Introduction

Section 14 of the income tax lays down that there can be various modes of income for a person.
These modes are classified into 5 broadheads for the purposes of computation and determination
of total income and tax rates apply thereafter.

The 5 main heads of incomes are-

1. Income from salary

2. Income from house property
3. Capital gains
4. Profit and gains from business and profession
5. Income from other sources

Income from salary

Section 15 of the act lays down the conditions under which an income falls under the head of
‘salaries.’

1. Any remuneration is due from the employer to any former employee(assessee) for the due
course of his employment in the previous year, whether paid or not.
2. Salary paid to an employee by the employer or former employer in the previous year even
though it was not due to him.
3. Salary paid to an employee by the employer or former employer in the previous year which was
not charged under income tax in any other previous years.

The key element of this head is that it mandates a relationship between employer and employee.
If an employer-employee relationship is not there, the income will not be accessible under the
head of salaries.

Section 17 of the Act has mentioned the term ‘salary’, which included-

1. Wages;
2. Any annuity or pension;
3. Any gratuity;
4. Any charges, commissions, perquisites or benefits in lieu of or notwithstanding any
compensation or wages;
5. any advance of salary;
6. Any payment received by a worker in regard to any time of leave not benefited by him;
7. The yearly accumulation to the balance at the employee partaking in a perceived Provident
Fund, to the degree to which it is chargeable to assess under Rule 6 of Part A of the fourth
schedule;
8. The total of all wholes that are included in the transferred parity as alluded to in sub-rule 2 of
Rule 11 of PartA of the Fourth schedule of an employee partaking in a perceived Provident Fund,
to the degree to which it is chargeable to assess under sub-rule 4 thereof; and
 9. The contribution made by the Central Government or any other employer in the previous year,
to the account of an employee under a pension scheme, referred to in Section 80CCD

Allowances

The employer pays allowances to his employees in order to fulfill his personal
expenses. Allowances can be fully taxable or partly taxable. Partly taxable allowances include
house rent allowance and special allowances under section 10(14) (i)&(ii).

Fully taxable allowances are:

 Dearness Allowance
 Overtime allowance
 Fixed Medical Allowance
 Tiffin Allowance
 Servant Allowance
 Non-practicing Allowance
 Hill Allowance
 Warden and Proctor Allowance
 Deputation Allowance

Perquisites

In addition to their salary, the employees are often given some other benefits which may or may
not be in cash form. For example, rent-free accommodation or car given by the employer to the
employee.

Reimbursement of bills is not a perquisite. Perquisites are only given during the continuance of
employment.

Taxable perquisites include

 Rent free accommodation

 Interest free loans
 Movable assets
 Educational expenses
 Insurance premium paid on behalf of employees

Exempted perquisites include:

 Medical benefits
 Leave travel concession
 Health Insurance Premium
 Car, laptop etc. for personal use.
 Staff Welfare Scheme
Profits in Lieu of Salary

Section 17(3) gives a comprehensive meaning of profits in lieu of salary. Any payment due or
accrued to be paid to the employee by the employer. Payment to be valid under section 17(3),
there are two essential features-

 There must be compensation received by an assessee from his employer or former employer;
 It is received at or in connection with the termination of his employment or adjustment of terms
and conditions.

‘Profit in lieu of Salary’ is taxable on ‘due’ or ‘receipt’ basis. Payment from unrecognized
provident or superannuation fund is taxable as “profit in lieu of salary” if that balance consists
employer’s contribution or interest on an employer’s contribution.

Exceptions to section 17(3) (exempted under section 10)

 Death cum retirement gratuity;

 House rent allowances;
 Commuted value of pension;
 Retrenchment pay received by an employee;
 Payment received from a statutory provident fund or recognized provident fund;
 Any payment from an approved superannuation fund;
 Payment from the recognized provident fund.

Computation of income tax on salary

Let’s take an example –

1. An individual, let’s say, Mr. A, receives the following pay –

Basic salary – Rs. 2,50,000 per annum;

Dearness Allowance – Rs. 10,000 per annum;

Entertainment Allowance – Rs. 3,000 per annum;

Professional Tax – Rs. 1,500 per annum;

then how much amount will be taxable from his salary?

Ans. Find out total gross salary = basic salary + Dearness Allowance + Entertainment
Allowance, i.e., 2,50,000 + 10,000 + 3,000 = 2,63,000.

As per deduction under section 16(iii) = 2,63,000 – 1500 = Rs. 2,61,500

 Income tax rate on income Rs. 2,61,500 is 5%, which will be equal to Rs. 13,075 and this
much amount will be taxable.

Income from house property

The total net assessable estimation of property, comprising of any buildings/lands/flats belonging
to the assessee, when assessee is the owner apart from the property which is under the use for
any business or profession undertaken by him, the proceeds of which are taxable under the
income tax act, falls under the ambit of income from house property. (section 22)

The income from house property includes lease-hold and deemed ownership.

The income from house property is taxable after considering the deductions under Section 24 of
the act. In the case of repairing and maintenance of the property, thirty percent of the Net Annual
Value is deductible. This deduction is not allowed on a self-occupied property.

For the purpose of computation of income from house property, house properties are divided into
three categories. House property which :

1. Were let out during the whole previous year

2. Were partly vacant but partly let out.
3. Let out for some time and then used for personal residence.

Deemed ownership-

Section 27 provides that certain persons are not legal owners of a property but are still
considered to be deemed owners under certain conditions.

Condition 1 – Transfer of property to a child or spouse, without consideration.

Condition 2 – Holder of an impartible estate is deemed to be the owner of the entire estate.

Condition 3 – Members of a co-operative society or company or association of person

Condition 4 – Person in possession of a property on lease for more than 12 years as per Section
269UA(f).

Co-owners of a property – Section 26

If there are two or more owners of a property and if the share of co-owners is determinate, the
income generated from such property is calculated as income from one property and it is divided
amongst co-owners. They are entitled to relief under section 23.
Unrealized rent (rent not paid by the tenant for some reason)

The unrealized rent is not included while calculation of net annual value. If the rent is received in
the subsequent years, then the amount will be added to the income from house property of that
particular year.

Set-off and carry forward of losses

Under Section 70 of the Income Tax Act, if a person has incurred losses from house property, he
is allowed to set them off from the income of any other house property.

Section 71 of the Act lays down the provision of setting off the losses from house property from
any other heads of Incomes but not casual income (income which might not arise again)

The unadjusted losses are allowed to be carried forward for a maximum period of 8 years starting
from the year succeeding to the year in which loss has occurred. In the subsequent years, the set-
off is allowed only from the head ‘Income from House Property’.

The amount of losses that can be set-off on the house property from other income heads is
restricted to Rs 2 lakh either house is a self-occupied or let out property.

Computation of Income from House Property

Step 1 – deduct the municipal taxes paid during the year from the Gross Annual Value, which
will be Net Annual Value.

Step 2 – deduct the amount under section 24(a) and under section 24(b) for which deduction is
provided.

Example –

An individual, let’s say Mr. X owned three properties and give it on rent. What will the Gross
Annual Value of all the Properties? Details of the properties provided below-

Particulars Property 1 Property 2 Property 3

Municipal Rent 7,50,000 7,50,000 2,00,000
Fair Rent 2,00,000 2,00,000 7,50,000
Standard Rent – 80,000 9,00,000
Amount at Step 1 8,00,000 50,000 8,50,000
Unrealised Rent 1,00,000 NIL 50,000

Ans : Step 1: reasonable expected rent, higher values of municipal rent or fair rent.
Particulars Property 1 Property 2 Property 3
Municipal Rent 7,50,000 7,50,000 2,00,000
Fair Rent 2,00,000 2,00,000 7,50,000

Standard Rent 80,000 9,00,000
Amount at Step 1 7,50,000 80,000 7,50,000

Step 2: deduct unrealised rent (e.g. 8,00,000-1,00,000)

Particulars Property 1 Property 2 Property 3

Amount at step 2 7,00,000 50,000 8,00,000

Step 3: higher values computed from step 1 and step 2 will be Gross Annual Income.

Particulars Property 1 Property 2 Property 3

Amount at step 1 7,50,000 80,000 7,50,000
Amount at step 2 7,00,000 50,000 8,00,000
Amount at step 3 7,50,000 80,000 8,00,000

Income from capital gains

Any profit or gain emerging from the exchange of capital assets held as investments are
chargeable under the head capital gains. The gain can be because of short-and long term gains. A
capital gain emerges just when a capital asset is transferred. This implies if the asset moved is
certainly not a capital asset; it won’t fall under the head of capital gains. Profits or gains
emerging in the previous year in which the transfer occurred will be considered as income of the
previous year and chargeable to IT under the head Capital Gains and indexation will apply, if
applicable.

To fall under the ambit of income from capital gains, there must be –

1. A capital asset
2. Which is transferred by the assessee
3. The transfer has taken place during the final year
4. Gain or loss has arisen from it

Capital assets include all kinds of properties whether tangible or intangible, movable or
unmovable, which are owned by the assessee, may or may not be for business and professional
purposes.
Capital assets do not include assets like stock in trade, goods of used personal effects,
agricultural land, etc.

Capital gains are of two types

1. Short term capital assets – those assets held by an assessee for at most 36 months,
immediately prior to its date of transfer.

ITO v. Narayana K Shah 2000 74 ITD 419 Mum.

In this case Court held that where the assessee held certain shares in a company by virtue of
which a right of occupancy in a flat is conferred on him, these shares cannot be treated as a
‘share’ mentioned in proviso to section 2(42A) and as such where such shares are sold after
being held for a period of fewer than 36 months, gain arising therefrom is to be treated as short-
term capital gain.

2. Long term capital assets – those assets held by an assessee for more than 36 months. Long-
term capital gains are generally taxable at a lower rate.

There are some cases where long term capital assets do not require a term of 36 months, assets
held for more than 12 months is valid for long term capital assets. Those conditions are –

1. Listed Equity or preference shares;

2. Securities listed in a recognized stock exchange, like debentures, security exchange;
3. Units of UTI;
4. Units of Mutual Funds;
5. Zero coupon bond;
6. Unlisted equity or preferential shares;
7. Units of equity oriented fund.

Tax on long-term capital assets is 20 percent.

Exemptions under section 54 :

Exemptions in regards to the transfer of a long-term capital asset, only when the assessee is an
individual or a Hindu Undivided Family. A capital gain arises from the transfer of residential
property, where the assessee has purchased another house property within a period of one year
before or two years after the date of transfer or transfer took place within a period of three years
after the date of construction.

The amount of exemption available will be whichever is lesser of capital gains and the cost of
the new house.

Types of Tax Condition Tax Rate Applicable

Short-term Securities transaction tax 15%
capital gains applicable
 Types of Tax Condition Tax Rate Applicable
tax The short-term capital gain is added to a taxpayer’s
Securities transaction tax not
income tax return and he will be taxed based on his
applicable
income tax slab
Except when selling equity 20%
shares/equity-oriented fund
Long-term
units
capital gains
When selling equity
tax
shares/equity-oriented fund 10% over and above Rs.1 lakh
units

Computation of Capital Gains

Long-term Capital Gain-

Problem – Mr. Shah has a gross total income of Rs. 4,00,000 and has invested Rs. 1,50,000 in
tax-saving instruments. After applying all the deductions total taxable income would be Rs.
2,00,000. And exemption tax limit as per the income tax slab is Rs.2,50,000. By the sale of gold,
he has a long-term capital gain of Rs. 5,00,000.

Solution- total taxable income = 2,00,000, which is less than 2,50,000;

Long-term capital gain @ 20% = 4,50,000 (difference between exemption tax limit and actual
taxable income) = 10,000

This much mount can be save from tax.

Tax rates are the same for short-term capital gain.

Income from Profit and Gain from business and profession

Business and Profession has been defined under Section 2(13) and Section 2(36) respectively.

Business.It includes any trade, commerce or manufacture or any adventure or concern in the
nature of trade, commerce, or manufacture.

Profession.“Profession” includes vocation.

Section 28 of the Income Tax Act covers the “Profits and gains of Business or Profession”, and
there is following income which shall be chargeable under the head “Profits and Gains of
Business or Profession” :

1. Profits and Gains of any business or profession;

 2. Any compensation or other payments due to or received by any person specified in section
28(ii), who is managing the whole affairs of an Indian Company or other than an Indian company
at the termination of his management;
3. Pay determined by a trade, professional or comparable association from explicit services
performed for its members;
4. Benefit on sale of import entitlement license, incentive by way of cash compensatory support
and drawback of duty;
5. Any benefit on an exchange of the Duty Entitlement Pass Book Scheme;
6. Any benefit on the exchange of the Duty-Free Replenishment Certificate;
7. The estimation of any benefit or perquisite, regardless of whether convertible into money or
not, emerging from business or the activity of a profession;
8. Any interest, pay, reward, commission or compensation received by a partner of a firm from
such firm;
9. Any amount received under a Keyman insurance policy including Bonus;
10. Income from speculative transactions;
11. Any total received in real money or kind, by virtue of any capital asset being devasted,
destroyed, discarded or transferred, if the exhaustive expenditure on such capital asset has
been permitted as a deduction under section 35AD.

Deduction under the heads of “Profits and Gains from Business or Profession” has been
mentioned under Section 30 to 37.

 Section 30. A deduction shall be permitted if the lease, rates, taxes, fixes, and insurance for
premises used for the purpose of business or profession.

 Section 31. A deduction shall be permitted on the repairs and insurance of apparatus, plant or
furniture used for the purposes of business or profession and the sum paid on the present
repairs shall not include any expenditure in the nature of capital expenditure.

 Section 32. Deterioration of buildings, hardware, plants or furniture, being tangible assets,
know-how, licenses, copyrights, trademarks, patents, establishment or some other business or
business privileges of comparative nature, being intangible assets owned, completely or
somewhat, by the assessee for the purposes of the business or professions.

 Section 32AC. Deduction in respect of investment in new plant or hardware where the
organization being an assessee occupied in business assembling or production of any article or
thing after 31st March 2013 or if any new asset procured or installed by the assessee is sold
within five years of its establishment etc.

 Section 33AB. where an assessee carrying on business of developing and assembling tea or
coffee or rubber in India has, before the expiry of six months from the end of the previous year
or before the due date of furnishing the return of his income, kept in a record affirmed by the
 Tea Board or Coffee Board or rubber Board or Central Government and should be audited by an
accountant.

 Section 33ABA. Any amount or amounts in an account deposited with the State Bank of India by
an assessee who is carrying on business consisting of the prospecting for, or extraction or
generation of petroleum or natural gas or both in India and consented to an arrangement with
the Central Government for such business and that account must be audited by an accountant.

 Section 33AC. Carrying on the business of the ship by the government organization or public
company, deduction shall be permitted not surpassing 50% of benefits derived from the
business of operation of a ship.

 Section 35. If any expenditure laid out or expanded on scientific research related to the
business, deduction shall be permitted but the organization has to enter in concurrence with the
prescribed authority for co-operation in such a research and development facility and satisfies
such conditions as to support the maintenance of accounts and audit.

 Section 35ABB. Expenditure for obtaining the license for media transmission services before the
commencement of the business or thereafter at any time during the previous year and for which
installment has really been made for acquiring the license.

 Section 35AC. Where an assessee incurs any expenditure by method for an installment of any
amount to public sector company or a local authority or to an affiliation or establishment
endorsed by the National Committee for carrying out any qualified venture or plan.

 Section 35AD. A deduction shall be allowed in the case of capital expenditure incurred, wholly or
exclusively, for the purpose of specified business.

 Section 35CCA. Expenditure by method for installment to affiliations and establishment for
carrying out rural development Programmes.

 Section 35CCC. Expenditure incurred on any agricultural extension project notified by the Board
then deduction shall be allowed on the sum equal to one and one-half times of expenditure.

 Section 35CCD. When an organization causes expenditure on any ability advancement program
advised by the Board then the sum shall be allowed for the deduction of a total equivalent to
one and one-half times of expenditure.
 Section 35D. Amortisation of certain preliminary expenses.
 Section 35E. Deduction for expenditure on prospecting for, or extraction or production of
certain minerals, for which deduction shall be allowed to the one-tenth of the amount of such
expenditure.
 Section 36. Other deductions are-
 under section 36 (1)(i), the amount of any premium paid in regard to insurance against the
danger of harm or annihilation of stocks or stores utilized for the purposes of the business or
profession.
 under section 36 (1)(ib), the amount of any premium paid by any mode of payment other than
cash by an assessee as an employer towards the health of the employee.
  under section 36 (1)(ii), any sum paid to an employee as bonus or commission for the services
he rendered
 under section 36 (1)(iii), the amount of the interest paid in respect of capital borrowed for the
purpose of business or profession.
 under section 36 (1)(iiia) the pro rata amount of discount on a zero coupon bond having regard
to the period of life of such bond calculated in the manner as may be prescribed.
 under section 36 (1)(iv) employer’s contribution to recognized provident fund an approved
superannuation fund.
 under section 36 (1)(iva) employer’s contribution to the notified pension scheme.
 under section 36 (1)(v) contribution towards approved gratuity fund.
 under section 36 (1)(va) employee’s contribution towards staff welfare scheme.
 under section 36 (1)(vi) write off allowance for animals which are used for the purpose of
business or profession and have died or turned out to be for all time futile.
 under section 36 (1)(vii) bad debt amount incidental to the business or profession of the
assessee must have been written off in the books of account of the assessee.
 under section 36 (1)(viia) provisions for bad and doubtful debts relating to rural branches of
commercial banks.
 under section 36 (1)(viii) transfer to the special reserve.
 under section 36 (1)(ix) family planning expenditure.
 under section 36 (1)(x) contribution towards exchange risk administration fund.
 under section 36 (1)(xii) revenue expenditure incurred by entities established under any Central,
State or Provincial Act.
 under section 36 (1)(xiv) contribution to credit guarantee trust fund.
 under section 36 (1)(xvi) Commodities Transaction Tax.
 Section 37 (2B). The expenditure acquired by an assessee on a commercial in any gift, leaflet,
tract, handout or something like that, published by a political party, is not deductible.

Computation of income under the heads of “Profits & Gains of Business or

Profession”

The amount of net profit is Rs. 4,00,000 of M/s D Ltd. and other information provided are:

Advance income tax debited to profit and loss account = Rs. 30000

Printing of brochures of a political party = Rs. 5000

The amount that has not to deposit till the date of filing of return = Rs. 50,000

What can be the taxable income of M/s D Ltd.?

Particulars
Amount

Net Profit 4,00,000

Amount of advance income tax 30000

Expenses incurred for political parties 5000

An amount that has not to deposit 50000

Net taxable income 4,85,000

Income from other sources

All sorts of incomes that are not covered in the above-mentioned heads are covered and
chargeable under this head. Income from other sources is laid down in section 56 of the act.

A few of these are :

1. Dividend under section 2(22);

2. Winning from lotteries, horse races, crossword puzzles, and other games;
3. Contribution received by the employer as an assessee from his work towards the Staff Welfare
Scheme;
4. Interest on debentures, government securities/bonds;
5. Where the assessee let on contract apparatus, plant or furniture belonging to him and
furthermore buildings, pay from this is assessable as salary from other sources if it is not taxable
under the head of “profits & gains of business or profession”;
6. Sum received under Keyman insurance policy including reward;
7. Salary from hardware, plant or furniture belonging to the assessee.

Gifts that cannot be charged:

1. Gifts received from any relative

2. Gifts received on the occasion of marriage
3. Gifts are given by the local authority
4. Gifts received in the form of inheritance
5. Gifts received from any funds, institutions, hospitals, etc.

Deductions applicable on income from other sources – section 56 and 57

S.No. Sections Nature of Income Deductions Allowed

1 57(i) Dividend or interest on Any reasonable amount paid by method for
securities commission or compensation to a banker or
some other individual for the purpose of

Employees contribution to PF.
superannuation fund, ESI fund
2 57(ia)
or any other fund set up for the
welfare of such employees
Rental income letting of plant,
3 57(ii)
machinery, furniture or building
4 57(iia) Family pension
5 57(iii) Any other income
Interest on compensation or
6 57(iv)
enhanced compensation
Income from the activity of
7 58(4) owning and maintaining race
horses
realizing dividend (other than dividends referred
to in section 115-O) or interest on securities
If employees’ contribution is credited to their
account in the relevant fund on or before the due
date
Lease, rates, charges, repairs, insurance, and
devaluation, and so on.
1/3rd of family pension subject to a maximum
of Rs. 15,000.
Any other expenditure (not being capital
expenditure) expended completely and solely
for earning such income
50% of such interest (subject to certain
conditions)
All expenditure relating to such activity.

Computation of Income from Other Sources

Computation of income from other sources can be done in two ways;

1. If income is one-time income or casual income then 30% tax is imposed on the total income.
2. If income is from any other method, then the tax shall be applicable in accordance with the tax
slab.

Example-

A person gets Family pension = Rs. 30,000 (exemption on this is 33.33% or 1500);33.33% of Rs.
30,000 = Rs. 9,999, this amount is less than 1500. So the taxable income is 30,000 – 9,999 =
20,001.Rs. 20,001 is taxable as income from other sources.

Conclusion
These five heads of income that we have discussed, provide a method to different categories of
people to compute their income as per their applicability as a taxpayer and they can get to know
by computation method that how much income is taxable after investing in different heads of
income. So it will make easy for them to plan their capital in the right direction.
What is TDS?

TDS or Tax Deducted at Source is a specific amount that is reduced when a certain payment like
salary, commission, rent, interest, professional fees, etc. is made. The person who makes the
payment deducts tax at the source, while the person who receives a payment/income has the
liability to pay tax. It lowers tax evasion because the tax will be collected at the time of making a
payment.

When should TDS be deducted and who is liable to deduct?

 If you are making any sort of payment specified under the Income Tax Act, then TDS will be
deducted at the time of these payments. However, no TDS will be deducted if you are an
individual or Hindu Undivided Family (HUF), and your books are not required to be audited.
 In case of rent payment by an individual or HUF member, where the amount payable exceeds
Rs.50,000, then a TDS at 5% will be deducted even if your books are not liable for a tax audit.
You will not be required to apply for a Tax Deduction Account Number (TAN) if you are liable to
have TDS deducted at 5%.
 If you are a working professional then your employer will deduct TDS as per the applicable
income tax slab rates. The bank with whom you hold a working account will deduct TDS at 10%.
However, if they do not have your PAN details, then TDS at 20% will be deducted. For the
majority of payments, TDS rates are set in the Income Tax Act the payer deducts TDS as per the
rates applicable.
 You will not be required to pay any tax if you submit your investment proofs to your employer
and your total income that can be taxed is below the total taxable threshold. Thus, no TDS will
be deducted in this case. You can also submit Form 15G and Form 15H to the bank if the total
taxable income is below the total taxable limit. The bank in this case will not deduct any TDS on
your interest income.
 In case you failed to submit the investment proof to your employer and the bank deducted the
TDS, you can file a return and claim a refund of it, provided your total taxable income is below
the total taxable limit.

Example of TDS

Let’s assume that a start-up company pays Rs.90,000 as rent every month to whoever owns the
property. The TDS applicable to the amount is 10%, so the company must subtract Rs.9,000 and
pay Rs.81,000 to the property owner. In this case, the owner of the property will receive
Rs.81,000 following TDS. The owner can add the gross amount of Rs.90,000 to his income,
thereby allowing him to take credit for the Rs.9,000 that has already been deducted by the
company.

Types of TDS

Here are some of the income sources that qualify for TDS:

 Salary
 Amount under LIC
  Bank Interest
 Brokerage or Commission
 Commission payments
 Compensation on acquiring immovable property
 Contractor payments
 Deemed Dividend
 Insurance Commission
 Interest apart from interest on securities
 Interest on securities
 Payment of rent
 Remuneration paid to the director of a company, etc
 Transfer of immovable property
 Winning from games like a crossword puzzle, card, lottery, etc.

What is the TDS rate on salary?

TDS rates on salary are the same as the tax slab rates applicable to individuals. If you are less
than 60 years of age, your TDS liability will be nil in case your income is less than Rs.2.5 lakh.
Individuals who earn between Rs.2.5 lakh and Rs.5 lakh will be subject to TDS at 5%, while
those who earn between Rs.5 lakh and Rs.10 lakh will have a TDS liability of 20%, and those
who earn more than Rs.10 lakh will be subject to a TDS rate of 30%

Under the new tax regime, no TDS will need to be paid for an annual income of up to Rs.2.5
lakh. In case the annual income is between Rs.2.5 lakh and Rs.5 lakh, the TDS liability is 5%. In
case the annual income is between Rs.5 lakh and Rs.7.5 lakh, the TDS liability is 10%. In case
the annual income is between Rs.7.5 lakh and Rs.10 lakh, the TDS liability is 15%. In case the
annual income is between Rs.10 lakh and Rs.12.5 lakh, the TDS liability is 20%. In case the
annual income is between Rs.12.5 lakh and Rs.15 lakh, the TDS liability is 25%. In case the
annual income is above Rs.15 lakh, the TDS liability is 30%.

Challan for TDS Payment

Challan ITNS 281 is the Challan form for online payment of TDS (Tax Deducted at Source) and
TCS (Tax Collected at Source). Challan No. 281 is applicable for Tax Deducted at Source / Tax
Collected at Source (TDS/TCS) from corporates and non-corporates. TDS exception is
essentially a mechanism developed by the Indian Government where in there is a tax deduction
at the source of an income, calculated at a specific rate and thereby becomes payable to the
department of Income Tax.

Penalty for Late Filing TDS Return

Here are the penalties levied by the Income Tax Department for the failure to submit or defaults
in submitting your TDS return/statements:
  Failure to submit your returns: Under Section 272A (2) of the Income Tax Act, a penalty of
Rs.100 will be levied for each day that the returns remain unsubmitted, subject to a maximum of
the TDS amount.
 Failure to file your returns on time: Under Section 234E of the Income Tax Act, a penalty of
Rs.200 will be levied for each day that the returns remain unfiled, subject to a maximum of the
TDS amount.
 For defaults in the filing of TDS statement: Under Section 271H of the Income Tax Act, a penalty
of Rs.10,000 to Rs.1 lakh will be levied in case the deductor defaults at the time of filing TDS
return within the due date.
 For incorrect details: Under Section 271H of the Income Tax Act, a penalty of Rs.10,000 to Rs.1
lakh will be charged in case the deductor submits incorrect information pertaining to PAN,
challan particulars, TDS amount, etc.
 For non-payment of TDS: Under Section 201A of the Income Tax Act, interest will also be levied
along with the penalty in case TDS is not paid within the due date. In case a part of the tax
amount or the whole of it is not deducted at source, interest will be charged at 1.5% every
month starting from the date on which the tax was deductible to the date on which the tax is
actually deducted.

Tax Collected at Source (TCS)

Indian Income Tax Act has provisions for tax collection at source or TCS. In these provisions, certain
persons are required to collect a specified percentage of tax from their buyers on exceptional
transactions. Most of these transactions are trading or business in nature. It does not affect the common
man.

Meaning of Tax collected at source (TCS)

Tax collected at source (TCS) is the tax collected by the seller from the buyer on sale so that it
can be deposited with the tax authorities. Section 206C of the Income-tax act governs the goods
on which the seller has to collect tax from the buyers. Such persons must have the Tax Collection
Account Number to be able to collect TCS.

Goods covered under TCS provisions and rates applicable to them

When the below-mentioned goods are utilised for the purpose of manufacturing, processing, or
producing things, the taxes are not payable. If the same goods are utilised for trading purposes,
then tax is payable. The tax payable is collected by the seller at the point of sale. The rate of TCS
is different for goods specified under different categories :

Type of Goods or transactions Rate

Liquor of alcoholic nature, made for consumption by humans 1%

Timber wood under a forest leased 2.5%

Tendu leaves 5%

Timber wood by any other mode than forest leased 2.5%

Forest produce other than Tendu leaves and timber 2.5%

Scrap 1%

Minerals like lignite, coal and iron ore 1%

Purchase of Motor vehicle exceeding Rs.10 Lakhs 1%

Parking lot, Toll Plaza and Mining and Quarrying

2%

Where total turnover is more than Rs.10 crores in the previous financial year and receives sale
consideration of any products of more than Rs. 50 lakhs, such seller must collect TCS upon receiving
consideration from the buyer on such amount over and above Rs.50 lakhs, , as per Section 0.1%
206C(IH).
(Without PAN, then 1% is TCS)

When will a higher TCS rate apply?

Note that as per Section 206CCA, tax at a higher rate (other than rates in the above table)
will be collected from the buyer if such buyer has-

 Not filed ITR for the last two financial years before the relevant financial year in which TCS had
to be collected, and
 The time limit to file ITR has expired, and
 The total of TCS and TDS was more than Rs.50,000 in each of these two financial years.

Such a higher TCS rate will be the highest of the following two rates-

 Two times the TCS rate mentioned in the Income Tax Act ( in the above table)
 5%

In special cases given under Section 206C(IG), 5% TCS applies where the authorised dealer
arranges remittance out of India of Rs.7 lakhs or more in a financial year from a buyer of
foreign currency remitting under Liberalized Remittance Scheme (LRS), not being the
overseas tour program package. If Aadhaar or PAN is unavailable, then TCS is 10%. Such TCS
is collected while debiting the buyer’s account or on receipt of money.
Classification of Sellers and Buyers for TCS

1. There are some specific people or organisationswho have been classified as sellers for tax
collected at the source. No other seller of goods can collect tax at source from the buyers apart
from the following list :
o Central Government
o State Government
o Local Authority
o Statutory Corporation or Authority
o Company registered under the Companies Act
o Partnership firms
o Co-operative Society
o Any person or HUF who is subjected to an audit of accounts under the Income-tax Act
for a particular financial year.
2. A buyer is a person who obtains goods of specified nature in any sale or right to receive any
such goods, by way of auction, tender or any other mode. However, the below buyers are
exempted from the collection of tax at the source. In other words, TCS need not be collected
from the following persons.
o Public sector companies
o Central Government
o State Government
o Embassy of High commission
o Consulate and other Trade Representation of a Foreign Nation
o Clubs such as sports clubs and social clubs
o Where resident buyer utilises such purchase for the purposes of manufacturing,
processing or producing articles or things or for the purposes of generation of power
(not for trading) and gives this declaration in writing in duplicate.

When should TCS be collected?

The seller must collect TCS at the earlier of the following two dates:

 When debiting the money payable by the buyer to their account in the books of accounts.
 Upon receipt of such money from the buyer in any mode such as cash issue of a cheque or draft.

In the case of the motor vehicle sale, the TCS is collected upon receipt of money or consideration
for the motor vehicle from the buyer.

Example of TCS calculation

If a buyer purchases a car from a showroom that is valued at Rs. 11 lakhs then an amount of Rs.
11,000 is the TCS deposited by the showroom. So, the total amount to be collected from the
buyer is Rs.11,11,000.

An invoice was issued to the customer for Rs. 12,000 on which 1% TCS was charged and
collected at Rs. 120. So, the total payable by the customer is Rs. 12,120.
TCS Exemptions

Tax collection at the source is exempted in the following cases:

 When the eligible goods are used for personal consumption

 The purchaser buys the goods for manufacturing, processing or production and not for the
purpose of trading those goods.

Minimum Alternate Tax (MAT)

Minimum Alternate Tax or MAT is a provision that is in direct tax laws which is for companies, it is the
provision for limit the tax exemptions which is availed by the companies. The provision requires that the
company shall not avail more exemption and they should pay at least minimum amount of tax to the
government. Under Section 115JB, the company has to pay compulsorily corporate tax to the
government and the amount shall be higher of the following: Normal tax liability of the company which
is calculated as per the normal tax provision that is by applying normal tax rate to the company which is
applicable to them. OR Minimum Alternate Tax which is computed at the rate of 15% for Financial Year
2019-2020 on book profit adding applicable cess and surcharge. COMPANIES THAT ARE LIABLE TO PAY
MAT: All companies whether it is private company or public company or whether it is Indian company or
foreign company, they all are eligible to pay MAT, if the income tax which is payable by the company is
less than 15% of book profit and cess and surcharge.

EXCEPTION: There is exception to the company which is receiving income from business of life insurance
and shipping income which is liable to pay tonnage taxation which is covered under section 115V to
115VZC of Income Tax Act, 1961.

CALCULATION OF MAT: MAT is calculated at the rate of 15% of book profit of the tax payer, and as per
section 115JB of income tax act book profit is calculated.

CALCULATION OF BOOK PROFIT:

 Book profit means net profit which is calculated in the profit and loss account which is prepared
as per Schedule III of the Companies Act, 2013, this is as per section 115JB (2). There are some
cost and income which shall be taken into account while calculating book profit of the company.
The following amount shall be added while calculating book profit if the amount is debited to
profit and loss account:

The following amount shall be added while calculating book profit if the amount is debited to
profit and loss account:
Income tax paid.
 Amounts which is carried to any reserve except which is specified under Section 33AC.
 Provision relating to unascertained liabilities.
 Provision relating to losses of subsidiary companies.
 Dividend paid.
 Expenditure that is related to incomes which are exempt under Section 10, 11, and 12 but it
excludes the amount which is under section 10(38).
 Income of an individual which is obtained from association of person or body of individuals on
which income tax is not payable.

The following amount shall be deducted while calculating book profit if the amount is credited
to profit and loss account:.

 Amount that is withdrawn from any reserve;

 Incomes which are exempt under Section 10, 11, and 12 but it excludes the amount which is
under section 10(38).
 Amount that is related to depreciation which is debited to profit and loss account.
 Amount that is withdrawn from re-valuation reserve to the extent that it does not exceed the
depreciation amount.
 Income of an individual which is obtained from association of person or body of individuals on
which income tax is not payable.