house should be taken as NIL.
  • Municipal taxes paid by the owner would be deductible
  • 30% of Net Annual Value will be the standard deduction for repairs
  • Full amount of interest on housing loan paid would be deductible. For self occupied property, interest would be deductible only to the extent of Rs. 1.50 lakhs only.
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  C.  Income from Business of Profession
 

Format for computation of business income:

Profit as per Profit & Loss a/c
(less) other admissible expenses
(add) inadmissible expenses
Taxable business or professional income

The following types of income are chargeable to tax under the head Business of Profession:

  • Profits and gains from any business of profession
  • Income derived from any trade or profession
  • Any salary, interest, bonus received by a partner of a firm from such a firm
  • Sum received under Key Man insurance policy
  • Income from a speculative transaction
  • Value of any benefit or any perquisite whether convertible into money or not arising from business or the exercise of a profession

Basic principles governing the admissibility of deductions under Income from Business of Profession:

  • Onus to prove the admissibility of the expenditure should lie on the assessee
  • Allowances are cumulative
  • Expenditure should relate to the previous year
  • Business should be carried on in the previous year
  • Expenditure should have been incurred in relation to the assessee's own business
  • Benefit of expenditure may extend beyond the previous year

No allowance in respect of a non existent liability:

  • Expenditure tainted with illegality cannot be allowed as a deduction
  • No allowance in respect of anticipated losses. Anticipated loss cannot be deducted even though the loss is certain. In other words loss which is neither suffered not incurred during the previous year is not deductible.
  • No deduction in respect of depreciation of investment i.e. deduction in respect of depreciation of investment in shares and other securities is not available.

Deductions expressly allowed:

  • Rent, rates, taxes, repairs and insurance of building
  • Depreciation
  • Deduction is possible under Tea Development account
  • Deduction possible under investment deposit scheme
  • Site restoration fund
  • Reserve for shipping business
  • Revenue expenditure incurred by an assessee who carries on scientific business
  • Deduction in respect of patents and copyrights
  • Deduction in respect of expenditure of know how
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  D.  Income from Capital Gains
 

Format for computation of Capital gains:

Consideration received on sale
(less) Expenses incurred in relation to sale
NET CONSIDERATION
(less) Cost / Indexed cost of acquisition
Long term / Short term capital gain
(less) Exemption u/s 54 of the I.T act
TAXABLE LONG / SHORT TERM CAPITAL GAIN / LOSS

Capital Gain arises on the fulfillment of the following conditions:

  • There should be a capital asset
  • The capital asset should be transferred by the assessee
  • The transfer must take place in the previous year
  • There has to be profit or gain as a result of the transfer
  • Such profit or gain is not exempt under section 54, 54B, 54EC, 54ED, 54F and 54G
Capital asset includes any property held up the assessee whether or not connected with his business or profession. But the following are excluded from the definition of capital asset
  • Any stock in trade
  • Consumable store
  • Personal affect of the assessee, any movable property including wearing apparel or furniture held for personal use
  • Agricultural land in India provided it is not situated
  • In any area within the jurisdiction of a municipality of a cantonment board
  • In any area specified by the government
  • 6.4% Gold bonds, 7% Gold Bonds, National Defense bonds
  • Special Bearer bonds
  • Gold deposit bonds

PERMISSABLE EXEMPTIONS UNDER CAPITAL GAINS

SECTION 54

  • Applicability: This exemption can be availed only by individuals or HUF.
  • Kind of asset: Residential house property or land appertained thereto
  • Nature of the asset: The house property is a long term capital asset
  • Investments: To be invested in residential house property or deposited in a bank a/c under the Capital gain account scheme.
  • Amount to be invested: Capital gains
  • Time limit: Residential house property to be purchased within 1 year before the date of such transfer or within 2 years after the date of transfer OR residential house must be constructed within 3 years after the date of transfer
  • Lock In period: The new house property that is acquired should not be sold within 3 years. In case if the property is sold within 3 years then the amount of capital gains that was exempted earlier and the capital gains accruing on the sale of the asset both, will be taxed in the year of receipt of consideration.

SECTION 54B

  • Applicability: This exemption can be availed only by individuals.
  • Kind of asset: Agricultural land
  • Nature of the asset: The agricultural land may be short term or a long term capital asset. Agricultural land must be used by the tax payer or his parents for agricultural purposes for a period of 2 years preceding the date of transfer
  • Investments: To be invested in another agricultural land or deposited in a bank a/c under the Capital gain account scheme.
  • Amount to be invested: Capital gains
  • Time limit: Within a period of 2 years from the date of such transfer
  • Lock In period: The agricultural land that is acquired shall not be transferred within 3 years.In case of a transfer then the capital gains arising on the transfer and the capital gains earlier exempt will be taxed in the year in which the gains are received

Section 54EC

  • Applicability: This exemption can be availed by anyone.
  • Kind of asset: Any capital asset
  • Nature of the asset: The capital asset must be long term.
  • Investments: To be invested in specified long term capital bonds. Specified long term capital bonds which are redeemable after 3 years are as follows:
    Issued on or after April 1st 2000 by REC or by NHAI
  • Amount to be invested: Capital gains
  • Time limit: Within 6 months from the date of such transfer
  • Lock In period: If the specified assets are transferred or converted into money within a period of 3 years then the capital gain arising on the transfer and the earlier exempted capital gain will be clubbed and taxed in the year of the receipt of the consideration

SECTION 54F

  • Applicability: This exemption can be availed only by individuals or HUF.
  • Kind of asset: Capital asset other than Residential house.
  • Nature of the asset: The asset must be a long term capital asset.
  • Investments: To be invested in residential house property or deposited in a bank a/c under the Capital gain account scheme.
  • Amount to be invested: Net consideration on sale.
  • Time limit: Residential house property to be purchased within 1 year before the date of such transfer or within 2 years after the date of transfer OR residential house must be constructed within 3 years after the date of transfer
  • Lock In period: The new house property that is acquired should not be sold within 3 years. In case if the property is sold within 3 years then the amount of capital gains that was exempted earlier shall be treated as long term capital gain, & will be taxed in the year in which the asset is transferred.
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  (A + B + C + D + E) = Gross total income
   
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