INCOME TAX AND PLANNING

STUDY MATERIAL

Semester – III
B.Com

Edition: 2024
#44/4, District Fund Road, Behind Big Bazaar, Jayanagar 9th Block, Bengaluru, Karnataka
560069

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 SYLLABUS

Program: B.COM Semester: III

Subject: Income Tax and Planning
Total Lecture Hours: 60 Credits: 04

Course Objectives
The objective of this course is to develop a comprehensive understanding of the regulatory outline
under which the direct law functions and the pros of tax planning for efficient decision making. It also
aims to provide knowledge to inculcate the tax concepts for practical scenarios while calculating taxable
income for any natural person and it also unify the students to solve problems on the application of
deductions available.

Module – 1: Introduction To Taxation 15 hours

Brief history of Indian Taxation – Legal Framework – Canons of Taxation – Finance Bill – Scheme
of Income Tax- Meaning of Assessee – Person – Assessment year – Previous year – Income –
Gross Total Income – Total Income- Agricultural income- Capital and Revenue- Residential
Status and Incidence of Tax on individual- Exempted Incomes. Income tax authorities: CBDT –
powers and functions; Commissioner of Income Tax – powers and functions; Types of
assessment and rectification of mistakes; Recovery of tax and refunds. Time limits for the
submission of information, claims and payment of tax, penalties for non- compliance.

Module-2: Heads of Income tax - I 20 hours

Income from Salary
Basic Salary- Allowance - Types – Perquisites – Types section 89(1) – Tax Rebate U/S 88 -
Problems. (Restricted to Individual Assessee) Allowance – Leave Encashment – Pension –
Gratuity – Perquisites compensation received on termination of the service.
Income from House Property
Introduction – Annual value under different situations (self occupied – Let out – Partly self-
occupied partly let out – Portion wise and time wise) – Deductions (u/s 24) – Problems.

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Module-3 : Heads of Income tax - II 12 hours
Profits And Gains From Business And Profession
Meaning of business, profession, profits of business or profession, features of assessment of
profits and gains, rules for adjustment of profit and loss account- Depreciation u/s 32.
Capital Gains
Meaning and kinds of capital asset, transfer, transactions not regarded as transfer, full value of
consideration, cost of acquisition, cost of improvement, capital gains exempt from tax,
exemptions from capital gains u/s 54. Problems on computation of short term and long term
capital gains.
Income from Other Sources
General income, specific incomes, treatment of specific incomes, deduction of tax at source
with respect to interests, winnings, prizes etc. Problems on computation of taxable income
from other sources and deduction u/s 57 and amounts expressly disallowed u/s 58.

Module – 4: Deductions from Gross Total Income & Tax Liability of Individual
10 hours

(Provisions relating to individuals only) u/s 80 – Deduction in respect of certain payments and
deduction in respect of certain incomes- Carry forward and set off of losses - Computation of
total taxable income and tax liability of an individual.

Module -5: Tax planning for Individual 03 hours

Introduction, Meaning, Tax planning- Tax Avoidance – Tax Evasion, Methods of Tax Planning –
Tax planning of individual under Heads of Income
Course Outcome
CO Code Course Outcome BTL
CO1 Explain the outline to the students with basic principles 2
underlying the provisions of direct tax laws and develop a
broad insight into the tax laws and accepted tax practices.
CO2 Assessing basic tax concepts to simple fact situations and 5
communicating potential income tax ramifications in
writing and orally.

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 CO3 Examine different types of incomes and their taxability and 4
expenses, deductibility, and their implication in practical
situations.
CO4 Discriminate the use of various deductions to reduce the taxable 4
income.
CO5 Distinguish the aspects of tax planning as an important 4
managerial decision-making process and apply critical thinking
and problem-solving skills to resolve income tax

Reference Books
• Vinod K Singhania. and Monica Singhania, Students’ Guide to Indirect Taxes, Taxmann
Publications Pvt. Ltd., Delhi. – 2023.
• Swamynathan. C, Abhirami.D, Srinivas. G, Income tax – Kalyani Publications –
Bangalore. – 2023.
• B.B. Lal Income Tax Law and Practice. Konark Publications, New Delhi. B.Com Program
CBCS Department of Commerce, University of Delhi, Delhi . – 2023.
• Dr. Mehrora and Dr. Goyal: Direct taxes – Law and practice, Taxmann publication. –
2023.
• Gaur and Narang: Income Tax – 2023.

CONTENT

MODULE PAGE NO.

Module 1 Introduction to taxation 5 to 42

Module 2 Heads of Income tax I 43 to 102
Module 3 Heads of Income Tax II 103 to171
Module 4 Deductions from Gross total 172 to209
income and tax liability of
Individual.
Module 5 Tax Planning for Individual 210 to 218

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 Module - 1:

Introduction To Taxation

Structure

1.1 Introduction
1.2 Legal Framework
1.3 Tax: features
1.4 Basic Terminologies Under Income Tax:
1.5 Agriculture Income
1.6 Integration of Agricultural Income with Non-Agricultural Income: [Sec 2(2)]:
1.7 Capital and Revenue:
1.8 Residential Status and Incidence of Tax
1.9 Determination of Residential Status of Individual:
1.10 Types of Residential Status.
1.11 Incidence of Tax or Taxability of Total Income on The Basis Of Residence:
1.12 Exempted Incomes
1.13income Tax Authorities
1.14 Procedure of Assessment:
1.15. Rectification Of Mistakes:
1.16. Permanent Account Number (Pan) – Section 139 (A)
1.17. Filing Of Returns:
1.18.Terminal Questions
1.19 Suggested Readings / Reference Books

Learning Objectives

• To understand the basic concepts of tax.

• To know various terminologies used.
• To give a clear idea about how individuals are treated under the taxing system.
• To be familiar with the authorities related to income tax and their functioning.

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Introduction
Tax is levied by the government to form a pool of resources to be used for the collective benefit
of the public. Taxes collected would be used by the government for public welfare programs,
maintenance of law and order in the country, running public sector undertakings etc.
There are two types of taxes – Direct and Indirect. Direct tax is a type of tax where the tax is
imposed on a person and it is paid by the same person. That means the incidence and the impact
of tax are on the same person. When the incidence and impact of tax are on different persons, it
is called an indirect tax.
Income Tax Slab Rate for AY 2024-25 for Individuals – OLD TAX REGIME

Individual (resident or non-resident), who is of the age of less than 60 years on the last day
of the relevant previous year:

Net income range Income-Tax rate

Up to Rs. 2,50,000 Nil
Rs. 2,50,000- Rs. 5,00,000 5%
Rs. 5,00,000- Rs. 10,00,000 20%
Above Rs. 10,00,000 30%

Resident senior citizen, i.e., every individual, being a resident in India, who is of the age of
60 years or more but less than 80 years at any time during the previous year:

Net income range Income-Tax rate

Up to Rs. 3,00,000 Nil
Rs. 3,00,000 – Rs. 5,00,000 5%
Rs. 5,00,000- Rs. 10,00,000 20%
Above Rs. 10,00,000 30%

Resident super senior citizen, i.e., every individual, being a resident in India, who is of the
age of 80 years or more at any time during the previous year:

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 Net income range Income-Tax rate
Up to Rs. 5,00,000 Nil
Rs. 5,00,000- Rs. 10,00,000 20%
Above Rs. 10,00,000 30%

Plus:-
 Health and Education cess: - 4% of income tax and surcharge.

 Surcharge: -
Rs. 50 Lakhs to Rs. Rs. 1 Crore to Rs. 2 Rs. 2 Crores to Rs. 5 Rs. 5 crores to Rs. 10 Exceeding Rs. 10
1 Crore Crores Crores Crores Crores

10% 15% 25% 37% 37%

Note: - A resident individual is entitled for rebate under section 87A if his total income does not
exceed Rs. 5,00,000. The amount of rebate (u/s 87A) shall be 100% of income-tax or Rs. 12,500,
whichever is less.

Income Tax Slab Rate for AY 2024-2025 for Individuals – NEW TAX
REGIME

All individuals:

Net income range Income-Tax rate

Up to Rs. 3,00,000 Nil
Rs 3,00,001. - Rs. 6,00,000 5%
Rs. 6,00,001 - Rs. 9,00,000 10%
Rs. 900,001 - Rs. 12,00,000 15%
Rs. 12,00,001 - Rs. 15,00,000 20%
More than 15,00,000 30%

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Notes:

1. There is no change introduced in the OLD and NEW tax regime in

- Rates of Surcharge
- Health & Education Cess @4%
2. New tax regime - Rebate u/s 87A increased to Rs,25000, for total income upto 7 lakh
Old tax regime- Rebate u/s 87A is maximum Rs.. 12500, for total income upto 5 lakh

INTRODUCTION TO TAXATION

Tax is levied by the government to form a pool of resources to be used for the collective benefit
of the public. Taxes collected would be used by the government for public welfare programs,
maintenance of law and order in the country, running public sector undertakings etc.
There are two types of taxes – Direct and Indirect. Direct tax is a type of tax where the tax is
imposed on a person and it is paid by the same person. That means the incidence and the impact
of tax are on the same person. When the incidence and impact of tax are on different persons, it
is called as indirect taxes.

1. Brief History of Indian Taxation:

The concept of income tax was introduced in India for the first time by Sir James Wilson
in the year 1860 in order to recover the expenditure incurred by the Government on account of
Sepoy Munity in 1857 (First war of Indian Independence). Thereafter several amendments were
made in 1918, 1921 etc.In 1961, based on the recommendation of the Direct Tax Committee and
in consultation with the Law Ministry a Bill was framed and introduced in the Parliament on 1 st
September 1961 and the same came to force with effect from 1 st April 1962.
The comprehensive Income Tax Act 1961 includes 14 section and sub section running
into thousands and many amendments which were made since 1961. Finance minister presents
budget every year in the parliament with a view to change rates and laws of income tax if any
needed in the interest of the nation building.

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 Income tax is levied by the Central Government and administered by Central Board of
Direct Taxes (CBDT). Income tax shall be levied only on those persons whose income exceeds
certain limit. Total tax revenue collected by the Central Government is shared by Central and
State Government on the basis of recommendation of finance commission.

1.2 Legal framework:

Income tax is a direct tax. It is levied and collected from the public who have income more than
the exempted limit for a given financial year. Income tax is a central subject and it is levied,
collected, administered, regulated and monitored by the Central Board of Direct Taxes (CBDT)
under the Ministry of Finance, Government of India. The scope of Income tax subject covers the
following aspects.

1. Income Tax Act,1961 (Bare Act – subjected to many amendments from time to time till
date)
2. Income Tax Rules 1962
3. Finance Act (passed in the Parliament every year)
4. Judicial pronouncements relating to various issues in Income Tax.

1.2.1 Finance Bill:

As per Article 110 of the Constitution of India, the Finance Bill is a Money Bill. The Finance
Bill is a part of the Union Budget, stipulating all the legal amendments required for the changes
in taxation proposed by the Finance Minister. This Bill encompasses all amendments required in
various laws pertaining to tax, in accordance with the tax proposals made in the Union Budget.
The Finance Bill, as a Money Bill, needs to be passed by the Lok Sabha — the lower house of
the Parliament. Post the Lok Sabha’s approval, the Finance Bill becomes Finance Act.

Need for a Finance Bill:

The Union Budget proposes many tax changes for the upcoming financial year, even if not all
of those proposed changes find a mention in the Finance Minister’s Budget speech. These
proposed changes pertain to several existing laws dealing with various taxes in the country.

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The Finance Bill seeks to insert amendments into all those laws concerned, without having to
bring out a separate amendment law for each of those Acts.

Article 110 states that a Bill shall be deemed to be a Money Bill if it contains only provisions
dealing with all or any of the following matters:

(a) the imposition, abolition, remission, alteration or regulation of any tax;

(b) the regulation of the borrowing of money or the giving of any guarantee by the Government
of India, or the amendment of the law with respect to any financial obligations undertaken or to
be undertaken by the Government of India;

(c) the custody of the consolidated Fund or the Contingency Fund of India, the payment of
moneys into or the withdrawal of moneys from any such Fund;

(d) the appropriation of moneys out of the consolidated Fund of India;

(e) the declaring of any expenditure to be expenditure charged on the Consolidated Fund of India
or the increasing of the amount of any such expenditure;

(f) the receipt of money on account of the Consolidated Fund of India or the public account of
India or the custody or issue of such money or the audit of the accounts of the Union or of a
State; or

(g) any matter incidental to any of the matters specified in sub clause (a) to (f)

1.3 Tax:

It is compulsory levy under certain conditions and it is meant for the general purposes of the
state.

1.3.1 Features of tax:

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1) It is compulsory payment to be paid by the citizens who are liable to pay it, hence refused to
pay tax is a punishable offence.
2) It is levied to meet public expenditure incurred by the government in the common interest
of the nation.
3) The payment of tax by a person does not entitle him to receive any direct benefits from the
government in return for the tax.
4) There is no direct relationship between the tax paid by the person and the benefits that he
may receive as a result of government expenditure.
5) It has to be paid regularly and periodically as determined by the tax authority.

1.3.2 Types of taxes:

1) Direct Taxes: It is a kind of tax where in incidence and impact is on the same person.
‘Incidence’ means liability to pay tax to the Government and
‘Impact means burden of paying the tax.
E.g. Income Tax, Wealth Tax, Property Tax etc.

2) Indirect Taxes: It is a kind of tax where in ‘incidence’ and ‘impact’ is on two different
persons.
E.g. Customs Duty, GST

Difference between Direct tax and Indirect Tax

Particulars Direct Tax Indirect Tax

Meaning It is a kind of tax where in It is a kind of tax where in ‘incidence’
incidence and impact is on the and ‘impact’ is on two different
same person. persons.
Nature of Tax Progressive in nature. Regressive in nature.
Taxable event Taxable income of the Assessee Purchase/Sale/Manufacture of goods
and or rendering of services.
Levy and Levied and collected from the Levied and collected from the
Collection Assessee. consumer but paid or deposited to the
exchequer by the Assessee or Dealer.

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 Shifting of Tax burden is borne by the person Tax burden is shifted to the
Burden on whom it is levied. Hence, the subsequent or ultimate user.
burden cannot be shifted.
Tax Collection Tax is collected on the income for At the time of sale or purchase or
a year is earned. rendering of services.
Examples Income Tax, Wealth Tax, Excise Duty, Customs Duty, Sales
Property Tax etc. Tax, Service Tax etc.

1.3.3. Principles or Canons of taxation:

1) Canon of Equality: According to this canon taxes imposed should be in accordance with an
individual’s ability to pay. That is it should be impartial and based on one’s ability to pay.
2) Canon of Certainty: The amount to be paid, the time and the method of payment should be
clear and certain for the tax payers to adjust his/her income and expenditure accordingly.

3) Canon of Convenience: This canon says that the time of payment and the manner payment
should be convenient to the tax payer.

4) Canon of Economy: Every tax involves a collection cost. It is important that the cost of
collection should be the minimum possible. The tax is economical, in the sense that the cost
of collection is very small.

5) Canon of Productivity: The tax system should sufficiently yield the revenue needed to meet
the requirements of the state. Productivity again means that the government should not
depend upon deficits.

6) Canon of Elasticity: Elasticity is closely connected with fiscal adequacy. This canon implies
that yield from taxation should grow along with increase in population and development of
economy.

7) Canon of Simplicity: Calculation of taxable income and taxable liability should be simple
and understandable to the tax payer.

8) Canon of Flexibility: Income tax authorities should revise the tax structure at the right time
in order to meet the changing needs of the economy.

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1.4 BASIC TERMINOLOGIES UNDER INCOME TAX:

1.4.1. Income Tax:

It is a tax on the income earned by an assessee during the previous year and the tax is payable in
the assessment year at the rates prescribed by the relevant Finance Act. It is a tax levied by the
Central Government on the income earned by an assessee every year.

1.4.2. Assessment U/S 2(8):

According to section 2(8) of Income Tax Act, 1961 the term assessment means-
1) Computation of total income or taxable income
2) Computing the tax on the income and
3) Imposition of tax liability

1.4.3. Assessment Year U/S 2(9):

Assessment year is defined as “the period of twelve months starting from 1 st of April and ending
of 31st March every year”. The current Assessment year is 2024-25.

1.4.4. Previous Year U/S 3

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It is the financial year immediately preceding the Assessment year. In other words, the year in
which income is earned is known as previous year. The previous year for the assessment year
2023-24 is 2024-25.

1.4.5. Difference between Previous year and Assessment year

Previous year Assessment year

The year in which income is earned. The year in which the income of the previous
year is assessed to tax.
It always precedes the assessment year. It always succeeds the previous year.
It may be either a full year or part of the year. It is always a full year
The present previous year is 2023-2024. The present assessment year is 2024-2025.

1.4.6. Exception to the General Rule Previous Year:

Normally all the incomes of the P.Y are assessed to tax in the A.Y. But there are certain
exceptions to this rule. In these cases, the income of a financial year is assessed to tax in the
same year. They are:
1) Sec. 172 – Income of non-resident from shipping business.
2) Sec. 174 – Income of persons leaving India either permanently or for a long period of time.
3) Sec. 174 (A) – Income of bodies formed for short duration.
4) Sec. 175 – Income of a person trying to transfer his/her assets to avoid the payment of tax.
5) Sec. 176 – Income of a discontinued business.

1.4.7. Assessee Sec 2(7):

An assessee means a person by whom any tax or any other sum is payable under the Income Tax
Act of 1961, it includes:
a) Every person in respect of whom any proceeding under this Act has been taken for the
assessment of income or any refund due to him or to such other person.
b) Deemed Assessee.
c) Deemed Assessee in default.

1.4.7(1) Deemed Assessee:

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A person may be liable not only for his own income but also on the income of other persons. A
person who is liable to pay any tax or file return of income for the income earned by a minor,
agent of non-resident or by any other person is called Deemed Assessee.
Deemed assessee is a person who is assessable for the income of any other person under this act
and includes the following.
1) The executors or the legal heirs of a deceased person
2) The guardian of a minor, lunatic or idiot having taxable income
3) The agent of any non – resident Indian having income in India.

1.4.7(2) Assessee in Default: When a person is responsible for doing any work under the Income
Tax Act and fails to do it, he is called as assessee in Default. E.g. A company is treated as
assessee in default for non-deduction of TDS.

1.4.8. Person Sec 2(31):

The term person includes:

a) An individual
b) A Hindu Undivided Family
c) A Firm
d) A Company
e) An association of persons/body of individuals
f) A Local Authority
g) Artificial Juridical Person
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1.4.9. Income - Sec 2(24):

The term income means and includes

1) Profit and gains of business
2) Dividends
3) Voluntary contribution received by a Trust or an Institutions
4) Perquisites of profit in lieu of salary/Allowance
5) Capital Gains
6) Winning from Lottery/ Cross word Puzzle/ Race
7) Sum received under Keyman insurance policies including bonus thereon
8) Gifts as per section 56
9) Any consideration received for issue of share as exceeds the fair market value of shares
as referred in clause of (vii)(b) of section 56(2)

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 10) Any sum of money referred to in section 56(2)(ix) sum of money received as an advance
or otherwise in course of negotiations for transfer of Capital Asset, if it is forfeited and
negotiations do not result in transfer of such capital asset.

1.4.10. Casual Income:

An income becomes casual income, if it contains the following feature: It is unanticipated, it

is non-recurring in nature, it arises from an unknown source, no specific efforts were put in
to earn such income. For example,
1) Winning from lottery
2) Income from cross word Puzzles and card games
3) Tips given to taxi drivers
4) Prize awarded for coin or stamp collection

1.4.11. Heads of Income:

Different heads of income are:
1) Income from Salary
2) Income from House Property
3) Profits and gains from Business or Profession
4) Capital Gains
5) Income from Other Sources

1.4.12. Gross Total Income:

It is the aggregate of the income computed under various heads of income after allowing set-off
of losses according to the provision of Income Tax Act. Section 14 deals with the Gross Total
Income which includes:
1) Income from Salary
2) Income from House Property
3) Profits and gains from Business or Profession
4) Capital Gains
5) Income from Other Sources
0R
Gross total income means total income arrived before making any deductions u/s 80C to 80U.

1.4.13. Total Income

Total Income (Sec 2(45) ) Total income means the amount of income left after making a
deduction u/s 80 C TO 80U.

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1.11 Agriculture income

According to Sec 2 (IA) Agriculture income means:

1) Any rent or revenue received from land which is used for agricultural purpose and
situated in India.
2) Any income derived from such land by agricultural operations including processing of
agricultural produce, raised or received as rent in kind so as to render it fit for the market,
or sale of such produce.
3) Income attributable to a farm house subject to the condition that building is situated on
or in immediate vicinity of the land and is used as a dwelling house, store house etc.

1.11(a) Examples of Agricultural Income:

1) Income from sale of replanted trees.

2) Rent received from agricultural land.
3) Income from growing flowers and creepers.
4) Share of profit of a partner from a firm engaged in agricultural operations.
5) Interest on capital received by a partner from a firm engaged in agricultural operations.
6) Income derived from sale of seeds, straw, dried Tobacco leaves.
7) Land leased for grazing of animals required for agriculture purpose.
8) Insurance money received for destruction of agricultural produce.

1.11(b) Examples of Non- Agricultural Income:

1) Income from sale of earth for brick making.

2) Income from stone quarries and fishing
3) Income from sale of spontaneously grown trees.
4) Income from dairy farming, poultry farming.
5) Interest received by a money lender in the form of agriculture products.
6) Income of salt produced by flooding the land with sea water.
7) Royalty income from mines.
8) Income from butter and cheese making.
9) Maintenance allowance charged on agriculture land.

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 10) Remuneration received as an employee of an agriculture farm.
11) Dividend received from a company engaged in agricultural operations.

Illustration

Determine whether the following incomes are agricultural incomes or not.

1. Income from interest on arrears of rent payable in respect of land used for agricultural
purpose.
2. Income from use of land for grazing of cattle required for agricultural operations.
3. Income from the sale of trees spontaneously grown.
4. Income from the sale of replanted trees in the forest.
5. Lease rent for letting out a tea estate by the assessee doing the business of growing and
manufacturing tea.

Solution:
1. Non-agricultural income as the income is derived from a financial activity and not from
direct agricultural activity.
2. Agricultural income as it is an agricultural activity.
3. Non-agricultural income because no agricultural activity is involved.
4. Agricultural income as there is some agricultural activity involved.
It is agricultural income as the estate is used for agricultural activities

1.11(c) Partly Agricultural Income:

Sometimes, there is composite income which is partially agricultural and partially non-
agricultural income. For certain crops, income tax act gives fixed percentages to segregate
agricultural and non- agricultural incomes. Agricultural income is not taxable and the non-
agricultural portion would be taxable.

PARTLY AGRICULTURAL AND PARTLY NON-AGRICULTURAL INCOME

Crop Rule Agricultural Non- agricultural

income income

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 1) Growing and manufacturing of tea 8 60% 40%
2) Rubber manufacturing business 7A 65% 35%
3) Coffee grown and cured by seller 7B(1) 75% 25%
4) Coffee grown and cured, roasted and 7B(1A) 60% 40%
grounded by the seller in India with or
without mixing chicory or other
flavoring agents

1.12. Integration of Agricultural Income with Non-Agricultural Income: [sec 2(2)]:

Agricultural income is exempt from tax u/s 10(1) but it is included in the total income for tax
liability calculation. The object of aggregating the net agricultural income with non-agricultural
income is to tax the non-agricultural income at higher rates.

1.12.1 Conditions for aggregation:

 Integration is done only in case of Individuals, HUF, Firms assessed as association of

persons (AOP), Association of persons, Bodies of individuals, artificial juridical persons.
 Integration is done only if Non-agricultural income of persons mentioned above exceeds
the exempted limits which are Rs.2,50,000 for individuals and HUF, and Rs. 3,00,000
for senior citizens in the relevant previous year.
 Integration is done if net agricultural income of all these persons exceeds Rs. 5000 in the
relevant previous year, companies and co-operative societies.

1.12.2 Calculation of net agricultural income:

It is computed in accordance with the rules laid down u/s 2(iA) of the Income tax act 1961 and
rules 7 & 8 of the income tax rules 1962. These rules are:
1. Rent or revenue derived from agricultural land will be computed on the same basis which is
adopted for computation of income under the head income from other sources u/s 57 to 59
of the income tax act.
2. Income derived from agricultural operations will be computed as if it is income chargeable
to tax under the head profits & gains of business or profession. Depreciation and loss on the
death of animals used in agricultural operations are allowed as expenses.

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3. Income from agricultural house property will be computed as if such income is chargeable
to tax under the head ‘income from house property’ and provisions under section 22 to 27
shall be applicable.
4. For computing share of income from tea business income is computed under rule 8 which
shall be considered to be agricultural income.
5. For computing share of income or loss of a firm assessed as AOP same rules are applicable
as provided in income tax act for computing share of profits and losses from firm assessed
as firm.
6. Loss incurred in agriculture will be allowed to be set off only against agricultural incomes.
7. Any sum payable by the person on account of any tax levied by State Govt. on agricultural
income will be allowed as deduction.
8. Where the net result of agricultural income from the various sources stated above in a
particular previous year is a loss, such loss will be disregarded and net agricultural income
shall be taken as nil.

1.13 Capital and Revenue:

It is necessary to understand the distinction between capital and revenue items to determine the
tax treatment of expenses and incomes. For the understanding of the concepts it is divided into
three parts:
i) Receipts
ii) Expenditure
iii) Losses

Capital Receipt Revenue Receipt

1. Amount of fixed capital received is a 1. Amount received as circulating capital is a
capital receipt. revenue receipt.
2. A receipt in substitution of a source of 2. A receipt in substitution of an income is a
income is a capital receipt. E.g. Compensation revenue receipt. E.g. Bonus received by an
received from his employer for the employee from his employer is a revenue
termination of service is a capital receipt. receipt.
3. An amount received as a compensation for 3. An amount received under an agreement as
the surrender of certain rights under an compensation for loss of future profits is a
agreement is a capital receipt. E.g. Amount revenue receipt. Compensation paid for
paid to a retiring director of a company for not breach of agreement is a revenue receipt

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 starting a competing business after his
retirement
4. If the asset is used by the assessee as an 4. If the asset is kept in the business as stock
investment then the sale proceeds thereof will in trade i.e. for the purpose of making profit
be a capital receipt. E.g.: Motor car used by a from its sale then the sale proceeds thereof is
business is a capital asset and the sale proceed a revenue receipt. E.g. Sale proceeds of motor
thereof is a capital receipt. cars maintained by vehicle dealer.
5. Subsidies or grants received from the 5. Subsidies or grants received from the
government for specific capital purpose. E.g., government for meeting foreign competition
For any development scheme or renovation or or otherwise assisting the trader in his
modernization is a capital receipt. business are revenue receipts.
6. Insurance money received for a capital 6. Insurance money received for a trading
asset is capital receipt. asset is revenue receipt.

1.13.1. Capital Expenditure and Revenue Expenditure:

Capital expenditure is not deductible from the gross income of the business but the revenue
expenditure is deductible therefore, it is essential to know the difference between the two:

Capital expenditure Revenue expenditure

1. Cost of acquisition and installation of a 1. Purchase price of goods bought for resale
fixed asset is a capital expenditure. along with expenses on their purchase is
revenue expenditure.
2. An expenditure incurred to discharge a 2. An expenditure incurred to discharge a
capital liability is a capital expenditure. revenue liability is revenue expenditure.
3. An expenditure incurred for acquiring a 3. An expenditure incurred for earning an
source of income is a capital expense. e.g. income is a revenue expense.
acquisition expenses of a business
4. An expenditure incurred for increasing 4. An expenditure incurred for maintaining
the earning capacity of a business by a fixed asset in good condition is revenue
improving its fixed assets is a capital expenditure.
expenditure.

21
 5. Capital expenditure is a non- recurring 5. It is recurring in nature.
item.
6. Expenditure in obtaining capital by 6. Expenditure incurred in raising loans or
issuing shares is a capital expenditure. issuing debentures is revenue expenditure.

1.13.2 Capital and revenue Losses:

Loss on the sale of a capital asset is a capital loss whereas loss on sale of goods of the business
is a revenue loss.Loss sustained on account of embezzlement done by an employee, destruction
of goods or non-recovery of any amount due in connection with business is a revenue loss.Loss
sustained by theft committed by an employee during usual business hours or outside business
hours is a revenue loss being incidental to the trade.

1.14 RESIDENTIAL STATUS AND INCIDENCE OF TAX

1.14.1 Introduction:

Under section 4 of the act income tax is charged on the total income of a person. Section 5 of the
act defines the total income of a person on the basis of his or her residential status. This section
divides a person into three categories:
a) Resident and ordinary resident
b) Resident but not ordinary resident
c) Non-resident.

The status of the assessee is determined every year as it may change.

It refers to the status of an individual, which determined on the basis of his/her total stay in India.
Under section 6, the residential status of an individual is divided into the following categories.

22
 Residential status of an individual

Resident Non- Resident

Ordinary Resident Not Ordinary

Resident

1.15 Determination of residential status of individual:

An individual’s residential status is decided on the basis of basic conditions and additional
conditions.

Basic Conditions u/s 6

(i) An assessee must be in India for a period of 182 days or more during the previous
year
OR
(ii) An Assessee must be in India for a period of 60 days or more during the previous
year and 365 days in 4 years preceding the relevant previous year.

Exception: Second Basic condition is subject to the following exceptions

(i) In case of an assessee who is an Indian citizen leaves India for employment purpose
or as a crew member of an Indian ship.
(ii) In case of an assessee who is of an Indian origin comes to India during the previous
year for a visit.
In the above cases 60 days, as suggested u/s 6 (1) shall be replaced by 182. In other words, the
second basic condition shall not be applicable.

23
Additional Conditions u/s 6(6)
(i) An assessee must be a Resident for 2 or more years out of 10 years preceding the
relevant previous year.
AND
(ii) An assessee must have been in India for at least 730 days in 7 years preceding the
relevant previous year.

TABLE SHOWING THE NUMBER OF DAYS PER MONTH FOR THE PY 2023-2024
PY: 01/04/2023-31/03/2024 AY:01/04/2024-31/03/2025
MONTH DAYS MONTH DAYS
April 2023 30 October 2023 31
May 2023 31 November 2023 30
June 2023 30 December 2023 31
July 2023 31 January 2024 31
August 2023 31 February 2024 28
September 2023 30 March 2024 31

1.16 Types of Residential Status

An individual who satisfies any one of the above Basic conditions u/s 6(1) is treated as a resident
for the previous year.
1) Ordinary Resident (O.R): An individual who satisfies any one of the basic conditions and
both the additional conditions.
2) Not Ordinary Resident (N.O.R): An individual who satisfies any one of the basic
conditions and any one or none of the additional conditions
3) Non-Resident (N.R): An individual who does not satisfy any of the basic conditions will be
treated as Non-Resident; here the additional conditions are irrelevant.

24
1.17 Incidence of tax or taxability of total income on the basis of residence:

1) Resident: Total income of any previous year of a person who is an “Ordinary Resident”
includes all income from Expainever source derived which:
a) Is received or deemed to be received in India
b) Accrues or arises or is deemed to accrue or arise to him in India
c) Accrues or arises to him outside India during the previous year.

2) Resident but not Ordinary Resident

The total income of a person who is a resident but not ordinary resident includes all income from
Expainever source derived which:
a) Is received or deemed to be received in India
b) Accrues or arises or deemed to accrue or arise to him in India
c) Accrues or arises to him outside India from a business controlled in or a profession setup in
India.
3) Non–resident
Total income of a Non-resident includes all income from Expainever source derived which:
a) Is received or deemed to be received in India
b) Accrues or arises or is deemed to accrue or arise to him in India during such year.

The tax incidence can be understood from the following table:

Whether taxable or not

Not
Incomes Ordinary Non
Ordinary
Resident Resident
Resident
1. Any income earned or deemed to be earned in India
Yes Yes Yes
irrespective of the place of receipt.
2. Any income earned or deemed to be earned in India
Yes Yes Yes
irrespective of the place of accrual.
3. Any income from business setup outside India but
Yes Yes No
being controlled from India.

25
 4. Any other income earned and received outside India Yes No No
5. Any past untaxed profit / foreign income brought
No No No
into India, during the previous year.

Illustration 4: Kishan, a foreign national furnishes the following particulars of his income
relevant for the previous year 2023-24.
1. Profit on sale of plant at London (one half is received in India) 1,46,000.
2. Profit on sale of plant at Delhi (one half is received in London) 1,02,000
3. Salary from an Indian company received in London (one half is paid for services rendered in
India) Rs.60, 000.
4. Interest on UK development bonds (entire amount received in London) Rs. 40,000
5. Income from property in London received there Rs. 30,000
6. Profit from a business in Delhi managed from India Rs. 49,000
7. Income from agriculture in London received there, half of which is used for meeting hostel
expenses of his son and remaining amount is later on remitted to India Rs. 25,000.
8. Dividend (gross) received in London from a company registered in India but mainly operating
in London Rs.17,000.
9. Rental income from a property in Nepal deposited by the tenant in a foreign branch of an
Indian bank operating there. Rs. 12,000
10. Gift from a relative in foreign currency (one third of which is received in India and remaining
amount is used for meeting education expenses of Kumar’s son in USA) Rs. 3,90,000.

Determine gross total income of Kishan for the assessment year 2024-25, if he is
a) Resident and ordinary resident
b) Resident but not Ordinary resident, and
c) Non-resident.

Solution:
Computation of Gross Total Income of Kishan for the A.Y 2024-25

26
 Not
Ordinary Non-
Particulars ordinary
resident resident
resident
1. Profit on sale of plant at London 1,46,000 73,000 73,000
2. Profit on sale of plant at Delhi 1,02,000 1,02,000 1,02,000
3. salary from an Indian company 60,000 30,000 30,000
4. Interest on UK development bonds 40,000 ----- -----
5. Income from property in London 30,000 ----- -----
6. profit from a business in Delhi 49,000 49,000 49,000
7. income from agriculture in London 25,000 ----- -----
8. Dividend from an Indian company 17000 17000 ……..
9. Rental income from property in Nepal 12,000 ---- ----
10. gift from a relative Exempt Exempt Exempt
Gross total income 4,81,000 2,71,000 2,54,000

1.10 Exempted incomes

The exempted incomes are given u/s 10(1) to 10 (49) of the act and are not included for the
calculation of total income of the assessee. Some of these incomes are listed below:

1. Agricultural income from a land in India – fully exempted u/s 10(1).

2. Share of income from HUF- fully exempt u/s 10(2)
3. Share of income from firms assessed as firm u/s 184 or 185 is fully exempt u/s 10(2A)
4. Any income from investment by an NRI in bonds and securities –fully exempted u/s10 (4)(i).
No exemption on such bonds issued after 1.6.2002.
5. Any income from interest on Non-resident (external) account – fully exempted u/s 10 (4)(ii).
6. Leave travel concession to an Indian citizen employee – exempted up to limits laid down u/s
10(5)
7. Tax paid by government or an Indian concern on behalf of foreign company (sec 10(6A))
8. Perquisites and allowances given by the government to its employees posted abroad - fully
exempted u/s 10 (7).

27
9. Any income of employees of foreign countries working in India under co-operative technical
assistance programme – fully exempted u/s 10(8).
10. Amount of retrenchment compensation given to workers – fully exempted u/s 10(10B)
11. Compensation received in case of any disaster [sec 10(10BC)] – in case an individual or his
legal heir receives any compensation on account of any disaster from central or state Government
or a local authority, the same shall be exempted.
12. Any amount received from life insurance corporation on maturity of policy with or without
bonus – fully exempt u/s 10(10D). The sum assured shall be exempt along with bonus in the
following cases:
a) If any sum received from insurance company on insurance of a dependent handicapped
member
b) If any sum received from insurance company when a dependent, or a member of family
is suffering from a notified disease,
c) Any sum received under a key man insurance policy
13. Payment received out of statutory provident fund – fully exempt u/s 10(11)
14. Payment received out of recognized provident fund – fully exempt u/s 10(12)
15. House rent Allowance – exempted as per conditions given u/s 10 (13A).
16. Income from certain exempted securities u/s 10(15).
17. Educational scholarships given by government or any other organisations - fully exempt
under sec 10(16).
18. Allowances received by MPs/MLAs – exempted u/s 10(17) up to the following extent:
 Daily allowance and Constituency allowance – fully exempted.
19. Any Awards instituted or notified by central or state government in the following fields–
fully exempt u/s 10(17 A)
a) Literary, scientific or artistic work or attainment
b) Services alleviating the distress of the poor, the weak and the ailing
c) Proficiency in sports or games
d) Gallantry awards (paramveerchakra, mahaveer chakra) approved by the government
20. Any pension received by winners of paramveer chakra, mahaveer chakra and veer chakra
and family pension received by their dependents- fully exempted under sec 10(18)
21. Family pension received by family members of armed forces. u/s 10(19).
22. Annual value of any one palace of an ex-ruler of Indian states shall be fully exempt u/s
10(19A)
23. Income of a local authority – exempted as per conditions given u/s 10(20)
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24. Income of a scientific research association – exempted as per conditions given u/s 10(21).
25. Income of a fund set up for welfare of employees or their dependents exempted as per
conditions given u/s 10(23AAA).
26. Any income of a trust or society approved by Khadi and Village Industries Commission u/s
10(23B).
27. Income of mutual fund – exempted as per conditions u/s 10(23D).
28. Income of a venture fund - exempted as per conditions u/s 10(23FA)
29. Income by way of dividend from an Indian company –fully exempted u/s 10(34)
30. Income from units of UTI and other mutual funds (sec 10(35)
Any income by way of:
a) Any income received by way of dividend from a domestic company.
b) Income received in respect of units from the specified company.
31. Income from sale of shares in certain cases [sec 10(36)]
Any income arising from the transfer of a long term capital asset, being an eligible equity
share in a company purchased on or after march 1, 2003 and before march 1, 2004 and held for
a period of twelve months or more.
32. Any income from long- term capital asset being self-cultivated urban agricultural land on
compulsory acquisition [section 10(37)]- in case of an assessee, being an individual or a Hindu
Undivided family, capital gain arising from the compulsory acquisition of self-cultivated land
shall be fully exempted.
33. Income from international sporting event (sec 10(39))
Any specified income of specified persons from any international event held in India shall be
fully exempt if:
a) Such event is approved by the international body regulating the international sport relating
to such event;
b) It has participation by more than two countries; and
c) It is notified by the central government in this regard.

1.5 Income tax Authorities

To discharge executive and administrative functions efficiently, the following authorities have
been constituted under section 116 of the income tax act, 1961:

29
 i. The Central Board of Direct Taxes (CBDT)
ii. Director General of Income Tax (DGIT) or Chief Commissioner of Income Tax (CCIT)
iii. Directors of Income Tax (DIT) or Commissioners of income tax or commissioners of
income tax (appeals)
iv. Additional Directors of Income Tax (ADIT) or Additional Commissioners of Income Tax
(ACIT) or Additional Commissioners of Income Tax (appeals)
v. Joint Directors of Income Tax (JDIT) or Joint Commissioners of Income Tax (JCIT)
vi. Deputy Directors of Income Tax (DDIT) or Deputy Commissioners of Income Tax
(DCIT) or Deputy Commissioners of Income Tax (appeals)
vii. Assistant Directors of Income Tax (ADIT) or Assistant Commissioners of Income viii.
Tax (ACIT)
ix. Income Tax Officer (ITO)
x. Tax Recovery Officers (TRO)
xi. Income Tax Inspectors (ITI)

1.5.1 Appointment of Income Tax Authorities (117)

The following authorities have the power to appoint Income Tax Authorities:
I. Central Government
II. Board or Director-general or Chief Commissioner or Commissioner of IT department.
III. Appoint of executive or ministerial staff by an income tax authority, authorized by the
board.

1.5.2. Power and Functions of Central Board of Direct Taxes (CBDT)

It is the top most authority in the sphere of direct taxes. The CBDT is created under the Central
Boards of Revenue Act, 1963. CBDT works under the Ministry of Finance.

1.5.2(1) Powers of CBDT:

i. To make rules for carrying out the objectives of IT act
ii. To issue orders and instructions to subordinate authorities for proper administration of IT act
iii. To authorize other IT authorities to accept application of claims for any exemption,
deduction, refund or any other relief after the expiry of the prescribed period
iv. To exercise control over IT authorities
30
v. To decide jurisdiction of IT authorities
vi. To empower authorities with the power of search

1.5.3. Commissioner of Income Tax (CIT)

He is vested with the following powers:
i) To review the order of the assessing officer
ii) To set-off refund against arrears of tax
iii) To appoint an IT authority below the rank of an Assistant Commissioner or Deputy
Commissioner
iv) To authorize Joint Commissioner to exercise the powers of an assessing officer
v) To transfer cases from one subordinate assessing officer to another
vi) To authorize any Joint Commissioner, Assistant Commissioner or Deputy Director or IT
Officer to make search and seizure
vii) To make any enquiry under this act
viii) To sanction the re-opening of an assessment after the expiry of 4 years.

1.5.4. Income Tax Officer (ITO)

ITO is the person with whom an assessee comes into direct contact. The important powers and
functions of ITO are narrated below:
i) To grant refunds
ii) To impose penalty for a non-payment of tax
iii) To re-assess the escaped income
iv) To allot permanent account number
v) To exercise power of search and seizure, if authorized by the designated authority
vi) To inspect register of companies
vii) To issue a certificate prescribing lower rate of deduction of tax at source
viii) To determine appropriate proportion of expenses for deduction in respect of premises partly
used for business or profession

1.6 Procedure of Assessment:

31
Every person whose total income during the previous year exceeds the minimum taxable limit,
shall, on or before the due date, furnish his return of income in the prescribed form

1.6.1 Types of Assessment

1. Self-Assessment
2. Assessment on the basis of return
3. Regular Assessment
4. Re- Assessment or Income escaping Assessment
5. Precautionary Assessment

1.6.1 (a) Self-Assessment:

The assessee has to compute the tax liability by adding heads of Income and giving the
deductions u/s 80s finally applying the provisions of set off and carrying forward of losses.

1.6.1 (b) Assessment on the basis of returns:

This assessment is also known as summary assessment [Us 143 (1)] under this provision, where
a return has been filed under Section 139 or in response to a notice under Section 142 (1)
i. If any tax or interest is found on the basis of such return, an intimation will be sent to the
assessee specifying the sum payable by him and such intimation will be deemed to be a notice
of demand issued under Section 156 and
ii. If any refund is due on the basis of such return, it will be granted to the assessee.

1.6.1(c )Regular Assessment:

Regular assessment means the assessment made on the following basis:

i) Basis of evidence U/s 143 (3)- When the assessing officer considers it necessary to verify the
correctness or completeness of the return, to ensure that the income has not been under-stated or
the tax has not been underpaid, he can serve a notice on the assessee either to attend his office
32
or to produce, on a date specified, any evidence on which the assessee may rely in support of the
return. Such a notice can be served on the assessee only during the financial year in which the
return is filed, or within six months from the date of filing the return, whichever is later.

ii) Best judgment assessment U/s 144 - are of two types:

a) Compulsory Best judgment assessment: Best judgment assessment (Eec.144): The

Assessing Officer is to make an assessment to the best of his judgment against a person who
is in default as regarding supplying information. Sec. 144 provides that the Assessing Officer
shall make assessment to the best of his judgment in the following cases:
 Where the assessee has failed to make voluntary return under Sec.139 (1) or has not
filed belated return under Sec. 139 (4) or revised return under Sec. 139 (5).
 Where there has been a failure to comply with all terms of notice under Sec. 142 (1)
requiring the assessee to produce accounts or other documents or information
specified therein or fails to get the accounts audited under Sec. 142 (2A).
 Where the return has been made but the Assessing Officer considers it to be incorrect
or incomplete and serves a notice under Sec.143 (2) upon the assessee requiring his
appearance or the production by him of evidence in support of his return, but the
assessee does not comply with the terms of the notice.

b) Discretionary Best judgment assessment: Where the Assessing Officer is not satisfied
about the correctness of the accounts of the assessee or where no method of accounting has
been regularly employed by the assessee, the Assessing Officer may at his discretion make
the best judgment assessment

1.6.1(d) Re-Assessment (Section 147):

This assessment is also known as income escaping assessment. If the assessing officer has reason
to believe that any income chargeable to tax escaped assessment for any assessment year he may
assess or reassess such income keeping in view the provisions of Section 148 to 153.

1.6.1(e )Precautionary Assessment:

Where it is not clear as to who has received the income and primafacie, it appears that the income
may have been received either by A or by B or by both together, the assessing officer can

33
commence proceedings against both A and B to determine the question as who is responsible to
pay tax.

1.7. Rectification of Mistakes:

The rectification of mistakes can be done by the concerned authority on its own or on an
application made by the assessee. Further, the order of rectification shall be passed in writing
by the concerned authority only. If an application for rectification is made by the assessee, the
concerned authority shall pass an order within a period of six months from the end of the month
in which the application is received by it, either accepting to make the amendment or refusing to
allow the claim.

If the rectification enhances the liability of the assessee or reduce the refund, the concerned
authority shall give notice to the assessee, asking him to pay the tax immediately. On the other
hand, if the rectification reduces the liability of the assessee, the authority shall make
arrangements to refund the amount, which is due to the assessee.

1.8. Permanent Account Number (PAN) – Section 139 (A)

PAN or Permanent Account Number is a ten-digit alphanumerical number (a number containing

a combination of alphabets and numerals), issued by the Regional Computer Centre of the
Income Tax Department. A typical PAN is AFRPP1595D

1.8.1 Who should have a PAN?

The following persons are required to obtain PAN:

i) Any existing assessee or tax payer or person who is required to furnish a return of income
(even on behalf of others)
ii) Any person carrying on business or profession whose total sales, turnover, gross receipts
in any financial year is more than Rs.5 lakhs
iii) Any person who intends to enter into economic or financial transactions where quoting
PAN is compulsory

PAN may be allotted or asked for by other persons also:

34
i) The Assessing Officer may allot PAN to any person either on his own or on a specific request
from such person.
ii) Any other person can apply for and obtain PAN?

Assessment is the process where in an assessee calculates the taxable income, tax liability and
files the income tax returns with the Department of Income Tax. This process is usually done in
the year following the financial year that is in Assessment Year.

1.9. Filing of Returns:

Every person if his total income exceeds the maximum amount not chargeable to tax i.e. basic
exemption limit has to file a return of income in Income Tax Department. Filing of Return is
compulsory even if tax payable is nil or refundable.

a) Loss return-Sec.139 (3): Any person who sustained loss in any previous year and claims
that such loss should be carried forward shall furnish a return of loss within the time allowed u/s.
139(1) in the prescribed form.

b) Belated return-Sec.139 (4): Any person who has not furnished a return within the time
allowed u/s.139 (1) or within the time allowed by the notice issued u/s.142 (1), can file a belated
return, for any previous year at any time before one year from the end of the relevant assessment
year or before the assessment is completed, whichever is earlier.

c) Revised return-Sec.139 (5): If the assessee discovers any omission or any wrong statement
in the return filed earlier. Such revised return can be furnished at any time before the expiry of
one year from the end of the relevant assessment year or before completion of assessment
whichever is earlier.

1.9.1 Due date of Filing of return of Income:

35
 (a) For company assessee By 30th September, the Assessment Year

(b) For all non-corporate persons whose accounts By 30th September, the Assessment Year
are subject to audit and working partners of a
firm whose account are subject to audit
(c) For all other persons By 31st day of July of the Assessment
Year

1.9.2 Refund Under Provisions of Income Tax Act, 1961

Section 237 of the Income Tax Act, 1961 deals with Income Tax refund of excess tax paid by
the assessee. If any person or assessee satisfies the assessing officer that the amount of the tax
paid by him or paid by any person on his behalf during any previous assessment year exceeds
the amount with which he is properly chargeable under the act for that year, he is entitled to
refund of excess amount paid.

The authority will also after considering the facts and circumstances of the case issue order for
the refund of excess tax paid by the assessee. It is right of the assessee to demand excess tax paid
over as tax assessed.

1.9.3 Section 238 : Who can claim Income Tax Refund

Generally Income Tax Refund can be claimed the person, who has paid the same but in a case
of clubbing of income under provisions of Sections 60 to 64 , the refund is claimed by the person,
in whose income , income of others are clubbed. In case of liquidation of a company its official
liquidator or in case of death or incapacity of a person his/her legal representative will claim the
refund.

If the taxpayer has to make a claim of Income Tax refund, then the claim should be made in
Form No. 30. However, w.e.f., 01-09-2019, the Finance (No. 2) Act, 2019 has amended this
provision to provide that the refund can be claimed only through filing of return of income within
the time limit prescribed under Section 139.

36
TERMINAL QUESTIONS:

Section A – 5 Marks Questions

1. Expain is Indirect Tax? Give examples.

2. Define a) Assessee
b) Assessment
c) Assessee in default
d) Deemed Assessee
e) Previous Year
f) Assessment Year
g) Person
h) Income
4. Expand ‘CBDT’ and ‘CIT’.
5. Mention four important Income Tax Authorities
6. Expain is Assessment Procedure?
7. Expain is Best Judgment Assessment?
8. Expain do you mean by PAN?
9. Expain do you mean by Precautionary Assessment?
10. Expain is Re-assessment?
11. Expain are Capital receipts?
12. Expain are Revenue receipts?
13. Explain Capital Expenditure
14. Explain Revenue Expenditure
15. Expain are Capital Losses?
16. Expain is revenue Losses?
17. Expain are the types of residents for income tax purpose?
18. Who is a Not Ordinary Resident?
19. Define Non-resident?
20. How an individual becomes Ordinary Resident?

Section B – 9 and 12 Marks Questions

1. Briefly explain the exceptions to the general rule of previous year.

37
2. Briefly Explain the Power and Function of CBDT.
3. Explain the types of Assessments.
4. Explain is Filing of Return? Explain in brief different types of Filing the Return of Income.
5. Distinguish between Capital and Revenue Receipt.
6. How capital expenditure is different from Revenue expenditure?
7. Briefly explain rules of segregating partly agricultural income.
8. Explain with reasons from the point of view of income tax which of the following incomes
are agricultural incomes and which non-agricultural incomes are:
a. Income from growing flowers and creepers.
b. Income from salt production, by flooding the land with sea- water.
c. Dividend from a company engaged in agricultural operations.
d. Profit on sale of standing crops after harvest and sale by cultivator.
e. Compensation received from insurance company for damage to crop by flood.
f. Interest on arrears of rent, payable in respect of agricultural land.
g. Income from sale of sugar, converted from sugarcane grown by sugar mill.
h. Interest on loan given to a farmer.
i. Income from agricultural land situated in Srilanka.
j. Income from dairy farming.
9. Compute the tax liability for the assessment year 2024-25
a) Mr. A’s total income from all other sources is Rs 1,54,000 and net agricultural income
is Rs 1,00,000.
b) Mr. D’s total income from all sources is Rs 2,66,000 and net agricultural income Rs
10,000.
c) A HUF has total income of Rs 4,64,000 and net agricultural income of Rs 50,000.
d) Non-agriculture income Rs 2,20,000 agricultural income is Rs 15,000. And
unabsorbed agricultural loss Rs 5,000 brought forward from the assessment year 2024-
25.

10. State whether the following is capital or Revenue Loss.

a) Loss on sale of machinery
b) Theft in office premises
c) Embezzlement of cash by an employee
d) Issue of the shares less than the face value

38
11. State whether the following is Capital or Revenue Receipts
a) Compensation received for the Revenue profits
b) Receipt of amount on maturity on LIC policy
c) Damages received on account of contract not executed on time
d) Profit on sale of technical know and how
e) Profit made on sale of shares held by a company as a short term or current
investment

12. State whether the following is Capital or Revenue expenditure

a) Purchase cost and installation expenditure incurred on Plant, Machinery, land &
building by a manufacturing company
b) Expenses incurred in curing defect to the title of an asset.
c) Commission paid to own employees as an incentive to achieve sales targets
d) Sales tax, excise duty, freights and marketing charges
e) Expenditure incurred in connection with promotion of a company.

13. Mr. Ramesh, a citizen of America, comes to India for the first time on 20-03-2023. On 01-
09- 2023 he leaves India for Nepal on a business trip. He comes back on 26-02-2024.
Determine his residential status, for the Assessment year 2024-25.

14. Mr. Frank a citizen of West Indies was appointed as Sales Manager in India on 1st April 21
e at Mumbai. On 25th January 2018 des appointed as Sales Monabra period of 3 years, but left
his wife and children in India. On 1st May 2020 he came to India and took with him his family
Uganda on 30th June, 2020. He returned to India and joined his original job on 24th January
2024.

15. Mr. Rithesh a citizen of U.K. came to India for the first time on 01.05.2018 He stayed here
without any break for 3 years and left for Bangladesh on 01.05.2020. He returned to India on
01.04.2021 and went back to U.K. on 01.12.2021. He was posted back to India on 20.01.2024.

16. Mr. Anish has the following incomes for the previous year 2023-2024
Rs.
I. Income from salary in India from a company 50,000
II. Dividend from an Indian company received in England and
39
 spent there 10,000
III. Income from house property in India received in Pakistan 20,000
IV. Dividend from a foreign company received in England
deposited in a bank there 10,000
V. Income from business in Kolkata, managed from USA 20,000
VI. Income from business in USA (controlled from Kanpur) 12,000
VII. Income was earned in Australia and received there but brought
to India 25,000
VIII. His maternal uncle sent bank draft from France as a gift
on his marriage 20,000

Compute the gross total income, if he is:

(i) Resident (ii) Not-ordinary Resident (iii) Non-resident.

17. Mr. Satya gives you the following information being a Resident Ordinary Resident.
1. Salary Rs.80,000 received in Japan for the services rendered in India.
2. Commission received in India for the services given in Srilanka Rs.1,40,000.
3. House rent of the house situated in Nepal received in India Rs.30,000.
4. Dividend of a England based company received in India Rs.75,000.
5. Profit of the business situated in Japan brought to India Rs.5,00,000.
Determine the residential status of Mr. Satya for the previous year 2023-24 and explain that
on which income he is liable to pay tax in India.
Compute his taxable income for the AY 2023-2024.

18. Krishna is an Indian citizen went out of India on 28th August 2021 for service in a company
in Japan and came back to India on 1st April 2022 to meet his family. During the year 2023-24,
he received the following incomes:
I. Incomes from salary in Japan Rs 28000.
II. Interest on bonds of central government of India Rs 28000
III. Taxable income from shares from foreign company Rs 7500 received in Japan.
IV. Income from agricultural land situated in Punjab Rs 10000
V. Interest received from firm in U.K. remitted to India Rs.9200
VI. Payment from public provident fund Rs 20000.
VII. Commission received in India for the services given in Nepal Rs.10000.
40
 VIII. Profit from business in SrilankaRs.40000 (business controlled from Chennai) of
which Rs 15000 was received in India.
IX. Profit of the business in Nepal brought to India. Rs 50000
X. Amount brought to India out of past-untaxed profit earned in Japan Rs 8000.
XI. Share of income from HUF Rs 12000.
Calculate the gross total income of Krishna after ascertaining his residential status for
assessment year 2024-25.

19. Mr. Naresh is an Indian Citizen. He left India on 16th July 2021 to England and return to
India on 02 Feb 2022. During the Previous Year his details of income were as follows:
• (a) Interest on Securities of an Indian Company received in England Rs 22,000
• (b) Agricultural Income in Gujarat Rs 30,000
• (c) Dividend from Indian Company Rs 10,000
• (d) Interest received from a firm in England remitted to India Rs 9,500
• (e) Amount brought to India out of past untaxed profit earned in England Rs 22,000
• (f) Income from business in Pakistan being controlled from India Rs 15,000
• (g) Interest earned & received in England from bank & deposited there Rs20,000
• (h) Income from Salary received in India for services rendered in England Rs20,000
Determine his Residential Status & Gross Total Income for the AY 2024-2025.

20. From the following particulars of Mr. Uday compute his Gross total income for the
A.Y.2024-2025 if he is 1. Resident, 2. Not Ordinarily Resident and 3. Non-Resident
(a) Income from business from Raichur Rs. 50,000
(b) Profit from business in U.K. controlled from India Rs 60, 000
(c) Income from house property in Japan not received in India Rs 30, 000
(d) Income from business in India but received in Pakistan Rs 50, 000
(e) Salary received in India for service rendered in USA Rs 70, 000
(f) Interest on deposit with State Bank in Bangalore Rs 10, 000
(g) Profit from business in Ceylon controlled from India (1/3 profit received in India)
Rs 30,000
(h) Salary received in India for service rendered in Kuwait Rs 35, 000
(i) Past untaxed foreign income brought into India Rs 8, 000
(j) Dividend received from Domestic Company Rs 5,000

41
(k) Interest on Post Office Savings Bank A/c Rs 1,000
(l) Agriculture income earned in Nepal Rs 25,000.
(m) Gift in cash from a relative received in India Rs 60000.
(n) Interest received from a firm in UK later on remitted to India Rs 10000

42
 MODULE: II

Heads of Income tax - I

A. INCOME FROM SALARY

Structure

2.1 Introduction ..............................................................................................................

2.2 Basis of charge: .........................................................................................................
2.3 Arrears of salary........................................................................................................
2.4 Tax Rebate -Sec 88 ...................................................................................................
2.5 Salary, Perquisite, and Profits in Lieu of Salary [Sec 17] ...........................................
2.6 Salary sec 17(1) ........................................................................................................
2.6.1 Basis of Charge: (Sec 15) ..................................................................................
2.6.2 Allowances ........................................................................................................
2.7 Perquisites [Sec. 17(2)] .............................................................................................
2.7.1 Perquisites (Fully Exempted From Tax): ...........................................................
2.7.2 Rent Free Accommodation ................................................................................
2.7.3 Transfer of Movable Assets to Employees [Rule 3(7)(viii)] ...............................
2.8 Profits in Lieu of Salary [SEC. 17(3)] .......................................................................
2.8.1 Gratuity: Sec 10 (10) .........................................................................................
2.8.2 Pension: Sec 17(1)(ii) ........................................................................................
2.8.3 Taxability of leave salary (Encashment of Earned leave): ..................................
2.8.4 Compensation for Voluntary Retirement: Sec. 10(10C) .....................................
2.9 Deductions Against Salary ........................................................................................
2.10 Terminal Questions ...................................................................................................
2.11 Student Practice Problems: ........................................................................................
2.12 Suggested Readings / Reference Books: ....................................................................

Learning Objectives
 To know the items treated under the head of income.
 To consider exemptions accordingly.
 To evaluate the allowances as per the guidelines of IT authority.

43
 To treat various perquisites and bonus.
 To calculate the total amount of taxable income under the head salary.

44
2.1 Introduction

The provisions pertaining to Income under the head “Salaries” are contained in section 15, 16
and 17 in the following manner.

Deduction for Entertainment allowance for Government employees and Professional tax are
allowable only under the optional tax regime i.e., if the employee exercises the option of shifting
out of the default tax regime provided under section 115BAC(1A). The same are not allowable
under the default tax regime under section 115BAC.

According to Income Tax Act there are certain conditions where all such remuneration is
chargeable to income tax:

 When due from the former employer or present employer in the previous year, whether
paid or not
 When paid or allowed in the previous year, by or on behalf of a former employer or
present employer, though not due or before it becomes due.
 When arrears of salary is paid in the previous year by or on behalf of a former employer
or present employer, if not charged to tax in the period to which it relates.

45
2.2 Basis of charge:

 The relationship between payer and payee is vital.

 Salaries and wages are not conceptually different. Both are compensation for work done
or services rendered.
 Salary from more than one source or employer is also considered.
 Salary from former employer, present or prospective employer shall also be taxable.
 Salary income must be real and not fictitious.
 Foregoing of salary: Section 15 taxes salary on ‘due’ basis even if it is not received.
 Voluntary payments: Salary perquisites or allowances may be given as a gift to an
employee, yet they would be taxable.

2.3 Arrears of salary

Normally speaking, salary arrears must be charged on due basis. However, there are
circumstances when it may not be possible to bring the same to charge on due basis.

 Example: If the Pay Commission is appointed by the Central Government and it

recommends revision of salaries of employees with retrospective date, the arrears
received in that connection will be charged on receipt basis. Here also, relief under
section 89 is available.
 Example: If the Central Government announces increase in HRA in the previous year
2023-24 which is effective from 1.1.2022, then the arrears from 1.1.2022 to 31.3.3023
will be taxed in the previous year in which they are paid because they were never due
earlier. Here also, relief under section 89 is available.

2.4 Tax Rebate -Sec 88

Section 88 of the Income Tax Act was introduced in 1961 to encourage taxpayers to save money
and invest in various instruments. The section allows taxpayers to claim deductions from their
taxable income by investing in specified savings instruments.

46
Eligibility for claiming deduction under Section 88
To claim a deduction under Section 88, the taxpayer must be an individual, Hindu Undivided
Family (HUF), or Association of Persons (AOP) or a body of individuals (BOI) who is a resident
of India.

Investments covered under Section 88

Section 88 covers various investments, including life insurance policies, EPF, PPF, NSC, ELSS,
and other notified schemes. The deductions under Section 88 are subject to an overall limit of
Rs. 1.5 lakh per year.

Investment Maximum Exemption

Life Insurance Policies themselves, their Premium should not exceed 20% of the sum
spouse, and their children assured After 2012.
Employee Provident Fund (EPF) and Public The maximum deduction that can be claimed
Provident Fund (PPF) for EPF is 12% of the taxpayer’s salary,
while for PPF, it is up to Rs. 1.5 lakh per year.
National Savings Certificates (NSC) Up to Rs. 1.5 lakh per year. The interest
earned on NSC is taxable.
Equity-Linked Savings Schemes (ELSS) ELSS up to Rs. 1.5 lakh per year. The lock-
in period for ELSS is three years.

2.5 Salary, Perquisite and Profits in Lieu of Salary [Sec 17]

2.5.1 Salary sec 17(1)

It is paid by the employer to the employee in consideration of the service rendered by him to the
organization. It includes monetary value or non-monetary value of benefits and facilities

47
provided by the employee. Any amount received other than from employer cannot be termed as
salary.

The term salary includes the following:

 Wages
 Any annuity or pension
 Any gratuity
 Any fees, commission, perquisite or profits in lieu of or in addition to any salary or wages
 Any advance salary
 Bonus [Note: If arrear bonus is received, the assessee can claim relief u/s 89(1]
 Encashment of leave-not-availed
 Interest earned in excess of 9.5% on Recognized Provident Fund (RPF)
 Amount transferred in excess of 12% of Salary to RPF
 The contribution made by Central Government or any other employer in the previous
year to the account of an employee under Pension Scheme u/s 80 CCD [National Pension
Scheme and Atal Pension Yojana].
 Money embezzled by an employee constitutes his income.

2.5.1.1 Basis of Charge: (Sec 15)

Salary is chargeable to tax either on ‘due’ basis or on ‘receipt’ basis, whichever is earlier. Hence,
the taxable salary includes:
a) Advance salary (on ‘receipt’ basis): Salary paid in advance is taxable under the head
‘Salaries’ in the year of receipt.
Note: Such an advance salary shall not be included again in the total income when the salary
becomes due.
b) Outstanding salary (on ‘due’ basis): Salary falling due is taxable under the head ‘Salaries’
in the year in which it falls due.
Note: Such due salary shall not be included again in the total income when it is received.
c) Arrear salary: Any increment in salary with the retrospective effect which has not been
taxed in the past, such arrears will be taxed in the year in which it is allowed. Arrear salary
is taxable on receipt basis.

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 2.5.1.2 Allowances
Allowance means a fixed quantum of money given regularly in addition to salary to meet a
particular requirement. The name of a particular allowance may reveal the nature of the
requirement, e.g. House Rent Allowance, Tiffin Allowance, Medical Allowance etc

Taxability of Allowances

Fully taxable allowances without any exemptions under both regimes

Allowances Meaning
1. Dearness Allowance
It is an extra amount given to an employee to meet the burden of
(DA) or Dearness Pay
inflation or increased cost of living.
(DP)
A grant to an employee for the extra hours of work performed
2. Overtime Allowance
after the regular hours
A grant to an employee made typically by a government or an
3. Family Allowance employer in addition to regular salary and graded according to
occupation and the number of dependent children.
4. City Compensatory An allowance to meet personal expenses, which arise due to
Allowance special circumstances, or to compensate extra expenditure by
reason of posting at a particular place.
5. Lunch/Tiffin/Dinner
An allowance to meet the expenditure on tiffin, refreshment etc.
Allowance
6. Fixed Medical
An allowance to meet the expenditure on medical treatment etc.
Allowance
An allowance to meet the expenditure of servant for personal
7. Servant Allowance
purpose.
8. Non-practicing Allowance is given to professionals to compensate them for
Allowance restriction on private practice.
9. Warden or Proctor Allowances are given to employees of educational institutions
Allowance for working as warden of the hostel or working as a proctor in
the institutions.

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 Allowances Meaning
10. Deputation Allowance Allowances are given to an employee when he is sent on
deputation for a temporary period from his permanent place of
service.
11. Entertainment It is an allowance to meet expenditure on entertainment, by
Allowance whatever name called. A government employee can claim
deduction u/s 16(ii) discussed later in this chapter.

Fully exempted allowances in the hands of employees: (Exemption is available under both
regimes)

Allowances Meaning
1. Travelling allowance Should be provided by the employer and spent by the
employee to meet the cost of the official tour or transfer
expenses.
2. Daily Allowance Should be spent by the employee for meeting the daily
charges incurred on a tour or transfer.
3. Conveyance allowance Should be used by the employee to meet the expenditure on
conveyance in the performance of official duties.
4. Helper/Assistant Should be used by an employee to meet the expenditure on a
allowance helper who assists him in the performance of official duties.
5. Academic allowance Should be used by the employee for his academic research
and training pursuits.
6. Uniform allowance Should be spent by the employee for purchasing/maintaining
office uniform for official duties.
7. Allowances and perks Fully exempted under Optional / old tax regime
paid by Government of
India to an Indian citizen
outside India
8. Allowance received Fully exempted under Optional / old tax regime
from UNO (United
Nations Organisation)

50
 Allowances Meaning
9. Allowance to judges of Fully exempted under Optional / old tax regime
the High Court or the
Supreme Court

Partially taxable (Partially exempted) allowances:

Allowances Exemption u/s 10(14) Rule 2BB

Children Education Allowance a) Rs 100 p.m. per child restricted up to 2 children
b) Actual received (restricted up to 2 children).
Whichever is less is exempted under Optional / old
tax regime
Children Hostel Expenditure a) Rs 300 p.m. per child restricted up to 2 children
Allowance b) Actual received (restricted up to 2 children).
Whichever is less is exempted under Optional / old
tax regime
Truck Driver /Running Allowance Whichever is less is exempted under Optional / old
(for transport sector employees for tax regime
meeting personal expenditure (a) 70% of the amount received, or
incurred during transport from one (b) Rs 10,000 p.m.
place to another)
Transport allowance (given to meet Rs 3,200 per month for an employee who is blind or
the employee’s expenditure for deaf and dumb or orthopedically handicapped.
travelling from his residence to office Note - Exemption is available under both regimes
and back)

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House Rent Allowance [Sec. 10(13A) Rule 2A]
An allowance to meet the expenses in connection with the rent of the house, by whatever name
called.

Least of these three will be exempted under Optional / old tax regime
1. Actual HRA received
2. 50% of the salary (if the house is situated in Mumbai, Kolkata, Chennai, New Delhi)
otherwise 40% in other places
3. Rent paid more than 10% of salary i.e., (Rent Paid – 10% of Salary)
Note: Salary = Basic Pay + DA (if considered for retirement benefits) + Commission (if
received as a fixed percentage on turnover as per terms of employment)

House Rent Allowance

Illustration -1

Mr A is entitled to a basic salary of Rs 5,000 p.m. and dearness allowance of Rs 1,000 p.m., 40%
of which forms part of retirement benefits. He is also entitled to HRA of Rs 2,000 p.m. He
actually pays Rs 2,000 p.m. as rent for a house in Delhi. Compute the taxable HRA for the AY
2024-25.

ANSWER:

Salary for HRA= Basic Pay + D.A. (considered for retirement benefits) + Commission (if
received as a fixed percentage on turnover as per terms of employment) = (5,000 x 12) + (40%
x 1,000 x 12) = 64,800

Calculation of Taxable HRA for AY 2024-25

Particulars Rs Rs
Amount received during the financial year for HRA 24,000
Less: Exemption u/s 10(13A) Rule 2A Least of the followings:
a) Actual amount received 24,000
b) 50% of Salary (64,800 * 50%) 32,400
c) Rent paid less 10% of Salary [2,000 x 12 – 10% of 64,800] 17,520 17,520
Taxable HRA 6,480

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Illustration -2

Mr X is employed at Delhi as Finance Manager of R Ltd. The particulars of his salary for the
previous year 2023-24 as under Basic Salary Rs 16,000 p.m. Dearness allowance Rs 12,000 p.m.
Conveyance Allowance for personal purpose Rs 2,000 p.m.; Commission @ 2% of the turnover
achieved which was Rs 9,00,000 during the previous year and the same was evenly spread. HRA
Rs 6,000 pm. The actual rent paid by him Rs 5,000 pm for accommodation at till 31.12.2023.
From 1.1.12024 the rent was increased to Rs 7,000 pm. Compute taxable HRA.

ANSWER:

Note: If there is an increase in rent paid, it is advisable to calculate the exemptions separately
based on the time period. Rent before and after the increase.

Salary for HRA = Basic Pay + DA (considered for retirement benefits) + Commission (if
received as a fixed percentage on turnover as per terms of employment)
(For 9 months) = (16,000 x 9) + (12,000 x 9) + (2% of 9,00,000 x 9/12) = 2,65,500
(For 3 months) = (16,000 x 3) + (12,000 x 3) + (2% of 9,00,000 x 3/12) = 88,500

Calculation of Taxable HRA for PY 2023-24

April to
Jan to Mar 2024
Particulars December 2023
Rs Rs Rs Rs
Amount received during the financial year for
54,000 18,000
HRA
Less: Exemption u/s 10(13A) Rule 2A
Least of the followings:
(a) Actual amount received 54,000 18,000
(b) 50% of Salary
(2,65,500 * 50%)
(88,500 * 50%) 1,32,750 44,250
(c) Rent paid less 10% of Salary
[5,000 x 9 – 10% of 2,65,500]
[7,000 x 3 – 10% of 88,500] 18,450 18,450 12,150 12,150
Taxable HRA 35,550 5,850

Total taxable HRA = 35550 + 5850 = 41400

53
Illustration -3

Z is employed in A Ltd. As on 31.3.2023, his basic salary Rs 6,000 p.m. He is also entitled to a
dearness allowance of 50% of basic salary. 70% of the dearness allowance is considered for
retirement benefits. The company gives him HRA Rs 3,000 pm. With effect from 1.1.2024, he
receives an increment of Rs 1,000 in his basic salary, was staying with his parents till 31.10.2023.
From 1.11.2023 he takes an accommodation on rent in Delhi and pays Rs 2,500 pm as rent for
the accommodation. Compute taxable HRA for the assessment year 2024-25.

ANSWER:

Salary for the purpose of HRA shall cover the time period for which the assessee, who is in
receipt of HRA, resided in rented accommodation and the rent paid by such assessee, is more
than 10% of salary.

Salary for HRA (for 5 months)

Particulars Rs
Basic Pay = (5,000 x 2) + (6,000 x 3) 28,000
DA = 50% of Basic Pay x 70% forming part of retirement benefits 9,800
= [50 % x 28,000 x 70%]
Total Salary for HRA 37,800

Calculation of Taxable HRA for AY 2024-25

Particulars Rs Rs
Amount received during the financial year for HRA (3,000 x 12) 24,000
Less: Exemption u/s 10(13A) Rule 2A Least of the followings:
a) Actual amount received 36,000
b) 50% of Salary (37,800 * 50%) 18,900
c) Rent paid less 10% of Salary [2,500x 5 – 10% of 37,800] 8,720 8,720
Taxable HRA 27,280

2.6 Perquisites [Sec. 17(2)]

Perquisite includes any amount due to or received in a lump sum or otherwise by an employee
from an employer which is usually attached to a position in addition to salary and wages.
Perquisite includes:
1. Value of rent-free accommodation given by the employer.
2. Value of accommodation given at concessional rate.
3. Any sum paid by the employer on behalf of the employees.
4. Sum paid/payable by the employer towards insurance on the life of the individual or
annuity payments.

54
 5. The value of any specified security or sweat equity shares allotted or transferred, directly
or indirectly, by the employer, or former employer, free of cost or at concessional rate to
the assessee.
6. The value of any other fringe benefit or amenity as may be prescribed.

2.6 Perquisites (Fully Exempted From Tax):

1. Tea or snacks provided during working hours.
2. Free meals are provided during working hours in a remote area or an offshore installation.
3. Goods manufactured by the employer and sold by him to his employees at concessional
(not free) rates.
4. Recreational facilities extended to a group of employees.
5. Provision for medical facilities subject to a limit.
6. Reimbursement of medical expenses Rs 15,000 is exempted (treatment in India if abroad
fixed by RBI).
7. Perquisites allowed outside India by the Government to a citizen of India for rendering
service outside India.
8. The sum payable by an employer through a recognized provident fund or approved
superannuation or deposit-linked insurance fund established under the Coal Mines
Provident Fund or the Employees Provident Fund.
9. Employer’s contribution to the staff group insurance scheme.
10. Payment of annual premium by the employer on personal accident policy affected by him
on his employee.
11. The free educational facility provided in an institute owned/maintained by an employer
to children of employee Provided cost/value does not exceed Rs 1,000 per month per
child (no limit on no. of children)
12. Interest-free/concessional loan of an amount not exceeding Rs 20,000
13. Computer/laptop given (not transferred) to an employee for official/personal use.
14. A transfer without consideration to an employee of a movable asset (other than a
computer, electronic items or car) by the employer after using it for a period of 10 years
or more.
15. Travelling facility to employees of railways or airlines.
16. The rent-free official residence provided to a Judge of a High Court or the Supreme
Court.

55
 17. Rent-free furnished residence (including maintenance thereof) to Official of Parliament,
a Union Minister or a Leader of Opposition in Parliament.

2.6.1 Rent Free Accommodation

Value of Unfurnished Accommodation:

Nature of Perquisite Taxable Value of Perquisite
Provided by Central Govt. or State Govt. Licence fee determined by the Government
Less: Rent recovered from the employee

Provided by Employer other than Central or State Government

a) Owned by employer In cities having a population exceeding 25 lakhs as per 2001
census
15% of Salary Less Rent actually paid by the employee
In cities having a population exceeding 10 lakhs but not
exceeding 25 lakhs as per 2001 census
10% of Salary Less Rent actually paid by the employee
In other places:
7.5% of Salary Less Rent actually paid by the employee
b) Taken on lease by the Rent paid by the employer or 15% of salary whichever is lower
employer Less Rent recovered from the employee
c) Accommodation in a hotel 24% of salary paid/payable or actual charges paid/payable
whichever is lower
Less Amount paid or payable by the employee

Salary for the purpose of Rent-free accommodation:

Salary = Basic + Dearness allowance/pay (if it forms a part of retirement benefit) + Bonus +
Commission + Fees + All other taxable allowances (only taxable amount) + Any other monetary
payment by whatever name called (excluding perquisites and lump-sum payments received at
the time of termination of service or superannuation or voluntary retirement, like gratuity,
severance pay leave encashment, voluntary retrenchment benefits, commutation of pension and
similar payments)

56
Hotel Accommodation: Accommodation provided in a hotel will not be a taxable perquisite if
the following two conditions are fulfilled:
 The period of such accommodation does not exceed 15 days
 Such accommodation has been provided on the transfer of the employees from one place
to another.

Value of Furnished Accommodation

 If owned by the employer, 10% p.a. of the original cost of such furniture.
 If hired from the third party, then Actual hire charges.

RENT FREE ACCOMMODATION

Illustration -4
R submits the following information regarding his salary income for the year 2023-24: Basic
salary Rs 15,000 p.m.; D.A (forming part of salary) 40% of basic salary; City Compensatory
Allowance Rs 300 p.m.; Children Education Allowance Rs 400 pm per child for 3 children;
Transport Allowance Rs 1,000 p.m. He is provided with rent-free unfurnished accommodation
which is owned by the employer. The fair rental value of the house is Rs 24,000 p.a. Compute
the gross salary assuming accommodation is provided in a city where the population is (a)
exceeding 25 lakhs (b) exceeding 10 lakhs but not exceeding 25 lakhs (c) less than 10 lakhs

ANSWER:

Computation of Income from Salary of the PY 2023-24

Particulars Amount Amount

Basic salary 15,000 × 12 1,80,000
D.A. (40% of 1,80,000) 72,000
City Compensatory Allowance (fully taxable) (300 × 12) 3,600

Children Education Allowance

Actual amount received (400 × 12 × 3) 14,400
Less: Exemption u/s 10(14) @ Rs 100 per month per child subject
2,400 12,000
to a maximum of 2 children (100 × 12 × 2)

Transport Allowance (1,000 x 12) 12,000

Gross Income from Salary u/s 17(1) 2,79,600
Add: Value of Unfurnished accommodation u/s 17(2) rule 3(1)
explanation 1
Case (a) Population exceeding 25 lakhs
15% of salary
Salary = Basic pay + DA (forming part of retirement benefits) +
all other taxable allowances
= 1,80,000 + 72,000 + 3,600 + 12,000 + 9,600 = 2,79,600 41,940
Total Income from Salary 2,37,660

57
Note:
Case (b): Where population is exceeding 10 lakhs but not exceeding 25 lakhs
10% of Salary shall be considered as the value of taxable
perquisite = 10% of Rs 2,79,600 = Rs 27,960

Case (c): Where population is less than 10 lakhs

7.5 % of salary shall be considered as the value of taxable
perquisite = 7.5% of Rs 2,79,600 = Rs 20,970

Illustration -5

Mr Kushal submits the following information regarding his salary income which he gets from
ABC Ltd. Basic salary Rs 15,000 pm; D.A. 40% of basic salary (forming part of retirement
benefits); City Compensatory Allowance Rs 300 pm; Children Education Allowance Rs 400 pm
(for 3 children); Transport allowance Rs 1,000 p.m.; Reimbursement of Medical Expenses Rs
25,000. He is also entitled to HRA of Rs 6,000 p.m. from 1.4.2023 to 31.8.2023. He was paying
a rent of Rs 7,000 p.m. for a house in Delhi. From 1.9.2019 he was provided with accommodation
by the company for which the company was paying the rent of Rs 5,000 pm. The company
charged him Rs 1,000 pm as rent for the accommodation. Compute gross salary for the AY.
2024-25.

ANSWER:
Computation of Income from Salary AY 2024-25

Particulars Amount Amount

Basic salary 15,000 x 12 1,80,000
D.A. (40% of 1,80,000) 72,000
City Compensatory Allowance (fully taxable) (300 x 12) 3,600
House Rent Allowance (working note 1) 5,500
Children Education Allowance
Actual amount received (400 x 12 x 3) 14,400
Less: Exemption u/s 10(14) @ Rs 100 per month per child subject
2,400 12,000
to a maximum of 2 children (100 x 12 x 2)
Transport Allowance (1,000 x 12) 12,000
Gross Income from Salary u/s 17(1) 2,85,100
Add: Value of Unfurnished accommodation u/s 17(2) rule 3(1)
Assuming Population exceeding 25 lakhs (as accommodation
provided in a Metro city)
15% of salary for 7 months (September 2018 to March 2019)
Salary = Basic pay + DA (forming part of retirement benefits) + all
other taxable allowances
24,465
= [(15,000 x 7) + (15,000 x 7 x 40%) + (300 x 7) + {(400 x 7 x 3) –
(100 x 7 x 2)} + (1000 x 7)] = 1,63,100
Total Income from Salary 2,60,635

58
Working note-1 House Rent Allowance (April to August 2023)

Particulars Rs Rs
The actual amount received (6,000 x 5) 30,000
Less: Exemption u/s 10(13A) Rule 2A
Least of the followings:
a) Actual amount received 30,000
b) 50% of salary 52,500
c) Rent paid – 10% of Salary [ 7,000 x 5 – 10% of 1,05,000] 24,500 24,500
Taxable HRA 5,500
Note: Salary for HRA (5 months) = Basic salary + DA = (15,000* 5) + (15,000 * 5*40%) =
1,05,000

Illustration -6

Mr. Sambhu was provided with accommodation in a hotel by his employer for 22 days before
providing him with rent-free accommodation which is owned by the employer. The hotel charges
are Rs 6,000 paid by him. The salary for the purpose of accommodation for the period of 22 days
is Rs 11,000. Compute the value of the accommodation for AY 2024-25.

ANSWER:

In case of accommodation provided to the assessee on account of transfer, which is exceeding

15 days cumulatively, such shall be taxable as a perquisite. The company recovered Rs 1,000
from the employee. Compute taxability.

Lower of the following:

(i) 24% of salary paid/payable= 24% of 11,000 = 2,640
(ii) Actual charges paid/payable = 6,000 2,640
Less Amount paid or payable by the employee 1,000
Taxable value of perquisite 1,640

2.6.2 Transfer of Movable Assets to Employees [Rule 3(7)(viii)]

Computer & Other

Particulars Electronic Car Movable
Gadgets Assets
Method of Depreciation WDV WDV SLM
Rate of Depreciation for every completed year 50% 20% 10%
Actual Cost XXXXX XXXXX XXXXX
Less: Depreciation for completed years (XXXXX) (XXXXX) (XXXXX)
WDV at the end of completed years XXXXX XXXXX XXXXX
Less: Sale Value taken from Employee (XXXXX) (XXXXX) (XXXXX)
Taxable Value of Perquisite XXXXX XXXXX XXXXX

59
Note:
(a) Electronic gadgets include computers, digital diaries and printers, but excludes washing
machines, microwave ovens, hot plates, mixers, ovens, etc.
(b) Transfer of Assets, which are 10 years old, shall not attract tax liability.
(c) Member of the household includes Spouse(s), children and their spouses, parents,
servants and dependents.
(d) Completed year means an actually completed year from the date of acquisition of the
asset to the date of transfer of such asset to the employees.

2.7 Profits in Lieu of Salary [SEC. 17(3)]

Following receipts are taxable as profits in lieu of salary:
1. The amount of any compensation due to or received by an assessee from his employer or
former employer at or in connection with the (a) termination of his employment, (b)
modification of the terms and conditions of employment.
2. Any payment due to or received by an assessee from his employer or former employer
except the following:
 Gratuity exempted u/s 10(10).
 House rent allowance exempted u/s 10(13A);
 Commuted pension exempted u/s 10(10A);
 Retrenchment compensation exempted u/s 10(10B);
 Payment from an approved Superannuation Fund u/s 10(13);
 Payment from the statutory provident fund or public provident fund;
 Payment from a recognised provident fund to the extent it is exempt u/s 10(12).
3. Any payment from the unrecognised provident fund or such other fund to the extent to
which it does not consist of contributions by the assessee or interest on such
contributions.
4. Any sum received by the employee under the Keyman Insurance Policy including the
sum allocated by way of bonus on such policy.
5. Any amount due to or received by the employee (in a lump sum or otherwise) prior to
employment or after cessation of employment.

60
 2.7.1 Gratuity: Sec 10 (10)
Gratuity is a retirement benefit given by the employer to the employee in consideration of past
services. Sec. 10(10) deals with the exemptions from gratuity income. Such exemption can be
claimed by a salaried assessee. Gratuity received by an assessee other than employee shall not
be eligible for exemption u/s 10(10). E.g. Gratuity received by an agent of LIC of India is not
eligible for exemption u/s 10(10) as agents are not employees of LIC of India.

Gratuity

Received during the service On termination Received after death of the employee
(Fully taxable) of service (Fully exempted in the hands of
recipient)

Government employee Non- Government employee

Fully Exempted u/s 10 (10)(i)
)

Covered by gratuity act of 1972 Not covered by gratuity act of 1972

Least of the following is exempted Least of the following is exempted
a) 15/26 * last drawn salary * No. of a) 15/30 * last salary * No. of years of
years of service rounded off completed service
b) Max of Rs 20 lakhs b) Max of Rs 20 lakhs
c) Actual gratuity received c) Actual gratuity received

Last drawn salary (from the date of retiring)

Salary = Basic + DA

Last salary (last month of retiring)

(E.g. If an employee retires on 18/11/2023 then 10 months average salary shall be a period
starting from Jan’ 2023 and ending on Oct’ 2023).
Salary = Basic + DA enters retirement benefits + Commission based on fixed % on turn over

No. of years of service rounded off:

(26 years 7 months is taken as 27 years, 26 years 6 months is taken as 26 years)

61
No. of years of completed service: (26 years 11 months is taken as 26 years)

Note: In case of seasonal employment instead of 15 days 7 days should be taken.

Where gratuity is received from more than one employer: Where gratuity is received from more
than one employer in the same previous year, the aggregate amount exempt from tax shall not
exceed statutory deduction.
GRATUITY

Illustration -7
Mr Hari retires on 15th October 2023, after serving 30 years and 7 months. He gets Rs 3,80,000
as gratuity. His salary details are given below:

D.A. 50% of salary. 40% forms part of retirement

FY 2023-24 Salary Rs 16,000 pm
benefits.
D.A. 50% of salary. 40% forms part of retirement
FY 2022-23 Salary Rs 15,000 pm
benefits

Determine his gross salary in the following cases:

a) He retires from government service
b) He retires from the seasonal factory in the private sector, covered under the Payment of
Gratuity Act, 1972.
c) He retires from the non-seasonal factory, covered by Payment of Gratuity Act, 1972
d) He retires from the private sector, not covered by payment of Gratuity Act

ANSWER:

a) The amount of gratuity received as a government employee is fully exempt from tax u/s
10(10)(i)

b) As an employee of a seasonal factory, in a private sector, covered under the Payment of

Gratuity Act, 1972
Computation of Taxable Gratuity

Particulars Rs Rs
Amount received as Gratuity 3,80,000
Less: Exemption u/s 10(10)(ii) Least of the followings:
a) Actual amount received 3,80,000
b) 7/26 x Last drawn salary × No. of years of completed service
or part thereof in excess of 6 months [31 × 7/26 × 24,000] 2,00,308

c) Maximum Limit 20,00,000 2,00,308

Taxable Gratuity 1,79,692

62
 c) As an employee of a non-seasonal factory, covered by the Payment of Gratuity Act,
1972

Computation of Taxable Gratuity

Particulars Rs Rs
Amount received as Gratuity 3,80,000
Less: Exemption u/s 10(10)(ii) Least of the followings:
a) Actual amount received 3,80,000
b) 15/26 × Last drawn salary × No. of years of completed 4,29,231
service or part thereof in excess of 6 months
= [15/26 × 31 × 24,000]
c) Maximum Limit 20,00,000 3,80,000
Taxable Gratuity NIL
Note: Salary = Basic Pay + Dearness Allowance
In the case of seasonal employment, instead of 15 days, 7 days shall be considered.

d) As an employee of a private sector, not covered by the Payment of Gratuity Act,1972

Computation of Taxable Gratuity

Particulars Rs Rs
Amount received as Gratuity 3,80,000
Less: Exemption u/s 10(10)(ii) Least of the followings:
a) Actual amount received 3,80,000
b) 1/2 x Average salary x No. of fully completed years of 2,80,800
service [1/2 x 18,720 x 30]
c) Maximum Limit 20,00,000 2,80,000
Taxable Gratuity 99,200

Note: Salary = 10 months average salary preceding the month of retirement.

= Basic Pay + Dearness Allowance considered for retirement benefits +
commission (if received as a fixed percentage on turnover)

Salary for the months December 2022 till September 2023 shall have to be considered.

Particulars Rs
Basic Salary:
 December 2022 to March 2023 = 15,000 x 4 = 60,000
 April 2023 to September 2023 = 16,000 x 6 = 96,000
Total Basic Salary 1,56,000
Add: D.A. [50% of 1,56,000 x 40%, forming part of superannuation benefits] 31,200
Salary for 10 months 1,87,200
Therefore, Average salary for 10 months = 1,87,200/10 = 18,720

63
 2.7.2 Pension: Sec 17(1)(ii)
Pension means a periodical payment received by an employee after his retirement. On
certain occasions, the employer allows withdrawing a lump sum amount as the present value
of the periodical pension. When the pension is received periodically by the employee, it is
known as Uncommuted pension. On the other hand, pension received in a lump sum is
known as a Commuted pension. Such lump sum amount is determined considering factors
like the age and health of the recipient, rate of interest, etc.

Pension

Un-commuted pension Commuted pension

(Fully taxable)

Government employee Non-government employee

Fully exempted u/s 10(10A) (i)
Partially exempted u/s 10(10A) (ii)

Is in receipt of gratuity Not in receipt of gratuity

1/3 * commuted value of full ½ * commuted value of full

pension is exempt pension is exempt

PENSION
Illustration -8
Mr King is getting a salary of Rs 5,400 pm since 1.1.2023 and dearness allowance of Rs 3,500
pm, 50% of which is a part of retirement benefits. He retires on 30th November 2023 after 30
years and 11 months of service. His pension is fixed at Rs 3,800 pm. On 1st February 2024, he
gets 3/4th of the pension commuted at Rs 1,59,000. Compute his gross salary for the previous
year 2023-24 in the following cases:
a) If he is a government employee, getting gratuity of Rs 1,90,000
b) If he is an employee of a private company, getting gratuity of Rs 1,90,000
c) If he is an employee of a private company but gets no gratuity.

64
ANSWER:

The previous Year 2018-19. Tenure of Service: 1.4.23 to 30.11.23 = 8 months Post-retirement
period: December ’23 to March ‘24 = 4 months

Computation of gross salary for the PY 2023-24

Particulars Case (i) Case (ii) Case (iii)

Salary 43,200 43,200 43,200
D.A 28,000 28,000 28,000
Taxable Gratuity Exempted 82,750 Nil
Uncommuted Pension = [(3,800×2) + (950×2)] 9,500 9,500 9,500
Commuted Value of Pension Exempted 88,333 53,000
Gross Salary 80,700 2,51,783 1,33,700

Case (ii) Gratuity received by an employee of a private company

Particulars Rs Rs
Actual amount received 1,90,000
Less: Exempted amount (least of the followings):
a) Actual amount received 1,90,000
b) 1/2 x Avg. Salary x No. of years of Completed service
1,07,250
[1/2 × 7,150 × 30]
c) Maximum Limit 10,00,000 1,07,250
Taxable Gratuity 82,750

Commuted Value of Pension (Non-Govt employee, gratuity received)

Particulars Rs
Actual commuted value of pension received 1,59,000
Less: Exempted u/s 10(10A)
1/3rd of Full Value of Commuted Pension [1/3 × 2,12,000]
𝑭𝒖𝒍𝒍 𝑽𝒂𝒍𝒖𝒆 𝒐𝒇 𝑪𝒐𝒎𝒎𝒖𝒕𝒆𝒅 𝑷𝒆𝒏𝒔𝒊𝒐𝒏
𝑨𝒎𝒐𝒖𝒏𝒕 𝒓𝒆𝒄𝒆𝒊𝒗𝒆𝒅 𝒐𝒏 𝒄𝒐𝒎𝒎𝒖𝒕𝒂𝒕𝒊𝒐𝒏 159000
= =
𝑷𝒆𝒓𝒄𝒆𝒏𝒕𝒂𝒈𝒆 𝒐𝒇 𝒑𝒆𝒏𝒔𝒊𝒐𝒏 𝒄𝒐𝒎𝒎𝒖𝒕𝒆𝒅 75%
= 2,12,000 70,667
Taxable Commuted Value of Pension 88,333

Case(iii) Commuted Value of Pension (Non-govt employee, gratuity not received)

Particulars Rs
Actual commuted value of pension received 1,59,000
Less: Exempted u/s 10(10A)
1/2 of Full Value of Commuted Pension [1/2 × 2,12,000]
𝑭𝒖𝒍𝒍 𝑽𝒂𝒍𝒖𝒆 𝒐𝒇 𝑪𝒐𝒎𝒎𝒖𝒕𝒆𝒅 𝑷𝒆𝒏𝒔𝒊𝒐𝒏
𝑨𝒎𝒐𝒖𝒏𝒕 𝒓𝒆𝒄𝒆𝒊𝒗𝒆𝒅 𝒐𝒏 𝒄𝒐𝒎𝒎𝒖𝒕𝒂𝒕𝒊𝒐𝒏
=
𝑷𝒆𝒓𝒄𝒆𝒏𝒕𝒂𝒈𝒆 𝒐𝒇 𝒑𝒆𝒏𝒔𝒊𝒐𝒏 𝒄𝒐𝒎𝒎𝒖𝒕𝒆𝒅
159000
= = 2,12,000
75% 10,6000
Taxable Commuted Value of Pension 53,000

65
 2.7.3 Taxability of leave salary (Encashment of Earned leave):
As per service contract and discipline, normally, every employee is allowed a certain period of
leave (with pay) every year. Such leave may be availed during the year or accumulated by the
employee. The accumulated leave lying to the credit of an employee may be availed
subsequently or encashed. When an employee receives an amount for waiving leave lying to his
credit, such amount is known as leave salary encashment.

Leave salary received

While in service At the time of retirement Leave salary paid to

Fully taxable the legal heir
Fully exempted

Government employee Non - Government employee

Fully exempted
Least of the following is exempted
a) Leave to credit * Average salary
b) 10 months average salary
c) Maximum limit of Rs 25 lakh
d) Actual leave salary received

Notes:
1. Leave to credit = Leave available – leave taken
2. A fraction of the year to be ignored
3. Average salary refers to the last 10-months’ salary on the date of retirement. (e.g. if an
employee retires on 18/11/2018 then 10 months average salary shall be a period starting from
19th Jan’ 2018 and ending on 18th Nov’ 2018)
4. Salary = Basic + DA (if it enters retirement benefits) + Commission (based on % on turnover)
5. Maximum leave is allowed 30 days per annum to encash (or) actual days for the year,
whichever is less.

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 LEAVE ENCASHMENT

Illustration -9

Mr Varun retires on 16th October 2023 after 30 years and 8 months of service. Salary structure
is given below:

FY 2023-24 Salary Rs 15,000 pm D.A Rs 7,500 pm

FY 2022-23 Salary Rs 12,000 pm D.A Rs 6,000 pm

40% of dearness allowance forms a part of superannuation benefits. Record of Earned Leave is
given below: Leave allowed for one year of completed service -20 days; Leave taken while in
service-150 days; Leave encashed during the year-60 days.
Determine the gross salary in the following cases:
(i) He retires from government service
(ii) He retires from the service of Life Insurance Corporation of India
(iii) He retires from the private sector

ANSWER:

Computation of gross salary for the PY 2023-24

Particulars Case(i) Case(ii) Case(iii)

Salary for 6 months & 16 days 98,000 98,000 98,000
Dearness Allowance 49,000 49,000 49,000
Taxable amount of Leave encashment Exempted 1,24,980 1,24,980
Gross Income from Salary 1,47,000 2,71,980 2,71,980

Working Notes: Salary for Leave encashment

Particulars Rs Rs
Average monthly salary for 10 months, prior to retirement:
Salary of 6 months 16 days: (1st April 2023 to 16th October 2023) 98,000
Salary of 3 months 14 days: (14th December 2022 to 31st March 2023) 41,600
Total Basic Salary 1,39,600
Add: Dearness allowance
For 6 months 16 days: (1st April 2023 to 16th October 2023) 49,000
For 3 months 14 days: (14th December 2022 to 31st March 2023) 20,800
Total D.A. 69,800
D.A. [40% of 69,800, forming part of retirement benefits] 27,920
The total salary of 10 months 1,67,520
Average Salary = 1,67,520 / 10 = 16,752

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Calculation of Taxable amount of Leave Encashment
Particulars Rs Rs
Amount of encashment received:
(30 x 20) – (150 +60) x (15,000 + 7,500)/ 30 = 2,92,500
Less: Exempted u/s 10(10AA) [Least of the followings]
a) Actual amount received 2,92,500
b) 10 months salary(preceding the month of retirement) 1,67,520
c) Leave credit on the date of retirement
[(30 × 20) – (150 + 60) × (16,752 / 30)] 2,17,776
d) Maximum Limit 3,00,000 1,67,520
The taxable amount of Leave encashment 1,24,980

2.7.4 Compensation for Voluntary Retirement: Sec. 10(10C)

If an employee accepts retirement willingly in lieu of compensation then such retirement is

known as Voluntary Retirement. Voluntary retirement compensation received or receivable by
an employee is eligible for exemption subject to the following conditions

Conditions for exemption:

1. Compensation is received from the specified employer
Specified Employer: Any company; or An authority established under Central, State or
Provincial Act; or A local authority; or A Co-operative society; or A specified University;
or An Indian Institute of Technology (IIT); or Any State Government; or The Central
Government; or Notified Institution of Management (IIM Ahmedabad, IIM Banglore,
IIM Calcutta, IIM Lucknow, and the Indian Institute of Foreign Trade New Delhi); or
Notified Institution.

Tax point: Voluntary retirement compensation received from the employer being an
Individual, Firm, HUF, AOP, etc. is fully taxable in the hands of the employee.

Note:
a) Deduction under this section is allowed once in the life of an assessee.
b) Where any relief has been allowed to an assessee u/s 89 in respect of voluntary
retirement, no exemption shall be allowed under this section.

68
 2. Compensation is received as per the Voluntary Retirement Scheme (VRS) framed in
accordance with prescribed guidelines
Guidelines [Rule 2BA]
a) Scheme (VRS) must be applicable to all employees (other than a director) who have
either completed the age of 40 years or has completed 10 years of service. (This
condition is, however, not applicable in the case of an employee of a public sector
company)
b) Such a scheme must be framed to reduce the number of employees.
c) The vacancy caused by VRS is not to be filled up.
d) The retiring employee is not to be employed in another company or concern
belonging to the same management.
e) The amount of compensation does not exceed the amount equivalent to 3 months
salary for each completed year of service; or salary at the time of retirement
multiplied by the balance month of service left.

Note: Salary = [Basic + DA (If forms a part of retirement benefit) + Fixed percentage of
commission on turnover], last drawn.

Amount of exemption
The exemption shall be minimum of the following -
a) The actual amount received as per guidelines
b) Rs 5,00,000.
c) 3 months’ salary * Completed years of service
d) Last drawn salary * Remaining months of service left

69
 MOTOR CAR

Owned / Hired by employer Owned by employee

Official Personnel Both Official Personnel Both

Not perquisite Actual expenditure on car Nil Nil Expenses born

+ 10% of the cost of car by employer

Small car Big car

Expenses born by employer Expenses born by employee Rs 1800 per month Rs 2400 per month

Small car Big car Small car Big car

Rs 1800 per month Rs 2400 per month Rs 600 per month Rs 900 per month

Big car: more than 1.6 cubic capacities (litres)

Small car: less than 1.6 cubic capacities (litres)
Note: if the Chauffeur/Driver facility is given Rs 900 per month is added.

70
 PROVIDENT FUNDS

Particulars Statutory PF Recognized PF Unrecognized PF Public PF

Constituted Provident Funds EPF and Miscellaneous Not recognized by the Commissioner Public Provident Fund
Under Act, 1952 Provisions Act, 1952 & of Income Tax Act, 1968 Account in SBI
recognized by the or Nationalized banks or
Commissioner of PF and CIT Post Offices
Contribution Employer and Employer and Employee Employer and Employee All assesses
By Employee
independently
Employee Deduction u/s 80C Deduction u/s 80C No Income Tax Benefit Deduction u/s 80C
Contribution
Employer’s Not taxable Amount exceeding 12% Not taxable at the time of Not applicable
Contribution of salary is taxable contribution
Interest Fully exempted Exempted up to 9.5% p.a. On Employee’s contribution Fully exempted
Any excess is taxable taxable under the head “Other
Sources”
On Employer’s contribution
not taxable at the time of credit
Withdrawal at Exempted u/s Exempted u/s 10(12) Employee’s contribution is not Exempted u/s
the time of 10(11) Subject to conditions listed taxable, and interest is taxable under 10(11)
retirement/ below table ## the head of income from other
resignation/ sources.
termination, Employer’s contribution and interest
etc thereon is taxable as Profits in lieu of
Salary, under the head Salaries

Note: Sum received by an Employee under an approved Superannuation Fund is also exempt from tax u/s 10(13).

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## Lump sum amount withdrawn from RPF
a) Amount withdrawn from RPF is not taxable, if
i. Employee retires or terminates job after 5 years of continuous service; or
ii. The employee has resigned before completion of 5 years and joins another organization (who also
maintains recognized provident fund and his fund balance with the current employer is transferred
to the new employer).
iii. The entire balance standing to the credit of the employee is transferred to his account under the New
Pension Scheme as referred u/s 80CC
iv. Employee retires or terminates job before 5 years of continuous service -
 by reason of ill health; or
 by reason of contraction or discontinuance of employer’s business; or
 any other reason beyond the control of the employee.
b) In any other case, the amount is withdrawn shall be taxable as in the case of URPF.

Employer’s Contribution to the New Pension System (as specified u/s 80CCD) is fully taxable under the head
‘Salaries’. However, the deduction is available u/s 80CCD.

2.8 Deductions Against Salary

1. Standard Deduction [Sec 16(ia)]: Applicable to all employees

Least of the following will be allowed as a deduction: (available under both regimes)
a) Amount of Gross Salary
b) Rs 50,000

2. Entertainment Allowance: (available under Optional / old tax regime)

Applicable only for Government Employees [Sec 16(ii)]
Least of the following will be allowed as a deduction:
c) The actual amount of entertainment allowance received
d) 20% of the Basic salary of the Individual
e) Rs 5,000

72
 3. Professional Tax [Sec 16(iii)] (available under Optional / old tax regime)
a) Professional tax or tax on employment paid by an employee levied under a State Act shall be allowed as
deduction only on actual payment.
b) If an employer pays professional tax on behalf of his employee, then first it is to be included in the Salary
as a perk later it is allowed as a deduction.

2.9 Terminal Questions

Section A - 5 marks questions

1. Explain the different types of Basic Salary an individual might receive.
2. Describe the process and significance of claiming a tax rebate under Section 88.
3. Summarize the provisions of Section 89(1) regarding arrears of salary received by an individual.
4. Discuss the tax treatment of leave encashment as per Section 10(10AA).
5. Clarify the conditions under which pension is exempt under Section 10(10A).
6. Illustrate the tax implications of receiving gratuity under Section 10(10).
7. Identify and explain the different types of allowances included in the computation of salary income.
8. Describe the rules related to perquisites as per Section 17(2)
9. Explain how compensation received on termination of service is treated under Section 10(10B).
10. Summarize the steps involved in the computation of total taxable salary for an individual.

PROBLEMS ON EARNED LEAVE

1. Mr. P retires on 1st July 2023 after 18 years 5months of service and receives Rs.75,000 as amount of leave
encashment for 15 months. His employer allows 45 days leave for every one year of service. During service
he has already encashed leave for 12 months. Calculate the taxable amount of leave encashment for the AY
2024-25, if his salary during 1-7-2022 to 1-7-2023 was Rs.5,000 p.m.

73
PROBLEMS ON GRATUITY

1. Mr. Mohith is employed for a salary of ₹6,200 p.m. He is also getting D.A. of 2,800 p.m (forming part of
salary). He received Rs.75,000 as a bonus. On 30/10/2023 he retired from his service after serving for a period
of 29 years and 5 months. He received Rs.2,00,000 as gratuity under the Payment of Gratuity Act. Compute
his taxable gratuity for the AY 2024-25.

Section B - 9 &12 marks questions

PROBLEMS ON PENSION
1. Mr. Sujith retired from service on 31/03/2024. His pension was fixed at 8,000 p.m. He commutes one-half of
his pension and received Rs.5,00,000. Find out the taxable amount of commuted pension if -
a) He is Government Employee
b) He is non-Government employee who also gets gratuity
c) He is non-Government employee who does not get any gratuity

PROBLEMS ON HRA

1. Mr. Ganesh is employed with a company at Delhi. During the previous year 2023-24, he gets 60,000 p.m. as
basic salary and 20,000 p.m. as house rent allowance. He is also getting Rs 20,000 p.m. as dearness allowance,
but only 50% shall be considered to calculate value of other retirement benefits. In Delhi he is having his own
residential flat which he bought in 2017. On 28th June, he was transferred to his native place of Nagpur where
he stayed with his parents up to 31st October and shifted to a rented house on 1st November and started paying
rent of 24,000 p.m. He did not pay any rent when he was staying with his parents. Find out the amount of
H.R.A. chargeable to tax for the Assessment Year 2024-25.

74
 PROBLEMS ON RENT FREE ACCOMMODATION
1. Mr. Rahul gets basic salary of 40,000 p.m., Medical allowance Rs 1,000 p.m., 1,200 p.m. as transport
allowance, bonus 24,000 and commission 60,000. He is also provided with rent free unfurnished
accommodation at Ludhiana (Population 20 lakhs as per latest census) whose fair rental value is 24,000 p.m.
He gets leave encashment for the current previous year of 20,000 during the year. House was provided to him
with effect from 1-7-2023. His salary is due on 1st day of every month. Calculate the value of taxable rent-free
accommodation for the AY 2024-25

COMPUTATION OF TAXABLE SALARY

1. Mr. Harish is working with two employers simultaneously and submits the following particulars of his income
for the year ending on 31.03.2023:

From ABC Ltd Fron XYZ Ltd

Salary 30,000 p.m. 20,000 p.m.
D.A. 30,00 p.m. 40,00 p.m.
Bonus 12,000 5,000
Conveyance Allowance 2,000 p.m. 300 p.m.

He spends 60% of the conveyance allowance received from 1st employer and 40% of such amount received
from 2nd employer for employment purposes. He joined the service with ABC Ltd. in 1983 and since then he
has been receiving Rs 400 p.m. as Entertainment Allowance. M/s ABC Ltd. has provided him with a rent-free
house at Chennai for which it pays rent of Rs 6,000 p.m. Services of gardener have also been placed at the
disposal of Mr. Harish for which company is paying Rs 800 p.m. The house has been furnished with all items
costing Rs 1,00,000.

Computation of Salary Income of Mr. Harish for the AY 2024-25.

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2. From the particulars given below compute the salary income of Mrs. Swati for the year ending on 31-3-2024:

a) Net salary received after deduction of the following 1,50,000

 Income tax deducted at source 6,000
 Own contribution to RPF 20,000
 Rent of residential house provided 4,000
 Profit Bonus 24,000
b) Entertainment Allowance 12,000 p.a.

c) She went on tour for official purposes and received travelling allowance Rs 6,000
d) She was ill and was treated in a private hospital. Medical bills reimbursed Rs 12,000
e) She was provided with rent free house owned by the company at Patna [Population 20 lakhs] company
also provided a gardener to maintain this house. Salary of gardener paid by the company Rs 500 p.m.
f) The electricity and water bill of the above house paid by the company Rs 1,200 p.m.
g) She was provided with a car of 1.2 lt. CC which was used partly for personal and partly for employment
purposes.
h) The company contributed Rs 24,000 towards RPF.
i) She has taken interest free loan of Rs 12,000 against salary during the year repayable in 6 equal monthly
instalments starting from August, 2022.

3. Shri. Rakesh an employee working in Dreams Ltd. (Mumbai) has presented the following particulars of his
salary. Calculate Salary income for the previous year 2023-24.
a. Basic salary 20,000 p.m. [Due on the last day of the month]

b. D.A. 80% of salary [50% of D.A. forms part of salary]

c. Bonus – Basic Salary of one month

d. He has engaged a helper at Rs 1,200 p.m. and his employer pays him Rs 1,500 p.m. on this account.

e. Leave encashment (relating to current year) Rs 20,000.

f. Mobile telephone bill of employee's wife paid by employer Rs 15,000.

g. His employment tax paid by employer Rs 2,500.

h. On 1-12-2022 he took a loan of Rs 3,00,000 from his employer to purchase a car. The rate of interest is

76
 6.25% p.a. Repayment of loan @ 5,000 p.m. is to start after 4 months from the date of taking of loan. The
prescribed rate of interest by SBI as on 1-4- 2023 is assumed to be 9.25%.

i. Commission Rs 66,000

j. He and his employer contribute Rs 3,200 p.m. each towards RPF.

k. Interest credited on the accumulated balance of RPF @ 10% is Rs 20,000.

l. He received Rs 20,000 as leave travel concession but has not travelled anywhere

m. He has been provided with free use of a car of 1.8 lt. C.C. Car is used partly for personal and partly for
employment purposes.
n. He has been provided with a rent-free house owned by employer (FRV of House Rs 8,000 p.m.) along
with facility of gardener costing employer 6.000 p.a. Furniture costing Rs 1,00,000 (W.D.V. 75,000) has
also been provided for his use by the employer.

o. His personal club bills paid by employer Rs 25.000 p.a.

p. Medical bills for Rs 75,000 were re-imbursed in following manner:

i. of a notified hospital 22,000 (for nose surgery-a notified disease)

ii. of a private hospital 53,000.

Student Practice Problems:

PROBLEMS ON EARNED LEAVE

1. Mr. Srinath is a non gov employee who receivesRs.28000 as EL Salary, at the time of retirement on 10 th March 2024.
Based on the following information, calculate his taxable amount of EL Salary for the AY 2024-25.
Basic Pay = Rs.5700 p.m. since 1/1/2023 and
D.A (forming part of salary) = Rs. 800 p.m
Duration of service = 26 years 8 months
Leave availed while in service is 17 months
Also, what benefit would he receive, if he was a Govt employee?

77
PROBLEMS ON GRATUITY

1. Mr. Arun of BN Ltd retired on 31/12/2023, after completing 32 years and 6 months of service. The company paid him a
gratuity of 68,000 (not covered under the payment of gratuity act). The terms of employment were as follows:
 Basic pay-2,100 per month till September 2023

 Basic pay-2,400 per month from October 2023

 Dearness allowance @ 50% of Basic pay of which 25% enters to retirement benefit. Compute taxable gratuity for
the AY 2024-25.

PROBLEMS ON PENSION

Mr. Khan retired from service on 30/06/2023. He gets pension of Rs.2,000 p.m. up to 31/01/2024 and with effect from
01/02/2024 he gets 70% of pension commuted for Rs.80,000. Determine the taxable pension for Assessment Year 2024-
25 assuming, he also receives gratuity.

PROBLEMS ON HRA
Mr. Hari is employed at Amritsar on a salary of 30,000 p.m. The employer is paying H.R.A. of 8,000 p.m. but the actual
rent paid by him (employee) is 12,000 p.m. He is also getting 2% Commission on turnover achieved by him and turnover
is 50,00,000. Calculate his Gross Salary for the AY 2024-25.

PROBLEMS ON RENT FREE ACCOMMODATION

Mr. Jitender is in receipt of annual salary of Rs 2,00,000. He is provided with furnished accommodation at Gurgaon
[population is 11 lakhs] for which his employer pays a rent of Rs 4,000 p.m. and deducts Rs 1,000 p.m. from employee's
salary. The cost of furnishing the residence amounts to Rs 30,000. Calculate the value of perquisite if house is occupied
for 9 months only for the AY 2024-25.

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COMPUTATION OF TAXABLE SALARY

1. Computation of salary income in case employee opts for new tax slab rates. The following are the particulars of Mr. A's
salary income. Compute his salary income if he opts for new tax slab rates for the AY 2024-25.

a) Salary (Basic) Rs 60,000 p.m.

b) D.A-50% of salary (50% of D.A. forms part of Retirement benefits)

c) Bonus one month's basic salary

d) Leave travel concession-equal to one month's basic salary (Given once in two years)
e) Conveyance allowance 4,000 p.m, House rent allowance 12,000 p.m. Mr.A is paying Rs 15,000 p.m. as rent
f) Entertainment allowance 2,000 p.m.
g) Education allowance @ 500 p.m. per child. Two children of Mr. A are studying in a school and he is paying a
monthly tuition fee of 1,800 p.m. for both children.
h) Helper allowance 2,000 p.m. Uniform allowance 5,000 p.a.
Conveyance allowance is given to Mr. A to meet petrol expenses of his car which he uses to come to office and go
back to his residence. It is also observed that he spends almost 50% of the entertainment allowance on visitors
coming to meet him in connection with his business/job duties.

2. Mr. John an employee of Ranchi [Population 15 lakhs] based company provides the following particulars of his salary
income:

a. Basic Salary Rs 12,000 p.m.

b. Profit Bonus Rs 12,000
c. Commission on turnover achieved by Mr. A Rs 42,000
d. Entertainment allowance Rs 2,000 p.m.
e. Club facility Rs 6,000
f. Transport allowance Rs 1,800 p.m.
g. Free use of car of more than 1.6 It. capacity for both personal and employment purposes; expenses are met by
employer.
h. Rent free house provided by employer. Lease rent paid by employer 6,000 p.m.
i. Free education facility for three children of the employee: [Bills issued in the name of employer] Rs 22,500

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 j. Gas, water and electricity bills issued in the name of employee but paid by employer Rs 16,800

Compute income under the head salary for the assessment year 2024-25.

3. Following details are furnished by R an Indian citizen for the year ending 31-3-2024. Compute income under the head
salary for the AY 2024-25.

a) Salary (net of professional tax, rent of house provided by employer and R's contribution to Provident Fund) Rs
2,48,000

b) R's contribution to Provident Fund Rs 40,000

c) Employer's contribution to Provident Fund Rs 40,000
d) Rent of residential house provided by employer and deducted out of salary Rs 9,600
e) Professional Tax deducted at source Rs 2,400

f) Interest credited to Provident Fund @ 8.75% per annum Rs 44,000

g) Leave Travel Allowance received Rs 7,800
h) Rent free house provided to employee at Hyderabad [Population 30 lakhs] Rent of house paid by employer Rs 66,000
i) Remote Locality Allowance @ Rs 3,000 p.m. [Notified to be exempted up to 200 p.m].
j) Bonus equal to one month salary
k) Running Allowance Rs 2,000 p.m.
l) Children Education Allowance for 3 children @ 400 p.m. each (one of his son is living in hostel)
m) Entertainment Allowance Rs 700 per month
n) Amount contributed to PPF 1,30,000.

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4. Mr. Sarangi, an employee of a public limited company at Cuttack, received the following emoluments for the previous
year 2022-23.

Rs
a. Basic salary @ Rs 30,000 p.m. 3,60,000
b. D.A. as per terms of employment Rs 3,000 p.m. 36,000
c. Bonus equal to 1 month's salary 33,000
d. Commission 60,000
e. Advance salary 66,000
f. Employee's contribution in recognized Provident Fund 48,000
g. Special allowance @ Rs 2000 p.m. 24,000
h. House rent allowance received @ Rs 10,000 p.m. 1,20,000
i. Rent paid by him @ Rs 12,000 p.m. 1,44,000
j. Entertainment allowance Rs 3,000 p.m. 36,000
(He spends the whole amount while performing his official duties)

(k) During the year employer has provided him a Honda city car of 1600 cc capacity with chauffeur which he uses for his
personal purposes. Employer's expenditure of the running and maintenance of the car including salary of the driver is Rs
1,20,000 during the year. Cost of the car is Rs 7,50,000.
(l) Interest credited to his recognized provident fund @ 12% is Rs 30,000.
(m) The employer company has provided him free club facility which costed the company Rs 24,000 and free lunch for 300
days cost being 150 per day.
(n) During the previous year he has been provided a interest free loan of 18,000 to purchase a motor cycle. In November
2022 his father fell ill (disease specified under Rule 3A) and he again got an interest free loan of Rs 50,000 from his
employer for the medical treatment of his father.

Find out his Salary Income for the Assessment Year 2024-25.

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 2 .2. Income from House Property
Structure

2.2.1 Introduction ..............................................................................................................

2.2.2 Basic terminologies under house property: ................................................................
2.2.3 Computation of Gross Annual Value (GAV) .............................................................
2.2.4 Treatment of Pre-Construction Period Interest. .........................................................
2.2.5 Treatment of unrealized rent recovered or realized during the P.Y.2023-24 or subsequently {sec 25A & Sec
25AA:} ...............................................................................................................................
2.2.6 Deductions from Annual value (Sec 24) ....................................................................
2.2.7 Self-Occupied-Property: ...........................................................................................
2.2.8 Terminal Questions: ..................................................................................................

Learning Objectives

To know the items treated under the House property head of income.
To consider exemptions u/s 24 accordingly.
To evaluate the taxable income as per the guidelines of IT act.

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 2.2.1 Introduction

This is the second head of income which charges income from house properties by way of rent received or receivable.

Basis of charge:
According to Sec 22, Annual value of a property, consisting of any building, or land appurtenant thereto, of which
the assessee is the owner, is chargeable to tax under the head “income from house property”.
Rental income is taxable under the head “income from house property if the following conditions are satisfied.
 The property should consist of any building or land appurtenant thereto
 The assessee should be the owner and
 The property should not be used by the owner for any business or profession carried on by him

Explanation:
 Building and land appurtenant thereto: - Income tax is charged on buildings and land appurtenant
(belonging) thereto. Income from a land which is not part of any building will be charged under income from
other sources.
 Land appurtenant to building include compound walls, playground, garden etc., in case of non- residential
building car parking spaces, drying grounds, connecting roads in the factory building shall be included in
lands appurtenant to buildings.
 Buildings include residential houses, warehouses, auditoriums, cinema halls, buildings let out for office use,
dance halls, lecture halls etc.,

Exceptions to the rule that income from house property is taxable under the head house property:

 The income from following buildings is not taxable under the head house property:
 Buildings or staff quarters let out to employees – if the assessee lets out staff quarters to his employees whose
residence there is necessary for the efficient conduct of business, then the rent collected by the assessee is
taxable as income from business and not as income from house property.
 If a building is let out to authorities for locating bank, post office, police station etc., the income is taxable
as business income, provided the dominant purpose of letting out the building was to carry on assessee
business more efficiently.
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  Composite letting of building with other assets: - where the assessee gives on hire, building along with
machinery, plant for a composite rent and the rent of the building is inseparable from other assets, the income
from such letting is chargeable under income from other sources or business income.
 Income from paying guest accommodation is chargeable under business income.

Deemed owners:
 Deemed owners are not legal owners of the property, but according to Income act they are treated as owners
of the property. In the following circumstances assess shall be treated as deemed owners:
 An individual who transfers any house property to his or her spouse, without adequate consideration, or to a
minor child, not being a married daughter shall be deemed to be the owner of the house property so
transferred.
 The holder of an impartible estate is deemed to be the owner of all the properties comprised in the estate.
 A member of a co-operative society, company, or an AOP to whom a building or its part is allotted or leased
under a house building scheme shall be deemed to be owner of that property.

Exemptions regarding income from house property:

Income from the following sources is not taxable under income tax act.
 Income from a farm house
 Income from property owned by
 Local authority
 Scientific research association
 Trade union
 Charitable trust
 Political party
 University or other educational institutions
 Hospitals or medical institutions
 Income from property used for assessing own business or profession.
 Income from two self-occupied houses.
 Income from house meant for self-residence but could not be occupied throughout the previous year on
account of his service or business/profession elsewhere.

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 2.2.2 Basic terminologies under house property:

 Annual Value: Income from house property does not mean rental income, but it is a sum for which the
building might reasonably be expected to be let from year to year. Annual value of the property is calculated
by considering the municipal valuation of the property; fair rental value, standard rent and actual rent
receivable of the house property Annual value may be Gross Annual Value (GAV) or Net Annual Value
(NAV).
 Municipal rental value (MRV): It refers to the rental value of the house property fixed by the municipal
authorities to levy the municipal taxes.
 Fair Rental value (FRV): It refers to the rental value of similar accommodation in the same or similar
locality as determined by local authority or any other competent authority.
 Standard Rental value (SRV)/ Minimum Rent: It refers to the rental value fixed by the Rent Control
Authority.
 Annual Rental Value (ARV)/ De-facto Rent: It refers to the rent received or receivable by the owner of the
property. It is also called de-facto rent. The Annual rental value is the value after deduction of Unrealized
Rent.
 Composite rent: It refers to the rent collected by the owner for the house property let out along with the
facilities of water, gardening, stair case lighting, security charges, pump maintenance etc. composite rent
should be split into Annual Rental value and service charges for associated services.
 The part of Annual Rental Value is assed under sec. 22, as Income from House Property. The amount which
related to rendition of the services (such as water, gardening, stair case lighting, security charges, pump
maintenance etc.) is charged to tax under the head “Profit and gains of Business or profession” or under the
head of “Income from other sources”.
 Expected Rental Vale (ERV): It refers to the highest of MRV or FRV but subject to a maximum of SRV.
 Unrealized Rent - Unrealized rent is the amount of rent which the owner cannot realize or which is payable
but not paid by the tenant. It is allowed to be deducted from GAV if conditions of Rule 4 are satisfied. Those
conditions are as follows:
 The tenancy is Bonafide.
 The defaulting tenant has vacated, or steps have been taken to compel him to vacate the property;
 The defaulting tenant is not in occupation of any other property of the assessee;

85
  The assessee has taken all reasonable steps of insisting legal proceedings for the recovery of the
unpaid rent or satisfies the assessing officer that legal proceedings would be useless.

 Loss due to Vacancy Period:

o The loss due to vacancy period is not to be subtracted from rent received. It shall be deducted under
step.

 Municipal Taxes:
o Municipal taxes are deductible only if:
o These taxes are borne by the owner,
o The tax must be paid by the owner during the previous year. (If municipal taxes are due but not
paid, it is not allowed as a deduction.)

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 2.2.3 Computation of Gross Annual Value (GAV)

Format Determination of Gross Annual Value

Name of the Assessee: Previous Year 2023-24
Status: Assessment Year 2024- 25
Municipal Value Whichever xxx
Step 1 is higher
OR
Fair rental value xxx
Notional Rent xxxx
Notional Rent Whichever xxxx
(The resultant of step 1) is Less
step 2
OR
Standard Rent xxx
Expected Rent xxxx
Expected Rent
step 3 (The resultant of step 2) Whichever xxx
OR is higher
Actual rent xxx
(Actual rent =Actual Rent-Unrealized rent- cost of common facilities)
Gross annual Value before vacancy period loss xxx
Less: - vacancy period loss xx
Gross annual Value xxxx

87
(b)Computation of income from house property of an L.O.P/D.L.O. P

Gross annual value xxx

Less: municipal taxes “paid by owner” xxx
Xxxx
Net annual value xxx
Less: deduction u/s 24
(i)Standard deduction 30% of NAV. (ii)Interest on loan:(no limit)
Pre-construction interest = 1/5th Post-construction interest. xxx
Income or loss from house property. Xxxx

Determination of actual rent:

Sometimes the owner takes upon under an agreement the burden of providing certain facilities to the tenant, e.g. lift,
water pump, electricity, vehicle parking, gardener, etc., in such a case the actual rent received or receivable minus
the cost of providing such facilities will be the actual rent.

If the tenant has undertaken the obligations of the landlord, the amount so paid will be added in rent received to
arrive at the actual rent. However, no adjustment will be made in determination of actual rent regarding the following:
• Tax paid by the tenant to the local authority
• Repair charges borne by the tenant
• Notional interest on deposit taken from the tenant.

88
89
 2.2.4 Treatment of Pre-Construction Period Interest.

Illustrations 1

Calculate the allowable interest on loan from NAV of the house property.

1. Date of borrowing loan 01-06-2015

2. Date of repayment of loan 10-05-2023
Date of completion of Construction May-2020

4. Amount of loan borrowed ₹. 30,000

5. Interest on Loan 20% P.A

01-06-2015 31-03-2016 30,000 X 20 % X 10 months 5,000

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 01-04-2016 31-03-2017 30,000 X 20% X 12 months 6,000

01-04-2017 31-03-2018 30,000 X 20% X 12 months 6,000

01-04-2018 31-03-2019 30,000 X 20% X 12 months 6,000

01-04-2019 31-03-2020 30,000 X 20% X 12 months 6,000
Total 29,000

For the first-year loan taken is in the month of June, so the total interest is calculated only for 10 months in 2014-
15. The total of 29,000 has to be adjusted from 2021 to 2025 (5 years)

Pre-Construction Period interest deductible in the previous year = 29,000/5= 5,800 Previous year interest (i.e.,
Current year interest) = 6,000
Total -11,800(5,800 +6,000)

91
 2.2.5 Treatment of unrealized rent recovered or realized during the P.Y.2023-24
or subsequently {sec 25A & Sec 25AA:}
 Any unrealized rent recovered during the previous year, which was disallowed earlier, is not taxable.
 Any unrealized rent recovered during the previous year, which was allowed earlier, is fully taxable as
deemed income.
 Note: No standard deduction under Sec 24 is allowed. Similarly, expenses incurred to realize unrealized
rent is also not allowed.

2.2.6 Deductions from Annual value (Sec 24)

While computing income from house property the following two deductions are allowed under section 24.
• Standard Deduction U/s 24(a)
• Interest on Loan U/s 24 (b) Explanation:

Standard deduction:
• A sum equal to 30% of Annual value as standard deduction.
• Interest on loan taken in respect of house property:
Interest on loan taken for the purpose of purchasing, constructing, reconstructing or repairing the house property is
allowed as deduction on accrual basis.

Exceptions:
In the following cases the Interest on loan is not allowed as deduction:
• Interest on unpaid interest – not allowed as deduction.
• Interest on a fresh loan, taken to repay the original loan taken for purchasing, constructing,
reconstructing or repairing the house property.
• Interest on loan paid to outside India, on which tax has not bee deducted at source (TDS).
• Any brokerage or commission for arranging the loan.

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 2.2.7 Self-Occupied-Property:

Assesse may occupy a maximum of two houses for his own residential purposes.
If more than two properties are used for own residential purposes, only two houses (according the choice of the
assessee) are treated as self-occupied properties and other houses/houses will be treated as “deemed to be let out.
Conditions:
• The property is used throughout the previous year for its own residential purposes, it is not let out or put to any
other use.
• The property could not be occupied throughout the previous year because employment, business or profession
of the owner is situated at some other place.
• In case of self-occupied house the GAV is nil and Municipal tax are not allowed as deductions, So NAV also
Nill, but Interest on loan is allowed as deduction as under:
• If the loan is borrowed before 1.04.1999 –maximum limit for deduction of interest is ₹. 30,000.
• If the loan is borrowed after 1.04.1999 – purpose of loan shall determine the maximum limit.
• Loan taken for acquisition, construction – ₹.2,00,000
• Loan taken for repairs, renewals – ₹.30, 000.

Note: No limit shall be applicable to let out house property.

Note: (the construction or acquisition must be completed within 3 years from the end of the financial year in which
loans were taken).

 When the part of the property is self-occupied and a part is let out.
In the above case the unit occupied is treated as self-occupied and the expenses apportioned between the all
units.
 During the part of the year the property is self-occupied and a part is let out.
In the above case the house shall be treated as let out house property (deemed to be let out house property).

Points to be noted:
 The expected rent would be GAV as the house property is not actually let out.
 The full amount of interest on loan taken for such property shall be allowed to deduct from annual value u/s

93
 24.
 The assessee can choose the house which would be treated as a self-occupied house.
 For the FY 2020-21 and onwards, the benefit of considering the houses as self-occupied has been extended
to 2 houses. Now, a homeowner can claim his 2 properties as self- occupied and the remaining house as let
out for Income tax purposes.

Illustration 2
Mrs. Shanthi (resident) owns two houses in Bangalore. She has let-out both the houses throughout the year for
residential purposes.

House 1 House 2
Municipal value 4,00,000 12,00,000
Fair Rental value 7,20,000 7,20,000
Rent received 4,80,000 8,00,000
Standard Rent 6,00,000 6,00,000
Repairs 72,000 1,00,000
Municipal Tax paid 40,000 1,20,000
Insurance Premium paid 48,000 70,000

On 1st April 2022, she bought a residential house for self-occupation for ₹. 10,00,000 by taking a housing loan in
Canara Bank. Loan amount was ₹. 7,00,000 and rate of interest 12% p.a.
Compute taxable income from House property for the Assessment Year 2024-25.

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Solution:

Computation of Taxable Income from House Property

Assessee: Mrs. Shanthi Previous Year: 2023-24
Status: Resident Assessment Year: 2024-25

Particulars House I ₹. House II ₹. House III ₹.

Municipal rental value 4,00,000 12,00,000 ---

Fair rental value 7,20,000 7,20,000 ---
Notional Rent (Whichever is high of the above 2) 7,20,000 7,20,000 ---
Standard rent 6,00,000 6,00,000 ---
Expected Rent (Whichever is low of the above 2) 6,00,000 6,00,000 ---
Actual rent 4,80,000 8,00,000 ---
Gross Annual Value (Whichever is high of the above 2) 6,00,000 8,00,000 ---
Less: Municipal taxes -40,000 -1,20,000 ---
Net Annual value 5,60,000 6,80,000
Less: Deductions U/s 24
Standard Deduction (Note 1) -1,68,000 -2,04,000 ---
Interest on Loan (Note 2) 0 0 -84,000
Income from House property 3,92,000 4,76,000 -84,000

Computation of Taxable Income of House Property

Particulars Amount ₹.
Income from House I Let-out property 3,92,000
Income from House II Let-out property 4,76,000
Loss from House III Self occupied property -84,000
Taxable Income from House Property 7,84,000

Working notes:
Note 1
Particulars Amount ₹.
Standard Deduction 30% on NAV
House I 5,60,000 * 30% 1,68,000
House II 6,80,000 * 30% 2,04,000
Note 2
Particulars Amount ₹.
Interest on loan 7,00,000*12% 84,000

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Illustration 2
Mr. Praveen is the owner of three houses. The particulars are as follows:

Particulars House A House B House C

Annual fair rent 40,000 35,000 50,000
Municipal valuation 50,000 40,000 50,000
Standard rent 45,000 42,000 55,000
Let out (per month) 3,000 2,500 -

Purpose of use Let out Let out Self

Residential business occupied
Repairs 2,000 - 5,000
Collection charges 3,000 1,000 -
Interest on loan 15,000 5,000 2,000

Municipal tax is 10% of MV. Municipal tax of House A was paid by the tenant, but Municipal tax of House B was
not paid till 31.03.23, but the municipal tax of House C was paid by owner. House A remained vacant for 4 months.
Compute income from House Property for A.Y. 2024-25.

Solution:
Computation of Taxable Income from House Property
Assessee: Mr. Praveen Previous Year: 2023-24
Status: Resident Assessment Year: 2024-25
House House House
Particulars
A ₹. B ₹. C ₹.
Municipal rental value 50,000 40,000 ---
Fair rental value 40,000 35,000 ---
Notional Rent (Whichever is high of the above two) 50,000 40,000 ---
Standard rent 45,000 42,000 ---
Expected Rent (Whichever is low of the above two) 45,000 40,000 ---
Actual rent (House A ₹. 3,000*12; B ₹. 2,500 * 12) 36,000 30,000 ---
Gross Annual Value (Whichever is high of the above two) 45,000 40,000 ---
Less: Vacancy rent (A ₹. 3,000*4) -12,000 0
Adjusted Gross Annual Value 33,000 40,000
Less: Municipal taxes 0 0 ---
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 Net Annual value 33,000 40,000
Less: Deductions U/s 24
Standard Deduction (Note 1) -9,900 -12,000 ---
Interest on Loan (Note 2) -15,000 -5,000 -2,000
Income from House property 8,100 23,000 -84,000

Computation of Taxable Income of House Property

Particulars Amount ₹.
Income from House A Let-out property 8,100
Income from House B Let-out property 23,000
Loss from House C Self occupied property -2,000
Taxable Income from House Property 29,100

Working notes:
Note 1
Particulars Amount ₹.
Standard Deduction 30% on NAV
House A 33,000 * 30% 9,900
House B 40,000 * 30% 12,000

2.2.8 Terminal Questions:

Section A - 5 marks questions

1. What is the definition of "income from house property" under the Indian Income Tax Act, 1961?

2. Explain the difference between a self-occupied property and a let-out property in terms of income tax
calculation.

3. Calculate the income from house property if the annual rent received is ₹5,00,000, municipal taxes paid are
₹40,000, and the interest on the home loan is ₹1,00,000.

4. Compare the tax benefits available for a self-occupied property and a let-out property under Section 24 of the
Income Tax Act.

5. Assess the impact of municipal taxes on the net annual value and the subsequent taxable income from house
property.

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 6. Describe how the annual value of a property is determined if it is not rented out.

7. If a taxpayer owns two properties, both self-occupied, demonstrate how the tax treatment would differ for these
properties.

Section B

1. Miss. Roopa is the owner of the following house properties. Find out the net annual value for the
assessment year 2024-25
Particular A B C
Municipal value 1,80,000 1,80,000 3,60,000
Fair rental value 1,92,000 1,68,000 3,96,000
Standard rent 2,04,000 2,40,000 3,00,000
Actual rent (p.a) 2,16,000 1,92,000 2,88,000
Municipal tax paid 12,000 24,000 -
Municipal tax due 12,000 - 24,000

2. Compute GAV from the following information

Particulars A B C D
FRV 1,25,000 1,20,000 1,44,000 1,08,000
MRV 1,20,000 1,25,000 1,08,000 1,44,000
SRV 1,10,000 1,44,000 1,25,000 1,20,000
ARV 1,44,000 1,08,000 1,20,000 1,32,000
Unrealized rent 27,000 10,000 11,000
Vacancy Allowance 24,000 9,000 20,000 22,000

3. From the following information compute Income House Property for the A.Y.2024-2025. Municipal Value
₹. 1,80,000Fair Rental Value ₹. 1,00,000 Let out (per month) ₹. 16,000 Standard Rent ₹. 1,20,000 Unrealized
rent for one month. Vacancy Allowance one month. Municipal tax paid by the owner of house property ₹.
20,000 Municipal tax paid by tenant ₹. 10,000
4. Calculate NAV in the following cases:

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 Particular H-1 H-2 H-3
Municipal value 80,000 1,40,000 1,40,000
Fair rental value 78,000 1,50,000 1,50,000
Standard rent 85,000 1,20,000 1,20,000
Actual rent 72,000 96,000 1,44,000
Unrealized rent 6,000 16,000 12,000
Vacancy Allowance 3 Months 4 Months 2 Months

Municipal tax paid 10% of Municipal value.

5 Mr. A is the owner of a house. The particulars of which are as follows: Municipal value ₹. 1,80,000m Fair
Rental value ₹. 1,95,000 Standard rent ₹. 1,90,000 Actual rent ₹. 15,500 p.m. Vacancy period 1month
Municipal tax paid by the owner ₹. 20,500 Municipal tax paid by tenant ₹. 2,500 Determine the taxable
income from house property for the A.Y. 2024-25

Section B - 9 marks questions

1 From the following particulars of house properties owned by Sri. Viswanath. Compute his income from
house property for the A.Y.2024-25

Particulars I House II House III House IV House

The first and second Municipal value 8,000 9,000 20,000 24,000
house is self- Actual rent -- --- 24,000 30,000
occupied. The third Local taxes paid 1,600 1,800 4,000 4,800
Repair charges 1,000 -- 3,000 --
house is let out for Fire insurance premium 50 150 200 500
residence and the Interest on loan for construction 1,180 -- 1,800 4,200
fourth house is let out Unrealized rent -- --- 3,000 --
Vacancy period -- -- 3 months ---
for business. The
tenant paid local taxes on the fourth house.

2 Mr. Sukruth is the owner of four houses in Bangalore. He gives the following particulars of these properties.

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 • Use of the House• •
I HP SOP •
II HP Self •
III HP LOP IV HP LOP
Business
• Rent received - - 66,000 54,000
• Fair rental value 60,000 70,000 56,000 90,000
• Municipal value 62,000 67,000 70,000 60,000
• Municipal Tax 10% - Paid by Paid by Tenant
Tenant but deducted
from Rent
• Repairs 5,000 3,000 - -
• Interest on loan - - - 3,000
• Vacancy period 2 months - 1 month -

Find out the Income from House Property for the AY 2024-25

1. Mr. Chopra owns four houses. The details of these properties are given below for the PY 2023-24.

Self-occupied Self-occupied
Particulars
for Residence Let out for Residence Let out
Municipal value 1,20,000 1,32,000 10,80,000 2,20,000
Fair rental value 1,50,000 1,60,000 12,00,000 2,50,000
Standard rent - 1,55,000 10,00,000 2,48,000
Rent receivable per month - 8,000 - 15,000
Vacancy period 3 months 1 month - -
Unrealized rent (conditions - - - 6,000
satisfied)
Municipal tax
 Paid by Chopra 9,600 4,000 42,000 1,000
 Paid by Tenant 6,000 11,000
Interest on loan borrowed
 For the year 2021-22 - 8,600 1,00,000 3,900
 For the pre-
construction period 10,000 25,000 2,10,000 -

Compute his total income for the assessment year 2024-25

2. Mr. Kumar owns a house in Delhi. During the previous year 2023-24, 3/4th portion of the house is occupied
for self-residence for a full year and 1/4th portion is let out for residential purposes from 1.4.2023 to 31-12-
2024 on a rent of ₹. 700 p.m. From 1-1- 2024 this portion was used for own residency by him. Municipal
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 valuation of the entire house is ₹. 20,000 and fair rental value is ₹. 24,000. Expenses incurred in respect of
the house property were: Municipal Taxes ₹. 60,000; Repairs ₹. 2,000; Fire insurance premium ₹. 3,500;
Land Revenue ₹. 4,000 and Ground Rent ₹. 200. These expenses were paid during the year Find out his
income from house property for the assessment year 2024-25

3. Mr. Gurudas owns the following four house properties. Other particulars are as follows:

House 3 House 4
House 1 House 2
Particulars Let out to a own
Self-occupied Self-occupied
business business
Municipal value 20,000 50,000 70,000 45,000
Standard rent --- ---- 72,000 48,000
Fair rental value 26,000 60,000 80,000 50,000
Annual rent --- --- 96,000 ----
Vacancy --- --- 1 month ----
Unrealized rent --- --- 16,000 ----
Municipal taxes 5,000 2,000 6,000 4,000
Repairs 4,000 2,000 8,000 5,000
Interest on money
borrowed 8,000 10,000 18,000 ----
(construction)

Determine the house property income of Mr. Gurudas.

Section C - 12 marks questions

1) Mr. Raj has three houses all of which are self-occupied. The particulars of the houses for the previous year 2023-
24 are as under:
Particulars House 1 House 2 Houses3
Municipal Valuation p.a. 3,00,000 3,60,000 3,50,000
Fair rent p.a. 3,50,000 3,25,000 3,90,000
Standard Rent p.a. 3,75,000 3,70,000 3,75,000
Date of Completion/purchase 31.3.1999 31.3.2001 1.4.2015
Municipal taxes paid during the year 36,000 28,800 19,800

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 Interest on money borrowed during the current
--- 50,000 ---
year
Interest for current year on money borrowed in
--- --- 1,65,000
August 2020 for purchase of property

Compute Mr. Raj’s income from house property for the AY 2023-24, and suggest which houses should be opted by
Raj to be assisted as of self-occupied, so that his tax liability is minimum, assuming he has not opted u/s 115 BAC.

2.3 Suggested Readings / Reference Books:

1. Vinod K Singhania. and Monica Singhania, Students’ Guide to Indirect Taxes, Taxmann Publications Pvt.
Ltd., Delhi. – 2024.
2. Swamynathan. C, Abhirami.D, Srinivas. G, Income tax – Kalyani Publications – Bangalore. – 2024.
3. Dr. Mehrotra and Dr. Goyal: Direct taxes – Law and practice, Taxmann publication.

Web Links:
 https://cleartax.in/s/house-property
https://cleartax.in/s/deductions-under-section24-income-from-house-property

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 Module-III
Heads of Income Tax-I
3.1 INCOME FROM BUSINESS AND PROFESSION

Structure:
• Introduction
• Disallowed or Inadmissible Expenses
• Business Income
• Allowed Expenses
• Depreciation
• Essential Features of Profits and Gains of Business

Objectives
1. Understand the meaning of ‘Business’ and ‘Profession’ and the scope of income
chargeable to tax under this head.
2. Identify the expenses, payments that are admissible as deduction and the conditions to
avail the same.
3. Identify the expenditures which are not admissible as deduction.
4. Compute the capital gains from transfer of capital assets in the manner prescribed
5. Compute cost of acquisition and indexed cost of acquisition
6. Identify the income which are chargeable to tax under ‘Income from other sources’
7. Compute the tax on casual income

Introduction

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Income from Business or Profession is the third head of income, maximum number of assesses
pertaining to this head. Section 22 to 44 of the Income Tax Act 1961 deals with the taxability of
income either from business or profession.

Chargeability (Section 28)

The following types of incomes are chargeable to tax u/s 28 under the head-profit and Gains of Business:

 Profits and gains of any business.

 Any compensation due or received by a person in connection with termination ormodification
of terms and conditions relating to this head.
 Income derived by a trade, profession or similar association from specific servicesperformed for
its members.
 Profit on sale of import licenses, incentives by way of cash compensatory support anddraw-back of
duty.
 The value of any benefit or perquisite convertible into money or not arising from businessor the exercise
of a profession.
 Any interest, salary, bonus, commission or remuneration received by a partner of a firm assessed as
such
 Any some whether received or receivable in cash or in kind under an agreement for not carrying out any
activity in relation to any business or profession.
 Income from speculation business.
 Any amount (including bonus) received under a key man insurance policy.
 Interest on securities where such securities are held as stock in trade.

Business u/s 2(13)

Business includes any trade, commerce or manufacture or any adventure or concern in the nature of trade,
commerce or manufacture. In simple terms Business means buying, selling and manufacturing of goods to earn
profit.
It is not necessary that there should be a series of transactions in a business, neither repetition nor continuity of
similar transactions is necessary.

Profession u/s 2(36)

Profession means those activities for earning livelihood which requires, intellectual skill and specialized
knowledge e.g. Doctors, Lawyers, Engineers, Chartered Account profession also include vocation.
Vocation refers to any activity which a person practices to earn his livelihood e.g. practice of religion, painting
etc.

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 Under section 2(36) profession includes vocation.
Vocation means any type of activity in which a person is engaged and earns his livelihood from such activity.
The practice of religion and writing of articles in a magazine is also vocation.
In other words, Vocation is the inbuilt talent/skill which is not acquired or possessed by a systematic study.

Speculative Business

It means any business in which a contract for the purchase and sale of any commodity including stock and shares
are periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity.

Format of Computation of Taxable Income from Business for the AY 2024-25

Particulars Amt Amt

Net profit as per Profit and Loss A/c XXX

Add:
• Inadmissible, Non-Business Expenses, Excess XXX
expenses debited to P/L A/c. (Expenses
debited to P&L A/c but not allowable as per
IT act)
• Business Incomes not credited to P&L A/c
• Over Valuation of opening Stock XXX
• Under Valuation of Closing Stock XXX
XXX

XXXX
Less:
 Allowed, Admissible Expenses not debited to P/L xxx
 A/c (Expenses not debited to P/L A/c and allowed XXX
as per IT act)
 Non-Business income credited to P/L A/c XXX
 Undervaluation of Opening Stock XXX
 Overvaluation of Closing stock
XXX

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 Taxable Income from Business XXX

XXX

Disallowed or Inadmissible Expenses

All expenses incurred either directly or indirectly related to business are allowed as business expenses. However,
the following expenses, are disallowed and hence to be added back to the net profit.
1) Personal expense like marriage expense, drawing, premium on life and medical insurance, proprietor salary,
rent paid for own building, saving made in NSC, PF, etc. household expenses like electricity, telephone uses
for residence.
2) Any payment made in excess of 10,000 either in cash or bearer cheque, the entire amount is inadmissible.
3) Income tax, Wealth Tax or Advance Income Tax paid.
4) Interest on loan, taken for personal purpose.
5) Provision for bad debts, doubtful debts, reserve for future losses.
6) Bonus and commission paid to employees not allowed it is paid after the due date of filingthe returns, (in
case of individual 31st July 2021).
7) Sales tax, Customs Duty, Excises Duty, if it is not paid before the due date of filing thereturns.
8) Any losses related to Capital in nature like loss on sale of assets.
9) Donation and Charities.
10) Any purchase of Capital Assets, renovation and extension of buildings.
11) Cost of sign board fixed on office premises.
12) Contribution to Staff Welfare Fund and political party.
13) Difference in trial balance.
14) Speculation losses
15) Preliminary expenses 4/5 are disallowed. E.g. Market survey, Discount on issue of shares
16) Interest on capital.
17) Employer’s contribution to URPF is not allowed.
18) Any gratuity not approved or given on ad-hoc basis is not allowed.
19) Expenses related to other heads of income
20) Theft at assesee residence
21) Family planning expenses of the employer is allowed only if the assesse is a company.
22) Personal gifts and presents.
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 23) Penalties and fines on excise and customs duty.
24) Any amount paid outside India without making TDS (30% of such payment isdisallowed)
25) Salary paid to family members who are not professionally qualified.
26) Legal expenses incurred to defend criminal proceeding will not be allowed.
27) Any payment made to non-residents after deducting TDS, and if that TDS amount is notpaid on or
before the due date of filing return (30% of such payment is disallowed).
Business Income

1) Bad debts recovered allowed earlier.

2) Sundry income/sales/commissionreceived/discount received/brokerage.
3) Miscellaneous incomes.
4) Interest from debtors.
5) Refund of customs duty.
6) Profit on sale of import license.
7) Sales tax refund (allowed earlier).
8) Smuggling income.
9) Export incentive.

3 Allowed Expenses
Expenses incurred for earning the business income are called as allowed expenses. Besides the regular and
common expenses, the following expenses are also treated as business expenses and they allowed to be deducted
from business incomes.

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1) Repairs and renewal of business premises.
2) Rent/taxes/rates related to business.
3) Bad debts.
4) Fire insurance paid for buildings and goods used for business.
5) Expenditure on scientific research.
6) Any contribution to approved scientific research institutions, colleges, and
universities150% of the amount contributed is allowed as a deduction.
7) Group insurance premium paid before the due date.
8) Bonus commission paid before the due date.
9) Sales tax paid before the due date.
10) Theft in office premises.
11) Pooja expenses at office.
12) Employer contribution to RPF
13) Revenue advertisement expenses willbe allowed in full.
14) Demurrage paid to railways.
15) Establishment expenses.
16) Audit fees/salaries to employees/office expenses.
17) Staff welfare expenses.
18) Interest on loan, if a loan is taken for business purposes.
19) Compensation to retrenched employees in the interest of the business.
20) Salary to staff.
21) Discount allowed.
22) Guest house and holiday home expenses.
23) Electricity/telephone bill/water billrelated to business premises.
24) Printing/stationary.
25) Travelling expenses relating tobusiness purposes.
26) Loss of goods or cash embezzled byan employee.
27) Depreciation.
28) Legal expenses incurred to avoid business liability and to defend the
assesses title of business.
29) Legal expenses for filing Income Tax appeal.
30) Deposits made under Tatkal Telephone Scheme or Scheme own your
telephone

For Private Circulation only ~ 108 ~

 Non-Business Incomes

1) Interest on securities.
2) Agriculture income.
3) Rent received or income from house property.
4) Bad debts recovered but not allowed earlier.
5) Profit on sale of fixed assets and investments.
6) Dividend received.
7) Interest on Deposit, Dividend on UTI and Mutual Funds.
8) Life Insurance Policy amount received.
9) Gifts received from relatives.
10) Income tax refund.
11) Share of Incomes from HUF.
12) Winnings from lottery/cross word puzzles/horse race.

Depreciation
It is a continuous, gradual and permanent fall in the value of an asset due to
wear and tear, passage of time and obsolescence of technology and change
of ownership etc.
Depreciation under income tax is to be claimed on the block of assets & not
on individual asset.
Rate of depreciations prescribed according to Income Tax Act 1961

Rate % p.a.
Particulars
I. Buildings

Buildings which are used mainly for residential 5%

purposesexcept for hotels and Boarding House

For Private Circulation only ~ 109 ~

 Non-residential building like offices, factory, godown. 10%

Books owned by assessees carrying on business in 40%

running lending libraries

II. Furniture and fittings

Any Furniture and Fittings 10%

III. Plant and Machinery

Plant and machinery 15%

Motor cars, other than those used in a 15%

business of running them on hire
Motor buses, Motor lorries, and Motor
used in a business of running them on 30%
hire
Motor buses, Motor lorries, and Motor 45%
used in a business of running them on
hire acquired on or after 23rd August
2019 but before 1st April 2021 and is
put to use before 1st April 2021
Water pollution control equipment 40%

Lifesaving Medical equipment 40%

Computers 40%

For Private Circulation only ~ 110 ~

 Books (Annual publication or other 40%
than annual publication) owned by
assessees carrying on a profession
Books owned by assessees carrying on 40%
business in running lending libraries
IV. Ships 20%

V. Intangible assets

Intangible assets: Patents, copyrights,

technical know- how, trademarks, 25%
licenses, franchises. Etc.

Methods of depreciation

Only WDV Method of charging depreciation is recognized under the Act.However,

Power Generation units have option to claim depreciation on SLM.

1) If assets are newly purchased in the previous year and put

to use for lessthan 180 days then 50% of rate of depreciation
will be given.
2) If the block of assets ceases to exist on the last date of the
previous year thendepreciation is inadmissible.
3) Additional depreciation
 In case any new plant & machinery is acquire dand
installed on or after01-04-2005, it shall qualify for
additional depreciation.

 Rate of additional depreciation: 20% of actual cost.

For Private Circulation only ~ 111 ~
  Undertakings set up in any backward area in State of
Telangana/West Bengal/Andhra Pradesh/Bihar during 1
April 2015 to 1 April 2021 : 35% of Actual Cost of New
P&M
Eligibility: The Assessee must be engaged in the business of – (a) Manufacturing or
production of any article or thing, or (b) Generation, transmission or Distribution of
Power.

COMPUTATION OF DEPRECIATION

Depreciation is allowed on the written-down value of the block of Assets.

Opening written Down value xxx

Add: purchase during the year xxx

Less: sales during the year xxx

Closing written down value xxx

Illustration 1

The following are the assets of Mr. A as on 1st April,2023 ( rate of depreciation15%)

Machinery( W.D.V) Rs. 3,00,000

He purchased a car for Rs. 2,00,000 on 1st August 2023 and used it in his business.

The rate of depreciation on the car is 15%

Calculate depreciation for the Assessment Year.

Solution:

W.D.V of machinery( 1.04.2023) 3,00,000

Add: purchased car (1.08.2023) 2,00,000

5,00,000

For Private Circulation only ~ 112 ~

 Less: Depreciation@15% 75,000

( 5,00,000 x 15/ 100)

WDV for depreciation 4,25,000

Illustration 2.

From the following information compute the amount of depreciation deductible in

computing profits and gains of business for the assessment year 2024-25.

a) Purchased goodwill of business for Rs. 2,50,000 in April 2023

b) Purchased patent for 4,00,000 in May 2023.

c) Purchased trademark for 3,00,000 in November 2023.

Solution:

Goodwill (No depreciation ……….

allowed)

Patent @25% of 4,00,000 1,00,000

Trade mark @12,5% of 3,00,000( 37,500

use less than 180 days)

Total allowable depreciation 1,37,500

Essential Features of Profits and Gains of Business.

1. Business carried on by the Assessee: It is a must that the

business should have been carried on by the assessee

For Private Circulation only ~ 113 ~

 himself during the previous year. It does not mean that an
assessee should physically carry on a business. What is
more important is that he must have right to carry on the
business and the business must have been carried on in
the exercise ofthat right by the assessee either personally
or through his agent or servant.A business may be carried
on in India or outside India. It is the residentialstatus of an
assessee which determines the incidence of tax.
2. Business is carried on during the previous year: The
business should have been carried on during the previous
year. The business may be carried on by the assessee at
any time during the previous year. Thus, it is not
necessary that the business should be carried on
throughout the year. Sometimes some of the receipts are
taxable as income from business even if no business is
carried on by the assessee in the year of receipt.
Following are some of the examples:
 Recovery against any excess payment.
 Sale of an asset used for scientific research.
 Bad debts recovered (allowed as expenditure in the earlier
years).
 Any amount withdrawn from special reserve.
 Amounts received relating to a discontinued business.
3. Aggregate income of different businesses is assessed to
tax: If an assessee has different businesses, the profits of all
of them will be aggregated and put to tax.
4. Speculation Profits: Profits from speculation business are
taxed under the head – Profits and Gains of Business.
However, speculation loss cannot be set-off against the
legal business profits.
5. Income of previous year is put to tax in the following assessment
year.
6. Any gain arising on the transfer of a capital asset used in
For Private Circulation only ~ 114 ~
 the business cannot be treated as business income. It can,
however, be treated to tax under the head-Capital Gains.
7. Profit on the revaluation of capital assets is not to be taxed
under this head.
8. Anticipated or future profits are not taxable in the current
year. But, the real profits i.e. the profits received or receivable
during the year are taxed in the relevant assessment year.
9. Profits on winding up are not taxable as business income
but are liable to tax under the head capital Gains.
Computation of Profits and Gains {Section 29}

The profits and gains of a business or profession are to be computed in accordance

with the provisions of sections 30 to 43 D (sec 29). The list of provisions/allowances
is not exhaustive. We should apply ordinary commercial principles while determining
real and true profits of a business or profession. Sometimes there may be an
expenditure or loss which may notbe covered under the above sections 30 to 43 D.
Yet such losses would have to be allowed in order to determine true profits. Some of
the usually occurring types of trading losses are given below:

1. Loss of Stock in trade: Loss of stock- in- trade because

of energy action, freezing of stocks, leakages, by
ravages of white ants, fire or negligence etc. are allowed
as deduction. However, any amount recovered shall be
treated as revenue receipt.
2. Loss through embezzlement by employee or agent is
allowed as deduction in computing business income.
3. Loss by theft: If robbery or theft takes place during the
normal working hours of the business, it is allowed as
expenditure. Any loss by theft should be incidental to
the operations of the business e.g. theft by a pretended
customer, or loss of cash before being deposited in the
bank etc.
4. Loss incurred for standing as surety: Where a trader
For Private Circulation only ~ 115 ~
 stands surety for the debts of another and such
guarantee is for the purpose of the trade, any payment
made as a result of such guarantee can be deducted as a
business loss.
5. Loss incurred on account of insolvency of banker with
which current account is maintained by assessee.
6. Loss due to forfeiture of deposit made by the assessee
for properly carrying out of contract for supply of
commodities.
7. Loss incurred due to devaluation of rupee in foreign
country which is being utilized in the course of
business.
8. Loss due to exchange rate fluctuation of foreign
currency held on revenue account.
General Principles Governing Admissibility of
Deductions

Following are the general principles which should be taken into consideration while
allowing deduction in respect of allowances, expenses orlosses. As has already been
explained, these are not exhaustive by nature but simply lay some guidelines which
may help us arriving at a decision while allowing or disallowing a particular
deduction.

1. Expenditure must be incidental to the business.

2. Deduction must be in respect of an existing business.
3. Expenditure should relate to the previous year. This depends upon
the method of accounting. Under mercantile system of accounting
expenditure is allowed only when it is related to the previous year.
However, under cash system of accounting, amount actually paid
during the year is allowed. There are certain exceptions with regard
to sales tax, excise duty and bonus etc.
4. Expenditure should be in relation to one’s own business.
5. Expenditure incurred should be in the commercial expediency. An
expenditure sometimes need not be for direct and immediate
For Private Circulation only ~ 116 ~
 benefit ofthe business.
6. Expenditure once incurred may give extended benefit to the business,
i.e. benefit of expenditure may be extended beyond the year of
expenditure viz. deferred revenue expenditure.
7. No deduction of expenditure incurred before setting up of a business,
except in the case of preliminary expenses u/s 35 D.
8. Expenditure must have a relationship with taxable profits.
9. Estimated losses are not allowed as
deduction.
10.Expenditure incurred on wasting assets is not
allowed.
11.Expenditure in relation to non-existing
liability is not allowed.
12.Expenditure incurred in defending against
the breach of law is not allowed e.g. fines and
penalties.
13. Depreciation on investment is disallowed.
14. Revenue expenses are allowed in full, while capital expenses are
allowedover a period of time.

Deduction expressly allowed

Section 30 to 37 contains a list of certain expenses/ deductions which are allowed in

computing the income under this head. While considering these deductions, the word
’paid’ means actually paid or incurred depending upon the method of accounting.
Under cash system, the word ’paid’ means ‘actually paid’, under mercantile system
the word ’paid’ means ‘actually incurred’.

The following deductions are expressly allowed:

1. Rent, rates, taxes, repairs and insurance of building used for

the business (Sec 30): The building may be own building or
rented one.As a tenant, any amount paid towards the current
repairs is also deductible. However, any premium paid towards
rented house is not allowed.
For Private Circulation only ~ 117 ~
 2. Repairs and insurance expenses paid in relation to plant and
machinery and furniture are allowed (sec.32): Any expenditure
incurred to replace petrol engine by diesel engine in a jeep to
augment the profit is allowed.
3. Depreciation u/s 32: Under Section 32 depreciation on assets
is allowed as deduction while computing income from
business or profession. To claim this deduction following
conditions should be satisfied: 1) Assessee should be owner of
the asset. 2) Asset must be used for the business. 3) Such use
must be in the previous year.
4. Site restoration fund (sec. 33 ABA): Deduction in respect of
prospecting for or extraction or production of petroleum or
natural gas or both in India and abroad is allowed. Amount of
deduction is-Amount deposited or amount deposited or 20%
of profits, whichever is lesser.
5. Expenditure on Scientific research (sec. 35): Scientific
research meansany activity for the extension of knowledge in
the fields of natural or applied science including for the
extension of knowledge in the fields of natural applied science
including agriculture, animal husbandry or fisheries.

The following deductions are allowed in res

pect ofexpenditure on scientific research:
a Revenue expenditure on in-house scientific
research related to business [Sec.35 (1) (i)]: Any
expenditure of revenue nature incurred on
scientific research related to business is allowed in
full.Any expenditure incurred for the payment of
salaries, material within three years immediately
preceding the commencement of business is also
allowed.
b Contribution of outsiders [Sec 35 (1)(ii)]: Any amount paid
to
 scientific research association which has object
For Private Circulation only ~ 118 ~
 of undertaking scientific research or
 To a university, college, or other institution to be
used forscientific research is deductible at 150%
of the sum paid. The research programme may be
related to business or not related to business.
From financial year 2022-22 the rate will be 100%.
 Payment of research in social science to any
approved institution, university or college is
deductible at 100% of the sum paid u/s 35 (1) (ii)
& 35(1) (iii).
 Capital expenditure incurred by an assessee who
carries on scientific research himself is fully
deductible u/s 35 (2) in that every year in which
it is incurred. Unabsorbed part of such
expenditure will be carried forward and set off as
unabsorbed depreciation.

If the asset is sold without having been used for other

purposes, the sale proceeds or deduction allowed
whichever is less is treated as business income if the
previous year in which the saletook place. The excess of
sale proceeds over deduction allowed however is taxed as
capital gain.
Contribution of National Laboratory [Sec.35 (2AA)]: Any
amount paid to any national laboratory will get a deduction
at 150% of actual amount given. National Laboratory
means a scientific laboratory functioning at national level
under the aegis of the Indian Council of Agricultural
Research, Indian Council of Medical Research or Council
of Industrial and Scientific Research, the Defense Research
and Development Organization, the Department of
Electronics, the Department of B io-Technology, or the

For Private Circulation only ~ 119 ~

 Department of Atomic Energy andwhich is approved by
the prescribed authority for this purpose. From financial
year 2022-22 the rate will be 100%.
 Any amount of expenditure incurred up to 31-3-2012 on
scientific research by a company engaged in the business
of bio- technology, drugs; pharmaceutical, electronic
equipment’s,computers, telecommunications etc. will get
a weighted deduction of 200% (sec. 35 2AA). (vii)
Contribution to research& Development: Sec. 35 2 AB
provides for weighted deduction at the rate of 125% in
respect of contribution made to IIT, approved university
college etc., towards research activities. This weighted
deduction is in addition to the special benefit available to
a person for in house research. In case of Biotechnology,
Drugs Pharmaceutical companies a weighteddeduction of
200% is allowed.
6. Expenditure incurred on acquisition of patent rights
or copy rights (sec. 35A): Where capital expenditure
is incurred by the assessee (after 1966 but before 1-4-
1998) on the acquisition of patent rights, copying for the
purpose of business, the whole amount is deductible in
14 equal instalments. Where the right became effective
in any year prior to the previous year in which
expenditure is incurred, the number of completed years
which have elapsed since commencement of the patent
shall be reduced from 14 years and the deduction is
allowed in remaining years. In the case of patent rights
acquired on or after 1-4-1998, the expenditure incurred
on the acquisition of such rights shall be capitalized and
depreciation u/s 32 is allowed.
7. Expenditure incurred on Technical know-how
(Sec.35 AB) : Any sum paid before 1-4-1998 on the
acquisition of technical know-how for use for the
purpose of his business will be allowed as deduction by
spreading it equally over six years, namely, the year in
For Private Circulation only ~ 120 ~
 which the lump-sum consideration is paid and the five
immediately succeeding years. Where the knowhow is
developed in a government laboratory, or a laboratory
owned by a public sector company or university, the
consideration will be spread over 3 years. But the know-
how acquired after 1-4-1998 will be treated as capital
expenditure and will be depreciated u/s 32.
8. Capital expenditure to obtain license to operate
telecommunication services (Sec. 35 ABB) :Any
capital expenditure incurred and actually paid by an assessee
on the acquisition of any right to operate telecommunication
services by obtaining license will be allowed as deduction in
equal instalments over the period starting from the year in which
such payment has been made and ending in the year in which the
license comes to an end.
9. Expenditure on eligible project or scheme (Sec. 35
AC): No deduction will be allowed from business
income in respect of expenditure incurred for an eligible
projector scheme on or after 01- 04-2018. Eligible
project or scheme means such project or scheme which
is meant for promoting social and economic welfare or
uplift of the public as may be certified by the
Government of India on the recommendation of
National Committee Constituted by Central
Government consisting of persons of eminence in
public life.
10. Payment of Rural Development Fund (Sec.35 CCA)
: Any sum paid to Rural Development Fund set up and
notified by the central Government is fully deductible.
This section applies to the National Poverty Eradication
Fund also. But once this deduction is claimed and
allowed u/s 35 CCA, the same is not allowed as a
deduction under anyother provision of this Act.
11. Amortization of preliminary expense (Sec .35 AD) :
For Private Circulation only ~ 121 ~
 Where any Indian Company or resident non-corporate
assessee incurs after 31st March 1998 any preliminary
expenditure, the assessee shall be allowed a deduction
of an amount equal to one-fifth of such expenditure of
each of the five successive previous years beginning
with the previous year in which the business
commences. Expenses incurred before 1-4-1998 are to
be spread over 10 years preliminary expenses include:
expenditure in connection with the preparation of
feasibility report, project report conducting marketing
survey, engineering services, legal charges for drafting
agreements, Memorandum of Association, Printing of
Memorandum of Association and registration
expenses. The maximum amount eligible for deduction
under this section shall not exceed 5% of the cost of the
project. But in the case of Indian companies, it is at the
option of the company, whether 5% of cost of the
project or 5% of the capital employed in the business of
the company.
12. Expenditure for amalgamation or demerger of an
undertaking (sec. 35 DD): Where an Indian Company
incurred expenditure after 31-3- 1999. Wholly and
exclusively for the purpose of amalgamation of
demerger of an undertaking 20% of such expenditure
for each of
13. Expenditure on voluntary retirement (Sec. 35
DDA): The amount received by an assessee in
consequence of an employee’s voluntary retirement, the
assessee shall be allowed a deduction of 20% of such
expenditure for each of the five successive previous
years beginning with the year in which such payment
was made.
14. Expenditure on prospecting etc. for development of
For Private Circulation only ~ 122 ~
 certain minerals (Sec. 35E) : Any expenditure
incurred by an Indian Company or Indian Resident non-
Corporate assessee wholly and exclusively on the
prospecting of any mineral or on the developmentof
mines or other natural deposit of any such minerals the
assessee shall be allowed a deduction of an amount
equal to 1/10th of he such expenditure for each of the
ten successive previous years beginning with the year
of commercial production.
Other Deductions (Section 36). While computing profits and gains
business or profession the following other deduction are allowed:

1. The amount of any insurance premium paid in

respect of insurance against risk of damages or a
destruction of stocks or stores used for the business
is fully deductible [Sec 36(1)(i)].
2. Insurance premium paid by a federal milk co-
operative society is fully deductible [Sec.36 (1) (ia)].
3. Insurance of health of employees [Sec.36 (1) (ib)]:
Any premium paid under a scheme framed in this
behalf by the general Insurance Corporation of India
and approved by the Central Government, shall be
fully deductible.
4. Bonus or commission paid to an employee [Sec.36
(1) (ii): Any bonus or Commission paid to an
employee for services rendered shall be deductible.
But such sum should not, in any way, be paidas
profit or dividend.
5. Interest on borrowed capital [Sec.36 (1) (iii): Any
interest paid in respect of capital borrowed for the
purpose of business/profession is fully deductible.
Interest on own capital is not deductible.
6. Employer’s contribution Provident Fund [Sec.36

For Private Circulation only ~ 123 ~

 (1) (iv) (v)]: Any amount paid by an assessee as an
employer by way of contribution towards
Recognized Provident Fund, or an approved
superannuation Fund or approved Gratuity Fund
shall qualify for deduction .
7. Loss regarding animals [Sec.36 (1)(iv)] : In respect
of animals which have been used for the purpose of
business (not as stock in trade) and have died or
become useless for such for such purpose, deduction
is allowed to the extent of the amount equal to the
difference between the actual cost to the assessee
and the amount, if any, realized in respect of the
carcasses of animals. If sale proceeds are Nil then
the entire cost will be allowed as loss.
8. Bad debts[Sec. 36 (1) (vii) and (2)]: Amount of any
bad debts of part thereof, which is written off as
irrecoverable in the accounts ofthe assessee for the
previous year is allowed as deduction subject to the
following conditions:
a The debt has been taken into account in
computing the income of the assessee of the
previous year in which the amount is written
off or of an earlier previous year; or
b It represents money lent in the ordinary course
of business ofmoney lending which is carried
on by the assessee.
c There must be a debt.
d Debt must be incidental to the business.
e Debt must have been taken into account while
computing business income.
f Debt must have been written off in the books
of account of the assessee.

For Private Circulation only ~ 124 ~

 Notes:

 If the amount of any part thereof of bad debts is

recovered at a later date, the same will be treated
as business income of the previous year during
which such recovery takes place.
 Bad debts of a discontinued business or to a
successor of the business are not deductible.

9. Provision for bad debts [Sec .36 (1) (iii a)]:

Normally any provision for bad and doubtful debts
is not allowed as deduction. But the same may be
allowed in the case of rural branches of commercial
banks.
10. Transfer to special reserve [Sec. 36 (1) (viii)] : The
amounttransferred to a special reserve account and
maintained by a financial corporation which is
engaged in providing long term finance for industrial
or agricultural or infrastructure development, in
India or by a public company formed and
registered in India
11. Family Planning Expenditure [Sec. 36 (1) (ix)]:
Any bona fide expenditure incurred by a company
for the purpose of promoting family planning
amongst its employees is allowed as deduction. If
such expenditure is of a capital nature. It shall be
allowed as a deduction in five equal annual
instalments commencing from the precious year in
which the expenditure is incurred.
12. Contribution of |Exchange Risk Administration
Fund [Sec. 36 (1)(x)]: The contribution made by
the public financial institutionsto the Exchange Rick
For Private Circulation only ~ 125 ~
 Administration Fund will be allowed as business
deduction while computing their income.

TERMINAL QUESTIONS
5 Marks questions.
1. Enumerate expenses allowed in computing a business's taxable profits and
state expenses or losses that are not admissible.
2. Explain clearly the deductions that are expressly allowed in computing the
income from business under the Indian Income Tax Act, 1961.
3. The net profit of Mr. Sulaiman as per his profit and loss A/c after charging the following
item was Rs. 3,40,000:

Particulars Amount

a. Interest on capital 20,000

b. Salary to staff 1,16,000

c. Office expenses 3,000

d. Bad debts written off 13,000

e. Provision for bad- 10,000

debts

f. Provisions for 16,000

income-tax

g. Donation 10,000

h. Depreciation 17,000

Depreciation allowable as per the Act is only Rs. 12,000.

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4 From the following profit and loss A/C of a merchant for the year ended 31st March,
2024 compute his taxable profit from business and house property:
Profit and loss A/c
Particulars Amount Particulars Amount
Office Salary 4,800 Gross profit 4,35,532
General expenses 2,550 Commission 1,205
Bad debts written- 2,100 Discount 751
off
Reserve for bad debts 3,000 Sundry receipts 202
Fire insurance 450 Rent of building 52,640
premium
Advertisement 2,500 Capital gain 3,000
Interest on capital 1,000
Interest on bank loan 1,550
Donations by cheque 3,875
Depreciation 1,200
Net profit 4,70,305
4,93,330 4,93,330

5 . Mr. Z running a cloth business has prepared the following profit and loss account for
the year ended 31st march 2024. You are required to compute his income from business
for the assessment year 2024-25
Profit and Loss Account
Particulars Amount Particulars Amount
Trade Expenses 450 Gross profit 2,19.400
Establishment 2,200 Dividend 3,140
charges

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Rent, rate, and Taxes 1,400 Interest on non-govt 5,400
securities(Net)
Household expenses 1,850
Discount allowed 200
Income tax 700
Advertisement 450
Postage & Telegrams 100
Gifts to relatives 125
Fire insurance 250
premium
Donations to prime 800
Minister National
relief fund
Repairs 1600
Life insurance 850
premium
Interest on capital 1,000
Audit fees 250
Net profit 2,15,715
2,27,940 2,27,940

6 On 1.4.2023, the written down value of a block of 10 machines ( depreciation 25%) was
Rs. 25,00,000. A new machine costing Rs. 4,00,000 was purchased in December 2023.
In March 2024, all the 10 old machines were sold for Rs. 1,00,000. Compute depreciation
allowance for the year 2023-24. Assets are not eligible for additional depreciation.

9 MARKS QUESTION

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7. Mr. Dhoni is the owner of a business. His profit and loss account for
the year ending 31-03-2024 was as follows:

For Private Circulation only ~ 129 ~

 Particulars Amount Particulars Amount

To salaries 5,000 By Gross profit 55,000

To Rent rates and taxes 2,900 By Interest on 5,000

To Printing and stationery 750 Investments

To personal expenses 3,000 By Rent received 6,000

To Commission 2,000 By Winning from 10,000

To Discount on allowance 450 Lottery

To Provision for bad 1,200

debts

To Postage and telegram 270

To law charge 450

To Advertisement 1,550

To Gifts and presents 150

To Fire insurance 500

premium on Stock

To Sales tax 1,250

To Repairs and 480

renewal(not

for business)

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 To loss on sale of 1,800
machinery

(used for private

purpose)

To Life insurance 1,700

premium

To Wealth tax 740

To Interest on capital 730

To Audit fee 300

To Interest on bank loan 1,380

To Provision for 2,500

depreciation

To Provision for income 3,900

tax

To Net Profit 43,000

76,000 76,000

Additional Information:
Actual bad debts were ₹. 500.
Actual amount of income tax paid during the year ₹. 4,000.
Allowable depreciation as per IT. Rules ₹. 1,500

Advertisement expenses include ₹. 450 spent on special advertisement

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campaign to open a new shop.
He carried out the business in a rented house, 40%(IA) of which is used for
his residence.
Rent, rates and taxes include ₹, 2,400 paid as rent of the property during the year.
Compute taxable his income from business for the A. Y. 2024-25

8.Following is the P & L A/c of Mr. Shivaji, a Merchant, for the year ending 31 st
March 2024.

Particulars Amount Particulars Amount

To Rent 60,000 By Gross Profit 5,23,000

To Rates 6,000 By Interest from Debtors 28,000
To Salary to Staff 54,000 By Rent from Property 24,000
To Diwali PoojaExpenses 2,000 By Sundry Income 16,000
To Interest on Loan 1,25,000 By Commission 37,000
To Sundry Expenses 55,000 By Bad debts recovered 10,000
To Bad debts 6,000 (LESS)(Disallowed earlier)
To charity 1,000
To Reserve for Bad debts 2,000
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 To Entertainment 8,500
To Loss by theft 14,000
To Sales tax penalty 10,000
To Net profit 2,94,500
6,38,000 6,38,000

Additional Information:
• Salary to Staff includes Salary of ₹. 24,000of a son, who is a B. Com
student and who casually helps and proprietor salary ₹. 1,000 p.m
• Rent includes ₹. 12,000 of a shop belonging to assessee himself
• A Loan of ₹, 60,000 at 15% p.a. is taken from his wife out of funds
advanced by him and interest is included in Interest on Loan.
• Sundry Expenses include ₹, 9,000 being expenses incurred on Pilgrimage
to Haridwar
• Entertainment includes ₹. 1,500 spent on tea of some guest of a local
MLA
• He earned ₹. 40,000 in gold smuggling and not shown in the books
• Rates include ₹. 4,000 for property Let out
• Loss by theft took place when somebody pretending to be a customer
stolen a necklace worth ₹. 6,000 in his shop, ₹. 8,000 was stolen from his
house.
• Sales tax paid and depreciation not taken to P/L(LESS) A/c ₹. 8,000 and ₹.
5,000 respectively.
Compute taxable his income from business for the A. Y. 2023-24.

9. From the P &L A/c of Mr. Ramesh for the year ending 31/3/2022. Compute
the Income from business for the A.Y. 2023-24.

For Private Circulation only ~ 133 ~

 Particulars Amount Particulars Amount

To Office Expenses 40,000 By Gross Profit B/d 6,40,000

To General Expenses 16,000 By Interest on Govt. 11,200
To Interest on Bank Loan 4,000 Securities
To Audit Fees 4,000 By Discount received 16,000

To Interest on Capital 12,000 By Bad debts recovered 800

To Rent 20,000 (not written of earlier year)

To Income Tax 16,000 By Sundry receipts 16,000
To Charity 8,000 By Dividends 16,000

To Legal Expenses 4,000

To Compensation to 20,000
Retrenched Employee
To Extension of Building 36,000
To Sales Tax 8,000
To Net Profit 5,12,000
7,00,000 7,00,000

Additional Information:
• General Expenses included ₹. 8,000 towards purchase of Computer.
• Legal Expenses include ₹. 1,600 penalty by Customs Authority.
• Rent includes ₹. 8,000 paid as rent of House in which assessee lives.
• Depreciation allowed ₹. 12,000 as per Income Tax Rules (excluding
depreciation on Computer purchased).
• Income tax in excessive to the extent of ₹. 5,000.

For Private Circulation only ~ 134 ~

• Sales tax includes ₹. 1,000 paid as penalty.

10. From the below given P & L a/c and Additional information of
Mr. David. Compute his taxable business income for A.Y. 2024-
2025
Particulars Amount Particulars Amount

To opening Stock 40,000 By Sales 5,00,000

To Purchases 2,20,000 By Closing Stock 50,000
To Wages 15,000
To Freight 10,000
To Gross profit 2,65,000
5,50,000 5,50,000

To Establishment 15,000 By Gross Profit 2,65,000

Expenses By Dividend on Shares

To Salaries 25,000 (Gross) 6,000
To Rent and Taxes 12,000 By Rent from House 15,000
To Income Tax 10,000 Property
To Household Expenses 14,000 By Refund of Income
2,000
To reserve for Bad debts 5,000 Tax
To Advertisement By Interest on Govt.
15,000 1,000
To Donation Securities
6,000
To Sales Tax By Bad Debts recovered

For Private Circulation only ~ 135 ~

To Provision for Income tax 20,000 (allowed earlier) 5,000
To Carriage outward 8,000 By Profit of sale of
To Drawings 11,000 Machinery 3,000
To General Expenses 4,000 By Miscellaneous
To Interest on Capital 16,000 Income
9,000
To Bad Debts
9,000
To Repairs
7,000
To Taxes and Insurances
8,000
To Car Expenses
2,500
To Audit Fees
11,000
To Depreciation
12,000
To Net Profit
20,500
75,000
3,06,000 3,06,000

Additional Information:
• Salaries include payment to a relative employee, which is considered to
be unreasonable up to Rs. 6,000.
• Purchases include two payments of ₹. 30,000 and ₹. 10,000 paid in cash
to a supplier.
• Opening stock is valued at 10% above the cost.
• Allowable depreciation is ₹. 22,500.
• 60% of car expenses are for business purposes.
• General expenses include ₹. 10,000 given to notified research institute
for carrying on scientific research.
For Private Circulation only ~ 136 ~
 Income from Profession

Format for computation of Profession Income

Particulars Amount

Professional receipt XXX

Less: Professional expenses XXX

Taxable Income from XXX

Profession

Chartered Account/Auditor
Professional Receipt Professional Expense

• Audit fees • Office expenses/rent/salaries

• Financial consultancy service • Printing and Stationery
• Income from Accountancy work • Depreciation on
• Gifts and presents from clients Professional books
• Income from Appellate Tribunal • Depreciation on
Appearance furniture/motor car/
• Tax consultation fees, Examiner’s office equipment
fees
• Tuition fees • Expenses of motor car.
• Fees from income tax appeal, • Allowance to clerk
Remuneration from Articles • Membership fees
published in professional journals • OYT expenses (own
your Telephone)
• Stipends to trainees
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 • Subscription to CA Institute

Lawyer
Professional Receipt Professional Expense

• Legal Income/fees • Office rent/expenses/salaries

• Special commission • Law journals
• Cash gifts and presents from clients • Telephone expenses
• Consultation fees • Magazines subscription
• Remuneration from • Motor car expenses
articles published in • Depreciation on motor
Professional journals car/ furniture/
Office equipment
• Arbitration fees
• Purchase of professional books
• Printing and stationery
• Electricity charges
• Miscellaneous /general/ office
expenses

For Private Circulation only ~ 138 ~

Doctor
Professional Receipt Professional Expense

1) Sale of medicines 1) Cost of medicines purchased

2) Depreciation on surgical expenses 2) Depreciation on surgical expenses
3) Salaries paid to staff 3) Salaries paid to staff
4) Rent of clinic/dispensary 4) Rent of clinic/dispensary
5) Purchase of professional books 5) Purchase of professional books
6) Telephone charges 6) Telephone charges
7) Printing and stationery 7) Printing and stationery
8) Motor car expenses 8) Motor car expenses
Depreciation on motor car/office 9) Depreciation on motor car/office
equipment/furniture
equipment/furniture

Treatment of Cost of Medicine

In case of calculation of cost of medicine, if the cash system of accounting is
followed, then the actual cost of purchases has to be taken as the cost
ofmedicine. If mercantile system of accounting is followed, then the cost of
goodssold has to be taken as the cost of medicine and to be deducted as
professional expenses. (Cost of goods sold = Opening stock + Purchases – Closing
stock)

Problems of Doctors
1. Smt. Jyoti is a registerd medical practitioner. She keeps her books on cash basis and for

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 the year ended 31st march, 2024 her summarised cash A/C is under:
Opening balance Rs Cost of medicines 20,000
2,700
Bank loan 6,000 Surgical equipment 6,000
Sale of medicines 30,500 Motor-car 12,000
Consultation fees 10,000 Car expenses 1,800
Visiting fees 8,000 salary 1,200
Interest on 9,000 Rent of Dispensary 1,200
Investments
Rent from property 7,200 General expenses 600
Sale of building 15,000 Personal expenses 3,600
Sale of furniture 5,000 Life insurance 2,000
premium
Interest on bank loan 360
Property insurance 400
Fixed deposit in bank 30,000
Closing balance 14,240
93,400 93,400

Considering the following additional information, compute her income from

the profession for the previous year 2023-24.
a) 1/3rd of car expenses are for personal use
b) The written down value of the house property on 1st April 2023 was Rs.
20,000 and that of furniture was Rs. 4,000. There were no other assets
in these blocks.
For Private Circulation only ~ 140 ~
 c) The car and surgical equipment depreciation rate is 15%.
2. Dr. Sathish is a medical practitioner. He gives you the following summary
of the cash book for the year ending 31.3.2024.
Rs Rs
Opening balance 10,000 Rent of clinic 18,000
Consultation fee 60,000 Purchase of 38,000
medicine
Visiting fee 45,000 Staff salaries 24,000
Gifts and 8,000 Surgical 40,000
presents equipments
Sale of medicine 42,000 Motor car 8,000
expenses
Dividend from 6,000 Purchase of the 1,40,000
UTI ( GROSS) motor car
Life insurance 1,00,000 Household 7,000
maturity expenses
Interest from 6,000 Closing balance 2000
national savings
certificates
2,77,000 2,77,000
Other information:
i. 50% of the motor-car expenses incurred in connection with the

For Private Circulation only ~ 141 ~

 profession. car was purchased in December 2023.
ii. Household expenses include Rs. 6800
iii. Gifts and presents include Rs 3,000 from relatives.
iv. Closing stock of medicine Rs. 12,000 and on 1.04.2023, opening stock
was rs. 4,000.
Compute his income from profession for the assessment year 2024-25.

3. Dr. Surendra is a renowned medical practitioner who maintains books of account on

a cash basis, and furnishes his receipts and payments account for the financial year
2023-24.
Receipts Amount Payments Amount
Balance b/d 14,000 Rent of clinic 2022-23
2023-24 600
2024-25 4,800
6,00
Consultation fees: Electricity and water 2,000
2022-23 3,000 bills
2023-24 15,000
2024-25 2,000

Visiting fees 30,000 Professional 4,000

books(Annual Pub.)
The loan from the bank 25,000 Household expenses 7,800
for professional purposes
Sale of Medicines 60,000 Collection charges on 100
dividend income
Gifts and presents 5,000 Motor- car purchased 30,000
Remuneration from 6,000 Surgical equipments 4,800
articles published in
professional journal
Dividend ( Gross) 10,000 Income tax 10,000
The interest of post 7,000 Salary to staff 15,000
office savings bank A/c
in Joint names.
Life insurance premium 15,000
Gift to wife 5,000
Interest on loan 2,000
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 Car expenses 15,000
Purchases of medicines 40,000
Balance c/d 20,300
1,77,000 1,77,000

Problems on Chartered Accountants/Auditor

4. From the following information of a chartered accountant, compute

taxable income from profession for the assessment year 2024-25:

Receipts Amount Payments Amount

Consultation fees 2,50,000 Office rent 25,000
Gifts from clients 20,000 Stipend to article 20,000
clerks
Gifts from father-in- 30,000 Professional books ( 18,000
law not annual
publication)
purchased
Appellate tribunal 12,000 Charitable donation 4,000
appearance by cheque
Fees for drafting 10,000 Professional tax 2,000
memorandum of
association
Allow depreciation on books @40%
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 5. Shri N.C Sharma is a chartered accountant. He has prepared the following income and
expenditure account for the year ended 31st March 2024.
Income and Expenditure account
Expenditure Amount Income Amount
Office expenses 10,000 Audit Fees 3,70,500
Employees salary 5,000 Gift from father-in- 5,050
law
Books( other than 5,500 Dividend (gross) 8,000
annual publications)
Personal expenses 3,02,000 Profit on sale of 6,450
investment
Donation to N.D.F 500
Interest 700
Income tax 13,300
Car expenses 2,000
Net surplus 51,000
3,90,000 3,90,000
You are required to compute his professional income from the AY 2024-2025 considering the
following points:
a) The car is used equally for official and personal purposes and
dep.allowed for official work is Rs.500.
b) Rs 1,000 domestic servants salary is included in employees salary.
c) Loan has been taken for personal purposes.
d) Allow depreciation on books @40%.
6. Ramakrishna is a chartered Accountant . He has submitted the following income and

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 expenditure account for the year 2023-24. Compute his income from the profession for
the assessment year 2024-25:
Expenses Amount Income Amount
Office rent 33,000 Audit fees 3,00,000
Salary to staff 75,000 Financial 60,000
consultancy services
charities 5,000 Interest on deposit in 22,000
a bank
Gift to relatives 6,000 Dividends on units of 6,000
UTI ( Gross)
Subscription for 2,400 Accountancy works 32,000
journals
drawings 16,000
Car expenses 24,000
House hold expenses 8,600
NSCs purchased 20,000
Net income 2,30,000
4,20,000 4,20,000

Additional information:
1. Office rent Rs. 3,000 though paid is not recorded
2. Depreciation of car during the year is Rs. 6,000.
3. 30% of car expenses are related to personal expenses.

7. Mr. K. Bajaji lives in Bhopal. He is a lawyer and his receipts and payment Account are
as follows:
Receipts Amount Payments Amount

For Private Circulation only ~ 145 ~

Opening balance 1,892 Books purchased 800
(annual
publications)
Fees received 2,40,000 Repairs of house 1,200
Salary as part-time 21,600 Local taxes @10% 600
lecture
Exam.Remuneration 2,300 Maintenance exp, of 2,000
from university car
Interest on bank 1,200 Office expenses 4,000
deposit
Shares sold 16,000 Domestic expenses 1,20,000
Dividend received 1,540 Plant purchased for 700
office
Car purchased 25,000
Life insurance 5,000
premium
Donation to a 1,200
recognized
institution
Gift to married 400
daughter
Income tax 3,500
Assessment 200
expenditure
Bank deposit 13,000

For Private Circulation only ~ 146 ~

 Public provident 4000
fund
Balance c/d 1,02,932
2,84,532 2,84,532

Additional information
a) 1/3rd part of the building is used for profession and 2/3rd for self residence.
b) The car is used in the profession and personal work equally.
c) Books purchased for teaching Rs.200 and remaining for the profession ( allow
depreciation @40 %).
Compute Mr. Bajaj’s professional income.

For Private Circulation only ~ 147 ~

 3.2 CAPITAL GAINS
OBJECTIVES

1. Compute the capital gains from transfer of capital assets in

the manner prescribed
2. Compute cost of acquisition and indexed cost of acquisition
3. Identify the income which are chargeable to tax under
‘Income from other sources’
4. Compute the tax on casual income

Capital Gain:

Any gains arising out of transfer of capital asset in the previous year is called as capital gains.
To tax an income under the head capital gains the following conditions are to be fulfilled.

• There should be a capital asset.

• It must have been transferred by the assessee.
• Transfer should have taken place in the previous year.
• Gain on such transfer should not be exempt from tax u/s 54, 54B, 54D, 54EC, 54EE,
54F, 54G, 54GA and 54GB

Capital Asset:

According to Section 2(14), capital asset is a property of any kind held by an assessee whether
or not connected with his business or profession and it includes all kinds of property whether
movable or immovable, tangible or intangible, fixed or floating.

Not a Capital asset:

• Stock in trade, Raw materials and consumable stores held by an assessee for his
business or professions.
For Private Circulation only ~ 148 ~
• All personal effects that are all movable assets used for personal purpose except
jewelry.
• 6.5% Gold Bonds 1977, 7% Gold Bonds 1980, National Defense Gold Bonds 1980,
Special Bearer
• Bonds 1991.
• Gold Deposits Bonds 1999.

Transfer:

According to Section 2(47) of Income tax Act 1961 the term transfer includes a sale, exchange
or relinquishment of the asset or extinguishment of any right or the compulsory acquisition
under any law or conversion of the asset into stock in trade.

The following transactions are not treated as Transfer:

• Transfer of asset in a scheme of amalgamation, demerger.

• Transfer of agricultural land before 01-04-1970.
• Transfer of debenture or bonds into shares.
• Transfer of asset in kind at the time of liquidation.
• Transfer of asset by a parent company to the own subsidiary company.
• Transfer of asset under gift or will.
• Transfer of capital asset at the time of partition of HUF.
• Transfer of capital asset, being a government security, made outside India by Non-
Resident to another Non-Resident.

Financial Assets:
It means the capital assets which comprises of securities, bonds, shares, mutual funds. Etc.
• Short Term Capital Gain: Any gains arising from transfer of Short-term capital asset is
known as short term capital gain.
• Long term Capital Gain: Any again arising from transfer of Long-term capital asset is
known as long germ capital gains

For Private Circulation only ~ 149 ~

Types of capital Asset

Note:
1. Financial assets mean the capital assets which comprises of securities, Bonds, Shares,
Mutual funds etc.
2. For unlisted shares and immovable property of Land & Building, it is 24 months or 2 years

Brokerage or Selling expenses:

It is the expenses incurred for transferring the capital asset, the expenses include, brokerage,
commission and other expenses related to transfer.

Cost of acquisition:
It refers to the cost incurred by an assessee to acquire the capital asset. It includes all capital
expenses incurred in acquiring the assets.

Cost of Acquisition of certain assets

For Private Circulation only ~ 150 ~

 Asset Cost of Acquisition

Goodwill, if self-generated NIL

Goodwill, if acquired Purchase Price

On Gift/ inheritance / distribution of assets of HUF Cost to the previous owner

on partition

Bonus Shares allotted prior to1st Apr’01 FMV (1st Apr’01)

Bonus Shares allotted post 1stApr’01 NIL

Rights Shares Amount paid to acquire the shares

Rights shares which are purchased by person in Purchase price paid to the renouncer +
whose favor the assessee has renounced the Price paid for acquiring rights shares
rights.

CII Table- Cost Inflation Index

FY CII FY CII
2001 - 2002 100 2013 - 2014 220
2002 - 2003 105 2014 - 2015 240
2003 - 2004 109 2015 - 2016 254
2004 - 2005 113 2016 - 2017 264
2005 - 2006 117 2017 - 2018 272
2006 - 2007 122 2018 - 2019 280
2007 - 2008 129 2019 - 2020 289
2008 - 2009 137 2020 - 2021 301
2009 - 2010 148 2021 - 2022 317

For Private Circulation only ~ 151 ~

 2010 - 2011 167 2022 - 2023 331
2011 - 2012 184 2023 - 2024 348

Cost of Improvement:

It is the cost incurred by the assessee to improve the status of capital assets. After
improvement the value of an improved asset will increase. e.g., additions, alterations and
repairs made for the properties.

Indexed cost of Acquisition (ICOA):

It means inflating the cost of an asset acquired to the present value. Indexation benefits are
available only for long term capital assets. However, the indexation benefits is a not available
in case of debentures, goodwill, intangible assets, bonus shares and depreciable assets even
it is a long term assets.

If the Assessee acquires the property before 01-04-2001

“Cost Inflation Index”, in relation to a previous year, means such Index as the Central
Government may, having regard to seventy-five per cent of average rise in the Consumer Price
Index (urban) the immediately preceding previous year to such previous year, by notification
in the Official Gazette, specify in this behalf. (Refer to CII Table below)

Indexed cost of Acquisition

a. If the Assesssee acquired the property before 01: 04:2001
ICOA=Actual cost or Fair Market Value as on 1/4/2001 (WEH) X CII*of the year in the
100 which the asset is sold

b. If the Assessee acquired the property after 01:04:2001

ICOA= Actual cost X CII*of the year in the which the asset is sold

For Private Circulation only ~ 152 ~

 100

Cost of acquisition shall have to be adjusted by the Cost Inflation Index to arrive at the indexed
cost of acquisition.

Note: Base year for the purpose for calculation of Indexed cost of acquisition or improvement
has been shifted from 1981-82 to 2001-2002. Accordingly, if any assessee /previous owner
has acquired capital asset prior to 1-4-2001 then he will have option to choose actual cost of
acquisition or FMV as on 1-4- 2001 as his cost of acquisition. Cost of improvement incurred by
assessee or previous owner prior to 1- 4-2001 shall be taken as NIL.

 If the Assessee acquires the property after 01-04-2001

Situation 1: (Before – Before, that is both the previous owner and present owner acquired the
property before 1st April 2001)

Situation 2: (Before – After, that is that the previous owner acquired the property before
1stApril 2001 and the present owner acquired the property after 1st April 2001)

Situation 3: (After – After, that is both the previous owner and the present owner acquired
the property after 1st April 2001)

Indexed Cost of Improvements:

It is the cost incurred by the assessee for improving the utility of the asset or enhancing
thevalue of the asset. Any cost incurred by the assessee or by the previous owner before 01-
04-2001 is to be ignored and should not be considered for deduction.
• The cost incurred on or after 01-04-2001 will be allowed as deduction.
• For the Short them capital asset the actual cost of improvement is allowed as
deduction.
For Private Circulation only ~ 153 ~
• For Long term capital asset, it will be indexed and allowed as deduction.

Cost of Improvements X Cost inflation index of the year in which the assets was sold
Cost inflation index of the year in which the improvement to asset took place

Exemptions u/s 54 TO 54 G
Section 54:
• Eligible assessee: Individual and HUF
• Type of asset: The house property transferred should be a long-term capital asset.
• Transfer(sale) of: Residential house
• Purchase or construction of: Residential house
• Time limit For purchase: Within 1 year before or within 2 years after the date of
transfer of residential house.
• For construction: within 3 years after the date of transfer of residential house.
Other conditions:
• Construction should be complete within 3 years from the date of transfer (Date of
commencement of construction, being irrelevant).
• No limit on number of properties that can be acquired.
• Amount of exemption u/S 54 is:

The Amount of capital gain or XX

Amount invested in purchase or construction of residential house XX

Whichever is less is exempt u/s 54 XXX

• The new residential property shall not be transferred within a period of 3 years from
the date of its purchase or completion of construction. If transferred (sold) then exemption
given earlier shall be taxable in the previous year of such transfer.
• Amount deposited in capital gain account scheme shall also be exempted. However,
the deposit amount shall be utilized for the said purpose within the time limit. If not, then it
shall be taxable in the P.Y in which it was utilized for other purposes or on the expiry of time
For Private Circulation only ~ 154 ~
limit. If the assessee is not utilizing the amount till the expiry of 3 years, if he withdraws after
three years for the said purpose or for other purpose is taxable.

Note: From the AY 2020-21 in order to save tax on long-term capital gains on the sale of house
property one can invest capital gains in two house properties instead of one but this benefit
is available once in a lifetime only if capital gains does not exceed Rs 2 crore.

Section 54B:
• Eligible Assessee: Individual
• Type of Asset: Short term or long-term capital asset being transferred which is an
agricultural land.
• Transfer of: Agricultural land
• Purchase of: Agricultural land
• Time limit: The assessee can purchase another agriculture land within 2 years from
the date of transfer.
Other conditions:

• The agricultural land was used by the assessee or his parents for a period of 2 years
immediately before the date of transfer.
• The new agricultural land purchased may be in rural or urban area.
However, the transfer (sale) of agricultural land shall be situated only in urban area (since
agricultural land in rural area is not a capital asset U/S 2(14).

Amount of exemption u/s 54B is,

The Amount of capital gain or XX

Amount invested in purchase of new agricultural land /Amount Invested in capital XX

gain A/c Scheme

Whichever is less is exempt u/s 54B XXX

For Private Circulation only ~ 155 ~

• The new agricultural land shall not be transferred within a period of 3 years from the
date of its purchase. If transferred, the exemption given earlier shall be taxable in the
previous year of such transfer.
• Amount deposited in capital gain account scheme shall also be exempted. however,
the deposit amount shall be utilized for the said purpose within the time limit. if not, then it
shall be taxable in the P.Y in which it was utilized for other purposes or on the expiry of time
limit. If the assessee is not utilizing the amount till the expiry of 2 years, if he withdraws after
three years for the said purpose or for other purpose is taxable. (Capital gain A/c scheme
shall be maintained by nationalized bank).

Note: Capital gains on compulsory acquisition of land and building forming part of industrial
undertaking (Sec 54 D).

Section 54D
• Eligible Assessee: All persons
• Type of Asset: Short term or long-term capital asset
• Transfer of: Compulsory acquisition of land or building forming part of Industrial
undertaking which is compulsorily acquired by Government.
• Purchase of: Land or building forming part of industrial undertaking
• Time limit: Within a period of 3 years after the date transfer
Other conditions:
• Such land or building forming part of industrial undertaking was used by the assessee
for at least 2years before the date compulsory acquisition (Transfer)
Amount of exemption U/S 54D:

The Amount of capital gain or XX

The amount invested in purchase or construction of new land or building forming XX

part of industrial undertaking

Whichever is less is exempt u/s 54D XXX

For Private Circulation only ~ 156 ~

• The new land or building purchased or constructed shall not be transferred within a
period of 3 years from the date of its purchase or construction. If transferred the exemption
given earlier shall be taxable in the previous year of such transfer.
• Amount deposited in capital gain account scheme shall also be exempted. However,
the deposit amount shall be utilized for the said purpose within the time limit. If not, then it
shall be taxable in the P.Y in which it was utilized for other purpose or on the expiry of time
limit.

Note: Capital gain on transfer of any long-term capital asset and invested in specified assets
(Sec 54 EC)

Section 54EC

• Eligible Assessee: All persons

• Type of Asset: long-term capital asset
• Transfer of: Any long-term capital asset in the form of land and building only
• Investment in: long term specified capital asset
• Time limit: Within 6 months from the date of transfer
Other conditions:

• Long term specified capital assets

• National Highway Authority of India (NHAI)
• Rural Electrification Corporation (REC)
• Bonds issues by Power Finance Corporation Ltd
• Any other bonds issued by notified authorities

Amount of exemption u/s 54EC

The Amount of capital gain or XX

For Private Circulation only ~ 157 ~

 The amount invested in long term specificized capital asset XX

Whichever is less is exempt u/s 54EC XXX

• Maximum amount that can be invested during any financial year is Rs.50,00,000
• The investment made in long term specified capital asset shall not be transferred or
liquidated within a period of 3 years from the date of making investment. If transferred, the
exemption given earlier shall be taxable in the previous year of such transfer.
• The above investments in specified capital assets are not eligible for deduction U/S
80C.
• Amount deposited in capital gain account scheme shall also be exempted. However,
the deposit amount shall be utilized for the said purpose within the time limit. If not then it
shall be taxable in the P.Y in which it was utilized for other purposes or on the expiry of time
limit.
Note: Capital gains on transfer of a long-term capital asset other than a house property, but
invested in residential house (Sec 54 F)

Section 54 F:
• Eligible Assessee: Individual and HUF
• Type of asset: Long-term capital asset.
• Transfer (sale) of: Any long-term capital asset other than residential house
• Purchase or construction of: Residential house
• Time limit:

• For Purchase: Within 1 year before or within 2 years after the date of transfer.
• For construction: within 3 years after the date of transfer.
Other conditions:

• Construction should be complete within 3 years from the date of transfer. (Date of
commencement of construction, being irrelevant).
• The assessee owns not more than 1 residential house on the date of transfer (other
than new residential house)
Amount of exemption U/S 54 F is:
For Private Circulation only ~ 158 ~
 The Amount of capital gain or XX

Capital gain x cost of new house (Net sale consideration) XX

Whichever is less is exempt u/s 54F XXX

(Note: Net sale consideration= Full value consideration - Expenses related to transfer)

• The new residential property shall not be transferred within a period of 3 years from
the date of its purchase or completion of construction. If transferred (sold) then exemption
given earlier shall be taxable in the previous year of such transfer.
• Amount deposited in capital gain account scheme shall also be exempted. However,
the deposit amount shall be utilized for the said purpose within the time limit. If not, then it
shall be taxable in the P.Y in which it was utilized for other purposes or on the expiry of time
limit (i.e. Above the time limit).

Note: Capital gain on shifting of industrial undertaking from urban to non-urban areas (Sec
54G)

Section 54G:

• Eligible Assessee: All persons

• Type of Asset: Short-term or long-term capital asset
• Transfer of: Land, Building, Plant or Machinery used for the purpose of an industrial
undertaking situated in urban area.
• Purchase of: Land or building or Plant or Machinery used for the purpose of an
industrial undertaking shifted from urban area to any area other than an urban area (Rural
area or semi urban area).
• Time limit: Within a period of 1 year before or 3 years after the date transfer
Other conditions:

For Private Circulation only ~ 159 ~

 The Amount of capital gain or XX

The amount invested in purchase or construction of new land or building, XX

Plant or Machinery forming part of industrial undertaking

Whichever is less is exempt u/s 54F XXX

• The new land or building or plant, machinery purchased or constructed shall not be
transferred within a period of 3 years from the date of its purchase or construction. If
transferred the exemption given earlier shall be taxable in the previous year of such transfer.
• Amount deposited in capital gain account scheme shall also be exempted. however,
the deposit amount shall be utilized for the said purpose within the time limit. If not, then it
shall be taxable in the P.Y in which it was utilized for other purpose or on the expiry of time
limit.
• Investment on compensation received (Sec 54 H):
In case any asset was taken over by Govt. and additional compensation is received it will be
deemed as income of the year in which it is received and period for reinvestment will be
counted from the date of receipt of such additional compensation.

Section A – 5 Marks Question

1. Explain the provisions of section 54 of income tax Act under the head capital gain.
2. Bring out the difference between exemption u/s 54 and 54F.
3. Rahul is the owner of a residential house sold it for Rs.16,00,000 in October 2023. It
was purchased for Rs.1,00,000 in 2008-09. He spent Rs.10,000 for the construction of
another room in 2014-15. Expenses incurred in the execution of sale were Rs.10, 000
that were borne by him.
4. Mr. Amith sells a residential House property for 38,00,000 on 24/12/2023. This was
purchased by him in 1982 for 2,00,000. Its Fair Market value as on 1/04/2001 is
10,00,000. He purchased a new House Property for 15,00,000 on 20/01/2023 and
deposited 2,00,000 in Capital Gains Account Scheme on 30/03/2023. Determine the
capital gain for the A.Y.2024-25.
5. A building of Mr. Ram is compulsorily acquired by U.P Government. Its cost of
acquisition to the assessee was 4,80,000 in August 2018. The U.P Government pays
8,75,000 as compensation on 25/05/2023. Mr. Sham purchased another building for
For Private Circulation only ~ 160 ~
 industrial undertaking for 2,00,000 on 24.04.2023. Compute the taxable capital gain
for the A.Y. 2024-25
6. From the following data, you are required to calculate the capital gains got
assessment year 2024 - 2025:

Site purchased in 1995 value • Rs. 33,000

Market value of site on 1.4.01 • Rs. 75,000

Ground floor-cost of construction in 1996-97 • Rs. 1,50,000

First floor cost of construction in 2002-03 • Rs. 2,66,000

Sale consideration received in 2023-24 • Rs. 55,00,000

Investment in new property • Rs. 10,00,000

7. From the following information relating to previous year 2023-24, compute taxable
capital gains of for the Assessment year 2024-25:

Purchased agricultural land (Agra city) in 01-02(Self-cultivated) 1,54,000

Sold the land on 10-8-2023 12,00,000

Purchased another piece of agricultural land on 10-10-2023 1,00,000

8. A building of Mr. Akshay is compulsorily acquired by U.P Government. Its cost of

acquisition to the assesses was Rs. 1,72,000 in August 2005. The U.P. Government pays
Rs. 8,75,000 as compensation on 25-05-2023. Mr. Akshay purchased another building
for industrial undertaking for Rs. 2,00,000 on 24-04-2022. Compute the taxable capital
gain for the A.Y. 2024-25.

Section B – 9 Marks Questions

1. From the following information compute the taxable capital gains. Sold a residential house
property for Rs. 16,00,000 on 28-02-2023. It was purchased on 15- 03-2000 for Rs.18,400.
F.M.V. on 01-04-01 was Rs. 31,000. The ground floor was constructed on 30-06-07 for Rs.
For Private Circulation only ~ 161 ~
 48,000. First floor was constructed in 2010 June at a cost of Rs. 1,45,000. Brokerage of Rs.
14,000 was paid. Sold an agricultural land for Rs. 3,45,500 on 30-06-2022, which was
purchased in October2006 for Rs. 90,000. Ancestral jewelry sold on 30-09-2023 for Rs.
4,50,000. It was purchased by Assesses grandmother for Rs. 4000 in 1985. F.M.V. on 01-
04-01 was Rs 30,000.
•
2. Mr. Ramesh submits the following particulars of his income for the P.Y.2023-24: He is the
owner of two residential houses. He sold one of them costing Rs.2,61,000 on August
16,2023 and paid brokerage etc. Rs.20,000, it was acquired in the year 2006-07 for
Rs.6,50,000. He had shares of the face value of Rs.1,50,000 of a limited company that were
purchased for Rs.2,59,000 in May 2011. He sold them Rs 520000 30 th September 2023
(Securities transactions tax paid) and also paid brokerage @ 1% on the face value of shares.
On 30th November 2023, he sold his personal car for Rs 90,000 that was purchased four
years back for Rs 60,000. He sold the listed debentures of a company on 1 st August 2023.
He sold the listed Debentures of a company on 1st August 2023, for Rs 171000 which were
purchased by him for Rs 12,9000 on 1st February 2020. He sold ancestral ornaments on 1st
July 2022 for Rs 28,50,000, which had costed his grandfather Rs 50,000 in 1985 and whose
market value on 1st April 2001 was Rs 2,50,000

3. Determine the amount of exemption under Sec 54 and capital gains chargeable to tax in
respect of the following transactions. Rakesh sells a residential house property in
Bangalore for Rs 28,40,000 on 23 April 2023 which was purchased by him on April 20, 2001
for Rs 2,90,000. On June 16, 2023, he purchased a house in Mysore for Rs 12,70,000 for
the purpose of residence of his daughter. On July 18, 2023, he sells the house property in
Mysore for Rs 16, 90,000.

4.
Mr. Mahindra had two houses. He occupied the first house for residence. He got this house
from his uncle as a gift on 15th July 2003. His uncle purchased this house in 1999 for
Rs.56,000. Its fair market value on 1st April 2021 was Rs. 70,000. Mahesh spent Rs.5,000
on its improvement on 10-9-2013 and sold it on 30th November 2019 for Rs.12,00,000. He
purchased another house for his residence on 25th February 2023 for Rs 2,00,000. He had
purchased the second house for Rs 60,000 in 1992-23 and had out for residential purpose.
He sold this house on 15th June 2022 for Rs 3,80,000. He had purchased some jewelry in
1992-93 for Rs 75,000. On 22nd February 2024 he sold this for Rs 4,50,000 and purchased
on 15th March 2024 new jewelry for Rs 75,000. Determine the taxable capital gains for the
assessment year 2024-25 .

For Private Circulation only ~ 162 ~

5.
Mr Krishnamurthy had agreed to sell this property to Mr. Ravi for a sum of Rs 1, 10,000
during the year 2001-02 and received a sum of Rs 10,000 as advance money. Mr. Ravi
failed to pay the balance amount within the agreed period and Mr. Krishnamurthy
forfeited the advance money paid by Mr. Ravi. Mr. Chandrashekar after becoming the
owner made an improvement to the property at the cost of Rs. 1,00,000 during the year
12-13. He wanted to sell the property during the year 2019 and received advance money
of Rs 1,00,000 and forfeited it when the buyer failed to pay the balance amount due. He
paid a brokerage of Rs. 25,000 to sell the property. Mr. Chandrashekar purchased a new
house property for a sum of Rs. 6,00,000 and also invested a sum of Rs. 3,00,000 in NHAI
bonds on 1-2-2023. Compute the amount of taxable capital gain for the A.Y.24-25

3.3 INCOME FROM OTHER SOURCES

Income from other sources is the fifth and last head of income. Any source of income
which doesn’t fall under any of the other heads of income is chargeable to tax under the
head income from other sources. The particulars taxable under the head income from
other sources are:

(a) Fee, commission and remuneration received by an employee form other than his own
employer.
(b) Salary or pension received by an MLA, MP or MLC.
(c) Income from guest lectures.
(d) Remuneration received from universities for examination work by a nonemployee of
the university.
(e) Director’s Fee.
(f) Interest from foreign securities.
(g) Income from undisclosed sources.
(h) Composite rent received for letting building along with plant and machinery and
furniture.
(i) Rent from letting vacant plot.
(j) Dividends from Mutual funds, companies etc.
(k) Interest of securities.
(l) Interest on Bank Deposits.
(m)Gift received.
(n) Insurance Commission received.
(o) Casual income received.
(p) Family Pension received.
(q) Agriculture income from land situated outside India.
(r) Any income from paying guest accommodation, sub-letting etc.
For Private Circulation only ~ 163 ~
(s) Royalty received by the owner of an asset.
(t) Directors commission for underwriting of shares of new company.
(u) Gratuity received by the directors, who is not an employee of a company. (v) Interest
on income tax refunds.
(w) Rent of subletting.
(x) Withdrawal of amount under NSS (National Savings Scheme) including interest
thereon.

SECURITIES
The term security is defined as the document held by a credit or as guarantee of his right
to payment. It means all the debt should be secured in some way or other. The borrower
issues the investor some document as acknowledgement of debt. This is called as security.

TYPES OF SECURITIES
Tax Free Government Securities: These are securities issued either by state or central
government. They are exempted from tax under 10(15) and it should not include in total
income.
Less Tax Government Securities: These are security issued by the government and
interests on these securities are fully taxable without deducting Tax at Source.
Tax Free Commercial Securities: These are securities issued by Local authority,
Statutory Corporation or a company in a form of Bonds and Debentures. The tax on
interest paid by company, hence it is called as tax- free securities.
Less Tax Commercial Securities: These are the securities issued by the company and
tax will be deducted at source before paying any interest to the investors.
Cum-Interest Securities: It is the amount of interest accrued in the duration between the
last coupon date and the settlement date or transaction date. Hence, cum interest refers
to ‘with interest’.
Ex–Interest Securities: It is the amount of coupon interest between transaction date or
settlement date and the next coupon date. Hence, it is also known as ‘without interest’.
Bond Washing Transactions - It refers to selling of a security to friend or relative
immediately before the due date for accrual or receipt of interest and acquiring the
securities back after the due date. This practice is usually adopted by high income class
assessee to escape from paying tax, by transferring the securities to a low-income class
assessee.

DEDUCTIONS AVAILABLE UNDER INCOME FROM OTHER SOURCES

(1) Family pension: 15,000 OR 1/3 of the amount received whichever is less will be
allowed as deduction.
(2) Collection charges paid for collecting dividend and interest is deducted provided
such income is chargeable to tax.
For Private Circulation only ~ 164 ~
(3) Any other expenses incurred to earn an income will be allowed as deduction. For
example, depreciation, repairs, insurance etc. incurred on letting out building
with plant, machinery and furniture, expenses on sub-letting, expenses relating
to owning and maintain the race horse.

TAX FREE GOVERNMENT SECURITIES

(1) Post office Cash Certificates (5years).
(2) Post Office National Saving Certificates (12years).
(3) Post Office Saving Bank (POSB) A/c, exempted up to Rs.3,500 and in case of Joint
A/c Rs.7,000 is exempted.
(4) Post office cumulative time deposit A/c.
(5) Public Account of Post Office Saving A/c (Interest up to Rs.5,000).
(6) Fixed Deposit in Post Office.
(7) National Plan Certificates (10years).
(8) 12 years National Saving Certificates.
(9) National Plan Saving Certificates (12years).
(10) National Defense Gold Bonds 1980.
(11) Special Deposit Scheme 1981.
(12) Special Bearer Bonds 1991.
(13) Treasury Saving Deposit Certificate (10years).
(14) Interest on 7% capital Investment Bonds.
(15) Notified NRI Bonds.
(16) Interest on Bonds Issued by Local Authority of State Finance Entity notified by
Central Government.
(17) Interest on Relief Bonds and Saving Bonds.

TAX DEDUCTION AT SOURCE (TDS) RATES

INCOME RATE OF TDS
Interest on debentures / securities issued by or on behalf 10%
of any local authority / statutory corporation, listed
debentures of a company, any security of the Central or
State Government.
Any other interest on securities (including interest on non- 10%
listed debentures.
Interest other than interest on securities to a resident 10%
Winning from lottery, horse race or crossword puzzle or 30%
card game or other games of any sort to a resident / non –
resident
Insurance commission to a resident 10%
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Dividend declared or received on or after 1.4.2020, TDS at 10%
10% if the amount of dividend exceeds Rs. 5000
Fees for professional or technical services to a resident 10%

TAX SHALL NOT BE DEDUCTED AT SOURCE FOR THE FOLLOWING:

(a) 4.25% National Defense Bonds.
(b) National Development Bonds.
(c) 7 years National Saving Certificate.
(d) Debentures issued by Cooperative Society or a Public Sector Company or any
Institution notified by Central Government.
(e) 6.5% Gold Bonds 1980.
(f) Any Security of Central or State Government.
(g) Debentures issued by the company or recognized Stock Exchange provided that the
interest is payable by Account Payee Cheque and the aggregate amount doesn’t exceed
Rs.2,500.
(h) Bank Interest on Fixed Deposit: It is fully taxable by deducting TDS if it exceeds
Rs.40,000 p.a. (Gross Interest) *
(i) Gifts received: Gifts received from a relative are not taxable and gifts received from
friends or non- relatives exceeding Rs.50,000 is fully taxable.
(j) Insurance Commission Received: It is fully taxable. If it is more than Rs.15,000 it is
subject to TDS. (Gross Commission) **
(k) Casual Income: Income from crossword puzzle, lottery, card games if it exceeds
Rs.10,000 and Horse race exceeds Rs.10,000 it is subjected to TDS. No expense is allowed
as deduction from these incomes. (Gross Winnings) ***

Illustration 1
Mrs. Kavya submits the following particulars of her Income from other sources for the
year ended 31st March 2024
(1) Family pension from Govt. of Karnataka yearly 42,000.
(2) Royalty from books written 20,000 (Expenses incurred for this purpose ₹2,500)
(3) Remuneration from articles published in a magazine 2,000.
(4) Cash worth 1,00,000 was found in her private locker. The source of which could not
be explained by her.
(5) Interest on fixed deposit in a Bank 15,000 (Gross).
(6) Rent from subletting a house 1,500 p.m. (Rent paid to the owner 1,000 p.m. and repair
expenses 200).
*Gross Interest = Net Interest Received (x) 100/90 **Gross Commission=Net
Amount (x) 100/90 ***Gross Winnings = Net Winning (x) 100/70

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(7) Winning from lottery Net 70,000 (purchase of lottery 100).
(8) Winning from horse race 35,000 (Net).
Compute taxable income from other sources for the AY 2024-25
Solution:
Particulars Amount Amount
1. Family Pension received 42,000
Less: 15,000 or 1/3 of 42,000 (WEL) 14,000 28,000
2. Royalty received 20,000
Less: Expenses Incurred 2500 17,500
3. Remuneration from article published 2,000
4. Income from undisclosed source 1,00,000
5. Interest on fixed deposit 15,000
6. Rent from Subletting (1500 x 12) 18,000
Less: Rent paid by the assessee (1000 x 12) 12,000
Less: Repair expenses of the house 200 5800
7. Winnings from Lottery (70,000 x 100/70) 1,00,000
8. Winnings from Horse Race (35,000 x 100/70) 50,000
Taxable Income from Other Sources 3,18,300

TERMINAL QUESTIONS
Section A – 5 Marks Questions
1. List out any 4 casual Income.
2. Mention the various kinds of securities.
3. Explain bond-washing transactions.
4. State the standard deduction for family pension
5. Explain tax free commercial securities.
6. Mention the rate of TDS for casual income.

Section B – 9 Marks Questions

1. Explain the various kinds of securities.
2. State the income which is chargeable under the head income from other sources.

Section C – 12 Marks Questions

1. From the following particulars compute the taxable income under income from
other sources of Ms. Kiran, compute his taxable income from other sources for the
A.Y. 24-25.
a. Interest on POSB a/c Rs. 5,000

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b. Interest from National Relief Bonds Rs. 10,000
c. Family Pension received Rs. 3,500 per month
d. Winnings from horse race Rs. 1,00,000
e. Lottery won from playwin Rs. 20,000
f. Prize amount received from Sikkim lottery Rs. 70,000
g. Dividend from Reliance ltd Rs. 12,000
h. Dividend from foreign company Rs. 2,500
i. Dividend from Cooperative society Rs. 5,000
j. Interest on F.D. with State Bank of Mysore Rs. 10,000
k. Interest received on listed bonds of Birla ltd Rs. 9,000
l. Amount invested in 8%, Karnataka govt securities Rs. 10,000
m. Invested in 11.5% tax free securities of Mudra ltd. (unlisted) Rs. 20,000
n. Fees Rs. 12,500
o. She lives in a house taken on rent for Rs. 9,000 p.m. she had sub-let 1/3rd. of the house
to Kavitha on a monthly rent of Rs. 5,000
p. She had written some articles in Times of India for which she received Rs. 20,000
q. She is the author of a text book titled “Art of Cooking” published by Banashankari
publishers amount received Rs. 18, 000. Amount spent on typing books and telephone Rs.
300, & 1,200 respectively.

2. From the following particulars, calculate income from other sources:

a. Rs. 25,000, 8% Govt. of Karnataka securities
b. Rs. 10,000, 10% KPTCL Bonds
c. Rs. 1,00,000, 12% B.D.A. Bonds
d. Rs. 12,000, 8% Jaipur Municipal Corporation Bonds
e. Dividend received from Colgate-India ltd Rs. 12,000
f. Dividend received from Castrol India ltd Rs. 10,000
g. Dividend received from cooperative society Rs. 8,000
h. Interest received from Aditya technologies Tax free bonds (listed) Rs. 9,000
i. Interest received from Chota biscuits ltd, tax-free commercial securities, Rs. 8,000
(unlisted)
j. Family pension received Rs. 5,000 p.m.
k. Rent received from letting of vacant plot Rs. 1,250 p.m
l. Composite rent received for letting factory 7,500p.m. expenses incurred, repairs and
maintenance Rs. 25,000, allowable depreciation Rs.28,000, Municipal taxes Rs. 7,000
m. Tips received for working as bartender Rs. 12,650
n. Agricultural income from India Rs. 1,25,000
o. Agricultural income from Punjab (Pakistan) Rs. 22,500
p. Royalty income from stone quarry Rs. 27,500. Expenses incurred Rs.2,200.
q. The assessee lives in a rented house taken on a monthly rent of Rs. 6,000 and

For Private Circulation only ~ 168 ~

r. sublets one-third (1/3rd.) for a monthly rent of Rs. 3,000 expenses incurred are repairs
and maintenance Rs. 1,500; Collection charges Rs.150, and municipal taxes Rs.1,500
s. Winnings from cross-word puzzle Rs. 10,000
t. Received winnings from horse race Rs. 70,000
u. Winnings received from Play-win Rs. 50,000
v. Income from undisclosed sources Rs. 10,000
w. Dividend received from foreign company Rs. 18,000.

3. Mr. Rama submits the following particulars of his income from other sources for the
previous year ended 31-3-2024:
a. Royalty from books written Rs. 40,000 (expenses incurred for this purpose Rs.4,000).
b. Interest on fixed deposits in a Bank Rs. 30,000 (gross)
c. Family pension form Government of Karnataka annually Rs. 48,000.
d. Winning from horse race Rs. 70,000 (net)
e. Rent from subletting of house Rs. 3,000 per month (Rent paid to owner Rs.2,000 p.m.
and repair expenses Rs. 400).
f. Cash worth Rs. 90,000 was found in his private locker. The source of which could not be
explained by him.
g. Winning from lottery net Rs. 1,40,000 (purchase of lottery Rs. 150)
h. Remuneration from articles published in a magazine Rs. 4,000.
i. Directors fees Rs. 10,000
j. Dividend from Co-operative society Rs. 5,000
k. Dividend from ABC Ltd. Rs. 5,500.

4. Mr. Balu has the following incomes during year ending 31st. March 2023. Compute his
income from other sources for the A.Y. 2024 - 25:
a. Dividend declared by X company, Bangalore Rs. 12,000.
b. Interim dividend received on 31-05-2022 Rs. 5,000.
c. Won Gold worth Rs. 25,00,000 from Rajasthan State Lottery.
d. Interest received on Government securities Rs.20,000
e. During March 2023, he earned Rs. 2,00,000 as prize money on Horserace.
These horses are owned by hi m and the expenses incurred in maintenance of these
horses is Rs. 2,10,000.
f. Family pension from Govt. of Karnataka yearly Rs. 42,000.
g. Remuneration from articles published in magazine Rs. 2,000.
h. Cash worth Rs. 1,00,000 was found in his private locker. The source of which could not
be explained by him.
i. Rent from subletting a house Rs. 1,500 p.m. (rent paid to the owner Rs. 1,000 p.m. and
repair expenses Rs. 200.

5. From the following receipts and payment of Mr. Dinesh, compute his income under
For Private Circulation only ~ 169 ~
the head income from other sources.
a. Winnings from MP State Lottery Rs. 28,000.
b. Winning from Horse Race Rs. 1,000.
c. Winning from Rajasthan State Lottery Rs. 3,000.
d. Winnings from Crossword puzzle Rs. 2,500.
e. Gift received from a friend in London Rs. 1,00,000.
f. Winnings from Card Games Rs. 2,500.
g. Purchase of Lottery tickets Rs. 3,000.
h. Payment for betting Horse Race Rs. 6,000.
i. Winnings from Horse Race Rs. 49,000.

6. Mr. Anand, a resident of India, has furnished the following income for the previous
year 2023-24. Compute his income from other sources for the assessment year
2024-25:
a. Winnings from Crossword Puzzles Rs. 6940.
b. Royalty from Text Book written by him (Gross) Rs. 45,000 (admissible deduction
Rs. 12,500).
c. 8% Interest on Rs. 40,000 Debentures.
d. 10% Interest on Rs. 80,000 Karnataka State Govt. Bonds.
e. Rs. 2,000 as interest on Bank Deposits.
f. Dividends from a Domestic Company Rs. 8,000.
g. Income from Undisclosed Sources Rs. 10,000.
h. Interest on Listed Securities (Net) Rs. 8,980.
i. Dividends from Foreign Company gross Rs. 16,000.
j. Winnings from Horse Race Rs. 17,780 (Net).
k. Interest on Debentures of a Local Authority gross Rs. 7,200.
l. Interest on PO Saving Bank A/c Rs. 1,500.

7. Dr. Ashok is a Professor of Economics. He submits the following details and wants
you to compute his taxable income from other sources.
a. He is an author of text and received a royalty of Rs. 45,000. He claims the following
deduction from this amount:
• Salary to Clerk for gathering information for him to write the book Rs. 5,000.
• Cost of books purchased Rs. 1,000 for reference work in order to write his book.
• Telephone expenses of Rs. 800 in connection with printing and publication of the book.
b. Income from articles published in “Economic Times” Rs. 7,000.
c. He lives in a rented house paying a rent of Rs. 4,000 p.m. He has sub-let half portion of
the house for a rent of Rs. 3,000 p.m. Dr. Ashok pays the municipal tax for the whole house
Rs. 4,000.

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d. He received Rs. 200 per lecture delivered at the Economic Institution during the year.
He delivered 22 such lectures.
e. As an examiner of various Universities, he received remuneration of Rs. 5,000.
f. His other incomes were:
• Winning from Lottery Rs. 21,000 (Net).
• Winning from Chess Rs. 1,000.
• Interest on Govt. of England bonds Rs. 3,000.
g. Interest on PO Cumulative Time Deposit Rs. 1,000.
h. Interest received on the deposit for a firm Rs. 5,400.
i. Income from agriculture land situated in Sri Lanka Rs. 70,000.
j. Scholarship for research work from the UGC Rs. 8,000 p.m.

8. Mr. Suresh submits the following details for his income for the year ending 31 st
March 2024. Compute his taxable income from other sources in A.Y. 2024-25:
a. He lives in a rented house. He pays a rent of Rs. 12,000 p.m. He has sub-let
1/3 portion of the house on a rent of Rs. 6,000 per month. He has undertaken the liabilities
of paying municipal taxes Rs. 3,000 on the whole house and also repairs the whole house
amounting to Rs. 12,000.
b. Income from agriculture land in Bangladesh Rs. 20,000.
c. Dividend from UTI Rs. 4,000
d. He holds the following investments:
i. Rs. 1,00,000, 8% tax-free commercial securities (not listed)
ii. Rs. 30,000, 7% debentures of JCT Mills Ltd.
iii. Rs. 72,000, 10% tax-free debentures of LIC of India (Listed).
iv. 10% UP State Electricity Board Bonds Rs. 10,000.
e. Interest on POSB A/c Rs. 1,000.
f. Honorarium received for writing articles in magazines Rs. 1,000.
g. He is an examiner of universities, he received Rs. 10,000 as remuneration

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 Module – IV

DEDUCTIONS FROM GROSS TOTAL INCOME AND TAX LIABILITY OF

AN INDIVIDUAL

Contents

• Introduction.
• Deductions under Gross Total Income
• Computation of Total income and Tax Liability
• Refund of Tax or Refund of excess payments
• Scheme of Set-off and carry forward
• Terminal Questions

INTRODUCTION

Income tax is levied on the total income earned by the Assessee in the previous year.
Hence, it is necessary to ascertain his total income. Sometimes an assessee may incur
loss from particular sources of income and unless such loss is set off against other
incomes, the net result of the assessee activities during a particular previous year
cannot be ascertained and consequently the tax payable also cannot be determined.
For this purpose, the Income- Tax Act provides certain specific provisions for set-off
and carry forward of losses.
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Objectives of this Module:

• To understand the concept of set-off and carry forward of loss.

• To know various deductions
• To know tax rates for different age group person

• Deductions under Gross Total Income (GTI).

The following rules have to be kept in mind, while calculating the deductions under section
from 80C to 80U.
• The aggregate amount deduction U/S 80C to 80U cannot be exceed GTI.
• No deductions can be claimed for the long term capital gain and casual income, Short
term capital gain liable for security Transaction Tax .
• Deductions under section 80G and 80GG can be claimed only after claiming all
theother deductions under section 80.
• While computing the total income of the assessee, No deduction shall be allowed
under section 80-1A, 80-IAB, 80-IB, 80-IC, 80-ID, or 80-IE unless the assess file s a return of his
income on or before the due date is specified U/S 139(1)

Sections 80 C to 80 U specifies the deductions to be made from the Gross TotalIncome. Deductions
applicable to individual assesses are as follows:

• Section: 80C
Savings and investments made:

• The following qualify for deduction:

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• Contribution to SPF, RPF, PPF (up to Rs.1,50,000) & approved superannuation fund.
• Contribution made for deferred annuity forGovt. employees.
• LIC premium paid on the life of the assessee,spouse and children. Policy issued before
01-04- 2012: (Actual premium paid or 20% of the sum assured WEL). Policy issued on or after
01-04- 2012: (Actual premium paid or 10% of the sum assured WEL). Policy issued on or after
01-04- 2013 on a life ofa disabled: (Actual premium paid or 15% of thesum assured WEL)
• Payment made by the employer towardsemployee’s group insurance.
• Deposits made in Unit LinkedInsurance Plan.
• Amount invested in NSC – VIII issueincluding interest accrued thereon.
• Amount invested in National Saving Scheme.
• Amount paid to LIC under Jeevan Dhara,Jeevan Akshay.
• Amount invested in notified Pension Fundset up by Mutual Fund or UTI or NHB.
• Amount deposited with an authority engaged in Housing Development or Town or
Rural Development.
• Amount deposited or invested in EquityLinked Savings Scheme.
• Repayment of House Building Loan (only principal)
• Tuition fees paid for two children only.
• Amount paid as subscription to equity shares or debentures of any eligible issue.
• Amount paid as subscription to any units of mutual fund.
• Investment in notified bonds issued by NABARD.
• 5-year time deposit in an a/c under post office time deposit rules.
• Deposit in an a/c under senior citizens savings scheme rules.
• Amounts invested in the Sukanya Samriddhi Yojana account Deduction: Aggregate
amount or Rs.1,50,000 (Whichever is less) Categories of Assessee: Individuals or HUF

• Section: 80CCC
Savings and investments made:

Contribution to any pension fund

Deduction: Amount invested in a pension fund set upby LIC or another insurer or
Rs.1,50,000WEL.
Categories of Assessee: Individuals or HUF
For Private Circulation only ~ 174 ~
• Section: 80CCD
Savings and investments made:

Contribution to pension scheme of central government employee: like notified NPS

Deduction: Actual amount deposited or 10% of The employee’s salary WEL
Categories Of Assessee: Allowed to individuals employed by the Central Government on or
after1-1- 2004.
Note: The maximum overall deductions u/s 80C, 80CC & 80CCD shall not exceedRs.1,50,000
as per Section 80CCE
• Section: 80CCD(1B) Savings and investments made:
Additional Deduction for contribution made to New Pension Scheme

Deduction: An Additional deduction ofRs.50000 is allowed over and above the limit of
1,50,000 u/s 80CCE
Categories Of Assessee: Individual
• Section: 80D
Savings and investments made:

Medical insurance premium:

• Premium paid by cheque on the health of self, spouse or dependent parents or

dependent children or Rs.25,000 WEL is allowed.
• For senior citizens (who have attained the age of 65 years) Deduction: a)Actual
Premium or 25,000 WEL b)Rs.50, 000. Categories Of Assessee: Individuals or HUF

• Section: 80DD
Savings and investments made:

Medical treatment of a dependent relative:

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Any expenditure for medical treatment, nursing and rehabilitation of handicapped dependent
relative Deposits under LIC, UTI’s Scheme & other IRDA approved insurers for benefits of
physically handicapped dependent
(e.g.LIC’sJeevanAadhar)

(Dependent means the spouse, children, parents, brothers and sisters of the assessee)
Deduction: Rs. 75,000 for normal disability & Rs.1,25,000 in case of severe disability.
Categories Of Assessee: Individual Or HUF

• Section: 80DDB Savings and investments

Medical treatment of notified diseases of a dependent:

Actual expenditure incurred on medical treatment of self or dependent relative or a member

of HUF suffering from terminal disease like, cancer Aids, renal failure etc.
In the case of senior citizens.

The deduction is available only if the expenses are actually spent. Deduction: a)Actual amount
paid or 40,000 W.E.L b)Up to Rs.1,00,000 Categories of Assessee: Individuals or HUF

• Section: 80E
Interest on loan taken for higher studies:

The loan can be taken for his own, spouse or children from any financial institution. The
deduction is available for 7 years or until the loan is repaid whichever is earlier Deduction: Any
amount
Categories of Assessee: Individuals or HUF

• Section: 80EE

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Payment of interest of Home Loan: This deduction would be allowed provided that the total
value of the loan is not more than 35,00,000
The total value of the house is not more than 50,00,000

The loan must be sanctioned between 01.04.2016 to 31.03.2017 (Deduction would be over
and the above the Rs.2,00,000 deduction u/s 24)
Deduction: 50,00
Categories of Assessee: Individuals

• Section: 80EEA

Payment of interest on home loans:

This will now be allowed for the loan sanctioned till the 31st of March 2021.

The individual taxpayer should be a first-home buyer and should not be entitled to deduction
under section 80EE
Deduction: 1,50,000

Categories of Assessee: Individual

• Section: 80EEB

Payment of interest on purchase of electric vehicle: Max amount Rs.1,50,000

Loan for only purchase of electric vehicle

Loan period must be o1-04-2019 to 31-03-2023 Deduction: 1,50,000

Categories of Assessee: Individual
For Private Circulation only ~ 177 ~
• Section: 80G

Donations to approved funds and charitable institutions Deduction: Refer the note 2- below*
Categories of Assessee: All assessee

• Section: 80GG

Payment of house rent: This deduction is allowed for individuals only for without receiving
HRA.
The assessee must be living in a rented house due to his employment, business or profession

He or his spouse should not have any self-occupied house in India or should not own a house
at the place where the taxpayers resides
Adjusted GTI=GTI-(LTCG+STCG from shares subject to STT+reberable income+all other
deductions u/s 80 except 80GG)

Deduction: Least of the following is allowed as deduction:

Statutory limit Rs. 5,000 p.m Rent paid – 10% of adjusted GTI 25% of adjusted GTI
Categories of Assessee: Individual or HUF

• Section: 80GGA
Savings and investments made:

Payment to institutions having rural development program or Scientific research as its object
Deduction: 100%
Categories of Assessee: Individual or HUF
For Private Circulation only ~ 178 ~
• Section: 80GGC
Savings and investments made:

Contributions given by any person topolitical parties Deduction: 100%

Categories of Assessee: Individual or HUF

• Section: 80QQB
Savings and investments made:

Royalty Income of authors

Deduction: Actual Royalty received or Rs. 3,00,000 WEL Categories of Assessee: Individual or
HUF

• Section: 80RRB Royalty on patents

Deduction: Actual Royalty received or Rs. 3,00,000 WEL Categories of Assessee: Individual or
HUF

• Section: 80TTA
Savings and investments made:

Interest on savings Bank Deposits in Banks, Co-operative Banks, Post Office Deduction: Actual
interest or10,000 p.a W.E.L
Categories of Assessee: Individuals or HUF except senior citizens

• Section: 80TTB
Savings and investments made:

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Interest on all kinds of deposits like Banks, Co-operative Banks, Post Office Deduction: Actual
interest or 50,000 p.a W.E.L
Categories of Assessee: Individuals or HUF for only senior citizens

• Section: 80U
Savings and investments made: Handicapped assessee Deduction: Fixed deduction of Rs.75,
000 is allowed. In case of severe disability,it is Rs.1,25,000

Categories of Assessee: Individuals orHUF

NOTE: Rebate of income tax in case of certain individual’s u/s 87A,

Note-1
The payment eligible for deduction includes any premium paid on health insurance
contributions made to the Central Government Health Scheme. W.E.F AY 2013-14, any
payment on account of preventive health checkup is also available to the extent of Rs. 5,000
(which is within the overall maximum limit of Rs.15,000 and 20,000 in case of senior citizen)
any mode of payment for preventive health checkup is eligible for deduction.

Note: Deductions for Donations to Approved Institutions and Funds Section 80G

Donations Qualifyi Rate of

ng Deduction
Amount
A: No Limit Donations:
• Prime Minister National Relief Fund 100% 100%
• Africa Fund 100% 100%

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• Armenia Earthquake Relief Fund 100% 100%
• University of National Eminence 100% 100%
• National Foundation for Communal Harmony 100% 100%
• CM Earthquake Relief Fund, Maharashtra 100% 100%
• AP Chief Minister’s Cyclone Relief Fund 100% 100%
• Zilla Saksharata Samiti 100% 100%
• National Blood Transfusion Council 100% 100%
• Army Central Welfare Fund 100% 100%
• National Illness Assistance Fund 100% 100%
• National Sports Fund 100% 100%
• National Cultural Fund 100% 100%
• Technology Development and Application Fund 100% 100%
• National Defense Fund 100% 100%
• Swachh Bharat Kosh by Central Govt
100% 100%
• Clean Ganga Fund by central Govt
• National fund for control of drug Abuse 100% 100%
100% 100%

• PM National Drought Relief Fund 100% 50%

• Jawaharlal Nehru Memorial Fund 100% 50%
• Indira Gandhi Memorial Fund 100% 50%
• Rajiv Gandhi Foundation 100% 50%
B: With Limit Donation:
1. State Government Actual total of Out of
1 Q.A.
2. Local Authority to 10 or 10% 100% of
of

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 3. Educational Institutions Adjusted GTI donations for
• Charitable Institutions WEL is Q.A. promotion
• Sports Institutions
of family
6. Corporation setup to protect the interest of minorities planning and
7. Authority constituted for development and housing and sports and
planning of
cities and towns balance at
8. Place of art, public worship or historical importance 50%
9. An institution or association engaged in promotion of family
planning
in India
10. Any sum paid by a company to Indian Olympic Association for
development of infrastructure and sponsorship of sports and games
in India

Note:

• Donation must not be given in kind or to a political party or to a particular person.

• Adjusted GTI = GTI – (Deduction u/s 80C to 80U except 80G + LTCG +
STCG from shares subject to STT + Rebateable income)

• Computation of Total income and Tax Liability:

Gross Total Income:

It refers to the aggregate of Income received from all five heads of income before allowing
deductions under sections 80c to 80 U.
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Total Income:
It is the total income which is earned from all five heads after making all the deductions under
section 80C to 80U is known as the Total income.

Computation of Total income and Tax Liability:

Name of the Assessee: Previous Year :2023-24
Residential status: Assessment Year : 2024-25
Calculation of Taxable income
Particulars Rs. Rs.
• Taxable income from salaries xxx
• Taxable income from House Property
xxx
• Taxable Profits and Gains from Business or Profession
• Taxable Capital gain xxx
• Taxable income from other sources
xxx
Gross Total Income
xxx
Xxx
Less: Deductions U/S 80c to 80U
Xxx
Xxx

Net taxable income

Tax Liability as per the specified rates (see below) Xxx

Less: Tax paid
• Tax deducted at source xxx
• Advance tax paid xxx
Tax payable / Tax Refund Xxx

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Tax on total income is divided into the following parts:
• Tax on STCG on shares subject to securities transaction(u/s 111A) tax is at 15% other
normal rates
• Tax on LTCG on all assets(u/s112) [except on shares subject to STT which is fully
exempted u/s 10(38) ] is at 20%
• Tax on LTCG on transfer on unlisted shares(u/s 112A) is at10%
• Tax on casual income is at 30%
• Unexplained money, cash credit expenditure etc is at Rs. 60%
• On balance total income, tax is calculated at scheduled slab rates.

Income Tax Slab Rate for AY 2024-25 for Individuals:

Individual (resident or non-resident), who is of the age of less than 60 years on the last day of
the relevant previous year:

Net income range Income-Tax rate

Up to Rs. 2,50,000 Nil
Rs. 2,50,000- Rs. 5,00,000 5%
Rs. 5,00,000- Rs. 10,00,000 20%
Above Rs. 10,00,000 30%

Resident senior citizen, i.e., every individual, being a resident in India, who is of the age of 60
years or more but less than 80 years at any time during the previous year:

Net income range Income-Tax rate

Up to Rs. 3,00,000 Nil
Rs. 3,00,000 – Rs. 5,00,000 5%
Rs. 5,00,000- Rs. 10,00,000 20%

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 Above Rs. 10,00,000 30%

Resident super senior citizen, i.e., every individual, being a resident in India, who is of the age
of80 years or more at any time during the previous year:

Net income range Income-Tax rate

Up to Rs. 5,00,000 Nil
Rs. 5,00,000- Rs. 10,00,000 20%
Above Rs. 10,00,000 30%

NEW TAX REGIME SLAB RATES FOR AY 2024-25 FOR INDIVIDUALS

Net income range Income-Tax rate
Up to Rs. 3,00,000 Nil
Rs 3,00,001. - Rs. 6,00,000 5%
Rs. 6,00,001 - Rs. 9,00,000 10%
Rs. 900,001 - Rs. 12,00,000 15%
Rs. 12,00,001 - Rs. 15,00,000 20%
More than 15,00,000 30%

Health and Education cess: - 4% of income tax and surcharge Surcharge: -

Rs. 50 Lakhs to Rs. 1 Crore to Rs. Rs. 2 Crores to Rs. 5 crores to Rs. Exceeding Rs. 10
Rs. 2 Crores Rs. 5 10 Crores Crores
1 Crore Crores

For Private Circulation only ~ 185 ~

 10% 15 25 37 37
% % % %
Note: - A resident individual is entitled for rebate under section 87A if his total income does
not exceed Rs. 5, 00,000. The amount of rebate shall be 100% of income-tax or Rs. 12,500,
whichever is less.

• Refund of Tax or Refund of excess payments

Refund means to pay back. If, therefore, any person satisfies the assessing officer that
the amount of tax paid by him or on his behalf for any assessment year exceeds the
amount with which he is properly chargeable under the act for that year. He is entitled
to a refund of the excess amount paid.

Who can claim refund

• The person who has made excess payment.
• In case of his death, insolvency, incapacity, liquidation or other reason his legal
representative can claim.

How to claim refund

• Every claim for refund shall be made by furnishing return of income in
accordance with the provisions of section 139.
• Refund has been arisen as a result of excess TDS/TCS and payment of advance
and the amount of refund does not exceed Rs. 50,00,000 for one A.Y
• No interest will be admissible on the belated refund claims.
• No claims will be entertained more than 6 A.Y

For Private Circulation only ~ 186 ~

• Scheme of Set-off and carry forward
The procedure of set off and carry forward operate as follows, subject to the conditions
as prescribed:
• Intra-head or inter source set-off
• Inter-head set –off
• Carry forward of unadjusted losses
• Order of set-off

Intra –head or inter source set-off (Sec 70):

If there is loss under one source, the same can be set-off against the income under
other source in the same head of income. It is known as Intra head or inter source set
off.

Examples:
• Loss from a Self-Occupied Property can be set off against income from
anyother house properties.
• Loss from one business can be set off against any other business income.
• STCL can be set off against both STCG and LTCG.

Exception: Intra head set off of losses is allowed for all losses except the following

• Loss from speculation business cannot be set-off against income from other
business. This can be set-off only against the income from speculation business.
• Loss from owning and maintaining race horses shall be set-off against income
from horse races only and not against any other income under the head of other
sources.
• Loss from an exempted source of income cannot be set-off against any taxable
income.
For Private Circulation only ~ 187 ~
• Long term capital losses can be set off only against long term capital gain.
• Loss on account of lottery cannot be set off against income from
lottery,crossword puzzle, card games, etc.
• Loss from any source or any head cannot be set off against casual incomes such
as winnings from lottery, horse race, gambling, etc.

Inter-head set-off Sec 71:

Any loss, if it cannot be set off against the same head of income, it can be set off against
the income from another head in the same year, it is known as inter head set off.

Examples:
• Any loss arising under the head income from house property can be set off
against income from any other heads of income including salary income in the same
A.Y.
• Losses arising from business or profession can be set off against any other heads
of income except salary income

Exceptions: Inter head set off is allowed subject to the following exceptions

• Loss from speculation business cannot be set off against other heads.
• Loss under the head capital gains cannot be set off against other heads of
income.
• Losses on a/c of lottery or card games cannot be set off against other heads of
income..
• Loss from owning and maintaining a race horse shall be set-off against income
from horse races only and not against any other income under the head of other
sources.

Carry forward and set off losses:

For Private Circulation only ~ 188 ~

Losses which cannot be set off under the same head or against income from other
heads during the same assessment year can be carried forward to the subsequent
assessment years and set-off; it is known as carry forward and setoff losses.
• Unabsorbed loss from house property can be carried forward for 8 subsequent
A.Y. to set off under the head house property.
• Unabsorbed business loss can be carried for 8 A.Ys. to be set-off only from
business income provided the business whose loss is being carried forward continues.
Unabsorbed depreciation can be carried forward till it is fully adjusted from any income
during the succeeding years.
• Unadjusted capital losses can be carried forward for 8 succeeding A.Ys. to be set
off only against capital gains. If it is short-term, it can be set off either against short-
term or long-term capital gain and in case of long-term capital loss; it can be carried
forward and set off only against long-term capital gain.
• Unabsorbed loss from the business of owning and maintaining race horses can
be carried forward for 4 A.Ys.
• Speculation losses can be carried forward for 4 A.Ys.

Order of Set off:

• Current year depreciation
• Current year expenditure on scientific research
• Brought forward business loss of earlier year
• Unabsorbed depreciation of earlier year
• Brought forward scientific research expenditure

Filing of Returns [Losses]

Unless the assessee files the returns of loss U/S 139(3) and gets the loss determined
by the assessing officer, assessee will not be entitled to carry forward and set-off any
loss as per the provisions.

For Private Circulation only ~ 189 ~

 SET-OFF OF LOSSES
Loss Set-Off
• Income from any other house property
• Any other head of income. However, w.e.f.
assessment year 2018-19/set off of loss against
any other head
shall be restricted to two lakh rupees for any
1. Loss from House Property assessment year

• Income from any other business or profession

• Any other head of income exceptunder
2. Loss from business or
the head "Salaries"
profession
3. Loss from speculation Income from speculation
Income from any other specified
3A. Loss of specified business Business
• Short-term capital gain
• Long-term capital gain
4. Short-term capital loss
5. Long-term capital loss Long-term capital gain
6. Loss from activity of owning
and maintaining race Horses Income from activity of owning andmaintaining
race horses

CARRY-FORWARD AND SET-OFF LOSSES

For Private Circulation only ~ 190 ~

 Loss Set-Off
In the following eight years, income from
1. Loss from House Property
house property.
2. Loss from business or In the following eight years, income from
profession business or profession.
In the following four years, income
3. Loss from speculation from speculation.
Income from any other specified
3A. Loss of specified business business.

In the following eight years:

• Short-term capital gain
4. Short-term capital loss • Long-term capital gain

In the following eight years,long-term

5. Long-term capital loss capital gain.
In the following four years,income
6. Loss from activity of from owning and maintaining
owning and maintaining race horses.
race horses

Illustration. 1

Mr. Srinath (Resident) is employed by AB Co. Ltd. He submits the following particulars of his
income and expenditure for the A.Y. 2024-25. Compute his total income.

1. Income from salary 6,00,000

For Private Circulation only ~ 191 ~

 2. Income from other sources 2,00,000

3. Own contribution to NPS 40,000

4. Own contribution to PPF 2,00,000

5. Deposit is notified annuity plan of LIC 5,000

Solution:
Computation of Income Tax
Assessee: Mr. Srinath Previous Year: 2022-23
Status: Resident Assessment 2023-24
Year:

Particulars Rs.
1. Income from salary 6,00,000
2. Income from other sources 2,00,000
Gross Total Income 8,00,000
Deduction u/s 80C:
Contribution to PPF (Restricted) 1,50,000
Deduction u/s80CCC:
Deposit is notified annuity plan of LIC 5,000
Deduction u/s80CCD:
Own contribution to NPS (additional deduction up to 40,000
50,000)

Max. Deductible amount (1,50,000+5,000= 1,50,000

1,55,000 or Max. limit of Rs.1,50,000 WEL)
Total Income 6,10,000

For Private Circulation only ~ 192 ~

Illustration. 2
Following are the particulars of Ms. Suvarna for the P.Y 2022-23.

Particulars Rs

Winning from Kerala state Lottery 1,00,000

Casual Income from Crossword puzzles 20,000
Rent of property
4,56,000
Business income
75,000
Long term capital gain
30,000

Compute the Gross Total Income of Ms. Suvarna for the A.Y 2023-24

Solution

Computation the Gross Total Income of Mr. Arjun for the A.Y 2023-24

Particulars Amount(Rs)

Income from HP 4,56,000

Income from Business 75,000
Income from capital gain –LTCG
30,000
Income from Other sources
1,00,000
• Winning from Kerala state Lottery
1,00,000
Casual income from crossword puzzles
20,000

6,81,000

For Private Circulation only ~ 193 ~

 Gross Total Income

Illustration. 4

Mr. Arjun aged 40 years submits the following information pertaining to the A.Y 2024-25

Particulars Rs

Income from Salary (Computed) 4,00,000

Loss from self-occupied property (-) 70,000
Loss from let out property
(-)1,50,000
Business loss
(-)1,00,000
Bank interest (FD) received
80,000

Compute the Gross Total Income of Mr. Arjun for the A.Y 2023-24

Solution

Computation the Gross Total Income of Mr. Arjun for the A.Y 2024-25

Particulars Amount(Rs) Amount (Rs)

For Private Circulation only ~ 194 ~

 Income from Salary 4,00,000

Less: Loss from HP of Rs.2,20,000 (70,000+1,50,000) (-) 2,00,000 2,00,000

to be restricted to Rs. 2lakhs by virtue of section
71(3A)
Note: Balance loss of Rs. 20,000 from HP to be carried
forward to next A.Y

Income from other source

Bank interest received 80,000
Less: Business loss set off
(-) 1,00,000
Note: Business loss Of Rs. 20,000 to be carried
forward for setoff against business income of the
next A.Y
Gross Total Income 2,00,000

Illustration 5
From the following information provided by Mr. Srinath, calculate the amount of
allowable deduction u/s 80C for the A.Y 2023-24.

• Life insurance premium on his own life Rs.2,700

• Life insurance premium of the life of his wife (not dependent upon Mr.
Srinath) Rs.8,000
• Life insurance premium on the life of his married daughter Rs.4000
• Life insurance premium on the life of his dependent sister Rs.10,000
• Repayment of loan taken from LIC for purchase of commercial house property
Rs.30,000
For Private Circulation only ~ 195 ~
• Contribution towards unrecognized provident fund (URPF) Rs.30,000
• Tuition fees of daughter Rs.22,000
• Life insurance premium on the life of his major son is due on 1.12.2019
Rs.3,000 but paid on1.5.2022.
• Accrued interest on NSC Rs.5,000.
• Contribution to PPF in the name of mother Rs.20,000.
• Rs.8,000 in Sukanya Samridh Scheme in the name of his minor daughter.

Solution:
Calculation of the amount of allowable deduction u/s 80C

Previous
Assessee: Mr. Srinath Year.:2022-23
Assessment
Status: Resident .Year.: 2023-24
Particulars Amount (Rs.)
1. Life insurance premium on own life 2,700
2. Life insurance premium on wife's life 8,000
3. Life insurance premium in married daughter's life 4,000
4. Life insurance premium on dependent sister life -
5. Repayment of loan -
6. Contribution to URPF -
7. Tuition fees 22,000
8. Life insurance premium due -
9. Accrued interest on NSC 5,000
10. Contribution to PPF -
11. Deposit in Sukanya Samridhe Scheme 8000
Gross deduction 49,700

For Private Circulation only ~ 196 ~

 Amount of deduction:
GQA of 49,700 or Maximum limit of Rs.1,50,000 w.e.l 49,700

Illustration 6

Mr. Sumanth a resident assessee, furnishes the following of his income/expenditure relevant
for the previous year ending March 31, 2023.

Business Income Rs.83,000

Long Term Capital Gain Rs.4,10,000
Short term capital gain (not covered by the section 111A) Rs.20,000
Other short term capital gain Rs.10,000
Interest on debentures Rs.9,000
Payment of medical insurance premium on own life Rs.3,000
Donation to the national trust for welfare of persons with autism. Rs.4,000
Donation to the fund setup by the Gujarat government Rs.3,000
Donation to Rajiv Gandhi foundation Rs.1,000
Donation to PM Drought relief fund Rs.5,000
Donation to approved public charitable Institution Rs.11,000
Determine his net income for the A.Y. 2023-24.

Solution:

Computation of Total Income

For Private Circulation only ~ 197 ~

 Assessee: Mr. Sumanth A.Y.: 2023-24
Residential Status: Resident P.Y.: 2022-23
Particular Amount
Business income 83,000
Short term capital gain (not covered by the sec. 111A) 20,000
Other short term capital gain 10,000
Interest on debentures 9,000
Other GTI 1,22,000
(-) Deduction u/s 80D
Medical insurance premium on own life Rs.3,000 or max. limit Rs.25,000
w.e.l 3,000

(-) Deduction u/s 80 G

(note-1) 14,950
Other total income 1,03,500
(+) Long term capital gain 4,10,000
Total income 5,13,500

Note 1:

Rate of Amount of

Particulars GQA NQA Deduction Deduction

1. Donation to the national trust for welfare

ofpersons with autism. 4,000 4,000 100% 4,000

2. Donation to the fund setup by The

Gujarat government 3,000 3,000 100% 3,000

For Private Circulation only ~ 198 ~

 3. Donation to Rajiv Gandhi foundation 1,000 1,000 50% 500

4. Donation to PM Drought relief fund 5,000 5,000 50% 2,500

5. Donation to approved public charitable Institution 11,000 11,000 50% 5,500

Total

15,500

Calculation of NQA

NQA = 10% of adjusted GTI or total donations under group 3 w.e.l Adjusted GTI = other
GTI - Deduction’s u/s 80C to 80U + Casual Income
= 1,22,000-3,000+Nil= Rs.1,19,000
Total donations under group 3 = 11,000
Therefore, 1,19,000 of 10% or 11,000, w.e.l 11,900 or 11,000 = Rs.11,000

Illustration 7
From the following particulars in respect of Ms. Neha, Compute total income and tax
liability He receives a Basic Salary of Rs1,00,000 PA. HRA of Rs 50,000, Special
Allowance of Rs 21,000 PA, LTA of Rs20,000 annually.
Income from Other Sources Rs 50,000 Income from business Rs1,80,000
Income that is generated from a house property Rs 1,60,000
Assuming assessee has not opted for Section 115BAC of the Income tax Act, 1961.

For Private Circulation only ~ 199 ~

Solution
Calculation of Total income
Particulars Amount
Income from Salary 1,91,000
(Basic salary+HRA+SA+LTA)
(1,00,000+50,000+21,000+20,000)
Income from other sources 50,000
Income from Business 1,80,000
Income from House Property 1,60,000
Total Income 5,81,000

Calculation of tax Liability

Particulars Amount
Up to 3,00,000 Nill
Next 2,81,000 @5% (2,81,000*5/100) 14,050
Add: Education Cess @ 4% 562
=14050*4/100

Tax Liability 14,612

Illustration 8.

For Private Circulation only ~ 200 ~

Mr. Suman a resident assessee, furnishes the following of his income/expenditure
relevant for theprevious year ending March 31, 2024.

Business Income Rs. 3,94,000

Long Term Capital Gain Rs.18,000
Short term capital gain Rs.96,000
Income from other sources ( winning from horse race) Rs.35,000
Total Income Rs. 5,43,000
Total Eligible deduction in the year previous year 2023-24 is Rs.1,61,800. Calculate
taxable income and tax payable for the A.Y 2024-25

Solution
Calculation of Total income
Particulars Amount
Business Income Rs. 3,94,000
Long Term Capital Gain Rs.18,000
Short term capital gain Rs.96,000
Income from other sources ( winning from horse race) Rs.35,000
Total Income Rs. 5,43,000
Less: eligible deductions 1,61,800
Taxable Income Rs. 3,81,200
Calculation of tax Liability

Particulars Amount

For Private Circulation only ~ 201 ~

 Tax on winning from lottery (30% on 35,000) 10500
Tax on LTCG (20% on 18,000) 3,600
Up to 2,50,000 Nill
From 2,50,000 to 5,00,000 @5% (78,200*5/100) (3,28,200- 3,910

2,50,000)
Taxable income – win from lottery- LTCG (3,81,200-3500-
18000=3,28,200 )
Total Tax ( 10,500+3,600+3,910) 18,010
Less: Rebate u/s 87A 100% of tax or 12500 WIL in case of 12,500
taxable income is less than 5,00,000
Balance Tax 5,510
Add: surcharge Nill
Tax and surcharge 5,510
Add: Education Cess @ 4% =5510*4/100 220

Tax Liability 5,780

• Terminal Questions
Section A – 5 Marks Questions

1. State the meaning of set-off and carry forward of losses.

2. Discuss the way of treating speculation loss.
3. Mention any two losses which cannot be set-off against income under other head.
4. Explain Inter head Set off and Intra head Set off
5. List out the deductions in respect of 80C.
6. Describe the way of computing net taxable income.

For Private Circulation only ~ 202 ~

7. .The gross total income of Mrs. Rashmi amounted to Rs. 6, 00,000 in the previous year 0n
31-3-2024. She has made the following donations to:

PM Gujarat Earthquake Relief Fund 40,000

Africa (Public Contributions India) Fund 10,000

Approved Educational Institutions 15,000

Approved Temples 35,000

Clothes distributed to the poor 5,000

Municipal Corporation for promotion of family planning 20,000

Compute the amount of deduction admissible u/s 80G for the assessment year
2024-25.

8. Mr. Naveen gross total income is Rs.5, 00,000 in the previous year 2023-24 made the
following donations during the year:
Rs. 10,000 to Chief Minister’s Earthquake Relief Fund Gujarat.

Rs. 15,000 to National Foundation for Communal Harmony

Rs. 40,000 to Corporation approved for promotion of family planning.

Rs. 25,000 to approved educational institutions.

Compute the amount of deduction admissible to him u/s 80G for the AY 2024-25

For Private Circulation only ~ 203 ~

Section B – 9Marks Questions

1. Mr. Varun whose gross total income is Rs. 40, 00,000 (includes Rs.10, 00,000 as
LTCG) makes the following donations during the previous year 2023-24.
Rs.

P.M. National Relief Fund 1,00,000

National Defense Fund 2,00,000

Municipal corporation for promotion of Family Planning 1,00,000

C.M.C. Ludhiana for promotion of Family Planning 50,000

To temple of public worship for repairs (notified) 2,00,000

To a college for construction of Commerce Block 1,00,000

To a poor student 10,000

To CM Earthquake Relief Fund, Maharashtra 20,000

Compute his total income and tax liability for the assessment year 2024-25

2. Mr. Raman, a CA living at Kanpur and is carrying his profession there, furnishes
the following information for the year 2023-24:
 Professional gain 52,400
 Rent received from house at Delhi 18000 p.a
 Municipal taxes 1500 p.a
 Long term Capital gain 10,000
 Part-time salary as lecturer 25,000
 Rent paid at Kanpur 2,000 p.m.
 Interest on Govt securities 19,000
 He deposited Rs. 15,000 in PPF a/c
Compute his total income and tax liability for A.Y 2024-25

For Private Circulation only ~ 204 ~

 3. Compute the deduction u/s 80C and total income from the following information
submitted by Ashok for the P.Y. 2023-24:

Gross salary 2,70,000

Royalty received 27,000

Expenses for the royalty received 5,000

Interest on bank deposit 13,000

Life insurance premium on his own life (sum assured 20,000) 6,000
Life insurance premium on the life of his wife 2,000

Life insurance premium on the life of his major son (not dependent 2,500

on Ashok)

Life insurance premium on the life of his dependent brother 2,000

Contribution to RPF 20,000

Amount deposited in PPF 15,000

Contribution to ULIP 3,000

Repayment of housing loan (principal 23,000 & interest 40,000) 63,000

Subscription to units of eligible mutual fund 45,000

Amount incurred on education of:

Child Akshata 14,000

Child Anitha 7,000

Child Sindhu 5,000 26,000

He had taken a loan from SBM for construction of a residential house

property which was completed in 2011 and using it as SOP

For Private Circulation only ~ 205 ~

 4. The following are the particulars of income of Mr. X for the P.Y 2023-24:
• Income from H.P. (computed) Rs.61,200
• Business income Rs.80,000
• Dividends from co-operative society Rs.500
• LTCG – from land Rs.1,000, from shares Rs.800
• He paid Rs.28,000 as LIC premium on his own life on a policy of 2,00,000
• He gave 20,000 as donation to a charitable institution approved under sec 80G
• During the year he deposited 10,000 in an equity linked savings scheme
• He deposited 12,500 in NSS. Compute taxable income.

Section C – 12 Marks Questions

1. From the following particulars compute total income and taxable income of Mr.B, for
the A.Y 2024-25:
 Salary received from employer Rs.1,60,000
 Annual rental value of LOP Rs.1,50,000
 Interest on loan taken to purchase another house which is SOP 20,000
 He won Rs. 40,000 in race course betting & 2,000 in a lottery.
 He paid 6,000 by cheque as premium to secure health insurance policy of GIC.
 His mother who is dependent on him is suffering from cancer & he spent 46,500 on
her treatment.
 His minor son is mentally retarded on whose special education; he spent 15,000
duringthe year.
 He donated 10,000 to Karnataka state C. M’s relief fund.
 He gave Rs. 2,000 for repair of a notified temple &Rs.1,500 to family planning
association of India.

2. From the following particulars determine the total income and tax liability of
Mr.Rohit for the P.Y 2023-24
 Salary computed (computed) Rs.4,50,000
 H.P. income (computed) Rs.30,000
For Private Circulation only ~ 206 ~
  Business income (80,000)
 STCG Rs. 20,000
 LTCG Rs. 12,000
 Winnings from lottery Rs. 50,000
 Winnings from card games Rs. 16,000
 Interest on securities Rs. 10,000
 His savings are:
 Contribution to RPF Rs 1,000 p.m.
 LIC premium paid Rs. 20,000
 LIC premium of major son Rs. 10,000
 LIC premium of father Rs. 10,000
 Contribution towards pension fund of LIC Rs. 12,000
 Own medical insurance premium paid by cheque Rs. 16,000
 Medical claim insurance premium of his father Rs. 8,000 paid in cash

3 His father is handicapped and he spent Rs. 30,000 on his treatment during the year.
He is suffering from a specified disease and during the year spent Rs. 60,000 on the
treatment
 His son is studying in a management college and he took a loan of Rs 2,00,000 at
12%from a Nationalized Bank in 2018 for doing MBA.
 From the following particulars compute the total income for the P.Y 2022-23:
 Royalty on books from Kalyani Publishers Rs.1,65,000
 STCG Rs. 10,000
 LTCG Rs. 80,000
 Interest on bank deposits Rs.18,450
 Interest on government securities Rs.9,000
 Dividend from Indian Companies Rs.3,450
 He paid Rs. 12,000 to LIC under a pension fund
 He spent Rs. 18,000 on the treatment of his mentally retarded sister who
isdependent on him
 He paid Rs. 25,000 to UTI to secure an annuity for the benefit of his dependent
handicapped sister.

• 4.Ms. Nakshtra, a resident assessee, furnishes the following of his income/expenditure

relevant for the previous year ending March 31, 2023.

For Private Circulation only ~ 207 ~

 Business Income Rs. 4,00,000
Long Term Capital Gain (u/s112) Rs.19,000
Short term capital gain ( not u/s 111A) Rs.90,000
Income from other sources ( winning from horse race) Rs.35,000
Total Income Rs. 5,44,000

Total Eligible deduction in the year previous year 2023-24 is Rs.1,62,000 and
income tax paid in advance Rs. 6000
Calculate taxable income and tax payable or refundable for the A.Y 2024-25.
5. From the following particulars of an individual compute his total income and net tax liability
for the assessment year 2024-25.
1. Rent from let-out properties Rs, 20,000.
2. Long term capital gain (computed) Rs, 30,000
3. Profit from own business Rs. 6,31,000.
4. Income from lottery (Gross) Rs, 1,00,000.
Net Agricultural Income Rs. 10,000.

PROBLEMS ON NEW TAX REGIME:

1. From the following details, compute the total income and tax liability of
Mr. X as per section 115BAC of income tax Act 1961 for the assessment year
2023-24.

For Private Circulation only ~ 208 ~

  basic pay Rs. 60,000 p.m. and dearness allowance Rs. 10,000 p.m.
(forming part of salary). Employer has paid bonus Rs. 20,000 during the
year. Commission was allowed @ 2% of sales turnover of Rs. 50,00,000.
 Income from house property (computed) Rs 1,60,000
 He received cash gift of Rs. 1,20,000
 Profits and Gains of Business & Profession Rs. 2,50,000
 Long-term capital gains Rs. 225,000
 his contribution to provident fund during this period is Rs. 7,200. In
addition, he has purchased national Savings Certificates (VIII Issue) for
Rs. 6,000.

2. Mr. Pranit is working in India Ltd. Pune. He has furnished the following details
of his income for the financial year 2022-2023.
 Basic Salary Rs. 30,000 p.m.
 Bonus equal to 2 months of basic salary
 He contributes to Public provident Fund Rs. 50,000 per annum
 Life Insurance Premium Paid Rs. 1,00,000
 Income from business Rs. 3,50,000
 Dividend received from listed Indian Company Rs. 15,000
 Interest on Fixed deposit Rs. 50,000
 Income From House Property (computed) Rs 1,50,000
Compute total income and tax payable of Mr. Pranit in accordance with the provisions
of section 115BAC for the A.Y. 2024-25

For Private Circulation only ~ 209 ~

 Module – 5

TAX planning for Individual

INTRODUCTION

The word 'tax' means 'a rate or sum of money levied on persons or property for the benefit of
the State'. Section 2(43) of the Income Tax Act, 1961, defines 'tax'. Tax means income tax
chargeable under the provisions of this Act.

There are three stages in the imposition of tax:

(i) There is the declaration of liability, that is the part of the statute which determines what
persons in respect of what property are liable.

(ii) There is the assessment.

(iii) Method of recovery if the person taxed does not voluntarily pay.

According to the Supreme Court the components which enter into the concept of a tax are:
(i) The character of the imposition known by its nature which prescribes the taxable event
attracting the levy.

(ii) A clear indication of the person on whom the levy is imposed and who is obliged to pay
the tax.

(iii) The rate at which the tax is imposed.

(iv) The measure to which the rate will be applied for computing the tax liability.

The rate of tax being very high at present, it has become necessary to arrange the fiscal affairs
in such a way as to attract least tax. This can be done by three ways:
(1) Tax planning
(2) Tax avoidance,
(3) Tax evasion
•

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c. (1) Tax Planning
Tax planning defined as an “arrangement of one's financial affairs in such a way that without
violating in any way the legal provisions of an Act, full advantage is taken of all exemptions,
deductions, rebates and reliefs permitted under the Act, so that the burden of the taxation on an
assessee, as far as possible, is the least”. Actually, the exemptions, deductions, rebates and
reliefs have been provided by the legislature to achieve certain social and economic goals.
For example, Section 80IB of the Income Tax Act, 1961 provides deduction from gross total
income in respect of profits from newly established industrial undertakings in industrially
backward State or industrially backward district as may be notified in this behalf. The object of
the tax concession is clear, i.e., economic development of industrially backward district or
State. Section 80C provides deduction from Gross Total Income, if an individual or H.U.F.
saves the amount and invests or deposits it in the prescribed schemes. The deduction has been
provided to encourage savings and investments for economic development of the country. Thus,
if a person takes the advantage of the aforesaid deductions, he not only reduces his tax liability
but also helps in achieving the objective of the legislature, which is lawful, social and ethical.
Thus, tax planning is an act within the four corners of the Act and it is not a colorable device
to avoid the tax.

(2) TAX EVASION

When a person reduces his total income by making false claims or by withholding the
information regarding his real income, so that his tax liability is reduced, is known as tax
evasion. Tax evasion is not only illegal but it is also immoral, anti-social and anti-national
practice. Therefore, under the direct tax laws provisions have been made for imposition of
heavy penalty and institution of prosecution proceedings against tax evaders.
The tax evader reduces his taxable income by one or more of the following steps:
(1) Unrecorded sales.

(2) Claiming bogus expenses, bad debts and losses.

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(3) Charging personal expenses as business expenses, e.g., car expenses, telephone expenses,
travelling expenses, medical expenses incurred for self or family may be shown in the
account books as business expenses.

(4) Submission of bogus receipts for charitable donations for deduction u/s 80G.

(5) Non-disclosure of capital gains on asset.

(6) Non-disclosure of income from 'Benami transactions'.

In brief to evade tax he suppresses or omits receipts, inflates expenses and claims bogus
deductions.

(3) TAX AVOIDANCE

Tax avoidance is an art of dodging tax without actually breaking the law. It is a method of
reducing tax incidence by availing of certain loopholes in the law. The Royal Commission on
Taxation for Canada has explained the concept of 'avoidance of tax' as under:

The expression Tax Avoidance' will be used to describe every attempt by legal means to prevent
or reduce tax liability which would otherwise be incurred, by taking advantage of some
provision or lack of provision in the law. It excludes fraud, concealment or other illegal
measures.

In other words, 'tax avoidance' is a device which technically satisfies the requirement of the law
but in fact it is not in accordance with the legislative intent.

Case study: Per Jagadisan J. [in Aruna Group of Estates vs. State of Madras (1965) 55 ITR
642 (Mad.)], "Avoidance of tax is not tax evasion and it carries no ignominy with it, for it is
a sound law and; certainly, not bad morality, for anybody to so arrange his affairs as to
reduce the brunt of taxation to a minimum."

However, now the Supreme Court is of the view that the color able devices to avoid tax should
not be encouraged and this is the duty of the court to expose the persons who avoid tax and
refuse to approve such practice because the social evils of tax avoidance are manifold, and may
be summarized as under:
(a) substantial loss of much needed public revenue, particularly in a welfare state like ours;

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(b) serious disturbance caused to the economy of the country by piling up of mountains of
black money directly causing inflation;

(c) large hidden loss to the community by some of the best brains in the country being
involved in the perpetual war waged between tax avoider and his expert team of advisers,
lawyers and accountants on one side, and Tax Officer and perhaps not so skillful advisers on
the other side;

(d) sense of injustice and inequality which tax avoidance arouses in the breasts of those
who are unwilling or unable to profit by it;

(e) ethics (or lack of it) of transferring the burden of tax liability to the shoulders of the
guideless, good citizens from those of artful dodgers.

[McDowell & Co. Ltd. vs. Commercial Tax Officer (1985) 154 ITR 148] One may not agree
with the issue of generating black money by avoidance of tax. In legal tax avoidance the money
neither goes out of books nor it is spent unnecessarily but it is used for further expansion of
business.
DIFFERENCE BETWEEN 'TAX PLANNING' AND TAX EVASION'

1. Tax planning is an act within the four corners of the Act to achieve certain social and
economic objectives and it is not a colour able device to avoid the tax. Tax evasion is a
deliberate attempt on the part of tax-payer by misrepresentation of facts, falsification of
accounts including downright fraud.

2. Tax planning is a legal right and a social responsibility. By tax planning certain social
and economic objectives are achieved. Tax evasion is a legal offence coupled with penalty and
prosecution.

3. Tax planning requires thorough knowledge of the relevant Acts, social, economic and
political situation of the country while tax evasion requires boldness to infringe the law.

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 4. Tax planning helps in economic development of the country by providing additional
funds for investment in desired channels while tax evasion generates black money which is
generally utilized for smuggling, bribery, extravagant expenses on luxury.

5. A tax planner enjoys his fruits freely and he does not suffer from high blood pressure,
whereas a tax evader remains always in anxiety of search and seizure.

As our society has become 'money society', whatever the evils of black money may be, it has
become a part of the life of most of the people.
The Legislature has initiated steps to curb black money by passing Black Money Act and
Prevention of Money Laundering Act. This, if implemented effectively, can go a long way in
checking the menace of black money.

DIFFERENCE BETWEEN 'TAX AVOIDANCE' AND 'TAX EVASION'

1. Tax avoidance is legal but tax evasion is illegal.

2. In case of tax avoidance the objects and spirit of the law are not followed while in the case
of tax evasion the provisions of the law are flouted.

3. In case of tax avoidance no penalty can be imposed while in case of tax evasion the person
is liable to penalty and prosecution.

4. In case of tax avoidance, black money is not generated, hence, it is not very harmful to the
society. In case of tax evasion, black money is generated which is mostly used for
unproductive purposes.

d. Need For Tax Planning

Tax payments are compulsory for all individuals who fall under the IT bracket. Now a days
Tax planning is Must to reduce tax liability by investing in different investment schemes as

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prescribed by income tax Act,. With tax planning, one will be able to make his/her tax payments
such that he or she will receive considerable returns over a specific period of time involving
minimum risk. Also, effective tax planning will help in reducing a person’s tax liability.

1. Reduction in tax liability. The basic need of tax planning is to reduce the tax liability
so that enough surplus out of profits remains with the earner for his personal and social needs
and also for future investments in his business. This is only possible by planning his tax affairs
properly and availing the deductions, exemptions and reliefs, etc.

2. Minimization of litigation. There is always a tug-of-war between the tax payers and
the tax administrators. The tax payers try their best to pay the least tax and the tax administrators
attempt to extract the maximum. This sometimes results in prolonged litigation. Actually, the
main reason for litigation lies in tax avoidance and not in tax planning. Whenever a tax payer
wants to reduce his tax liability by finding a loophole in the Act and the tax administrator does
not agree with the interpretation of the assessee under which he is demanding exemption,
deduction or relief, it results in litigation. A good tax planning is always based on clear words
of the statute or in conformity with the provisions of the taxation laws. In such a case the
chances of litigation are minimized.

3. Productive investment. A proper tax planning brings fiscal discipline in the

functioning of a tax payer and reduces the transfer of money, from the person who has earned
it by hard labour, to the Government for waste and ostentation. The amount so saved enhances
the capacity of the tax payer for expansion and growth, which in turn increases the tax revenue
of the Government.

4. Reduction in cost. Incidence of tax (direct and indirect) forms a part of cost of
production. The reduction of tax-by-tax planning reduces the overall cost. It results in more
sale, more profit and more tax revenue.

5. Healthy growth of economy. The growth of a nation's economy depends upon the
growth of its citizens. Savings through tax planning devices foster the growth of economy while
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 savings through tax evasion leads to generation of black money, the evils of which are obvious.
The tax planning plays an important role in the development of backward districts and
backward states and development of infrastructure facilities or in other words it takes the
economy in the intended direction.

6. Employment generation. The amount saved by tax planning is generally invested in

commencement of new undertakings or expansion of the business. This creates new
employment opportunities in the business. Further, taxation laws are so complicated that by
and large tax payers cannot plan their affairs efficiently. Hence, such persons need services of
chartered accountants, financial advisers and lawyers. Such persons join the business concerns
either as employees or provide their services as private professionals.

Thus, tax planning is not only the need of the tax payers but also of the society as a whole and
the Government.

e. Advantages of Tax Planning

1. To claim excess tax paid or deducted: when we don’t do tax planning results in excess
tax payment & sometimes excess is deducted by employer that could have been saved by tax
planning.

2. To reduce tax liabilities: Every taxpayer wishes to reduce their tax burden and save
money for their future. You can reduce your payable tax by arranging your investments within
the various benefits offered under the Income Tax Act, 1961. The Act offers many tax planning
investment schemes that can significantly reduce your tax liability.

3. To plan events: It helps us to decide when to realize capital gain and when to withdraw
money from different schemes.

4. To earn tax free returns: when we invest in schemes specified in income tax act we
get risk free return or fixed rate of return which are tax free subject to conditions specified in
relevant section.

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Types of Tax Planning

Most people merely perceive tax planning as a process that helps them reduce their tax
liabilities. However, it is also about investing in the right securities at the right time to
achieve your financial goals.

Following are some of the various methods of tax planning:

1. Short-range tax planning

Under this method, tax planning is thought of and executed at the end of the
fiscal year. Investors resort to this planning in an attempt to search for ways to
limit their tax liability legally when the financial year comes to an end. This
method does not partake long-term commitments. However, it can still
promote substantial tax savings.
2. Long-term tax planning
This plan is chalked out at the beginning of the fiscal and the taxpayer follows
this plan throughout the year. Unlike short-range tax planning, you might not
be offered with immediate tax benefits but it can prove useful in the long run.
3. Permissive tax planning
This method involves planning under various provisions of the Indian taxation
laws. Tax planning in India offers several provisions such as deductions,
exemptions, contributions, and incentives. For instance, Section 80C of the
Income Tax Act, 1961, offers several types of deductions on various tax-
saving instruments.
4. Purposive tax planning
Purposive tax planning involves using tax-saver instruments with a specific
purpose in mind. This ensures that you obtain optimal benefits from your
investments. This includes accurately selecting the appropriate investments,
creating an apt agenda to replace assets (if required), and diversification of
business and income assets based on your residential status.

Terminal Questions:

Section A
1. Discuss about Tax evasion
2. Discuss about Tax planning
3. Differentiate Tax planning and Tax evasion

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Section B
4. Describe the types of Tax planning
5. Discuss the advantage of tax planning

Section C
1. Write a note on Tax planning

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 MODEL QUESTION PAPER

Subject:
Time: 3 Hours Total Marks: 50

SECTION-A
Answer any Four of the following questions (4x5 = 20)
1. Mr. Bhaskar, born and brought up in India, joined a company in on 1 st October
2018. He came back to India on 25th April 2019 and went back on 25th may 2019.
He again came to India on 25 th March 2020 and left back on 22nd May 2020. Due
to acute illness, he came back to India on leave on 15th October 2020 and joined
back his duty on 1st august 2022. He resigned from his job on 1st January 2023
and came back to India on 1st February 2023.
2. Mr. Sumeet Basak (resident) retired from services on 31st Jan 2024. His pension
was fixed at ₹ 6,000 p.m. He commutes one-half of his pension and received
₹.3,00,000. Find out the taxable amount of commuted pension, if:
a. He is a government employee.
b. He is a non-Govt. employee who also gets gratuity and
c. He is a non-Govt. employee who does not get any gratuity.
3. Discuss the advantages of tax planning .
4. Gross total income of Mr. Y. who is suffering from a severe disability, for the
previous year 2023-24 is Rs 7,25,000. He is living in a rented house and paying
rent of Rs, 6,000. Compute his total income.
5. From the following information compute income from other sources:
1. Rs. 1,00,000 received by the assessee from his friends on the marriage of his son.

2. Interest on enhanced compensation of Rs. 40,000 received as per court decree

during the previous year.

3. Undisclosed income Rs 2,00,000.

4. Winnings from lottery Rs. 70,000(Net).

5. Interest on Post Office Savings Bank A/c Rs. 4,000.

6. Family pension Rs. 60,000.

SECTION-B
II. Answer any Two of the following questions (2x9 = 18)
1. . Mr. Anish has the following incomes for the previous year 2023-2024
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 b) Income from salary in India from a company Rs. 50,000
c) Dividend from an Indian company received in England and spent there Rs. 10,000
d) Income from house property in India received in Pakistan Rs. 20,000
e) Dividend from a foreign company received in England deposited in a bank there Rs.
10,000
f) Income from business in Kolkata, managed from USA Rs. 20,000
g) Income from business in USA (controlled from Kanpur) Rs. 12,000
h) Income was earned in Australia and received there but brought to India Rs. 25,000
i) His maternal uncle sent bank draft from France as a gift on his marriage Rs. 20,000
Compute the gross total income, if he is:
(ii) Resident (ii) Not-ordinary Resident (iii) Non-resident.
2. Sri Rama Krishna is employed as an engine driver in southern railway.
1. He is getting Rs. 7,500.p.m.as basic pay, Rs. 2,500 p.m as dearness
allowance. During the previous year he received the following
allowances also:
2. Rs. 200 p.m. per child as education allowance for the education of his
two sons.
3. One of these sons is living in hostel on whom Sri. Ramakrishna is
spending Rs. 800p.m., He is getting hostel allowance of Rs. 500 p.m.
for his son for meeting this expenditure.
4. Rs. 250 p.m. as city compensatory allowance
5. Rs. 400 p.m. as uniform allowance which was fully spent for
employment purpose
6. Rs. 1,250 p.m. as House Rent Allowance. Sri. Ramakrishna has
taken a house for his residence at Coimbatore at Rs. 1,500 p.m. as
rent.
7. He contributes 10% of his Basic pay and dearness pay to his statutory
fund and the southern railway also contributes the same.
Compute the salary income of Rama Krishna for the A.Y.2023-2024.

3. Mr. Hanuman submits the following particulars about sale of assets during the year
2022-23:
Jewellery (Rs) Plot (Rs) Gold (Rs)
Sale price 7,00,000 18,24,000 5,00,000
Expenses on sale Nil 24,000 Nil
Cost of 1,29,000 2,26,000 1,48,000
acquisition
Year of 2007-08 2004-05 2009-10
acquisition

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 He has purchased a house for Rs, 15 lakh on 1-3-2023. Compute the amount of taxable
capital gain if CII for 2004-05, 2007-08, 2009-10 and 2022-23 are 113,129,148 and 331
respectively

SECTION-C
III. Compulsory question (1x12= 12)
1. From the following particulars of Mr.Nivedit, compute his total income and net tax

payable by him for the assessment year 2024-25:

2. Rent from let out property (subject to TDS2 10 %) Rs. 3,00,000.

3. Long- term capital gain (computed) Rs. 2,00,000.

4. Profit from own business Rs. 8,00,000.

5. Income from lottery (Gross) Rs, 80,000.

6. Net agricultural income Rs. 40,000.

7. Payment of interest on loan taken for higher education Rs. 30,000.

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