Computation of Total Income under Various Heads

This presentation provides a comprehensive guide to the computation of total income under various heads as per the Income Tax Act. It covers the five broad categories: Income from Salary, Income from House Property, Capital Gains, Profit and Gains from Business and Profession, and Income from Other Sources. Each section details the specific criteria and calculations required for determining taxable income, including allowances, perquisites, and deductions. This presentation is a valuable resource for understanding the intricacies of income computation and tax liabilities in India.

1. COMPUTATION OF TOTAL INCOME UNDER VARIOUS HEAD

2. Introduction Section 14 of the income tax lays down that there can be various modes of income for a person. These modes are classified into 5 broadheads for the purposes of computation and determination of total income and tax rates apply thereafter. 1. Income from salary (section 15 to 17 ) 2. Income from house property (section 22 to 27) 3. Capital gains (Section 2844D) 4. Profit and gains from business and profession (section 45-55A) 5. Income from other sources (Section 56-59)

3. Income from salary Section 15 of the act lays down the conditions under which an income falls under the head of ‘salaries.’ Any remuneration is due from the employer to any former employee( assessee ) for the due course of his employment in the previous year, whether paid or not. (normal) Salary paid to an employee by the employer or former employer in the previous year even though it was not due to him. (advance) Salary paid to an employee by the employer or former employer in the previous year which was not charged under income tax in any other previous years. (arrears/due) The key element of this head is that it mandates a relationship between employer and employee. If an employer-employee relationship is not there, the income will not be accessible under the head of salaries.

4. Section 17 of the Act has mentioned the term ‘salary’, which included- 1. Wages; 2. Any annuity or pension; 3. Any gratuity; 4. Any charges, commissions, perquisites or benefits in lieu of or notwithstanding any compensation or wages; 5. any advance of salary; 5a. Any payment received by a worker in regard to any time of leave not benefited by him; 6. The yearly accumulation to the balance at the employee partaking in a perceived Provident Fund, to the degree to which it is chargeable to assess under Rule 6 of Part A of the fourth schedule; 7. The total of all wholes that are included in the transferred parity as alluded to in sub-rule 2 of Rule 11 of PartA of the Fourth schedule of an employee partaking in a perceived Provident Fund, to the degree to which it is chargeable to assess under sub-rule 4 thereof; and 8. The contribution made by the Central Government or any other employer in the previous year, to the account of an employee under a pension scheme, referred to in Section 80CCD

5. Allowances The employer pays allowances to his employees in order to fulfill his personal expenses. Allowances can be fully taxable or partly taxable. Partly taxable allowances include house rent allowance and special allowances under section 10(14) ( i )&(ii). Fully taxable allowances are: Dearness Allowance Overtime allowance Fixed Medical Allowance Tiffin Allowance Servant Allowance Non-practicing Allowance Hill Allowance Warden and Proctor Allowance Deputation Allowance

6. Perquisites In addition to their salary, the employees are often given some other benefits which may or may not be in cash form. For example, rent-free accommodation or car given by the employer to the employee. Reimbursement of bills is not a perquisite. Perquisites are only given during the continuance of employment. Taxable perquisites include Rent free accommodation Interest free loans Movable assets Educational expenses Insurance premium paid on behalf of employees Exempted perquisites include: Medical benefits Leave travel concession Health Insurance Premium Car, laptop etc. for personal use. Staff Welfare Scheme

7. Profits in Lieu of Salary Section 17(3) gives a comprehensive meaning of profits in lieu of salary. Any payment due or accrued to be paid to the employee by the employer. Payment to be valid under section 17(3), there are two essential features- There must be compensation received by an assessee from his employer or former employer; It is received at or in connection with the termination of his employment or adjustment of terms and conditions. ‘Profit in lieu of Salary’ is taxable on ‘due’ or ‘receipt’ basis. Payment from unrecognized provident or superannuation fund is taxable as “profit in lieu of salary” if that balance consists employer’s contribution or interest on an employer’s contribution. Exceptions to section 17(3) (exempted under section 10) Death cum retirement gratuity; House rent allowances; Commuted value of pension; Retrenchment pay received by an employee; Payment received from a statutory provident fund or recognized provident fund; Any payment from an approved superannuation fund; Payment from the recognized provident fund.

8. Computation of income tax on salary Let’s take an example – An individual, let’s say, Mr. A, receives the following pay – Basic salary – Rs. 2,50,000 per annum; Dearness Allowance – Rs. 10,000 per annum; Entertainment Allowance – Rs. 3,000 per annum; Professional Tax – Rs. 1,500 per annum; then how much amount will be taxable from his salary? Ans. Find out total gross salary = basic salary + Dearness Allowance + Entertainment Allowance, i.e., 2,50,000 + 10,000 + 3,000 = 2,63,000. As per deduction under section 16(iii) = 2,63,000 – 1500 = Rs. 2,61,500 Income tax rate on inome Rs. 2,61,500 is 5%, which will be equal to Rs. 13,075 and this much amount will be taxable.

9. Income from house property The total net assessable estimation of property, comprising of any buildings/lands/flats belonging to the assessee , when assessee is the owner apart from the property which is under the use for any business or profession undertaken by him, the proceeds of which are taxable under the income tax act, falls under the ambit of income from house property. (section 22) The income from house property includes lease-hold and deemed ownership. The income from house property is taxable after considering the deductions under Section 24 of the act. In the case of repairing and maintenance of the property, thirty percent of the Net Annual Value is deductible. This deduction is not allowed on a self-occupied property. For the purpose of computation of income from house property, house properties are divided into three categories. House property which : 1. Were let out during the whole previous year 2. Were partly vacant but partly let out. 3. Let out for some time and then used for personal residence.

10. Computation of taxable income from house property WHAT IS CONSIDERED? Municipal Value/tax Fair Rent: Standard rent: fixed under Rent Control Act Actual rent received or receivable. Comparing Municipal rent and fair rent and consider whichever is higher Comparing standard rent and higher rent from above and consider whichever is lower. Compare actual rent and lower value and consider whichever is higher FROM THIS WE CAN OBTAIN Gross annual value.

11. Deemed ownership- Section 27 provides that certain persons are not legal owners of a property but are still considered to be deemed owners under certain conditions. Condition 1 – Transfer of property to a child or spouse, without consideration. Condition 2 – Holder of an impartible estate is deemed to be the owner of the entire estate. Condition 3 – Members of a co-operative society or company or association of person Condition 4 – Person in possession of a property on lease for more than 12 years as per Section 269UA(f).

12. Income from capital gains Any profit or gain emerging from the exchange of capital assets held as investments are chargeable under the head capital gains. The gain can be because of short-and long term gains. A capital gain emerges just when a capital asset is transferred. This implies if the asset moved is certainly not a capital asset; it won’t fall under the head of capital gains. Profits or gains emerging in the previous year in which the transfer occurred will be considered as income of the previous year and chargeable to IT under the head Capital Gains and indexation will apply, if applicable. To fall under the ambit of income from capital gains, there must be – 1. A capital asset 2. Which is transferred by the assessee 3. The transfer has taken place during the final year 4. Gain or loss has arisen from it Capital assets include all kinds of properties whether tangible or intangible, movable or unmovable, which are owned by the assessee , may or may not be for business and professional purposes. Capital assets do not include assets like stock in trade, goods of used personal effects, agricultural land, etc.

13. Capital gains are of two types 1. Short term capital assets – those assets held by an assessee for at most 36 months, immediately prior to its date of transfer. ITO v. Narayana K Shah 2000 74 ITD 419 Mum. In this case Court held that where the assessee held certain shares in a company by virtue of which a right of occupancy in a flat is conferred on him, these shares cannot be treated as a ‘share’ mentioned in proviso to section 2(42A) and as such where such shares are sold after being held for a period of fewer than 36 months, gain arising therefrom is to be treated as short-term capital gain. 2. Long term capital assets – those assets held by an assessee for more than 36 months. Long-term capital gains are generally taxable at a lower rate. There are some cases where long term capital assets do not require a term of 36 months, assets held for more than 12 months is valid for long term capital assets. Those conditions are – Listed Equity or preference shares; Securities listed in a recognized stock exchange, like debentures, security exchange; Units of UTI; Units of Mutual Funds; Zero coupon bond; Unlisted equity or preferential shares; Units of equity oriented fund. Tax on long-term capital assets is 20 percent.

14. Tax on Short Term and Long Term Capital Gains: Long Term Capital Gain : 20% (Except on sale of equity shares/ units of equity orientated fund Long Term Capital gain on sale of equity shares / units of equity oriented fund (10% over and above Rs. 1 lakh) Short Term capital gain when securities transaction tax is not applicable: added to your ITR and payers is taxed on basis of his Income tax slab. Short term capital gains tax when securities transaction tax is applicable 15%.

15. Income from Profit and Gain from business and profession Business and Profession has been defined under Section 2(13) and Section 2(36) respectively. Business. It includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce, or manufacture. Profession. “Profession” includes vocation. Section 28 of the Income Tax Act covers the “Profits and gains of Business or Profession”, and there is following income which shall be chargeable under the head “Profits and Gains of Business or Profession” : Profits and Gains of any business or profession; Any compensation or other payments due to or received by any person specified in section 28(ii), who is managing the whole affairs of an Indian Company or other than an Indian company at the termination of his management; Pay determined by a trade, professional or comparable association from explicit services performed for its members; Benefit on sale of import entitlement license, incentive by way of cash compensatory support and drawback of duty;

16. Any benefit on an exchange of the Duty Entitlement Pass Book Scheme; Any benefit on the exchange of the Duty-Free Replenishment Certificate; The estimation of any benefit or perquisite, regardless of whether convertible into money or not, emerging from business or the activity of a profession; Any interest, pay, reward, commission or compensation received by a partner of a firm from such firm; Any amount received under a Keyman insurance policy including Bonus; Income from speculative transactions; Any total received in real money or kind, by virtue of any capital asset being devasted, destroyed, discarded or transferred, if the exhaustive expenditure on such capital asset has been permitted as a deduction under section 35AD. Deduction under the heads of “Profits and Gains from Business or Profession” has been mentioned under Section 30 to 37. Section 30. A deduction shall be permitted if the lease, rates, taxes, fixes, and insurance for premises used for the purpose of business or profession.

17. Income from other sources All sorts of incomes that are not covered in the above-mentioned heads are covered and chargeable under this head. Income from other sources is laid down in section 56 of the act. Dividend under section 2(22); Winning from lotteries, horse races, crossword puzzles, and other games; Contribution received by the employer as an assessee from his work towards the Staff Welfare Scheme; Interest on debentures, government securities/bonds; Where the assessee let on contract apparatus, plant or furniture belonging to him and furthermore buildings, pay from this is assessable as salary from other sources if it is not taxable under the head of “profits & gains of business or profession”; Sum received under Keyman insurance policy including reward; Salary from hardware, plant or furniture belonging to the assessee .

18. Gifts that cannot be charged: Gifts received from any relative Gifts received on the occasion of marriage Gifts are given by the local authority Gifts received in the form of inheritance Gifts received from any funds, institutions, hospitals, etc. Deductions applicable on income from other sources – section 56 and 57

19. Computation of Income from Other Sources Computation of income from other sources can be done in two ways; 1. If income is one-time income or casual income then 30% tax is imposed on the total income. 2. If income is from any other method, then the tax shall be applicable in accordance with the tax slab. Example- A person gets Family pension = Rs. 30,000 (exemption on this is 33.33% or 1500);33.33% of Rs. 30,000 = Rs. 9,999, this amount is less than 1500. So the taxable income is 30,000 – 9,999 = 20,001.Rs. 20,001 is taxable as income from other sources. Conclusion These five heads of income that we have discussed, provide a method to different categories of people to compute their income as per their applicability as a taxpayer and they can get to know by computation method that how much income is taxable after investing in different heads of income. So it will make easy for them to plan their capital in the right direction.

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