income tax handbook 2014

Tax Hand Book

Issue Date – Apr 24, 2013 (Updated on July 10, 2013 & Feb 26, 2014)

2 Private & Confidential . Refer

disclaimer at the end of the report

Disclaimer: The Income Tax rules and regulations may be subject to modifications by legislative, regulatory, administrative or judicial decisions. Investors

are advised to consult his/her financial advisor/consultant with respect to the specific tax implications arising out of his/her transactions. This presentation

is for reference only and is not to be construed as tax advice.

Contents

A. Residential Status

B. Income Tax Slab Rates

C. Sources of Income

D. Salary

E. Business Income

F. Speculation Income

G. Capital Gains

H. Taxability of Gifts

I. Income from other sources

J. Income from House Property (Rental Income)

K. Clubbing of Income

L. Withholding of Income

M. Limited Liability Partnership

N. NRI Bank Accounts

O. Taxation of Trust Structures

3-4

5

6

7

8-9

10

11-18

19

20-23

24-25

26-27

28-30

31-32

33-36

37






Residential Status

Required to be determined for each assessment year for determining the scope of total income.

Residential Status

The extent of an individual’s liability for personal income tax depends on whether the individual is • resident and ordinarily resident, • resident but not ordinarily resident, or • non-resident in India

Residential Status Determination

Section 6 (1) – Resident

An individual is said to be resident in India in any previous year if he fulfills any one of the following two basic conditions:

• He is in India in that previous year for a period or periods amounting in all to 182 days or more; or

• He is in India for a period or periods amounting in all to 60 days or more during the previous year and 365 days or more during the 4 years preceding that previous year

Non-Resident If an individual does not satisfy both the basic conditions mentioned above, he shall be considered as a non-resident

Section 6 (6) – Resident and not ordinarily resident

In addition to fulfilling one of the above basic conditions, in case an individual fulfills any of the following additional conditions, he will be treated as “Not Ordinarily Resident” in India in that previous year:

• He has been a non-resident in India in 9 out of the 10 preceding previous years; or

• He has been in India for a period not exceeding 729 days during the 7 preceding previous years.

Resident and ordinarily resident In case an individual fails to satisfy both the conditions for not ordinarily resident, he shall be considered as resident and ordinarily resident.

Taxability of Resident & ordinarily resident Resident but not ordinrariy resident Non-resident

1. Income received or deemed to be received in India Taxable Taxable Taxable

2. Income accruing or arising or deemed to accrue or arise in India Taxable Taxable Taxable

3. Income accruing or arising outside India from-

i) Business controlled in India or profession set up in India Taxable Taxable Not Taxable

ii) Any other source Taxable Not Taxable Not Taxable






Residential Status

Particulars Explanation

Exceptions to Basic conditions

• An individual, • who is a citizen of India, • leaving India in any year for employment purpose or • as a member of the crew of an Indian ship,

• is considered as resident in India in that year only if he has been in India for 182 days or more.

• A citizen of India or person of Indian origin • who is residing outside India and • comes to India, on a visit in any previous year

• is required to stay in India for 182 days for being treated as Resident.

• If an employee is assigned to entities outside India & • he stays in India for less than 182 days during the previous year as per Section 6(1)(a), • he could obtain the status of non resident

Residential Status of -

Company - Section 6 (3)

The following companies are considered as ‘resident’ in India • Any Indian Company • Any other company whose control & management is situated wholly in India

In any other case, the company shall be considered as non – resident

Firm and AOP - Section 6 (6)

• Firm and AOP is considered as resident if the control and management is wholly or partly situated in India • If control & management is wholly situated outside India, such firm and AOP is considered as non-resident

Notes:

1. As per the Income Tax Act, 1961 a person shall be deemed to be of Indian origin if he or either of his parents or any of his grand parents was born in undivided India.

2. Under the Foreign Exchange (Deposit) Regulations, 2000, which deal with banking accounts in India by NRIs, the term PIO is defined as under a) he at any time held an Indian Passport, or b) he or either of his parents or any of his grandparents was a citizen of India by virtue of the Constitution of India or the Citizenship Act, 1955, or c) he is a spouse of an Indian citizen or a person referred to in (a) or (b) above






Income Tax Slab Rates

Rates of tax for Individuals, HUF, AOP, BOI and Artificial Juridical Person

Income Rates of tax

Upto Rs. 200,000/- (Basic exemption limit) NIL

Above Rs. 200,000/- upto Rs. 500,000/- 10%

Above Rs. 500,000/- upto Rs. 10,00,000/- 20%

Above Rs. 10,00,000/- 30%

Notes:

1. The above mentioned basic exemption limit of Rs.200,000/- shall be applicable to both men & women (resident & non-resident) below 60 years and, Rs.250,000/- in case of resident individuals who are 60 years or more at any time during the previous year but below the age of 80 years.

2. In case of every resident individual aged 80 years or more at any time during the previous year, the basic exemption limit shall be Rs. 500,000/-.

3. In case of trust, political parties and other artificial juridical persons, the above mentioned rates shall apply unless exemption is granted or maximum marginal rate is applicable depending upon the facts of each case.

4. Surcharge @ 10% shall be applied for taxable income above Rs. 1 crore

5. Education cess @ 3% shall be applied on income tax plus surcharge

Rates of tax for firms and companies

Particulars Firms &

LLPs Domestic

Co Foreign

Co

Basic Tax Rate 30% 30% 40%

Surcharge - if taxable income > Rs. 1 crore in the previous year N.A 5% 2%

Surcharge - if taxable income > Rs. 10 crore in the previous year N.A 10% 5%

Education cess on Income tax plus surcharge 3% 3% 3%

Rebate of tax for resident individuals having total income of up to Rs. 5 lakhs (Section 87A of the Income Tax Act, 1961)

1. The above mentioned rebate shall be equal to the amount of income tax payable on the total income for any assessment year or an amount of Rs. 2000, whichever is less.






Sources of Income

Salary

Business (Non-speculation) Income

Speculation Business Income

Income from Capital Gains

Interest Income

Dividend Income

Rental Income






Income under the head “Salary”


Definition of salary

“Salary” includes any amount due to or received by an employee including arrears of salary from an employer or former employer (Sec.15)

So, any income earned in pursuance of an employer-employee relationship is taxable as Salary.

This includes compensation received before joining employment or after cessation of employment.

Constitutents of salary

As per Section 17 (1), salary includes

• wages,

• any annuity or pension,

• any gratuity,

• any fees, commissions, perquisites or profits in lieu of or in addition to any salary or wages,

• any advance of salary,

• leave encashment,

• the annual accretion to RPF (employer's contribution in excess of 12% of salary and Interest credited to RPF in excess of 9.5% p.a

• accumulated transferred balance from unrecognised PF to RPF to the extent it is chargeable

• employer's contribution to employee's account under a pension scheme as per Sec. 80CCD

Taxable Year Year in which it is due or received, whichever is earlier.

Tax rates Subject to normal slab rates

Computation Particulars Amount

Basic Salary xxx

Add: Taxable allowance (after exemption u/s 10) xx

Add: Taxable perquisites u/s 17 xx

Gross Salary xxx

Less: Deduction u/s 16

Entertainment Allowance xx

Profession Tax xx

Taxable Salary xxx






Business Income


Definition

Profits and gains of business or profession carried on by the assessee (including deemed profits and income from discontinued business) - Sec. 28, 41 and 176

Section 2 (13) defines "Business" to include any

• trade,

• commerce or

• manufacture or

• any adventure or concern in the nature of trade, commerce or manufacture

Taxable Year Due basis or receipt basis depending on accounting method regularly followed by the assessee - Sec. 145

Tax rates Subject to normal slab rates

Taxation of Income from trading in capital markets

It is taxed under the head of Non speculation business income

Tax Audit for F&O trading If turnover > 100 lakh, tax audit u/s 44AB is required

Turnover for F&O trading

Since the transaction in shares are non-delivery based, it is only the net of the sales and purchases that is to be treated as turnover. For the purpose of 44AB , following items should be considered to constitute turnover:-

• The total of positive and negative differences , plus

• Premium received on sale of options is also to be included in turnover ,plus

• In respect of any reverse trades entered, the difference thereon But not the total value of contract.

Turnover for delivery based trading Gross sale value has to be taken as turnover

Tax Audit for delivery based trading If gross sale value > 100 lakh, tax audit u/s 44AB is required






Business Income …… contd.


Commodity Derivatives As per the Finance bill of March 2013, income from commodity derivatives would not be considered as speculative income and introduced Commodities Transaction tax @ 0.01% on non-agri futures traded on the bourses

Set off

U/s 72, non-speculation business income can be set off against

• any other business income &

• then against short term capital gains,

• house property income &

• income from other sources,

• but not against salary income.

Carry Forward Any remaining balance (post set off) can be carried forward for next 8 assessment years to be set off only against non-speculation business income

Computation

Particulars Amount

Net Profit as per P/L Account xxx

Add: i) Inadmissible expenses xx

ii) Income taxable but not credited to P/L Account xx

xxx

Less: i) Income credited but not taxable xx

ii) Allowable expenses & debited to P/L Account xx

Taxable Income xxx






Speculation Income


Definition

A speculative transaction means a transaction in which a contract for purchase or sale of any commodity including stocks and shares is periodically or ultimately settled otherwise than by actual delivery or transfer of the commodity or scrip. (Sec. 43(5))

Intra-day trading (in equity shares, currency and commodities) shall be considered as speculation business transaction and income thereon is taxed at normal rates

Exceptions-

• Forward contracts and,

• Futures & Options contracts

which are treated as Non-speculation business income

Set off U/s 73, speculation business loss cannot be set off against income from regular business or against income under any other head . Hence, set off allowed only against speculation income.

Carry Forward Carried forward & set off within 4 assessment years from the current assessment year, only against speculation income






Capital Gains


Definition

Under Section 2 (14) of the Income Tax Act, 1961, “Capital asset” means property of any kind held by an assessee, whether or not connected with his business or profession, but does not include the following

• Stock-in-trade, raw materials or consumable stores held for the purposes of business or profession. • Agricultural land in India which is not situated in any specified area • Personal effects of movable nature, such as furniture, utensils and vehicles held for personal use by the assessee or any dependent

member of his family. • “Personal effects of movable nature” do not include

• Jewellery, • Archaelogical collections, • Drawings, Painting, Sculptures or any work of Art.

Taxable Year Year of transfer of capital asset

Short Term Capital Asset

A capital asset held by an assessee for not more than 36 months before the date of its transfer is a “Short Term Capital Asset”. However,

• a share held in a company, or

• any other security listed in a recognised stock exchange in India,

• units of UTI and a mutual fund or

• a zero coupon bond

will be treated as short term capital asset if it is held for not more than 12 months before the date of its transfer.

Only debentures have to be necessarily listed in order to qualify for the 12 month period for determination of long term capital asset

Long Term Capital Asset If the capital asset is not a short term capital asset as defined then it is a long term capital asset

Set off

Short term capital loss can be set-off against short term or long term capital gains of that year & balance remaining can be set off against income from any other head except salary.

Long term capital loss can be set-off only against long term capital gain.

Carry Forward Short term capital loss can be carried forward for 8 assessment years u/s 74 to be set off against short term or long term capital gains only.

Long term capital loss can be carried forward for 8 assessment years u/s 74 to be set-off only against long term capital gain

Deduction under Chapter VIA

Available for short term capital gain (other than stcg on securities taxable u/s 111A).

Not available against long term capital gains






Capital Gains Tax - Rates

Long Term Capital Gains (units held for more than 12 months) ShortTerm Capital Gains (units held for 12 months or less)

Individual / HUF Domestic Company NRI Individual / HUF Domestic Company NRI

Listed Equity shares & Equity Oriented Schemes

Nil Nil Nil 15% 15% 15%

Debt Schemes, zero coupon bonds, offshore funds, Off Market Buyback of equity shares

10% without indexation or 20% with indexation

whichever is lower


whichever is lower


whichever is lower Normal slab rates

Listed Cumulative bond / NCD / debentures

10% without indexation Normal slab rates

Unlisted stocks 20% with indexation 20% with indexation 10% without indexation Normal slab rates

Unlisted bonds / debentures

20% without indexation 10% without indexation Normal slab rates

Gold / Bullion / Jewellery 20% with indexation 20% with indexation 20% with indexation Normal slab rates

Real Estate 20% with indexation 20% with indexation 20% with indexation Normal slab rates

Note: • Debentures have to be listed to qualify for the 12 month holding period criteria of Long Term Capital gains. • Unlisted debentures require a holding period of 36 months for being a long term capital asset.






Capital Gains Tax - Notes & TDS Rates

Notes

• Surcharge @ 5% is to be levied in the case of domestic companies, if their income exceeds Rs. 1 crore but less than Rs. 10 crore & @ 10% if income exceeds Rs. 1 crore

• Surcharge @ 10% is to be levied in the case of individual / HUF, if their income exceeds Rs. 1 crore

• Education cess @ 3% will be applied on tax + surcharge

Dividend Stripping: The loss due to sale of units in equity mutual funds will not be available for set off to the extent of the taxfree dividend declared, if units are

i) bought within 3 months prior to the record date fixed for dividend declaration; and

ii) sold within 9 months after the record date fixed for dividend declaration

Bonus Stripping: The loss due to sale of original units in mutual fund schemes, where bonus units are issued, will not be available for set off to, if original units are

i) bought within 3 months prior to the record date fixed for allotment of bonus units; and

ii) sold within 9 months after the record date fixed for allotment of bonus units.

However, the amount of loss so ignored shall be deemed to be the cost of purchase or acquisition of such unsold bonus units.

Tax Deducted at Source (Applicable only to NRI Investors)

Short term capital gain

Long term capital gain

Equity 15.45% NIL

Debt Listed Units 30.90% 20.60%

Debt Unlisted units

30.90% 10.30%






Certain Exemptions from Tax on Long Term Capital Gains

Section Assessee Conditions Quantum of Exemption

54 Individual, HUF

• Residential house to be transferred • Must be a long term capital asset • Income from such asset is chargeable under the head ‘Income from House

Property’ • Within a period of 1 year before or 2 years after the date of transfer, a

residential house is purchased or within a period of 3 years after the date of transfer, a residential house is constructed.

• If the cost of the new residential house is greater than capital gain, then the whole of the capital gain is exempt. Otherwise to the extent of the cost of the new residential house.

54B Individual • Agricultural land to be transferred • Must have been used in the 2 years immediately preceding the date of transfer

for agriculture purposes either by the assessee or by his parent • Within 2 years from the date of transfer another agricultural land is purchased

• If the cost of the new asset is not less than capital gain, then the whole of the capital gain is exempt. Otherwise to the extent of the cost of the new agricultural land.

54EC Any Assessee

• Must be a long term capital asset • Within a period of 6 months from the date of transfer, the amount of capital

gains should have been invested in the specified bonds issued by REC or NHAI • Assessee shall not transfer or convert or avail loan or advance on the security of

the above bonds within a period of 3 years from the date of its acquisition • The max amt of investment shall not exceed Rs. 50 lakhs during any fin year.

• Amount of investment in the specified bonds or the capital gains whichever is lower.

54F Individual, HUF

• Must be a long term capital asset, but not a residential house • Within a period of 1 year before or 2 years after the date of transfer, a

residential house is purchased or within a period of 3 years after the date of transfer, a residential house is constructed.

• Assessee does not owns more than one residential house other than the new asset on the date of transfer

• Assessee does not within a period of 1 year after the date of transfer, purchase or does not within a period of 3 years after the date of transfer construct any residential house other than the new asset.

• If the cost of the new residential house is not less than the net consideration, then the whole of the capital gain is exempt. Otherwise to the extent of the capital gain in the same proportion as the cost of the new residential house bears to the net consideration.






Capital Gains Account Scheme

Under Sections 54, 54B and 54F, the capital gains is exempt if such gains are reinvested in new assets, within the time allowed for the

purpose. If such reinvestment is not made before the date of furnishing the return of income then the amount of the capital gain or the net

consideration, is required to be deposited in an account under Capital gains Accounts Scheme.

The deposit shall be made before furnishing the return of income or within the due date for furnishing the return of income u/s. 139

(1), whichever is earlier.

The deposit shall be made in a bank account or institution in a scheme notified by the Central government.

Amount deposited can be withdrawn for utilization in accordance with the scheme, for the specified purpose

If the amount deposited is not utilized for acquiring the new asset within the required period, the capital gain related to the unutilized

amount shall be treated as capital gain of the year in which period specified in the above provisions expires.

Cost Inflation Index

FY CII FY CII FY CII FY CII

1981-82 100 1990-91 182 2000-01 406 2010-11 711

1982-83 109 1991-92 199 2001-02 426 2011-12 785

1983-84 116 1992-93 223 2002-03 447 2012-13 852

1984-85 125 1993-94 244 2003-04 463 2013-14 939

1985-86 133 1994-95 259 2004-05 480

1986-87 140 1995-96 281 2005-06 497

1987-88 150 1996-97 305 2006-07 519

1988-89 161 1997-98 331 2007-08 551

1989-90 172 1998-99 351 2008-09 582

1999-00 389 2009-10 632






Capital Gains on depreciable assets


Computation of Capital Gains - Depreciable Asset

In the case of block of assets, depreciation u/s 32 can be claimed on the WDV as per Sec 43 (6) provided as on the last day of the previous year, the following two requirements are fulfilled:

a) There must be at least one asset in the block

b) There must be some value for the block on which prescribed percentage can be applied

Where any one or both the above mentioned requirements are not satisfied on transfer of any asset from the block, the provisions of Sec. 32 cease to apply & Sec. 50 provision become applicable resulting in short term capital gains

When Sec. 50 gets attracted

• When one or some of the assets in the block is / are sold for a consideration which is more than the value of the block

• When all the assets are transferred for a consideration which is more than the value of the block

• When all the assets are transferred for a consideration which is less than the value of the block

In the first 2 situations above, the net result of the computation would result in short term capital gains, the excess of WDV over the sale consideration in the third situation shall be treated as short term capital loss

Computation

Particulars Amount

Full value of consideration xxx

Less: i) Expenses for transfer xx

ii) WDV of the block of assets at the beginning of the previous year

xx

ii) Assets acquired during the year & belonging to the same block of assets

xx

Short term capital gain / loss xxx






Securities Transaction Tax Rates

Securities Transaction Tax Rates

Transaction Rates Payable By

Purchase/ Sale of equity shares 0.100% Purchaser/Seller

Purchase of units of equity oriented mutual fund (delivery based)* Nil Purchaser

Sale of units of equity oriented mutual fund (delivery based)* 0.001% Seller

Sale of equity shares, units of equity oriented mutual fund (non-delivery based) 0.025% Seller

Sale of an option in securities 0.017% Seller

Sale of an option in securities, where option is exercised 0.125% Purchaser

Sale of a futures in securities* 0.010% Seller

Sale of unit of an equity oriented fund to the Mutual Fund* 0.001% Seller

* effective 1 June 2013






Deductibility of expenses from sale value of shares

Particulars Explanations

Points to determine Whether the sale transaction in capital market is chargeable as business income or capital gain

• Intention at the time of purchase

• Length of period of holding

• Time devoted

• Infrastructure & set up employed

• Transaction frequency

• Transaction volume

• Purchase - sale ratio

• Owned fund vs. Borrowed fund

• Circumstances due to which asset is sold

• Use of sale consideration

• Any other occupation of the assessee

• Accounting treatment in assessee's books

• MOA / AOA of assessee

Deductions allowed from Business Income

• Interest on borrowings

• Brokerage, Service Tax, stamp duty, SEBI fee charged by Brokers

• Demat Account Charges

• Loss of shares & securities and non payment by brokers

• Portfolio Management & Advisory Fees

• Penalties, Bad Delivery charges, Auction Charges etc.

Deductions allowed from Capital Gain • Only expenses incurred in connection with transfer






Taxability of Gifts


When is it taxable Gifts received by an individual or Hindu Undivided Family (HUF) are taxable as per the Income Tax Act, 1961 but there are a few exceptions as mentioned below. It is included under the head “Income from other sources” under Section 56(2)(viii)

Gifts are taxable in the hands of recipient and there is no taxation for the donor.

Cases for taxation Any cash gift (including gifts by cheque or drafts) received, exceeding Rs. 50,000/-

Any movable property received without consideration or at a lesser consideration than its fair market value, the aggregate fair value of which is more than Rs.50,000/-

Any immovable property received without consideration and its stamp duty value is more than Rs.50,000/-

Any immovable property received for a consideration which is less than the stamp duty value of the property by an amount which is more than Rs. 50,000/-, the difference between the stamp duty value & the consideration shall be chargeable to tax

Frequency In the case of immoveable property, a single transaction is considered for calculating the limit of Rs.50,000/- In other cases , all transaction in a financial year will be considered for calculation of the ceiling limit of Rs. 50,000/-

Exempted Gifts The following receipts/gifts are exempted even if they are without or inadequate consideration -

• From any relative; or

• On the occasion of marriage of an individual; or

• Under a will or by way of inheritance; or

• In contemplation of the death of the payer or donor, as the case may be; or

• From a local authority; or

• From any fund, foundation, university, other educational institution, hospital, medical institution, any trust or institution referred to in Section 10 (23C)

Note: • Relative means spouse, brother or sister of assessee or spouse, brother or sister of either of the parents, any lineal ascendant or descendant of the assessee or spouse. • Property means immoveable property being land or building or both; shares & securities; jewellery; archeological collections; drawing, paintings, sculptures; any work of

art and bullion.






Income from other sources


Definition

“Income from other sources” is a residuary head of income. Any item which is chargeable to tax but does not fall with the scope of the other four specific heads of income shall be included under this head of income.

Certain items of income which are specifically chargeable only under this head of income under section 56, are as follows:

• Dividend income (including deemed divided un/s. 2(22)(e))

• Income through winnings from lotteries, races including horse races, gambling, betting, etc.

• Any sum of money, the aggregate value of which exceeds Rs. 50,000, received from any person without consideration by an individual or HUF during the year

• Any movable property, the aggregate value of which exceeds Rs. 50,000, received from any person without consideration, or for inadequate consideration where such inadequacy exceeds Rs. 50,000, by an individual or HUF during the year

• Where an immovable property, stamp duty value of which exceeds Rs. 50,000, received by an individual or HUF from any person without consideration, the stamp duty value of such property will be considered.

• Any immovable property 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 the stamp duty value & the consideration will be considered.

• Where a firm or closely held company receives shares of a closely held company from any person or persons, without consideration where the aggregate fair market value exceeds Rs. 50,000 or for inadequate consideration where the inadequacy in aggregate exceeds Rs. 50,000

• Income from subletting

• Interest Income

• Family Pension

When is it taxable Due basis or receipt basis depending on the method of accounting regularly followed by the assessee

Set off Income from other sources can be set off against non-speculation business loss, house property loss and short term capital loss of the current year except loss from activity of owning & maintaining race horses u/s 74

Carry Forward No carry forward of loss is permissible

Tax Rates Normal slab rates






Income from other sources


Exemptions from taxability of gifts

Taxablility does not arise in the hands of individual/HUF in case such sum of money, specified movable/immovable property is received –

• From any relative; or

• On the occasion of marriage of an individual; or

• Under a will or by way of inheritance; or

• In contemplation of the death of the payer or donor, as the case may be; or

• From a local authority; or

• From any fund, foundation, university, other educational institution, hospital, medical institution, any trust or institution referred to in Section 10 (23C)

• From charitable institution registered u/s 12AA.

Computation

Particulars Amount

Gross Receipts xxx

Less: Exemption u/s 10 xx

xxx

Less: Deduction u/s 57 xx

Taxable Income xxx






Tax on Dividend

Individual Domestic Company NRI

Dividends received from domestic company / MF Taxfree in the hands of investor

Dividends from foreign company Taxable as per marginal rates 30% + 10% surcharge + 3% cess = 33.99%

Local taxation applies

Note: Dividend received by an Indian company from its foreign subsidiary (minimum 26% share holding) are subject to tax @ 15% plus 10% surcharge and 3% cess.

Dividend Distribution Tax Individual Domestic Company NRI

on Companies 15% + 10% surcharge + 3% cess = 17.00%

on Equity oriented schemes Nil

on Debt mutual fund schemes 25% + 10% surcharge + 3%

cess = 28.325% 30% + 10% surcharge + 3% cess

= 33.99% 25% + 10% surcharge + 3% cess

= 28.325%






Tax on Interest Income

Particulars Individual Domestic Company NRI

Interest from foreign company Taxable as per normal rates Local taxation applies

Interest on Bonds/NCD from domestic company Taxable as per normal rates

Deductions available (Section 57) Any reasonable sum paid by way of remuneration or commission for the purpose of realizing such income including interest on borrowed capital if such borrowed capital is used for making investment in shares or securities.

Source of Income Exemption TDS

Interest from securities No TDS in respect of listed debentures in demat form (Sec 193). However on remat of NCDs, TDS shall be deducted

Interest other than interest from securities (Eg. Bank interest)

• Exemption upto Rs. 5000 • Exemption upto Rs. 10,000 if interest is received from banking

company, cooperative society engaged in banking business, specific schemes of post office

TDS @ 10% is deducted in respect of all assesses

TDS – Rates






Income from House Property (Rental Income)


Defination Annual value of any property comprising of building or land appurtenant thereto, of which the assesee is the owner. Property can be residential or commercial

Income not taxable

Annual value of any building or portion of a building occupied by the assessee for the purposes of business or profession carried on by him

What is Gross Annual Value

Gross Annual Value (GAV) is fair rent or municpal valuation whichever is higher, maximum subject to standard rent.

• If actual rent > fair rent, then actual rent is taken as GAV

• If actual rent < fair rent because of vacancy, then actual rent is taken as GAV, otherwise fair rent is taken as GAV

Types of House property

• Self-occupied property

• Let-out property

• If more than 1 properties are self-occupied & not leased, any one house property can be chosen as self-occupied & the remaining are treated as "deemed let-out properties“.

Deductions

• 30% of the net annual value

• Interest on borrowed capital

• in case of let-out & deemed let-out property - can be fully claimed

• If loan is used for repair, renovation or reconstruction of the house property, then deduction upto Rs. 30,000 is allowed

• If loan is used to acquire or construct property on or after 1.4.99 & where it is completed within 3 years from the end of the financial year in which loan is borrowed, then interest deduction upto Rs. 1.5Lakh shall be allowed. Rs. 1lakh additional for first time home loan seeker for loan upto Rs. 25 lakhs..

Computation

Particulars Amount

Gross Annual Value xxx

Less: Property taxes paid to local authority xx

Net Annual Value xxx

Less: Deductions u/s 24 of the IT Act, 1961

30% of the net annual value xx

Interest on borrowed capital xx

xxx

Add: 70% of arrears of rent received u/s 25B

xx

Add: Unrealised rent received u/s 25AA xx

Taxable Income xxx






Income from House Property (Rental Income)


Set off

Loss from house property can be set off against

• non speculation business income,

• short term capital gains &

• income from other sources of that year

Carry Forward Any balance house property loss remaining, is allowed to be carried forward & set off within the next 8 assessment years, only against income from house property u/s 71B






Clubbing of Income


Definition

When income of other persons is included in the total income of the assessee, it is known as clubbing of income

Clubbing of income includes clubbing of negative income also (Explanation to Sec.64)

Sec. 64(1) covers cross transfers also, the effect of which is difficult to separate

Treatment Clubbed income is taxable under the head "Income from other sources" and is subject to normal slab rates

Income from the asset is clubbed with the income of the transferor

if income is transferred but asset is not transferred (Sec. 60)

if transfer of asset is a revocable transfer (Sec. 61)

• Exception: if transfer is made to a trust which is irrevocable till the lifetime of beneficiary (transferee) or transfer is made before 1 April 1961

if asset is transferred by an individual to spouse without adequate consideration (Sec.64(1)(iv))

• Exception:

• assets transferred before marriage & assets transferred in consideration of agreement to leave apart

• asset transferred for adequate consideration i.e. a genuine sale

if a karta transfers a co-parcenary property

• applies only to original assets & not to the accretion to the asset (eg. Bonus shares)

if asset is transferred by an individual to son's wife without adequate consideration (Sec.64(1)(vi))

if asset is transferred by an individual to anybody without adequate consideration but the benefit goes to the spouse of transferor (Sec.64(1)(vii))

Income is clubbed with the income of the transferor

if remuneration to the spouse of an individual given by an organisation in which such individual has a substantial interest (Sec. 64 (1)(ii))






Clubbing of Income


If an individual gifts a self acquired property to HUF of which he/she is a member, clubbing applies as follows (Sec. 64(2))

till the HUF is not partitioned Income from the property is clubbed with the income of the transferor

after the HUF is partitioned Income from the property which goes to the benefit of spouse or minor child is clubbed with income of that individual

Income of a minor child is clubbed with the income of the parent

Exceptions if income is earned on account of any activity involving application of his knowledge or manual labour

Other points to note

if parents are not divorced, then income is clubbed with income of that parent, whose income is greater

if parents are divorced, then income is clubbed with income of that parent who maintains the minor

exemption of Rs.1500 per year per minor is available for the parent's income in which minor's income is clubbed






Withholding Tax


What is Withholding Tax

It is an obligation on the payer to withhold tax at the time of making payment under certain heads such as rent, commission, salary, professional services, contract, etc. at the specified tax rates

As per Sec.195 of the Income Tax Act, there is an obligation on the person responsible for payment to deduct tax at source at the time of payment or, at the time of the credit of the income to the account of the non-resident

Rate of Withholding tax

Tax is to be deducted at the rate prescribed in the Act or rate specified in the Double Taxation Avoidance Agreement (DTAA) whichever is beneficial to the assessee.

Current rates for withholding tax for payment to non-residents are

• Interest - 5%

• Dividends paid by domestic companies - nil

• Royalties - 10%

• Technical services - 10%

• Any other service

• Individuals: 30% of the income

• Companies: 40% of the income

The above rates are general & are applicable in respect of countries with which India does not have a DTAA

Provisions in the Finance Bill 2013-14

A final withholding tax at the rate of 20% on profits distributed by unlisted companies to shareholders through buyback of shares.

Proposal to increase the rate of tax on payments by way of royalty and fees for technical services to non-residents from 10% to 25%






Withholding Tax

Tax rates in case of some countries with which India has double taxation avoidance agreements

Country Dividend (Not being covered by sec. 115O) Interest Royalty Fees for technical

service

Australia 15% 15% Note 2 Note 2

Canada 15% if at least 10% of the shares of the

company paying the dividends is held by the recipient of dividend; 25% in other cases

15% (Note 1) 10-20% 10-20%

Mauritius 5% if at least 10% of the capital of the

company paying the dividend is held by the recipient; 15% in other cases.

20 % (Note 1) 15% No separate provision

Singapore 10% if at least 25% of the shares of the

company paying the dividend is held by the recipient; 15% in other cases

10% if loan is granted by a bank/similar institute including an

insurance company; 15% for others

15% for copyrights; 10% for others

15% for copyrights; 10% for others

United Arab Republic

10% 20% 30% No separate provision

United Kingdom 15% 10% if interest is paid to a bank;

15% for others (Note 1) (Note 3) (Note 3)

United States 15% if at least 10% of the voting stock of the company paying the dividend is held by the

recipient; 20% in other cases

10% if loan is granted by a bank/similar institute including an

insurance company; 15% for others (Note 3) (Note 3)






Withholding Tax

Note

1. Dividend / Interest earned by the government and certain institutions like Reserve Bank of India is exempt from taxation in the country of source.

2. Royalties and fees for technical services would be taxable in the country of source at the following rates :

a) 10 per cent in case of rental of equipment and services provided along with know-how and technical services ;

b) any other case

• during first five years of the agreement

i. 15 per cent if the payer is Government or specified organization;

ii. 20 per cent in other cases;

• Subsequent years, 15% in all cases

Income of Government and certain institutions will be exempt from taxation in the country of source.

3. Royalty and fess for technical services would be taxable in the country of source at the following rates:

a) 10 per cent in case of royalties relating to the payments for the use of, or the right to use, industrial, commercial or scientific equipment;

b) 20 per cent in case of fees for technical services and other royalties.






Limited Liability Partnerships


What is LLP

• A Limited Liability Partnership, popularly known as LLP combines the advantages of both the Company and Partnership into a single form of organization.

• Unlike corporate shareholders, the partners have the right to manage the business directly.

• An LLP also limits the personal liability of a partner for the errors, omissions, incompetence, or negligence of the LLP's employees or other agents.

• LLP has a separate legal entity, liable to the full extent of its assets, the liability of the partners would be limited to their agreed contribution in the LLP.

• No partner would be liable on account of the independent or unauthorized actions of other partners, thus allowing individual partners to be shielded from joint liability created by another partner’s wrongful business decisions or misconduct.

Highlights • LLP’s will be treated as Partnership Firms for the purpose of Income Tax w.e.f assessment year 2010-11

• LLP resident in India even if control & management of its affairs is partly in India

• No surcharge will be levied on income tax.

• Profit will be taxed in the hands of the LLP and not in the hands of the partners (Sec 10 (2A)).

• Remuneration to partners is a deductible expenditure for LLP subject to certain limits

• Interest on capital contribution - deductible expenditure provided it is authorised by the LLP agreement

• Interest & remuneration received by a partner from his LLP will be taxed as Profits & Gains of Business u/s 28(v)

• No capital gain on conversion of partnership firms into LLP.

• Capital Gain on conversion of Company into LLP will be exempt from tax, if prescribed conditions are complied with.

• On conversion, the successor LLP , will be allowed to carry forward and set off of accumulated loss and unabsorbed depreciation allowance

& take the credit of MAT paid by the predecessor company

• Professionals can form Multi-disciplinary Professional LLP, which was not allowed earlier.

• Audit requirement only in case of contributions exceeding Rs. 25 lakh or turnover exceeding Rs. 40 lakh.






Limited Liability Partnerships


Tax rate

• 30% flat tax rate + 3% education cess

• No Minimum Alternate Tax & Dividend Distribution Tax. Alternate Minimum Tax @ 19.06% (18.5% plus 3% cess) is applicable on the book profits.

Limits on Remuneration to Partners

On first Rs. 300,000 of book profit or in case of loss – Rs.150,000 or at the rate of 90% of book profit, whichever is more

• On the balance of book profit – at the rate of 60%






NRI Bank Accounts

Features NRE NRO FCNR

Type of account Savings, Current, Recurring, Fixed Deposit Savings, Current, Recurring, Fixed Deposit Term Deposit only

Currency INR INR Any permitted currency i.e. a foreign currency which is freely convertible

Tenure of Deposits At the discretion of the bank. As applicable to resident accounts. 1yr- 5 yrs

Repatriability Freely Repatriable

Repatriable upto USD 1 million per financial year subject to documentation and conditions. Current income like rent, dividend, pension is repatriable subject to CA certificate and proof of such nature of income

Freely Repatriable

Tax deducted at source on interest earned

Tax free 30% plus surcharge and education cess. Tax free

Purpose of Account

To deposit foreign funds received from any: To deposit To deposit foreign funds received

from any:

• Traveler's cheques • dues earned in India in Rupees • Traveler's cheques

• Foreign currency • foreign exchange funds • Foreign currency

• Other NRE/FCNR a/c • Other NRE/FCNR a/c

• Proceeds of repatriable investments • Proceeds of repatriable

investments

Joint Holding Only with NRIs (a Resident Indian can be a joint

holder only in either or survivor mode) Indian Residents and NRIs Only with NRIs






NRI Bank Accounts


Operations by Power of Attorney in favour of a resident by the non-resident account holder

Operations thru PoA is restricted to withdrawals for permissible local payments or remittance to the account holder himself through normal banking channels.

Operations thru PoA is restricted to withdrawals for permissible local payments in rupees, remittance of current income to the account holder outside India or remittance to the account holder himself through normal banking channels.

Operations thru PoA is restricted to withdrawals for permissible local payments or remittance to the account holder himself through normal banking channels.

Remittance is subject to the ceiling of USD 1 (one) million per financial year.

Loans

a. In India

i) to the Account holder

Permitted up to Rs.100 lakhs Permitted subject to the extant rules (Note 2) Permitted only up to Rs.100 lakhs

ii) to Third Parties Permitted up to Rs.100 lakhs Permitted subject to conditions (Note 3) Permitted only up to Rs.100 lakhs

b. Abroad


Permitted Not Permitted Permitted

(Provided no funds are remitted back to India and are used abroad only)


ii) to Third Parties Permitted Not Permitted Permitted








NRI Bank Accounts


c. Foreign Currency Loans in India


Not Permitted Not Permitted Permitted up to Rs.100 lakhs

ii) to Third Parties Not Permitted Not Permitted Not Permitted

Purpose of Loan

a. In India


i) Personal purposes or for carrying on business activities.*

Personal requirement and / or business purpose.(Note 1)

i) Personal purposes or for carrying on business activities *

ii) Direct investment in India on non-repatriation basis by way of contribution to the capital of Indian firms / companies.


ii) Direct investment in India on non-repatriation basis by way of contribution to the capital of Indian firms / companies

iii) Acquisition of flat / house in India for his own residential use. (Please refer to para 6(a) of Schedule1 to FEMA 5).


iii) Acquisition of flat / house in India for his own residential use. (Please refer to para 9 of Schedule 2 to FEMA 5).

ii) to Third Parties

Fund based and / or non-fund based facilities for personal purposes or for carrying on business activities *. (Please refer to para 6(b) of Sch. 1 to FEMA 5)

Personal requirement and / or business purpose (Note 1)

Fund based and / or non-fund based facilities for personal purposes or for carrying on business activities *. (Please refer to para 9 of Schedule 2 to FEMA 5).






NRI Bank Accounts


b. Abroad

To the account holder and Third Parties

Fund based and / or non-fund based facilities for bonafide purposes.

Not permitted. Fund based and / or non-fund based facilities for bonafide purposes.

*Note:

1. The loans cannot be utilised for the purpose of on-lending or for carrying on agriculture or plantation activities or for investment in real estate business.

2. Subject to usual norms as are applicable to resident accounts, for personal purposes or for carrying on business activities except for the purpose of relending or carrying on agricultural / plantation activity or for investment in real estate business.

3. Subject to conditions such as

(i) the loans shall be utilised only for meeting borrower's personal requirements and/ or business purpose and not for carrying on agricultural/ plantation activities or real estate business, or for relending,

(ii) Regulations relating to margin and rate of interest as stipulated by the Reserve Bank from time to time shall be complied with, and

(iii) The usual norms and considerations as applicable in the case of advances to trade/industry shall be applicable for such loans/ facilities






Taxation of Trust structure

Trusts

Revocable Irrevocable

Clubbing at contributor level

(tax at settlor level)

(no tax at trust level) Indeterminate / Discretionary

Tax rate at peak

Used for AIF III

Either at trust or at assessee level

Tax rate as per head of income

Used for PE/AIF I

Determinate






Disclaimer

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Email: [email protected]

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available information sources and also obtained from sources LTCML believes to be reliable but in no way are warranted by LTCML, its affiliates, directors and officers as to its accuracy or

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income tax handbook 2014

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