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Income Tax Rebate

Income tax rebates are deductions that apply to the total income earned for a financial year. Income tax is usually paid on the final amount arrived upon after applying all the deductions a person or a company is allowed to make.

Deductions are usually allowed on investments and other eligible expenses. The Income Tax Act of India, 1961 provides a variety of deductions under various sections for different categories of taxpayers, as summarized below:

Some of the commonly availed Income tax deductions

Section Brief description Deductible amount
80C EPF, PPF, Fixed deposits, LIC premiums, Education fees ₹ 1.5 Lakh (including sections 80C, 80CCC and 80CCD)
80CCC Pension funds ₹ 1.5 Lakh (including sections 80C, 80CCC and 80CCD)
80CCD Central govt. pension funds ₹ 1.5 Lakh (including sections 80C, 80CCC and 80CCD)
80CCG Equity schemes 50% of the invested amount up to a maximum of ₹ 25000
80CCF Infrastructure bonds (long term) Maximum limit of ₹ 20000
80D Premiums for health insurance and health check-up costs Deduction on premiums up to ₹ 25000 (₹ 50000 in case of senior citizens)
80E Interest on educational loan No limit
80EE Interest on house loan Maximum limit of ₹ 50000
80G Donations to any recognized society Depends on the amount donated
80GG Rent paying individuals not receiving HRA  25% of total income or ₹ 5000, whichever is less
80GGA Donations to scientific research and development of rural areas Depends on the amount donated (can only be claimed by entities who do not have income for business or profession)
80GGB Donations to political parties Depends on the amount donated
80TTA Interests on bank savings account Maximum limit of ₹ 20000

*Eligibility to claim deductions: Individuals – Sections 80C to 80G; HUFs- Sections 80C, 80CCF, 80D, 80G & 80TTA; Companies – Sections 80G and 80GGB.

Income Tax Regime for the Financial Year 2020-21

A new income tax slab rate has been proposed in the budget 2020, for the financial year commencing on 1 April 2020, which is not compulsory. The new tax regime does away with some of the existing deductions and exemptions, and the taxpayer will have to declare his option (of the new or old regime) at the time of filing IT returns.

  1. Earlier Tax slab vs New Tax Slab

    Here is the comparison of earlier tax slab and new income tax slab proposed in the budget 2020:

    CURRENT TAX SLAB (FY 2019-20) ANNUAL INCOME NEW TAX SLAB  (FY 2020-21)
    NA Less than ₹ 2.5 Lakh NA
    5% ₹ 2-5 Lakh – ₹ 5 Lakh 5%
    20% ₹ 5 Lakh – ₹ 7.5 Lakh 10%
    ₹ 7.5 Lakh – ₹ 10 Lakh 15%
    30% ₹ 10 Lakh – ₹ 12.5 Lakh 20%
    ₹ 12.5 Lakh – ₹ 15 Lakh 25%
    Above ₹ 15 Lakh 30%

    *The new tax slabs will be applicable from Financial Year 2020-21 (Assessment Year 2021-22)

    * Separate taxation for senior and super senior citizens does not exist under the new tax regime

  2. Calculation of taxable income as per old and new tax regimes

    (On an annual income of ₹ 12 Lakh)

    Tax slab (Amount in ₹) Old Tax regime (FY 2019-20) New Tax regime (FY 2020-21)
    Total Annual income  1200000 1200000
    HRA deductions section 10(13A) 150000 0
    Deductions under section 80C 150000
    Standard deductions (medical & travel) 50000 0
    Deductions under section 80CCD 50000 0
    Taxable Income (net) in ₹ 800000 1200000
  3. Tax Payable on an annual income of ₹ 12 Lakh under both regimes

    Tax slab Old Tax regime (FY 2019-20) (in ₹) New Tax regime (FY 2020-21) (in ₹)
    Taxable Income (net)  800000 1200000
    Less than ₹ 2.5 Lakh 0 0
    ₹ 2-5 Lakh – ₹ 5 Lakh 12500 12500
    ₹ 5 Lakh – ₹ 7.5 Lakh 40000 25000 
    ₹ 7.5 Lakh – ₹ 10 Lakh 10000 37500 
    ₹ 10 Lakh – ₹ 12.5 Lakh 0 40000
    Tax paid (in ₹) 62500 115000

    The new tax regime does away with around 70 exemptions that were available under the previous income tax plan.

    Some of the exemptions that will be not available under the new tax regimen include the following:

    • House rent allowance (HRA) 
    • Investments up to ₹ 1.5 lakh, under section 80 C 
    • Standard deductions like medical and leave travel allowance (LTA)
    • Investments under National pension scheme (NPS), section 80 CCD 
    • Conveyance allowance
    • Premiums paid for health insurance, under section 80 D
    • Interest on home loans (section 24)
    • Savings bank interests under section 80 TTA (for ₹ 10,000/-)
    • Professional tax
    • Relocation allowance etc.

    Citizens who are earning an annual income of ₹ 5 Lakh and below can still claim the ₹ 12,500/- tax deduction under section 87 A, which will make an annual income of less than ₹ 5 Lakh per year, tax-free under both regimes.

    Rebate under section 87 A

    Under this section, people whose income is less than a specified amount will either pay a lesser tax or get a total exemption.

    For the financial year 2019-20, section 87A provides a rebate of either 100% of income tax or ₹ 12,500/-, whichever is less, for all citizens whose annual income is less than ₹ 5 lakhs and is qualified as a resident Indian.

    This rebate would not be applicable to non-resident Indians.

To choose between the Old and the New Tax Regimes

Individuals earning income from salaries and pensioners have the option to shift between older and the newer tax plans each year based on the types of investments they make or on the amount of income they are earning. However, individuals who are earning their incomes from businesses or consultancies do not have the option to shift between two tax plans every year. Once they choose to opt for one regime, they can only change their option once for a lifetime. 

The new tax regime will benefit those individuals who do not make any investments. Still, if a person is investing in homes, mutual funds, taking health insurance, etc., he may benefit more by opting for the older tax regime.

The Ministry of Finance analyzed close to 6 Crore taxpayers, before presenting the budget and claims that nearly 70% of those taxpayers would benefit from the new tax scheme and is estimating that around 80% of taxpayers will be shifting to the new regime as time unfolds.

Income Tax Rebates for Non-Resident Indians

Here is a rundown to an income tax rebate for non-resident Indians (NRIs):

  1. Double Taxation

    If a person is earning income in India and another foreign country, he may be liable to pay tax in India as well as a foreign country, where he is making money. To avoid any duplicate taxation and make paying tax more feasible, countries establish double taxation agreements between them.

  2. Double taxation avoidance agreement (DTAA)

    The purpose of DTT is to facilitate the non-payment of tax in both countries for the same income earned. If withholding tax applies to a person for an income originating in one country, he may not need to pay tax for the same income again in his country.

    For better clarification, it is advised to peruse the DDTA agreements with the country where one wants to invest or earn an income. India has DTAA agreements with more than 80 countries (sections 90 & 91 of the Income Tax Act, 1961).

  3. Special Taxes for Non-resident Indians

       
    Interest on rupee-denominated bonds issued by the govt. or an Indian company, or from notified infrastructure debt funds; Interest earned by FIIs (section 194LD) 5%
    Interests received from business trusts (subject to certain conditions) or money borrowed in foreign currency from a source outside India 5%
    Income from Royalty/ FTS, from long-term capital gains made on transfer of  units purchased in foreign currency 10%
    Income from bonds or GDRs (global depository receipts) of a PSU sold by the govt. and purchased in a foreign currency, or LTCG on their transfer  10%
    Long-term capital gains made from the transfer of capital assets (securities or shares) of companies listed or unlisted in a recognized stock exchange 10%
    Long-term capital gains made by FIIs and  10%
    Non-residents and FIIs: Long-term capital gains from transfer of long-term capital assets (equity shares, units of business trusts/ equity funds) of companies that are listed – 10% shall be levied on LTCG more than ₹ 1 lakh 15%
    Short-term capital gains from transfer of equity shares, units of business trusts/ equity funds, for which STT is applicable or STCG made by FIIs 15%
    Long-term capital gains 20%
    Interest received from govt. or any Indian concern on money borrowed or income raised on purchasing mutual funds in foreign currency  20%
    Dividends, other incomes earned by FIIs  20%
    Income received by a non-resident sportsman/ entertainers who is a foreign citizen for his performance in a sport or an advertisement, 20%
    Income from a foreign exchange asset of an NRI 20%
    Any other short-term capital gains made by the FIIs 30%
  4. Rebates in Corporate taxation

    Income tax slab rates for Corporates - Domestic companies (FY 2019-20)

    Type of Corporate Tax Rate
    Domestic companies (Turnover for the previous year)
    ≤ 250 Crore 25%
    > 250 Crore 30%

    *Health and Educational Cess of 4% is applicable 

    Income Tax surcharge for Domestic companies (FY 2019-20)

    Net Income Surcharge Rate
    ₹ 1 Crore - ₹ 10 Crore 7 %
    > 10 Crore 12%

    *Health and Educational cess of 4% is applicable 

Finance (No.2) Act, 2019

Proposed in the Union budget presented on 5 July 2019 and passed by the Lok Sabha on 18 July 2019, Finance (No.2) Act, 2019 states the financial proposals made by the central government for the FY 2019-20.

Key features of Finance (No.2) Act, 2019 (relevant to the context)

The following are the key features of Finance (No. 2) Act, 2019 (relevant to the context):

  • Tax rates and exemptions for all entities deemed as ‘persons’ other than domestic companies will be same as in the previous financial year 2019-20
  • A surcharge of 25 % for incomes exceeding ₹ 2 Crore and 37 % for incomes exceeding ₹ 5 Crore respectively, would be charges on individuals/ HUFs, AOPs, BOIs and AJPs. The surcharge of 15 % for incomes below ₹ 1 Crore remains unchanged
  • In the case of domestic companies, a concessional tax rate of 25 % would be applicable to companies whose annual turnover for FY 2017-18 is less than ₹ 400 Crore. In case, it is more than ₹ 400 Crore; the payable tax would be 30%
  • A TDS of 1% was to be levied upon amount credited to a resident for transfer of immovable property valued greater than ₹ 50 lakhs and a TDS of 10% to be collected on income component of life insurance pay-outs
  • An additional income tax (distribution tax) of 25% is applicable for all companies at the time of buy-back of shares from shareholders, either listed or not listed on recognized stock exchanges, effective from 5 July 2019
  • Limit of tax payable has been increased from ₹ 3000 to ₹ 10,000 beyond which prosecution proceedings will be initiated for the failure of filing income tax returns within the due date. This means, if the income tax payable by a person for a financial year is more than ₹ 10,000, prosecution proceedings will be initiated against him if returns are not filed before the last date
  • A new section 270A has been inserted, which provides for a penalty on non-disclosure of income (under-reporting) or for furnishing inaccurate details (misreporting). A penalty of 50% on the under-reported income in case of ‘under-reporting’ and a penalty of 200% on the under-reported income in case of ‘misreporting’ have been made applicable
  • Amendment to Section 115QA - This amendment also overwrites the buy-back tax for listed companies mentioned in the Finance (No. 2) act, 2019. As per the newly introduced amendment, buy-back tax does not apply to such listed companies that have made a public buy-back announcement, before 5 July 2019

Taxation Laws (Amendment) Ordinance 2019

Introduced on 20 September 2019, this ordinance prescribes amendments to Sections 92BA, 115QA of the Income Tax Act 1961, and the Finance (No.2) Act 2019.

In addition, sections 115BAA (taxation of certain new domestic companies) and 115BAB (taxation for newly set-up manufacturing companies), were newly introduced.

Given below is a summary of key amendments, as per this ordinance.

  1. Section 115BAA - Tax rebate for existing domestic companies 

    The Taxation Laws (Amendment) Ordinance 2019 introduced a new section 115BAA for the financial year 2019-20, which states that:

    • All domestic companies that do not avail of any tax exemptions or incentives can choose to pay an annual income tax of 22% (excluding surcharge and cess)
    • Domestic companies that opt for this taxation are also exempt from paying MAT. However, a surcharge of 10% and a cess of 4% will be applicable to the amended tax rate of 22%
    • Companies that are in a tax holiday or availing other exemptions will pay the earlier tax rate of 30%. But once the concession period ends, they can choose for the new tax regime of 22%
    • However, once the companies opt to avail of the benefits of section 115BAA, they cannot choose to opt-out of it
  2. Section 115BAB - Tax rebate for newly set-up domestic manufacturing companies 

    (Under Make-in-India initiative)

    A decreased tax rate of 15% is applicable for newly set-up domestic manufacturing companies the financial year 2019-20, provided:

    • The company is incorporated before 1 October 2019 and starts production of goods before 31 March 2023
    • The company is not formed by restructuring or splitting of an existing business, does not use any construction which previously served as a hotel or a convention centre, or any plant or machinery which previously has been used in India and for which depreciation has not been claimed (certain relaxations applicable)
    • The said companies must not be availing any tax exemptions or incentives
    • These companies are not required to pay MAT. However, a surcharge of 10% and health and education cess of 4% is applicable
    • Similar to section 115BAA, companies that opt for section 115BAB cannot choose to opt-out, once opted for

    A brief list of companies that qualify under ‘manufacturing industries’

    • Paper, chemicals, textile, furniture
    • Automobile, petroleum, coal, energy
    • Steel and metal, rubber, cement, wooden, furniture
    • Plastics, non-metallic minerals, pharmaceuticals, automation
    • Food, beverages, tobacco, leather, etc.

    Businesses that are not eligible for the 15% tax rebate in the newly set-up manufacturing companies include:

    • Book printing, production of cinema films
    • Mining and companies that convert marble blocks or other similar items into slabs
    • Companies that develop software (in any form) for computers 
    • Companies that are set up for bottling gas into cylinders

Comparison of Effective Tax Rates for Companies those Avail Sections 115BAA, 115BAB 

Total income earned Companies that do not avail sections 115BAA/ 115BAB and have an annual turnover ≤ 400 Crore for FY 2017-18 Companies that opted for section 115 BAA Companies that opted for section 115 BAB All other companies
< 1 Crore 26 % 25.168 % 25.168 % 31.2 %
1 – 10 Crore 27.82 % 33.384 %
> 10 Crore 29.12 % 34.944%

Relaxation of Surcharge Rates

As per the Taxation laws ordinance of Sep 2019, the enhanced surcharges of 25 % (for incomes exceeding ₹ two crores) and 37 % (for incomes exceeding ₹ five crores) on individuals, HUFs, BOI/ APOs, and AJPS, introduced in the Finance (No. 2) Act, 2019 are amended in case of FIIs (foreign institutional investors) as referred to in section 115AD with respect to capital gains made by selling securities.

Surcharge Rates 

Total Income Tax for income arising from capital gains covered under sections 111A & 112A Tax for income arising from sources other than capital gains

Total Income Tax for income arising from capital gains covered under sections 111A & 112A Tax for income arising from sources other than capital gains
< 50 Lakh NA NA
₹ 50 Lakh - ₹ 1 Crore 10% 10%
₹ 1 Crore - ₹ 2 Crore 15% 15%
₹ 2 Crore - ₹ 5 Crore 15% 25%
> 5 Crore 15% 37%

Comparison between Tax Rates Before and After Amendments

Type of Company FY 2018-19 FY 2019-20
Income Tax  MAT Income Tax MAT
Domestic companies with annual turnover ≥ 400 Crore and avails exemptions/ deductions 30 % 18.5 % 30 % 15 %
Domestic companies with annual turnover ≥ 400 Crore and does not  avail exemptions/ deductions 30 % 18.5 % 22 % NA
Domestic companies with annual turnover ≤ 400 Crore and avails exemptions/ deductions 25 % 18.5 % 25 % 15 %
Domestic companies with annual turnover ≤ 400 Crore and does not  avail exemptions/ deductions 25 % 18.5 % 25 % NA
Manufacturing/ production companies incorporated on or before 1st March, 2016 25 % 18.5 % 25 % 15 %
Manufacturing/ production companies incorporated after 1st Oct, 2019, and starting operations before 31st March, 2023, and are not availing tax exemption 25 % 18.5 % 25 % NA

*Surcharges are applicable as per the income earned

*Health and Education cess of 4% is applicable on Income tax and MAT

* Minimum alternate tax

Minimum Alternate Tax or MAT (Section 115JB)

MAT or minimum alternate tax is the minimum tax companies are liable to pay in case they cannot pay the total tax liability for the year.

MAT falls under the purview of section 115JB – special provision of payment of tax by certain companies. As per this section, every company whose income tax for the year, including surcharge and cess is less than the designated MAT rate (15% for FY 2019-20) of its book profit including surcharge and cess is liable to pay the minimum alternate tax to the government for that year. 

Introduced from the financial year 1987-88, the purpose of MAT is to collect dues from the ‘zero tax companies,’ the companies, which do not pay any tax under various incentives and concessions, despite earning good profits and paying out healthy dividends.

In September 2019, the government of India had reduced the MAT rate to 15% from 18.5% (FY 2018-19) for the financial year 2019-20.

  1. MAT Credit

    MAT credit is the difference between the regular income tax and tax payable as per MAT provision.

    If a company were liable to pay an annual tax of ₹ 15 lakhs under regular taxation and ₹ 18 lakhs under MAT, the higher of the amounts would be collected as tax for the year. In this case, an amount of ₹ 3 lakhs can be carried forward as MAT credit and can be offset in the future when regular tax payable under is higher than that of MAT.

  2. Carry forward MAT Credit

    MAT credit can be carried forward for a period of 15 assessment years.

Alternate Minimum Tax (AMT)

While MAT applies for companies, AMT or alternate minimum tax applies for non-corporate taxpayers. Introduced in 2011, AMT applies for all individuals, HUFs, Firms (LLPs), AOP, BOI, and AJPs, whose ‘adjusted total income’ for the year exceeds ₹ 20 lakh.

Further AMT needs only payable by non-corporate taxpayers who have claimed deductions under sections 80H to 80RRB, except section 80P (profits and gains made from specific industries such as hotel business, construction, etc.), section 35 AD (expenditure incurred on specified business such as fertilizer production) or section 10AA (concerns special economic zones). For simplification purposes, AMT is only applicable to such non-corporate taxpayers who have the income to show under ‘profits and gains from business or profession’ head.

As per the current regulations, an AMT of 18.5% is levied on ‘Adjusted total income’ for the financial year, after claims for tax deductions and exemptions.

  1. Adjusted Total Income

    Adjusted total income is arrived at after adding deductions claimed in respect of certain incomes (chapter VI-A) and profits from SEZ units (section 10AA).

    Adjusted total income = Total income as per the ITA + Deductions under chapter VI-A + Deductions under section 10 AA.

  2. CSR Funding

    The Taxation Laws (Amendment) Ordinance 2019 has increased the scope of spending for the 2 % CSR. As per the amendment, CSR can now be spent on incubators, agencies or PSUs funded by state or central governments, contributions to publicly funded universities, IITs, national laboratories, and autonomous bodies researching medicine, science, technology, or engineering (affiliated to CSIR, ICMR, ICAR, DRDO, DST, Ministry of Electronics & IT, etc.), that reworking towards promoting sustainable development goals (SDGs).

Corporate Tax Rebates under other Sections

The following are the corporate tax rebates under other sections:

  1. Section 115AD

    In the case of FIIs, long-term capital gains above ₹ 1 Lakh, made by transferring long-term capital assets such as equity shares of listed companies or units of equity-oriented funds or business trusts, are taxable at a rate of 10%, for the amount exceeding ₹ 1 Lakh.

  2. Section 196 D

    This section provides for a lower tax rate of 20% on all incomes earned by foreign institutional investors on securities (referred to in section 115AD), except the income that is earned from interest on securities. However, this section does not mention the incomes earned on rupee-denominated bonds and government securities.

  3. Section 111A

    Provides for the rate of taxation for short term capital gains arising from the transfer of equity shares or units of an equity-oriented fund or of a business trust and transferred through a recognized stock exchange by way of a transaction that is liable to securities transaction tax (STT).

  4. Section 112A

    Provides for the rate of taxation for long-term capital gains that arise from the transfer of equity shares or units of an equity-oriented fund or a business trust. This section, introduced in Finance Act, 2018 overwrites the previously existing section 10(38), under which long-term capital gains were exempt from taxation.

  5. Transfer Pricing Provisions

    Transfer pricing is the price set for selling goods or services between two legally related entities, such as a parent company and its subsidiary.

    The concept of Specified domestic transactions (SDTs) was introduced in the Finance Act, 2012, to nullify unfair tax advantages (tax arbitrages) that may arise due to transactions between domestic companies (e.g., if they are related or have the same owner, etc.). 

    The scope of SDTs includes the transfer of goods or services to tax-holiday eligible units, transactions between related companies, and any other transaction if notified by the CBDT (central board of direct taxes).

  6. Section 92BA 

    Section 92 of the Income Tax Act, 1961 states that a specified domestic transaction (SDT) of any natured should be done according to the ‘arm’s length principle.’

    SDTs are defined under section 92BA. According to the Taxation Laws (Amendment) Ordinance 2019, all the transactions that are entered into the newly set-up manufacturing companies that opt for a reduced tax of 15% under section 115BAB, must comply with the ‘arm’s length principle.’

  7. Arm’s Length Principle

    When a transaction occurs between two legally related entities, the pricing should be the same as that of a transaction that occurs between two unrelated business parties. It means no concessions or special allowances are allowed, and the pricing would be similar to what would be charged to any other business entity in the market.

Finance Bill 2020

The finance bill 2020 has been passed in the Lok Sabha on 23 March 2020 in an attempt to provide stimulus to the economy, which took a telling blow due to the coronavirus epidemic.

The bill, which proposes around 40 amendments, was passed by the voice of vote, without any discussion, and was approved by the President of India on 27 March 2020, after which the bill became an act. The provisions of the bill will come into effect from 1 April 2020.

Some of the amendments, which are relevant to the context, include:

An individual need not be residing for a minimum period of 120 days in the financial year to be considered as a ‘resident,’ if the income earned in India (other than foreign sources) for the period is less than ₹ 15 Lakh.

A hike in TDS rate for withdrawal from banks has been proposed for persons who have not filed their tax returns for the last 3 preceding years – at a rate of 2% for aggregate withdrawals exceeding ₹ 20 lakh and 5% for if the total aggregate withdrawals exceed ₹ 1 Crore (section 194N).

The definition of royalty is amended to include the amount generated on sale, distribution, or exhibition of cinematographic films. The amendment also provides for a reduction in withholding tax rate from 10% to 2%, which was applicable to FTS, previously (section 194J).

The dividend distribution tax (DDT) has been abolished for companies and mutual funds for FY 2020-21. An amendment is introduced to charge a withholding tax of 10% on resident individuals by the administrators of mutual fund units; on payments exceeding ₹, 5000 (section 194K).

Interest received by a non-resident or a foreign company from debt funds, bonds, Indian companies and government securities were taxed at a standard rate of 5% previously (section 115A). This has been amended so that only interest received from an infrastructure debt fund is taxed at 5% and other interests and incomes earned will be taxed at rates specified under respective sections.

Interest, dividend, and long-term capital gains that arise from an investment made in India by a ‘specified person’ in the form of debt or equity will be exempt from taxation, provided the investments are made between 1 April 2020 and 31 March 2024 and held for three years. The amendment also widens the scope of entities in which investments could be made to certain business trusts and alternative investment funds, which earlier was restricted to a wholly-owned subsidiary of the Abu Dhabi Investment Authority and sovereign wealth funds. The scope of ‘specified person’ is also amended to include pension funds notified by governments (section 10(23FE)).

FAQ's

  • Q: What is a book profit? Is it different for income tax profit (taxable profit)?

    Ans: As per section 115JB, book profit is the net profit, as demonstrated in the profit and loss statement, which is prepared in accordance with Schedule III to the companies act, 2013.

    Book profit (also known as bookkeeping profit or accounting profit) is the profit calculated after deducting all the expenses incurred during the year and depreciation rates as per the Companies Act. Expenses include costs for raw materials, production, distribution, etc.

    Income tax profit is the profit that is taxable as per the Income Tax Act and includes book profit. Book profit may be more than tax profit in instances where accrued revenues (not recovered fully) or prepaid expenses. If the profit and loss statement is reporting unearned revenues or accrued expenses (not yet paid), book profit will be lesser than the tax profit. 

    The financial statements released by companies for the public, usually depict ‘book profits.’

  • Q: Should all companies pay MAT (minimum alternate tax)?

    Ans: No. According to explanation 4A of Section, 115JB MAT is not payable by foreign companies whose income arises from businesses referred to in the following sections: 44 AB (tax audit for companies whose turnover or gross receipts are in excess of ₹ 2 Crore, except those who opt for presumptive taxation); 44 BB (oil-exploration), 44 BBA (operating aircraft), and 44 BBB (construction of civil buildings or erection of plants and machinery).
  • Q: What is tax arbitrage?

    Ans: Tax arbitrage is a way of minimizing taxable income by taking advantage of different taxation systems. A company, with its presence in different tax regimes, can choose to a higher amount as expenses in a region with high tax rates and show higher income in another region with low tax rates. By doing so, a company makes profits by capitalizing on such a facility.

    Purchasing shares before the ex-dividend date and selling them at a higher rate after the date is also considered as Tax arbitrage.

    Not all forms of tax arbitrage are legal.

  • Q: What does a tax holiday mean?

    Ans: A period of exemption from paying tax for companies or industries that are newly established. It is a kind of incentive given by the government to encourage investors into investing in new and diverse sectors.
  • Q: What is AMT credit?

    Ans: It is known that AMT or alternate minimum tax is payable only when it is higher than the normal tax payable. For example, a person’s income tax payable for a financial year is ₹ 2 Lakh, but the AMT (total income+ deductions claimed) is ₹ 8 Lakh, he will pay only the AMT of ₹ 8 Lakh. 

    He will carry forward the remaining ₹ 2 Lakh to the next year. In the next year, if his calculated normal tax was ₹ 10 Lakh and AMT was ₹ 7 Lakh, he will be required to pay the normal tax of ₹ 10 Lakh. In such a scenario, the person can offset his AMT credit against normal tax and pay only ₹ 3 Lakh.

    AMT credit is allowed to be carried forward for a period of 10 years.

  • Q: To whom do foreign nationals working in India pay tax?

    Ans: Foreign nationals working in India on short term assignments and if their stay in India is not more than 90 days, they are exempted from paying tax in India, if he or she continues to be on the payroll of the foreign employer. He or she does not engage in any business or activity in India that may generate income.
Written By: Paisawiki - Updated: 12 April 2021