INCOME TAX IN INDIA

The government of India imposes an income tax on taxable income of

individuals,
Hindu Undivided Families (HUFs), companies, firms, co-operative societies
and
trusts (Identified as body of Individuals and Association of Persons) and any
other
artificial person. Levy of tax is separate on each of the persons. The levy is
governed by the Indian Income Tax Act, 1961. The Indian Income Tax
department is governed by the Central Board for Direct Taxes (CBDT) and is
part
of the Department of Revenue under the Ministry of Finance, Govt. of India.

. OVERVIEW

CHARGE TO INCOME-TAX

Every Person whose total income exceeds the maximum amount which is
not chargeable to the income tax is an assesse, and shall be chargeable to
the
income tax at the rate or rates prescribed under the finance act for the
relevant assessment year, shall be determined on basis of his residential
status. Income tax is a tax payable, at the rate enacted by the Union Budget
(Finance Act) for every Assessment Year, on the Total Income earned in the
Previous Year by every Person.

The changeability is based on nature of income, i.e., whether it is revenue or

capital. The principles of taxation of income are:

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RESIDENTIAL STATUS

The inclusion of a particular income in the Total Income of a person for

income-tax in India is based on his residential status. There are three
residential status, viz., (i) Resident & Ordinarily Residents (Residents) (ii)
Resident but not Ordinarily Residents and (iii) Non Residents. There are
several steps involved in determining the residential status of a person [1]

All residents are taxable for all their income, including income outside India.
[2]
Non residents are taxable only for the income received in India or Income
accrued in India. Not Ordinarily residents are taxable in relation to income
received in India or income accrued in India and income from business or
profession controlled from India.

DEPARTMENTAL STRUCTURE

* Chairman
* Board Members of Direct Taxes
* Chief Commissioner
* Commissioner
* Additional Commissioner
* Joint Commissioner
* Deputy Commissioner
* Assistant Commissioner
* Income Tax Officer
* Tax Inspector
* Tax Assistant
* Constable

. HEADS OF INCOME

The total income of a person is divided into five heads, viz., taxable[3]:

1. Salaries
2. Income from House Property
3. Profits and Gains of Business or Profession
4. Capital Gains
5. Income from Other sources

. INDIVIDUAL HEADS OF INCOME

INCOME FROM SALARY

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All income received as salary under Employer-Employee relationship is taxed
under this head. Employers must withhold tax compulsorily, if income
exceeds minimum exemption limit, as Tax Deducted at Source (TDS), and
provide their employees with a Form 16 which shows the tax deductions and
net paid income. In addition, the Form 16 will contain any other deductions
provided from salary such as:

1. Medical reimbursement: Up to Rs. 15,000 per year is tax free if

supported by bills.
2. Conveyance allowance: Up to Rs. 800 per month (Rs. 9,600 per year) is
tax free if provided as conveyance allowance. No bills are required for
this amount.
3. Professional taxes: Most states tax employment on a per-professional
basis, usually a slabbed amount based on gross income. Such taxes paid
are deductible from income tax.
4. House rent allowance: the least of the following is available as deduction
1. Actual HRA received
2. 50%/40%(metro/non-metro) of basic 'salary'
3. Rent paid minus 10% of 'salary'. basic Salary for this purpose is
basic+DA forming part+commission on sale on fixed rate.

Income from salary is net of all the above deductions

INCOME FROM HOUSE PROPERTY

Income from House property is computed by taking what is called Annual

Value. The annual value (in the case of a let out property) is the maximum of
the following:

.
Rent received
.
Municipal Valuation
.
Fair Rent (as determined by the I-T department)

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If a house is not let out and not self-occupied, annual value is assumed to
have
accrued to the owner. Annual value in case of a self occupied house is to be
taken as NIL. (However if there is more than one self occupied house then
the
annual value of the other house/s is taxable.) From this, deduct Municipal
Tax
paid and you get the Net Annual Value. From this Net Annual Value, deduct:

.
30% of Net value as repair cost (This is a mandatory deduction)
.
Interest paid or payable on a housing loan against this house

In the case of a self occupied house interest paid or payable is subject to a

maximum limit of Rs, 1, 50,000 (if loan is taken on or after 1 April 1999 and
construction is completed within 3 years) and Rs.30,000 (if the loan is taken
before 1 April 1999). For all non self-occupied homes, all interest is
deductible, with no upper limits.

The balance is added to taxable income.

INCOME FROM BUSINESS OR PROFESSION

Carry forward of losses An example .. An architect works out of home and co-
ordinates work for his clients. All the following expenses would be deductible
from his professional fees.

.he uses a computer,

.he travels to sites in his car,
.he has a peon to help him collect payments
.He has a maid who comes in daily
.part of the society maintenance bills
.Entertainment expenses incurred..
.Books and magazines for his professional practice.

The income referred to in section 28, i.e, the incomes chargeable as "Income
from Business or Profession" shall be computed in accordance with the
provisions contained in sections 30 to 43D. However, there are few more
sections under this Chapter, viz., Sections 44 to 44DA (except sections 44AA,
44AB & 44C), which contain the computation completely within itself. Section
44C is a disallowance provision in the case non-residents. Section 44AA deals
with maintenance of books and section 44AB deals with audit of accounts.

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In summary, the sections relating to computation of business income can be
grouped as under: -

1. Deductible Expenses - Sections 30 to 38 [except 37(2)].

2. Inadmissible Expenses - Sections 37(2), 40, 40A, 43B & 44-C.
3. Deemed Incomes - Sections 33AB, 33ABA, 33AC, 35A, 35ABB & 41.
4. Special Provisions - Sections 42 & 43D
5. Self-Coded Computations - Sections 44, 44A, 44AD, 44AE, 44AF, 44B,
44BB, 44BBA, 44BBB, 44-D & 44-DA.

The computation of income under the head "Profits and Gains of Business
or
Profession" depends on the particulars and information available.[4]

If regular books of accounts are not maintained, then the computation would
be as
under: -

Income (including Deemed Incomes) chargeable as income under this head

xxx
Less: Expenses deductible (net of disallowances) under this head xxx Profits
and
Gains of Business or Profession xxx

However, if regular books of accounts have been maintained and Profit and
Loss
Account has been prepared, then the computation would be as under: -

Net Profit as per Profit and Loss Account

xxx

Add: Inadmissible Expenses debited to Profit and Loss

Account xxx

Deemed Incomes not credited to Profit and Loss

Account xxx

xxx

Less: Deductible Expenses not debited to Profit and

Loss Account xxx

Incomes chargeable under other heads credited to

Profit & Loss A/c xxx

5
xxx

Profits and Gains of Business or Profession

xxx

6
INCOME FROM CAPITAL GAINS

Transfer of capital assets results in capital gains. A Capital asset is defined

under section 2(14) of the I.T. Act, 1961 as property of any kind held by an
assesse such as real estate, equity shares, bonds, jewellery, paintings, art
etc.
but does not include some items like any stock-in-trade for businesses and
personal effects. Transfer has been defined under section 2(47) to include
sale, exchange, relinquishment of asset, extinguishment of rights in an
asset,
etc. Certain transactions are not regarded as 'Transfer' under section 47.

For tax purposes, there are two types of capital assets: Long term and short
term. Long term asset are held by a person for three years except in case of
shares or mutual funds which becomes long term just after one year of
holding. Sale of such long term assets gives rise to long term capital gains.
There are different scheme of taxation of long term capital gains. These are:

1. As per Section 10(38) of Income Tax Act, 1961 long term capital gains
on shares or securities or mutual funds on which Securities Transaction
Tax (STT) has been deducted and paid, no tax is payable. STT has been
applied on all stock market transactions since October 2004 but does
not apply to off-market transactions and company buybacks; therefore,
the higher capital gains taxes will apply to such transactions where STT
is not paid.
2. In case of other shares and securities, person has an option to either
index costs to inflation and pay 20% of indexed gains, or pay 10% of
none indexed gains. The indexation rates are released by the I-T
department each year.
3. In case of all other long term capital gains, indexation benefit is
available and tax rate is 20%.

All capital gains that are not long term are short term capital gains,
which are taxed as such:

Under section 111A, for shares or mutual funds where STT is paid, tax
rate is 10% From Asst Yr 2005-06 as per Finance Act 2004. For Asst Yr
2009-10 the tax rate is 15%. *
In all other cases, it is part of gross total income and normal tax rate is
applicable. *

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 For companies abroad, the tax liability is 20% of such gains suitably indexed
(since STT is not paid).

INCOME FROM OTHER SOURCES

This is a residual head; under this head income which does not meet criteria
to go to other heads is taxed. There are also some specific incomes which
are
to be taxed under this head.

1. Income by way of Dividends

2. Income from horse races
3. Income from winning bull races
4. Any amount received from key man insurance policy an donation.

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AGRICULTURAL INCOME SECTION 10(1)

U/s 10(1) agricultural income is exempted from tax. Agriculture income

means under section 2(1A) the expression agricultural income means

a. Any rent o7r revenue derived from land which is situated in India and is is
used for agricultural purpose.
b. Any income derived from such land by agricultural operations including
processing of agricultural produce, raised or received as rent in kind so as
to render it fit for market or sale of such produce.
c. Income attributable to a farm house subject to certain conditions.

Three types of income are classified as agricultural incomes.

a. Rent or revenue from land

b. Income from agricultural operations
c. Income attributable to farm house rent or revenue from land.

Rent or revenue derived from land will termed as agricultural income.

i) Rent or revenue is derived from land (in cash or kind)

ii) The land is situated in India.
iii) The land is use for agricultural purpose.

This clause covers income of landlord from land used for agricultural
purpose and situated in India.

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d. INCOME FROM AGRICULTURAL OPERATIONS.

It includes

i) Income derived by performing agricultural operations from land

situated in India and used for agricultural purposes. I.e. income of a
cultivator
ii) Income derived by the cultivator of land by performance of
agricultural operations in India is exempted from tax.

In some cases the cultivator or receiver of rent in kind has to perform some
operations so as to make the agricultural produce fit for market. This is the
case where the agriculture output is not marketable unless some other non
agricultural operations are performed on the agricultural output. Income
from
such operations is considered as agricultural income. Such operation may be
performed by the cultivator or the receiver of rent in kind.

In such cases, income from both the operations, agricultural as well

operations necessary to make the produce marketable will be considered as
agricultural income.

C. INCOME FROM FARM BUILDING:

Annual value of a house property is taxable under section 22.

However income from a house property which satisfies the following

conditions would be treated as agricultural income

A} The building or house property is occupied by the cultivator or receiver of

rent in kind.

B} The house property should be on or in the immediate vicinity of land,

situated in India and used for agricultural purposes.

C} The cultivator or receiver of rent in kind requires the building as dwelling

house or as a store house due to agricultural operations carried on the land.

D} The land is assessed to land revenue or local rates.

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 OR if the land is not assessed to land revenue it should be situated
outside urban areas.

It mean land should not be situated in any area which is with the jurisdiction
of a municipality or a cantonment board and which has a population of a
10,000 or more and it should not be situated within such limits (max. 8 km)
from the local limits of such municipality or cantonment board as the central
government may be notification in the official gazette specify in this behalf

If the above conditions are satisfied, income from farm building is exempt
from tax under sec 2 (1A) (c).

Amendment made by the finance act 2000

Finance act 200 has inserted explanation 2 to clause (1A) above.

This explanation states that if any income is derived from such farm building
due to use of such building for any other purpose (including letting for
residential purpose or for the purpose of any business or profession) then
such an income shall not be considered as agricultural income. In other
words
if such a farm building which is referred above is used for non agricultural
purpose, income derived from such use will not be considered as agricultural
income.

The primary condition to claim exemption as agricultural income is that the

land should be used for agricultural purpose. The term agriculture or
agricultural purpose has not been defined in the act.

Bhagwati J after discussing the case on the subject laid down the following
principles in CIT v/s Benoy Kumar Sahas (1957) SC.

a) Some basic operations prior to germination involving expenditure of

human skill and labour on the land itself is essentials to constitute
agriculture activity. Examples of such activities are tilling of land, sowing
or disseminating of seeds and planting.
b) Subsequent operations which are performed after the produce sprouts
from the land e.g. weeding, digging, cutting etc by themselves do not

11
constitute agriculture. However if subsequent operations are combined
with the basic operations, the subsequent operations would also
constitute part of the agricultural activity.
c) Agriculture connotes not merely raising food grains food produces it also
includes raising of all commercial crops such as tea, coffee, cotton,
sugarcane, rubber etc.
d) The most important principle is that activities which do not involve basic
operations would not constitute agriculture. The mere fact that on activity
has some connection with land or an activity is dependent upon land is not
sufficient to bring it within the scope of agricultural income. For example
breeding and rearing of live stock, dairy farming would not amount to
agricultural activity.
e) In CIT v/s Kameshwar Singh it was held that in a forest where there is no
tilling of land or other basic operations like sowing, or planning and all
trees are of spontaneous germination, subsequent operations for the
conservation, growth and improvement of the forest trees would not
constitute agricultural operations.

Following incomes are held as agricultural income.

a) Rent for agricultural land received from sub tenant by mortgagee in

possession.
b) Profit on sale of standing crop or produce after harvest by a cultivating
owner or tenant of land.

c) If denuded parts of the forest are replanted and subsequent operations in

forestry are carried out, the income arising from sale of replanted trees.

d) Income from growing flowers and creepers.

e) Share of profit of partner from a firm engaged in agricultural operation

and
also salary received by him for rendering services is agricultural income.

f) Interest on capital received by partner from the firm engaged in

agricultural
operation.

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Following incomes are not agricultural incomes.

a) Interest on arrears of rent in respect of land used for agricultural purpose.

b) Income from sale of forest trees, fruits and flowers growing on land
naturally without the intervention of labour.
c) Income from sale of wild grass of spontaneous growth.
d) Dividend paid by a company out of its agricultural income.
e) Interest received by a money lender in the form of agricultural produce.
f) Commission earned by the landlord for selling agricultural produce of his
tenant.
g) Remuneration received by a money lender in the form of agricultural
produce.
h) Income of salt produced by the flooding the land with sea water as it is not
derived from land used for agricultural income.
i) Income from poultry farming, fisheries, mines.

There are some business in which the some activates are agricultural
activities and some activities are non agricultural activities. For example if
the
assesse is engaged in cultivation of sugarcane and manufacturing of sugar.
The
activity is connections of manufacturing of sugar are not agricultural
activities, since activities in connection with manufacturing of sugar are not
for making the sugarcane fit for market.

In such cases the income from non agricultural activities will be ascertained
by deductining market sd value of agricultural produce which has been
raised
by the assesse or received by him as rent in kind and which has been utilized
as a raw material. However no deduction shall be allowed in respect of any
expenditure incurred by him for earning agricultural income. In other words,
we have to first total income from all activities and then deduct the market
value of the produce used for manufacturing sugar.

Growing of sugar cane converting sugarcane in to sugar

Expenses 5,00,000 expenses incurred 7,00,000

Sugar sold for Rs 20,00,000

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Market value of cane transferred 7,00,000

Income = sale price of sugar – expenses on manufacturing sugar market

value
of sugarcane utilized in manufacturing of sugar.

Expenses incurred on cultivation of sugar will not be allowed as deduction.

For example if a sugar mill has its own farm and the sugarcane grown on the
farm has been utilized in the factory, the average market price of the sugar
cane shall be deducted from the sale proceeds of sugar while computing the
taxable income from manufacturing of sugar.

INCOME FROM MANUFACTURING OF TEA.

Income derived from cultivator or receiver of rent in kind from any process
ordinarily employed to render the agricultural produce fit for market.

In some cases the cultivator or recievor of rent in kind has to perform some
operations so as to make the agricultural produce fit for market. Income from
such operations is considered as agricultural income.

Cultivation of tea is one such activity. If a manufacturer is engaged in

cultivation and manufacture of tea the activities and connection with the
manufacture of tea would strictly be regarded as agricultural activities and
as
manufacturing operation in respect of tea are essential to make the produce
marketable.

This would imply that the entire income of cultivation and manufacturing of
tea would be agricultural income .however the ensure that such assesses
pay a
reasonable amount of tax it has been provided that in case of income
derived
from assesses engaged in cultivation and manufacture of tea, sixty
percent of the income would be treated as agricultural income and
fourty percent as non agricultural business income. In computing the total
income all cost incurred in connection raising of tea will deducted

such method of dividing composite income(agricultural income and non

agricultural income) is also applicable , in case of growing and manufacturing
coffee in India and growing and manufacturing centrifuged latex or cenex

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manufactured from rubber plants grown by the seller in India.(with effect
from assessment year 2002-2003.

Growing and manufacturing tea in

India

40% is charged as non

agricultural income and 60% is
agricultural income.

Growing and manufacturing coffee

in India with or without mixing of
chicory or other flavouring
ingredients

40% is charged as non

agricultural income and 60% is
agricultural income.

Sale of centrifuged latex or cenex

manufactured from rubber plants
grown by the seller in India

35% is charged as non

agricultural income and 65% is
treated as agricultural income.

Though agricultural income has been exempted from payment of income tax
,
agricultural income is taken in to account for the purpose of determining the
payable on non agricultural income.

The procedure for computing tax of payable on non agricultural income is

stated as below. This procedure is applicable only if the following conditions
are satisfied.

a. THE tax payer is an individual, a Hindu undivided family or a body of

individual or an association of persons.
b. the non-agricultural income of the payers is more than exemption limit
(Rs 1,45,000 in case of woman, Rs.1,95,000 in case of an senior citizen and
Rs.1,10,000 in any other case)

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c. the agricultural income of the tax payer more than Rs.5000

Following steps are taken for calculating the exemption in respect of

agricultural income.

1) Net agricultural income is computed and added to the non agricultural

income as if agricultural income was chargeable to tax.

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2) Tax is calculated on such aggregated income. this may be called tax on
aggregate income
3) The net agricultural income is increased by Rs.50,000 and tax is
calculated
on net agricultural income so increases as if such income is taxable.
4) Tax payable = tax on aggregate income - tax on agricultural income. I.e.
tax
determined in (2) above - tax determined (3) above.

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RECEIPTS BY A MEMBER FROM A HINDUUNDIVIDED
FAMILY Sec.10 (2)

As per section 10(2), any sum received by an individual as a member of a

Hindu undivided family either out of income of the family or out of income of
estate belonging to the family is exempt from tax. Such receipts are not
chargeable to tax in the hands of an individual member even if tax is not
paid
or payable by the family on its total income.

Illustration 3.1 - X, an individual, has personal income of Rs. 56,000 for the
previous year 2005-06. He is also a member of a Hindu undivided family,
which has an income of Rs. 1, 08,000 for the previous year 2005-06. Out of
income of the family, X gets Rs. 12,000, being his share of income. Rs.
12,000
will be exempt in the hands of X by virtue of section 10(2). The position will
remain the same whether (or not) the family is chargeable to tax. X shall pay
tax only on his income of Rs. 56,000

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SHARE OF PROFIT FROM PARTNERSHIPFIRM
Sec.10 (2A)

As per section 10(2a), share of profit received by partners from a firm is not
taxable in the hand of partners. This will the case even if the partner is a
minor admitted for the benefits of the partnership.

CASUAL AND NON-RECURRING INCOME Sec.10

(4) and (4B)

LEAVE TRAVEL CONCESSION Sec.10 (5)

As per section 10(5), the amount exempt under section 10(5) is the value of
any travel concession or assistance received or due to the assesse from his
employer for himself and his family in connection with his proceeding on
leave to any place in India. The amount exempt can in no case exceed the
expenditure actually incurred for the purposes of such travel. Only two
journeys in a block of four years is exempt. Exemption is available in respect
of travel fare only and also with respect to the shortest route.

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FOREIGN ALLOWANCE Sec.10 (7)

As per section 10(7), any allowance paid or allowed outside India by

the

Government to an Indian citizen for rendering service outside India

is wholly exempt from tax.

TAX ON PERQUISITE PAID BY EMPLOYER

Sec.10 (10CC)

As per section 10(10CC), the amount of tax actually paid by an

employer, at his option, on non-monetary perquisites on behalf of an
employee, is not taxable in the hands of the employee. Such tax paid
by the employer shall not be treated as an allowable expenditure in
the hands of the employer under section 40.

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AMOUNT PAID ON LIFE INSURANCE POLICIES
Sec.10 (10D)

As per section 10(10D), any sum received on life insurance policy (including
bonus) is not chargeable to tax. Exemption is, however, not available in
respect of the amount received on the following policies –

a. any sum received under section 80DD (3) or 80DDA (3);

b. any sum received under a Keyman insurance policy;

c. any sum received under an insurance policy (issued after March 31, 2003)
in respect of which the premium payable for any of the years during the term
of policy, exceeds 20 per cent of the actual sum assured.

In respect of (c) (supra) the following points should be noted -

1. Any sum received under such policy on the death of a person shall
continue
to be exempt.

2. The value of any premiums agreed to be returned or of any benefit by way

of bonus or otherwise, over and above the sum actually assured, which is
received under the policy by any person, shall not be taken into account for
the purpose of calculating the actual capital sum assured under this clause.

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EDUCATIONAL SCHOLARSHIPS Sec.10 (16)

As per section 10(16), scholarship granted to meet the cost of

education is exempt from tax. In order to avail the exemption it is
not necessary that the Government should finance scholarship.

DAILY ALLOWANCES OF MEMBERS OFPARLIAMENT

Sec.10 (17)

Clause (17) of section 10 provides exemption to Members of

Parliament and State Legislature in respect of the following
allowances:

CASES

NATURE OF
ALLOWANCE

HOW MUCH IS
EXEMPT

Case 1

Daily allowance

Entire amount is exempt

Case 2

Any other allowance

received by a Member
of

Parliament under the

24
Members of

Entire amount is
exempt

25
Parliament

(Constituency
Allowance)

Rules, 1986

Case 3

All allowances received

by

any person by reason of

his

member- ship of any

State

Legislature or any

Committee thereof

Up to Rs. 2,000 per

month

in aggregate

FAMILY PENSION RECEIEVED BYMEMBERS OF ARMED

FORCES Sec.10 (19)

As per section 10(19), family pension received by the widow (or children or
nominated heirs) of a member of the armed forces (including para-military
forces)Of the Union is not chargeable to tax from the assessment year 2005-
06, if death is occurred in such circumstances given below—

26
a. acts of violence or kidnapping or attacks by terrorists or anti-social
elements;
b. b. action against extremists or anti-social elements;
c. c. enemy action in the international war;
d. d. action during deployment with a peace keeping mission abroad;
e. e. border skirmishes;
f. f. laying or clearance of mines including enemy mines as also mine
sweeping
g. operations;
h. g. explosions of mines while laying operationally oriented mine-fields or
lifting or
i. negotiation mine-fields laid by the enemy or own forces in operational
areas

27
j. near international borders or the line of control;
k. h. in the aid of civil power in dealing with natural calamities and rescue
l. operations; and
m. i. in the aid of civil power in quelling agitation or riots or revolts by
n. demonstrators

INCOME OF MINOR Sec.10 (32)

As per section 10(32), in case the income of an individual includes the

income
of his minor child in terms of section 64(1A), such individual shall be entitled
to exemption of Rs. 1,500 in respect of each minor child if the income of
such
minors includible under section 64(1A) exceeds that amount. Where,
however, the income of any minor so includible is less than Rs. 1,500, the
aforesaid exemption shall be restricted to the income so included in the total
income of the individual

CAPITAL GAIN ON TRANSFER OF US 64 Sec.10 (33)

As per section 10(33), any income arising from the transfer of a capital asset
being a unit of US 64 is not chargeable to tax where the transfer of such
assets
takes place on or after April 1, 2002. This rule is applicable whether the
capital asset (US64) is long-term capital asset or short-term capital asset.

If income from a particular source is exempt from tax, loss from such source
cannot be set off against income from another source under the same head
of
income.

Consequently, loss arising on transfer of units of US64 cannot be set off

against any income in the same year in which it is incurred and the same
cannot be carried forward.

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29
DIVIDENDS AND INTEREST ON UNITS Sec.10
(34)/(35)

As per section 10(34)/ (35), the following income is not chargeable to

tax—

a. any income by way of dividend referred to in section 115-O [i.e., dividend,

not being covered by section 2(22) (e), from a domestic company];

b. any income in respect of units of mutual fund;

c. income from units received by a unit holder of UTI [i.e., from the
administrator of the specified undertaking as defined in Unit Trust of India
(Transfer of

Undertaking and Repeal) Act, 2002];

d. Income in respect of units from the specified company.

CAPITAL GAIN ON COMPULSORYACQUISITION OF

URBAN AGRICULTURALLAND Sec.10 (37)

As per section 10(37), in the case of an individual/Hindu undivided family,

capital gain arising on transfer by way of compulsory acquisition of urban
agricultural land is not chargeable to tax from the assessment year 2005-06
if
such compensation is received after March 31, 2004 and the agricultural
land
was used by the assesse (or by any of his parents) for agricultural purposes
during 2 years immediately prior to transfer.

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31
LONG-TERM CAPITAL GAINS ON TRANSFER OF
EQUITYSHARES/UNITS INCASES COVERED BY
SECURITIES TRANSACTION TAX Sec.10 (38)

As per section 10(38), Long-term capital gains arising on transfer of equity

shares or units of equity oriented mutual fund is not chargeable to tax from
the assessment year 2005-06 if such a transaction is covered by securities
transaction tax.

The securities transaction tax is applicable if equity shares or units of equity

oriented mutual fund are transferred on or after October 1, 2004 in a
recognized stock exchange in India (or units are transferred to the mutual
fund). If the securities transaction tax is applicable, long-term capital gain is
not chargeable to tax; short-term capital gain is taxable @ 10 per cent (plus
SC
and EC). If income is shown as business income, the taxpayer can claim
rebate
under section88E.

*
The lesson discusses in brief few selected income, which are exempt from
income-tax in India. The few important in today age include agricultural
income, income of minor, family pension; leave travel commission and
dividend income.

*
Deduction: While deduction is available from gross total income,
exemptions are not included in gross total income.

*
Agricultural income from a foreign country: Indian agricultural income

32
is exempt from tax by virtue of section 10(1). Agricultural income from a
foreign country is treated as non-agricultural income in India.

33
NATURE OF INCOME

EXEMPTION LIMIT, IF ANY

10(1)

Agricultural income

10(2)

Share from income of

HUF

10(2A)

Share of profit from

firm

10(3)

Casual and non-

recurring receipts

Winnings from races Rs.2500/- other

receipts Rs.5000/-

10(10D)

Receipts from life

Insurance Policy

10(16)

Scholarships to meet
cost of education

34
10(17)

Allowances of MP and
MLA.

For MLA not exceeding Rs. 600/- per

month

10(17A)

Awards and rewards

(i) from awards by
Central/State
Government
(ii) from approved
awards by others
(iii) Approved rewards
from Central & State
Governments

10(26)

Income of Members of
scheduled tribes
residing in certain areas
in North Eastern States
or in the Ladakh region.

Only on income arising in those areas

or interest on securities or dividends

10(26A)

Income of resident of
Ladakh

On income arising in Ladakh or

outside India

10(30)

(i) Subsidy from Tea

Board under approved

35
scheme of replantation

10(31)

(ii) Subsidy from

concerned Board under
approved Scheme of

36
replantation

10(32)

Minor’s income clubbed

with individual

Upto Rs. 1,500/-

10(33)

Dividend from Indian

Companies, Income
from units of Unit Trust
of India and Mutual
Funds, and income from
Venture Capital
Company/fund.

10(A)

Profit of newly
established undertaking
in free trade zones
electronic hardware
technology park on
software technology
park for 10 years (net
beyond 10 year from
2000-01)

10(B)

Profit of 100% export

oriented undertakings
manufacturing articles
or things or computer
software for 10 years
(not beyond 10 years
from 2000-01)

37
10(C)

Profit of newly
established undertaking
in I.I.D.C or I.G.C. in
North-Eastern Region
for 10 years

38
INCOME FROM INTEREST

Section

Nature of Income

Exemption limit, if any

10(15)(i)(iib)(iic)

Interest, premium on�

redemption or other
payments from notified
securities, bonds, Capital
investment bonds, Relief
bonds etc.

To the extent mentioned in

notification

10(15)(iv)(h)

Income from interest

payable by a Public Sector
Company on notified bonds
or debentures

10(15)(iv)(i)

Interest payable by
Government on deposits
made by employees of
Central or State
Government or Public
Sector Company of money
due on retirement under a
notified scheme

10(15)(vi)

Interest on notified Gold

Deposit bonds

39
10(15)(vii)

Interest on notified bonds

of local authorities

40
INCOME FROM SALARY

Section

Nature of Income

Exemption limit, if any

10(5)

Leave Travel assistance/

concession

Not to exceed the amount

payable by Central
Government to its employees

10(5B)

Remuneration of
technicians having
specialised knowledge and
experience in specified
fields (not resident in any
of the four preceding
financial years) whose
services commence after
31.3.93 and tax on whose
remuneration is paid by the
employer

Exemption in respect of
income in the from of tax
paid by employer for a
period upto 48 months

10(7)

Allowances and perquisites

by the government to citizens
of India for services abroad

10(8)

Remuneration from foreign

41
governments for duties in
India under Cooperative
technical assistance
programmers. Exemption is
provided also in respect of
any other income arising
outside India provided tax
on such income is payable
to that Government.

10(10)

Death-cum-retirement
Gratuity-

(i) from Government

(ii) Under payment of

Gratuity Act 1972

Amount as per Sub-sections

(2), (3) and (4) of the Act.

(iii) Any other

Upto one-half month’s

salary for each year of

42
completed service.

10(10A)

Commutation of Pension-

(i) from government,

statutory Corporation etc.

(ii) from other employers

Where gratuity is payable –

value of 1/3 pension.�
Where gratuity is not payable
– value of 1/2 pension

(iii) from fund set up by LIC

u/s 10(23AAB)

10(10AA)

Encashment of unutilized
earned leave

(i) from Central or State

government

43
(ii) from other employers

Upto an amount equal to 10

months salary or Rs.
1,35,360/- whichever is less

10(10B)

Retrenchment
compensation

Amount u/s. 25F (b) of

Industrial Dispute Act 1947
or the amount notified by
the government, whichever
is less.

10(10C)

Amount received on
voluntary retirement or
termination of service or
voluntary separation under
the schemes prepared as per
Rule 2BA from public sector
companies, statutory
authorities, local authorities,
Indian Institute of
Technology, specified
institutes of management or
under any scheme of a
company or Co-operative
Society

Amount as per the Scheme

subject to maximum of Rs. 5
lakh

10(11)

Payment under Provident

Fund Act 1925 or other

44
notified funds of Central
Government

10(12)

Payment under recognized

provident funds

To the extent provided in rule

8 of Part A of Fourth Schedule

10(13)

Payment from approved

Superannuation Fund

10(13A)

House rent allowance

least of-

(i) actual allowance

(ii) actual rent in excess of

10% of salary

(iii) 50% of salary in

Mumbai, Chennai, Delhi and
Calcutta and 40% in other
places

10(14)

45
Prescribed [See Rule 2BB (1)]
special allowances or benefits
specifically granted to meet
expenses wholly necessarily
and exclusively incurred in
the performance of duties

To the extent such expenses

are actually incurred.

10(18)

Pension including family

pension of recipients of
notified gallantry awards

EXEMPTIONS TO NON-CITIZENS ONLY

Section

Nature of Income

Exemption limit, if any

10(6)(i)(a)
and (b)

(i) passage money from

employer for the employee
and his family for home leave
outside India

(ii) Passage money for the

employee and his family to
‘Home country’ after
retirement/termination of
service in India.

46
10(6)(ii)

Remuneration of members of

47
diplomatic missions in India
and their staff provided the
members of staff are not
engaged in any business or
profession or another
employment in India.

10(6)(vi)

Remuneration of employee
of foreign enterprise for
services rendered during
his stay in India in specified
circumstances provided the
stay does not exceed 90
days in that previous year.

10(6)(xi)

Remuneration of foreign
Government employee on
training in certain
establishments in India.

EXEMPTIONS TO NON-RESIDENT INDIANS (NRIS) ONLY

Section

Nature of Income

Exemption limit, if any

11.2

The units purchased by them

are out of the amount
remitted from abroad or from
their Non-resident (External)
Account

48
EXEMPTIONS TO FUNDS, INSTITUTIONS, ETC.

Section

Nature of Income

Exemption limit, if any

10(14A)

Public Financial Institution

from exchange risk premium
received from person
borrowing in foreign currency
if the amount of such premium
is credited to a fund specified
in section 10(23E)

10(15)(iii)

Central Bank of Ceylon

49
from interest on securities

10(15)(v)

Securities held by Welfare

Commissioners Bhopal Gas
Victims, Bhopal from Interest
on securities held in Reserve
Bank’s SGL Account No.
SL/DH-048

10(20)

any local Authority

(a)� Business income

derived from Supply of
water or electricity any
where. Supply of other
commodities or service
within its own
jurisdictional area.

(b) ½ Income from house

property, other sources and
capital gains.

10(20A)

Housing or other
Development authorities

10(21)

Approved Scientific Research

Association

50
10(23)

Notified Sports
Association/ Institution
for control of cricket,
hockey, football, tennis or
other notified games.

10(23A)

Notified professional
association/institution

All income except from house

property, interest or dividends
on investments and rendering
of any specific services

10(23AA)

Regimental fund or Non-

public fund

10(23AAA)

Fund for welfare of employees

or their dependents.

10(23AAB)

Fund set up by LIC of India

under a pension scheme

10(23B)

Public charitable trusts or

registered societies approved

51
52
by Khadi or Village Industries
commission

10(23BB)

Any authority for

development of khadi or
village industries

10(23BBA)

Societies for administration of

public, religious or charitable
trusts or endowments or of
registered religious or
charitable Societies.

10(23BBB)

European Economic
Community from Income
from interest, dividend or
capital gains

10(23BBC)

SAARC Fund

10(23C)

Certain funds for relief,

charitable and promotional
purposes, certain
educational or medical
institutions

10(23D)

53
Notified Mutual Funds

10(23E)

Notified Exchange Risk

Administration Funds

10(23EA)

Notified Investors Protection

Funds set up by recognized
Stock Exchanges

10(23FB)

Venture capital Fund/

company set up to raise
funds for invest�ment in
venture Capital undertaking

Income from invest�ment

in venture capital
undertaking

10(23G)

Infrastructure capital fund, or

infrastructure capital company

Income from dividend,

interest and long term capital
gains from investment in
approved infrastructure
enterprise

10(24)

Registered Trade Unions

Income from house property

and other sources

54
10(25)(i)

Provident Funds

Interest on securities and

55
capital gains from transfer of
such securities

10(25)(ii)

Recognized Provident Funds

10(25)(iii)

Approved Superannuation
Funds

10(25)(iv)

Approved Gratuity Funds

10(25)(v)

Deposit linked insurance

funds

10(25A)

Employees State Insurance

Fund

10(26B)(26BB)
and (27)

Corporation or any other body

set up or financed by and
government for welfare of
scheduled caste/ scheduled
tribes/backward classes or
minorities communities

56
10(29)

Marketing authorities

Income from letting of go

down and warehouses

10(29A)

Certain Boards such as coffee

Board and others and
specified Authorities

57
CONCLUSION

Various tax systems grant a tax

exemption to certain
organizations, persons, income,
property or other items taxable
under the system. Tax exemption
may also refer to a personal
allowance or specific monetary
exemption which may be claimed by an individual to reduce
taxable income under some systems. Tax exempt status may
provide a potential taxpayer complete relief from tax, tax at a
reduced rate, or tax on only a portion of the items subject to tax.
Examples include exemption of charitable organizations from
property taxes and income taxes, exemptions provided to
veterans, and exemptions under cross-border or multi-
jurisdictional principles. Tax exemption generally refers to a
statutory exception to a general rule rather than the mere absence
of taxation in particular circumstances (i.e., an exclusion). Tax
exemption also generally refers to removal from taxation of a particular item
or class rather than a reduction of taxable items by way of deduction of other
items (i.e., a deduction). Tax exemptions may theoretically be granted at any
governmental level that imposes taxation, though in some broader systems
restraints are imposed on such exemptions by lower tier governmental units.

58
WEBLIOGRAPHY

@ http://www.etaxindia.org/2010/02/income-exempt-
under-section-10.html

@ http://www.indiastudychannel.com/resources/73921-
Income-exempt-under-section.aspx

@ http://www.usig.org/countryinfo/laws/India/India%20Income%20Tax
%20Act%201961%2010_23c_.pdf

@ en.wikipedia.org/wiki/Exemption

@ en.wikipedia.org/wiki/Income_tax_in_India

@ www.managementparadise.com/forums/...php/t-
22810.html

THANK YOU

59