Tax Laws and Rules

“Assessee” under Section 2(7) of the Income Tax Act is explained to be the person who is liable to pay tax or any other sum of money to the Income Tax Department, and includes the following:

1. A person in respect of whom any proceeding is undertaken as per the Act for assessment of his income or any other fringe benefits or income of any other person on behalf of whom he/she is assessable, or of the loss incurred by him or such other person, or of the refund amount due to him or such other person;
2. A person who is deemed to be assessee under the provisions of this Act;
3. A Person who is deemed to be an assessee in default under the Act.

As per the Section 2(31) of the Income Tax Act, 1961, a person includes the following:

1. Individual;
2. Hindu Undivided Family(HUF);
3. A firm;
4. A company;
5. An association of persons(AOP) and Body of Individuals(BOI) whether incorporated or not;
6. A local authority;
7. Any artificial judicial person, not falling in any of the preceding clauses.

As per section 2(9) of the Act, the assessment year is explained as the period of twelve months initiating from 1st April every year, in which the income of an assessee is assessed for the purpose of taxation. This means, it is the year in which the income earned in the financial year is assessed and tax is paid.

This is a period of twelve months in which an assessee earns the income which is assessed in the assessment year. It is the period beginning on the first day of April and ending on the last day of the March of the succeeding year. Income is earned in the financial year on which assessee pays tax in the assessment year.

The previous year is defined under Section 3 of Income Tax Act, 1961. In the assessment year, the income of the previous year is assessed, and accordingly, previous year can be explained as the year preceding the current assessment year.

In case a business or profession is newly set up, or a source of income has come into existence for the first time in the said financial year, then the previous year shall be the period beginning with the date of setting up of the business or profession or, as the case may be, the date on which the source of income newly comes into existence and ending with the said financial year.

As per section 5 of Income Tax Act, 1961, there are two parameters to understand the scope of income under the Act. One for the resident Indians and the other for the non-resident Indians.

The total income for the Income Tax perspective of the resident Indian includes the following incomes earned from any source thereof:

• If it is received or deemed to be received in India by or on behalf of such person;
• If income accrues or arises or deems to accrue or arise in India during the financial year;
• If income arises or accrues or deem to accrue or arise outside India during such year.

Note that: In case the assessee is ***not ordinarily resident in India, the income earned from outside India shall not be included in the total income, except in the case it is earned by business or profession set up in India.

The total income of an NRI for any previous year earned from whatever source include:

• The income received or deemed to be received in India;
• The income accrues or arises or deemed to accrue or arise in India during such year.

Section 6 of the Income Tax Act has provided the residential status of the person. With the meaning of Section 6(1), an Individual is considered to be a resident of India if:

1. a) He stayed in India for a minimum period of 182 days in the previous year, or
2. b) He stayed in India for minimum 60 days in the previous year and total 365 days in the immediately preceding four years.

In case any one of the conditions mentioned above are not satisfied, the individual is considered to be non-resident Indian.

1. In case an Individual who is citizen of Indian origin, leaves India in the previous year or any previous year as a member of the crew of an Indian ship, as per the provisions of the Merchant Shipping Act, 1958, or for the purpose of employment outside India, then the minimum days limit as in the clause (b) above shall be 182 days instead of 60 days.
2. In case a citizen of India, or a person of Indian origin being outside the country, visits India in the previous year, then the limit of 60 days in the clause (b) above shall be considered as 182 days.

As per section 6(2) the HUF, or Firm, or AOP is considered to be Indian resident in all case except in the case its management and control of its affairs are situated wholly outside India in that previous year.

Section 6(3) of the Income Tax Act has explained a company to be a resident of India if:

• It is an Indian company registered and incorporated under the Indian Companies Laws.
• Its place of effective management and control of affairs in that previous year is situated in India.

IV. Every other person except those mentioned above shall be deemed to be resident in India except in the case its affairs in that year are controlled and managed outside India.

V. If a person is resident in India in a previous year related to an assessment year for any source of income, then he shall be deemed to be a resident of India for all other sources of India earned in that previous year as well.

VI. *** A person is said to be not ordinarily resident in case:

• An individual is not a resident in India in the past nine out of the ten years preceding to that year or was resident in India for 729 days or less in the immediately seven preceding years to that year.
• In the case of HUF, if its Karta is said to be non-resident in nine out of the immediately preceding years of that previous year, or was a resident in India in the immediately seven preceding years for 729 days or less.

Section 14 of the Income Tax Act, 1961, provides that for the purpose of charging income tax and computing total income, all types of income shall be classified under the following heads:

1. Salaries;
2. Income from house property;
3. Profits or losses from business or profession;
4. Capital gains;
5. Income from other sources.

As per section 45(1) of the Act, any profits which are arising out of the sale proceeds of the capital assets in the previous year shall be deemed to be the income under the capital gains head and shall be chargeable to income tax for that previous year.

The income which is chargeable under the head "Capital gains" is computed by deducting from the total value of consideration or proceeds received or accruing after the transfer of capital asset the following amounts, viz.:—

1. expenditure incurred wholly and or exclusively related to such transfer;
2. the cost of acquisition of the asset and the cost of improvement if any.

1. In case of an assessee who is a non-resident, capital gain arising out of the sale proceed of Indian company’s shares or debentures, shall be computed by converting the cost of acquisition, all the expenditures incurred in relation to such transfer, and the full value of consideration which is received as a proceeds to transferring the capital assets in the same currency in which it was initially used for purchasing or acquiring the shares or debentures. Furthermore, the capital gains computed in the foreign currency shall be reconverted into Indian currency. The computation of capital gains shall be done in the same manner for every reinvestment after that in the sale of, shares in or debentures of the Indian company.
2. In case the long-term capital gains arise due to the transfer of long-term capital assets, other than the capital gain arising to an NRI from the transfer of shares, or debentures of Indian Company, the words “cost of acquisition” and “cost of any improvement” is replaced with the words “indexed cost of acquisition” and “indexed cost of any improvement”.
3. In case if an NRI assessee gains any sum of money on account of appreciation of the rupee against a foreign currency at the time of redeeming the rupee-denominated bonds of an Indian company, it shall be ignored while computing the full value of consideration under this section.

Under the Income Tax Act, 1961, the capital gain from mutual fund investments are chargeable to taxes under the head Capital Gains, which are further classified into short-term capital gain and long-term capital gain.

Short-Term Capital Gains The holding period for the equity and debt instruments for the purpose of calculating short-term capital goals is less than one year. In the case of equities, short-term capital gains are taxed at the rate of 15%, while in the case of debt investments, the capital gain is added to the total income of the assessee.

Long-Term Capital Gains The minimum holding period for the purpose of computing long-term capital gain is one year or more. In the case of equities, the capital gains in the long-term are tax-free, while long-term capital gains on debt investments are chargeable to taxes at a minimum of the following rates:

• 10% without indexation
• 20% with indexation

In the case of long-term capital gains, income is chargeable to tax. For the purpose of reducing the effect of inflation on the earnings, the government constructs an index which is called the cost of the inflation index. At present the base year for this index is 2001-2002, and its value is 100. For each financial year, the government fixes an index which is declared in the official notification. For determining the gains component on which the tax is payable, the ratio of inflation index at the time of sale of the instrument to its value at the time of purchase is taken. This value so generated is then multiplied by the cost of acquisition of the asset which results in computing the indexed cost of acquisition. The long-term capital is computed by subtracting the indexed cost of acquisition from the sale proceeds on which the capital gain tax is payable.

Cost of Inflation Index (CII)= Cost Inflation Index at the Time of Sale of Asset/Cost Inflation Index at the Time of Purchase of The Asset

Indexed Cost of Acquisition= CII(as computed above) * Purchase Value of the Asset

Long-term Capital Gain= Sale Price of the Asset - Indexed Cost of Acquisition

*While using indexation benefit, it must be remembered that it is applicable in the cases where the long-term capital gain is made.

While computing the total income under the Act, all the income on which tax is not payable under Chapter VII shall also be included.

Section 70 (2) and 70(3) of the Income Tax Act, 1961, deal with the set-off and carry forward provisions. Setting off in the case of mutual funds means adjustment of taxable income by the capital losses and capital gains. As per the provisions of the Act, if an assessee incurs the capital loss in one fund, he can adjust it against the capital gain from another fund. However, the capital loss in mutual funds cannot be set off against the capital gain in other heads like salary, business income, house property or gold, etc.

The key factors are:

1. Short-term capital losses can be set off against the short-term as well as long-term capital gains on other funds.
2. The long-term capital loss is allowed to set off against the long-term capital gain only.
3. As long-term capital gains on equity investments are tax-free, the losses incurred by them are not eligible for setting off.
4. In case the capital losses are more than the total capital gains and cannot be set off anymore, then they can be carried forward for the next eight years and are eligible for set off in the next eight years.

Section 80C of Income Tax Act, 1961, provides deduction in the total taxable income up to Rs.1,50,000. There are several instruments, investing in which entails the benefit of deduction in this section. This deduction is allowed for the Individual and HUF only. The instruments which fall in the 80C bar and provide relaxation in the taxable income include the following:

1. Premium for the Life Insurance Policy taken for self, spouse, or children.
2. Deferred Annuities which are payable by self and the Government.
3. The contribution made towards PPF.
4. Contribution which is made towards PFs operated by the Central Government.
5. The contribution for a Recognised PF.
6. The contribution to a Superannuation Fund.
7. Any Subscription made for a Government Deposit or Security.
8. The Subscription made for Saving Certificates.
9. A Subscription towards ULIP, 1971.
10. The Contribution made to ULIP of LIC Mutual Fund.
11. Annuity Plans from Insurance companies including LIC.
12. A subscription to Notified units of the Mutual Funds.
13. A contribution to the Pension Fund of Notified units of the Mutual Fund plans.
14. The National Housing Bank’s Pension Fund.
15. Subscription for the Deposit Scheme of a Public Sector company allocating long-term financing for housing.
16. Tuition fees for maximum two children studying in India.
17. Repayment of housing loan taken on a residential property.
18. Subscription to the units of Mutual Funds recommended by Central Board of Direct Taxes.
19. An FD from a scheduled bank with a minimum tenure of at least five years.
20. NABARD notified bonds.
21. Contributions made towards Senior Citizens Saving Scheme.
22. Tax Saving 5 Year FD.

An individual is allowed to claim deduction up to Rs.1,50,000 on total taxable income for payment towards the Pension Funds.

An individual assessee can claim a deduction under this section if he and his company make a contribution in the Central Government’s certified pension schemes. Both the amounts are eligible for tax exemption if the amount does not exceed 10% of the salary of the taxpayer.

Important Note (Section 80CCE): The maximum limit of deduction allowed in section 80C, 80CCC and 80CCD is Rs.1,50,000.

The individual and HUF can claim a maximum deduction of Rs.20,000 in this section on investments which are made in the Government notified Long-Term Infrastructure Bonds.

This section is applicable on some specified individual assessees who can claim the maximum benefit of Rs.25,000 against investments which are made in the Government notified Equity Schemes. The maximum deduction which can be claimed under this section is 50% if the invested amount only.

This section provides for a deduction in the total taxable income over and above the 80C exemption on medical premium paid by the individual or HUF.

In Case of Individual

1. Mediclaim paid for self, spouse or dependent children, the maximum limit for deduction is Rs.25,000.
2. In case Mediclaim is paid for a senior citizen(above 60 years) who is dependent on the assessee, the maximum exemption amount is increased to Rs.30,000.
3. In the case of uninsured super senior citizen (above 80 years) medical expenditure incurred up to a specified limit of Rs.30,000 shall be deductible.
4. In addition to this, the Mediclaim paid for parents is deductible up to Rs.25,000 and in case parents are a senior citizen the amount allowed for deduction is increased to Rs.30,000.

In Case of HUF

For Mediclaim paid for any member of the HUF, the maximum deductible amount is Rs.25,000. While in case any of the member in the HUF is a senior citizen, the amount of deduction allowed is Rs.30,000.

The interest paid on the educational loan is eligible for tax deduction under this section of Income Tax Act.

1. Only individuals can avail this exemption for paying interest on the loan taken for self, spouse, children or a student of whom the individual is a legal guardian for the purpose of higher education.
2. The loan must be taken from any bank, financial institutions or any approved charitable institution.
3. The loan must have been taken to pursue higher education whether in India or abroad including both vocational courses and regular courses.
4. The amount of deduction is the total value of the interest paid by the assessee in the financial year through EMI.
5. The deduction is allowed for a consecutive eight years period starting from the year in which assessee starts paying off the interest. The deduction can be claimed for eight years or until the interest is fully paid whichever is earlier.

This section allows that the contributions made for relief funds and or charitable institutions are eligible for deduction under the Act. There are some prescribed funds where this deduction is allowed.

1. All the categories of person can claim an exemption for such contribution. As per the Finance Act 2017-18, the donations in cash can be claimed up to Rs.2000 only, and for the further claim, one has to make a donation from a source other than cash.
2. The deduction that can be claimed is up to 50% or even 100% as prescribed by the Government.
3. In case the deduction is allowed up to 50%: First, the total income of the assessee is computed, and the aggregate of donations made is calculated. Then 50% of such donations value is evaluated which is compared with 10% of the total income of the taxpayer. The amount in access shall be ignored, and rest will be allowed for deduction.

In the case of an Individual or HUF, if the total income includes the interest income from the savings account, then such income shall be allowed to claim exemption up to Rs.10,000 in a financial year.

This section provides that the tax calculated on the total income of the assessee in any assessment year is allowed for a tax rebate up to the limit specified in the relevant section. It further provides that the limit of rebate provided in any of the sections out of 87A, 88, 88A, 88B, 88C, 88D, 88E shall in no case exceed the tax mount payable by the assessee.

If you satisfy the following two conditions, i.e.,:

• You are a Resident Individual
• Your total income after Section 80 deductions is less than or equal to Rs.3,50,000

Then you can claim a rebate of Rs.2500 under this section. This means if your tax liability is less than Rs.2500, such amount shall be a rebate under Section 87A. This rebate is allowed before adding the Education Cess of 3%.

This section of the Act has certain provisions which offer the relief from Income Tax in case the assessee receives a sum in the form of salary, or profit in lieu of salary, or family pension which is being paid in advance or arrears in a financial year, due to which the assessee’s total income is assessed at a higher rate, the Assessing Officer shall grant relief as may be prescribed. No such relief is granted in the case of money received from voluntary retirement or termination of service.

This provides that in case the total income of the assessee include the income which is not taxable under any of the provisions of the Act, shall be entitled to a deduction of an amount which is computed by evaluating the tax at an average income tax rate on the non-taxable income. Accordingly, the total tax shall be deducted with an amount of tax calculated at an average rate of Income Tax on the income on which no income tax is payable but is included in the total income.

This section can be explained as under:

In case the total income of the assessee comprises the income chargeable under the head ‘Capital Gains’ which is attained by transferring the short-term capital asset, either the equity shares of a company, units of any equity-oriented plan, or a unit of any business trust, and if such transaction is being entered on or after the date on which Chapter VII of Finance Act (No.2), 2004, came into force and the transaction is chargeable to STT (Securities Transaction Tax), then the total tax payable by the assessee in such a case would be aggregate of the amount of tax calculated on the short-term capital gain at 15%, and the amount of tax payable on the balancing figure considering it as the total income of the assessee.

Section 112 of the Income Tax Act deals with Long-Term Capital Gain Provision. According to this, for the long-term capital gain earned on the listed securities which include shares, scrips, stocks, bonds, debentures, government securities, money market instruments, zero tax coupon bonds, the assessees are given the option of

• Paying 20% tax on the indexed cost of acquisition and improvement; or
• Paying 10% tax on the actual or historical cost of asset

The NRI, i.e., Non-Resident Indians are not allowed to avail any deduction in respect of the expenditure or allowance while computing the investment income.

• In case the Gross Total Income of the assessee consists only the investment income or long-term capital gains, no deductions shall be allowed to the assessee.
• If gross total income includes the investment income or long-term capital gain, such income amount shall be reduced from the gross total income and other deductions so provided in the Act shall be allowed.

In the case of NRI, if the total income includes

1. any income from investment or income from long-term capital gains on assets other than specified or
2. any income earned from the long-term capital gains

then the tax amount payable by the NRI would be the sum of the following figures:

1. The amount of income tax computed on the income earned in point (a) above at the rate of 20%.
2. Amount of income tax computed n income earned in point b at the rate of 10%
3. The amount of income tax chargeable on the income which is reduced with the income earned in point a & b above.

This section deals with the kinds of returns filed by the assessee or person. The due dates prescribed by the authorities for filing the returns by the assessee are:

A. July 31st: For those assessees who are not required to have an audit performed on their books of accounts. They may include:

1. A salaried person
2. Self-employed person or professional
3. A consultant
4. A freelancer

B. September 30th: For those who are required to or liable to perform an audit of their books of accounts. They include:

1. A company
2. A self-employed person or professional
3. A working partner employed with a firm who are required to have an audit performed on their books of accounts
4. A consultant

The different types of returns covered under the subsections of Section 139 include:

1. Mandatory Return & Voluntary Return
2. Return of Loss
3. Belated Return of Income
4. Revised Return
5. Return of Income of a Charity or Religious Institution
6. Return of Income of a Political Party
7. Defective Returns

For the purpose of filing taxes, you first need to compute the total taxable income and then the total tax payable on such income.

• All the income earned from different sources are to be added to get the gross total income.
• Out of it the deductions applicable and the exemptions allowed are reduced to attain the net taxable income.
• Next, one needs to compute the tax liability as per the applicable slab rate.
• This tax value has to be paid by the assessee for the particular financial year.

The process involved in the filing the Income Tax Return involves the following steps:

1. Create your e-filing account on the website of Income Tax Department
2. Download Form 26AS
3. Download the applicable Income Tax Return Form
4. Fill the details in the form either physically after downloading its print or online
5. Validate the details filled in the form
6. Calculate the tax liability
7. Generate XML file
8. Submit the income tax return
9. Send the signed ITR-V to the Income Tax Department, and it is done
10. Check the ITR-V receipt status