TAX ASSIGNMENT

OnComputation of taxable income of

individual, HUF and firms

Submitted to:

Mrs Niti Saxena

Prepared by:

Ashish Sahotra

MBA 3rd SEM

COMPUTATION OF TAXABLE INCOME OF AN INDIVIDUAL

What is included in income of an individual?

While computing taxable income of an individual, the following points should be considered—

Nature of income Tax treatment

Income earned by the taxpayer

Share of profit from a HUF

Share of profit from a firm assessed as firm

Salary & interest from the aforesaid firm

Share of profit from an association of persons/body of individuals

Income earned by others and included in the income of the taxpayer by virtue of sections 60 to 64

Except the following, all other incomes shall be included—

a. Income exempt under sections 10 to 13A;

b. Incomes to be included in income of others by virtue of sections 60 to 64.

It is exempt under section 10(2)

It is exempt under section 10(2A)

These are taxable as business income

If the association/body us taxable at the maximum marginal rate, then share of profit is not taxable in the hand of recipient

Such income shall be included in the income of the taxpayer

Taxable income – how computed

Taxable income shall be computed as follows:

Step 1 – income under the different heads of income- First find out income under the five heads of income.

Step 2 – adjustment of losses of the current year and earlier years- Losses should be set off according to the provisions of sections 70 to 80. The income after adjustment of losses is gross total income.

Step 3 – deduction from gross total income- from the gross total income, the following deductions are available—

Section Nature of deduction80C

80CCC80CCD80D80DD

80DDB80E80G80GG80GGA80GGC80-IA

80-IAB

80-IB

80-IC

80-JJA

80QQB80RRB80U

Payment of insurance premium, contribution to provident fund etc.Contribution to certain pension fundContribution to pension scheme of central governmentPayment of medical insurance premiumMaintenance including medical treatment of a dependent being a person with disabilityMedical treatment expenditureRepayment of loan taken for higher studiesDonations to charitable institutions and fundsRent paidDonations for scientific research or rural developmentContributions given to political partiesProfits and gains from industrial undertakings or enterprise engaged in infrastructure development, etc.Profits and gains by an undertaking or enterprise engaged in development of special economic zoneProfits and gains from certain industrial undertakings other than infrastructure development undertakingsProfits and gains of certain undertakings in certain special category of statesProfits from the business of collecting and processing of bio-degradable wasteRoyalty income of authorsRoyalty on patentsIncome of a person with disability

Step 4 – Rounding off- The balance should be rounded off to the nearest Rs. 10. It is known as net income or total income or taxable income.

Tax liability – how calculated

Final tax liability shall be determined as under –

Particulars amountTax on net incomeLess: Tax rebates under section 88EBalanceAdd: SurchargeTax and surchargeAdd: Education cess (2% of tax & surcharge)Total taxLess: Tax rebate or relief under sections 86,89,90,90A & 91Add: Interest payable under sections 234A,234B & 234CLess: Prepaid taxTax deducted at source on his own income & on income of others included in his taxable incomeTax collected at sourceAdvance taxTax payable at the time of submission of return of income

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Special provisions relating to non-residents [sec.115C to 115-I] – These provisions are given below:

WHO CAN CLAIM THE BENEFIT OF SPECIAL PROVISIONS – The benefit of special provisions can be claimed by non-resident Indians. The following are “non –resident Indians” for this purpose:

a. Citizen of India who is a non-resident; orb. A person of Indian origin who is a non-resident.

A person shall be deemed to be of Indian origin if he, or either of his parents or any of his grandparents, were born in undivided India.

INCOMES WHICH ARE QUALIFIED FOR SPECIAL TREATMENT – The provisions under sections 115C to 115-I are applicable only in respect of the following incomes derived by a non-resident Indian:

a. Investment income derived from a “foreign exchange assets”;b. Long term capital gains on sale or transfer of “foreign exchange

assets”.

Foreign exchange asset: It means those “specified assets” which the assesse has acquired or purchased with, or subscribed to in, convertible foreign exchange.

The following are “specified assets” for this purpose:

a. Shares in an Indian company (public or private);b. Debentures issued by an Indian company which is not a private

company;c. Deposits with an Indian company which is not a private

company – it may be even deposit with SBI or any other banking company;

d. Any security of the central government; ande. Such other assets as the Central Government may specify in this

behalf by notification in the official Gazette

HOW TO CALCULATE INVESTMENT INCOME – In computing the investment income of a non-resident Indian, no deduction in respect of any expenditure or allowance shall be allowed under any provisions of the act. Moreover, No deductions under sections 80C to 80U shall be allowed in respect of investment income of non-resident Indians.

HOW TO CALCULATE LONG-TERM CAPITAL GAIN – Long term capital gain on sale or transfer of foreign exchange assets shall be calculated subject to the following points:

1. The benefit of indexation is not available in respect of sale or transfer of foreign exchange assets.

2. No deduction is permissible in respect of long-term capital gain under sections 80C to 80U.

3. By investing sale consideration in another asset, the non-resident Indian can claim exemption under section 115F.

TAX ON INVESTMENT INCOME AND LONG-TERM CAPITAL GAIN – Non-resident Indian are chargeable to tax on investment income and long-term capital gain at the rate of 20% and 10% respectively.

RETURN OF INCOME NOT BE FILLED IN CERTAIN CASES – In cases where a non-resident Indian has income only from a foreign exchange asset or income by way of long-term capital gains arising on transfer of foreign exchange asset, or both, and tax deductible at source from such income has been deducted, he is not required to file the return of income under section 139(1).

The income from foreign exchange assets and long-term capital gains arising on transfer of such assets would be treated as a separate block and charged to tax at a flat rate as explained above. If the non-resident Indian has other income in India, such other income is treated as an altogether separate block and charged to tax in accordance with other provisions of the act.

BENEFIT AVAILABLE EVEN AFTER THE ASSESSEE BECOMES RESIDENT – These provisions are given below—

1. A non-resident Indian, in any previous year, becomes assessable as resident in India in any subsequent year.

2. He may furnish to the assessing officer a declaration in writing to the effect that the special provisions shall continue to apply to him in relation to the investment income derived from any foreign exchange asset.

3. The foreign exchange assets for this purpose are debentures and deposit with an Indian public limited company and Central Government securities.

4. If he does so, the special provisions shall continue to apply to him in relation to such income for that assessment year until the transfer or conversion into money of such assets.

COMPUTATION OF TAXABLE INCOME OF HUF

What is understood by Hindu Undivided Family?Under the Income tax Act, a Hindu Undivided Family is treated as a separate entity for the purpose of assessment. The term “Hindu Undivided Family” has not been defined under the Income-tax act.

The expression is, however, defined under the Hindu Law, as a family which consists of all persons lineally descended from a common ancestor and includes their wives and unmarried daughters. The relation of a Hindu Undivided Family does not arise from a contract but arises from status.

What are the basic conditions for assessment of Hindu Undivided Family?Income of a joint Hindu Family may be assessed as a Hindu Undivided Family if the following two conditions are satisfied:

1. There is a coparcener ship. In this connection, it is worthwhile to mention that once a joint family income is assessed as Hindu Undivided Family, it continues to be assessed as such in subsequent assessment years till partition is claimed by its coparceners.

2. There is a joint family property which is consists of ancestral property, property acquired with the aid of ancestral property and property transferred by its members. Ancestral property, in this connection, may be defined as the property which a man inherits from any of his three immediate male ancestors, i.e., his father, grandfather and great-grandfather. Therefore, property inherited from any other relation is not treated as ancestral property.

Few instances – In the following cases, income of ancestral property is taxable as income of the Hindu undivided family:

a. Family consisting of widow mother and sons (maybe minor or major);

b. Family consisting of husband and wife having no child;c. Family consisting of two widows of deceased brothers;d. Family consisting of two or more brothers;e. Family consisting of uncle and nephew;f. Family consisting of mother, son and son’s wife;

g. Family consisting of a male and his late brother’s wife.

What is the basis of computation of taxable income of HUF?First ascertain income under different heads of income, ignoring incomes exempted under sections 10 to 13A. While computing income one should keep in mind the following additional points:

1. If funds of a Hindu undivided family are invested in a company or firm, fees or remuneration received by the member as a director or a partner in the company or firm may be treated as income of the family, if the fees or remuneration is earned essentially as a result of investment of fund.

2. If any remuneration is paid by the Hindu undivided family to the Karta for services rendered by him in conducting family’s business, the remuneration is deductible if remuneration is:

a) Paid under a valid and bona fide agreement;b) In the interest of, and expedient for, the business of family;

andc) Genuine and not excessive – jugal Kishore baldeo sahai v.

CIT [1967] 63 ITR 238 (SC).3. The following incomes are not taxed as income of Hindu

undivided family:a) If a member has converted (or transferred without adequate

consideration) after December 31, 1969, his self-acquired property into joint family property, income from such property is not taxable in the hands of the family.

b) Income from impartial estate is taxable in the hands of the holder of the estate and not in the hands of Hindu undivided family. Though the impartible estate belongs to the family, income arising therefrom belongs to the holder of the estate who is the senior most male member of the family. Income from impartial estate is taxable in the hands of the holder of the estate.

c) Personal income of the member cannot be treated as income of Hindu undivided family.

d) As stridhan is an absolute property of a woman, income therefrom is not taxable as income of Hindu undivided family.

e) Under the Dayabhaga school of law, no son has any right in the ancestral property during the lifetime if his father. If, therefore, the father does not have any brother as a coparcener, income arising from ancestral property is taxable as his individual income.

Clubbing and adjustment of losses – In this regard the following points should be noted –

1. Under sections 60 to 63, income belonging to some other person, may be taxable as income of a Hindu undivided family. For instance, if a Hindu undivided family transfers income without transferring the asset, such income is taxable under section 60 in the hands of the family. Likewise, if an asset is transferred under “revocable transfer” by the family, its income is taxable in the hands of the family.

2. Losses of the current year as well as preceding years will be set off under sections 70 to 80

After the aforesaid adjustments, the total of the five heads of income is gross total income.

Deductions from gross total income:

Section Nature of deduction

80C

80D80DD

80DDB80G80GGA80GGC80-IA

80-IAB

80-IB

80-IC

80-JJA

Payment of life insurance premium, contribution to provident fund, etc.Payment in respect of medical insurance premium.Maintenance including medical treatment of a dependent being a person with disability.Expenditure in respect of medical treatment, etc.Donations to charitable institutions and fundsDonations to charitable institutions and fundsContributions given to political partiesProfits and gains from industrial undertakings or enterprise engaged in infrastructure development, etc.Profits and gains by an undertaking or enterprise engaged in development of special economic zoneProfits and gains from certain industrial undertakings other than infrastructure development undertakingsProfits and gains of certain undertakings in certain special category of statesProfits from the business of collecting and processing of bio-degradable waste.

Tax liability – how calculatedFirst determine net income and tax payable thereon at the prescribed rates. If the Hindu undivided family has agricultural income, then give due consideration to the rules so as to arrive at tax on non-

agricultural income. From the amount of tax so determined, deduct the rebate under section 88E.

To the balance add surcharge and add education cess and then, deduct rebate under sections 86, 90,90A and 91.

From the balancing amount, prepaid tax (like advance tax, tax deducted or collected at source, etc.) shall be deducted to find out the amount of tax payable.

How to find out income of a firmFirst find out the taxable income of firm under the following steps:

1. Find out under the different heads of income (viz., “income from house property”, “profits and gains of business or profession”, “capital gains” and “income from other sources”) excluding incomes exempt under sections 10 to 13A. The payment of remuneration and interest to partners is deductible if conditions of section 184 and section 40(b) are satisfied.

2. Make adjustments on account of brought forward losses/disallowances. The total income under the aforesaid heads is gross total income.

3. From the “gross total income” make the following deductions and the balancing amount is net income of the firm.

Section Nature of deduction80G80GGA80GGC80-IA

80-IAB

80-IB

80-IC

80-JJA

Donations to charitable institutions and fundsDonations to charitable institutions and fundsContributions given to political partiesProfits and gains from industrial undertakings or enterprise engaged in infrastructure development, etc.Profits and gains by an undertaking or enterprise engaged in development of special economic zoneProfits and gains from certain industrial undertakings other than infrastructure development undertakingsProfits and gains of certain undertakings in certain special category of statesProfits from the business of collecting and processing of bio-degradable waste.

Other points – The following other points one should also keep in mind –

1. Where at the time of assessment, it is found that a change has occurred in the constitution of a firm; only one assessment shall be made in respect of the entire previous year in which change in the constitution has occurred.

A change in the constitution of a firm is said to take place:

a. If one or more of the partners cease to be partners or one or more new partners are admitted, provided that at least one of the partners of the firm before the change continues as partner after the change; or

b. Where all the partners continue with a change in their respective shares or a change in the share of some of them.

2. Where a firm carrying on a business/profession is succeeded by another firm and the case is not covered by the aforesaid provision, separate assessments shall be made on the predecessor firm and the successor firm.

3. Every person who was, during the previous year, a partner of a firm, and the legal representative of any such person who is deceased, shall be jointly and severally liable along with the firm for the amount of tax, penalty or other sum payable by the firm for the assessment year.

4. Section 167C has been inserted with effect from the assessment year 2010-11. It is applicable in the two cases—Case1- Where any tax is due from a limited liability partnership in respect of any income of any previous year.Case2- Where any tax is due from any other person in respect of any income of any previous year during which such other person was a limited liability partnership.

5. If conditions of section 184 and/or 40(b) are not satisfied, then salary and interest paid by a firm to partners are not deductible.

How to find out tax liability of firm

1. Find out income-tax—

Tax rateShort term capital gain under section 111ALong-term capital gain (sec. 112)Winnings from lottery, races, etc.Income (not being income which is subject to special tax rate)

15%20%30%30%

2. Add: Education cess @ 2% of (1)3. Add: Secondary and higher education cess @ 1% of (1).4. Tax liability is (1) + (2) + (3).

How to find out taxable income of partners of a firmThese provisions are given below—

Share of profit- Section 10(2A) provides that in case of a partner (including a minor admitted for the benefit of the firm) of a firm, his share in the total income of the firm shall be exempt from tax.

Remuneration or interest- If condition of section 184 and section 40(b) are satisfied then interest, salary, bonus, commission or remuneration paid/payable by the firm to partners is taxable in the hands of partners (to the extent these are allowed as deduction in the hands of the firm).

The following points one should note—

1. Remuneration is not taxable under the head “salaries” – Remuneration is not taxable in the hands of partners under section 15 under the head “salaries”. It is taxable as business income.

2. Expenses are deductible under sections 30 to 37- Any expenditure incurred in order to earn salary/interest income can

be claimed as deductions under sections 30 to 37 from such income. For instance, if a partner borrows money to make his capital contributions to the firm and he has received interest on his capital contribution, the amount of such interest will be taxed under the head “profits and gains of business or profession”, but the interest paid by him on the borrowed money will have to be allowed as a deduction.

3. Consequences when remuneration/interest is disallowed in firm’s hands- if salary/interest is disallowed in the hands of firm under section 40(b) and/or section 184, and then the same is not taxable in the hands of the partners. Likewise if part of salary/interest is not allowed as deduction in the hands of the firm, that part of the salary/interest, is not taxable in the hands of the partners. The cumulative impact of the aforesaid provision is that in the hands of partners the entire remuneration/interest (excluding the amount disallowed in the assessment of partners) is chargeable to tax.