Keyman Insurance Policy, Tax Treatment of - Casual Income, Interest on Securities, Dividend | Income Tax for assessment (Inter Level) - Taxation PDF Download

Keyman Insurance Policy
Keyman insurance policy means a life insurance policy taken by a person on the life of another person who is or was the employee of the first-mentioned person or is or was connected in any manner whatsoever with the business of the first-mentioned person.

Section 10(10D). Amount Received Under Life Insurance Policy
Any sum received under a life insurance policy, including the sum allocated by way of bonus on such policy
• is exempt if premium payable for all the years during the term of the policy do not exceeds 10% of the actual capital sum assured.
• is taxable if premium payable for any years during the term of the policy exceeds 10% of the actual capital sum assured.
• However where any sum is received on the death of a person it is fully exempt from tax u/s 10(10D).

Note : The limit of 10% shall be taken as 15% for person who is a person with disability as referred to in section 80U or suffering from disease as specified in section 80DDB.

Family pension
Family pension means a regular monthly amount payable by the employer to a person belonging to the family of an employee in the event of his death. It is chargeable in the hands of legal heirs of the deceased.

Section 57(iia). A standard deduction of 1/3 of pension or Rs. 15,000 whichever is less is allowed.

Section 56(2). Profit from activity of owning and maintaining race horses
This income is chargeable under the ‘Income from Other Sources’. Deduction allowed : Any allowances or expenses incurred in connection with activity of owning and maintaining race horses is allowed as deduction.

Computation of Income

Section 56(2)(ib). Lottery Income Etc [Casual Income]

1. Meaning of lottery It includes winnings from prizes awarded to any person by draw of lots or by chance or in any other manner whatsoever, under any scheme or arrangement by whatever name called.
Meaning of “card game” and other game of any sort. It includes any game show, an entertainment programme on television or electronic mode, in which people compete to win prizes or any other similar game. We shall call this type of income to be casual income & rate of tax 30% flat.

2. Where winnings are in kind, market value of product is taxable u/s ‘Other Sources’

3. S 58(4). No deduction (in respect of expenses incurred to earn such casual income) shall be allowed in connection with income from lotteries, crossword puzzles, races, card games, gambling etc.
4. No deduction u/s 80C to 80U is allowed from casual income.
5. S 115BB. Rate of tax levied is @ 30% flat rate + surcharge and education cess as applicable.

Section 56(2)(ii). Income from letting out of plant & machinery, Furniture

Income from machinery, plant or furniture belonging to the assessee and let on hire, if not charged under the head business, is chargeable to income-tax under the head “Income from Other Sources”. Depreciation is also allowed as deduction.

Section 56(2)(iii). Income from composite letting of plant & machinery, furniture with building (FACTORY )

Where an assessee lets on hire machinery, plant or furniture belonging to him and also buildings, and the letting of the buildings is inseparable from the letting of the said machinery, plant or furniture, the income from such letting, is chargeable to income-tax under the head “Income from Other Sources”. Depreciation is also allowed as deduction. (Composite rent inseparable)

Section 56(2)(id). Interest on securities
1. Where securities are held as stock in trade (main business is dealing in sale and purchase of debentures/ Bonds) interest is chargeable under the head ‘Profit from Business’. Deduction shall be allowed u/s 28 to 44D.
2. Where securities are held as investment interest is chargeable under the head ‘Income from Other Sources’. Deduction shall be allowed u/s 56 to 59.

Section 57(i). Deduction allowed from interest
Following deductions are allowed from interest income :
1. Expenses for earning interest : Any expenditure incurred in earning interest is allowed as deduction. Suppose Mr. X borrows Rs. 1,00,000 @ 8% p.a. and invest it in 11% p.a. debentures of KIL Ltd. Interest shall be 11% of 1,00,000 – 8% of 1,00,000 = Rs. 3,000.
2. Collection charges: Sometimes Banks, to encash the cheque, collects some charges known as collection charges. Collection charges depends upon the amount of cheque. Suppose Mr. X receives a cheque of Rs. 11,000 and bank collects collection charges @ 0.5%. In such case collection charges shall be 0.5% of 11,000 = Rs. 55.

Example

Section 10(15). Following interest are exempt from tax (Also no TDS either u/s 193 and 194A)
1. Interest on investment in
(a) Post Office Cash Certificates.
(b) Post Office National Savings Certificates. (12 years / 7 years)
(c) Post Office Saving Accounts. In case of Individual account upto Rs. 3,500 is exempt. In case of joint account upto Rs. 7,000 is exempt. Also deduction u/s 80TTA available. (Interest Rs. 15,000 – 3,500 = 11,500 – 10,000 = 1,500)
(d) Post Office Cumulative Time Deposit (CTD) scheme. Deduction u/s 80C available on deposits if deposit is made for atleast 5 years
(e) Schemes of Fixed Deposits governed by the Post Office (Fixed Deposits) Rules 1968. Deduction u/s 80C available on deposits if deposit is made for atleast 5 years.
However Interest on Post Office Monthly Income Scheme is taxable.

2. Interest on Government Securities :
(a) Interest on 7% Capital Investment Bonds for individual / HUF. (do not exists)
(b) Interest on RBI Relief Bonds in case of Individual / HUF.
(c) Interest on Gold Deposit Bonds issued under Gold Deposit Scheme, 1999.
(d) Interest on Gold Certificates issued under Gold Monetisation Scheme

3. Interest exemptions available to NRI’s or Non-Resident.
(a) Non Resident (Non-Repatriable) Rupee Deposit Scheme.
(b) NRI Bonds — 1998 issued by State Bank of India. (do not exists)
(c) NRI Bonds (Second Series) issued by State Bank of India. (do not exists)

4. Interest exemptions available on securities issued by notified companies. (None of the companies notified)

5. Interest on Bonds issued by local authority and notified by the Central Government. (No notification)
Note : Interest on Non Resident External account is exempt from tax u/s 10(4).

Section 56(2)(i). Taxability of Dividend
1. Dividend income is always taxable under the head ‘Income from Other Sources’ whether shares are held as stock in trade or as an investment. Dividend always taxed u/h ‘other sources’ even if assessee’s main business is to deal in shares and purchases of shares. As per section 57(i) deduction shall be allowed in connection with earning such income like interest on loan taken for purchase of shares and collection charges.

2. For the purpose of set off of losses dividend income shall be treated as income under the head ‘Profit from business’.
3. As per section 8(a) final dividend chargeable to tax in the year of declaration of dividend in the Annual General Meeting even if dividend not received.
4. As per section 8(b) interim dividend is chargeable to tax in the year of receipt. (Dividend is proposed)
5. As per section 10(34) dividend from Indian Company is exempt in the hands of shareholders. Any expenditure incurred in earning dividend from Indian company is not allowed as deduction. However Dividend from foreign company is taxable in the hands of shareholders under the head Other Sources. Expenditure incurred in earning dividend from foreign company is allowed as deduction.
6. As per section 10(35) income received in respect of the units of a Mutual Fund specified under section 10(23D) or units of UTI is exempt from tax.
7. Dividend from foreign company and co-operative societies are taxable u/h ‘Other Sources’.

Other Incomes charged under the head ‘other sources’
1. Director’s sitting fees, commission etc. : Fees for attending the Board Meeting is always charged under the head Income from Other Sources. However other remuneration or commission may be charged under the head Income from Salary if directors are employed as the employee of the Company. However if the Directors are not appointed as the employee then any remuneration received by them shall be charged under
the head Income from Other Sources.
Deduction u/s 57(iii) is allowed : Any revenue expenditure incurred for the purpose of earning such income is allowed as deduction.
2. Examinership remuneration : The remuneration for checking the answer sheet is charged under the head Income from Other Sources. Deduction u/s 57(iii) is allowed.
3. Remuneration received by Members of Parliament : The remuneration is charged under the head Income from Other Sources since MPs or MLAs are not the servant of the Government, they are the representative of the public. Deduction u/s 57(iii) is allowed.
4. Income from Subletting : It is charged under the head Income from Other Sources since the assessee who has further let out the building is not the owner of the building. Deduction of rent paid to the owner is allowed as deduction u/s 57(iii).
5. Rent from a vacant piece of plot of land : It is charged under the head Income from Other Sources since there doesn’t exist a building. Deduction u/s 57(iii) is allowed.
6. Interest on Bank deposits : It is charged under the head Income from Other Sources if account is held as investment. Deduction u/s 57(iii) is allowed. Also deduction u/s 80TTA is allowed on interest on saving account.
7. Interest on Deposit with companies : It is charged under the head Income from Other Sources if account is held as investment. Deduction u/s 57(iii) is allowed. 80TTA not allowed.
8. I nsurance commission : It is charged under the head Income from Other Sources. Deduction u/s 57(iii) is allowed.
9. Agricultural income from agricultural land situated outside India : It is charged under the head Income from Other Sources. However if there is an agricultural income from a land situated in India then such income is exempt under section 10(1). Deduction u/s 57(iii) is allowed.
10. Royalty income : It is charged under the head Income from Other Sources. It is also for eligible for 80QQB or 80RRB deductions if certain conditions are satisfied. Deduction u/s 57(iii) is allowed.
11. Interest on delayed refund of income tax : It is charged under the head Income from Other Sources. However refund of tax is not taxable since it is not an income. Deduction u/s 57(iii) is allowed.