unit 10-15 Flashcards
(42 cards)
what are the 5 heads of income
The 5 heads of income as per Section 14 of the Income Tax Act, 1961 are: Income from Salaries, Income from House Property, Income from Capital Gains, Income from Profits and Gains from Business and Profession, and Income from Other Sources
what / when will a payment be considered salary?
- payer must be employer, payee the employee/ a master/servant relationship
- the payment should be made in such capacity
- advance salary is taxable in reciept basis and will not be included in the total income when salary becomes due
- outstanding salary is taxable on a due basis, not to be included in total income when it is recieved
contract of service vs contrac for service
COntract OF service- employer employee relationship exists because they can direct and control the duties and manner of performance so it is under salary
Contract FOR service- they can only chose the target to be achieved but not direct the manner of performace so it is not under salary this will come under income from other sources or PGBP profit gain from business or profession
section 16
deduction from salary
- salary which is taxable will be computed after deductions which is
- A deduction of 50K rupees or salary amt whichever is less
- when the assessee is recieving salray from govt and has been given an entertainment allowance from their employer - a sum of 1/5th of salary or 5k rupees whichever is less
- deduction of any sum which has been paid by assessee due to TAX ON EMPLOYMENT depending on state laws. but only if they paid the tax b4 31st march of PY
so what exactly constitutes a salary?
“Salary”, “perquisite” and “profits in lieu of salary”
SECTION 17
salary” includes—
(i) wages;
(ii) any annuity or pension;
(iii) any gratuity;
(iv) any fees, commissions, perquisites or profits in lieu of or in addition to any salary or
wages;
or any advance payment of the above is also salary
v) leave enchashment (getting paid if they did not take leaves)
vi) contribution to provident fund by assessee’s employer etc
TAXABLE PERQS: VALUE OF
1. Rent free acco
2. concessional acco
3. any benefit/amenity
4. life insurance premium of employee paid by employer
5. sweat equity/esop
6. other perqs as notified by govt
what are some non taxable perqs
- medical facility (Fixed Medical allowance is taxable)
- Education of children in employers facility up to 1000 rs/ per month per child not taxed
- education or training of employee
- interest free or concession loand for medical purpose or a loan of less than 20k rupees per year
- use of mobile laptop etc
- gift in kind less than 5k rupees (but cash gifts from emplyr are fully taxable)
- tea snacks,
- travelling facility by railways or national airlines
- ## pickup or drop facility
HOUSE RENT ALLOWANCE [SEC 10(13A)]
HRA is given by employer to employee to meet the expenses in connection with rent of the accommodation which the employee might have to take for his/her residence. HRA given to an employee is exempt to the extent of minimum of the following:
1. Actual HRA
2. Rent Paid- 10% of Salary
3. 50% of salary in 4 metros which is bombay chennai kolkata and delhi
Salary includes basic salary + Dearness allowance. (forming part of salary) + commission (if based on
%of turnover)
2. Exemption is not available to an assesse who lives in his own house or in house for
which he has not incurred the expenditure of rent
3. Relevant period means the period for which the said accommodation was occupied
the assesse during the previous year
Gestentner Duplicators vs CIT
Does Salary include comission paid per contract of emplyment?
HELD: YES
Vrajeshwari B. Parikh v. ITO
Excess salary paid by employer in earlier years but recovered during present year,, taxable? NO
This decision hinged on the understanding that only the net amount (after refunding the excess) should be considered “salary due” to her. Thus, the taxable salary should reflect what was legitimately retained by her after accounting for the refunded excess
The ruling clarifies that, under similar circumstances, employees may not need to pay tax on excess salary amounts if they are returned in later years, so long as the employer appropriately reports the adjustment. This case is an important precedent for handling such adjustments in tax filings.
CIT v. Abdul Wahid
comission payments to emplyees via seperate agrements considered as salary? YES
sections regarding income from house property
section 22- charging section
section 23, 24, 25= computationf of IFHP
Section 25A, 26= special provisions
section 27= Deemed ownership
Section 22
- Income from house property.—The annual value of property consisting of any buildings or lands appurtenant thereto of which the assessee is the owner, other than such portions of such property as
he may occupy for the purposes of any business or profession carried on by him the profits of which are
chargeable to income-tax, shall be chargeable to income-tax under the head “Income from house
property”.
“owner”= legal owner, beneficial owner, deemed owner
land appurtenant thereto= doesn not include incomplete or ruinied or demolished property
Annual value how determined income from hosue propert
Section 23
so if we have expected rent of the house based on like municipal valuation/ fair rent in locality etc at suppose 10k but actual the rent recieved in PY was 15k then ACTUAL RENT RECIEVED AMT is taxable because it is higher. but if it was lower then tax would be on basis of EXPECTED RENT/ Reasonable Lettable Value
Expected rent can be on basis of :
1. Municipal valuation
2. fair rent in locality
3. max standard rent per rent control
if the property is vacant and in the PY the ARR is less than RLV then ARR will be considered
deduction of unrealised rent
deduction of unrealised rent will be allowed if:
1. tenancy was bonafide
2. defaulting tenant has vacated the HP
3. the defaulting tenant has no occupied any other proprties of assessee
4. assesse tried his best to recover the rent and can satisfy AO that he tried his vwery bwest <3
besides legal owner - who will be considered deemed owner?
[Onlyforthepurposes of S.22-26 i.e IFHP
- Person having possession of a house due to part performance of acontract as laid out under 53AofTOPA
- agreement done but deed not registered and the purchaser has paid or is ready to pay consideration and has taken posession of property
- will be deemed owner - Individual who has transferred property to spouse or minor child will be a
deemed ownerif:
■ Taxpayerisanindividual and he/she transfers a house property
■ Tohis/her spouse (not being a transfer in connection with an arrangement to
live apathy) or his/her minor child (not being a married daughter)
■ Andpropertyistransferred without adequate monetary consideration
3, A holder of an impartible estate is a deemed owner
deduction for IFHP under s24
- Standard deduction- 30% of Net Annual Value- ■ Itisdeductible irrespective of any expenditure incurred by the taxpayer
- Interest on loan [S.24(b)]
■ Interest on loan is allowable as deduction if loan is borrowed for the purpose of
purchase, construction, repair, renewal or reconstruction of the property
■ Interest on loan is deductible on an accrual basis- when it is due, not when
you actually pay
■ You cannot deduct interest on unpaid interest
Interes ton Pre-construction Period?
so if assessee borrowed funds to buy/construct house, the interest on the loan will be deductable in 5 equal annual installments.
so suppose u get loan in 2019- with 1 lakh interest for that year.
then u buy house in 2020. the interest of 1 lakh will be split into 5 equal annual deductions FROM the year you buy the house//finish construction so 2020-25 u will have deduction of 20k for pre-construction period.
pre-construction period means the period
commencing on date of borrowing and ending March 31
immediately prior to date of completion/date of acquisition or date of repayment of loan- whichever is earlier
IFHP not chargeable under tax
- income from farm house
- property held for charitable purpos e
- property for own business or profession
- 2 houses for self occupancy
- properrty for trade union/ local authority
- palace of ex ruler
Certain limitations on deductions for interest on loan under S. 24(b)
If it is leased out property (LOP) or deemed to be leased out property (DLOP) then there is no limitation on deduction of interest
i) In respect of let-out property, actual interest incurred on capital borrowed for the purpose of acquisition, construction, repairing, re-construction shall be allowed as deduction
- If it is Self-occupied property (SOP)
- If the following three conditions are met, interest on borrowed capital is
deductible upto Rs. 2,00,000
1) Capital is borrowed on or after April 1, 1999 for acquiring or
constructing property
2) The acq/con to becompletedwithin5years, from end of nancial year
in which capital was borrowed
3) Person extending loan certi es that such interest is payable in respect of
amountadvanced for acq/construction
ii)
If the above 3 conditions are not met, then interest on loan is deductible only
upto Rs.30,000
Co-owned properties [S.26]
In case of Self-occupied property- when the property consists of one house in the
occupation of the owner for his own residence, the annual value of the house shall be
taken as NIL, under S. 23(2)(a), if the following conditions are met : (i) the property is
not actually let out during the whole year, (ii) no other bene t is derived therefrom
whatever the fuck that means???
when unrealised rent is realised subsequently [25A]
Whentheamount of rent received in arrears or the amount ofunrealised rent realised
subsequently by an assessee shall be charged to income tax in the previous year in
which such rent is received or realised.
● The recipient of arrears of rent is chargeable to tax in the year in which such rent is
received, regardless of the fact whether in the year of receipt the house property is
ownedbyhimornot.
● Therecipient can claim standard deduction of 30% of the arrears of rent or unrealised rent
Ghanshiam Das v.Devi Prasad &Anr,1966SC
○ while interpreting the term “building”under the Income Tax Act held that it must be construed in its ordinary grammatical sense unless there is something in the
conext of the object of the statute to show that it is used in a di erent sense. From the
de nition of building under the act, it does not appear that the existence of a root is
always necessary for a structure to be regarded as a building
○ Residential buildings ordinarily have roofs but there can be non-residential buildings
for which a roof is not necessar
ITO v. K.K.Bhatnagar,
○ While answering when would a land called appurtenant to a building, held that if the
land is indivisible part and parcel of teh building, its use anf enjoyment by occupeirs
and the land is no put to any other useandis not yielding income assessable under the
head other the ifhp
S.Kartar Singh v. CIT
S.KartarSinghv. CIT
○ Itwasheldthatsince the ownerofthe property continues to be taxable by reason of his
ownership subject to the prescribed deductions, the creation of an overriding title with
respect to income from the house property will not relieve the owner from liability to
pay tax. The assessee continued to be the legal owner
Estate of Ambalal Sarabhai v. CIT, 2000 ITR Guj
○ Question arose whether the executors holding the property merely as trustees for an
behalf of the bene ciaries shall be treated as the owner in respect of IFHP
○ Held-Notwithstanding the fact that the executor is the legal owner, the law in a case
where any income of the estate of the previous year is distributed or applied to the
speci c legatee, it should be treated as income in the hands of the speci c legatee.
Thus where IFHP is so applied to the special legatee, he is to be treated as the
bene cial owner of the house property so far as IFHP is concerned
