Unit 5

Computation of tax liability of individuals

5.1 Computation of tax liability of individuals

According to section 2(45) total income means the total amount of income referred to in section 5, computed in the manner laid down in this Act. Section 5 of the act provides scope of total Income-

(1) Subject to the provisions of this Act, the total income of any previous year of a person who is a resident includes all income from whatever source derived which-

(a)  is received or is deemed to be received in India in such year by or on behalf of such person; or

(b)  accrues or arises or is deemed to accrue or arise to him in India during such year; or

(c)  accrues or arises to him outside India during such year:

Provided that, in the case of a person not ordinarily resident in India within the meaning of sub-section (6) of section 6, the income which accrues or arises to him outside India shall not be so included unless it is derived from a business controlled in or a profession set up in India.

(2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which—

(a)  is received or is deemed to be received in India in such year by or on behalf of such person; or

(b)  accrues or arises or is deemed to accrue or arise to him in India during such year.

The stepwise procedure for computation of total income and tax liability of an individual are stated below-

Step 1:       Compute the income of an individual under 5 heads of income on the basis of his residential status.

Step 2:       Income of any other person, if includible u/ss 60 to 64, will be included under respective heads.

Step 3:       Set off of the losses if permissible, while aggregating the income under 5 heads of income.

Step 4:       Carry forward and set off of the losses of past years, if permissible, from such income.

Step 5:       The income computed under Steps 1 to 4 is known as Gross Total Income from which deductions under sections 80C to 80U (Chapter VIA) will be allowed. However, no deduction under these sections will be allowed from short-term capital gain covered under section 111A, any long-term capital gain and winning of lotteries etc., though these incomes are part of gross total income.

Step 6:       The balance income after allowing the deductions is known as total income which will be rounded off to the nearest Rs. 10.

Step 7:       Compute tax on such Total Income at the prescribed rates of tax.

Step 8:       Allow rebate of maximum Rs. 2,500 under section 87A in case of resident individual having total income up to Rs. 3,50,000. For details see below.

Step 9:       Add surcharge @ 10% on total income exceeding Rs. 50,00,000 and upto Rs. 1 crore and 15% of such income tax in case of an individual having a total income exceeding Rs. 1 crore.

Step 10:     Add education cess @ 2% and SHEC @ 1% on the tax (including surcharge if applicable).

Step 11:     Allow relief under section 89, if any.

Step 12:     Deduct the TDS, advance tax paid for the relevant assessment year and double taxation relief under section 90, 90A or 91. The balance is the net tax payable which will be rounded of nearest ten rupees and must be paid as self-assessment tax before submitting the return of income.

5.2 Procedure of assessment

Income tax assessment

Every assessee, who earns income beyond the basic exemption limit in a Financial Year (FY), must file a statement containing details of his income, deductions, and other related information. This is called the Income Tax Return (ITR). Once you as a taxpayer file the income returns, the Income Tax Department will process it. There are occasions where, based on set parameters by the Central Board of Direct Taxes (CBDT), the return of an assessee gets picked for an assessment. Different types of assessment are-

(1) Self-Assessment (Section 140)

This is the type of income tax assessment in which the assessee calculates the tax themself, usually accompanied by payment of the amount they believe is due. After taking TDS and subtracting advance tax paid, tax payable is required to be given under section 139, section 142, section 148, or section 153A.

(2) Summary Assessment [u/s 143(1)]

The assessment under section 143(1) is similar to the initial review of a tax return. The taxpayer receives an intimation u/s 143(1) from the IRS under this section. The department will send you a comparative income tax calculation. The overall income or loss incurred is computed in the income tax assessment.

(3) Scrutiny Assessment [u/s 143(3)]

Scrutiny assessment is the assessment of a return filed by an assessee by providing an opportunity for the assessee to support the declared income and expenses, as well as claims of deductions, losses, exemptions, and so on, in the return using proof. The committee manages it using a single work plan. The committee undertakes specific work, as well as forming informal panels (for in-depth activities) or working groups. The assessing officer is given the chance to conduct an investigation in order to determine if the assessee correctly reported his or her income in the return. The claims for deductions, exemptions, and other benefits are legal and factually correct. In case of any omissions, contradictions, inaccuracies, or other errors, the assessing officer prepares his or her own assessment for the assessee, taking into account all relevant circumstances.

(4) Best Judgment Assessment [u/s 144]

The term ‘best judgement assessment’ refers to the assessing officer’s opinion or calculation of the assessee’s income in the context of income tax law. In the situation of best judgement assessment, the evaluating officer will make the decision based on the best reasoning, i.e., they will not be dishonest. The assessee will not be dishonest in his or her assessment, nor will he or she be hostile to the officer.

(5) Protective Assessment

This is a type of assessment that focuses on those that are made to ‘protect’ the revenue’s interests. The income tax legislation, however, has no provision for the imposition of income tax on anyone other than the person to whom it is due. It is open to the authorities to undertake a protective or alternative assessment if it is unclear who among a few probable persons is actually liable to pay the tax. The authorities just make an assessment and keep it on paper until the situation is resolved when they make a protective assessment. A protective order of assessment, but not one of penalty, can be issued.

(6) Re-Assessment (or) Income Escaping Assessment [u/s 147]

If the assessing officer has reason to think that income liable to tax has escaped assessment for any assessment year, they will conduct an income escaping assessment under Section 147. Moreover, it gives them the authority to reassess or re-compute income, turnover, and other figures that have escaped their notice. The goal of conducting an assessment under Section 147 is to bring any income that escaped assessment in the original assessment into the tax net.

(7) Assessment in Case of Search u/s 153A

The assessing officer will do the following in this type of income tax assessment:

• Giving such a person notice requires furnishing it within the time frame mentioned in the notice. Clause (b) referred to the income return for each of the six assessment years, which is confirmed in the prescribed format. Setting forth such other particulars as may be prescribed, and the provisions of this Act shall apply as if such return were a return required to be furnished under Section 139, to the extent possible; 
• The assessor re-assesses the total income of the six assessment years immediately preceding the assessment year relevant to the previous year in which such search or requisition is made.

Tax planning for individuals

Tax Planning may be described as legal way of reducing of tax liability in a year by investing in different schemes as prescribed by income tax Act. It may also include entering or exiting investment schemes so as to save maximum tax possible within the legal framework. The tax planning for individuals is discussed below-

1. Section 80C – Deductions on Investments/Payments

Income tax department with a view to encourage savings and investments amongst the taxpayers have provided various deductions from the taxable income. Investments in following schemes are eligible for deduction under this section:

1. Payment of annual premium of a Life Insurance policy (LIC). The deduction is eligible only if the premium is less than 10% of the sum assured.

2. Payment of Children’s Tuition fees for two children’s.

3. Repayment of the principal portion of loan taken to buy or construct a residential house property.

4. Investment in Tax Saving FDs.

5. Investment in Public Provident Fund (PPF) and Employee Provident Fund (EPF)

6. Investment in Sukanya Samridhi Yojna.

7. Investment in National Pension system (NPS).

It is important to note that overall limit including the all the investments/payments for claiming deduction under this section is Rs 1.5 lakh except an additional deduction of Rs 50,000 allowed for contribution to Atal Pension Yojna.

2.     Section 80D – Medical Insurance

• Deductions are eligible for individuals or alongside the policies availed in the name of individual, his/her spouse and dependent children. The maximum limit of deduction benefit is Rs 25000.
• An additional deduction for insurance of parents is available up to Rs 25,000, if they are less than 60 years of age. If the parents are aged above 60, the deduction amount is Rs 50,000 A deduction of Rs 5000 is also available for payment made in respect of health check-up. Please refer the below table for details:

3.     Section 80E – Interest on Education Loan

A deduction is allowed to an individual for interest on loans taken for pursuing higher education. This loan may have been taken for the taxpayer, spouse or children or for a student for whom the taxpayer is a legal guardian. This deduction is available for a maximum of 8 years (beginning the year in which the interest starts getting repaid) or till the entire interest is repaid, whichever is earlier.

4.     Section 80G – Donations

The various donations specified in u/s 80G are eligible for deduction up to either 100% or 50% with or without restriction. Donations to funds like Prime Minister’s National Relief Fund, National Défense Fund and National Foundation for Communal Harmony also allow 100% deduction Every taxpayer must smartly optimize their tax liability through tax-saving investments that offer financial growth besides saving tax outgo.

5.     Section 80TTA – Interest on Savings Account

Individuals may claim a deduction of maximum Rs 10,000 against interest income from your savings account with a bank, co-operative society, or post office.

This deduction is not available on interest income from fixed deposits, recurring deposits, or interest income from corporate bonds.

6.     Section 80TTB – Interest Income (Senior citizens)

Deduction with respect to interest income from deposits held by senior citizens will be allowed up to Rs 50000.

5.3 Income-tax authorities

Income tax authority includes

      Commissioner

      a Joint Commissioner

      a director

      a Joint Director

      an Assistant Director or a Deputy Director or an Assessing Officer, or

      a Tax Recovery Officer.

Section 133 provides power to call for information to the Assessing Officer, the Deputy Commissioner (Appeals), the Joint Commissioner or the Commissioner (Appeals)] may, for the purposes of this Act:

(1) require any firm to furnish him with a return of the names and addresses of the partners of the firm and their respective shares;

(2) require any Hindu undivided family to furnish him with a return of the names and addresses of the manager and the members of the family;

(3) require any person whom he has reason to believe to be a trustee, guardian or agent, to furnish him with a return of the names of the persons for or of whom he is trustee, guardian or agent, and of their addresses;

(4) require any assessee to furnish a statement of the names and addresses of all persons to whom he has paid in any previous year rent, interest, commission, royalty or brokerage, or any annuity, not being any annuity taxable under the head ―Salaries‖ amounting to more than 5[one thousand rupees, or such higher amount as may be prescribed], together with particulars of all such payments made;

(5) require any dealer, broker or agent or any person concerned in the management of a stock or commodity exchange to furnish a statement of the names and addresses of all persons to whom he or the exchange has paid any sum in connection with the transfer, whether by way of sale, exchange or otherwise, of assets, or on whose behalf or from whom he or the exchange has received any such sum, together with particulars of all such payments and receipts;

(6) require any person, including a banking company or any officer thereof, to furnish information in relation to such points or matters, or to furnish statements of accounts and affairs verified in the manner specified by the Assessing Officer, the Deputy Commissioner (Appeals), the Joint Commissioner or the Commissioner (Appeals), giving information in relation to such points or matters as, in the opinion of the Assessing Officer, the Deputy Commissioner (Appeals), the Joint Commissioner or the Commissioner (Appeals), will be useful for, or relevant to, any enquiry or proceeding under this Act.

The various tax authorities are discussed below-

(i)  Administrative [Income Tax Authorities] [ Sec. 116]

1. The Central Board of Direct Taxes constituted under the Central Boards of Revenue Act, 1963 (54 of 1963),
2. Directors-General of Income-tax or Chief Commissioners of Income-tax,
3. Directors of Income-tax or Commissioners of Income-tax or Commissioners of Income-tax (Appeals),
   1. (cc) Additional Directors of Income-tax or Additional Commissioners of Income-tax or Additional Commissioners of Income-tax (Appeals),
   2. (cca) Joint Directors of Income-tax or Joint Commissioners of Income-tax.
4. Deputy Directors of Income-tax or Deputy Commissioners of Income-tax or Deputy Commissioners of Income-tax (Appeals),
5. Assistant Directors of Income-tax or Assistant Commissioners of Income-tax,
6. Income-tax Officers,
7. Tax Recovery Officers,
8. Inspectors of Income-tax.

(ii) Assessing Officer [Sec. 2(7A)]

"Assessing Officer" means the Assistant Commissioner or Deputy Commissioner or Assistant Director or Deputy Director or the Income-tax Officer who is vested with the relevant jurisdiction by virtue of directions or orders issued under sub-section (1) or sub-section (2) of section 120 or any other provision of this Act, and the Joint Commissioner or Joint Director who is directed under clause (b) of sub-section (4) of that section to exercise or perform all or any of the powers and functions conferred on, or assigned to, an Assessing Officer under this Act.

(iii)  Appointment of Income-Tax Authorities [ Sec. 117]

1. Power of Central Government: The Central Government may appoint such persons as it thinks fit to be income-tax authorities. It kept with itself the powers to appoint authorities up to and above rank of an Assistant Commissioner of Income-Tax [ Sec. 117 (1)]
2. Power of the Board and Other Higher Authorities:  Subject to the rules and orders of the Central Government regulating the conditions of service of persons in public services and posts, the Central Government may authorize the Board, or a Director-General, a Chief Commissioner or a Director or a Commissioner to appoint income-tax authorities below the rank of an Assistant Commissioner or Deputy Commissioner. [ Sec. 117 (2)]
3. Power to appoint Executive and Ministerial Staff:  Subject to the rules and orders of the Central Government regulating the conditions of service of persons in public services and posts, an income-tax authority authorized in this behalf by the Board may appoint such executive or ministerial staff as may be necessary to assist it in the execution of its functions.

(iv) Control of Income-Tax Authorities [Sec. 118]

The Board may, by notification in the Official Gazette, direct that any income-tax authority or authorities specified in the notification shall be subordinate to such other income-tax authority or authorities as may be specified in such notification.

References:

1. Singhanai V.K.: Student’s Guide to Income Tax; Taxmann, Delhi.

2. Prasad, Bhagwati: Income Tax Law & practice: Wiley Publication, New Delhi.

3. Dinker Pagare: Income Tax Law and Practice; Sultan Chand & Sons, New Delhi.

4. Girish Ahuja and Ravi Gupta; Systematic approach to income tax; Sahitya Bhawan Publications, New Delhi.

5. Chandra Mahesh and Shukla D.C.: Income Tax Law and Practice; Pragati Publications, New Delhi.