7/30/2019 Ifp 30 Taxable Income

1/3

202 Financial Planning Handbook PDP

Chapter 30

7/30/2019 Ifp 30 Taxable Income

2/3

203Financial Planning HandbookPDP

Taxable Income

Under the Income tax act, the Total Income is the taxable income because the tax is payable on thetotal income.What is income?

Income connotes a periodical monetary return coming in with some sort of regularity, or expected

regularity from definite sources. The source is not necessarily one which is expected to be continuously

productive, but it must be one whose object is the production of a definite return, excluding anything

in the nature of a mere windfall.

Following principles are important to understand the concept of Income:

Income has a regular and definite source

Income may be in cash or in kind.

Tainted or illegal receipt is also income.

Reimbursement of expenses is not an income.

Capital receipt is not an income. Revenue receipt is an income.

Income can arise on both receipt and accrual basis.

Personal gifts received are not income. But it is covered under the extended definition of income.

Income must be real and not fictional. A person cannot earn an income by trading with himself or by

transferring funds from one pocket to another. Income does not arise in a transaction between headoffice and branch office.

Windfall or receipt due to pure chance is not an income. However, in the extended definition some

types of wind fall or casual receipt has been included as income.

Compensation for death on account of fatal accident is not an income.

Subsidies and grants-in-aid. This will also depend on the purpose of receipt. If it is intended to

supplement or augment the trading receipt of the recipient it is income. For example subsidy to sugar

factories for early crushing of sugarcane. But subsidy for starting a new factory in a backward area

is a capital receipt and not an income.

What constitute Total Income?

First of all we should calculate what is normally considered as income and what is covered under the

extended definition of income. From this we need to exclude what is exempted income under section 10

to 13A. What ever is left will have to be divided into various heads of income as shown below:

Income Heads

Income from Salary

Income from House Property

Profits and gains from Business and profession

Income from Capital gain, and

7/30/2019 Ifp 30 Taxable Income

3/3

204 Financial Planning Handbook PDP

Income from other sources.

It is important to classify the income into various heads as each head of income has different rules for

allowing deduction of expenses and exemptions. Once we have identified income to correct heads, the

expenses and exemptions as prescribed under those heads are allowed to be deducted to arrive at

income under each head. Total of all these five heads of income is Gross Total Income (GTI).

From GTI we need to allow deduction under Chapter VIA of the Income Tax Act, which is in the form of

investment in various schemes (section 80C), investment in Pension Fund (80CCC), investment in

pension scheme of GOI ( section 80CCD), medical insurance premium ( 80D), medical treatment of

handicapped dependent ( 80DD), medical treatment for specified disease (80DDB), interest on loan for

higher education (80E), donation (80G), donation for scientific research or rural development (80GGA),

contribution to political parties (80GGB and 80GGC), Industrial undertaking engaged in infrastructure

development ( 80IA), Industrial undertaking located in industrial backward state or district (section

80IB), undertakings or enterprises located in notified area in North Eastern State, State of Sikkim,

Himachal Pradesh, Uttranchal (section 80IC), business of collecting and processing of bio-degradable

waste 80JJA), employment of new workmen (80JJAA), Offshore banking unit and International Financial

Services Centre in SEZ (80LA), Primary agricultural Credit Society (80P), Royalty from books (80QQB),Royalty on patents (80RRB), handicapped person (80U).The sum of deduction under chapter VI A of the

Income Tax Act can not be more than Gross Total Income.

What is left after deducting these deductions from Gross Total Income is the Total Income chargeable

to tax under the Income-tax Act. On this, income tax is calculated in accordance with the rates prescribed

in Finance Act. There is separate rate for capital gain tax.

For resident, long term capital gain on shares where security transaction tax is paid is nil. Short term

capital gain where security transaction tax is paid is 10%. In all other cases of residents, long term

capital gain tax is calculated at the rate of 20% on indexed cost of acquisition subject to maximum 10%

on non indexed cost. Short term capital gain, in other cases of resident, is taxed as normal income.

Once we have calculated tax on total income, we need to allow some rebate or relief from this tax. What

is left after applying the rebate and relief is the tax payable by the assessee. On this he will get credit for

tax deducted at source or advance or self assessment tax paid by him. If this is more than the tax

payable, the tax payer will be entitled to refund.

Chapter Review