Income Tax

The direct tax which is paid by individual to the Central Government of India is known as
Income Tax. It is imposed on our income and plays a vital role in the economic growth &
stability of our country. For years the Government is generating revenue through this tax
system.

The word 'Tax' originated from the 'Taxation.' which mean 'Estimate.' Hence, 'Income Tax'
mean 'Income Estimate,' which helps the government to know the actual economic strength of
a person. It is also a way to set up an economic standard for general people. It helps the
Government to know the distribution of money among country's people.

Income Tax has been in force in different forms since years. If we go through the history of
India, we get relevant information regarding the taxation system of India. In ancient history, it
is mentioned that at about such system which were imposed on the income, expenditure and
other subject. Even information of such is given Manu Smriti and Arthasatra which confirms its
existence at that time.

In modern India, Income Tax came into existence in 1860 with the implementation of first
Income Tax Act. After implementation of this Act, people became aware of the actual meaning
of Income Tax. This act was in force for first five years. After this, in 1865, second Act came
into force. There were major changes in this Act relative to the first. It proved itself as a good
factor for the growth of our economy. With this Act a new concept of Agriculture Income came
into existence.

After this, different new Act was also implemented. The most important of them is the Income
Tax Act, 1961. According to ruling of Income Tax Act, 1961, any person whose salary from
any source of income is more than the maximum limit of unchargeable amount will be liable to
pay Income Tax. There is also a provision of deduction and exemptions in Income Tax,
depending upon the type of assessee, source of income, residential status and investment in
saving schemes. Income tax rates are a matter of chang, which is declared by Ministry of
Finance, Government of India regularly, usually on annual basis.

Heads of Income
Under chapter 4 of Income Tax Act, 1961 (Section 14), income of a person is calculated under
various defined heads of income. The total income is first assessed under heads of income and
then it is charged for Income Tax as under rules of Income Tax Act. According to Section 14 of
Income Tax Act, 1961 there are following heads of income under which total income of a
person is calculated:

Heads of Income: Salary

What is Salary?
Income under heads of salary is defined as remuneration received by an individual for services
rendered by him to undertake a contract whether it is expressed or implied. According to
Income Tax Act there are following conditions where all such remuneration are chargeable to
income tax:
 When due from the former employer or present employer in the previous year,
whether paid or not
 When paid or allowed in the previous year, by or on behalf of a former employer or
present employer, though not due or before it becomes due.
 When arrears of salary is paid in the previous year by or on behalf of a former
employer or present employer, if not charged to tax in the period to which it relates.

What Income Comes Under Head of Salary:

Under section 17 of the Income Tax Act, 1961 there are following incomes which comes under
head of salary:
1. Salary (including advance salary)
2. Wages
3. Fees
4. Commissions
5. Pensions
6. Annuity
7. Perquisite
8. Gratuity
9. Annual Bonus
10. Income From Provident Fund
11. Leave Encashment
12. Allowance
13. Awards

What is Leave Encashment:

Leave encashment is the salary received by an individual for leave period. It is a chargeable
income whether he is a government employee or not. Under section 10(10AA) (i) there is also
a provision of exemption in case of leave encashment depending upon whether he is a
government employee or other employees.

What is Annuity:
It is an annual income received by the employee from his employer. It may be paid by the
employer as voluntarily or on account of contractual agreement. It is not taxable until the
right to receive the same arises. Under section 56, Income Tax Act, 1961 other annuities
come under a will or granted by a life insurance company or accruing as a result of contract
which comes as income under from other sources.

What is Gratuity:
It is salary received by an individual paid by the employee at the time of his retirement or by
his legal heir in the case of death of the employee.

What is Allowance:
It is the amount received by an individual paid by his/her employer in addition to salary.
Under section 15 of the Income Tax Act, 1961 these allowance are taxable excluding few
condition where they are entitled of deduction/ exemptions.

Under Income Tax Act following types of allowance are defined

House Rent Allowance:
Under sections 10(13A) of Income Tax Act, 1961 allowance is defined as an amount received
by an employee paid by his/ her employer as a rent of his/her house. It is a taxable income.
There is no exemption in tax if he is living in his own house or house for which he is not
paying rent. There are following amount which are exempt from tax:
 Actual house rent paid by that individual
 Rent paid for the accommodation over 10% of the salary
 50% of the salary if house is placed at Delhi, Mumbai, Kolkata, Chennai or 40% of the
salary in it is placed in any other city

Entertainment Allowance:
It is the amount paid by employer for availing entertainment services. Under section 16(ii) of
Income Tax Act, 1961 it is entitled to deduction in tax from is salary. But in this case
deduction is given to his gross salary which also includes entertainment allowance. Deduction
in tax against this allowance can be divided into two parts :

In case of Government employee entitled to minimum deduction of

 Entertainment allowance received
 20% of basic salary excluding any other allowance
 Rs. 5000

In case of other employee entitled to minimum deduction of

 (a) Entertainment allowance received
 20% of basic salary excluding any other allowance
 Rs. 7500
 Entertainment allowance received during 1954-1955

Other Special Allowances

 Children Education Allowance
 Tribal Area Allowance
 Hostel Expenditure Allowance
 Remote Area Allowance
 Compensatory Field Area Allowance
 Counter Insurgency Allowance
 Border Area Allowance
 Hilly Area Allowance

Allowances for there is a provision of exempt in income tax are:

 Allowance given to a citizen of India, who is a government employee, for rendering
services outside India
 Allowances given to Judges of High Courts
 Allowance given Judges of Supreme Court
 Allowances received by an employee of UNO

What is Perquisite
Under section 17(2) of Income Tax Act, 1961 perquisite is defined as:
 Amount paid for the rent-free accommodation provided to the assessee by his
employer
 Any concession in the matter of rent respecting any accommodation provided to the
assessee by his employer
 Any benefit or amenity granted or provided free of cost or at concessional rate in any
of the following cases:
 1. By a company to an employee, who is a director thereof
2. By a company to an employee being a person who has a substantial interest in
the company
3. By any employer to an employee whose income under the head 'Salaries'
exceeds Rs.24000 excluding the value of non monetary benefits or amenities
4. Any sum paid by the employer in respect of any obligation which, but for such
payment, would have been payable by the assessee
5. Any sum payable by the employer whether directly or through a fund, other
than a recognised provident fund or EPF, to effect an assurance on the life of
the assessee or to effect a contract for an annuity

There are following perquisites which are tax free:

 Medical facility
 Medical reimbursement
 Refreshments
 Subsidised Luch/ Dinner provided by employer
 Facilities For Recreation
 Telephone Bills
 Products at concessional rate to employee sold by his/ her employer
 Insurance premium paid by employer
 Loans to employees by given by employer
 Transportation
 Training
 House without rent
 Residence Facility to member of Parliament, judges of High Court/ Supreme Court
 Conveyance to member of Parliament, judges of High Court/ Supreme Court
 Contribution of employers to employee's pension, annuity schemes and group
insurance

Heads of Income: House Property

What Is Heads of House Property
According to Chapter 4, Section 22 - 27 of Income Tax Act, 1961 there is a provision of
income under head of house property. In every section from 22-27 there are detail
specification of house property income. It is defined as income earned by a person through his
house or land.

What Income Comes Under Head of House Property:

Annual value of building or land owned by assessee. There is a charge on the potential of
property to generate incomes not on the rent received. But if property is used for making
profit in business then it will be taxable not under this head but will be taxable under head of
profit in business/ profession.

How to calculate annual value of property:

According to annual value, house property is calculated as
1. Annual value of a house is zero if property is in the occupation of the owner for his
residence for the whole year & if no other benefit is availed by owner from his
property. There will be no deductions as given under section 24 except deduction
interest on borrowed capital
 2. If the owner lets out the house or a part thereof for any period of time during the
previous year the annual value of the property or part has to be calculated for the
whole year and the proportionate annual value of the period for which the house or
any part thereof was in the occupation of the owner for his own residence shall be
deducted from the gross annual value. The assessee in such cases cannot claim
deduction under section 24 in excess of the annual value so determined
3. The assessee occupies more than one house for his residence the above exemption is
applicable only to one such house at the option of the assessee. The annual value of
the other house or houses shall be computed as if the house or houses are let
4. In case where the assessee has only one residential house but it cannot be occupied
by the owner by reason of that owing to his employment, business or profession
carried out on at any other place, he has to reside at that other place in a building not
belonging to him, the annual value of such house shall be taken to be nil if the house
is not actually let and no other benefit is derived by the owner from such house. The
assessee cannot claim any deduction in such case as allowable under section 24 of the
Act except for interest on borrowed capital subject to a maximum of Rs. 15,000/-

Heads of Income: Profit in Business/

Profession
According to Income Tax Act, 1961 income under this head is defined as the income earned by
assessee as a profit or gain in his business or profession. Income under this head must follow
these conditions:
 There must be a business/ profession
 Business/ profession is being carried by assessee
 Business/ profession have been carried out by assessee in assessment year for which
income tax is filling

What Income Comes Under Head of Profit in Business:

 Profits and gains assessee from any business or profession during assessment year
 Any payment or compensation due or received by a person for his services to
organization as a part of his business
 Making profit in trade Income of professional or organization against services provided
by that professional/ organization
 Profits on sale of a license granted under the Imports (Control) Order, 1955, (EXIM
control Act, 1947)
 Cash received or due by any person against exports under government schemes
 Any benefit whether it is not in cash coming from business/ profession
 Any profit, salary, bonus or commission received by company partners

Heads of Income: Capital Gains

What is Capital Gain:
According to Income Tax Act,1961 heads of capital gain is defined as gains derived on transfer
of capital asset. Capital Gain is the profit or gain of an assessee coming from the transfer of a
capital asset effected during the previous year or assessment year. "Capital Asset" and
transfer are predefined in income tax act.
What is Capital Asset:
Under section 2(14) of the Income Tax Act,1961 Capital Assets is defined as property of any
kind held by assesse including property held for his business or profession. It includes all type
real property as well as all rights in property. It is also defined as gains on transfer of assets in
which there in no cost of acquisition like:
 Goodwill of business generated by assessee
 Tenacy rights
 Stage carriage permits
 Loom hours
 Right to manufacture
 Processing & production of any article or things

Assets Which Don't Come Under Heads of Capital Assets

According to Income Tax Act,1961 there are few assets which don't form a part of Capital
Assets, which are as follows:
 Stock of goods and raw materials used by assessee for his business or profession
 Those property which are movable like wearing apparel, furniture, automobile, phone,
household goods etc. Held by assessee. But Jewelry which is also an movable assets
comes under heads of Capital Assets
 Agricultural property in India. But agriculture land coming under municipal limits (in
area having population ore than 10,000) comes under Capital Assets. Agriculture lands
within 8KM from municipal limit also comes Capital Assets if it is notified by the central
government of India
 Few Gold Bonds issued by government
 Few special bonds issued by central government like Special Bearer Bonds, 1991

Transfer of Capital Assets

Under Section 2(47) of The Income Tax Act,1961 transfer of capital assets is defined as:
 Sale, exchange and relinquishment of assets
 Extinguishment of any rights in capital assets
 Acquisition of capital assets or rights
 Conversion of capital asset by its owner as stock in trade of his business, it may be
also a term transfer
 Transfer of immovable property under Section 53A of Transfer of Property Act, 1882
 Any transaction by which an assessee become enable to act as a member of
cooperative society
 Any transaction by which an assessee acquire shares in cooperative society

Heads of Income: Other Sources

Every type of income comes under a specified heads. But there are few incomes, which don't
come under any of following heads:
 Salary
 House Property
 Profit In Business/ Profession
 Capital Gains

So under Section 56(2) of Income Tax Act,1962 all such income comes in this heads of
income. There are following incomes which are taxed under this heads
 Income coming as a dividend paid by a company to an assessee
  Income coming from winning in lottery, crossword puzzles, races, card games,
gambling or other such sports
 Income coming as an amount received by assessee from his employer as a fund for
welfare of employee
 Income as an interest on securities
 Income coming by letting on hire machinery, plant, furniture, building or other goods
Income coming from insurance policy

Income Tax Return

"Income Tax Return" is a term which is oftenly used when we talk about income tax. It is a
way by which we pay this tax. When total annual income of a person, including all sources, is
more than maximum unchargeable limitation (At present it is Rs. 1, 00,000/-) then that
person is liable to pay income tax.

Under section 139(1) of the Income Tax Act, there are additional six conditions, which forces a
person to file his income tax return. These conditions are:-

1. Owner of a Motor vehicle

2. Owner of immovable property
3. Person who does foreign-travel
4. Subscribers of a telephone
5. Holder of a credit card
6. Incurs expenses on himself

Income Tax Rates

For General
For Year 2005-2006
Taxable Annual Income Slab (In
Tax Rate (In %)
Rs.)
0 - 1,00,000 Nil

1,00,001 - 1,50,000 10%

1,50,001 - 2,50,000 20%

More than 2,50,001 30%

For Women
For Year 2005-2006
Taxable Annual Income Slab (In
Tax Rate (In %)
Rs.)
0 - 1,35,000 Nil

1,35,001 - 1,50,000 10%

1,50,001 - 2,50,000 20%

More than 2,50,001 30%

For Senior Citizen

For Year 2005-2006
Taxable Annual Income Slab (In
Tax Rate (In %)
Rs.)
0 - 1,85,000 Nil

1,85,001 - 2,50,000 20%

More than 2,50,001 30%

Note:
 Surcharge @ 10% applicable if total income exceeds Rs. 8.5 lakh for A.Y. 2005-06 and
Rs. 10 lakh for A.Y. 2006-07.
 There is a new section 80C according to which a person can get rebate upto Rs.
1,00,000 against insurance premium, PF contributions and other such schemes.
 In case of higher education there is a deduction in tax for a maximum period of 8
years.
 Marginal relief would be provided to ensure that the additional income tax payable
including surcharge, on the excess of income over Rs. 10,00,000 (Rs. 8.5 lakh for A.Y.
2005-06) is limited to the amount by which the income is more than Rs. 10 lakh (Rs.
8.5 lakh for A.Y. 2005-06).
 Education cess @ 2% on tax plus surcharge.

Income Tax Dates

It is very important to filing of income tax return before the last date of return filing. Last date
for an individual having only salary income is 30th June as well as last date for individual
having business income (if auditing not required) is 31st august. There is a list of important
dates for income tax return filing:

List of Dates:
14th January
Submission of tax deduction against interest, dividend or any other amount paid to non-
resident during 1st,October - 31st,December. Form No : 27

15th March
In case of other than company - Payment of 3rd installment of advance for the financial year
In case of a company - Payment of 4th installment of advance for the financial year

14th April
Submission of statement of tax deduction against interest, dividend or amount paid to non-
resident during 1st,January - 31st,March. Form No : 27

30th April
(i) Certificates of such taxes which are deducted due to payment given to employees as their
salary. From No : 16
(ii) Certificates of such taxes, which are deducted due to amount, paid as insurance
commissions. Form No : 16A
(iii) Certificate of tax deducted other than salary Form No: 16A
(iv) filing annual return of dividend and income in terms of units under section 206 of Income
Tax Act 1961. Form No : 26

31st May
(i) filing of annual return against earning from prize, lottery. Form No : 26B
(ii) filing of annual return against earning from horse races. Form No : 26BB
(iii) filing of annual return against salary paid. Form No : 24

15th June
In case of company - Payment of 1st installment of advance for the financial year

30th June
(i) filing of income tax return if assessee is not a corporate/ cooperative and having no source
of income from business/ profession. Form No: 3/2A
(ii) filing of income tax return against insurance commissions/ commission paid without
deduction of tax. Form No : 26D, 26E
(iii) filing of income tax return against interest either on securities or on any other. Form No :
25, 26A
(iv) filing of income tax return against payment to contractors Form No : 26C
(v) filing of income tax return against deposits under national saving schemes Form No : 26F
(vi) filing of income tax return against payment for purchasing of Mutual Funds Form No : 26G

(vii) filing of income tax return against payment of commission on sale of lottery Form No :
26H
(viii) filing of income tax return against payment of rent Form No : 26J

14th July
Submitting date for the statement of tax deducted from interest on amount paid to non
residents during 1st,April - 30th,June Form No : 27

31st August
filing of income tax return if
(i) Assessee is not a corporate/ cooperative
(ii) There is no need of auditing accounts under any law
(iii) Total income includes income through business or other profession.
Form No: 2
15th September
In case of other than company/ corporate : Payment of 1st installment of advance income tax
In case of a company/ corporate : Payment of 2nd installment of advance income tax

14th October
Submitting date for the statement of deduction of tax interest, dividend and other amount
paid to non resident during 1st July - 30th September. Form No : 27

31st October
(i) In case of non corporate : Submitting auditing report under section 44AB of Income Tax
Act. Form No : 3CA, 3CB, 3CC, 3CD, 3CE
(ii) In case of cooperative/ non corporate : filing of income tax return of the relevant
assessment year if it require to get his account audited under Income Tax Act. Form No : 2

filing of half yearly return against tax collected during 1st April - 30th September Form No :
27EA, 27EB, 27EC, 27ED
Date of submission of annual audited account for approved programs under section 35 (2AA)
of Income Tax Act 1961.

30th November
In case of a company - filing of annual return with auditing report under section 44AB
For annual return filing : Form 1
For submitting auditing report : Form 3CA & 3CD

15th December
In case of other than company - Payment of 2nd installment of advance for the financial year
In case of a company - Payment of 3rd installment of advance for the financial year

Income Tax Deductions

In Case of Donations For Charity

Under section 80-G of the Income Tax Act, there are following relief in case of Donations:
 Donation to certain funds, approved education institutions of national importance,
charitable institutions.
 The deduction will be 50% of the amount.
 Deduction may be 100% if donation is given to Prime Minister Relief Funds, National
Foundation for Communal Harmony, Blood Transfusion Council, The Africa Fund,
Earth-quake Relief Fund.

In Case of Physically Handicapped Persons

 A person who is suffering from permanent physical disability or mental retardation is
entitled to deduction upto Rs. 40,000.
 Handicapped must be certified by a physician, surgeon or a psychiatrist who is working
in a government hospital.

Under section 80DD and 80U of Income Tax Act, physical disability must be one of the
following:
1. Permanent or more than 50% disability in limb
2. Permanent or more than 60% disability in 2 or more limb
 3. Permanent loss of voice
4. Permanent blindness
5. Mental Retardation in which mental intelligence is less than 50% of normal required
intelligence

In Case of Treatment of Handicapped Dependents

All the person who are dependent on physically handicapped person comes under this
category. There is provision of deduction in tax against expenditure on medical treatment,
training & rehabilitation of handicapped dependents or amount paid in an approved scheme of
LIC or UTI.

In Case of Repayment of Loan Taken For Higher Education

There is deduction in income tax in respect of repayment of loan taken by a student from a
bank or any other financial institutions for higher education in India or worldwide.

In Case of Contribution To Pension Fund

Under section 80CCC there is a provision of deduction to an individual for any amount paid to
keep in force annuity plan of the LIC for receiving pension from a fund set up by that
corporation, as per section 10(23AAB) of Income Tax Act,1961. The amount received by
assessee or his nominee will be taxable. There will be no rebate under section 88 to the
persons whose deduction under this section has been approved.

In Case of Amount Paid as House Rent

Under section 80GG of the Income Tax Act there is a provision of deduction in tax on amount
paid by a person (not a salaried person getting housing allowance) for residential
accommodation. Deduction in tax will be measured under following parameters :-
 The excess of actual rent paid over 10% of the total income (excluding long term
capital gain & income, as per section 115A or 115D of Income Tax Act, 1961)
 Deduction will not be allowed to an assessee who owns an residential accommodation
at a place where he is temporarily residing
 Deduction will not be allowed to an assessee who owns an residential accommodation
at any place and has also claimed for deduction in respect of self occupied property

In Case of Remuneration Received in Foreign Currency by Employer

Under section 80RR an individual resident of India who is an author or writer or photographer
or TV/ film cameraman or TV/ film director or musician or actor or sport person or other such
artist whose source of income is foreign income and brings income to India according to
foreign exchange regulation, then he is entitled to get a deduction of amount equal to 75% of
such income as it is brought in India in convertible foreign exchange. This amount will be
deducted from his taxable income within the period 6 months or period allowed by Chief
Commissioner of Income Tax Department. It is necessary to show the documents in favor of
your claim.

In Case of Remuneration Received For Services Rendered Outside India

Under section 80RRA of the income tax act, an individual who is getting remuneration in a
foreign currency from an employer for his service in outside of India, will get a deduction of
75% of such income brought into India. This amount will be deducted from his taxable income
within the period 6 months or period allowed by Chief Commissioner of Income Tax
Department. It is necessary to show the documents in favor of your claim.

In Case of Certain Investment

Under section of 80L of the Income Tax Act, there are few investment which is a matter of
deduction in taxable amount. Here an assessee will get a deduction of amount upto Rs.12,000
- 15,000 from income on certain specified investments in government securities, UTI mutual
funds, bonds and other tax saving schemes. An assessee will be entitled for deduction from his
taxable income if he is getting interest or dividend on certain investment which are as
follows :
 Investment in Securities of central or state government
 Investment in National Saving Schemes
 Investment in Debentures or Bonds of an institution/ authority/ public sector
company/ cooperative society or other such organization notified by central
government.
 Investment in under National Deposit Schemes as notified by Central Government
 Investment in under other schemes which are notified by central government like
national saving schemes, time deposit schemes, recurring deposit schemes.
 Investment in under monthly income scheme of the post office
 Investment in units of UTI and Mutual Funds (under Section 10(23D) of the Income
Tax Act)
 Investment in with banking institutions
 Investment in financial institution working for Industrial Development of India
 Investment in an public company limited working for providing long term financing of
housing accommodation
 Investment in such authorities which are working for planning & development of cities
and villages
 Investment in co-operative societies

Income Tax Exemptions

According to Chapter III of the Income Tax Act, 1961 there is a provision of
exemptions in income tax. There are few specified income on which a person can get
exemptions. It means that at the time of calculating annual income, this type of income
will not be added. For claiming any of these exemptions, it is necessary to furnish
documents which shows that your income comes under this list. If a person don't
furnish required documents then he/ she will not be entitled for this

Income Type Under Section

Agriculture Income 10(1)

Receipts from a Hindu Undivided Family being paid out of 10(2)

family's income or in the case of an impartible estate
belonging to family being paid out of such estate's income

Share of partner in total income of a firm which is assessed 10(2A)

separately as such.

Receipts being in the nature of casual and non-recurring 10(3)

nature not exceeding Rs. 5,000/- (Rs. 2500/- in the case
of winnings from horse races, etc).

Interest on securities and bonds including premium on 10(4)(i)

redemption of bonds by Non Resident as notified by
Central Government.
Interests on amounts in Non-resident (External) Account in 10(4)(ii)
any bank in India being maintained as per FERA, 1973 and
rules thereunder by an individual..

Interest on specified Central Government's Savings 10(4B)

Certificates which were subscribed to in convertible foreign
exchange remitted from a country outside India as per
FERA and rules thereunder by an individual citizen or a
person of Indian Origin..

Value of Leave Travel Concession or assistance not 10(5)

exceeding the amount actually spent.

Specified remuneration to a foreigner and non-resident 10(5A)

individual for shooting of film in India who comes solely for
such purpose.

Income-tax paid by the employer carrying on scientific 10(5B)

research in respect of the salary income of certain
technicians from abroad commencing from 1.4.93 subject
to conditions stated therin.

Incomes of foreginers as passage money. 10(6)(i)

Remuneration received by an ambassador, diplomats, etc. 10(6)(ii)

as specified.

Remuneration received by employees of foreign companies 10(6)(vi)

in respect of services rendered during stay in India subject
to conditions as specified.

Remuneration received from foreign philanthropic 10(6)(via)

institutions etc. in respect of services rendered in India
subject to both the institutions and the purposes thereof
being approved by the Central Govt.

Income-tax paid by the employer carrying on scientific 10(6)(viia)

research in respect of the salary income of certain
technicians from abroad commencing from 1.4.88 till
31.3.93 subject to conditions stated therein.

Salaries to non-resident employed on a foreign ship 10(6)(viii)

subject to aggregate stay of not more than 90 days in the
previous year.

Salaries to non-residents professors or teachers. 10(6)(ix)

Income of individuals engaged in research work in India 10(6)(x)

under duly approved research schemes.

Remuneration received from foreign government for 10(6)(xi)

training in a government office or undertaking as
employee.

Death-cum-retirement gratuity payable to specified 10(10)(i)

members of civil or defence services.
Gratuity not exceeding Rs.3 ½ Lakhs payable under the 10(10)(ii)
Payment of Gratuity Act, 1972

Any other gratuity not exceeding Rs. 2 ½ Lakhs received 10(10)(iii)

by employee on retirement or termination of his services
or by legal heirs on death of employee limited to 15 days
salary for each completed year of service.

Receipt in respect of commutation of pension as per 10(10A)

specified limits.

Leave encashment not exceeding 8 months salary and 10(10AA)

subject to specified conditions & limits.

Compensation paid to employees on account of 10(10B)

retrenchment under Industrial Disputes Act, 1947:
Ascertainment of amount to be either minimum Rs. 50,000
or as per the said Act whichever is less.

Payments made under Bhopal Gas Leak Disaster Act, 10(10BB)

1985.

Receipt of amount on voluntary retirement upto Rs. 10(10c)

5,00,000 subject to specified scheme and guidelines and
necessary approval.

Payment on a Life Insurance Policy, including bonus 10(10D)

thereon but excluding therefrom amounts received u/s
80DDA(3).

Receipt of Payment from Public Provident Fund or 10(11)

Statutory Provident Fund.

Payment to employee from recognised provident fund in 10(12)

respect of accumulated balance standing to the credit
thereof.

Receipt of Payment from Superannuation Fund subject to 10(13)

specified conditions and limits.

Special allowance to employee viz., house rent allowance. 10(13A)

Special benefit to employees within meaning of s.17(2) 10(14)

subject to conditions stated therein.

Receipt of premium on account of Exchange risk from 10(14A)

borrower of foreign currency.

Receipt of interest or premium on redemption etc. on 10(15)(i)

notified securities, bonds etc. such as monthly payment on
15-year Annuity Certificates subject to specified condition
and limits.

Interest on the new Capital Investment Bonds. 10 (15)(iib)

Interest income from notified Relief Bonds w.e.f., 10 (15)(iic)

assessment year 1989-90.
Interest on notified bonds owned by a non-resident etc. 10 (15)(iid)
and bought in foreign exchange subject to certain
conditions.

Interest on securities under the Ceylon Monetary Law Act, 10 (15)(iii)

1949

Interest payable to any bank incorporated outside India 10 (15)(iiia)

and approved by RBI.

Receipt of interest from Govt. etc. on moneys lent to them 10 (15)(iv)(a)

from sources outside India.

Receipt of interest from industrial undertaking in India 10 (15)(iv)(b)

being approved foreign financial institutions in respect of
moneys lent to it.

Receipt of interest from industrial undertaking in India in 10 (15)(iv)(c)

respect of moneys lent to it outside India for purchases of
raw materials, plant & machinery, etc. from abroad.

Receipt of interest from specified financial institution in 10 (15)(uv)(d)

India in respect of moneys lent to it from sources outside
India.

Receipt of interest from financial institution other than 10 (15)(iv)(e)

those covered by 15(iv)(d) above in respect of moneys
lent to it from sources outside India for the purposes as
specified.

Receipt of interest from industrial undertaking in India in 10 (15)(iv)(f)

respect of moneys lent to it in foreign currency from
sources outside India.

Receipt of interest from scheduled bank in respect of 10(15) (iv)(fa)

deposits made in foreign currency subject to same being
duly approved by the RBI.

Receipt of interest from public company having been 10 (15)(iv)(g)

formed and registered in India to provide long-term
finances for construction/purchase of houses in respect of
moneys lent to it in foreign currency from sources outside
India.

Receipt of interest from public sector company in respect 10 (15)(iv)(h)

of bonds and debentures as notified.

Receipt of interest from Government in respect of deposits 10 (15)(iv)(i)

made in its specified schemes from funds due on
retirement.

Receipt of interest on securities held by Welfare 10 (15)(v)

Commissioner, Bhopal Gas Victims as also on deposits
made with RBI or Public Bank from 1-4-1994 for the
benefit of such victims.

Receipt of payment from an Indian company carrying on 10(15A)

business of operation of aircraft, to acquire an aircraft or
aircraft engine excluding spares etc., on lease from foreign
Govt. or enterprise under an agreement entered into
before 1-4-1997 and being duly approved.

Scholarships granted to meet the cost of education 10(16)

Daily allowances received by MPs, MLAs and MLCs. 10(17)(ii)

Receipt of allowances by MPs under the Member of 10(17)(ii)

Parliament [Constituency Allowance] Rules, 1986.

Receipt of allowances by MLAs under the limit of Rs. 10(17)(iii)

2,000/- per month

Receipt of any amount in connection with an award, 10(17A)(i)

including award in kind, for literary, scientific or artistic
work etc. instituted by Government etc.

Receipt of amount in connection with a reward including 10 (17A)(ii)

award in kind from Government in respect of public
interest purposes.

Receipt of ex-gratia payments from Government to ex- 10(18A)

rulers in respect of abolition of their privy purses.

Amount calculated as annual value being the notional 10(19A)

value in respect of any one palace to be treated for the
purpose as residence by ex-ruler.

Income of a local authority as specified. 10(20)

Income of a development or housing improvement 10(20A)

authority in a city and/or village.

Income of approved scientific and research association. 10(21)

Income of a university or other educational institution. 10(22)

Income of a hospital or other such institution working 10(22A)

exclusively for philanthropic purposes and not for profit.

Income of news agency having been set up in India for the 10(22B)
sole purpose of collection & distribution of news provided
its income in any way is not distributed to its members.

Income of associations for promotion of sports, etc. as 10(23)

specified.

Any income of associations or institutions for controlling 10(23A)

professions of law, medicine, engineering, accountancy,
architecture, etc., except incomes derived from house
property or for rendering any specified services or interest
on/dividends from its investments.

Income of regiment Fund or Nonpublic fund of armed 10(23AA)

forces established for welfare of past and present members
Income of a fund established for welfare of employees or 10 (23AAA)
their dependents, the employees being members thereof
subject to fulfillment of conditions as to approval and
otherwise.

Income of fund set up by LIC from 1-4-1996 in respect of 10 (23AAB)

pension scheme subject to conditions as specified.

Income of a charitable trust or registered society, etc. 10(23B)

working exclusively for development of khadi & village
industries and not for profit as per conditions specified.

Income of Khadi & Village Board, etc.. 10(23BB)

Income received by a statutory public religious or 10 (23BBA)

charitable trust or endowment.

Income of European Economic Community derived in India 10 (23BBB)

in the shape of interest, dividends or capital gains arising
out of investments from its funds under such schemes as
notified.

Any income of SAARC Fund having been established under 10 (23BBC)

Colombo Declaration dt. 21-12-91 by Heads of State or
Government of member countries for the purposes of
development of regional projects.

Income on behalf of Prime Minister's National Relief Fund. 10 (23C)(i)

Income on behalf of Prime Minister's Fund (Promotion of 10 (23C)(ii)

Folk Art.)

Income on behalf of Prime Minister's Aid to Students Fund. 10 (23C)(iii)

Income of National Foundation for Communal Harmony. 10 (23C) (iii)(a)

Income of any fund or institution established for charitable 10 (23c)(iv)

cause.

Income of any trust or institution established wholly for 10 (23c)(v)

public religious and/or charitable purposes subject to
specified conditions.

Income of specified Mutual Funds registered and/or set up 10(23D)

under /by SEBI Act, 1992; public-sector bank/financial
institution or RBI fulfilling such conditions as specified.

Income of Exchange Risk Administration Fund having been 10(23E)

set up by public financial institutions either jointly or
separately as per specified conditions.

Income in the shape of dividends or long-term capital 10(23F)

gains derived by a venture capital fund/company from its
investments in the equity of a venture capital undertaking

Income in the shape of dividends, interest or long-term 10(23G)

capital gains derived by a infrastructure capital
fund/company from its investments in the equity or long-
term finance of any infrastructure facility oriented
enterprise fulfilling such conditions as specified.

Income of registered trade-union relating to "income from 10(24)

house property" and "income from other sources" as
specified.

income received by trustees of Provident, Superannuation 10(25)

& Gratuity Funds relating to interest on securities and
capital gains resulting from sale or exchange of such
securities as specified.

Income of Employees State Insurance Fund as specified. 10(25A)

Income of member of Scheduled tribes as specified. 10(26)

Income accruing to any person from any source of income 10(26A)

in the district of Ladakh or outside India subject to the
person being resident in the said district in the relevant
previous year and satisfying other conditions as specified.

Income from winnings from lottery, agreement for draw in 10(26AA)

respect of which having been entered into upto 28-2-89
between Sikkim Govt. and organising agents of such
lottery subject to fulfilling of such condition as specified.
{to be omitted from 1-4-1998}

income of any statutory corporation formed for promoting 10(26B)

the interests of Scheduled Castes or Scheduled tribes, etc.,
as specified.

Income of any statutory corporation formed for promoting 10(26BB)

the interests of the members of any minority community.

income of any cooperative society formed for promoting 10(27)

the interests of members of Scheduled Caste & Tribes.

Any amount adjusted or paid relating to Tax Credit 10(28)

Certificates. {To be omitted from 1-4-1998}

Income of an authority from letting of 10(29)

godowns/warehouses for storage, processing or facilitating
marketing of goods as specified.

Receipt by way of subsidy received from Tea Board as 10(30)

specified.

Receipt by way of subsidy received from the concerned 10(31)

Board by an assessee growing or manufacturing rubber,
coffee, cardamom and other notified commodities.

Income relating to minor child if clubbed u/s 64(1A) in the 10(32)

hands of the assessee not exceeding Rs.1,500 in respect of
each minor chid.

Any income by way of dividends (whether interim or 10(33)

otherwise) declared, distributed or paid by a Domestic
 Company on or after 1-6-1997 as referred to in section
115-O.

Any profits and gains of newly established industrial 10A

undertakings in free trade zones, electronic
hardware/software technology parks for any five
consecutive assessment years within a block of eight years
from the assessment year corresponding to previous year
in which production started subject to fulfilling all the
conditions as specified.

Any profits and gains of newly established 100% export- 10B

oriented units for any five consecutive assessment year
within a block of eight years from the assessment year
corresponding to previous year in which production started
subject to fulfilling all the conditions as specified.

Income of any person from the property held under trust 11

wholly or in part for charitable or religious purposes as
specified in detail and subject to the provisions of sections
60 to 63.

Receipt of any voluntary contributions by a trust/institution 12

created/ established wholly for charitable or religious
purposes excluding the contributions made to it with
specific direction to form part of corpus: Such voluntary
contributions be deemed to be income from property in
terms of section 11.

Income of political party chargeable as income from house 13A

property or other sources or by way of voluntary
contributions received by it from any person subject to
conditions as specified.

Income Tax Saving Schemes

National Savings Certificates (NSC)

Public Provident Fund (PPF)

Kisan Vikas Patra (KVP)

Post Office Scheme (POS)

Special Schemes For Retiring Person

Postal Life Insurance

Dividend
National Savings Certificates (NSC)
National Saving Schemes (NSC) is one of the popular Income Tax Saving schemes which is
available throughout the year. It can be operated by single, joint, or minor with his/her parent
or guardian. There is a return on this scheme at interest rate of 8%. The minimum investment
limitaion of the scheme is Rs.100/- and with no upper limit. Other investments can be done in
multiple of Rs. 100/-. This scheme has a mturity period of 6 years. It is transferable and also
there is a provision of loan on the basis of this scheme. Under section 88 of the Income Tax
Act, 1961 any person can take benefit in income tax on amount invested in this scheme and
under section 80L of Income Tax Act, 1961 there is a provision of benefit on interests coming
from scheme.

Public Provident Fund (PPF)

Under this scheme, there is a return at the interest rate of 8% p.a. The minimum investment
limit is Rs. 500/- and maximum limitation is Rs. 70,000/-. It can be opened any time
throughout the year. It can be operated either single or jointly. In case of minor, with
parent/guardian. There is also a facility of nomination in this scheme. This scheme has a
maturity period of 15 years. The first loan can be taken in the third financial year from the
date of opening of the account, or upto 25% of the amount at credit at the end of the first
financial year. Loan amount can be returned in maximum of 36 installments. A person can
withdraw an amount (not more than 50% of the balance) every year. Under Section 88 of
Income Tax Act, 1961 there is a provison of tax benefit by investing in this scheme. Interest
on this schme is tax free.

Kisan Vikas Patra (KVP)

Money invested in this scheme doubles in 8 years. There is a minimum investment limitation
of Rs.100/- with no upper limit. This scheme is available throughout the year. It can be
operated either single or jointly. In case of minor, with perent/ guardian. Facility for
nomination is also available under this scheme. Currently there is no tax benefit on investment
under this scheme.

Post Office Scheme (POS)

It is one of the best Income Tax Saving Scheme. It can be operated by either single or jointly.
In case of minor, with parent/ guardian. It is available throughout the year. There are several
types of post office schemes depending upon the type of investment and maturity period. Post
office schemes can be dividen into following catagories:
 Monthly Deposit
 Saving Deposit
 Time Deposit
 Recurring Deposit

Special Schemes For Retiring Person

Government Employees : There is a return at the rate of 8% per annum. The minimum
investment is Rs.1000/- and maximum, amount equal to the total retirement benefit. Maturity
period of this scheme is 3 years. According to Income Tax Act, 1961 interest on this scheme is
tax free.

Public Sector Employees: Under this scheme there is a return of 9.5% payable half-yearly on
30th June and 31st December respectively. There is a minimum investment limitation of
Rs.1000/- and the maximum limitaion is the amount equal to total retirement benefit. It can
be operated by retired PSU employees in his/her own name or with the spouse, jointly. In this
scheme, there is a facility of premature encashment. Entire balance or part thereof can be
withdrawn after the expiry of three years from the date of deposit. Maturity period of this
scheme is 3 years. According to Income Tax Act, 1961 interest on this scheme is tax free.

Postal Life Insurance For

This scheme is in operation for the last 117 years. This scheme started in 1884 as a welfare
measure for the employees of Postoffices & Telegraphs Department under Government of
India to the Secretary of State (having dispatch No. 299 dated 18-10-1882). But after few
years, various departments of Central and State Governments were extended its benefits.
Now it is open for employees of all departments of Central as well as State Government,
Nationalized Banks, Public Sector Undertakings, Financial Institutions, Local Bodies like
Municipalities and Zila Parisads, Educational Institutions aided by the Government. According
to Income Tax Act there is also a provision of special relaxation in income tax on the basis of
investment done in urban or rural areas.

Dividend
According to Income Tax Act,1961 there is a provision benefit in Income Tax if assessee has
an income as a dividend on investment in any of the following:
 Shares
 Mutual Funds
 Unit of UTI

This dividend can be given by any company or coperative society.

Income Tax Calculator

How to calculate tax

Example 1: Let us take a case where the assessee's income is Rs. 2,10,000.
 According to the Income Tax Slab, the first 1,00,000 is not taxable.
 The next Rs. 50,000 is taxable @10%.
 10% of Rs. 50,000 is Rs. 5,000.
 The remaining Rs. 60,000 i.e. 2,10,000 - (1,00,000+50,000) is taxable @20%.
 20% of Rs. 60,000 is Rs. 12,000.
 Therefore, the net Income Tax Payable is Rs. 5,000 + Rs. 12,000 i.e. Rs. 17,000.

Example 2: Let us take a case where the assessee is women and whose taxable income is Rs.
2,40,000.

 According to the Income Tax Slab, the first 1,35,000 is not taxable.
 The next Rs. 15,000 is taxable @10%.
 10% of Rs. 15,000 is Rs. 1,500.
 The remaining Rs. 90,000 i.e. 2,40,000 - (1,35,000+15,000) is taxable @20%.
 20% of Rs. 90,000 is Rs. 18,000.
 Therefore, the net Income Tax Payable is Rs. 1,500 + Rs. 18,000 i.e. Rs. 19,500.
Example 3: Let us take a case where the assessee is senior citizen and whose taxable income
is Rs. 2,90,000.
 According to the Income Tax Slab, the first 1,85,000 is not taxable.
 The next Rs. 65,000 is taxable @20%.
 20% of Rs. 65,000 is Rs. 13,000.
 The next Rs. 40,000 i.e. 2,90,000 - (1,85,000+65,000) is taxable @30%.
 30% of Rs. 40,000 is Rs. 12,000.
 Therefore, the net Income Tax Payable is Rs. 13,000 + Rs. 12,000 i.e. Rs. 25,000.

(If the assesse claims any rebate/ exemption, the claimed amount will be deducted from his
income with reference to the law of Income Tax Act before calculating the tax.)

Note:
 Surcharge @ 10% applicable if total income exceeds Rs. 8.5 lakh for A.Y. 2005-06 and
Rs. 10 lakh for A.Y. 2006-07.
 There is a new section 80C according to which a person can get rebate upto Rs.
1,00,000 against insurance premium, PF contributions and other such schemes.
 In case of higher education there is a deduction in tax for a maximum period of 8
years.
 Marginal relief would be provided to ensure that the additional income tax payable
including surcharge, on the excess of income over Rs. 10,00,000 (Rs. 8.5 lakh for A.Y.
2005-06) is limited to the amount by which the income is more than Rs. 10 lakh (Rs.
8.5 lakh for A.Y. 2005-06).
 Education cess @ 2% on tax plus surcharge.

Income Tax Complaint

There is a provision of Income Tax Complaint in Income Tax Act, 1961. According to the act,
one can file a complain against any person who is not fulfilling the Income Tax Act to his
assessing officer or other officer incharge like CIT or CCIT or DGIT (investigation), responsible
for its further processing. The person who is filing the complain can also submit proof/
evidence for his/her own interest. On the basis of his/her complaint, if the IT department
collects more tax from such person, then he/she will be rewarded monetarily from the
department.

Indian Budget 2006-07 on Income Tax

Union Budget of India - Income Tax

February 28, 2006

Income Tax

 No changes in the rates of personal income tax or corporate income tax.

 No new taxes are imposed.
 Abolishment of one by six scheme for filing of income tax returns.
 25% across-the-board increase in securities transaction tax
 Exemption from taxes to cooperative lending banks and rural development
banks under Section 80(B).
 Fixed deposits in scheduled commercial banks with at least five year
maturity will get tax exemption for savings under section 80C of Income Tax
Act.
 The Rs 10,000 exemption limit for investment in pension funds under Section
80CCC has been removed but these investments would be brought under
Sec 80C subject to a ceiling of Rs 1,00,000.
 Donations to only relgious institutions will be exempted from tax.
 Minimum alternative tax on corporates increased from 7.5 per cent to 10 per
cent.
 Constituency allowances of MLAs to be treated as constituency allowances of
MPs for income tax purposes.
 Fringe Benefit Tax modified. Threshhold limits raised, but FBT will remain as
it is justified for ensuring horizontal equity.

 To check tax evasion more items would come under annual information
return reporting.