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Wednesday, February 16, 2011

What is Separate Block of Income

Q: What is Separate Block of Income? Explain with examples.

Ans. The method of computation of taxable income and tax thereon is to first compute the income under each head of income by deducting 'deductions allowed', if any, from 'amount chargeable' under the head. Incomes under all five heads are then added up to get 'total income', from which are reduced 'deductible allowances'. The resulting amount is called 'taxable income'. Tax rates given in the first schedule to ITO-2001 are then applied to the whole amount of the taxable income to determine the tax liability of the person for the year.

However, there are few exceptions to this method of computation of tax liability. There are some incomes which are treated separately as a 'separate block of income'. These types of income are given below:

(1) incomes subject to final tax (FTR) are not included in any head and are to be treated separately.

Example: Dividend recieved by an individual amounting to Rs. 200,000 from which tax has been deducted at sources at Rs. 20,000.

(2) certain incomes are subject to lower tax rates than are normally applicable, such as income from property, capital gains, and golden handshake amount etc. Though such incomes are taken into account while computing taxable income but are subtracted from it at the time of application of tax rates.

Example:

Income from Business..................................800,000
Income from Property....................................400,000
Total income................................................1,200,000
L:Deductible Allowance.................................50,000
Taxable Income...........................................1,150,000
L:Income from Property.................................400,000
Taxable Income ( for Normal rates).................750,000
Income from Property ( for Reduced rates)....... 400,000

2 comments:

  1. Services used to come under FTR, but now come under NTR.

    Will services income be added with other incomes (like salary) and will be taxed at new slab rate.

    I am a permanent employee and have an annual salary of 1,000,000

    I also earn 500,000 from teaching as a visiting faculty member and my payment is deducted @ 6% by university.


    I have talked with multiple sources. Some say that services income will be added with my salary income to compute new total income and will be taxed at new slab.

    Some say that, service income will not be added in salary income. Its tax will be calculated seperately.

    Kindly guide me.

    ReplyDelete
  2. Tax deducted at source on services rendered are minimum tax for individuals and AOPs. Minimum tax is a hybrid form of Final-Adjustable tax. The income subject to minimum tax is charged to tax in the normal way at standard tax rate, and the resulting tax is compared with the minimum tax (deducted at source). If tax deducted is more than the normal tax computed at rates of 1st Schedule, then it becomes final, but coversely if tax computed in the normal method is more then minimum tax becomes adjustable and is deducted from it. However, in no case minimum tax is refundable.

    ReplyDelete