Chapter 7: Concepts in Taxation

by with No Comment NISM Series XB Investment Adviser

Income Tax Framework in India

  • Income tax in India is governed by the provisions of the Income Tax Act, 1961.
  • The administration of the Act is assigned to the Central Board of Direct Taxes (CBDT).
  • The Income Tax Rules, 1962 are framed to carry out the purposes of the Act.
  • CBDT also issues Circulars and Notifications as and when required.

Implications for Trading and Investing in Securities Market

  • It is important to understand the income tax implications while trading or investing in securities market.
  • Gains arising on sale of securities may have different tax treatments depending on various factors such as:
  • The type of security
  • Holding period
  • Whether the transaction was done in capacity of trader or investor, etc.

Key Concepts-

Subheading Information
Previous year v/s Assessment year India follows the financial year (FY) from April 01 to March 31 for calculating income for various purposes. The financial year for which one wants to calculate tax liability is the “previous year” for the purposes of Income Tax Act. The financial year following the previous year is the “assessment year.”
  Section 2(9) of the Act defines the assessment year as a period of 12 months commencing on the 1st day of April every year. Section 3 of the Act defines the “previous year” as the financial year immediately preceding the assessment year.
Person Section 2(31) of the Act defines a “person” to include Individual, HUF, Company, Partnership firm, AOP or BOI, Local authority, Artificial juridical person, not falling within any of the above categories.
  Persons referred in (e), (f) and (g) above shall be deemed a person even if they are not formed or established or incorporated with the object of deriving income, profits or gains.
Assessee Section 2(7) of the Income-tax Act defines “assessee” as the person who is liable for payment of taxes or any other sum of money under the Act. It also includes the person in respect of whom any proceeding has been initiated under this Act. Such proceedings may be in respect of income, loss, or refund. It also includes “deemed assessee” and “assessee-in-default.”
  A “deemed assessee” is a person who is assessable in respect of income or loss of any other person, such as a representative assessee, legal representative, an agent of a non-resident, etc.
  A person can be an “assessee-in-default” if he fails to discharge his obligations as per the provisions in the Act.

Key Concepts of Income Tax – Income

Subheading Explanation
Definition Section 2(24) of the Income Tax Act provides an inclusive definition of income, which means any sum of money mentioned in the section 2(24) will be considered as income, and any other sum which is not covered in this section can also be taxed if it is in the nature of income.
Relevant clauses The more relevant clauses in Section 2(24) are: Dividend, Capital gains, Gifts received from a non-relative which is covered by section 56, Any movable or immovable property received at below the market price as per the provisions of section 56, Certain perquisites arising out of employment.

Residential Status for Income Tax Act

Residential status for Income Tax Act has to be determined as per the provisions of section 6 of the Act. The income tax liability of an assessee is calculated on the basis of his ‘Total Income’. An assessee can be categorized into following residential status during the previous year:

Residential Status Description
Resident in India An individual is treated as resident in India if he stays in India for 182 days or more during the relevant previous year; or 60 days or more during the relevant previous year and for 365 days or more in the last 4 preceding previous years. In case of an Indian citizen or a person of Indian Origin, the condition mentioned in (b) above is modified.
Non-Resident in India An individual who does not become a ‘resident’ by virtue of the above mentioned conditions is treated as a non-resident for income tax purposes.
Not Ordinarily Resident Once it is determined that an individual will be treated as resident on the basis of the above mentioned conditions, the next step will be to see if he will be treated as ‘not ordinarily resident’. Where an individual is treated as resident in India, he will be treated as Not Ordinarily Resident (NOR) in India if he satisfies any one condition specified.

A resident individual and HUF are further sub-classified into the following status:

Resident Status Description
Resident and Ordinarily Resident If an individual has been a resident in India for two out of the ten years preceding the relevant previous year and if his stay in India is 730 days or more during seven years preceding the relevant previous year, he is said to be resident and ordinarily resident in India.
Resident but Not-ordinarily Resident If an individual does not satisfy any one of the two basic conditions discussed above, he will be considered a resident but not ordinarily resident in India. An RNOR is eligible for certain benefits like tax exemptions on foreign income etc.

A new category of ‘deemed resident’ has been introduced in clause (1A) of Section 6 with effect from Assessment Year 2021-22. As per Section 6(1A) an Indian citizen is deemed as resident in India irrespective of his stay in India if his total income, excluding income from foreign sources, exceeds Rs. 15 lakh during the previous year and he is not liable to tax in any other country or territory by reason of his domicile or residence or any other criteria of similar nature. Here, ‘income from foreign sources’ means income which accrues or arises outside India (except income derived from a business controlled in or a profession set up in India). A deemed resident is always treated as Not-Ordinarily Resident.

Residential Status of Companies and Other Entities

Entity Type Residential Status Criteria for Determining Residential Status
Indian Company Resident Always treated as resident in India
Foreign Company Resident Place of Effective Management (POEM) in India during the relevant previous year with gross turnover or receipts exceeding Rs. 50 Crores
Firm, AOP, BOI, Local Authority, Artificial Juridical Person Resident Any part of control and management of affairs situated in India during the previous year, even if principal decision-makers take a single decision in India
Firm, AOP, BOI, Local Authority, Artificial Juridical Person Non-Resident Control and management of affairs situated wholly outside India during the previous year

Notes:

  • Indian companies are always considered resident in India.
  • Foreign companies with a POEM in India and gross turnover or receipts exceeding Rs. 50 Crores are treated as resident in India.
  • For firms, AOPs, BOIs, local authorities, and artificial juridical persons, residential status is based on the location of control and management of affairs during the previous year.
  • These entities are considered resident in India if any part of control and management is in India during the previous year, even if decision-makers take only one decision in India.
  • These entities are considered non-resident in India if the control and management of their affairs is wholly outside India during the previous year.

Scope of Income Tax based on Residential Status

Resident and Ordinary Resident Worldwide income – Income received or deemed to be received in India – Income accruing or arising in India – Income accruing or arising outside India
Resident but not Ordinary Resident Only Indian income – Income received or deemed to be received in India – Income accruing or arising in India – Income accruing or arising outside India if derived from a business controlled from India or a profession set up in India
Non-Resident Only Indian income – Income received or deemed to be received in India – Income accruing or arising in India

Example 1: Residential Status Determination

  • Mr. C is a resident for FY 2020-21 as he stayed in India for more than 182 days
  • Mr. C is a resident but not ordinarily resident in India for FY 2020-21 as he is a non-resident in nine out of ten preceding financial years

Example 2: Taxability of Offshore Bank Account Income

  • For a resident and ordinarily resident like Mr. A, worldwide income is taxable in India, including the interest income from the USA bank account
  • For a resident but not ordinarily resident like Mr. A, only Indian income is taxable in India, and the interest income from the USA bank account will not be taxed in India.

Income from House Property-

Head of Income Explanation Tax Rate
Income from Salary Income earned through employment or services rendered under an employer-employee relationship. Includes basic salary, allowances, bonuses, and perquisites (such as company car, house rent allowance, medical reimbursements, etc.). Taxed as per the income tax slab rates applicable to the individual.
Income from House Property Income earned from owning and renting out a house property. Taxed at the applicable slab rates after deducting property taxes, standard deduction (currently 30% of the net annual value), and interest on home loan (if applicable).
Profit & Gains of Business or Profession Income earned by an individual who is self-employed or runs a business, including freelancers, consultants, and professionals like doctors, lawyers, and architects. Taxed at slab rates after allowing for deductions such as business expenses, depreciation, and interest on business loans.
Income from Capital Gains Income earned from selling capital assets such as real estate, stocks, mutual funds, gold, etc. Taxed at 20% (with indexation benefit) for long-term gains (holding period of more than 24 months), or 10% (without indexation benefit) for short-term gains (holding period of up to 24 months).
Income from Other Sources Income earned from sources other than the four above, such as interest income, dividend income, rental income (not from a house property), etc. Taxed at slab rates after allowing for deductions such as standard deduction (currently Rs. 50,000) and any applicable exemptions.

Note that the tax rates and deductions mentioned in the table may change from time to time based on the budget announcements made by the government of India. It’s always advisable to consult a tax professional or visit the official income tax website for up-to-date information.

Clubbing of Income

The Clubbing of Income provisions in the Income Tax Act are designed to counteract the taxpayers’ tendency to dispose of their property or income in favour of other people to avoid or reduce tax liabilities. This article explains the provisions for clubbing of income in a table format, covering the sections from 60 to 64 of the Income Tax Act.

Table: Provisions for Clubbing of Income in Income Tax Act

Section Provision Explanation
60 Transfer of income without transferring asset If a person transfers income from an asset without transferring the asset, such income is included in the total income of the transferor, whether the agreement is revocable or irrevocable.
61 Revocable transfer of assets All income arising to any person by virtue of a revocable transfer of assets is included in the total income of the transferor, even if only part of the income of the transferred asset had been applied for the benefit of the transferor.
62 Exception to section 61 If the transfer isn’t revocable during the lifetime of the beneficiary and the transferor derives no direct or indirect benefit from such income, the income shall be taxable in the hands of the beneficiary or transferee.
63 Deemed revocable transfer Any transfer of an asset shall be deemed as ‘revocable’ if it contains a provision for retransfer, directly or indirectly, of the whole or any part of the income or assets to the transferor or gives transferor a right to re-assume power, directly or indirectly, over the whole or any part of the income or assets.
64 Income of another person to be included in taxpayer’s income This section applies to the following situations: (i) Income of spouse from assets transferred to them by the taxpayer, (ii) Income of a minor child, and (iii) Income of any other person, if such income arises directly or indirectly from assets transferred to them by the taxpayer.

Set-off and Carry Forward of Losses

Loss under the head Capital Gains

  • Capital losses can be short-term or long-term.
  • Both losses are computed separately and disclosed in the Income-tax Returns.
  • Short-term capital loss can be set-off against any capital gain.
  • Long-term capital loss can only be set-off against long-term capital gains.

Intra-head Adjustment

  • Loss from one source of income may be set-off against income from another source falling under the same head of income.
  • Long-term capital loss cannot be set-off against short-term capital gains, but short-term capital loss can be set-off against any capital gain.

Inter-head Adjustment

  • Net loss under a head of income can be set-off against income from other heads in the same previous year.
  • Capital loss cannot be set-off against income taxable under any other head.

Carry forward of losses

  • If capital loss cannot be set-off against eligible capital gains in the current year, it can be carried forward and set-off against relevant capital gains in the subsequent year.
  • Short-term capital loss can be set-off against short-term or long-term capital gain, but brought forward long-term capital loss can only be set-off against long-term capital gains.
  • Losses can be carried forward for 8 Assessment Years immediately following the year for which the loss was first computed.
  • The return of income must be filed on or before the due date of filing the original return under section 139(1).
  • Assessee can apply to the Assessing Officer or the CBDT for condonation of delay in filing of return of income.

Loss under the head Profits and Gains of Business or Profession

  • Loss from speculative transactions can only be set-off against profit from speculative transactions.
  • Normal business loss can be set-off from any income other than salary and income from gambling activities.
  • Speculative loss and non-speculative loss can be carried forward for 4 years and 8 years respectively.
  • In subsequent years, speculative loss can only be set-off against speculative profit, whereas normal business loss can be set-off against non-speculative as well as speculative income.

Losses under the head Income from House Property

  • Loss from one house property can be set-off against income from another house property during the same year.
  • House property loss can be set-off against incomes under other heads but is restricted to Rs. 2 lakhs for any financial year.
  • Unadjusted loss can be carried forward till the next 8 years and can only be set-off against income from house property in the subsequent year.

Loss under the head Other Sources

  • Loss under the head Other Sources can be set-off against any income under any head except income from gambling activities.
  • Loss under the head Other Sources cannot be carried forward to subsequent years if it cannot be set-off in the current year due to inadequacy of income under other heads.

Table 7.2: Set-off and Carry Forward of Losses

Sr. No Type of Loss Set-off in the Same Financial Year Maximum Period upto Which Unadjusted Loss can be Carried Forward Set-off in Subsequent Previous Year Allowed Against
1. House Property Any Income under any Head of Income (Set-off restricted to Rs. 200,000) 8 years Income from House Property
2. Business or Profession Any Income under any Head except Salaries 8 years Business Income Only
3. Speculation Loss Speculation Profit Only 4 years Speculation Profit Only
4. Short-term Capital Loss Any Capital Gain 8 years Any Capital Gains
5. Long-term Capital Loss Long-term Capital Gain 8 years Long-term Capital Gains
6. Other Sources Any Income under any Head of Income Cannot be carried forward Unutilized loss not allowed for carry forward

The table summarizes the type of losses and their set-off rules in the same financial year and in the subsequent previous year, along with the maximum period for which unadjusted loss can be carried forward. The set-off provisions are different for each type of loss under different heads of income.

Exempt Incomes under Chapter III of Income Tax Act, 1961

Chapter III of the Income Tax Act, 1961 lists certain incomes that are exempt from tax and are not included in the computation of the assessee’s total income. The exemptions are covered under sections 10 to 13B. In this article, we will discuss some of the important items of exempted income

Exempt Incomes and their Sections
The following table lists the exempt incomes and the sections under which they fall:

Exempt Income Section
Agricultural income 10(1)
Income from NRE account 10(4)(ii)
Income from RFC/FCNR account 10(15)(iv)(fa)
Income of a charitable trust 11
Monies received under a life insurance policy including the sum allocated by way of bonus on such policy 10(10D)
Payment from Public Provident Fund 10(11)
Payment from Sukanya Samriddhi Scheme 10(11A)
Accumulated balance due and becoming payable to an employee from recognized employees provident fund 10(12)
Payment from National Pension System 10(12A)
Income arising to shareholders on buy-back of shares by the company on which tax has been paid by the company under section 115QA 10(34A)

Amendments proposed by Finance Bill, 2021
The Finance Bill, 2021 proposes amendments to some of the sections mentioned above. The following table lists the amendments and their impact:

Amendment Impact
Section 10(11) and 10(12) Interest income accrued during the previous year in the account of the person to the extent it relates to the amount or the aggregate of amounts of contribution made by the person exceeding Rs. 2.50 lakh in a previous year in the above mentioned Provident / employees provident fund, on or after 1st April, 2021, computed in such manner as may be prescribed. The limit for contribution is Rs. 5,00,000 where there is no contribution by the employer to any such provident fund. The limit of Rs. 250,000 (or Rs. 5,00,000 as mentioned above) applies separately each to contributions made to provident fund covered under section 10(11) and to employees provident fund under section 10(12).
Section 10(10D) Sums received under a Unit Linked Insurance Policy issued after 1 February 2021 where the aggregate premium payable on such policy exceeds Rs. 2,50,000 for any year during the entire tenure of the policy are not exempted. The exemption will continue to apply to those ULIP policies where the aggregate of the premium payable under the policies is lower than Rs. 2,50,000 per annum. This amendment applies to all ULIP policies issued on or after 1 February 2021 only.

Note: The amendments proposed by the Finance Bill, 2021 will take effect from 1st April, 2022 (FY 2022-23) and shall apply to the assessment year 2022-23 and subsequent assessment years.

Deductions under Chapter VI-A

Section Nature of payment/income Available to Permissible deduction
80C Deduction for investments in insurance policies, repayment of housing loan, etc. Individual and HUF Rs. 1,50,000*
80CCC Contribution to annuity plan of LIC or any pension fund Individual Rs. 150,000*
80CCD(1) Employee’s contribution towards NPS Individual 10% of salary*
80CCD(1B) Contribution towards NPS by any individual Individual Rs. 50,000
80CCD(2) Employer’s contribution towards NPS Individual Central Government employees: 14% of salary; Others: 10% of Salary
80D 1. Medical Insurance 2. Contribution to Central Government Health Scheme 3. Preventive Health Check-up 4. Medical Expenditure Individual and HUF Rs. 75,000 [where individual (incl. his family) is less than 60 years of age and his parents are senior citizen); Rs. 1,00,000 [where both individual (incl. his any member of family) and his parents are senior citizens
80DD Expenditure on medical treatment of disabled dependant Individual and HUF Rs. 75,000 (Rs.1,25,000 in case of severe disability)
80DDB Medical treatment of specified diseases Individual and HUF Rs. 40,000 (Rs. 1,00,000 for senior citizen)
80E Interest on education loan Individual Amount paid as interest on loan without limit
80EEA Interest on loan to acquire house property over and above the limit of Rs. 2,00,000 specified under section 24 with stamp duty value not exceeding Rs. 45 lakhs and loan sanctioned before March 31, 2022 and assessee not owning any residential property on the date of sanction of loan Individual Rs. 1,50,000
80EEB Interest on loan to purchase an electric vehicle Individual Rs. 1,50,000
80G Donations All assessees 50%/100% of the net qualifying amount
80GG Rent paid Individual not receiving HRA Rent paid in excess of 10% of total income or Rs. 5,000 per month or25% of total income whichever is less
80GGA Donations for certain scientific research and rural development All assesses not having any income chargeable under the head PGBP 100%
80GGB Sums to political parties/electoral trust Indian company 100%
80GGC Sums to political parties/electoral trust All assesses other than local authorities and artificial judicial person wholly or partly funded by government 100%
80-IA Deduction for profits of industrial undertaking engaged in infrastructural development All assesses 100%
80-IAB Deduction of profits from industry in SEZ SEZ developers 100%
80-IAC Deduction for eligible start-up businesses All assesses 100%
80-IB Deduction for industrial undertaking other than infrastructure development undertaking All assesses Upto 100%
80RRA Royalty on patents All assesses Lower of the following: (i) amount actually received (ii) Rs. 3,00,000
80TTA Interest on deposits in savings accounts Individual and HUF Rs. 10,000
80TTB Interest on deposits in savings accounts for senior citizens Individual and HUF Rs. 50,000
80U Persons suffering from physical disability Individual Rs. 75,000 (Rs. 1,25,000 in case of severe disability)

Important sections and provisions of the Income-tax Act, 1961

  • Section 87A: Tax rebate of up to Rs. 12,500 for resident individuals with income less than Rs. 5,00,000; not available for long-term capital gains.
  • Minimum Alternate Tax (MAT): Payable by companies whose tax on total income is less than 15% of ‘book profit’; payable even if total income is nil or has tax losses; exceptions for insurance & shipping companies, certain foreign companies, and companies opting for Section 115BAA or Section 115BAB.
  • MAT Credit: Excess tax paid as MAT can be carried forward for 15 years as credit to set-off against tax payable as per normal provision in future years.
  • Alternate Minimum Tax (AMT): Payable by an assessee (not a company) whose tax on total income is less than 18.5% of ‘Adjusted Total Income’; payable even if total income is nil or has tax losses; exceptions for individuals with adjusted total income less than Rs. 20 Lakh, and those not claiming certain deductions.
  • 80TTB: Senior citizens can claim deduction of up to Rs. 50,000 on interest earned on deposits with banks/post offices/cooperative societies.
  • 80U: Individuals with medical disabilities can claim deductions of up to Rs. 75,000 (or Rs. 1,25,000 in case of severe disability).

Computation of Gross Total Income (GTI)

Heading Subheading Amount (in Rs.)
Gross Total Income (GTI)    
Step 1 Income under five heads of income  
  Income from salaries xxx
  Income from house property xxx
  Profits and gains from business and profession xxx
  Capital gains xxx
  Income from other sources xxx
  Total of head-wise income xxx
Step 2 Club income of other persons  
     
Step 3 Set-off the losses of the current year or earlier years  
  Intra-head adjustment, i.e., set-off of losses from one source of income against income from another source taxable under the same head of income. xxx
  Inter-head adjustment, i.e., set-off of losses from one head of income against income taxable under another head of income. xxx
  Total losses set-off (xxx)
Gross Total Income   Xxx

Table: Computation of Total Income

Heading Subheading Amount (in Rs.)
Total Income    
Gross total income   xxx
Less: Deduction under chapter VI-A, i.e., Section 80C to 80U (xxx)  
Total Income   xxx

Note: GTI stands for Gross Total Income. As per Section 80B(5) of the Income-tax Act, Gross Total Income is the total income computed in accordance with the provisions of the Income-tax Act before making any deduction under chapter VI-A. The table provides a step-wise computation of GTI. Similarly, the table provides a step-wise computation of Total Income, which is the balance income remaining after claiming deductions from Gross Total Income. Total Income is the base for the calculation of tax liability.

Computation of Tax Payable

Non-Corporate Assessee

Calculation of tax for non-corporate assessees involves the following steps:

  • Compute tax as per applicable tax rates and special tax rates on total income
  • Add surcharge (if applicable) and Health & Education Cess to arrive at gross tax liability
  • Reduce AMT credit, relief under section 89 or foreign tax credit from gross tax liability to arrive at net tax liability
  • Increase net tax payable by the amount of interest and late filing fees (if any)
  • Deduct taxes already paid (Advance Tax, TDS, TCS or Self-Assessment tax) to compute the amount of tax payable by or refundable to taxpayer

If tax payable is less than 18.5% of the adjusted total income, then the assessee is liable to pay Alternate Minimum Tax (AMT) at the rate of 18.5% of the adjusted total income.

Corporate Assessee

Calculation of tax for corporate assessees involves the following steps:

  • Apportion total income into normal income and special income
  • Charge normal income to tax as per applicable tax rates
  • Charge special income to tax at special rates
  • Add surcharge (if applicable) and Health & Education Cess to arrive at gross tax liability
  • Reduce MAT credit and foreign tax credit from gross tax liability to arrive at net tax liability
  • Increase net tax payable by the amount of interest and late filing fees (if any)
  • Deduct taxes already paid (Advance Tax, TDS, TCS or Self-Assessment tax) to compute the amount of tax payable by or refundable to taxpayer

If tax payable by a company is less than 15% of the book profit, then it is liable to pay Minimum Alternate Tax (MAT) at the rate of 15% of the book profit.

Double Tax Avoidance Agreement (DTAA)

Taxation principles are different in different countries. Residence-based taxation gives taxing rights to the country where the assessee is a resident, while source-based taxation gives taxing rights to the country where the income source is located. India follows a dual approach where residents are taxed on their worldwide income, and non-residents are taxed only on their Indian income.

Double taxation of income

Due to these taxation principles, the same income can be charged to tax in both the residence and source countries, leading to double taxation of income. To illustrate, if an Indian resident has a property in the US and earns rental income, the income may be taxed in India and the US, resulting in double taxation.

DTAA

To avoid double taxation of income, countries enter into Double Taxation Avoidance Agreements (DTAAs). DTAAs allocate taxing rights or give credit for taxes paid in the source state by the residence state.

Types of DTAA

DTAAs are usually bilateral or multilateral. Bilateral DTAA is an agreement between two countries, while multilateral DTAA is an agreement between more than two countries or a group of countries. For example, the DTAA between India and the USA is bilateral, while the DTAA among the Governments of SAARC member nations is multilateral.

Taxation Regime

Heading Subheading Details
Tax-saving investments EEE, EET, and ETE E denotes Exempt and T denotes Taxable. Investment is made to grow capital in three stages: 1) investment, 2) interest/returns, 3) transfer/withdrawal.
EEE Investments Public Provident Fund Investment qualifies for deduction, returns exempt from tax, no tax on transfer or withdrawal of principal/interest.
EET Investments Equity Linked Saving Schemes (ELSS) Taxable only at the time of transfer/withdrawal.
ETE Investments Fixed deposit for 5 years or more; Senior Citizen Savings Scheme Tax benefit at the time of deposit and withdrawal, but returns are chargeable to tax.
Heading Subheading Details
Maximum Marginal Rate of Tax N/A Maximum Marginal Rate (MMR) = Highest slab rate + Surcharge + Health & Education Cess.
    MMR for individuals, Association of Person or Body of Individual is 42.744%.
Effective Rate of Tax N/A Effective tax rate = Applicable tax rate × (1 + Rate of Surcharge) × (1 + Rate of Education Cess).
    In case of a partnership firm with income above Rs. 1 crore, the effective tax rate is 34.944% [i.e. 30% x (1 + 12%) x (1 + 4%)].
    In case of an individual, effective tax rate = total income-tax as a percentage of total taxable income.
Heading Subheading Details
Tax Alpha N/A Tax Alpha maximizes after-tax returns and adds value to a person’s portfolio by implementing sound tax strategies.

General Anti-Avoidance Rules (GAAR)

General Anti-Avoidance Rules (GAAR) are a set of tax laws aimed at preventing aggressive tax avoidance schemes that erode the tax base of a country. The GAAR provisions empower revenue authorities to declare an arrangement as an “impermissible avoidance arrangement” if its main purpose is to obtain a tax benefit, and the arrangement lacks or is deemed to lack commercial substance.

An impermissible avoidance arrangement may create rights or obligations that are not ordinarily created between persons dealing at arm’s length, result in the misuse or abuse of provisions of the Income-tax Act, lack commercial substance or deemed to lack commercial substance, or be entered into or carried out in a manner that is not ordinarily employed for bona fide purposes.

Round trip financing, which involves transferring funds among parties to the arrangement without any substantial commercial purpose other than obtaining the tax benefit, is deemed an impermissible avoidance arrangement. If an arrangement is declared to be an impermissible avoidance arrangement, the assessing officer can determine the consequences in relation to tax or benefit under a tax treaty in such a manner as deemed appropriate.

The consequences may include disregarding, combining, or re-characterizing any step of the arrangement, treating the arrangement as if it had not been entered into, reallocating expenses and income between the parties, relocating the place of residence of a party, considering or looking through any arrangement by disregarding any corporate structure, or re-characterizing equity into debt or vice versa.

However, the provisions relating to GAAR shall not apply to certain arrangements, such as those where the tax benefit does not exceed Rs. 3 crore, foreign institutional investors who have not taken benefit of the tax treaty and invested in accordance with SEBI guidelines, non-resident persons who have made investments through offshore derivative instruments, and income accruing or arising from investments made before 01-04-2017.

Mock Tests-

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Investment Advisor Level 2

Chapter 7: Concepts in Taxation- 1

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1. What does GAAR aim to achieve in relation to tax planning arrangements?

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2. How is an arrangement deemed to lack commercial substance?

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3. What is the tax rate for MAT if the assessee is located in an International Financial Services Centre (IFSand derives income solely in convertible foreign exchange?

4 / 50

4. Which countries are part of the SAARC Multilateral DTAA?

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5. Which entities or arrangements are exempt from the provisions of GAAR?

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6. What is the basic objective of 'Tax Alpha'?

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7. How is 'Tax Alpha' defined in the context of portfolio management?

8 / 50

8. What is the purpose of a Double Taxation Avoidance Agreement (DTAA)?

9 / 50

9. MMR' stands for ________.

10 / 50

10. Which investment falls under the category of 'ETE'?

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11. Which sections of the Income-tax Act allow companies to opt for concessional tax rates?

12 / 50

12. What are the consequences of declaring an arrangement as an impermissible avoidance arrangement?

13 / 50

13. What is the purpose of a DTAA?

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14. What is charged to tax at special rates for a corporate assessee?

15 / 50

15. What does GAAR stand for in the context of taxation?

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16. What is the principle of 'Residence based Taxation'?

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17. What is the significance of 'EEE' in tax-saving investments?

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18. Which investment is an example of 'ETE'?

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19. Which investment falls under the category of 'EEE'?

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20. What is the principle of 'Source-based Taxation'?

21 / 50

21. What does 'EET' represent in the taxation regime?

22 / 50

22. What is round trip financing in the context of impermissible avoidance arrangements?

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23. Which type of DTAA exists between India and the USA?

24 / 50

24. Which investment falls under the category of 'EET'?

25 / 50

25. What approach does India follow for income taxation?

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26. What is deducted from the Gross tax liability to calculate the tax payable after MAT credit?

27 / 50

27. What is deducted from the Gross tax liability to compute the net tax liability for a corporate assessee?

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28. What does 'EEE' stand for in the context of tax-saving investments?

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29. What does 'MMR' stand for in the context of taxation?

30 / 50

30. What does the term 'effective tax rate' represent?

31 / 50

31. When does a company become liable to pay Minimum Alternate Tax (MAT)?

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32. What is the maximum amount of foreign tax credit available against MAT?

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33. Which companies are exempted from the provisions of MAT?

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34. How is the Total tax payable/refundable calculated for a corporate assessee?

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35. What is the main purpose of an impermissible avoidance arrangement?

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36. What is a Bilateral DTAA?

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37. Which investment is an example of 'EEE'?

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38. What is the maximum marginal rate for individuals as per the Income-tax Act?

39 / 50

39. The effective tax rate for an individual with an income of Rs. 20 lakhs and an income tax payable of Rs. 4,29,000 would be ________.

40 / 50

40. Which party may be disregarded or treated as the same as an accommodating party in an impermissible avoidance arrangement?

41 / 50

41. Which of the following is NOT a characteristic of an impermissible avoidance arrangement?

42 / 50

42. How can the effective tax rate be calculated?

43 / 50

43. Which investment is an example of 'EET'?

44 / 50

44. Tax Alpha focuses on optimizing __________.

45 / 50

45. In the case of a partnership firm with income exceeding Rs. 1 crore, the effective tax rate would be _______.

46 / 50

46. What does 'ETE' signify in the tax-saving investment context?

47 / 50

47. How is the total income of a corporate assessee apportioned for tax calculation?

48 / 50

48. When does a corporate assessee become eligible for MAT credit?

49 / 50

49. What is a Multilateral DTAA?

50 / 50

50. What is one of the methods that may be used to counter an impermissible avoidance arrangement?

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Investment Advisor Level 2

Chapter 7: Concepts in Taxation - 2

1 / 50

1. What is the rate of AMT for non-corporate assesses?

2 / 50

2. What is deducted from the Gross tax liability to calculate the tax payable after AMT credit?

3 / 50

3. Under which section of the Income-tax Act is a tax rebate provided to a resident individual?

4 / 50

4. Which deductions can trigger the applicability of AMT?

5 / 50

5. Which provision of the Income-tax Act defines Gross Total Income?

6 / 50

6. In which section of the Income-tax Act can an individual claim a deduction for contributions to an annuity plan of LIC or any pension fund?

7 / 50

7. Which of the following is not a head of income for the computation of Gross Total Income?

8 / 50

8. What is the final step in the computation of Total Income?

9 / 50

9. Which companies are exempted from the provisions of MAT?

10 / 50

10. In relation to MAT credit, which type of foreign tax credit is not allowed to be carried forward?

11 / 50

11. In which section of the Income-tax Act can an individual claim a deduction for expenditure on medical treatment of a disabled dependent?

12 / 50

12. What is the maximum permissible deduction under Section 80CCD(1) for an individual's contribution towards the NPS (National Pension System)?

13 / 50

13. How is the Total tax payable/refundable calculated?

14 / 50

14. What is the second step in computing Gross Total Income?

15 / 50

15. What is the tax rate for Minimum Alternate Tax (MAT) applicable to companies?

16 / 50

16. What is the maximum Adjusted Total Income for exemption from AMT?

17 / 50

17. What is the final step in computing Gross Total Income?

18 / 50

18. Which section of the Income-tax Act allows a deduction for interest on education loans?

19 / 50

19. What is the term used to describe the income remaining after claiming deductions from Gross Total Income?

20 / 50

20. Which type of capital gains is exempted from the rebate under Section 87A?

21 / 50

21. Which section of the Income-tax Act allows a deduction for investments in insurance policies, repayment of housing loans, etc.?

22 / 50

22. Companies opting for which sections are exempted from the provisions of MAT?

23 / 50

23. What is the permissible deduction limit under Section 80DD for severe disability?

24 / 50

24. How much deduction is allowed for an individual's contribution towards the NPS under Section 80CCD(1B)?

25 / 50

25. Which foreign tax credits affect the utilization of AMT credit?

26 / 50

26. What is the maximum deduction limit under Section 80D for an individual (less than 60 years) with senior citizen parents?

27 / 50

27. In the computation of Gross Total Income, what happens after clubbing income of other persons?

28 / 50

28. What is the maximum tax rebate amount available under Section 87A?

29 / 50

29. What is the term used to describe the tax liability after deducting AMT credit, relief under section 89, and foreign tax credit?

30 / 50

30. If an assessee incurs losses that cannot be set-off in the same year, what happens to those losses?

31 / 50

31. At what rate is AMT computed for an assessee in the International Financial Services Centre (IFSwith income solely in convertible foreign exchange?

32 / 50

32. Which term is used to refer to the total of head-wise income in the computation of Gross Total Income?

33 / 50

33. What is the purpose of the Alternate Minimum Tax (AMT)?

34 / 50

34. What is deducted from the Gross Total Income to arrive at Total Income?

35 / 50

35. Which companies are eligible for MAT credit if their tax on total income is less than 15% of book profits?

36 / 50

36. What is considered as the income of an assessee for AMT calculation?

37 / 50

37. How long can AMT credit be carried forward to set-off against tax payable in future years?

38 / 50

38. How long can MAT credit be carried forward to set-off against tax payable in future years?

39 / 50

39. What is the permissible deduction limit for Section 80C deductions?

40 / 50

40. What is the definition of Gross Total Income?

41 / 50

41. What is considered as the income of a company for MAT calculation?

42 / 50

42. Which entities are exempted from AMT provisions if they opt for concessional tax rates?

43 / 50

43. What is the purpose of setting off the current year and brought forward losses?

44 / 50

44. When does a non-corporate assessee become liable to pay Alternate Minimum Tax (AMT)?

45 / 50

45. Who is liable to pay Alternate Minimum Tax (AMT)?

46 / 50

46. Which tax rate is applicable to a non-corporate assessee located in an International Financial Services Centre (IFSand deriving income solely in convertible foreign exchange?

47 / 50

47. How are losses adjusted in the computation of Gross Total Income?

48 / 50

48. What is the condition for the non-utilization of carried forward AMT credit?

49 / 50

49. What is deducted from the Gross tax liability to compute the net tax liability?

50 / 50

50. Under which section of the Income-tax Act can an individual claim a deduction for medical insurance and medical expenditure?

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Investment Advisor Level 2

Chapter 7: Concepts in Taxation - 3

1 / 50

1. Income from which type of account is exempt under Section 10(4)(ii) of the Income Tax Act?

2 / 50

2. Which section of the Income Tax Act covers exemptions for agricultural income?

3 / 50

3. What is the purpose of including certain incomes under the head 'income from other sources'?

4 / 50

4. What is the distinction between short-term capital loss and long-term capital loss?

5 / 50

5. Can short-term capital loss be set-off against any capital gain?

6 / 50

6. Intra-head adjustment allows for the set-off of losses from one source of income against income from another source under which head of income?

7 / 50

7. Mr. D is a resident and ordinarily resident in IndiHe has a daughter-in-law. His daughter-in-law is a homemaker and does not earn any income. Can the income of Mr. D's daughter-in-law be clubbed in the total income of Mr. D?

8 / 50

8. What is the maximum period for carrying forward speculative loss and non-speculative loss?

9 / 50

9. Which section of the Income-tax Act deals with the clubbing of income from assets transferred to another person?

10 / 50

10. What is the amendment proposed by the Finance Bill, 2021 regarding provident funds?

11 / 50

11. Mr. A gifted Rs. 30,00,000 to his wife. Mrs. A earned interest income of Rs. 150,000 on the same. Will this interest income be clubbed in the total income of Mr. A?

12 / 50

12. Can losses be carried forward if the return of income is filed after the due date?

13 / 50

13. Under Section 61 of the Income-tax Act, what happens when a transfer of assets is revocable?

14 / 50

14. Which type of income can unutilized loss under the head "Other Sources" be set-off against?

15 / 50

15. Mr. E is a resident and ordinarily resident in IndiHe gifted a house property to his HUF. The HUF earned a rental income of Rs. 5,00,000 from the property. Can the rental income of the HUF be clubbed in the total income of Mr. E?

16 / 50

16. Which of the following is an example of income taxable under the head 'income from other sources'?

17 / 50

17. How many assessment years can losses be carried forward for set-off?

18 / 50

18. Mr. C is a resident and ordinarily resident in IndiHe has a minor son. His son earns a dividend income of Rs. 50,000 from shares that were gifted to him by Mr. Can the dividend income of Mr. C's son be clubbed in the total income of Mr. C?

19 / 50

19. When does clubbing of income occur?

20 / 50

20. How many years can the unadjusted loss from house property be carried forward?

21 / 50

21. Can a short-term capital loss be set-off against long-term capital gains?

22 / 50

22. What is the maximum period for which house property loss can be carried forward for set-off?

23 / 50

23. Which section of the Income Tax Act provides exemption for income from a charitable trust?

24 / 50

24. Can a capital loss be set-off against income taxable under any other head?

25 / 50

25. Mr. B is a resident and ordinarily resident in IndiHe has a house property in IndiHe rents out the house property. He earns a rental income of Rs. 10,00,000. His wife is a homemaker and does not earn any income. Can the rental income of Mr. B be clubbed in the total income of his wife?

26 / 50

26. Which head of income is applicable when an income is specifically taxed under the head 'income from other sources'?

27 / 50

27. According to Section 10(12of the Income Tax Act, which type of payment is exempt?

28 / 50

28. Can speculative loss be set-off against non-speculative income in subsequent years?

29 / 50

29. Income arising to shareholders on buy-back of shares, on which tax has been paid by the company, is exempt under which section of the Income Tax Act?

30 / 50

30. What is the exception to the general rule of clubbing in the case of irrevocable transfers?

31 / 50

31. What is included in the nature of income taxable under the head 'income from other sources'?

32 / 50

32. What is the purpose of clubbing provisions in the Income-tax Act?

33 / 50

33. What conditions make a transfer of assets deemed 'revocable' under Section 63?

34 / 50

34. What type of payment is exempt under Section 10(12) of the Income Tax Act?

35 / 50

35. How is income computed under the clubbing provisions?

36 / 50

36. What is deducted from the income from other sources for computation purposes?

37 / 50

37. According to Section 10(10of the Income Tax Act, which type of payment from a life insurance policy is exempt?

38 / 50

38. If the loss under the head "Other Sources" cannot be set-off in the current year, what happens to the unadjusted loss?

39 / 50

39. What happens when a person transfers income from an asset without transferring the asset itself?

40 / 50

40. In the given example of Mr. J settling properties on trust for Mr. C, will the income be clubbed in Mr. J's income?

41 / 50

41. How many years can speculation loss be carried forward for set-off?

42 / 50

42. Which type of payment received under a Unit Linked Insurance Policy is not exempt under the amended provisions?

43 / 50

43. Can the loss under the head "Other Sources" be carried forward to subsequent years?

44 / 50

44. Payments from which scheme are exempt under Section 10(11of the Income Tax Act?

45 / 50

45. What happens if the net result under a head of income is a loss after intra-head adjustment?

46 / 50

46. Is there a limit on the set-off of loss from one house property against income from another house property during the same year?

47 / 50

47. What is the treatment of income from gifts under the head 'income from other sources'?

48 / 50

48. Which type of income can be set-off against business or profession loss, excluding speculation and specified business or depreciation losses?

49 / 50

49. What is the maximum period for which long-term capital loss can be carried forward for set-off?

50 / 50

50. Loss under the head "Other Sources" can be set-off against which type of income?

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Investment Advisor Level 2

Chapter 7: Concepts in Taxation - 4

1 / 50

1. What is the annual value of a self-occupied property for the computation of income from house property?

2 / 50

2. What are the five heads of income under the Income-tax Act?

3 / 50

3. Is the motive of making a profit a necessary ingredient of a business?

4 / 50

4. What is considered for computing long-term capital gain or loss?

5 / 50

5. What are the deductions allowed from salary income?

6 / 50

6. Which section of the Income-tax Act defines the term 'Salary'?

7 / 50

7. Which basis is used to determine the taxability of income under the head of salary?

8 / 50

8. Who is considered the owner of a house property for tax purposes?

9 / 50

9. How should business profits be computed if an assessee follows the cash system of accounting?

10 / 50

10. What is the inclusive definition of a business under the Income-tax Act?

11 / 50

11. What are the factors considered in determining the taxable income of an individual?

12 / 50

12. Under what conditions is the rental income from immovable property taxable under the head 'Income from house property'?

13 / 50

13. How is short-term capital gain or loss computed?

14 / 50

14. What are the deductions allowed to compute business income under the normal provision of the Income-tax Act?

15 / 50

15. Can small and medium enterprises opt for the presumptive taxation scheme to compute their business income?

16 / 50

16. When is the rental income earned from a property taxable as business income instead of income from house property?

17 / 50

17. What is the maximum limit on the allowability of interest on borrowed capital for a self-occupied property?

18 / 50

18. When is a profit or gain arising from the transfer of a capital asset taxable?

19 / 50

19. Which of the following incomes is taxable in India for a resident but not ordinary resident individual and HUF?

20 / 50

20. How is the nature of capital gain (short-term or long-term) determined?

21 / 50

21. What are the three categories of house property for the computation of income under the head 'Income from house property'?

22 / 50

22. When is a partnership firm or AOP or BOI or Local Authority considered resident in India?

23 / 50

23. When is a foreign company considered resident in India?