Income Tax Related to Armed Forces

BRIEF NOTES AS RELEVANT TO ARMED FORCES GENERALLY

1. The Income-tax Act, 1961 is the charging statute of Income Tax in India. It provides for levy, administration, collection and recovery of Income Tax.A person may have following five types of income;

• Income from Salary;
• Income from Renting of House Property;
• Income from Business/ Profession;
• Income from Capital Gain;
• Income from Other Sources not mentioned in abovementioned four items.

2. If a person earns anything in cash or in kind, the same is taxable in India under provisions of Income Tax Act 1961, unless it is specifically exempt from tax as provided in the act.The Income Tax Act contains a long list of sections, each of which deals with different aspects of taxation in the country. Let us look into main chapters of the IT Act and their related sections and sub-sections, which are applicable to defence personnel.

 

3. Source of Income

Most serving Defence personnel receive primarily salary income which shall be taxable under the head Income from the head Salaries and after retirement receive income by way of pension which is also taxable under the head income from Salaries.

 

4. Taxability and filing of return

• As defence personnel receive salary income they are required to file their income tax returns for a particular financial year on or before 31July of the year following the current financial year.Defence personnel are issued with form16 containing the total salary received and the total TDS deducted, based on which their Income Tax return shall ordinarily be filed unless there is income from other sources.

5. Allowances

• Defence personnel get allowances due to the special nature of duties which are being entrusted on them, out of which certain allowances are taxable while other are not taxable or partly taxable.

• Allowances such as military grade pay, pay commission, service badge pay, flying/submarine allowances, Special Forces allowance, sea duty allowances, dearness allowance are fully taxable.

• Allowances such as Siachen allowance, house rent allowance, Special compensatory allowance, and compensatory field area allowance shall be party liable to income tax based on the predefined limits.

 

6. Fully exempted allowances

• a) Gallantry award
• b) Foreign allowance
• c) Bhutan compensatory allowance
• d) Servant wages allowance
• e) Outfit allowance on posting to an Embassy
• f) Myanmar allowance
• g) Outfit allowance
• h) Special winter uniform allowance
• i) Kit maintenance allowance

 

7. Partly Exempted Allowances

 

S No	Particulars/Description	Amount of Exemption (Amount in Rs)
a.	Saichen Allowance	7000 per month
b.	Reimbursement of medical expenditure	Actual amount reimbursed subject to maximum of 15,000 per annum.
c.	Compensatory field area allowance	2,600 per month
d.	Compensatory modified field area allowance	1,000 per month
e.	Allowance in the nature of counter insurgency allowance	3,900 per month
f.	Transport allowance	1,600 per month
g.	Highly active field area allowance	4,200 per month
h.	High altitude uncongenial allowance	a) Altitude of 9000 to 15000 ft	1,060 pm
		b) Altitude above 15000 ft	1,600 pm
i.	Island Allowance	3,250 pm

8. Rental Income from house property-The Income Tax Act of India has a specific head of income, titled ‘Income from house property’, to tax the rent received by the owner of a property. Rent received with respect to a rented out property is taxable under this head on basis of Annual Value. (Annual Rental Value means Actual Rent Received or Fair Market Rent, whichever is higher). Rent received with respect to a residential house, as well as commercial property, is taxable under this head.

The following deductions are permissible from the rent received/receivable for the property:-

1. Municipal taxes payable for the property.

1. The rent is taxable on accrual basis, however, subject to fulfillment of certain conditions, the law allows to claim deduction for the rent which one has not been able to realise.

After deducting the above two items, what one gets is the annual value, from which one is allowed a standard deduction of 30% of the annual value, to cover the expense for repairs, etc.

9. Deduction on interest paid on acquisition of house property- Home owners can claim a deduction of up to Rs.2 lakhs on their home loan interest if the owner or his family reside in the house property. The same treatment applies when the house is vacant. If you have rented out the property, the entire interest on the home loan is allowed as a deduction.

Conditions to claim upto Rs 2 lakhs deduction on home loan interest –

• The home loan must be for purchase and construction of a new property.
• The loan must be taken on or after 1 April 1999
• The purchase or construction must be completed within 3 years from the end of the financial year in which the loan was taken

10. Conditions precedent for claiming rebate on HRA and interest paid on acquisition of house property. Salaried individuals who live in a rented house can claim House Rent Allowance (HRA) to lower the taxes. The same could be partially or completely exempt from taxes. The allowance is for expenses related to rented accommodation. If one does not live in a rented accommodation, this allowance is fully taxable.

The deduction of HRA available is the least of the following amounts:

• Actual HRA received; or
• 50% of [basic salary + DA] for those living in metro cities (40% for non-metros); or
• Actual rent paid less 10% of basic salary + DA

11. Capital Gains: Capital gains is the profit that an investor realizes when he sells the capital asset for a price higher than its purchase price. The transfer of capital asset made in the financial year should be reflected in the return for the corresponding year. Gains calculated as per the provisions of the Income Tax Act are taxable under the head ‘Capital Gains’ whenever there exists a capital asset, transfer of the capital asset and profit or gains arising from the transfer. Capital Gains include any property held by the assesse except the following:

• Stock in trade.
• Consumable stores or raw materials held for the purpose of business or profession.
• Personal effects that are movable except jewellery, archaeological collections, drawings, paintings, sculptures or any art work held for personal use.
• Agricultural land. The land must not be located within 8 kms from a municipality, Municipal Corporation, notified area committee, town committee or a cantonment board with a minimum population of 10,000.
• 5 percent Gold Bonds, National Defence Gold Bonds and Special Bearer Bonds.
• Gold Deposit bonds under Gold Deposit Scheme.

12. Classification of Capital Gains Tax– Capital assets are classified into ‘Short-Term Capital Asset; and ‘Long-Term Capital Asset’.

Short-Term Capital Asset: If the capital asset has been held by the taxpayer for a period not exceeding 36 months preceding the date of its transfer then the is treated as  short-term capital asset.

Long- Term Capital Asset: If the capital asset has been held by the taxpayer for a period exceeding 36 months preceding the date of its transfer then the is treated as  long -term capital asset.

However equity shares which are listed in a recognised stock exchange, units of equity oriented mutual funds, listed debentures and Government securities, units of UTI and Zero Coupon Bonds’ period of holding will be considered for 12 months instead of 36 months.

Transfer is giving up of an asset voluntarily or by operation of law and the same includes sale, exchange, compulsory acquisition under any law and relinquishment.

13. Reporting the High Value Transactions including acquisition or disposal of immoveable properties. It is always advisable to report all transactions regarding the sale/purchase of the immoveable properties in the IT return for the financial year in which such transactions occur. As it is the Government of the day has got the ways to get information about any such transactions. Income Tax department normally acts on such information after years but just before the limitation clause comes to rescue the individual from scrutiny of the transaction on the grounds of period of limitation. It serves great purpose in avoidance of penal provisions regarding the concealment of transactions and income by the IT authorities.

14. Income Tax on the Gifts Received and Given. – The provisions related to the calculation of income tax are charged to taxation u/s 56(2)(vii). The donor of gift is not charged to taxation under this section. Section 56(2)(vii) is applicable only when gifts are received by Individual and HUF.

1. Gifts of both moveable and immoveable property having the value upto Rs 50,000- are not taxable across the board.

1. The donor or done may be Resident or Non- Resident.

1. Gifts above the value of Rs 50,000- are taxable and added to the income of the receiver/donee except in following cases

1. From Relatives (see list of permissible relatives below).
2. On the marriage of individual,

iii. By will or inheritance

1. In contemplation of Death of payer
2. From local authority
3. From Charitable Trust registered u/s 12AA

vii. From Any Trust, Foundation etc referred u/s 10(23c).

Note:- Relatives means:-

– Spouse of Individual.

– Brother & Sister of Individual

– Brother & Sister of Spouse of Individual

– Brother & Sister of either of the parents of Individual

– Any Lineal ascendants or descendants of the individual

– Any Lineal ascendants or descendants of the spouse of the individual.

 

Below is a comprehensive list of Donors as defined as relative under I.Tax Act ( Hindi connotation has also been mentioned)

List of Male Donors	List of Female Donors
Father (Papa or Pitaji)	Mother (Maa or Mummy)
Brother (Bhai)	Sister (Bahin)
Son (Beta or Putra)	Daughter (Beti or Putri)
Grand Son (Pota or Potra)	Grand Daughter (Poti or Potri)
Husband (Pati)	Wife (Patni)
Sister’s Husband (Jija)	Brother’s Wife (Bhabhi)
Wife’s Brother (Sala)	Wife’s Sister (Sali)
Husband’s Brother (Dewar)	Husband’s Sister (Nanad)
Mother’s Brother (Mama)	Mother’s Sister (Mausi)
Mother’s Sister Husband (Mausa)	Wife’s brother’s wife (Sala Heli)
Father’s Brother (Chacha or Tau)	Father’s Brother’s Wife (Chachi or Tai)
Father’s Sister’s Husband(Fufa)	Father’s Sister (Bua)
Grand Father (Dada, Pardada)	Grand Mother (Dadi, Pardadi)
Daughter’s Husband (Jawai)	Son’s Wife (Bahu or Putra Vadhu)
Spouse Father (Sasur)	Spouse Mother (Sas)
Spouse Grand Father (Dada Sasur)	Spouse Grand Mother (DadiSas)
Brother’s Wife (Bhabhi)	Mother’s Brother’s Wife (Mami) Husband’s Brother’s Wife (Devrani or Jithani)

15. Refund and relief for income tax on arrears- Armed forces personnel may receive salary of a year in the consequent years known as arrears of salary. This situation could arise due to pay revisions, fixations, upgradation, pay commissions or any other reason.

Such receipt of arrears of salary is the basis of claiming of relief under section 89(1). For claiming relief under section 89(1), one has to file a relief claim in a separate known as form 10E in which the assesse is required to provide the details regarding the arrears received in the current year, salary of the current year etc. Form 10E has to be filed before filing the income tax return for availing relief under section 89(1).

 

16. Allowability of deductions- All other deductions under chapter VIA which are allowed to individuals shall be equally allowed to armed forced personnel.