Person Section 10(16) Scholarship For Education Section 10(17) Daily Allowances To MPS&MLAS Section 10(17a) Award & Reward Section 10(18) Pension To Awards Or Their Members Section 10(20) Income Of Local Authority Incomes Not To Be Included In Total Income Of Any Person Section 10(21) Income From Approved Research Association Section 10(22b) Income Of Specified News Agency Section 10(23a) Income Of Professionals/ Institution Section 10(23bbh) Income Of PRASAR BHARTI Section 10(23c) Income Of Certain Funds Of National Importance Section 10(23c) Income Of Certain Funds Of National Importance. The Prime Minister’s National Relief Fund. The Prime Minister’s Fund For Promotion Of Folk Art. The Prime Minister’s Aid To Students Fund 4. The National Foundation For Communal Harmony 5. University Or Educational Institution Solely For Educational Purpose. Section 10 (23c) Incomes Of Certain Funds Of National Importance 6. Any Hospital Or Other Institution For Reception And Treatment Of Persons • Suffering From Illness • Mental Defectiveness • During Convalescence • Requiring Medical Attention Or Rehabilitation Existing Solely For Philanthropic For Above Two Points Only Exemption Shall Be Given To Following Type Of Universities Or Institution Or Hospitals A) Financed By The Government (Wholly Or Substantially) B)Aggregate Annual Receipts Do Not Exceed Rs.1 CRORE C) Other Than Institution Mention (A) & (B) , Institution Approved By Prescribed Authority. I.E. Principal Chief Commissioner or Chief Commissioner Or Principal Director General Or Director General. Application On or Before 30the September Of The Relevant Assessment Year. Section 10(23c) Income Of Certain Funds Of National Importance Incomes Not To Be Included In Total Income Of Any Person Section 10(23d) Income Of Mutual Funds Section 10(23fc) Income Of Business Trust Section 10(23fd) Income By Unit Holder From The Business Trust Section 10(32) Income Of Minor Clubbed In The Hands Of A Parent Section 10(34) Dividend Incomes Not To Be Included In Total Income Of Any Person Section 10(34a) Income To Shareholder On Account Of Buy Back Section 10(35) Income From Units Of Uti Section 10(35a) Income From Securitization Trust Section 10(37) Capital Gain On Compulsory Acquisition Of Agriculture Land Section 10(38) Capital Gains From Sale Of Shares And Units 1. 20. (A) Incomes Not To Be Included In Total Income Of Any Person Section 10(39) Income From International Sporting Event Held In India Section 10(43) Amount Of Loan Under Reverse Mortgage Scheme Section 10(44) Income Of New Pension Scheme Trust Section 10(45) Allowances/Perquisite To Chairman & Member Or Retired Chairman / Member Of U.P.S.C. Section 10(46) Income To Notified Body/Authority/ Board/Trust/ Commission Incomes Not To Be Included In Total Income Of Any Person Section 10(47) Income Of Infrastructure Debt Fund Section 10(48) Income Received By Certain Foreign Companies Special Provisions In Respect Of Newly Established Units In Special Economic Zones Section 10aa Section 10aa Eligible Assessee: Every AssesseeBeing Entrepreneurs • Entrepreneurs May Be A Person. • Who Derived Profits Or Gains • From An Undertaking • Being A Unit • Engaged In The Export • Export Of Articles Or Things Or Services Essential Conditions To Claim Deduction, Begins During The Previous Year 2005- 06 Or Thereafter In Any Sez. 2. New Establishment, I.E No 51 CU IDOL SELF LEARNING MATERIAL (SLM)
Splitting Up Or Reconstruction Of Already Business In Existence. 3. New Plant & Machinery. I.E. P&M Should Not Be Used Before In Any Business. Two Exceptions Are There It May Be Used Outside India By Any Person Other Than Assessee And P&M Is Imported From Foreign Country By Assesee For New Business. No Deduction on Depreciation In Respect Of Previously Allowed Depreciation to Any Person. Total Value Of Second-Hand P&M Should Not Exceed 20% Of The Value Of P&M Used In Such Export Business. 2.7 SUMMARY Gross income for an individual—also known as gross pay when it’s on a pay check is the individual’s total pay from their employer before taxes or other deductions. This includes income from all sources and is not limited to income received in cash; it also includes property or services received. Gross annual income is the amount of money that a person earns in one year before taxes and includes income from all sources. For companies, gross income is interchangeable with gross margin or gross profit. A company’s gross income, found on the income statement, is the revenue from all sources minus the firm’s cost of goods sold (COGS). Gross income for an individual consists of income from wages and salary plus other forms of income, including pensions, interest, dividends, and rental income. Gross income for a business, also known as gross profit or gross margin, includes the gross revenue of the firm less cost of goods sold, but it does not include all of the other costs involved in running the business. Individual gross income is part of an income tax return and—after certain deductions and exemptions—becomes adjusted gross income, then taxable income. An individual’s gross income is used by lenders or landlords to determine whether said individual is a worthy borrower or renter. When filing federal and state income taxes, gross income is the starting point before subtracting deductions to determine the amount of tax owed. For individuals, the gross income metric used on the income tax return includes not just wages or salary but also other forms of income, such as tips, capital gains, rental payments, dividends, alimony, pension, and interest. After subtracting above-the-line tax deductions, the result is adjusted gross income (AGI). Continuing down the tax form, below-the-line deductions are taken from AGI and result in a taxable income figure. After applying any allowed deductions or exemptions, the resulting taxable income can be significantly less than an individual’s gross income. 52 CU IDOL SELF LEARNING MATERIAL (SLM)
There are income sources that are not included in gross income for tax purposes but still may be included when calculating gross income for a lender or creditor. Common non-taxable income sources are certain Social Security benefits, life insurance pay- outs, some inheritances or gifts, and state or municipal bond interest. A company’s gross income, or gross profit margin, is the simplest measure of the firm’s profitability. While the gross income metric includes the direct cost of producing or providing goods and services, it does not include other costs related to selling activities, administration, taxes, and other costs related to running the overall business. 2.8 KEYWORDS Levy: Levy refers to a charge, such as a tax, fine, or other fee, that is imposed on something. Gift Tax: The gift tax is a federal tax levied on a taxpayer who gives money or property to someone else. The IRS allows a lifetime tax exemption on gifts, which is adjusted yearly to keep pace with inflation. Gift splitting and gifts given in trust are two strategies to avoid incurring the gift tax. Expenditure: An expenditure is a payment or the incurrence of a liability in exchange for goods or services. Taxation: Taxation is a term for when a taxing authority, usually a government, levies or imposes a financial obligation on its citizens or residents. Finance: Finance is a broad term that describes activities associated with banking, leverage or debt, credit, capital markets, funds, and investments. Basically, finance represents the getting, the spending, and the management of money. 2.9 LEARNING ACTIVITY 1. Create a session on Gross Total Income. ___________________________________________________________________________ ___________________________________________________________________________ 2. Create a survey on Scope of total income. ___________________________________________________________________________ ___________________________________________________________________________ 2.10 UNIT END QUESTIONS A. Descriptive Questions 53 CU IDOL SELF LEARNING MATERIAL (SLM)
Short Questions 1. Write about Gross total income? 2. What are Investments? 3. Define the term Total Income? 4. Describe the term Person? 5. Define the term Paid in arrears? Long Questions 1. Explain the Relief and Rebate in respect of Income-tax. 2. Discuss the Relief when salary is paid in arrears or in advance Section 89. 3. Illustrate the term Total Income. 4. Describe the term Person. 5. Examine the Income deemed to accrue or arise in India. B. Multiple Choice Questions 1. What does Mr. X, partner of M/s XYZ, is assessable as? a. Firm b. HUF c. An Individual d. None of these 2. What does a Hindu Undivided family is said to be resident in India? a. The family has a house in India where some of its members reside b. The member of such HUF is in India during the previous year c. Control and management of its affairs wholly or partly situated in India d. The Karta has been resident in India in at list 9 out of 10 previous years preceding the relevant previous year 3. Who is an individual is said to be resident in India? a. He has a house in India b. He is in India in the previous year for a period of 182 days or more c. He is in India for a period of 30 days or more during the previous year and for 365 or more days during 4 previous years immediately preceding the relevant previous year 54 CU IDOL SELF LEARNING MATERIAL (SLM)
d. His parents are Indian citizen. 4. What if an Indian citizen leaving India during the previous year for employment purpose is said to be resident? a. He has a house in India b. He is in India in the previous year for a period of 182 days or more c. He is in India for a period of 60 days or more during the previous year and for 365 or more days during 4 previous years immediately preceding the relevant previous year d. His parents are Indian citizen. 5. What isresidential status for the previous year 2018-19 if an individual, being foreign national, came to India first time during the previous year 2018-19 on 01-01-2019 for200 days? a. Non-resident b. Resident but not ordinarily resident in India c. Resident and ordinarily resident in India d. Resident in India Answers 1-c, 2-d, 3-b, 4-c, 5-b 2.11 REFERENCES References book Charles E. McLure, (2015) Jr. \"Taxation\". Beardsley, Ruml. (2017) \"Taxes for Revenue are Obsolete\" (PDF). American Affairs. VIII (1). McCluskey, William J.; Franzsen, Riël C. D. (2005). Land Value Taxation: An Applied Analysis. Ashgate Publishing, Ltd. Textbook references Quick, John; Garran, Robert (1 January 1901). The Annotated Constitution of the Australian Commonwealth. Australia: Angus & Robertson. p. 837. Atkinson, A. B. (1977). \"Optimal Taxation and the Direct Versus Indirect Tax Controversy\". 55 CU IDOL SELF LEARNING MATERIAL (SLM)
Ncsu.edu. 2 May 2007. Fees “Archived from the original on 8 October 2012. Website https://facelesscompliance.com/10621/earning-agriculture-income-and-non- agricultural-income-know-how-both-will-be-taxed https://housing.com/news/taxation-of-income-from-agricultural-land/ https://www.indiafilings.com/learn/agricultural-income-income-tax-act/ 56 CU IDOL SELF LEARNING MATERIAL (SLM)
UNIT 3- TAX STRUCTURE 3.0 Learning Objectives 3.1 Introduction 3.2 Tax evasion 3.3 Tax avoidance 3.4 Residence and tax liability 3.4.1 Meaning and importance of residential status 3.4.2 How to determine residential status? 3.4.3 Taxability 3.5 Summary 3.6 Keywords 3.7 Learning Activity 3.8 Unit End Questions 3.9 References 3.0 LEARNING OBJECTIVES After studying this unit, you will be able to: Describe the Tax evasion. Illustrate the concept of Tax avoidance. Explain the Residence and tax liability. 3.1 INTRODUCTION India, a country in South East Asia, is the seventh-largest country by geographical area, the second-most populous country with over 1.25 billion people, and the most populous democracy in the world. It is bounded by the Indian Ocean to the south, the Arabian Sea to the southwest, and the Bay of Bengal to the southeast. It shares land borders with Pakistan to the west; Bhutan, the People's Republic of China, and Nepal to the northeast; and Bangladesh and Myanmar to the east. India is divided into 28 states and eight union territories, with New Delhi as the capital. The official languages of India are Hindi and English, and the currency is the Indian rupee (INR). 57 CU IDOL SELF LEARNING MATERIAL (SLM)
India gained independence in 1947 and is developing into an open-market economy. Economic liberalisation, including reduced controls on foreign trade and investment, began in the early 1990s and has served to accelerate the country's growth rate, estimated at 5% in tax year 2020/21 (tax year begins on 1 April and ends on 31 March of the following year; note that, in India, 'tax year' is referred to as 'financial year' and the year following a 'tax year' is referred to as 'assessment year'). Over the seven decades since independence, the country has achieved self-sufficiency in terms of food and grains. India is now a net exporter of food. Life expectancy has more than doubled, literacy rates have quadrupled, health conditions have improved, and a sizeable middle class has emerged. India is now home to globally recognised companies in pharmaceuticals, automobiles, steel, and information and space technologies. While direct taxes are levied on taxable income earned by individuals and corporate entities, the burden to deposit taxes is on the assessees themselves. On the other hand, indirect taxes are levied on the sale and provision of goods and services respectively and the burden to collect and deposit taxes is on the sellers instead of the assessees directly. The taxation system in India is such that the taxes are levied by the Central Government and the State Governments. Some minor taxes are also levied by the local authorities such as the Municipality and the Local Governments. Over the last few years, the Central and many State Governments have undertaken various policy reforms and process simplification towards great predictability, fairness, and automation. This has consequently led to India’s meteoric rise to the top 100 in the World Bank’s Ease of Doing Business ranking in 2019 as India jumps 79 positions from 142nd (2014) to 63rd (2019) in 'World Bank's Ease of Doing Business Ranking 2020'. The Goods & Services Tax (GST) reform is one such reform to ease the complex multiple indirect tax regime in India. This study material has been published to aid the students in preparing for the Tax Laws and Practice paper of the CS Executive Programme. It is part of the educational kit and takes the students step by step through each phase CS Executive Programme. It is part of the educational kit and takes the students step by step through each phase of preparation stressing key concepts, pointers, and procedures. Company Secretary ship being a professional course, the examination standards are set very high, with emphasis on knowledge of concepts, applications, procedures, and case laws, for which sole reliance on the contents of this study material may not be enough. Besides, as per the Company Secretaries Regulations, 1982, students are expected to be conversant with the amendments to the laws made up to six months preceding the date of examination. The material may, therefore, be regarded as the basic material and must be read along with the original Bare Acts, Rules, Orders, Case Laws, Student Company Secretary e-bulletin published and supplied to the students by the Institute every month as well as recommended readings given with each study lesson. The subject of 58 CU IDOL SELF LEARNING MATERIAL (SLM)
Tax Laws is inherently complicated and is subjected to constant refinement through new primary legislations, rules and regulations made there under and court decisions on specific legal issues. It therefore becomes necessary for every student to constantly update himself with the various changes made as well as judicial pronouncements rendered from time to time by referring to the Institutes journal ‘Chartered Secretary’ and ‘Student Company Secretary e-bulletin’ as well as other law/professional journals on tax laws. The purpose of this study material is to impart conceptual understanding to the students of the provisions of the Direct Tax Laws (Income Tax) and Indirect Tax Laws (Service Tax, Value Added Tax and Central Sales Tax) covered in the Syllabus. This study material has been updated up to 30th June 2015 and contains relevant amendments made by Finance Act, 2015 applicable for the Assessment Year 2016-17. This is relevant for students appearing in June 2016 session onwards. However, it may so happen that some developments might have taken place during the printing of the study material and its supply to the students. The students are therefore, advised to refer to the Student Company Secretary e-bulletin and other publications for updating of the study material. In the event of any doubt, students may write to the Directorate of Academics in the Institute at academics for clarification. Although care has been taken in publishing this study material yet the possibility of errors, omissions and/or discrepancies cannot be ruled out. This publication is released with an understanding that the Institute should not be responsible for any errors, omissions and/or discrepancies or any action taken in that behalf. Should there be any discrepancy, error or omission noted in the study material, the Institute shall be obliged if the same are brought to its notice for issue of corrigendum in the Student Company Secretary e-bulletin. The Institute has decided that the examination for this paper will be held in the Optical Mark Recognition (OMR) format, whereby students are required to answer multiple choice questions on OMR sheet by darkening the appropriate choice by HB pencil. One mark will be awarded for each correct answer. Negative marking for wrong answers attempted by the candidates will be implemented i.e.,December 2015 session of examination in the ratio of 1: 4, i.e., deduction of one mark for every four wrong answers and total marks obtained by the candidates would be rounded up to next whole number. Further, the negative marks would be limited to the extent of marks secured for correct answers so that no candidate shall secure less than zero mark. The specimen OMR sheet is appended at the end of the study material. There is practice test paper in the study to acquaint students with the pattern of examination. These are for practice purpose only, not to be sent to the institute. 3.2 TAX EVASION Tax evasion is an illegal attempt to defeat the imposition of taxes by individuals, corporations, trusts, and others. Tax evasion often entails the deliberate misrepresentation of the taxpayer's affairs to the tax authorities to reduce the taxpayer's tax liability, and it includes 59 CU IDOL SELF LEARNING MATERIAL (SLM)
dishonest tax reporting, such as declaring less income, profits or gains than the amounts earned, or overstating deductions. Tax evasion is an activity commonly associated with the informal economy. One measure of the extent of tax evasion (the \"tax gap\") is the amount of unreported income, which is the difference between the amount of income that should be reported to the tax authorities and the actual amount reported. In contrast, tax avoidance is the legal use of tax laws to reduce one's tax burden. Both tax evasion and tax avoidance can be viewed as forms of tax noncompliance, as they describe a range of activities that intend to subvert a state's tax system, but such classification of tax avoidance is disputable since avoidance is lawful in self-creating systems. Tax evasion is often an offence by an individual, while tax avoidance is often a corporate practice. In 1968, Nobel laureate economist Gary Becker first theorized the economics of crime, based on which authors M.G. Allingham and A. Sandmo produced, in 1972, an economic model of tax evasion. This model deals with the evasion of income tax, the main source of tax revenue in developed countries. According to the authors, the level of evasion of income tax depends on the detection probability and the level of punishment provided by law. The literature's theoretical models are elegant in their effort to identify the variables likely to affect non-compliance. Alternative specifications, however, yield conflicting results concerning both the signs and magnitudes of variables believed to affect tax evasion. Empirical work is required to resolve the theoretical ambiguities. Income tax evasion appears to be positively influenced by the tax rate, the unemployment rate, the level of income and dissatisfaction with government. The U.S. Tax Reform Act of 1986 appears to have reduced tax evasion in the United States. In a 2017 study Alabaster et al. concluded based on random stratified audits and leaked data that occurrence of tax evasion rises sharply as amount of wealth rises and that the very richest are about 10 times more likely than average people to engage in tax evasion. The tax gap describes how much tax should have been raised in relation to much tax is raised. The tax gap is mainly growing due to two factors, the lack of enforcement on the on hand and the lack of compliance on the other hand. The former is mainly rooted in the costly enforcement of the taxation law The Latter is based on the foundation that tax compliance is costly for individuals as well as firms (tax filling, bureaucracy), hence not paying taxes would be more economical in their opinion. During the second half of the 20th century, value-added tax (VAT) emerged as a modern form of consumption tax throughout the world, with the notable exception of the United States. Producers who collect VAT from consumers may evade tax by under-reporting the amount of sales. The US has no broad-based consumption tax at the federal level, and no state currently collects VAT; most states instead collect sales taxes. Canada uses both a VAT 60 CU IDOL SELF LEARNING MATERIAL (SLM)
at the federal level (the Goods and Services Tax) and sales taxes at the provincial level; some provinces have a single tax combining both forms. In addition, most jurisdictions which levy a VAT or sales tax also legally require their residents to report and pay the tax on items purchased in another jurisdiction. This means that consumers who purchase something in a lower-taxed or untaxed jurisdiction with the intention of avoiding VAT or sales tax in their home jurisdiction are technically breaking the law in most cases. This is especially prevalent in federal countries like the US and Canada where sub-national jurisdictions charge varying rates of VAT or sales tax. In liberal democracies, a fundamental problem with inhibiting evasion of local sales taxes is that liberal democracies, by their very nature, have few (if any) border controls between their internal jurisdictions. Therefore, it is not generally cost-effective to enforce tax collection on low-value goods carried in private vehicles from one jurisdiction to another with a different tax rate. However, sub-national governments will normally seek to collect sales tax on high- value items such as cars. Dennis Kozlowski is a particularly notable figure for his alleged evasion of sales tax. What started as an investigation into Kozlowski's failure to declare art purchases for the purpose of evading New York state sales taxes eventually led to Kozlowski's conviction and incarceration on more serious charges related to the misappropriation of funds during his tenure as CEO of Tyco International. 3.3 TAX AVOIDANCE Tax avoidance is the legal usage of the tax regime in a single territory to one's own advantage to reduce the amount of tax that is payable by means that are within the law. A tax shelter is one type of tax avoidance, and tax havens are jurisdictions that facilitate reduced taxes, Forms of tax avoidance that use tax laws in ways not intended by governments may be considered legal but are almost never considered moral in the court of public opinion and rarely are in journalism. Many corporations and businesses that take part in the practice experience a backlash from their active customers or online. Conversely, benefitting from tax laws in ways that were intended by governments is sometimes referred to as tax planning. The World Bank's World Development Report 2019 on the future of work supports increased government efforts to curb tax avoidance as part of a new social contract focused on human capital investments and expanded social protection. \"Tax mitigation\", \"tax aggressive\", \"aggressive tax avoidance\" or \"tax neutral\" schemes generally refer to multi territory schemes that fall into the grey area between common and well-accepted tax avoidance, such as purchasing municipal bonds in the United States, and 61 CU IDOL SELF LEARNING MATERIAL (SLM)
tax evasion but are widely viewed as unethical, especially if they are involved in profit- shifting from high-tax to low-tax territories and territories recognised as tax havens. Since 1995, trillions of dollars have been transferred from OECD and developing countries into tax havens using these schemes. Laws known as a General Anti-Avoidance Rule (GAAR) statute, which prohibit \"aggressive\" tax avoidance, have been passed in several countries and regions including Canada, Australia, New Zealand, South Africa, Norway, Hong Kong, and the United Kingdom. In addition, judicial doctrines have accomplished the similar purpose, notably in the United States through the \"business purpose\" and \"economic substance\" doctrines established in Gregory v. Helve ring and in the United Kingdom in Ramsay. The specifics may vary according to jurisdiction, but such rules invalidate tax avoidance that is technically legal but is not for a business purpose or is in violation of the spirit of the tax code. The term \"avoidance\" has also been used in the tax regulations of some jurisdictions to distinguish tax avoidance foreseen by the legislators from tax avoidance exploiting loopholes in the law such as like-kind exchanges. US Supreme Court has stated, \"The legal right of an individual to decrease the amount of what would otherwise be his taxes or altogether avoid them, by means which the law permits, cannot be doubted\". Tax evasion, on the other hand, is the general term for efforts by individuals, corporations, trusts and other entities to evade taxes by illegal means. Both tax evasion and some forms of tax avoidance can be viewed as forms of tax noncompliance, as they describe a range of activities that are unfavourable to a state's tax system. According to Joseph Stiglitz, there are three principles of tax avoidance: postponement of taxes, tax arbitrage across individuals facing different tax brackets, and tax arbitrage across income streams facing different tax treatment. Many tax avoidance devices include a combination of the three principles. The postponement of taxes is the present discounted value of postponed tax is much less than of a tax currently paid. Tax arbitrage across individuals facing different tax brackets or the same individual facing different marginal tax rates at different times is an effective method of reducing tax liabilities within a family. However, according to Stiglitz, differential tax rates may also lead to transactions among individuals in different brackets leading to “tax induced transactions”. The last principle is the tax arbitrage across income streams facing different tax treatment. Two kinds of anti-avoidance measures exist: General Anti Avoidance Rules and Specific Anti Avoidance Rules (SAAR). The GAAR implies a set of generic anti-avoidance rules, while SAAR targets a specific avoidance practice or technique. Also, there is a set of bilateral measures pursued thorough treaties or double taxation agreements (DTAAs), this can be done via various clauses. 62 CU IDOL SELF LEARNING MATERIAL (SLM)
Since 1980s there have been six major tax reforms in the US. The first one, in 1981, introduced a variety of tax loopholes. With this, the tax shelter industry boomed, giving rise to a demand for tax reform. The 1986 tax reform was the most accurate attempt at reducing tax avoidance, but then the next reforms of 1993 and 1997 opened new opportunities for tax avoidance and increased incentives of tax avoidance. The 1986 tax law reduced the demand for tax shelters and the opportunities for tax avoidance by constricting the gap between regular rates and the minimum tax rates. Lowering the top marginal rates, restricting the ability to use losses on just one type of income for balancing gains on other income and finally by taxing capital gains with full rates. There was another tax act in 1993, in which the alternative minimum tax rates were increased, also the regular rates, and an increase in the absolute gap for upper-income people. In the 1997 act, a gap between the rates at which capital gains and ordinary income was introduced to all taxpayers. During the 2001 and 2003 tax acts introduced more opportunities for tax avoidance because the gap between the capital gains and ordinary income tax remained the same as both rates were reduced by 5%, Finally, in the 2013 tax act, increased the tax on capital gains and ordinary income to 20 and 39.6% respectively. A company may choose to avoid taxes by establishing their company or subsidiaries in an offshore jurisdiction (see offshore company and offshore trust). Individuals may also avoid tax by moving their tax residence to a tax haven, such as Monaco, or by becoming a perpetual traveller. They may also reduce their tax by moving to a country with lower tax rates. However, a small number of countries tax their citizens on their worldwide income regardless of where they reside. As of 2012, only the United States and Eritrea have such a practice, whilst Finland, France, Hungary, Italy, and Spain apply it in limited circumstances. In cases such as the US, taxation cannot be avoided by simply transferring assets or moving abroad. The United States is unlike almost all other countries in that its citizens and permanent residents are subject to U.S. federal income tax on their worldwide income even if they reside temporarily or permanently outside the United States. U.S. citizens therefore cannot avoid U.S. taxes simply by emigrating from the U.S. According to Forbes magazine some citizens choose to give up their United States citizenship rather than be subject to the U.S. tax system; but U.S. citizens who reside (or spend long periods of time) outside the U.S. may be able to exclude some salaried income earned overseas (but not other types of income unless specified in a bilateral tax treaty) from income in computing the U.S. federal income tax. The 2015 limit on the amount that can be excluded is US$100,800. In addition, taxpayers can exclude or deduct certain foreign housing amounts. They may also be entitled to exclude from income the value of meals and lodging provided by their employer. Some American parents don't register their children's birth abroad with American authorities because they do not want their children to be required to report all earnings to the IRS and pay American taxes for their entire lives, even if they never visit the United States. 63 CU IDOL SELF LEARNING MATERIAL (SLM)
Most countries impose taxes on income earned or gains realized within that country regardless of the country of residence of the person or firm. Most countries have entered bilateral double taxation treaties with many other countries to avoid taxing non-residents twice once where the income is earned and again in the country of residence (and perhaps, for U.S. citizens, taxed yet again in the country of citizenship) however, there are relatively few double-taxation treaties with countries regarded as tax havens. To avoid tax, it is usually not enough to simply move one's assets to a tax haven. One must also personally move to a tax haven (and, for U.S. citizens, renounce one's citizenship) to avoid tax. Tax shelters are investments that allow, and purport to allow, a reduction in one's income tax liability. Although things such as home ownership, pension plans, and Individual Retirement Accounts (IRAs) can be broadly considered \"tax shelters\", insofar as funds in them are not taxed, provided that they are held within the Individual Retirement Account for the required amount of time, the term \"tax shelter\" was originally used to describe primarily certain investments made in the form of limited partnerships, some of which were deemed by the U.S. Internal Revenue Service to be abusive. The Internal Revenue Service and the United States Department of Justice have recently teamed up to crack down on abusive tax shelters. In 2003 the Senate's Permanent Subcommittee on Investigations held hearings about tax shelters which are entitled U.S. tax shelter industry: the role of accountants, lawyers, and financial professionals. Many of these tax shelters were designed and provided by accountants at the large American accounting firms. Examples of U.S. tax shelters include Foreign Leveraged Investment Program (FLIP) and Offshore Portfolio Investment Strategy (OPIS). Both were devised by partners at the accounting firm, KPMG. These tax shelters were also known as \"basis shifts\" or \"defective redemptions.\" Prior to 1987, passive investors in certain limited partnerships (such as oil exploration or real estate investment ventures) were allowed to use the passive losses (if any) of the partnership (i.e., losses generated by partnership operations in which the investor took no material active part) to offset the investors' income, lowering the amount of income tax that otherwise would be owed by the investor. These partnerships could be structured so that an investor in a high tax bracket could obtain a net economic benefit from partnership-generated passive losses. In the Tax Reform Act of 1986, the U.S. Congress introduced the limitation on the deduction of passive losses and the use of passive activity tax credits. The 1986 Act also changed the \"at risk\" loss rules of 26 U.S.C. 465. Coupled with the hobby loss rules, the changes greatly reduced tax avoidance by taxpayers engaged in activities only to generate deductible losses. 64 CU IDOL SELF LEARNING MATERIAL (SLM)
3.4 RESIDENCE AND TAX LIABILITY Direct tax imposed on the Income of assesses, is very significant source of revenue to the government. Government needs money to run various welfare and developmental programmes and to maintain law and order in the nation. Therefore, any person whose taxable income for the previous year exceeds the exemption limit is liable to pay Income Tax to Central Government during the current financial year at the rates applicable in force by the annual finance Act during the current year. According to Section 5 “the scope of total income of an assessee is determined with reference to his residence in India in the previous year.” This means that the total income of each person is based upon his residential status. This article focuses on types of residential status of a person and how it is determined. The residential status of an assessee is determined with reference to his residence in previous year. Residential status during the assessment year is immaterial. It is pertinent to note that residence and citizenship are two different concepts hence should not be mixed for the purpose of taxation. For the purpose for Taxation citizenship of a person does not matter. An India may be non-resident and a foreigner may be resident for the purpose of tax. The residence of a person may change from year to year, but the citizenship remains constant or at least does not change every year. 3.4.1 Meaning and importance of residential status The taxability of an individual in India depends upon his residential status in India for any particular financial year. The term residential status has been coined under the income tax laws of India and must not be confused with an individual’s citizenship in India. An individual may be a citizen of India but may end up being a non-resident for a particular year. Similarly, a foreign citizen may end up being a resident of India for income tax purposes for a particular year. Also, to note that the residential status of different types of persons via an individual, a firm, a company etc is determined differently. In this article, we have discussed about how the residential status of an individual taxpayer can be determined for any particular financial year. 65 CU IDOL SELF LEARNING MATERIAL (SLM)
Figure 3.1: Types of Residential Status 3.4.2 How to determine residential status? To income tax in India, the income tax laws in India classify taxable persons as: A resident A resident not ordinarily resident (RNOR) A non-resident (NR) Resident A taxpayer will qualify as a resident of India if he satisfies one of the following 2 conditions: Stay in India for a year is 182 days or more or Stay in India for the immediately 4 preceding years is 365 days or more and 60 days or more in the relevant financial year In the event an individual leaves India for employment during an FY, he will qualify as a resident of India only if he stays in India for 182 days or more. This otherwise means, condition above of 60 days would not apply to him AartiRaote, Partner, Deloitte India explains, Mr A who has left India for the first time in November 2018 (i.e., his stay in India during the FY 2018-19 was 220 days) qualifies as ROR for tax purpose as his stay in India exceeds 182 days during the previous year 2018-19 and his stay in the 7 previous years more than 730 days as well as he is a resident of India in all the earlier previous years. \"In such case, his global income would be subject to tax in India,\" she said. Resident Not Ordinarily Resident 66 CU IDOL SELF LEARNING MATERIAL (SLM)
If an individual qualifies as a resident, the next step is to determine if he/she is a Resident ordinarily resident (ROR) or an RNOR. He will be a ROR if he meets both of the following conditions: Has been a resident of India in at least 2 out of 10 years immediately previous years and Has stayed in India for at least 730 days in 7 immediately preceding years Therefore, if any individual fails to satisfy even one of the above conditions, he would be an RNOR. Non-resident The individual qualifies as NR in India if he/she meets all the following conditions: His/her cumulative stay in India during the financial year is less than 181 days and His/her cumulative stay in India does not exceed 60 days or more during the financial year His/her cumulative stay in India exceeds 60 days or more during the financial year but does not exceed 365 days or more during the 4 previous financial years In such a scenario, say if Mr C stayed in India was for 40 days during the financial year, so he qualifies as 'Non-Resident' (NR) in India as he meets 3 conditions above. In case if the person has NR status, only India- sourced income and income received directly in India bank account, would be taxable. 3.4.3 Taxability Resident: A resident will be charged to tax in India on his global income i.e., income earned in India as well as income earned outside India. NR and RNOR: Their tax liability in India is restricted to the income they earn in India. They need not pay any tax in India on their foreign income. Also note that in a case of double taxation of income where the same income is getting taxed in India as well as abroad, one may resort to the Double Taxation Avoidance Agreement (DTAA) that India would have entered with the other country to eliminate the possibility of paying taxes twice. 3.5 SUMMARY One reason for taxpayers to evade taxes are the personal benefits that come with it, thus the individual problems that lead to that decision Additionally, Wallschutzky's ‘exchange relationship hypothesis presents as a sufficient motive for many. The exchange relationship hypothesis states that tax payers believe that the exchange between their taxes and the public good/social services as unbalanced. Furthermore, the little capability of the system to catch the tax evaders poses as another incentive. Most often, it is more economical to evade taxes, being caught and paying a fine therefore, than paying the accumulated tax burden over the years. Thus, evasion 67 CU IDOL SELF LEARNING MATERIAL (SLM)
numbers should be even higher than they are; hence for many people there seem to be moral objective countering this practice. Tax evasion is a crime in almost all developed countries, and the guilty party is liable to fines and/or imprisonment. In Switzerland, many acts that would amount to criminal tax evasion in other countries are treated as civil matters. Dishonestly misreporting income in a tax return is not necessarily considered a crime. Such matters are handled in the Swiss tax courts, not the criminal courts. In Switzerland, however, some tax misconduct (such as the deliberate falsification of records) is criminal. Moreover, civil tax transgressions may give rise to penalties. It is often considered that the extent of evasion depends on the severity of punishment for evasion. Tax farming is an historical means of collection of revenue. Governments received a lump sum in advance from a private entity, which then collects and retains the revenue and bears the risk of evasion by the taxpayers. It has been suggested that tax farming may reduce tax evasion in less developed countries. In 2008 it was reported by Private Eye that Tesco utilized offshore holding companies in Luxembourg and partnership agreements to reduce corporation tax liability by up to £50 million a year. Another scheme previously identified by Private Eye involved depositing £1 billion in a Swiss partnership, and then loaning out that money to overseas Tesco stores, so that profit can be transferred indirectly through interest payments. This scheme is reported to remain in operation and is estimated to be costing the UK exchequer up to £20 million a year in corporation tax. 3.6 KEYWORDS Commercial Intangible - An intangible that is used in commercial activities such as the production of a good or the provision of a service, as well as an intangible right that is itself a business asset transferred to customers or used in the operation of business. Commodities Futures - Contracts traded on recognized futures markets, in which sellers promise to deliver a given commodity by a certain date at a predetermined price. Deductions - Deduction denotes, in an income tax context, an item which is subtracted (deducted) in arriving at, and which therefore reduces, taxable income. Deemed Interest - If a member of a multinational enterprise (MNE) receives an interest-free loan from an affiliated company, the tax authorities of the lender's country may readjust the lender's profits by adding an amount equal to the interest which would have been payable on the loan had it been made at arm's length. 68 CU IDOL SELF LEARNING MATERIAL (SLM)
Deferred Income - Term used to describe income which will be realized at a future date, thus delaying any tax liability. 3.7 LEARNING ACTIVITY 1. Create a session on Meaning and importance of residential status. ___________________________________________________________________________ ___________________________________________________________________________ 2. Create a survey on Taxability. ___________________________________________________________________________ ___________________________________________________________________________ 3.8 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. Define Taxability? 2. Define Residential status? 3. What is tax? 4. What is Tax evasion? 5. How to determine residential status? Long Questions 1. Explain the concept of Tax evasion. 2. Discuss aboutTax avoidance. 3. Illustrate the concept of Residence and tax liability. 4. Examine the concept of Taxability. 5. Illustrate the Importance of residential status. B. Multiple Choice Questions 1. Which of the following need not pay any tax in India on their foreign income? a. Only NR b. Only RNOR c. IR d. NR and RNOR 69 CU IDOL SELF LEARNING MATERIAL (SLM)
2. Which of the following is considered as home ownership, pension plans, and Individual Retirement Accounts? a. Income payee b. Tax shelters c. Tax holder d. None of these 3. Which of the following are investments that allow, and purport to allow, a reduction in one's income tax liability? a. Tax shelters b. Salary c. Firm d. All of these 4. Which of the following imposed on the Income of assesses, is very significant source of revenue to the government? a. Indirect tax b. Direct tax c. Income tax d. Pay tax 5. Write the abbreviation of DTAA? a. Described Taxation Avoidance Agreement b. Designed Taxation Avoidance Agreement c. Double Taxation Avoidance Agreement d. Date Taxation Avoidance Agreement Answers 70 1-d, 2-b, 3-a, 4-b, 5-c 3.9 REFERENCES References book CU IDOL SELF LEARNING MATERIAL (SLM)
Dyreng, Scott D.; Hanlon, Michelle; Maydew, Edward L. (2008). \"Long‐Run Corporate Tax Avoidance\". The Accounting Review. Back, Philippa Foster (2013-04-23). \"Avoiding tax may be legal, but can it ever be ethical?\". The Guardian. Jesse Drucker (21 October 2010). \"Google 2.4% Rate Shows How $60 Billion Is Lost to Tax Loopholes\". Textbook references David Kocieniewski (January 6, 2013). \"Major Companies Push the Limits of a Tax Break\". The New York Times. Retrieved January 7, 2013. Michael Wenzel (2002). \"The Impact of Outcome Orientation and Justice Concerns on Tax Compliance\" (PDF). Journal of Applied Psychology Stiglitz, Joseph. (2021)\"The General Theory of Tax Avoidance\" (PDF). National Bureau of Economic Research. National Bureau of Economic Research. Website https://en.wikipedia.org/wiki/Tax_avoidance https://www.alberta.ca/taxes-levies-overview.aspx https://en.wikipedia.org/wiki/Tax_avoidance 71 CU IDOL SELF LEARNING MATERIAL (SLM)
UNIT 4 – EXEMPTED INCOMES STRUCTURE 4.0 Learning Objectives 4.1 Introduction 4.2 Exempted Incomes 4.2.1 List of Exempted Incomes 4.2.2 Exemption under Section 10 (1) on agricultural income 4.2.3 Exemption under Section 10 (2) on income received by a coparcener from the HUF 4.2.4 Exemption under Section 10 (2A) on profit received by a partner from a firm 4.2.5 Exemption under Section 10 (4) on interest received by a non-resident 4.2.6 Exemption under Section 10 (4B) on interest paid on notified savings certificates 4.2.7 Exemption under Section 10 (5) on Leave Travel Allowance /Concession paid to an employee 4.3 Summary 4.4 Keywords 4.5 Learning Activity 4.6 Unit End Questions 4.7 References 4.0 LEARNING OBJECTIVES After studying this unit, you will be able to: Describe the concept of Exempted Incomes. Explain the concept of List of Exempted Incomes. Illustrate the Exemption under Section 10 (1) on agricultural income. 4.1 INTRODUCTION Tax exemption is the reduction or removal of a liability to make a compulsory payment that would otherwise be imposed by a ruling power upon persons, property, income, or transactions. Tax-exempt status may provide complete relief from taxes, reduced rates, or tax 72 CU IDOL SELF LEARNING MATERIAL (SLM)
on only a portion of items. Examples include exemption of charitable organizations from property taxes and income taxes, veterans, and certain cross-border or multi-jurisdictional scenarios. Tax exemption generally refers to a statutory exception to a general rule rather than the mere absence of taxation in particular circumstances, otherwise known as exclusion. Tax exemption also refers to removal from taxation of a particular item rather than a deduction. International duty-free shopping may be termed \"tax-free shopping\". In tax-free shopping, the goods are permanently taken outside the jurisdiction, thus paying taxes is not necessary. Tax- free shopping is also found in ships, airplanes and other vessels travelling between countries (or tax areas). Tax-free shopping is usually available in dedicated duty-free shops. However, any transaction may be duty-free, given that the goods are presented to the customs when exiting the country. In such a scenario, a sum equivalent to the tax is paid, but reimbursed on exit. More common in Europe, tax-free is less frequent in the United States, except for Louisiana. However, current European Union rules prohibit most intra-EU tax-free trade, except for certain special territories outside the tax area. There are several different approaches used in granting exemption to organizations. Different approaches may be used within a jurisdiction or especially within sub-jurisdictions. Some jurisdictions grant an overall exemption from taxation to organizations meeting certain definitions. The United Kingdom, for example, provides an exemption from rates (property taxes), and income taxes for entities governed by the Charities Law. This overall exemption may be somewhat limited by limited scope for taxation by the jurisdiction. Some jurisdictions may levy only a single type of tax, exemption from only a particular tax Some jurisdictions provide for exemption only from certain taxes. The United States exempts certain organizations from Federal income taxes, but not from various excise or most employment taxes. Many tax systems provide complete exemption from tax for recognized charitable organizations. Such organizations may include religious organizations (temples, mosques, churches, etc.), fraternal organizations (including social clubs), public charities (e.g., organizations serving homeless persons), or any of a broad variety of organizations considered to serve public purposes. The U.S. system exempts from Federal and many states income taxes the income of organizations that have qualified for such exemption. Qualification requires that the organization be created and operated for one of a long list of tax-exempt purposes, which includes more than 28 types of organizations and requires, for most types of organizations, that the organization apply for tax exempt status with the Internal Revenue Service, or be a religious or apostolic organization. Note that the U.S. system does not distinguish between various kinds of tax-exempt entities (such as educational versus charitable) for purposes of granting exemption but does make such distinctions with respect to allowing a tax deduction 73 CU IDOL SELF LEARNING MATERIAL (SLM)
for contributions. In November 2017, the GOP released a tax bill that would allow churches to keep their tax exemptions even if they endorse political candidates. Certain classes of persons may be granted a full or partial tax exemption within a system. Common exemptions are for veterans, clergymen, or taxpayers with children (who can take \"dependency exemption\" for each qualifying dependent who has lived with the taxpayer. The dependent can be a natural child, step-child, step-sibling, half-sibling, adopted child, eligible foster child, or grandchild, and is usually under age 19, a full-time student under age 24, or have special needs). The exemption granted may depend on multiple criteria, including criteria otherwise unrelated to the tax. For example, a property tax exemption may be provided to certain classes of veterans earning less than a particular income level. Definitions of exempt individuals tend to be complex. In Samuel 17:25 in the Hebrew Bible, King Saul includes tax exemption as one of the rewards on offer to whoever comes forward to defeat the Philistine giant Goliath. In the Ottoman Empire, tax breaks for descendants of Muhammad encouraged many people to buy certificates of descent or forge genealogies; the phenomenon of teseyyüd falsely claiming noble ancestry spread across ethnic, class, and religious boundaries. In the 17th century, an Ottoman bureaucrat estimated that there were 300,000 impostors; in 18th-century Anatolia, nearly all upper-class urban people claimed descent from Muhammad. The number of people claiming such ancestry which exempted them from taxes such as avarız and tekalif- iorfiye became so great that tax collection was very difficult. 4.2 EXEMPTEDINCOMES Exempt income refers to certain types or amounts of income that are not subject to income tax. Some types of income are exempt from federal or state income tax, or both. The Internal Revenue Service (IRS) determines which types of income are exempt from federal income tax as well as the circumstances for each exemption. Congressional action plays a role as well, as exemptions and the threshold amounts are often tweaked or changed entirely. Exempt income rules underwent certain changes under the Tax Cuts and Jobs Act signed into law in December 2017. For example, the Act eliminated personal exemptions from tax years 2018 to 2026 but roughly doubled the standard deduction. (The standard deduction for tax year 2020 is set at $12,400 for singles and $24,800 for couples filing jointly. The numbers go up to $12,550 for singles and $25,100 for couples for the 2021 tax year. There are several types of income and benefits that are non-taxable under certain circumstances. Several health-related benefits are tax-exempt including benefits from employer-sponsored supplemental disability insurance purchased with after-tax dollars, 74 CU IDOL SELF LEARNING MATERIAL (SLM)
private insurance plans funded with after-tax dollars, most benefits from employer-sponsored health insurance plans, and worker's compensation.5 Gifts that exceed a certain value can trigger a gift tax on the person providing the gift. However, any gift worth less than $15,000 is exempt from income tax. Regardless of value, certain gifts including tuition and medical expenses paid for someone else and charitable donations are income tax exempt. The Act specifically raises the exemption and phase-out levels for the alternative minimum tax, which is typically levied on individuals earning income above a certain threshold. 4.2.1 List of Exempted Incomes Most income tax systems exclude certain classes of income from the taxable income base. Such exclusions may be referred to as exclusions or exemptions. Systems vary highly. Among the types of income that may be included are classes of income earned in specific areas, such as special economic zones, enterprise zones, etc. These exemptions may be limited to specific industries. As an example, India provides SEZs where exporters of goods or providers of services to foreign customers may be exempt from income taxes and customs duties. Agriculture Income [Section 10(1)] As per section 10(1), agricultural income earned by the taxpayer in India is exempt from tax. Agricultural income is defined under section 2(1A) of the Income-tax Act. As per section 2(1A), agricultural income generally means: Any rent or revenue derived from land which is situated in India and is used for agricultural purposes. Any income derived from such land by agriculture operations including processing of agricultural produce to render it fit for the market or sale of such produce. Any income attributable to a farm house subject to satisfaction of certain conditions specified in this regard in section 2(1A). Any income derived from saplings or seedlings grown in a nursery shall be deemed to be agricultural income. Any sum received by a Co-parcener from Hindu Undivided Family (H.U.F.) [Section 10(2)] As per section 10(2), amount received out of family income, or in case of importable estate, amount received out of income of family estate by any member of such HUF is exempt from tax. Example-1 HUF earned 5, 00,000 during the previous year and paid tax on its income. Mr. A, a co-parcener is an employee and earns a salary of `.20, 000 p.m. During the previous year 75 CU IDOL SELF LEARNING MATERIAL (SLM)
Mr. An also received `.1, 00,000 from HUF. Mr. A will pay tax on his salary income, but any sum of money received from his HUF is not chargeable to tax in Mr. A’s hands. Example-2 HUF earned `.90, 000 during the previous year 2016-17 and it is not chargeable to tax. Mr. A, a co-parcener is earning individual income of 20,000 p.m. Besides his individual income, Mr. A receives `.30, 000 from his HUF. Mr. A will pay tax on his individual income, but any sum of money received by him from his HUF is not chargeable to tax in the hands of co-parcener whether the HUF has paid tax or not on that income. Share of Income from the Firm [Section 10(2A)] As per section 10(2A), share of profit received by a partner from a firm is exempt from tax in the hands of the partner. Further, share of profit received by a partner of LLP from the LLP will be exempt from tax in the hands of such partner. This exemption is limited only to share of profit and does not apply to interest on capital and remuneration received by the partner from the firm/LLP. Interest paid to Non-Resident [Section 10(4)(i)] As per section 10(4) in the case of a non-resident any income by way of interest on certain notified securities or bonds (including income by way of premium on the redemption of such bonds) is exempt from tax. As per section 10(4), in the case of an individual, any income by way of interest on money standing to his credit in a Non-Resident (External) Account in any bank in India in accordance with the Foreign Exchange Management Act, 1999, and the rules made there under is exempt from tax. Exemption under section 10(4) is available only if such individual is a person resident outside India as defined in clause (q) of section 2 of the said Act or is a person who has been permitted by the Reserve Bank of India to maintain the aforesaid Account. Interest to Non-Resident on Non-Resident (External) Account [Section 10(4)] Any income by way of interest on moneys standing to his credit in a Non-Resident (External) Account in any bank in India shall be exempt from tax in case of an individual who is a person resident outside India or is a person who has been permitted by the RBI to maintain the aforesaid account. The person residing outside India shall have the same meaning as defined under Foreign Exchange Regulation Act, 1973, FEMA, 1999. This exemption shall not be available on any income by way of interest paid or credited on or after 1-4-2005. Interest paid to a person of Indian Origin and who is Non-Resident [Section 10(4 B)] In case of an individual, being a citizen of India or a person of Indian origin, who is nonresident, any income from interest on such savings certificates issued by the Central Government, as Government may specify in this behalf by notification in the Official 76 CU IDOL SELF LEARNING MATERIAL (SLM)
Gazette, shall be fully exempt. The exemption under this section shall not be allowed on bonds or securities issued on or after 1-6-2002. This exemption shall be allowed only if the individual has subscribed to such certificates in Foreign Currency or other foreign exchange remitted from a country outside India in accordance with the provisions of the Foreign Exchange Act, 1973, FEMA, 1999 and any rules made there under. For this purpose, a person shall be deemed to be of Indian origin if he or either of parents or any of his grandparents, was born in India or in undivided India. Leave Travel Concession or Assistance (LTC/LTA) to an Indian Citizen Employee [Section 10(5)] The employee is entitled to exemption under section 10(5) in respect of the value of travel concession or assistance received by or due to him from his employer or former employer for himself and his family, in connection with his proceeding On leave to any place in India. To any place in India after retirement from service or after the termination of his service. 4.2.2 Exemption under Section 10 (1) on agricultural income If you earn any type of agricultural income in a financial year, such an income would be exempted from tax. Agricultural income, as defined under Section 2 (1A) of the Income Tax Act, 1961, would include the following types of incomes Rent or revenue earned from a land located in India which is used for agricultural purposes Income earned from an agricultural land located in India by doing agricultural activities. These agricultural activities also include processing of the agricultural produce to make it fit for sale in the market Income earned from a farmhouse provided specific conditions are fulfilled Moreover, income earned from saplings or seedlings which are grown in a nursery would also be considered as an agricultural income 4.2.3 Exemption under Section 10 (2) on income received by a coparcener from the HUF If you are a coparcener in a Hindu Undivided Family (HUF), share of income received from family income or income received from an impartial family estate would be exempted from tax. For instance, in a financial year, you earn INR 50,000 as salary from your HUF. Moreover, the HUF earned an income of INR 60,000 out of which you received INR 20,000 as your share. In this case, your salary income would be liable to tax but the share of profit which you received from the HUF, i.e., INR 20,000 would be exempted from tax. 77 CU IDOL SELF LEARNING MATERIAL (SLM)
4.2.4 Exemption under Section 10 (2A) on profit received by a partner from a firm If you are a partner in a partnership firm or in an LLP (Limited Liability Partnership), the share of profit which you receive from the firm or LLP would be exempted from tax. This exemption would be allowed only on the share of profit received. Any other amount received by way of remuneration or interest on capital would not be exempted. 4.2.5 Exemption under Section 10 (4) on interest received by a non-resident Section 10 (4) is further divided into two sub-sections. The first one is Section 10 (4) wherein interest received by a non-resident individual on specific securities or bonds and the premium earned on redemption on such bonds are allowed as an exemption. The second one is Section 10 (4) wherein interest earned by a non-resident on the Non-Resident External Account (NRE Account) is allowed as an exemption. The NRE account can be maintained with any bank as per the Foreign Exchange Management Act, 1999 (FEMA). The exemption under Section 10 (4) would be available to an individual who is a resident outside India as mentioned in Section 2, clause ‘w’ of the FEMA or is an individual who is allowed by the RBI to maintain an NRE Account. 4.2.6 Exemption under Section 10 (4B) on interest paid on notified savings certificates If an individual is an Indian citizen or a PIO (Person of Indian Origin) and he/she is a non- resident, interest income earned from saving certificates which are issued by the Central Government would be completely exempted from tax. The saving certificates should be notified in the Official Gazette of the Central Government and the individual should have invested in such certificates in foreign currency or foreign exchange as specified in the Foreign Exchange Act, 1973, FEMA or any other Act passed by the Government. However, if the securities are issued on or after 1st June 2002, the exemption would not be allowed, and the interest income would be fully taxable. 4.2.7 Exemption under Section 10 (5) on Leave Travel Allowance /Concession paid to an employee A salaried employee can claim an exemption for the Leave Travel Allowance (LTA) or Leave Travel Concession (LTC) paid by the employer. There are various rules for claiming LTC exemption which includes the following The actual cost of travel would be allowed as an exemption subject to the maximum allowance paid by the employer. Let’s understand with an example. Mr Verma, an employee, receives LTA of INR 50,000 from his employer. He goes on a trip with his wife and two kids, and the total cost of travel tickets comes to INR 40,000. In this case, the LTA exemption would be allowed for INR 40,000 which is the actual cost of the journey. However, if the travel tickets amounted to INR 60,000, the exemption would have been available only for INR 50,000 which is the maximum LTA paid by 78 CU IDOL SELF LEARNING MATERIAL (SLM)
the employer. The remaining INR 10,000 would be taxed in the hands of the employee The exemption can be claimed either when the employee takes a leave from work and travels or if the employee has retired or left the job before travelling The travel should be taken within India The travel cost of the family members can also be claimed as an exemption. Family members include spouse, children, parents, and siblings. In the case of children, the exemption is allowed for up to 2 children born on or after 1st October 1998. For children born earlier, however, there is no maximum limit. Costs incurred on sightseeing, food, etc. would not be allowed as an exemption under LTA If the journey is done by air, the maximum exemption would be the economy class return airfare for the shortest route taken from the place of origin to the place of destination If the journey is done by any other mode (except by air) when there is train connectivity, the maximum exemption would be limited to the return fare of first- class AC train ticket for the shortest possible route If the destination is not connected by train, the exemption limit would be limited to the return fare of first-class AC train ticket for the shortest possible route assuming that the journey is done by train The exemption can be taken for a maximum of two journeys undertaken in a block of 4 years. The block of 4 years has been listed by the Government and it follows the calendar, i.e., the year starts from January and ends in December. The current block is from January 2018 to December 2021 If two LTA exemptions are not claimed in a block of four years, the unclaimed LTA can be carried forward to the next block. However, in that case, the carried forward LTA should be claimed within the first year of the next block. For example, for the block of 2018-2021, if the employee claims only one LTA, the remaining LTA can be carried forward to the 2022-2025 block. However, the carried forward exemption should be claimed between 1st January 2022 and 31st December 2022 Overview on Exempted Income Exempt income refers to any income that is exempt from taxation. The rules and regulations that govern exempt income vary from country to country and even by locale within a country. However, they are created as different types of incentives and breaks to foster certain types of growth and economic well-being. 79 CU IDOL SELF LEARNING MATERIAL (SLM)
Individuals who receive income from a foreign country may get some or all that income exempt. It depends on several factors, such as the country from which the income originates, the type of income it is, how much income is earned, and whether it had been subject to taxes in that country. In Canada, when declaring exempt foreign income, it must be declared on your tax return. It must be noted the country the funds came from, as well as the entire amount of income before any foreign tax. A separate form for each country in which you’ve received income must be filled out. If a tax treaty exists between the country upon which the income was gained and Canada, a special section on the Canadian tax return exists to make this income exempt. All different types of income from these countries may be taxed differently. For example, pension and income tax gained in a treaty country may be regarded as different and exempted differently. Countries that have applicable tax treaties can be found on the government of Canada’s Department of Finance website. One common example of such an occurrence is the U.S. Social Security benefits that are paid to individuals who are now residing in Canada. As of 2020, in Canada, you may claim up to 15% of those benefits on your tax return as tax-exempt income. Often, countries will set up special economic zones to spur innovation and development. They serve as a type of incubator for new and existing companies to grow in close relation to one another in circumstances conducive to their success. Many times, certain types of income exemption make it lucrative and appealing for talented individuals to earn and relocate to the special economic zones. Many developing countries offer such incentives in their ports as well, whereby exporters of certain goods abroad will often be exempt from income tax and certain types of duties. 4.3 SUMMARY The personal exemptions in the federal income tax merit critical examination from time to time both because the tax itself is the country's biggest source of governmental revenue and because the personal. Exemptions constitute a major component of its structure. More than 90 per cent of the aggregate of personal incomes as defined by the tax law termed adjusted gross income has been accounted for on the annual income tax returns filed in recent years. Nevertheless, only a little more than one-half of the aggregate becomes \"taxable income,\" i.e., subject to any of the bracket rates of tax. Most of the rest is excluded by the personal exemptions and the personal or non- business deductions. The personal exemptions on taxable returns alone removed $91.9 80 CU IDOL SELF LEARNING MATERIAL (SLM)
billion, or 22.5 per cent of adjusted gross income, from the taxable category in 1965. 3. One aspect of the part played by the personal exemptions in the tax rate structure is provided by the following calculation: if all persons who were excluded from income tax by the exemptions and non-business deductions in 1965 had been excluded in some other manner, as by a direct exclusion of all with incomes below some figure, and the exemptions (but not the deductions) had been eliminated for taxable persons, the same amount of tax revenue raised by the income tax in 1965 could have been obtained with a reduction of 27 per cent in the average tax rate on all taxable income. At the same time, there would have been a redistribution of tax liabilities to the disadvantage of those with larger families, the aged, and the blind, and in favour of those who had previously had fewer exemptions. Until World War II, the personal exemptions in this country functioned primarily to exclude most persons and the greater part of personal income from the income tax. Less than 5 per cent of the population, including taxpayers and their dependents, and less than onethird of the total amount of adjusted gross income were covered by taxable returns in most years prior to 1941. Until 1934, the value of the personal exemptions for taxable persons was restricted to a reduction in liability for normal tax: the exemptions were not allowed in computing surtax. The income tax was transformed during and after World War II into a mass tax of unrivalled revenue yield by radically reduced levels of personal exemptions, an accompanying great rise in personal incomes (in part from inflation), and drastically increased tax rates, particularly in the lower brackets. The aggregate dollar amounts of the exemptions on taxable returns rose substantially, despite the cuts in the statutory allowance for each exemption, because of the great increase in the number of taxable persons and a disproportionate increase in exemptions for dependents, the allowance for whom was raised to equality with that for the taxpayer beginning in 1944. Between 1939 and 1965, total adjusted gross income on taxable returns rose twenty- threefold, the dollar amount of exemptions on them, fourteen-fold, and the dollar amount of exemptions for dependents, sixty-seven-fold. In recent years more than 90 per cent of the population has been represented on income tax returns, taxable and non-taxable. Individual income tax revenues, which had never reached $1.5 billion in any year prior to 1940, totalled $49.5 billion in 1965. And whereas taxpayers with incomes under $10,000 had accounted for little more than 1 per cent of individual income tax revenues in 1929, they accounted for 40.1 per cent in 1965. 81 CU IDOL SELF LEARNING MATERIAL (SLM)
4.4 KEYWORDS Effective Tax Rate - The rate at which a taxpayer would be taxed if his tax liability were taxed at a constant rate rather than progressively. This rate is computed by determining what percentage the taxpayer’s tax liability is of his total taxable income. Employee Profit Sharing - System under which the employees of an enterprise are entitled by employment contract or by law to a share in the profits made by the enterprises. Entertainer - Income of a professional entertainer e.g., a musician, actor or other artiste, or sportsman is, in many cases, treated differently from income of persons carrying on other independent profession. Fiscal Transparency - \"Looking through\" an entity and attributing profits and losses directly to the entity's members. The profits of certain forms of enterprises are taxed in the hands of the members rather than at the level of the enterprise. Often occurs in the case of a partnership for example. Gearing - Term broadly used in the context of a company's debt/equity ratio. A company is highly geared if the ratio of debt to equity is high. Sometimes referred to as capital gearing or leveraging. 4.5 LEARNING ACTIVITY 1. Create a session on Exempted Incomes. ___________________________________________________________________________ ___________________________________________________________________________ 2. Create a survey on Exemption under Section 10 (1) on agricultural income. ___________________________________________________________________________ ___________________________________________________________________________ 4.6UNIT END QUESTIONS A. Descriptive Questions 82 Short Questions 1. Write the list of Exempted Income? 2. Define Income? 3. Write the main objective of Exempted Income? 4. What is Tax income? CU IDOL SELF LEARNING MATERIAL (SLM)
5. What is Leave Travel Allowance? Long Questions 1. Explain the Exemption under Section 10 (5) on Leave Travel Allowance /Concession paid to an employee. 2. Discuss the Exemption under Section 10 (4B) on interest paid on notified savings certificates. 3. Illustrate the Exemption under Section 10 (4) on interest received by a non-resident 4. Illustrate the Exemption under Section 10 (1) on agricultural income. 5. Examine the List of Exempted Incomes. B. Multiple Choice Questions 1. What is remuneration to partner of a firm engaged in the business of growing and manufacturing rubber in India? a. Partly agricultural income and partly non-agricultural income b. Agricultural income c. Non-Agricultural income d. None of these 2. Which of the following activity shall be considered as agricultural activity? a. Subsequent operation on the agricultural land b. Basic operation on the agricultural land c. Basic and subsequent operation on the agricultural land d. Both (b) and (c) 3. Which of the following is not taxable under head ‘Salaries’? a. Remuneration paid to the lecturer at a college for setting a question paper by a university b. Salary received by a member of the Parliament c. Commission received by an employee director of a company d. Both (a) and (b) 4. What is the maximum amount of leave salary not chargeable to tax as specified by the Government in case of a non-Government employee? a. 75,600 83 CU IDOL SELF LEARNING MATERIAL (SLM)
b. 3,00,000 c. 77,760 d. 2,40,000 5. What does employer’s contribution to superannuation fund for employee? a. Is not taxable in hands of employee b. Is taxable in hands of employee provided contribution to such fund exceeds ` 1,50,000 c. Is exempt to the extent of 12% of salary d. Is fully taxable Answers 1-a, 2-d, 3-d, 4-b, 5-b 4.7 REFERENCES References book Ostwal, T.P.; Vijayaraghavan, Vikram (2010). \"Anti-Avoidance Measures\". National Law School of India Review. Anonymous (2016-09-13). \"Anti-Tax Avoidance Package\". Taxation and Customs Union - European Commission. PricewaterhouseCoopers. \"ATAD (Anti-Tax Avoidance Directive)\". Textbook references Office, Australian Taxation. \"A strong domestic tax regime\". www.ato.gov.au. Retrieved 2021-04-21. Stiglitz; Rosengard, Joseph; Jay (2000). Economics of the Public Sector. W.W Norton & Company. Moran Harari, Markus Meinzer and Richard Murphy (October 2012) Website http://incometaxmanagement.com/Pages/Tax-Ready-Reckoner/Exempted- Incomes/Exempted-Incomes-Under-Section-10.html https://www.nber.org/system/files/chapters/c1146/c1146.pdf https://en.wikipedia.org/wiki/Tax_exemption 84 CU IDOL SELF LEARNING MATERIAL (SLM)
UNIT 5 – INCOME HEADS PART I STRUCTURE 5.0 Learning Objectives 5.1 Introduction 5.2 Income from Salaries 5.2.1 Taxable Incomes under Salary Head 5.2.2 Computation of Income from Salary Head 5.2.3 Tax Treatment Provident Fund 5.2.4 Types of Provident Funds 5.2.5 Perquisites Exempted from Tax for All Employees 5.2.6 Perquisites Taxable for all employees 5.2.7 Perquisites Taxable for Specified Employees only 5.3 Calculation 5.4 Summary 5.5 Keywords 5.6 Learning Activity 5.7 Unit End Questions 5.8 References 5.0 LEARNING OBJECTIVES After studying this unit, you will be able to: Describe the concept of Income from Salaries. Elaborate the Taxable Incomes under Salary Head. Illustrate the Types of Provident Funds. 5.1 INTRODUCTION A salary is a form of periodic payment from an employer to an employee, which may be specified in an employment contract. It is contrasted with piece wages, where each job, hour or other unit is paid separately, rather than on a periodic basis. From the point of view of running a business, salary can also be viewed as the cost of acquiring and retaining human 85 CU IDOL SELF LEARNING MATERIAL (SLM)
resources for running operations and is then termed personnel expense or salary expense. In accounting, salaries are recorded in payroll accounts. Salary is a fixed amount of money or compensation paid to an employee by an employer in return for work performed. Salary is commonly paid in fixed intervals, for example, monthly payments of one-twelfth of the annual salary. Salary is typically determined by comparing market pay rates for people performing similar work in similar industries in the same region. Salary is also determined by levelling the pay rates and salary ranges established by an individual employer. Salary is also affected by the number of people available to perform the specific job in the employer's employment locale. While there is no first pay stub for the first work-for-pay exchange, the first salaried work would have required a society advanced enough to have a barter system which allowed for the even exchange of goods or services between tradesmen. More significantly, it presupposes the existence of organized employers perhaps a government or a religious body that would facilitate work-for-hire exchanges on a regular enough basis to constitute salaried work. From this, most infer that the first salary would have been paid in a village or city during the Neolithic Revolution, sometime between 10,000 BCE and 6000 BCE. A cuneiform inscribed clay tablet dated about 3100 BCE provides a record of the daily beer rations for workers in Mesopotamia. The beer is represented by an upright jar with a pointed base. The symbol for rations is a human head eating from a bowl. Round and semi-circular impressions represent the measurements. By the time of the Hebrew Book of Ezra (550 to 450 BCE), salt from a person was synonymous with drawing sustenance, taking pay, or being in that person's service. At that time, salt production was strictly controlled by the monarchy or ruling elite. Depending on the translation of Ezra 4:14, the servants of King Artaxerxes I of Persia explain their loyalty variously as \"because we are salted with the salt of the palace\" or \"because we have maintenance from the king\" or \"because we are responsible to the king\" Similarly, the Latin word salarium linked employment, salt, and soldiers, but the exact link is not very clear. More modern sources maintain instead that although Roman soldiers were typically paid in coin, the word salarium is derived from the word SAL (salt) because at some point a soldier's salary may have been an allowance for the purchase of salt or the price of having soldiers conquer salt supplies and guard the Salt Roads that led to Rome. However, there is no ancient evidence for either of these hypotheses. Some people even claim that the word soldier itself comes from the Latin SAL dare (to give salt), but mainstream sources disagree, noting that the word soldier more likely derives from the gold solidus, with which soldiers were known to have been paid Within the Roman Empire or (later) medieval and pre-industrial Europe and its mercantile colonies, salaried employment appears to have been relatively rare and mostly limited to 86 CU IDOL SELF LEARNING MATERIAL (SLM)
servants and higher status roles, especially in government service. Such roles were largely remunerated by the provision of lodging, food, and livery clothes (i.e., \"food, clothing, and shelter\" in modern idiom). Many courtiers, such as valets de chamber, in late medieval courts were paid annual amounts, sometimes supplemented by large if unpredictable extra payments. At the other end of the social scale, those in many forms of employment either received no pay, as with slavery (although many slaves were paid some money at least), serfdom, and indentured servitude, or received only a fraction of what was produced, as with sharecropping. Other common alternative models of work included self- or co-operative employment, as with masters in artisan guilds, who often had salaried assistants, or corporate work and ownership, as with medieval universities and monasteries. From 1870 to 1930, the Second Industrial Revolution gave rise to the modern business corporation powered by railroads, electricity and the telegraph and telephone. This era saw the widespread emergence of a class of salaried executives and administrators who served the new, large-scale enterprises being created. New managerial jobs lent themselves to salaried employment, in part because the effort and output of \"office work\" were hard to measure hourly or piecewise, and in part because they did not necessarily draw remuneration from share ownership. As Japan rapidly industrialized in the 20th century, the idea of office work was novel enough that a new Japanese word was coined to describe those who performed it, as well as referencing their remuneration. 5.2 INCOMEFROMSALARIES A salary is the regular payment by an employer to an employee for employment that is expressed either monthly or annually, but is paid mostmonthly, especially to white collar workers, managers, directors, and professionals. A salary employee or salaried employee is paid a fixed amount of money each month. Their earnings are typically supplemented with paid vacations and public holidays, healthcare insurance in countries without universal coverage, and other benefits. Salaries are usually determined by comparing what other people in similar positions are paid in the same region and industry. Most large employers have levels of pay rates and salary ranges which are linked to hierarchy and time served. In most countries, salaries are also affected by supply and demand how many job vacancies there are for a specific position in relation to the number of people that exist in the area who could fill that post. Apart from supply and demand (market forces), salaries are also determined by tradition and legislation. In the United States, for example, pay levels are influenced mainly by market forces, while in Japan seniority, social structure and tradition play a greater role. 87 CU IDOL SELF LEARNING MATERIAL (SLM)
Even in nations were market forces play a dominant role, studies have shown there are still differences in how monetary compensation is arranged for work done based on gender or race men tend to earn more than women and white employees’ average incomes are overall higher than those of other ethnic groups. In 2007, the US Bureau of Labour Statistics reported that women of all races earned 80% of the median wage of their male counterparts. Although the gender gap has closed slightly since then, total equality will probably not be reached for at least another five decades, experts believe. No salary can be below the minimum wage if one exists in that country. For example, if the minimum wage is $10 per hour, and the employee works 40 hours per week, his or her salary cannot be less than $20,800 per year ($10 x 40 hours per week x 52 weeks in a year). Any remuneration received by an employee in consideration of services rendered by his/her employer is called salary. It included all the monetary benefits and facilities provided by the employer which are taxable. 5.2.1 Taxable Incomes under Salary Head As per section 15, the following incomes are taxable under head salaries. Due salary from the employer or former employer. Salary paid or allowed to an assessee in the previous year. Any arrears of salary paid or allowed to the assessee in the previous year. Salary received from the present or past employer. To avoid the double taxation, when the assessee received income as a salary is to tax in advance. 88 CU IDOL SELF LEARNING MATERIAL (SLM)
5.2.2 Computation of Income from Salary Head Table 5.1: Computation of Income from Salary Head 5.2.3 Tax Treatment Provident Fund Provident means to provide for the future. Therefore, provident fund means provide the fund for the future of employee. This fund is created by deducting any amount from the salary of the employee every month at a certain rate and the employer also makes his own contribution to this fund. These contributions are invested to earn interest and it credited to employee’s provident fund account. At the time of retirement, the employee gets the provided fund on lump sum basis with the interest. To encourage savings for the social security of employees, the Government has set up various kinds of provident funds. The employee contributes a fixed percentage of his salary towards these funds and in many cases employer also contributes. The whole contribution along with interest is credited to employee’s account. He will get payment out of this fund at the time of retirement and at some other important occasions. If the employee dies, his heirs will get the full payment. Statutory provident fund is set up under the provisions of the Provident Funds Act, 1925. This fund is maintained by the Government and the Semi-Government organisations, local authorities, railways, universities and recognised educational institutions. A provident fund scheme to which the Employee’s Provident Fund and Miscellaneous Provisions Act, 1952 (hereinafter referred to as PF Act, 1952) applies is recognised provident 89 CU IDOL SELF LEARNING MATERIAL (SLM)
fund. As per PF Act, 1952 any establishment employing 20 or more persons is covered by the PF Act, 1952 (establishments employing less than 20 persons can also join the provident fund scheme if the employer and employees want to do so). An establishment covered by the PF Act, 1952 has the following two alternatives and may join any of the following two schemes. The Central Government has established the public provident fund for the benefits of public to mobilise personal savings. Any member of the public (whether a salaried employee or a self-employed person) can participate in the fund by opening a provident fund account at the State Bank of India or its subsidiaries or other nationalised banks. Even a salaried employee can simultaneously become member of employees’ provident fund (whether statutory, recognised, or unrecognised) and public provident fund. Any amount (subject to minimum of Rs. 500 and maximum of Rs. 1, 50,000 per annum) may be deposited under this account. The accumulated sum is repayable after 15 years (it may be extended). This provident fund, at present, carries compound interest at the rate of 8.7% per annum. Interest is credited every year but payable only at the time of maturity. Like Provident Fund, Superannuation fund is also a scheme of retirement benefits for the employee. These are funds, usually established under trusts by an undertaking, for the purpose of providing annuities, etc., to the employees of the undertaking on their retirement at or after a specified age, or on their becoming incapacitated prior to such retirement, or for the widows, children, or dependents of the employees in case of the any employee's earlier death. The trust invests the money contributed to the fund in the form and mode prescribed. Income earned on these investments shall be exempt, if any such fund is an Approved Superannuation Fund. Particulars Recognised Unrecognised PF Statutory Public PF PF PF Contribution to 12% of salary is Employer’s exempt, above Not taxable Not Not Contribution taxable taxable that is added Section to salary 90 income of the employee. Employee’s Section 80C No Section 80C Section CU IDOL SELF LEARNING MATERIAL (SLM)
Particulars Recognised Unrecognised PF Statutory Public PF PF PF Contribution Deduction deduction 80C 80C Deduction Deduction Any interest over and above 9.5% is Interest on added to Not taxable Exempt Exempt PF Income from Salaries. Until 9.5% interest is exempt. Contribution from employer and interest on that is taxable under the head Income from Amount Exempt Salaries; withdrew at subject to a retirement certain Contribution by an time conditions*. employee is not Exempt Exempt taxable, and employee’s contribution interest is taxable under the head Income from Other Sources. Table 5.2: Tax Treatment Provident Fund 5.2.4 Types of Provident Funds Provident fund is another name for pension fund. Its purpose is to provide employees with lump sum payments at the time of exit from their place of employment. This differs from pension funds, which have elements of both lump sum as well as monthly pension payments. 91 CU IDOL SELF LEARNING MATERIAL (SLM)
As far as differences between gratuity and provident funds are concerned, although both types involve lump sum payments at the end of employment, the former operates as a defined benefit plan, while the latter is a defined contribution plan. Specific provident funds include: Employees' Provident Fund Organisation, India's retirement plan. Mandatory Provident Fund (Hong Kong), Hong Kong's retirement plan. Central Provident Fund (Singapore), Singapore's retirement plan. Employees Provident Fund (Malaysia), Malaysia's retirement plan. Employees Provident Fund Nepal, Nepal's retirement Plan. Central Provident Fund (South Africa), a retirement trust. National Social Security Fund (Kenya). The Public Provident Fund (PPF) is a savings-cum-tax-saving instrument in India, introduced by the National Savings Institute of the Ministry of Finance in 1968. The aim of the scheme is to mobilize small savings by offering an investment with reasonable returns combined with income tax benefits. The scheme is fully guaranteed by the Central Government. Balance in PPF account is not subject to attachment under any order or decree of court. However, Income Tax & other Government authorities can attach the account for recovering tax dues. Public Provident Fund Scheme, 2019 introduced by the Government on 12 December 2019 and with the new scheme the earlier Public Provident Fund Scheme, 1968 as amended from time to time is rescinded. As of August 2018, as per the Indian Ministry of finance (Department of Economic Affairs), NRIs (Non-resident Indians) are not allowed to open new PPF accounts. However, they are allowed to continue their existing PPF accounts up to its 15 years maturity period. An amendment to earlier rules allowing NRIs to invest in PPF was proposed in the finance bill 2018 but has not yet been approved. In October 2017, a notification was passed by the Ministry of finance regarding an amendment to the PPF scheme of 1968, which would deem a PPF account closed from the day a person became a non-resident. This led to much confusion. Subsequently, the ministry issued an office memorandum in February 2018 keeping the above notification in abeyance till any further order in this regard, thus bringing the situation to the same stance as earlier. A minimum yearly deposit of ₹500 is required to open and maintain a PPF account. A PPF account holder can deposit a maximum of ₹1.5 LACS in his/her PPF account (including those accounts where he is the guardian) per financial year. There must be a guardian for PPF accounts opened in the name of minor children. Parents can act as guardians in such PPF accounts of minor children. Any amount deposited more than ₹1.5 LAKHS in a financial year 92 CU IDOL SELF LEARNING MATERIAL (SLM)
will not earn any interest. The amount can be deposited in lump sum or in instalments per year. However, this does not mean a single deposit once in a month. The Ministry of Finance, Government of India announces the rate of interest for PPF account every quarter. The interest rate compounded annually and paid on 31 March every year. Interest is calculated on the lowest balance between the close of the fifth day and the last day of every month. The Public Provident Fund (Amendment) Scheme, 2016 made changes in Paragraph 9, for sub-rule 3(C) of Public Provident Fund Scheme, 1968 to facilitate the premature closure of PPF Account. Premature closure of PPF account is permitted after completion of 5 years for medical treatment of family members and for higher education of PPF account holder. However, premature closure comes with an interest rate penalty of 1%. As per GOI 12 December 2019 NOTIFICATIONS some new rules for prematurely withdraw added 1. If change in residency must produce Visa and passport or ITR may be closed the account.2. Higher education of self or dependent on producing fee Bills or admissions confirm letter account may shut rest rules are same as demise of holder or medical condition of self or dependent. Statutory Provident Fund (SPF): It is regulated by the provident funds act 1925. It applies to employees of government, semi-government organisations, local bodies, universities and recognised educational institutions. Recognised Provident Fund (RPF): A recognised provided fund is governed by the provident fund act 1952. It recognised by the chief commissioner of income tax. This fund maintained by scheduled banks, factories, and several business houses. So, this is private sector undertaking provident fund. Unrecognised Provident Fund (URPF): It is neither statutory nor recognised provided fund. Any institution or organisation can maintain this fund. It is recognised by the P.F. commissioner not by the commissioner of income tax. This type of fund maintained by the private sector organisations. Public Provident Fund (PPF): It is operated under public provided fund act 1968. This type of fund is open to everyone, so it is suitable to self-employed people. Under this scheme, an account operated in State Bank of India and Subsidiary groups or at a branch of any 13 nationalised banks authorised for this purpose by the central government. The amount along with interest is to be payable after 15 years of contribution is made. 5.2.5 Perquisites Exempted from Tax for All Employees It is any casual emolument, fee, or profit attached to an office or position in advantage and benefits a person by going ‘into his pocket’. It may be granted to an employee, whether 93 CU IDOL SELF LEARNING MATERIAL (SLM)
present, past, or future as a substitute for his regular remuneration or in addition to it. It may be given voluntarily or under some contract in the form of cash or in kind. Free medical facilities or reimbursement of medical expenditure for self, family members and dependents. If treatment was taken from the hospital is maintained by the employer. If treatment was taken from the hospital which is maintained by the central, state, or local authority or a hospital approved by the government for purpose of medical treatment of its employee If treatment taken in respect of prescribed diseases or ailments specified in Rule 3A, in any hospital approved by CCTI In case of treatment taken from a private or unrecognised hospital, the benefit is exempted from tax upto Rs.15000 p.a. In case employer under a scheme approved by the Central Govt. pays medical insurance premium of employees In case any health insurance premium is paid by the employer to General Insurance Corporation under notified schemeto insure the health of its employees and members of their families. In case of treatment is taken outside India. Free refreshment during working hours Free recreational facilities Provision of telephone whether basic or cellular if exclusive for official work Free meals provided in remote area or at offshore installation Free education, training, or refresher course for employees Goods sold at concessional rates Free ration received by members of armed forces Perquisites allowed by Govt. to its employees posted aboard\\ Rent free house provided to an officer of parliament, a union minister and leader of opposition in parliament Conveyance facilities to judges of supreme court and high court Free conveyance provided by the employer to employee for going to or coming from place of employment Any amount contributed by employer towards pension or deferred annuity scheme. 94 CU IDOL SELF LEARNING MATERIAL (SLM)
Employer’s contribution to staff group insurance scheme Computers, laptops given to (not transferred) an employee to official/personal use. Transfer of a moveable asset (computer, car, or electronic items) which are more than 10 years old without consideration. Accident insurance premium paid by employer for his own benefits Interest free loan or loan at concessional rate of interest taken by employee from employer if amount of loan does not exceed Rs. 20000 or loan is taken for medical treatment Value of any shares or debentures given free of cost or at concessional rate to employees understock option scheme approved by Central Govt. 5.2.6 Perquisites Taxable for all employees Perquisites are fringe benefits that are received over and above an employee’s salary. These fringe benefits or perquisites can be taxable or non-taxable depending upon their nature. There are several benefits which come in addition to an individual’s salary and are grouped under fringe benefits or perks. These components are taxed separately from the employer’s account to maintain transparency and accountability. Amenities that are made available to employees by the company are included in perquisites and are subject to taxation as per the rules and conditions as prescribed. Here we have talked about what exactly are perquisites in salary, its types, benefits, example, calculation and taxation. Perquisite is defined as a privileged gain or profit incidental to regular salary. Perquisites are both taxable and exempt. Perquisites can be simple as company car, fuel reimbursement etc. or may also include interest-free loan, medical facilities, credit cards, accommodation sponsored by the company, etc. Value of Unfurnished House: In case of transfer of an employee from one place to another and he is allowed to maintain two accommodations at two places, for a period not exceeding 90 days, the value of one accommodation with lower value shall be taxable. But if the period is exceeding 90 days the value of both the accommodation shall become taxable with effect from the day 90 days are over. Nature of accommodation: Owned by employer/Hired or leased by employer Meaning of Salary for rent free house: Pay + DASB + Fee + Commission of all types + Statutory Bonus + All Fully Allowances except D.A. which does not enter + Taxable portion of all other allowances + Salary in lieu of leaves only if it relates to encashment of current years leave. 95 CU IDOL SELF LEARNING MATERIAL (SLM)
It shall not include DA (which does not enter), arrears, advance salary, provident fund excess, gratuitous bonus, value of other perks and profits in lieu of salary. In case salary is received from more than one employer, salary from all employers is to be taken. Owned by the Employer Govt. Employees: The value of house is rent fixed (license fee) by the govt. for such house. It can be rent charged by Govt. from another employee of same status for similar type of house. Other Employees: Value of house is calculated in the following manner. 5.2.7 Perquisites Taxable for Specified Employees only For perquisites taxable in the hands of the employee for the purposes of taxation, the employee is the “assessee”. As a rule, the taxable value of perquisites in the hands of the employees is its cost to the employer. However, specific rules for valuation of certain perquisites have been laid down in Rule 3 of the Income-tax Rules. These have been revised by Central Board of Direct Taxes Notification No. 68/2005 dated 28.2.2005. Furthermore, Finance Act 2007 has provided clarifications regarding the valuation of rent free and concessional accommodation. The clarifications provide what constitutes concession in the matter of rent. The revised provisions are briefly given below: Where unfurnished accommodation is provided by the Central Government or any State Government, the value of the perquisite is the license fee determined by the Central Government or any State Government in respect of the accommodation in accordance with the rules framed by such Government, as reduced by the rent actually paid by the employee. 2) Where furnished accommodation is provided by the Central Government or any State Government, concession in the matter of rent is deemed to have been provided, with effect from 1st April 2002. Therefore, the provisions apply in relation to the assessment year 2002- 2003 and subsequent years. In this case, the concession is deemed to have been provided if the license fee determined by the Central Government or any State Government in respect of the accommodation in accordance with the rules framed by such Government, as increased by the value of furniture and fixtures in respect of the period during which the said accommodation was occupied by the employee as reduced by the rent actually paid by the employee, exceeds the aggregate of rent recoverable from or payable by the employee and any charges paid or payable for the furniture and fixtures by the employee. In the case of furnished accommodation provided by the Central Government or any State Government, the value of the perquisite of the accommodation alone is the same as that of the unfurnished accommodation provided by the Central Government or any State Government as given above. In addition, the value of furniture and fixture is taken to be 10% per annum of the cost of furniture (including television sets, radio sets, refrigerators, other household appliances, airconditioning plant or equipment or other similar appliances or gadgets) or if such furniture 96 CU IDOL SELF LEARNING MATERIAL (SLM)
is hired from a third party, the actual hire charges payable for the same as reduced by any charges paid or payable by the employee. In a case where the accommodation is owned by the employer, value of the perquisite of the concessional accommodation in such a case is determined at the rate of 10% of salary in cities having population exceeding four LAKHS as per 1991 census and 7.5% of salary in other cities, in respect of the period during which the said accommodation was occupied by the employee, as reduced by the rent, if any, payable by the employee. However, i.e., 1-4- 2005, the value of the perquisite of the concessional accommodation in such a case would be determined at the rate of 20% of salary in cities having population exceeding 4 LAKHS as per 2001 census and 15% of salary in other cities, in respect of the period during which the said accommodation was occupied by the employee, as reduced by the rent, if any, payable by the employee. In a case where the accommodation is taken on lease or rent by the employer, the value of the perquisite of the concessional accommodation in such a case is the actual amount of lease rental paid or payable by the employer or 10% of salary, whichever is lower, in respect of the period during which the said accommodation was occupied by the employee, as reduced by the rent, if any, payable by the employee. In a case where the accommodation is owned by the employer, with effect from 1st April 2006, concession in the matter of rent is deemed to have been provided if the value of the accommodation determined at the specified rate in respect of the period during which the said accommodation was occupied by the employee, exceeds the rent recoverable from, or payable by the employee. The provisions apply in relation to the assessment year 2006-2007 (previous year 2005-2006) and subsequent years. The specified rate and value of the perquisite of the concessional accommodation in such a case is determined at the rate of 15% of salary in cities having population exceeding 25 LAKHS as per 2001 census, 10% of salary in cities having population exceeding 10 LAKHS but not exceeding 25 LAKHS as per 2001 census, and 7.5% of salary in other areas in respect of the period during which the said accommodation was occupied by the employee, as reduced by the rent, if any, actually paid by the employee. In a case where the accommodation is taken on lease or rent by the employer, with effect from 1st April, 2006, concession in the matter of rent is deemed to have been provided if the value of the accommodation being the actual amount of lease rental paid or payable by the employer or 15% of salary, whichever is lower, in respect of the period during which the said accommodation was occupied by the employee, exceeds the rent recoverable from, or payable by the employee. The value of the perquisite of the concessional accommodation in such a case is the actual amount of lease rental paid or payable by the employer or 15% of salary, whichever is lower, in respect of the period during which the said accommodation was occupied by the employee, as reduced by the rent, if any, actually paid by the employee. In a case where the accommodation is owned by the employer, the concession is deemed to have been provided if the valuation of the employer-owned accommodation alone as 97 CU IDOL SELF LEARNING MATERIAL (SLM)
determined above, as increased by the value of furniture and fixtures in respect of the period during which the said accommodation was occupied by the employee, exceeds the aggregate of rent actually paid by the employee and any charges payable for the furniture and fixtures by the employee. In a case where the accommodation is taken on lease or rent by the employer, the concession is deemed to have been provided if the valuation of the leased or rented accommodation alone as determined above, as increased by the value of furniture and fixtures in respect of the period during which the said accommodation was occupied by the employee, exceeds the aggregate of rent actually paid by the employee and any charges payable for the furniture and fixtures by the employee. In the case of furnished accommodation provided by any employer other than the Central Government or any State Government the value of the perquisite of the accommodation alone is the same as that of the unfurnished accommodation provided by any employer other than the Central Government or any State Government as given above for the two cases of employer owned and leased or rented accommodations, respectively. In addition, the value of furniture and fixture is taken to be 10% per annum of the cost of furniture or if such furniture is hired from a third party, the actual hire charges payable for the same as reduced by any charges paid or payable by the employee. The provisions apply in relation to the assessment year 2002-2003 and subsequent years. The concession is deemed to have been provided if the value of the accommodation determined at the rate of 24% of salary paid or payable or actual charges paid or payable to such hotel, whichever is lower, for the period during which such accommodation is provided, exceeds the rent recoverable from or payable by the employee. The value of the accommodation is determined at the rate of 24% of salary paid or payable or actual charges paid or payable to such hotel, whichever is lower, for the period during which such accommodation is provided, as reduced by the rent, if any, actually paid or payable by the employee. An exception is made where the employee is provided such accommodation for a period not exceeding 15 days on his transfer from one place to another Where on account of his transfer from one place to another, the employee is provided with accommodation at the new place of posting while retaining the accommodation at the other place, the value of perquisite is determined with reference to only one such accommodation which has the lower value for a period not exceeding 90 days and thereafter the value of perquisite shall be charged for both such accommodations. The value of the benefit to the employee or any member of his household resulting from the provision by the employer of the services of a sweeper, a gardener, a watchman or a personal attendant is the actual cost to the employer. The actual cost is the total amount of salary paid or payable by the employer, or any other person on his behalf for such services, as reduced by any amount paid by the employee for such services. The value of the benefit to the employee resulting from the supply of gas, electric energy or water for his household consumption is the sum equal to the amount paid on that account by 98 CU IDOL SELF LEARNING MATERIAL (SLM)
the employer to the supplying agency. Where the supply is made from the resources owned by the employer, without purchasing them from any other outside agency, the value of the perquisite is the manufacturing cost per unit incurred by the employer. Where the employee is paying any amount in respect of such services, the amount so paid is deducted from the value of the perquisite arrived at The value of the benefit to the employee resulting from the provision of free or concessional educational facilities for any member of his household is the sum equal to the amount of expenditure incurred by the employer in that behalf. In the case where the educational institution is itself maintained or owned by the employer, or where free educational facilities for such member of employees’ household are allowed in any other educational institution by reason of his being in employment of that employer, the value of the perquisite is determined with reference to the cost of such education in a similar institution in or near the locality (however, in this case this sub-rule does not apply if the cost of such education or the value of such benefit per child does not exceed Rs. 1,000 per month). Where any amount is paid or recovered from the employee on that account, the value of benefit is reduced by the amount so paid or recovered. The value of the benefit to the assessee resulting from the provision of interest-free or concessional loan for any purpose made available to the employee or any member of his household by the employer or any person on his behalf is determined as the sum equal to the interest computed at the rate charged per annum by the State Bank of India, as on the 1st day of the relevant previous year in respect of loans for the same purpose advanced by it, on the maximum outstanding monthly balance as reduced by the interest, if any, actually paid by the employee or any such member of his household. However, an exception is made if such loans are made available for medical treatment in respect of diseases specified in Rule 3A of the Income Tax Rules or where the amount of loans are petty not exceeding in the aggregate Rs. 20,000. Where the benefit relates to the loans made available for medical treatment referred to above, the exemption so provided is reduced by any amount that has been reimbursed to the employee under any medical insurance scheme. The value of benefit to the employee resulting from the use by the employee or any member of his household of any movable asset (other than assets like furniture, televisions, etc., in furnished accommodation already specified in Rule 3 and other than laptops and computers) belonging to the employer or hired by him is determined at 10% per annum of the actual cost of such asset or the amount of rent or charge paid or payable by the employer, as the case may be, as reduced by the amount, if any, paid or recovered from the employee for such use. The value of benefit to the employee arising from the transfer of any movable asset belonging to the employer directly or indirectly to the employee or any member of his household is the amount representing the actual cost of such asset to the employer as reduced by the cost of normal wear and tear and as further reduced by the amount, if any, paid or recovered from the 99 CU IDOL SELF LEARNING MATERIAL (SLM)
employee as consideration for such transfer. The cost of normal wear and tear is calculated at the rate of 10% of such cost for each completed year during which such asset was use by the Any benefit or amenity in free or subsidised transport or any such allowance provided by the employer to his employees for journeys by the employees from their residence to the place of work or such place of work to the place of residence shall not form a part of fringe benefits for levy of Fringe Benefit Tax. The provision takes effect from 1st April 2007 and applies in relation to the assessment year 2007-2008 and subsequent years. It has been clarified that where fringe benefit has been paid by the employer and subsequently recovered from the employee, the recovery of fringe benefit tax shall be deemed to be the tax paid by such employee in relation to value of fringe benefits provided to him. The deeming provision shall apply only to the extent to which the amount of recovery relates to the value of the fringe benefits provided to such employee. Further it is provided that, notwithstanding anything contained in the Income Tax Act, in the above situation, the employee shall not be entitled for any refund out of such deemed payment of tax; and shall also not be entitled to claim any credit of such deemed payment of tax against tax liability on other income or against any other tax liability. The provision takes effect from 1st April 2008 and applies in relation to the assessment year 2008-2009 and subsequent years. 5.3 CALCULATION It is essential to gather all the details required to file your Income Tax Returns before computing your taxable income on salary. You will then have to calculate your total taxable income, followed by the calculation of final tax refundable or payable. To calculate the final tax, you will have to use the applicable tax rates before subtracting taxes already paid through advance tax or TCS/TDS from the tax amount due. The income tax regulations allow individuals to derive income from five sources, viz. Income from Salary, Income from Business or Property, Income from Capital Gains, Income from House Property, and Income from Other Sources. Each income derived by an individual must fall under one of the categories. Following is the procedure for the calculation of taxable income on salary: Gather your salary slips along with Form 16 for the current fiscal year and add every emolument such as basic salary, HRA, TA, DA, DA on TA, and other reimbursements and allowances that are mentioned in your Form 16 (Part B) and salary slips. The bonus received during the financial year must be added for the income that is being calculated. The total is your gross salary, from which you will have to deduct the exempted portion of House Rent Allowance, Transport Allowance (for which the maximum 100 CU IDOL SELF LEARNING MATERIAL (SLM)
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