3.1 Computation of Total income of an Individual | unit 3 computations of total income

ITLA

UNIT III
COMPUTATION OF TOTAL INCOME

3.1 Computation of Total income of an Individual

Computation of Total Income

Particulars					Amt (Rs)
Income from Salary					XX
Income from House Property					XX
Profits & Gains from Business & Profession					XX
Capital Gains					XX
Income From Other Sources					XX
Gross Total Income					XX
Subdivision of GTI	STCG u/s 111	LTCG	Winnings, lottery Etc	Remaining GTI	Total
	XX	XX	XX	XX	XX
Less: Deduction under chapter VI A				(XX)	(XX)
Net Taxable Income					XX

Solved Examples

Q.1 (PGBP + IFOS + Deduction)

From the following Profit & Loss Account of Mr. Swaraj, Pune compute his total taxable income & Tax Liability from for A.Y 2020-21

Particulars	Rs	Particulars	Rs
To Salary	40,000	By Gross profit B/d By Bad debts Recovered By Commission (Business Related) By Dividend from Domestic company By FD Interest	5,22,400
To Rent	46,000		15,000
To Advertisement	15,000		85,000
To Int. on loan (Business)	16,000
To Depreciation	95,000		15,000
To Printing & Stationery	24,000
To Postage	2,400		40,000
To General Expenses	15,000
To Patents	20,000
To Bad debts	5,000
To Income Tax	2,000
To Wealth Tax	1,000
To R.D.D.	15,000
To Penalty on GST	4,000
To Charity to poor	2,000
To LIP (Self)	12,000
To Net Profit	3,63,000

	6,77,400		6,77,400

Additional Information:

Printing Stationery & Advertisement Expenses is 50% related to Private purpose.

Allowable Depreciation as per Income Tax Act Rs 90,000.

Business receipts Rs 90,000 is not entered into Profit & Loss Account.

Depreciation on Patents @ 25% is allowed as deduction.

Solution:

Mr. Swaraj

Statement showing calculation of total income & tax liability for AY 2020-21

Particulars				Amount (Rs)		Amount (Rs)	Amount (Rs)
Profits & Gains from Business & Profession
Net Profit as per Profit & Loss Account						3,63,000
Add: Disallowed Expenses
Advertisement for Private Purpose(15,000 x 50%)				7,500
Printing & Stationery for Private Purpose(24,000 x 50%)				12,000
Depreciation as per P/L A/c				95,000
Patents (capital expenditure)				20,000
Income Tax				2,000
Wealth Tax				1,000
R.D.D				15,000
Penalty on GST				4,000
Charity to Poor(Personal Expense)				2,000
Life Insurance Premium Self(Personal Expense)				12,000		1,70,500

Less: Non Business Incomes
Dividend from Domestic Company				15,000
FD Interest				40,000		(55,000)

Add: Unrecorded Business Incomes
Business receipts not recorded						90,000

Less: Unrecorded Business Expenses
Depreciation as per Income Tax Act				90,000
Depreciation on Patents(20,000 x 25%)				5,000		(95,000)	4,73,500

Income From Other Sources
Dividend from Domestic Company (Exempt)						-
FD Interest						40,000	40,000


Gross Total Income							5,13,500
Subdivision of GTI	STCG u/s 111	LTCG	Winnings, lottery Etc		Remaining GTI		Total
	-	-	-		5,13,500		5,13,500
Less: Deduction under chapter VI A
Section 80C- LIC Premium					(12,000)		(12,000)

Net Taxable Income	-	-	-		5,01,500		5,01,500

Notes:

Income tax , wealth tax and penalty on GST are expressly disallowed.

Patents made during the year are of capital nature, hence disallowed.

Bad debts recovered are assumed as business incomes in absence of information.

Dividend on shares & FD interest are non business incomes.

Q.2 (PGBP + IFHP + IFOS + Deduction)

The following is the Profit & Loss account for previous year furnished by Mr. Sagar for financial year ended 31st March, 2020. (AY 2020-21)

Particulars	Amount Rs.	Particulars	Amount Rs.
To salary	88,500	By Gross Profit	2,23,000
To general Expenses	l2,500	By Sundry Receipt	8,400
To Advertisement	8,000	By Gift from father	25,000
To Fire insurance	3,500	By Interest on saving
To Depreciation	l5,800	Bank deposit	6,000
To office expenses	4,500	By Bad debts
To Bonus	l2,800	recovered	5,400
To Income tax	8,600	(not allowed earlier
To VAT	4,500	as deduction)
To interest on Bank Loan To Municipal Tax of House To Interest on Loan for House Property	5,600 10,000 1,08,000	By Rent from House Property	2,40,000


To Interest on Income Tax	3,500
To Net Profit	2,22,000
	5,07,800		5,07,800

Additional Information:

Salary includes Rs. 4,200 paid to domestic servant.

Advertisement includes Rs. 550 as expenditure incurred for selling house hold furniture.

Allowable depreciation as per Income Tax Rules Rs. l4,000.

VAT includes Rs. 500 as penalty for not filling return in time.

General expenses include Rs. 5850 as the gift given to friend on his marriage ceremony.

You are required to compute total Taxable income & tax liability thereon for relevant A. Y. 2020-21 of Mr. Sagar.

Solution:

Mr. Sagar

Statement showing calculation of total income & tax liability for AY 2020-21

Particulars				Amount (Rs)		Amount (Rs)	Amount (Rs)
Profits & Gains from Business & Profession
Net Profit as per Profit & Loss Account						2,22,000
Add: Disallowed Expenses
Salary to domestic servant				4,200
Gift to Friend(general expense)				5,850
Advertisement for personal purpose				550
Depreciation as per P/L A/c				15,800
Income Tax				8,600
Penalty for late filing of VAT returns				500
Interest on Housing Loan				1,08,000
Municipal Tax Paid for House Property				10,000
Interest on Income Tax				3,500		1,57,000

Less: Non Business Incomes
Sundry Receipts				8,400
Gift from Father				25,000
Bad Debts recovered				5,400
Rent from House Property				2,40,000
Interest on Bank deposit				6,000		(2,84,800)

Add: Unrecorded Business Incomes

Less: Unrecorded Business Expenses
Depreciation as per Income Tax Act						(14,000)	80,200

Income From House Property
Gross Annual Value(Actual Rent received)						2,40,000
Less: Municipal Tax Paid						(10,000)
Net Annual Value						2,30,000
Less: Deduction under section 24
Standard Deduction @ 30% of NAV						(69,000)
Interest on Housing Loan						(1,08,000)	53,000

Income From Other Sources
Sundry Receipt						8,400
Gift from Father(Exempt)						-
Interest on Savings bank deposit						6,000	14,400

Gross Total Income							1,47,600
Subdivision of GTI	STCG u/s 111	LTCG	Winnings, lottery Etc		Remaining GTI		Total
	-	-	-		1,47,600		1,47,600
Less: Deduction under chapter VI A
Section 80TTA- Saving Bank Interest					6,000		(6,000)

Net Taxable Income	-	-	-				1,41,600

Notes:

Personal expenses like salary to domestic servant, advertisement for personal sale of asset and gift to friend are disallowed.

Income Tax and any penalties are expressly disallowed.

Depreciation as per P/L A/c is disallowed.

Bad debts recovered (not allowed earlier as deduction) is not taxable. Hence deducted.

Q.3 (IFS + IFHP + PGBP + CG + IFOS + Deductions)

Mr. Avinash aged 50 years working in PQR Ltd., Mumbai. He has furnished the following details on his income for the year ended 31.3.2020.

Particulars	Rs
Salary	6,80,000
Dearness Allowance	1,20,000
Bonus Received	1,20,000
Taxable Income from Let out property	1,72,000
Municipal Tax paid
Current Year	4,000
Last Year	2,000
Free car (1800 CC) use both purpose office as well as private
cost of expenses is born by employee himself.	22,000
Share of profit from
20% share of profit from partnership firm	40,000
A Hindu undivided Family	38,000
Income from Business	6,20,000
Dividend received from Domestic company	60,000
Interest received on FD	80,000
Income from Lottery	80,000
Interest received on Saving Bank A/c.	16,000
Long Term Capital gain	1,60,000
His Saving & Investment
1) LIC premium	60,000
2) Repayment of Higher Education Loan
(Including Interest Rs. - 20,000)	60,000
3) Repayment of Housing Loan
(Including Interest Rs 30,000)	90,000
4) Medical Insurance Premium
Mother (by cheque) (Age 69 years)	32,000
Himself (by cash)	15,000
5) National saving certificate	60,000
6) Deposited in PPF Account	60,000
He paid Professional Tax	2,500

Compute total taxable Income & Tax liability of Mr. Avinash for the A.Y. 2020-2021.

Solution:

Mr Avinash

Statement showing calculation of total income & tax liability for AY 2020-21

Particulars				Amount (Rs)		Amount (Rs)	Amount (Rs)
Income from Salary
Basic Salary						6,80,000
Dearness Allowance						1,20,000
Bonus Received						1,20,000
Perquisite value of Motor Car				22,000
Value calculated as per Income Tax Act (1800 x 12)				21,600		22,000
Gross Taxable Salary						9,42,000
Less: Deduction u/s 16
Standard Deduction						(50,000)
Profession Tax						(2,500)
Net Taxable Income from Salary							8,89,500

Income From House Property
Gross Annual Value(Actual Rent received)						1,72,000
Less: Municipal Tax Paid(4,000+2,000)						(6,000)
Net Annual Value						1,66,000
Less: Deduction under section 24
Standard Deduction @ 30% of NAV						(49,800)
Interest on Housing Loan						(30,000)	86,200

Profits & Gains from Business & Profession
Income from Business						6,20,000
Share of Profit from Partnership Firm (Exempt)						-
Share of Profit from HUF (Exempt)						-
Total Income from Business & Profession							6,20,000

Capital Gains – LTCG							1,60,000

Income From Other Sources
Dividend received from Domestic company(Exempt)
Interest received on FD						80,000
Income from Lottery						80,000
Interest received on Saving Bank A/c						16,000	1,76,000

Gross Total Income							19,31,700
Subdivision of GTI	STCG u/s 111	LTCG	Winnings, lottery Etc		Remaining GTI		Total
	-	1,60,000	80,000		16,91,700		19,31,700
Less: Deduction under chapter VI A
Section 80C
Life Insurance Premium					60,000
Repayment of Housing Loan					60,000
Investment in NSC					60,000
Investment in PPF					60,000
Total					2,40,000
Maximum Deduction allowed					1,50,000		1,50,000
Section 80D
Medical Insurance Premium of Mother(Senior citizen)					32,000		32,000
Section 80E
Interest on repayment of Higher Education Loan					20,000		20,000
Section 80TTA
Interest received is 16000 but maximum deduction allowed is 10000					10,000		10,000


Net Taxable Income	-	1,60,000	80,000		14,79,700		17,19,700

Q.4 (IFS + PGBP + IFOS)

Mrs. Sharma is working in Mahendra Ltd. Delhi. She was furnished the following details of her income for the year 20l9-20.

Basic salary Rs. 28,000 p.m.

D.A. Rs. l7,200 p.m. (not considered for retirement benefit)

Bonus Rs. l,00,000.

Entertainment allowance Rs. 600 p.m.

Transport allowance (for coming to office & going back to her residence) Rs. l800 p.m.

Agricultural income from land situated at Sri Lanka Rs. 30,000.

Income from business Rs. 45,000.

Income from unit of UTI Rs. 4,500.

Interest on Debentures Rs. 12,000

She has taken life insurance policy of Rs. 2,00,000. LIC premium of Rs. 25,800 & professional tax Rs. 2,500 is paid by employer.

Repayment of loan borrowed for higher education of her son Rs. 59,000 including interest Rs. 29,000.

Compute the total taxable income & Tax payable by Mrs. Sharma for AY 2020-21.

Solution:

Mrs Sharma

Statement showing calculation of total income & tax liability for AY 2020-21

Particulars				Amount (Rs)		Amount (Rs)	Amount (Rs)
Income from Salary
Basic Salary(28,000 x 12)						3,36,000
Dearness Allowance(17,200 x 12)						2,06,400
Bonus Received						1,00,000
Entertainment allowance(600 x 12)						7,200
Transport Allowance(1,800 x 12)						21,600
Gross Taxable Salary						6,71,200
Less: Deduction u/s 16
Standard Deduction						(50,000)
Profession Tax						(2,500)
Net Taxable Income from Salary							6,18,700

Profits & Gains from Business & Profession
Income from Business							45,000

Income From Other Sources
Agricultural income from land in Sri lanka						30,000
Income from units of UTI(Exempt)						-
Interest on Debentures						12,000	42,000

Gross Total Income							7,05,700
Subdivision of GTI	STCG u/s 111	LTCG	Winnings, lottery Etc		Remaining GTI		Total
	-	-	-		7,05,700		7,05,700
Less: Deduction under chapter VI A
Section 80C
Life Insurance Premium(Note 1)					25,800		25,800

Section 80E
Interest on repayment of Higher Education Loan					29,000		29,000

Net Taxable Income					6,50,900		6,50,900

Note:

LIC Premium- Lower of

Premium Paid Rs 25,800

Limit of 20% of sum assured (2,00,000 x 20%) Rs 40,000 Rs 25800

Computation of Tax Liability

Particulars					Amt (Rs)
Income from Salary					XX
Income from House Property					XX
Profits & Gains from Business & Profession					XX
Capital Gains					XX
Income From Other Sources					XX
Gross Total Income					XX
Subdivision of GTI	STCG u/s 111	LTCG	Winnings, lottery Etc	Remaining GTI	Total
	XX	XX	XX	XX	XX
Less: Deduction under chapter VI A				(XX)	(XX)
Net Taxable Income					XX
Apply Tax	15%	20%/10%	30%	Slab rate
Gross Tax Liability					XX
Add: Surcharge					XX
Add: Health & Education Cess(4%)					XX
Total Tax Liability					XX
Less: Relief					(XX)
Less: TDS/TCS					(XX)
Less: Tax paid					(XX)
Net Tax Liability/Refund					XX/(XX)

Solved Examples

Q.1 (PGBP + IFOS + Deduction)

From the following Profit & Loss Account of Mr. Swaraj, Pune compute his total taxable income for A.Y 2020-21

Particulars	Rs	Particulars	Rs
To Salary	40,000	By Gross profit B/d By Bad debts Recovered By Commission (Business Related) By Dividend from Domestic company By FD Interest	5,22,400
To Rent	46,000		15,000
To Advertisement	15,000		85,000
To Int. on loan (Business)	16,000
To Depreciation	95,000		15,000
To Printing & Stationery	24,000
To Postage	2,400		40,000
To General Expenses	15,000
To Patents	20,000
To Bad debts	5,000
To Income Tax	2,000
To Wealth Tax	1,000
To R.D.D.	15,000
To Penalty on GST	4,000
To Charity to poor	2,000
To LIP (Self)	12,000
To Net Profit	3,63,000

	6,77,400		6,77,400

Additional Information:

Printing Stationery & Advertisement Expenses is 50% related to Private purpose.

Allowable Depreciation as per Income Tax Act Rs 90,000.

Business receipts Rs 90,000 is not entered into Profit & Loss Account.

Depreciation on Patents @ 25% is allowed as deduction.

Solution: Mr Swaraj

Statementt showing calculation of total income & tax liability for AY 2020-21

Particulars				Amount (Rs)		Amount (Rs)	Amount (Rs)
Profits & Gains from Business & Profession
Net Profit as per Profit & Loss Account						3,63,000
Add: Disallowed Expenses
Advertisement for Private Purpose(15,000 x 50%)				7,500
Printing & Stationery for Private Purpose(24,000 x 50%)				12,000
Depreciation as per P/L A/c				95,000
Patents (capital expenditure)				20,000
Income Tax				2,000
Wealth Tax				1,000
R.D.D				15,000
Penalty on GST				4,000
Charity to Poor(Personal Expense)				2,000
Life Insurance Premium Self(Personal Expense)				12,000		1,70,500

Less: Non Business Incomes
Dividend from Domestic Company				15,000
FD Interest				40,000		(55,000)

Add: Unrecorded Business Incomes
Business receipts not recorded						90,000

Less: Unrecorded Business Expenses
Depreciation as per Income Tax Act				90,000
Depreciation on Patents(20,000 x 25%)				5,000		(95,000)	4,73,500

Income From Other Sources
Dividend from Domestic Company (Exempt)						-
FD Interest						40,000	40,000


Gross Total Income							5,13,500
Subdivision of GTI	STCG u/s 111	LTCG	Winnings, lottery Etc		Remaining GTI		Total
	-	-	-		5,13,500		5,13,500
Less: Deduction under chapter VI A
Section 80C- LIC Premium					(12,000)		(12,000)

Net Taxable Income	-	-	-		5,01,500		5,01,500

Notes:

5. Income tax , wealth tax and penalty on GST are expressly disallowed.

6. Patents made during the year are of capital nature, hence disallowed.

7. Bad debts recovered are assumed as business incomes in absence of information.

8. Dividend on shares & FD interest are non business incomes.

Q.2 (PGBP + IFHP + IFOS + Deduction)

The following is the Profit & Loss account for previous year furnished by Mr. Sagar for financial year ended 31st March, 2020. (AY 2020-21)

Particulars	Amount Rs.	Particulars	Amount Rs.
To salary	78,000	By Gross Profit	2,23,000
To general Expenses	l2,500	By Sundry Receipt	8,400
To Advertisement	8,000	By Gift from father	25,000
To Fire insurance	3,500	By Interest on saving
To Depreciation	l5,800	Bank deposit	6,000
To office expenses	4,500	By Bad debts
To Bonus	l2,800	recovered	5,400
To Income tax	8,600	(not allowed earlier
To VAT	4,500	as deduction)
To interest on Bank Loan To Municipal Tax of House To Interest on Loan for House Property	5,600 10,000 1,08,000	By Rent from House Property	2,40,000
To Donation to Educational
Institution	l0,500
To Interest on Income Tax	3,500
To Net Profit	2,22,000
	5,07,800		5,07,800

Additional Information:

6. Salary includes Rs. 4,200 paid to domestic servant.

7. Advertisement includes Rs. 550 as expenditure incurred for selling house hold furniture.

8. Allowable depreciation as per Income Tax Rules Rs. l4,000.

9. VAT includes Rs. 500 as penalty for not filling return in time.

10. General expenses include Rs. 5850 as the gift given to friend on his marriage ceremony.

You are required to compute total Taxable income for relevant A. Y. 2020-21 of Mr. Sagar.

Solution:

Mr Sagar

Statement showing calculation of total income & tax liability for AY 2020-21

Particulars				Amount (Rs)		Amount (Rs)	Amount (Rs)
Profits & Gains from Business & Profession
Net Profit as per Profit & Loss Account						2,22,000
Add: Disallowed Expenses
Salary to domestic servant				4,200
Gift to Friend(general expense)				5,850
Advertisement for personal purpose				550
Depreciation as per P/L A/c				15,800
Income Tax				8,600
Penalty for late filing of VAT returns				500
Interest on Housing Loan				1,08,000
Municipal Tax Paid for House Property				10,000
Interest on Income Tax				3,500		1,57,000

Less: Non Business Incomes
Sundry Receipts				8,400
Gift from Father				25,000
Bad Debts recovered				5,400
Rent from House Property				2,40,000
Interest on Bank deposit				6,000		(2,84,800)

Add: Unrecorded Business Incomes

Less: Unrecorded Business Expenses
Depreciation as per Income Tax Act						(14,000)	80,200

Income From House Property
Gross Annual Value(Actual Rent received)						2,40,000
Less: Municipal Tax Paid						(10,000)
Net Annual Value						2,30,000
Less: Deduction under section 24
Standard Deduction @ 30% of NAV						(69,000)
Interest on Housing Loan						(1,08,000)	53,000

Income From Other Sources
Sundry Receipt						8,400
Gift from Father(Exempt)						-
Interest on Savings bank deposit						6,000	14,400

Gross Total Income							1,47,600
Subdivision of GTI	STCG u/s 111	LTCG	Winnings, lottery Etc		Remaining GTI		Total
	-	-	-		1,47,600		1,47,600
Less: Deduction under chapter VI A
Section 80TTA- Saving Bank Interest					6,000		(6,000)
Section 80G- Donation to Educational Institution					10,500		(10,500)

Net Taxable Income	-	-	-				1,31,100

Notes:

Personal expenses like salary to domestic servant, advertisement for personal sale of asset and gift to friend are disallowed.

Income Tax and any penalties are expressly disallowed.

Depreciation as per P/L A/c is disallowed.

Bad debts recovered (not allowed earlier as deduction) is not taxable. Hence deducted.

Q.3 (IFS + IFHP + PGBP + CG + IFOS + Deductions)

Mr. Avinash aged 50 years working in PQR Ltd., Mumbai. He has furnished the following details on his income for the year ended 31.3.2020.

Particulars	Rs
Salary	6,80,000
Dearness Allowance	1,20,000
Bonus Received	1,20,000
Taxable Income from Let out property	1,72,000
Municipal Tax paid
Current Year	4,000
Last Year	2,000
Free car (1800 CC) use both purpose office as well as private
cost of expenses is born by employee himself.	22,000
Share of profit from
20% share of profit from partnership firm	40,000
A Hindu undivided Family	38,000
Income from Business	6,20,000
Dividend received from Domestic company	60,000
Interest received on FD	80,000
Income from Lottery	80,000
Interest received on Saving Bank A/c.	16,000
Long Term Capital gain	1,60,000
His Saving & Investment
1) LIC premium	60,000
2) Donation to National Defence Fund	20,000
3) Repayment of Higher Education Loan
(Including Interest Rs. - 20,000)	60,000
4) Repayment of Housing Loan
(Including Interest Rs 30,000)	90,000
5) Medical Insurance Premium
Mother (by cheque) (Age 69 years)	32,000
Himself (by cash)	15,000
6) National saving certificate	60,000
7) Deposited in PPF Account	60,000
He paid Professional Tax	2,500
Company has deducted TDS from his salary for the year	2,40,000

Compute total taxable Income of Mr. Avinash for the A.Y. 2020-2021.

Solution:

Mr Avinash

Statement showing calculation of total income & tax liability for AY 2020-21

Particulars				Amount (Rs)		Amount (Rs)	Amount (Rs)
Income from Salary
Basic Salary						6,80,000
Dearness Allowance						1,20,000
Bonus Received						1,20,000
Perquisite value of Motor Car				22,000
Value calculated as per Income Tax Act (1800 x 12)				21,600		22,000
Gross Taxable Salary						9,42,000
Less: Deduction u/s 16
Standard Deduction						(50,000)
Profession Tax						(2,500)
Net Taxable Income from Salary							8,89,500

Income From House Property
Gross Annual Value(Actual Rent received)						1,72,000
Less: Municipal Tax Paid(4,000+2,000)						(6,000)
Net Annual Value						1,66,000
Less: Deduction under section 24
Standard Deduction @ 30% of NAV						(49,800)
Interest on Housing Loan						(30,000)	86,200

Profits & Gains from Business & Profession
Income from Business						6,20,000
Share of Profit from Partnership Firm (Exempt)						-
Share of Profit from HUF (Exempt)						-
Total Income from Business & Profession							6,20,000

Capital Gains – LTCG							1,60,000

Income From Other Sources
Dividend received from Domestic company(Exempt)
Interest received on FD						80,000
Income from Lottery						80,000
Interest received on Saving Bank A/c						16,000	1,76,000

Gross Total Income							19,31,700
Subdivision of GTI	STCG u/s 111	LTCG	Winnings, lottery Etc		Remaining GTI		Total
	-	1,60,000	80,000		16,91,700		19,31,700
Less: Deduction under chapter VI A
Section 80C
Life Insurance Premium					60,000
Repayment of Housing Loan					60,000
Investment in NSC					60,000
Investment in PPF					60,000
Total					2,40,000
Maximum Deduction allowed					1,50,000		1,50,000
Section 80D
Medical Insurance Premium of Mother(Senior citizen)					32,000		32,000
Section 80E
Interest on repayment of Higher Education Loan					20,000		20,000
Section 80G
Donation to National Defense Fund					20,000		20,000
Section 80TTA
Interest received is 16000 but maximum deduction allowed is 10000					10,000		10,000


Net Taxable Income	-	1,60,000	80,000		14,59,700		16,99,700

Q.4 (IFS + PGBP + IFOS + Deduction 80G)

Mrs. Sharma is working in Mahendra Ltd. Delhi. She was furnished the following details of her income for the year 20l9-20.

Basic salary Rs. 28,000 p.m.

D.A. Rs. l7,200 p.m. (not considered for retirement benefit)

Bonus Rs. l,00,000.

Entertainment allowance Rs. 600 p.m.

Transport allowance (for coming to office & going back to her residence) Rs. l800 p.m.

Agricultural income from land situated at Sri Lanka Rs. 30,000.

Income from business Rs. 45,000.

Income from unit of UTI Rs. 4,500.

Interest on Debentures Rs. 12,000

She has taken life insurance policy of Rs. 2,00,000. LIC premium of Rs. 25,800 & professional tax Rs. 2,500 is paid by employer.

Repayment of loan borrowed for higher education of her son Rs. 59,000 including interest Rs. 29,000.

She paid donation to the Government for the promotion of family planning Rs. 5,000 & Prime minister drought relief fund Rs. 5,000.

Compute the total taxable income of Mrs. Sharma for AY 2020-21.

Solution:

Mrs Sharma

Statement showing calculation of total income & tax liability for AY 2020-21

Particulars				Amount (Rs)		Amount (Rs)	Amount (Rs)
Income from Salary
Basic Salary(28,000 x 12)						3,36,000
Dearness Allowance(17,200 x 12)						2,06,400
Bonus Received						1,00,000
Entertainment allowance(600 x 12)						7,200
Transport Allowance(1,800 x 12)						21,600
Gross Taxable Salary						6,71,200
Less: Deduction u/s 16
Standard Deduction						(50,000)
Profession Tax						(2,500)
Net Taxable Income from Salary							6,18,700

Profits & Gains from Business & Profession
Income from Business							45,000

Income From Other Sources
Agricultural income from land in Sri lanka						30,000
Income from units of UTI(Exempt)						-
Interest on Debentures						12,000	42,000

Gross Total Income							7,05,700
Subdivision of GTI	STCG u/s 111	LTCG	Winnings, lottery Etc		Remaining GTI		Total
	-	-	-		7,05,700		7,05,700
Less: Deduction under chapter VI A
Section 80C
Life Insurance Premium(Note 1)					25,800		25,800

Section 80E
Interest on repayment of Higher Education Loan					29,000		29,000
Section 80G
Donation to Government for Promotion of Family Planning(100%) (Note 2)					5,000		5,000
Donation to Prime Minister Drought Relief Fund (5,000 x 50%)					2,500		2,500

Net Taxable Income					6,43,400		6,43,400

Note:

LIC Premium- Lower of

Premium Paid Rs 25,800

Limit of 20% of sum assured (2,00,000 x 20%) Rs 40,000 Rs 25800

2. Calculation of limit for Donation to Government for Promotion of Family Planning

Calculation of Adjusted GTI
Gross Total Income	7,05,700
Less: STCG/LTCG	-
Less: Deductions except 80G(25,800+29,000)	(54,800)
Adjusted GTI	6,50,900
Limit is 10% of AGTI (650900 x 10%)	65,090
Actual Deduction(100% can be claimed)	5,000
Whichever is lower	5,000

3.2 Computation of Total income of HUF

Before discussing the Steps for computation of total income of HUF, the following points should be considered:

As per section 64(2), income from the transfer of a self acquired asset, without adequate consideration or conversion of the same into joint family property, shall not be treated as the income of the HUF. It shall continue to be taxed in the hands of the transferor who is the member of the HUF.

Similarly, income from an impartible estate is taxable in the hands of the holder of the estate and not in the hands of the HUF.

Any fee or remuneration received by a member of the HUF as a director or a partner in a company or firm which is as a result of the investment made in such concern out of the funds of the HUF, shall be treated as income of the HUF. However, if such fee or remuneration is earned by the member as a director or partner for services rendered purely in his personal capacity because of his personal aptitude to the business of the concern, it shall be treated as the income of the individual and not the HUF. In a case decided by the Supreme Court it has been held that remuneration and commission received by the Karta of HUF on account of his personal qualifications and exertions and not on account of investments of the family funds in the company cannot be treated as income of HUF.

If remuneration is paid to the Karta of a HUF or any other member of HUF:

a) under a valid agreement which is bona fide,

b) is in the interest of, and expedient for, the business of the family, and

c) the payment is genuine and not excessive.

such remuneration paid wholly and exclusively for the business of the family, shall be allowable as an expenditure while computing the income of the HUF and such salary shall be taxable in the hands of karta/member as his individual income.

As already discussed above, the son is not a coparcener in Dayabhaga School of law. Therefore, if the father does not have a brother as a coparcener, income arising from ancestral property is taxable as his individual income.

Karta in his individual capacity and Karta representing HUF are two different entities. HUF can sublet its contract to Karta in his individual capacity. Income earned by Karta in his individual capacity from such contract cannot be assessed in the hands of HUF.

Steps involved in computation of total income and tax liability of HUF:

Step 1: The Gross Total Income of HUF, like any other person, shall be computed under four heads of income, on the basis of their residential status. There can be no income under the head income from salaries in the case of HUF.

Step 2: Sections 60 to 63 relating to income of other person included in the assessee’s total income are applicable in case of HUF but section 64 is not applicable to HUF as it is applicable in case of individual assessee only.

Step 3: Set off of losses is permissible while aggregating the income under different heads of income.

Step 4: Carry forward and set off of losses of past years, if permissible, is allowed.

Step 5: The income computed in steps 1 to 4 is known as gross total income from which the deductions u/s 80C, 80D, 80DD, 80DDB, 80G, 80GGA, 80GGC, 80-IA, 80-IB, 80-IBA, 80-IC, 80- ID, 80-IE, 80JJA, 80JJAA, 80TTA will be allowed.

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 the tax on such total income at the prescribed rates of tax i.e. at special rates and normal slab rates.

Step 8: 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 a person having a total income exceeding Rs. 1 crore.

Step 9: Education cess @ 2% plus SHEC @ 1% on the tax plus surcharge if any, shall be levied.

Step 10: 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 off to nearest Rs. 10 and must be paid as self-assessment tax before submitting the return of income.

3.3 Computation of Total income of Firm

No capital expenditure or personal expenses will be allowed. Further, the remuneration paid must be only and exclusively for the purposes of the business of the firm. Section 40(b) of Income Tax Act places some restrictions and conditions on the deduction of expenses available to an assessee assessable as a partnership firm in relation to the remuneration and interest payable to the partners of such firm. The deductions regarding salary to partners and any payment of interest to partners cannot exceed the monetary limits specified u/s 40(b) and are available subject to the fulfillment of conditions mentioned therein.

The following conditions must be satisfied before claiming any deduction in respect of salary, bonus, commission or other remuneration payable to partner by a partnership firm.

1. Such remuneration should be paid only to the working partner.

Explanation 4 to section 40(b) defines working partner as one who is actively engaged in conducting the affairs of the business or profession of the firm of which he is a partner. To be a working partner, the partner has to be actively engaged in conducting the affairs of the business or profession of the firm. A partner can be said to be actively engaged in conducting the affairs of the firm even if he devotes a part and not the whole of his working hours.

Another significant point to be noted here is that the definition of “working partner” in Explanation 4 contemplates an individual. Therefore, a partner other than an individual (example a company) cannot be a working partner.

When a company is a partner in a firm, a director or shareholder of the company can very well be an employee of the firm in which the company is a partner. Any salary/remuneration paid by the firm to such an employee would be totally outside the ambit of disallowance under section 40(b). This would be so because the individual who is an employee of the firm is not a partner in the firm. Section 40(b) contemplates allowance of remuneration paid by a firm to its partners and not to other employees.

2. It should be authorized by the Partnership Deed.

Any payment of salary, bonus, commission or remuneration by whatever name called to a working partner is not allowed as a deduction, if the payment is not authorised by partnership deed or it is not in accordance with the terms of partnership deed. The partnership deed will have to contain clear directions as to the quantum of remuneration to be paid to the working partners.

3. It should not pertain to a period prior to Partnership Deed.

The remuneration paid to the working partners will be allowed as deduction to the firm from the date of such partnership deed and not from any period prior thereto.

Consequently, if for instance a firm incorporates the clause relating to payment of remuneration to the working partners by executing an appropriate deed as on July 1st, but effective from April 1st, the firm would get deduction for the remuneration paid to its working partners from July 1st onwards but not for the period from April 1st to June 30th.

4. It should not exceed the permissible limit.

The maximum amount of salary, bonus, commission or other remuneration to all the partners during the previous year should not exceed the limits given below:

On first 3 lakhs of book profit or in case of loss – Rs. 1, 50,000 or 90% of book profits (whichever is higher).

On the balance book profit - 60% of book profit.

Calculation of Book Profit

Book profit means the net profit as shown in the profit and loss account which is computed according to the manner laid down in the chapter IV-D as increased by amount of remuneration paid to partners which is allowed as deduction in the profit and loss account. Book profit is calculated in the following ways:

1. Net profit as per profit and loss account

2. Add remuneration if already debited

3. Deduct interest if it is not deducted

4. Make adjustments for expenses as per section 28 to 44D

Interest payable to partners-

So far as allowability of interest paid by a firm to its partners under section 40(b) is concerned, the following conditions have been prescribed by section 40(b):

(1) The interest payable by a firm to its partners should be authorised by and in accordance with the partnership deed.

(2) The interest payable by a firm to its partners should not be for a period falling prior to the date of such partnership deed authorizing the payment of such interest.

(3) The rate of interest payable to the partners shall not exceed 12% simple interest per annum.

Note: Interest includes simple interest and not compounding interest. This means if the company is paying interest on delayed payment of simple interest, such compounding interest shall not be permitted to be deducted as per Section 40(b).

Partner in a Representative Capacity

If an individual is a partner in a firm in a representative capacity (that is on behalf and for the benefit of another person) and not in his personal capacity then interest paid by the firm to such individual in his personal capacity and not as a representative partner will not be subject to the conditions and ceiling as prescribed for disallowance.

Computation of income of partner of a firm

The partner’s share in the total income of firm (PFAS) will be exempt in his hands and will not be included in his total income. His share in the total income of the firm will be calculated as follows:

Total income of firm x = Partner's share in profits of firm as per partnership deed / Total Profit of the firm

By virtue of this exemption, a partner of PFAS will not be taxed in respect of his share in the firm’s income since the firm itself will be taxed as a separate entity @30%. There will be no allocation of income among the partners. On account of this exemption, he will not be entitled to set-off his share in the firm’s loss against his other personal income.

Section 40b determines the maximum amount of remuneration and interest on capital payable to a partner under Income Tax Act. The amount over the specified limit is not allowed as a deduction to a partnership firm.

Remuneration to Partners

Remuneration includes salary, bonus, commission .Remuneration in partnership firm is allowed as a deduction if following conditions are satisfied.

Remuneration is allowed only to working partners.

Remuneration must be authorised by partnership deed and according to the terms of partnership deed. Also the amount of salary or manner of its computation is to be mentioned in the deed. If there is not any such provision in deed then no deduction is allowed. Normally people mentions in deed that salary is allowed to partners as per maximum limit defined under this section. This clause satisfies the condition for quantum of deduction.

It should be related to the period of the partnership deed. If there is another partnership deed for another period then such deed’s provisions will be considered for that period.

It is not allowed if tax is paid on presumptive basis under section 44AD or section 44ADA.

Remuneration should be within the permissible limits as mentioned below. Please note that this limit is for total salary to all partners and not per partner.

Book Profit	Amount deductible as remuneration under section 40(b)
If book profit is negative	Rs. 1,50,000
If book profit is positive- On first Rs. 3 lakh of book profit On the balance of book profit	Rs. 1,50,000 or 90% of book profit whichever is more 60% of book profit

Calculation of book profit

Profit as per Profit & Loss a/c – xxx

Add- Remuneration to partners if debited to Profit and loss a/c xxx

Add- Brought forward business loss, deduction under section 80C

to 80U if debited to profit and loss a/c xxx

Less – Income under house property, capital gain, other

sources if credited to profit and loss a/c xxx

Book Profits xxx

Remuneration which is allowed as expenses in the hands of partnership firm will be taxable in the hands of receiving partner as “Income from Business or Profession”.

If such remuneration is not allowed as expense in hands of partnership firm then it will not be taxable in the hands of partners.

Interest on Partner’s Capital

For deduction of interest following conditions must be satisfied –

Payment of Interest can be made to working or non-working partner.

Payment of Interest must be authorized by the partnership deed and it should be related to the period of the partnership deed. If there is another partnership deed for another period then such deed’s provisions will be considered for that period.

The rate of interest should not exceed 12%. If the amount of interest exceeds 12% of the capital then such excess amount is disallowed.

It is not allowed if the tax is paid on presumptive basis under section 44AD or section 44ADA.

If a person is a partner in a firm on behalf or for the benefit of any other person then any interest paid to such person otherwise as a representative capacity shall not be taken into account for the purpose of this section. Interest paid to such person as a representative capacity and to person so represented is taken into account.

If interest is paid to a partner on behalf or for the benefit of any other person then such interest is not disallowed under this section.

If the firm receives interest on drawings from partner then it is taxable in the hands of the firm.

When it is said that remuneration or interest is not allowed, it means that it is not allowed as deduction for calculating net taxable profit. The firm can still pay it to the partner in cash, there is no restriction on it under partnership act.

The amounts which are deductible as remuneration or interest in the hands of the firm under section 40b are taxable in the hands of the partner which are receiving such amounts under the head Profit from business/profession. However, if the amount is disallowed in hands of firm, then such amounts are exempt in the hands of partner.

No TDS is to be deducted by partnership firm on salary or interest paid or credited to partner. TDS is not required to be deducted even when such salary or remuneration is taxable in the hands of partner. For more information, you can read – TDS on Salary to Partners.

Key Takeaways:

Section 40b determines the maximum amount of remuneration and interest on capital payable to a partner under Income Tax Act.

Remuneration which is allowed as expenses in the hands of partnership firm will be taxable in the hands of receiving partner as “Income from Business or Profession”.

References:

Income Tax Act with Gist of Supreme Court Rulings Book (Bharat Law House.)

Income Tax Law & Accounts For B.Com Vth Semester of Calicut University (English, Paperback, Dr. H.C. Mehrotra, Dr. S.P. Goyal).

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