Personal Financial Planning

Module 1 & Module 3(Part 1)

Income tax
Can government remove income tax? Where does exchequer invest the money collected as tax Importance of Income tax

Income tax act 1961

Income tax act imposes tax on income other than agricultural income. Tax on agricultural income can be imposed by state governments.

Finance Act
Finance act amendments made every year Importance of Finance act

Types of taxes in india

Direct taxes
Income tax Wealth tax Property tax

Indirect tax
Sales Vat Excise Custom duty

Terminology
Assessment year [sec 2(9)] The period starting from 1 April and ending 31 March of the next year. Previous year [sec 3] Year in which the income is earned or year preceding assessment year Newly set business organization Previous year can be 12 or less months.

Example
Rajs previous year is 2010-11. What is his assessment year? Rajs assessment year is 2009. which year will he pay the income tax? Raj paid individual income tax on 31 July 2008. Which year will he pay the tax for? Company ABC ltd paid advance tax on September 2009. Which is the assessment year?

A Financial year has double role to play

Terminology
Assessee [sec 2(31)] a person by whom any tax or any sum of money is payable under income tax act. Person includes [sec 2(7)] Individual HUF Company (under Indian company act 1956) Firm (Under Indian partnership act 1932) association of person whether incorporated or not local authority like municipality Other artificial judicial person Not falling in any of the above category. Eg: Deity, University, Guru Granth Sahib and trust etc.

Terminology
Deemed assessee
Who has been treated as an assessee only by law. Is assessed on income or loss of any other person.

Eg: The legal representative of the deceased, guardian of a minor, trustee of the trust.

Terminology
Deemed to be an assessee in default
A person deemed to be an assessee in default if he does not comply with the statutory duty under the income tax act.

Ex: Person required to deduct tax at source does not deduct tax or having deducted fails to pay it to the central government.

Terminology
Income is periodical monetary return with some sort of regularity Income [sec 2(24)] it includes Profit and gains Dividend Voluntary contribution received by a trust Perquisite in the hands of the employee Any specific allowance or benefit City compensatory allowance

Terminology
Any benefit of perquisite to a director Any benefit or perquisite to a representative or assessee Capital gains Insurance profit Banking income of a co-operative society Winning from a lottery Employee contribution towards provident fund Amount received under keyman insurance policy Amount exceeding Rs50,000 by way of gift

Terminology
Gross total income [sec 14] As per the section income is computed under the following five heads :
Income from Salaries Income from house property Income from business or profession Income from Capital gains Income from other sources

Aggregate income under these heads is termed as gross total income

Terminology
Total income means total income computed in accordance with the provisions of the act after making any deduction under sections 80c to 80u.

Capital and revenue receipts

Capital receipt are exempt from tax unless they are expressly taxable.
Eg: profit on sales of capital assets may be a capital receipt but will still be taxable as capital gain

Revenue receipt are taxable unless they are expressly exempt from tax

Sequence of taxation
Heads of Income Exempt income Gross total income Deductions Total income Rate of income tax Rebate Relief from tax Advance tax Tax at source Refunds

Residential status
Different taxable entity
Individual HUF Firm or an Association of person Joint stock company Every other person

Resident status
An assessee is either
resident in India or Non-resident in India

An individual or HUF has to be

Resident and ordinarily resident Resident but not ordinarily resident

All other assessee can be

Resident in India Non-resident in India

Residential status
Residential status There are two test, If you pass one test, you are resident (but may not be ordinary resident). If you pass both the test, then you are resident and ordinary resident. A person is deemed to be of Indian origin if he/she or parents or any grand parent was born in undivided India.

1st test for residential status

U/S 6(1) An individual is resident in India in any previous year, if he satisfies at least one of the following condition
He is in India in the previous year for a period of 182 days or more He is in India of 60 days or more during the previous year and 365 days or more during 4 year immediately preceding the previous year

Problems
Determine residential status for 2011-12
He came to India on 1 April 2010 at 11 a.m. and left India on 29 September 2010 at 11 p.m. He comes to stay in India from Japan on 3 October 2010 and stays for entire financial year. Prior to this, he has been visiting India for 3 month from April to June every year Since 2004

1 Total days of stay is 182 days. Thus resident of India 2 The person is staying in India for more than 60 days in previous year but less than 182 days and less than 365 days in the 4 preceding years prior to previous year. Thus he is not a resident of India

2nd test for ordinarily status

U/s 6(6)
He has resident in India status in at 2 out of 10 previous years immediately preceding the relevant previous year and He has been in India for a period of 730 days or more during 7 years immediately preceding the relevant previous year

Practice questions
X left India for the first time on May 20, 2009. During the financial year 2010-11, he came back once on may 27, for a period of 53 days. Determine the residential status for the assessment year 2011-12 X came to India for the first time on 16-04-08. During his stay in India up to 5-10-10 he stays in Delhi up to 10-04-10 and there after remains in Chennai till his departure from India. Status for assessment year 2011-12

Answers
1 Since the person does not fulfill the condition of 182 days nor 60 days in previous year and 360 days in 4 years preceding previous year. Thus the person is a Non resident

Practice question
Previous year
2010 2009 2008 2007

Presence in India
126 10 65 305

Resident or non resident

2006
2005 2004 2003 2002

181
360 16 360 180

2001
2000 1999 1998 1997

65
5 6 310 85

Answer
Previous year 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 Presence in India
126 10 65 305 181 360 16 360 180 65 5

Resident or non resident

R NR R R R R NR R R R NR

1999
1998 1997

6
310 85

NR
R R

Examples
X is a foreign citizen comes to India for the first time on 20-03-10. on 01-09-10 he leaves India for Nepal. He comes back on 26-02-11. Determine the residential status for X for assessment year 2011-12. X a foreign national comes to India for the first time on 15-04-06. He stays during 2006, 2007, 2008, 2009 and 2010 for 10 days, 80 days, 13 days, 210 days, 75 days respectively. Determine the residential status for 2011-12.

HUF
HUF consist of all persons lineally descended from a common male ancestor (Joint family). However, Income earned by an individual member in HUF in their individual and personal capacity is taxed as their personal income. Such income is not treated as income of HUF. Thus, it is possible to have an income from a proprietary firm ( in individual capacity) as well as income from business of HUF.

Number of HUF
Each male person can form one separate HUF All the decisions of the HUF will be taken by the male head of that HUF called KARTA

Residential status of HUF

U/S 6(2) In case of HUF, If control and management of its affair is wholly or partly situated in India, it will be resident in India. If control and management of its affair is wholly out in India, it will be non-resident in India.

Ordinarily status of a HUF

Both the condition need to be satisfied
Karta has been a resident in India for 2 out of 10 previous years immediately preceding the relevant previous year. Karta has been present in India for a period of 730 days or more during 7 years immediately preceding the previous year.

Problem
X an individual, is resident but not ordinarily resident in India for the assessment year 2011-2012. During the previous year a HUF whose karta is X since 1970 are partly managed from Delhi and partly from Nepal. Determine the residential status of HUF.

Firms or AOPs residential status

U/S 6(2) A partnership firm and an association of person will be resident in India if control and management of their affairs are wholly or partly situated within India during the relevant previous year. If control and management of their affairs are situated wholly outside India. It will be Non-resident in India

Residential status of a company

U/S 6(3) A company incorporated in India is an Indian company. It will always be resident in India. A foreign company (i.e. company incorporated abroad), is resident in India only, if during the previous year, control and management of its affair is situated wholly in India else it will be non-resident

Residential status of every other person

U/S 6(4) Every other person will be resident in India if control and management of his affairs is wholly or partly, situated within India during the relevant previous year. If control and management of his affairs is situated wholly outside India. It will be Non-resident in India

Case study
XYZ ltd. is registered in Sri Lanka and is a subsidiary of an Indian company. The business of the company is stevedoring in Sri Lanka. The meetings o the board of directors and shareholders are held in Bombay. The affairs of assessee company are looked after by two managers under two powers of attorney which confer upon them the widest power and authority. The directors retain the complete control over the matter delegated to the managers and from time to time give directions to the managers as to how things should be done and managed. Is the company fully controlled from India.

Incidence of tax
U/S 5 Incidence of tax of a taxpayer depends on his residential status and also on the place and time of accrual or receipt of income. Incomes can be of two types: Indian income Foreign income

Income types
Income will be Indian income if any of the three is satisfied: if income is received or deemed to be receive in India during the previous year or at the same time it accrues or deemed to be accrue in India during the previous year In income is received in India but accrues outside India If income is received outside India but it accrues in India

Income will be foreign income if the income is received outside India and it accrues outside India

Incidence Of Tax For Individual & HUF

Residential Status
Indian Income Foreign Income Business Income when business is controlled wholly or partly from India

Ord. Resi.
Taxable in India Taxable in India

Not Ord. Resi.

Taxable in India Taxable in India

Non Resident
Taxable in India Not taxable in India

Income from profession set up in India

Business Income when business is controlled from outside India Income from profession set up outside India

Taxable in India
Taxable in India Taxable in India

Taxable in India
Not taxable in India Not taxable in India Not taxable in India

Not taxable in India

Not taxable in India Not taxable in India Not taxable in India

Any other foreign Income Taxable in (like rent salary interest etc.) India

Problems
X is ordinarily resident for assessment year 2011-2012.
Capital gain on sales on house 40,000 Salary received in Sri Lanka for services rendered in India 50,000 Interest received from GOI (paid in Sri Lanka and utilized there) 60,000 Royalty received from a foreign company, in India, outside India. 70,000

Problem
Find gross total Income for 2010-11 Interest on German development bond (2/5 is received in India) 60,000 Income from agriculture in Bangladesh received there but 50,000 remitted to India ( activity controlled there) 1,81,000 Income from property in Canada received outside India (76,000 used in Canada and rest remitted to India 86,000 Income earned in Kampala which is controlled from Delhi (15,000 received in India) 65,000

Problem contd.
Dividend paid by a foreign company but received in India on April 10, 2011 46,500 Past untaxed profit of 1997-98 brought to India in 201011 10,43,000 Profits from business in Madras and managed from outside 27,000 Profit on sales of a building in India but received in Sri Lanka 14,80,000 Pension from a former employee in India, received in Rangoon 36,000 Gift in foreign currency from a friend received in India on January 20, 2011. 80,000

Solution
Particulars R with Os R with NOs Non resident

German bond (2/5 received in india) 24,000 24,000 24,000 German bond (3/5 received outside) 36,000 0 0 Income from agri in Bangladesh 181,000 0 0 Income from property in canada 86,000 0 0 Income from Kampala received in india 15,000 15,000 15,000 Income from Kampala received outside 50,000 50,000 0 Dividend paid by foreign company 46,500 46,500 46,500 Past untaxed profit brought to India 0 0 0 Profits from business in Madras 27,000 27,000 27,000 Pofit on sale of building in India 1,480,000 1,480,000 1,480,000 Pension received in Rangoon 36,000 36,000 36,000 Gift from friend 80,000 80,000 80,000

Salaries
The amount received by a individual shall be treated as salary only if the relation between payer and payee is of an employer and employee or master and servant. Members of parliament or state legislature are not treated as an employee of the government and thus are not chargeable to tax under salary but are charged under income from other sources

Characteristics of salary
Payer and payee relationship Salary and wages
Wages are for manual service but are not different

Salary from more than one source

Taxable

Salary from former, present or prospective employer

Remuneration received or due is taxable

Salary income should be real and not fictitious Foregoing of salary

Salary taxable even if salary acrrued is foregone

Characteristics of salary
Surrender of salary
If salary is surrendered to central govt., then it calls for no taxation on that amount.

Salary paid tax free

Employee has to include the salary plus the tax paid by the employer

Voluntary payments
Salary, perquisite or allowance may be given as a gift but are taxable.

Salaries under section 17(1)

Salary include: Wages Annuity or pension Any leave encashment Gratuity Any fee, commission, perquisite or profit in lieu of or in addition to any salary or wages Any advance of salary Transferred balance to the provident fund to the extent it is taxable Employers contribution towards pension scheme

Basis of charge of salary

U/S 15 Any salary due from an employer (paid/not) Any salary paid or allowed to him in the previous year by or on behalf of employer though not due Any arrears of salary paid or allowed by or on behalf of the employer, if not charged for income tax in any of the previous year.

How many months salary will be accounted for 2009-10 year

Different month of the previous year Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Due date of the salary July 1, 2009 August 1, 2009 September 1, 2009 October 1, 2009 November 1, 2009 December 1, 2009 January 1, 2010 February 1, 2010 March 1, 2010 April 1, 2010 Date of payment July 7, 2009 August 7, 2009 September 7, 2009 October 7, 2009 November 7, 2009 December 7, 2009 January 7, 2010 February 7, 2010 March 7, 2010 April 7, 2010

Forms of salary
Advance salary
Taxable on receipt basis. A loan taken from employer is not taxable.

Arrear salary
Taxable on receipt basis

Salary in lieu of notice period

Taxable on receipt basis

Leave salary
Will discuss

Forms of salary
Salary to a partner
Is an appropriation. Thus not taxable under Income from salary but is taxable under Income from business an profession

Fee and commission

Taxable under salary but if to director it is called as income from the other sources.

Bonus
taxable on receipt

Tax slabs
Tax rate Exempt 10% 20% 30% Individual 0 - 1,80,000 1,80,001 - 5,00,000 5,00,001 - 8,00,000 8,00,001 and above W omen 0 - 1,90,000 1,90,001 - 5,00,000 5,00,001 - 8,00,000 8,00,001 and above

Tax rate Senior citizen (Age more than 60 but less than 80) Exempt 0 - 2,40,000 10% 2,40,001 - 5,00,000 20% 5,00,001 - 8,00,000 30% 8,00,001 and above No surcharge over this 3% education cess

Tax rate Senior citizen (Age more than 80) Exempt 0 - 5,00,000 20% 5,00,001 - 8,00,000 30% 8,00,001 and above No surcharge over this 3% education cess

1. Leave encashment
Nature of leave encashment
Leave encashment during continuity of employment

Status of employee
Government/ Non government employee

Whether it is taxable
It is chargeable to tax.

Leave encashment at the time of retirement/ leaving job whether on superannuation Leave encashment at the time of retirement/ leaving job

Government employee

It is fully exempt from tax under section 10(10AA)(i)

Non-government employee

It is fully or partly exempt from tax in some case U/S 10(10AA)(ii)

Non government employee at the time of retirement (Least is exempt)

Period of earned leave (in nos of monthnext slide) to the credit of employee at the time of his retirement or leaving the job * Avg monthly salary 10 * Avg monthly salary Amount specified by govt i.e. 3,00,000 Leave encashment at the time of retirement

Calculating leaves
a) Find duration of service in number of years (ignore any fraction) b) Find rate of earned leaves entitled from the service rule (not more than 30 days p.a) c) Find leave actually taken or encashed. (a * b c) / 30 Average salary avg salary drawn during the 10 months preceding the retirement (Basic + DA(% part for computation of retirement benefits) + Commission (% basis))

Practice question 1
X was employed by PQR ltd up to march 15, 2004. At the time of leaving PQR ltd. At the time of leaving PQR ltd. he was paid Rs 3,50,000 as leave salary out of which Rs 57,000 was exempt from taxes. Thereafter he joined ABC ltd. and received Rs4,14,000 as leave salary at the time of his retirement on December 31, 2010. Determine the amount of taxable leave salary from the information so provided.

Practice question contd.

Salary at the time of retirement (pm) 23,000 Average salary received during 10 months ending on December 31, 2010
March 1, 2010 to July 31(pm) From August 1, 2010 to December 31(pm) 22,600 22,900

Duration of service 14 years Leave entitled 45 days Leave availed 90 days Leave at the credit of the employee at the time of retirement 18 months Leave salary paid at the time of retirement (pm) 23,000

Problem question 2
X a non-government employee, receives Rs 2,5,000 as leave salary at the time of retirement on February 20,2011. On the basis of the following information, determine the amount of taxable leave salary: Basic Rs15,000 per month, duration -26 years, leave at the credit of X at the time of retirement 25 months, entitlement of leave salary 60 days salary for every year of service and leave availed while in service 27 months.

Practice question 3
From the following information find out the amount chargeable to tax Date of retirement of X Nov15, 10 Basic salary from 01/01/10 to 30/09/10 Rs10,000 pm Basic Salary from 01/10/10 onwards Rs 12,000 pm DA p m (50% of DA received is used for computation of retirement) Rs1000 Commission(pm) Rs1000 Leave available 660 days Rate of leave entitlement 60 day pa Duration of service 16 years Leave encashment at retirement Rs 2,64,000

Main problem
X retires on March 16, 2011 from a private sector company. According to the service rule, he is entitled to 24 days leave for each year of completed service. The following information is available
Duration of service Gross leave encashment Leaves availed Leave encashment taken during 1998-99 Leave encashment paid on May1, 2010@15000 Leave encashment received 32 years 768 days 108 days 390 days
60 days 1,13,750

Problem contd
DA (62% as part used for calculation of retirement Basic benefits Jan 1, 2010 to Oct 31,2010 Nov 1, 2010 to March 16, 2011 14000 15000 1000 1250

Calculate the taxable Leave encashment. If X receives his last salary on 31 March 2011.

2. Gratuity
U/S 10(10) It is retirement/death benefit on cessation. And is given as below

Status of employee Government employee Non-govt employee under gratuity act 1992 Non-govt employee not under gratuity act 1992

Taxable /not taxable Exempt U/S 10(10)(i) It is fully or partially exempt U/S 10(10)(ii) It is fully or partially exempt U/S 10(10)(iii)

Gratuity
Under gratuity act 1972 the least amount will be exempted
1. 15 days salary based on salary last drawn for each year (15 days salary * length of service) 2. Rs 3.5 L 3. Gratuity actually received

Anything above is taxable

Gratuity
Length of service excludes first six months. Years cannot be rounded off for term less than or equal to half year. Salary means latest Basic + DA(% of retirement Benefit) only Salary for 15 days means
salary for month * 15/26

Other employees
On retirement, death, termination, resignation or his becoming incapable the benefit is exempt to a limit of the least
Rs 3.5 L Half months average salary for each completed year of service Gratuity actually received

 Average monthly salary average of 10 latest months salary preceding at the moment of leaving job. Salary means Basic + DA + Commission only DA on % of salary for computation of retirement benefit Commission is based on % of revenue basis. Gratuity not exempt if received during the continuation of job

Problem 1
X is a government employee, receives Rs 2,10,000 as gratuity at the time of his retirement on April 30,2010. On may 15, 2010, he joins a private sector company on a monthly salary of Rs23,000. Is the gratuity taxable?

Problem 2
X, an employee of PQ ltd. , receives Rs 78,000 as gratuity. He is covered by the payment of gratuity act, 1972. He retires on December 12, 2010 after rendering services for 38 years and 8 months. At the time of retirement his monthly basic salary and DA was Rs2,400 and Rs800. How much gratuity is exempt?

Problem 3
X, an employee of LMN Ltd., receives Rs 45,000 as gratuity under the payment of gratuity act, 1972. He retires on November 10, 2010 after rendering services for 30 years and 4 months. At the time of retirement his monthly salary was 2,340 (inclusive of DA of Rs200 pm.). How much gratuity is exempt?

Problem 4
X, who is covered by the payment of gratuity act, 1972, retires on November 20, 2010 from ABC ltd. and receives Rs 1,86,000 as gratuity after service of 38 years and 10 months. His salary is Rs 8,000 pm, up to July 31, 2010 and Rs 9,000 pm. from August 1,2010. besides he gets Rs 500 pm. as DA(69% is a part of the salary). What amount of gratuity is exempt from tax?

Problem 5
X, a marketing executive of Bombay, is working with two companies A ltd and B ltd. He retires from A ltd on November 30, 1988 (salary at that time : Rs 2,600) and receives Rs 22,000 as gratuity out of which Rs 20,000 is exempt. He also retires from B ltd. On December 10,2010 after 38 years and 8 months of service and receives Rs 3,90,000 as death cum retirement gratuity. His average basic salary for preceding 10 months ending on November 30,2010 is 18,200 pm. Besides he receives Rs 1,000 pm. as DA, 80% of which forms part of salary and 6% of commission on turnover achieved by him. Total turnover achieved by him in 10 months is Rs. 2,00,000. determine gratuity exempt.

Problem 6
X is a marketing manager of A Ltd. He retires on November 30, 2010, after service of 22 years and 10 months. At the time of retirement he has been paid Rs 2,80,000 as Gratuity, although A Ltd. Is not covered by the payment of gratuity act, 1972. Find the salary chargeable to tax
Salary and allowance Rs8,000 pm Rs 1000 salary increment from month of July. DA (15% is considered for retirement) Rs 2000 pm Commission (fixed on pm basis) Rs 500

Problem 6 contd
He also receives 0.5% commission on turnover which is
Jan 2010 Feb March April June July Oct November Rs 70000 Rs 80000 Rs 85000 Rs 270000 Rs 370000 Rs 95000

Salary, allowance and commission are due on last day of the month and are paid then X retires on Nov 30,2010

Pension
Different situation
Case 1 Received from UNO

Tax treatment
Not taxable

Case 2

Family pension received by the family member of armed forces

Family pension received by family member (not in 2 case) after the death of the employee Pension received during life time for person who joined central government on or before 1 January 2004 Pension received by the employee during his life time, in any other case.

Is exempt under section 10(19) in some cases

Taxable under section 56 under other sources. Deduction of 1/3 of pension amount or 15,000 which ever is lower Tax benefit at the time of contribution but taxable at the time of receiving pension. The deduction is under section 80CCD

Case 3

Case 4

Case 5

Pension
Pension Status of employee It is chargeable to tax
Chargeable to tax

Uncommuted pension

Govt/non govt.

Commuted pension

Government

It is exempt under section 10(10A)(i)

Commuted pension

Non-government

It is fully or partly exempt under section 10(10A)(ii)

Pension
Commuted pension
It is lumpsum payment of pension

Uncommuted
It is periodical payment of pension

Excess commuted pension above these are liable to tax

Status of employee
Government employee

Gratuity received/ not received

Gratuity may (may not) be received

Exemption

Entire is exempt

Non- govt employee

Non-govt employee

Gratuity is received One-third of the pension is exempt

Gratuity is not received One-half of the pension is exempt

Person who joined central government after 1 January 2004 New scheme of contributing 10% of salary every month. A match need to be done by employer
Contribution is deductible U/S 80ccd upto 1010% each Salary includes DA Total amount of deduction U/S 80c, 80ccc, 80ccd cannot exceed 1L.

Determine the amount of pension taxable

X receives Rs18,250 pm. as pension from central govt. X only receives Rs20,000 pm. as pension from public ltd company in private sector. X retires from central govt. service on May31, 2010. He gets pension of Rs 15,000 pm upto Nov30,2010. With effect from Dec 1, 2010, he gets one-third of his pension commuted for Rs 7,18,000.

Determine the amount of pension taxable

X retires from ABC ltd on June 30,2010. He gets pension of Rs 20,000 pm upto Jan31,2011. With effect from Feb 1, 2011, he gets 60% of pension commuted for Rs 10,71,000. Does it makes any difference if he also gets gratuity of Rs40,000 at the time of retirement.

Problem
X joins he central government service on January 1, 2011 (salary being Rs 60000pm.) The government matches the contribution to the pension fund account of X. X makes a contribution of Rs 6000 pm. Find the income of X taxable in Assessment year 2011-12

Annuity
Annuity payable by an employer is taxable. Contribution towards provident fund is tax exempt. Amount transferred from unrecognized PF to recognized PF is partly taxable.

Problem 1
X, age 65,is a marketing manager of A Ltd. He retires on November 30, 2010, after service of 22 years and 10 months. At the time of retirement he has been paid Rs 2,80,000 as Gratuity, although A Ltd. is not covered by the payment of gratuity act, 1972. He receives his first pension on Dec 31, 2010 worth Rs 15,000 pm. He also receives a leave encashment of Rs 3,50,000 from the employer. Find the tax liability
Latest Basic Salary Rs 10,000 pm Rs 1000 salary increment from month of July. DA (50% of Basic) HRA (30% of basic and DA) Commission (fixed on pm basis) Rs 500

Problem contd
He also receives 0.5% commission on turnover which is
Jan 2010 Feb March April June July Oct November Rs 70000 Rs 80000 Rs 85000 Rs 270000 Rs 370000 Rs 95000

Salary is due on last day of the month Leave entitled 35 days Leave in balance 150 days Pension is commuted at 50% to Rs 3,00,000. on Jan 31, 2011.