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TAX3

Unit IIIComputation of Tax Liability of Individuals and HUF Q1) How to compute Total Income & Tax Liability of an Individual?A1) Computation Of Total Income & Tax Liability of an IndividualStep 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/s 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 upto Rs. 3,50,000. 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.  Rebate of maximum Rs. 2,500 for resident individuals having total income up to Rs. 3,50,000 [Section 87A]With a view to provide tax relief to the individual tax payers who are in lower income bracket, the Act has provided rebate from the tax payable by an assessee, if the following condition and satisfied:
  • The assessee is an individual
  • He is resident in India,
  • His total income does not exceed Rs. 3,50,000.
  • Quantum of Rebate:The rebate shall be equal to the amount of income-tax payable on the total income for any assessment year, or Rs. 2,500, whichever is less.  Q2) (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.
  •  A2)     Mr SwarajStatementt 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.
  •   Q3) (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.A3) Mr SagarStatement 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.
  •   Q4) (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.A4) Mr AvinashStatement 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

       Q5) (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.A5) Mrs SharmaStatement 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
  •   Q6) What are the points to be considered for computation of total income of HUF?A6) 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 continued 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:
  • under a valid agreement which is bona fide
  • is in the interest of, and expedient for, the business of the family, and
  • 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.  Q7) How to compute Total Income & Tax Liability of HUF?A7) Computation Of Total Income & Tax Liability of HUFSteps 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.