Assessment of an Individual – Computation of Taxable Income

Assessment of an Individual involves the practical application of the various provisions  of the Income-tax Act, in a given situation.

An individual means a Natural Person, i.e., Human Being. Individual Includes A Male, Female, Minor Child and A Lunatic or An Idiot.

In the case of male/female who is a major, income-tax will be levied on his/her Total Taxable Income separately, unless the income is to be clubbed under provisions of sections 60-64.

As regards a minor child, the income of a minor after giving exemption upto Rs.1,500 per minor child will be clubbed with the income of that parent whose Total income, before clubbing such income, is greater.

However, there are certain incomes which are not to be clubbed. Such income of the minor, which is not to be clubbed, will be assessable in the hands of the representative assessec on behalf of the minor.

Income of a Lunatic or An Idiot will be assessed in the hands of the representative assessee.

1.  An Individual is liable to pay Tax in respect of the following Incomes:

(i)   Income earned by an individual himself:

i.e., incomes earned by an individual in his individual capacity.

(ii) Remuneration and Interest received by the partner from a firm or a Limited Liability Partnership (LLP):

Following incomes received by an individual as partner of a firm shall be taxable in his hands:

(a)        The remuneration by way of salary, bonus, commission, etc., received by a partner, is taxable as business income in the hands of a partner [Section 28(v)];

(b)        Interest on capital/loans to a firm or a limited liability partnership, in which he is a partner, is also assessed as income from business.

(iii) Income received as a Member of an Association Of Persons (AOP), etc. :

Where an individual is member of an association of persons or body of individuals, his share of income from such AOP/ BOI shall be taxed as under:

(a) Where the income of AOP or BOI is taxed at normal rates,

i.e., the rates applicable to an individual: Share of income of a member from such AOP or BOI will be included in the taxable income of the individual only for rate purposes and a relief under section 86 shall be allowed.

(b) Where no income-tax is chargeable on the income of the AOP or BOI:

Share of income of a member from such AOP/BOI will be chargeable to tax as part of his Total Income.

(iv) Income of the Other Persons included in the income of the individual [Sections 60 to 65]:

As already discussed under the chapter on ‘clubbing of income’, the income of other persons will also be included in the individual’s Total Income under respective heads of income.

(v)  Income from impartible estate of HUF:

Any income from an impartible estate of Hindu undivided family is taxable in the hands of the Karta.

2.  Incomes Received from Firm/AOP/HUF which are Exempt in the hands of an Individual

The following incomes received by the individual from the firm or HUF or AOP shall be exempt:

(a) Share of profit of the Firm or Limited Liability Partnership [Section 10(2A)]:

The share of profit from a partnership firm or a limited liability partnership is exempt from tax in the hands of the partner;

(b) Where the income of AOP or BOI is chargeable at Maximum Marginal Rate [Proviso (a) to section 86]:

Share of income of a member from such AOP or BOI will not be included in his taxable income at all.

(c) Share of income from HUF [Section 10(2)]:

An HUF is a separate assessee. Therefore, any share of income received by a member from such HUF will be exempt in the hands of the individual and will not be included in his Total Income.

3.  Computation of Total Income and Tax Liability of an Individual

Step 1:

Compute the income of an individual under five heads of income on the basis of his residential status.

Step 2:

Income of any other person, if includible under sections 60 to 64, will be included under respective heads.

Step 3:

Set off of the losses if permissible, while aggregating the income under 5 heads of income.

Step 4:

Carry forward and set off of the losses of past years, if permissible, from such income.

Step 5:

The income computed under Steps 1 to 4 is known as Gross Total Income from which deductions under sections 80C to 80U (Chapter VIA) will be allowed (if the individual does not opt to be taxed under section 115BAC).

However, no deduction under these sections will be allowed from short-term capital gain covered under section 111A, any long-term capital gain and winning of lotteries etc., though these incomes are part of gross total income.

Step 6:

The balance income after allowing the deductions is known as total income which will be rounded off to the nearest Rs.10.

Step 7:

Compute tax on such Total Income at the prescribed rates of tax, i.e., at special rates and normal slab rates.

Step 8:

Allow rebate of 100% of the income-tax or Rs.12,500, whichever is less under section 87A in case of resident individual having total income upto Rs.5,00,000. For details see below.

Step 9:

Add surcharge wherever applicable.

Step 10:

Add health and education cess 4%.

Step 11:

Allow relief under section 89, if any.

Step 12:

Deduct the TDS, advance tax paid for the relevant assessment year and double taxation relief under section 90, 90A or 91. The balance is the net tax payable which will be rounded of nearest ten rupees and must be paid as self-assessment tax before submitting the return of income.

4.  Tax on Income of an Individual/HUF [Section 115BAC]

(1)  Option to pay tax on total income (other than income taxable at special rates) as per section 115BAC [Section 115BAC (1)]

Notwithstanding anything contained in this Act but subject to the provisions of this Chapter (i.e., Chapter XII relating to determination of tax in certain special cases), the income-tax payable in respect of the total income of a person, being an individual or a Hindu undivided family (HUF not relevant for this Chapter), for any previous year relevant to the assessment year beginning on or after 1.4.2021, shall, at the option of such person, be computed at the rate of tax given in the following Table, if the conditions contained in section 115BAC(2) are satisfied, namely:—

(2) Conditions to be satisfied for opting to be Taxed as per provisions of section 115BAC(1) [Section 115BAC(2)]

For the purposes of section 11 5BAC( 1), the total income of the individual (whether resident or non-resident or whether less than 60 years old or more than 60/80 years old) or HUF (whether resident or non-resident) shall be computed,—

(i) Without Claiming Exemptions or Deductions :

under the following provisions of the Income Tax Act:

(a)        Leave travel concession or assistance exempt under section 10(5).

(b)        House rent allowance exempt under section 10(13A).

(c)        Special allowances which are exempt under section 10(14) other than those as may be prescribed for this purpose.

(d)        Daily allowance or Constituency allowance received by a Member of Parliament or Member of State Legislature which is exempt under section 10(17).

(e)        Deduction of Rs.1,500 under section 10(32) in case of income of a minor child for a maximum of two children which has been clubbed in the income of a parent.

(f)         Deduction available to SEZ unit under section 10AA.

(g)        Standard deduction of Rs.50,000 under section 16(ia) and deduction on account of tax on employment. i.e., professional tax paid by the salaried employee.

(h)        Deduction of interest on self-occupied house property up to Rs.2,00,000 under section 24(b).

(i)         Additional depreciation under section 32(1)(iia) to an assessee engaged in the business of manufacture of any article or a thing or generation, transmission or distribution of power.

(j)         Investment allowance of 15% if new plant and machinery is installed in notified backward areas in certain States as per section 32AD.

(k)        Deduction under section 33AB to an assessee engaged in the business of growing & manufacturing of Tea/Coffee/Rubber.

(l)         Deduction under section 33ABA on account of deposit in Site Restoration Fund.

(m)       Deduction in respect of payment made to certain association/institutions for scientific research [Section 35(1)(ii)] or payment made to a company to be used for scientific research [Section 35(1)(iia)] or payment made to certain institutions for research in social sciences or statistical research [Section 35(1)(iii)] or payment made to a National laboratory or a University or an Indian Institute of Technology [Section 35(2AA)].

(n)        Deduction under section 35AD in respect of expenditure on specified business.

(o)        Deduction under section 35CCC in respect of expenditure on agriculture extension project.

(p)        Deduction for family pension under section 57(iia) of a sum equal to 1/3rd of such family pension or Rs.15,000, whichever is less.

(q)        Deductions under the provisions of Chapter VI A, i.e., under sections 80C to 80U other than under the provisions of section 80CCD (Deduction in respect of contribution to pension scheme of Central Government or section 80JJAA (Deduction in respect of employment of new employees).

(ii) without Set Off,—

(a)        of any loss carried forward or depreciation from any earlier assessment year, if such loss or depreciation is attributable to any of the deductions referred to in clause (A) above;

(b)        of any loss under the head “Income from house property” with any other head of income;

(iii) by Claiming the Depreciation,

if any, under any provision of section 32, except additional depreciation under section 32(l)(iia), determined in such manner as may be prescribed; and

(iv) Without any Exemption or Deduction

for allowances or perquisite, by whatever name called, provided under any other law for the time being in force.

5.  Rebate of Maximum Rs.12,500 for Resident Individuals having total income up to Rs.5,00,000 [Section 87A]

With a view to provide tax relief to the individual tax payers who are in lower income bracket, the Act has provided rebate from the tax payable by an assessee, if the following conditions are satisfied:

(1)        The assessee is an individual

(2)        He is resident in India,

(3)        His total income does not exceed Rs.5,00,000.

Quantum of Rebate:

The rebate shall be equal to:

(1)        the amount of income-tax payable on the total income for any assessment year or

(2)        Rs.12,500,

whichever is less.

6.  Alternate Minimum Tax (AMT) on all Persons other than Companies [Sections 115JC to 115JF]

Where the regular income-tax payable for a previous year by a person (other than a company) is less than the alternate minimum lax payable for such previous year, the adjusted total income shall be deemed to be the total income of such person and he shall be liable to pay income-tax on such total income at the rate of 18.5%. [Section 115JC (1)]

However, in case of a unit located in an International Financial Service Center and which derives the income solely in convertible foreign exchange, the alternate minimum tax under section 115JC shall be charged @ 9% instead of 18.5% [Section 115JC (4)]