Income Tax – Basics

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​In this module, we are going to learn how tax planning is an integral part of financial planning. We will start with the basics of tax and gradually move towards the understanding of how different types of incomes are taxed. For example, income from salary is taxed differently than income from business and profession. So, let's start: 

What do you understand by Taxes?

Tax is the amount payable on an income, activity or a product to the Government.

Explain the Indian Tax structure

The Indian tax structure comprises of the following:

 What is tax planning?

Tax planning is a method of arriving at tax liability based on income in such a way so as to take the maximum benefit of the deductions and exemptions available under the provisions of the Act.

A person who is being assessed to determine how much tax they must pay is known as an assessee.

The income of an assessee for a financial year is fixed. Now, the assessee can allocate a part of the income to various savings and investments under the category of deductions and exemptions, this will allow an assessee to reduce the tax liability.

For example, your income is ₹5,00,000 wherein you get an exemption of ₹2, 50,000. Here, you can invest in life insurance policies or fixed deposits of a term of 5 years or any other investment for which deduction is available u/s 80C.

Hence, getting a total exemption of ₹ 2,50,000 + ₹1,50,000 = ₹4,00,000. Hence, tax shall be payable on ₹1,00,000 only. Such planning in which we reduce the amount on which tax is payable is known as Tax Planning. 

What are the basic criteria for being charged Income-tax?

The basic criteria  is to earn income. Once an assessee starts earning, he/she is required to file income-tax subject to the provisions of the Act. The taxability depends on the income tax slab and the status of the assessee under the Act. 

Who is a Person, defined under the Income Tax Act?

As per the provisions of section 2 of subsection 31 of the Act, a person includes:

• an individual,
• a Hindu undivided family,
• a company,
• a firm,
• an association of persons or a body of individuals, whether incorporated or not,
• a local authority, and
• every artificial juridical person, not falling within any of the preceding sub-clauses.

​What is a Previous Year defined under the Income Tax Act?

As per the provisions of section 3 of the Act, previous year refers to the financial year immediately preceding the assessment year.
For example: If the assessment year is 2021-22, then the financial year will be 2020-21.

What is an Assessment year defined under the Income Tax Act?

As per the provisions of section 2(9) of the Act, the year following the financial year (FY) is the assessment year (AY) starting from the First day of April every year.
So the assessment year for the year 2020-21 shall be April 1st, 2020 – March 31st, 2021.

Exempt income refers to those items or income which does not form part of the computation of income. These incomes are explicitly mentioned under each of the heads of income and are categorised as below:

How Interest Income earned from savings bank accounts are treated?

According to the provisions under section 80TTA, interest income earned by an assessee (other than a senior citizen, they have a separate section for deduction) from the bank deposits in a savings account are exempted from taxation subject to the following:

The interest income shall be from the deposits made in:

• A banking company
• A co-operative society engaged in banking business
• Post office

The amount allowed shall be the lower of:

• Total Interest Income Earned
• Rs. 10,000/-

What does 'Set Off & Carry Forward of Losses' mean?

In income-tax provisions, a loss incurred can be set off against the income earned and the balance of loss that remains unsettled can be carried forward to next year subject to the related provisions.

Set off can be done from the income of the same source or it can be done from a different source of income.

However, do note that certain losses can be set off only against the same sources of income. 

For example:  losses from house property can be adjusted against income from house property.

State the Personal Income Tax Rates / Slabs

From the Financial year 2020-2021, a new tax regime was introduced by our Finance Minister along with the Old/Existing Tax regime. So an assessee can file income tax under any one tax regime. The tax slabs are also different. They are mentioned below. 

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Existing Regime Slab Rates for FY 20-21 (AY 21-22) are mentioned below :

For a resident individual ( <60 years)

Note: This will be subject to Health & Education cess of 4 % 

For a resident individual (60 < 80 years)

Note: This will be subject to Health & Education cess of 4 % 

For a resident individual (80 years and above)

Note: This will be subject to Health & Education cess of 4 % 

New Regime Slab Rates for FY 20-21 (AY 21-22) are mentioned below : 

Note: If a taxpayer's total taxable income for a given financial year does not exceed the ₹5,00,000 threshold, they are eligible for a rebate under Section 87A.

Income From Salary

Now that we have understood the basic structure of taxes in India. We will start discussing how taxes are levied on income from salary.

What is the chargeability section of the income from salary?

Section 15 of the Act denoted the chargeability section of the income from salary. So for taxation purpose, salary shall comprise of the following:

• any amount of salary due from the current or the former employer to an assessee in the previous year whether the salary is paid or not;
• any amount of salary paid or allowed to the assessee , whether due or not;
• arrear salary paid or allowed, if not taxed in the previous year.

Note:

• Income from salary is chargeable either on receipt or due basis.
• For the salary to be charged under section 15, the employer-employee must exist.

What are allowances and their treatment under the Act?

Allowances are part of the salary, which is paid as a fixed amount on a regular basis for a certain specific purpose. There are two types of allowances:

• Taxable allowance
• Exempt allowance

Let us discuss few of the important exempt allowances classified as below:

* The amount of allowance allowed means the amount given by the company.
* Other allowances not mentioned here can be read in details from the Income Tax Rules

Now, we will discuss about the third category of allowance which is based on the specific method of computation:

What is House Rent Allowance (HRA)?

HRA is the amount paid by an employer to an employee for meeting the rental expenditure.
As per the provisions of section 10(13) read with rule 2A, exemption for HRA shall be computed as follows:

Lower of the following:

• 50% of salary (when residential house is located in the metro cities like Mumbai, Kolkata, Chennai or Delhi) and 40% when located in any other place.
• HRA received  and incurred by the employee
• Actual Rent paid – Minus 10% of salary

Let us understand this computation with the help of an example:

Example:

Ram is a sales engineer in XYZ limited, located in Jalandhar and the company is paying him the following:

• Salary p.m. = ₹90,000 p.m.
• HRA = ₹10,000 p.m.
• Rent paid by him = ₹20,000 p.m.
• Dearness Allowance = ₹12,000 p.m.

Computation of HRA:

Step 1: First we need to compute the exemption allowed, which will be lower of the following:

40% * Salary = 40* 1224000 = ₹4,89,600/-, where salary will be (90,000 + 12,000 = 102000*12 = 12,24,000). 

Annual HRA = 10,000 * 12 = 1,20,000

Rent paid – 10% of salary
= (20,000 * 12) -  10% (90,000*12)
= 2,40,000 – 10% * 10,80,000
= 2,40,000 – 1,08,000
=₹1,32,000

Lower  of the above shall be Rs. 1,20,000

Step 2: Computation of taxable HRA will be :

Annual HRA = 10,000 * 12 = 1,20,000
Less: Exemption as computed in step 1 = 1,20,000

                                         Taxable HRA     NIL

Note:  Practice a similar sum with the HRA amounting to ₹15,000 p.m

Perquisites

As per the provisions of section 17(2) of the Act, perquisites mean any benefit provided by the employer to the employee. 

In this section, we will discuss majorly about one of the most important perquisites taxable in the hands of employee – Rent Free Accommodation (RFA)

If the employer provides a hotel accommodation to the employee:

Lower of:

• 24% of salary
• Hotel charges paid

What is an Employment Provident Fund (PF)?

This scheme is set up for providing the employees with the retirement benefits. Under this, both employer and employee contribute the same sum towards the fund. While in the case of employees, the amount is deducted directly from their salary. 

The amount contributed by the employer and employee are invested in approved securities and any income earned from them are also credited in the employees account.

The cumulative amount of EPF is given to the employee at the time of retirement or resignation.

Different Types 

* However, a salaried employee may also contribute to this fund separately for himself and also for a minor on his/her behalf.

How are these funds treated for taxation purposes?

​

The tax treatment of each of the fund is shown below:

Key Points:

• Standard deduction is the fixed amount of deduction from gross salary allowed to all the employees. For example, If total yearly salary income is ₹500,000 & standard deduction is ₹50,000, then Taxable income is ₹(500,000-50,000)= ₹450,000. It is climbed as an exemption. 
• Leave encashment means the amount received for the un availed leave. This amount shall be taxed, when received during the period of service.
• Gratuity is the amount received by the employee (who has completed five years of service or more) for the services rendered to the employer.

Income From House Property

Apart from earning from salary, there are many people who have earnings from letting out property on rent that is owned by them. This type of income is called 'Income from House Property.' The taxes levied on such income are discussed here.

What is the Section under which Income from house property is charged?

Section 22 of the income tax act states that the annual value of property consisting of any buildings or lands of which the assessee is the owner, other than such portions of such property which is let-out or it is occupied for the purposes of any business or profession carried on by him/her the profits shall be chargeable to Income- tax under the head " Income from house property"

Computing Income when house property is let out throughout the year?

Income chargeable to tax under the head "Income from house property" in the case of a let-out property is computed in the following manner:

How to calculate the Gross Annual value of the property which is let out throughout the year?

The GAV of the property can be calculated in the following manner:

How to calculate Reasonable Expected Rent (RER) of the property which is let out throughout the year?

The RER is the higher of:

• Municipal value of the property
• Fair rent 

​What does self-occupied property mean?

It refers to the property occupied by the assessee for self residence throughout the year.

Key Points

• Municipal value refers to the value of the property determined by the municipal authorities.
• Fair rent is the reasonable expected rent, which is basically the expected rent from similar property.
• Standard rent is applicable to the properties covered under the Rent Control Act. It refers to the maximum rent that can be charged from the tenant under the provisions of the Rent Control Act.
• Unrealised rent refers to the rental amount which was not received from the tenant.
• What happens when an assessee has more than two houses?In case the assessee owns more than two houses, irrespective of whether the other house(s) are vacant or occupied by you, they will all be deemed to be let out. 
• What is the taxability of the property which is partly self occupied and partly let out? In this case both are considered as separate units and income from house property is calculated separately for each unit of the house.
• The maximum amount that can be deducted from loan interest is ₹2,00,000. The interest can be deducted by people who own two self-occupied housing properties. But the deduction can be reduced to ₹30,000 if the loan is taken before 1st Apr 1999 for construction of a new home or taken after 1st Apr 1999 to renovate an existing house.

Income From Business & Profession

The ways of earning a livelihood are different for different people, and each of their incomes is taxed differently. For instance, employees of a corporation drawing a salary are income from salary, whereas the employers who are the owner of these corporations have income from the business. Also, doctors, lawyers, and chartered accountants neither have income from salary nor from have income from business because they are not employees and employers; they are Professionals and they charge fees for their services. So, as we have already covered income from salary, in this section, we will discuss how taxes are levied on income from businesses and professions.

What is the section under which the Income from Business & Profession is charged?

Section 28 of the Act states the following income to be taxed as income from business & profession.  

• Any kind of compensation received or receivable by certain persons as mentioned in the Act
• Income arising from trade, business or profession for specific services provided to its members.
• Income arising from export business whether received or receivable
• Any benefit or perquisite gained arising from any business or profession
• Any income received or receivable as the partner of the firm, by whatever name called
• Any amount received under Keyman Insurance Policy.
• Any amount received on account of a capital asset being demolished, transferred, discarded or destroyed.
• Amount received under an agreement

Show the pattern of computation of Income under this head?

The computation of income under the head Income from business & profession/ Profits & gins from business or profession (PGBP) is shown below:

Explain the provisions of depreciation.

Section 32 read with rule 5 of the Act allows depreciation as a result of diminution or exhaustion in the value of certain assets. The deduction of depreciation is not subject to the claim made by the assessee; it is a compulsory deduction from the head of income.

• The depreciation allowance is subject to the following conditions:
• The assessee shall be the owner of the asset, whether wholly or partly
• The asset must have been used for the purpose of business or profession during the previous year
• The asset must be a tangible asset such as building, plant & machinery and furniture or fixture
• The asset must be an intangible asset such as patent, copyright etc.

What are the expenses not deductible?

Section 40A of the Act states the following deductions which shall not be allowed under the provisions of the Act:

• Any kind of payment made to relatives
• Amount paid in cash in excess of RS. 10,000 subject to certain conditions as specified in the Act
• As per the provisions of section 40A(7), no deduction shall be allowed in case of any provision made for gratuity
• Any contribution made by the employers to any fund, trust etc.

Books of Accounts & Audit

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Maintenance of books of accounts

As per the provisions of section 44AA of the Act, certain persons are mandatorily required to maintain the books of accounts under the provisions of section 44A

These persons are as mentioned below:

• If the assessee is –
• Engaged in specified profession 
• If the Income from Business or Profession exceeds ₹1,20,000 or the Total Sales/ Turnover/ Gross Receipts exceed ₹10,00,000 in any of the previous 3 years. These limits have been increased to ₹1,50,000 and ₹25,00,000 respectively from Financial Year 2017-18 onwards. (Announcement made in Budget 2017)

Audit of accounts

As per the provisions of section 44AB of the Act, the following persons shall be required to get the accounts audited by a chartered accountant within the dates specified under section 139(1):

Key Points:

Capital receipts are not considered as profit under PGBP

Either can or mercantile system of accounting is followed under this head of income.

Speculative transaction means a transaction of sale and purchase of commodity whereby the transaction is settled otherwise than that of actual delivery. 

Block of asset means group of assets categorised under

• Tangible assets
• Intangible assets

Actual cost of an asset means cost of an asset reduced by any cost incurred by the person other than the assessee.

What is the order of set-off under this head?

• Current year depreciation
• Brought forward losses
• Unabsorbed depreciation

CSR refers to Corporate Social Responsibility (CSR) which is basically the amount expended by the company for the benefit of the society. It is mandatory to be incurred by the companies subject to the conditions mentioned thereto.

Sub-rule (2) of Rule 6F states the books of accounts and documents to be maintained by the assessee.

As per the provisions of section 36, STT shall be allowed as business expenditure.

Income From Capital Gains

Now, in this unit, we will learn how income from capital gain is taxed. But before we start, let us have a brief understanding of the concept of Capital gains. 

In simple words, a capital gain occurs from selling as an asset at a higher price than the purchase price, or else it is considered as a capital loss. For instance, you bought ten shares of TCS at ₹2500/share, and a year later, you sold those ten shares at ₹3000/share leading to a capital gain of (3000-2500)=500x10= ₹5000. This amount is taxed by the government under the head capital gain from tax.

What is the section under which Income from Capital Gains (CG) is charged?

Section 45 of the Act states that profits or gains arising from the transfer of the capital asset shall be taxable under the income from capital gains.  The two important terms to be understood here is “transfer” and “capital asset”

Explain the terms Transfer & Capital Asset:

As per the provisions of section 2(14) of the Act, a capital asset means:

• Any kind of property held by the assessee, whether related with the business or profession or not.
• Any investment made in securities by the foreign institutional investors as governed by the SEBI guidelines

• Stock-in-trade
• Personal effect
• Rural agricultural land in India
• Specified Gold Bonds
• Special Bearer bonds, 1991
• Gold Deposit Bonds

• Sale, exchange or relinquishment of the asset
• The extinguishment of any rights therein
• Compulsory acquisition
• Owner of a capital asset converting it into stock-in-trade. This is referred to as transfer
• Maturity or redemption of zero Coupon Bond(ZCB)
• Part-performance of the contract

Explain the classification of Capital Assets:

The capital assets are divided under the following two heads:

Long term capital asset:

Any capital asset held for more than 36 months immediately preceding the date of transfer will be regarded as a capital asset.

However, in respect of certain assets the holding period differs:

• In case of listed shares, units of equity oriented mutual funds, listed securities, units of UTI and ZCB, the period of holding (POH) will be 12 months
• For unlisted shares, POH will be 24 months
• For immovable property (w.e.f. 2018-19) will be 24 months

Short term capital asset:

Any capital asset other than land, building, listed & unlisted shares, Equity & Debt mutual funds  held for a period less than or equal to 36 months shall be treated as short term capital asset.

Show the computation of long term capital gain:

The process of computation of capital gain is as mentioned below:

Show the process of computation of short term capital gain:

What is indexation and its purpose?

Indexation is the benefit given in the case of long-term assets. While indexing, the cost of acquisition / cost of improvement of a capital asset are adjusted against the inflationary fluctuations of the asset.

How is indexation computed?

Indexation is done for cost of acquisition of the asset and for the cost of improvement:

Indexed cost of acquisition can be calculated as below:

Cost of acquisition (COA) * Cost inflation index (CII) for the year of transfer of the capital asset 
                                                                         CII of the year of acquisition

Indexed cost of improvement  can be calculated as below:

Cost of improvement (COI) * Cost inflation index (CII) for the year of transfer of the capital asset 
                                                                           CII of the year of acquisition

When is the benefit of indexation not available?

Income From Other Sources

Apart from several income heads that we have learned earlier, there are also a few other incomes, such as dividend income, winning from lotteries, etc. All these incomes are clubbed together and termed as Income from Other Sources. So, in this section, we will learn how these incomes from other sources are taxed. 

What is the section under which Income from other sources are charged?

Section 56 states that all those incomes which do not fall under the previous four income heads are not exempted from taxes, rather they are chargeable under the head “Income from other sources.” They are as follows: 

• Dividend Income
• Annuity income received or due 
• Winnings from any game etc
• Income received from any welfare fund
• Rent earned from letting-out plant, machinery 
• Sum received under Keyman insurance policy

What are deemed gifts?

Deemed gifts cover the most important part of this chapter as it helps us to understand what would be considered gifts and will be exempt under the provisions of the Act.

This part will be covered section-wise:

As per the provisions of Section 56(2)(vii) where any individual or HUF receives any sum of money or property without consideration falling under below categories and subject to the conditions mentioned therein, he/she shall be liable to tax:

• Any amount of money received in excess of ₹50,000, the whole amount of money received shall be taxable
• Immovable property, say Land & building
  1. Received without consideration, the stamp duty value of which is > ₹50,000
  2. Received with consideration, but the difference between the selling price and stamp duty value exceeds ₹50,000 

• Movable property
  1. Received without consideration, the Fair Market Value (FMV) > ₹50,000
  2. Received with consideration, but the difference between the selling price and FMV exceeds ₹50,000 

Note: This clause shall not be applicable to the following:

• Relative
• Anything received on the occasion of marriage
• Under a will
• By inheritance
• In contemplation of the death of the payer
• Local authority
• Fund, foundation, university, other educational institution, hospital, medical institution, any trust or institution referred therein
• Charitable institution
• Any transaction not regarded as transfer u/s 47.

Example: Mr. Y received a cash gift from a friend – ₹30,000. Will this be taxable?

Yes, friend does not fall under the definition of relative and hence, the entire amount will be taxable under the head income from other sources.

• In case of dividend apart from that mentioned in Section 115-O, any income earned in the process of earning this income, say, commission, interest or remuneration,
• In case of pension earned by legal heirs after the death of employee, a standard deduction of the lower of the following shall be allowed:
  1. ₹15,000
  2. 1/3rd of the amount received

• In case of lease rental, deduction shall be allowed on repairs, insurance and depreciation.
• Any expenditure except capital expenditure incurred to earn such income
• In case of income received as compensation referred to u/s 145A(2), 50% deduction of such amount shall be allowed.

What is clubbing of income?

Generally, an individual  is taxed for the income earned by him/her and hence, pays the tax accordingly. However, there can be a situation where the other person’s income might be taken for computing income. This situation where a person’s income, including another person's income, is known as clubbing of income.

Example: Clubbing of minor child’s income

What is Gross total income?

Gross total income (GTI) refers to the total income of the assessee reduced by the deductions available under Section 80C to 80U.

Casual income refers to income earned from winning from lotteries, puzzles etc.

Relative under this head of income includes:

• Spouse of the individual
• Brother or sister of the spouse of the individual
• Any lineal ascendant or descendant of the spouse of the individual
• Brother or sister of the individual
• Brother or sister of either of the parents of the individual
• Any lineal ascendant or descendant of the individual

Property means the following capital assets:

• Immovable property
• Shares and securities
• Jewellery archaeological collections
• Drawings, paintings, sculptures
• Bullion
• Any work of art

The entire amount of money received from a mutual fund is exempted under the head income from other sources.

Personal expenses cannot be claimed under this head.

Agricultural land is not a capital asset and is not taxable.

56(2)(VIIA) deals with the receipt of shares of a closely held company by a firm or a closely held company, whether received without consideration or with an inadequate consideration.

Valuation date means the date on which the property or any consideration is received by the assessee.

Any member of the HUF is considered to be the relative.

Deductions Under Chapter VI-A

Before we start with this chapter, let us first understand a few basic and important differences between an exemption and a deduction. Exemption is an advantage provided to the assessee of not including an income in computing the gross total income. Section 10 exempts these incomes. However, section 80 comprises deductions, which are excluded post computation of gross total income subject to the maximum limit as referred to under Chapter VI-A.

Now let us quickly go through some of the most important deductions under chapter VI-A:

Starting with the three prominent sections:

Section 80C: Investment made in Life Insurance, PPF, NSC etc:

Contribution made by individual/ HUF in the following shall be allowed as deduction:

• Any contribution made to the Life Insurance premium of the self, spouse and children shall be allowed as a deduction. The deduction shall be subject to the date of the policy issued therein as per the provisions of the Act.
• Contribution made by employees to Approved Superannuation fund, Recognized provident fund (RPF), or Statutory Provident Fund (SPF).
• Contribution to Public Provident Fund (PPF) subject to the maximum limit of ₹1,50,000/-
• Contributions made in terms of deposits in NSC, mutual funds, fixed or term deposit of 5 years etc.
• Contribution for tuition fees up to 2 children for study done in India.
• Repayment of principal amount of housing loan. This deduction is available only after the construction of the house is completed).
• Any sum deposited in the Sukanya Samriddhi yojana in the name of a self or girl child.

 Section 80CCC: Amount contributed by an individual for annuity plan of LIC

Amount contributed by an individual for an annuity plan of LIC or pension fund out of the taxable income. This shall be subject to the lower of the amount invested or ₹1,50,000 whichever is lower.

Section 80CCD: Amount contributed to the pension scheme by the self- employed

Amount contributed to the pension scheme by the self- employed, deduction shall be the lower of amount invested or 20% of GTI whichever is lower or by the employed, deduction shall be lower of amount invested or 10% of salary whichever is lower. 

Note: The overall deduction under section 80C, 80CCC and 80CCD shall not exceed the overall limit of ₹1,50,000/- with an additional deduction of ₹50,000 under sub section 1(B) of the Income Tax Act, 1961

Section 80CCG: Amount invested under notified equity savings scheme

Amount invested under notified equity savings scheme such as Rajiv Gandhi Equity Saving Scheme or listed units in accordance with the notified scheme subject to 50% of the amount invested or  ₹25000 whichever is lower.

 Section 80D: Contribution to health insurance premium

This section is a very important section related to the contribution made by individual or HUF to the health insurance premium as shown below:

Deduction available under this section: 

1. Self, spouse and children – Up to ₹25,000/-. In case the age of assessee or his spouse or his dependent children has reached 60 years, then the amount will be ₹50,000/-
2. For parents- Up to ₹25,000/-. In case if anyone’s has reached 60 years, then the amount of maximum deduction will be₹ 50,000/- 

 Section 80DD:

Any expenditure incurred by the resident individual/ HUF for disabled dependent relatives is fixed to ₹75,000/- and ₹1,25,000/- if the person is severely disabled.

Section 80U:

This deduction is available only to the resident individual wherein the assessee himself is disable and is not able to incur any expenses. The amount of deduction is fixed to ₹75,000/- and ₹1,25,000/- if the person is severely disabled.

Section 80DDB: Medical treatment of specified disease

This deduction shall be available to resident individuals/ HUF on the medical treatment of specified disease of self or dependent relatives as specified under the provisions of the Act.

The deduction shall be allowed as follows:

Lower of the amount incurred or the following reduced by the insurance claim received:

Section 80E:  Repayment of interest part of the loan taken for higher education

This section covers the repayment of interest part of the loan taken for higher education, taken for self or spouse or children. The interest part is allowed a deduction for the period of 8 years.

Section 80G: Donations

This section relates to deduction available to all assessee for the donations given as categorized below:

With ceiling limit:

Note: Ceiling limit here means 10% of the adjusted gross total income (AGTI). 

Without ceiling Limit:

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List of items mentioned under Section 80G of the Act.

Section 80TTA: Interest on bank deposits (except senior citizen)

This is an important deduction for individuals and HUF (except senior citizens), whereby they can save tax up to ₹10,000/- p.a. for the interest earned on the deposits made in the savings bank account.

Section 80TTB: Interest on bank deposits to senior citizens

This deduction is exclusively available to senior citizens wherein interest on deposits made in either savings bank account or fixed deposit account is allowed up to ₹50,000/- p.a.

Hindu Undivided Family (HUF)

Till now, in this module, our learnings are limited to how taxes are levied on the income of an individual, but there is another type called Hindu Undivided Family (HUF), and they are taxed quite differently than an individual. In this section, we will discuss taxes levied on HUF. But before we start, let us first get an overview of the Hindu Undivided Family (HUF). 

What is HUF?

The definition of Hindu Undivided Family (HUF) originates from the Hindu law, which states it as a family of “all males lineally descended from a common ancestor and includes their wives and daughters.”

Though HUF is not defined in the Income tax Act, 1961 (the Act), It is treated as a separate entity for the purpose of taxation. HUF is included in the definition of person under the provisions of section 2(31) of the Act and income tax is chargeable on every “person.”  Hence, HUF is deemed to pay the income tax and income earned by it is assessable in its own hands as per the tax slab rates given (discussed later).  Also, Jain and Sikh families are treated as HUF for the purpose of the Act.

Why does an HUF need to be formed?

Now the most important part to be understood here is that there is no provision for the HUF to be formed. It is automatically created in the following two situations:

Situation 1: When you possess ancestral property, soon after getting married your HUF comes into existence.

Situation 2: When you do not possess ancestral property, then soon after you have your child, (whether girl or boy) born, the HUF comes into existence.
 

Now the question arises as to why a HUF?

Since HUF is treated as a separate entity for the purpose of taxation, it also gets the advantage of the basic exemption limit and deductions (as shown below) under the provisions of the Act. 

Deductions: An individual can also take the advantage of claiming deductions under the provisions of section 80C of ₹1,50,000.

Basic Exemption limit: An individual can take the advantage of the exemption limit of ₹2,50,000 by creating and HUF.

How to form an HUF?
 

HUF can be formed in three simple step as mentioned below:

Application for PAN card:

Opening a Bank Account:
Once a PAN card is received, a bank account is required to be created in the name of HUF to carry out all the transactions pertaining to the HUF.

Rubber stamp:
Before getting the HUF deed prepared, do get the stamp in the name of HUF prepared for affixing the name of HUF, in all the important documents for records.

HUF deed:
A deed is to be created which is referred to as the formal written document for the record of the names of the Karta and the members of the HUF. Karta is the eldest male member of the family. 

Raising capital

For any entity or organisation, one of the most important elements is infusing capital. This capital can be raised in several ways in case of HUF which are also tax free. 

One of the most popular ways of raising capital which are also exempted from tax is by receiving gifts as mentioned below:

• Any monetary gift received by an HUF from a relative.
• Any monetary gift received by an HUF on the occasion of marriage of an individual;
• Gifts received from the non-relatives, the aggregate value of the does not exceed Rs. 50,000/-
• Gifts received from the members of HUF.

Enhancing capital

After creating capital, the HUF can enhance its capital in many ways. It can also earn income from various methods except income from salary and use the income earned in creating more capital.

Some of the ways in which HUF can earn income are:

• Investing in shares or other securities
• Running a business
• Rental Income
• Interest income
• Other sources of income.

Filing of Income tax return:

As mentioned before, HUF is a separate legal entity and will be required to file income tax returns. For this purpose, it shall be required to compute the taxable income after claiming all the related applicable deductions prescribed under Chapter VI-A of the Act. HUF shall be taxed under the same slab as chargeable to an individual.

Incomes not chargeable to tax
The following incomes earned by the HUF shall not be chargeable to tax:

• Income arising from a self -acquired property, which has been converted or transferred by a member into the property of the joint family.
• Personal income of the individuals not taxable in the hands of an HUF.
• Income from the individual property of the daughter is not taxable in the hands of HUF even if such property is vested into HUF by the daughter.
• Income arising from the property of women (stridhan) cannot be taxed in the hands of a HUF.

Points to note: 

• The HUF accounts cannot be opened with joint holders.
• No nominee can be appointed for the HUF accounts.

Where can an HUF invest?

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There is no bar on HUF for investing in either moveable or immovable property. However, it is subject to taxation as prescribed under the Act.

• HUF can purchase land, buildings etc. It can put them on rent and earn rental income through it.
• It can invest in shares or other securities. 
• It can invest in tax free government schemes, mutual funds, bonds etc.
• It can also apply for life insurance policies in the name of its members and pay premiums.
• The HUF as an entity cannot invest in government's small savings schemes, such as the PPF, NSC, monthly income schemes, recurring deposits and other time deposits.

In general, there is no bar on any kind of investments made by the HUF subject to the provisions of the Act.

Return Filing

Now that we have a complete understanding of the structure of income tax, exemption limits, and deductions. Finally, it is time to calculate our tax and file a return.

What are the five easy steps to calculate income tax?

The calculation of taxation depends upon the income tax slab and status of a person as mentioned under the Act.

The following steps will help you calculate-

Step 1: Know your income
The first thing which a taxpayer should know is how much income was earned by that person in the previous year for which he is liable to calculate tax. 

Step 2: Deductions
After this, calculate the amount of deductions you have invested in. These deductions will be deducted from the total income calculated by you for tax purposes.

Step 3: Calculate any taxes paid
Verify the amount of advance tax, if any, paid by you. This will help you to calculate the balance amount of tax payable.

Step 4: Tax slab
Know the taxation slab under which you fall.  One should know the status as to whether you are an individual or HUF, or firm or company or any other assessee.  Accordingly, you will come to know the rates of tax applicable to you.

Step 5: Online tax calculator
Click on the Online tax calculator, which will redirect you to the income tax site where you will be able to calculate the income tax payable online after following all the above steps.

Try calculating tax for yourself as an individual with a salary income of ₹5,00,000 p.a.

Who should apply for Permanent Account Number (PAN) ?

Following persons should mandatorily hold a PAN:

• A person, whose total income is more than the maximum amount not chargeable to tax,
• A person, whose income from business or profession exceeds ₹5 lakhs,
• A person,  whose tax has been deducted at source,
• An importer or exporter
• A charitable trust
• Any person liable to pay excise duty or is in manufacturing or production business.
• A person liable to pay goods and service tax
• Any person who enters in any financial transactions wherein quoting PAN is compulsory.

Discuss the different modes of collection of Income Tax -TDS, Advance Tax & Self-Assessment tax?

The different modes of collection of income tax are mentioned as below:

Tax deducted at source (TDS) – TDS stands for Tax Deducted at Source. “At source” means at the point of origin or issue. Herein it means that tax is deducted at the origin of income.

Illustration:  Mr. X is a salaried person working in ABC Limited. His income is taxable as per the respective tax slab under the provisions of the Income Tax Act, 1961. Herein, ABC limited will pay salary to Mr. X after deducting the tax amount (as calculated under the respective slab for the financial year) and pay the balance amount. Thus, salary refers to the source of income and the amount deducted refers to the TDS amount. Herein ABC Limited is the deductor (one who deducts TDS) and Mr. X is the deductee (on whose behalf TDS is deposited).

TDS is deducted on several sources of income i.e. interest income, dividend income, royalty income, income from professional services etc. 
Now in case you have multiple deductions during the year, it becomes very difficult to trace the total amount of TDS paid. Hence, you end up calculating the wrong tax amount. To cross check as well as to prevent any miscalculation with respect to the total unclaimed TDS amount, you need to simply download Form 26AS.

Advance tax - Advance tax is the amount of income tax paid to the Government based on probable tax liability of the previous year.

Advance tax needs to be paid in the following manner:

Self assessment tax - Tax paid by the assessee after 31st march but before the due date for return of income is called self assessment tax.

Note: Both the self assessment tax and advance tax can be paid in this FORM.  An assessee should ensure that he selects the correct column.

What is Tax Refund and how to get a refund?

Tax refund refers to the excess of tax paid to the Government by the assessee. This excess amount is to be returned back by the Government. 

Usually the amount is remitted back into the bank account of the taxpayers. Otherwise, an assessee can also check the status of the tax refund online by clicking here.

For claiming the refund of tax, an assessee needs to fill FORM 30 stating the details as mentioned therein to the income tax department.

What is the Return of income?

Return of income is a format prescribed by the Government in the form of forms wherein an assessee mentions the details of the income and expenses, taxes paid, refund to be received etc. This format is prescribed in the form of different forms based on the status and nature of income of the assessee.

These forms can be downloaded from the income tax website itself.

What are the documents for Evidence of Income?

Documents of evidence of income are basically the proof of income. It can be salary slips, an interest certificate, bank transaction statements etc. Though they need not to be submitted while filing return of income, the assessee should maintain a proper record of all these documents for 7 years to substantiate the income earned if required by any assessing authority in future.

What are the points to be kept in mind while filing returns?

While filing return of income, following points should be kept in mind:

• An assessee should be careful with the due date of filing the return if income because a delay may lead to no carry forward of losses of the previous year.
• Cross check the amount TDS with Form 26AS available online.
• Filing return on the basis of all the documents evidencing the income earned. The figures entered in the return should be exactly as mentioned in the supporting documents.
• Identify the correct form for filing return of income.
• Enter correct details of all the important information such as PAN, bank number details etc
• Once the return is filed, the acknowledgement receipt of the return of income is to be dispatched to the CPC, Bangalore within one hundred twenty days.

What are the modes of filing return of income?

The different modes are as follows:

1. Paper Form
2. E-filling with digital signature
3. Electronic transfer of data under Electronic Verification Code (EVC)
4. Electronic transfer of data and submission for ITR-V

What is E-filing and state its benefits?

E-filing means filing the return of income through the income tax website. The income tax department (IT department) has provided an e-filing utility software to prepare the return of income and then upload it in the website. This software is quite user friendly and minimizes the hurdles of manual cumbersome filing of return.

One of the most important benefits of e-filing is that if one maintains all the documents properly, he can file the return from anywhere and any place saving time with less trouble. 

What is a digital signature?

Digital Signature Certificates (DSC) are the digital equivalent (that is electronic format) of physical or paper certificates. 
Few Examples of physical certificates are drivers' licenses, passports or membership cards. 

Certificates serve as proof of identity of an individual for a certain purpose…………………., a digital certificate can be presented electronically to prove one’s identity, to access information or services on the Internet or to sign certain documents digitally.”

Key Points

• Form 26AS is the concise details of the TDS, TCS and the advance tax or the self assessment tax paid by the assessee. It can be downloaded from the income tax website by entering the assessee details.
• The assessee should contact the tax deductor and cross-check whether any errors have been made by the tax deductor in entering any deductee details.
• The sections related to TDS are section 192, 193 and 194 of the Act.
• ITR-V is the acknowledgement receipt of filing the return of income.
• The due date of filing return of income by an individual or HUF is 31st July.
• The due date of filing the return of income by the company is 30th September.
• The return can be revised subject to the condition that the revised return should be submitted before the end of assessment year or completion of assessment (whichever is earlier).
• DSC is required to be used for signing the e-forms/documents.

Conclusion

Now that we are at the end of this module of Tax Planning hope you have got an in-depth knowledge of taxes and how to plan them for your benefit with the help of exemptions or deductions offered under the Income Tax Act 1961. 

You must remember that taxes are collected by the government in two different forms, one which is the direct tax Income Tax, and the other is the indirect tax Goods & Service Tax. 

As there is no way to avoid paying GST on goods and services we use on a daily basis, Tax planning is only applicable to income tax. 

Every earning citizen of India, wheater their income is taxable or not, should file their tax every year. Hope you have learned how to file your tax. 

So, if you liked reading this module, do share it with your friends. There are many interesting modules on ELM School that you can go through to have broad knowledge in the field of finance.