Unit 10: Income-tax and Corporate Tax Planning mind map

The vocabulary of income tax, who is a resident, and how agricultural income is treated.

Basic concepts

Previous year, assessment year, person and assessee

Income of one year is taxed in the next. A person is wider than an assessee.

• Previous year runs 1 April to 31 March. Assessment year is the year after.
• A new source starts its previous year on the day it begins.
• Person includes individual, HUF, company, firm, AOP or BOI, local authority, artificial juridical person.
• An assessee is always a person. A person need not be an assessee.

A lecturer appointed on 1 July 2022 has a previous year from 1 July 2022 to 31 March 2023 for AY 2023-24. Assessment year is the 12 months starting 1 April. Residential status is fixed afresh for each previous year.

Residential status and scope of income

Residence decides which income India can tax. Only individuals and HUFs can be resident but not ordinarily resident.

• Resident: 182 days in the year, or 60 days plus 365 in four earlier years.
• A company can only be resident or non-resident, never RNOR.
• Resident company: Indian company, or place of effective management in India.
• Income from a business controlled from India but arising abroad is taxed for ROR and RNOR.

An Australian cricketer who stays 100 days every year for ten years meets the 60 plus 365 test, so he is resident. He is not an ordinary resident, because he fails the further tests. Pension for service rendered in India is deemed to accrue in India, even if the retiree lives abroad.

Direct taxes, buoyancy and tax terms

Direct taxes are paid by the person on whom they fall. Canons of taxation guide good design.

• Direct: income tax, corporate tax, capital gains tax. GST is indirect.
• Buoyancy: revenue rises naturally as the economy grows.
• Economy means least cost of collection. Certainty means well-determined liability.
• TIN is not an income tax term. TAN, DA and LTA are.

Surcharge is charged on tax, not on income. For an individual it is 10 per cent above Rs 50 lakh and 15 per cent above Rs 1 crore. Health and education cess for AY 2025-26 is 4 per cent of tax.

Agricultural income and partial integration

Agricultural income is exempt under Section 10(1). It still raises the rate on other income.

• Includes rent from agricultural land, income from farm operations, and farm building income.
• Dairy, poultry and dividend from an agricultural company are not agricultural income.
• Tea growing and manufacturing: 60 per cent agricultural, 40 per cent business.
• Partial integration needs agricultural income above Rs 5,000 and other income above the exemption limit.

It applies to individuals, HUFs, AOPs and BODs and other slab-rate assessees, not to companies, firms or co-operative societies. Steps: tax on the total, tax on exemption limit plus agricultural income, subtract, then rebate and cess.

Order of computing total income and exempt incomes

Computation follows a fixed order. Section 10 lists many exempt items.

• Order: status, heads, clubbing, set-off, gross total income, deductions, rounding.
• 10(1) agriculture, 10(10CC) tax paid by employer, 10(11) provident fund.
• 10(13A) house rent allowance, 10(10C) voluntary retirement.
• Disaster compensation from government is fully exempt.

Sections 288A and 288B round tax and income. Professional tax comes off salary. Loan interest comes off house property. Investments such as PPF fall under Chapter VI-A at the end.

The five heads of income at a glance

All income is sorted into five heads. Each head has its own sections and its own main deduction.

• Salary: Sections 15 to 17. Standard deduction under 16(ia).
• House property: Sections 22 to 27. Standard deduction and interest under 24.
• Profits and gains of business or profession: Sections 28 to 44. Depreciation under 32.
• Capital gains: Sections 45 to 55. Exemptions such as 54.
• Other sources: Section 56 onwards. It is the residual head.

A deduction belongs to one head only. Standard deduction on salary cannot be claimed against rent. Depreciation belongs to business, not to house property. Exemptions under Section 54 reduce capital gains, not salary.

Resident, RNOR and non-resident: the full test

A person first becomes a resident or not. A resident is then ordinary or not ordinary.

• Resident: 182 days this year, or 60 days plus 365 in four earlier years.
• Ordinary resident: also 2 of last 10 years resident, and 730 days in 7.
• Not ordinarily resident: a resident who fails either of the second tests.
• Non-resident: fails the first test.

Think of two gates. The first gate decides resident or non-resident. The second gate, used only for residents, decides ordinary or not ordinary. A company has no second gate. Only an individual or HUF can be RNOR.

Slabs, rebate and cess in the papers

Questions give a year and ask for tax. Learn the slabs the papers used, with the year attached.

• AY 2018-19: nil, then 5, 20 and 30 per cent at 2.5, 5 and 10 lakh.
• Rebate 87A for AY 2018-19: Rs 2,500 if income is up to Rs 3.5 lakh.
• Senior citizen (60 or more) in PY 2019-20: exemption limit Rs 3 lakh.
• New regime FY 2021-22: 5, 10, 15, 20, 25, 30 per cent, each Rs 2.5 lakh.

Tax of Rs 5,000 on Rs 3.5 lakh falls to Rs 2,500 after the rebate. Cess of 3 per cent gives Rs 2,575, rounded to Rs 2,580. For AY 2025-26 the cess is 4 per cent.

Salary, house property, business, capital gains and other sources, with the exemptions and deductions of each.

Income from salary

What salary includes and the standard deduction

Salary is wide. It covers wages, pension, gratuity and advance of salary, among other things.

• Section 17(1): wages, annuity or pension, gratuity, fees, commission, leave encashment, advance of salary.
• Interest on government securities is not salary.
• Standard deduction under the new regime from AY 2025-26 is Rs 75,000 or salary, if lower.
• Entertainment allowance is deductible only for government employees.

A private employee with entertainment allowance of Rs 1,500 a month gets nil deduction under Section 16(ii). For a government employee the deduction is the least of Rs 5,000, one-fifth of basic salary and the allowance received.

Allowances, HRA and perquisites

Allowances are taxable unless a rule exempts them. HRA exemption is the least of three amounts.

• HRA exemption is the least of three amounts.
• Place of residence, rent paid, salary and HRA received are the factors. Fair rent is not.
• Children education allowance: Rs 100 a month for two children.
• Transport allowance exempt up to Rs 1,600 a month, as in the paper.

With Rs 80 per child for three children, only two count, so Rs 160 is exempt. Movable assets owned by the employer are valued at 10 per cent per annum of cost. Sumptuary allowance to judges and government allowances for service abroad are exempt.

Retirement benefits and provident funds

Retirement receipts get different treatment. Provident funds come in four kinds.

• Gratuity of a government or local authority employee is fully exempt, Section 10(10)(i).
• Voluntary retirement compensation is exempt up to Rs 5 lakh, Section 10(10C).
• Commuted pension of a government employee is fully exempt.
• Statutory PF is under the Provident Funds Act 1925. Recognised PF is under the 1952 Act.

Employer's contribution to a recognised PF is exempt up to 12 per cent of salary. Public provident fund has no employer. Unrecognised PF is not taxed year to year, and employee's contribution gets no Section 80C benefit.

Perquisites: car, assets and other benefits

A perquisite is a benefit given by the employer. Rules value it so that it can be taxed.

• Car owned by employer, running cost paid by employer, mixed use: flat monthly amount.
• Up to 1.6 litre: Rs 1,800 a month. Above: Rs 2,400. Driver adds Rs 900.
• Movable assets owned by employer: 10 per cent a year of cost.
• Rent-free house and free education are other perquisites.

A 1.8 litre car with a driver gives Rs 2,400 plus Rs 900. That is Rs 3,300 a month, or Rs 39,600 a year. The actual running cost does not matter. Rule 3 fixes the amount.

Income from house property

Annual value of a house

Annual value is built in steps. Standard rent is a ceiling on expected rent.

• Expected rent: higher of municipal value and fair rent, but not above standard rent.
• Gross annual value: higher of expected rent and actual rent after unrealised rent.
• Net annual value: gross annual value minus municipal tax actually paid.
• Standard deduction on NAV and interest on borrowed capital come next.

Take municipal value Rs 3.6 lakh, fair rent Rs 4 lakh, standard rent Rs 5 lakh, actual rent Rs 4.8 lakh. Expected rent is Rs 4 lakh. Actual rent is higher, so GAV is Rs 4.8 lakh. Tax due but not paid is not deducted.

Sections 23 to 27 and housing loan interest

The house property chapter follows section order. Interest on a home loan has a ceiling.

• Section 23 annual value, 24 deductions, 25A arrears of rent, 26 co-owned property, 27 deemed ownership.
• Self-occupied house interest: up to Rs 2 lakh for purchase or construction.
• Loan for repair or renovation: ceiling of Rs 30,000.
• Farm house, charitable property and a registered trade union's property are not charged.

Under the new regime, interest on a self-occupied house is not allowed, but interest on a let-out house is. Interest for the period before the previous year of completion is allowed in five equal instalments.

Profits and gains of business

Allowed and disallowed expenses

Business expenses must be revenue in nature and for the business. Several items are expressly disallowed.

• Section 37(1) allows revenue expenses wholly and exclusively for business.
• Personal expenses, charity and expenses for other heads are added back.
• Section 40 disallows wealth tax and salary paid abroad or to a non-resident without TDS.
• Section 35: 35(1)(ii) research associations, 35(1)(iii) social science, 35CCD skill development.

Losses before commencement, on closing down, and on capital assets are not deductible. Loss of stock-in-trade by enemy action or embezzlement by an employee is deductible. Fees for drafting a partnership deed are capital in nature.

Depreciation and presumptive taxation

Depreciation is on a block of assets. Small businesses can use presumptive schemes.

• Block of assets: assets of a class carrying the same rate.
• Steps: opening WDV, add new assets, deduct sale money, closing WDV.
• Presumptive taxation: income is presumed, not computed from books.
• Family planning capital spend: one-fifth first year, rest over four years.

Depreciation uses the written down value method under the Act. No one method is the best. Presumptive schemes are Sections 44AD, 44ADA and 44AE. A person opting out of these may need a tax audit.

Capital gains

Computing capital gains and exemptions

Capital gains follow steps. Exemptions depend on the asset sold and the new asset bought.

• Steps: is it a capital asset, is it a transfer, full value, deduct cost, claim exemption.
• Section 54 residential house, 54B agricultural land, 54D industrial undertaking, 54EC specified bonds.
• Unused account scheme money becomes long-term gain after three years from transfer.
• Long-term capital loss can be set off only against long-term gains.

Long-term gains above Rs 1 lakh on listed shares were taxed at 10 per cent without indexation. The 20 per cent rate with indexation was for other assets. Short-term capital asset is defined in Section 2(42A).

Income from other sources

Residual head: what falls here

Income from other sources is the leftover head. It takes anything not covered by the other four.

• Subletting income, director's fees, ground rent, insurance commission.
• Agricultural income from outside India.
• Deemed dividend (Section 2(22)): debentures distributed, reduction of capital, loan to substantial shareholder.
• Interest on enhanced compensation: 50 per cent deduction.

Sale of securities is capital gains or business income, not other sources. Personal expenses, wealth tax and interest payable abroad without tax deduction are not deductible under Section 58. Dividend is taxed in the shareholder's hands from 1 April 2020.

How losses are carried, whose income is clubbed, and which Chapter VI-A deductions reduce tax.

Clubbing of income

Clubbing of spouse and minor child income

Some income of family members is added to the income of the person who passed it on.

• Section 64(1A): minor child's income is clubbed with the parent who has the higher income.
• Parent gets an exemption under Section 10(32): Rs 1,500 per child or the income, if less.
• Spouse's salary from a concern where the other spouse has a substantial interest is clubbed.
• Substantial interest means 20 per cent or more of voting power.

Mrs Q's own professional income or clerk's salary from an outsider is not clubbed. A minor's interest on money gifted by an uncle is clubbed. If Mr X holds 26 per cent of a company and his wife works there without qualification, her salary after standard deduction is added.

Set-off and carry forward

Carrying losses forward

Losses can be set off in the same year and then carried forward. Each head has its own rules.

• House property loss: carried forward 8 years, set off only against house property income.
• Business loss: carried forward 8 years, set off only against business income.
• Speculation loss: 4 years, against speculation gains. Capital loss: 8 years, against capital gains.
• A discontinued business loss can still be carried forward under Section 72.

All five losses in the question can be carried forward. They differ in how long and against what. Long-term capital loss is set off only against long-term gain.

Chapter VI-A

Matching the 80-series sections

Chapter VI-A deductions are given from gross total income. Many questions match section numbers to purposes.

• 80D medical insurance, 80DDB specified diseases, 80E higher education loan interest, 80EE house loan interest.
• 80G donations, 80GG rent without HRA, 80GGA scientific research, 80U disability.
• 80GGB company's gift to political parties. 80GGC gift by any other person.
• 80CCH Agnipath, 80JJA biodegradable waste, 80QQB author's royalty, 80TTA savings interest.

Cash donations above Rs 2,000 get no deduction under 80G. Section 80TTB gives senior citizens up to Rs 50,000 on deposit interest. Section 80TTA is Rs 10,000 on savings interest for those below 60. Section 80IA is the tax holiday section.

Weighted and special deductions

Some deductions give more than what you spent. Others are for special zones.

• Research donation to an approved body: 150 per cent, as the law then stood.
• Donation to National Defence Fund: 100 per cent, with no limit.
• SEZ units under Section 10AA: 15 years.
• Tax holiday family: Sections 80IA, 80IB and 80IC.

Section 10AA gives 100 per cent for 5 years, 50 per cent for the next 5, then a limited deduction for 5 more. Weighted deduction means a bigger deduction than the amount spent, as an incentive.

Limits worth remembering in Chapter VI-A

Each deduction has a number attached. The numbers are what the examiner changes.

• 80TTA: up to Rs 10,000 on savings interest, for persons below 60.
• 80TTB: up to Rs 50,000 on deposit interest, for senior citizens.
• 80EE: interest on a first home loan, up to Rs 50,000 as in the paper.
• 80G cash donation: deduction only up to Rs 2,000.

Section 80TTA and 80TTB never apply together to the same person. A senior citizen uses 80TTB. Cash donations above Rs 2,000 get no deduction at all. Employer contribution to a recognised provident fund is exempt up to 12 per cent of salary.

Filing a return, tax deducted at source, advance tax, planning versus evasion, and relief from double tax.

Assessment procedure

Returns, forms and e-filing

A return is filed under Section 139. Different forms suit different taxpayers.

• 139(1) normal return, 139(4) belated return, 139(8A) updated return within 24 months.
• Belated return: before the end of the assessment year or before assessment, whichever is earlier.
• ITR-1 (Sahaj): resident individual, income up to Rs 50 lakh, salary, one house, other sources.
• ITR-4 (Sugam): presumptive income. ITR-6: companies. ITR-7: trusts and similar.

Directors, those with unlisted equity shares, foreign assets or lottery winnings cannot use ITR-1 or ITR-4. E-filing order: register, login, download utility and prepare, e-file, verify. Late fee under Section 234F is up to Rs 10,000.

Tax audit, firms and dispute settlement

Tax audit is compulsory above a turnover limit. Firms are assessed as firms only when valid.

• Section 44AB: business turnover above Rs 1 crore, profession receipts above Rs 50 lakh.
• Business limit is Rs 10 crore if cash dealings are within 5 per cent.
• A partner is assessed as an individual. A firm pays a flat 30 per cent.
• Vivad se Vishwas Act 2020: pay disputed tax, plus 10 per cent if paid late.

Remuneration to partners is allowed as a deduction in the firm's hands. Partners' share in the firm's income is not taxed again. The Vivad se Vishwas scheme does not apply where prosecution has been started.

Types of return under Section 139

The Income-tax Act has a family of returns. Each sub-section has its own purpose.

• 139(1): normal return by the due date.
• 139(3): return of loss to carry forward a loss.
• 139(4): belated return, filed late.
• 139(5): revised return to correct a mistake. 139(8A): updated return.

A belated return can be filed before the end of the assessment year or before assessment, whichever is earlier. An updated return (ITR-U) lets a person come clean on missed income within 24 months, with extra tax. A late fee under Section 234F is up to Rs 10,000, or Rs 5,000 if income is up to Rs 5 lakh.

Presumptive taxation and the audit link

Small taxpayers can pay tax on presumed income. They then skip detailed books.

• 44AD: small business. 44ADA: small professionals. 44AE: goods carriages.
• Receipts ceiling for 44ADA is Rs 50 lakh.
• ITR-4 (Sugam) is the return for these schemes.
• Opting out of the scheme can bring in a tax audit.

Presumptive means the law presumes your income. For example, a fixed percentage of turnover is treated as profit. The presumptive taxpayer also pays all advance tax in one instalment by 15 March.

TDS and advance tax

TDS sections and rates

Tax is deducted at source on many payments. Section numbers and rates are asked.

• 192 salary, 193 interest on securities, 194 dividend, 194A interest, 194B lottery.
• 194C contractor: 1 per cent for individuals and HUFs, 2 per cent for others.
• 194J professional fees 10 per cent. 194-I rent. 194D insurance commission 5 per cent.
• 194-IB rent by individuals above Rs 50,000 a month, 5 per cent. 194-IA is property sale.

Winnings from horse races under 194BB are taxed at 30 per cent. Rent of furniture is at 10 per cent and plant and machinery at 2 per cent. For non-residents, dividend is 20 per cent, short-term gain under 111A 15 per cent, horse race 30 per cent.

TDS forms, TCS and advance tax

Each TDS certificate has its own form. Advance tax is paid in instalments.

• Form 16 salary. 16A non-salary. 16B sale of property. 16C rent under 194-IB.
• Form 15G (below 60) and 15H (senior citizen) stop TDS on interest.
• Advance tax: 15 June 15 per cent, 15 September 45, 15 December 75, 15 March 100.
• Presumptive taxpayers under 44AD and 44ADA pay the whole in one instalment by 15 March.

Advance tax is payable only if tax after TDS is Rs 10,000 or more. Sections 207 to 211 run: liability, condition, computation, own payment, instalments. TCS under 206C: 1 per cent on a motor vehicle above Rs 10 lakh, liquor, timber and some minerals.

Limits and dates to remember for TDS and advance tax

Many questions test one number. Put every threshold in one place.

• 194C: one payment above Rs 30,000, or year's total above Rs 1 lakh.
• 194-IB: rent above Rs 50,000 a month, deduct 5 per cent.
• Advance tax is payable only if tax after TDS is Rs 10,000 or more.
• 206C: TCS of 1 per cent on a motor vehicle above Rs 10 lakh.

Form 16 for salary is issued once a year, by 15 June after the financial year. Form 16A for non-salary payments is issued every quarter. Forms 16B and 16C are for property and rent, issued within 15 days.

Tax planning

Planning, avoidance, evasion and management

Four ideas are often confused. Only evasion is illegal.

• Tax planning: reducing tax within the law, using reliefs the law intends.
• Tax avoidance: legal but grey, using loopholes against the spirit of the law.
• Tax evasion: illegal, hiding income or claiming bogus expenses.
• Tax management: compliance, record keeping and filing on time.

Evasion leads to penalty and prosecution. Planning rests on full disclosure and is accepted by courts. Claiming deductions that the law offers is planning, not evasion. The key picks avoidance for the phrase 'reducing tax in a legally permissible way' in one paper.

MAT, AMT, dividends and transfer pricing

Minimum taxes and transfer pricing apply to companies and international deals.

• MAT (Section 115JB) applies to companies on book profit.
• AMT (Section 115JC) applies to non-corporate assessees on adjusted total income.
• Arm's length price: price between unrelated persons in uncontrolled conditions.
• Section 92C gives methods. Section 92F defines the arm's length price.

Methods under 92C: comparable uncontrolled price, resale price, cost plus, profit split, transactional net margin and any other method. Slum sale price method is not one. Dividend is taxed in the receiver's hands from 1 April 2020. Crypto transfers face 30 per cent tax.

Double taxation

Relief under Sections 90 and 91

India gives relief from double tax in two ways. Treaty relief is bilateral and the other is unilateral.

• Section 90: relief under a treaty (DTAA). Section 91: unilateral relief without a treaty.
• Section 91 conditions: resident in India, income earned outside India, tax paid abroad, no DTAA.
• There is no condition on total income above Rs 10 lakh.
• Relief is the lower of the Indian average rate tax or the foreign rate tax.

The ADEN Rules 1953 deal with double taxation relief. India signs comprehensive treaties (like Austria), limited ones (like Lebanon) and TIEAs for information only (like Bahamas).