Module-1

Computation of Tax an Overview

Individual, Company , Firm –Accounting Standards relating to Tax-Tax Information services
Tax Computation for Different Entities
Individual
 Tax computation for individuals is based on their income from various sources such
as salary, house property, business or profession, capital gains, and other sources. The
computation follows a progressive tax slab system, with exemptions and deductions
provided under specific sections of the Income Tax Act.
1. Income Sources :The total income of an individual is computed by aggregating income
under five heads:
 Income from Salary: Includes salary, wages, bonuses, pension, and any other
compensation received by an employee.
 Income from House Property: Rental income from a property owned by the
individual.
Deduction for interest on home loans under Section 24 (up to ₹2 lakh on a self-occupied
house).
 Income from Business or Profession: Applicable to self-employed individuals or
professionals, based on their business profits. Deductions can be claimed for
business-related expenses.
 Capital Gains: Gains from the sale of capital assets like real estate, stocks, and
mutual funds. Short-term and long-term capital gains are taxed at different rates.
 Income from Other Sources: Includes interest income, dividends, winnings from
lotteries, etc.
2. Deductions under Chapter VI-A :To reduce the taxable income, individuals can claim
various deductions:
Section 80C: Up to ₹1.5 lakh deduction for investments like Provident Fund (PF), Life
Insurance Premiums (LIC), National Savings Certificates (NSC), Public Provident Fund
(PPF), Equity Linked Savings Scheme (ELSS), etc.
Section 80D: Deduction for medical insurance premiums: ₹25,000 for self, spouse, and
dependent children. An additional ₹25,000 for insuring parents ( ₹50,000 if parents are senior
citizens).
Section 80E: Deduction for interest on education loans for higher studies.
Section 80TTA/80TTB: Deduction for interest earned from savings bank accounts (up to
₹10,000 for individuals and ₹50,000 for senior citizens).
Section 80G:Deductions for donations to eligible charitable institutions.
3. Tax Slabs for Individuals (FY 2023-24) Income tax for individuals is based on
progressive tax slabs, meaning that the higher the income, the higher the rate of tax. The
rates differ for: Individuals below 60 years, Senior citizens (60-80 years) and Super senior
citizens (80+ years)
Example of Tax Slab for Individuals New Tax Regime
(2024):
Old Tax Regime Up to Rs 3,00,000: Nil
Up to ₹2.5 lakhs: Nil Rs 3,00,000 to Rs 7,00,000: 5%
₹2.5 lakhs to ₹5 lakhs: 5% Rs 7,00,000 to Rs 10,00,000: 10%
₹5 lakhs to ₹10 lakhs: 20% Rs 10,00,000 to Rs 12,00,000: 15%
Above ₹10 lakhs: 30% Rs 12,00,000 to Rs 15,00,000: 20%
Above Rs 15,00,000: 30%

4. Rebate under Section 87A : Individuals with income up to ₹5 lakh are eligible for a
rebate of up to ₹12,500, effectively making their tax liability nil.
5. Surcharge and Cess : Surcharge is applicable on income exceeding ₹50 lakh:
oIncome between ₹50 lakh and ₹1 crore: 10%
oIncome between ₹1 crore and ₹2 crore: 15%
oIncome between ₹2 crore and ₹5 crore: 25%
oIncome above ₹5 crore: 37%
Health and Education Cess: 4% of the total tax liability (including surcharge).
6. Exemptions Under the old tax regime, individuals can claim exemptions, including:
House Rent Allowance (HRA): For salaried individuals living in rented accommodation.
Leave Travel Allowance (LTA): For travel expenses within India.
Standard Deduction: ₹50,000 from salary income.
The new tax regime does not allow these exemptions or deductions, but offers lower tax
rates.
7. Advance Tax Payment :If an individual’s total tax liability exceeds ₹10,000, they must
pay advance tax in quarterly instalments:
o 15% by June 15
o 45% by September 15
o 75% by December 15
o 100% by March 15
8. Filing of Income Tax Return (ITR) :Individuals must file their Income Tax Return (ITR)
by July 31 of the assessment year. Senior citizens not having business income are exempt
from paying advance tax.
Company
Company: The computation for companies follows a different structure. Companies pay a
flat rate of tax on their profits. The rates may vary for domestic and foreign companies.
Companies are also subject to Minimum Alternate Tax (MAT) if their tax liability is lower
than a certain percentage of their book profits.
1. Determine Total Income
A company’s taxable income is calculated by aggregating income under different
heads, such as:
 Income from Business or Profession: The core source of income for most
companies, representing profits from business activities.
 Capital Gains: Income from the sale of capital assets.
 Income from House Property: If the company earns rental income.
 Income from Other Sources: This includes dividends, interest income, etc.
2. Deductions and Allowable Expenses
After calculating the total income, companies can deduct certain expenses from their
income, such as:
 Depreciation: As per Section 32, depreciation on tangible and intangible assets is
allowed.
 Employee Salaries and Wages: Remuneration paid to employees and directors.
 Business Expenditures: Costs incurred for business operations, including rent,
utilities, marketing, and travel.
 Research and Development (R&D): Deductions for expenditures on scientific
research (Section 35).
 Interest on Loans: Interest payments on business-related loans are also allowed as
deductions.
3. Income Tax Rates for Companies
 Domestic Companies:
o 25% tax rate for domestic companies with turnover up to ₹400 crore in the
previous financial year.
o 30% tax rate for domestic companies with turnover exceeding ₹400 crore.
 Foreign Companies:
o Flat tax rate of 40% on taxable income derived from India.
4. Minimum Alternate Tax (MAT)
 Companies are subject to MAT under Section 115JB if their tax liability is lower than
15% of their book profits (adjusted profits as per the company’s financial
statements).
 MAT is imposed at 15% (plus surcharge and cess) on book profits.
 MAT credit can be carried forward for 15 years and set off against regular tax liability
in future years.
5. Surcharge and Cess :Surcharge is applicable based on the company’s income:
o If income exceeds ₹1 crore but is up to ₹10 crore: 7% for domestic
companies, 2% for foreign companies.
o If income exceeds ₹10 crore: 12% for domestic companies, 5% for foreign
companies.
 Health and Education Cess: This is levied at 4% on the total of income tax and
surcharge.
6. Deductions under Chapter VI-A
 Section 80G: Donations made to eligible charitable institutions.
 Section 80IA/IB: Deductions for companies engaged in infrastructure or power
projects.
 Section 80JJAA: Deduction for employment of new employees.
These deductions, if applicable, reduce the total taxable income of the company.
7. Computation of Total Tax Liability
 Calculate taxable income after deductions and apply the appropriate tax rate (25%,
30%, or 40% depending on the type of company).
 Add applicable surcharge and cess to arrive at the total tax liability.
8. Advance Tax Payment
 Companies must pay advance tax in quarterly installments if their tax liability
exceeds ₹10,000 in a financial year.
o 15% by June 15
o 45% by September 15
o 75% by December 15
o 100% by March 15
9. Filing of Income Tax Return (ITR)
 Companies must file their Income Tax Return (ITR) in Form ITR-6 by October 31
of the assessment year if they are subject to audit under Section 44AB. Non-audited
companies must file by July 31.
10. Corporate Tax Cuts and Special Provisions
 Companies opting for special tax regimes under Section 115BAA (for domestic
companies) and Section 115BAB (for new manufacturing companies) can enjoy a
reduced tax rate of 22% and 15% respectively, provided they forgo certain
deductions and exemptions.
 Firm
The computation of tax for a firm (such as a partnership firm) in India involves several steps.
Here's an overview of the tax computation process for a firm, including partnership firms as
per the Income Tax Act, 1961:
1. Determine Total Income :A firm's total income is calculated by aggregating income under
various heads, including:
 Income from Business or Profession: This includes profits and gains from business
activities.
 Income from House Property: If the firm owns rental property, income from such
property is taxable.
 Income from Capital Gains: Gains from the sale of capital assets are taxable under
this head.
 Income from Other Sources: This includes income not specifically categorized
under other heads, such as interest income, dividends, etc.
2. Allowable Deductions: Certain expenses are allowed as deductions to reduce taxable
income. Some common deductions for firms include:
 Rent, salaries, and wages: If these are related to the business.
 Interest on borrowings: Interest paid on loans taken for business purposes.
 Depreciation: Depreciation on assets used in the business, calculated under Section
32 of the Income Tax Act.
 Bad Debts: Actual bad debts written off are allowed as deductions.

3. Disallowed Expenses: Some expenses debited in the profit and loss account may not be
allowed for tax purposes, such as:
 Provisions for bad and doubtful debts.
 Expenses incurred for non-business purposes.
 Capital expenditures: Expenditure that results in the acquisition of a capital asset
cannot be claimed as a deduction.
 Personal expenses: Any personal expenses of partners debited to the firm's account.
4. Tax Rates for Partnership Firms: Partnership firms are taxed at a flat rate of 30% on
the total taxable income, plus:
 Surcharge: A surcharge of 12% is applicable if the firm's total income exceeds ₹1
crore.
  Health and Education Cess: This is charged at 4% of the total income tax plus
surcharge (if applicable).
5. Computation of Alternate Minimum Tax (AMT)
Firms are subject to Alternate Minimum Tax (AMT) under Section 115JC if their adjusted
total income exceeds ₹20 lakh. The AMT rate is 18.5% (plus surcharge and cess). This
ensures that firms claiming certain deductions under Chapter VI-A or Section 10AA pay a
minimum tax.
6. Deductions Under Chapter VI-A : Some common deductions that a firm can claim under
Chapter VI-A include:
 Section 80C to 80U deductions: These typically relate to contributions to pension
schemes, health insurance, etc.
 However, many deductions under Chapter VI-A are generally not available for firms,
as they apply primarily to individuals or HUFs.
7. Computation of Tax Liability
The tax liability of the firm is computed by applying the applicable tax rate (30%) on the
taxable income. Surcharge, if applicable, and health & education cess are added to this
amount to determine the final tax payable.
8. Partner's Remuneration and Interest
As per Section 40(b) of the Income Tax Act, a firm can pay remuneration to partners and
interest on capital, but there are limits:
 Interest on partner's capital is allowed up to 12% per annum.
 Remuneration to partners is allowed subject to specified limits based on the book
profits of the firm:
o On the first ₹3 lakh of book profit: The maximum allowable remuneration is
90% of the book profit or ₹1.5 lakh, whichever is higher.
o On the balance of book profit: 60% of the book profit.
9. Payment of Advance Tax: Firms are required to pay advance tax if their tax liability
exceeds ₹10,000 in a financial year. The advance tax is paid in four installments:
 15% by June 15
 45% by September 15
 75% by December 15
 100% by March 15

10. Filing of Income Tax Return (ITR)

A partnership firm must file its Income Tax Return (ITR) using Form ITR-5. The due date
for filing the return is usually July 31 of the assessment year, unless the firm is subject to a
tax audit, in which case the due date is extended to October 31.
 2. Accounting Standards Relating to Tax
Accounting standards play a significant role in tax computation as they guide the recognition
of income, expenses, and the overall financial reporting process. Some key accounting
standards related to taxation include:
AS 22 - Accounting for Taxes on Income:
 Accounting Standard 22 (AS 22), titled "Accounting for Taxes on Income," indeed
addresses the accounting treatment of taxes on income. It's crucial for aligning the
reported accounting income (profit before tax) with the taxable income under the
provisions of the Income Tax Act, 1961. Here's a breakdown of the key points you
mentioned:
 Accounting Income: This refers to the net profit before tax as reported in the profit
and loss statement of a company or entity for a specific period.
 Taxable Income: This is the income on which income tax is calculated and payable
according to the regulations specified in the Income Tax Act, 1961, and its relevant
rules.
 AS 22 primarily aims to reconcile the differences that arise between accounting
income and taxable income. The differences between accounting income and taxable
income lead to the creation of deferred tax assets or liabilities. Let's break them down:

Expenses Debited in Profit and Loss Statement but Disallowed Under Income
Tax Act:
Expenses like provisions, fines, or penalties may be debited to the profit and loss
statement, reducing accounting income, but these are disallowed as per the Income
Tax Act, increasing taxable income.
 Provision for Bad/Doubtful Debts:
Such provisions are often allowed while computing accounting income as per
company policies, but they may be disallowed when computing taxable income under
the Income Tax Act.
 Depreciation Charged at Different Rates:
Depreciation rates prescribed under the Companies Act, 2013 may differ from those
under the Income Tax Act, 1961. This leads to temporary differences in the carrying
amount of assets, affecting both accounting and taxable income.
 Income Recognized on an Accrual Basis in Accounting but on Receipt Basis for
Taxation:
Certain income is recognized on an accrual basis in the profit and loss statement, but
under tax laws, it is taxable only when actually received, causing a temporary
difference.
 Ind AS 12

Ind AS 12 (Indian Accounting Standard 12), which is based on IAS 12 (International

Accounting Standard 12), deals with the accounting treatment of income taxes. It is part of
the Ind AS framework and is aligned with IFRS (International Financial Reporting
Standards), whereas AS 22 (Accounting for Taxes on Income) was specific to Indian GAAP
(Generally Accepted Accounting Principles).
Key Concepts:
Current Tax Liabilities: These are taxes payable for the current accounting period based
on the taxable income of the entity, as per applicable tax laws. This includes taxes owed for
the present financial year.
1. Deferred Tax Liabilities and Assets:
o Deferred Tax Liability (DTL): This arises when accounting income is
greater than taxable income due to temporary differences. For example,
where income or expenses are recognized in one period in the financial
statements but in another period for tax purposes.
 Example: Accelerated depreciation for tax purposes, which reduces
taxable income in the earlier years but increases it later on.
o Deferred Tax Asset (DTA): This arises when taxable income is greater than
accounting income, and it indicates future tax savings. Deferred tax assets are
recognized if it's probable that the entity will generate future taxable profits to
use the asset.
 Example: Expenses such as provisions for doubtful debts or employee
benefits are recognized in the books but are allowable for tax purposes
only in future periods.
2. Temporary Differences: Ind AS 12 recognizes the impact of temporary differences,
which are differences between the carrying amount of assets and liabilities in the
financial statements and their tax base. These differences can lead to deferred tax
assets or liabilities.
Types of Temporary Differences:
o Taxable temporary differences: Result in deferred tax liabilities.
o Deductible temporary differences: Result in deferred tax assets.
3. Recognition Criteria for DTA and DTL:
o Deferred tax liabilities are always recognized for all taxable temporary
differences.
 o Deferred tax assets are recognized for deductible temporary differences only
if it is probable that the entity will have sufficient future taxable income
against which the asset can be utilized.
4. Tax Rates: Deferred taxes are measured using the tax rates and tax laws that are
expected to apply when the asset is realized or the liability is settled, based on tax
laws that are enacted or substantively enacted by the balance sheet date.
5. Current and Deferred Taxes in Profit and Loss (P&L): Both current tax expenses
and deferred tax expenses or benefits are recorded in the Profit and Loss account
unless they relate to items recognized in other comprehensive income (OCI) or
directly in equity.
6. Disclosure Requirements:Ind AS 12 has strict disclosure requirements, ensuring that
entities provide detailed information about the current tax and deferred tax
recognized in the financial statements, the movement in deferred tax balances, and
any unrecognized deferred tax assets.
Comparison between Ind AS 12 and AS 22:
Aspect Ind AS 12 AS 22
Alignment Aligned with IFRS Indian GAAP-specific
Focus on Recognizes temporary Recognizes timing
Temporary differences between carrying differences (based on
Differences amounts and tax base when they reverse)
Deferred Tax More comprehensive Focused on timing
Recognition recognition of deferred taxes differences and not future
recovery of deferred tax
assets
Revaluation of Requires recognition of Does not consider
Assets deferred tax for revaluations revaluation of assets for
of assets deferred taxes
Presentation in Provides more detailed and Simpler approach and
Financial specific guidance fewer disclosures
Statements

AS 9 - Revenue Recognition:
 Objective: Ensures that revenue is recognized when it is earned, rather than when
the payment is received. This affects not only financial reporting but also the timing
of tax liabilities, as revenue recognition determines when income should be
accounted for in a company's profit and loss statement.

3. Tax Information Services

Tax Information Services are systems and platforms provided by governments and
organizations to assist taxpayers in understanding and complying with tax regulations. These
services include:
 Income Tax Filing Portals: Government websites where taxpayers can file returns,
check tax credit (Form 26AS), and track refunds. For instance, the Income Tax e-
 filing portal in India allows individuals and businesses to file returns online, check
their TDS, and rectify errors.
 TDS Information: TRACES (TDS Reconciliation Analysis and Correction
Enabling System): A portal used in India for accessing TDS-related information.
o Provides services such as Form 16/16A generation, TDS refund status, and
TDS/TCS statement filing.
 Tax Calculators: Available on government websites and private tax platforms, these
tools help taxpayers calculate their liability based on income, deductions, and
applicable slabs.
 AIS (Annual Information Statement): A comprehensive statement that provides a
taxpayer with information about their financial transactions. This helps in cross-
checking data when filing returns.
 Taxpayer Support Services: These include helplines, live chat support, FAQs, and
grievance redressal systems that assist individuals and companies in resolving tax-
related issues.

Tax Information Services:

1. Tax Planning: Advice on minimizing tax liability.

2. Tax Compliance: Preparation and filing of tax returns.
3. Tax Audit: Representation before tax authorities.
4. Tax Advisory: Guidance on tax laws and regulations.