S.Y B.COM
SEMESTER - III
ELEMENTS OF DIRECT TAXES
(EDT)
• Tax is a price which is paid by every citizen of country for social welfare what he / she avails.
• Cost of living in a society
Why are taxes levied?
• The reason for levy of taxes is that they constitute the basic source of revenue to the Government. Revenue so raised is utilized for meeting the expenses of Government like defence, provision of education, health-care, infrastructure facilities like roads, dams etc.
Types of tax
Types of Tax
• Direct Taxes : If tax is levied directly on the income or wealth of a person, then, it is a direct tax. The person who pays the tax to the Government cannot recover it from somebody else i.e. the burden of a direct tax cannot be shifted. e.g. Income- tax.
• Indirect Taxes : If tax is levied on the price of a good or service, then, it is an indirect tax e.g. Goods and Services Tax (GST) or Custom Duty. In the case of indirect taxes, the person paying the tax passes on the incidence to another person.
Assessment & Previous Year
• Assessment Year- It is a year in which assessee pays tax for Previous Year.
• Previous Year- It is a year in which assessee earns income.
Income Tax Law
• Two Acts are more important -
i. Income Tax Act, 1961
- Provisos and Explanations
- sub-sections or clauses and sub-clauses
ii. Annual Finance Act - Fixation of tax rate
Important Definitions
• Assessment Year u/s 2(9)
• Previous Year u/s 3
• Assessee u/s 2(7)
• Person u/s 2(31)
• Gross Total Income u/s 14
• Income u/s 2(24)
Assessment Year u/s 2(9)
• Means -
The period starting from April 1 and ending on March 31 of next year. Thus, the assessment year 2021-22 commences on April 1, 2021 and ends on March 31, 2022. Income of pervious year of an assessee is taxed during the next following year at the rate prescribed by relevant Finance Act.
Previous year u/s 3
• Means -
The year in which income is earned is known as previous year and the next year in which income is taxable is known as assessment year.
In our syllabus, we will consider A.Y 2021-22 and P.Y. 2020-21 throughout the semester.
Assessee u/s 2(7)
• It includes -
i. A person who files tax return though his income is less than Rs. 2,50,000.
ii. A person who doesn't file tax return though his income is more than Rs. 2,50,000
iii. A person in respect of whom any proceeding under the Act has been taken
iv. Deemed Assessee
Person u/s 2(31)
• The term person includes-
a. An Individual
b. A Hindu Undivided Family
c. A company
d. A firm
e. An AOP or BOI, whether incorporated or not
f. A local authority; and
g. Every artificial juridical person not falling within any of the preceding categories
Gross Total Income u/s 14
• As per section 14, income of a person is computed under the following five heads:
1. Salaries
2. Income from house property
3. Profits and gains of business or profession
4. Capital gains
5. Income from other sources
The aggregate income under these heads is termed as "gross total income".
Income u/s 2 (24)
• It is inclusive definition as it includes-
- Profits and gains
- Dividend
- Anv allowance
- Winning from lottery
- Compensation
- Consideration etc.
Tax v/s Duty
|
TAX |
Duty |
|
In case of tax, person earns income and then pays tax to government. |
In case of duty, person pays tax and then he may earn
income by selling the product or he may consume himself. |
|
For eg. Income tax |
For eg. Custom duty |
Deduction v/s Exemption
|
Deduction |
Exemption |
|
Deduction is generally given from Income chargeable to tax. Deduction can
be less than or equal to or more than amount of income. If amount deductible
is more than the amount of income, the resulting amount will be taken as loss |
If an income is exempt from tax, it is not included in the computation
of income. Exemption can never exceed the amount of income. |
Method of Accounting
Income chargeable under the head "Profits and gains of business or profession" or " Income from other sources" is to be computed in accordance with the method of accounting regularly employed by the assessee.
In other cases, method of maintaining books of account is irrelevant.
Income tax slabs under the new tax regime for all individuals for FY 2020-21
(Applicable from A.Y. 2021-22)
|
Income Tax Slab |
Tax Rate |
|
Up to Rs 2.5 lakh |
NIL |
|
Rs. 2.5 lakh to Rs. 5 lakh |
5% (tax rebate of Rs.12,500 available under under section 87A) |
|
Rs. 5 lakh to Rs. 7.5 lakh |
10% |
|
Rs. 7.5 lakh to Rs. 10 lakh |
15% |
|
Rs. 10 lakh to Rs. 12.5 lakh |
20% |
|
Rs. 12.5 lakh to Rs. 15 lakh |
25% |
|
Rs. 15 lakh And above |
30% |
Income Tax Slabs & Rates for Individual Tax Payers & HUF (Less Than 60 Years Old) for FY 2020-21-
Part I
(A. Y. 2021-22)
|
Income Tax Slab |
Tax Rate for Individual &
HUF Below the Age Of 60 Years |
|
Up to Rs. 2,50,000 |
Nil |
|
Rs.2,50,001 to Rs. 5,00,000 |
5% of total income exceeding Rs.2,50,000 |
|
Rs. 5,00,001 to Rs. 10,00,000 |
Rs. 12,500 + 20% of total income Exceeding Rs.5,00,000 |
|
Above Rs.10,00,000 |
Rs. 1,12,500 + 30% of total income exceeding Rs. 10,00,000 |
Computation of Tax: An outline
I. Aggregate of income under 5 heads
Salary xxx
Income from House Property xxx
Profit and gain of Bus. Or Profession xxx
Capital Gain xxx
Income from other sources xxx
----------------------------------------------------------------
Gross Total Income xxx
II. Less: Deduction (80C to 80U) xxx
Net Income/Total Income xxx
III.Calculation of Tax using applicable tax slab
IV. Less: Rebate upto Rs. 12500 if net income is less than or equal to Rs. 500000
V. Add: Surcharge if applicable
VI. Add: Health and education tax @ 4% on tax liability
Example
• Mr. Dev is an Indian citizen (age: 56 years). He has received salary of Rs. 800000 in the year 2019-20 and also paid LIC premium of Rs. 72000 in the same financial year. Calculate his lax liability for the assessment year 2020-21.
Ans. Salary 800000
Less: Deduction (72000)
Net Income 728000
728000-250000 (exempt)
= 478000 - 250000 (5% on 250000) = 12500
= 228000 @20% = 45600
tax libility = 12500 + 45600
= 58100 @ 4% (HEC) = 2324 Total tax = 58100 + 2324
= 60424
Examples
• Mr. Dev is an Indian citizen (age: 66 years). He has received salary of Rs. 750000 in the year 2019-20 and also paid LIC premium of Rs. 72000 in the same financial year. He has also received rental income of Rs. 50000 from house property in the financial year 2019-20. Calculate his lax liability for the assessment year 2020-21.
• Mr. Dev is an Indian citizen (age: 86 years). He has received salary of Rs. 700000 in the year 2019-20 and also paid LIC premium of Rs. 72000 in the same financial year. He has also received rental income from house property of Rs. 100000 in the financial year 2019-20. Calculate his tax liability for the assessment year 2020-21.
Broad principles which clarify the concept of income
• Meaning of income as generally understood:
- Periodical monetary return
- Regularity
- True increase in the amount of wealth which comes to a person during a fixed period of time.
Principles:
1. Regular and definite sources
2. Different form of income
3. Receipt vs Accrual
4. Illegal Income
5. Disputed Title
6. Relief or reimbursement of expenses not treated as income
7. Diversion of income by overriding title vs Application of income
8. Surplus from mutual activity
9. Temporary and permanent income
10. Lump sum receipt
11. Tax free income
12. Receipt on account of dharmada, gaushala etc.
13. Devaluation of currency
14. Income includes loss
15. Appropriation of payment between capital and interest
16. Same income cannot be taxed twice
17. Income should be real not fictional
18. Source of income need not exist in the assessment year
19. Pin Money
20. Award received by a sportsman
21. Revenue receipt vs Capital receipt
22. Voluntary payment
23. Prize on winning a motor rally
24. Burden of proof
Incidence of Tax
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