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Many partnership agreements require that a partner who wishes to dispose of his interest in the partnership do so by surrendering it to the partnership in exchange for a liquidating distribution. Many partnership agreements do not allow the unrestricted sale to the public since the remaining partners do not want to be forced to accept anyone who may not be desirable for the business, who may not have the requisite skills, or who may not get along with the other partners. The partnership agreement will also often contain a formula for determining the liquidating distribution that reduces the partner’s basis in the partnership to 0.

Liquidating distributions are based on the fair market value (FMV) of a partner’s capital account, so the partnership property must be revalued and unrecorded intangible assets, such as goodwill, must be included. The value of the liquidating distribution = the amount received by the withdrawing partner + any extinguished apportioned debt.

Liabilities. When a third-party buy a partnership interest, the buyer generally assumes the selling partner’s share of indebtedness of the partnership, and thus, is added on to the sale price.

Hot Assets

A partnership that has unrealized receivables and inventory, i.e., hot assets, that, when sold by the partnership, causes it to recognize ordinary income complicates the taxation of the selling partner’s interest, since some of the gain or loss may be ordinary rather than capital. The selling partner must recognize the income just as if those assets were sold, with the ordinary income being allocated to the partner. This rule prevents the conversion of ordinary income into capital income that is usually taxed at a lower rate through the sale of the partnership interest.

Unrealized receivables consist of accounts receivable of a cash basis partnership and anything that is sold that is subject to depreciation recapture rules.

Abandonment or Worthlessness of Partnership Interest:

Depending upon the circumstances, the abandonment or worthlessness of a partnership interest may give rise to a loss deduction under Code Sec. 165. Whether the loss is capital or ordinary depends on whether or not the loss results from the sale or exchange of a capital asset. If there is an actual or deemed distribution from the partnership, the transaction is treated as a sale or exchange of the partnership interest and any resulting loss is capital, except as provided in Code Sec. 751(b) (relating to inventory and unrealized receivables).

See Code Sec. 731(a), Code Sec. 741, and Rev. Rul. 93-80, 1993-2 C.B. 239. Thus, for example, if the abandonment results in the relief of the partner’s share of the partnership’s liabilities, the loss will be capital even if no other consideration is received. In addition, the receipt of a de minimis amount of consideration will cause the loss to be a capital loss. However, a partner who does not receive any consideration and is not relieved of a liability may take an ordinary loss on the abandonment of a partnership interest. Citron, B. Philip, (1991) 97 TC 200.

Sale of Entire Interest When a partnership interest is sold, it is necessary to allocate partnership profit or loss between the transferor-partner and the transferee-partner. Generally, the taxable year of the partnership as a whole does not close on the sale or exchange of a partner’s interest. Code Sec. 706(c)(1) ; Reg § 1.706-1(c)(1) . This is true even though the transfer often results in the partnership’s technical dissolution under the nontax rules of most jurisdictions.

However, a partnership’s taxable year closes with respect to a partner who sells his entire partnership interest. Code Sec. 706(c)(2)(A); Reg § 1.706-1(c)(2) . Accordingly, the selling partner’s distributive share of the partnership’s tax items for the short period, ending on the disposition date, is included in his tax return for his taxable year that includes the sale date. Reg § 1.706-1(c)(2)(i).

Thus, if the sale occurs in December of Year 2, a selling calendar year partner in a January fiscal year partnership may be required to include as many as 23 months of partnership income on his Year 2 return (his share of the partnership’s income for the partnership year ending January of Year 2 and his share of the partnership’s income from January of Year 2 to December of Year 2). The other partners will not be affected by the sale.

The selling partner’s share of partnership tax items may be determined either by making an “interim closing” of the partnership books and determining the amount of partnership’s items up to the day of the sale. However, if the partners agree, the partnership’s income, gain, loss, deduction, and credit for the entire year may be allocated between the selling partner and the buyer. This can be done by estimating what the partner’s share of the partnership’s items would have been had he remained a partner until the end of the year and prorating these items between the selling partner and the buyer. The proration may be based on the portion of the taxable year that has elapsed before the sale, exchange, or liquidation or may be determined under any other reasonable method. Reg § 1.706-1(c)(2)(ii).

A 501(c) organization is a nonprofit organization in the federal law of the United States according to Internal Revenue Code Section 501(c) (26 U.S.C. § 501(c)) and is one of over 29 types of nonprofit organizations exempt from some federal income taxes. Sections 503 through 505 set out the requirements for obtaining such exemptions. Many states refer to Section 501(c) for definitions of organizations exempt from state taxation as well. 501(c) organizations can receive unlimited contributions from individuals, corporations, and unions.

For example, a nonprofit organization may be tax-exempt under section 501(c)(3) if its primary activities are charitable, religious, educational, scientific, literary, testing for public safety, fostering amateur sports competition, preventing cruelty to children, or preventing cruelty to animals.

According to the IRS Publication 557, in the Organization Reference Chart section, the following is an exact list of 501(c) organization types and their corresponding descriptions.

Forming a tax-exempt organization

The tax-exempt organization is not really an entity choice, but rather a declaration of how your particular entity will conduct its business. When used in reference to nonprofit organizations, the term “tax-exempt” generally refers to net profits of an organization (income minus expenses) being exempt from state or federal taxes. While a nonprofit organization can be established by incorporating, the entity is not automatically tax-exempt upon filing the articles of incorporation with the state.

Tax-exempt status can only be achieved by applying and receiving approval from the Internal Revenue Service (IRS). The most common organization is called a Section 501(c)(3) public charity or private foundation, established for purposes that are religious, educational, charitable, scientific, literary, safety-oriented or amateur sports-related. (There are also a number of other IRS-designated organization types that are considered tax-exempt but not charitable. Examples include trade associations, social clubs and certain advocacy organizations involved in political lobbying. Check out the IRS classification chart for additional information.)

The application process is difficult, and professional help is recommended. It requires the filing of IRS Form 1023 within the first 27 months of the organization’s formation. The form is quite lengthy, and a typical application package can range from 25 to 75 pages and take more than 100 hours to complete. A two-tiered filing fee structure ($300 and $750) allows very small organizations to apply at a reduced rate, compared to larger, more traditional tax-exempt organizations.

While the IRS generally rejects less than one-tenth of all applicants, another third are abandoned by the filer either out of frustration or inability to answer IRS follow-up questions. The process typically takes between two to 12 months, depending on the need for follow-up information. A negative determination by the IRS can be appealed, or the organization may choose to apply again, but either way it will be difficult once the initial application is rejected.

Advantages of tax-exempt status. One of the primary benefits of being considered tax-exempt is the ability to accept contributions and donations that are tax-deductible to the donor. Additional benefits include, but are not limited to:

• Exemption from federal and/or state income taxes.
• Possible exemption from state sales and property taxes (varies by state).
• Ability to apply for grants and other public or private allocations available only to IRS-recognized 501(c)(3) organizations.
• Potentially higher thresholds before incurring federal and/or state unemployment tax liabilities.
• The public legitimacy of IRS recognition.
• Discounts on U.S. Postal bulk-mail rates and other services.

The income of an estate of a deceased person is that which is received by the estate during the period of administration or settlement. The period of administration or settlement is the period actually required by the administrator or executor to perform the ordinary duties of administration, such as the collection of assets and the payment of debts, taxes, legacies, and bequests, whether the period required is longer or shorter than the period specified under the applicable local law for the settlement of estates. For example, where an executor who is also named as trustee under a will fails to obtain his discharge as executor, the period of administration continues only until the duties of administration are complete and he actually assumes his duties as trustee, whether or not pursuant to a court order. However, the period of administration of an estate cannot be unduly prolonged. If the administration of an estate is unreasonably prolonged, the estate is considered terminated for Federal income tax purposes after the expiration of a reasonable period for the performance by the executor of all the duties of administration. Further, an estate will be considered as terminated when all the assets have been distributed except for a reasonable amount which is set aside in good faith for the payment of unascertained or contingent liabilities and expenses (not including a claim by a beneficiary in the capacity of beneficiary). Notwithstanding the above, if the estate has joined in making a valid election under section 645 to treat a qualified revocable trust, as defined under section 645(b)(1), as part of the estate, the estate shall not terminate under this paragraph prior to the termination of the section 645 election period. See section 645 and the regulations thereunder for rules regarding the termination of the section 645 election period.

Generally, the determination of whether a trust has terminated depends upon whether the property held in trust has been distributed to the persons entitled to succeed to the property upon termination of the trust rather than upon the technicality of whether or not the trustee has rendered his final accounting. A trust does not automatically terminate upon the happening of the event by which the duration of the trust is measured. A reasonable time is permitted after such event for the trustee to perform the duties necessary to complete the administration of the trust. Thus, if under the terms of the governing instrument, the trust is to terminate upon the death of the life beneficiary and the corpus is to be distributed to the remainderman, the trust continues after the death of the life beneficiary for a period reasonably necessary to a proper winding up of the affairs of the trust. However, the winding up of a trust cannot be unduly postponed and if the distribution of the trust corpus is unreasonably delayed, the trust is considered terminated for Federal income tax purposes after the expiration of a reasonable period for the trustee to complete the administration of the trust. Further, a trust will be considered as terminated when all the assets have been distributed except for a reasonable amount which is set aside in good faith for the payment of unascertained or contingent liabilities and expenses (not including a claim by a beneficiary in the capacity of beneficiary).

(c)

(1) Except as provided in subparagraph (2) of this paragraph, during the period between the occurrence of an event which causes a trust to terminate and the time when the trust is considered as terminated under this section, whether or not the income and the excess of capital gains over capital losses of the trust are to be considered as amounts required to be distributed currently to the ultimate distributee for the year in which they are received depends upon the principles stated in § 1.651(a)-2. See § 1.663-1 et seq. for application of the separate share rule.

(2)

(i) Except in cases to which the last sentence of this subdivision applies, for taxable years of a trust ending before September 1, 1957, subparagraph (1) of this paragraph shall not apply and the rule of subdivision (ii) of this subparagraph shall apply unless the trustee elects to have subparagraph (1) of this paragraph apply. Such election shall be made by the trustee in a statement filed on or before April 15, 1959, with the district director with whom such trust’s return for any such taxable year was filed. The election provided by this subdivision shall not be available if the treatment given the income and the excess of capital gains over capital losses for taxable years for which returns have been filed was consistent with the provisions of subparagraph (1) of this paragraph.

(ii) The rule referred to in subdivision (i) of this subparagraph is as follows: During the period between the occurrence of an event which causes a trust to terminate and the time when a trust is considered as terminated under this section, the income and the excess of capital gains over capital losses of the trust are in general considered as amounts required to be distributed for the year in which they are received. For example, a trust instrument provides for the payment of income to A during her life, and upon her death for the payment of the corpus to B. The trust reports on the basis of the calendar year. A dies on November 1, 1955, but no distribution is made to B until January 15, 1956. The income of the trust and the excess of capital gains over capital losses for the entire year 1955, to the extent not paid, credited, or required to be distributed to A or A’s estate, are treated under sections 661 and 662 as amounts required to be distributed to B for the year 1955.

(d) If a trust or the administration or settlement of an estate is considered terminated under this section for Federal income tax purposes (as for instance, because administration has been unduly prolonged), the gross income, deductions, and credits of the estate or trust are, subsequent to the termination, considered the gross income, deductions, and credits of the person or persons succeeding to the property of the estate or trust.

An asset is something of value that your business owns, like buildings, machinery, equipment, and vehicles. When you sell a capital asset (used for investment or to make a profit), you can sell it at a gain or loss. The difference between the original cost (called the basis) and the sales price is either a capital gain or a capital loss.

For example, if you own business equipment, you may add to the basis by upgrading the equipment or reduce the basis by taking certain deductions and by depreciation. The cost at purchase plus the changes create an adjusted basis at the time you sell the equipment. The difference in this adjusted basis and the sales price is either a capital gain or a capital loss.

Capital gains tax is a tax charged on all capital gains. These gains are taxed differently, depending on how long they are held. If you own the asset for more than a year before you sell it, your capital gain is long-term. If you hold it one year or less, the gain is short-term.

To calculate your capital gains tax rate for your tax return, you must separate short-term and long-term capital gains on all the assets you sold during the year to get a net short-term and net long-term capital gain (or loss).

The net long-term capital gain is taxed is usually no higher than 15% for most taxpayers, but there are some exceptions.

A net short-term capital gain is usually taxed as ordinary income, based on your tax rate.

At the time of Sale of any Real Estate Property, Tax is liable to be paid on the Gains earned on the sale of the Real Estate Property. Such Gains could either be Short Term Capital Gains or Long Term Capital Gains. The basis of such Classification in the Income Tax Return has been given below:

• Short Term Capital Gain (STCG): If the Real Estate Property is held for less than 24 Months.
• Long Term Capital Gain (LTCG): If the Real Estate Property is held for more than 24 Months (Reduced from 36 to 24 Months from FY 2017-18 onwards).

Full Value of Consideration

Full Value of Consideration means what the transferor receives or is entitled to receive as consideration for the Sale of Property /Asset. This Value may be in cash or in kind i.e. in exchange for an Asset.

In case of exchange of an asset, the full value for the computation of Capital Gains shall be the Fair Market Value of the Property (Asset) granted in exchange. Fair Market Value in relation to Capital Gains means the price which the Property (Asset) would normally fetch if sold in the open market on the Relevant Date.

In case, the full value of consideration is received in installments in different years, the entire value of consideration shall be the Market Value of the Property/Asset granted in exchange.

Expenses on Transfer

Expenses on Transfer include any expenditure incurred, whether directly or indirectly, for the purpose of transfer like Advertisement Expense, Brokerage Expense, Stamp Duty, Registration Fees, and Legal Expenses etc. However, any expense which has been claimed as a deduction under any other provision of the Income Tax Act cannot be claimed as a deduction under this Clause.

Cost of Acquisition

Cost of Acquisition is the price which the assessee has paid, or the amount which the assessee has incurred, for acquiring the Property /Asset. The Expenses incurred at the time of completing the title are a part of the cost of acquisition.

In cases where the Capital Asset became the property of the assessee in any of the manners mentioned below, the cost of acquisition shall be deemed to be the cost for which the previous owner of the property acquired it:

• On the Distribution of Assets/ Total Partition of HUF.
• Under a Gift or Will.
• By Succession, Inheritance or Devolution.
• On Distribution of Assets on Liquidation of a Company.

Capital gains on depreciable asset

Under Section 50 of Income Tax Act, if you have sold a capital asset forming part of a block of assets, including building and machinery, on which the depreciation has been allowed under the law, the income arising from the sale is treated as short-term capital gain.

The reader must note here that as land is not a depreciable asset and so, cannot form part of a block of assets in absence of rate of depreciation. Hence, the provisions of Section 50 cannot be invoked, in case of sale of land. If land is held for a period of more than 24 months, the gains earned through the transactions is taxed as long­term capital gains.

Computation of profit or loss from sale of business property in an asset block

Unlike regular accounting where the depreciation is calculated with reference to the cost or written down value of each asset, the depreciation for a particular block of assets is computed in an aggregate manner. If there are more than one assets in one particular block of assets, the depreciation is calculated on the value arrived at after adding the cost of acquisition for the assets purchased during the year and falling under the same block of assets, to the written down value of the block at the beginning of the year and by reducing the sale price of one or more assets sold during the year.

Passive income comprises of earnings which are derived via a rental property, limited partnership, or any other enterprise in which any individual is not involved in active participation. Usually, passive income is taxable.

Paying Income tax is one thing, which most of the people do not like. Everyone tries to minimize their income tax by some or the other means.

A few analysts consider portfolio income as passive income, and hence, interest and dividends would be regarded as passive income. Passive income requires little to no effort in order to earn and maintain. It is termed as progressive passive income when an earner puts in little effort to generate income.

A passive income investment will make the life of an investor easier in several ways, especially when a hands-off approach is chosen. The four passive income investment options include – Real Estate, Peer-to-Peer Lending, Dividend Stocks, and Index Funds. These four options indicate varying levels of risk and diversification. As with any kind of financial investment, it’s vital to gauge the expected returns with respect to a passive income opportunity versus the potential for loss.

There are three types of passive activities:

Cash flows via property income, inclusive of profits from ownership of capital, rent via ownership of resources such as rental income, cash flows from a property or from any piece of real estate, and in the form of interest through owning financial assets.

• Trade/business-related activities in which an individual does not take part in the operations of a business other than investing during the year.
• Royalties, i.e. payments initiated by one firm (the licensee) to another firm/an individual (the licensor) for the right to utilise the latter’s intellectual property (music, video, book).

Tax free Passive income

Agricultural Income:

Agricultural Income is exempted from tax. However, the income from agriculture (if earned more than Rs 5000 a year) has to be taken into consideration for calculating the tax payable.

Dividends received from your shares or equity mutual funds

You receive dividends from your stocks or equity mutual funds (dividend option). This dividend money you get is also tax-free in your hand. However, the bad side of the story is that company anyways pays the dividend distribution tax to govt before giving the dividends to its shareholders. Hence, anyways we are getting slightly less share of profits in our hand anyway.

Now after budget 2018, the dividends from equity shares or mutual funds will be taxed at a flat rate of 10% above the threshold limit of Rs 1,00,000 in a financial year. Before budget 2018, the profits from equity after a year was 100% tax free.

Profits from shares or equity mutual funds after a year

When you earn any profits from your shares or equity mutual funds after holding it for minimum 1 yrs, it is called Long-term Capital gains, and it is 100% tax exempted as per current tax rules.

Now after budget 2018, the profits from shares or equity will be taxed at a flat rate of 10% above the threshold limit of Rs 1,00,000 in a financial year. Before budget 2018, the profits from equity after a year was 100% tax free.

Any amount received through WILL or Inheritance

There is no inheritance tax in India now. So, anything you get in inheritance through WILL is not taxable in your hands. It becomes your property and now when you invest that money, only the interest part earned on that property will be taxed.

Money received from your EPF account after 5 yrs

The money one gets from their EPF account is also tax-free, provided the money is taken out after 5 yrs of service.

Money got under VRS scheme up to Rs 5 Lacs

If a person takes VRS (Voluntary retirement scheme) than any amount received up to Rs 5 lacs is income tax-free. However, not everyone is eligible for it. Only employees of Public sector companies or an authority established under a Central or State govt is eligible for this.

Maturity or Claim amount received by Life Insurance Company

The money you get from life insurance companies on maturity, claim or surrender is 100% tax-free provided, If the premium paid does not exceed 20% of the sum assured. I am quoting new amendments which have come in recent years.

As per amendments introduced in the Finance Act, 2003, (i.e., with effect from April 1, 2003), any proceeds received on account of maturity/surrender of an insurance policy were exempt from tax only if the premium paid did not exceed 20% of the sum assured.

Interest on saving bank interest up to Rs 10,000 a year

From 2013 onwards, a new section 80 TTA is introduced under which, the interest on your saving bank account up to Rs 10,000 is not taxable. So if your saving bank interest for a year is Rs 20,000, then out of that Rs 10,000 is exempted and only the rest Rs 10,000 will be added to your taxable income.

Adjusted gross income (AGI) is an individual’s total gross income minus specific deductions. It is used to calculate taxable income, which is AGI minus allowances for personal exemptions and itemized deductions. For most individual tax purposes, AGI is more relevant than gross income.

Gross income is sales price of goods or property, minus cost of the property sold, plus other income. It includes wages, interest, dividends, business income, rental income, and all other types of income. Adjusted gross income is gross income less deductions from a business or rental activity and 21 other specific items.

Several deductions (e.g. medical expenses and miscellaneous itemized deductions) are limited based on a percentage of AGI. Certain phase outs, including those of lower tax rates and itemized deductions, are based on levels of AGI. Many states base state income tax on AGI with certain deductions.

Adjustments

Gross income is reduced by certain items to arrive at adjusted gross income. These include:

• Expenses of carrying on a trade or business including most rental activities (other than as an employee)
• Certain business expenses of teachers, reservists, performing artists, and fee-basis government officials.
• Health savings account deductions.
• Certain moving expenses.
• One-half of self-employment tax.
• Allowable contributions to certain retirement arrangements (SEP IRA, SIMPLE IRA, and qualified plans) and Individual Retirement Accounts (IRAs).
• Penalties imposed by financial institutions and others on early withdrawal of savings.
• Alimony paid (which the recipient must include in gross income).
• College tuition, fees, and student loan interest (with limitations and exceptions).
• Jury duty pay remitted to the juror’s employer.
• Domestic production activities deduction.
• Certain other items of limited applicability.

An Income Tax penalty is a punitive measure which applies to assessees who make default in compliance with the Income Tax Act. The Act has introduced various penalties for contraventions committed by taxpayers. The penalty prescribed as per the Income Tax Act can either be mandatory or leviable at the discretion of a tax authority. In this article, the various income tax penalties are discussed.

Audit and Audit Report

• If the assessee fails to get his accounts audited, obtain audit report, or furnish report of such auditor, a penalty will be leviable at the ₹1,50,000 or ½% of the total sale/ Turnover/ gross receipts whichever is lesser.
• Failure of assessee to furnish Audit report related to foreign transaction, a penalty @ ₹1,00,000 will be payable.

TDS/TCS

• Where a person fails to deduct tax at source, he will be liable to pay a penalty equal to the amount of tax which he has failed to deduct/ pay.
• Where a person fails to collect tax at source, he will be liable to pay a penalty equal to the amount of tax which he has failed to collect.
• Failure to furnish TDS/TCS statement or furnishing incorrect statements, shall attract a penalty ranging from ₹10,000 to ₹1,00,000.
• Failure to furnish information/ furnishing inaccurate information related to TDS deduction related regarding Non-residents shall attract a penalty of ₹100,000.

Penalty for Failure to Comply with Notice

According to the Income Tax Act, an Income Tax Assessing Officer is allowed to issue a notice demanding the taxpayer to file an income tax return. The officer can demand the assessee to produce documents pertaining to an income tax assessment. If a taxpayer may fail to comply with a notice from an Income Tax Officer. In such cases, the taxpayer shall be liable for a penalty of Rs.10,000 for each instance of failure to comply. The officer may also require the taxpayer to furnish in writing any information. The taxpayer should get the accounts audited or re-audited by a Chartered Accountant.

Undisclosed income

• Where the income determined includes undisclosed income, a penalty @10% is payable. However, no such penalty will be leviable, if such income was included in the return and tax was paid before the end of the relevant previous year.
• Where Search has been initiated on/ after 1/7/2012 but before 15/12/2016,
• If undisclosed income is admitted during the course of search and assessee pays tax and interest and files return, a penalty @ 10% of such undisclosed income is payable.
• If undisclosed income is not admitted but the same is furnished in the return filed after such search, 20% of such undisclosed income is payable.
• In all other cases, penalty is leviable @ 60%

Penalty for Concealing Income

The taxpayer may endeavour to reduce his tax liability by concealing income or by furnishing inaccurate particulars of income. In such cases, a penalty can be levied by the Assessing Officer. Penalty for such contravention shall be 100% to 300% of the tax evaded.

Penalty for Not Maintaining Book of Accounts

The Income-tax Act mentions that a taxpayer is bound by the need to maintain books of account. The taxpayer may fail to maintain books of account. In such cases a penalty of up to Rs.25000 is applicable.

Default in making payment of tax

The amount of penalty leviable will be as determined by the Assessing Officer. However, the amount will not exceed the amount of tax in arrears.

Income Tax Return (ITR) is a form in which the taxpayers file information about his income earned and tax applicable to the income tax department.

The department has notified 7 various forms i.e. ITR 1, ITR 2, ITR 3, ITR 4, ITR 5, ITR 6 & ITR 7 till date.Every taxpayer should file his ITR on or before the specified due date. The applicability of ITR forms varies depending on the sources of income of the taxpayer, the amount of the income earned and the category the taxpayer like individuals, HUF, company, etc.

if your gross annual income is more than the basic exemption limit as specified below:

Types of Income Tax payers

The Income tax Act has classified the types of taxpayers in categories so as to apply different tax rates for different types of taxpayers.

Taxpayers are categorized as below:

• Individuals, Hindu Undivided Family (HUF), Association of Persons (AOP) and Body of Individuals (BOI)
• Firms
• Companies

ITR-1 OR SAHAJ

This Return Form is for a resident individual whose total income for the AY 2021-22 includes:

Income from Salary/ Pension.

• Income from One House Property (excluding cases where loss is brought forward from previous years).
• Income from Other Sources (excluding Winning from Lottery and Income from Race Horses)
• Agricultural income up to Rs.5000.

Types of Income / Heads of Income

Everyone who earns or gets an income in India is subject to income tax.(Yes, be it a resident or a non-resident of India ).For simpler classification, the Income tax department breaks down income into five main heads:

Interest Income

Interest that gets accumulated in your savings bank account must be declared in your tax return under income from other sources. Do note that bank does not deduct TDS on savings bank interest. Interest from both fixed deposit and recurring deposits is taxable while interest from savings bank account and post office deposits are tax-deductible to a certain extent. But they are shown under income from other sources. Interest income from a savings bank account or a fixed deposit or from a post office savings account are all shown under this head.

Deduction on Interest Income Under Section 80TTA

For a residential individual (age of 60 years or less) or HUF, interest earned upto Rs 10,000 in a financial year is exempt from tax. The deduction is allowed on interest income earned from:

• Savings account with a bank.
• Savings account with a co-operative society carrying on the business of banking.
• Savings account with a post office.

Avoiding TDS on Fixed Deposits

Banks are required to deduct tax when interest income from deposits held in all the bank branches put together is more than Rs.40,000 in a year (Prior to FY 2019-20, it was Rs.10,000). A 10% TDS is deducted if PAN details are available. It is 20% if the bank does not have your PAN details. The details of TDS deducted on Fixed Deposit Interest is in the Form 26AS. If your total income is below the taxable limit, you can avoid tax deduction on fixed deposits by submitting Form 15G and Form 15H to the bank requesting them not to deduct any TDS. Form 15H is for senior citizens (60 years or older); Form 15G is for everybody else. These forms are for residents only and for those whose taxes add up to zero. These forms must be submitted at the start of the financial year. If you missed submitting them, then you can claim a refund by filing an income tax return. These forms are valid for one year only. Therefore, they must be submitted each year to keep banks from deducting tax.

Tax on Fixed Deposits

Fixed deposit interest that you receive is added along with other income that you have such as salary or professional income, and you’ll have to pay tax on that income at a tax rate that’s applicable to you. TDS is deducted on interest income when it is earned, though it may not have been paid. Example: The bank will deduct TDS on interest accrued each year on a FD for 5 years. Therefore, it is advisable to pay your taxes on an annual basis instead of doing it only when the FD matures. Senior citizens, with effect from 1 April 2018, will enjoy an income tax exemption upto Rs 50,000 on the interest income they receive from fixed deposits with banks, post offices etc under Section 80TTB.

Dividend

Dividend usually refers to the distribution of profits by a company to its shareholders.

However, in view of Section 2(22) of the Income-tax Act, the dividend shall also include the following:

(a) Distribution of accumulated profits to shareholders entailing release of the company’s assets.

(b) Distribution of debentures or deposit certificates to shareholders out of the accumulated profits of the company and issue of bonus shares to preference shareholders out of accumulated profits.

(c) Distribution made to shareholders of the company on its liquidation out of accumulated profits.

(d) Distribution to shareholders out of accumulated profits on the reduction of capital by the company.

(e) Loan or advance made by a closely held company to its shareholder out of accumulated profits.

Tax rate on dividend income

The dividend income shall be chargeable to tax at normal tax rates as applicable in case of an assessee except where a resident individual, being an employee of an Indian company or its subsidiary engaged in Information technology, entertainment, pharmaceutical or bio-technology industry, receives dividend in respect of GDRs issued by such company under an Employees’ Stock Option Scheme. In such a case, dividend shall be taxable at concessional tax rate of 10% without providing for any deduction under the Income-tax Act. However, the GDRs should be purchased by the employee in foreign currency.

Taxable in the hands of resident shareholder

A person can deal in securities either as a trader or as an investor. The income earned by him from the trading activities is taxable under the head business income. Thus, if shares are held for trading purposes then the dividend income shall be taxable under the head business or profession. Whereas, if shares are held as an investment, then income arising in nature of dividend shall be taxable under the head other sources.

The income, taxable under the head PGBP, is computed in accordance with the method of accounting regularly followed by the assessee. For the purpose of computation of business income, a taxpayer can follow either mercantile system of accounting or cash basis of accounting. However, the method of accounting employed by the assessee does not affect the basis of charge of dividend income as Section 8 of the Act provides that final dividend including deemed dividend shall be taxable in the year in which it is declared, distributed or paid by the company, whichever is earlier. Whereas, interim dividend is taxable in the previous year in which the amount of such dividend is unconditionally made available by the company to the shareholder. In other words, interim dividend is chargeable to tax on receipt basis.

A tax credit is a tax incentive which allows certain taxpayers to subtract the amount of the credit they have accrued from the total they owe the state. It may also be a credit granted in recognition of taxes already paid or a form of state support.

Income tax systems often grant a variety of credits to individuals. These typically include credits available to all taxpayers as well as tax credits unique to individuals. Some credits may be offered for a single year only.

Low income subsidies

Several income tax systems provide income subsidies to lower income individuals by way of credit. These credits may be based on income, family status, work status, or other factors. Often such credits are refundable when total credits exceed tax liability.

Tax credit is an amount that offsets the overall tax liability of a person. It is basically the sum that can be subtracted from the total payable tax by an individual. Tax credits are different from deductions as deductions are applicable indirectly, i.e. they help in reducing the base taxable amount of an individual, whereas tax credits directly reduce the amount of liability irrespective of the base tax liability of the tax player.

Foreign Tax Credit

Foreign tax credit is available to Indians as per the Double Taxation Avoidance Agreement (DTAA), which India maintains with more than 80 countries worldwide. According to this agreement, if you are a resident Indian with income from abroad, you will be levied taxes in both the countries. To avoid double payment, DTAA allows for tax credits in the country of residence if the host country has deducted TDS on income. This credit can then be used to reduce the amount of payable tax in the country.

Child Tax Credit

There are no specific laws regarding child tax credits in India. However, there are various exemptions and deductions that can be claimed if you have a child.

Income Tax Credit

Income tax credit is a popular form of tax credit. If an individual is invariably charged more tax than their actual liabilities due to various factors, then the excess amount is available as tax credit to the individual. This credit can be adjusted against future tax liabilities in an absolute manner, i.e. the credit is entirely deducted from the payable tax amount regardless of the individual’s tax bracket or liabilities.

Input Tax Credit

Input tax credit is available for manufacturers and dealers. These taxpayers are entitled to tax credit on inputs purchased through the course of manufacture. Similarly, a trader will receive input tax credit on goods purchased for the purpose of reselling. The tax credits are available on capital goods purchases made within the state, and only those goods that are involved in the processing or manufacture are applicable under this credit.

This tax credit is state-specific. If the final product is sold outside the state of manufacture, the input tax credit has to be reversed to authorities. Also, if the final product has tax exemptions, the input tax credit will not be applicable. The tax credit is usually spread over a period of 3 years; however, rules vary according to individual states.

Tax incentives for undertakings other than infrastructure development undertakings

If certain conditions are met, a tax holiday is permitted on the profits earned by an undertaking engaged in any of the following:

• Integrated business of handling, storage, and transportation of food grains.
• Commercial production or refining of mineral oils.
• Processing, preservation, and packaging of fruits or vegetables.
• Operating and maintaining a hospital in a rural area.