Year: 2020

Taxpayers should be aware that for every house property owned by them, income tax is payable on a yearly basis. The tax payable is calculated as a percentage of the net annual value of the property. The net annual value is determined based on the approximate amount of annual rent which the property can be expected to fetch in the market at an arms’ length price. Each and every house property owned by a taxpayer is taxable, with the exclusive exception of self-occupied residential properties. Even in the case of self-occupied residential properties, the exemption from taxability is given only for one self-occupied property. 

According to Section 24 of the Income Tax Act, “the Income from House Property shall be reduced by the amount of interest that is paid on Loan where the loan has been taken for the purpose of purchase, construction, renewal, repair or reconstruction of property”. The following deduction from Net Annual Value (NAV) is permissible to determine the taxable income from house property:

• Deduction at 30% on NAV under Section 24(a).
• Interest on loan under Section 24(b) if the loan is taken for purchases, construction, repair or reconstruction of House Property.

Calculating Net Annual Value Deduction

The Net Annual Value of the house property deduction can be divided into two scenarios:

Let-out House Property

In this case, Net Annual Value can be deducted under two sections:

• The standard deduction under Section 24(A)
• Interest on money borrowed under Section 24(B).

Self-occupied House

In this case, the Net Annual Value can be deducted from the interest on money that is borrowed under Section 24(B).

Section 24(A)

Section 24(a) deals with the standard deduction of the Net Annual Value. It is a deduction made out of the Net Annual Value for some expenses of the owner of the house property that is connected with the rental income. The rental income includes charges like rent collection charges, insurance of house, repair of the house, and so on. All these charges will be deductible at 30% of NAV.

Self-occupied house property does not require standard deduction because there is no NAV for a self-occupied house. In simple terms, the standard deduction for a let out house or for a deemed let outhouse is 30% of Net Annual Value. On the other hand, there is no deduction for a self-occupied house.

Section 24(B)

Section 24(B) deals with the purchases of items in connection with the construction or repair of a house property. For this section to be applicable, the owner of the house property has to avail a housing loan through which the transaction for the purchase, construction, repairs or renovation of the house of completed.

In such cases, the interest paid for the housing loan is used for the deduction of NAV at the time of calculating the house property income. There is no maximum limit for let out house property/deemed let out house property. For a self-occupied house, there is a maximum limit up to which the interest can be claimed for deduction.

Computation of Self-occupied House Property

Section 24(2)

When the property consists of a house or part of a house which is in the owner’s occupation for the purposes of his own residence or cannot be owned by the owner by the reason of fact that owing to his employment business or profession carried on at any other place, the owner has to reside at that other place in a building that is not belonging to him. The annual value of the house or part of the house would be considered as nil.

Section 23(3)

The annual value of the self-occupied house would not be taken as nil to the below conditions:

• If the house of part of the house which is actually let during the whole or any part of the previous year; or 
• Any other benefit that is derived by the owner from such a house.

In the above cases, the annual value would be determined as per provisions applies for the let out properties.

Section 23(4)

If there is more than one residential house, that is in the employment of the owner for his residential purposes then the owner might exercise an option to treat any one of the houses to be self-occupied. The other house would be deemed to be let out and the annual value of such houses will be determined as per the following Section 23(1)(a). The assessee, in this case, must exercise his option in a way that his taxable income is the minimum. Such an option would be changed from year to year. If an assessee has a house property that consists of two or more residential units and all such units are self-occupied, then the annual value of the entire house property would be considered as nil as there is only one house property though it has more than one residential units.

As per the amendments in income tax law made by the Finance Act, 2019, the benefits under Section 23(2) is to be allowed for two self-occupied houses instead of one. If there are more than two residential houses, that are in the occupation of the owner of his residential purposes then the owner may exercise an option to treat any two of the houses to be self-occupied. The other houses will be determined as per Section 23(1)(a). The annual value of two self-occupied houses opted by the assessee can be taken as nil.

Deduction in respect of one Self-Occupied House

When the annual value is nil, the assessee will not be allowed for the standard deduction of 30%. However, the assessee will be granted deduction on account of interest as under:

• If capital is borrowed, then the maximum amount of deduction on account of interest would be Rs.30,000  (not Rs.2 lakhs).
• The acquisition or construction must be completed within 5 years from the end of the financial year in which the capital was borrowed. The construction of the residential unit to have commenced before April 1, 1999. 
• The aforesaid three conditions are satisfied, the higher deduction of Rs.2 lakhs would be available.

 Section 23(5) 

Where the house property consisting of any land or building appurtenant thereto are held as stock-in-trade and the property or any part of the property is not let during the whole or any part of the previous year. Then the annual value of house property or part of the house, for the period up to 1 year from the end of the financial year in which the completion certificate of construction of the house property is taken from the competent authority, shall be taken to be nil.

Under section 10 of the Income-tax Act 1961 following incomes from house property are exempted from tax. These incomes are not to be included in the total income of assessee. Hence no tax is payable on such incomes. These incomes are:

1. Agricultural House Property [Section 2(1)(c)].

Income from such house property which is situated on or in the immediate vicinity of agricultural land which is used for agricultural purposes by cultivator is exempted from tax.

2. Income from Property held under Trust Wholly for Charitable or Religious Purposes [Section 11(1)(a)]:

Income derived from property held under trust, wholly for charitable and religious purposes, shall be exempt:

• To the extent such income is applied in India for such purposes; and
• Where any such income is accumulated or set apart for application to such purposes in India, to the extent to which the income so accumulated or set apart is not in excess of 15% of the income from such property.

3. Income from Property held under trust which is applied in part only for Charitable or Religious purposes [Section 11(1)(b)]:

Income derived from property held under trust in part only for such purpose, shall be exempt:

• To the extent such income is applied in India for such purposes, provided, the trust in question is created before the commencement of Income-tax Act, 1961 i.e. before 1.4.1962; and
• Where any such income is finally set apart for application to such purposes in India, to the extent to which the income so accumulated or set apart is not in excess of 15% of the income from such property.

4. Income from Property held under trust which is applied for Charitable Purposes outside India [Section 11(1)(c)]:

• Income derived from property held under trust, created on or after 1.4.1952 for charitable purpose which tends to promote international welfare in which India is interested, shall be exempt to the extent to which such income is applied to such purpose outside India. Religious trusts are not covered here.
• Income derived from property held under a trust for charitable or religious purposes, created before 1.4.1952, shall be exempt to the extent to which such income is applied to such purposes outside India.

In the above two cases, it is necessary that the Board, by general or special order, has directed in either case that it shall not be included in the total income of the person in receipt of such income.

5. Self-Occupied but Vacant House [Section 23(3)].

in case an assessee keeps one of his own houses reserved for self-occupation but is living in a rented house elsewhere due to his employment or profession the income from such house is taken to be NIL.

The annual value of self-occupied house shall not be NIL:

• If such house or part of the house is actually let during the whole or any part of the previous year
• Any other benefit therefrom is derived by the owner from such house.

In the above cases, the annual value shall be determined as per provisions applicable for let out properties i.e. under clause (a), (b) or (c) of section 23(1).

6. House used for Own Business or Profession.

There is no income chargeable to tax under this head from such house property.

7. Property held by Registered Trade Union [Section 10(24)].

Income from a house property owned by a registered trade union is not to be included in its G.T.I.

8. Income from House Property held by following shall be exempted:

• House property held by a local authority.
• House property held by a scientific research institution.
• House property held at a political party.
• House property held by a university and any other educational institution working for spreading education and not to earn profit.
• House property held by a hospital or medical institution working for the spreading of medical services to people and are not meant for earning profit.
• It is income from a farmhouse.

9. One House Property (a palace) owned by a former ruler of Indian states.

Ex-rulers of Indian states may be owning many palaces but only one palace of their choice shall be treated as a self occupied house and shall be exempted.

10. One Self-Occupied House.

In case assessee owns one residential house, the net annual value of the same shall be taken as nil but in case he owns more than one house, then only one of his choice but normally of higher value shall be treated as a self occupied one and other/others are treated as deemed to Je let out.

Out of sum computed above, any loss incurred due to vacancy in the house property shall be deducted and the remaining sum so computed shall be deemed to the gross annual value.

Deductions:

* Any interest pertaining to the period prior to the year of acquisition/ construction of the house property shall be allowed as deduction in five equal installments, beginning with the year in which the property was acquired/ constructed.

* Deduction for interest on borrowed capital shall be limited to Rs. 30,000 in following circumstances:

1. a) If capital is borrowed before 01-04-1999 for the purpose of purchase or construction of a house property;
2. b) If capital is borrowed on or after 01-04-1999 for the purpose of re-construction, repairs or renewals of a house property;
3. c) If capital is borrowed on or after 01-04-1999 but construction of house property is not completed within five years from end of the previous year in which capital was borrowed.

Canons of taxation refer to the administrative aspects of a tax. They relate to the rate, amount, method of levy and collection of a tax.

In other words, the characteristics or qualities which a good tax should possess are described as canons of taxation. It must be noted that canons refer to the qualities of an isolated tax and not to the tax system as a whole. A good tax system should have a proper combination of all kinds of taxes having different canons.

According to Adam Smith, there are four canons or maxims of taxation on the administrative side of public finance which are still recognised as classic.

To him a good tax is one which contains:

1. Canon of equality or equity.
2. Canon of certainty.
3. Canon of economy.
4. Canon of convenience.

To these four canons, economists like Bastable have added a few more which are as under:

5. Canon of elasticity.
6. Canon of productivity.
7. Canon of simplicity.
8. Canon of diversity.
9. Canon of expediency

Chart represent the different canons of taxation.

Every fiscal economist, along with Adam Smith, stresses that taxation must ensure justice. The canon of equality or equity implies that the burden of taxation must be distributed equally or equitably in relation to the ability of the tax payers.

Equity or social justice demands that the rich people should bear a heavier burden of tax and the poor a lesser burden. Hence, a tax system should contain progressive tax rates based on the tax-payer’s ability to pay and sacrifice.

Canon of Certainty:

Taxation must have an element of certainty. According to Adam Smith, “the tax which each individual is bound to pay ought to be certain and not arbitrary. The time of payment, the manner of payment, the amount to be paid ought to be clear and plain to the contributor and to every other person.”

The certainty aspects of taxation are:

1. Certainty of effective incidence i.e., who shall bear the tax burden.
2. Certainty of liability as to how much shall be the tax amount payable in a particular period. This the tax payers as well as the exchequer should unambiguously know.
3. Certainty of revenue i.e., the government should be certain about the estimated collection of revenue from a given tax levied.

There are some incomes which do not form part of total income and thus, are also called as income exempt from tax. Such exempted incomes are given under section 10 of the Income-tax Act, 1961.

Some of those incomes are explained below:

Agricultural income [Sec. 10(1)]:

Agricultural income in India is totally exempt from tax. However, such income is to be aggregated in case of certain assessees for the purpose of determining rate of tax on non-agricultural income.

Receipts by a member from a HUF [Sec. 10(2)]:

Any sum received by an individual as a member of a Hindu Undivided Family either out of income of the family or out of income of estate belonging to the family is exempt from tax.

Share of profit received by a partner from a firm [Sec. 10(2A)]:

In case of a person being a partner of a firm which is separately assessed as such, his/ her share in the total income of the firm is exempt from tax.

Interest on Non-resident (External) Account [Sec. 10(4)]:

In the case of an individual who is not resident in India, any income by way of interest on money standing to his credit in a Non-resident (External) account in any bank in India shall be exempt from tax if certain conditions are satisfied.

Remuneration to persons who are not citizens of India [Sec. 10(6)]:

In case of an individual who is not a citizen of India, the following income shall be exempt from tax:

• Remuneration received by diplomats, etc.
• Remuneration received by a foreign national as an employee of a foreign enterprise.
• Non-resident employed on a foreign ship.
• Remuneration of employee of foreign Government during his training in India.

Allowance or perquisites outside India [Sec. 10(7)]:

Any allowances or perquisites paid or allowed, as such, outside India by the Government to a citizen of India, for rendering services outside India, are exempt.

Payments under Bhopal Gas Leak Disaster (Processing of Claims) Act, 1985 [Sec. 10(10BB)]:

Any payments made, under the above Act or any scheme made thereunder, shall be exempt from tax in the hands of the recipient.

Exemption for compensation received or receivable on account of any disaster [Sec. 10(10BC)]:

Any amount received or receivable from the Central Government or a State Government or a local authority by an individual or his legal heir by way of compensation on account of any disaster shall be exempt from tax.

However, the exemption is not allowable in respect of amount received or receivable to the extent such individual or his legal heir has been allowed a deduction under the Income-tax Act on account of any loss or damage caused by such disaster.

Tax on non-monetary perquisites paid by employer [Sec. 10(10CC)]:

The tax actually paid by the employer on a perquisite provided to the employee [other than the perquisite provided by way of monetary payment within the meaning of section 17(2)] shall be exempt from tax in the hands of the employee.

Provident Fund [Sec. 10(11)]:

Any payment from a provident fund to which the Provident Fund Act, 1925 applies or from Public Provident Fund set up by the Central Government shall be exempt from tax.  

Educational scholarships [Sec. 10(16)]:

Scholarships granted to meet the cost of education are exempt from tax. In order to avail the exemption, it is not necessary that scholarship should be financed by the Government.

Daily allowances of Members of Parliament [Sec. 10(17)]:

The following incomes shall be exempt from tax in the hands of the persons specified:

• Daily allowance received by any person by reason of his membership of Parliament or of any State Legislature or of any Committee thereof;
• Any allowance received by any person by reason of his membership of Parliament under the Members of Parliament (Constituency Allowance) Rules, 1986;
• Any constituency allowance received by any person by reason of his membership of any State Legislature under any Act or Rules made by that State Legislature.

Pension received by certain awardees/ any member of their family [Sec. 10(18)]:

Any income by way of pension/ family pension received by an individual or any member of his family shall be exempt from tax if such individual has been in the service of Central/ State Government and has been awarded Param Vir Chakra or Maha Vir Chakra or Vir Chakra or such other gallantry award as may be notified.

Exemption of the family pension received by the family members of armed forces (including para-military forces) personnel killed in action in certain circumstances [Sec. 10(19)]:

Where the death of a member of the armed forces (including para-military forces) of the Union has occurred in the course of operational duties, in such circumstances and subject to such conditions as may be prescribed, the family pension received by the widow or children or nominated heirs, as the case may be, shall be exempt from tax.

Annual value of one palace of the ex-ruler [Sec. 10(19A)]:

The ‘annual value’ in respect of any one palace which is in occupation of an ex-ruler is exempt from tax, provided such annual value was exempt before 28.12.1971 by virtue of any law or order then prevailing.

Income of minor clubbed in the hands of a parent [Sec. 10(32)]:

Under section 64(1A), the income of a minor child is includible in the total income of the parent under the circumstances mentioned therein, section 10(32) provides that such parent in whose income the minor’s income is included shall be entitled to exemption to the extent such income does not exceed of ` 1,500 in respect of each minor child, whose income is so includible. In other words, the exemption shall be allowed to the extent of the income of each minor child included or ` 1,500 per child, whichever is less.

Capital gain on transfer of units of US-64 exempt if transfer takes place on or after 1-4-2002 [Sec. 10(33)]:

Any income arising from the transfer of a capital asset, being a unit of the Unit Scheme, 1964 where the transfer of such asset takes place on or after 1-4-2002, shall be exempt from tax.

Dividend to be exempt in the hands of the shareholders [Sec. 10(34)]:

Any dividend declared, paid or distributed by a domestic company shall be liable to dividend distribution tax @ 15% plus surcharge @ 10% plus education cess @ 2% plus secondary and higher education cess @ 1% of the amount so declared, distributed or paid. Hence, such dividend received by the shareholders shall be exempt from tax in their hands.

Income from units to be exempt in the hands of the unit-holders [Sec. 10(35)]:

Like dividends, income received on units of UTI (now known as specified undertaking and specified company) and Mutual Funds covered under section 10(23D) shall be exempt from tax in the hands of the unit-holders.

Exemption of long-term capital gain arising from sale of shares and units [Sec. 10(38)]:

Any income arising from the transfer of a long-term capital asset, being an equity share in a company or a unit of an equity oriented fund shall be exempt from tax provided:

• Such equity shares are sold through recognized stock exchange, whereas units of an equity oriented fund may either be sold through the recognized stock exchange or may be sold to the mutual fund.
• Such transaction is chargeable to securities transaction tax.

Exemption of amount received by an individual as loan under reverse mortgage scheme [Sec. 10(43)]:

Any amount received by an individual as a loan, either in lump sum or in installment, in a transaction of reverse mortgage referred to in section 47(xvi) shall be exempt from tax.

The Constitution of India → Schedule VII → Union List → Entry 82 has given the power to the Central Government to levy a tax on any income other than agricultural income, which is defined in Section 10(1) of the Income Tax Act, 1961. The Income Tax Law consists of Income Tax Act 1961, Income Tax Rules 1962, Notifications and Circulars issued by Central Board of Direct Taxes (CBDT), Annual Finance Acts and judicial pronouncements by the Supreme Court and High Courts.

The government imposes a tax on taxable income of all persons who are individuals, Hindu Undivided Families (HUF’s), companies, firms, LLP, an association of persons, a body of individuals, local authority and any other artificial juridical person. The levy of tax on a person depends upon their residential status. The CBDT administers the Income Tax Department, which is a part of the Department of Revenue under the Ministry of Finance, Govt. of India. Income tax is a key source of funds that the government uses to fund its activities and serve the public.

The Income Tax Department is the biggest revenue mobilizer for the Government. The total tax revenues of the Central Government increased from ₹1,392.26 billion (US$20 billion) in 1997–98 to ₹5,889.09 billion (US$83 billion) in 2007–08. In 2018–19, the direct tax collections reported by CBDT were approximately INR 11.17 lakh crore.

Modern Times

The 19th century saw the establishment of British rule in India. Following the Mutiny of 1857, the British government faced an acute financial crisis. To fill up the treasury, the first Income-tax Act was introduced in February 1860 by James Wilson, who became British-India’s first Finance Minister.[7] The Act received the assent of the Governor-General on 24 July 1860 and came into effect immediately. It was divided into 21 parts consisting of no less than 259 sections. Income was classified under four schedules:

• Income from landed property
• Income from professions and trade
• Income from securities, annuities and dividends
• Income from salaries and pensions. Agricultural income was subject to tax.

Subsequently, many laws were brought to streamline income tax laws. For example, the Super-Rich Tax was introduced in 1918, and the new Income-tax Act was passed in 1918. However, the Act of 1922 marked an important change from the Act of 1918 by shifting the administration of the income tax from the hands of the Provincial Government to the Central government. Another remarkable feature of this Act was that the rules were to be enunciated by the annual finance Acts instead of the basic enactment. Again, a new Income-tax Act came in 1939.

The 1922 Act, was amended not less than twenty-nine times between 1939 and 1956. A tax on capital gains was imposed for the first time in 1946, although the concept of ‘capital gains’ has been amended many times by later amendments. In 1956, Nicholas Kaldor was appointed to investigate the Indian tax system in the light of the revenue requirement of the second five-year plan (1956–1961). He submitted an exhaustive report for a coordinated tax system and the result was the enactment of several taxation Acts, viz., the wealth-tax Act 1957, the Expenditure-tax Act, 1957 and the Gift-tax Act, 1958.

The Direct Taxes Administration Enquiry Committee, under the Chairmanship of Mahavir Tyagi, submitted its report on 30 November 1959 and the recommendations made therein took shape of the Income Tax Act, 1961. The 1961 Act came in to force with effect from 1 April 1962, by replacing the Indian Income Tax Act, 1922 which had remained in operation for 40 years. The present law of income tax is governed by the Income Tax Act, 1961, which has 298 sections and 4 schedules and is applicable to whole of India including the state of Jammu and Kashmir.

The Direct Taxes Code Bill was tabled in the Parliament on 30 August 2010 by the then Finance Minister to replace the Income Tax Act, 1961 and Wealth Tax Act. The bill, however, could not go through and eventually lapsed after revocation of the Wealth Tax Act in 2015.

Charge to Income Tax

For the assessment year 2016–17, individuals earning an income up to ₹2.5 lakh (US$3,500) were exempt from income tax.

About 1% of the national population, called the upper class, fall under the 30% slab. It grew 22% annually on average during 2000–10 to 0.58 million income taxpayers. The middle class, who fall under the 10% and 20% slabs, grew 7% annually on average to 2.78 million income taxpayers.

Any Amendment Please Comment

Previous Year indicates the financial year immediately preceding the assessment year. It is the year in which a person or entity earns income, which becomes taxable in the assessment year. In Income Tax Act, 1961, the term “previous year” is defined under section 3.

Previous Year is a period of 12 months, but it can be shorter than that too, such as in the case of a newly set up business or profession, the previous year will be less than 12 months, starting from the date of commencing the business and ending on 31st March of that financial year.

Further, if a source of income commences in a particular financial year, then also the previous year begins from the date on which the income generation starts and ends on the 31st March, of that particular financial year.

It is a common rule that the income of the previous year is assessed in the immediately following financial year. However, there are certain instances when the income of the previous year is assessed in the same year. These are:

• Shipping business of non-resident.
• Person leaving India, permanently having no intention of coming back.
• Association of persons, Body of individuals or any artificial juridical person established for a definite objective.
• Discontinued business
• Person is likely to transfer, sell or dispose of assets to avoid the payment of taxes.

The term previous year is very important because it is the income earned during previous year which is to be assessed to tax in the assessment year. As the word ‘Previous’ means ‘coming before’, hence it can be simply said that the previous year is the financial year preceding the assessment year e.g. for assessment year 2014-15 the previous year should be the financial year ending on 31st March 2014.

In simple words, it may be said that the year in which income is earned is called previous year and the next year in which such income is computed and put to tax is known as assessment year: For example, income earned by an assessee in the previous year 2013-14 is taxable in the assessment year relevant to the previous year 2013-14 and so it is taxable in the assessment year 2014-15. The simple rule is that the income of a previous year is taxed in its relevant assessment year subject to certain exceptions.

(a) Previous year in case of a continuing business. It is the financial year preceding the assessment year. As such for the assessment year 2014-15, the previous year for a continuing business is 2013-14 i.e. 1-4-2013 to 31-3-2014.

(b) Newly set up business or profession. The assessee is free to set up a new business or start a new profession on any day and the first previous year in case of a newly set up business/profession or newly created source of income shall be on the day it is set up and end on 31st March next following. So the first previous year may be of 12 months or less than 12 months but all subsequent previous years shall be of 12 months duration and always be starting on 1st April each year.

(c) In case of a Newly created source of Income. In such case the previous year shall be the period between the day on which such source comes into existence and 31st. March next following

Before implementing a new or revised strategy, company leaders must ensure the organizational structure can support the planned activities. After identifying the tasks that the company must perform well to succeed, company executives configure organizational hierarchies to support primary strategic goals and achieve competitive advantages. They also identify areas of weakness that pose risks and devise techniques for handling crises. Successful strategic implementation depends on structuring the organization’s employees so they can most effectively use the tools and resources available to create quality products and services.

Structuring Activities

To prevent their staff from spending time on activities not directly related to achieving companies’ strategic goals, managers identify tasks that can be outsourced to third-party vendors. Structuring work this way allows experts to perform these jobs, typically at a lower cast, while employees focus on their core competencies supporting main businesses. For example, computer manufacturers typically outsource assembly while focusing internally on design, sales and distribution duties.

Aligning Functions to Strategic Objectives

Before corporate leaders can implement new strategyies, they need to ensure that all personnel in the organizational structure possess the necessary skills, knowledge and resources to accomplish the tasks. Work must flow from one function to another so leaders should establish clear processes with policies and procedures that define roles and responsibilities. The strategy must be consistent across all departments, adaptive to changes, competitively advantageous and technically feasible.

Establishing Authority

Successfully implementing a new strategy requires that managers and employees understand what activities require executive approval and which decisions employees have the empowerment to make without further approval. Ideally, decision makers should be those people who are closest to the situation and most knowledgeable about the impact. By avoiding micro-managing the organization, managers streamline operations and eliminate wasteful tasks. If the organization is structured to allow employees the flexibility to make critical decisions, they must also be held accountable for their actions.

Developing Partnerships

Strategic implementations require personnel to work together to achieve specific, measurable, attainable, relevant and time-constrained goals and objectives. Establishing a common balanced scorecard prevents groups from competing against each other to succeed individually at the expense of the whole company. If company executives foster a cooperative environment between departments, managers share resources, personnel and knowledge effectively. Additionally, the organizational structure should encourage new employees to seek out coaching and mentoring from corporate executives. By encouraging learning and development, company leaders establish a framework for sustainable growth.