Understanding Section 105: A Comprehensive Guide to the Indian Income Tax Act

Introduction

Section 105 of the Income-tax Act, 1961 (hereafter referred to as "the Act") is a crucial provision that deals with the taxation of certain incomes. This section has undergone significant amendments over the years, with the most recent changes being introduced by the Finance Act, 2023. This comprehensive guide will delve into the intricacies of Section 105, providing a detailed understanding of its scope, conditions, and implications.

Applicability of Section 105

Section 105 primarily applies to the following types of incomes:

1. Income from Specified Sources: Certain incomes earned from specified sources, such as interest, dividends, and royalties, are subject to a concessional tax rate under Section 105.

2. Incomes under Special Provisions: Incomes that are taxable under specific sections of the Act, such as Section 40(a)(i) (long-term capital gains) and Section 56(2)vii (income from intellectual property), may also be eligible for tax relief under Section 105.

   

Conditions for Exemption under Section 105

In order to claim exemption under Section 105, the following conditions must be satisfied:

1. Taxpayer's Status: The taxpayer must be an individual, a Hindu Undivided Family (HUF), or an Association of Persons (AOP).

2. Source of Income: The income must be earned from one of the specified sources mentioned in Section 105(1) or under any of the special provisions enumerated in Section 105(2).

   

3. Income Amount: The gross amount of income from the specified sources or under the special provisions should not exceed the prescribed limits specified in Section 105(1) or (2), as applicable.

Types of Incomes Covered under Section 105

Section 105 encompasses a wide range of incomes, including:

1. Interest on bank deposits, fixed deposits, and savings accounts
2. Dividends from domestic companies
3. Interest on government securities and bonds
4. Royalties from patents, trademarks, and copyrights
5. Long-term capital gains on equity shares or units of equity-oriented mutual funds
6. Incomes from business carried out by AOPs and body of individuals

Tax Rates under Section 105

For incomes falling within the specified limits under Section 105, the following concessional tax rates apply:

Calculation of Tax under Section 105

The tax payable under Section 105 is calculated as follows:

Tax = Gross Income * Applicable Tax Rate

Example:

An individual earns an interest income of ₹1,00,000 from bank deposits. Since this falls within the specified limit of ₹2,50,000 under Section 105(1), the tax payable would be:

Tax = ₹1,00,000 * 30% = ₹30,000

Important Points to Note

1. The limits prescribed under Section 105(1) and (2) are subject to change as per the amendments made to the Act from time to time.

2. The tax rates under Section 105 are applicable only to the portion of income that falls within the specified limits. Any income exceeding these limits will be taxed at the regular slab rates applicable to the taxpayer's income level.

3. Incomes covered under Section 105 are not eligible for any other deductions or exemptions under the Act, except for the deduction under Section 80C for investments in specified schemes.

Benefits of Section 105

Section 105 offers several benefits to taxpayers, including:

1. Concessional Tax Rates: The concessional tax rates under Section 105 provide significant tax savings for individuals, especially for those with lower incomes.

2. Simplified Tax Calculations: The simplified tax calculation formula under Section 105 makes it easier for taxpayers to compute their tax liability.

3. Reduced Compliance Burden: Taxpayers claiming exemption under Section 105 are not required to file a separate tax return or furnish any additional documents, reducing their compliance burden.

Limitations of Section 105

Despite its benefits, Section 105 has certain limitations:

1. Limited Scope: The benefits of Section 105 are available only for specified incomes and under specific conditions, which may not always be applicable to all taxpayers.

2. Income Limits: The income limits prescribed under Section 105(1) and (2) may not be sufficient for individuals with higher incomes, limiting the tax savings they can avail.

3. No Deductions or Exemptions: Incomes covered under Section 105 are not eligible for any other deductions or exemptions under the Act, which may reduce the overall tax savings available to taxpayers.

Case Studies

Case Study 1:

Mr. X, a salaried individual, earns an annual salary of ₹8,00,000. Additionally, he earns interest income of ₹1,50,000 from bank deposits. As per the limits prescribed under Section 105(1), Mr. X is eligible to claim exemption for the interest income.

Case Study 2:

Ms. Y, a senior citizen, earns dividend income of ₹4,00,000 from domestic companies. Under Section 105(2), senior citizens are eligible for exemption on dividend income up to ₹5,00,000. Therefore, Ms. Y can claim exemption for the entire dividend income.

Case Study 3:

XYZ AOP, a partnership firm, earns business income of ₹10,00,000. As per Section 105(2), AOPs are eligible to claim exemption on business income up to ₹15,00,000. XYZ AOP can therefore avail a tax exemption on a portion of its business income.

Lessons Learned from the Case Studies

1. Section 105 can provide significant tax savings for individuals with lower incomes, especially for those with interest and dividend income.

2. Senior citizens can take advantage of the higher exemption limit on dividend income under Section 105(2).

3. AOPs can also benefit from the exemption on business income under Section 105(2), reducing their overall tax liability.

Tips and Tricks for Utilizing Section 105

1. Maximize Exemptions: Plan your investments and income streams to maximize exemptions under Section 105. Consider investing in bank deposits, mutual funds, and government securities to earn income that qualifies for tax exemption.

2. Consider Interest Rates: When choosing bank deposits or savings accounts, compare interest rates to optimize your returns while staying within the exemption limit.

3. Invest for Long-Term Capital Gains: Utilize the exemption available on long-term capital gains to minimize tax on investments in stocks and mutual funds.

4. Plan for Retirement: For senior citizens, plan for retirement income to take advantage of the higher exemption limit on dividend income under Section 105(2).

Comparison of Pros and Cons of Section 105

Pros:

1. Concessional tax rates on specified incomes
2. Simplified tax calculations
3. Reduced compliance burden

Cons:

1. Limited scope to specific incomes
2. Income limits may not be sufficient for all taxpayers
3. No deductions or exemptions available

Frequently Asked Questions (FAQs)

Q1: What is the maximum amount of interest income that is exempt under Section 105?
A: Individuals can claim exemption on interest income up to ₹2,50,000 under Section 105(1).

Q2: Are incomes earned from rental properties eligible for exemption under Section 105?
A: No, incomes from rental properties are not covered under Section 105.

Q3: Can I claim exemption on both interest and dividend income under Section 105?
A: Yes, individuals can claim exemption on both interest income up to ₹2,50,000 and dividend income up to ₹1,000,000 under Section 105.

Q4: Is Section 105 applicable to companies?
A: No, Section 105 is applicable only to individuals, Hindu Undivided Families (HUFs), and Associations of Persons (AOPs).

Q5: What are the consequences of exceeding the income limits under Section 105?
A: Any income exceeding the specified limits under Section 105(1) or (2) will be taxed at the regular slab rates applicable to the taxpayer's income level.

Q6: Is it mandatory to file a tax return if I claim exemption under Section 105?
A: No, taxpayers claiming exemption under Section 105 are not required to file a separate tax return.

**Q7: Can I claim deductions under