House Property

House property from premarhea

Scope of Total Income

Scope of total income from premarhea

Introduction to Investment Management

Introduction to investment mangement from premarhea

Introduction to Tax

Introduction to tax from premarhea

Basic Concepts of Income Tax

Basic concepts of income tax from premarhea

Assessment Year and Previous Year

ASSESSMENT YEAR (Section 2(9))

The term has been defined under section 2(9). This means a period of 12 months commencing on 1st April every year. The year in which income is earned is the previous year and such income is taxable in the immediately following year which  is the assessment year. Income earned in the previous year 2019-20 is taxable  in the assessment year 2020-21.

Assessment year means the period starting from April 1 and ending on March 31 of the next year.

Previous year

 The financial year immediately preceding the assessment year. As mentioned earlier, the income earned during the previous year is taxable in the assessment year.

Different types of Assessee

Assessee

“Assessee” means a person by whom any tax or any other sum of money  is payable under this Act.

1.      Normal Assessee:

A normal Assessee is an individual who is liable to pay taxes for the income earned by him for a particular financial year. Each and every Individual who has paid taxes in preceding years against the income earned or losses incurred by him is liable to make payments to the government in the form of tax. Any individual who is supposed to make payments to the government in the form of interest or penalty or anybody who is entitled to tax refund under the IT Act is an Assessee. All such individuals are grouped under the category of Normal Assessee.

2.      Representative Assessee:

Many times, it so happens that an individual is liable to pay taxes for income or losses incurred not only by him, but also for income or losses incurred by a third party. Such an individual is known as Representative Assessee. Basically, he acts as a representative for people who themselves are not in a position to file and pay their taxes themselves. Generally, the people who need representatives are non-residents, minors or lunatics. And the people representing them are either their agents or guardians. Such people are deemed to be Representative Assesses

3.      Deemed Assessee:

Deemed Assessee is an individual who is put in a position to pay taxes for some other person by the legal authorities. Generally, the individuals who are treated as Deemed Assesses are:

• The executors or the legal heir of the property of a deceased person, who in written has passed on his property to the executor, is treated as a Deemed Assessee.
• The eldest son or any other legal heir of a deceased individual (who has expired without writing his will) is treated as a Deemed Assessee.
• The guardian of a minor, a lunatic or an idiot is treated as a Deemed Assessee.
• The agent of a Non-Resident Indian (having Income Sources in India) is treated as a deemed Assessee.

4.      Assessee-in-default:

An Assessee-in-default is an individual who has failed to fulfill his legal duty of paying tax to the government. An employer is deemed to be an Assessee in default if he fails to submit the TDS deducted by him to the government. An employer is supposed to disburse salary to his employees after deducting TDS from their salary and submit the same to the government. However, if he fails to do so then he is treated as an Assessee-in-default.

Types of Taxes

Let us begin by understanding the meaning of tax. Taxes are considered to be the “cost of living in a society”. Taxes are levied by the Governments to meet the common welfare expenditure of the society. There are two types of taxes - direct taxes and indirect taxes.

Direct Taxes: If tax is  levied directly on the income or wealth of a person, then, it  is a direct tax. The person who pays the tax to the Government cannot recover it from somebody else i.e. the burden of a direct tax cannot be shifted. e.g. Income- tax.

Indirect Taxes: If tax is levied on the price of a good or service, then, it is an indirect tax e.g. Goods and Services Tax (GST) or Custom Duty. In the case of indirect taxes, the person paying the tax passes on the incidence to  another person.

History of Income Tax in India

Introduction

·        Tax is the compulsory financial charge levy by the government on income, commodity, services, activities or transaction. The word ‘tax’ derived from the Latin word ‘Taxo’. Taxes are the basic source of revenue for the government, which are utilized for the welfare of the people of the country through government policies, provisions and practices.

Brief History of Income Tax in India

·        In India, this tax was introduced for the first time in 1860, by Sir James Wilson in order to meet the losses sustained by the Government on account of the Military Mutiny of 1857.

·        In 1918, a new income tax was passed and again it was replaced by another new act which was passed in 1922.This Act remained in force up to the assessment year 1961-62 with numerous amendments.

·        In consultation with the Ministry of Law finally the Income Tax Act, 1961 was passed. The Income Tax Act 1961 has been brought into force with 1 April 1962. It applies to the whole of India and Sikkim (including Jammu and Kashmir).

Since 1962 several amendments of far-reaching nature have been made in the Income Tax Act by the Union Budget every year.

In India, Income Tax was first time introduced in the year 1860 by Sir James Wilson in order to meet the loss caused on account of ‘military mutiny’ in 1857.

'Why should I pay tax?

v I have to pay for my food, for my house, for my travel, for my medical treatment, for owning a vehicle not only cost of vehicle but also vehicle tax and what not.

v  Even on many roads, one has to pay toll tax! They also say that if we compare with countries like USA and UK, the people get social security as also medical facilities virtually without any cost. But India does not offer such facilities.

·        The reason for levy of taxes is that they constitute the basic source of revenue to the Government. Revenue so raised is utilized for meeting the expenses of Government like defence, provision of education, health-care, infrastructure facilities like roads, dams etc.

What Government Do from our TAX?

§  The Government provide Health care through Government hospitals (usually they offer service without any cost), Education (In Municipal and Government schools the fee is negligible).

§  The Government also provides cooking gas at concessional rate or gives subsidy.

§  Of course the major expenditure of Government has to be incurred on National Defense, Infrastructure Developments etc.

§   Taxes are used by the government for carrying out various welfare schemes including employment programs.

§  There are Lakhs of employees in various departments and the administrative cost has to be borne by the Government.

§  Though the judicial process involves delay, yet the Salaries, perks of Judges, Magistrates and judicial staff has also to be paid by the Government.

§  Thus on considering these various duties of the Government, we need to appreciate that we must pay tax as per law. We have to act like a responsible citizen.

Introduction to tax

Income Tax in India

Income Tax in India: Taxes in India can be categorized as direct and indirect taxes. Direct tax is a tax you pay on your income directly to the government. Indirect tax is a tax that somebody else collects on your behalf and pays to the government eg restaurants, theatres and e-commerce websites recover taxes from you on goods you purchase or a service you avail. This tax is, in turn, passed down to the government. Direct Taxes are broadly classified as :

• Income Tax – This is taxes an individual or a Hindu Undivided Family or any taxpayer other than companies, pay on the income received. The law prescribes the rate at which such income should be taxed
• Corporate Tax – This is the tax that companies pay on the profits they make from their businesses. Here again, a specific rate of tax for corporates has been prescribed by the income tax laws of India

Indirect taxes take many forms: service tax on restaurant bills and movie tickets, value-added tax or VAT on goods such as clothes and electronics. Goods and services tax, which has recently been introduced is a unified tax that has replaced all the indirect taxes that business owners have to deal with.

31 January	31 March	31 July	Oct – Nov
Deadline to submit your investment proofs	Deadline to make investments under Section 80C	Last date to file your tax return	Time to verify your tax return

Income Tax Basics

Everyone who earns or gets an income in India is subject to income tax. (Yes, be it a resident or a non-resident of India ). Also read our article on Income Tax for NRIs. Your income could be salary, pension or could be from a savings account that’s quietly accumulating a 4% interest. Even, winners of ‘Kaun Banega Crorepati’ have to pay tax on their prize money. For simpler classification, the Income Tax Department breaks down income into five heads:

Head of Income	Nature of Income covered
Income from Salary	Income from salary and pension are covered under here
Income from Other Sources	Income from savings bank account interest, fixed deposits, winning KBC
Income from House Property	This is rental income mostly
Income from Capital Gains	Income from sale of a capital asset such as mutual funds, shares, house property
Income from Business and Profession	This is when you are self-employed, work as a freelancer or contractor, or you run a business. Life insurance agents, chartered accountants, doctors and lawyers who have their own practice, tuition teachers

Taxpayers and Income Tax Slabs

Taxpayers in India, for the purpose of income tax includes:

• Individuals, Hindu Undivided Family (HUF), Association of Persons(AOP) and Body of Individuals (BOI)
• Firms
• Companies

Each of these taxpayers is taxed differently under the Indian income tax laws. While firms and Indian companies have a fixed rate of tax of 30% of profits, the individual,HUF, AOP and BOI taxpayers are taxed based on the income slab they fall under. People’s incomes are grouped into blocks called tax brackets or tax slabs. And each tax slab has a different tax rate. In India, we have four tax brackets each with an increasing tax rate.

• Income earners of up to 2.5 lakhs
• Income earners of between 2.5 lakhs and 5 lakhs
• Income earners of between 5 lakhs and 10 lakhs
• Those earning more than Rs 10 lakhs

Income Range	Tax rate	Tax to be paid
Up to Rs.2,50,000	0	No tax
Between Rs 2.5 lakhs and Rs 5 lakhs	5%	5% of your taxable income
Between Rs 5 lakhs and Rs 10 lakhs	20%	Rs 12,500+ 20% of income above Rs 5 lakhs
Above 10 lakhs	30%	Rs 1,12,500+ 30% of income above Rs 10 lakhs

This is the income tax slab for FY 2017-18 for taxpayers under 60 years. There are two other tax slabs for two other age groups: those who are 60 and older and those who are above 80.A word of note: People often misunderstand that if they earn let’s say Rs.12 lakhs, they will be paying a 30% tax on Rs.12 lakhs i.e Rs.3,60,000. That’s incorrect. A person earning 12 lakhs in the progressive tax system, will pay Rs.1,12,500+ Rs.60,000 = Rs. 1,72,500. Check out the income tax slabs for previous years and other age brackets.

Exceptions to the Tax Slab

One must bear in mind that not all income can be taxed on slab basis. Capital gains income is an exception to this rule. Capital gains are taxed depending on the asset you own and how long you’ve had it. The holding period would determine if an asset is long term or short term. The holding period to determine nature of asset also differs for different assets. A quick glance of holding periods, nature of asset and the rate of tax for each of them is given below.

Type of capital asset	Holding period	Tax rate
House Property	Holding more than 24 months – Long Term Holding less than 24 months – Short Term	20% Depends on slab rate
Debt mutual funds	Holding more than 36 months – Long Term Holding less than 36 months – Short Term	20% Depends on slab rate
Equity mutual funds	Holding more than 12 months – Long Term Holding less than 12 months – Short Term	Exempt (until 31 March 2018) Gains > Rs 1 lakh taxable @ 10% 15%
Shares (STT paid)	Holding more than 12 months – Long Term Holding less than 12 months – Short Term	Exempt (until 31 March 2018)Gains > Rs 1 lakh taxable @ 10% 15%
Shares (STT unpaid)	Holding more than 12 months – Long Term Holding less than 12 months – Short Term	20% As per Slab Rates
FMPs	Holding more than 36 months – Long Term Holding less than 36 months – Short Term	20% Depends on slab rate

Residents and non residents:

Levy of income tax in India is dependent on the residential status of a taxpayer. Individuals who qualify as a resident in India must pay tax on their global income in India i.e. income earned in India and abroad. Whereas, those who qualify as Non-residents need to pay taxes only on their Indian income. The residential status has to be determined separately for every financial year for which income and taxes are computed.

Investment, Speculation and Gambling

Financial and Economic Meaning of Investment

Financial Investments are the allocation of monetary resources ranging from risk-free to risky investments and with the expectation of a good return that varies with risk. The investor has to aim at a trade-off between risk and return. The investors are the suppliers of ‘capital’ and in their view, investment is a commitment of a person’s funds to derive future income in the form of interest, dividends, rent, premiums, pension benefits or the appreciation of the value of their principal capital. To the financial investor, it is not important whether money is invested for a productive use or for the purchase of secondhand instruments such as existing shares and stocks listed on the stock exchanges. Most investments are considered to be transfers of financial assets from one person to another.

The economist understands the term ‘Investment’ as net additions to the economy’s  capital stock which consists of goods and services that are used in the production of other goods and services. For them, the term investment implies the formation of new and productive capital in the form of new construction, new producers’ durable equipment such as plant and equipment, including inventories and human capital.

The financial and economic meaning of investment cannot be separated because the term draws a relationship with the economists and financial experts. Investment is a part of the savings of individuals which flow into the capital market either directly or through institutions; they may be divided in ‘new’ or ‘secondhand’ capital financing. Investors as ‘suppliers’ and ‘investor as ‘users’ of long-term funds find a meeting place in the market.

In this book, however, investment is used in its ‘financial sense’ and investment will include those instruments and institutional media into which savings are placed.

Investment and Speculation

Investment is distinguished from speculation in three ways which are based on the factors of risk, time period and gains.

1. Risk

The term ‘risk’ has significance in the financial meaning of investment. Whatever amount is invested has the probability of incurring a gain or a loss in a financial transaction. Investment is not considered to involve high risk but it has limited risk and risk can be calculated through different techniques and the capital can be invested in avenues where the principal is safe. ‘Speculation’ is correlated with ‘high risk’ and short commitment. There are degrees of risk, and arbitrary judgements are made between high risk and low risk. An investor cannot have completely risk-free investments because there are certain non-controllable risks that cannot be calculated. The purchasing power  risk or the fall in the real value of the interest and principal is beyond the control of a person. The money rate risk or the fall in market value, with the rise in interest rates also cannot be controlled.

These risks affect both the speculator and the investor. High risk and low risk are, therefore, general indicators to help an understanding between the terms investment and speculation.

2. Capital Gain

Speculation is buying low and selling high in a short time to make large capital gains. The motive in speculation is primarily to achieve profits through price changes. This can be distinguished from investment where securities are purchased by an investor through proper evaluation, analysis and review with the view of receiving a stable return over a long-term period of time.

3. Time

Time period explains the difference between  investment  and speculation. A fund allocation over a long-term period is called investment. A short-term holding is associated with trading for the ‘quick turn’ and is called speculation. The speculator is not interested in holding a security for current  income but for high short-term gains.

The distinctions between investment and speculation help to identify the role of the investor and speculator. To summarize the above discussion:

1.      The investor constantly evaluates the worth of a security through fundamental analysis, whereas the speculator is interested in market action and price movement.

2.      There is a very fine line of division between investment and speculation. There are no established rules and laws that identify securities which are permanently for investment. There has to be a constant review of securities to find out whether it is a suitable investment for long-term or for quick turn of speculative profit. Long-term commitment becomes investment of the same security which if sold immediately on purchase only for profit becomes speculation.

3.      Some financial experts have called investment ‘a well grounded and carefully planned speculation’, or good investment is a successful speculation. Speculation is planned short- term investment based on haunches and beliefs. Investment is planned, evaluated and analyzed long-term commitment of funds.

4.      Speculation is to achieve high returns though risk of loss is high. Investments are for minimizing risk of investors with the expectation of high returns. Therefore, investment and speculation are a planning of risks.

5.      A speculator expects high return for his investment and to make gains, he can commit his own funds as well as use borrowed funds. An investor is cautious by nature and usually uses his own funds for investing in securities.

The distinction between investment and speculation is given in Table 1.1.

Table 1.1: Distinction between Investment and Speculation

	Investment	Speculation
Time Horizon	Long-term time framework beyond 12 months.	Short-term planning holding assets even for one day.
Risk	It has limited risk.	High Returns though risk of loss is high.
Return	It is consistent and moderate over a long period.	There are high profits and gains as well as high losses. It is not consistent.
Use of funds	The investor uses his own funds through savings.	Speculation is through own and borrowed funds.
Decisions	Safety, liquidity, profitability and stability considerations and performance of companies.	Market behavior information, judgments on movement in the stock market, haunches and beliefs.

Investment and Gambling

Gambling is artificial and unnecessary risk created for increased expected  returns.  The difference between investment and gambling is very clear. From the above discussion, it is established that investment is an attempt to carefully plan, evaluate and allocate funds in various investment outlets which offers safety of principal, moderate and continuous returns and long-term commitment.

Gambling is quite the opposite of investment. It connotes high risk and the expectation of high returns. It consists of uncertainty and high stakes for thrill and excitement. Typical examples of gambling are horse racing, game of cards, lottery, etc. Gambling is based on tips, rumors and haunches. It is unplanned, non-scientific and without knowledge of the exact nature of risk.

The distinctions between investment, speculation and gambling give us a basic idea of their nature, purpose and role.

Investment and Arbitrage

Investment is planned commitment of funds from a person’s savings into different outlets with  the expectation of safe, stable and fare return. Arbitrage is the mechanism of minimizing risk through hedging and taking advantage of price differences in different markets. An arbitrage transaction is the simultaneous purchase of the same or similar  security in two  different markets. Short-term gains can be expected through such transactions. An investor can also be an arbitrageur if he buys and sells securities in more than one stock exchange to take advantage of the price differentials in such exchanges. Derivatives introduced in the Indian market have a great potential for arbitrage transactions. Arbitrage transactions help in enhancing efficiency and liquidity in the stock market and in increasing the volume of trade. Hedgers, speculators and arbitrageurs can minimize risks and  make  profits through the arbitrage process.

         TYPES OF REAL AND FINANCIAL ASSETS

Real assets are tangible goods in possession of a person. Financial securities represent papers that are dependent on real assets for creating wealth.

1.  Real Assets

Real assets are used to produce goods or services. They are tangible assets that have a physical form. Some examples of real assets are land and buildings, furniture, gold, silver, diamonds or artifacts. They may be marketable or non-marketable. They may also have the feature of being moveable or non-moveable.

2.  Financial Assets

Financial assets are called paper securities. Some examples of these assets are shares, bonds, debentures, bills, loans, lease, derivatives and fixed deposits. Financial assets represent a claim by securities, on the income generated by real assets of some other parties. Such assets can be easily  traded, as they are marketable and transferable. Financial assets are transactions between two or more parties. For example, if a person takes an insurance policy of ` 1,00,000 of Life Insurance Corporation, the contract is a liability of LIC but an asset of the person insuring himself because he has a claim over the insurance company to receive the principal sum with  interest  on the happening of an event or on  the completion of a certain number of years.

Table 1.2: Distinction between Real and Financial Assets

Real Assets	Financial Assets
Land and building, furniture and machinery.	Shares,    debentures,    bonds,    derivatives,                 fixed deposits, bills and loans.
Tangible assets moveable, immoveable, marketable and non-marketable.	These are called paper securities as they deal with claims generated on the issuer.
Theses assets are used for production of goods and services.	These assets are financial claims represented by securities.

3.  Commodity Assets

Commodities are a new form of investment in India. Examples of commodity assets are wheat, sugar, potatoes, rubber, coffee and other grains. Commodities are also in the form of metal like gold, silver, aluminum and copper. Cotton, crude oil and foreign currency are other examples of commodities. Importers and exporters invest in commodities to diversify their portfolios. Traders hedge or transact in commodities to make gains. A National Commodity and Derivatives Exchange Ltd. (NCDEX) has been set up in India in 2003 as a public limited company to transact in  commodities.

The promoters of NCDEX were ICICI Bank Ltd., National Bank for Agriculture and Rural Development (NABARD), Life Insurance Corporation of India, Punjab National Bank, Canara Bank, CRISIL Ltd., Indian Farmers Fertilizer Cooperative Ltd. (IFFCO) and National Stock Exchange of India Ltd. (NSE). All these institutions subscribed to the equity shares of NCDEX.

The above explanations of the terms of investment have provided a background to the meaning of investment. This chapter now presents the importance of investments, opportunities conducive to investment, media available for investment, investment features and the process of investment