Sewa Tax Module

SHRI MAHILA SEWA SAHAKARI BANK LTD

FINANCIAL LITERACY PROGRAMME
TAXATION MODULE
CA Sonalee Shah

2012‐13

Shri Mahila Sewa Sahakari Bank Ltd.

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TAXATION MODULE What is tax? Why tax is levied? In Indian economy, the Government plays crucial role by making heavy investments/expenditure on core areas like heavy industries, infrastructure, defence, internal security, education, poverty alleviation, employment generation, health etc. For this purpose, the Government raises funds by levying various taxes‐ direct and indirect, other receipts and also borrows from the market. Different types of tax: For the above mentioned purpose, Government levies different types of taxes; which are broadly divided into two main categories: ‐ Direct tax ‐ Indirect tax Direct Tax: Direct taxes includes income tax, wealth tax etc. But amongst all, income tax assumes greater significance. Meaning of income tax: Income tax means the tax levied on income of the persons. What is important here is to understand the meaning of ‘persons’ and ‘income’: Persons: Following are the persons who are liable to pay income tax: 1. Individuals 2. Association of persons 3. Societies and charitable/religious trusts, 4. Hindu Undivided Family 5. Co‐operative societies 6. Partnership firms Income: The term ‘income’ is of greater significance in relation to income tax. It includes various sources of income viz: ‐ Salary income ‐ Income from business/profession ‐ Interest income etc. Thus, the thing to be noted is that, only revenue incomes are levied to income tax. Capital receipts are not levied to the same. To explain: Diff. b/w revenue receipts & capital receipts Revenue receipts: Revenue receipts are receipts that keep on accruing from time to time. Capital receipts: Capital receipts are those receipts which are generally one time in nature, and not accruing from time to time generally. Indirect tax: Indirect tax means the tax levied by the government on goods and services. Shri Mahila Sewa Sahakari Bank Ltd. Page 2

TAXATION MODULE We will consider Direct Tax portion first in this module: IMP NOTE: Whenever we talk about year for the purpose of Income Tax; we always consider financial year. i.e year for Income tax purpose commences from 1st April and ends on 31st March. When liability to pay income tax arises? • Income tax liability arises for the following persons if their income exceeds the basic exemption limit: ‐ Individuals, ‐ HUF ‐ Association of persons (where individual shares of members are known) ‐ Societies and religious/charitable trust These persons become liable to income tax if their income in the financial year exceeds the following limits: For individual males & females: Rs. 2,00,000 For senior citizens of and above 60 years: Rs. 2,50,000 For very senior citizens of and above 80 years: Rs. 5,00,000 Lets take this understanding with the help of few examples: 1. Kananbhai, aged 42, has his total income which includes profits from his business as well as his interest income during the financial year 2012‐13: Rs. 1,75,000. Calculate the tax consequences. Soln.: for FY 2012‐13; male and female below 60 years of age; income upto Rs. 200000 is exempt. So in the given case, kananbhai’s income is 175000 which is below exemption limit, therefore he would not be liable to tax. 2. In the above case; if Kananbhai’s income during FY 12‐13 is Rs. 220000; calculate the tax consequences. Soln.: Now, in this case total income of kananbhai exceeds basic exemption limit of Rs. 200000; therefore he will be liable to tax. The manner of how to calculate tax in discussed below separately. 3. Pannaben, aged 35, has her total income which includes profits from her business as well as bank FD interest income during the FY 2012‐13: Rs. 180000. Calculate tax consequences. Soln.: for FY 2012‐13; male and female below 60 years of age; income upto Rs. 200000 is exempt. So in the given case, Pannaben’s income is 180000 which is below exemption limit, therefore he would not be liable to tax.

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TAXATION MODULE 4. In the above case; if Pannaben’s income during FY 12‐13 is Rs. 220000; calculate the tax consequences. Soln.: Now, in this case total income of Pannaben exceeds basic exemption limit of Rs. 200000; therefore he will be liable to tax. The manner of how to calculate tax in discussed below separately. 5. Kailasben, aged 62, has her total income which includes profits from his business as well as his interest income during the financial year 2012‐13: Rs. 2,10,000. Calculate the tax consequences. Soln.: for FY 2012‐13; male and female above 60 years of age; income upto Rs. 250000 is exempt. So in the given case, Kailasben’s income is 210000 which is below exemption limit, therefore he would not be liable to tax. Important thing to note here is that, if kailasben would be of age below 60 years, then her income of Rs. 210000 will be taxable,as it is above the exemption limit of Rs. 200000.(for non‐senior citizens) 6. In the above case; if Kailasben’s income during FY 12‐13 is Rs. 260000; calculate the tax consequences. Soln.: Now, in this case total income of Kailasben exceeds basic exemption limit of Rs. 250000(for senior citizen); therefore she will be liable to tax. 7. Viruben, aged 81, has her total income which includes profits from his business as well as his interest income during the financial year 2012‐13: Rs. 3,00,000. Calculate the tax consequences. Soln.: for FY 2012‐13; male and female above 80 years of age are termed as ‘super senior citizens’; income upto Rs. 500000 is exempt. So in the given case, Viruben’s income is 300000 which is below exemption limit, therefore he would not be liable to tax. 8. In the above case; if Viruben’s income during FY 12‐13 is Rs. 510000; calculate the tax consequences. Soln.: Now, in this case total income of Viruben exceeds basic exemption limit of Rs. 500000(for super senior citizen); therefore she will be liable to tax. However, following persons have to pay income‐tax irrespective of their amount of income: ‐ Partnership firms ‐ C0‐operative societies ‐ Association of persons (where shares of members are unknown) What are the rates at which taxes are deducted? Income Tax Act has prescribed rate at which taxes are to be paid by various persons; which are described as follows: Shri Mahila Sewa Sahakari Bank Ltd. Page 4 •

TAXATION MODULE ‐ For partnership firm: 30% on total income chargeable to tax of the firm + 2% education cess on amount of tax+ 1& secondary and higher education cess on amount of tax This amount towards education cess & secondary and higher education cess will be contributed towards Government’s education fund for the education(including higher education) of youth India. Let us take an example to understand this: Kranti & Co. doing business of trading of plastic toys. During the FY 2012‐13, it made a profit of Rs. 250000. Calculate tax for the said year. Soln.: For partnership firms, they have to pay tax at the rate of 30.9% on their income irrespective of any amount of income. i.e even if they make profit of Rs. 10 from their business, they have to pay tax at 30.9% of their profits. Thus in the current case, Kranti & Co. is making profit or Rs. 250000 during FY 2012‐13. And so their tax calculation will be as follows: 250000 * 30.9%= Rs. 77250 For Individuals/ HUF/ AOP: (BASIC EXEMPTION LIMIT) For individual male & female below 60 years, HUF, AOP: Income chargeable to tax Income Tax Upto 2,00,000 Nil 2,00,001 to 5,00,000 10% 5,00,001 to 10,00,000 30,000 + 20% Exceeding 10,00,000 1,30,000 + 30% For Senior Citizens: (60 years or more but less than 80 years) Income chargeable to tax Income Tax Upto 2,50,000 Nil 2,50,001 to 5,00,000 10% 5,00,001 to 10,00,000 25,000 + 20% Exceeding 10,00,000 1,25,000 + 30% For very senior citizens: (80 years or more) Income chargeable to tax Income Tax Upto 5,00,000 Nil 5,00,001 to 10,00,000 20% Exceeding 10,00,000 1,00,000 + 30% Page 5

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TAXATION MODULE Let us understand tax calculation for individuals with the help of examples: (Of non‐senior citizen) 1. Laxmiben, aged 38 years, is carrying on beauty parlour business. Her profit during the FY 2012‐13 is as follows. Calculate the tax. a) Rs. 190000 b) Rs. 300000 c) Rs. 700000 d) Rs. 1200000 Soln.: For FY 2012‐13, exemption limit for non‐senior citizen, both male and female, is Rs. 200000. a) Profit of laxmiben is Rs. 190000, which is below exemption limit. Therefore, She wont be liable to tax. b) In this case, profit of laxmiben is Rs. 300000, which is above the exemption limit of Rs. 200000. Thus, she will be liable to tax. Calculation of tax will be as follows: Upto 2 lac: tax will be nil Above 2 lac upto 500000: tax will be 10% of taxable income i.e. out of Rs. 300000, Rs. 200000 will be exempted. On rest Rs. 100000; tax will be levied at 10%, which will be 100000*10%= Rs. 10000 + 3% Education & higher education cess= Rs. 300 Thus total tax= Rs. 10000+Rs. 300= Rs. 10300 c) In this case, profit of laxmiben is Rs. 700000, which is above the exemption limit of Rs. 200000. Thus, she will be liable to tax. Calculation of tax will be as follows: Upto 2 lac: tax will be nil Above 2 lac upto 500000: tax will be 10% of taxable income Above 5 lacs upto 10 lacs: tax will be 20% of taxable income i.e. out of Rs. 700000, Rs. 200000 will be exempted. Above 2 lacs upto 5 lacs; i.e. on 300000, tax will be levied at 10%, which will be 300000*10%= Rs. 30000 On rest 2 lacs= tax will be at 20% i.e., 200000*20%= Rs. 40000 Total tax=(30000 + 40000) Rs. 70000 + 3% Education & higher education cess= Rs. 2100 Thus total tax payable(70000+2100)= Rs. 72100 d) In this case, profit of laxmiben is Rs. 12,00,000, which is above the exemption limit of Rs. 200000. Thus, she will be liable to tax. Shri Mahila Sewa Sahakari Bank Ltd. Page 6

TAXATION MODULE Calculation of tax will be as follows: Upto 2 lac: tax will be nil Above 2 lac upto 500000: tax will be 10% of taxable income Above 5 lacs upto 10 lacs: tax will be 20% of taxable income Above 10 lacs; tax will be 30% of taxable income i.e. out of Rs. 12,00,000, Rs. 200000 will be exempted. Above 2 lacs upto 5 lacs; i.e. on 300000, tax will be levied at 10%, which will be 300000*10%= Rs. 30000 Above 5 lacs upto 10 lacs; i.e. on 5 lacs= tax will be at 20% i.e., 500000*20%= Rs. 100000 On balance 2 lacs; tax will be at 30% i.e 200000*30%= Rs. 60000 Total tax=(30000 + 100000+60000) Rs.190000 + 3% Education & higher education cess= Rs. 5700 Thus total tax payable(190000+5700)= Rs.195700 (Of senior citizen) 2. In the above example, if Laxmiben is of 62 years, then calculate tax payable in following cases: a) If profit is Rs. 220000 b) If profit is Rs. 500000 c) If profit is Rs. 1100000 Soln.: For FY 2012‐13, exemption limit for senior citizen i.e. 60 years or above, both male and female, is Rs. 250000. a) In the first case, profit of laxmiben is Rs. 220000, which is below exemption limit of Rs. 250000 Therefore, She wont be liable to tax. b) In this case, profit of laxmiben is Rs. 500000, which is above the exemption limit of Rs. 250000. Thus, she will be liable to tax. Calculation of tax will be as follows: Upto 250000: tax will be nil Above 250000 upto 500000: tax will be 10% of taxable income i.e. out of Rs. 500000, Rs. 250000 will be exempted. On rest Rs. 250000; tax will be levied at 10%, which will be 250000*10%= Rs. 25000 + 3% Education & higher education cess= Rs. 750 Thus total tax= Rs. 25000+Rs. 750= Rs. 25750 c) In this case, profit of laxmiben is Rs. 11,00,000, which is above the exemption limit of Rs. 250000. Thus, she will be liable to tax. Calculation of tax will be as follows: Shri Mahila Sewa Sahakari Bank Ltd. Page 7

TAXATION MODULE Upto 250000: tax will be nil Above 250000 upto 500000: tax will be 10% of taxable income Above 5 lacs upto 10 lacs: tax will be 20% of taxable income Above 10 lacs; tax will be 30% of taxable income i.e. out of Rs. 11,00,000, Rs. 250000 will be exempted. Above 250000 upto 5 lacs; i.e. on 250000, tax will be levied at 10%, which will be Rs. 25000 250000*10%= Above 5 lacs upto 10 lacs; i.e. on 5 lacs= tax will be at 20% i.e., 500000*20%= Rs. 100000 On balance 1 lacs; tax will be at 30% i.e Rs. 30000 100000*30%= Total tax=(25000 + 100000+30000) Rs.155000 + 3% Education & higher education cess= Rs. 4650 Thus total tax payable(190000+5700)= Rs.159650 ‐ For Association of Persons: Where shares of the members of AOP are known: Income of AOP will be charged at the ‘rates applicable to individuals’. Where shares of the members of AOP are unknown: Income of AOP will be charged at ‘maximum marginal rates’ i.e. 30.9% ‐ For Co‐operative Societies: Yet to write What is Tax Deduct at Source (TDS)? Any person responsible for making specified payments, is liable to deduct tax at source, at prescribed rate, from such payments. The list of such ‘specified payments’ which we generally face is given below later. However, if payment is to be made by individuals and HUFs, then they are not liable to deduct tax at source on these commonly made payments. Following table contains list of ‘specified payments’ on which TDS is to be deducted, basic limit of exemption, rate of tax. Ser. Section Type of payment No. Payment to Payment to Basic exemption Individual/ company, limit HUF partnership firm, Co‐op. Society. Basic At the rates At the rates exemption applicable for applicable for limits income‐tax income‐tax Page 8

1

192

Salary

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TAXATION MODULE mentioned for individuals by 10,000 10% 5,000 10%

2 3 4

194‐A 194‐A 194‐C

5 6

194‐D 194‐H

7

194‐I

8

194‐I

9

194‐J

Interest payment bank/post Interest payments from others Payment to contractors, sub‐contractors for carrying out any work. ‘work’ includes advertising, broadcasting, telecasting, carriage of goods and passengers by any mode of transport except railways, catering, manufacturing/supply of a product as per requirement/specification of the customer by using material purchased from such customer(and not from any other person). Insurance commission Commission (other than insurance commission), brokerage Payment of rent for use of immovable property viz. Land, building Payment of rent for use of plant, machinery, equipment, furniture, fittings Feest for professional services and technical services

10% 10% 2%

1% 30,000 (one time payment) 75,000 (total yearly payment)

20,000 5,000

10% 10%

10% 10%

1,80,000

10%

10%

1,80,000

2%

2%

30,000

10%

10%

Filing of Return: Who should file Return? Following persons are required to file return of their income, duly filled in completely and correctly: 1. Individuals, Hindu Undivided Family (HUF), Association of Persons(AOP) (where individual shares of members are known); ‐ having taxable income exceeding the basic exemption limit for the year 2. All companies and partnership firms irrespective of income/loss. This is mandatory. 3. Co‐operative society irrespective of its income. Shri Mahila Sewa Sahakari Bank Ltd. Page 9

TAXATION MODULE 4. AOP where shares of the members are unknown, irrespective of income. 5. Societies and Trusts deriving income from property, or receiving voluntary contributions; which is held of charitable or religious purposes; if their total income exceeds Rs. 2,00,000. 6. Any person who has paid tax (by way of TDS or advance tax) in excess of tax payable on total income, is advised to file return for claiming refund of excess tax paid. WAY TO SHOW VARIOUS INCOME UNDER INCOMETAX RETURN: The major income which we generally show in our IT return are income earned from: ‐ Salary ‐ Business ‐ Interest We will understand the whole working of return through detailed example given below: Kalpanaben, aged 33, doing tailoring work along with working as Bank Sathi at Sewa Bank receiving commission after deduction of TDS. She has put fixed deposit with Sewa Bank from which she receives interest after deducting TDS. Her earnings during the FY 2012‐13 are as follows: Profit from tailoring business: 300000 Bank Sathi Commission from Sewa Bank: 70000 TDS deducted by Sewa Bank On commission (10%): 7000 FD interest income from Sewa Bank: 15000 TDS deducted on FD(10%): 1500 Calculate tax payableby her during for FY 2012‐13. Soln.: we calculate the total taxable income of Kalpanaben as follows: Her income includes 3 sources i.e. profit from business, interest income & Commission income. Profits from business: Net profit from tailoring business 300000 Commission income from Sewa Bank (net of TDS) 63000 Shri Mahila Sewa Sahakari Bank Ltd. Page 10

TAXATION MODULE FD interest income from Sewa Bank (net of TDS) 13500 ____________ Total taxable income 376500 Now we calculate tax payable on this income: Kalpanaben, of age 33 i.e. non senior citizen. Therefore her income upto 200000 is exempted. Then from 2 lac to 5 lac: tax is 10% Therefore, out of 376500, 200000 is exempted. And on balance, 176500; tax will be 10% i.e. 176500 * 10%= 17650 + EC & HC 3% 529.5 __________ Total tax 18179.5 Now, out of this tax payable, we will setoff the TDS already deducted by Bank on Commission and FD. i.e. total tax payable 18179.5 less: TDS on commission 7000 TDS on interest 1500 _______ Net tax payable 9679.5

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