Taxation: Direct & Indirect

Ans wer: 1
Introduction:
Salary: Salary is the remuneration received by an individual for any service rendered for
his skills and knowledge through a contract. The law gives an inclusive but not in-depth
definition of salary. Salary is the remuneration money which is paid by the employer to the
employee for the lieu of his work to the company or employer. Salary is usually fixed and
is paid to the employees usually on monthly basis. Salary is often expressed as an annual
income to the employee and is mostly paid to the white collars of professionals.
The definition of salary is very common and is non-specific in nature. Although salary is
considered for the various purpose of taxation, this can also be defined under Section 17(1)
of the Income Tax Act, 1961.
Below listed are the Salary as pe r Section 17(1), this includes the following:
 Wages.
 Annuity or pension.
 Gratuity.
 The advance of salary.
 Fees, commission, perquisites or profits instead of salary or wages.
 Leave encashment.
 Transfer of balance in a recognised provident fund.
 Annual accumulation of balance to the cred it of an employee participating in a
recognised provident fund.
 Contribution by the Central Government or any other employer to Employees Pension
Account as referred to in Sec. 80CCD.
Salary structure us ually consists of the following particulars:
 Basic salary (BS).
 House Rent Allowance (HRA).
 Dearness Allowance (DA)
 Conveyance allowance.
 Leave Travel Allowance (LTA).
 Variable pay or Bonus.
 Special allowance or Performance based allowance.
There are several forms of salary and all these salaries are treated for tax differently as per.
Different types of salaries have different tax treatments. Some of the taxability elements of
salary are as follows:
A. House Rent Allowance (HRA): Under Section 10 (13A) of the Act, HRA is exempt
from income tax to the level prescribed in Rule 2A of the Income Tax Rules, 1962,
which demands the least of the following amounts which are exempt:
 The actual rent paid is in excess of one-tenth of the salary.
 The actual amount of House Rent Allowance (HRA).
 If the accommodation is situated in cities like Mumbai, Kolkata, Delhi or Chennai, it
is 50% of the salary.
 If the accommodation is situated in other cities, it is 40% of the salary.

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B. Conveyance allowance: The allowance given to an employee to meet the travel

expenses from the residence to the workplace is exempt to the amount of Rs.1,600 per
month. The sections under which this exemption is applicable are Section 10(14)(ii) of
Income Tax Act and Rule 2BB of Income Tax Rules.
C. Gratuity: This is the amount which is payable to employees who have completed 5
years of service with the company or employer, and this is calculated on the basis of
Basic Pay and DA. The amount which is received is tax exempt up to Rs. 20 lakhs.
D. Provident Fund: This is the amount which is accumulated in the employee’s account
consists of employer’s and employee’s share of contribution plus interest gained on a
yearly basis. This is totally tax-exempt.
E. Leave salary: If leave standing on the employee's credit is not used within a year, as
per the rules it will get lapsed or it may get encashed or it may get accumulated and
carried forward. This is also calculated on the basis of basic pay and DA and is exempt
from income tax.
F. Leave Travel Concession or Allowance (LTC): The Leave Travel Concession (LTC)
is received by an employee for himself and for his family in regards to beginning leave
to any place in India is exempt under Section 10(5) of Income Tax Act, 1961. The
government of India has fixed a slab of 4 years during which LTA can be claimed twice
only. It can be called as Leave Travel Concession (LTC) or Leave Travel Allowance
(LTA).
Perquisites are benefits or welfare by cash or in kind provided by the employer to the
employee apart from his salary. Perquisite is defined under Section 17(2) of the Income
Tax Act.
Perquisites are not reimbursement of expenses. Some perquisites are not tax exempt and it
is taxable for all employees, few are as follows:
a) Rent free accommodation.
b) Movable assets.
c) Concession in accommodation rent.
d) Educational expenses.
e) Interest- free loans.
f) Club fee payments.
g) Insurance premium paid on behalf of employees.
Some perquisites are exempt from tax, which are not taxable to the employees. The fringe
benefits that are exempt from tax are as follows:
a) Medical benefits
b) Leave travel concession
c) Health Insurance Premium
d) Car, laptop etc. for personal use.
e) Staff Welfare Scheme
Allowance for entertainment: The employees are allowed to receive one-fifth of basic
salary i.e., Rs.5,000/-. This is an entertainment allowance which is provided to the
employees while computing the gross salary of an individual. It is one of the main
elements that are taken into consideration while the gross salary is calculated. However,
this provision can only be enjoyed by Government officials.

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According to Section 16(ii) of the Income Tax Act, 1961, if an employee is receiving an
entertainment allowance, the amount will first be added along with the basic salary of the
employee. Afterwards, it will it be considered for deduction under the tax. This allowance
will be one- fifth of the employee’s salary and will be totally exclusive of other allowances
and other benefits.
Payment of Professional Tax by the employer: The Central and State Government
charge a certain tax, known as a professional tax, on individual’s salary incomes, trades,
employment. This professional tax amount does not exceed Rs.2500 per annum.
According to Section 16(ii) of the Income Tax Act, 1961, a taxpayer has complete
authority to claim a tax deduction with respect to the professional tax that an employee is
paying to the employer. However, this deduction will only be allowed in the same financial
year as the taxpayer pays the tax. An overdue professional tax cannot be considered for
deduction, whatever the scenario may be.
The amount of income that will be subjected to Income Tax deductions is emphasized what
taxable income stands for. Although most of the incomes are taxed according to the tax
slab that the individual will fall under, it is important to record that sometimes certain
incomes are partially taxable or not taxable at all.
Steps for calculation of taxable income on salary:
 Collecting the salary payslips along with Form 16 for the current fiscal year and add
every consideration i.e., Basic salary, HRA, DA, TA and other reimbursements,
incentives and allowances that are being mentioned in Form 16 (Part B) and salary
payslips.
 The bonus or variables which are received during the fiscal year must be added for the
income that is being calculated.
 The total is gross salary, from which we will have to deduct the exempted portion of
House Rent Allowance, Transport Allowance (Max. Rs.19200 per annum) Medical
reimbursement (Max. Rs.15,000 per annum) and all other reimbursements provided the
actual bills in respect of the expenses incurred.
 The total what we get is our net income from salary.
The format of Salary payslip on how the Net salary of an e mployee is calculated:
Description Amount (Rs.) Deductions (Rs.)
Basic Salary XXXXX
House Rent Allowance XXXX
Dearness Allowance XXXX
Statutory Bonus XXXX
Perquisites XXXX
Gross Salary XXXXX
Professional Tax XXX
Provident Fund XXXX
Net Salary XXXXX

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 Taxation: Direct & Indirect

Ans wer: 2
Introduction:
Gift Tax: Gift tax is a type of tax that is urged after a person gifts certain money or
property to another person. Gift tax in India is a rule by the Gift Tax Act, which was first
introduced in April 1958. This rule was published and followed pan India except for
Jammu and Kashmir. According to the Gift Tax Act 1958, all the gifts exceeding beyond
Rs.25,000 were taxable. The gift can be in any form such as cash, cheque, demand draft,
etc., which is received from a person who is a third person and not a blood relative of the
receiver.

In 1998, the Gift Tax Act was cancelled in India. Although it was cancelled, the Gift Tax
Act was reintroduced in the year 2004. As per the present gift tax standards, all the gift
received by the receiver (individual or HUF) which exceeds Rs.50,000 are taxable. Earlier
(before October 1st 2009), gifts in kind (a car or a house) were not considered at the cash
value and also all gifts received at the time of marriage were exempt from tax. The gifts
could have been from anyone and of any type. This made very high- value gifts the rule at
the marriages of rich people. The government department officers were cheated by making
marriages occasions for large-scale conversion of illegal money (black money) into legal
gifts.

The receiver has to pay tax on any gift received, which exceeds at Rs. 50,000 or more. Gift
tax is both charged on cash gifts such as cash, cheques and demand drafts and certain gifts
in kind like property, jewellery, shares, dividends and artefacts. Gifts are treated as
“income from other sources” under Section 56(2) of the Income Tax Act in the hands of
the receiver. Hence, non-cash gifts are also taxed by the government. Let’s assume a gift of
a house worth Rs. 45 lakhs is automatically taxed in the highest income bracket of 30% +
surcharges. The rule, therefore effectively prevents money laundering in the appearance of
high- value gifts.

Although, this rule is not relevant if your relatives present the gifts. Let’s say to get free
from gift tax in India we cannot make any person as relative saying he is the son of my
uncle’s neighbour’s client’s brother or sister! To stay away from scenarios like these, the
income tax rules clearly specify relatives from whom tax- free gifts can be received. These
are the following listed which will be accepted by the Indian government:
 Spouse of an individual.
 Brother or sister of an individual.
 Any ancestor ascendant or descendant of an individual.
 Any ancestor ascendant or descendant of the spouse of an individual.
 Spouse of the persons referred to above.
 Brothers or sisters of the spouse of an individual.
 Brothers or sisters of either of the parents of an individual.

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Besides this, the gifts can be exempted even if they are not received from these relatives if
it is received during the marriage. So, let’s stop being anxious about the Income Tax
Department questioning us about the car that was gifted by a far-off relative at our
wedding. But make sure that the dates mentioned on the gift deed or agreement is of the
marriage day or at least closer to the marriage date.

Just like marriages, there is no tax inference of gifts received as a result of a legacy. If the
gifts come to us by way of a will then we do not necessarily need to pay any tax on the
amount received. Although, the income earned later, let’s say by mode of rent on a house
rented by us would be taxable.

We need not comprise the amount we get from local authorities or educational institutions
as gifts for our good deeds or on the basis of scholarship. However, if the number of gifts
received in instance other than the above and from a person who is not a relative as
specified and exceeds Rs. 50,000, then the entire amount would be added to our income.
So, do not make the mistake of adding just Rs. 20,000 to our income, if a friend gifts Rs.
70,000 for helping his parents.

When we give a gift to someone, it is necessary to keep it with proper gift deed or
agreement. A gift deed act as a legal document which is used to give a detailed explanation
about the transfer of gift from giver to receiver without any exchange of money.

Checklists of a Gift Deed which should be included in the agreement or Gift Deed are
as follows:
 Date and place where Gift Deed is executed.
 Details of the giver or donor (Name, Father’s Name, Date of Birth, Address).
 Details of the receiver (Name, Father’s Name, Date of Birth, Address, relationship with
giver or donor).
 Relationship of the receiver with the giver or donor.
 Details of the property (if any) that is gifted.
 Signatures of giver and receiver.
 Details of two witnesses in whose presence the deed will be executed.
 Signatures of the witnesses.

Stamp duty of recommended value has to be paid for the registration of Gift Deed. The
Stamp duty charges will differ from state to state and also based on gender. Few states
offer a concession in stamp duty if the property is gifted within the family.

This is a detailed explanation on taxability of gifts and related to provisions of Income Tax
Act. Now, we can assess the situations as per the question is given.

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Conclusion:
In the first scenario, Abhishek received a cash gift of Rs.51,000 from his father’s friend on
the occasion of his birthday. As per the rule of Income Tax Act, Abhishek’s Father’s friend
is not a relative and birthday’s gifts are also not listed to be tax exempted. So, the cash
amount of Rs.51,000 received by Mr Abhishek on his birthday will be taxable under
income from other sources.

In the second scenario, Abhishek’s patients gift him a plot of land as an appreciation for
his personal qualities and dedication towards his work. His patient gifted him the plot of
land without any specific reason and moreover, he is not Abhishek’s relative to the plot of
land will also be taxable. As discussed above, Gift Tax is both charged on cash gifts such
as cash, cheques and demand drafts and certain gifts in kind like property, jewellery,
shares, dividends and artefacts.

In case the property is received without consideration being paid by the person receiving
the gift, the stamp duty value of the property would be taxable (provided the stamp duty
exceeds Rs.50,000). It is assumed that plot of land’s market price would be more than
Rs.50,000 so, it will be taxable and Mr Abhishek will be liable to pay tax for the gifts he
receives, as it is not tax exempt as per the Gift Tax Act.

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 Taxation: Direct & Indirect

Ans wer: 3
3a) Calculation of eligible amount of deduction under Chapte r VI-A for the
Assessment Year 2018-19:
The computation of Gross Total Income (GTI) of an assessee, is the income which the
assessee earns in his previous financial year under different income heads as specified
under Section 14 of the Income Tax Act, 1961. Although Gross Total Income (GTI) which
is defined under Section 80B (5) is not the income on which tax will be paid by the
taxpayer in the assessment year.

Consequently, for the computation of actual taxable income of an assessee, few general
deductions are allowed, which are covered under chapter VIA of the Income Tax Act,
1961. Chapter VIA of the Income Tax Act comes under section 80 and the deductions are
covered from section 80C to 80U. According to the section 80A, deductions described
under sections 80C to 80U which come under Chapter VIA shall be allowed while
computing the total income of an assessee from GTI.

Deductions under Section 80C: Under this section, it allows a deduction of up to Rs.
1,50,000 in the form of Life Insurance Premiums, Provident Fund, Tuition fees in schools
(maximum for 2 children), repayment of principal of the home loan, National Savings
Certificate (NSC), Equity Linked Savings Scheme (ELSS), Bank deposit for five years
term, etc.

In Mr Arman’s case the total deductions which will be permissible unde r section 80C
are as follows:
Particulars Amount (Rs.)
LIC premium paid 30,000
PPF amount paid 75,000
Repayment of housing loan 1,25,000
Total 2,30,000

The total amount for his investments is Rs.2,30,000 but as per the income tax rule, it is
restricted to Rs.1,50,000. So, under Section 80C Arman will get a deduction for
Rs.1,50,000 only.

Deduction under Section 80D:

Under this section, it allows a deduction of up to Rs. 25,000. Deduction under this section
is available to an individual or a HUF. It can be claimed for insurance of self, spouse and
dependent children. An extra deduction for insurance of parents is also available to the
extent for Rs 25,000 if their age is less than 60 years of age or Rs 50,000 if parents are
more than 60 years old. In case, a taxpayer’s age and his spouse are senior citizens (60
years or above), the maximum deduction available under this section may get increased.

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In this scenario, Arman is paying Rs.10,000 for medical insurance for himself and his wife
so here his deduction will be of the full amount of Rs.10,000. Apart from his medical
insurance, he also pays Rs.25,000 medical premium for his mother whose age is 85 years.

So as per the income tax rule, he will get the advantage of the full deduction for his
mother’s medical premium. Hence, the total deduction under section 80D will be
Rs.35,000. Therefore, the total deduction under Chapter VI-A will be Rs.1,50,000 (under
section 80C) plus Rs.35,000 (under section 80D).

The total eligible amount of deduction which comes under Chapter VI-A for the
assessment year 2018 - 2019 will be of Rs.1,85,000.

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3b) Calculation of additional eligible amount of deduction when he also contributes in

certain work of literacy and earned royalty income:
Deduction under Section 80QQB: Under this section, it allows a deduction of up to
Rs.3,00,000/- on any royalty income or for any copyright (patent) fees of an author of any
specific book group or category. Deduction under this section is only available for the
Individual resident of India.

The professional income earned by authors is by publishing their books. The publishers
publish the author’s books and at a certain point of sales or the publisher pay profit to the
authors as compensation for his work. This sort of income is called Royalty Income. In
India, the Income Tax Department charges tax on Royalty income too. But there are
deductions, which can be claimed to save tax by the author. These deductions are covered
under Section 80QQB of Income Tax Act, 1961.

What is Included in Gross Total Income?

The computation of Gross Total Income (GTI) of an assessee, is the income which the
assessee earns in his previous financial year under different income heads as specified
under Section 14 of the Income Tax Act, 1961. Although Gross Total Income (GTI) which
is defined under Section 80B (5) is not the income on which tax will be paid by the
taxpayer in the assessment year.

For the individual resident of India, Gross Total Income (GTI) comprises of the
following:
 Any Income procured by an author for practising his profession.
 Any amount of remuneration received by the author for his assignments and gets
approval on writing books of his interests in respect to the copyrights of any book based
on literature, artistic (Imaginative) or scientific in nature (based on methodical and
technology), for royalty income or any copyright fees.
 Any income which is received an advance payment of royalties or copyright fees. (an
amount which is non-refundable).

Deductions which are allowed under Section 80QQB: The cut off the amount of
deduction under this section is up to Rs. 3,00,000/- for royalty income or copyright fees, or
any Gross total income being earned by him, or whichever is lower.

In the given scenario, Mr.Arman have earned a royalty income of Rs.15,00,000/- As per
the Income Tax Act rule, he will be entitled to a deduction of Rs.3,00,000 only. Therefore
his total deduction under chapter VIA will be as follows:
Particulars Amount (Rs.)
Deductions under Section 80C & 80D 1,85,000
Deductions under Section 80QQB 3,00,000
Total 4,85,000
The total eligible amount of deduction which Mr.Arman will be getting the benefit for the
assessment year 2018 - 2019 will be of Rs.4,85,000.

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