Introduction to Income Tax Matters

Introduction to Income Tax Matters

Income Tax Matters

The Drawing and Disbursing Officers are entrusted to deduct accurateamount of Tax Deduction at Source (TDS) by the Income Tax Authorities, on the other hand, the employees of the office approach the Drawing and Disbursing Officer (DDO) to guide and suggest for income tax planning. In such scenario, a DDO should be well versed and updated with all provisions of Income Tax particularly in relation with computation of income of an individual, computation of amount of Tax Deduction at Source (TDS), timely deposit of deducted amount of TDS, generation of Form-16 / 16A for employees / vendors and quarterly e-filing of e-TDS return.

What is a Tax?

Tax is a fee charged by a government on a product, income or activity. There are two types of taxes: direct taxes and indirect taxes. If tax is levied directly on the income or wealth of a person, then it is a direct tax e.g. income-tax, wealth tax (introduced in 1957 and abolished in 2015 Union Budget). Wealth Tax was replaced with a surcharge of 12% upon income of high net worth individuals, HUFs, and Corporates. If tax is levied on the price of a good or service, then it is called an indirect tax e.g. Goods and Services Tax (GST), 4-tier tax structure i.e. 5%, 12%, 18%, and 28%.

What is Income Tax Act?

The levy of income-tax in India is governed by the Income-tax Act, 1961. The Act contains 298 sections and XIV schedules. These undergo change every year with additions and deletions brought about by the Finance Act passed by Parliament. The Income Tax Return is also filed by the citizens who have taxable income as per the Income Tax Act. As a DDO, the following details of each chapters should be known regarding each chapter of the Income Tax Act:

•      Chapter I: 

Introducing the Income Tax Act and how it works for Government.

•      Chapter II: 

When the Income Tax Act commenced and what the extent of the Income Tax Act is enforced.

•      Chapter III: 

About the charge and levy of income tax, total income and its scope, dividend income, and income arising from working abroad etc.

•      Chapter IV: 

Various forms of incomes that do not included in the total income for income tax purposes such as certain incomes from property, trusts, institutions, incomes of political parties etc.

•      Chapter V: 

Income of other individuals forming part of the taxpayers’ or assessee’s total income including income from business / profession, capital gains, house property etc.

•      Chapter VI: 

This chapter contains provisions for transfer of income particularly when there is no actual transfer of assets.

•      Chapter VII: 

This chapter contains deductions applicable on certain payments and incomes while computing the total income.

•      Chapter VIII: 

This chapter contains rebates and share of member in an association or body.

•      Chapter IX: 

It is a principle that no income should be taxed twice. This chapters contains double taxation relief that is rebate on income tax and relief in amount of income tax payable.

•      Chapter X: 

This chapter contains special provisions where payment of income tax is avoided including agreements with foreign countries i.e. Double Tax Avoidance Agreement (DTAA) and also information about those countries with which there exists no agreement on tax payment.

•      Chapter XA: 

This chapter contains general anti-avoidance rules for income tax.

•      Chapter XII: 

This chapter details on the calculation of tax under certain special cases

•      Chapter XIIA: 

This chapter provides the special provisions for incomes earned by Non-Resident Indians (NRIs).

•      Chapter XIIB: 

This chapter contains special taxation provisions applicable to certain companies from sections 115J to section 115JF.

•      Chapter XIIBB: 

This chapter details the taxation process for conversion of a foreign company into an Indian subsidiary.

•      Chapter XIID: 

This chapter details the taxation process for profits made by domestic companies. It also points out the interest payable on non-payment of tax by the companies with the cases of defaults in payments.

•      Chapter XIIDA: 

This chapter provide details on rules for levying tax on distributed income of a company.

•      Chapter XIIE: 

This chapter deals with the provisions of tax on distributed income of unit holders.

•      Chapter XIIF: 

This chapter contains provisions for tax on income received from venture capital companies or venture capital funds.

•      Chapter XIIG: 

This chapter contains the special provisions particularly related to taxation of shipping companies.

•      Chapter XIII: 

This chapter contains all information about Income Tax authorities including their appointments, powers, control etc.

•      Chapter XIV: 

This chapter provides details regarding section 139 to section 152 which are relating to how to deal and file with income tax return. How to obtain Permanent Account Number (PAN) for filing income tax return. It also provides details on online activities for income tax return.  

•      Chapter XIVA: 

This chapter contains the provisions for avoiding repetitive appeals including the appeals already pending with the courts.

•      Chapter XV: 

This chapter details the liabilities of taxpayers in various cases and how to recover tax from the people and companies not adhering to rules or intentionally not paying their taxes.

What does Income comprise?

As per income tax act, the definition of income is inclusive, means it is not limited to certain types of incomes only. It states, “Income includes”. The scope of income cannot be confined to a range of incomes only; it leaves room for more inclusions within the ambit of the term. Income means net receipts and not gross receipts. Net receipts are arrived at after deducting the expenditure incurred in connection with earning such receipts. The expenditure which can be deducted while computing income under each head.

*Copyright © 2019 Dr. Lalit Kumar. All rights reserved.

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11 Must-claim Exemptions and Deductions

11 Must-claim Exemptions and Deductions 

Must-claim Exemptions and Deductions under Income Tax

Exemptions and Deductions

The taxpayers compute their income and apply the tax slabs to arrive the tax liability. The tax liable to be paid is required to be deposited through challan and a return is required to be filed to avoid the penalty. The individuals, HUFs, companies are free to plan as per the provisions of income tax to claim the deductions and exemptions. Each taxpayer love to find out the exemptions to reduce the tax liability. The following exemptions should be claimed whenever possible:

(i) Standard Deductions:

·        Standard Deduction from Rent Received:

u/s 24 of Income Tax Act @30% is allowed for Income from Rent (Net Annual Value i.e. Gross Annual Value – Municipal Taxes).

It is worth to mention here that this deduction is also available for the taxpayers who opted for the New Tax Regime. 

·        Standard Deduction from Salary:

For FY  2018-19, it was Rs. 40000 and From FY 2019-20 it becomes Rs. 50000, to be deducted from Income from Salaries. As it is standard deduction, the employee is not required to submit any bill/proofs to the employer for claiming this deduction.

However, in case, an individual opt for New Tax Regime, then this deduction will not be available.

(ii) Exemption for Rent Paid:

In case, an individual resides in a residential accommodation, if he is salaried employee then he may be receiving House Rent Allowance and in case he is either salaried or self-employed person, he may not be receiving the House Rent Allowance. In both cases, he would love to claim exemption or deduction.

However, if the New Tax Regime has been opted by a taxpayer, then he cannot claim exemption on HRA and whole amount of HRA received will be fully taxable in the hands of the recipient.

     ·        In case House Rent Allowance is received:

HRA is exempt to the extent, at least of the following:

(a) HRA Received

(b) Rent Paid – 10% of Salary,

(c) 40% of Salary (Non-metro cities) or 50% of Salary (Metro Cities).

Here Salary = BP +GP + DA.

In case, an employee not submitted rent receipt to the Drawing and Disbursing Officer or Employer as a proof to claim exemption in House Rent Allowance and he had paid rent, he can claim the exemption while filing the income tax return.

     ·        In case House Rent Allowance is not received:

Deduction is available u/s 80GG to the extent, at least of the following:

(a) 25 per cent of the total income

(b) Rs. 5,000 per month

(c) Rent paid - 10 per cent of total income.

Here total income = Gross Total Income – 80C to 80U (except 80GG)

(iii) Exemption for expenses paid on Leave Travel:

The salaried persons usually get opportunity to claim Leave Travel Concession or Leave Travel Allowance; such allowance is exemption to the extent, expenses are incurred. However, such expenses should be incurred on domestic travel i.e. within India only and mode of such travel should be railways, air travel, or public transport.

In case, a taxpayer opts for the New Tax Regime, he will not be able to claim the exemption on expenses paid on Leave Travel.

(iv) Exemption or deductions covered in various provisions of section 80C (Only for taxpayers with Old Tax Regime):

      ·        Payment of Life Insurance Premium:

If amount is paid for annuity plan of Life Insurance Policy, that can be claimed as a deduction under section 80C. Such premiums paid for self, spouse and children can be claimed under section 80C and the premium paid for policy of father, mother, or others cannot be claimed as deduction under section 80C. Amount received on maturity of the policy will be exempt under section 10 (10D).

     ·        Payments for contributing in Employees’ Provident Fund:

The employee and employer’s contribution to provident fund accumulate a corpus and interest is earned upon the same. Such interest earned up to 9.5% is not taxable in the hands of the employee. The interest earned above the limit of 9.5% per annum will be taxable. Further, if the employer contributes more than 12% of employee’s salary in employee’s Provident Fund Account, then the excess will be taxable in the hands of employee. The interest earned and maturity amount is exempt. From financial year 2021-22, the interest on "portion of PF contribution exceeding 2.5 Lacs in a year" will be taxable and the concerned interest provider will deduct the tax deduction at source (TDS) under section 192A and 194A.

    ·        Repayment of Principal component of Home Loan:

In case, an individual took a home loan for the purchase or construction of residential house and the construction of the property is completed or possession of property is taken during the financial year; then the amount of repayment of principal component of the home loan can be claimed. Any payment made to the Government Development Authorities for purchase of residential house is also eligible.

    ·        Payment of Tuition Fees up to Two Children:

The portion of payment comprises development charges, library charges, and other such charges are not counted as tuition fees. The tuition fees should be paid for children’s education to the school or college or university (Full-time courses) located in India only. Tuition fees does not include amount paid for coaching classes.

    ·        Payment of Stamp Duty or Registration Charges for purchase or construction of residential house:

After completing the construction of house property or taking possession of the same, the charges can be claimed as deduction under section 80C.

    ·        Payments or Investments in Pension Plans

The financial institutions, insurance companies and banks offer various types of pension or annuity plans offering monthly pension after the date of retirement or age of 60; are eligible under this section. The monthly pension received after the maturity of the pension or annuity plan, is taxable in the hands of recipient. In case, the plan is surrendered before maturity and amount is received, that will be taxable including interest or bonus received upon it.

    ·        Payment or contribution to Government Pension Scheme

The salaried people or employees can contribute up to 10% of their salary in notified government pension account (i.e. National Pension Scheme or Atal Pension Yojana). The self-employed taxpayers can also contribute up to 20% of their gross total income or Rs. 1,50,000 whichever is less; to claim deduction under section 80CCD(1). A person who is not salaried person can also contribute in these Government Pension Accounts to claim the deduction under this section.

   ·       Payment or Contribution to Government Pension Scheme under section 80CCD (1B):

The salaried people or employees can also claim additional deduction of Rs. 50,000 above the overall limit of 80C (i.e. Rs. 1,50,000) for their contribution to notified pension scheme (i.e. National Pension Scheme or Atal Pension Yojana) under section 80CCD (1B). 40% amount of sum assured is given to legal heirs while 60% is returned in two instalments i.e. One after age of 60, another after age of 80.

[7/14, 10:04 PM] Lalit Kumar: National Pension System

*Deductions and Exemptions for New Tax Regime Taxpayers:*

*Read Full article*

https://drlalitsetia.blogspot.com/2019/05/11-must-claim-exemptions-and-deductions.html 

*Latest news*

Sources in the government said that pension regulator, Pension Fund Regulatory and Development Authority (PFRDA) is considering coming out with a better option for National Pension System (NPS) subscribers under which they would be able to withdraw their entire money at one go if pension corpus is upto Rs 5 lakh.

At present, there is a threshold of Rs 2 lakh upto which a NPS subscriber can withdraw the entire money. Beyond this limit, currently only 60 per cent of pension corpus could be withdrawn while 40 per cent of the contributions has to be mandatorily parked in government approved annuities.

 Upcoming Changes in NPS:

Sources said the plan is to increase the threshold to Rs 5 lakh that will offer better liquidity to a certain segment subscribers.

Also, at a corpus of Rs 5 lakh, the regular pension amount would be too insignificant to provide any significant income for life to the subscribers.

However, even with changed withdrawal plan, PFRDA is expected to provide the option of retaining a portion of subscribers pension money for investment in annuities or for investment by pension fund managers itself.

The changes are being thought as returns of annuities at present average around 5.5 per cent. Together with inflation and income tax on pension accumulation, the return for subscribers from annuities falls in the negative territory. Changed would give subscribers wider option to increase returns on their lifetime contributions. The regulator will issue fresh rules to soon allow those saving up to ₹5 lakh in the NPS to take the whole amount at retirement, up from ₹2 lakh at present. The pension fund regulator is also hoping to launch the first guaranteed return NPS scheme in the coming year.

Suppose somebody reaches ₹2.1 lakh at retirement, he will get an annuity component of ₹84,000 which today will fetch an income of ₹400 or ₹450 a month — a pittance. The regulator is keeping in view such cases 

(v) Deduction on Payment of Medical Insurance Policy Premium:

•    This deduction is available for premium paid on medical insurance for self, spouse, parents and children. For senior citizens, the deduction up to Rs. 30,000 is allowable towards the medical insurance premium and for non-senior citizens, the limit is Rs. 25000. For very senior citizens, additional deduction of Rs. 30,000 on payment of medical expenditure (as the very senior citizens may not covered in medical insurance)

(vi) Exemption on payment of interest on home loan (Only for taxpayers of Old Tax Regime):

     ·        Section 24 of Income Tax Act:

It has provision for max. deduction for self-occupied house property up to Rs. 2 Lacs but if constructed before 1.4.1999 then max up to 30000. In case, house is not self-occupied then no limit on such deduction. If home loan for repairs, then max. deduction is Rs. 30000. The amount is considered on Accrual basis means even if the payment is made in advance or delayed, it can be considered in the year of payment becomes due.

•      Further, Section 80EE (effective from FY 2016-17):

The first time home buyers are eligible for additional deduction of Rs. 50000 on payment of interest on home loan provided:

       i.            The sanctioned loan is less than Rs. 35 lacs

     ii.            The value or cost of house is up to 50 lacs

  iii.            The buyer should not possess any residential house is his name

èAfter claiming 80EE, the interest of loan of self-occupied house can be claimed up to Rs. 2,50,000.

(vii) Deduction on payment of interest on education loan (Only for taxpayers of Old Tax Regime):

Section 80 E of Income Tax Act:

If a taxpayer has taken an educational loan for higher education (after class 12) of himself or spouse or children or the student to whom he is the legal guardian, deduction can be claimed only for the repayment of interest component of education loan. The education should be from a school/institute/university recognized by the government.

•      Higher Education of Spouse or Children:

Also, effective April 1, 2008, the said deduction is also available where the loan is taken for the purpose of higher education of spouse or children of the individual or the student for whom the individual is a legal guardian. The deduction on interest is allowed for maximum eight years, or till the interest is fully paid.

(viii) Deduction on donations (Only for Taxpayers of Old Tax Regime):

     ·        Section 80G of Income Tax Act:

If a taxpayer makes a donation for charity, social purpose or makes a contribution towards National Relief Fund, then this deduction can be claimed as a deduction. Exempt charities or Donations to specified funds or charitable institutions – 50 or 100% depending on the charity and as per approval. Also, donations must be made to registered institutions only. If donations are made through cash, up to Rs. 10000 would be allowed and for claiming deductions above Rs. 10000 the taxpayer would have to make a donation through cheque.

     ·        Section 80GGC of Income Tax Act:

There is 100% exemption on donation to political party or an electoral trust formed to oversee the election process. Deduction is available u/s 80GGC. Such donation should not be in cash mode.

(ix) Exemption or Deduction for Interest of Saving Accounts (Only for the Taxpayers of Old Tax Regime):

      · Deduction under section 80TTA:

The individuals and HUFs Deduction may claim deduction up to Rs. 10000 amount of interest earned as interest on saving accounts with banks / post office / financial institutions. Firstly such income is included in ‘Income from other sources’.

     · Tax Deduction at Source by Banks or Financial Institutions:

In case interest of saving bank accounts become more than Rs. 40000, the banks will be bound to deduct TDS on interest except for the taxpayers who filed Form 15G / 15H. This limit was Rs. 10000 before FY 2019-20.

(x) Deduction for disability of taxpayer (Only for taxpayers of Old Tax Regime):

•      Section 80 U of Income Tax Act:

An individual who is certified by the prescribed medical authority to be a person with disability shall be allowed a deduction up to Rs. 75,000/- (for disability up to 40%). While if an individual, who is certified as a person with severe disability, shall be allowed a deduction of Rs 125,000.

•      Disability Forms:

The disability may be in Blindness, Low vision, Leprosy-cured, Hearing impairment, Locomotor disability, Mental retardation, Mental illness etc.

(xi) Treatment of Diseases (Only for the taxpayers of Old Tax Regime):

•      80DD of Income Tax:

It is related to Medical Treatment of Disabled Dependents (spouse, parents, children or siblings) (Rs. 75000 for disability over 40% and Rs. 1.25 Lac for disability over 80%).

•      80DDB of Income Tax:

It is related to Treatment of Specified Diseases for self or dependents. Amount is Rs. 40000 however in case of Senior Citizen (Age>60), it is Rs. 60000, for Super Senior Citizens (Age>80), it is Rs. 80000. (Furnishing of certificate in Form 10-1 is mandatory).

Apart from it, in case of individuals doing business can claim the expenses incurred in operating business from the income of business or profession. For such purposes, if turnover becomes more than Rs. 10 lac, it is mandatory to have an audit from the chartered accountant.

Deductions and Exemptions for New Tax Regime Taxpayers:

The Budget 2020 introduced a new section 115BAC for new set of lower tax rates if an individual decides to leave various deductions and exemptions. The new tax rates will be 5% from Rs. 2.5 Lacs to 5 Lacs, 10% from Rs. 5 Lacs to 7.5 Lacs, 15% from Rs. 7.5 Lacs to 10 Lacs, 20% from Rs. 10 Lacs to 12.5 Lacs, 25% from Rs. 12.5 Lacs to 15 Lacs, and 30% for the amount above Rs. 15 Lacs. 

The individuals who decided to opt New Tax Slab Rates under section 115BAC, cannot claim the standard deduction on salaries, exemption on Leave Travel Allowance (LTA) for the expenses incurred during leave travel, exemption on House Rent Allowance (HRA) for amount of rent paid, exemption on Minor child income allowance, exemption on Helper allowance, exemption on Children education allowance, exemptions available under section 10 (14) for other special allowances, exemption on part of interest paid on housing loan on the self-occupied property or vacant property, and also the deduction under section 80C to 80U i.e. deductions of Chapter VI-A except Section 80CCD(2) and 80JJAA, exemption or deduction on allowances and perquisities, deduction on Family Pension Income.

However, the taxpayers of New Tax Regime will be entitled for Deduction u/s 80CCD (1B) which is up to Rs. 50,000 for the contribution in Tier I Account of NPS. Further, the exemption on received TA, DA, and Conveyance Allowance will also be available. The exemption for Transport Allowance for specially-abled person will also be available. 

In case of 80CCD (2), most of the salaried taxpayers be confused because it is also available for taxpayers of New Tax Regime. This deduction is available only if the amount of “employer’s contribution in NPS” is also included in the salaried income and in such cases only, the section 80CCD (2) allows deduction of an amount up to 10% of the salary (BP+GP+DA) can be deducted from the salaries income.

*Copyright © 2019 Dr. Lalit Kumar. All rights reserved.

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