1. Income tax returns (ITR) filing: Employees’ alert! Your pay set to be cut; here’s why

Income tax returns (ITR) filing: Employees’ alert! Your pay set to be cut; here’s why

Income tax returns (ITR) filing: In a bid to broaden its tax base, the government wants to impose income tax on the compensation one receives after suffering business or profession termination, and has proposed some changes in the Income Tax Act.

By: | Updated: February 9, 2018 3:52 PM
Taxability of Compensation: Laid off? Now your compensation will be taxed Income tax returns (ITR) filing: The Budget 2018 has recommended to introduce a tax on compensation under Section 56 of the Income Tax Act.

As if no relief in the income tax burden was not enough, here’s another bad news for the salaried persons. In a bid to broaden its tax base, the government is now eyeing even the compensation which someone would receive after being laid off. The Budget 2018 has proposed that if someone is laid off and receives a compensation, that will now be taxed as ‘Other Income’. Earlier, it was mostly considered as a non-taxable capital receipt.

Similarly, the government wants to broaden the scope of the existing tax on compensation in relation to business u/s Section 28. Thus, it now wants to impose income tax on the compensation one receives after suffering business or profession termination.

Tax experts say that compensation is the only means of subsistence after someone’s termination. In simple words, compensation is the final payment which one receives after being laid off or suffering business termination. It gives some strength to the concerned person to search for a new business or profession.

As per the existing provisions of the Income-Tax Act, 1961, “various types of compensation receipts are taxable as business income under clause (ii) of Section 28. The prevailing provision under Section 28 is confining its purview in relation to taxation of compensation keeping a large number of compensation receipts in connection with both business and employment out of the purview of taxation. It is leading to erosion of tax base and revenue loss,” says CA Abhishek Soni, Founder, tax2win.in.

Consequently, it has been proposed in the Budget 2018 to amend the Section 28 of the I-T Act to provide that any compensation received or receivable, whether revenue or capital, in connection with the termination or the modification of the terms and conditions of any contract in relation to business shall be taxable as ‘Business Income’.

Additionally, it has also been recommended to introduce the tax on compensation under Section 56 of the Act. It means any compensation received or receivable, in the nature of revenue or capital, in connection with the termination or the modification of the terms and conditions of any contract in relation to employment shall be taxable as ‘Other Source Income’.

Thus, “dual changes have been suggested in this Budget in relation to the receipt of compensation. One is broadening the scope of the existing tax on compensation in relation to business under Sec 28 and another one is taxing the compensation received in terms of employment for the first time under Sec 56. The object of this modification is to widen and deepen the tax base. These amendments will take effect from 1st April, 2018,” informs Soni.

To summarize
Tax experts say that compensation is not an income receipt, rather it’s more or less a kind of help to the laid off person. “On the one hand, the government is giving priority to the creation of employment and on the other hand, it is hitting the persons whose business or professional work has suffered termination. Therefore, the government must rethink on this tax proposal and come up with some modification upon it,” says Soni.

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  1. L S Naik
    Feb 10, 2018 at 8:56 am
    It is not either wise or wanted decision instead if govt needs money they should tax heavily the present legislatures, MLAs, ministers and apply pension rule to them as applicable to other servants. It is very shame to just increase their pay without general opinion of puplic for remember they are elected by public. As such rethink of the same.
    Reply
    1. Ravi Shankara
      Feb 9, 2018 at 7:22 pm
      Now government wants to feast on corpses too. Now way to fly. Become food.
      Reply
      1. Chaitanya Agarwal
        Feb 9, 2018 at 10:01 am
        Why no tax on political person perks?Are all the rules for the common man?
        Reply
        1. Christopher Fernandes
          Feb 9, 2018 at 12:01 am
          This government is not indian government they should be called thief government ....just squeezing the middle class dry
          Reply
          1. Santhosh K Narayanan
            Feb 8, 2018 at 11:00 pm
            Anti-cons utional, This Government is by the people and not for the people.These fellows are of the misconception that they are delegates to extract revenue to the treasury by exploiting the citizens of the nation
            Reply
            1. Santhosh K Narayanan
              Feb 8, 2018 at 10:57 pm
              Anti-Democrats
              Reply
              1. Kanu Warriar
                Feb 8, 2018 at 10:01 pm
                Nice anti-Govt article, Madam bhakt motivation perhaps. A better way would be to say that this section should not be applied to middle class(18 lakhs income per annum) and below, that would be a good cause to represent. To cry a river about people earning above that points to something else. Many stealth benefits enjoyed over the last 6 or 7 decades are vanishing for sure. Stop emotional drama in the name of middle class when high of tax volume from higher slabs.
                Reply
                1. Shekhar Chakraborty
                  Feb 8, 2018 at 8:54 pm
                  The Modi Jaitley combination has vowed to annihilate the middle class! The there will be only two classes - the rich who will fund politics and reap riches, and the poor who will vote and right fully become beggars for life!
                  Reply
                  1. Sanjib Acharya
                    Feb 8, 2018 at 8:48 pm
                    This is like hitting the last blow to the ried people so that they are killed. So much injustice to the ried class by the cur government!!!
                    Reply
                    1. Sanjib Acharya
                      Feb 8, 2018 at 8:49 pm
                      Read tied as ried....
                      Reply
                    2. VK Khurana
                      Feb 8, 2018 at 8:37 pm
                      This is what may be called "rubbing salt over the wounds" but as it may also be said "Enjoy when R is inevitable" . Despite some irritants, would support the budget and the Modi government. No corrupt and useless The Family my side of the world in my life time.
                      Reply
                      1. Vinod Kumar Parmar
                        Feb 8, 2018 at 8:15 pm
                        The no. of daysleft for this govt are very few. Hope they dont ladt long
                        Reply
                        1. Gopal Paul
                          Feb 8, 2018 at 8:06 pm
                          It is the duty of every person to pay tax according to their professional status. Now a days price of all the goods and services are at the top, very difficult for individual person to survive now a days, the government will never think about the middle class. Being the middle class we are the ???
                          Reply
                          1. Rahul Patil
                            Feb 8, 2018 at 7:37 pm
                            Oh please... How many are laid off?? Plus how many get 'capital ry'? Lol
                            Reply
                            1. Vikash Singh
                              Feb 8, 2018 at 5:40 pm
                              Don't know what to do. Just ridiculous. How every financial decision is almost against the ried class. Than it dawned upon me. Actually there must be some problems with ried person. They surely must be commiting graver crimes compared to other say business , traders politician. So I accept that there crime must be punished.
                              Reply
                              1. Raghu Sampath
                                Feb 8, 2018 at 5:28 pm
                                The Modi government should have by now realised that people especially tax payers are not happy with the budget as it has nothing for them. Rather it takes away more in the form of tax. To add fuel to the fire the LTCG and the tax on compensation are additional burden. People expected more from the last budget but the government which has only collection of more and more tax without worrying about people or ensuing election did a big somersault. Even now the time is not lost. They can make corrections in the budget to make it more populist.Middle class people are the one who dont get any benefit from the government though they contribute more in the form of tax.
                                Reply
                                1. Harish M
                                  Feb 8, 2018 at 5:11 pm
                                  This government has gone totally crazy
                                  Reply
                                  1. Ravishankar M.R.
                                    Feb 8, 2018 at 4:45 pm
                                    Wish to know whether Sanjay is an economist? Is it necessary that every budget should have sold? It's very bad economics. More over the editor is also seem illiterate by having the article hear like this. You are all rightly called press utes no doubt. What action has sanjay taken for increasing the tax base for expecting SOP's from budget? Shameful of him.
                                    Reply
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