Assessment of ‘Individual’

Income Received from different Institutions by an Individual for Tax Calculation

1. As a Member of Hindu Undivided Family.

Any sum received by an individual as a member of H.U.F. out of family income is not to be included in his total income, because the share of income received from the H.U.F. is exempted in the hands of such individual, the family may or may not have paid tax on that income [Section 10 (2)1.

If the member earns his own income, besides being the member of H.U.F. he will pay tax on his own earned income.

But u/s 64 (2) where an individual converts his individual property into the common pool of H.U.F. of which he is a member, income from such property shall be included in his individual income.

Assessement of Individual
Assessement of Individual

2. Income Received as Share from AOP.

The share from AOP is treated in following manner:

  1. Compute total income of AOP.
  2. Where Share of Members of AOP are determined

(i). How to Compute Taxable Income of an AOP/BOI

First find out the taxable income of the AOP/BOI under the following steps:

  1. Find out income under the different heads of income (viz., “Income from house property”, “Profits and gains of business or profession”, “Capital gains” and “Income from other sources”, ignoring incomes exempt under sections 10 to 13A.
  2. Make adjustments on account of brought forward losses/allowances. The total income under the aforesaid heads is “Gross total income”.
  3. From the “gross total income” make deductions under sections 80G, 80GGA, 80GGC, 80-I, 80-IA, 80-IB, 80-IC and 80JJA.
  4. The balancing amount is total income or taxable income.

(ii). Where Shares of Members are Determinate –

Tax liability is determined as under:

(A).  If none of the Member of the AOP / BOI has income in Excess of the Maximum Amount which is Not Chargeable to Tax in the hands of Members –

In this case, tax is chargeable on the income of the AOP/BOI at the same rate as is applicable in the case of an individual.

(B). If Any Member Of The AOP/BOI Has Income In Excess Of The Maximum Amount Which Is Not Chargeable To Tax-

In such case, tax will be chargeable at the maximum marginal rate (i.e., 35.535 % for the assessment year 2018-19 and 35.88 % for the assessment year 2019-20).

3. As a Partner of Firm Assessed as Firm Assessed u/s 184.

The share received by an individual from a firm shall not he included in his total income irrespective of the fact, whether the firm has paid the tax or not. Any salary or other remuneration and interest on capital is taxable under the head Profits and Gains to the extent above remuneration and interest are allowed as deduction to the firm.

4. Share of income from firm assessed u/s 185.

Share of income received by a partner from a firm which has been assessed to tax u/s 185 as it has not submitted a copy of its instrument of partnership is fully exempted u/s lO(2A). The following sums received by partner from such firm shall also he exempted in the hands of the partner

(a) Any remuneration, bonus, fees, commission etc.

(b)       Interest on loan/capital from such firm.

Note. The above exemptions are applicable because firm covered u/s 185 is not allowed to charge these items as expense.

5. As a Shareholder of a company.

The gross amount of dividend received by an individual is to he included in his total income. The gross amount means, the net dividend received plus tax deducted at source. The shareholder is liable to pay tax on whole of his income from dividend i.e., the gross amount of dividend declared by the company. The assessee shall get credit of the tax deducted at source out of his final tax liability. The individual shall be entitled to the deduction as provided by the different sections of Income-tax Act.

With effect from assessment year 1998-99 dividend received from or declared or distributed by an Indian company on or after 1-6-97 shall he fully exempted and shall not form part of total income.

Note. Dividend from foreign company is fully taxable as income from other sources.

Incomes Of Other Persons To Be Included In The Total Income Of An Individual (Section 60 to 64)

Under the provisions of section 60 to 64 of the Income-tax Act, 1961, in the following cases some incomes although accruing to other persons, but to prevent tax-evasions, are included in the total income of individual assessee (Clubbing of Income).

1. Transfer of income where there is no transfer of assets [Section 60]

Where there is a transfer of an income by a person to another person, without the transfer of the asset from which the income arises, such income shall be included in the total income of the transferor, whether such transfer is revocable or not and whether this transfer is effected before or after the commencement of the Income-tax Act, 1961.

For example :

X who owns a house which fetches a rent of Rs.10,000 per month, declares that henceforth the rent shall belong to his friend Y but the house shall remain the property of X. 
In this case, because there is only a transfer of income without the transfer of the asset, the rental income shall be included in the income of X for purposes of computing his total income.

2. Revocable transfer of assets [Section 61]

Where there is a revocable transfer of an asset by a person to another person, any income arising/ derived from such assets shall be included in the total income of the transferor.

3. Section 61 not applicable, if the transfer is irrevocable for a specified period [Section 62]:

As per section 62(1), the provisions of revocable transfer, discussed in section 61, shall not apply in certain circumstances. Such circumstances are—

  1. in the case of transfer by way of trust, the transfer is not revocable during the life time of the beneficiary;
  2. in the case of any other transfer, the transfer is not revocable during the life time of the transferee;
  3. in case the transfer is made before 1.4.1961, the transfer is not revocable for a period exceeding 6 years.

The above exceptions are applicable provided the transferor derives no direct or indirect benefit from such income.

In the above cases, the income shall be taxable in the hands of the transferee.

4. When a transfer is revocable [Section 63]:

As per section 63, a transfer for the purpose of sections 60, 61 and 62 shall be deemed to be revocable if:

  1. it contains any provision for the re-transfer, directly or indirectly of the whole or any part of the income or assets to the transferor, during the life time of the beneficiary or the transferee as the case may be, or
  2. it gives the transferor a right to re-assume power directly or indirectly over the whole or any part of the income or assets during the life time of the beneficiary or the transferee as the case may be.

5. Income of an individual to include income of spouse, minor child, etc. [Section 64]

A- Remuneration of spouse from a concern in which the other spouse has substantial interest [Section 64(1)(ii)]:

In computing the total income of an individual, there shall be included all such sums as arise directly or indirectly to the spouse, of such individual by way of salary, commission, fees or any other form of remuneration, whether in cash or in kind from a concern in which such individual has a substantial interest.

Therefore, any remuneration derived by a spouse from a concern in which the other spouse has a substantial interest, shall be clubbed in the hands of the spouse who has a substantial interest in that concern.

Any other income, not specified above, is outside the scope of this section and will not the clubbed even if it accrues to the spouse from a concern in which the individual has a substantial interest.

Where both husband and wife have substantial interest and both are getting remuneration from the concern:

If the husband and wife both have substantial interest in the concern and both are in receipt of remuneration from the concern, then the remuneration of both shall be clubbed in the hands of that spouse whose total income, before including such remuneration, is greater.

B. Income from assets transferred to the spouse [Section 64(1)(iv)]:

In computing the total income of an individual, all such income as arises directly or indirectly, subject to the provisions of section 27(i) (i.e. deemed owner), to the spouse of such individual from assets (other than house property) transferred directly or indirectly to the spouse of such individual otherwise than for adequate consideration or in connection with an agreement to live apart shall be included.

As per this provision, if an individual transfers any asset other than house property to his/her spouse, the income from such an asset shall be included in the total income of the transferor. This provision is not applicable to house property because in that case the transferor is deemed to be the owner of the house property and the annual value of the property is taxed in the hands of the transferor as per section 27.

C. Income from assets transferred to son’s wife [Section 64(1)(vi)]:

Any income which arises from assets transferred directly or indirectly by an individual to his son’s wife after 1.6.1973, otherwise than for adequate consideration, shall be included in the income of the transferor. For example, R transfers 1,000 10% bonds of Rs.100 each of IDBI to his son’s wife without any consideration. IDBI declares Rs.10,000 as interest. Although the sum of Rs.10,000 as interest is received by his son’s wife, this amount shall be included in the income of R under the head ‘Income from Other Sources’ for the purpose of computing his total income.

D. Income from assets transferred to any person for the benefit of the spouse of the transferor [Section 64(1)(vii)]:

Where an individual transfers any assets to any person or association of persons, otherwise than for adequate consideration, the income from such assets shall be included in the income of the transferor to the extent to which the income is for the immediate or deferred benefit of his or her spouse. In other words, where an asset is transferred to some other person, without adequate consideration for the benefit of the spouse of the individual as well as for some other persons, income on such an asset to the extent of benefit which accrues to the spouse, shall be included in the total income of the individual.

For example :

X transfers a house to his friend Y with a direction that 50% of the rental income is to be used for the benefit of his wife Mrs. X and 50% for others, then the rental income to the extent of 50% shall be included in the total income of X.

E. Income from assets transferred to any person for the benefit of son’s wife [Section 64(1)(viii)]:

Where an individual transfers any assets, after 1st June, 1973 to any person or association of persons, otherwise than for adequate consideration the income from such assets shall be included in the income of the transferor to the extent to which the income is for the immediate or deferred benefit of his or her son’s wife.

6. Clubbing of income of a minor child [Section 64(1A)]

In computing the total income of an individual, there shall be included all such income as arises or accrues to his minor child. Therefore, the income of a minor child is to be clubbed in the hands of either of his parents.

The income shall be clubbed in the hands of that parent whose total income (excluding the income of the minor) is greater. If the marriage of his parents does not subsist, the income shall be clubbed in the hands of that parent who maintains the minor child in the previous year.

Where any income is once included in the total income of either parent, any such income arising in any succeeding year shall not be included in the total income of the other parent, unless the Assessing Officer is satisfied, after giving that parent an opportunity of being heard, that it is necessary so to do.

Where the income of a minor child has been included in the total income of a parent, such parent shall be entitled to an exemption to the extent of such income or Rs.1,500 whichever is less, in respect of each minor child whose income is so included.

7. Income from self-acquired property converted to joint family property [Section 64(2)]

Where an individual, who is a member of the Hindu Undivided Family,—

  1. converts, his separate property as the property of the HUF, or
  2. throws the property into the common stock of the family, or
  3. otherwise transfers his individual property to the family,

otherwise than for adequate consideration, then the income from such property shall continue to be included in the total income of the individual.

In other words, if self-acquired property of an individual is treated/converted into joint family property without adequate consideration, the income derived by the joint family on account of such property shall be included in the total income of the individual who was the owner of such self-acquired property.

For example :

X owns a house property from which he derives an income of Rs.6,00,000 per annum. If, he converts this property as the property of an HUF of which he is a member. Although the income shall henceforth be received by the HUF but it shall be deemed to be the individual income of X and shall be included in computation of his total income under the head ‘Income from House Property’.

Computation Of Total Income & Tax Liability of an Individual

Step 1:       Compute the income of an individual under 5 heads of income on the basis of his residential status.

Step 2:       Income of any other person, if includible u/ss 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. 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.

Step 8:       Allow rebate of maximum Rs. 2,500 under section 87A in case of resident individual having total income upto Rs. 3,50,000. For details see below.

Step 9:       Add surcharge @ 10% on total income exceeding Rs. 50,00,000 and upto Rs. 1 crore and 15% of such income tax in case of an individual having a total income exceeding Rs. 1 crore.

Step 10:     Add education cess @ 2% and SHEC @ 1% on the tax (including surcharge if applicable).

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. 

Rebate of maximum Rs. 2,500 for resident individuals having total income up to Rs. 3,50,000 [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 condition and satisfied:

  1. The assessee is an individual
  2. He is resident in India,
  3. His total income does not exceed Rs. 3,50,000.

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. 2,500,

whichever is less.