Taxation

Under the Income Tax Act, 2058, tax is levied on the net taxable income of a person for an income year. Chargeable income is calculated separately for each source.

(a) Income from business

Income from business is the net profit of the business for the income year:

$\text{Business income} = \text{Gross receipts (income)} - \text{Deductible expenses}$

• Includes: sales and service receipts, gains from disposal of business assets, interest or royalty connected with the business, and the like.
• Deductions allowed: expenses incurred wholly in the production of the income, such as cost of goods sold, wages and salaries, rent, interest, repairs, and insurance; depreciation under the pools of assets (Section 19); and other items the Act permits.
• Not deductible: private or domestic expenses, income tax itself, fines and penalties, and capital expenditure (except through depreciation).
• Losses: a business loss is carried forward against future business income (up to 7 years, or 12 years for some sectors).

Example: A trading firm has sales of Rs 50,00,000, cost of goods sold of Rs 30,00,000, salaries of Rs 6,00,000, rent of Rs 2,00,000, depreciation of Rs 1,50,000 and private expenses of the owner of Rs 50,000 (not deductible).

$\text{Business income} = 50{,}00{,}000 - (30{,}00{,}000 + 6{,}00{,}000 + 2{,}00{,}000 + 1{,}50{,}000) = \text{Rs } 10{,}50{,}000$

(b) Income from employment

Income from employment is the total of all payments received from employment, less the deductions permitted:

$\text{Employment income} = \text{Salary, wages and allowances} + \text{Benefits (in kind)} - \text{Allowed deductions}$

• Includes: basic salary, wages, allowances, bonus, leave pay, commission, and the value of benefits in kind such as free housing or a vehicle for personal use.
• Deductions: contributions to approved retirement funds (the Social Security Fund, Employees Provident Fund, Citizen Investment Trust) up to the limit allowed (one-third of income or the prescribed ceiling), and insurance premiums as allowed. No deduction is given for ordinary expenses of earning the income.
• Taxation: the tax is deducted at source by the employer (TDS) under the slab rates for the income year.

Example: An employee earns a basic salary of Rs 40,000 a month and allowances of Rs 10,000 a month, a Dashain bonus of Rs 40,000, and contributes Rs 4,000 a month to an approved retirement fund (assumed within the limit).

$\text{Gross} = (40{,}000 + 10{,}000) \times 12 + 40{,}000 = \text{Rs } 6{,}40{,}000$

$\text{Employment income} = 6{,}40{,}000 - 4{,}000 \times 12 = \text{Rs } 5{,}92{,}000$

Tax is then charged on this amount at the applicable slab rates, with the Social Security Tax at 1% on the first slab where it applies.