Rebate / Exemption from Income Tax Liability

9 Following rebates / exemptions are available.

9-1 Deductions under chapter VI-A and rebates

Investments and deposits - Investments in PPF, Provident Fund, LIC, repayment of housing loans, NSIC, 5 year FDR with scheduled banks, 5 year time deposit in post office, deposit in Senior Citizens Saving Scheme etc. are allowed as deduction upto Rs 1,00,000 u/s 80C.

Deduction of medical insurance premium, pension fund - Following deductions are permissible - (a) Medical insurance premium upto Rs 20,000 for senior citizen and Rs 15,000 for others. For the Assessment Year 2009-10, additional deduction of Rs 15,000 will be allowed if insurance policy of parents is taken (section 80D). (b) Contribution to pension fund within overall ceiling of Rs one lakh (section 80CCC)

Donations - Contribution to approved charitable institutions - in some cases 50% of amount paid is allowed as deduction, while in some cases, 100% amount paid is allowed as deduction (section 80G).

Exemption to EOU, SEZ - Income In case of EOU, STP, EHTP and BTP, the concession will continue upto 31-3-2010. In case of SEZ, exemption is for larger period.

Other provisions of Income Tax

10 Certain other important provisions of income tax are discussed here.

10-1 Clubbing of Income - Often salary or other expenses from business are shown in name of close relatives like spouse (wife / husband) or minor child, to reduce tax liability. In such case, if the individual has a substantial interest in the concern, the income of such wife, husband or minor child will be added to the income of such individual. This is termed as ‘clubbing of income’.

The clubbing provision is not applicable if spouse possesses technical or professional qualifications and the income is solely due to application of his / her technical knowledge and experience [section 64(1)(ii) of Income Tax Act]

If an asset is transferred to the spouse, income from such asset is also treated as income of the individual. [e.g. by transferring shares, house property etc.].

Similarly, if an individual throws his separate property into the property of HUF, income from such converted property will be included in the total income of such individual [section 64(2) of Income Tax Act]

The clubbing provision has obviously been made to plug avoidance of income tax liability, by ‘showing’ some income in the name of spouse / minor child / HUF.

10-2 Set off and carry forward of loss

Carry forward of loss other than speculation loss - Carry forward of loss is permitted only when return is filed in time. In case of closely held company, unabsorbed loss can be carried forward only if at least 51% of shares are held beneficially by same persons who were holding them in previous year.

Unabsorbed depreciation - Unabsorbed depreciation can be set ff against any head of income other than salary. It can be carried forward to any number of years. It can be carried forward by same assessee except in case of amalgamation, demerger and business reorganization.

Speculative loss - Loss from speculative transactions involves sale and purchase of commodities including stocks and shares. It can be set off against speculative profits only and can be carried forward for four years.

10-3 Permanent Account Number - Every person whose total sales, turnover or gross receipts are over Rs 5,00,000 are required to apply and obtain a Permanent Account Number (PAN) [section 139A].

Any other person can obtain PAN voluntarily.

In addition, ITO can allot PAN suo moto to a person by whom income tax is payable.

Government has decided to use PAN as a common business identification number to be used by various agencies and departments like customs, excise, DGFT, SEBI etc.

10-4 Advance Income Tax - Tax is deducted from salary payable to an employee. Since a businessman or professional earns his own income, there is no TDS (Tax Deduction at Source). Hence, he is liable to pay advance tax as he earns income. This is ‘Pay Tax as you Earn’. Thus, advance tax is payable on the basis of estimated income of the current financial year. [The income is ‘estimated’ because, actual income will be known only after the financial year is over].

Advance tax is payable only in cases where tax payable is in excess of Rs 5,000. The assessee has to pay advance tax on his own accord and no notice will be issued to him. The advance tax is payable in installments as follows -

In case of company - # 15% on or before 15th June # 30% on or before 15th September # 30% on or before 15th December # Remaining 25% on or before 15th March. If there was shortfall in earlier installment, it should be made up in subsequent installment.

* In case of partnership firms, proprietors, professionals etc. - # 30% on or before 15th September # 30% on or before 15th December # Remaining 40% on or before 15th March. If there was shortfall in earlier installment, it should be made up in subsequent installment.

Thus, 100% income tax in respect of estimated income of current financial year is payable by 15th March. If any instalment is not paid on due date, it can be paid subsequently.

If advance tax is not paid or short paid on due dates, mandatory interest is payable as follows :

* If advance tax was not paid before 31st March of the financial year, or advance tax paid was less than 90% of the assessed tax, interest @ 1% per month or part thereof is payable from 1st April till the month of payment. [section 234B]. The interest is not payable if total tax liability is less than Rs 5,000 or if at least 90% of assessed tax was paid before 31st March.

* If installments of advance tax are not paid on due dates, interest on shortfall is payable @ 1% per month. In case of last instalment which is due on 15th March, interest @ 1% is payable for one month if tax is not paid at all or is paid after 15th March. [section 234C]. Note that this interest is calculated only upto 31st March, as from 1st April, interest @ 1% becomes payable on entire tax due under section 234B.

This interest is mandatory and there is no provision to grant exemption form payment of this interest.

If the return is not filed within due date, interest @ 1% is payable u/s 234B. In addition, interest @ 1% is payable u/s 234A. Thus, if return is not filed on or before due date, interest payable is 2% for every subsequent month.

10-5 Special provisions in respect of Partnership firm

A partnership firm is presently assessed on the lines similar to the assessment of a company. The firm can pay salary and interest on capital to the partners. Income tax is payable on profits calculated after deducting salary and interest paid to partners. The salary paid to partners is treated as ‘business income’ in their hands and is taxable accordingly.

The partnership firm may or may not be registered. However, the partnership must be evidenced by a partnership deed. The deed should indicate * individual shares of the partners * Salary payable to working partners * Interest payable to partners. A true copy of partnership deed certified and signed by all the partners should be filed along with the first return of income. Subsequently, the copy is not required to be filed along with every return. However, if there is any change in the partnership agreement, a fresh copy has to be filed.

Return of partnership firm can be signed by managing partner.

Salary to working partners - The salary payable to partners is as follows -

* Professional partnership firms - # upto book profit of Rs 1,00,000 - 90% of book profit - minimum Rs 50,000 # On next Rs 1,00,000 book profit - 60% # On balance of book-profit - 40%.

* Other than professional partnership firms (i.e. business firms) - # upto book profit of Rs 75,000 - 90% of book profit - minimum Rs 50,000 # On next Rs 75,000 book profit - 60% # On balance of book-profit - 40%.

The salary can be paid only to working partners. Such payment should be authorised by partnership deed. This salary is allowed as deduction from income of the partnership firm and is taken as business income of the individual partner.

Interest to partners - Income Tax Act provides that interest upto 12% paid to the partners will be allowable as deduction from income of partnership firm [section 40(b)((iv) of Income Tax Act]. [The interest rate was 12% upto 31-5-2002]. Such payment should be authorised by partnership deed. This interest is allowed as deduction from income of the partnership firm and is taken as ‘other income’ of the individual partner.

10-6 Tax deduction at source (TDS)

A person is under liability to deduct income tax at source and pay it to Government. He should issue a certificate to the person from whom tax is deducted, so that the person can submit the same to Income Tax authorities. Tax deducted at source should be paid to Government within one week from date of deduction. At the end of the year, a return in prescribed form has to be filed with ITO.

TDS is rightly called ‘tedious’, but not deducting tax at source can invite penalties.

As can be seen from following, if the person making payment is individual or HUF, he is exempt from the provisions of TDS in most of the cases, if he is not required to submit income tax audit report u/s 44AB. However, TDS provisions apply to (a) salary payments made by an individual or HUF even if he is not required to submit any income tax audit report u/s 44AB (b) If the individual/HUF is required to submit Income Tax Audit report.

TDS from salary - Every employer has to deduct tax from salary of employees. Payer should calculate tax payable on salary at the  [section 192].

While deducting tax at source, the employer can consider the investments made by employee which qualify for exemption, payment for purchase or construction of house, mediclaim insurance premium etc. Income tax is to be deducted every month and should be paid to Government within a week after deduction. The employer can adjust deductions from month to month so that total deductions from salary of the whole year is equal to tax payable by employee on salary income.

Deduction under section 80G is not to be considered by employer (except some specified funds like PM Relief Fund etc.) while calculating tax liability of employee. The tax relief has to be claimed by employee through tax return. 

The employer has to file an annual return of tax deducted at source from all employees.

TDS from Interest other than interest on securities - Tax should be deducted from interest paid if interest payable in financial year exceeds Rs 10,000 in case of banks, post office and cooperative society  and Rs 5,000 in case of others [section 194A].

If recipient is a resident other than domestic company, TDS is as follows - (a) If recipient is individual/HUF/AOP where aggregate payment or credit is upto Rs 10 lakhs, cooperative society, local authority, firm where aggregate payment or credit does not exceed Rs one crore - 10.3% (b) If recipient is individual/HUF/AOP where aggregate payment or credit exceeds Rs 10 lakhs, firm where aggregate payment or credit  exceeds Rs one crore - 11.33%

If recipient is a domestic company, TDS rate is as follows - (a) If recipient is domestic company where aggregate payment or credit does not exceed Rs one crore - 20.6% (b) If recipient is domestic company where aggregate payment exceeds Rs one crore - 22.66%

An individual who is 65 years of age or above can get interest without deduction of tax at source, if he submits a self-declaration to the payer in duplicate, in form No. 15H. Others have to submit declaration in form 15G.

The payer has to submit one copy of declaration (form 15G/15H as applicable) to Commissioner of Income Tax under whose jurisdiction his tax is being assessed.

Individuals and HUF are required to deduct tax  on interest payment, if they is required to submit income tax audit report u/s 44AB. Provisions of making payment of TDS do not apply to small HUF and individuals who do not have to submit income tax audit report.

TDS from Payments to contractors, sub-contractors and advertising contracts  - TDS provisions apply if contract value exceeds Rs 20,000 for single payment or Rs 50,000 in aggregate for a financial year [section 194C].

In case of contract other than advertising contract, TDS is at following rates - (a) If recipient is individual/HUF/AOP where aggregate payment or credit is upto Rs 10 lakhs, cooperative society, local authority , firm/domestic company where aggregate payment or credit does not exceed Rs one crore - 1.03% (b) If recipient is individual/HUF/AOP where aggregate payment or credit exceeds Rs 10 lakhs, firm/domestic company where aggregate payment exceeds Rs one crore - 1.133%

In case of advertising contract, TDS is at following rates - (a) If recipient is individual/HUF/AOP where aggregate payment or credit is upto Rs 10 lakhs, cooperative society, local authority , firm/domestic company where aggregate payment or credit does not exceed Rs one crore - 2.06% (b) If recipient is individual/HUF/AOP where aggregate payment or credit exceeds Rs 10 lakhs, firm/domestic company where aggregate payment exceeds Rs one crore - 2.266%

TDS is also required to be deducted, if payment to contractors/sub-contractors is made by an individual or HUF, who is required to submit income tax audit report u/s 44AB. Provisions of making payment of TDS do not apply to small HUF and individuals who do not have to submit income tax audit report.

TDS from  payment on advertising contracts - See above. Provision of TDS applies when client makes payment to advertising agency and not when advertising agency makes payment to the media i.e. print media or elecronic media.

TDS from commission / brokerage – TDS applies in respect of payment of commission or brokerage to resident. There is no TDS if commission / brokerage paid during the financial year is less than Rs 2,500. [section 194H]

TDS is at following rates - (a) If recipient is individual/HUF/AOP where aggregate payment or credit is upto Rs 10 lakhs, cooperative society, local authority , firm/domestic company where aggregate payment or credit does not exceed Rs one crore - 10.3% (b) If recipient is individual/HUF/AOP where aggregate payment or credit exceeds Rs 10 lakhs, firm/domestic company where aggregate payment exceeds Rs one crore - 11.33%

TDS provisions are applicable, if payment of commission/brokerage is made by an individual or HUF, who is required to submit income tax audit report u/s 44AB. Provisions of making TDS payment do not apply to small HUF and individuals who do not have to submit income tax audit report.

TDS from Payments of Rent - TDS provisions apply if aggregate sum of rent paid exceeds Rs 1,20,000 per annum [section 194-I] 

The TDS rates vary between 10.3% to 22.66% depending on whether rent is for plant, machinery, land, furniture etc. and who is the recipient.

TDS provisions are applicable, if payment of rent is made by an individual or HUF, who is required to submit income tax audit report u/s 44AB. Provisions of making payment of TDS do not apply to small HUF and individuals who do not have to submit income tax audit report.

TDS from Payments for professional or technical services - TDS provisions apply if aggregate sum paid for professional or technical services exceed Rs 20,000 per annum [section 194J].  TDS should be on total payment including reimbursement of expenses, as per CCBDT circular No. 715 dated 8-8-1995. However, I ITO v. Dr. Willmar Schwabe (2005) 3 SOT 71 (ITAT), it has been held that reimbursement of expenses for which bill is separately raised did not attract the provisions of section 194J.

TDS is at following rates - (a) If recipient is individual/HUF/AOP where aggregate payment or credit is upto Rs 10 lakhs, cooperative society, local authority , firm/domestic company where aggregate payment or credit does not exceed Rs one crore - 10.3% (b) If recipient is individual/HUF/AOP where aggregate payment or credit exceeds Rs 10 lakhs, firm/domestic company where aggregate payment exceeds Rs one crore - 11.33%

TDS provisions are applicable, if payment for professional or technical services is made by an individual or HUF, who is required to submit income tax audit report u/s 44AB. Provisions of making TDS payment do not apply to small HUF and individuals who do not have to submit income tax audit report.

TAN number – Assessee should obtain TAN (Tax Deduction Account Number) which is required to be quoted on all TDS returns. It is a 10 digit alphanumeric code.

TDS Return – Person who has deducted tax at source is required to file return to Income Tax department on annual basis. In case of companies, the return is to be filed on computer media, i.e. for them, filing of e-TDS is compulsory. The form has been prescribed. ‘Electronic Filing of Returns of Tax Deducted at Source Scheme, 2003’ has been notified by CBDT for this purpose. The return has to be filed in prescribed form in floppy. NSDL (National Securities Depository Ltd.) has been given task of handling e-TDS returns.

10-7 No income tax clearance certificate

Income Tax department has discontinued giving Income Tax Clearance Certificates for various purposes like filing tender, bidding contracts etc. No such certificate will be issued by Income Tax department. The contractors etc. should quote PAN – CBDT circular No. 2/2004 dated 10-2-2004.

Income Tax Returns

11 Every assessee should file an annual return in prescribed form. The prescribed forms are as follows -

The income tax return is really a self assessment memorandum. The assessee should calculate the tax and interest payable by him and pay it by challan. The payment will of course be after deducting the advance tax which he might have already paid.

E-return – Beginning has been made in 2003 for electronic filing of return under Electronic Furnishing of returns of Income Scheme, 2003. Filing of e-return is compulsory for corporate employees.

Due dates for filing return - The due dates for filing return are as follows -

* (a) Individuals having only salary income  (b) Non-corporate assessees (Individuals, HUF, partnership firms or societies) having income from business or profession but who do not have to get their accounts audited under Income Tax or any other law - 31st July

* (a) Non corporate assessees (Individuals, HUF, partnership firms or societies) having income from business or profession and who have to get their accounts audited (b) A working partner where the firm in which he is a working partner has to get its accounts audited (c) Corporate Assessee (d) Persons who have to file return under one by six scheme – 30th September (Till 2007, it was 31st October).

The dates are mandatory and there is no provision to extend the due date. If the return is filed beyond due date, mandatory interest @ 1% per month of tax due is payable. Belated return upto one year beyond due date is permissible. Mandatory interest is payable, but no penalty is payable. Thus, if no tax was due, belated return upto one year can be submitted without payment of any interest.

A loss return must be filed in time. Otherwise, the carry forward of loss is not permitted. However, CBDT can grant extension for submitting return by a loss making company.

Signature on return - The return should be signed by individual, karta of HUF, managing partner, managing director etc. In some cases, return can be signed by authorised representative.

No intimation will be sent by Income Tax Officer, if any tax / interest / refund is not due on the basis of return of income / wealth filed.

Correction of arithmetical mistakes and incorrect claims – Arithmetical mistakes and incorrect claim apparent from the return can be corrected by department and intimation sent to assessee within one year from end of financial year in which return is made [section 143(1) amended vide Finance Act, 2008]. If no such intimation is made, acknowledgment of return will be deemed to be an intimation.

Scrutiny of returns - Some of the returns are taken by ITO for detailed scrutiny. Notice for scrutiny has to be served within 6 months from close of financial year in which return is furnished i.e. by 30th September. The ITO can require assessee to attend his office or produce evidence in support of the return filed [section 143(2) of Income Tax Act – section 115WE(2) in respect of FBT]

Payment of tax - The advance tax and self-assessment tax should be paid vide prescribed challan. Facility of e-payment is available.