An individual’s entire remuneration/salary received from an employer for services rendered in India is taxable in India. Taxable income includes all amounts, whether in cash or in kind, arising from an office of employment.
Apart from salary, fees, bonuses, and commissions, some of the most common remuneration items are allowances, reimbursement of personal expenses, education payment, and perquisites or benefits provided by the employer either free of cost or at concessional rates. All such payments are included, whether paid directly to employees or on their behalf.
Reimbursement of expenses actually incurred wholly, necessarily, and exclusively in the performance of official duties is not included in taxable salary. However, concessional treatment is accorded to housing benefit, reimbursement of medical expenses, conveyance, car facility, and certain retirement benefits. Certain allowances and benefits paid or provided by an employer, such as house rent allowance (instead of housing benefit) and leave travel allowance, are treated as exempt subject to applicable conditions and limits and are accordingly not included in the computation of income.
The amount of any contribution by an employer to an approved superannuation fund in excess of INR 150,000 is taxable as perquisites in the hands of the employee. Employer’s contribution to a recognised provident fund, up to 12% of employee’s salary, is tax exempt in the year of contribution.
An employee holding a foreign passport and employed by a foreign enterprise, who is not present in India for more than 90 days in a tax year, is not taxed on remuneration received from the foreign employer for services performed in India, provided the foreign enterprise is not engaged in any trade or business in India, and also provided that the remuneration is not deductible in computing the employer’s taxable income in India. Tax treaties entered into by India also provide short stay exemption wherein the 90 days period (as discussed above) is replaced by 183 days and two other conditions (i.e. remuneration received from an employer who is not a resident of India and where the salary is not borne by a permanent establishment of the overseas employer in India are provided on similar lines in many cases). The benefit under the tax treaty is extended to all individuals, including foreign citizens.
Value of any specified security or sweat equity shares allotted or transferred directly or indirectly by the employer or former employer, free of cost or at a concessional rate, is taxable as perquisite in the hands of the employee. The valuation for this purpose is to be done on the basis of the fair market value of the specified security or sweat equity share on the date when the option is exercised (i.e. allotment) by the employee as reduced by the amount recovered from the employee.
As per the income tax rules, fair market value shall be the average of the opening price and closing price of the share on the date of exercise by the employee on the recognised stock exchange of India on which such shares are listed. In cases where the shares are listed on more than one recognised stock exchange of India, then fair market value shall be the average of the opening price and closing price of the share on the date of exercise by the employee on the recognised stock exchange that records the highest volume of trading in the share on such date.
Further, in cases where there was no trading on the said date, then such fair market value on the closest date, immediately preceding the date of exercise will be considered. In cases where the shares are not listed on the recognised stock exchange in India, the fair market value is to be determined by a Category I merchant banker in India registered with the Securities and Exchange Board of India (SEBI). The merchant banker valuation shall be the date of exercise or a date earlier than the date of exercise of the option, but not being a date that is more than 180 days earlier than the date of exercise.
Further, in case of sale of shares by the employees, capital gains may arise and the same will be taxable in the hands of the employees. The taxes on capital gains have to be paid by the employees depending on the residential status in the relevant tax year.
Income from business or profession
Profits and gains from a business or profession carried out by an individual are taxable in India, subject to certain deductions and allowance of depreciation and business expenses.
The following income, inter alia, is taxable in the hands of an individual:
- Profits and gains of any business or profession carried on by the taxpayer at any time during the tax year.
- Any interest, salary, bonus, commission, or remuneration, by whatever name called, due to, or received by, a partner of a firm from such firm. This would be deductible in the firm’s hands.
Note that the share of profit from a partnership firm is not taxed in the hands of the partner since it is paid out of the post-tax profits of the partnership firm.
Presumptive taxation scheme for persons having income from profession
Income of a taxpayer who is engaged in any profession such as legal, medical, engineering, or architectural profession, or the profession of accountancy or technical consultancy, interior decoration, or any other profession as is notified by the Board in the Official Gazette and whose total gross receipts does not exceed INR 5 million in a previous year, is estimated at a sum equal to 50% of the total gross receipts, or, as the case may be, a sum higher than the aforesaid sum earned by the taxpayer. The scheme will apply to such resident taxpayer who is an individual, a Hindu Undivided Family (HUF), or a partnership firm, but not a limited liability partnership firm. Under this scheme, the taxpayer will be deemed to have been allowed all the business expenses that one is otherwise eligible to claim. The taxpayer is not required to maintain books of accounts and get them audited unless the taxpayer claims profits and gains from the aforesaid profession are lower than the profits and gains deemed to be one's income and the taxpayer’s income exceeds the maximum amount that is not chargeable to income tax. This has been effective from 1 April 2017 and will apply to tax year 2016/17 and subsequent years.
See Capital gains taxes in the Other taxes section for a description of the treatment of capital gains.
Dividend income received from an Indian company is not taxable in the hands of the shareholder if dividend distribution tax is paid on the same by the company. This applies to resident as well as non-resident shareholders. However, dividend income in excess of INR 1 million will be chargeable to tax in the case of an individual, HUF, or a firm who is a resident in India at the rate of 10%. The taxation of dividend income in excess of INR 1 million shall be on a gross basis (i.e. no deduction will be allowed).
Dividend income received from an SEBI-registered Indian mutual fund is not taxable in the hands of the recipient. This applies to resident as well as non-resident shareholders.
Interest income is taxable in India. A deduction of up to INR 10,000 is allowed in respect of savings bank interest on deposits (not being time deposits) with specified banking companies registered with the banking authority/cooperative societies engaged in carrying on business of banking/post office in India.
Any income earned from the letting-out or renting of any building, or land appurtenant thereto, is taxable as ‘income from house property’ in the hands of the individual. The tax is levied on the annual value of the property computed in terms of the provisions of the Act. Deduction of municipal taxes paid during the year and a standard deduction at the rate of 30% is available on the gross annual value while computing the ‘income from house property’.
If an individual owns more than one house property for one's use, then under the existing tax provisions any one property as per individual’s choice is treated as self-occupied. The other house property(s) is deemed to be let-out and a notional rent as per the provisions of the Act is computed as the taxable income under the head ‘income from house property’. In other words, the second house property is treated as let-out and an expected rental income is treated as taxable income.
The amount of rent received in arrears or the amount of unrealised rent realised subsequently by a taxpayer will be charged to income tax in the tax year in which such rent is received or realised, whether the taxpayer is the owner of the property or not in that tax year. 30% of the arrears of rent or the unrealised rent received/realised subsequently by the taxpayer will be allowed as a deduction. There are separate property taxes levied as per municipal tax laws, apart from income tax on rental income (see the Other taxes section for more information).
Interest in excess of taxable rental income
Individuals can set off such excess interest from any other head of income up to a maximum of INR 200,000. Any unabsorbed loss under the head of house property will be carried forward for the next eight tax years and will be eligible to be set off against the income from house property only.
To incentivise first-home buyers availing home loans, an additional deduction of up to INR 50,000 will be available subject to fulfilment of certain prescribed conditions in this regard.
Certain income is eligible to be claimed as exempt from taxable income. The exemption can be based on income or investment. Some of them are detailed below:
- Income-source based:
- Tax holiday of profits of business engaged in infrastructure development or development of Special Economic Zones (SEZ).
- Agricultural income, dividend income, long-term capital gains on sale of securities that are subject to STT.
- Investment based:
- Income arising from investment in certain mutual funds, infrastructure bonds, investment in government securities, etc.