Unit-4 Profit and Gain- Income Tax | BBA 3rd Sem

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Unit-4

Profit and Gain

Meaning of Profit and Gain

• Income from profits and gains of business and profession refers to the money you earn from running a business or practicing a profession. It includes the revenue generated from selling goods or services, minus the expenses incurred in running the business or practicing the profession. It’s basically the income you make from your entrepreneurial or professional endeavors.

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Business Incomes Taxable under the head of ‘Profit and Gains

1. Income from Trading: If you buy and sell goods, any profit you make from these transactions is considered income from trading. This includes both tangible products and commodities.
2. Income from Manufacturing: If you are involved in the production or manufacturing of goods, the income generated from selling those manufactured goods is considered income from manufacturing.
3. Income from Services: If you provide services to clients or customers, the income you earn from these services is considered income from services. This can include professions like doctors, lawyers, consultants, and more.
4. Income from Profession: If you are engaged in a profession, such as being a chartered accountant, architect, engineer, or any other specialized field, the income you earn from your professional services falls under this category.
5. Income from Commission or Brokerage: If you earn income through commissions or brokerage, such as being a real estate agent or stockbroker, this income is taxable under the head of ‘Profit and Gains of Business or Profession’.
6. Income from Rent: If you own properties and earn rental income from them, this income is also considered taxable under this head. It includes both residential and commercial properties.
7. Income from Royalties: If you receive royalties for the use of your intellectual property, such as copyrights, patents, or trademarks, this income is taxable under this head.
8. Income from Speculative Business: If you engage in speculative business activities, such as trading in futures and options, the income generated from these activities is considered speculative business income and is taxable accordingly.

Business Income Not Taxable under the head ‘ Profit and Gains’

• There are a few scenarios where certain types of business income may not be taxable. One example is income that falls under the category of exempted income. This can include income from certain agricultural activities, income from specified industries or regions, and income from specific types of investments.
• Another instance where business income may not be taxable is if it falls under the category of deductions or exemptions. For example, certain expenses incurred for business purposes, such as rent, salaries, and utility bills, can be deducted from the overall income, reducing the taxable amount.
• Additionally, there are specific provisions in tax laws that provide relief or exemptions for certain types of businesses. These can include startups, small businesses, and businesses located in economically disadvantaged areas.
• However, it’s important to note that the specific rules and regulations regarding taxable business income can vary depending on your jurisdiction. It’s always a good idea to consult with a tax professional or accountant who can provide you with accurate and up-to-date information tailored to your specific circumstances.

Rental Income in the case of Dealer in Property

• When it comes to rental income for a Dealer in Property, it is generally considered as business income and falls under the head of ‘Profit and Gains of Business or Profession’. As a dealer, if you regularly engage in buying, selling, or developing properties with the intention of making a profit, any rental income you earn from those properties is treated as business income.
• The rental income you receive is typically added to your total business income and is subject to tax based on the applicable tax rates for businesses. However, you can also claim deductions for expenses related to the rental property, such as property maintenance, repairs, and interest on loans taken for the property.
• It’s important to maintain proper records of your rental income and expenses, as well as any relevant documents related to the property transactions, to ensure accurate reporting and compliance with tax laws.
• Remember, tax laws can vary depending on your jurisdiction, so it’s always a good idea to consult with a tax professional or accountant who can provide you with specific guidance based on your circumstances.

Wikipedia- https://en.wikipedia.org/wiki/Income_tax

Dividend on Shares in the case of a Dealer in Shares

• When it comes to dividends on shares for a Dealer-in-Shares, it is generally considered as business income and falls under the head of ‘Profit and Gains of Business or Profession’. As a dealer, if you regularly engage in buying and selling shares with the intention of making a profit, any dividends you receive from those shares are treated as business income.
• The dividends you earn are typically added to your total business income and are subject to tax based on the applicable tax rates for businesses. However, you may also be eligible for certain deductions or exemptions related to your share trading activities.
• It’s important to keep track of your dividend income and any related expenses or deductions to ensure accurate reporting and compliance with tax laws. Maintaining proper records of your share transactions, including purchase and sale details, will be helpful for tax purposes.
• Remember, tax laws can vary depending on your jurisdiction, so it’s always a good idea to consult with a tax professional or accountant who can provide you with specific guidance based on your circumstances

Winnings from Lotteries

• When it comes to winnings from lotteries, raffles, or other similar games of chance, they are generally considered as income and are subject to tax. In India, the tax treatment of such winnings is covered under Section 115BB of the Income Tax Act.
• According to this section, any winnings from lotteries, crossword puzzles, races (including horse races), card games, or any other game or gambling activity exceeding Rs. 10,000 are subject to a flat tax rate of 30%. This tax is deducted at source by the organization paying out the winnings.
• It’s important to note that the tax is levied on the total winnings without allowing for any deductions or exemptions. The organization paying out the winnings is responsible for deducting the tax and providing you with a TDS certificate.
• If you receive winnings from a lottery or similar activity, it’s essential to keep proper records of the income, including any TDS certificates received. This will help you accurately report the income while filing your income tax return.

Interest received on Compensation or Enhanced Compensation

• When it comes to compensation or enhanced compensation, any interest received on such amounts is generally considered as income and is subject to tax. The tax treatment of this interest depends on the nature of the compensation and the applicable tax laws in your jurisdiction.
• In some cases, when compensation or enhanced compensation is awarded by a court or tribunal, the interest received on such amounts may be treated as a capital receipt. This means that the interest is not taxable as income but may have other tax implications, such as affecting the cost of acquisition or the cost of improvement for tax purposes.
• However, it’s important to note that the tax treatment of interest on compensation or enhanced compensation can vary depending on the specific circumstances and the relevant tax laws. It’s always a good idea to consult with a tax professional or accountant who can provide you with specific guidance based on your situation.
• Additionally, it’s essential to keep proper records of any interest received on compensation or enhanced compensation, as well as any related expenses or deductions. This will help you accurately report the income and comply with tax laws while filing your tax returns.

Mode of Taxation on Certain Income

1. Income Tax: This is the most common mode of taxation and applies to various types of income, such as salaries, wages, business profits, rental income, and interest income. Income tax rates can vary based on income brackets, with higher incomes generally being subject to higher tax rates.
2. Capital Gains Tax: This mode of taxation applies to profits made from the sale of assets, such as stocks, real estate, or other investments. The tax rate on capital gains can vary depending on the holding period of the asset and the specific tax laws in your country.
3. Goods and Services Tax (GST): This mode of taxation is applied to the supply of goods and services and is commonly known as value-added tax (VAT) in some countries. GST is generally levied on the final consumer and is collected at each stage of the supply chain.
4. Property Tax: This mode of taxation applies to the ownership of real estate properties. Property tax rates can vary depending on the value of the property and the local tax laws in your area.
5. Inheritance Tax: This mode of taxation applies to the transfer of assets from one person to another after their death. Inheritance tax rates can vary depending on the value of the assets and the relationship between the deceased and the beneficiary.

Basic Principles for computing income Taxable under the head ‘ Profit and Gains of Business or Profession’

1. Gross Receipts: Start by calculating the gross receipts or sales of your business or profession. This includes all the income generated from your business activities, such as sales of goods or services.
2. Allowable Deductions: From the gross receipts, you can deduct certain expenses that are incurred in the course of running your business. These deductions can include expenses like rent, salaries, utilities, advertising costs, and any other expenses directly related to your business operations.
3. Depreciation: If you have any assets like machinery, equipment, or buildings that are used in your business, you can claim depreciation on them. Depreciation allows you to account for the wear and tear of these assets over time and deduct a portion of their value as an expense.
4. Net Profit: After deducting allowable expenses and depreciation from the gross receipts, you arrive at the net profit of your business or profession. This is the amount that is subject to income tax.
5. Taxable Income: Once you have calculated the net profit, you can apply the applicable tax rate to determine the taxable income. The tax rate can vary depending on the tax laws and income brackets in your country.
6. Tax Liability: Finally, you can calculate the tax liability by multiplying the taxable income by the applicable tax rate. This will give you the amount of income tax that you owe on the profits and gains of your business or profession.

Business or profession carried on by the assessee

• When we talk about a business or profession, we’re referring to the activities that someone engages in to earn a living. It can be anything from running a shop, providing services, or even freelancing. The person who carries out these activities is called an assessee.
• A business is typically an activity where goods are produced, bought, or sold. For example, if you have a bakery where you sell cakes, that’s considered a business. On the other hand, a profession usually involves providing specialized services, like being a doctor, lawyer, or engineer
• When you’re engaged in a business or profession, there are certain things to consider for tax purposes. You need to keep track of your income and expenses related to your business or profession. This includes things like sales, fees earned, and any other income you receive from your activities.
• On the expense side, you can deduct certain expenses that are incurred in running your business or profession. These can include things like rent, salaries, utilities, advertising costs, and any other expenses directly related to your business operations. By deducting these expenses, you can reduce your taxable income.
• It’s important to maintain proper records and documentation of your business or profession. This will help you accurately calculate your income and expenses, and ensure that you’re complying with tax laws.
• When it comes to income tax, the net profit from your business or profession is considered taxable. This is calculated by subtracting your allowable deductions from your gross income. The tax rate that applies to your taxable income will depend on the tax laws in your country or region.
• Remember, tax laws and regulations can be complex and vary from place to place, so it’s always a good idea to consult with a tax professional or accountant who can provide you with specific guidance based on your situation.

Business or profession should be carried on during the previous year

• In order for a business or profession to be considered as being carried on during the previous year, it means that the person was actively engaged in those activities throughout that specific year. This includes all the income earned and expenses incurred during that time.
• Let’s say you started a business selling handmade jewelry in January 2023. If you continued operating that business and generating income from it until December 2023, then it can be said that you carried on the business during the previous year, which in this case would be 2023.
• Similarly, if you’re a professional like a doctor or a lawyer, and you provided your services consistently throughout the year, then you can consider your profession to have been carried on during the previous year.
• The key here is continuity and regularity. It’s not just about a one-time activity or sporadic work. The business or profession needs to be ongoing and active throughout the entire year for it to be considered as being carried on during the previous year.
• When it comes to tax purposes, the income and expenses related to the business or profession carried on during the previous year are taken into account for calculating taxable income. This allows the tax authorities to determine the tax liability based on the earnings and deductions during that period.
• Remember, it’s important to keep proper records and documentation of your business or profession activities throughout the previous year. This will help ensure accurate reporting and compliance with tax laws.

Income from Capital Gains

• Income from capital gains refers to the profit made from the sale of certain assets, such as stocks, bonds, real estate, or other investments. When you sell these assets for a higher price than what you originally paid for them, the difference is considered a capital gain.
• Capital gains can be either short-term or long-term, depending on how long you held the asset before selling it. Short-term capital gains apply to assets held for one year or less, while long-term capital gains apply to assets held for more than one year.
• The tax treatment of capital gains varies depending on the country and its tax laws. In many jurisdictions, including India, capital gains are subject to taxation. The tax rate on capital gains may differ from the tax rate on other types of income, such as regular salary or wages.
• In India, capital gains are categorized as either short-term or long-term, and the tax rates differ accordingly. Short-term capital gains are generally taxed at the individual’s applicable income tax rate, while long-term capital gains are taxed at a lower rate. The tax rate for long-term capital gains can vary depending on the type of asset and the duration of holding.
• To calculate capital gains, you typically subtract the original purchase price (also known as the cost basis) from the selling price. However, there may be certain adjustments or exemptions allowed by tax laws, such as indexation for inflation in the case of long-term capital gains.

Types of Capital Assets

• Capital assets refer to various types of assets that individuals or businesses own for investment purposes or to generate income. These assets can come in different forms and have different characteristics.

1. Stocks: Stocks represent ownership in a company. When you purchase stocks, you become a shareholder and have the potential to earn capital gains if the stock price increases or receive dividends if the company distributes profits.
2. Bonds: Bonds are debt instruments issued by governments, municipalities, or corporations to raise funds. When you buy a bond, you are essentially lending money to the issuer in exchange for regular interest payments and the return of the principal amount at maturity.
3. Real Estate: Real estate includes properties such as houses, apartments, land, or commercial buildings. Investing in real estate can generate rental income and potential capital appreciation over time.
4. Mutual Funds: Mutual funds pool money from multiple investors to invest in a diversified portfolio of stocks, bonds, or other securities. They offer a convenient way to access a variety of assets and are managed by professional fund managers.
5. Exchange-Traded Funds (ETFs): ETFs are similar to mutual funds but trade on stock exchanges like individual stocks. They track specific market indexes or sectors and provide investors with exposure to a diversified portfolio of assets.
6. Commodities: Commodities are raw materials or primary agricultural products, such as gold, silver, oil, natural gas, wheat, or corn. Investors can trade commodities through futures contracts or invest in commodity-based funds.
7. Cryptocurrencies: Cryptocurrencies like Bitcoin, Ethereum, or Litecoin have gained popularity as digital assets. They operate on decentralized blockchain networks and can be bought, sold, or held for potential price appreciation.
8. Art and Collectibles: Artwork, antiques, collectible items, and rare coins can also be considered capital assets. Their value can appreciate over time, and they can be bought or sold in specialized markets.

Long- term capital asset

1. Stocks and Bonds: When you hold stocks or bonds for more than one year, they are considered long-term capital assets. Investing in these assets can provide you with the opportunity for capital appreciation and potentially higher returns over time.
2. Real Estate: Owning residential or commercial properties for more than one year qualifies them as long-term capital assets. Real estate investments can generate rental income, benefit from property value appreciation, and provide tax advantages such as depreciation deductions.
3. Mutual Funds and ETFs: If you hold mutual funds or ETFs for more than one year, they become long-term capital assets. These investment vehicles offer diversification and professional management, making them suitable for long-term investment goals.
4. Precious Metals: Gold, silver, platinum, and other precious metals held for more than one year are considered long-term capital assets. These assets can serve as a hedge against inflation and provide a store of value over time.
5. Art and Collectibles: Collectible items, artwork, or rare coins held for more than one year are classified as long-term capital assets. These assets can appreciate in value over time and provide aesthetic enjoyment along with potential financial gains.
6. Real Estate Investment Trusts (REITs): REITs are companies that own and manage income-generating properties. Holding shares in REITs for more than one year qualifies them as long-term capital assets. REITs offer a way to invest in real estate without directly owning properties.
7. Business Interests: If you own shares in a business or have a partnership interest for more than one year, they become long-term capital assets. These assets can provide a share of profits and potential capital gains upon selling the business interest.

Short-term capital asset

1. Stocks and Bonds: When you buy and sell stocks or bonds within a year, they are considered short-term capital assets. Short-term trading in these assets can provide opportunities for quick gains based on market fluctuations.
2. Treasury Bills and Short-term Bonds: Investments in short-term government securities, such as treasury bills or short-term bonds, are also considered short-term capital assets. These assets offer low-risk options for investors who prefer shorter investment horizons.
3. Certificates of Deposit (CDs): CDs are time deposits offered by banks that mature within a year or less. Investing in CDs can provide a fixed interest rate and guaranteed returns over a short period.
4. Options and Futures Contracts: Trading options and futures contracts within a year qualifies them as short-term capital assets. These financial instruments allow investors to speculate on the future price movements of underlying assets.
5. Currency Trading: Engaging in short-term currency trading, also known as forex trading, involves buying and selling different currencies within a short time frame. This practice can be highly volatile but offers potential profits based on fluctuations in exchange rates.
6. Flipping Real Estate: Buying and selling properties within a year is considered short-term capital asset activity. Real estate flipping involves purchasing undervalued properties, renovating them, and selling them quickly for a profit.
7. Short-term Business Ventures: If you engage in short-term business activities, such as buying and selling inventory or providing short-term services, the resulting gains or profits are considered short-term capital assets.

Tax on short-term and Long-term Capital Gains

• Short-term capital gains are the profits you make from selling an asset that you held for one year or less. These gains are subject to the short-term capital gains tax rate, which is typically the same as your ordinary income tax rate. In India, short-term capital gains on listed securities are taxed at a rate of 15%.
• On the other hand, long-term capital gains are the profits you make from selling an asset that you held for more than one year. The tax on long-term capital gains depends on the type of asset:

1. Listed Securities: For listed securities like stocks and equity-oriented mutual funds, long-term capital gains exceeding INR 1 lakh are taxed at a rate of 10% without indexation benefit. If you choose to avail the indexation benefit, the tax rate is 20%.
2. Real Estate: For real estate, long-term capital gains are taxed at a rate of 20% after indexation. Indexation is a method that adjusts the purchase price of the property based on inflation, reducing the taxable gain.
3. Other Assets: For other assets like gold, jewelry, debt mutual funds, and non-equity shares, long-term capital gains are taxed at a rate of 20% after indexation.

• It’s important to note that the tax rates and rules can vary, so it’s always a good idea to consult with a tax professional or refer to the latest tax regulations for accurate information.
• To calculate your capital gains tax, you need to determine the cost of acquisition, cost of improvement (if any), and the sale price of the asset. The difference between the sale price and the cost of acquisition/improvement is your capital gain. Remember to keep proper records of your transactions and consult a tax professional for accurate calculations.
• Additionally, there are certain exemptions and deductions available for long-term capital gains under sections like 54, 54EC, and 54F of the Income Tax Act. These provisions allow you to reinvest the gains in specified assets or properties to reduce or eliminate the tax liability.

Tax on Equity and Debt Mutual Funds

Equity Mutual Funds:

• Equity mutual funds are funds that primarily invest in stocks or shares of companies. The tax treatment for equity mutual funds is as follows:

1. Short-term Capital Gains: If you hold equity mutual funds for one year or less, any gains made from selling them are considered short-term capital gains. Short-term capital gains on equity mutual funds are taxed at a rate of 15%. This tax rate applies to both dividend income and redemption proceeds.
2. Long-term Capital Gains: If you hold equity mutual funds for more than one year, any gains made from selling them are considered long-term capital gains. Long-term capital gains on equity mutual funds exceeding INR 1 lakh are taxed at a rate of 10% without indexation benefit. If you choose to avail the indexation benefit, the tax rate is 20%.

Debt Mutual Funds:

• Debt mutual funds are funds that primarily invest in fixed-income instruments like bonds, government securities, and corporate debentures. The tax treatment for debt mutual funds is as follows:

1. Short-term Capital Gains: If you hold debt mutual funds for three years or less, any gains made from selling them are considered short-term capital gains. Short-term capital gains on debt mutual funds are added to your taxable income and taxed according to your applicable income tax slab rate.
2. Long-term Capital Gains: If you hold debt mutual funds for more than three years, any gains made from selling them are considered long-term capital gains. Long-term capital gains on debt mutual funds are taxed at a rate of 20% after indexation benefit. Indexation adjusts the purchase price of the investment based on inflation, which reduces the taxable gain and consequently, the tax liability.

Calculating Capital Gains

• First, you need to know the cost basis. That’s the original price you paid for the investment, including any extra fees. If you got the investment as a gift or inheritance, the cost basis might be different. It’s important to know this to get the right capital gains.
• That’s the amount of money you get when you sell the investment. Don’t forget to consider any fees or charges that come with the sale.
• To find the capital gains, subtract the cost basis from the selling price. This will give you the total profit you made from the sale.
• how long you held onto the investment before selling it. The tax you pay on capital gains can depend on this. In India, for example, investments held for a short period are considered short-term, while longer periods are considered long-term.
• The tax rate for capital gains also depends on the type of investment and the holding period. In India, short-term capital gains on equity mutual funds are taxed at 15%, while long-term capital gains exceeding INR 1 lakh are taxed at 10% without indexation benefit or 20% with indexation benefit. For debt mutual funds, short-term capital gains are taxed at the applicable income tax slab rate, while long-term capital gains are taxed at 20% with indexation benefit.

Income from other sources

• Income from other sources can include things like interest from savings accounts, rental income, income from investments, royalties, and even winnings from lotteries or game shows. It’s basically any income that doesn’t fit into the other specific categories.

1. Interest Income: This is the money you earn from your savings accounts, fixed deposits, or bonds. It’s important to note that interest income is taxable, and you’ll need to report it when filing your taxes.
2. Rental Income: If you own a property and receive rent from tenants, that’s considered rental income. You’ll need to report this income and pay taxes on it. Remember to deduct any allowable expenses, like maintenance costs or property taxes, to calculate your taxable rental income.
3. Income from Investments: If you earn money from investments like stocks, mutual funds, or dividends, that falls under income from other sources. You’ll need to report this income and pay taxes on it. The tax rates can vary depending on the type of investment and the duration of holding.
4. Royalties: If you’ve created something like a book, song, or artwork and receive payments for its use or reproduction, that’s considered royalty income. You’ll need to report this income and pay taxes on it.
5. Winnings and Prizes: If you win money from lotteries, game shows, or any other contests, that’s considered income from other sources. Keep in mind that these winnings are usually subject to taxes, so you’ll need to report them when filing your taxes.

Items Classified as Income from Other Sources

1. Interest Income: This is the money you earn from your savings accounts, fixed deposits, or bonds. When you keep your money in a bank or invest in certain financial instruments, you may receive interest on those funds. This interest income is classified as income from other sources.
2. Rental Income: If you own a property, such as a house or an apartment, and you receive rent from tenants, that’s considered rental income. This income is generated from the property you own and is classified as income from other sources. Remember, you may need to pay taxes on this rental income.
3. Income from Investments: If you invest in stocks, mutual funds, or other financial instruments, any income generated from these investments is considered income from other sources. This can include dividends received from stocks, capital gains from selling investments, or even income from bonds or debentures.
4. Royalties: If you create something artistic or intellectual, such as a book, song, or software, and you receive payments for its use or reproduction, that’s classified as royalty income. This income from the use of your creative work falls under the category of income from other sources.
5. Winnings and Prizes: If you win money from lotteries, game shows, or any other contests, that’s also considered income from other sources. Whether it’s a big jackpot or a small prize, any monetary winnings are classified as income and may be subject to taxation.

Tax Deduction Allowed for Income from Other Sources

1. Expenses for Rental Income: If you earn rental income from a property, you may be able to deduct expenses such as property taxes, mortgage interest, repairs and maintenance costs, insurance premiums, and property management fees. These deductions can help offset the rental income you receive.
2. Investment Expenses: When it comes to income from investments, you may be able to deduct certain expenses related to managing your investments. This can include brokerage fees, advisory fees, custody fees, and other investment-related expenses. However, it’s important to note that not all investment expenses may be deductible, so it’s best to consult with a tax professional to determine what is eligible in your specific situation.
3. Royalty Expenses: If you earn royalty income from your creative work, you may be able to deduct expenses directly related to producing and distributing that work. This can include costs for materials, professional services, marketing and promotion, and any other expenses incurred in the process of creating and monetizing your work.
4. Other Allowable Expenses: Depending on your country’s tax laws, there may be additional deductions allowed for specific types of income from other sources. These could include deductions for interest expense on loans used to generate income, expenses related to winning prizes or awards, or any other expenses directly related to earning income from other sources.

Tax Deduction Not Allowed

1. Personal Expenses: Generally, personal expenses such as groceries, clothing, personal vacations, and household items are not eligible for tax deductions. These are considered personal and not directly related to generating income.
2. Capital Expenses: Capital expenses, which are costs incurred for acquiring, improving, or maintaining a long-term asset, are usually not deductible. Examples include the purchase of a house, car, or major renovations. However, there may be specific circumstances or provisions that allow for deductions related to capital expenses, so it’s always good to check with a tax professional.
3. Non-Business or Hobby Expenses: If you have expenses related to a non-business or hobby activity, they are generally not deductible. While pursuing hobbies is great, the expenses incurred are considered personal rather than business-related.
4. Illegal Activities: Expenses related to illegal activities, such as fines, penalties, or legal fees resulting from illegal actions, are not deductible. It’s important to stay on the right side of the law and not expect any tax benefits from illegal activities.
5. Political Contributions: Contributions made to political parties, candidates, or campaigns are typically not deductible. These fall under personal or political expenses rather than business expenses.