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India Individual - Income determination

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Employment income

An individual’s entire remuneration/ salary received from the 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 the 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 rate. 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, car facility and certain retirement benefits. Certain allowances and benefits paid or provided by an employer like house rent allowance (instead of housing benefit), 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 0.15 million is taxable as perquisites in the hands of the employee. Employer’s contribution to recognised provident fund (PF) 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 the remuneration is not deductible in computing the employer’s taxable income in India. In 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.

Equity compensation

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 (FMV) 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, FMV 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 case where the shares are listed on more than one recognised stock exchange of India, then FMV 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 which 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 FMV on the closest date, immediately preceding the date of exercise would be considered. In case if the shares are not listed on the recognised stock exchange in India, the fair market value is to be determined by Category I merchant banker in India registered with 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 which 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.

Rental income

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 (irrespective of the year to which the expense pertains) 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 his/ her 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 section “other taxes” for more information).

Deduction on housing loan interest

Income from house property shall be reduced by the amount of interest paid on borrowed capital where the loan has been taken for the purpose of purchase/ construction/ repair/ renewal/ reconstruction of the residential house property. However, no deduction shall be allowed unless the individual furnishes a certificate, from the person to whom the interest is payable on the capital borrowed, specifying the amount of interest payable by the taxpayer for the purpose of such acquisition or construction, etc. of the property.

Unlike the deduction on property taxes or principal repayment of home loan, which are available on actual payment basis, the deduction on interest is available on accrual basis i.e. it is immaterial whether the interest has been actually paid or not during the year. Charges like service fee or other charge in respect of the loan amount related to the housing loan is eligible to be included in interest and qualifies for tax deduction.

Deduction on housing loan can be claimed once the construction is completed and possession of the property has been obtained. The law provides a deferred deduction on the interest payable during pre-construction period (i.e. period prior to the tax year in which the property has been acquired or constructed). The deduction on such interest is available equally over a period of 5 tax years starting from the year of acquired/ constructed.

Maximum limit of deduction

In case the house property is not let out during the year, the maximum amount of interest that can be claimed as deduction is limited to INR 0.2 million subject to conditions that the loan is taken on or after 1 April, 1999 for the purpose of purchase or construction and such property is acquired or constructed within 5 years from the end of year in which loan is taken. For all other cases, where the house property is not let out, the maximum amount that can be claimed as deduction is limited to INR 30,000.                                             

Interest in excess of taxable rental income

Individuals subsequent to claiming deduction of interest as per above mentioned prescribed limits, can set off loss under the head house property (due to claim of excess interest) from any other head of income up to a maximum of INR 0.2 million. Any unabsorbed loss under the head of house property will be carried forward for 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, additional deduction of up to INR 50,000 will be available subject to fulfilment of certain prescribed conditions in this regard.

Capital gains taxes

As a general rule, capital gains from the disposal of capital assets are liable to tax in the tax year in which such assets are sold or transferred. Capital assets include all forms of property, stocks and shares, land and buildings, goodwill, etc. (but exclude personal effects except stock-in-trade, stores, and raw materials held for business purposes). Jewellery although forms part of capital asset.

Categorising capital gains

Capital assets held for more than 24 months (12 month in the case of shares or securities listed on a recognised stock exchange in India/ equity oriented mutual funds/ zero coupon bonds and 36 months in case of debt oriented mutual funds/ unlisted debentures) are termed as ‘long-term capital assets’ and the assets not so held are called ‘short-term capital assets’. Capital gains arising from the transfer/ disposal of long-term capital assets are called long-term capital gains (LTCG). Gains arising from the disposal of short-term capital assets are called short-term capital gains (STCG). This distinction is important as LTCG are taxed or treated beneficially and there are also planning opportunities to save taxes provided the consideration or gain is re-invested, subject to fulfilment of certain other conditions.

LTCG is subject to tax at prescribed beneficial rates (plus applicable SC and HEC). STCG is added to the taxable income of the individual and subject to tax at normal slab rates.

Computation of LTCG

Except in case of debentures and bonds (other than capital indexed bonds issued by Government/ Sovereign Gold Bonds issued by RBI), the cost of acquisition of long term capital assets is determined after indexing costs by a prescribed inflation factor (known as ‘indexed cost of acquisition’). The base year for computation of indexed cost of acquisition is 2001. Assets acquired before 1 April, 2001 can be taken at actual cost or fair market value as on 1 April, 2001 at the option of the taxpayer.

In case of non-residents where shares or debentures of an Indian company are purchased by utilising foreign currency, the subsequent capital gains are determined by computing the gains in the same foreign currency in which it was purchased and reconverting the gains into Indian rupees to calculate the tax payable on the same.

However, there are few exceptions for indexation and rate of tax on LTCG/ STCG:

  1. For equity shares and equity oriented mutual funds, which have been sold on recognised stock exchanges in India and security transaction tax (STT) has been paid, the LTCG earned (if any) is fully exempt from tax. For LTCG to be exempt in such cases, STT should also be paid on acquisition stage for shares acquired on or after 01 October, 2004 (subject to certain exceptions as prescribed in this regard acquisition of shares in IPO (initial public offer), bonus or rights issue by a listed company, etc.).
  • Effective 01 April 2018, the above mentioned exemption has been withdrawn and LTCG exceeding INR 1 lakh would be taxable at the rate of 10% (without any indexation benefit). It is important to note that gains accrued based on FMV as on Jan 31, 2018 has been grandfathered, i.e. would not be liable to tax
  • For transaction of sale effective 01 April 2018, the cost of acquisition would be determined as higher of the following:
  1. Actual cost of acquisition, and
  2. The lower of:
    • FMV as of January 31, 2018
    • The full value of consideration arising on transfer
  • Tax on LTCG (arising to any person) on transfer of securities (other than units) listed on recognised stock exchange in India or a zero coupon bond is computed at the lower of 10% on gains computed without indexation or 20% of gains computed without indexation (if applicable)
  • In case of Non - Resident, if the securities are not listed on Indian recognised stock exchange, the tax on corresponding long-term capital gains is computed at 10% (without indexation and/ or conversion reconversion to/ from foreign currency, as mentioned above)
  • STCG earned on equity shares and equity oriented mutual funds which are listed on a recognised stock exchange in India is taxable at 15% provided STT has been paid.

 Note* - For NRs the basic exemption limit of INR 250,000 does not apply against the gains earned on sale of such shares/ units.

Tax lability on LTCG can be reduced by taking benefit of exemptions provided in the Act when gains/ sale proceeds from the sale of the capital assets are reinvested into house property and or prescribed investments, as the case may be.

Short-term capital losses can be offset against any capital gains (long-term or short-term). Long term capital loss can only be offset against LTCGs. Unabsorbed capital losses (short-term or long-term) can be carried forward for a maximum of 8 years to be offset only against future capital gains as mentioned above.

In order to raise funds for the “Start-up Action Plan,” the Government has provided an exemption from long-term capital gains on sale of any long-term capital asset, if the sale consideration is invested in units of a specified fund. The specified fund will be notified by the Central Government in due course and the maximum deduction available will be INR 5 million. The investments should be held for a minimum period of three years to avail the exemption.

Further, an individual/ HUF selling a residential property has the option to reinvest the long-term capital gain by subscribing to shares of a company which qualifies as a small or medium enterprise and also in shares of eligible start-ups with no cap on reinvestment of the capital gain. Investments under this provision can be made up to 31 March, 2019. In case the eligible start up is a technology driven start up, it will be entitled to utilise the proceeds of such equity shares in computers or computer software.

Securities transaction tax

STT is applicable to transactions involving purchase/ sale of equity shares, derivatives, units of equity-oriented funds through a recognised stock exchange, or purchase/ sale of a unit of an equity-oriented fund to any mutual fund. The STT leviable for such transactions varies for each kind of instrument, whether delivery based or non-delivery based. 

Buyback of shares

An additional tax is payable on transactions involving buyback of shares by unlisted companies from its shareholders. A tax at 20% (plus SC and HEC) is payable by the company on the difference of consideration paid on buyback and the issue price of shares. The buyback consideration received would be tax exempt in the hands of the receiver. No tax credit would be allowed in respect of such taxes paid, to the company or to the shareholder.

Income from business of 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 specified profession such as legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or any other profession and whose total gross receipts does not exceed INR 5 million in a tax 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, Hindu undivided family (HUF) or partnership firm but not Limited liability partnership firm. Under this scheme the taxpayer will be deemed to have been allowed all the business expenses, which he is otherwise eligible to claim. The taxpayer are 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 his/ her income and the taxpayer’s income exceeds the maximum amount which is not chargeable to income-tax. 

Dividend income

  • 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 gross basis (i.e. no deduction will be allowed).

  • Dividend income received from SEBI registered Indian mutual fund is not taxable in the hands of recipient. This applies to resident as well as non-resident shareholders.

Interest income

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.

Further, as per section 80TTB, the exemption limit on interest income for senior citizens has been increased to INR 50,000. Interest income will also include interest earned from fixed deposits and recurring deposits

Losses

Type of loss to be carried forward to subsequent year(s) Income against which loss can be offset in the subsequent year(s) Number of years for which loss can be carried forward
Loss under the heading ‘Income from house property’ ‘Income from house property’ only 8
Speculation business loss Speculation profits only 4
Unabsorbed depreciation Any income, except salary Perpetually
Business loss (other than speculation business losses) Any business profit 8
Short-term capital loss Any income under the head ‘capital gains’ 8
Long-term capital loss (non STT paid) Long-term capital gains only (non STT paid) 8

Exempt income

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 from domestic companies/ specified mutual funds, long-term capital gains on sale of securities which are subject to STT.
  • Investment based
    • Income arising from investment in certain mutual funds, infrastructure bonds, investment in government securities, etc.

Last Reviewed - 13 July 2018

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