Month: July 2020

An audit program is a set of directions that the auditor and its team members need to follow for the proper execution of the audit. After preparing an audit plan, the auditor allocates the work and prepares a program which contains steps that the audit team needs to follow while conducting an audit. Thus, an auditor prepares a program that contains detailed information about various steps and audit procedures to be followed by the audit.

Audit Program

An audit program provides a basic plan for the audit team regarding the entity’s business, its size, how to conduct the audit, allocation of work among team members and the estimation of time within which it should complete the work.

It contains details regarding the relevancy of evidence, materiality level, risk tolerance, measure of the sufficiency of the evidence. Thus, programs enhance the accountability of the audit team and its members for the work performed by them.

An auditor may revise the audit program if he considers it necessary due to prevailing circumstances. The size of the entity, type of business or services in which entity deals, applicable laws, the effectiveness of internal controls, and various other relevant factors, also affect an audit program.

Thus, an auditor prepares an audit program according to its scope of work. The minimum essential work to be performed is the Standard Program. However, there is no set audit standard program applicable in all the circumstances.

Audit working papers document the activities that the audit program performs. Audit working papers support the work performed by the auditor for providing assurance that the audit was performed in accordance with all the applicable standards on auditing (SA’s). It helps the auditor in the proper execution of audit work.

An audit program covers various steps of auditing in an audit program like the assessment of internal control, ascertaining accuracy and reliability of books of accounts, inspection, vouching and verification, valuation of assets and liabilities, scrutiny of accounts, presentation of financial statements, and submission of reports and related disclosures.

Definition

Prof. Meigs defines an audit program as, “an audit program is a detailed plan of the auditing work to be performed, specifying the procedures to be followed in verification of each item and the financial statements and giving the estimated time required.”

Features (or) Characteristics of an Audit Programme

The features of an audit programme may be of the following:

1. It is a set of procedures to be adopted to conduct the audit more efficiently.
2. It is a written scheme designed by the auditor.
3. It is a blue print of the audit work.
4. It facilitates delegation of work, based on the capabilities of audit staff.
5. It acts as evidence in future for the audit work being performed.
6. It specifies the work to be done by the audit staff, the manner and time limit for completion of the work.

Objectives of Audit Program

The following are the objectives of audit programme:

1. To provide clear instructions to the audit assistants specifying the nature of work to be performed and fixing the time span for completion of each work.
2. To facilitate coordination among various parts of audit work.
3. To ensure uniformity in the performance of audit work and to avoid duplication and repetition of work.
4. To attain a fair allocation of work among audit team.
5. To fix responsibility and accountability of each audit assistant.
6. To serve as a guide for planning the audit work in future.
7. To serve as evidence in future showing the date of completion of audit work, methods or procedures undertaken, persons involved in completion of audit work etc.

Contents of an Audit Programme

The following are the details of an audit programme:

1. Name of the client.
2. Nature of operations and business of client.
3. Review of system of internal check.
4. Date of commencement of audit work.
5. Duration of audit work.
6. Accounting system followed in client organization.
7. Review the report of the previous auditor.
8. Review the remarks, instructions or objections raised in the previous audit report.
9. Examine the various ledger accounts and subsidiary books.
10. Examine the statutory books and registers, profit and loss account, and balance sheet.

Advantages of an Audit Program

An audit programme can give the following advantages:

1. Helps in Estimation and Division of Work

Audit Programme helps in estimating the quantum of audit work in advance and also helps in dividing the work among the audit assistants based on their capabilities.

2. Helps in Fixation of Responsibility

It enables to fix responsibility on the audit assistants by clearly defining the scope of work.

3. Helps in Future Planning

Audit programme serves as a basis for planning the audit work for subsequent year.

4. Serves as a Guide

It serves as  a valuable guide for the audit staff in execution of the audit work for succeeding years.

5. Valuable Evidence

It serves as an evidence for the work done as initials of those who have done the particular work are appended to it. The auditor can produce the audit programme as a proof when a charge of negligence being brought upon him.

6. Uniformity

It provides for uniformity in audit work as the same work will be done every year.

7. Continuity

When an audit staff goes on leave others can continue the work by referring to the audit programme, hence, audit programme provides for continuity of work.

8. Coordination

If facilitates coordination and helps in supervising the work of the audit staff.

Disadvantages of an Audit Programme

The disadvantages that may be experienced by conducting audit as per predetermined audit programme are –

1. Mechancial

When audit work is conducted mechanically every year based on the audit programme, it causes monotony and boredom to the auditor and audit staffs.

2. No Quality in Work

The audit staff will be more interested to complete the work in time rather than to maintain any standard in the work.

3. Loss of Initiative

Audit staff cannot take their own decisions and they are compelled to comply with the audit programme. Hence, an efficient audit clerk loses his initiative and interest as he cannot make any suggestions.

4. Rigidity

A rigid and inflexible audit programme cannot be laid for all types of business. During the course of audit, new areas to be verified may come to the notice of the audit staff. Unless the audit programme is revised, such areas may escape from auditing.

5. Shelter for Inefficient Staff

Inefficient audit staffs conceal their mistakes or weakness on the basis of audit programme. Hence, it provides shelter for inefficient audit staff.

6. Unsuitable

Pre-determined audit programme is not suitable for small business organizations.

Audit working papers are the outcome of the documentation process. Working papers are the record of various audit procedures performed, audit evidence obtained, allocation of work between audit team members etc. Audit working papers are the documents and evidence that an auditor collects and retains with himself during the audit.

Audit working papers support the work that the auditor performs for providing assurance that he conducts the audit in accordance with all the applicable standards on auditing (SA’s).

They constitute all the audit evidence that an auditor obtains. Also, it contains various procedures that he applies to indicate that the audit is performed by him.

The auditor and his audit team members prepare the audit working papers while performing the audit. Working papers are connecting link between the client’s records and audited financial statements.

Working papers provide entity’s historical records as well as matters which should be taken care and given due importance while performing future audit’s of such entity.

Audit working papers help auditor in audit planning and collecting evidence of the audit work performed on which his opinion is based.

Working papers helps auditor in allocating the time required for performing various audit procedures. The working paper helps auditor to maintain a record of various matters discussed with management while conducting an audit.

Also, the working papers help audit team members to understand entity’s business, points which they need to check on a priority basis, queries and actions against them in previous audits. Working papers helps auditor in future cases to protect himself if the client files a suit against auditor for auditor’s negligence while conducting the audit.

Working papers provide information on the following matters

• Information about audit team members and work allocated to them. Information regarding unallocated work
• Whether he follows all the applicable standards on auditing (SA’s) or not
• He properly plans the audit or not
• Whether there was proper supervision over the work performed. Enabling the audit team members to be responsible for the work performed by them
• An auditor undertakes an appropriate review or not
• Whether the evidence is relevant, sufficient and appropriate to support the opinion of the auditor

We can divide the working papers into two parts

• Permanent audit file
• Current audit file

A permanent audit file contains information which is of continuous interest and is relevant in future audits. Information like articles of association, loan agreements, leases, documents related to internal control of the entity, record of accounting policies followed by the entity on a continuous basis, significant observations of previous audits etc.

A current audit file contains information regarding audit conducted for the current period. It includes information like financial statements and audit report of the entity, trial balance and worksheets, records regarding internal control risk of an entity, external confirmations received, queries of auditor and reply received from the management etc.

Examples of Audit Working Papers

Here is the example of audit working papers:

• Audit documents on client nature of business
• Audit documents of team meeting
• Evidence of the planning process including audit programs and any changes thereto
• Evidence of the auditor’s consideration of the work of internal audit and conclusions reached
• Analyses of transactions and balances
• Analyses of significant ratios and trends
• Identified and assessed risks of material misstatements
• A record of the nature, timing, extent, and results of audit procedures
• Evidence that the work performed was supervised and reviewed
• An indication as to who performed the audit procedures and when they were performed
• Details of audit procedures applied regarding components whose financial statements are audited
• Result of audit testing on depreciation expenses
• Result of audit testing on salaries expenses

Working papers are very important for auditors to support the audit opinion. It proves that auditors perform an audit assignment based on applicable standards, and as well as policy.

These working papers should state the proper information like source of the documents, the period of audit, who prepared the working papers, objective obtained or prepared the working papers and the conclusion.

Commencement of audit means that  when an organization is going to start final audit before commencement of audit the following instruction must be given by the auditor to his client.

• A list of book in use, list of employees, their duties and internal control should be provided to the audit staff.
• Books of original entry, ledgers, trial balance and Final account should be provided to the auditor.
• All supporting document should be properly arranged.
• List and schedule of assets and liabilities should be arranged properly for the examination to the audit staff managed properly for the examination to the audit staff.

The auditor of the newly established company should also carry out the following primary work before commencing the audit.

1. Appointment of the auditor

The auditor can examine his appointment the shareholder have right to appoint an auditor .a copy of resolution shows the decision of management for appointment.

2. Previous auditor

The auditor can write a letter to old auditor for obtaining his consent. He must have no objection to such appointment. it is moral duty of new auditor to inform old auditor for appointment.

3. Time of Audit

The audit can consult the management for fixing time of audit the stating data is fixed with the consent of management. The time allocated utilized for proper audit work.

4. Time required

The auditor can decide the time required for completion of audit work he can engage sufficient audit clerks to complete work in time otherwise the cost of audit increases.

5. Audit Staff

The auditor can arrange audit staff on the basis of work load. The number of audit Clerks can be engaged on the basis of audit work. There should be no extra burden of work on audit staff.

6. Audit Duties

The auditor cannot fix audit duties such duties are usually stated in audit engagement letter. The duties stated in company’s ordinance cannot be overlooked.

7. Nature of Business

The auditor can check the nature of business. The nature may relate to manufacturing, trading or services. The auditor must know the nature of activities in order to conduct audit.

8. Business History

The auditor should record the history of business. He can record year of establishment nature and number of products available in market.

9. Types of Product

The business may produce different products of successful working. One product or service is not sufficient to compete in the market the auditor should note the types of product.

10. List of officers

The auditor can ask for list of officer their duties and specimens signature he must know authority and responsibility of officer.it is essential for completion of audit work.

11. Copies of documents

The auditor can collect copies of document like memorandum of association and articles of association. He can examine all such document for the purpose of audit.

12. Books of account

The auditor can obtain lists of books of account he can check that legal requirement are followed in preparing books of account.

13. Internal control

The internal control system is tested to rely on it. Audit sampling is possible if it is effective the business work flow under proper accounting and administrative control.

14. Certificates of clients

The auditor can obtain certificate from client, the confirmation of accounts from debtors and creditor is possible. The client can issue stock valuation certificate for the auditor.

15. Old reports

   The auditor should examine old audit report. he can note the weakness stated in previous report he can check that weak point stated in old report are net repeated during this year.

16. Analytical review

The auditor can check the ration and percentage for a number of years he can examine the trend of various items in order to note the usual items.

17. Prepare report

The auditor can prepare report for work done by him. When he is fully satisfied there is clean report. In case of bad working he can submit qualified report to the shareholders.

When accounting process ends, auditing begins, for the purpose of determining the true and fair picture of books of accounts. It is an activity of record keeping and preparation & presentation of the financial statement. Accounting is used by the firms for keeping a track of their monetary transactions. It is the language the business understands, as it is the tool for reporting financial statement of the business entity.

Conversely, Auditing is an activity of verification and evaluation of financial statement. It aims at checking and comfirming the authenticity of financial books prepared by the accounting staff of the enterprise. Thus, it determines the validity and reliability of accounting information.

Accountancy

It is the process of recording, classifying, summarising and interpreting all the financial transactions.

Accounting

Accounting is a specialised language of business, which helps to understand the economic activities of the entity. It is an act of orderly capturing the day to day monetary transactions of the business and classifying them into various groups along with that, the transactions are summarized in a way that they can be easily referred at the time of urgency, thereafter analyzing and understanding the results of the financial statement and finally communicating the results to the interested parties.

The main function of accounting is to provide material information, especially of a financial nature for decision making. Cost Accounting, Management Accounting, Tax Accounting, Financial Accounting, Human Resource Accounting, Social Responsibility Accounting are the fields of Accounting. The primary objectives of Accounting are as under:

Proper record keeping through Journal, Subsidiary Books, Ledger and Trial Balance

Determination of the results (profitability position) from the records maintained through Trading and Profit & Loss Account

Showing the financial position of the entity through Balance Sheet

Providing necessary information about solvency and liquidity position to the interested parties.

Auditing

The audit is a methodical procedure of independently examining the financial information of an entity with the aim of giving an opinion on true and fair view. Here organization refers to all the entities, regardless of their size, structure, nature and form.

Auditing is a critical, unbiased investigation of each and every aspect of the transaction, i.e. vouchers, receipts, account books and related documents are verified, in order to spot the validity and reliability of the financial statement. Moreover, errors and frauds or deliberate manipulation in accounts or misappropriation etc. can also be detected through detailed scrutiny.

The auditor will inspect the accuracy and transparency of the financial information, compliance with the accounting standards and taxes are properly paid or not. After the complete inspection of accounting books and financial records, he will give an opinion in the form of a report. The reporting on the true and fair view shall be made to the person who appoints the auditor. There are two types of Audit Report, they are:

(i) Unmodified

(ii) Modified

• Qualified
• Adverse
• Disclaimer

The audit can be conducted internally and externally. The task of internal audit is conducted by an internal auditor who is appointed by the management of the organization for improving its internal control systems and accounting system. External Auditor is appointed by the shareholders of the company.

Differences between Accountancy and Auditing

Conclusion

Accounting and Auditing both are specialized fields, but the scope of auditing is wider than accounting as it needs a thorough understanding of various acts, tax rules, knowledge of accounting standards and standards on auditing as well as communication skills are also required.

Apart from that, confidentiality, integrity, honesty and independence are the basic requirements that is to be maintained while performing the audit procedure. The reports submitted by the auditor are helpful for the users of the financial statement like creditors, shareholders, investors, suppliers, debtors, customers, government, etc. for rational decision making.

Although Accounting is not less, it also requires complete knowledge of the accounting standards, principles, conventions and assumptions as well as Companies Act rules and tax laws. The procedure of auditing is conducted only when the accounting is done properly so; it cannot be neglected.

Gross interest [i.e., Net Interest + TDS (Tax Deducted at Source] is Taxable.

Net interest is grossed up in the hands of recipient if tax is deducted at source by the payer.

Net interest (if tax is deducted at source) in the hands of the recipient should be grossed up by multiplying it by the following fraction:

Net Interest x 100 ÷ [100 – Rate of TDS (tax deduction at source)]

Grossing up is required in the case of the following securities:

• 8% Saving (Taxable) Bonds if the amount of interest payable exceeds Rs.10,000 (these Bonds have now been withdrawn. New 7.75% Government of India Savings (Taxable) Bonds, 2018 have been issued);
• Securities issued by a statutory corporation or a local authority or by any company.

Grossing up mechanism specifies that the payer must ensure complete payment of the amount due to the recipient, which precisely means that the payer must cover the tax deduction costs of the payee.

Gross interest, which is derived after adding net interest with tax deducted at source, is taxable. Net interest is grossed up in the hands of the recipient if the payer deducts tax at source. Net interest is grossed up by using the following formula:

100/ (100 – Rate of tax deduction at source)

A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal definition varies by jurisdiction. In some countries and languages, the term “security” is commonly used in day-to-day parlance to mean any form of financial instrument, even though the underlying legal and regulatory regime may not have such a broad definition. In some jurisdictions the term specifically excludes financial instruments other than equities and fixed income instruments. In some jurisdictions it includes some instruments that are close to equities and fixed income, e.g., equity warrants.

Securities may be represented by a certificate or, more typically, “non-certificated”, that is in electronic (dematerialized) or “book entry” only form. Certificates may be bearer, meaning they entitle the holder to rights under the security merely by holding the security, or registered, meaning they entitle the holder to rights only if he or she appears on a security register maintained by the issuer or an intermediary. They include shares of corporate stock or mutual funds, bonds issued by corporations or governmental agencies, stock options or other options, limited partnership units, and various other formal investment instruments that are negotiable and fungible.

In the United Kingdom, the national competent authority for financial markets regulation is the Financial Conduct Authority; the definition in its Handbook of the term “security” applies only to equities, debentures, alternative debentures, government and public securities, warrants, certificates representing certain securities, units, stakeholder pension schemes, personal pension schemes, rights to or interests in investments, and anything that may be admitted to the Official List.

A security is a tradable financial asset of any kind. Securities are broadly categorized into:

• Debt securities (e.g., banknotes, bonds and debentures)
• Equity securities (e.g., common stocks)
• Derivatives (e.g., forwards, futures, options, and swaps).

The company or other entity issuing the security is called the issuer. A country’s regulatory structure determines what qualifies as a security. For example, private investment pools may have some features of securities, but they may not be registered or regulated as such if they meet various restrictions.

Securities are the traditional way that commercial enterprises raise new capital. These may be an attractive alternative to bank loans depending on their pricing and market demand for particular characteristics. Another disadvantage of bank loans as a source of financing is that the bank may seek a measure of protection against default by the borrower via extensive financial covenants. Through securities, capital is provided by investors who purchase the securities upon their initial issuance. In a similar way, a government may issue securities too when it needs to increase government debt.

Types of Securities

1. Equity securities

Equity almost always refers to stocks and a share of ownership in a company (which is possessed by the shareholder). Equity securities usually generate regular earnings for shareholders in the form of dividends. An equity security does, however, rise and fall in value in accord with the financial markets and the company’s fortunes.

2. Debt securities

Debt securities differ from equity securities in an important way; they involve borrowed money and the selling of a security. They are issued by an individual, company, or government and sold to another party for a certain amount, with a promise of repayment plus interest. They include a fixed amount (that must be repaid), a specified rate of interest, and a maturity date (the date when the total amount of the security must be paid by).

Bonds, bank notes (or promissory notes), and Treasury notes are all examples of debt securities. They all are agreements made between two parties for an amount to be borrowed and paid back with interest at a previously-established time.

3. Derivatives

Derivatives are a slightly different type of security because their value is based on an underlying asset that is then purchased and repaid, with the price, interest, and maturity date all specified at the time of the initial transaction.

The individual selling the derivative doesn’t need to own the underlying asset outright. The seller can simply pay the buyer back with enough cash to purchase the underlying asset or by offering another derivative that satisfies the debt owed on the first.

A derivative often derives its value from commodities such as gas or precious metals such as gold and silver. Currencies are another underlying asset a derivative can be structured on, as well as interest rates, Treasury notes, bonds, and stocks.

Derivatives are most often traded by hedge funds to offset risk from other investments. As mentioned above, they don’t require the seller to own the underlying asset and may only require a relatively small down payment, which makes them favorable because they are easier to trade.

When the seller retains the right to receive the interest or dividend; the transaction is called “Ex-Interest” or “Ex-Dividend” purchase or sale. In other words, when the price quoted is exclusive of accrued interest/dividend, the price so quoted is treated as the capital cost of investment, that is, the buyer has to pay accrued interest due from the last interest date to the date of transaction to the seller along with the cost price of investment.

Interest on debentures is generally paid half-yearly to the holders on certain specified dates, e.g., 30th September and 31st Mach every year. If debentures are purchased exactly on these specified dates, it involves no problem. In such a case, interest is payable to the holders of debentures. But, where debentures are purchased at a date before the specified date of payment of interest the question which naturally arises is whether the price paid for such debentures includes the interest for the expired period (i.e. from the previous date of payment of interest up to the date of purchase) or not.

For this purpose it is important to note whether the price paid for the debentures is quoted as “Cum-interest” or “Ex-interest”. If the purchase price for the debentures includes interest for the expired period, the quotation is said to be “Cum-interest”. If, on the other hand, the purchase price for the debentures excludes the interest for the expired period, the quotation is said to be “Ex-interest”. In case of Ex-interest quotation, interest has to be paid to the holders for the expired period in addition to the price paid for the debentures. In any case, the company must pay interest for the expired period and while making entry in its books at the time of purchase of the debentures, the amount paid by way of interest should be treated separately from the price actually paid for the debentures. For example, if a company purchases 10 of its 9% Debentures of 100 each at 95 each on 1st August, 2014 the dates of payment of Interest being 30th September and 31st March, the treatment of the same for “Cum-interest” and “Ex-interest” quotations will be as follows:

N.B. If nothing is stated, purchase and sale of debentures and government securities should be taken to be on ex-interest basis. That of shares should be presumed to be on cum-dividend basis.

(1) In case of cum-interest quotation: If the purchase price of 95 is taken to be the cum-interest price, it implies that this includes the interest for the expired period of 4 months (i.e. from 1st April, 2014 to 31st July, 2014 which amounts

Bond Washing Transactions

Bond washing transactions are the transactions in Securities which leads to shift in income. Now one may think that the provision of shifting may lead to the provision of clubbing. But, what about transfer in case transfer is made to friend? The Clubbing provisions do not apply. For such cases Section 94 of Income Tax Act 1961, comes into picture.

Section 94 aims at preventing avoidance of tax by an assessee where there is a transfer of securities before the due date of payment of interest and re-acquisition thereof after due date. Such transfer avoids tax or shifts the burden of tax to some other person. As per Section 94, the income of the securities transferred shall be deemed to be that of the transferor and shall be assessable in his hands accordingly and therefore bond washing transactions shall have null effect.

For example, Mr. Ram holds 12% debentures of Rs. 1 crore of Company “A”. Company “A” provides interest half-yearly say on 30^th June and 31st December.

On 28th June 2018, Mr. Ram sells the said debentures of Rupees 1 crore to his friend Mr. Shyam and re-acquires those debentures on 1^st July 2018. Now interest of rupees 6 lakhs received by Mr. Shyam shall not be taxable in hands of Mr. Shyam but shall be taxable in the hands of Mr. Ram by virtue of Section 94 of the Act.

However, Section 94 shall not apply and the said interest shall not be taxable in hands of Mr. Ram:

• If Mr. Ram proves that the interest is taxable in hands of Mr. Shyam at the same rate as it would have been taxable in his hands i.e. proves that there is no avoidance of income tax or
• Mr. Ram proves that he sold debentures on 28th June 2018 as he was in urgent need of money and there has been no such Bond washing transaction in any of the three previous year ending 31st March 2018.

Explanation to Section 94(1) provides that if transferor re-acquires similar type of securities, then his tax burden shall not be greater than or less than what would have been if he had sold original securities.

Accordingly if Mr. Ram buy backs on 1^st July 2018 shares of Company “B” with interest of 11%, then still the amount that will be added to Mr. Ram’s income would be Rs. 6 lakhs (1cr * 12% * 6 / 12) and not Rs.5.5 lakhs ( 1cr * 11% * 6 / 12).

So, Bond Washing Transactions can be done, provided the person produces the evidence showing urgency of money or that there is no tax avoidance.

1. Section 80C

Deductions on Investments

You can claim a deduction of Rs 1.5 lakh your total income under section 80C. In simple terms, you can reduce up to Rs 1,50,000 from your total taxable income, and it is available for individuals and HUFs.

Filing your Income Tax Return. The Income Tax Department will refund the excess money to your bank account.

2. Section 80CCC – Insurance Premium

Deduction for Premium Paid for Annuity Plan of LIC or Other Insurer

Section 80CCC provides a deduction to an individual for any amount paid or deposited in any annuity plan of LIC or any other insurer. The plan must be for receiving a pension from a fund referred to in Section 10(23AAB). Pension received from the annuity or amount received upon surrender of the annuity, including interest or bonus accrued on the annuity, is taxable in the year of receipt.  

3. Section 80CCD – Pension Contribution

Deduction for Contribution to Pension Account

1. Employee’s contribution under Section 80CCD (1)

You can claim this if you deposit in your pension account. Maximum deduction you can avail is 10% of salary (in case the taxpayer is an employee) or 20% of gross total income (in case the taxpayer being self-employed) or Rs 1.5 lakh – whichever is less.

Until FY 2016-17, maximum deduction allowed was 10% of gross total income for self-employed individuals.

1. Deduction for self-contribution to NPS – section 80CCD (1B)A new section 80CCD (1B) has been introduced for an additional deduction of up to Rs 50,000 for the amount deposited by a taxpayer to their NPS account. Contributions to Atal Pension Yojana are also eligible.
2. Employer’s contribution to NPS – Section 80CCD (2)Claim additional deduction on your contribution to employee’s pension account for up to 10% of your salary. There is no monetary ceiling on this deduction.

4. Section 80 TTA – Interest on Savings Account

Deduction from Gross Total Income for Interest on Savings Bank Account

If you are an individual or an HUF, you 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. Do include the interest from savings bank account in other income.

Section 80TTA deduction is not available on interest income from fixed deposits, recurring deposits, or interest income from corporate bonds.  

5. Section 80GG – House Rent Paid

Deduction for House Rent Paid Where HRA is not Received

1. Section 80GG deduction is available for rent paid when HRA is not received. The taxpayer, spouse or minor child should not own residential accommodation at the place of employment
2. The taxpayer should not have self-occupied residential property in any other place
3. The taxpayer must be living on rent and paying rent
4. The deduction is available to all individuals

Deduction available is the least of the following:

1. Rent paid minus 10% of adjusted total income
2. Rs 5,000/- per month
3. 25% of adjusted total income*

*Adjusted Gross Total Income is arrived at after adjusting the Gross Total Income for certain deductions, exempt income, long-term capital gains and income related to non-residents and foreign companies.

An online e-filing software like that of ClearTax can be extremely easy as the limits are auto-calculated. So, you do not have to worry about making complex calculations.

From FY 2016-17 available deduction has been raised to Rs 5,000 a month from Rs 2,000 per month.

6. Section 80E – Interest on Education Loan

Deduction for Interest on Education Loan for Higher Studies

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.

80E 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. There is no restriction on the amount that can be claimed.

7. Section 80EE – Interset on Home Loan

Deductions on Home Loan Interest for First Time Home Owners

FY 2017-18 and FY 2016-17 This deduction is available in FY 2017-18 if the loan has been taken in FY 2016-17. The deduction under section 80EE is available only to home-owners (individuals) having only one house property on the date of sanction of the loan. The value of the property must be less than Rs 50 lakh and the home loan must be less than Rs 35 lakh. The loan taken from a financial institution must have been sanctioned between 1 April 2016 and 31 March 2017.There is an additional deduction of Rs 50,000 available on your home loan interest on top of deduction of Rs 2 lakh (on interest component of home loan EMI) allowed under section 24.

FY 2013-14 and FY 2014-15 During these financial years, the deduction available under this section was first-time house worth Rs 40 lakh or less. You can avail this only when your loan amount during this period is Rs 25 lakh or less. The loan must be sanctioned between 1 April 2013 and 31 March 2014. The aggregate deduction allowed under this section cannot exceed Rs 1 lakh and is allowed for FY 2013-14 and FY 2014-15.

8. Section 80CCG – RGESS

Rajiv Gandhi Equity Saving Scheme (RGESS)

The deduction under this section 80CCG is available to a resident individual, whose gross total income is less than Rs.12 lakh. To avail the benefits under this section the following conditions should be met:

1. The assessee should be a new retail investor as per the requirement specified under the notified scheme.
2. The investment should be made in such listed investor as per the requirement specified under the notified scheme.
3. The minimum lock in period in respect of such investment is three years from the date of acquisition in accordance with the notified scheme.

Upon fulfillment of the above conditions, a deduction, which is lower of the following is allowed.

• 50% of the amount invested in equity shares; or
• Rs 25,000 for three consecutive Assessment Years.

Rajiv Gandhi Equity Scheme has been discontinued starting from 1 April 2017. Therefore, no deduction under section 80CCG will be allowed from FY 2017-18. However, if you have invested in the RGESS scheme in FY 2016-17, then you can claim deduction under Section 80CCG until FY 2018-19.  

9. Section 80D – Medical Insurance

Deduction for the premium paid for Medical Insurance

You (as an individual or HUF) can claim a deduction of Rs.25,000 under section 80D on insurance for self, spouse and dependent children. 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, which has been increased in Budget 2018 from Rs 30,000.

In case, both taxpayer and parent(s) are 60 years or above, the maximum deduction available under this section is up to Rs.1 lakh.

Example: Rohan’s age is 65 and his father’s age is 90. In this case, the maximum deduction Rohan can claim under section 80D is Rs. 100,000. From FY 2015-16 a cumulative additional deduction of Rs. 5,000 is allowed for preventive health check.  

10. Section 80DD – Disabled Dependent

Deduction for Rehabilitation of Handicapped Dependent Relative

Section 80DD deduction is available to a resident individual or a HUF and is available on:

1. Expenditure incurred on medical treatment (including nursing), training and rehabilitation of handicapped dependent relative
2. Payment or deposit to specified scheme for maintenance of handicapped dependent relative.
3. Where disability is 40% or more but less than 80% – fixed deduction of Rs 75,000.
4. Where there is severe disability (disability is 80% or more) – fixed deduction of Rs 1,25,000.

To claim this deduction a certificate of disability is required from prescribed medical authority.From FY 2015-16 – The deduction limit of Rs 50,000 has been raised to Rs 75,000 and Rs 1,00,000 has been raised to Rs 1,25,000.  

11. Section 80DDB – Medical Expenditure

Deduction for Medical Expenditure on Self or Dependent Relative

1. For individuals and HUFs below age 60

A deduction up to Rs.40,000 is available to a resident individual or a HUF. It is available with respect to any expense incurred towards treatment of specified medical diseases or ailments for himself or any of his dependents. For an HUF, such a deduction is available with respect to medical expenses incurred towards these prescribed ailments for any of the HUF members. 

1. For senior citizens and super senior citizens

In case the individual on behalf of whom such expenses are incurred is a senior citizen, the individual or HUF taxpayer can claim a deduction up to Rs 1 lakh. Until FY 2017-18, the deduction that could be claimed for a senior citizen and a super senior citizen was Rs 60,000 and Rs 80,000 respectively. This has now become a common deduction available upto Rs 1 lakh for all senior citizens (including super senior citizens) unlike earlier.

1. For reimbursement claims

Any reimbursement of medical expenses by an insurer or employer shall be reduced from the quantum of deduction the taxpayer can claim under this section.

Also remember that you need to get a prescription for such medical treatment from the concerned specialist in order to claim such deduction. Read our detailed article on Section 80DDB.

12. Section 80U – Physical Disability

Deduction for Person suffering from Physical Disability

A deduction of Rs.75,000 is available to a resident individual who suffers from a physical disability (including blindness) or mental retardation. In case of severe disability, one can claim a deduction of Rs 1,25,000.

From FY 2015-16 – Section 80U deduction limit of Rs 50,000 has been raised to Rs 75,000 and Rs 1,00,000 has been raised to Rs 1,25,000.  

13. Section 80G – Donations

Deduction for donations towards Social Causes

The various donations specified in u/s 80G are eligible for deduction up to either 100% or 50% with or without restriction. From FY 2017-18 any donations made in cash exceeding Rs 2,000 will not be allowed as deduction. The donations above Rs 2000 should be made in any mode other than cash to qualify for 80G deduction.

1. Donations with 100% deduction without any qualifying limit

• National Defence Fund set up by the Central Government
• Prime Minister’s National Relief Fund
• National Foundation for Communal Harmony
• An approved university/educational institution of National eminence
• Zila Saksharta Samiti constituted in any district under the chairmanship of the Collector of that district
• Fund set up by a State Government for the medical relief to the poor
• National Illness Assistance Fund
• National Blood Transfusion Council or to any State Blood Transfusion Council
• National Trust for Welfare of Persons with Autism, Cerebral Palsy, Mental Retardation and Multiple Disabilities
• National Sports Fund
• National Cultural Fund
• Fund for Technology Development and Application
• National Children’s Fund
• Chief Minister’s Relief Fund or Lieutenant Governor’s Relief Fund with respect to any State or Union Territory
• The Army Central Welfare Fund or the Indian Naval Benevolent Fund or the Air Force Central Welfare Fund, Andhra Pradesh Chief Minister’s Cyclone Relief Fund, 1996
• The Maharashtra Chief Minister’s Relief Fund during October 1, 1993 and October 6,1993
• Chief Minister’s Earthquake Relief Fund, Maharashtra
• Any fund set up by the State Government of Gujarat exclusively for providing relief to the victims of earthquake in Gujarat
• Any trust, institution or fund to which Section 80G(5C) applies for providing relief to the victims of earthquake in Gujarat (contribution made during January 26, 2001 and September 30, 2001) or
• Prime Minister’s Armenia Earthquake Relief Fund
• Africa (Public Contributions — India) Fund
• Swachh Bharat Kosh (applicable from financial year 2014-15)
• Clean Ganga Fund (applicable from financial year 2014-15)
• National Fund for Control of Drug Abuse (applicable from financial year 2015-16)

1. Donations with 50% deduction without any qualifying limit

• Jawaharlal Nehru Memorial Fund
• Prime Minister’s Drought Relief Fund
• Indira Gandhi Memorial Trust
• The Rajiv Gandhi Foundation

1. Donations to the following are eligible for 100% deduction subject to 10% of adjusted gross total income

• Government or any approved local authority, institution or association to be utilized for the purpose of promoting family planning
• Donation by a Company to the Indian Olympic Association or to any other notified association or institution established in India for the development of infrastructure for sports and games in India or the sponsorship of sports and games in India

1. Donations to the following are eligible for 50% deduction subject to 10% of adjusted gross total income

• Any other fund or any institution which satisfies conditions mentioned in Section 80G(5)
• Government or any local authority to be utilized for any charitable purpose other than the purpose of promoting family planning
• Any authority constituted in India for the purpose of dealing with and satisfying the need for housing accommodation or for the purpose of planning, development or improvement of cities, towns, villages or both
• Any corporation referred in Section 10(26BB) for promoting the interest of minority community
• For repairs or renovation of any notified temple, mosque, gurudwara, church or other places.

14. Section 80GGB – Company Contribution

Deduction on contributions given by companies to Political Parties

Section 80GGB deduction is allowed to an Indian company for the amount contributed by it to any political party or an electoral trust. Deduction is allowed for contribution done by any way other than cash.  

15. Section 80GGC – Contribution to Political Parties

Deduction on contributions given by any person to Political Parties

Deduction under section 80GGC is allowed to an individual taxpayer for any amount contributed to a political party or an electoral trust. It is not available for companies, local authorities and an artificial juridical person wholly or partly funded by the government. You can avail this deduction only if you pay by any way other than cash.  

16. Section 80RRB – Royalty of a Patent

Deduction with respect to any Income by way of Royalty of a Patent

80RRB Deduction for any income by way of royalty for a patent, registered on or after 1 April 2003 under the Patents Act 1970, shall be available for up to Rs.3 lakh or the income received, whichever is less. The taxpayer must be an individual patentee and an Indian resident. The taxpayer must furnish a certificate in the prescribed form duly signed by the prescribed authority.

17. Section 80 TTB – Interest Income

Deduction of Interest on Deposits for Senior Citizens

A new section 80TTB has been inserted vide Budget 2018 in which deductions with respect to interest income from deposits held by senior citizens will be allowed. The limit for this deduction is Rs.50,000.

No further deduction under section 80TTA shall be allowed. In addition to section 80 TTB, section 194A of the Act will also be amended so as to increase the threshold limit for TDS on interest income payable to senior citizens. The earlier limit was Rs 10,000, which was increased to Rs 50,000 as per the latest Budget.

18. Deductions-Summary

Section 80 Deduction Table