All income for purpose of computation and charge of income tax is classified under the following heads:

These heads have been briefly described below:

Salary

Salary income is

 ·Liable to be taxed on due or receipt basis, whichever is earlier; and

Salary is generally divided into following key heads:

·Wages and allowances: include all monthly cash remuneration paid by an employer to the employee like base salary, bonus, house rent allowance, conveyance allowance, etc.These components are chargeable to tax in full except to the extent specifically exempt (like house rent allowance).

·Perquisites: include all benefits provided by an employer to the employee like company leased accommodation, car, free education, etc.This represents provision of a facility rather than an allowance for expense.These components are offered to tax based on the value prescribed as per the perquisite valuation rules.

·Profit in lieu of salary: includes non-recurring, one-off payments received by the employee e.g. joining bonus, compensation for termination of employment or modification in the terms of employment etc.

 Income from House Property

 The annual value of property /rental income is chargeable to tax under the head ‘Income from House Property’ if the following conditions are satisfied:

 ·The individual owns a property that consists of buildings or lands appurtenant (i.e., attached) thereto; and

·The property should not be used by the owner for the purpose of any business or profession carried on by him, the profits of which are chargeable to tax.

Following deductions are allowed while computing income under the head ‘house property’:

·Standard deduction of 30% of annual value;

 ·Amount actually paid as municipal taxes;

·Amount of interest paid on borrowed funds for acquiring / constructing / repairing / reconstructing the property (subject to specified provisions)

·Interest on amount borrowed for the purpose of acquisition or construction of a self occupied property upto Rs. 150,000 (for each financial year). The deduction, as aforesaid, is allowed subject to the following conditions:

-The property is acquired or constructed on or after 1 April 1999; and

-Such acquisition or construction is completed within three years from the end of financial year in which the amount was borrowed.

 Profits and gains of business and profession

 Following incomes are charged under this head:

-profits and gains of any business or profession;

-any compensation or other payments due to or received by any specified person

-income derived by a trade, professional or similar association from specific services performed for its members;

-the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession;

-export incentive available to exporters;

-any interest, salary, bonus, commission or remuneration received by a partner of a firm from the firm;

-any sum received for not carrying out any activity in relation to any business or not to share any know-how, patent, copyright, trademark, etc.;

-any sum received under a Key-man Insurance Policy including bonus;

-Income from speculative transaction being of such nature so as to constitute a business.

 Expenses and deductions: Expenses which relate wholly and exclusively for carrying out a business or profession are normally allowed as deductions from the income. Deduction for certain specified expenses has been provided under section 30 to 36 of the IT Act.

Section 37 of the IT Act, lays down broad guidelines for determining the allowabilty of an expense from the business income. As per the said section, expenditure shall be allowed as deduction if, the following conditions are satisfied:

 ·Such expenditure is not in the nature of capital expenditure;

·Such expenditure is not in the nature of personal expenditure;

·Such expenditure has been incurred wholly and exclusively for the purpose of business.

The courts have laid down various principles in respect of fulfillment of the aforesaid tests, which need to be examined on a case to case basis based on the facts and circumstances therein.

 Income from capital gains (Capital Gains Tax)

 ·Any profits or gains arising from the transfer of a capital asset are chargeable to tax under the head ‘Capital gains’ in the year in which the transfer takes place.

·Capital Asset is defined as property of any kind held by a taxpayer (whether or not connected with his business or profession) but does not include the following —

-Stock in trade, raw materials, consumable stores held for the purpose of business or profession;

-Personal effects, (excluding jewellery, archeological collections, drawings, paintings, sculptures, any work of art);

-Agricultural land;

-Other specified deposit or bearer bonds.

·Capital Gains are specified as short-term or long-term depending on the period of holding of the capital assets. The capital assets are classified as:

§Short term capital asset: A capital asset held by a taxpayer for not more than 36 months immediately preceding the date of its transfer (not more than 12 months in case of shares held in a Company or any other security listed in a recognized stock exchange in India, units of UTI, units of a mutual fund) is classified as a short term capital asset.

§Long-term capital asset: Any asset that is not a short term capital asset.

(For a detailed note, please refer Appendix ‘A’)

·Dividends - Dividend from shares in Indian companies and from specified mutual funds and units is exempt from tax.Dividends earned from foreign companies are fully chargeable to tax.

·Interest - Interest income unless specifically exempt from any source, is fully liable to tax in India.

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