All you want to know about Income Tax

It's tax time. It is also time to go through this primer on income tax.

Who is an 'assessee' under the Income Tax Act?

Under Section 2(7) of the Income Tax Act, an 'assessee' means a person by whom any tax or any other sum of money is payable under this Act, and includes:

• Every person in respect of whom any proceeding under this Act has been taken for the assessment of his income or of the income of any other person in respect of which he is assessable, or of the loss sustained by him or by such other person, or of the amount of refund due to him or to such other person;
• Every person, who is deemed to be an assessee under the provision of this Act;
• Every person, who is deemed to be an assessee in default under any provision of this Act.

What are the 'Heads of Income' under the Act?

Under the Act, all income shall, for the purposes of charge of income tax and computation of total income, be classified under the following heads of income.

• Salaries
• Income from house property
• Profits and gains of business or profession
• Capital gains
• Income from other sources

How is 'salary' defined?

Under Section 17(1) of the Income Tax Act, 'Salary' includes the following:

• Wages
• Annuity or pension
• Gratuity
• Any fee, commission, perquisite in lieu of or in addition to any salary or wages
• Any advance of salary
• Any payment received in respect of any period of leave not availed
• The annual accretion to the balance at the credit of an employee participating in a Recognised Provident Fund (RPF) consisting of contributions made by the employer in excess of 12% of the salary of the employee and the interest in excess of 12% on the balance in the RPF
• The aggregate of all sums in respect of the balance to the credit of each employee the amount thereof which is transferred to that employees account in the recognised provident fund

Section 15: The following income shall be chargeable to income tax under the head 'salaries':

• Any salary, due from an employer or a former employer to an assessee in the previous year whether paid or not.
• Any salary, paid or allowed to him in the previous year by or on behalf of an employer or a former employer though not due or before it became due to him.
• Any arrears of salary paid or allowed to him in the previous year by or on behalf of an employer or former employer if not charged to income tax for any earlier previous year.

Where any salary paid in advance is included in the total income of any person for any previous year, it shall not be included again in the total income of the person when the salary becomes due.

Further any bonus, commission or remuneration by whatever name called, due to or received by a partner of a firm from the firm shall not be regarded as 'salary'.

How are 'perquisites', or perks, defined?

Under Section 17(2) of the Income-tax Act 'Perquisite' includes:

1. The value of rent-free accommodation provided to the assessee by his employer;

2. The value of any concession in the matter of rent of any accommodation, provided to the assessee by his employer;

3. The value of any benefit or amenity, granted or provided free of cost or at concessional rate in any of the following cases:

• By a company to an employee who is a director thereof;
• By a company to an employee being a person who has a substantial interest in the company;
• By any employer (including a company) to an employee to whom the provisions of paragraphs (a) and (b) of this sub-clause do not apply and whose income under the head 'Salaries' (whether due from, or paid or allowed by, one or more employers), exclusive of the value of all benefits or amenities not provided for by way of monetary payment, exceeds fifty thousand rupees. Provided nothing in this sub-clause shall apply to value and benefit to an employee due to allotment of shares, debentures or warrants under any Employees Stock Option Plan.

Explanation: The use of any vehicle provided by a company or an employer for journey by the assessee from his residence to his office or other place of work, or from such office or place to his residence, shall not be regarded as a benefit or amenity granted or provided to him free of cost or at concessional rate for the purposes of this sub-clause.

4. Any sum paid by the employer in respect of any obligation which but for such payment would have been payable by the assessee.

5. Any sum payable by the employer where her directly or through a fund other than a recognised provident fund or an approved Superannuation fund or a Deposit-linked Insurance Fund established under Section 3G of the Coal Mines Provident Fund and Miscellaneous Provisions Act, 1948 (46 of 1948), or, as the case may be, Section 6C of the Employees' Provident Funds and Miscellaneous Provisions Act, 1952 (19 of 1952)], to effect an assurance on the life of the assessee or to effect a contract for an annuity; and

6. The value of any other fringe benefits or amenity as may be prescribed.  This sub-clause will not apply to certain prescribed medical benefits.

What is the meaning of 'annual value' in relation to 'house property'?

• The annual value of house property shall be deemed to be:
• The sum for which the property may be reasonably expected to be let out from year to year; or
• Where the property or any part of the property is let and the actual rent received or receivable by the owner in respect thereof is in excess of the sum referred to above, the amount so received or receivable; or
• Where the property or any part of the property is let and was vacant during the whole or any part of the previous year and owing to such vacancy the actual rent received or receivable by the owner in respect thereof is less than the sum referred to in clause (a), the amount so received.

The following four factors have to be taken into consideration while determining the annual property:

• Rent payable by the tenant.
• Municipal valuation of property.
• Fair rental value (market value of a similar property in the same area) of the property.
• Standard rent payable under the Rent Control Act.

What are 'capital gains'?

Under Section 45, of the Income Tax Act, a 'capital gain' is the surplus from the sale of a capital asset. The loss on the sale of such assets is treated as a capital loss. A capital gain on the sale of an asset is chargeable to tax as capital gains in the year in which it is sold.

Capital gains are taxed on even the transfer of a capital asset, not merely on sale. Capital gains shall be short-term or long-term as per the period of holding. With effect from October 1, 2004 shares shall be subject to Securities Transaction Tax under Chapter VII  of the Finance (No.2) Act, 2004.

What is income from other sources?

This is income that is not chargeable to tax under any other head of income and which is not to be excluded from the total income under this Act.

Such income covers dividend, winnings from lotteries, crossword puzzles, horse races and game shows. To illustrate: X, a person hits a jackpot of Rs 50,000; TDS will be calculated as shown in Table 1.

Source: www.legalpundits.com

What is the standard deduction for the assessment year 2005-06?

Under Section 16(1) of the Act, the income chargeable under the head 'Salaries' shall be computed after making the following deductions namely:

For the assessment year 2004-05 and 2005-06, standard deduction will be available as shown in Table 2.

Table 2

Source: www.legalpundits.com

Filing of annual returns:

Who is supposed to file Annual returns?

Section 139 of the Income Tax Act deals with the filing of returns of income. The following are the provisions of this Section in brief:

• Every company or person who has taxable income during any previous year must furnish a return of income in the prescribed form and verified in the prescribed manner giving the prescribed details on or before the due date for such furnishing.
• Every person who satisfies any one of the six criteria set under the 1 by 6 scheme will also have to file a return of income.

The Central Government may, by notification in the Official Gazette, specify class or classes of persons to whom the above provisions do not apply.

What does 'due date' for this purpose mean?

Due date is October 31 of the assessment year in the following cases:

Where the assessee:

• Is a company; or
• A person other than a company and his accounts are required to be audited under the Income Tax Act or any other law for the time being in force; or
• A working partner of a firm whose accounts are required to be audited under the Income Tax Act or any other law for the time being in force;

Due date would be July 31 of the assessment year in the case of any other assessees.

What is a 'belated return' and what are its provisions?

Any person who has not furnished the return of income within the time allowed as mentioned above or within the time permitted under a notice issued under Section 142 (1), may furnish the return for any previous year at any time before the expiry of one year from the end of the relevant assessment year or before the completion of the assessment, whichever is earlier.

When can a person file revised returns?

If any person has already submitted his return of income in accordance with the above-mentioned provisions and subsequently he discovers any omission or wrong statement therein, he may furnish a revised return for any previous year at any time before the expiry of one year from the end of the relevant assessment year or before the completion of the assessment, whichever is earlier.

What are the 'annexures and procedures' in filing annual returns?

The Act requires the assessee to furnish the particulars of income exempt from tax, assets of prescribed nature, value and belonging to him, his bank account and credit card held by him, expenditure exceeding the prescribed limits and such other prescribed outgoings.

It is also required of the assessee to furnish the particulars of the location and style of the principal place of business or profession and all branches thereof, the names, addresses and shares of his partners or fellow members in the firm or AOP or BOI in which he is a partner or member, as the case may be.

Some of the miscellaneous points to be adhered at the time of filing:

• Name & Address -- (1) The name and address must be written in block letters and while filling up the same in the cages meant for the same, one cage may be left blank after each word. (2) As the income tax returns are to be generally filed on the basis of territorial jurisdiction any mistake in the address may dislocate the return, which will cause undue delay in finalisation of the assessment.
• Assessment year -- The assessment year may be correctly filled. An assessment year is the Financial Year succeeding the year for which the income is accounted.
• Revised Return -- Proper particulars of the original return may be mentioned in case the income tax return is a revised return.
• The PAN/GIR No -- should be correctly filled so that the return reaches the concerned Assessing Officer.
• Status -- Correct code of status/residential status may be filled in as per the Notes attached to the income tax return.

What are the provisions under the Income Tax Act with respect to refunds?

If any person proves to the satisfaction of the Assessing Officer that the amount of tax paid by him or on his behalf exceeds the amount with which he is properly chargeable under the Act for that year, he is entitled to refund of such excess.

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