FAQ

How is resident/ non-resident status relevant for levy of income tax?

In case of resident individuals and companies, their global income is taxable in India. However non-residents have to pay tax only on the income earned in India or from a source/activity in India.

What is Income Tax?

It is a tax imposed by the Government of India on any body who earns income in India. This tax is levied on the strength of an Act called Income tax Act which was passed by the Parliament of India.

What do you mean by income earned in India?

Income earned in India is not limited to income earned within the geographical limits or boundaries of the country. Certain incomes are also deemed to have been earned in India although they may have been earned outside the country.

Who administers the Income-Tax Act?

The job of monitoring the Income-tax collection by the government is entrusted to a Department called Income-Tax. This department functions under the Department of Revenue, Ministry of Finance, Government of India.

What is the period for which a persons income is taken into account for purpose of Income tax?

Income earned in the twelve months contained in the period from 1st April to 31st March (commonly called Financial Year [FY]) is taken into account for purposes of calculating Income Tax. Under the income tax Act this period is called a Previous year.

What is meant by Previous Year?

In India the Previous Year (PY) coincides with the Financial Year (FY) i.e. period between April 1 and March 31. Also, the FY in which the income is earned is termed as Previous Year.

What is meant by Assessment Year and how is it different from the Previous Year / Financial Year?

Assessment Year (AY) is the year in which the income of a Previous Year (PY) is taken up for assessment by the Income Tax Authorities. The AY is the year following the Previous Year. Suppose income is earned in PY 2007-08 then the same is assessed by the tax authorities in AY 2008-09

What does the Income Tax Department consider as income?

The word Income has a very broad and inclusive meaning. In case of a salaried person, all that is received from an employer in cash, kind or as a facility is considered as income. For a businessman, his net profits will constitute income. Income may also flow from investments in the form of Interest, Dividend, and Commission etc. Infect the Income Tax Act does not differentiate between legal and illegal income for purpose of taxation. Under the Act, all incomes earned by persons are classified into 5 different heads, such as:1. Income from Salary 2. Income from House property 3. Income from Business or Profession 4. Income from capital gains 5. Income from other sources

Are all receipts considered as income?

Receipts can be classified into two kinds. A) Revenue receipt B) Capital receipt. The general rule under the Income tax Act is that, all revenue receipt are taxable unless a receipt is specifically exempted and all capital receipts are exempt from taxation unless there is a provision to tax it. Gifts and loans etc are in the nature of capital receipts not attracting tax.

What is the difference between “Resident but not ordinarily resident” (RNOR) and “Non resident” (NR)?

An individual is said to be a RNOR if he/she satisfies at least one of the following basic conditions and one or none of the additional conditions. Basic Condition 1 The individual has been in India for a period of 182 days or more during the financial year.Basic Condition 2 The individual has been in India for a period of 60 days or more during the Financial Year and 365 days or more during 4 years immediately preceding the financial year. Additional Condition 1 The individual has been a resident in India in at least 2 out of 10 financial years immediately preceding the said financial year. Additional Condition 2 The individual has been in India for a period of 730 days or more during 7 years immediately preceding the said financial year. Whereas an individual is treated as a Non Resident is in India if he satisfies none of the Basic Conditions.

What is Permanent Account Number (PAN) and is having one compulsory?

Permanent Account Number (PAN) is an unique identification number that helps in tracking the financial transaction of an assessee. This is similar to the Social Security Number in the US of America. Obtaining a PAN is mandatory for assessee who has taxable income. Moreover, most financial transactions such as opening bank accounts, demat accounts, purchase of property, mutual fund investing etc., currently requires a person to quote the PAN mandatorily.

If I have a PAN in my individual name then should also apply for a fresh PAN for the Hindu Undivided Family (HUF) where I am the Karta?

In case you need your HUF to be treated as a separate entity and taxed separately, then you would need to make a fresh application for the HUF. However, you are requested to check if the fourth sequence number in the PAN carries the letter H signifying that the number belongs to an HUF.

How do you explain the structure of Permanent Account Number (PAN)?

PAN is made up of a series of alpha numeric numbers. The fourth letter of the PAN identifies the type of assessee such as; A – Association of Persons (AOP) B – Body of Individuals (BOI) C – Company F – Firm G - Government H – Hindu Undivided Family (HUF) J – Artificial Juridical Person L – Local Authority P – Person The fifth letter signifies the first letter of the surname of the PAN holder. An example illustrating this is; suppose you make a PAN application in the name of Mitesh Turakhia, then your PAN might look something like this – ADLPT2669C where “P” signifies that you are treated as an Individual / Person and “T” is taken from your surname Turakhia.

If I have a PAN in my individual name then should also apply for a fresh PAN for the Hindu Undivided Family (HUF) where I am the Karta?

In case you need your HUF to be treated as a separate entity and taxed separately, then you would need to make a fresh application for the HUF. However, you are requested to check if the fourth sequence number in the PAN carries the letter H signifying that the number belongs to an HUF.

I am working for a Pharmaceutical Company head quartered in US of America, which had given me shares as part of its ESOP program. Such ESOP (shares listed on NASDAQ) was granted to me in January 2002 and in April 2003. These granted shares vested to my account in November 2007 however instead of purchasing them, I sold them at USD 50 per share and got the difference between the granted price and sale price. I wish to know the tax implications of this transaction.

With effect from April 1, 2007 the date of allotment / transfer would be reckoned to be the date to be used the period of holding. Hence if on vesting of the ESOP shares, you exercise your right and are allotted the shares on say November 9, 2007; the period of holding for the purpose of determining whether the share is a long term or short term asset starts from November 9, 2007. Accordingly, if the share is held say till November 20, 2008 then the same would be treated as a long term asset else the same would be treated as short term asset. In this case as the ESOP shares were sold directly on exercise of the option, the same would be treated as a short term asset and accordingly any capital gains would be chargeable to tax as short term gain. Moreover, as the shares are not listed on any recognized stock exchange in India and Securities Transaction Tax (STT) is not paid, the gains would attract a tax at the applicable slab rate.

I am working for an Indian Company whose share is listed on the recognized stock exchange. I was granted ESOP rights in January 2002 and vested in January 2005. I applied for the allotment and received the same on April 2, 2007 and sold the share on January 14, 2008. What is the tax implication on this transaction?

In this case as the ESOP right has been exercised in financial year 2007-08, Fringe Benefit Tax (FBT) is applicable on the fair market value of such shares and is payable by the employer. Moreover, as the shares have been sold within 12 months, the capital gains (if any) arising from such transaction would be taxable as short term capital gains at a base rate of 15% (plus surcharge and education cess as may be applicable).

Is leave encashment received by an employee tax free?

Leave encashment received during the continuity of employment is fully taxable, however relief under section 89 can be availed to offset the change in slab rates for the current year. Leave encashment received by an employee at the time of retirement or leaving employment is fully exempt from tax in case of Government employee and either fully or partly exempt from tax depending on specified conditions.

Is rent received for let out commercial property covered under the head “Income from House Property” or is it covered under Business Income?

All income received out of renting out of property is covered under this head. It makes no difference if the main business of the assessee is deriving income by letting out property. Only if the assessee uses the property for the purpose of conducting his/her business or profession, the profits of which is taxed, then the same is not covered under this head. I have more than one house, which I have not let out on hire. Can I claim benefit of Self Occupied Property (SOP) i.e. annual value of income from such property is treated as Nil?

I have more than one house, which I have not let out on hire. Can I claim benefit of Self Occupied Property (SOP) i.e. annual value of income from such property is treated as Nil?

The claim for the benefit of SOP is available to an individual only in respect of one house of his/her choice. Accordingly, all other house properties, though have not been let out, would be treated as deemed to be let out and the reasonable expected letting out value would be taxable as Income under the head House Property.

What is amount of deduction available for interest paid on borrowed funds for the acquisition of house property?

In case the house property is being used as Self Occupied Property (SOP), the deduction on account of interest paid on the housing loan is restricted to Rs. 150,000. However, in case the property is let out or deemed to be let out, then the entire interest paid / payable is available as deduction.

Who is covered under the rules of getting tax audit done?

In case of persons carrying on business with the total sales, turnover or gross receipt in business for the financial year exceeds Rs. 40 Lakhs and persons carrying on Profession with gross receipts in the financial year of in excess of Rs. 10 Lakhs; are required to get their accounts audited by a Chartered Accountant and submit a report along with the annexures to the Income Tax department.

I am a Management Consultant with a billing of approximately Rs. 60 Lakhs per annum. Is it mandatory for me to maintain proper accounting records and documents from the perspective of Income Tax; if Yes then what are the records supposed to be maintained?

Section 44AA of the Income Tax Act defines “Specified Profession” such as legal, medical, engineering, architectural, accountancy, technical consultancy, interior decoration or other notified professions to maintain certain documents in case their gross receipts exceed Rs. 150,000 in three preceding financial years. In other cases, only such records as may enable the assessing officer to compute their taxable income needs to be kept. The stipulated books and records for Specified Profession are as follows: - Cash book, which records the cash transactions on a day-to-day basis. - Ledger - Journal register - Copy of the invoices raised by the assessee - Original expenditure bills In case of person carrying on the medical profession, apart from the above the following documents are also prescribed. - Daily case register with the details of the patient in the format prescribed in Form 3C - An inventory list of the major heads of drugs and medicine as on the first and last day of the financial year.

What is the difference between short term and long term capital asset?

Short term capital asset means such assets that are held by the assessee for a period of 36 months or less. However, in case of certain specified investments this period of 36 months is to be replaced with 12 months. Such specified investments are equity or preference shares of any Company (quoted / unquoted), securities such as debentures, government securities (quoted on recognized stock exchange), Zero coupon bonds (quoted / unquoted), Units of UTI and Mutual Funds specified under section 10(23D) (quoted / unquoted).

Can I consider the 12 month criteria even for equity shares of Companies listed outside India?

Section 2(17) of the Income Tax Act defines a Company to include any body corporate incorporated by or under the laws of a country outside India. Interpreting this, apparently if you hold the shares of a Company listed outside India then such asset would be termed as long term asset if the period of holding is in excess of 12 months. 1-Income from other sources 2-Deductions from Gross Total Income 3-Wealth Tax 4-NRI Taxation 5-Income exempt from tax 6-Clubbing of income 7-Set off and carry forward of losses 8-IT returns 9-Advance Tax 10-Interest 11-TDS

What does the Income Tax Department consider as income?

The word Income has a very broad and inclusive meaning. In case of a salaried person, all that is received from an employer in cash, kind or as a facility is considered as income. For a businessman, his net profits will constitute income. Income may also flow from investments in the form of Interest, Dividend, and Commission etc. Infect the Income Tax Act does not differentiate between legal and illegal income for purpose of taxation. Under the Act, all incomes earned by persons are classified into 5 different heads, such as: 1. Income from Salary 2. Income from House property 3. Income from Business or Profession 4. Income from capital gains 5. Income from other sources