Publisher:HOW TO CALCULATE TDS ON SALARY INCOME? | ACADEMY TAX4WEALTH
Oct 05,2021
How to Calculate TDS on Salary Income?
Tax Deducted at Source (TDS)- Introduction:
Tax Deducted at Source (TDS) is a crucial component of the Indian taxation system. It ensures the collection of taxes at the source of income, thus reducing the possibility of tax evasion. TDS is applicable to various types of payments, such as salaries, rent, professional fees, interest, and more. In this blog post, we will delve into the intricacies of TDS calculation, providing you with a comprehensive understanding of its calculation methodology.
As per the provisions outlined in Section 192 of the Income Tax Act, 1961, TDS (tax deducted at source) is applicable to salary income. Typically, the employer deducts TDS from the salary payable to the employee. Under the Income Tax Act, 1961, salary received from the employer falls under the "Salary" income head, and accordingly, TDS is deducted based on the average income tax rate determined by the prevailing income tax slabs for the specific financial year, taking into account the estimated income. The TDS amount deducted is documented in Form 16, which is issued by the taxpayer at the end of each financial year.
1. Who is Eligible to Deduct TDS under Section 192?
As mentioned previously, the responsibility to deduct TDS under Section 192 generally lies with employers. The term "Employer" encompasses the following entities:
✔ Hindu Undivided Family (HUF)
✔ Individuals
✔ Companies
✔ Partnership Firms
✔ Trusts
✔ Co-operative societies
All of the aforementioned employers are obligated to deduct TDS at a specific time and remit it to the government. According to the provisions of Section 192 of the Income Tax Act, of 1961, the deduction of TDS requires the existence of an employer-employee relationship between the parties. It should be noted that the employer's status, such as being a company or HUF, is irrelevant for TDS deduction under this section. Additionally, the number of employees working for an employer is inconsequential when calculating and deducting tax at source.
2. When is TDS Deducted under Section 192?
It is important to note that TDS is deducted under Section 192 of the Income Tax Act at the time of actual or original payment of salary, and not on the accrual of salary. Additionally, if the employer provides an advance salary or pays salary-in-arrears, TDS will also be deducted accordingly. However, if the estimated salary falls below the basic exemption limit, TDS will not be deducted.
This rule is applicable to all individuals, regardless of whether they have a valid Permanent Account Number or not. Here are the basic exemption limits based on age, where a TDS deduction is not required:
✔ Below 60 years (Resident in India): 2.5 lakh
✔ Between 60 to 80 years of age (Senior citizens):3 lakh
✔ Above 60 years of age (Senior Citizens): 5 lakh
3. What is the Rate of Tax Deduction for FY 2019-20?
Please note that Section 192 of the Income Tax Act does not specify a specific rate for TDS calculation. Generally, TDS is deducted based on the applicable income tax slab rates for the specific financial year in which the salary payment is made.
To begin with, the total salary of the employee is computed after considering all applicable deductions, and then the tax is calculated based on the relevant tax rate. If an employee wishes to opt for the new tax regime, they can inform their employer accordingly for each financial year.
Normally, the employer calculates the tax at the beginning of each financial year. The TDS amount is determined by dividing the estimated tax liability of the employee for the particular financial year by the number of months of employment.
However, if an employee does not have a PAN, TDS will be deducted at a rate of 20% (excluding the higher education cess and education cess). If there is a shortfall or excess in any deduction, it can be adjusted by reducing or increasing subsequent deductions made during the financial year.
If any advance tax has already been paid, it can also be adjusted in the computation of TDS.
Illustration:
The tax on salary income is deducted based on the average rate of income tax, which is calculated using the following formula:
The average rate of income tax = Income tax payable (calculated as per the tax slab rates) / Estimated income of the employee
4. Does Receiving Salary from Multiple Employers affect?
If you happen to work for more than one employer simultaneously, you are required to provide details of your salary and TDS through Form 12B to either of the employers. Once the employer receives this information from you, they will be responsible for computing your gross salary and deducting TDS accordingly.
Furthermore, if you resign from your current employment or join a new employer, it is essential to share the details of your previous employment using Form 12B with your current employer. Based on the information regarding your previous year's salary, your current employer will calculate and deduct TDS for the remaining months of the relevant financial year.
However, if you choose not to share the details of your previous employment, each employer will independently deduct TDS based on the salary paid to you by them.
Conclusion:
Determining the applicability of TDS involves considering the type of payment, threshold limits, relevant sections of the Income Tax Act, and any applicable exemptions. Adhering to the guidelines ensures compliance with tax regulations and helps avoid penalties. It is advisable to seek professional advice or refer to the Income Tax Act for specific cases to accurately determine the applicability of TDS.
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Publisher:WHAT IS THE DIFFERENCE BETWEEN GIFT AND INHERITANCE TAX
Oct 12,2021
What is the difference between Gift and Inheritance Tax
What is an Inheritance Tax?
Inheritance tax is also known as death tax as it is calculated basing on the fact that who owns the property after the deceased person. Generally, the amount of tax is calculated basing on the current value of the property received by the legal heir or beneficiary of the deceased person. In some of the cases, legal heirs are exempted from paying the inheritance tax or may face lower rates of taxes. However, friends or distant relative of the deceased may face higher rates of inheritance taxes.
What is a Gift Tax?
A gift tax refers to the tax where one individual transfers certain valuable property to another individual. It may be in cash or kind. Since it is Gift, the receiver is not obliged to pay the full amount for the gift to the giver. However, they can pay a lesser amount than the full value of the gift. According to law, it is compulsory for the individual who is passing the gift to pay the taxes.
Relationship between Gift and Inheritance Tax
A gift tax is meant for prevention of individuals who are transferring their assets or money to avoid the payment of estate or inheritance tax. An individual who inherit the property of a deceased person is required to inheritance tax. However, in case of gift tax, the individual who is gifting is obliged to report the same only if the value of the gift exceeds a specific sum. But, in case of inheritance taxes, the receiver of inheritance is liable to report the inheritance.
An analysis on Inheritance Tax and Gift Tax
Inheritance Tax
To remove the increase of wealth with the help of estate or inheritance, and also for protection of money in different means, the aforesaid taxes were introduced so as to decrease the income inequality level.
It is some way similar to wealth tax but it is not. Many rich individuals do charity so as to reduce the overall net worth of their property. This is a technique which reduces the tax liability after death on a larger picture but ultimately funds for the social causes.
Although the taxes are imposed, the estate still has a great value when it is rightly transferred to its rightful legal heir for their benefit. To avoid such kind of burden on the estate of an heir, there are certain rules which will be applicable for some businesses.
Income tax implications on inheritance
In case of death of an individual, the property of the deceased will pass on to his legal heirs as per the law. In such case, there is no doubt that such transfer is done without any consideration in return. Thus, the same cannot be qualified as a gift as per the provisions under Income Tax Act, 1961.
However, provisions of Income tax Act, 1961, does not include a case of transfer under inheritance or will under the provisions of the gift tax. Accordingly, the law does not provide any provision for taxation of property received as a result of inheritance.
Tax on income from inheritance
Sometimes, the property inherited may become a source of income including rent, interest etc for the receiver of the inheritance. When the legal heir or receiver of inheritance becomes the owner, ultimately the income generated from the use of such property will go to him. Thus, the new owner has to disclose the said income generated and accordingly must pay taxes.
For example, Mr. Singh owns a commercial complex and provided the same on rent. The construction cost of commercial complex was Rs. 50 lakhs. Currently, he gets a rent of Rs. 60,000 per month from the commercial complex. After his death the said property was inherited by his son Mr. Aditya Singh. In this case, the transfer through will and the same cannot be considered as taxable. However, the rent received by Mr. Aditya Singh will be taxed under the "Head Income from House Property" under the provisions of Income Tax Act, 1961.
Tax on subsequent sale
Once the property is inherited, the owner has the right to sell it subsequently. If the owner does so, the income generated will be considered as capital loss or if loss occurs then it will be treated as capital loss on the part of the legal heir.
Further, the period of holding of property including the period of holding of deceased and legal heir ownership will be considered for determination of capital gains which may come under long term capital gains tax or short term capital gains tax.
For example, Mr. Kapoor inherited a property from his late father in the year 2017. His father had bought that property in year 1997 for Rs. 20,000. The property was sold for Rs. 3, 00,000 in the year 2018. As the property has been held for more than 24 months including the holding period of both deceased father and legal heir son the capital gain will be considered as long term capital gain. Accordingly, Mr. Kapoor can claim for the benefits of indexation while determination of the capital gains.
Gift Tax
Gift taxes provide the advantage to the individuals in terms of tax savings. There are vast potential for an inheritance and the legal heir can enjoy the benefits of tax savings. Still, in some of the places, gift tax is not imposed. This suggests that the individuals do not have a certain limit on how much tax on gifts can be imposed every year. In case of gift that, gift is given while the giver is still alive and he or she can look on how the receiver enjoys the gifts and makes the best use out of it.
Gift Taxation in India
According to law, gift tax was amended in the year 2017. Gifts received by any person are taxed on the part of the receiver under the head "Income from Other Sources" as per the normal rates of tax. The different kinds of gifts that are covered and its taxability have been discussed below mentioned paragraphs.
The provisions in respect of gift tax have been provided under Section 56(2)(x) of the Income-tax Act, 1961. A table containing some brief details of the aforesaid provisions has been provided below;
Gifts Covered (in Cash or Kind)
Monetary Threshold
Quantum Taxable
Any amount of money given without any consideration
Amount > 50,000
Whole amount will be taxable
Any immovable property including land, building etc, given without any consideration
Value of Stamp duty > Rs 50,000
Value of stamp duty of the property will be taxable
Any immovable property for inadequate consideration
Value of Stamp duty exceeds consideration by > Rs 50,000
Value of Stamp duty Minus consideration
Example 1: Value of Stamp duty is Rs 2,00,000 Consideration Rs 75,000. In that case, the taxable amount will be Rs 1.25 lakhs (Value of stamp duty exceeds consideration by > Rs 50,000)
Example 2: Considering the aspects of example 1, if the value of consideration is Rs 1,60,000, then the taxable gift will be Nil as value of stamp duty does not exceed consideration by > Rs 50,000
Jewellery, shares, drawings etc. other than immovable property given without any consideration
Fair market value > Rs 50,000
Fair market value of such property will be taxable
Any property excluding immovable property for a consideration
Fair Market Value exceeds consideration by > Rs 50,000
Fair Market Value Minus consideration (Same example in case of immovable property can be referred)
Provisions Related to Stamp Duty
The provisions related to stamp duty value is similar as that of the provisions prescribed under Section 50C of the Income Tax Act, 1961. The details whereof are provided below;
For calculation of gift tax with regard to immovable property, the value of stamp duty is required to be considered. However, the value of stamp duty can increase due to several reasons. One of such reasons can be a relatable time gap between fixing of agreement consideration and registration date. Thus, the purpose of gift tax, the value of stamp duty as on date of fixing agreement the consideration required to be considered if the below mentioned conditions are fulfilled;
Agreement date and date of registration is different
Consideration may be either partly or fully paid through an A/c Payee cheque or bank draft or in any other means of transfer electronically prior or on the date of the transfer of the agreement.
Further, if the taxpayer has certain questions or dispute with regard to the stamp duty value as prescribed by the stamp duty valuation authority according to the provisions under the provision of Section 50C of the Income Tax Act, 1961. The tax officer needs to refer the same to the valuation office. It is the duty of the valuation officer to check the records and provide an opportunity of being heard and accordingly pass the order containing the order value in writing. A lower stamp duty value is generally adopted in case of gift tax.
Publisher:HOW TO FILE AN INCOME TAX RETURN ONLINE | ACADEMY TAX4WEALTH
Oct 19,2021
How to File an Income Tax Return( ITR)
An Introduction of Income Tax Return:
An income tax return (ITR) form helps the taxpayer for declaration of his or her expenses, incomes, investments, taxes, deduction of taxes etc. According to the provisions of the Income-tax Act, 1961, it is compulsory for a taxpayer to file income tax return annually. Accordingly, an ITR form has to be filled in by a taxpayer to report his or her annual income to the government. There can be several reasons for file income tax return online even though there is no income earned during a particular financial year. Now, this is very easy to go for Filing Income Tax Return online.
Apart from this, a taxpayer can also file income tax return for reporting of carry forward losses, to claim tax deductions, to claim income tax refund in a particular financial year. The Income Tax Department has introduced the facility for electronic filling of income tax return. It is to be noted that a taxpayer has to keep the documents ready for computation and reporting of ITR data before filling the income tax return.
The following are the steps for filling of income tax return-
Calculation of Income and Tax:
The taxpayer has to calculate his or her annual income according to the provisions of the Income Tax Act, 1961. The calculation of the income will include all sources of income such as interest income, salary, freelance income etc. Apart from, the taxpayer can also claim for deductions for tax saving investments under the provisions of Section 80C of the Income tax Act. Besides, the taxpayer must also consider the amount of TDS or TCS or any advance tax that has been paid by him in any of the financial year.
TDS Certificates and Form 26AS:
The first step towards filing of return will be the summarization of TDS certificates and TDS amount received by the taxpayer in all quarters of a particular financial year. For the same form 26AS will be used by the taxpayer to summarize the TDS paid during the particular financial year.
Choosing the right Income Tax Form:
The next step is to ascertain the forms required and used for filing the income tax return. After ascertaining the same, the taxpayer can start filling the income tax return. There are two modes available for filing of income tax return such as online mode and offline mode. In the online mode, the taxpayer can login into the database of income tax portals and start filing. However, it is to be noted that on the portal forms for ITR 1, ITR2,ITR4 are not available for individual taxpayer. In the offline mode, all forms are available for all types of taxpayers where they can generate XML document and upload the same.
Downloading of ITR utility from Income Tax Portal:
Login to the website of Income Tax portal i.e. www.incometax.gov.in and click on the option ‘Downloads’ on the top menu bar displayed on the website. A screen displaying the relevant screen is annexed below;
Income Tax Portal Home Page:
After clicking on the download option, then chose the assessment year you want to download and download the same with offline utility software such as Java, Microsoft excel, JSON on basis of your choice. However, it is to be noted that Microsoft Excel and JAVA utility has been discontinued from the Assessment Year 2020-21 by the Income Tax Department.
Filling the details in the Downloaded File:
After downloading the offline forms, fill the required details including the income, tax payable, refund available if any according to the utility calculation. The income challan details can also be furnished in the forms downloaded.
Validation of the Information Entered:
There are few buttons of the right hand side of forms downloaded. Click on the button ‘Validate’ to make sure all the required details and information is filled properly without any error or omission.
Conversion to XML Format:
After successful validation, Click on the button ‘Generate XML’ displayed on the right hand side of the file and convert the same into XML format.
Uploading the XML file on Tax Portal:
After conversion of file to XML format, login to the website of income tax e-filing portal and then click on the option of "e-File" and then select the option ‘Income Tax Return’ available in the drop down. A screen print depicting the same is annexed below;
Upon displaying the page, furnish the necessary details including assessment year, PAN, submission mode, ITR form number etc. Then chose the option ‘Upload XML’ from the drop down list with correspondence to the field named ‘Submission Mode’. A relevant screen print depicting the same is annexed below;
After the aforesaid process, attach the XML files from the computer and the click on the button "Submit". Then chose any of the verification modes available such as;
Aadhaar OTP
Electronic Verification Code (EVC)
Manually sending a signed ITR-V copy to CPC, Bengaluru
Signatures and E-Filing:
Each ITR filed by taxpayer has to be signed compulsorily by the relevant person authorized by the law. The authorization provides a confirmation that the information provided in the ITR is accurate and correct and as per the provisions of the Income Tax Act. Apart from that the signed ITR form provides the confirmation that he/she is competent to make the verification of the return. According to Section 140 of the Income-tax Act, 1961, the following are the persons who can sign the ITR form;
Individuals
Any other person appointed by Individual
Any person authorized person related to the individuals
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Publisher:TAXATION OF MUTUAL FUND INVESTMENTS
Nov 15,2021
Taxation of Mutual Fund Investments
Introduction
These days' Mutual funds are being considered as one of the most popular and convenient investment option as it helps the individual to achieve his or her financial goal at the time of need. Generally, Mutual funds are termed as tax saving instruments. Investment of funds in a fixed deposit is considered as greatest disadvantage if the individual taxpayer is falling under the highest slab of income tax as the interest will be added to his total taxable income and will be taxed at a higher income tax slab rate. On the other hand, Mutual funds are far better option as the score is better as compared to the investment is fixed deposit. When a investment is made in a mutual fund, there is a benefit or advantage of effective tax returns and expert money management.
How Returns are earned when investments are made in Mutual Funds?
Mutual funds provide return in the following two forms to its investors;
Dividend
Capital Gains
Dividend:
Basically, dividends are paid out of the company’s profits if any. In case the companies have surplus cash left then they may decide to distribute the same with the investors in dividend form. In such case, investors get proportional dividends according to the units of mutual funds held by each of them.
Capital Gain:
Capital gain refers to realization of profits by the investors in case the security selling price is more than the purchase price held by them. In simple words, the capital gains are realized as a result of the appreciation in the mutual funds unit price.
It is to be noted that dividends as well as capital gains are taxable on the end of investors of mutual funds under the provisions of Income Tax Act, 1961.
Taxation of Dividends Earned by Investment in Mutual Funds
According to the changes and amendment made in the Union Budget 2020, any dividends provided under the mutual fund scheme are taxed as per the provisions of Income Tax Act, 1961. This simple means that the dividends received by the investors is added to the total taxable income of the investor and taxed according to their respective income tax slab rates.
Before the aforesaid provisions, dividends received by investors were tax free as the companies used to pay Dividend Distribution Tax (DDT) prior to sharing of the profits with the investors in the form of dividends. Under the aforesaid regime, dividends received up to 10 lakh per annum from domestic companies were tax free on the end of the investor. Any dividend received that is more than 10 Lakh per annum in a particular financial year is subject to Dividend Distribution Tax at the rate of 10%.
Taxation of Capital Gains Offered by Mutual Funds
Basically, the rate of taxation for capital gains earned through mutual funds depends on the holding period of the mutual funds. The holding period of mutual funds is the duration of holding of mutual funds unit by the investor. It simply means that the holding period is the time duration between purchase and sale date of mutual funds units. A table containing the details of categories of capital gains earned due to sell of mutual funds unit is provided below;
Fund Type
Short-term Capital Gains
Long-term Capital Gains
Equity funds
Less than 12 months holding
More than 12 months holding
Debt funds
Less than 36 months holding
More than 36 months holding
Hybrid equity-oriented funds
Less than 12 months holding
More than 12 months holding
Hybrid debt-oriented funds
Less than 36 months holding
More than 36 months holding
It is to be noted that both short-term and long-term capital gains are taxed are different rates under the provision of Income Tax Act as offered by mutual funds.
Taxation of Capital Gains earned through Equity Funds
Equity funds are the mutual funds the portfolio of which is equity exposed exceeding 65%. As mentioned earlier, the realization of short-term capital gains for redemption equity funds units within the specific holding period of 12 months. The aforesaid gains are taxable under a flat rate of 15% irrespective of the income tax slab.
The gains can be realized on sale of long-term capital gains on equity funds units after the holding period is more than 12 months. It is to be noted that the capital gains less than Rs. 1 lakh are exempted from tax. A long term capital gain exceeding the prescribed limit is subject to Long term Capital Gain Tax (LTCG) at the rate of 10% and the advantage of indexation is not provided.
Taxation of Capital Gains earned through Debt Funds
Debt funds are the mutual funds the portfolio of which is debt exposed exceeding 65%. As mentioned earlier in the table, the redemption of short term capital gains on the debt units within a holding period of more than 36 months. The aforesaid gains are added to the total taxable income of the taxpayer and the same is taxed as per the respective income tax slab rate.
Long-term capital gains are earned when the debt funds are sold after a period of holding it for more than 36 months. The aforesaid gain is also taxed at flat rate of 20% after indexation. Apart from that, cess and surcharge on tax will also be imposed on the same as applicable.
Taxation of Capital Gains earned through Hybrid Fund
The taxation rate of capital gains on balanced or hybrid funds is clearly based on the exposure of the portfolio of the equity. In case the equity is exposed more than 65%, then the fund scheme is taxable just like an equity fund and if not then the taxation rules for debt funds will not be applicable.
Thus, it is important to know the exposure of equity of the hybrid scheme that the individual wants to invest, if not then the individual will land in trouble at the redemption of the fund units. A table summarizing the taxation rate of capital gains on mutual funds is furnished below;
Fund Type
Short-term Capital Gains
Long-term Capital Gains
Equity funds
15% Adding cess and surcharge
Up to Rs 1 lakh for more than 12 months is exempt from tax. Any gains more than Rs 1 lakh is taxable at the rate of 10% adding cess and surcharge
Debt funds
Taxed according to the income tax slab rate of investor
20% adding cess and surcharge
Hybrid equity-oriented funds
15% Adding cess and surcharge
Up to Rs 1 lakh for more than 12 months is exempt from tax. Any gains more than Rs 1 lakh is taxable at the rate of 10% adding cess and surcharge
Hybrid debt-oriented funds
Taxed according to the income tax slab rate of investor
20% adding cess and surcharge
Taxation of Capital Gains If the investments are made Through SIPs
Systematic Investment Plans otherwise known as SIPs are considered as methods for investment in mutual funds. SIPs are designed in a manner that a small amount can be invested periodically by an investor in a mutual fund scheme. In this investment, investors are provided the opportunity and authority to choose the investment frequency. The frequency can be monthly, weekly, quarterly, annually or bi-annually.
There are certain mutual funds units which can be purchased through the installment of SIPs. The redemption of these mutual units can be processed on first-in and first-out basis. This can be better analyzed with the help of an illustration. For example, if an investment is made in an equity fund through SIP for 12 months, then the same can be redeemed entirely after a period of 13 months.
In this case, the mutual funds units are bought through SIP are held for longer period i.e. more than 12 months or 1 year, then capital gain realized for sale of the same will be considered as long term capital gain. In case the long term capital gains are less than Rs. 1 lakh then there is no need to pay tax.
However, realization of short term capital gains are made on the mutual funds units bought through SIPs from the investment of 2nd months and onwards. Irrespective of the income tax slab, the capital gains are taxable at flat rate of 15%. Apart from that applicable cess and surcharge will be applicable on the taxable amount.
Securities Transaction Tax (STT)
Apart from the tax on capital gains and dividends, another tax known as Securities Transaction Tax (STT) is charged according to the provision of the Income Tax Act, 1961. A Securities Transaction Tax of 0.001% is imposed by the Ministry of Finance, in case of buy and/or sell of mutual funds units of a hybrid-oriented fund or an equity fund. It is to be noted that there is no Securities Transaction Tax on sale of debt mutual funds units.
Conclusion
From the above analysis and explanation, it can be concluded that the longer the holding of the mutual funds, the more tax effective they will become. The tax on the long term capital gains is relatively lower as compared to the tax on short-term gains.
Publisher:PRESUMPTIVE TAXATION FOR BUSINESSES AND PROFESSIONALS
Nov 18,2021
Presumptive Taxation for Businesses and Professionals
Presumptive Taxation for Businesses
Presumptive Taxation for a business is provided under Section 44AD of the Income Tax Act, 1961. A business having a turnover not exceeding Rs. 2 crore can opt for presumptive taxation. The businesses can declare profits for non-digital transactions and for digital transaction of 8% and 6% respectively whichever one is applicable. The below mentioned businesses are excluded from the presumptive taxation;
Life Insurance Agents
Commission Received in any form or kind
Business of hiring, leasing, plying of good carriages
Computation of Presumptive Taxation
Example
Elite Traders have gross receipts of Rs. 1.5 Crore during the financial year 2020-21 and they do not maintain any books of accounts. M/s Elite Traders has opted for the presumptive taxation scheme. During the financial year M/s Elite Traders received Rs. Lakhs and Rs. 80 Lakh through cash payments and digital transactions respectively. Here, the question arises under what income of M/s Elite Traders under the head business and profession.
Solution:
Income under the business and profession will be as calculated as follows;
For cash payments: 70, 00,000 X 8% = Rs. 5, 60,000
For digital transactions: 80, 00,000 X 6% = Rs. 4, 80,000
Accordingly, the income under the head “Business or Profession” will be Rs 10, 40,000
Benefits of Presumptive Taxation
The following are some of the benefits of presumptive taxation;
Central Government's establishment of National Defence Fund
Prime Minister’s National Relief Fund.
Under the provisions of Section 44AD for presumptive taxation, the net income will be 8% of the turnover and tax must be paid on that income.
In case the digital receipts of transactions then 6% of the receipts will be considered as net income and tax will be paid on that specified income.
There is no need to maintain accounting records
There is no need to get the accounting records audited.
The payment of advance tax must be made but rather than estimation of income paying of taxes every quarter. All advance tax must be paid before March 31. Advance tax is meant for the taxpayers who want to opt for the presumptive scheme must pay tax by 15 March for the specified financial year. In case, the income tax liability is more than Rs.10,000 in the financial year, the taxpayer has to pay advance tax.
For International Transaction
If TDS is deducted by the foreign client
If a business has clients in foreign countries and he or she is receiving payment via PAYPAL or directly into the bank account. In most of the cases, the foreign client already deducts TDS prior to release of payment according to the local taxes. As a resident of India, the business will still be liable to income tax on the income. However, the claim credit for payment of taxes overseas in return of the income.
If TDS not deducted by the foreign client
If there is no deduction of TDS by foreign clients, then the business need to include all the receipts in the total income while doing the calculation of income and accordingly pay the tax applicable on the same as the person will be a tax resident in India. To consider the requirement of advance tax the estimation of the annual income from all other sources is necessary.
Return of Income
An individual of Hindu Undivided Family (HUF) carrying on business is bound to file the income tax return in Form ITR 3 for a taxpayer opting for presumptive tax. Accordingly, he must file income tax return in ITR 3.
Presumptive Taxation for Professionals
The following are some of the professions for the purpose of Income Tax Laws;
Engineering
Accountant
Medical
Legal
Architectural Profession
Technical consultant
Interior decoration
Professionals carrying on specific professions
Professionals carrying on the aforesaid professions are needed to maintain the books of accounts according to rule Rule 6F of the Income Tax Act. Such professionals must maintain the accounting records if the gross receipts more than Rs. 1.5 lakhs in any three immediately preceding years. If a person has started off with the profession in a financial year and the gross receipts is more than Rs. 1.5 lakh then he is required to maintain the accounting records for the same financial year.
Professionals carrying on non-specified professions
Professionals carrying professions other than any of the aforesaid professions are needed to maintain the books of accounts enabling the Assessing officer to compute the taxable income according to the provisions of the Income Tax Act. However, this is compulsory when the income of the individual is more than. 2.5 lakhs or gross receipts in a financial year is more than Rs. 25 lakhs in any one of the immediately 3 preceding years.
Presumptive Taxation
A professional with revenue less than Rs. 50 lakh can opt for the presumptive taxation scheme. The tax can be deducted straightaway with 50% of the gross revenue of the taxable income and taxes are paid according to the specified tax slab rates on such income. Once opting the presumptive taxation scheme, one cannot claim for any other profession related expenses as a deduction.
Further, if anyone opting for the presumptive taxation scheme is not bound to maintain the books of accounts mandatorily. However, he is liable to file the income tax return by 31 July of the assessment year. Then, ITR 4 for income tax return must be filed.
Example:
Rohan works as a practicing company secretary and has an annual turnover of Rs. 30 Lakh in financial year 2020-21. The actual expenses incurred by Rohan is running his firm amounting to Rs. 3,00,000. The tax liability for Rohan for the financial year 2020-21 is provided below;
Particulars
Tax liability with Presumptive taxation
Tax liability without Presumptive taxation
Income
Rs. 30,00,000
Rs. 30,00,000
Expenses
Rs. 15,00,000 (50% of income that cane be claimed as deduction)
Rs. 3,00,000
Taxable income
Rs. 15,00,000
Rs. 27,00,000
Tax liability
Rs. 2,62,500 without cess
Rs. 6,22,500 without cess
Thus, it seems that Rohan follows the presumptive taxation scheme and he can save Rs. 3,60,000 from his outgoing tax.
Freelancing Incomes
It refers to the income which is earned by getting or delivering a work on a specified assignment with certain terms and conditions and gets paid after the submission or completion of the work. There will not be any employer or employee relationship between the parties in freelance work. The freelancer will not be placed on the payroll of the company and freelancer will not get any other benefits of the organization including provident fund, bonus, gratuity etc. as per the provisions of the Companies Act, 2018. In case of freelancing work, there is no need to go to an office and the freelancer has to complete the work as per the pre decided deadline from any place as convenient for the freelancer.
According to the provisions of the Income Tax Laws of India, any income generated with the use of manual or intellectual skill of the person will be considered as taxable and the same will come under the head of income “Profits and Gains from Business or Profession”. The gross income will be the aggregate of all the payment received during the course of the financial year out of the skill or profession. The bank statement will act as a document for such information in which the professional income is transferred through different banking channels.
Expenses allowed as a deduction
As per the provisions of the Income Tax Act, freelancers are allowed to deduct the expenses incurred to get the work done from their income. The expenses can be anything including cab fares for client visits, telephone expenses, office furniture etc. However, it is to be noted that the expenses incurred must be related directly to the work and not for any other purpose.
The following are some of the conditions which must be satisfied to claim an expense as deduction in respect of freelancing income;
The expense must be incurred due to the carrying on for the freelancing work
The expenses must have been spent exclusively for purpose of work
The expenses must be incurred during the tax year
The expenses must not be freelancer's personal or capital expenditure
The expenses must not have been incurred for an activity which is prohibited by law or considered as an offence
The following are some of the expenses which can be claimed as deduction against the freelancing income;
Rent of the property
Repairs
Depreciation
Office Expenses
Travel Expenses
Meal, Entertainment or Hospitality Expenses
Local Taxes and Insurance obtained for Business Property
Domain Registration
Application Purchased for testing of product
Publisher:HOW TO DETERMINE RESIDENTIAL STATUS OF DIFFERENT PERSONS UNDER INCOME TAX ACT
Nov 30,2021
How to determine residential status of different Persons under Income tax Act
Meaning and Importance of Residential StatusBasically, the tax liability of an individual taxpayer depends on his or her residential status in India for a specific financial year. It is to be noted that determination of residential status under Income Tax Law is different from citizenship of an individual. A citizen of India may not be a resident Indian for income tax purposes for a particular financial year and end up being a non-resident Indian.Similarly, a foreign citizen can also become a resident Indian for the purpose of income tax for the particular financial year. The residential status of the different types of individuals such as individual, company and firm determined differently.How to Determine Residential Status?According to the income tax law, for determination of residential status the following things are considered;
A resident
A resident not ordinarily resident (RNOR)
A non-resident (NR)
The taxability for the above-mentioned status differs from each other. The taxability of a taxpayer depends clearly on the residential status.Residential StatusAs per the provisions under the Income Tax Act, 1961, residential status of a person is considered as one of the essential criteria for the determination of implications of tax. The residential status of a person can be categorized into the following categories;
Resident
Ordinarily Resident (ROR)
Resident but Not Ordinarily Resident (RNOR)
Non- Resident (NR)
ResidentA resident individual taxpayer has to satisfy any one of the below mentioned conditions;
Stayed in India for a minimum period of 182 days in a year
OR
Stayed for a minimum of 365 days in India in the immediate preceding 4 years and minimum of 60 days in current financial year.
This can be better analyzed with the help of an illustration. For example, Mr. Singh is the Operational Manager of a Private firm. He is born and brought up in India. He travels a lot for business purposes to different locations. He almost spend 200 days for travelling in the financial year. Apart from that, Mr. Singh also been travelling to different countries from last 2 years and considering the same he stayed about 400 days out of India in the current financial year. Evaluation of Residential Status of Mr. SinghFirstly, the Condition I i.e. stayed in India for a minimum period of 182 days in a year is not satisfied.To figure out Mr. Singh's residential status, it is important to evaluate his stay in India. It is to be noted that he has stayed only 165 days in the current financial year in India. Thus, Mr. Singh does not satisfy the first condition.Further, it is essential to analyze if condition II is satisfied. Condition II i.e. Stayed for a minimum of 365 days in India in the immediate preceding 4 years and minimum of 60 days in current financial year is Satisfied.Mr. Singh has been travelling since past 2 years. Apart from that, he has been travelling for almost 400 days in last 2 years. This suggests that, in the last 4 years, Mr. Singh has stayed for more than 365 days in India.Thus, Mr. Singh has stayed for at least 60 days in the present current financial year and 365 days more in immediately preceding 4 financial years. Thus, Mr. Singh satisfied the second condition.Thus, if any of the conditions is satisfied, then he will become a resident taxpayer. That may be;
Resident and Ordinarily Resident (ROR)
Resident but Not Ordinarily Resident (RNOR)
Additionally, the basic conditions, if the following conditions are satisfied, then he will be Resident and Ordinarily Resident;
If the stay is for at least 2 out of 10 immediate previous years in India
If the stay for at least 730 days in 7 immediate previous years in India
In the provided example, Mr. Singh has satisfied the condition as resident of India. Further, it is required if he is a Resident and Ordinarily Resident (ROR) or Resident but Not Ordinarily Resident (RNOR)If both the additional conditions Mr. Singh will be Resident and Ordinarily Resident (ROR) Considering the aforesaid example, Mr. Singh had been travelling abroad for past 2 years. Thus, here the first condition is satisfied as Mr. Singh had stayed in India for at least 2 years in the immediate previous 10 years. Apart from that, he also fulfilled the second criteria of stay for at least 730 days in 7 immediate previous years. Thus, Mr. Singh is a Resident Ordinarily Resident. In case, any of the conditions are not fulfilled then Mr. Singh would have been Resident but not Ordinarily Resident.Non-ResidentAny individual who does not fulfill the basic criteria of resident will be considered as a Non-Resident. This can be better analyzed with the help of an illustration. For example, Ms. Singh is studying in London and has joined a university in 3 year course. At the time of study, she decided to do her post graduation as well from the same university due to which she stayed there for another 2 years. Apart from that she got a internship certificate for completion of the course. After completion of the course, a company offered Ms. Singh a permanent job opportunity. She was employed in that firm for last 4 years. Considering the aforesaid information, Ms. Singh had been out of India for almost 9 years now. She gets rent from her inherited property. Here, both the aforesaid conditions are not fulfilled. Thus, Ms. Singh is a Non -Resident for tax purposes.Note:It is to be noted that the criteria of minimum 60 days stay in the current financial year which can be extended to 182 days in the following cases;
A person is an Indian citizen and leaves India for employment purposes during the current financial year.
A person being a Indian citizen or of Indian Origin but stays outside India and comes to India to visit during the current financial year.
