Unit-1

1.1-History of Taxation in India

Tax payment is mandatory for every citizen of the country.
There are two types of tax in india i.e. direct and indirect.
Taxation in India is rooted from the period of Manu Smriti
and Arthasastra. Present Indian tax system is based on this
ancient tax system which was based on the theory of
maximum social welfare.

Tax is a mandatory liability for every citizen of the country. There are two types of tax in india i.e.
direct and indirect. Taxation in India is rooted from the period of Manu Smriti and
Arthasastra. Present Indian tax system is based on this ancient tax system which was based on the
theory of maximum social welfare.

"It was only for the good of his subjects that he collected taxes from them, just as the Sun draws
moisture from the Earth to give it back a thousand fold" –

By Kalidas in Raghuvansh eulogizing KING DALIP.

The origin of the word "Tax" is from "Taxation" which means an estimate.

In India, the system of direct taxation as it is known today has been in force in one form or another
even from ancient times. Variety of tax measures are referred in both Manu Smriti and Arthasastra.
The wise sage advised that taxes should be related to the income and expenditure of the subject. He,
however, cautioned the king against excessive taxation; a king should neither impose high rate of tax
nor exempt all from tax.

According to Manu Smriti, the king should arrange the collection of taxes in such a manner that the
tax payer did not feel the pinch of paying taxes. He laid down that traders and artisans should pay
1/5th of their profits in silver and gold, while the agriculturists were to pay 1/6th, 1/8th and 1/10th of
their produce depending upon their circumstances.
Kautilya has also described in great detail the system of tax administration in the Mauryan Empire. It
is remarkable that the present day tax system is in many ways similar to the system of taxation in
vogue about 2300 years ago.

Arthasastra mentioned that each tax was specific and there was no scope for arbitrariness. Tax
collectors determined the schedule of each payment, and its time, manner and quantity being all pre-
determined. The land revenue was fixed at 1/6 share of the produce and import and export duties were
determined on ad-valorem basis. The import duties on foreign goods were roughly 20% of their value.
Similarly, tolls, road cess, ferry charges and other levies were all fixed.
Kautilya also laid down that during war or emergencies like famine or floods, etc. the taxation system
should be made more stringent and the king could also raise war loans. The land revenue could be
raised from 1/6th to 1/4th during the emergencies. The people engaged in commerce were to pay big
donations to war efforts.

Kautilya's concept of taxation emphasised equity and justice in taxation. The affluent had to pay
higher taxes as compared to the poor.

Brief History of Income Tax in India: In India, this tax was introduced for the first time in 1860, by
Sir James Wilson in order to meet the losses sustained by the Government on account of the Military
Mutiny of 1857. In 1918, a new income tax was passed and again it was replaced by another new act
which was passed in 1922.This Act remained in force up to the assessment year 1961-62 with
numerous amendments.
In consultation with the Ministry of Law finally the Income Tax Act, 1961 was passed. The Income
Tax Act 1961 has been brought into force with 1 April 1962. It applies to the whole of India and
Sikkim (including Jammu and Kashmir).

Since 1962 several amendments of far-reaching nature have been made in the Income Tax Act by the
Union Budget every year.

Components of Financial and Money market in India

Central Board of Revenue bifurcated and a separate Board for Direct Taxes known as Central Board
of Direct Taxes (CBDT) constituted under the Central Board of Revenue Act, 1963.

The major tax enactment in India is the Income Tax Act, 1961 passed by the Parliament, which
imposes a tax on the income of persons.

This Act imposes a tax on income under the following five heads:
I. Income from salaries
II. Income from business and profession
III. Income in the form of capital gains
IV. Income from house property
V. Income from other sources

In Terms of the Income Tax Act, 1961, a person includes

I. Individual
II. Company
III. Firm
IV. Association of Persons (AOP)
V. Hindu Undivided Family (HUF)
VI. Body of Individuals (BOI)
VII. Local authority
VIII. Artificial Judicial person not falling in any of the preceding categories

What is GST Bill and how will it affect the life of a Common Man?

Tax Slab in India:

The Latest income tax slabs based on the Union budget presented on 29 February 2016. The Minister
of Finance Mr. Arun Jaitley presented the union budget on 29 February 2016. Following are the major
highlights of the latest income tax slab.
Why are Taxes Imposed?

Everybody is obliged by law to pay taxes. Total Tax money goes to government exchequer. Appointed
government decides that how are taxes being spent and how the budget is organized.

Tax payment is not optional; an individual has to pay tax if his/her incoming is coming under the
income tax slab. It is a duty of every citizen to pay taxes. More collection of tax allows the
government to launch more and more welfare schemes.

Let's look at the reasons why do we pay taxes?

1) To Provide Basic Facilities for Every Citizen of the Country: Whatever money is received by
the government in terms of direct tax and indirect tax is spent by it for the welfare of the citizens of
the country. Some of the services provided by the government are: health care, electricity, roads,
education system, free houses for poor, water supply, police, firefighters, judiciary system, disaster
relief, taking care of bridges and other things of public welfare.

2) To Finance Multiple Governments: All the local government of the state like village panchayats,
block panchayats and municipal corporations receive fund from the state finance commission.

3) Protection of the Life: Tax payers receive the protection of life and wealth from the government
in case of external aggression, internal armed rebellion or any other situation in exchange of tax paid
by them.

Dissatisfaction with Taxes: we often hear that there are so many scams in the country which
confiscates the precious public money. There are so many others reasons because of them tax payers
are angry i.e.

a. Rate of tax is too high

b. Unfair tax is collected from the peoples. Some rich people pays less tax while poor pays
high and vice versa.
c. Government is wasting tax money (inefficiency)
d. Government is spending money on wrong or unnecessary things.
1.2-Fundamental Principles relating to Tax Laws

Introduction
Taxation is the most important component of the financial structure of any country.
Taxes are imposed upon individuals and business entities that are paid to the
government or the state. Taxes are considered to be contributions made by individuals
and business entities for economic growth and development. In simple words, it is the
source of revenue for the government to manage public expenditure. On the contrasting
side, taxes are involuntary payments made by the individuals and business entities to
the government which decreases their annual income or profits. Going by the normative
standards, it has been understood that taxes should be levied in such a manner that
they don’t pinch the taxpayer.

This conflict of interest in the taxation domain is guided by the principles of fairness,
transparency, effectiveness, and efficiency to balance both the interests of the taxpayers
as well as of the government. If we go by this regard, one would be able to understand
that taxation, yet niche is an interdisciplinary subject that touches upon subjects of law,
economics, and accountancy. Such intersectionality of different subjects makes taxation
a complex subject to comprehend and practice. The interaction of the world economies,
also known as globalization has accelerated the complexity to comprehend taxation. It is
because the tax laws are not only concentrated to merely the interest of the taxpayer
and government but have expanded to inculcate and consider the international
relationship between the two nations who are subjected to such tax rules.

Classification of tax
The tax levied on the individuals and business entities are divided into two categories:

1. Direct Tax: As the name suggests, it is paid directly to the government. Direct
taxes are levied on income and property, which are directly assessed by the
government. The tax rates are determined by the Ministry of Finance in the
budget for the financial year. It includes income tax, expenditure tax, and
interests tax. The Income Tax Act, 1961 (“Act”) governs the implication of
direct taxes in India. Direct taxation in India is progressive as the tax rate
increases with the increase in income.
2. Indirect Tax: It is the indirect levy paid to the government on the sales of
goods and services. It is governed by the Goods and Services Act, 2017. The
execution of the goods and services act, plays an important role in the
determination of India as a federal state wherein the Central Goods and
Services Tax (CGST) and Integrated Goods and Services Tax (IGST) is paid to
the Union and State Goods and Services Tax (SGST) is paid to the state. It
includes the Goods and Services Act, 2017, The Central Excise Act 1944, and
The Customs Act 1962.
Rule of interpretation for taxation statute
For the purposes of interpretation of taxation statutes, the law goes by the strict
interpretation and plain meaning rule is applied. In case of conflict between two possible
meanings, the preference is given to the one that is beneficial to the taxpayer or the
assessee. The constitutional mandate behind enacture of taxation statutes according to
article 265 states that no tax can be levied or collected without the authority of the law.
Any law related to taxation should be enacted by the competent legislature. Such laws
should be implemented and interpreted in expressed terms in a strict sense. The court
cannot go into the implied meaning of any tax provision so as to detract its organic
meaning from the intention of the legislature in a case when the language used in the
legislature is plain and unambiguous. There is no room for equity in the interpretation of
the tax statutes The interpretation of the tax status should go in hand with the original
objects and purposes of the act. In case of exemption notifications, the exemptions must
be strictly applied to the interests of the assessee. But in case of any ambiguity in
exemption notifications, it must be interpreted in favor of the revenue. However, in the
case of the interpretation of tax liability, in case of any ambiguity, it must be decided in
favor of the assessee.

Determination of tax implication

 Tax Residency:
The tax implications on any individual or business entity for the previous year are paid in
the subsequent assessment year. For example, A is liable to pay a tax of the amount of
Rs.1000/- in the assessment year 2020-21. It means that the income was earned in
2019-2020, known as the previous year for tax purposes. The imposition of taxes for
individuals is based upon the principle of residency by the virtue of section 6 of the
Income Tax Act, 1961 (“act”) and not on the basis of citizenship. So, for the purposes of
paying taxes in India, it is pertinent to determine the status of an individual as a resident
of India immaterial of the fact whether he is a citizen of India or not. For a company to
be resident in India, it has to be an Indian company with its place of effective
management in India as per section 6(3) of the act. In the case of a Hindu undivided
family, firm, or other association of persons the control and management of its affairs
should be in India.

However, before deciding the tax implication on the taxpayer on the principle of
residency, it has to be borne in mind that section 90 of the act has to be taken into
consideration. Section 90 provides for an agreement between two nations to avoid
double taxation. In simpler words, when the tax laws of two countries are in conflict on
the same subject matter as to comprehend the taxing rights, the provision which is more
beneficial to the assessee is applicable. The Income Tax Appellate Tribunal of the Cochin
Bench in M/S.Mathewsons Exports & Imports v ACIT determined the question of whether
which provision will prevail over others when there is a conflict between the Indian
Income-tax Act and the UAE-DTAA. The court in this case observed that the provisions of
the UAE-DTAA have to be applied to the assessee as the provisions are more beneficial
to the assessee as compared to the provision of the Income Tax Act.

 Tax implications:
According to section 5(1), a resident is subjected to pay income tax on income earned
from all sources which are received or deemed to receive in India or accrue or arise or
deemed to accrue or arise in or outside India. For an ordinarily resident, income which is
accrued or arise outside India is not considered unless it is derived from a business
controlled in or a profession set up in India.
According to section 5(2), a non-resident is subjected to pay income tax on income
earned from all sources which are received or deemed to receive or accrue or arise or
deemed to accrue or arise in India.

1.3 Law of taxation and the Constitution of India

Introduction
The system of taxation is the backbone of a nation’s economy which keeps revenue
consistent, manages growth in the economy, and fuels its industrial activity. India’s
three-tier federal structure consists of Union Government, the State Governments, and
the Local Bodies which are empowered with the responsibility of the different taxes and
duties, which are applicable in the country. The local bodies would include local councils
and the municipalities. The government of India is authorized to levy taxes on individuals
and organisations according to the Constitution. However, Article 265 of the Indian
constitution states that the right to levy/charge taxes hasn’t been given to any except
the authority of law. The 7th schedule of the constitution has defined the subjects on
which Union/State or both can levy taxes. As per the 73rd and 74th amendments of the
constitution, limited financial powers have been given to the local governments which
are enshrined in Part IX and IX-A of the constitution.

Definition of Tax
A tax may be defined as a monetary burden rested upon individuals or people with
property to help add to the government’s revenue. Tax is, therefore, a mandatory
contribution and not a voluntary payment or donation which one decides on one’s own.
It is a payment exacted by the legislative authority. It may be direct tax or indirect tax.
Revenue growth which may be a little faster than GDP (Gross Domestic Product) can
result from revenue mobilization with an effective tax system and measures.

The government uses this tax to carry out functions such as:

 Social welfare projects like schools, hospitals, housing projects for the poor,
etc.
 Infrastructure such as roads, bridges, flyovers, railways, ports, etc.
 Security infrastructure of the country such as military equipment
 Enforcement of law and order
 Pensions for the elderly and benefits schemes to the unemployed or the ones
below the poverty line.

Characteristics of a good tax structure

 A good tax system as a whole should be equitable and be fairly leading to
equal distribution of wealth in the community.
 It should be effective and yield the required revenue for the government.
  The collection of taxes is a major task and it should be economical.
 The development of trade and industry should not be hampered by the burden
of taxes.
 The taxes levied should give a clear picture to the government of its revenue.
 The tax system should be based on comprehensive and up-to-date statistical
information enabling accurate forecasting.
 The tax system should also be simple and elastic so that it can respond to the
new needs of the State.
 While distributing the burden of taxes, the ability of the tax-payers should be
considered.

Taxation system in India

India’s tax system is a three-tier federal structure which is made up of the following:

1. Union List (List 1 of the 7th schedule to the Constitution of India) contains
those matters on which the Central Government has the power to make laws
[Article 246(1)].
2. The State List has only those matters on which the State Government has the
power to make laws [Article 246(3)].
3. The Concurrent List has those matters on which both the Central and State
Governments have the power to make laws [Article 246(2)].
Law made by Union Government prevails whenever there is a conflict between the
Centre and state concerning entries in the concurrent list. But if any provision
repugnant to earlier law made by parliament is part of law made by the state, if the law
made by the state government gets the assent of the President of India, it prevails.

Distribution of powers of taxation

 List 1 in the 7th schedule to the constitution has the powers of the Central
Government listed in Entries 82-92B.
 List 2 in the schedule has the powers of the State Government listed in Entries
45-63.
 As regards list 3, it doesn’t deal with taxation and hence both centre and state
do not have any concurrent powers of taxation.
 Entry 97 of List 1 in the 7th Schedule contains residuary powers of taxation
belonging only to the centre.

Types of Taxes in India

The two types of taxes in India are Direct and Indirect taxes. One of the biggest and
most successful tax reforms in India is the GST(Goods and Services Tax). It assists as a
comprehensive indirect tax which helps in eliminating the flowing effect of tax as a
whole.

Direct tax
It is a tax imposed on corporate units and individual people. It is a type of tax that can’t
be moved or accepted by anyone else. Direct tax examples are wealth tax, income tax,
gift tax, etc. In the Ministry of Finance, the Central Board of Direct Tax (CBDT) is a part
of the revenue department. This board has a two-fold role that gives important ideas,
significant inputs of planning, and policies to be implemented regarding direct tax in
India. The management of direct taxes which is done by the Income Tax department is
helped by the Central Board of Direct Taxes in doing so.

Indirect tax
Taxes that are indirectly imposed on the public through goods and services are called
indirect taxes. The government bodies collect taxes from people who sell goods and
services. When a good or product is sold in a state, then a sales tax is levied on it and its
rate is decided by the government, this is called Value Added Tax (VAT).

 Formulation of the policy regarding duty, collection of custom excise duty and
service tax is dealt with by the Central Board of Excise and Custom (CEBC)
 The Central Board of Excise and Custom was given a new name which was the
Central Board of Indirect tax and Custom (CBIC) after GST came into force. Its
key role is to help the government in formulating policies related to GST.

Custom Duty
The customs duty is collected on all goods entering the country to ensure that they are
taxed and paid for. It is levied on both export and import of goods and is important in
regulating trade as well as being a source of revenue to the government.

Excise Duty
This is a commodity tax in the true sense as it is levied on the production of goods and
not on its sales. It is levied by the Central Government but for alcohol/liquor and
narcotics/drugs. Unlike custom duty, this applies only to goods produced in India. It is
also called the Central Value Added Tax (CENVAT).

Service Tax
Here the product taxed is a service. In India, service tax was initially on the services of
telephone, share broking, and general insurance. This circle includes far more services
since then and now it has been replaced by a consolidated Goods and Service tax.

Value Added Tax

This tax was introduced because of India’s indirect tax structure being weak that created
quite a stir. Value Added tax has a self-monitoring means which makes the
administration of this tax simple. VAT is applicable in India in All-Union Territories and
States except for the Union Territories of Andaman and Nicobar and Lakshadweep.

GST
After GST came into force, direct and indirect taxes were collected by the three bodies of
the government until 1 July 2017. Various indirect taxes which were imposed by the
central and state government are incorporated by GST. Both the central and state
government collect indirect tax through the intrastate supply of goods and services.

Constitutional Provisions Regarding Taxation in

India
The roots of every law in India lie in the Constitution, therefore understanding the
provisions of the Constitution is foremost to have a clear understanding of any law. The
Constitutional provisions regarding taxation in India can be divided into the following
categories:

 Only by the authority of law can taxes be levied. (Article 265)

 Levy of duty on tax and its distribution between centre and states (Article
268, Article 269, and Article 270)
 Restriction on power of the states to levy taxes (Article 286)

 Sale/purchase of goods which take place outside the respective state

 Sale/purchase of goods which take place during the import and export of the
goods

 Taxes imposed by the state or purpose of the state (Article 276, and Article
277)
 Taxes imposed by the state or purpose of the union (Article 271, Article 279,
and Article 284)
 Grants-in-Aid (Article 273, Article 275, Article 274, an Article 282)

Article 265
Without the ‘authority of law,’ no taxes can be collected is what this article means in
simple terms. The law here means only a statute law or an act of the legislature. The law
when applied should not violate any other constitutional provision. This article acts as an
armour instrument for arbitrary tax extraction.

In the case Tangkhul v. Simirei Shailei, all the villagers were paying Rs 50 a day to the
head man in place of a custom to render free a day’s labour. This was done every year
and the practice had been continuing for generations. The Court, in this case, held that
the amount of Rs. 50 was like a collection of tax and no law had authorized it, and
therefore it violated Art 265. Article 265 is infringed every time the law does not
authorize the tax imposed.
In the case, Lord Krishna Sugar Mills v. UOI, sugar merchants had to meet some export
targets in a promotion scheme started by the government but if they fell short of the
targets then an additional excise duty was to be levied on the shortfall. The court
intervened here and said that the government had no authority of law to collect this
additional excise tax. What this means in effect is that the government on its own cannot
levy this tax by itself because it has not been passed by the Parliament.

Article 266
This article has provisions for the Consolidated Funds and Public Accounts of India and
the States. In this matter, the law is that subject to the provisions of Article 267 and
provisions of Chapter 1 (part XII), the whole or part of the net proceeds of certain taxes
and duties to States, all loans raised by the Government by the issue of treasury bills, all
money received by the Government in repayment of loans, all revenues received by the
Government of India, and loans or ways and means of advances shall form one
consolidated fund to be entitled the Consolidated Fund of India. The same holds for the
revenues received by the Government of a State where it is called the Consolidated Fund
of the State. Money out of the Consolidated Fund of India or a State can be taken only in
agreement with the law and for the purposes and as per the Constitution.

Article 268
This gives the duties levied by the Union government but are collected and claimed by
the State governments such as stamp duties, excise on medicinal and toilet preparations
which although are mentioned in the Union List and levied by the Government of India
but collected by the state (these duties collected by states do not form a part of the
Consolidated Fund of India but are with the state only) within which these duties are
eligible for levy except in union territories which are collected by the Government of
India.

Article 269 provides the list of various taxes that are levied and collected by the Union
and the manner of distribution and assignment of Tax to States. In the case of M/S.
Kalpana Glass Fibre Pvt. Ltd. Maharashtra v. State of Orissa and Others, placing faith in
a judgement of the Apex Court in the case of Gannon Dunkerley & Co. and others v.
State of Rajasthan and others, the advocate from the appellant side submitted that to
arrive at a Taxable Turnover, turnover relating to inter-State transactions, export,
import under the CST Act are to be excluded. Thus, the provision of the State Sales Tax
Act is always subject to the provisions of Sections 3 and 5 of the CST Act. Sale or
purchase in the course of interstate trade or commerce and levy and collection of tax
thereon is prohibited by Article 269 of the Constitution of India.

Article 269(A)
This article is newly inserted which gives the power of collection of GST on inter-state
trade or commerce to the Government of India i.e. the Centre and is named IGST by the
Model Draft Law. But out of all the collecting by Centre, there are two ways within which
states get their share out of such collection

1. Direct Apportionment (let say out of total net proceeds 42% is directly
apportioned to states).
 2. Through the Consolidated Fund of India (CFI). Out of the whole amount in CFI
a selected prescribed percentage goes to the States.

Article 270
This Article gives provision for the taxes levied and distributed between the Union and
the States:

 All taxes and duties named within the Union List, except the duties and taxes
named in articles 268, 269 and 269A, separately.
 Taxes and surcharges on taxes, duties, and cess on particular functions which
are specified in Article 271 under any law created by Parliament are extracted
by the Union Government.
 It is distributed between the Union and the States as mentioned in clause (2).
 The proceeds from any tax/duty levied in any financial year, is assigned to the
states where this tax/duty is extractable in that year but it doesn’t form a part
of the Consolidated Fund of India.
 Any tax collected by the centre should also be divided among the centre and
states as provided in clause (2).
 With the introduction of GST 2 sub-clauses having been added to this
Article- Article 270(1A) and Article 20(1B7).
The Supreme Court of India has set a famous judicial precedent under Article 270 of the
Constitution of India in the case T.M. Kanniyan v. I.T.O. The SC, in this case,
propounded that the Income-tax collected forms a part of the Consolidated Fund of
India. The Income-tax thus extracted cannot be distributed between the centre, union
territories, and states which are under Presidential rule.

Article 271
At times the Parliament for the Union Government (only when such a requirement
arises), decides to increase any of the taxes /duties mentioned in article 269 and Article
270 by levying an additional surcharge on them and the proceeds from them form a part
of the Consolidated Fund of India. Article 271 is an exception to Article 269 and Article
270. The collection of the surcharge is also done by the Union and the State has no role
to play in it.

Cess and surcharge

There seems to be a lot of confusion between cess and surcharge. Cess is described in
Article 270 of the Constitution of India. Cess is like a fee imposed for a particular
purpose that the legislation charging it decides. Article 271 deals with a surcharge which
is nothing but an additional tax on the existing tax collected by the union for a particular
purpose. Proceeds from both the cess and surcharge form part of the Consolidated Fund
of India In the case of m/s SRD Nutrients Private Limited v. Commissioner of Central
Excise, Guwahati, the Supreme Court was presented with the question: If on excisable
goods an education cess can be levied before the imposition of cess on goods
manufactured but cleared after imposition of such cess. The judgement given in this case
was in favour of the manufacturer but the judges, Justice A K Sikri and Justice Ashok
Bhushan observed that education and higher education cess are surcharges.
Grants-in-aid
The constitution has provisions for sanctioning grants to the states or other federating
units. It is Central Government financial assistance to the states to
balance/correct/adjust the financial requirements of the units when the revenue
proceeds go to the centre but the welfare measures and functions are entrusted to the
states. These are charged to the Consolidated Fund of India and the authority to grant is
with the Parliament.

Article 273
This grant is charged to the Consolidated Fund of India every year in place of any share
of the net proceeds, export duty on products of jute to the states of Assam, Bihar,
Orissa, and West Bengal. This grant will continue and will be charged to the Consolidated
Fund of India as long as the Union government continues to levy export duty on jute, or
products of jute or the time of expiration which is 10 years from its commencement.

Article 275
These grants are sanctioned as the parliament by law decides to give to those states
which are in dire need of funds and assistance in procuring these funds. These funds
/grants are mainly used for the development of the state and for the widening of the
welfare measures/schemes undertaken by the state government. It is also used for
social welfare work for the Scheduled tribes in their areas.

Article 276
This article talks about the taxes that are levied by the state government, governed by
the state government and the taxes are collected also by the state government. But the
taxes levied are not uniform across the different states and may vary. These are sales
tax and VAT, professional tax and stamp duty to name a few.

Article 277
Except for cesses, fees, duties or taxes which were levied immediately before the
commencement of the constitution by any municipality or other local body for the
purposes of the State, despite being mentioned in the Union List can continue to be
levied and applied for the same purposes until a new law contradicting it has been
passed by the parliament.

In the case Hyderabad Chemical and Pharmaceutical Works Ltd. v. State of Andhra
Pradesh, the appellant was manufacturing medicines for making which they had to use
alcohol, the licenses for which were procured under the Hyderabad Abkari Act and had to
pay some fees to the State Government for the supervision. But the parliament passed
the Medicinal and Toilet Preparations Act, 1955 under which no fee had to be paid but
the petitioner challenged the levy of taxes by the state after the passing of the Medicinal
and Toilet Preparations Act, 1955 because according to Article 277, entry 84 of list 1 in
the 7th schedule, the state could not levy any fee. The difference between tax and fee
was explained. Proceeds from tax collection are used for the benefit of all the taxpayers
but a fee collected is used only for a specific purpose.
Article 279
This article deals with the calculation of “net proceeds” etc. Here ‘net proceeds’ means
the proceeds which are left after deducting the cost of collection of the tax, ascertained
and certified by the Comptroller and Auditor-General of India.

Article 282
It is normally meant for special, temporary or ad hoc schemes and the power to grant
sanctions under it is not restricted. In the case Bhim Singh v. Union of India & Ors the
Supreme Court said that from the time of the applicability of the Constitution of India,
welfare schemes have been there intending to advance public welfare and for public
purposes by grants which have been disbursed by the Union Government. In this case,
the Scheme was MPLAD (Member of Parliament Local Area Development Scheme) and it
falls within the meaning of ‘public purpose’ to fulfil the development and welfare projects
undertaken by the state as reflected in the Directive Principles of State Policy but subject
to fulfilling the constitutional requirements. Articles 275 and 282 are sources of granting
funds under the Constitution. Article 282 is normally meant for special, temporary or ad
hoc schemes and the power to grant sanctions under it is not restricted. In the case Cf.
Narayanan Nambudripad, Kidangazhi Manakkal v. State of Madras, the Supreme Court
held that the practice of religion is a private purpose. And donations and endowments
made are therefore not a state affair unless the state takes the responsibility of the
management of such religious endowment for a public purpose and uses the funds for
public welfare measures. So it can be seen that Article 282 can be used for a public
purpose but at times in the name of public purpose it can even be misused.

Article 286
This article restricts the power of the State to tax

1) The state cannot exercise taxation on imports/exports nor can it impose taxes outside
the territory of the state.

2) Only parliament can lay down principles to ascertain when a sale/purchase takes
place during export or import or outside the state. (Sections 3, 4, 5 of the Central Sales
Tax Act, 1956 have been constituted with these powers)

3) Taxes on sale/purchase of goods that are of special importance can be restricted by

the parliament and the State Government can levy taxes on these goods of special
importance subject to these restrictions (Section 14 and Section 15 of Central Sales Act,
1956 have been constituted to impose restrictions on the state Government to levy taxes
on these goods of special importance). In the case of K. Gopinath v. the State of
Kerala, Cashew nuts were purchased and imported by the Cashew Corporation of India
from African suppliers and sold by it to local users after processing it. The apex court
held that this sale was not in the course of import and did not come under an exemption
of the Central Sales Tax Act, 1956. The issue before the court was to decide whether the
purchases of raw cashew nuts from African suppliers made by the appellants from the
cashew corporation of India) fall under the nature of import and, therefore protected
from liability to tax under Kerala General Sales Tax Act, 1963. The judgement here went
against the appellants.
Article 289
State Governments are exempted from Union taxation as regards their property and
income but if there is any law made by the parliament in this regard then the Union can
impose the tax to such extent.

Some other tax-related provisions

1. Article 301 which states that trade, commerce and inter-course are exempted
from any taxation throughout India except for the provisions mentioned in
Article 302, 303, and 304 of the Indian Constitution, 1949.
2. Article 302 empowers the parliament to impose restrictions on trade and
commerce in view of public interest.
3. Article 303– Whenever there is the scarcity of goods this article comes in play.
Discrimination against the different State Governments is not permitted under
the law except when there is a scarcity of goods in a particular state and this
preference to that state can be made only by the Parliament and in keeping
with the law.
4. Article 304– permits a State Government to impose taxes on goods imported
from other States and Union Territories but it cannot discriminate between
goods from within the State and goods from outside the State. The State can
also exercise the power to impose some restrictions on freedom of trade and
commerce within its territory.

Article 366
Apart from all these provisions, there are other provisions also that require mention such
as Article 366 which gives the definition of:

 Goods;
 Services;
 Taxation;
 State;
 Taxes that are levied on the sale/purchase of goods;
 Goods and service tax etc.

Conclusion
India is a big country with people belonging to different communities and different
wealth groups and income. Taxation to all cannot be the same. This is the reason for
the tax system in India being a complicated one for long. India has been grappling with
the problem of tax evasion which seems to be making our taxation system hollow from
the core. India has a high tax rate but a low yield of direct taxes. So, over the years the
government has made an attempt to reduce the taxes. Also, for a nation to prosper its
tax collection system has to be strong and efficient even if the tax rates are not high else
its coffers will be depleted and developmental programmes truncated. One of the
biggest problems faced by India’s taxation system is the power of the government to
make retrospective amendments regarding the tax statues. The practice began with the
judgement given by the supreme court in the case of Chhotabhai Jethamal Patel & Co v.
UOI & Others after which an amendment bill was passed for retrospective levy of excise
duties.

After the implementation of the GST which is an all-inclusive indirect tax, the process
has become smoother and helped prevent the cascading effect it had earlier. The
Constitution of India has provisions with respect to the distribution of financial resources
under chapter two of part twelfth which is in rhythm with the Federal, State and
Concurrent list under 7th Schedule. To sum up, the Parliament rights are not bound and
the Indian Constitution gives wide powers to the Parliament and it is neither rigid nor the
same. So, according to future needs, there are provisions that can change the said rules
of law. Paying taxes may not be the best task, however, it pays for all the development
and infrastructure that one enjoys.

UNIT -2
Income Tax Act 1961 – Basics that you need to
know
Introduction to Income Tax
Tax is the mandatory financial charge demand by the government on pay, product,
administrations, exercises or exchange. Taxes are the fundamental modes of income for
the government, which are used for the welfare of the general population of the nation
through government strategies, arrangements, and practices.

There are references for taxes in ancient writings like Manusmurti and Kautilya
Arthashastra. It was initiated in India in 1860 for the first time to defeat the financial
crisis of 1857. Accordingly, it is the income tax Act 1961 which is at present operative in
India

Need for Income Tax in India

Income tax is a tax on the income of an individual or an entity. Income tax is the main
source of income for the government to carry out its functions. The jobs of government
are not just restricted to defense, law, and order, etc., but it also has to undertake
activities like welfare and development under sectors of health, education, rural
development, etc. the government also has to pay for its own administration. All of these
activities need huge public finance which is raised by the collection of taxes.

Purpose of Taxation
1. The money spent on the development of roads, schools, and hospitals, market
regulations or legal systems, etc. is raised by the revenue generated by the
collection of taxes
2. Redistribution of resources by the richer section to the poorer section of the
society.
3. Taxes are levied on certain products to eliminate externalities such as the
taxes on tobacco to discourage smoking
Taxes are broadly divided into two categories- Direct and Indirect taxes.

Income tax is a direct tax imposed on an individual. Estate and wealth tax were also
direct taxes, however, these are abolished now

Indirect taxes that were imposed in India are customs duty, central excise duty, service
tax, sales tax, and value-added tax.

As of now GST has been implemented and has made all the other indirect taxes
obsolete.
Important Terms and Definitions under The Income
Tax Act, 1961

Assessment year and previous year

As per Section 2(9) of the Income Tax Act, 1961, states that assessment year means the
12 month period beginning on the 1st day of April every year. The assessee is required
to file the income tax return of the previous year in the assessment year. As per S.2(34)
of Income Tax Act, 1961, unless the context otherwise requires, the term “previous
year” means the previous year as defined in section 3.

As per Section.3 of Income Tax Act, 1961, the term “previous year” means the financial
year immediately preceding the assessment year

Say, for example, the year starting from 1st April 2018 and ending on 31st March 2019
is the assessment year 2018-19, the previous year would be 2017-18. The rates of
assessment year are taken into consideration.

Who is a person under income tax?

A person is defined under section 2(31) of the act. The term ‘person’ includes –

1. An individual.
2. A Hindu Undivided Family.
3. A Company.
4. A Firm.
5. An association of persons or body of individuals whether incorporated or not;
6. A local authority; and
7. Every artificial judicial; person not falling within any of the preceding

Who is an Assessee
Any individual who has income earned or losses incurred, and is liable to pay taxes on
these to the government in a particular assessment year, is an assessee.

Categories of the assessee –

1. Normal Assessee
 a person against whom proceedings are going on under the Income Tax Act,
despite the fact that any tax or other amount is payable by him or not;
 a person who has undergone loss and filed a return of loss u/s 139(3);
  a person by whom some amount of interest or tax or penalty is payable under
the income tax Act;
 any person who is entitled to refund of tax under this Act.

2. Representative Assessee
 A person may not be liable for his own income or loss but he might also be
liable for the income or loss of other persons say for example agent of a non-
resident, guardian of a minor or a lunatic person, etc. In such cases, the
person responsible for the assessment of the income of such a person is called
representative assessee. Such a person is deemed to be an assessee.

3. Deemed Assessee
 In the case of a deceased person who has died after writing down his will, the
administrators of the property of the deceased are deemed as assessee.
 In case if a person dies intestate (without writing down his will) the eldest son
or other legal heirs of the deceased person are deemed as assessee.
 In case a minor, lunatic or an idiot person has income taxable under the
Income Tax Act, their guardian is deemed to be an assessee.
 In case a non-resident has income in India, any person acting on his behalf is
deemed as an assessee.

4. Assessee-in-default
 A person is deemed as an assessee-in-default if he fails to fulfill his statutory
obligations. In case an employer is paying a salary or a person who is paying
interest, it is their duty to deduct TDS and deposit the amount of tax so
collected in Government treasury. If he fails to deduct TDS or deducts tax but
does not deposit it in the treasury, he is known as assessee-in-default.

Concept of income
The Income Tax Act does not define the term Income but section 2 (24) of the Act
describes the various receipts which are included under the ambit of income.

1. Profits and gains.

2. Dividends
3. Voluntary contributions received by a charitable trusts
4. The value of any perquisite or profit in lieu of salary.
5. Any capital gains.
6. Any winnings from lotteries,
7. Crossword puzzles etc.
Charging section
 Section 4 of the Income-Tax Act, 1961 is the Charging section of the Act
Accordingly, the section provides that :

 The rates are prescribed under the finance act of every assessment year.
Income tax for the previous year is to be charged according to the given rates.
 The taxable income is that of the previous year not the assessment year
 The total income, computed according to the provisions of the act, is leviable
 Tds or advance tax wherever applicable is to be charged

Heads of income
Income is classified under 5 main heads under section 14 of the act

1. Income from salary

2. Income from house property
3. Income from capital gains
4. Profit and gains from business and profession
5. Other sources of income

Agricultural income
Agricultural income is any rent or revenue by means of cash or in-kind, derived from a
land, which is used for an agricultural purpose and land should be situated in India.

Income from agricultural should be produced by a cultivator or a rent receiver of that

produce in-kind, which can be fit to take that into the market.

The income should be derived from the sale by a cultivator or a rent receiver of that
product which is produced or received by him, no process can be performed other than
the process to render it fit for the market. You can read more about agricultural
income here.

Income deemed to accrue or arise in India

The income of a non-resident person or a foreign company is only taxable to the extent
it arose in India. However, under section 9 of the income tax act, other provisions lay
down the criteria as to why certain incomes are deemed to accrue in India even though
they might actually arise out of India.

Business connections – the term business connections has not been defined in the act
but various judgments and circulars have emphasized on the meaning of it.
As per the circular no. 23 of the income tax. Examples of non-resident having business
connections in India have been given-

1. Branch office in India

2. Agent appointed for sale of goods for a non-resident.
3. Forming a subsidiary company, of a non-resident parent company, in India
4. Establish a factory in India to process the raw materials and the final product
is then exported.
5. Financial relations between resident and non-resident company

Residential status
The taxation laws classify taxable persons under three categories

1. Resident person
2. Resident not ordinarily resident
3. Non-resident

Resident person –
There are various tests to determine the residential status of a person

Test 1 – If the person is residing in India for 182 days, not necessarily at a stretch, in
the preceding previous year, he is said to be a resident of India.

Test 2 – If the person is residing in India for 365 days or more in the previous 4 years
and 60 days in the immediately previous year, he is said to be a resident.

Resident not ordinary resident –

An individual is not an ordinary resident if

Test 1 – he has not resided in India for 9 out of the 10 previous years preceding that
year

Test 2 – if the individual has not resided for 729 days or more in India in the 7 previous
years

Test 3 – a Hindu undivided family whose manager has fulfilled above conditions

Let’s understand this with an example

Question. Mr. John, a foreigner came to India for the first time in 2014 and settled
here. He wants to file his income tax return for the assessment year 2015-16 and 2016-
17. Determine his residential status for the said two years.
Answer. For the assessment year 2015-16, the previous year is 2014-15

For the previous year 2014-15, he is a resident, because, in the year ending 31st March
2014, he has stayed in India for more than 182 days.

For the previous year 2015-16, he is a resident for he has stayed in India for more than
182 days in the year ending 31st March 2016

For the previous years 2014-15 and 2015-16, he is not an ordinary resident because he
is non-resident India for 9 out of 10 previous years preceding previous years and he has
not resided in India for 730 or more days during 7 preceding previous years.

Residential status of a company

As per section 6(3) of the income tax act, a company is said to be a resident of India if
either of the following conditions is fulfilled-

1. If the company is an Indian company, or

2. If the place of effective management, for that year, is in India.
Place of effective meaning is the place where all the important key managerial and
commercial decisions for the conduct of business are made.

What is Payroll Tax

Payroll taxes are Medicare and social security taxes, employers withhold half of these
taxes from employee’s wages. Medicare taxes are a contribution to medical benefits for
the person above the age of 65. Social security taxes are for the benefits of the retired
person or disabled person or for their dependents. These two taxes are called as FICA
tax, i.e., Federal Insurance Contribution Act Tax, which is defined by Internal
Revenue Service. These taxes are paid to the Federal or State authority.

If a person is self-employed then he doesn’t need to pay FICA tax, but a Self-employed
Tax needs to be pay by him.

FICA Tax rate is equal for employers and employees. Self-employed tax rates are
different from FICA tax rates.

Income Tax Return Definition

As per the Black Law Dictionary (9th Edition) An Income Tax form on which a person or
entity reports income, deductions, and exemptions and on which tax liability is
calculated.

Income Tax Return (ITR) is a statement of tax and income, which an individual files to
inform the government that how much income he has earned in a financial year. ITR
should be filed before the last date, i.e., 31st July. There are different ITR form filed by
an individual as per their applicability, and the eligibility of a person is mentioned in the
form. There is a total of seven ITR forms which we will discuss one by one.
Corporate Income Tax
Corporate income tax is levied by the government on the profits of the companies. The
tax rate paid by companies varies every year by the Income Tax Department. There are
two types of Company explained under the Income Tax, i.e., Domestic Company and
Foreign Company.

Domestic Company.- Domestic Companies are those which are registered under the
Companies Act of India. A company can be a Public Company or a Private Company. I
also include those companies which are situated or registered outside India but having
control and management completely in India.

Foreign Company.- Foreign Companies are those which are not registered under the
Companies Act of India and having control and management completely outside India.

Now, under Corporate Income Tax these both companies are liable to pay taxes. In the
case of Domestic Company, tax is levied on universal income but for Foreign companies,
only that income is taxable which is earned within India.

Income earned from the Company included-

1. Profit earned by the business;

2. Capital gains from sale;
3. Income from renting property;
4. Income from other sources.
Income Tax Rate of the company depends on the turnover of the company during the
Financial Year.

Income Tax Return form file by a company is ITR-6 and ITR-7. As per Income Tax,
requirement companies have to audit their accounts and submit it along with ITR form.
This audit is known as Tax Audit.

Conclusion
Tax is a mandatory charge levied on a person by the government, as we have discussed
what taxes are paid by a person and how he can calculate his payable tax. There are a
number of Provisions provided under law for taxpayers as per their requirements. The
government has provided various forms to pay income tax whether a person is an
individual or HUF or a company or he is an ordinary resident or non-ordinary or non-
resident person, as per their applicability they can file income tax.
Total income

Total Income is a financial metric that reflects the total amount of money a
business has earned or generated during a certain period of time, typically a
year. It includes all income sources, such as sales revenue, fees, commissions,
and interest. It includes income from sources like salary, capital gains, business profits,
house property and other sources. Total income is the taxpayer's income that remains after
taking into account all the permissible deductions under the income tax act. It is calculated by
subtracting GTI - deductions.

Meaning of Agricultural Income

(income not included in the total income)
Agricultural income is any income that is earned from any rent or revenue from a land or
a building, which is used for an agricultural purpose. Agricultural income is exempt from
income tax as per section 10(1) of the Income Tax Act, 1961. The Central Government
has not any power in relation to this, but the State Government can collect agricultural
income from other sources. But when agricultural income can be non-agricultural
income, we will discuss it here.

Agricultural income is defined under Sec. 2(1A) of the Income Tax Act, 1961.

Agricultural income is any rent or revenue by means of cash or in-kind, derived from a
land, which is used for an agricultural purpose and land should be situated in India.

Income from agricultural should be produced by a cultivator or a rent receiver of that

produce in-kind, which can be fit to take that into the market.

The income should be derived from the sale by a cultivator or a rent receiver of that
product which is produced or received by him, no process can be performed other than
the process to render it fit for the market.

Income which is derived from the building should follow some conditions:

1. The building should be situated in India;

2. It should be occupied by a cultivator or a receiver of rent-in-kind.
3. In the connection of the land of a cultivator or a rent receiver, the building
required to be as a dwelling-house, store-house or other outbuildings.
Agricultural Income has been exempted from Income Tax under Sec. 10(1) of the
Income Tax Act, where it has been given that, in computing, the total income of a
previous year of a person whose source of income is agriculture will not fall under the
category of total income. The burden of proof that an income fall under this category is
on the assessee.

Sri Ranganatha Enterprises v. CIT [1998] 232 ITR 568 (kar.)

In this case, the Court held that the burden lies on the assessee to prove that the
income derived by him is the agricultural income for which he is claiming an exemption
under Sec. 10(1) of the Income Tax Act.

Clubbing Of Income Under Section

64
There are many occasions when you may require to club income of someone
else with your income. If you are planning to transfer any of your assets/income
to another person as a means of tax planning to avoid the income getting taxed
in your hands, hold on. Such transfers could result in attraction of clubbing
provisions under the Indian income tax laws.

Even genuine gifts extended to your kith and kin could have these income tax
implications. It will help you immensely if you get some insights on the clubbing
provisions under the Indian income tax law. Hence, let us understand these
provisions a little more in detail.

Clubbing of Income
As the term suggests, clubbing of income means adding or including the income
of another person (mostly family members) to one’s own income. This is allowed
under Section 64 of the IT Act. However, certain restrictions pertaining to
specified person(s) and specified scenarios are mandated to discourage this
practice.

Specified Persons to Club Income

Income of any and every person cannot be clubbed on a random basis while
computing total income of an individual and also not all income of specified
person can be clubbed. As per Section 64, there are only certain specified
income of specified persons which can be clubbed while computing total income
of an individual.

Examples on Clubbing of Income

Example 1
Mr P owns a shop which fetches a rent of Rs.12,000 per month. He transfers the
rent to his friend Mr Q but retains the ownership of the shop.

In this case, because Mr P has transferred the income without transferring the
asset. Hence, as per section 60 of the income tax act, Mr P must include the
rental income while computing his total income.

How to avoid Clubbing of Income ?

Now we have explained the provision where transaction which are considered
under clubbing of income , Let's explain some of unique ways you can plan your
taxes without clubbing of Income provision

 Transfer of amount to Parents and Interest earned on such

investment : Any amount transferred to your Parents as a Gift will not be
taxable in the hands of your Parents and lets say such amount is invested in
a Fixed Deposit , Interest on such FD will continue to be taxed in the hands
of Parents and clubbing provision will not be applicable

 Gift Received at the time of Marriage : Any gift received during the time of
marriage will not be taxable in the hands of the recipient and thus any
income arising on such investment will continue to be taxed in the hands of
the recipient.
 Investment in PPF : Since interest earned on PPF is exempt income , Even
if you invest in PPF in the name of your Spouse or Minor child , Interest will
not be taxable. Thus clubbing provision became irrelevant.

Since there is an investment cap of Rs 150,000 per individual in PPF , You can
open multiple PPF accounts in the name of your Spouse or Minor child to get this
benefit.

Tax Planning
Tax Planning – Introduction
As we all know, the Government has imposed tax liability on taxpayers. In the era of
high tax rates, everyone wants to save their money for their future plans. To reduce that
liability taxpayer do financial plans to save their taxes and future investments. For
salaried individuals, it is essential to invest their money in the right way for fruitful
consequences. In this article, we will discuss what is tax planning and tax management
and how does it help the corporates and individuals.

Tax Planning Meaning

Tax planning is an activity to reduce tax liability. Tax planning is the basic and important
part of the financial plan and helps to save our capital. There are many options that
provide deduction in the tax liability of the taxpayer, from which Section 80C of the
Income Tax Act, 1961 is the most suitable option for an individual to claim the tax
deduction. There are many schemes under Sec.80C which provided eligible deduction
like under life insurance, contract for a deferred annuity, contribution by an individual
provident fund, contribution by an employee to a recognized provident fund and to an
approved superannuation fund, contribution in pension fund, etc. but one should reduce
his tax liabilities within the framework of law.

As in the case of McDowell & Co. Ltd. v. CTO (1985) 3 SCC 230, McDowell & Co. Ltd. was
a licensed manufacturer of Indian liquor. Appellant paid sales tax to the sales tax
authority on the basis of turnover but excluded excise duty. The question raised before
the SC was that whether the excise duty which was payable by the appellant but had
been paid by buyers was actually a part of turnover. Here appellant tried to reduce the
burden of sales tax for which the duty burden was directly transferred to the buyers.

SC held that “tax planning may be legitimate if it is within the framework of law, but the
colorable device cannot be part of tax planning. It is wrong to say that it is honorable to
avoid payment of tax by the dubious method. It is the obligation of every citizen to pay
tax honestly without resorting to subterfuges.”
Features of Tax Planning
 Reduction in tax liability.- one of the most important features of tax
planning is to reduce tax liability. Every individual has done his financial plan
so he can reduce his tax amount and can save for his future plans.
 Advance planning.- one has to arrange his tax plans at the beginning of the
financial year because no one can plan to reduce his tax liability day before
filing an income tax return.
 Investment in the right direction.- with the help of tax planning one can
invest his money in the right direction by choosing the right policy. Investment
in any assets or policy will not help in saving money from taxes, for this right
investment should be done.
 Dynamic in nature.- tax planning has to be done every year because of the
new implementation of policies introduced by the government. One has to
modify his tax plans at the beginning of every financial year.

Tax Planning Examples

Tax planning is an arrangement to reduce tax liabilities. How can an individual reduce his
tax liability by planning at the beginning of the financial year? Let’s take a look at some
examples-

1. Mr. W who is an individual of age 45 years, whose taxable income is

rs.5,00,000 and except a premium of medical insurance of rs.10,000 he has
invested no money in any scheme. After calculating all his income details and
deduction his gross tax amount will be rs. 16,224.
2. Mr. Y who is an individual of the same age as Mr. W and all the income details
are similar to Mr. W. But Mr. Y invested his money in schemes offered by the
government under Sec.80C, his gross tax amount will be rs.0.
This is how one can reduce his tax liability by investing in the right schemes and
programs or otherwise has to pay high tax rates.

Tax Planning and Tax Evasion

Tax Evasion is not a legal practice to avoid tax liabilities. To avoid tax in an illegal
manner like giving untrue statement knowingly, submitting misleading documents,
suppression of facts, misguided by not maintaining proper account of income earned will
lead to punishment under relevant laws for tax evasion. In this context, The Court in the
case of CIT v. Sri Abhayananda Rath Family Benefit Trust [2002] 123 Taxmann 81
(Ori.), said that ‘evasion’ necessarily means, ‘to try illegally to avoid paying tax’.

Let’s understand Tax Avoidance and Tax Evasion by an illustration –

In a state say, Punjab, the government has granted exemption from excise duty for five
years to the industries with the purpose of increasing industrialization in these areas.

If a manufacturer sets up his industry in Punjab is Tax planning. But he brings an almost
ready product to Punjab just for minor operations and sells it in Punjab. This is Tax
Avoidance. Here the purpose of government was defeated.
If a manufacturer manufactures the good somewhere else and dispatches it there but
shows that product manufacture and sold in Punjab. This is a Tax Evasion.

Tax Avoidance
Tax Avoidance is reducing tax liability in legal ways. Tax avoidance is done by taking
advantage of loopholes of the law. Provisions of law interpreted in such a manner that it
will avoid payment of tax. No element of mala fide motive present in tax avoidance.
Even the Court in the support of the tax avoidance said that tax avoidance is not
unlawful and the taxpayer can take its advantages. One can minimize his tax liability
within the legal framework even by taking advantage of loopholes in the law.

Essential Features of Tax Avoidance are as follow-

 Legitimate arrangements should be in such a manner that will minimize the tax
liability.
 Tax avoidance is in respect of legal provisions and carries no public disgrace
with it.

Difference between Tax Avoidance and Tax Evasion

Tax Avoidance and Tax Evasion both practices are done by taxpayers to avoid tax
liabilities. But both the practice has different legal provisions.

Tax Avoidance Tax Evasion

1. Any tax planning which is done to reduce

1. All the illegal methods by which tax liabilities
tax liability by legally permissible ways is
are avoided is tax evasion.
tax avoidance.

2. Tax avoidance takes into account of 2. Tax evasion is done by unfair means like
loopholes of the law. fraud, suppression of facts, etc.

3. Tax evasion is not legal and assessee who is

3. Tax avoidance is done within the legal
guilty under evasion will be punished under the
framework.
provisions of law.

4. Tax evasion is the intentional avoidance of

4. Tax avoidance is intentional tax planning.
tax when the tax liability arises.

Need of Tax Planning

Tax planning is essential to point in a person’s life. As the Government imposed high tax
rates so, to reduce that tax liability there is a requirement of tax planning. There are
many schemes and offers provided in taxation law. One has to choose the right scheme
where he can invest and avail the benefits of those schemes. Many Benefits are provided
to assesses like-

 Deduction under Section 80C

 Deduction for HRA
 Deduction on education loan
 Investment in senior citizen scheme
 Investment in mutual funds
 Investment in national saving schemes
 Any many miscellaneous schemes.

Tax Planning benefits

Tax planning should be done to reduce tax liability but what are other benefits of tax
planning? Let’s discuss here, a very important factor of tax planning and every individual
or company focus on this factor i.e, to save tax. The main purpose of tax planning is to
save capital from taxes and use it for the more beneficial purposes like invest in some
beneficial scheme. Better to save the money at the beginning of the year by planning
better to spend it in paying tax. One should avail the offers as much as he can, so he
can spend that money in any other way or save for his future plans.

Methods of Tax Planning

 Short-Range Tax Planning.- short-range tax planning involves year to year
planning to complete some specific and limited objects. In this type of tax
planning, one can invest in PPF or NSCs within the prescribed limit of income.
 Long-Range Tax Planning.- unlike short range tax planning, long-range tax
planning are those activities undertaken by an assessee, which does not pay
off immediately. This starts at the beginning or the income year to be followed
around the year.
 Permissive Tax Planning.- Permissive tax plannings are permissible under a
taxation law. In India, there are many provisions of law which offers
deduction, exemption, contribution and incentives. E.g. Sec. 80C of the
Income Tax Act which offers deduction, contribution, subscription, etc.
 Purposive Tax Planning.- Purposive tax planning refers to those plannings
by which taxpayers can avail maximum benefits by applying provisions of law
based on national priorities. Section 61 to 65 of the Income Tax Act talks
about the income of another person included in the income of the assessee.
So, the assessee can plan in such a manner that these provisions do not get
attracted and it would increase disposable resources.

Corporate Tax Planning

Tax planning regarding Residential Status

Non- residents
Tax liabilities for non-residents under tax law-

1. A non-resident person in India is one who has not completed the basic
condition of being a resident of India. A Hindu Undivided family can also be
non-resident of India as an individual. If a firm or an association of persons
who are said to be resident in India, control or manage the affairs wholly
outside India will also be non-resident.
2. Foreign income is not taxable in the hands of non-resident in India.
3. Under Sec.9 certain income is deemed to arise in India even if it may arise
outside India.
4. Tax paid on behalf of the non-resident/foreign companies in respect of other
income shall not be taxable under Sec. 10(6B).
And many other provisions with respect to non-resident in India like- 115A,
115AB,44BBA, etc.

For non-resident government provide relief of Double Taxation. Double taxation is, the
person is liable to pay taxes in two different countries, one is from where he earned and
another one is where he is resident. So to avoid this double taxation Government of
India has signed avoidance agreement with other countries under Sec. 90. And if there is
no agreement exists between the two countries then double tax income governed by the
provision of Sec.91.

Residents
Section 6 of the Income Tax Act provides Residential status of Indian. As per Sec.6 if any
person resident in India in the previous year for 182 days or more, and during the
previous four years resident for 365 days or more.

The tax law has categorized the residents into two parts i.e.,

 Resident and non-ordinarily resident (RNOR)

 Resident and ordinarily resident (ROR)
For RNOR, the individual has been Non-Resident in India for at least 9 fiscal years out of
10. In the previous 7 years, he has been in India for 729 or fewer days.

Tax planning for New Business

Any person or company can do their financial planning to reduce their tax liability. An
individual can plan his tax liability by contribution in government schemes, deduction,
subscription or any other exemption provided by law. But how can be tax planning is
done with reference to setting up of new business, financial management decision,
employee remuneration, etc. we will discuss it here.
Setting up a new business
To set up a new business, one has to decide the following matters-

Location of the new undertaking

Many factors can affect the location of business for the purpose of better tax planning,
there are some tax incentives provided by law-

1. Free Trade Zone under Sec. 10A provides a deduction to newly established
undertakings for which some conditions should be satisfied like- undertaking
must begin manufacture/production in Free Trade Zone, the industrial
undertaking should not be formed by the splitting up or reconstruction of a
business already in existence except those undertakings which are referred
under Sec. 33B.
2. Hundred percent export-oriented undertakings under Sec. 10B
3. Deduction under Sec. 80-IB in respect of profits and gains from certain
industrial undertakings like- business of an industrial undertaking, operation of
a ship, hotels, industrial research, production of mineral oils, developing and
building housing projects, convention theatre, etc.

 Manufactured product under that undertaking

Many incentive Acts are provided by the law, in regard to the nature of the business on
which deduction or exemption will be provided, are as follows-

1. Newly established industrial undertakings in Free Trade Zone under Sec. 10A.
2. Hundred percent export-oriented undertakings under Sec. 10B.
3. Venture Capital Companies (VCC) under Sec. 10 (23FB).
4. Infrastructure Capital Companies under Sec. 10 (23G)
5. Tea/Coffee/rubber development account under Sec. 33AB
6. Site restoration fund under Sec. 33ABA
7. Amortization of telecom license fees Sec. 35ABB
8. Deduction in respect of expenditure on specified business under Sec. 35AD
9. Amortisation of preliminary expenses under Sec. 35D
10. Amortisation of expenditure on prospecting of certain minerals under Sec. 35E
11. Deduction under Sec. 36(1)(viii) by a financial corporation and a public
company.
12. Special tax provisions under Sections 42, 44BB, 44AD, 44AE, 44AF, 44B,
44BBA, 44BBB, 44D, 115A, 115AB, 115AC, 115AD, 115BBA and 115D.
13. Deduction in respect of profits and gains from industrial undertakings engaged
in infrastructure development etc. under Sec. 80-IA
14. Profits and gains from industrial undertakings other than infrastructure
development under Sec. 80-IB
15. Profits and gains of undertakings in a certain special categories of states under
Sec. 80-IC.
 16. Profits and gains from the business of collecting and processing of
biodegradable waste under Sec. 80JJA
17. Employment of new workmen under Sec. 80JJAA.

 The legal form of Organisation

One can decide tax liabilities under different organization forms while comparing other
factors and tax incentives like how a person can reduce his tax liability by availing tax
incentives provided under the law.

Tax Planning Strategies

Tax planning strategies are a plan to reduce tax liability by availing the advantages of
schemes and programs offered by the government to an individual or an organization.
The motive of tax planning strategy is to use the schemes for the reduction of tax
liability in the right direction and in a lawful manner. As we have discussed, there are
many schemes and programs which are offered by the government. Let’s take a look

 Deduction under Section 80C.- section 80C covers a wide area for a tax
deduction which offers a number of schemes and plans where one can invest
his money and save it from tax.
 Deduction for HRA.- house rent allowances given under Section 10(13A) where
employees are exempted from paying tax who lives in a rented
room/apartment.
 Deduction on education loan.- under section 80E one can save his tax, as per
this section deduction is allowed on the loan taken by an assessee for his
higher education or for the higher education of his relative.
 Rebate for home loan.- one can save his tax on home loan principal repayment
or home loan interest payment. Under section 80C assessee can claim for
principal repayment and section 24b for home loan interest.
 Planning for Long term capital gain.- under long term capital gain, one can
claim for deduction on the sale of long term capital assets. Here, long term
capital assets mean by for 3years or more.
 Donation exemptions.- donation exemption can be claimed under section 80G
if the assessee has donated any amount for NGOs or for any political party.

Tax Planning Salary

Before planning tax liabilities to reduce tax limit one should know how much salary is
taxable and what allowances are not taxable. Just take a look –

 Basic salary.- A basic salary is the fixed amount that is paid to the employee
before adding any bonus or surplus charges or reduction in any investment.
 House Rent Allowance.- house rent allowance is that amount which paid to
those employees who live in a rented house or apartment for the employment
 purpose. House rent allowance is not taxable under income tax but if the
employee who gets house rent allowance and live in his own house then that
amount will be taxable.
 Leave Travel Allowance.- leave travel allowances are exempted under income
tax where it is provided that allowance will be claimed on short distance trips
within India. Employees directly cannot claim this exemption.
 Bonus.- bonus is the additional amount given by the employer to his
employees. Bonus can be given on some occasion or can be based on the
performance of employee whatever it is, will be completely taxable.
 Provident Fund.- provident fund is a scheme started for the employees so they
can contribute to this scheme and save money for their future. 12% of the
basic salary contributed to the pension and provident fund of the employee.
 Standard Deduction.- standard deduction is that amount which is not taxable
and can reduce the tax liability. The employee can claim rs.50,000 as a
standard deduction from his taxable income.
 Professional Tax.- this is the tax imposed by the State government on a
person. The maximum limit which the state government can levy on a person
is rs.2,500 which is not taxable under income tax.
One can take help from these allowances and schemes to reduce his tax liability by
reducing his salary. There will be a minimum tax on less salary.

Tax Planning in Income Tax

To decide whether one should invest his salary in a particular scheme or not depends on
what is a more suitable option for that person. To invest income in a particular income
an assessee should have enough knowledge about schemes and investment under those
schemes. As we have sub-categorized the options for tax planning available to the
assessee,i.e.

 Investment in government schemes

There are many tax provisions under which government provide benefit to assessees. So
different assessee can choose different options as per their suitability. Like – some invest
in life insurance corporation, some under pension fund according to their suitability. Now
we will discuss government scheme one by one-

In all the government schemes Section 80C is the most tax-saving scheme under which
people claim their taxes. Before the Assessment Year 2006-07, deduction under Sec.80C
was provided under Sec.88, 88B, and 88C which has been now replaced. There are some
schemes under Sec.80 where deduction allowed out of total income.

One can invest in a different category of schemes, like-

Tax-saving scheme.- there are some tax-saving schemes where contribution in those
schemes will not be covered under taxable income and entitled to deduction under
Sec.80C. These schemes are-

 Life insurance policy

 Contribution to Provident Funds
 Contribution in Life Insurance Corporation or Mutual Funds
  Investment in National Savings Certificate
 Amount invested in Annuity Plans
 The amount deposited in Pension Funds
 Tuition fee paid
Tax-free return scheme.- in tax-free return schemes, one can invest his capital under
the following institutions-

1. Post office.- one can invest in schemes offered by post office like- Post Office
Saving Account Schemes and Public Provident Fund Schemes.
2. Life Insurance Corporation.- an individual can invest in different plans offered
by LIC like- Whole Life Plan, Endowment Plans, Money Back Plan, Children
Plan, etc.

 Unit Trust of India.- Unit Trust of India governed by the Unit Trust of India Act
which was formed to encourage assessee to invest their capital and to avail
the benefits of the schemes provided by the government.
 Public Companies and Corporation.- Public companies and corporations provide
tax return benefit to an individual assessee under following schemes-

1. Investment in equity shares

2. Investment in bonds.
The return from the investment is totally exempted from Income Tax under Section 10.
Investment in these schemes shall not provide tax liabilities but return from these
investments shall be entitled to tax benefits.

 Deduction under other provisions

Number of Deductions provided under Section 80C to 80U of the Act. these deductions
are allowed only to some specified assessee. Under these provisions, a deduction is
allowed only when payment is made through the taxable income, and the total amount
of the deduction shall not exceed the amount of Gross total income. Now, a deduction
can be sub-categorized in two parts-

 In respect of payment
Deduction in this category allowed only when there is a payment made by assessee falls
under Sec.80C to Sec.80GGC, now we will discuss these provisions one by one for better
understanding-

Deductions Under section 80C

This section covers a wider area for the assessee to avail the benefits of all the schemes
and provisions. For most people, this is a suitable provision to invest their capital. The
deduction limit under this Section is up to Rs. 1,00,000. Sec.80C says Deduction in
respect of Life Insurance Premia, deferred annuity, contribution to provident funds,
subscription to certain equity shares and debentures, etc. some major Schemes under
this Section are-

 Investment under Life Insurance Policy .- any person can contribute to a

life insurance policy, where up to 20% deduction is allowed from the Gross
total income of the assessee. For eligibility under this Section, one should pay
the life insurance premium
 1. On own life;
2. On spouse’s life;
3. On the life of all the dependent children minor or major;
4. On joint life with any member discussed above.

 Contribution to Provident Funds.- Contribution by an employee to the

Public Provident Fund or any other recognized provident fund by the
government shall be deductible from his tax liability.
 Investment in National Saving Certificates.- Capital investment in the
National Saving Certificate in the name of his own or his wife or children shall
be deductible under Sec.80C. Interest other than investment shall also be
deductible under Sec.80C.
 Public Deposit Scheme.- contribution in any such pension fund which is set
up by the National Housing Bank governed by Sec.3 of National Housing Bank,
1987.
 Investment in Annuity Plans.- the amount paid by an individual under
contract for deferred annuity payment on his own life, or spouse’s life or on
the life of children or any other member of the Hindu Undivided Family shall be
deductible.
 Investment in Mutual Funds or pension funds.- amount paid as
contribution in any pension fund scheme set up by mutual funds or Unit Trust
of India shall be qualified for deduction under Sec.80C.
 Home loan Installment.- repayment of the Home loan borrowed by the
assessee during the purchase or construction of residential house property
then the principal component of EMI qualifies for the deduction under Sec.80C.
 Tuition fee.- tuition fee paid by an individual to any university, college or
school situated in India for full-time education of any of his two children shall
be eligible for deduction under Sec.80C.
Deductions Under section 80CCC

Section 80CCC talks about deduction in respect of contribution to certain pension funds.
If an assessee paid or deposited any amount to the annuity plan of Life Insurance
Corporation or to any other insurer in respect of receiving pension funds shall be eligible
for deduction under Sec.80C but that amount should not exceed Rs.1,50,000 in the
previous year.

Deductions Under section 80CCD

Deduction in respect of contribution to pension scheme of the Central Government.

Where an assessee, being an individual employed by the Central Government or
employee in any other case, as may be notified by the Central Government shall be
eligible for deduction, but the amount he paid or deposited shall not exceed 10% of his
salary in the case of an employee or in any other case shall not exceed 20% of his gross
total income.

Deductions Under section 80D

Premium Amount paid by an assessee from his taxable income in respect of the health
insurance for his own or his wife or his children health shall be deductible under this Sec.
the amount should not exceed Rs.10,000 and Rs.15,000 in the case of a senior citizen.

Deductions Under section 80GG

An assessee who is not in receipt of House Rent Allowance under Section 10(13A) shall
be eligible for deduction in respect of house rent. For deduction under this Section, one
should fulfill some conditions like-

1. He shall be lived in a rented house due to his employment;

2. He shall not get House Rent Allowances;
3. He or his wife or his children should not have self-occupied houses in India.

 In respect of receipt
These are the following provision under which deduction is qualified in respect of
receipt-

 Deductions Under section 80QQB

The deduction is allowed in the case of royalty income earned by the author, either
whole of his income or three lakh rupees, whichever is less.

 Deductions Under section 80R

Deduction in respect of remuneration from certain foreign sources in the case of
professor, teacher etc. this section does not include remuneration in gross total income
where remuneration received by assessee, outside India from any university or any
other educational institution established outside India, for rendered his service as a
professor, teacher or research worker.

This section provided that no deduction shall be allowed unless the assessee furnishes
the certificate in a prescribed form along with the return of income.

 Deductions Under section 80U

A deduction shall be allowed to a permanent physically disabled person. Assessee, whose
earning capacity has been reduced because of disablement, then deduction of Rs. 50,000
in a year shall be allowed to him or in the case of severe disability Rs.75,000 in a year.
Provided that assessee should provide a certificate from the medical authority in a
prescribed form along with the return of income.

Other than these deduction provisions some other provisions under the Act are-

1. Deduction in respect of certain donations for Scientific Research or rural

development (Sec.80GGA);
2. Deduction in respect of contribution given by any person to political
parties(Sec.80GGC);
3. Deduction in respect of loan taken for higher education(Sec.80E);
4. Deduction in respect of loan taken for residential house property(Sec.80EE);
5. Deduction in respect of interest on deposits in a savings account (Sec.80TTA);
Tax Planning Capital Gains
Capital gain is a profit arises from the sale of capital assets. Capital gain can be a long-
term capital gain and short term capital gain. The capital gain exemption is provided
under section 54 where capital gains tax rates divide by 0%, 15%, and 20%. In the
2019 amendment by the Finance Act under Section 54 where exemption provided for
house property it is included that where the amount of capital gain does not exceed 2
crore rupees then assessee by his choice can purchase or construed two residential
houses in India.

To avail, this benefit one needs to fulfill the following conditions provided under the Act-

1. The time period of purchasing of new property shall be either before 1 year of
selling the property or 2 years after selling that property.
2. That capital gain should be invested in the construction of property which is
necessarily completed within the 3 years of selling.
Other exemptions provided under taxation law are-


o Section 54F provides Exemption for capital assets other than a house
property. This section talks about long term capital gain.
o Section 54EC in respect of capital gain not to be charged on
investment in certain bonds, where the capital gain arises from the
transfer of long term capital assets.
o Section 54B provides that capital gain on transfer of land used for
agricultural purposes not to be charged in certain cases.

Tax Planning for Partnership Firm

A partnership firm is a business consists of two or more people who have a common goal
and invest their money and assets for the accomplishment of that goal and share equal
profit and liabilities.

Tax planning for a partnership firm is the most important issue for each and every
partner. The primary focus to avoid tax levied by the government is to make proper tax
planning. To maintain the growth of the business firm owners has to do arrangements to
avail the benefits.

In a partnership firm, income tax is levied on all partners, so all the record and
document of their income attached with partnership tax return form. Profit arises from
sales of any assets that are taxable too.

There are some exemptions or benefits provided in regards to the partnership firm,
these are-

 Section 40(b) talks about that amount which is not deductible in the case of

1. Any payment of salary, bonus, commission or remuneration to any partner

who is not a working partner;
 2. Any payment of remuneration to any partner who is a working partner but not
authorized by the terms of partnership firm;
iii. Any payment of remuneration to any partner who is a working partner and authorized
by the terms of partnership firm but the payment is for such period which is not
authorized in any earlier partnership deed;

1. Any payment of interest to any partner who is authorized by the terms of

partnership deed and relates to any period falling after the date of such
partnership deed for which amount calculated exceed by the rate of 12%
simple interest per annum;
2. Any remuneration to any partner who is a working partner and authorized by
the terms of the partnership deed and relates to any period falling after the
date of such partnership deed so far as the amount of payment to all the
partners during the previous year exceeds the aggregate amount.

 Section 10(38) provides that any income shall not be included in total
income if that if that income arises from the transfer of long term capital asset,
being an equity share in a company or a unit of an equity oriented or a unit of
a business trust where further it is provided that income by the transfer of
long-term capital gain shall be taken in account of computing book profit and
income tax payable under Section 115JB.
 Deduction for Donation under Section 80G we have studied that no amount
shall be included in total income if it is donated as a charity to any NGO or to
any political party or to any charitable institution within India. No deduction
shall be allowed if the amount exceeds rs. 2000 unless it is payable by any
mode other than cash.
 Section 44AD provides exemption on presumptive taxation for any business
other than business related to plying, hiring or leasing goods carriages referred
under section 44E or any business whose total turnover or gross receipts in the
previous year does not exceed Rs. 2 crores.
 Section 54E provides that capital gain not to be charged if the cost of long
term specified assets is not less than capital gain arising from the transfer of
original asset the whole of such capital shall not be chargeable under Section
45.
If the cost of long term specified assets is less than capital gain arising from the transfer
of original asset, so much of the capital gain as bears to the whole of capital gain the
same proportion as the cost of acquisition of the long-term specified asset bear to the
whole of capital gain, shall not be charged under section 45.

Zero Tax Planning

Zero tax planning is the way to reduce tax liability as much that the payable amount of
tax will be zero. As we have studied all the provisions of the taxation law which provides
deduction from tax liability. By planning and investment in the right schemes and
programs, one can plan zero tax. There are many schemes like one can invest his money
in mutual funds or claim deduction under Sec.80C up to 1.5lakh rupees and many
more.
Conclusion
As we have discussed many tax incentives under the provision of law which focus and
help in the reduction of tax liabilities. An individual or a corporate, who are taxable under
the present tax regime can avail the benefits that arise out of these incentives. The
income tax regime in India has evolved over time and has made it easier to plan and
save their capital accordingly. It is suggested that one should avail of these benefits
within the framework of the law.

Income from House Property and Taxes

Budget 2023 update: It is proposed that the cost of acquisition of a property

should not include any home loan interest claimed as an income-tax deduction by
the seller throughout the holding term for computing capital gains from the sale of
a residential property.

Income tax on house property: On Owning a house one day – everybody dreams
of this, saves towards this and hopes to achieve this one day. However, owning a
house property is not without responsibilities. Paying house property taxes
annually is one of them. If you want to learn how to save tax on home loan
interest, this guide is for you. It also talks about how to report home ownership in
your income tax return.

Basics of House Property Tax

A house property could be your home, an office, a shop, a building or some land
attached to the building like a parking lot. The Income Tax Act does not
differentiate between commercial and residential property. All types of properties
are taxed under the head ‘income from house property’ in the income tax return.
An owner for the purpose of income tax is its legal owner, someone who can
exercise the rights of the owner in his own right and not on someone else’s
behalf.

When a property is used for the purpose of business or profession or for carrying
out freelancing work – it is taxed under the ‘income from business and profession’
head. Expenses on its repair and maintenance are allowed as business
expenditure.

a. Self-Occupied House Property

A self-occupied house property is used for one’s own residential purposes. This
may be occupied by the taxpayer’s family – parents and/or spouse and children.
A vacant house property is considered as self-occupied for the purpose of
Income Tax.

Prior to FY 2019-20, if more than one self-occupied house property is owned by

the taxpayer, only one is considered and treated as a self-occupied property and
the remaining are assumed to be let out. The choice of which property to choose
as self-occupied is up to the taxpayer.

For the FY 2019-20 and onwards, the benefit of considering the houses as self-
occupied has been extended to 2 houses. Now, a homeowner can claim his 2
properties as self-occupied and remaining house as let out for Income tax
purposes.

b. Let Out House Property

A house property which is rented for the whole or a part of the year is considered
a let out house property for income tax purposes

c. Inherited Property

An inherited property i.e. one bequeathed from parents, grandparents, etc. again,
can either be a self-occupied one or a let-out one based on its usage as
discussed above.
What Is Business Income?
Business income is a type of earned income and is classified as ordinary
income for tax purposes. It encompasses any income realized as a result of an
entity’s operations. In its simplest form, it is a business entity’s net profit or loss,
which is calculated as its revenue from all sources minus the costs of doing
business.1

Understanding Business Income

Business income is a term commonly used in tax reporting. According to
the Internal Revenue Service (IRS) , business income “may include income
received from the sale of products or services,” such as “fees received by a
person from the regular practice of a profession...[and] rents received by a
person in the real estate business.”2

Business expenses and business losses can offset business income, which can
be either positive or negative in any given year. The profit motive behind
business income is universal to most business entities. However, the way in
which business income is taxed differs for each of the most common types of
businesses: sole proprietorships, partnerships, and corporations.

How Business Income Is Taxed

How a business is formed determines how it reports its income to the IRS and
the federal taxes it must pay. Also, some states impose taxes based on the
structure of the business .

 A sole proprietorship is not a legally separate entity from its owner.

Therefore, business income from a sole proprietorship is reported on that
individual’s Form 1040 tax return using Schedule C: Profit or Loss from
Business.324
 A partnership is an unincorporated business that is jointly owned by two or
more individuals. It reports business income on Form 1065.5 However,
the partnership itself does not pay income tax. All partners receive
a Schedule K-1 and report their share of the partnership’s income on their
own individual income tax returns.627
 A limited liability company (LLC) is a hybrid between a corporation and a
sole proprietorship or partnership. Single-member LLCs report business
income on Form 1040, Schedule C. LLCs with more than one member, on
the other hand, use the same form used by partnerships: Form 1065. An
LLC also can opt to be taxed as a C corporation (C-corp) or an S
corporation (S-corp).8
 A corporation is a legally separate entity from any individual who owns it.
Corporations are each generally taxed as a C-corp, which means they are
taxed separately from their owners. Business income from a corporation is
reported on Form 1120.2910
  An S-corp is a corporation that elects to be taxed as a pass-through
business. Business income for an S-corp is reported on Form 1120-S.
Like a partnership, the S-corp does not pay income tax. Shareholders
receive a Schedule K-1 and report their share of the company’s income on
their individual tax returns. Note that an S-corp is not a type of business
entity; it is a tax filing election that an LLC or a C-corp can elect after
forming.11212

Business income coverage (BIC) offers companies the possibility to

obtain insurance against a loss of business income caused by damage to
physical property.13

Insurance Coverage for Business Income

A business income coverage form is a type of property insurance policy that
covers a company’s loss of income due to a slowdown or a temporary
suspension of normal operations stemming from damage to its physical
property.13

Let’s say a doctor’s office in Florida is damaged by a hurricane. The doctor is

unable to see patients in that office until the building is considered to be
structurally sound again. The business income coverage would kick in during the
time period when the doctor’s business is interrupted.

Examples;- Business income, as the name implies, is income

generated by a business. According to the Internal Revenue Service (IRS),
any payment made in exchange for a product or service offered by a
business is considered business income. That can include a sale made in
a shop or online or rent received by a real estate business.12

Capital Gains:-
What Is a Capital Gain?

A capital gain refers to the increase in the value of a capital asset when it is sold.
Put simply, a capital gain occurs when you sell an asset for more than what you
originally paid for it.

Almost any type of asset you own is a capital asset. This can include a type of
investment (like a stock, bond, or real estate) or something purchased for
personal use (like furniture or a boat).

Capital gains are realized when you sell an asset by subtracting the original
purchase price from the sale price. The Internal Revenue Service (IRS) taxes
individuals on capital gains in certain circumstances.1
Understanding Capital Gains
As noted above, capital gains represent the increase in the value of an asset .
These gains are typically realized at the time that the asset is sold. Capital gains
are generally associated with investments, such as stocks and funds, due to
their inherent price volatility. But they can also be realized on any security or
possession that is sold for a price higher than the original purchase price, such
as a home, furniture, or vehicle.

Capital gains fall into two categories:

 Short-term capital gains: Gains realized on assets that you've sold after
holding them for one year or less
 Long-term capital gains: Gains realized on assets that you've sold after
holding them for more than one year

Both short- and long-term gains must be claimed on your annual tax return.
Understanding this distinction and factoring it into an investment strategy is
particularly important for day traders and others who take advantage of the
greater ease of trading in the market online.

Realized capital gains occur when an asset is sold, which triggers a taxable
event. Unrealized gains, sometimes referred to as paper gains and losses,
reflect an increase or decrease in an investment's value but are not considered a
capital gain that should be treated as a taxable event. For example, if you own
stock that goes up in price, but you haven't yet sold it, that is an unrealized
capital gain.1

The tax rates for capital gains are listed below.

A capital loss is the opposite of a capital gain. It is incurred when there is a

decrease in the capital asset value compared to an asset's purchase price.1

Capital Gains Tax

Short- and long-term capital gains are taxed differently. Tax-efficient
investing can lessen the impact of these taxes. Remember, short-term gains
occur on assets held for one year or less. As such, these gains are taxed as
ordinary income based on the individual's tax filing status and adjusted gross
income (AGI).

Long-term capital gains, on the other hand, are taxed at a lower rate than regular
income. The exact rate depends on the filer's income and marital status, as
shown below:23
ncome From Other Sources -
Calculate Income Tax, Deductions
& Exemptions
By Ektha Surana

|
Updated on: Mar 27th, 2024
|
10 min read

Heads of Income
The Income Tax Department breaks down income into five heads of income for
the purpose of income tax reporting:

 Income from Salary

 Income from House Property

 Income from Capital Gains/Loss

 Profits and Gains from Business and Profession

 Income from Other Sources

Income from Other Sources covers income that does not fall under any of the
other heads of income.

Savings Bank Account – Interest

Income
Interest that gets accumulated in your savings bank account must be declared
in your tax return under income from other sources. Note that the bank does not
deduct TDS from savings bank interest. Interest from fixed
 deposits and recurring deposits is taxable, while interest from savings bank
accounts and post office deposits is tax-deductible to a certain extent. However,
they are shown as under income from other sources. Interest income from a
savings bank account or a fixed deposit or from a post office savings account are
all shown under this head.

Deduction on Interest Income

Under Section 80TTA
For a residential individual (age of 60 years or less) or HUF, interest earned upto
Rs 10,000 in a financial year is exempt from tax. The deduction is allowed on
interest income earned from:

 savings account with a bank;

 savings account with a co-operative society carrying on the business of

banking; or

 savings account with a post office

Senior citizens are not entitled to benefits under section 80TTA.

Tax on Fixed Deposits

Fixed deposit interest that you receive is added along with other income that you
have, such as salary or professional income, and you’ll have to pay tax on that
income at a tax rate that applies to you. TDS is deducted on interest income
when it is earned, though it may not have been paid.

Example: The bank will deduct TDS on interest accrued each year on a FD for 5
years. Therefore, it is advisable to pay your taxes annually instead of only paying
them when the FD matures. With effect from 1 April 2018, senior citizens will
enjoy an income tax exemption of up to Rs 50,000 on the interest income they
receive from savings bank accounts, fixed deposits, recurring deposits with
banks, post offices, etc., under Section 80TTB.

Avoiding TDS on Fixed Deposits

Banks are required to deduct tax when interest income from deposits held in all
the bank branches put together is more than Rs.40,000 in a year (Prior to FY
2019-20, it was Rs.10,000). A 10% TDS is deducted if PAN details are available.
It is 20% if the bank does not have your PAN details. The details of TDS
deducted on Fixed Deposit Interest is in the Form 26AS.If your total income is
below the taxable limit, you can avoid tax deduction on fixed deposits by
submitting Form 15G and Form 15H to the bank requesting them not to deduct
any TDS. Form 15H is for senior citizens (60 years or older); Form 15G is for
everybody else. These forms are for residents only and for those whose taxes
add up to zero. These forms must be submitted at the start of the financial year. If
you missed submitting them, then you can claim a refund by filing an income tax
return. These forms are valid for one year only. Therefore, they must be
submitted each year to keep banks from deducting tax.

Reporting Fixed Deposit and

Recurring Deposits in Your Tax
Return

Reporting recurring deposit

Starting June 2015, when interest income from all the branches of the bank
including from recurring deposits, exceeds Rs.10,000 in a financial year, a 10%
tax on interest earned will be deducted. The interest earned should be shown in
‘income from other sources.
Exempt Income
The PPF and EPF amount you withdraw after maturity is exempt from tax and
must be declared as exempt income from income from other sources. Note that:
The EPF is only tax-exempt after five years of continuous service. Read in detail
the rules of EPF withdrawal and taxability thereof.

Family Pension
If you are collecting a pension on behalf of someone who is deceased, then you
must show this income under income from other sources. There is a deduction of
Rs 15,000 or one-third of the family pension received whichever is lower from the
Family Pension Income. This will be added to the taxpayer’s income and tax
must be paid at the tax rate that is applicable.

Taxation of Winnings from Lottery,

Game Shows, Puzzles - Casual
Income
If you receive money from winning the lottery, Online/TV game shows, races
including horse races, card games and other games, gambling betting, etc., it will
be taxable under the head Income from other Sources. The income will be
taxable at the flat rate of 30%, which after adding cess, will amount to 31.2%

Expenses allowed to be deducted from certain income sources;-

Similar to freelancers and businesses who can deduct certain expenses from
their income, a taxpayer earning income from other sources can claim deductions
for expenses as given below:
 Expenses (not capital expenses) such as repairs, insurance premium, and
depreciation in respect of plant, machinery, furniture and buildings are
deductible from rental income earned by letting out of plant, machinery,
furniture and building.

 The rental income from the plant and machinery is chargeable to tax under
income from other sources. The expenses incurred in respect of such plant
and machinery are allowed to be deducted.

 A standard deduction is allowed on family pension, i.e. a deduction which is

the lower of Rs.15,000 and one-third of such income is available in case of
income in the nature of family pension which is paid monthly to the family
members of a deceased employee.

 In case, interest on compensation or enhanced compensation is received,

50% of the interest is allowed to be deducted (applicable starting from the
assessment year 2010-11).

 As per Section 57(iii), a deduction is allowed for any other expense (which is
not a capital expense) which has been spent wholly and exclusively for
making or earning such income.

Dividend Income
Dividends received from investments, such as stocks, are taxed under “income
from other sources”. However, as of the recent removal of the Dividend
Distribution Tax (DDT), individuals receiving dividends need to include them in
their total income and pay tax based on their applicable slab rates. Taxpayers
can claim interest expense up to 20% of the dividend income. Also, if the total
dividend amount exceeds Rs 5,000, the company deducts TDS at 10% while
paying the dividend.
 Agriculture income
As per the Income-tax law, agricultural income covers 3 main activities:

 Rent or revenue earned from agricultural land situated in India.

 Income from agricultural activities such as the cultivation of the land, tilling of
the land, sowing of seeds, planting, etc., and also includes subsequent
operations which would make the product fit for use in the market like
tending, pruning, cutting, harvesting, etc. Income derived from saplings or
seedlings grown in a nursery would also be considered to be agricultural
income.

 Income derived from farm building required for agricultural operations.

Virtual Digital Assets (VDAs)

The virtual digital asset shall mean a cryptocurrency, NFT, etc. Any profit or loss
from the sale of VDAs shall be charged to income tax @ 30% subject to the
conditions on set off of losses against the incomes.

Income from Gifts

Taxation on gifts is covered by section 56 (2)(vi) of the Income Tax Act. Any gift
received with or without consideration in excess of Rs 50,000 in a financial year
will be taxed according to your slab.

 Any gifts received in cash exceeding Rs 50,000 shall be chargeable to tax.

 Any gifts received in kind (without any consideration) and the fair market
value of such gift is more than Rs 50,000 then the aggregate value will be
taxable in the hands of such individual.