Challenge Pathway -Prep Book

["General Accounting Principles Around the Globe Two main accounting standards guide just about all territories: The U.S. supports a standard known as Generally Accepted Accounting Principles (GAAP). Most of the rest of the world follows a similar standard, although we should point out that some nations do not require either a global or specific national standard. The non-GAAP accounting standard is supported by the International Financial Reporting Standards organization (IFRS). IFRS standards are designed to promote transparency, accountability, and economic efficiency, and are permitted or required by at least 125 jurisdictions. Both the GAAP and IFRS standards have many components, and a financial planner need not be fully conversant with all standards. To help you get a sense of the breadth of standards, we provide the following listing of a few IFRS standards. \uf0b7 Conceptual framework for financial reporting \uf0b7 First-time adoption of international financial reporting standards \uf0b7 Business combinations \uf0b7 Insurance contracts \uf0b7 Financial instruments: Disclosures \uf0b7 Operating segments \uf0b7 Consolidated financial statements \uf0b7 Fair value measurement \uf0b7 Leases International College of Financial Planning \u2013 Challenge Pathway Prep Book Page 397","Many individuals decide to move beyond sole ownership and join together in a partnership arrangement. \uf0b7 Partnerships allow businesses to increase capitalization, because more than one individual can contribute money. \uf0b7 Simple partnership arrangements are not too dissimilar to sole ownership structures. \uf0b7 Profits and losses are passed directly to each partner, usually in equal shares. When a business wants to raise additional funds and limit individual liability, it may be organized as a joint stock company. The organization will sell shares of stock of different values and have a board of directors that manages the organization. There are two primary types of joint stock companies 1. Private Limited - These companies usually are formed by two or more people. Shares are held by members and sales are not open to the general public. Public limited. Private limited: 2. Public Limited - These companies extend ownership opportunities to the general public. International College of Financial Planning \u2013 Challenge Pathway Prep Book Page 398","TAXATION Income Tax Tax payable by an individual, a person, a corporate on the earned income during the specific year. Direct taxes are within the purview of the Central Government. Sales tax, excise duty, land revenue, entertainment tax and others are within the purview of the State Governments. Union excise duties and income tax levied by the Central Government and proceeds shared with State Governments. Direct Tax: Imposed on the taxpayer directly and paid to the central government. \uf0b7 Income Tax, Capital Gains Tax, Securities Transaction Tax, Fringe Benefit Tax, Corporate Tax Indirect Tax: Paid on consumption by the consumer; included in prices of goods and services purchased. \uf0b7 Taxes merged into Goods & Services Tax (GST) with effect from July 1, 2017: \uf0b7 Excise duty, Custom Duty, Service Tax, Surcharge and Cess , VAT\/Sales Tax Central Board of Direct Taxes (CBDT) \uf0b7 Statutory authority working under the Central Board of Revenue Act, 1963. \uf0b7 Part of Department of Revenue under the Ministry of Finance. \uf0b7 Directed by a Chairman and six members, who are ex-officio Special Secretary to the Indian Government. \uf0b7 Functions of CBDT \uf0b7 To provide inputs for policy and planning of direct taxes in India \uf0b7 Administration of direct tax laws through the Income Tax Department. \uf0b7 Other areas of work include general policy relating to: o Collection of taxes International College of Financial Planning \u2013 Challenge Pathway Prep Book Page 399","o Measures for disposal of assessments o Prevention and finding of tax evasion and tax avoidance o Setting targets and fixing of priorities for disposal of assessments Income Tax Act, 1961 o Charging statute of income tax o Provides for levy, collection, administration and recovery of income tax in India. o The Income Tax Act comprises of 23 Chapters, 298 Sections and XIV Schedules o These changes according to the additions and deletions proposed by the Finance Act every year. o Schedules are annexures added over the years to include scenarios not previously covered Income Tax Rules, 1962: o CBDT has the onus to efficiently implement working of the direct taxes in the country. o Central Board of Revenue frames standard rules for effective achievement of the purpose of the Income Tax Act Annual Finance Act: o A budget is presented in the Indian Parliament every year, by way of a Bill. o Contains proposed policies and amendments related to commercial areas & taxation. o Once approved by Parliament and President of India, the Bill is converted into Finance Act. o All the financial policies of the Government, new and the existing, for the year are included in this Act. o Central Government gives effect to financial proposals at the start of each Financial Year through this Act. Judicial (Case Laws): o Provide decisions on issues which come up at the time of implementation of the Income Tax Act. o Critical to study the judicial laws for a complete understanding of the Income Tax Laws. International College of Financial Planning \u2013 Challenge Pathway Prep Book Page 400","o Decisions taken by the Hon\u2019ble courts in matters related to tax are to be followed. Central Board of Indirect Taxes and Customs (CBIC) \uf0b7 Formerly known as the Central Board of Excise and Customs (CBEC) \uf0b7 Boards established under the statute the Central Boards of Revenue Act, 1963 \uf0b7 Assistant to the Department of Revenue under Ministry of Finance. \uf0b7 Mainly deals with: o policy formulation regarding levy and collection of Custom duties, Central Excise duties and Goods & Services tax, o prevention of smuggling and administration of matters relating to Customs, Central Excise, Central Goods and Service Tax (CGST) and Narcotics Need for GST Law \uf0b7 Proposed to be a dual levy where: o Union Government will levy and collect tax in the form of central GST o State Government will levy and collect tax in the form of state GST on intra-State supply of goods or services or both. \uf0b7 To simplify and harmonize the indirect tax regime. \uf0b7 Reduce cost of production and inflation in the economy. \uf0b7 Smooth transfer of input tax credit from one stage to another. \uf0b7 Broaden the tax base. Salient Features of CGST Act \uf0b7 Comprehensive indirect tax levy on supply of Goods and Services. \uf0b7 Subsumes various indirect tax levies in India. \uf0b7 Increases tax base by minimising exemptions provided by Government. \uf0b7 Ensures free flow of goods across the country. International College of Financial Planning \u2013 Challenge Pathway Prep Book Page 401","Features of Income Tax Act Assessment year (Section 2(9)) \uf0b7 The period of 12 months commencing on the first day of April every year. \uf0b7 Assessment year 2020-2021 commenced on 01-04-2020 and will end on 31-03-2021. \uf0b7 Assessment year is always of a 12 months duration. \uf0b7 Income tax levied in assessment year w.r.t. total income earned in previous year. Previous year (Section 3) \uf0b7 Financial year immediately preceding the assessment year. \uf0b7 Income is earned in the previous year & taxed in the assessment year. \uf0b7 Previous year for assessment year 2020-2021 will be 2019-2020. \uf0b7 All assessees are required to follow the financial year (April 1 to March 31) as the previous year. \uf0b7 Previous year may or may not be of 12 months. \uf0b7 In case of a newly set up business, the previous year begins from the date of setting up of a new business or from the date the new sources came into existence till March 31 of the year. Assessee (Section 2(7)) \uf0b7 Person by whom any tax, or any sum of money, is payable under the Act. \uf0b7 He is liable to pay tax to government against income earned in previous year. \uf0b7 The definition of assessee includes: \uf0b7 Every person in respect of whom any proceeding under the IT Act,1961 \uf0a7 has been taken for the assessment of his income or \uf0a7 the income of any other person in respect of which he is assessable, or \uf0a7 the loss sustained by him or by such other person, or \uf0a7 the amount of refund due to him or to such other person; Person (Section 2(31)) Page 402 The definition of a \u2018Person\u2019 is inclusive and not exhaustive; it includes: o An individual o A Hindu Undivided Family (HUF) International College of Financial Planning \u2013 Challenge Pathway Prep Book","o A Company o A Firm o An Association of Person (AOP) or a Body of Individuals (BOI) o A local authority o Every artificial juridical person not falling within any of the preceding sub clauses Difference between Association of Person and Body of Individuals S. No. Association of Person Body of Individuals 1. Any person can be a member Only individuals can be member There is common will and desire among the Under this common will and desire is lacking 2. member They voluntarily join together to carry on the It is formed by operation of law 3. activities. 4. Example: X, ABC LTD. and PQ & CO. (A firm) join Example: X, Y and Z join together for a particular together for a particular venture. venture but do not constitute a firm. Income: Any sum of money received on account of sale of goods or services\/capital investment. It includes: o Profits and gains o Dividend o Voluntary Contributions received by a trust o The value of any perquisite or profit in lieu of salary taxable o Any special allowance or benefit o Value of any benefit or amenity, whether convertible into money or not o The value of benefits\/perquisites obtained from a company o Any sum chargeable to income-tax o Any capital gains taxable o Winnings from lotteries, crossword puzzles, prizes, races including horse races, card games, games of any sort, gambling or betting International College of Financial Planning \u2013 Challenge Pathway Prep Book Page 403","o Gifts received exceeding Rs. 50,000 Broad Principles that categorize \u2018Income\u2019 \uf0b7 Accrual of Income o Income accrued in India is taxable in all instances. \uf0b7 Receipt of Income o Income received in India is taxable in all cases. \uf0b7 Receipt vs. Accrual o Income not taxable on receipt basis might be taxable on accrual basis. \uf0b7 Actual vs. Deemed receipt o An income deemed to be received in India in the previous year is also taxable. \uf0b7 Receipt vs. Remittance o Receipt denotes first instance when recipient gets money. o Remittance of that amount does not result in \\\"receipt\\\" at the other place. \uf0b7 Cash vs. Kind o Incomes received in cash or kind, are taxed as per the provisions. Capital Receipt: Incomes derived from activities not part of normal activities of the business. Receipts generated from investment and financing activities of the business. Examples: cash from sale of fixed assets, loans, disinvestments, insurance claims etc. Revenue Receipt: Receipts related to normal activities of business. Income generated from operating and sales activities of business. Examples: receipts from sale of goods\/services, interests earned, rent received, discount received from creditors or suppliers, dividends received, commission received, recovery of bad-debts, income from other sources, etc Taxability : Tax is levied only on income of assessee and not on his every receipt. Different methods are used for charging tax on different types of receipt. All revenue receipts are taxable unless one is specifically exempted. All capital receipts are exempt from taxation unless there is a provision to tax it. International College of Financial Planning \u2013 Challenge Pathway Prep Book Page 404","The basic scheme of income tax is to tax the income and not the capital. Loans and gifts are kind of capital receipts which are tax-free. Residential status of an individual and other taxable entities An individual and a Hindu Undivided Family (HUF) can either be: \uf0b7 Resident and ordinarily resident, or \uf0b7 Resident but not ordinarily resident, or \uf0b7 Non-resident in India Basic rules for determining residential status: \uf0b7 Determined for each category of persons separately. \uf0b7 Always determined for the previous year. \uf0b7 An assessee may have different residential status for different assessment years. \uf0b7 A person may be a resident of more than one country for any previous year. \uf0b7 Citizenship of a country and residential status of that country are two different concepts. Incidence of tax depends on: \uf0b7 the residential status of the taxpayer, \uf0b7 place and time of accrual, or \uf0b7 receipt of his income. \uf0b7 Foreign income is taxable for a resident and not taxable for a non-resident. \uf0b7 A resident is taxed in India on his global income i.e. income earned in India as well as income earned outside India. Individuals \u2013 Not-resident in India (NRI) Person who is not a resident of India is a Non-resident. Contains detailed criteria of who is considered as Resident in India. Anyone who does not meet criteria as per Section 6 of the Act is a Non-Resident. An individual is a non-resident if he does not satisfy any of the basic conditions. International College of Financial Planning \u2013 Challenge Pathway Prep Book Page 405","New rules to determine residential status of NRIs as per Finance Bill 2020 In February 2020, the Finance Bill 2020 proposed to reduce the period of 182 to 120 days for all NRIs. The reduced period of 120 days shall apply, only in cases where the total Indian income (i.e. income accruing in India) of such visiting individuals during the financial year is more than Rs. 15 lakh. Such an individual further needs to check whether his stay in India is 365 days or more in the immediately preceding 4 years. Till the end of FY 2019-20, NRIs included those individuals who visited India for less than 182 days in a financial year. Residential Status of a Foreign Company A company is said to be a resident if: It is an Indian company, or During the year, the control and management of its affairs is situated wholly in India or, An Indian company is always resident in India. A foreign company is resident in India only if control & management is situated wholly in India. From AY 2018-19 a foreign company will be resident if its place of effective management (POEM) is in India. POEM means a place where key management and commercial decisions are made. Residential Status of Hindu Undivided Family (HUF) HUF is resident in India when control and management of its affairs is wholly situated in India. \u2018Control and management\u2019 lies where the Head\/the seat are situated and decisions regarding affairs of the HUF are taken. The HUF shall be said to be resident if its Karta is resident. Also the conditions to be fulfilled by the Karta are the same as those of an individual to qualify Residential Status of \u2018any other person\u2019 Residential Status of a Firm and Association of Person Resident in India if control and management of their affairs are wholly or partly situated within India. Non-resident in India if control and management of their affairs are situated wholly outside India. The residential status of the partners \/ members of the firm \/ association is not relevant in determining the status of the firm \/ association. International College of Financial Planning \u2013 Challenge Pathway Prep Book Page 406","The control and management \uf0b7 Vested in partners in case of the firm, \uf0b7 In case of an AOP is vested in its principal officer. Income \u2018received\u2019 vs. \u2018accrue\u2019 or \u2018arise\u2019 in India Income is said to be \u2018received\u2019 when it reaches the assessee. Income is said to \u2018accrue\u2019 or \u2018arise\u2019 when the right to receive the income becomes vested in the assessee. The receipt of income refers to the first occasion when the recipient gets the money. Once amount is received, any remittance of amount to another place does not result in receipt. Income accrued in India is chargeable to tax in all cases irrespective of residential status of an assessee. Income deemed to accrue or arise in India Section 9, Income Tax Act, 1961, specifies following incomes as deemed to accrue or arise in India. o Income from a Business Connection in India o Income from any Property, Asset or Source of Income situated in India o Income from the Transfer of any Capital Asset situated in India o Any income which falls under the head 'Salaries' if it is earned in India o Income by way of Salary Payable by the Government to an Indian citizen\/national for services rendered outside India. Various heads of salary and their taxability As per Section 15, Salary is: any salary due from an employer whether actually paid or not; any salary paid or allowed by an employer though not due or before it became due; and any arrears of salary paid by an employer, if not charged to tax earlier. International College of Financial Planning \u2013 Challenge Pathway Prep Book Page 407","Allowances are added to the salary and taxed under the head \u2018Income from Salaries\u2019. Each salary allowance is given to meet the expenditure of a particular nature. Allowances: Monetary benefit from employer for meeting expenses, over basic salary. They can be bifurcated into three broad categories, namely: 1. Taxable, 2. Non-taxable, and partly taxable allowances Perquisites are casual emoluments or benefits attached to an office or position, in addition to salary or wages, may be provided in cash or in kind. Perquisites are taxable under the head \u201cSalaries\u201d only if they are: \uf0b7 Allowed by an employer (former, present or prospective) to his employee; \uf0b7 Allowed during the continuance of employment; \uf0b7 Directly dependent upon service; \uf0b7 Resulting in the nature of personal advantage to the employee; and \uf0b7 Derived by virtue of employer\u2019s authority. Profits in lieu of salary As per Section 17(3) Profits in lieu of salary include: \uf0b7 Compensation due\/received from employer in connection with termination of employment. International College of Financial Planning \u2013 Challenge Pathway Prep Book Page 408","\uf0b7 Compensation due\/received from employer in connection with modification of the terms and conditions of employment. \uf0b7 Payment due\/received from employer from a provident fund (only employer\u2019s contributions or interest on such contributions). \uf0b7 Sum received under a Keyman Insurance policy. \uf0b7 Any amount, received from any person - o before joining employment with that person, or o after cessation of his employment with that person. \uf0b7 Any other sum received by the employee from the employer. Wages \uf0b7 Not different from salary \uf0b7 Associated with employee compensation \uf0b7 Based on the number of hours worked multiplied by an hourly rate of pay a wage earner is paid Fees and Commission \uf0b7 Fees or commission paid by the employer are part of salary \uf0b7 Fully taxable \uf0b7 Commission may be paid as a fixed percentage of turnover or net profits etc. Gratuity: Page 409 \uf0b7 Monetary benefit given by the employer \uf0b7 Not paid as part of the regular monthly salary \uf0b7 Provisions governed by the Payment of Gratuity Act, 1972 \uf0b7 Mandatory for employee to have completed 5 years in service \uf0b7 Time limit shall not apply in the case of death or disablement \uf0b7 Not given to interns, temporary employees \uf0b7 Given to contract employees who serve 5 years at a stretch. \uf0b7 Gratuity is given on the occurrence of: International College of Financial Planning \u2013 Challenge Pathway Prep Book","o Superannuation (employee who attains age of retirement) o Retirement or resignation o Death or disablement due to accident or disease \uf0b7 Payable to the employee himself \uf0b7 In case of death of employee, paid to his nominee\/heirs \uf0b7 If nominee is a minor, share of minor to be deposited with controlling authority \uf0b7 Forfeited for any act of willful omission\/negligence causing damage to employer\u2019s property Calculating Gratuity A. For Employees covered under the Payment of Gratuity Act, 1972 \uf0b7 Gratuity = Last drawn salary x 15\/26 x No. of years of service \uf0b7 Last drawn salary = monthly basic salary + dearness allowance. \uf0b7 The service period is rounded off to the nearest full year. B. For Employees NOT covered under the Payment of Gratuity Act, 1972 \uf0b7 Gratuity = Last drawn salary x 15\/30 x No. of years of service \uf0b7 Last drawn salary = average of last ten months\u2019 salary (basic + dearness allowance + commission as a percentage of turnover). \uf0b7 While calculating completed years, any fraction of the year is ignored. Taxation of Gratuity [Sec.10(10)] Death-cum-retirement gratuity received by Govt. employees, defense employees and employees in local authority is fully exempt from tax. \uf0b7 Gratuity received by persons covered under the Payment of Gratuity Act, 1972, is exempt from tax on the following basis: 1 Actual gratuity received ______ 2 Last month salary \u00d7 15\/26 \u00d7 total service period ______ 3 Maximum, as specified 20,00,000 \uf0b7 The least of the above three is exempt from tax. Page 410 International College of Financial Planning \u2013 Challenge Pathway Prep Book","\uf0b7 Gratuity in excess of the aforesaid limits is taxable for assessee. For any other employee, gratuity is exempt from tax on following basis: 1 Actual gratuity received ______ Average salary \u00d7 15\/30 \u00d7 total service ______ 2 period 3 Maximum, as specified 20,00,000 \uf0b7 The least of the above three is exempt from tax. \uf0b7 Gratuity in excess of the aforesaid limits is taxable for assessee. Annuity: o Annuity received from a present employer is taxed as salary. o Annuity received from a past employer is taxable as profit in lieu of salary. o Annuity received from any person other than an employer is taxable as \u201cIncome from other sources\u201d. Uncommuted Pension When the employee or his relative takes the pension on regular or monthly basis then it is known as uncommuted pension. o pension received periodically o is fully taxable for both government and non-government employees. Commuted pension When the sum of amount receivable by the beneficiary is withdrawn in whole instead of regular payments, then it is known as commuted pension. \uf0b7 For government-employees\/local authorities\/Statutory Corporation is fully exempt from tax. \uf0b7 For non-government employees commuted pension is taxed in the following manner: o For employee receiving gratuity, exemption = 1\/3 of the amount of pension which he would have received had he commuted the whole of the pension. International College of Financial Planning \u2013 Challenge Pathway Prep Book Page 411","o For employee not receiving gratuity, exemption = \u00bd of the amount of pension which he would have received had he commuted the whole of the pension. Leave Encashment Leaves in credit, at the time of retirement or leaving the job, are calculated as below: \uf0b7 Step (a) - Find number of years of service (ignore any fraction of year). \uf0b7 Step (b) - Find number of days leave credited for each year of service (cannot exceed 30 days for every year of service). \uf0b7 Step (c) - Find earned leave actually taken or encashed during the service. \uf0b7 Number of Leave Balance (days) = [[Step (a) X Step (b)] minus Step (c)] \uf0b7 Number of Leave Balance (months) = [[Step (a) X Step (b)] minus Step (c)]\/30 Balance in recognized Provident Fund \uf0b7 Credit balance in a provident fund consists of the following: o Employee\u2019s contribution o Interest on employee\u2019s contribution o Employer\u2019s contribution o Interest on employer\u2019s contribution. \uf0b7 Accumulated balance paid to the employee at the time of his retirement or resignation \uf0b7 Considered part of Salary income \uf0b7 Paid to legal heirs in case of employee\u2019s death National Pension System (NPS) \uf0b7 Voluntary, defined contribution retirement savings scheme, \uf0b7 Mandatory for persons entering the Government service on or after January 1, 2004, \uf0b7 Contribute 10% of their salary, every month, towards NPS, o \\\"Salary\\\" includes basic and dearness allowance, o employer also needs to make matching contribution, o employer\u2019s contribution is first included under the head \\\"Salaries\\\", International College of Financial Planning \u2013 Challenge Pathway Prep Book Page 412","o then deductible (to the extent of 10% of the salary of the employee), \uf0b7 No ceiling for contribution by the employer for employee\u2019s NPS account \uf0b7 Maximum deduction allowed under Section 80CCD (2) is 10% of employee\u2019s salary. Employee\u2019s Provident Fund (EPF) \uf0b7 Government-managed retirement savings scheme, available to all salaried employees, \uf0b7 Maintained by the Employees Provident Fund Organization (EPFO), o any company with over 20 employees is required to register with the EPFO. \uf0b7 Employee and employer both contribute *12% of the basic salary + dearness allowance o (*10% for establishments employing less than 20 people). o employee\u2019s contribution (12%) & employer\u2019s contribution (3.67%) goes to EPF account, o balance 8.33% of employer\u2019s side goes to Employee\u2019s Pension Scheme (EPS), o ceiling limit of salary for this purpose is Rs. 15,000 per month. VRS\/VSS schemes Organizations offer employees option of taking voluntary retirement before actual date Voluntary and amicable separation of employees Those who opt for it get a one-time lump sum compensation. Applies to an employee who has completed 10 years of service or 40 years of age This exemption is available to employees of any of the following: \uf0b7 Public Sector Company. \uf0b7 Any other company. \uf0b7 Authority established under Central, State or Provincial Act. \uf0b7 Local Authority. \uf0b7 Universities, Co-operative Societies, IITs and Notified Institutes of Management. \uf0b7 Any State Government or the Central Government. Tax exemption on the VRS amount received should not exceed the following: The amount actually received from the employer Higher of the following amount: International College of Financial Planning \u2013 Challenge Pathway Prep Book Page 413","\uf0b7 3 month\u2019s salary for each completed year of service \uf0b7 Last Drawn Salary x balance of months left before the date of retirement \uf0b7 Amount notified by the government from time to time (presently Rs. 5,00,000) \uf0b7 Salary for this purpose includes dearness allowance + commission. House Rent Allowance (HRA) Salaried individuals living in a rented house\/ apartment, can claim HRA from their employer. Self- employed individuals are exempt from claiming HRA. Employee cannot claim HRA when he\/she lives in his\/her own house and does not pay rent Salary means basic salary + dearness allowance. Also includes commission and exclude any other allowance and perquisite. The least of the following three is exempt from tax: --------- Actual HRA received --------- --------- Excess of rent paid over 10% of salary *40% or 50% of salary (depending on place of stay of the employee) *50% of salary where residential house is situated at Mumbai, Kolkata, Delhi or Chennai and 40% of salary where residential house is situated at any other place. Claim Rules for HRA \uf0b7 An employee can also avail tax benefits of HRA along with a home loan. \uf0b7 In case employee stays with his parents, he is eligible to pay rent to his parents and collect a receipt for HRA claim. \uf0b7 Similar rules don't allow him to pay rent to his spouse and claim a tax exemption. \uf0b7 If the annual rent of accommodation exceeds Rs.1 lakh, presenting the landlord's PAN card is mandatory. International College of Financial Planning \u2013 Challenge Pathway Prep Book Page 414","City Compensatory Allowance Allowance given by the employer to compensate for the cost of living in metropolitan, Tier-1, Tier-2 and other cities. Primary criterion for computing CCA is the cost of living index in a particular city. CCA differs within Tier-1 cities based on the standard of living. CCA is determined based on the pay scale and grade of the employee. Fully taxable as per Section 10(14) of the Income Tax Act, 1961 Entertainment Allowance Given to employee for the purpose of hospitality of the customers. Entire allowance first added in computation of gross salary and deduction u\/s 16(ii) is granted thereafter. Government employees can claim deduction from gross salary upto the least of the following: \uf0b7 Actual Allowance Received \uf0b7 20% of the basic salary exclusive of any allowance, benefit or other perquisite \uf0b7 Rs. 5,000 Amount actually spent not taken into consideration. Not deductible for private sector employees. Special Allowance \uf0b7 Usually the leftover component of the salary, after allocations are divided into basic, LTA, transport allowance, HRA etc. \uf0b7 Differs from company to company. \uf0b7 Exempt under section 10(14) (i) to the extent of o the actual amount received or o the amount spent for the performance of the duties of the office, whichever is lower. Travelling Allowance: \uf0b7 Allowance granted to meet the cost of travel on transfer and packing; \uf0b7 Transportation of personal effects on such transfer. International College of Financial Planning \u2013 Challenge Pathway Prep Book Page 415","Daily Allowance: \uf0b7 Allowance granted on tour, or for the period of journey in connection with transfer, \uf0b7 To meet the ordinary daily charges on account of absence from his normal place of duty. Conveyance Allowance: \uf0b7 Amount paid by the employer to meet the expenditure incurred on conveyance in performance of duties of an office, if free conveyance not provided by the employer. Uniform Allowance: \uf0b7 Money given for the purchase and maintenance of the uniform \uf0b7 Allowance is exempt to the extent of actual expenditure incurred on purchase and maintenance of uniform Academic\/ Research Allowance: \uf0b7 Granted for encouraging academic research and training pursuits in research institutions. Exempt to the extent spent Irrespective of expenditure incurred Some allowances are exempt irrespective of whether any expenditure was incurred or not. Amount of exemption does not depend upon expenditure incurred by the employee. Allowances under this category are exempt to the extent of: \uf0b7 The amount of allowance; or \uf0b7 The amount specified in rule 2BB, whichever is lower. Hill area allowance Special allowance given to employees working in hilly areas or at a high altitude. Amount exempt depends on the location and other factors. Exemption varies from Rs. 300 per month to Rs. 7,000 per month. International College of Financial Planning \u2013 Challenge Pathway Prep Book Page 416","Tribal area allowance Allowance given to employees posted in tribal areas in states of Madhya Pradesh, Tamil Nadu, Uttar Pradesh, Karnataka, Tripura, Assam, West Bengal, Bihar, Orissa. Tax exemption allowed up to Rs. 200 per month. Standard Deduction Finance Act, 2018 introduced standard deduction of Rs. 40,000 in lieu of transport allowance of Rs. 1,600 per month and annual medical allowance of Rs. 15,000. Change took effect from the financial year 2018-19. No separate transport allowance of Rs. 1,600 per month is available to employees other than physically challenged employees and employees of a transport business. Limit of Rs. 40,000 increased to Rs. 50,000 in the Interim Budget 2019. Perquisites Rent Free Accommodation: o House provided to an employee by his employer for residential purpose. Salary is aggregate of: o Basic Salary; o Dearness Allowance, or Dearness Pay which is taken into account while computing superannuation or retirement benefit of the employees; o Bonus; o Commission; o All other taxable allowances (excluding the portion not taxable); and o Any monetary payment which is chargeable to tax (by whatever name called). International College of Financial Planning \u2013 Challenge Pathway Prep Book Page 417","Value of furnished accommodation provided by the employer Value would be the value of unfurnished accommodation increased by 10% per annum of the cost of furniture. If such furniture is hired from a third party, the value of unfurnished accommodation would be increased by the hire charges paid\/payable by the employer. Any payment recovered from the employee towards the above would be reduced from this amount. Services of house help, attendant Value of free service of a sweeper, gardener and a watchman to be taken at actual cost to employer. Where the attendant is provided at residence of employee, full cost will be taxed as perquisite in hands of employee. Any amount paid by employee for such facilities or services shall be reduced from above amount. Supply of amenities (electricity, water, gas, etc.) Amount paid by the employer to the agency supplying the amenity such as gas, electricity and water for household consumption, shall be the value of perquisite. If the supply is made from the employer\u2019s own resources, the manufacturing cost per unit incurred by the employer would be the value of perquisite. International College of Financial Planning \u2013 Challenge Pathway Prep Book Page 418","Any amount paid by the employee for such facilities shall be reduced from the above amount. Interest free loan or concessional loan Value of perquisite shall be the amount which is the difference between interest payable at prescribed interest rate and the interest, if actually paid by the employee. Prescribed interest rate is the per annum interest rate by State Bank of India. Perquisite value would be calculated on the basis of the maximum outstanding monthly balance method. Small loans up to Rs. 20,000 are exempt. Use of car and other movable assets Taxable value of perquisites for movable assets shall be \uf0b7 For use of Laptops and Computers: Nil \uf0b7 For movable asset other than Laptops, computers and Motor Car: \uf0b7 10% of original cost of the asset (if asset is owned by the employer) or \uf0b7 actual higher charges incurred by the employer (if asset is taken on rent) less amount recovered from employee. Club Facility Annual or periodical fee for Club facility which is reimbursed\/ paid by the employer is taxable on the following basis: Amount of expenditure incurred by the employer XXX Less: Expenditure for official purposes XXX Less: Amount recovered from the employee XXX Amount taxable as perquisite XXX If the amount is incurred wholly and exclusively for official purposes it will be exempt. Employer\u2019s contribution towards superannuation fund (above the exempt maximum limit) As per Section 17(2)(vii) of the Income Tax Act,1961, Any contribution to an approved superannuation fund by the employer, to the extent it exceeds Rs. 1,50,000, will be taxable as a perquisite in the hands of the employee. International College of Financial Planning \u2013 Challenge Pathway Prep Book Page 419","Value of specified security, sweat equity, Employee Stock Option Plan (ESOP) allotted\/transferred to employee \uf0b7 Sweat equity shares: o shares issued by a company to its employees at a discount. o such shares may be equity shares, any other shares, scrips, debentures, derivatives or units. o these may be transferred\/allotted directly or indirectly to the employee. \uf0b7 An employee can acquire shares in the employer-company at a reduced price after completion of a specified period of service. Tax of an employee paid by employer \uf0b7 When tax is borne by the employer on behalf of the employee, it is considered a perquisite as defined in Section 17(2 (iv). \uf0b7 It is in the nature of an obligation and hence, non-monetary. \uf0b7 As per Section 10(10CC), tax paid on such non-monetary perquisites by the employer will be exempt from tax in the hands of the employee. Income from House Property The Basis of Charge Under Section 22, Income is taxable under this head if: \uf0b7 The house property consists of any building or land appurtenant thereto; \uf0b7 The taxpayer is the owner of the property. Owner includes deemed owner. \uf0b7 The house property is not used for purpose of business\/profession carried by taxpayer. Wherein: \uf0b7 \\\"Owner\\\" includes legal owner as well as deemed owner, \uf0b7 Owner may be an individual, HUF, firm, company, co-operative society or association of persons, International College of Financial Planning \u2013 Challenge Pathway Prep Book Page 420","\uf0b7 Annual value of property is assessed in the hands of the owner even if he is not in receipt of income, \uf0b7 If owner uses property for carrying on own business\/profession (whose income is chargeable to tax), then such income is NOT chargeable under house property. Composite rent is split up: \uf0b7 The sum attributable to the use of the property is assessed under house property, \uf0b7 Amount with respect to provision of the services is taxed under the head \\\"Profits and gains of business or profession\\\" or \\\"Income from other sources\\\", \uf0b7 In case of letting of plant\/machinery\/furniture and letting of the building (both are inseparable) then such income is taxable either as \\\"Profits and gains of business or profession\\\" or \\\"Income from other sources\\\". The Basis of computing income from a let out house property \uf0b7 Basis: Property is self-occupied, let-out or deemed to be let-out. \uf0b7 Let-Out House Property (Section 23(1)) o House given on rent for whole, or part, of the year. \uf0b7 Self-Occupied\/Unoccupied\/Vacant House Property (Section 23(2)): o house used for residence by an individual and\/or his spouse, parents or children, o considered as a self-occupied property even if property is vacant o can be categorized further as: o property is used throughout the previous year for own residential purposes and is not let-out or put to any other use; o property could not be occupied throughout the previous year because employment, business or profession of the owner is situated at some other place; o a part of the property (being independent residential unit) is self-occupied and other part is let-out; \uf0b7 Let-out property for part of the year and self-occupied for part of the year (Section 23(3)) o property is self-occupied for a part of the year and let-out for other part of the year. International College of Financial Planning \u2013 Challenge Pathway Prep Book Page 421","\uf0b7 Deemed Let-Out House Property (Section 23(4)) o assessee occupies more than one house for his own residential purposes, o two such houses (according to his own choice) are treated as self-occupied, o all other houses will be \\\"deemed to be let out\\\", o exemption of two self-occupied house available only to an individual\/HUF, o no deduction for municipal taxes is allowed in respect of such a property. Gross Annual Value (GAV) on the basis of Municipal Valuation (MV), Fair Rent (FR) and Standard Rent (SR) Gross Annual Value (GAV) is determined as follows: Step I: Find out the reasonable expected rent of the property Step II: Find out the rent actually received or receivable after excluding unrealized rent but before deducting loss due to vacancy Step III: Find out which one is higher - amount computed in Step I or Step II Step IV: Find out loss because of vacancy Step V: Step III minus Step IV is the Gross Annual Value Rent actually received\/receivable is determined as follows: 1. Rent of the previous year (or that part of the previous year) for which the property is available for letting out. 2. Less: Unrealized rent if a few conditions are satisfied 3. (1-2) is the Rent received\/receivable before deducting loss due to vacance International College of Financial Planning \u2013 Challenge Pathway Prep Book Page 422","Income from house Property is computed as mentioned below: Particulars Amount Gross Annual Value \u2013 Less: Municipal Taxes \u2013 Net Annual Value Less: Standard deduction at 30% [Section 24(a)] **** Less: Interest on borrowed capital [Section 24(b)] \u2013 Income from house property \u2013 **** Computation of Gross Annual Value (GAV) under different cases A. Let-out property [Sec 23(1)]: \uf0b7 GAV is higher of: 1. Expected rent (higher of municipal valuation or fair rent, subject to maximum of standard rent); 2. Rent actually received\/receivable after excluding unrealized rent but before deducting loss due to vacancy. \uf0b7 Deduct any loss incurred due to vacancy, \uf0b7 Remaining sum so computed shall be the GAV. \uf0b7 If actual rent received < expected rent, due to vacancy of property, then the actual rent received shall be considered as GAV. B. Self-occupied\/ vacant\/unoccupied property [Section 23(2)]: \uf0b7 Self-occupied for own residence or was unoccupied throughout the previous year, its GAV will be Nil. C. Partly self-occupied and partly let-out property in the same year [Section 23(3)]: \uf0b7 Expected rent for the whole year is compared with the actual rent for the let-out period, higher of the two shall be adopted as the GAV. \uf0b7 Municipal taxes for the whole year are allowed as a deduction (if paid by the owner). International College of Financial Planning \u2013 Challenge Pathway Prep Book Page 423","D. Deemed to be let-out property [Section 23(4)]: \uf0b7 Expected rent shall be taken as the GAV, \uf0b7 No adjustment is made on account of property remaining vacant or unrealized rent, \uf0b7 Municipal taxes actually paid by the owner can be claimed as deduction. Net Annual Value (NAV) \uf0b7 The Net Annual Value (NAV) = Gross Annual Value (GAV) less the municipal taxes paid. \uf0b7 Municipal taxes: o should be borne by the assessee. o should actually have been paid during the previous year. Standard Deduction under section 24(a) and Interest on borrowed capital u\/s 24(b) \uf0b7 Two deductions from the Net Annual Value under section 24: o Standard Deduction, o Interest on Borrowed Capital \uf0b7 Standard Deduction [u\/s 24(a)] - 30% of the Net Annual Value o automatic deduction; not dependent on actual expenditure. o allowed even if the assessee does not incur any expenditure. o assessee can avail this deduction even if tenants undertake such repairs. The standard deduction is Nil for self-occupied property. o Interest paid on borrowed capital (for acquisition, construction, renovation, repairing or reconstruction) can be claimed as deduction. o For self-occupied residential house property (upto two properties), interest for acquisition or construction shall be allowed as a deduction up to Rs. 2 lakhs and for reconstruction, repairs or renewals shall be allowed as a deduction up to Rs. 30,000. o Interest on unpaid interest is not deductible. o No deduction is allowed for any brokerage or commission for arranging the loan. o For a let-out property, interest on borrowed capital is deductible fully without any maximum ceiling. International College of Financial Planning \u2013 Challenge Pathway Prep Book Page 424","Interest on borrowed capital during the \u201cpre-construction\u201d period \uf0b7 Interest on borrowed capital for purchase or construction of a house property, o deducted in five equal annual installments, commencing from the previous year in which the house is acquired or constructed. \uf0b7 First instalment is deductible in the year in which construction of property is completed or is acquired. Deduction for interest on housing loan [Section 80EE] Deduction of up to Rs 50,000 shall be allowed to an Individual for interest payable on loan taken for the purpose of acquisition of a house property subject to following conditions: 1. Loan has been sanctioned by Financial institution during the financial year 2016-17; 2. The amount of loan sanctioned does not exceed Rs 35,00,000; 3. The value of residential property does not exceed Rs 50,00,000; 4. The assessee does not own any residential house property on the date of sanction of loan; 5. Where deduction has been allowed under this section, no deduction shall be allowed in respect of such interest under any other provision. Deduction for interest paid on housing loan taken for affordable housing [Section 80EEA] An individual can claim deduction of up to Rs. 150,000 under section 80EEA subject to following conditions: 1. Loan should be sanctioned by the financial institution during the period beginning on 01-04-2019 and ending on the 31-03-2020; 2. Stamp duty value of residential house property should not exceed Rs. 45 lakhs; 3. The assessee should not own any residential house property on the date of sanction of loan; and 4. The assessee should not be eligible to claim deduction under Section 80EE. Self-occupied house purchased\/built on borrowed capital \uf0b7 GAV will be Nil for self-occupied property or if unoccupied throughout the previous year. International College of Financial Planning \u2013 Challenge Pathway Prep Book Page 425","\uf0b7 Interest incurred on capital borrowed for the purpose of o Acquisition\/construction of house property shall be allowed as a deduction up to Rs. 2 lakh. o Reconstruction\/repairs\/renewals of a house property shall be allowed as deduction up to Rs. 30,000. \uf0b7 Deduction allowed if capital is borrowed on or after 01-04-1999 and acquisition or construction of the house property is completed within 5 years. Capital Gains \u201cCapital Gains\u201d: gain\/profit arising on sale of capital asset Shall be chargeable to tax if following conditions are satisfied: o a) There should be a capital asset; o b) The asset transferred should be a capital asset on the date of transfer; o c) The asset should be transferred by the taxpayer during the previous year; o d) There should be profits or gain as a result of transfer. Capital Asset Capital asset\u2019 (as per section 2(14)) means: property of any kind, whether fixed or circulating, movable or immovable, tangible or intangible. Also includes: 1. Property held by assessee, whether or not connected with his business\/profession, 2. Rights in an Indian company, including rights of management\/control etc, 3. Securities held by Foreign Institutional Investor invested in accordance with SEBI Act, 1992. 4. Jewellery, stones, ornaments made of silver, gold, platinum other precious metal, drawings, paintings, work of art etc. even if used for personal purposes Does not include: 1. Stock-in-trade (other than securities), consumable stores, raw materials held for purpose of business or profession; 2. Movable property held for personal use of taxpayer\/member of family dependent upon him. International College of Financial Planning \u2013 Challenge Pathway Prep Book Page 426","3. Rural agricultural land in India; 4. Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 or deposit certificates issued under the Gold Monetisation Scheme, 2015 Transfer of Capital Asset \uf0b7 Following transactions are NOT regarded as transfers: 1. Distribution of assets in kind by company to its shareholders on its liquidation. 2. Distribution of capital assets in kind by a HUF to its members at the time of partition. 3. Transfer of capital asset under a gift or a Will or an irrevocable trust. 4. Transfer of capital asset between holding company and its 100% subsidiary company, if the transferee company is an Indian company. 5. Transfer of capital asset in the scheme of amalgamation\/demerger, if the transferee company is an Indian company. 6. Any transfer by way of conversion of bonds or debentures, of a company into shares or debentures of that company. 7. Any transfer of capital asset in reverse mortgage. Transfer includes sale\/exchange\/relinquishment of asset. Short-term\u2019 and \u2018Long-term\u2019 capital asset 1. Short-Term Capital Asset [Section 2(42A)] o Capital asset held by an assessee for not more than 36 months\/24 months\/12 months, as the case may be, immediately preceding the date of its transfer. 2. Long-Term Capital Asset [Section 2(29A)] o Capital asset which is not a short-term capital asset. The tax incidence under the head \\\"Capital gains\\\" depends on whether the capital gain is short-term or long-term. Gain arising on transfer of short-term capital asset is termed as short-term capital gain and on transfer of long-term capital asset is termed as long-term capital gain. However, there are a few exceptions to this rule like gain on depreciable asset is always taxed as short-term capital gain. Long- term capital gain is generally taxable at a lower rate. International College of Financial Planning \u2013 Challenge Pathway Prep Book Page 427","Minimum period for different capital assets to become long-term capital assets \uf0b7 Short-term capital assets if held upto a period of 12 months: 1. a security including shares (other than unit) listed in a recognized stock exchange in India 2. a unit of an equity oriented fund 3. a zero coupon bond \uf0b7 Short-term capital assets if held upto a period 24 months: 1. Share of a company (not being a share listed in a recognized stock exchange in India) 2. An immovable property being land and building or both. Hence, if unlisted share or immovable property is transferred after 24 months from the date of its acquisition, the gain arising from the transfer of share or immovable property shall be treated as long- term capital gain. Indexation benefit basis cost inflation index (CII) in respect of certain capital assets Cost of Acquisition \uf0b7 Value for which the asset was acquired by the assessee. \uf0b7 Expenses of capital nature for completing or acquiring the title to the property are includible in the cost of acquisition. \uf0b7 Interest on money borrowed to purchase asset is part of actual cost of asset. \uf0b7 Formula for computing Indexed cost of acquisition: Cost of acquisition \u00d7 Cost inflation index of the year of transfer of capital asset Cost inflation index of the year in which asset was first held by the assessee or the previous owner in cases specified u\/s 49(1) or 2001-02, whichever is later. Indexation is a process by which the cost of acquisition is adjusted against inflationary rise in the value of the assets. For this purpose, Central Government has notified the Cost Inflation Index (CII). The benefit of indexation is available only to long-term capital assets. For computation of indexed cost of acquisition following factors are to be considered: \uf0b7 Year of acquisition\/improvement International College of Financial Planning \u2013 Challenge Pathway Prep Book Page 428","\uf0b7 Year of transfer \uf0b7 Cost inflation index of the year of acquisition\/improvement \uf0b7 Cost inflation index of the year of transfer Cost of Improvement \uf0b7 Capital expenditure incurred by assessee in making additions\/improvement to capital asset. \uf0b7 Includes expenditure incurred to protect or complete the title. \uf0b7 Expenditure incurred to increase value of capital asset. \uf0b7 Cost of improvement incurred before April 1, 2001 is NOT taken into consideration. \uf0b7 Formula for computing Indexed cost of improvement: Cost of improvement \u00d7 Cost inflation index of the year of transfer of capital asset Cost inflation index of the year of improvement. Cost Inflation Index (CII) Table Previous year CII Previous year CII Previous year CII Previous year CII 2001-02 100 2006-07 122 2011-12 184 2016-17 264 2002-03 105 2007-08 129 2012-13 200 2017-18 272 2003-04 109 2008-09 137 2013-14 220 2018-19 280 2004-05 113 2009-10 148 2014-15 240 2019-20 289 2005-06 117 2010-11 167 2015-16 252 International College of Financial Planning \u2013 Challenge Pathway Prep Book Page 429","Capital assets transferred under a Gift, a Will, by succession\/inheritance, etc. \u2013 Basis of cost of acquisition including improvement cost \uf0b7 Property received on inheritance\/gift is not taxable for the receiver (inheritor). \uf0b7 When inheritor sells it, capital gains on the sale transaction are taxable for the inheritor. \uf0b7 Cost to the previous owner [Sec. 49(1)] o Cost to the previous owner is taken as cost of acquisition when: o acquisition of property on any distribution of assets on partition of (HUF); o acquisition of property under a gift or a Will; o acquisition of property Acquisition of property - (i) By succession, inheritance or devolution, or (ii) On any distribution of assets on the dissolution of a firm, body of individuals or other association of persons where such dissolution had taken place before April 1, 1987, or (iii) On any distribution of assets on the liquidation of a company, or (iv) Under a transfer to a revocable or an irrevocable trust, or International College of Financial Planning \u2013 Challenge Pathway Prep Book Page 430","(v) By a wholly-owned Indian subsidiary company from its holding company, or (vi) By an Indian holding company from its wholly-owned subsidiary company, or (vii) Under a scheme of amalgamation, or (viii) Under a scheme of demerger. Fair Market Value for capital assets acquired before April 1, 2001 Where the capital asset became the property of the assessee 1. before April 1, 2001; or 2. by any mode referred to in section 49(1) and such asset became the property of the previous owner before April 1, 2001. The assessee has an option to take either actual cost or the fair market value of the asset as on April 1, 2001 whichever is higher, as cost of acquisition. The option is not available in the case of depreciable assets, transfer of goodwill of a business; trade mark\/brand name associated with a business; right to manufacture, produce or process any article or thing; right to carry on business\/profession; tenancy right; route permits or loom hours (whether self- generated or otherwise). Capital gain on transfer of land and building Transfer of land and building come under Sec. 50C. Applicable if the following conditions are satisfied: \uf0b7 There is a transfer of land or building or both. \uf0b7 The asset may be long-term capital asset or short-term capital asset. \uf0b7 It may be depreciable or non-depreciable. \uf0b7 The sale consideration is less than value adopted by \\\"Stamp duty authority\u201d. If the above conditions are satisfied, the value adopted by the Stamp duty authority shall be taken as \\\"full value of consideration\\\" for the purpose of computation of capital gains. 1. Section 50C is not applicable for calculating business income. International College of Financial Planning \u2013 Challenge Pathway Prep Book Page 431","2. Where the date of an agreement fixing the value of consideration and the date of registration are not same, the stamp duty value may be taken as the date of the agreement for transfer (and not as on the date of registration) for such transfer. However, this exception shall apply only in those cases where amount of consideration (or a part thereof) has been received by way of an account payee cheque\/demand draft or electronic clearing system through a bank account before the date of the agreement. Capital Gain where advance money was forfeited [Sec. 51] If advance money is forfeited during 2013-14 (or earlier) It is in the hands of the recipient till the capital asset (in respect of which advance money was received and forfeited) is transferred. If capital asset is not transferred during his lifetime, advance money forfeited by him will not be chargeable to tax. Conversely, if the capital asset is transferred during his lifetime, the advance money will be deducted from the cost for which the asset was acquired or the written down value or the fair market value, as the case may be, in computing the cost of acquisition. If advance money is forfeited during 2014-15 (or later) It is taxable in the hands of recipient under section 56(2)(ix) under the head \\\"Income from other sources\\\" in the year in which advance money is forfeited. It will not be deducted from cost of acquisition when the capital asset is ultimately transferred. Self-generated capital assets (goodwill, business rights\/permits\/licenses, trade mark, brand, etc. Following special rules are applicable when a self-generated capital asset is transferred: 1. Self-generated goodwill of a business, right to manufacture\/produce an article\/thing or right to carry on business or profession - o cost of acquisition and cost of improvement is taken as nil. o Expenses on transfer are deductible on the basis of actual expenditure. 2. Self-generated assets being tenancy right, route permit, loom hours, trade mark or brand name associated with a business o Cost of acquisition is taken as nil. International College of Financial Planning \u2013 Challenge Pathway Prep Book Page 432","o Cost of improvement and expenses on transfer are deductible on the basis of actual expenditure. Following special rules are applicable when a self-generated capital asset is transferred: 1. Any other self-generated asset \u2013 o capital gain is not chargeable to tax. 2. Even if the aforesaid self-generated assets were acquired before April 1, 2001, the option of adopting the fair market value on the said date is not available. Shares converted from debentures\/bonds \u2013 basis of cost and period of holding \uf0b7 Conversion of debentures into shares is not a \u201ctransfer\u201d for calculating capital gain. \uf0b7 When the converted shares are again transferred, the following rules are applicable: o Cost of acquisition of debentures\/bonds will become cost of acquisition of shares. o To find whether such shares will come under short-term or long-term capital assets, the period of holding shall be counted from the date of allotment of debentures. o The benefit of indexation is available from the date of allotment of debentures. \uf0b7 Period of holding o The period for which it was held prior to the conversion. Transfer of securities in Dematerialized form \u2013 FIFO basis of cost and period of holding Cost of acquisition and period of holding of security in demat form is determined on FIFO basis. Transfer of ESOP \u2013 cost of acquisition\/consideration Cost of acquisition is determined as follows: If sweat equity shares allotted on or after April 1, 2009, the cost of acquisition is the fair market value on the date of exercise of option by the employee. If such shares allotted during April 1, 2007 and March 31, 2009, the fair market value on the date of vesting of option, is taken as the \\\"cost of acquisition\\\". If such shares allotted before April 1, 2007, the amount actually paid by the employee is taken as the \\\"cost of acquisition\\\". International College of Financial Planning \u2013 Challenge Pathway Prep Book Page 433","If shares (being long-term capital assets) are transferred on a recognized stock exchange and STT is applicable, the capital gain will be exempt from tax. ESOP shares are allotted by an employer to its employees. It is a taxable perquisite chargeable to tax in the hands of the employees receiving such ESOPs. Special provisions apply for computing capital gain when such shares are transferred by the employees. Capital gain (long-term) on transfer\/redemption of equity shares of domestic companies and units of equity-oriented MF schemes w.e.f. April 1, 2018 (grandfathering provisions) Concept of Grandfathering Cost of Acquisition (COA) of such investments shall be deemed to be the higher of: \uf0b7 The actual COA of such investments; and \uf0b7 The lower of \u2013 o Fair Market Value (FMV) of such investments; and o Full Value of Consideration received or accruing as a result of the transfer of the capital asset i.e. the Sale Price FMV is the highest price quoted on the recognised stock exchange on 31 January 2018. For units not listed on a recognized stock exchange, FMV is the NAV of such units, as on January 31, 2018. S. No. Transaction Date Tax Implications 1 Purchase and sale before 31\/1\/2018 Exempt under Section 10(38) 2 Purchase before 31\/1\/2018, Exempt under Section 10(38) 3 Sale after 31\/1\/2018 (but before 4 LTCG taxable, Gains accrued before 31\/1\/2018 1\/4\/2018) exempt Purchase before 31\/1\/2018, LTCG taxable Sale on or after 1\/4\/2018 Purchase after 31\/1\/2018, Sale on or after 1\/4\/2018 International College of Financial Planning \u2013 Challenge Pathway Prep Book Page 434","Equity shares of domestic companies and Units held in equity-oriented schemes for a period of more than 12 months are considered as Long-Term Capital assets, and for a period of 12 months or less are considered as Short-Term Capital assets. Capital gain on buyback of shares \uf0b7 Consideration paid by a company on buyback is deemed as full value of consideration. \uf0b7 Difference between cost of acquisition and buy-back price (full value of consideration) is taxed as capital gain. Capital gain on transfer\/redemption of debt securities and units of income\/liquid MF schemes \uf0b7 Short-term capital gains are taxed as per applicable income tax slabs for individuals and HUFs. \uf0b7 Long-term capital gains are taxed @20% (with indexation). Tax on long-term\/short-term capital gains where Securities Transaction Tax (STT) is paid Long-Term Capital Gains (STT paid) \uf0b7 For listed equity shares, units of equity-oriented MFs o long-term capital gains taxed @10% (on capital gains in excess of Rs. 1 Lakh). \uf0b7 This concessional rate of 10% is applicable if: o In a case of an equity share in a company, securities transaction tax has been paid on both acquisition and transfer of such capital asset; and o In a case a unit of an equity oriented fund or a unit of a business trust, STT has been paid on transfer of such capital asset. \uf0b7 For listed securities, units or a zero-coupon bonds: o Taxed at lower of the following: o 20% with indexation; or 10% without indexation. \uf0b7 A non-resident or a foreign company: o Gains from transfer of unlisted securities are taxed without giving benefit of indexation. STT is a kind of financial transaction tax, a direct tax, levied on every purchase and sale of securities that are listed on the recognized stock exchanges in India. STT is governed by Securities Transaction Tax (STT) Act. Off-market transactions are out of the purview of STT. International College of Financial Planning \u2013 Challenge Pathway Prep Book Page 435","The term \u2018Securities\u2019 is defined in Securities Contracts (Regulation) Act, 1956 and includes the following: \uf0b7 Shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate. \uf0b7 Derivatives. \uf0b7 Units or any other instrument issued by any collective investment scheme to the investors in such schemes. \uf0b7 Government securities of equity nature. \uf0b7 Equity oriented units of mutual fund. \uf0b7 Rights or interest in securities. \uf0b7 Securitized debt instruments. Short-Term Capital Gains (STT paid) Gains arising from transfer of equity shares, units of an equity-oriented funds or a unit of a business trust chargeable to STT are taxed @15% under Section 111A. In all other cases the Short-term capital gains are included in the gross total income of the taxpayer and taxed at the normal rates (slab rates). Tax on long-term\/short-term capital gains where STT is not paid \uf0b7 Long-term capital gains are subject to tax @20%, \uf0b7 Short-term capital gains are included in the gross total income of the taxpayer and taxed at the normal rates (slab rates). Income from Other sources Any income which is not chargeable to tax under any other heads of income, and, Any income which is not to be excluded from the total income. Such incomes shall be chargeable to tax as residuary income under this head. \uf0b7 Incomes received in cash or kind, both are taxable. \uf0b7 No distinction between income from a legal or an illegal source. \uf0b7 Consists of two main categories: International College of Financial Planning \u2013 Challenge Pathway Prep Book Page 436","o Recurring income \u2013 interest from savings bank, post office savings, fixed deposits, recurring deposits etc., and o Non-recurring income \u2013 income from the lottery, gambling, horse racing etc. \uf0b7 Chargeability: computed on the basis of: o Mercantile system \u2013 income and expense is maintained by the assessee on \u2018due\u2019 basis, and o Cash system \u2013 income and expense is maintained on \u2018receipt and payment\u2019 basis. \uf0b7 Conditions: The income will fall under this head only if: o a) there is an income, o b) such income is not exempt from tax, and o c) such income is not chargeable to tax under any other heads of income. Interest on Deposits (with banks, post office, companies, cooperative societies, etc.) Any interest on deposits in a savings bank account, a co-operative society, Post Office schemes, fixed deposits etc. attracts tax; Income is added to the gross total income of the assessee under the head \u201cIncome from Other sources\u201d; All assessees need to disclose their details of interest incomes while filing their Income Tax returns. Section 80TTA: \uf0b7 Provides deduction of Rs 10,000 for every financial year on the interest income. \uf0b7 Deduction allowed on interest earned to an Individual and HUF: From a savings account with a bank, co-operative society, post office \uf0b7 If deposits are held by, or on behalf of, a firm\/AOP\/BOI, then no deduction is allowed in this. Section 80TTB: \uf0b7 Inserted for senior citizens w.e.f April 1, 2018; \uf0b7 Provides for a deduction upto Rs. 50,000 from such interest income. o Gross interest (i.e. net interest plus TDS) is taxable. o Net interest is grossed up in the hands of recipient if any tax is deducted at source by the payer. International College of Financial Planning \u2013 Challenge Pathway Prep Book Page 437","o [100 \u00f7 (100 - Rate of tax deduction at source)]. Interest on loans \uf0b7 Income received by way of interest on loans disbursed to family or friends is chargeable to tax. \uf0b7 Such income is however exempted under provisions of Section 80TTA and 80TTB. Interest on securities, e.g. bonds, debentures, government securities, etc. (other than dividend from Indian companies) Any income by way of interest on securities is taxable under the head \\\"income from other sources\\\" if the same is not taxable as business income under section 28. Interest becomes due on the due dates specified on securities. \uf0b7 Income by way of interest on securities is taxable on o \\\"Receipt\\\" basis, if the assessee maintains books of account on \\\"cash basis\\\". o \\\"Due\\\" basis when books of account are maintained on mercantile system. o \\\"Receipt\\\" basis, if such interest had not been charged to tax on due basis for any earlier previous year. \uf0b7 Interest on notified securities, including notified bonds and certificates, is exempt under section 10(15). Interest on securities means: a. Interest on any security of the Central Government or a State Government, b. Interest on debentures or other securities for money issued by or on behalf of a local authority or a company or a corporation established by a Central, State or Provincial Act. Dividends received by residents and ordinarily residents from non-domestic companies Dividend paid by an Indian company is deemed to accrue or arise in India. Payment under the aforesaid nature can be treated as a dividend only to the extent of accumulated profits of the company. Dividend from an Indian company is generally not taxable in the hands of the shareholders subject to a few exceptions under section 115BBDA, which provides for the taxability of dividend in excess of Rs. 10,00,000 at 10%. International College of Financial Planning \u2013 Challenge Pathway Prep Book Page 438","Dividends received from a non-domestic company are taxable in the hands of a shareholder if the dividend is received in India or if the shareholder is resident-and-ordinarily-resident in India. Dividend, in general terms, means the amount paid to or received by a shareholder in proportion to his shareholding in a company out of the total sum so distributed. However, under section 2(22), the following payments or distribution by a company to its shareholders are also deemed as dividend: a) Any distribution entailing the release of company's assets b) Any distribution of debentures, debenture-stock, deposit certificates and bonus to preference shareholders c) Distribution on liquidation of company d) Distribution on reduction of capital, and e) Any payment by way of loan or advance by a closely-held company to a shareholder, holding substantial interest, provided the loan should not have been made in the ordinary course of business and money-lending should not be substantial part of the company's business Gifts If any sum of money, or property, received during the previous year without consideration, or with inadequate consideration, by an individual or a Hindu undivided family (on or after October 1, 2009 but before April 1, 2017) or by any person (on or after April 1, 2017), exceeds Rs. 50,000, the whole of such amount is taxable in the hands of the recipient as \u2018income from other sources\u2019. Property for this purpose means (i) immovable property being land or building or both (ii) shares and securities (iii) jewellery (iv) archaeological collection (v) drawings (vi) paintings (vii) sculptures (viii) any work of art (ix) bullion. The word \u201cindividual\u201d includes only the specific individual, whose marriage is solemnized. While calculating the monetary limit of Rs. 50,000, any sum of money or property received from the following shall NOT be considered: o Money\/property received from a relative. o Money\/property received from relatives, friends or any other person on the occasion of the marriage of the individual International College of Financial Planning \u2013 Challenge Pathway Prep Book Page 439","o Money\/property received by way of will\/inheritance. o Money\/property received in contemplation of death of the payer. o Money\/property received from a local authority. While calculating the monetary limit of Rs. 50,000, any sum of money or property received from the following shall NOT be considered: o Money\/property received from any fund, foundation, university, other educational institution, hospital, medical institution, any trust or institution referred to in section 10(23C). o Money\/property received from a charitable institute registered under section 12A\/12AA. o Share received as a consequence of demerger\/amalgamation of a company or business re- organisation of a co-operative bank (applicable from the assessment year 2017-18). 1. If the taxpayer is X and he receives gifts from any of his relatives, such gifts will not be chargeable to tax. 2. Gifts received from a group of relatives (like HUF) is also exempt from tax. Gift received by a Hindu undivided family from its members is treated as a gift received from a \\\"relative\\\". 3. The above provision is applicable whether the recipient OR the donor is a resident or non- resident. Even a gift received by a non-resident in India is chargeable to tax. 4. If an individual\/HUF gets a gift of agricultural land situated in a rural area in India, it is not chargeable to tax in the hands of recipient, as rural agricultural land is not treated as a \\\"capital asset\\\" under section 2(14). Gift of cash and kind exempt within prescribed limit If the aggregate amount of any sum of money received (gift in cash or kind), by an individual \/HUF (on or after October 1, 2009 but before April 1, 2017) or by any person (on or after April 1, 2017), without any consideration, from one or more persons, during a previous year, is upto Rs. 50,000, such aggregate amount will be exempt from tax in the hands of the recipient. For the ceiling of Rs. 50,000, it is not essential that a single transaction should be of the prescribed amount. all the transactions of the previous year will be considered and summed up to derive the amount. International College of Financial Planning \u2013 Challenge Pathway Prep Book Page 440","Gift of movable assets above the prescribed limit \uf0b7 If aggregate fair market value of movable property, or properties, received without consideration during a previous year, exceeds Rs. 50,000, o the whole of aggregate fair market value of such movable property, or properties, will be chargeable to tax. o The value of movable property shall be the fair market value of the property as on the date of receipt. \uf0b7 If movable property, or properties, is received for a consideration which is less than the aggregate fair market value of the property by an amount exceeding Rs. 50,000 o the difference between aggregate fair market value and the consideration is chargeable to tax. Movable property for this purpose means the following capital assets of the assessee: (i) shares and securities (ii) jewellery (iii) archaeological collections (iv) paintings, sculptures, any work of art (v) bullion. \uf0b7 Valuation of Jewellery, archaeological collections, drawings, paintings, sculptures or any work of art: o If purchased from a registered dealer - Invoice value shall be the fair market value. o If received by any other mode - The price which such jewelry, archaeological collections, etc. would fetch if sold in the open market on the valuation date. \uf0b7 For the ceiling of Rs. 50,000, all the transactions of the previous year will be considered and summed up to derive the amount. Gift of immovable assets at inadequate consideration If the stamp duty value of any immovable property, received without consideration exceeds Rs. 50,000, The stamp duty value of such a movable property will be chargeable to tax. The value of movable property shall be the stamp duty value of the property as on the date of receipt. If the immovable property is received for a consideration which is less than the stamp duty value of the property, by an amount exceeding Rs. 50,000, The difference between stamp duty value and the consideration is chargeable to tax. For the ceiling of Rs. 50,000, every single transaction is treated separately. International College of Financial Planning \u2013 Challenge Pathway Prep Book Page 441","Winning from lotteries, horse races, card games, crossword puzzles, TV shows\/contests, etc. Winnings from lotteries, crossword puzzles, races, card games and other games of any sort or from gambling or betting of any form or nature whatsoever, is taxable in the hands of the winner under the head \u2018income from other sources\u2019. As per section 194B, gross winnings are chargeable to income tax at a flat rate of 30% on the gross winnings. This rate is independent of the tax slab rate of the individual. No TDS is to be deducted by the organizer up to an amount of Rs. 10,000. \uf0b7 If the prize or winning is received in kind o The market value of the item received is taken into consideration. o The tax is levied on the market value of the item. \uf0b7 Where the prize is given partly in cash and partly in kind, o Tax will be deductible from cash prize, with reference to the aggregate amount of cash prize and the value of the prize in kind. \uf0b7 Gross up o If the net amount is received from the organizer after deduction of tax, then that net amount is grossed up to find out the amount chargeable to tax. \uf0b7 Gross amount = Net amount \/ (1 \u2013 tax rate) Income from racing establishment Winnings from races, including horse races (other than the activity of owing and maintaining race horses) is taxable in the hands of the winner under this head, As per section 194BB, gross winnings are chargeable to income tax at a flat rate of 30% on the gross winnings (without claiming any allowance or expenditure). This rate is independent of the tax slab rate of the individual. No TDS is to be deducted by the organizer up to an amount of Rs. 5,000. If the net amount is received from the organizer after deduction of tax, then that net amount is grossed up to find out the amount chargeable to tax. Rental income on letting out plant, machinery, furniture and attached premises to such plant Income from machinery, plant or furniture, belonging to the assessee and let on hire, is taxable under this head if not chargeable to tax under the head \\\"Profits and gains of business or profession\\\". If there is letting of machinery, plant and furniture and also letting of the building and the two lettings are International College of Financial Planning \u2013 Challenge Pathway Prep Book Page 442","inseparable, such income is taxable under the head \\\"Income from other sources\\\" (if it is not taxable as business income). This rule is applicable even if the sum receivable for the two lettings is fixed separately. If a building is let-out but other assets like machinery, plant or furniture are not given on rent the portion of rent attributable to the building should only be assessed as \\\"Income from house property\\\" and balance portion, if any, attributable to amenities must be assessed as \\\"Income from other sources\u201d. Advance money received and forfeited in the course of negotiations on transfer of a capital asset If any sum of money, received as an advance in the course of negotiations for transfer of a capital asset, is forfeited and the negotiations do not result in transfer of such capital asset, then, such a sum of money is chargeable to income-tax under the head \\\"Income from other sources\\\". The above rule is applicable only when advance money is forfeited during the previous year. The above rule is applicable only when the asset involved is a \\\"capital asset\\\". Income from undisclosed sources Undisclosed income is the income which the assessee has not shown in his Income Tax return and thereby not paid income tax on it. If the Assessing Officer detects income from undisclosed sources, the sources for which are not satisfactorily explained by the assessee, then the assessing officer is empowered to charge income tax on such amount. The onus of satisfactorily explaining such credits remains on the person in whose books such sum is credited. Unexplained money, investments etc. attract tax @60% under Section 115BBE. No basic exemption or allowance or expenditure shall be allowed to the assessee in computing such deemed income. INCOME EXEMPT FROM TAX Agricultural Income (meaning and tax treatment) Agricultural income is , Any rent or revenue derived from land, situated in India, used for agricultural purposes. Any income derived from such land by agricultural operations\/processing of agricultural produce, Any income attributable to a farm-house (subject to conditions). Any income derived from saplings or seedlings grown in a nursery. Section 10(1) exempts agricultural income from income tax. International College of Financial Planning \u2013 Challenge Pathway Prep Book Page 443","Tax Treatment The scheme of partial integration of non-agricultural income with agricultural income is applicable if the following conditions are satisfied: Condition 1 The taxpayer is an individual, a Hindu undivided family, a body of individual, an association of persons or an artificial juridical person. Condition 2 The taxpayer has non-agricultural income exceeding the amount of Condition 3 exemption limit as per slab. The agricultural income of the taxpayer exceeds Rs. 5,000. Net agricultural income is to be computed as if it were income chargeable to income tax. Agricultural and non-agricultural income aggregated and income tax calculated on aggregate income as if such aggregate income were the total income. The net agricultural income increased by the amount of exemption limit (i.e. the first slab of income on which tax is charged at nil rate) and income tax calculated on net agricultural income, so increased, as if such income was the total income of the assessee. Income tax determined at step two is reduced by the amount of income tax determined at step three. Find out the balance. Add surcharge, cess. Family income received by a member of HUF Money received by an individual as a member of an HUF is exempt from tax if received:, either out of the income of the HUF or out of income of the estate belonging to the HUF. Such money is not chargeable to tax in the hands of the individual member even if tax is not paid by the HUF on its total income. As per Section 10(2), only those members of an HUF can claim exemption under this section who are entitled: to demand share on partition or to maintenance under the Hindu Law. Leave Travel Concession (LTC) Leave Travel Concession (LTC) extended by an employer to employee for going anywhere in India along with his family is exempt (as per Section 10(5)). Provisions are given below: International College of Financial Planning \u2013 Challenge Pathway Prep Book Page 444","Situation Amount of exemption Where journey is performed by air Amount of economy class air fare of the national carrier by the Where journey shortest route or the amount spent, whichever is less. performed by rail Amount of air-conditioned first-class rail fare by the shortest route or isamount spent, whichever is less. Exemption available only in respect of fare for going anywhere In India, along with family, twice in a block of 4 calendar years. Quantum of exemption is limited to the actual expenses incurred on the journey. Exemption is strictly limited to expenses on air fare, rail fare, bus fare only. Exemption not available if family members are travelling separately without the employee who is not on leave. Gratuity received by an employee on retirement or by dependents on death of employee (subject to rules) Gratuity: \uf0b7 Governed by the Payment of Gratuity Act, 1972, \uf0b7 Monetary benefit given by employer, \uf0b7 Not paid as part of regular monthly salary \uf0b7 Employee to have completed a minimum of 5 years in service, \uf0b7 Time limit does not apply in the case of death or disablement of the employee, \uf0b7 Not available for interns or temporary employees, \uf0b7 Payable to contract employees who serve for at least 5 years at a stretch Gratuity is given on the occurrence of: Page 445 \uf0b7 Superannuation (employee who attains age of retirement) \uf0b7 Retirement or resignation \uf0b7 Death or disablement due to accident or disease International College of Financial Planning \u2013 Challenge Pathway Prep Book","Taxation of Gratuity [Sec.10(10)] All employees divided into three categories, exemption is granted according to the category: Death-cum-retirement gratuity received by Central\/State Govt.\/defence and employees in local authority is fully exempt. For persons covered under Payment of Gratuity Act, 1972: 1 Actual gratuity received ______ Last month salary \u00d7 15\/26 \u00d7 total service ______ 2 period 3 Maximum, as specified 20,00,000 The least of the above three is exempt from tax. Gratuity in excess of the aforesaid limits is taxable for assessee. 3. In case of any other employee: ______ 1 Actual gratuity received ______ Average salary \u00d7 15\/30 \u00d7 total service 20,00,000 2 period 3 Maximum, as specified The least of the above three is exempt from tax. Gratuity in excess of the aforesaid limits is taxable for assessee. Gratuity payment to widow\/legal heirs of an employee, who dies during service, shall be exempt subject to provisions mentioned above. Gratuity received by an employee on retirement is taxable under the head \u201cSalary\u201d. Gratuity received by legal heir, upon the death of the employee, is taxable under the head \u201cIncome from Other Sources\u201d. International College of Financial Planning \u2013 Challenge Pathway Prep Book Page 446"]