INTRODUCTION TO INCOME TAX

In Income Tax we need to study

1. How to calculate total taxable income.

2. And how to calculate tax payable on total taxable income.

Basically Income Tax is tax on the income of a Person.

First Income is earned and then tax is paid on the income so earned.

There are 2 types of tax, namely Direct Tax & Indirect Tax.

DIRECT TAX INDIRECT TAX

Direct Tax is a tax on the income of a Person Indirect Tax is tax on Service & Commodities.
Burden of Direct Tax cannot be shifted Burden of Indirect Tax can be shifted.
It is Progressive in nature It is Regressive in nature
It considers Previous year & Assessment year for It considers Financial Year for computation
computation
Examples of Direct Tax is Examples of Indirect Tax
Gift Tax Service Tax
Income Tax Excise Duty
Wealth Tax Customs Duty
MVAT / CENVAT [& Now G.S.T]
IMPORTANT POINTS

1. Calculation of Income tax is governed by Income Tax Act and Income Tax Rules.
2. Income Tax is chargeable on the world income [meaning income earned from any part of the world is
taxable]
3. Income is taxable even if it is earned through legal Sources or Illegal Sources.
4. Income earned may be actually received or deemed to be received or receivable.
5. Income can be received in cash or in kind.

DEFINITIONS

There are 2 types of definitions as per Income Tax Act 1961.

1. Inclusive definition &
2. Exclusive definition

Person Section 2 (32) :-

It includes any
1. Individual
2. HUF
3. Company
4. Firm
5. AOP/BOI
6. Local Authourity
7. Artificial Juridical Person

What is a Previous Year ?

Previous Year is the year in which income is earned.
It consists of 12 Months.
It starts of 1st April every year and ends on 31st March of succeeding year.
Current Previous Year applicable is 2022 – 2023.
What is Assessment Year ?
Assessment Year is a year in which income is charged or taxable.
It consists of 12 Months.
It starts of 1st April every year and ends on 31st March of succeeding year.
Current Assessment Year applicable is 2023 – 2024.
Thus Income earned in the Previous year is taxable or charged in the Assessment year.

What are Exemptions ?

Exemptions are concessions or discount allowed by the government on the Income
earned.

What are Deductions ?

Deductions are concession or discounts allowed by the government due to expenses
incurred.

Thus Exemptions are applicable on the income earned and deductions are applicable
on expenses incurred.

Who is an Assessee ?
Assessee is the Person who is liable to pay Income Tax.

Heads of Income as per Income Tax

There are 5 Heads of Income [Sources of Income as per Income Tax Act] namely
1. Income from Salary
2. Income from House Property
3. Income from Business or Profession
4. Income from Capital Gains
5. Income from Other Sources

1. How does Income from Salary arise?

Ans :-
When the relationship between the payer and the receiver is that of an Employer and
Employee, income received in the hands of the employee is taxable under the head
Income from Salary.

2. How does Income from House Property arise?

Ans :-
When a House Property is Let out by the Landlord to the Tenant, the income [inform of
Rent] in the hands of the Landlord taxable under the head income from House
Property.

3. How does Income from Business / Profession arise?

Ans :-

Any profits earned by a business person due to operations of business or undertaking

any business activity is taxable under the head income from Business.
Any income earned by a professionals like Lawyer, Doctors, Chartered Accountants
etc. is taxable under the head Income from Profession.

4. When Shall Income from Capital Gain arise?

Ans:-
Income from Capital Gains shall arise when there is a Transfer of Capital Asset.
5. When shall Income from Other Sources arise?

Ans:-
If any income is not taxable in any other heads of income it will be taxable under the
head Income from Other Sources.

Once the taxable income is ascertained from all possible sources [5 Heads] then we
need to compute total taxable income as follows:

COMPUTATION OF TOTAL TAXABLE INCOME OF AN ASSESSEE

PARTICULARS AMT IN ₹ AMT IN ₹
* Income from Salary XXX
* Income from House Property XXX
* Income from Business / Profession XXX
* Income from Capital Gains XXX
* Income from Other Sources XXX
AGREGATE GROSS TOTAL INCOME [A.G.T.I] XXX
Less :- Deductions Under Chp. VI A
80 – C Investment XXX
80 – CCC Pension XXX
80 – D Mediclaim XXX
80 – U Handicap Person XXX
80 – DD Dependent Handicap Relative XXX
80 – E Interest on Higher Education Loan XXX
80 – TTA Interest on Savings XXX [XXX]
NET TAXABLE TOTAL INCOME XXX
 TOLANI COLLEGE OF COMMERCE [AUTONOMOUS]

INCOME FROM SALARY

When the relationship between the payer and the receiver is that of an employer and employee, the
income received by the employee will be taxable under the head Income from Salary.
HOW TO CALCULATE TAXABLE INCOME FROM SALARY?
Income from Salary is calculated by preparing a format. In this format all the taxable amounts are
recorded in the outer column. Taxable income from salary can never be a negative figure.
Anything (cash, kind or facility) received by the employee from the employer will be taxable and
recorded in the outer column provided it is not fully exempt.

STATEMENT OF INCOME FROM SALARY

PARTICULARS AMOUNT AMOUNT
• Basic Salary [Gross] XXX
• Dearness Allowance
- In Terms XXX
- Not in Terms XXX XXX
• Commission XXX
• Bonus XXX
• Arrears of Salary XXX
• Advance Salary XXX
• Allowances [3 Types] XXX
• Perquisite XXX
XXX
• Gratuity
XXX
• Pension
XXX XXX
- Commuted
XXX
- Un-commuted
XXX
• Provident Fund XXX
• Leave Salary XXX
• Commission XXX
• Voluntary Retirement Compensation XXX
GROSS TAXABLE SALARY XXX
Less: - Deduction Under Section 16
A] Standard Deduction 50,000
B] Entertainment Allowance XXX
C] Profession Tax XXX [XXX]
NET TAXABLE SALARY XXX
NOTE: - Amount in bracket should be deducted from Gross Taxable Salary.
BASIC SALARY - Basic Salary is always fully Taxable, however if Net Basic Salary is provided in
the question it should be converted into Gross Basic Salary.
Net Basic Salary is converted into Gross Basic Salary by either adding back the amounts deducted
or by cross multiplication as case may be.
DEARNESS ALLOWANCE - Dearness Allowance whether in terms or not in terms are fully
taxable.
COMMISSION - Commission received by the employee is always fully taxable whether received or
outstanding.
BONUS - Bonus is fully taxable provided if it is received. Bonus of earlier years received in the
Previous year is also fully taxable. If the bonus is only promised or is outstanding, then it should
be completely IGNORED.

NOTES COMPILED:- By Prof. Mubeen Y. Shaikh

 TOLANI COLLEGE OF COMMERCE [AUTONOMOUS]
ARREARS OF SALARY – When the employee gets an increment in his salary and the employer is
unable to pay this incremented amount, He promises to pay the balance of the incremented salary
[which keeps accumulating until fully paid] at a later date. So whenever the employers pay the
accumulated amount of incremented salary it becomes taxable in that particular previous year.

ADVANCE SALARY – Advance Salary is fully taxable provided it not utilized for the purpose of
purchasing a Fixed Asset. In case if Advance Salary is utilized for the purchase of fixed asset then
it should be completely IGNORED since it will be considered as a loan from the employer. And loan
is not an income as it is to be repaid.
If only the word Advance is mentioned in the problem, then too it is considered as a Loan.

ALLOWANCES – Allowances are purely monetary benefits paid by the employer to his employee
for official or personal purpose.
Basically Allowances are divided into 3 parts
ALLOWANCES

Special Allowance Exempt Allowance Taxable

[Amount Spent = Amount Exempt] Allowance Any
Entertainment Allowance T = Travelling Allowance Allowance not in
[Fully Taxable] C = Conveyance Allowance the category of
However, if the person U = Uniform Allowance Exempt Allowance
Is a Government employee D = Daily Allowance will be fully taxable.
then following deduction H = Helper Allowance e.g.
will be applicable. R = Research Allowance Medical Allowance
Servant Allowance
1/5th of Basic Salary [Fixed Amount = Exempt Amount] Tiffin Allowance
TC3H Lunch Allowance
OR Tribal Area Allowance City Compensatory
[₹ 200 per month] Allowance
Actual Amt Received etc.
Commutation Allowance
OR [₹ 1,600 for any employeed
and for Visual & Physically
₹ 5,000 Challenged ₹ 3,200 per
month]

Children Education Allowance

[₹.100 per month per child
Maximum 2 Children]

Children Hostel Allowance

[₹ 300 per month per child
Maximum 2 Children]

House Rent Allowance

[Exempt or Taxable amount to be
specified in the problem as per
Section 10(13A)]

NOTES COMPILED:- By Prof. Mubeen Y. Shaikh

 INCOME FROM SALARIES

Q.1. From the following details, Calculate taxable salary of Mr. Raj Kumar for P.Y. 2022 – 2023.
1] Basic Salary [NET] ₹ 10,000 per month.
2] Professional Tax Deducted ₹ 200 per month.
3] Income Tax deducted at source Rs. 2,000 per month.
4] Arrears of Salary [Taxed earlier] ₹ 90,000.
5] Arrears of Salary [After settlement of dispute] ₹ 72,000.
6] Advance Salary ₹ 58,000.
7] Advance for purchase of furniture worth ₹ 1,20,000.
8] He also took Advance Salary of ₹ 80,000 on account of his daughter’s marriage.
9] Bonus received ₹ 85,000 [for P.Y. 2021 – 2022]
10]Bonus received ₹ 38,000 [Net TDS ₹ 12,000]

Q.2. Mr. Ajay, who is employed with Government of Maharashtra, gives the following details for the
previous year P.Y. 2022 – 2023.
1] Basic Salary ₹ 64,000 per month.
2] Dearness Allowance [in terms] ₹ 10,000 per month.
3] Uniform Allowance ₹ 6,000 [Amount spent ₹ 4000].
4] Research Allowance ₹ 1,500 p.m. [Amount spent ₹ 1,200 p.m.]
5] Children Education Allowance ₹ 14,400 [3 Children].
6] Entertainment Allowance ₹ 5,000 per month.
7] Commutation Allowance ₹ 9,000 per month [Amount spent ₹ 7,000 per month]
8] House Rent Allowance ₹ 20,000 p.m. [Amount Exempt u/s 10(13A)] ₹ 5,000 p.m.
9] Medical Allowance ₹ 30,000 [Fully Spent].
10]Bonus Receivable ₹ 3,00,000.
You are requested to calculate his Taxable income from Salaries.

Q.3. Mr. Vinay is employed with Jagdish Ltd provides

following details of his salary income for P.Y. 2022 – 2023.
Basic Salary ₹ 30,500 p.m.
Dearness Allowance ₹ 12,500 p.m.
Travelling Allowance ₹ 3,000 p.m.
[Amount spent ₹ 20,000]
Expenses on Lunch reimbursement ₹ 1,500 p.m. in cash.
Uniform Allowance ₹ 1,000 p.m.
[Amount spent on Uniform ₹ 6,000]
Project Allowance ₹ 12,000 p.m.
Overtime Allowance ₹ 2,000 p.m.
Servant Allowance ₹ 70,500 [Amount spent ₹ 40,000]
Medical Allowance ₹ 40,000 [Amount spent on Medical treatment ₹ 10,500]
Children Education Allowance ₹ 500 p.m. per child [Mr. Vinay has 3 Children]
Helper Allowance ₹ 700 p.m.
Profession Tax paid during the year ₹ 2,400
Other expenses incidental to employment ₹ 98,000.
Calculate Taxable Salary for P.Y. 2022 – 2023 and A.Y. 2023 – 2024.
Q. 4.
Mr. Ravi provides following details for computation
of his taxable Income from Salary for A.Y. 2023 – 2024.
a] Basic Salary ₹ 1,00,000 per month.
b] Installment on Home loan deducted at source ₹ 1,20,000.
c] Dearness Allowance ₹ 12,000 per month.
d] Mediclaim Insurance premium paid by the employer ₹ 24,000.
e] Telephone bills reimbursed by Employer ₹ 80,000.
f] Electricity bills reimbursed by employer ₹ 1,80,000.
g] Free refreshment in office premises ₹ 15,000.
h] Mr. Ravi was provided car for office and personal use [Perquisite Value ₹ 6,20,000]
i] Gift of watch from employer on birthday valued at ₹ 15,000.
j] Free meals worth ₹ 180 per meal for 200 days.
k] Free watchman at employee’s residence valued at ₹ 30,000.

Q.5. Mr. Amol provides you the following information

Basic Salary ₹ 45,000 per month.
Dearness Allowance ₹ 20,000 per month.
Bonus ₹ 2,00,000.
Turnover Commission 2% [Turnover being ₹ 40,00,000]
Mr. Amol’s Contribution to Provident Fund [₹ 10,000 per month.]
Employer’s Contribution to Provident Fund [₹ 10,000 per month].
Interest Credited to Provident Fund @ 11% ₹ 55,000.
He has paid Profession Tax ₹ 200 per month.
Calculate his Income from Salary for A.Y. 2023 – 2024,
if the Provident Fund is
A] S.P.F
B] R.P.F
C] U.P.F
 TOLANI COLLEGE OF COMMERCE [AUTONOMOUS]
PERQUISITE
Perquisites are personal or official benefits given by the employer to his employee. Perquisite can be
in cash as well as in kind. The following words will indicate that it is a perquisite.
1. Free / Facility
2. Benefit / Fringe Benefit
3. Provided by Employer
4. Paid by Employer
5. Reimbursed by Employer
PERQUISITE

EXEMPT TAXABLE
MRS TC GE2L Any other perquisite apart from Exempt
perquisites will be Fully Taxable
M = Medical

Treatment in GRE Hospital Fully Exempt

Treatment in Other Hospital Exempt up to ₹15,000.
G = Government
R = Recognized by Government
E = Employers Hospital
NOTE: -
Any medical Insurance premium / accidental insurance premium / health insurance premium
paid by the employer is FULLY EXEMPT.
Group insurance policy premium paid by the employer is also FULLY EXEMPT.
However, life insurance policy premium paid by the employer will be Taxable.
Treatment includes treatment of employee’s spouse, children, dependent parent brothers & sisters.

R = Refreshment
Any kind of refreshments provided by the employer during office hours is FULLY EXEMPT.
S = Scholarship
Scholarship provided by the employer to the employee’s children is FULLY EXEMPT
T = Telephone
Telephone / Mobile facilities provided by the employer is FULLY EXEMPT.
C = Car Facility
1. Car facility provided only for official purpose is FULLY EXEMPT.
2. Car facility provided for commuting from office to residence & vice versa is FULLY EXEMPT.
3. Car facility provided partly for official & partly for personal purpose is FULLY TAXABLE.
4. Car facility provided fully for personal purpose is FULLY TAXABLE.
G = Gift from Employer
Gift in Kind or Gift Voucher is exempt up ₹ 5000. Cash Gifts are FULLY TAXABLE.
E = Employee’s Training & E.S.O.P
Expenses of employee’s training paid by the employer is FULLY EXEMPT.
E.S.O.P. stands for Employee’s stock of option plan. Any benefit derived by the employee under this
scheme is FULLY EXEMPT.
L = Leave Travel Allowance \ Assistance \ Concession & Lunch provided by Employer.
Amount Spent = Amount Exempt
Lunch or Meal provided by the employer. Exempt up to ₹ 50 per meal.

NOTES COMPILED:- By Prof. Mubeen Y. Shaikh

FORMAT FOR SOLVING THE PROBLEM
NO. SATISFIED
CONDITIONS OF OR NOT REASON
DAYS SATISFIED
BASIC CONDITION
1. Stay of 182 days or more in
India in previous year.
OR
2. [a] Stay of 60 days or more in
India in previous year.
&
[b] Stay of 365 days or more
in India in last 4 previous
years.
ADDITIONAL CONDITION
1. Resident in India in at least 2
out of last 10 previous years
AND
2. Stay of 730 days or more in
India in last 7 previous years

SPACE FOR WORKING ANS:-

YEAR DAYS CONCLUSION:
2012 – 2013
2013 – 2014
2014 – 2015
2015 – 2016
2016 – 2017
2017 – 2018
2018 – 2019
2019 – 2020
2020 – 2021
2021 – 2022

Month April May Jun Jul Aug Sept Oct Nov Dec Jan Feb Mar
Days

Month April May Jun Jul Aug Sept Oct Nov Dec Jan Feb Mar
Days

Month April May Jun Jul Aug Sept Oct Nov Dec Jan Feb Mar
Days

Month April May Jun Jul Aug Sept Oct Nov Dec Jan Feb Mar
Days

Month April May Jun Jul Aug Sept Oct Nov Dec Jan Feb Mar
Days
 RESIDENTIAL STATUS OF AN ASSESSEE
An assessee can be either a Resident ( ‘R’ ) or a Non Resident ( ‘NR’ ) as per income tax. Further if the
assessee is a Resident ( ‘R’ ) than he can either be a ‘R-OR’ or ‘R-NOR’ depending on fulfilment of 2
additional conditions.
ASSESSEE

RESIDENT NON RESIDENT

ORDINARILY NOT AN ORDINARILY

Q.1. How to determine the residential status of an assessee ?

Ans: Residential status of an assessee depends on the number of days of stay in India. For this the
assessee needs to full fills any one of the basic condition to be considered as a Resident in India. However
if the assessee also full fills both the additional condition then he will be considered as Resident and
Ordinarily Resident [‘R-OR’].

Q. 2. What condition needs to be fulfilled by an assessee to be considered as a Resident ?

Ans: An assessee needs to fulfil any one of the following basic conditions:

1. Stay of 182 days or more in India in previous year.

OR
2. a] Stay of 60 days or more in India in previous year.
&
b] Stay of 365 days or more in India in last 4 previous years.

Q.3. How will be an assessee be considered as a Non Resident ?

Ans. If the assessee fails to satisfy any of the basic condition then he is considered a Non Resident.

Q.4. How is an Assessee considered as R-OR or R-NOR ?

Ans. After fulfilling any of the basic condition the assessee is considered as a Resident. After that if the
assessee also satisfies both the additional conditions, he/she considered as Resident and Ordinarily
Resident [R-OR]. However if the assessee fails even one additional conditional he will be considered as
Resident but not an Ordinarily Resident [R-NOR].

Q.5. What are the additional condition that a Resident needs to fullfill in order to become R-OR ?
Ans. A resident needs to fullfill both the additional conditions in order to become R-OR
1. Resident in India in at least 2 out of last 10 previous years. and
2. Stay of 730 days or more in India in last 7 previous years.

Q.6. What are the exceptions for Basic condition wherein only the first basic condition will be
applicable ?
Ans. In case of the following exception only the first basic condition will be applicable.
1. An Indian citizen who leaves the country for employment in previous year.
2. An Indian citizen who visits the country for vacation in previous year.
3. A person of Indian origin who visit the country in previous year.
4. An Indian citizen who is a member of crew of an Indian vessel that departs from an Indian port in
the previous year.

Q.7. Who is a person of India origin?

Ans. A person whose either maternal or paternal grand parents [any one] were born in undivided India [i.e.
before 1947] will be considered as person of India Origin.
FORMAT FOR SOLVING THE PROBLEM
NO. SATISFIED
CONDITIONS OF OR NOT REASON
DAYS SATISFIED
BASIC CONDITION
1. Stay of 182 days or more in
India in previous year.
OR
2. [a] Stay of 60 days or more in
India in previous year.
&
[b] Stay of 365 days or more
in India in last 4 previous
years.
ADDITIONAL CONDITION
1. Resident in India in at least 2
out of last 10 previous years
AND
2. Stay of 730 days or more in
India in last 7 previous years

SPACE FOR WORKING ANS:-

YEAR DAYS CONCLUSION:
2012 – 2013
2013 – 2014
2014 – 2015
2015 – 2016
2016 – 2017
2017 – 2018
2018 – 2019
2019 – 2020
2020 – 2021
2021 – 2022

Month April May Jun Jul Aug Sept Oct Nov Dec Jan Feb Mar
Days

Month April May Jun Jul Aug Sept Oct Nov Dec Jan Feb Mar
Days

Month April May Jun Jul Aug Sept Oct Nov Dec Jan Feb Mar
Days

Month April May Jun Jul Aug Sept Oct Nov Dec Jan Feb Mar
Days

Month April May Jun Jul Aug Sept Oct Nov Dec Jan Feb Mar
Days
 RESIDENTIAL STATUS OF AN ASSESSEE

1. Mr. Bret Lee an Australian Citizen came to India for the first time on 1st April 2018 and started a
Business in Mumbai. He went out of India on 1st April 2022 and came back to India on 1st January
2023 and was in India thereafter. Find out his Residential Status for Assessment Year 2023-2024.
(T.Y.B.Com April 2010 Modified).

2. Mr. Charlie Farande who is an Indian citizen went for employment to Dubai on 1st April 2016 and
came on a visit to India on 1st July 2022 and left for Dubai on 15th December 2022.
Determine his residential status for A.Y. 2023 - 2024. (T.Y.B.Com Mumbai Oct., 2010 Modified)

3. Shri. Ramesh an Indian citizen, left India for the first time on 22/09/2022 for employment in U.K.
and did not return till 31st March 2023.
Determine his residential status for A.Y. 2023 - 2024 (T.Y.B.Com Mumbai April 2011 - Modified)

4. Shri Praveen Kumar came to India from Australia for the first time on 10/11/2021. He returned to
Australia after staying in India up to 6/10/2022.
Determine his Residential Status for Assessment Year 2023-2024.
(T.Y.B.Com October 2011 - Modified)

5. Mr. Charles D’Souza an Indian Citizen went to employment in Oman on 1st April, 2014 and came
on a visit to India on 8/1/2023 and left for Oman on 15/01/2023. Determine his Residential Status for
Assessment Year 2023-2024. (T.Y.B.Com October 2012 - Modified)

6. Mr. Aniket Vijaykumar Agrahari, is a Citizen of BURMA. His grandmother was born in a village near
Karachi in 1945. He came to India for the first time on 08 – 06 – 2022 for a visit and stayed up to 100
days. Find the Residential Status of Mr. Aniket Vijaykumar Agrahari for P.Y. 2022 – 2023 and A.Y. 2022
– 2023.

7. Ms. Shruti Shreedhar Aher a foreign national visited India during P.Y. 2022 – 2023 as follows:-
From 01 – 05 – 2022 to 20 – 06 – 2022 [Stay at New Delhi]
From 07 – 12 – 2022 to 11 – 01 – 2022 [Stay at Mumbai]
Determine her Residential Status for P.Y. in 2022 – 2023 on the basis of the following information
She did not come to India in P.Y. 2018 – 2019 & 2019 – 2020.
During 2020 – 2021 she was in Hong Kong.
During 2021 – 2022 she was in India for 200 days.

8. Mr. Mohd Tauheed Mohd Fareeduddin, an Indian citizen who is appointed as taxation officer by
Government of Japan leaves India for the first time on 26 – 09 – 2019 for joining duty in Japan. During
the P.Y. 2022 – 2023 he comes back to India for a vacation for 176 days.
Determine his Residential Status for P.Y. 2022 – 2023 and A.Y. 2023 – 2024.
9. Ms. Divya Dilip Bamane an American Citizen came to India for the first time on 1st April 2019 and
started a business in Mumbai. She went out of India on 1st October 2022 and came back to India on
21st Jan 2023 & is staying in India till date.
Find out her Residential Status for P.Y. 2022 – 2023 and A.Y. 2023 – 2024.

10. Mr. Yash Vijay Pitale, an Indian Citizen, went out of India for the first time for the purpose of
employment. He went out of India on 1st May 2022 and came back on 31st December 2022. Find out
his Residential Status for P.Y. 2022 – 2023 and A.Y. 2023 – 2024.
TOLANI COLLEGE OF COMMERCE S.Y.BBI/S.Y.BAF/T.Y.BMS/T.Y.BFM

PROVIDENT FUND
Provident Fund is a saving scheme that benefits the empl oyee at the time of retirement. In this
scheme a certain amount is deducted from employee’s salary and is considered as employee’s
contribution towards provident fund. Some amount is also contributed by the employer [Usually the
same amount as that of employee’s contribution] and is considered as employer’s contribution
towards his employee’s provident fund.
Both the employee’s contribution and employer’s contribution is invested by the employer or
deposited in a bank account. This investment fetches interest (or dividend).
Whole amount inclusive of Employee’s contribution, Employer’s contribution, interest on
Employee’s contribution and interest on Employer’s contribution is received on retirement.
STATUTORY RECOGNIZED UNRECOGNIZED
PARTICULARS PROVIDENT PROVIDENT PROVIDENT
FUND FUND FUND
Employee’s contribution to
IGNORE IGNORE IGNORE
provident fund
Employer’s contribution to Exempt up to 12% of
Exempt Exempt
provident fund (BAS+DAT+TOC)
Interest credited to Exempt up to Interest
Exempt Exempt
provident Fund rate of 9.5% p.a.
Lump Sum payment on Refer the Chart
Exempt Exempt
Retirement below
BAS : Basic Salary
DAT : Dearness Allowance [in terms]
TOC : Turnover Commission

LUMPSUM PAYMENT RECEIVED ON RETIREMENT

Employee’s Employer’s Interest on Interest on

Contribution Contribution is Employee’s Employer’s
should be FULLY TAXABLE Contribution is Contribution is
IGNORED under IFS taxable under IFOS FULLY TAXABLE
under IFS

NOTES COMPILED:- By Prof. Mubeen Y. Shaikh

 SCOPE OF TOTAL INCOME
Section -5 of Income Tax Act, 1961 provides Scope of total Income in case of person who is a resident in
India as well as ordinarily resident [R – OR], a Resident in India but not an ordinarily resident [R – NOR] in
India and a person who is a non-resident [NR].
Income can be earned from any source however, how much is the tax liability depends on the status of an
Assessee.
Income earned by an Assessee can be categorized in following manner.
(a) Income is received or accrues in India or both or is deemed to be received or accrued in India.
(b) Income from Business outside India but controlled from India.
(c) Income accrues or arises as well as is received outside India.
SN PARTICULARS R-0R R-NOR NR
1 Income received in India Taxed Taxed Taxed
2 Income Deemed to be receive in India Taxed Taxed Taxed
3 Income accrues or arises in India Taxed Taxed Taxed
4 Income deemed to accrues or arises in India Taxed Taxed Taxed
5 Income accrues/arises as well as received outside India Taxed No No
Income accrues or arises outside India from
6 business/profession controlled/set up in India Taxed Taxed No
7 Income Other than Above (No Relation In India) Taxed No No
NOTE-
1. Residential status is as per section 6 of Income Tax Act, 1961.
2. Deemed income is not actually accrued but is supposed to be accrued notionally.
3. The income accrued is when the assessee obtains the rights to receive it.
4. Previous year means the financial year immediately preceding the assessment year.
EXPLANATION 1 & 2:-
Income accruing or arising outside India shall not be deemed to be received in India within the meaning of
this section by reason only of the fact that it is taken into account in a balance sheet prepared in India.
Income which has been included in the total income of a person on the basis that it has accrued or arisen or
is deemed to have accrued or arisen to him shall not again be so included on the basis that it is received or
deemed to be received by him in India.
Certain Examples of incomes which treated as incomes deemed to have accrued or arisen in India:
• If Mr. X Transfer his Residential Property situated in Delhi, then Capital gain arising on transfer of
such Capital Asset is deemed to accrue in India. It means Capital gain arising on transfer of property
situated in India.
• Income from business connection in India.
• Dividend paid by an Indian company.
• Income from any property, asset or other source of income located in India.
• In respect of services rendered in India.
• Indian national from Government of India in respect of service rendered outside I ndia. However,
allowances and perquisites are exempt in this case.
INTEREST INCOME: -
• Received from Government of India.
• Received from a resident is treated as income deemed to have accrued or arisen in India in all cases,
• Except where such interest is earned in respect of funds borrowed by the resident and used by
resident for carrying on business/profession outside India or is in respect of funds borrowed by the
resident and is used for earning income from any source outside India.
• Received from a non-resident is treated as income deemed to accrue or arise in India if such interest
is in respect of funds borrowed by the non-resident for carrying on any business/profession in India.
ROYALTY: -
• Received from Government of India.
 • Received from resident is treated as income deemed to have accrued or arisen in India in all cases,
except where such royalty/fees relates to business/profession/other source of income carried on by
the payer outside India.
• Received from non-resident is treated as income deemed to have accrued or arisen in India if such
royalty/fees is for business/profession/other source of income carried by the payer in India.
INDIA:
As per Section. 2(25A) of the Income Tax Act, 1961, the term “India” means the territory of India as
referred to in article 1 of the Constitution, its territorial waters, seabed and subsoil underlying such
waters, continental shelf, exclusive economic zone or any other maritime zone as referred to in the
Territorial Waters, Continental Shelf, Exclusive Economic Zone and other Maritime Zones Act, 1976 and
the air space above its territory and territorial waters.
Income is defined u/s 2(24) of the Act.
As per section 2(13) business includes……..
Trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or
manufacture
Profits arising from an isolated transaction are taxable as business profits, if it is treated as an adventure
in the nature of trade, commerce or manufacture.
In this connection it is not necessary that there should be a series of transactions in a business and also
it should be carried on permanently. Neither repetition nor continuity of similar transactions is necessary.
As already defined under section 2(13), the income derived from any adventure in the nature of trade is
also treated as business income.
As per Section 2(36) profession” includes vocation.
A profession is an occupation requiring purely intellectual skill or manual skill e .g., lawyer, CA, engineer,
surgeon, author etc.
Extract of Section 5 of Income Tax Act, 1961
Scope of total income.
5. (1) Subject to the provisions of this Act, the total income of any previous year of a person who is a
resident includes all income from whatever source derived which—
(a) is received or is deemed to be received in India in such year by or on behalf of such person; or
(b) accrues or arises or is deemed to accrue or arise to him in India during such year; or
(c) accrues or arises to him outside India during such year:
Provided that, in the case of a person not ordinarily resident in India within the meaning of sub -section
(6)* of section 6, the income which accrues or arises to him outside India shall not be so included unless
it is derived from a business controlled in or a profession set up in India.
(2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non -
resident includes all income from whatever source derived which—
(a) is received or is deemed to be received in India in such year by or on behalf of such person; or
(b) accrues or arises or is deemed to accrue or arise to him in India during such year.
Explanation 1.—Income accruing or arising outside India shall not be deemed to be received in India
within the meaning of this section by reason only of the fact that it is taken into account in a balance
sheet prepared in India.
Explanation 2.—For the removal of doubts, it is hereby declared that income which has been included in
the total income of a person on the basis that it has accrued or arisen or is deemed to have accrued or
arisen to him shall not again be so included on the basis that it is received or deemed to be received by
him in India.

SN PARTICULARS R-OR R-NOR NR

1 Income accrues/arises/received from/in India or both. XXX XXX XXX
Income from business/profession outside India but is controlled
2 XXX XXX .-
from/set up in India.
3 Income accrues/arises as well as received outside India. XXX .- .-
 PROBLEM ON SCOPE OF TOTAL INCOME
Q.1. Mr. Rohan, an India Citizen left India for Employment on 31 – 08 – 2022. Before this he
was always in India.
Find his Residential Status for P.Y. 2022 – 2023 and A.Y. 2023 – 2024 Also calculate his total
Income from the following Information.
1. Dividend from foreign company ₹ 5,000.
2. Rent from property in New York ₹ 20,000.
3. Sale of property in Japan, amount received in Mumbai ₹ 3,000.
4. Dividend from Indian Company ₹ 5000.
5. Agricultural Income from India ₹ 10,000.
6. Gift from brother ₹ 5,000.
7. Interest on Debentures ₹ 12,000 of European Companies received in London.
8. Rent from plot of land in Ceylon ₹ 20,000.

Q.2. Ms. Raksha an Indian Citizen, furnishes the following particulars of her income earned
during the previous year relevant to A.Y. 2023 – 2024
a] Pension from an Indian employer received in Sudan ₹ 36,000.
b] Profit from business at Pune & Managed from Britain ₹ 48,000.
c] Income earned from business in Kuwait which is controlled from Mumbai ₹ 54,000
d] Past untaxed profit brought to India ₹ 1,00,000.
e] Income from agricultural land in Sri Lanka ₹ 10,000 received in India.
f] Profit from sale of plant at Bhopal ₹ 38,000 [Half received in U.S.A].
g] Dividend from German company received in India ₹ 5,000
h] Income from Business in Nairobi which was set up in India received there ₹ 12,000.
i] Gift from friend ₹ 95,000
Determine the Gross Total Taxable Income of Ms Raksha for the Assessment year 2023 – 2024.

Q.3. From the following details furnished by Ms. Lisa determine her total income if she is a
A. Resident & Ordinarily Resident
B. Resident But not an Ordinarily Resident
C. Non Resident

1. Agricultural Income from Punjab ₹ 10,000.

2. Salary earned & received in U.S.A. ₹ 20,000.
3. Asset Sold in Nepal & amount received in Bhopal ₹ 5000.
4. Dividend from an Italian Company received in India ₹ 8000.
5. Rent from House Property in Nepal, received there & then sent to India ₹ 12,000
6. Interest on Debenture of a foreign company received in Mumbai ₹ 3,000.
7. Dividend from German company [Half received in India] ₹6000.
8. Income from business in Pakistan controlled from Afghanistan ₹ 10,000.
9. Income from business in China, controlled from Delhi [Half received in India] ₹ 5000.
10. Income from Business in Mumbai, controlled from Dubai ₹ 3000.
11. Salary earned & received in Africa ₹ 8000.
Q.4. Ms. Akshata furnished the following particulars of Her income earned during the previous
year ended 31 – 03 – 2023
1. Interest on U.K. Development Bonds [Received in India] ₹ 42,000.
2. Profit on Sale of Plant in Malaysia [Received in Mumbai] ₹ 92,000.
3. Profit on Sale of property at Mumbai [Received in Dubai] ₹ 1,04,000.
4. Income from Business in Sri Lanka controlled from India ₹ 20,000.
5. Rental Income from property in New York deposited there ₹ 25,000.
6. Pension from Employer in Indian Bank deposited there ₹ 60,000.
You are required to compute Her Total Income taxable in India if Her Residential Status during the
previous year 2022 – 2023 is R-OR, R-NOR & NR.

Q.5. From the following particulars, compute the taxable income of Mr. Ayush when his
residential status is [i] R – OR [ii] R – NOR [iii] NR
a] Interest for Debentures in an Indian Company received in London ₹ 5,000.
b] Interest on a company deposit in India but received in Germany ₹ 22,000.
c] Interest on U.K. Development Bond, 50% of Interest received in India ₹ 40,000.
d] Profit on sale of shares of an Indian company received in London ₹24,000.
e] Dividend from British Company received in London ₹ 10,000.
f] Profits on sale of plant at Germany 50% of profits are received in India ₹ 60,000.
g] Income earned from business in Germany which is controlled from Delhi of which ₹ 40,000
received in India. Total amount of income ₹ 70,000.
h] Profits from a Business in Delhi but managed entirely from London ₹ 45,000.
i] Rent from property in London deposited in a Indian Bank at London, brought to India ₹ 50,000
j] Interest received in London on money lent to a resident in India in London but the same money
was used in India ₹ 46,000

Q.6. Ms. Saloni a Foreign national, furnished the following particulars of her income for the
previous year relevant to assessment year 2023 – 2024.

a] Profit from sale of plant in London [Half received in India] ₹ 40,000.

b] Profit from sale of plant at Delhi [Half received in London] ₹ 52,000.
c] Interest on UK Development Bonds [Entire amount received in London] ₹ 40,000.
d] Interest on Bank Account in India ₹ 5,000.
e] Dividend from British Company received in India ₹ 2,000.
f] Income from Property in London ₹ 3,000.
g] Dividend received in London from a Company registered in India but mainly operating in U.K. ₹
18,000.
i] Profit from business in Delhi managed from India ₹ 30,000.

Determine the Gross Total Income of Ms. Saloni for the Assessment year 2023 – 2024 if She is
i] R – OR
ii] R – NOR
iii] N.R.
 HP

LOP TAXABLE SOP

DLOP PLOP SOP[R] SOP[B]

TAXABLE TAXABLE DEDUCTION IGNORE

INTEREST
ON
HOUSING
LOAN

LOP – LET OUT PROPERTY SOP – SELF OCCUPIED PROPERTY DLOP – DEEMED TO BE LET OUT
PROPERTY
PLOP – PARTLY LET OUT PROPERTY SOP[R] – SELF OCCUPIED PROPERTY SOP[B] – SELF OCCUPIED PROPERTY
FOR RESIDENTIAL PURPOSE FOR BUSINESS PURPOSE
NOTE: - If there are more than one house properties and none of them are let out then, the house property which
has maximum GAV is considered as SOP[R] and the rest of the house property are considered as DLOP.
STATEMENT OF INCOME FROM HOUSE PROPERTY
PARTICULARS LOP PLOP DLOP SOP [R]
Municipal Value XX XX XX –
Fair Rent XX XX XX –
Whichever of the above is Higher XX XX XX –
Standard Rent XX XX XX –
Expected Rent XX XX XX –
Actual Rent Received XX XX XX –
GROSS ANNUAL VALUE XX XX XX –
Less :- Municipal Tax paid by Landlord [XX] [XX] [XX] –
NET ANNUAL VALUE XX XX XX –
Less :- DEDUCTION U/s 24
A] Standard Deduction – 30% of NAV [XX] [XX] [XX] –
B] Interest on Housing Loan [XX] [XX] [XX] [XX]
TAXABLE INCOME FROM HOUSE PROPERTY XX XX XX [XX]

XX
RECEIPT OF [Previous Years] Rent if any
Add :- Arrears of Rent less 30% XX
Add :- Recovered Rent less 30% XX
TOTAL TAXABLE INCOME FROM HOUSE PROPERTY XX
NOTE:-
Arrears of Rent refers to rent unpaid by the tenant but not considered as Bad Debt.
Recovered Rent refers to unpaid rent considered as Bad Debt recovered later.
IMPORTANT POINTS

1. Municipal Value means rent as per municipal records or Local Authority. It is also known as ‘Rateable
Value’.
Fair Rent is the rent from a similar house property in a similar locality and is also known as ‘Reasonable
Letting Value’ or ‘Reasonable Rent’.
Standard Rent means maximum rent which can be legally recovered as per ‘Rent Control Act’.

EXPENSES

Municipal Tax paid by Landlord Interest on Loan on housing Loan Any Other Expenses

DEDUCT DEDUCTION [U/s 24] IGNORE

Municipal Taxes

a) Deduction is allowed on ‘payment basis’ [Meaning if municipal tax is paid by the Landlord – it is allowed, but
if not paid by the landlord – it is not allowed. If rent payable by the landlord is Outstanding, Due, in Arrears,
remaining to be paid, Unpaid – it will not be allowed. Further it should be paid by Landlord only and not by
the tenant or any other person]
An y amount paid in cash as municipal tax by the landlord will be allowed whether such cash is paid for past
previous year, current previous year or future years to come [i.e. paid in advance].

b) Municipal Tax is calculated as a percentage of Municipal Value.

c) The following taxes paid by the landlord are also considered as is Municipal Tax.
E.g. Water Tax
Local Tax
Property Tax
Corporation Tax
Sewerage Tax
Assessment Tax etc.

2. INTEREST ON HOUSING LOAN

a] Deduction is allowed on Due Basis. [Allowed whether paid or outstanding but should
be related to the current P.Y.]

b] Loan should be taken for House [Purchase/Construction/Repairs/Renovation etc].

c] Deduction is allowed whether the Housing Loan is taken from Banks/Financial

Institution or any others lending institution.
HOUSING LOAN
DEDUCTION U/s 24 – Calculation of Taxable DEDUCTION U/s 80 C – at the time of Computation
Income from House Property of Total Income
Deduction will be allowed on Interest Deduction will be allowed on Principal
Allowed even if Loan can be taken from any one. Allowed only if the loan is taken from Banks and
recognized Financials Institution
 d] LIMIT FOR DEDUCTION
Interest on Housing Loan

LOP/DLOP/PLOP SOP [R]

NO LIMIT LIMIT

LOAN TAKEN FOR

LOAN TAKEN LOAN TAKEN FOR REPAIRS
PURCHASE/CONSTRUCTION
Loan taken before 1-4-99 Maximum Rs. 30,000 Maximum Rs. 30,000
Loan taken on or after 1-4-99 Maximum Rs. 2,00,000 Maximum Rs. 30,000

3. A House Property is treated as SOP[R] only if it is self occupied for FULL 12 MONTHS. If the house
property is let out even for some time it should be treated as LOP. In other word for some time the
house property was LET out and the same house property was also self occupied for residential purpose
for the remaining period.

4. No Standard Deduction of 30% on NAV is allowed if the NAV is negative.

5. Interest paid on Housing Loan outside India without TDS is not allowed.

6. Penalty in respect of Municipal Tax and Interest on Loan is not allowed. If such information is provided in
the problem it should be IGNORED.
Q.1. From the following details of Ms. Shital, Calculate her Income from House Property for P.Y. 2022-
2023
PARTICULARS H1 H2 H3
Municipal Value 80,000 1,20,000 2.00,000
Reasonable Rent 90,000 1,10,000 2,10,000
Standard Rent 84,000 - 2,20,000
Rent Receivable 78,000 1,32,000 2,20,000
Municipal Tax
- Paid 6,000 10,000 2,000
- Outstanding 2,000 - 15,000
Insurance Premium [Paid in cash] 1,000 2,000 3,000
Annual Charge [Paid in cash] 3,000 - 6,000
Interest on Loan
For Construction 12,000 28,000 -
For Repairs/Renovation - 12,000 -
For Brother’s Marriage - - 16,000

Q.2. Ms. Neha request you to Calculate her income from House Property for the P.Y. 2022-2023 from
following details.
PARTICULARS H1 H2
Municipal Value 1,00,000 2,00,000
Reasonable Letting Value 1,20,000 1,80,000
Annual Rent Received 1,08,000 2,16,000
Municipal Tax paid by
- Owner 4,000 -
- Tenant - 6,000
Repairs 6,000 -
Land Revenue 4,000 8,000
Ground Rent 3,000 6,000
Interest on Loan
- Paid 4,000 6,000
- Outstanding 3,000 -
Q.3. Ms. Naila owns a House at Pune. During the P.Y. 2022-2023 it was Let out for residential
purpose from 01 – 08 – 2022 to 31 – 12 – 2022 and for remaining period it was self occupied by
owner. Rent ₹ 8,000 per month.
Other particulars pertaining to the house property is as follows :-
Municipal Value 60,000
Municipal Tax 6,000
Interest on Loan for Renovation 20,000
Preconstruction Interest [Total] 5,000
Calculate the Income from House Property for Assessment Year 2023 - 2024.

Q.4. From the following details Calculate Taxable Income from House Property of Ms. Meenu for P.Y.
2022-2023.
PARTICULARS H1 H2
Rent Received 40,000 p.m. -
Reasonable Letting Value 5,25,000 4,00,000
Municipal Value 4,90,000 4,25,000
Municipal Tax 10% 15%
Interest on Loan 2,50,000 -
House No. 2 was purchased out of funds borrowed by mortgaging House No. 1. Housing Loan was
taken on 01 – 08 – 2020.

Q.5. Ms. Deepika provides you following information for previous year 2022-2023.
PARTICULARS H1 H2
Municipal Valuation 3,00,000 4,00,000
Fair Rent 3,25,000 4,50,000
Standard Rent 3,10,000 4,60,000
Rent per annum 3,36,000 -
Unrealized Rent 36,000 -
Total Municipal Tax 10% 40,000
MUNICIPAL TAX
Paid by the Landlord 75% -
Paid by the Tenant 25% -
Annual Charge 20,000 35,000
Interest on Loan 40,000 42,000
Calculate Taxable Income from House Property.
Problem No. ________

STATEMENT OF INCOME FROM HOUSE PROPERTY

PARTICULARS

1.Municipal Value
2.Fair Rent
3.Whichever of the above is Higher
4.Standard Rent
5.Expected Rent
6.Actual Rent Received
GROSS ANNUAL VALUE
Less :- Municipal Tax paid by Landlord
NET ANNUAL VALUE
Less :- DEDUCTION U/s 24
A] Standard Deduction – 30% of NAV
B] Interest on Housing Loan
TAXABLE INCOME FROM HOUSE PROPERTY

TOTAL TAXABLE INCOME

FROM HOUSE PROPERTY
House Property 1
House Property 2
House Property 3
House Property 4
House Property 5
TOTAL

SPACE FOR W ORKING

 INCOME FROM CAPITAL GAINS

Q.1. How does income from Capital Gains arise?

Ans :- Income from Capital Gains Shall arise when there is a Transfer of Capital Asset.

Q.2. What are Capital Assets ?

Ans :- Capital Asset means asset of any kind. Whether Movable or Immovable. Whether Tangible or Intangible
But excluding ‘MRS GS’
M = Movable Personal Effects [Except DJ S2AAP]
R = Rural Agricultural Land in India.
S = Stock in Trade
G = Gold Deposit Bonds 1999
S = Special Bearer Bonds

Q.3. When will there be a transfer of capital assets in case Capital Gains as per income tax?
Ans : The following are considered as transfer of capital asset as per income tax. [SEREC2]
1. Sale
2. Exchange
3. Relinquishment
4. Extinguishment
5. Conversion into Stock in Trade
6. Compulsory Acquisition

Q.4. Which exceptional movable personal effects are considered as Capital Asset?
Ans :- The following movable personal effects are considered as Capital Assets. [DJ S2AAP]
1. Drawings
2. Jewelry
3. Sculpture
4. Shares and Securities
5. Archeological Collections
6. Art Work
7. Paintings

Q.5. What are Short Term Capital Gains?

Ans :- Any capital asset held for less than 3 Years and is transferred then it will be considered as Short Term
Capital Gains. However Shares and Securities held for less than 1 Year are considered as Short Term.

Q.6. What are Long Term Capital Gains?

Ans :- Any capital asset held for More than 3 Years and is transferred then it will be considered Long Term
Capital Gains.
Q.7. How is Short Term Capital Gains determined?
Ans:- Short Term Capital Gains is determined by preparing following Statement
STATEMENT OF INCOME FROM SHORT TERM CAPITA GAINS
PARTICULARS AMOUNT AMOUNT
Full Value of Consideration [Sales Price] XXX
Less :- Cost of Transfer XXX
Net Value of Consideration XXX
Less :- Cost of Acquisition -XXX
XXX
Less:- Cost of Improvement -XXX
SHORT TERM CAPITAL GAINS XXX
Q.8. How is Long Term Capital Gains determined?
Ans:- Long Term Capital Gains is determined by preparing following Statement
STATEMENT OF INCOME FROM LONG TERM CAPITA GAINS
PARTICULARS AMOUNT AMOUNT
Full Value of Consideration [Sales Price] XXX
Less :- Cost of Transfer XXX
Net Value of Consideration XXX
Less :- Indexed Cost of Acquisition -XXX
XXX
Less:- Indexed Cost of Improvement -XXX
LONG TERM CAPITAL GAINS XXX

Q.9. What is the formula for ascertaining Indexed cost of Acquisition?

Ans:- Indexed Cost of Acquisition = Index of the Year of Transfer X Cost of Acquisition
Index of Year of Acquisition

Q.10. What is the formula for ascertaining Indexed cost of Improvement?

Ans:- Indexed Cost of Improvement = Index of the Year of Transfer X Cost of Improvement
Index of Year of Improvement
 INCOME FROM CAPITAL GAINS

SHORT TERM CAPITAL GAINS AMT AMT LONG TERM CAPITAL GAINS AMT AMT
Full Value of Consideration XXX Full Value of Consideration XXX
Less :- Cost of Transfer [XXX] Less :- Cost of Transfer [XXX]
Net Value of Consideration XXX Net Value of Consideration XXX
Less :- Cost of Acquisition [XXX] Less :- Indexed Cost of Acquisition [XXX]
XXX XXX
Less:- Cost of Improvement [XXX] Less:- Indexed Cost of Improvement [XXX]
STCG XXX LTCG XXX

COST OF INFLATION INDEX TABLE

FIN. YEAR C.I.I. FIN. YEAR C.I.I.
2001-02 100 2013-14 220
2002-03 105 2014-15 240
2003-04 109 2015-16 254
2004-05 113 2016-17 264
2005-06 117 2017-18 272
2006-07 122 2018-19 280
2007-08 129 2019-20 289
2008-09 137 2020-21 301
2009-10 148 2021-22 317
2010-11 167 2022-23 331
2011-12 184 2023-24 348
2012-13 200 2024-2025

Q.1. Mr. Asim purchased a Flat as on 1st May 2019 for ₹ 35,00,000 he also paid Stamp Duty and Registration
charges of ₹ 2,00,000 and paid a brokerage of ₹ 35,000. He renovated his flat on 1st January 2021 and spent ₹
3,00,000. On 31st July 2022 he sold his flat for Rs, 1,00,00,000. He had to pay ₹ 1,00.000 as brokerage for selling
his flat. You are required to Calculate the Taxable income from Long Capital Gains of Mr. Asim for P.Y. 2022 -
2023.

Q.2. Miss. Gurupyari purchased a shop worth ₹ 50,00,000 on 1st April 2021 after paying brokerage of ₹ 50,000
and also paid registration and stamp duty of ₹ 3,00,000.
She sold her shop as on 25th December 2022 for ₹ 1,20,00,000 and paid Rs 1,20,000 as brokerage.
Calculate Taxable Income of Miss. Gurupyari from Short Term Capital Gain for P.Y. P.Y. 2022 - 2023.
Q.3. Miss Ragini purchased a Flat as on 1st June 2010 for ₹ 15,00,000. She also paid Stamp Duty and Registration
charges of ₹ 15,000 and paid a brokerage of ₹ 3,500. She renovated her flat on 1st July 2014 and spent ₹ 50,000.
She again renovated her Flat again on 5th November 2018 and Spent ₹ 1,20,000.
On 31st October 2022, She sold her flat for ₹ 1,00,00,000. She had to pay ₹ 1,00,000 as brokerage for selling
her flat. You are required to Calculate the Taxable income from Long Capital Gains of Miss Ragini for P.Y. 2022
– 2023.

Q.4. Miss Maithili purchased a flat worth ₹ 90,00,000 on 1st August 2021 after paying brokerage of ₹ 90,000
and also paid registration and stamp duty of ₹ 2,00,000.
She sold her flat as on 25th February 2023 for ₹ 1,20,00,000 and paid ₹ 2,00,000 as brokerage.
Calculate Taxable Income of Miss Maithili from Short Term Capital Gains.
 INCOME FROM OTHER SOURCES
Q.1. How does income from other sources arise?
Ans:- Those incomes which do not fall under the head of income from salaries, Income from House
Property, Incomes from Business or Profession, Income from Capital Gain are taxable as Income from other
sources.

Following are the Income from Other Sources.

DW RAM2U F2AKIR2 G Etc.…

D
Dividend Income from

Indian Company Foreign Company Co-operative Society

Taxable Taxable Taxable

Note: Any Expenses incurred to generate the Dividend Income should be deducted from the Income.
(For E.g. Collection Charges of Dividend Charged by bank for collection of dividends)

Winning Income / Casual Income

Income from Winning of Lottery, Gambling, Betting, Puzzles, Electronics Games, Card Games, Horse Race,
Camel race. Fully Taxable
Note: Ignore any expenses spent to generate the income (e.g. Cost of Lottery Tickets)

Rental Income
There are basically 3 types of Rental Income

1. Renting of Assets
2. Subletting
3. Composite Rent

Rent of Assets other than House Property e.g. Machinery (including Rent from Open plot of Land)
Rent from Sub-letting (Subletting = Rent Paid — Rent Received)
Composite Rent is the rent of Building along with other Assets (deduct expenses related to assets such as
deprecation, repairs from rent received) (Composite Rent = House Property + Facilities)

Agricultural Income

From India From Foreign Country

Exempt Taxable
M

Income of MP/MLA/MLC

Salary Daily Allowance

Taxable Exempt

Income of Minor Child

• Taxable in the hands of Parents
• Parents will get exemption of Maximum of Rs. 1,500 per annum per minor child.

Income from Units of UTI or Mutual Funds - Fully Exempt

Director Board meeting Fees - Fully Taxable

Family Pension Received by Family member after death of employee.
Family Pension
Less: Standard Deduction 1/3rd of Actual Amount Received
Or
15,000 (Whichever is less)

Award Received

From Government From Private Institute

Exempt Taxable

Keyman Insurance Policy Amount Received Taxable.

Note: Amount received from LIC Policy on Maturity Fully Exempt.

Interest Income (Refer Note 1)

Royalty Income Taxable

Remuneration received from Non-Employer is Taxable

Gift Income (Refer Note 2)

Note 1:
I
Interest Income

G NP TP KRC Other
Taxable
DSP SCC
Exempt
G = Gold Deposit Bond/Scheme 1999
N = National
Defense Gold Bond
Saving Annuity Certificate
Plan Certificate
P = Post office
Savings Bank Account
Cumulative Time Deposit Account
Cash Certificate
T = Treasury Saving Deposit Certificate
P = Public Provident Fund
K = Konkan Railways Corporation Bond
R = Relief Bond (National /State/RBI)
C =Capital Investment Bond

Note 2:
Gift Income
1. If gift is received from Employer it is taxable in the hands of the employee as it is regarded as
Perquisite from the Employer. Hence is taxable under the head Income from Salary.
2. Gift received from clients & other businessman or professions, it is taxable in the hands of
Businessman or professions. It is taken care in Income from Business or Profession .
3. Any other Gift other than 1 & 2 is taxable as Income from Other sources Gifts.

Gift Income

IM DR HUT Lo Others
EXEMPT Up to Rs. 50,000 Not Taxable
Above Rs. 50,000 Fully Taxable

I = Inheritance
M= Marriage
D = Death
R = Relatives
H = Hospital/ Approved Charitable Institution
U = University/Educational Institution
T = Trust
L = Local Authourity
 INCOME FROM OTHER SOURCES

Q.1. From the following Information given by Ms. Priyanka Chopra, Calculate her taxable Income from
other sources for previous year 2022 – 2023.
1. Dividend from Indian Company ₹ 8,000 [Dividend collection Charges ₹ 500].
2. Dividend from a Foreign Company ₹ 10,000. Bank Charges ₹ 1,000 as collection charges. Interest on
Loan borrowed for purchasing shares ₹ 500.
3. Winnings from Lotteries ₹ 5,000 [Lottery Tickets purchased ₹ 500]
4. Interest on Debentures ₹ 1,500 from Indian Company.
5. Income of a Minor Child ₹ 500.
6. Rent from Plant & Machinery ₹ 1,500 p.m. Expense incurred ₹ 1,000 for repairs ₹ 2,000 as
depreciation and other expenses ₹ 500.
7. Gross Salary ₹ 5000 from A Ltd.
8. Agricultural Income from India ₹ 8,000.
9. Income Tax Refund [including interest ₹ 10,000] ₹ 25,000.

Q.2. Ms. Aliya Bhat requests you to Calculate Her income from Other Sources for the P.Y. 2022 – 2023.
Details of Income & Expenses is as follows: -
1. Ms. Aliya Bhat retired from XYZ Ltd on 31 – 12 – 2022.
She received monthly pension of ₹ 2,000 after Her retirement from the Company.
2. She owns a House Property, which She has let out on hire to Ms. Katrina Kaif on a monthly rent of ₹
6,000. She also paid Municipal Taxes of ₹ 1,000.
3. Interest on Debentures of Indian Company ₹ 3,000.
4. Income of Minor son Master Dinu from acting in T.V. Advertisement ₹ 3,000.
5. Ms. Aliya Bhat is also a MLC in Maharashtra. Her Salary as MLC is ₹ 7,000 per month & she also
received a daily allowance of ₹ 3,000.
6. Refund of Share Application money ₹ 5,000.
7. Interest on Bonds issued by Bajaj Auto. Face value ₹ 10,000. Interest rate 10% per annum.

Q.3. Mr. Shahrukh Khan provides you the following information for the year ended on 31st March 2023.
1. Gross Salary ₹ 48,000 from Fast Food Pvt Ltd [Profession tax deducted from salary ₹ 600]
2. Income from units of Unit Trust of India ₹ 2,000.
3. Family Pension received on death of wife ₹ 60,000.
4. Interest on deposit with ₹ 2,200.
5. Interest on deposit with Hindustan Lever Ltd. ₹ 3,000.
6. Winning from Lottery ₹ 8,000 and expenses incurred to realize the Lottery prize of ₹ 200.
7. Refund of Share Application money ₹ 10,000.
8. Received ₹ 10,000 from L.I.C. on maturity of policy.
9. Interest on PPF account with State Bank of India ₹ 125.
10. Accrued Interest on NSC ₹ 1,400.
11. Interest on Gold Deposit Scheme 1999 ₹ 5,400.
12. Private Tuition Fees ₹ 5,000 [Conveyance Expense 20%]
You are required to Compute his Income Chargeable under the Head Income from Other Sources for the
Assessment year 2023 - 2024.
Q.4. Mr. Ae May Le Netaji is a Member of Parliament. During the previous year, he had the following
incomes:
1. As a member of parliament, he received a salary of ₹ 1,00,000 per month and daily allowance of
₹ 5,000 for attending various sessions.
2. He received dividend of ₹ 50,000 from a Co-operative society and ₹ 5,00,000 from ABC Ltd.
3. He has won ₹ 9,00,000 in Crossword Puzzle.
4. On 1st September, 2021 he purchased a plot of Land for constructing his house on account of
shortage of funds, he could not get this house constructed and hence let out the plot at ₹ 15,000
per month since1st October, 2022.
5. He has let out Machinery & Furniture and also building to Mr. Wagle at a monthly rent of ₹ 60,000.
He spent ₹ 4,500 on the repairs of Machinery, Furniture & Building during the previous year.
Depreciation allowed in respect of these assets for the previous year was ₹ 18,000.
6. Gift from Girl Friend ₹ 51,000 and from wife ₹ 90,000 received on wedding anniversary on
21/12/2022.
Compute the Income from Other Sources of Mr. Ae May Le Netaji for P.Y. 2022 – 2023.

Q.5. Following are the particulars furnished by Mr. Ricky Ponting for the year ending on 31st March,
2022. Compute the Income under the head ‘Income from Other Sources’ for the Assessment year 2023
- 2024.
1. Dividend on Preference Shares ₹ 5,000.
Collection charges in respect of dividends ₹ 100.
2. Rent from Letting of a Building along with Plant, Machinery & Furni ture fitted therein ₹ 20,000.
Depreciation on Building, Furniture etc. ₹ 6,000.
Insurance Premium paid in respect of the Building ₹ 1,000.
Office & Establishment expenses related to Building ₹ 2,000.
3. Fixed Deposit with Bajaj Finserv Ltd placed on 1st July 2014 for ₹ 2,00,000 carrying simple
interest @ 15% per annum.
4. Rent from sub – Letting a Flat ₹ 12,500. Rent paid to the land lord ₹ 2,500.
5. Dividend from Units of Unit Trust of India ₹ 2,500.
6. Amount received on Maturity of Life Policy ₹ 60,000.
7. Received Gold valued at ₹ 5,00,000 as a gift from his girlfriend.
8. Winnings [Net ₹ 70,000] after TDS of ₹ 30,000.
9. Interest on Post Office monthly income account ₹ 1,000.

Q.6. Ms. Katrina Kaif, a Technical Director of a reputed concern, gives you the following information for
the previous year ended March 31, 2022.
1. Interest on Fixed Deposits with Bank of India ₹ 36,000 Net [TDS 10%]
2. Agricultural Income ₹ 24,000.
3. Interest on Company Deposit ₹ 1,500.
4. Interest on Deposit in Post Office Saving Bank account ₹ 1,250.
5. Dividend received from Reliance Textiles Ltd ₹ 10,000.
6. Directors Board Meeting fees ₹ 200 per meeting. During the previous year Ms. Katrina Kaif
attended 5 meetings including annual general meeting.
7. Family pension received after the death of Mr. Kaif ₹ 2,500 per month.
8. Interest on Konkan Railway Corporation Bonds ₹ 2,000.
9. Income from units of SBI Mutual Fund ₹ 1,000.
10. Gift ₹ 1,00,000 received from a Charitable Trust.
You are required to Calculate her Income from Other Sources for A.Y. 2023 - 2024.
Q.7. Shri Vidhayak holds following Securities and Shares as on 01 – 04 – 2021:
₹ 40,000 7.5% Bihar Government Securities
₹ 85,000 12% Debentures of ABC Ltd.,
₹ 10,000 9% National Relief Bonds.
₹ 20,000 10.5% Konkan Railway Corporation Bonds.
₹ 15,000 10% Preference Shares in PQR Ltd.
Shri Vidhayak is a Member of Parliament. Salary & Daily Allowance from this source amounted to ₹ 36,000
& ₹ 10,500 respectively.
Following information is given regarding his Minor Children’s Income.
First Son’s Income ₹ 5,600
Second Son’s Income ₹ 1,200
Daughter’s Income ₹ 25,600
[Received as First Prize in Singing Competition]
Rent from Subletting ₹ 35,000
Rent paid to Landlord ₹ 10,000
Calculate the Income from Other Sources for the A.Y. 2021 - 2022.
 INCOME FROM BUSINESS OR PROFESSION
Q.1. How does income from business or profession arise?
Ans: - Income from business shall arise through operations of business activities. In other words, the net profit
earned by a business shall be considered as his income from business.

Q.2. What is given in the problem?

Ans: - Profit and Loss Account or Income & Expenditure Account and certain information or adjustments.

Q.3. What we have to do?

Ans: - We have to prepare a Statement indicating Taxable Income from business.

Q.4. How to prepare the Statement of Taxable Income from Business?

Ans: - Following is the format of Statement of Income from Business

STATEMENT OF INCOME FROM BUSINESS AS PER INCOME TAX

PARTICULARS AMOUNT AMOUNT
Net Profit as per Profit & Loss Account XXX
Add:- Disallowed Business Expenses
1. XXX
2. XXX
3. XXX XXX

Less:- Non Business Income

1. XXX
2. XXX XXX
XXX
Less:-Unrecorded Business Expense
1. XXX
2. XXX XXX

Add:- Unrecorded Business Income

1. XXX
2. XXX XXX
TAXABLE PROFIT AS PER INCOME TAX XXX

Q.5. What are Disallowed Business Expense?

Ans: - Disallowed Business Expense are Non-Business Expense or those Expense which are not considered as
Business Expense as per Income Tax.

Q.6. What are Non Business Income?

Ans: - All Income which are not earned through operations of business are Non-Business Income. E.g. Income
from Salary, Income from House Property, Income from Capital Gains & Income from other sources.
Q.7. What are Unrecorded Business Expenses?
Ans: - Unrecorded Business Expense are those business expense which are forgotten to be recorded by the
business man on the profit and loss account debit side. Or have been omitted by mistake.

Q.8. What are Unrecorded Business Incomes?

Ans: - Unrecorded Business Expense are those business Income which are forgotten to be recorded by the
business man on the profit and loss account credit side. Or have been omitted by mistake.

Q.9. Where to find Disallowed Business Expenses?

Ans: - Disallowed Business Expenses appear on the Debit of Profit and Loss Account.

Q.10. What to do if we locate Disallowed Business Expense on the Debit Side of Profit and Loss account?
Ans: - On the Debit side of Profit and Loss account we need to mark them as Cross ‘X’. These expenses marked
as Cross ‘X’ are to be added back to Net profit as per Profit and Loss Account.

Q.11. What to do if we locate Non-Business Income on the Credit Side of Profit and Loss account?
Ans: - On the Credit side of Profit and Loss account we need to mark them as Cross ‘X’. These incomes marked
as Cross ‘X’ are to be deducted from Net profit as per Profit and Loss Account.

Q.12. How to locate Unrecorded Business Expenses?

Ans: - Unrecorded Business Expenses are usually specified in the adjustment or information. However 2 items
namely Depreciation [If Depreciation as per Income tax is provided separately] and Scientific Research [25%]
are always Unrecorded Business Expense.
Note :- When depreciation as per income tax is provided in the adjustment then the depreciation in the profit
and loss account is considered as Disallowed Business Expense and depreciation provided in the adjustment is
the Unrecorded Business Expenses.

Q.13. How to locate Unrecorded Business Income?

Ans: - Unrecorded Business Expenses are specified in the adjustment or information.

Q.14. Which expenses are allowed as business expense as per Income Tax
Any expenditure incurred for the purposes of business or profession, provided it satisfies the following
conditions:
a) Such expenditure is not of the nature as described u/s 30 to 36.
b) Such expenditure is not in the nature of capital expenditure or personal expenses of the assessee.
c) Such expenses are wholly and exclusively incurred for the purposes of business or profession.
d) It should be in respect of business carried on by the assessee.
e) If such expenditure incurred for the purpose which is an offence or which is prohibited by law, shall not be
deemed to have been incurred for the purpose of business or profession and hence shall not be allowed.
f) Such expenditure incurred by an assessee should not be in relation to corporate social responsibility,
expenditure applicable to companies under the Companies Act, 2013.

EXAMPLES OF EXPENSES THAT ARE USUALLY ALLOWED AS BUSINESS EXPENSES AS PER INCOME TAX
[Unless otherwise specifically mentioned in the problem as Disallowed or Non Business Expenses]
1. Purchases of Materials.
2. Royalties.
3. Freights & Carriages.
4. Wages.
5. Salaries.
6. Pension paid to employees on retirement.
7. Premium for insurance against loss of profit.
s. Technical Fees.
9. Legal expenses. .
10. Loss due to Theft.
11. Loss on sale of Investments.
12. Embezzlement of cash etc.
13. Discounts.
14. Staff Welfare expenses.
15. Travelling expenses.
16. Fees and subscription
17. Telephone expenses
18. Damages.
19. Commission and Brokerage.
20. Audit Fees.
21. Directors’ Remuneration.
22. Profession Tax.
23. Expenses on Local Festivals such as Diwali, Muhurat, etc.
24. Provision for sales tax payable.
25. Expenses on registration of trade marks.
26. Cash shortage found in business at the end of the day.
27. Expenditure on special advertisement campaign at the time of opening of new branches.
28. Expenditure, incurred to secure overdraft facilities for the business purpOSeS.
29. Expenditure on training of employees.
30. Compensation paid to a worker in order to dismiss him in the interest of business.
31. Remuneration tO family members.
32. Loss caused by standing surety for others.
33. Loss due to failure to recover advance.
34. Loss by white ants.
35. Loss by fire.
36. Sales tax, excise duty etc.
37. Demurrage paid to the Railways.

Q.15. Which expenses are disallowed as business expense as per Income Tax
EXPENSES EXCLUSIVELY DISALLOWED AS BUSINESS EXPENSES AS PER INCOME TAX
1. Donations.
2. Charity and Presents.
3. Income Tax, advance income tax, wealth tax, estate duty.
4. Legal expenses incurred to defend criminal liability.
5. Fines, penalty, resulting from contravention of any law.
6. Drawings by the proprietor including self-use of goods.
7. Depreciation in excess of the prescribed limits.
8. Fines paid for violation of the provisions of Factories Act or P.F. Act or any other law.
9. Expenses of a capital nature.
10. Expenses incurred for the purpose which is an offence or which is prohibited by any law.
 INCOME FROM BUSINESS AND PROFESSION

Q.1. Mr. Ritik Kumar has a small Soap factory at Nagpur. Following are the particulars of the Profit & Loss account
prepared by him for the accounting year 2021-2022. Compute his taxable income from business for A.Y. 2023 - 2024.
PARTICULARS ₹ PARTICULARS ₹
To Preliminary Expense 2,000 By Gross Profit b/d 98,000

To R.D.D. 5,000 By House Property Income 15,000

To Scientific Research 12,500 By Interest on Deposit under

To Commission 2,000 National Deposit Scheme 20,000

To Depreciation 6,000 By Bad Debt Recovery 6,500

To Donation to National By Sales Tax Refund 5,000

Defense Fund 11,000 By Income Tax Refund 5,000

To Income Tax 1,000 By Income from Units of UTI 12,000

To Wealth Tax 500

To Sales Tax 500

To Profession Tax 5,000

To Salary to Staff 22,000

To Office Expenses 7,000

To Municipal Tax of H.P. 3,000

To Life Insurance Premium 5,000

To Net Profit c/d 79,000

1,61,500 1,61,500

ADDITIONAL INFORMATION :
1. Advertising Expenses of ₹ 5,000 not recorded.
2. Depreciation as per Income Tax rules is ₹ 8,000.
3. Discount received but not recorded ₹ 5,000

Q.3. Ms. Saini Jaspreet Kaur has prepared the following Profit & Loss Account for the year ending 31st March, 2023.
PARTICULARS ₹ PARTICULARS ₹
To Trade Expenses 11,800 By Gross Profit b/d 60,000

To Establishment Charges 12,000 By Dividend for Co-op Society 2,600

To Rent, Rates & Taxes 11,600 By Rent from property 15,000

To Household Expenses 10,800 By Bad Debts recovered

To Discount Allowed 11,200 [Disallowed Earlier] 10,000

 To Income Tax 7,000 By Bad Debts recovered

To Advertisement Expenses 4,500 [Allowed Earlier] 12,200

To Postage & Telegram 1,100 By Salary from Partnership F. 16,000

To Fire Insurance Premium 1,200 By Bad Debts recovered

To Gifts to Customers 2,000 [Only ₹ 3,000 allowed earlier] 15,000

To Charities & Donation 2,400 By Personal Bad Debts 5,000

To Repairs & Renewals 4,000 [Recovered]

To Loss on Sale of Car 1,400 By Commission received 8,000

To Depreciation 7,000 By Interest on Capital from

To Life Insurance Premium 2,000 Partnership Firm 16,000

To Wealth Tax 7,000 By Share of Net Profit from

To Interest on Capital 1,900 Partnership Firm 1,10,000

To Audit Fees 1,850 By Compensation for Loss of

To Scientific Research 4,000 Stock by Fire 12,000

To Loss by Fire 15,000 By Sale of Packing Material 3,200

To Cash Shortage as per By Reserve for Discount on

Cash Book 1,150 Creditors 7,000

To Entertainment Expenses 8,000 By Sundry Income from

To I. Tax. appeal Expenses 7,000 Business 4,000

To Commission for raising By Agricultural Income from

Business Loan 2,100 Allahabad 88,000

To R.D.D 7,000 By Interest on belated

To Reserve for Discount 3,000 Payment by Customers 10,000

To General Expenses 4,000 By Profit on Sale of Personal

To Net Profit c/d 2,62,000 Television 20,000

4,14,000 4,14,000

ADDITIONAL INFORMATION
1. Depreciation charged in the books is in excess of depreciation according to I.T. Rules by ₹ 1,000.
2. Fire Insurance premium belongs to property let out.
3. Sundry Income from Business outstanding but not accounted ₹ 2,000.
Compute the Income Taxable
Q.4. Ms. Prachi Vishwas Pawar is the owner of Reliance & co. Following is the Trading and Profit and Loss account
for the year ended on 31st March 2023.
PARTICULARS ₹ PARTICULARS ₹
To Opening Stock 40,000 By Sales 6,90,000

To Purchases 2,06,500 By Closing Stock 30,000

To Salaries & Wages 54,000 By Custom Duty Drawback 6,000

To Stationery 11,500 By Sale of Import License 2,000

To Sales Tax 37,500 By Cash Compensation

To Advertisement 36,000 Subsidy for Expert 5,000

To Electricity 18,500 By Amount received under

To Depreciation on Endowment Life Insurance 17,000

Plant & Machinery 32,000 [Including Bonus ₹ 7,000]

To Salary to Son 20,000

To Scientific Research on

- Land 10,000

- Plant & Machinery 10,000

- Building 10,000

- Salary 19,000

- Material 5,000

To Entertainment Expenses 12,000

To Purchase of New Machine 1,00,000

To Interest on Capital 40,000

To Income Tax 10,000

To Net Profit c/d 78,000

7,50,000 7,50,000

1. Purchase include ₹ 20,000 paid in cash for goods purchased from Mr. Ranveer [Supplier] on 15 – 09 – 2015.
2. Advertisement bill of ₹ 36,000 was paid in cash.
3. Income Tax of ₹ 10,000 was paid in cash.
4. Full Amount of Stationary was paid in cash.
5. Reasonable salary of son is ₹ 10,000.
6. WDV of the Old Plant and Machinery as on 01 – 04 – 2022 is ascertained at
₹ 3,00,000. Depreciation rate as per Income Tax Rules is 15%.
On the basis of the above information you are required to compute the income taxable under the head Income from
Business or Profession.
Q.5. Miss Prathama Chandrashekar Shetty is a practicing Chartered Accountant in Delhi. She deposits all receipts
in her bank account and pays all expenses by cheque. Following is the analysis of her bank account for the year
ending 31 – 03 – 2023.
RECEIPTS ₹ PAYMENTS ₹
To Balance b/d 7,250 By Salaries 14,000

To Professional Receipts 1,40,000 By Rent of Office 4,500

To Dividend from U.T.I. 8,000 By Professional Expenses 3,000

To House Rent 22,500 By Telephone Expenses 1,000

To Horse Race Income 12,000 By Misc. Office Expenses 5,500

To Loan from Friend for By Motor Car Expense 8,000

Purchase of Car 1,00,000 By Purchase of Car 1,15,000

To Share of Income in H.U.F. 6,750 By Advance Income Tax 40,000

By Donation to Delhi

University 10,000

By Personal Expenses 45,500

By Balance c/d 50,000

2,96,500 2,96,500
Compute the Taxable Income from Business of Miss Prathama Chandrashekar Shetty after taking into account the
following :
[i] ¼th of the Motor Car expenses relate to personal use.
[ii] Car was purchased on 15 – 10 – 2022 and rate of depreciation on car is 15%.
 ACADEMIC YEAR 2023-2024, SEMESTER – V
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STUDY MATERIAL FOR B.COM.,

INCOME TAX LAW & PRACTICE

SEMESTER – V

ACADEMIC YEAR 2023-24

PREPARED BY

COMMERCE DEPARTMENT

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INDEX

UNIT CONTENT PAGE NO

I Basic concepts, meaning and definition 4-9

II Salary 10-22
III Income from house property 23-30
IV Income from business or profession 31-59
V Set off and carry forward of losses 60-77

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Income Tax, Law and Practices

Unit I
Basic concepts - Definition - Previous year - Assessment year - Person - Assesse Income - Total
Income - Casual income - Capital and Revenue - Residential status and incidence of tax incomes
exempt under Section - 10

Unit II
Salary - Basis of charge - Different forms of salary - allowances - gratuity - pension perquisites and
their valuation - deduction from salary - computation of taxable salary .

Unit III
House property - basis of charge - determination of GAV and NAV - income from let out property -
deductions - computation of House property income

Unit IV
Profits and gains of business and profession - basis of charge - methods of accounting deductions -
allowable expenses and disallowable expenses - computation of taxable income from Capital
Gains - Income from other sources

Unit V
Income of other persons included in assesses total income - Aggregation of income; Set off or
carry forward and set off of losses - Deductions from gross total income - Computation of total
income and tax payable; Rebates and relief's - Provisions concerning advance tax and tax
deducted at source - Provisions for filing of return of income.

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UNIT – 1
BASIC CONCEPTS, MEANING AND DEFINITION

Meaning of tax
The tax is a compulsory payment that has to be made by individual or other persons to
central government, state government or local government. Tax is based on certain will
establishment rules or criteria such as income earned, property owned or expenditure made.
Direct and indirect tax
Direct tax is a payment directly made to the stable by the person who bears it.

Indirect tax is a tax which is paid by one person and burned by another person.
Income tax act
The income tax act of 1961 has been in effect from the first day of April 1962 (sec 1). It
contains 298 sec, sub sections, schedules etc. the income tax rules of 1962 was framed by central
board of Direct Taxes (CBDT)
Assessment year (sec 2(9)
Assessment year may be defined as a year in which the income tax of the previous year is
to be assessed. It is a period of twelve months starting from April 1 of every year and ending on
March 31 of the next year.
Previous year (sec 3)
For the purposes of this Act, the term “previous year” means that the financial year
immediately preceding the assessment year Under Income Tax, the returns are filed by assesses
after end of the year/ period during which earnings are made and that period is called as previous
year/ financial year.
Definition of 'Assesse'
Section 2(7) of Income Tax Act. As per S. 2(7) of the Income Tax Act, 1961, unless the
context otherwise requires, the term “Assessee” means a person who is responsible for payment
of any tax or any other sum of money under this Act, and includes.
Person 2(31)
It includes an individual and Hindu Undivided Family (HUF), Company, Firm, Association of
Person (AOP), Body of Individual (BOI) Local Authority & Artificial Juridical Persons.

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Income Exempted From Tax
Meaning and importance of residential status
The taxability of an individual in India depends upon his residential status in India for any
particular financial year. The term residential status has been coined under the income tax laws of
India and must not be confused with an individual’s citizenship of India. An individual may be a
citizen of India but may end up being a non-resident for a particular year. Similarly, a foreign
citizen may end up being a resident of India for income tax purposes for a particular year.
Also to note that the residential status of different types of persons via an individual, a firm, a
company etc is determined differently in this article, we have discussed about how the residential
status of an individual taxpayer can be determined for any particular financial year

How to determine residential status?

For the purpose of income tax in India, the income tax laws in India classify taxable persons as:

 A resident

 A resident not ordinarily resident (RNOR)

 A non-resident (NR)
The taxability differs for each of the above categories of taxpayers. Before we get into taxability,
let us first understand how a taxpayer becomes a resident, an RNOR or and NR.
Resident
A taxpayer would be qualified as a resident of India if he satisfies any one of the following
2 conditions:

 Stay in India for a year is 182 days or more

 Stay in India for the immediately 4 preceding years is 365 days or more and 60 days or
more in the relevant financial year

In the event an individual leaves India for employment during an FY, he will be qualified as a
resident of India only if he stays in India for 182 days or more. Else the condition (b) above 60 days
will not apply to him

Resident Not Ordinarily Resident

If an individual qualifies as a resident, the next step is to determine if he/she is a Resident
ordinarily resident (ROR) or an RNOR. He will be a ROR if he meets both the following conditions:

 Has been a resident of India For at least 2 out of 10 years immediately, For the previous
years

 Has stayed in India for at least 730 days in 7 immediately after the preceding years

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Therefore, if any individual fails to satisfy even one of the above conditions, he would be an
RNOR.
Non-resident
An individual satisfying neither of the conditions stated in (a) or (b) above would be an NR
for the year.
Taxability Resident:
A resident will be charged to tax in India on his global income i.e. income earned in India as
well as the income earned outside India.
NR and RNOR:
Their tax liability in India is restricted to the income they earn in India. They are not in
need to pay any tax in India on their foreign income.
Also note that in case of double taxation of income where the same income is getting
taxed in India as well as in abroad, one may resort to the Double Taxation Avoidance Agreement
(DTAA) that India would have entered into with the other country in order to eliminate the
possibility of paying taxes twice.
Scope of total income

Section -5 of Income Tax Act, 1961 provides Scope of total Income in case a person who is
a resident, not an ordinarily resident in India and person who is a non-resident which includes.
Income can be Income from any source which (a) is received or is deemed to be received in India
in such year by or on behalf of such person; or (b) accrues or arises or is deemed to accrue or arise
to him in India during such year; or (c) accrues or arises to him outside India during such year.
Table explaining Scope of total Income under section 5 of Income Tax Act, 1961

Sr. Particulars Resident Resident Not Non Resident

No Ordinary Ordinary Resident (NR)– 5(2)
Resident (ROR) (RNOR)
– 5(1)

1 Income received in India Taxed Taxed Taxed

2 Income Deemed to be receive in India Taxed Taxed Taxed

3 Income accrues or arises in India Taxed Taxed Taxed

4 Income deemed to accrues or arises in Taxed Taxed Taxed

India

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5 Income accrues or arises outside India Taxed NO NO

6 Income accrues or arises outside India Taxed Taxed NO

from business/profession
controlled/set up in India

7 Income Other than Above Taxed NO NO

(No Relation In India)

Exercise Problems
1. Mr. Rajan left India for the first time on 15th December 2018 and returned back to India
on 2nd February 2019. Identify his residential status for the assessment year 2019-20.
Solution:
Mr.Rajan Singh will get the status “Ordinary Resident”, since he satisfies the first basic
condition and both the additional conditions

2. Mr. Williams is an Indian citizen who lives, in India since 1984.During the previous year
2018-2019 he went to Arabia for 325 days. Identify the residential status.
Solution:
Mr. Williams will get the status “Non-Resident”, since he not satisfy the basic conditions itself as
he had stayed only for 40 days in the previous year 2018-2019.

3. From the following details calculate the total income of Mr. Raja, if he is OR, NOR and NR
i. dividend from Indian company rs 1,00,000
ii. dividend from foreign company rs 1,50,000, received in India
iii. income from business in Kenya but controlled from India rs, 2,00,000
iv. income accrued in Switzerland rs, 2,50,000, 2/5th received in India

v. income from business in Indonesia but controlled from Bangladesh rs, 5,00,000

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Solution:
Calculation of taxable income of Mr. Raja

S.No Income O.R N.O.R N.R.

1 Dividend from Indian company

- - -

2 Dividend from foreign company, received in India

1,50,000 1,50,000 1,50,000

3 Income from business in Kenya but controlled

from India 2,00,000 2,00,000 2,00,000

4 income accrued in Switzerland

2/5received in India{2,50,000*2/5}
Balance 1,50,000 1,00,000 1,00,000 1,00,000

1,50,000 - -

5 Income from business in

Indonesia but
5,00,000 - -
controlled from Bangladesh

Total income 11,00,000 4,50,000 2,50,000

4. Mr.Sunil earns the following income during the previous year 2018-19
i. Interest from an Indian company received in Germany rs, 1,00,000

ii. Pension from former employer in India received in U.K. Rs, 2,00,000
iii. Income from companies in USA and received in India 1,00,000
iv. Income from agriculture in USA and received in India 10,000
v. Income from employment in Japan received there rs, 20,000
vi. Past untaxed profits brought to India rs, 50,000

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Compute GTI of Sunil for the assessment year 2019-20 if he is,
a. Resident
b. Not ordinarily resident
c. Non resident
Solution:

Calculation of taxable income of Mr.Sunil

Sr Income O.R N.O.R N.R.

1 Interest from an Indian company received in Germany

1,00,000 1,00,000 1,00,000

2 Pension from former employer in India received in U.K

2,00,000 2,00,000 2,00,000

3 Income from companies in USA and received in India

1,00,000 1,00,000 1,00,000

Income from agriculture in USA and received in India

4 10,000 10,000 10,000

5 Income from employment in Japan received there

20,000 - -

6 Past untaxed profits brought to India Rs, 50,000 - - -

Total income 4,30,000 4,10,000 4,10,000

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UNIT - II
INCOME FROM SALARY

Salary
Salary comes into existence as a result of employer-employee relationship. In an employer
- employee relationship, employee performs his duties and the employer provides him salary.
Allowances
Allowances are part of salary given to employees to meet some particular requirements
such as house rent, conveyance, etc. Allowances may be fully taxable, partially taxable or fully
exempt.
House Rent Allowance [S. 10(13A) & Rule 2A]
The least of the following is exempt from tax:

 50% of salary, (residential house situated at Mumbai, Kolkata, Delhi or Chennai) and 40%
of salary where residential house is situated at any other place;

 Actual house rent allowance received by the employee;

 Excess of rent paid over 10% of salary

Leave Encashment [S. 10(10AA)]
Encashment of earned leave while in service will be treated as income. S. 17(1)(v)(a).
Encashment of earned leave on retirement would however, be exempt to the extent of least of:

 10 months’ salary calculated on the basis of last 10 months average salary or Rs. 3,00,000

 Amount equivalent to earned leave

 Actual amount paid by the employer

Entitlement of earned leave should not exceed 30 days for every year of actual service. Limits
provided for aggregate maximum from any number of employers. Encashment of earned leave on
retirement would be wholly exempt for employees of Central/State Government.

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Special Allowances [S. 10(14)]
Following prescribed special allowances are exempt:
 Allowance, not in the nature of perquisite, granted to meet expenses wholly, necessarily
and exclusively incurred in the performance of duties, to the extent to which actually
incurred.
 Allowance granted to meet personal expense at the place where duties of his office are
ordinarily performed or at the place where he ordinarily resides or to compensate for
increased cost of living as may be prescribed in Rule 2BB.

Nature of allowance prescribed under Rule 2BB

 For cost of travel on tour or on transfer,
 For ordinary daily charges on account of absence from normal place of duty on tour or for
journey in connection with transfer,

 For conveyance in performance of duties, where free conveyance is not provided,

 For expenditure on helper engaged for performance of office duties,
 For encouraging academic, research and training pursuits in educational and research
institutions,
 For purchase or maintenance of uniform,
 Special Compensatory Allowance in specified areas to extent specified,
 Tribal Area Allowances in specified states up to Rs. 200 p.m.

 For meeting personal expenditure of employee of transport system running transport

vehicle, up to 70% of allowance, maximum of Rs. 6,000 p.m., provided no daily allowance
for the said duty is received.

 Children educational allowance @ Rs. 100 p.m. per child, maximum of two children,
 Children hostel allowance @ Rs. 300 p.m. per child, maximum of two children,
 Compensatory Field Area Allowance in specified areas, @ Rs. 2,600 p.m.
 Compensatory modified field area allowance @ Rs. 1,000 p.m.
 Counter insurgency allowance @ Rs. 3,900 p.m. to members of armed forces.

 Transport allowance (TA) granted to meet expenses for commuting between place of
residence and place of duty is exempt up to Rs. 800 per month and TA received by blind or
orthopedically handicapped is exempt up to Rs. 1,600 per month.

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 Underground allowance granted to employee of underground coal mines: Rs. 800 per
month.
 Special allowance in the nature of high altitude to members of armed forces: Rs.
1,060 per month for altitude of 9,000 to 15,000 ft. or Rs. 1,600 per month for altitude
above 15,000 ft.

 Special compensatory highly active field area allowance to members of armed forces Rs.
4,200 per month.
 Island (duty) allowance to members of armed forces – Rs. 3,250/- per month.
 Perquisites
 Perquisites are benefits such as rent free accommodation, company’s car, etc
 Perquisites may be provided in cash or in kind.
 Reimbursement of expenses incurred during office work is not a part of perquisites.
 Unauthorized benefits obtained do not form part of Perquisites
 Perquisites may be fully taxable, partially taxable or fully exempt.
 Fully and Partially Taxable Perquisites

Perquisites not taxable in all cases

The following perquisites are not taxable under CBDT instructions or by virtue of the Act/Rules:
 The provision of medical facilities as per Para 4(i).
 Free meals provided to all employees in office up to Rs. 50 per employee provided by the
employer through paid vouchers usable at eating joints.
 Telephone including mobile phone provided to the employee.
 Perquisites allowed outside India by the Government to a citizen of India for rendering
services outside India.
 Sum payable by an employer to pension or deferred annuity scheme.

 Employer’s contribution to staff group insurance scheme.

 Actual travelling expenses paid/reimbursed for journeys undertaken for business
purposes.
 Payment of annual premium on personal accident policy, if such policy is taken to
 safeguard the employer’s interest. See CIT vs. Lala Shri Dhar (1922) 84 ITR 192 (Delhi).

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 Rent-free official residence to a High Court or Supreme Court Judge.
 Rent-free furnished residence to official of Parliament.
 Conveyance facility to High Court/Supreme Court Judges.

Perquisites taxable in hands of all employees:

 Value of rent-free accommodation.

 Value of concession in rent.
 Amount paid by employer in respect of any obligation which otherwise would have been
payable by employee.
 Value of any security or sweat equity shares allotted or transferred by employer/former
employer as free or concessional cost.
 An amount of contribution to an approved superannuation fund by the employer, to an
extent it excess Rs. 1, 00,000/-.
 Any sum payable either directly or through a fund by employer (other than recognized PF,
approved superannuation fund etc.) to effect an assurance on the life of the employee or
to affect a contract for an annuity.
Determination of the value of prescribed fringe benefit or amenity Interest free or concessional
loan
Value of perquisite w.e.f. 1-4-2000, of the loan given to the employee or any member of
his household shall be at the rates charged by State Bank of India in respect of the loans for the
same purpose advanced by the employer, on the maximum outstanding monthly balance as
reduced by interest actually paid by employee – However, perquisite value for loans (net of
amount reimbursed under medical insurance scheme) given for medical treatment of specified
disease or petty loans up to Rs. 20,000 is not taxable.
Use of movable assets
Value of benefit shall be 10% p.a. of the actual cost of asset or the rent charges paid by the
employer as reduced by amount paid by the employee.
Transfer of movable assets
Value of benefit on transfer of movable asset shall be the actual cost of the asset to the
employer as reduced by the amount calculated at 10% of such cost for each completed year of
use by the employer and further reduced by the payments made by the employee. The normal
wear and tear would be computed at 50% in case of computers and electronic items, and 20% in
case of motor cars on the reducing balance method.

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Perquisites taxable only in hands of specified employees
Other perquisites are taxable only in the hands of the following specified employees; i.e.,

 Director-employee

 Employee having substantial interest in employer-company

 Employee drawing salary in excess of Rs. 50,000

Rent free accommodation:
The rent free accommodation provided to employees by their employer is taxable. Since
the employees are provided rent free accommodation, the amount of income accruing to them
cannot be determined by them. Accordingly, there is prescribed manner for calculating income
chargeable to tax as perquisite. The manner of calculating income chargeable to tax as perquisite
for rent free accommodation is as follows:

Income

Unfurnished Accommodation Furnished Accommodation

Category of Employees

1) Provided to a Judge of
High Court, Supreme Court2)
In case of Rent free Official Residence: In case of Rent Free Official
Provided to an Officer of
Nil Residence: Nil
Parliament

(a) Same as Unfurnished

Accommodation (b) 10%

p.a. Of the cost of furniture

If such furniture is hired,
Provided to Central/ State (a) License fees determined by the
then hire charges payable.
Government employees Central/ State Government

Provided to any other employee

(a) Same as Unfurnished

Accommodation (b) 10%
(i) 15% of salary in cities having
population exceeding 25,00,000(ii) 10% p.a. Of the cost of furniture
1) Where the
of salary in cities having population
accommodation is owned by If such furniture is hired,
between 10,00,000 and 25,00,000(iii)
the employer then hire charges payable.
7.5% of salary in other areas

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(a) Same as Unfurnished
Accommodation (b) 10%
p.a. Of the cost of furniture
2) Where the
accommodation is taken on If such furniture is hired,
Lower of the following:(i) Rent Payable
rent by the employer then hire charges payable.
Or(ii) 15% of salary

Lower of the following:(i)

24% of salary (ii) Rent
Accommodation provided in Not Applicable since Hotel is presumed
(Room Fare/ Charges)
a hotel to be furnished.
Payable

Concession in rent:

Some employers provide the employees with accommodation at rates lower than normal
market rates. This reduction in rates is known as concession in rent.

Payment by the employer in respect of an obligation of employee:

In this case, the amount is liable to be paid by the employee and the employer pays the same.
Example:
Self-Assessment Tax of the employee is paid by the Employer.
Note: If the employer pays taxes on behalf of employees on non-monetary perquisites provided
to them, then such taxes are exempt in the hands of the employee.

Valuation of benefit of provision of domestic servants

If the employee or any member of his household is provided with domestic servants such
as sweeper, gardener, watchman or personal assistant then the benefits so received by the
employee are taxable as perquisites in the hands of the employee.

Utility such as gas, electricity or water supplied by employer

If the employer pays to the utility provider on behalf of the employee or if the employer
himself provides such utilities then the benefits so received by the employee are taxable as
perquisites in the hands of the employee.
Free or concessional educational facilities
If the employer provides free or concessional educational facilities from the educational
institutions maintained and owned by the employer or if free educational facilities are allowed in
any other educational institution then the benefits so received by the employee are taxable as
perquisites in the hands of the employee.

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However, if the educational institution is maintained and owned by the employer and the
employer provides free or concessional education facilities to the employee himself or his children
and the benefits so received by the employee does not exceed Rs. 1,000/- per month then such
amount shall not be taxable in the hands of the employee as perquisite.
Interest-free or concessional loan

The value of the benefit to the employee as a result of interest-free loan or concessional loan for
any purpose provided to the employee or any member of his household is a taxable perquisite.
However, this perquisite will be not being chargeable to tax in any of the following cases:
 If such loan is provided for the purpose of treatment of diseases such as cancer,
tuberculosis, etc. However, out of the amount of loan provided, if the employee receives
reimbursement from any medical insurance scheme, then such amount shall not be
exempt.
 Amount of loans made to an employee does not exceed Rs. 20,000/-.

Free or concessional food and non-alcoholic beverages

If the employer provides free or concessional food and/ or beverages such as tea, coffee
etc., then the benefits so received by the employee are taxable as perquisites in the hands of the
employee. However, if the following are provided by the employer then they are not taxable in
the hands of employees as perquisites:
 Free food and beverages such as tea, coffee etc. provided by the employer to an employee
during working hours at office or business premises less than Rs. 50/- per meal.
 Vouchers provided having value less than Rs. 50/- per meal
 Tea or Snacks provided during working hours

 Free food and beverages such as tea, coffee etc. provided during working hours provided
in a remote area or an offshore installation.

Gifts or Vouchers
Gift or vouchers received by employees or by member of his household on ceremonies or
occasions are taxable perquisites in the hands of the employees. However, if the value of such
gifts in totality does not exceed Rs. 5,000/- then such gifts are not taxable as perquisite in the
hands of the employees.

Reimbursement of credit card expenses

If the employer reimburses expenses incurred by the employee or any member of his household
using a Credit card then the benefits so received by the employee are taxable as perquisites in the
hands of the employee.
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However, if such expenses are made by the employee exclusively for official purposes and
the employer has documented the expenses incurred using the credit card then such
reimbursements are not taxable as perquisite in the hands of the employees.

Club expenditure
If the employer pays or reimburses for the periodic subscription of a club for the employee
or any member of his household then the benefits so received by the employee are taxable as
perquisites in the hands of the employee.
However, if the following are provided by the employer then they are not taxable in the
hands of employees as perquisites:
 If the use of health club, sports and such facilities are provided uniformly to all employees
by the employer.
 Such expenditure is incurred wholly and exclusively for business purposes and if the
expenditure is properly documented by the employer.
Gratuity
Gratuity is a payment received by an employee by his employer as a gratitude for the
employee’s services to the organization. It is over & above normal salary & other retirement
benefits received by an employee.
Taxability of Gratuity Pension
Pension means the employer provides to the employee a fixed monthly amount after his
retirement in consideration of past services. Pension can also be called as annuity. There are 2
types of pension:
Uncommuted Pension:
The employer provides the employee with monthly pension till the lifetime of the
employee starting post retirement.
Example: Manish worked for a company for past 20 years. After retirement the company pays him
Rs. 5,000/- per month in appreciation of his past services to the company.

Commuted Pension:
The employee may request his employer to pay him a lump sum amount of money on
retirement rather than providing a monthly amount. The employee can even request that out of
the monthly pension, a certain part lets say 50% be given to him on retirement as a lump sum
amount and receive the balance part monthly post retirement. This is known as commuted
pension.

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Example: Manish worked for a company for past 20 years. After retirement the company pays him
Rs. 5,000/- per month in appreciation of his past services to the company. Now, Manish request
the Company that instead of Rs. 5,000/- per month, he requires the entire amount post his
retirement itself. This is a case of commuted pension.
Provident Fund

It is a savings scheme wherein a person saves a certain amount of money every year and
receives the cumulative amount of money on retirement. There are various types of Provident
Funds. They are as follows:

Public Provident Fund (PPF):

It is an account which may be opened from a nationalized bank. Only individual can open
such PPF Accounts with annual contributions as low as Rs. 500/-.
Statutory Provident Fund:
This is applicable only to individuals employed with the Government, railways or all recognized
educational institutions. The Government and the employee contribute a certain portion of the
employee’s salary to this fund monthly.
Recognized Provident Fund:
If the Provident Fund is approved by the Commissioner of Income-tax, it is known as
Recognized Provident Fund. In recognized provident fund the employer and the employee
contribute a certain portion of the salary of the employee to the fund.
Unrecognized Provident Fund:
A fund, which is not recognized by Income Tax Authorities, in which the employer and the
employee contribute a certain portion of the salary of the employee, is an Unrecognized
Provident Fund.

Taxability of Provident Fund

Public Provident Fund:

The amount of Contribution made to PPF in a Financial Year is allowed as Deduction U/s
80C subject to specified conditions. The amount of interest accrued is exempt from tax. If the
amounts are withdrawn from PPF in specified manner then such withdrawals are also exempt
from tax.

Statutory Provident Fund:

The amount of Contribution made by the Government is exempt from tax. Employee’s
contribution to Statutory Provident Fund is allowed as Deduction U/s 80C subject to specified

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conditions. The amount of interest accrued is exempt from tax. The amount received on
retirement out of such fund is exempt from tax.
Recognized Provident Fund:
It is a fund, which is recognized by the commissioner of income tax. This type of fund is
maintained by business houses, industrial undertakings and banks. Under this fund both
employee and employer will contribute. Employee’s contribution qualifies for deduction u/s 80C.
Employer’s contribution over 12% of mentioned salary is taxable. Interest is exempted up to 9.5%
Unrecognized Provident Fund:
The amount of contribution made by the employer is not taxable in the hands of the
employee during the years when such amounts are being contributed. Employee’s contribution to
Unrecognized Provident Fund is not allowed as deduction. The amount of interest accrued is not
taxable in the year of accrual. The amount received on retirement out of such fund is required to
be bifurcated in 4 categories in order to understand its taxability.

Simple Format To Compute Salary Income

Basic items ***

Basic salary/wages/remuneration/pay ***
Special pay ***
Bonus ***

Fees ***
Commission ***
Advance salary ***
Arrear salary ***

Allowances
Fully taxable allowance ***
Partly taxable/partly exempted allowances ***
Fully exempted allowances Nil

Perquisites

Taxable for all (specified and unspecified) ***

Taxable for specified employees only ***
Nil
Exempted for all (specified and unspecified)

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Special items
Gratuity ***
Pension ***
Leave encashment ***

Provident fund

Gross salary ***

Deduction u/s 16
Standard deduction-(limit 40,000) ***

Entertainment allowance ***

Professional/employment tax *** ***

Income from salary ***

EXERCISES
House rent allowance
Problem: 1
Mr. Ram resides in Chennai and gets Rs.10, 000 per month as basic salary Rs. 8,000 per
month as DA (entering service benefits), Rs.12, 000 per month as HRA. He pays Rs. 10,000 per
month as rent. Calculate taxable HRA.
Solution:
Calculation taxable HRA

Actual HRA 1,44,000

Less: Exempted 98,000

Taxable HRA 45,600

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Workings
Calculation of exempted HRA
Actual HRA = 1, 44,000
Rent paid-10% of salary = 98,400
50% of salary = 1, 08,000

Whichever less is exempted = 98,400

Problem: 2
The Following are the particulars of Mr.Priyan who is employed in Chennai.
i. Basic Salary Rs.4000 p.m
ii. DA (60% of Basic Salary)

iii. CCA Rs.250 p.m

iv. House Rent Allowance Rs.450 p.m (Rent paid Rs.500 p.m)
v. During the year he paid professional tax Rs.550
vi. Education allowances Rs.150 p.m (Per Child) Calculate Salary Income.
Solution:

Computation of income from salary for the A.Y-_____

Particulars Amount Amount

(i) Basic salary (4000*12) 48,000
(ii) DA (48,000*60/100) 28,800
(iii) CCA (250*12) 3,000
(iv) Actual HRA 5400
Less: Exempted Nil 5,400
(v) Educational allowance (150*1*12) 1800
Less: Exempted (100*1*12)
1200 600
Gross salary 85,800
Deduction U/S 16
(i) Standard deduction 40,000
(ii) Professional tax 550 40,550

Taxable salary 45,250

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Problem: 3
The Following are the particulars of income of Mr.Ramesh (an employee of an Individual) for the
previous year ended on 31 March2017.
i. Salary Rs.4500p.m
ii. Bonus equal to two month spay
iii. Dog allowance – Rs.75p.m

iv. Special Allowance – Rs.60 p.m

v. Employee’s contribution to a recognized provident fund @ 15% of salary
vi. Employer’s contribution to the fund @ 15% of the salary
vii. Interest credited to the provident fund @ 9.5% p.a. is Rs.2,800
viii. He is provided with free lunch in office. The cost per meals Rs.30

ix. The employer has given him the use of small car which he uses for personal and official
purpose. He meets the expenses for personal purpose from out of his pocket.

Compute the income of Mr.Ramesh from salaries for the A.Y. 2019-2020.
Solution:
Computation of income from salary for the A.Y ____

Particulars Amount Amount

(i) Basic salary (4,500*12) 54,000

(ii) Bonus (4,500*2) 9,000

(iii) Dog allowance (75*12) 900

(iv) Special allowance (60*12) 720

(v) Employer contribution to provident fund 8,100

(54,000*15/100)
Less: Exempted up to 12% 6,480 1,620

(vi) Interest on EPF 9.5 % 2,800

Less: Exempted up to 9.5% 2,800 Nil

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UNIT – III
INCOME FROM HOUSE PROPERTY
Basis of Charge
Annual value of any property is assessable under this head it,
 Assesse is the owner of the property.

 Property is building and attached land.

 Property should not be used by the owner for his business or profession.
Incomes - Exempted from 'House Property Income'
Under section 10 of the Income-tax Act 1961 following incomes from house property are
exempted from tax. These incomes are not to be included in the total income of assesse. Hence
no tax is payable on such incomes. These incomes are:
Agricultural House Property [Section 2(1)(c)].
Income from such house property which is situated on or in the immediate vicinity of
agricultural land which is used for agricultural purposes by cultivator is exempted from tax.
Income from Property held under Trust Wholly for Charitable or Religious Purposes [Section
11(1)(a)]:
Income derived from property held under trust, wholly for charitable and religious
purposes, shall be exempt. To the extent such income is applied in India for such purposes; and
where any such income is accumulated or set apart for application to such purposes in India, to
the extent to which the income so accumulated or set apart is not in excess of 15% of the income
from such property.
Income from Property held under trust which is applied in part only for Charitable or Religious
purposes [Section 11(1)(b)]:
Income derived from property held under trust in part only for such purpose, shall be
exempt: To the extent such income is applied in India for such purposes, provided, the trust in
question is created before the commencement of Income-tax Act, 1961 i.e. before 1.4.1962; and
Where any such income is finally set apart for application to such purposes in India, to the extent
to which the income so accumulated or set apart is not in excess of 15% of the income from such
property.

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Income from Property held under trust which is applied for Charitable Purposes outside India
[Section 11(1)(c)]:
Income derived from property held under trust, created on or after 1.4.1952 for charitable
purpose which tends to promote international welfare in which India is interested, shall be
exempt to the extent to which such income is applied to such purpose outside India. Religious
trusts are not covered here.

Income derived from property held under a trust for charitable or religious purposes,
created before 1.4.1952, shall be exempt to the extent to which such income is applied to such
purposes outside India.
In the above two cases, it is necessary that the Board, by general or special order, has
directed in either case that it shall not be included in the total income of the person in receipt of
such income.
Self-Occupied but Vacant House [Section 23(3)]

In case an assessed keeps one of his own houses reserved for self-occupation but is living
in a rented house elsewhere due to his employment or profession the income from such house is
taken to be NIL.

The annual value of self-occupied house shall not be NIL:

If such house or part of the house is actually let during the whole or any part of the
previous year; or any other benefit there from is derived by the owner from such house.
In the above cases, the annual value shall be determined as per provisions applicable for
let out properties i.e. under clause (a), (b) or (c) of section 23(1).
House used for Own Business or Profession.
There is no income chargeable to tax under this head from such house property. Property
held by Registered Trade Union [Section 10(24)].
Income from a house property owned by a registered trade union is not to be included in its G.T.I.
Income from House Property held by following shall be exempted:

 House property held by a local authority.

 House property held by a scientific research institution.
 House property held at a political party.
 House property held by a university and any other educational institution working for
spreading education and not to earn profit.
 House property held by a hospital or medical institution working for the spreading of
medical services to people and is not meant for earning profit.

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 It is income from a farmhouse.
One House Property (a palace) owned by a former ruler of Indian states.
Ex-rulers of Indian states may own many palaces but only one palace of their choice shall
be treated as a self-occupied house and shall be exempted.
One Self-Occupied House
In case assessed owns one residential house, the net annual value of the same shall be
taken as nil but in case he owns more than one house, then only one of his choice but normally of
higher value shall be treated as a self-occupied one and other/others are treated as deemed to be
let out.
Income from house property specimen / important provisions for self-occupied:

Gross Annual Value(GAV)/ Annual Rental Value(ARV) Nil

Less: Municipal tax paid during the year by the owner Nil

Net Annual Value(NAV) Nil

Less: Deduction u/s 24

Standard deduction-not applicable

Interest on loan of pre-construction *** ***

Loss from house property ***

Overall chart for computation of house property income For let-out property:

Municipal value (or)

Fair Rent (whichever is higher)
Expected Rent (or) Standard Rent (whichever is lower)
Expected Rent (or)
Actual Rent (whichever is higher)

***

Gross Annual Value ***

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Less:
Local taxes (or) Municipal taxes paid by the Owner during the
previous year
***
Unrealized rent conditions of rule 4 are satisfied

*** ***

Annual value ***

Less: Deduction u/s 24

30% of Annual value ***

Interest on borrowed capital-paid or due *** ***

Income from House Property ***

Problem: 1
From the following calculate Gross Annual Value, assuming that there is no vacant period.

Particulars House 1 House 2

MRV 1,05,000 1,05,000

FRV 1,07,000 1,07,000

SR under rent control act 1,35,000 1,35,000

Actual Rent (AR) 1,12,000 98,000

Period in the previous year 12 months 12 months

Solution:
Computation of Gross Annual Value

Particulars Amount Amount

MRV 1,05,000 1,05,000

FRV 1,07,000 1,07,000

Whichever is higher 1,07,000 1,07,000

SR 1,35,000 1,35,000

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ER (Whichever is higher) 1,07,000 1,07,000

AR 1,12,000 98,000

GROSS ANNUAL VALUE 1,12,000 1,07,000

Problem: 2
Mr.Ganesh owns two house properties at Madurai the first house is self- occupied and the second
house is let out for residential purpose. The other details of the properties given below.

Particulars First House (Rs) Second House (Rs)

Municipal value 5,000 6,000

Municipal Tax 600 800

Rental Income - 7,200

Land revenue 100 125

Fire insurance premium 150 200

Interest on mortgage - 300

Collection charges - 100

The second house remained vacant for a period 2 months during the year. Compute the income
from house property.
Solution:

Computation of self-occupied house property (HOUSE-1)

Particulars Amount Amount

Gross annual value of the house Nil

Less: Municipal tax paid by owner Nil

Annual value Nil

Less: standard deduction of annual value Nil

Interest on loan for self-occupied house Nil Nil

Loss from self-occupied house Nil

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Computation of Income From House Property for the A.Y _____ (HOUSE-2)

Particulars Amount Amount

Municipal value 6,000

Actual Rent(7,200-2 months vacant(600*2)

whichever is higher 6,000 6,000

Gross Annual Value 6,000

Less:
Municipal tax paid by Owner Unrealized Rent 600

Nil 600

Annual value 5,200

Less: Deduction U/S 24

(i) 30% of annual value (5,200*30/100)

(ii) Interest on loan 1,560

300 1,860

Income From House Property 3,340

Problem: 3
Mr.Senthil is the owner following house Property particulars in respect of which for the year
ended31/03/2019.

Particulars House A House B House C

Actual Rent 12,000 2,000 Twilling of

the House

Standard rent 8,000 2,400 Nil

Municipal Tax 900 200 3,800

Municipal Value 900 2,000 40,000

Municipal Tax paid by Senthil 900 100 Nil

Municipal Tax paid by Tenant Nil 100 Nil

Repairs 600 2,000 3,000

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Vacancy Period 1 Month Nil Nil

Interest on Loan for repairs loans 600 900 16,000

House A
Unrealized rent allowed in assessment year 2015-16 received during the year for the House in
Rs.5, 000
Solution:
Computation of self-occupied house property (HOUSE-1)

Particulars Amount Amount

Gross annual value of the house Nil

Less: Municipal tax paid by owner Nil

Annual value Nil

Less: standard deduction of annual value Nil

Interest on loan for self-occupied house 16,000 -16,000

Loss from self-occupied house -16,000

Computation of Income From House Property for the A.Y ___ (HOUSE-2)

Particulars Amount Amount

Municipal value 90,000

Standard rent 8,000

(Whichever is higher)

Expected rent 8,000

Actual rent(12,000-one month vacant ) 11,000

(Whichever if higher)

Gross Annual Value 11,000

Less:
Municipal tax paid by Owner 900
Unrealized Rent Nil 900

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Annual value 10,100

Less: Deduction U/S 24

(i) 30% of annual value (10,100*30/100) 3,030
(ii) Interest on loan 600 3,630

6,470

Add: unrealized rent 5,000

Income From House Property 11,470

Computation of Income From House Property for the A.Y. ----------- (HOUSE-2)

Particulars Amount Amount

Municipal value 2,000

Standard rent 2,400

(Whichever is lower)

Expected rent 2,000

Actual rent 2,000

(Whichever is higher)

Gross Annual Value 2,000

Less:

Municipal tax paid by Owner Unrealized Rent 100

Nil 100

Annual value 1,900

Less: Deduction U/S 24

(i) 30% of annual value (1,900*30/100) 570

(ii) Interest on loan 900

1,470

Income From House Property 11,470

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UNIT - IV
INCOME FROM BUSINESS OR PROFESSION
Introduction
Provision regarding calculation of profits and gains of business or profession is dealt under
section 28 to 44 of income tax act 1961. This head of the act is a major source of revenue to the
government.
Business [section 2(13)]
Definition of “Business” includes any trade, commerce or manufacture or any venture or
concern in the nature of trade, commerce or manufacture.
Profession [section 2(36)]
Profession involves an exercise of intellect and skill based on learning and experience.
Vocation refers to any work performed on the strength of one’s natural ability for the work.
Regularity and profit motive are not necessary for an activity to be called a vocation.
OVER ALL CHAT FOR CALCULATION OF INCOME FROM BUSINESS

Particulars Amount Amount

Net profit as per P & L A/c ****

Add:

1.Disallowed Expenses ****

2.Business Income not credited in P & L A/c ****

3.Under valuation of closing stock ****

4.Over valuation of opening stock ****

Less:
1.Non business income credited in P & L A/c ****
2.Allowed expenses not debited in P & L A/c ****
3.Over valuation of closing stock ****

4.Under valuation of opening stock **** ****

Income From Business ****

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Problem: 1
From the following P&L A/c calculate Income from Business

Particulars Amount Particulars Amount

To Rent 40,000 By gross profit 2,50,000

To Salary to employees 25,000 By house property income

To Depreciation 10,000 By income from other 1,50,000
To Donation 8,000 sources
To Net profit 5,17,000 2,00,000

6,00,000 6,00,000

Adjustments:
 Depreciation to be allowed as per income tax provision Rs. 8,000.
 Business income of Rs. 12,000 is not shown in the P&L A/c.

 Rs. 8,000 of the rent is of personal nature.

Solution:
Calculation of Income from Business

Date Particulars Amount Amount

N\P as per P&L A/c 5,17,000
Add:
Donations 8,000
Depreciation 10,000
Business income not shown P&L A/c 12,000
Rent 8,000 38,000
Less: 5,55,000
H/P Income
IFOS 1,50,000
Depreciation 2,00,000
8,000 3,58,000
Income from Business 1,97,000

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Problem: 2
From the following P&L A/c calculate Income from Business

Particulars Amount Particulars Amount

To General expenses 20,000 By Gross profit 5,00,000

To Bad debts 25,000 By Sundry receipt

To Advance income tax 24,000 By Bad debts recovered 50,000
To Salary to staff 40,000 (earlier allowed as
To Drawings 40,000 deduction) 12,500
To Interest on capital 24,000 By Interest on debentures 40,000

To Advertisement 9,000 By Interest on deposit with a

To Excise duty 12,000 company 25,000
To Expenditure on
acquisition of patent right (in
2016) 10,000

To Net profit 4,23,000

6,27,500 6,27,500

Adjustments

 General expenses include Rs. 2,300 spent as marriage expenses by the proprietor.
 Advertise an expense was spent on 31st august 2018.
 Income of Rs. 12,000 accrued during the PY 2018-19 is nit recorded in the P&L A/c.
 An expenditure of Rs, 1,000 relating to business is not show in P&L A/c.
 The proprietor owns two houses from which he gets the income of Rs, 1,80,00

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Solution:
Calculation of Income from Business

Date Particulars Amount Amount

N\P as per P&L A/c 4,23,000

Add:
Advance income tax Drawings 24,000
Interest on own capital General expenses 40,000
Income accrued during 2018-19 Patents 24,000
Less: 2,300
Depreciation for patents (10,000*25%) Expenditure 12,000
relating to business Interest on debentures
10,000 1,12,300
Interest on deposit with a company
5,35,800

2,500

1,000

40,000

25,000

68,500

Income from Business 4,67,300

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Format for Professionals like Doctors, Lawyers, Accountants, Tax Consultants.

Particulars Amount Amount

PROFESSIONAL INCOMES:

1.Fees [for all professional] ****

2.Operation fees, Visiting fees [for doctors] ****

3.Institute fees [for accountants] ****

4.Legal fee, practicing fees [for lawyers] ****

5.Gift from clients [for all professionals] ****

6.Gift from patients [for doctors] ****

7.Examiner fees [for all professional] ****

8.All other professional receipts ****

Less:
PROFESSIONAL EXPENSES:
1.Office and administrative expenses [for all professionals] ****
2.Clinic expenses and dispensary expenses [for doctors] ****
3.Cost of books for professional purposes. [for all ****
professionals]

4.Subscription for journals. [for all professionals] ****

5.Depreciation ****
a) For office equipments (for all professional)
****
b) For surgical equipments ( for doctors)
****
6.Any membership fee (for all professionals)

7.Cost of medicine [for doctors]

[opening stock +purchases-closing stock]
8.All other professional payments

****

Income From Profession ****

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Problem :3
From the following receipts and payments A/c of Mr.Vasanth, a tax consultant, calculate
income from profession.

Receipts Amount Payments Amount

To balance 3,50,000 By office and admin expenses By 60,000

salary to staff:
To fees from clients
2019-20 40,000
2019-20 1,00,000
2018-19 30,000
2018-19 50,000 1,50,000
By repairs
70,000
By interest on loan for
To presents from clients 40,000 business By income tax 8,000

To winning from lotteries 28,000 By purchase of car(purchased

To rent from let out property 75,000 during January 2019) 12,000

To share of income from firm 12,500 By balance 6,000

1,50,000

3,49,500

6,55,500 6,55,500

Solution:
Calculation of Income from Profession of Mr. Vasanth

Date Particulars Amount Amount

Professional receipts:

i) Fess 2019-20 1,00,000

2018-19 50,000 1,50,000
Presents from client 40,000
Less: Professional payments 60,000 1,90,000
Office and admin expenses
70,000

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Staff salary: 2019-20 40,000 2018-19 30,000 8,000
Repairs 12,000
Interest on loan for business
Depreciation on car purchased during January 2019 (1, 11,250 1,61,250
50,000*15%=22,500*50%)

Income from Profession 28,750

Problem: 4
From the following income and expenditure A/c of Ramana & Co, charted accountants, calculate
income from profession from the details below.

Expenditure Amount Incomes Amount

To charity and donation 1,00,000 By audit fee 3,00,000

To subscription to journals 2,000 By examiner fee 25,000
To institute fee 4,000 By fee for other accounts work 40,000
To office rent 5,000 By dividend from UTI

To drawings 50,000 35,000

To electricity bill 9,000
To salary to trainee 20,000
To net income 2,10,000

4,00,000 4,00,000

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Solution:
Calculation of Income from Profession of Ramana & Co

Date Particulars Amount Amount

Professional Receipts:

i) Audit fees 3,00,000

ii) Examiner fees 25,000

iii) Fees for other accounting work

40,000

Less: Professional Payments

i) Subscription to journal 3,65,000

ii) Institute fee 2,000

iii) Office rent 4,000

iv) Bill of electricity 5,000

v) Salary to trainee 9,000

vi) Depreciation as per provisions 20,000

5,000

45,000

Income from Profession 3,20,000

Capital Gains
Simply put, any profit or gain that arises from the sale of a ‘capital asset’ is a capital gain.
This gain or profit comes under the category ‘income’, and hence you will need to pay tax for that
amount in the year in which the transfer of the capital asset takes place. This is called capital gains
tax, which can be short-term or long-term. Capital gains are not applicable to an inherited
property as there is no sale, but only a transfer of ownership. The Income Tax Act has specifically
exempted assets received as gifts by way of an inheritance or will. However, if the person who
inherited the asset decides to sell it, capital gains tax will be applicable.
Defining Capital Assets
Land, building, house property, vehicles, patents, trademarks, leasehold rights, machinery,
and jewellery are a few examples of capital assets. This includes having rights in or in relation to

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an Indian company. It also includes the rights of management or control or any other legal right.
The following do not come under the category of capital asset:
i. Any stock, consumables or raw material, held for the purpose of business or profession
ii. Personal goods such as clothes and furniture held for personal use
iii. Agricultural land in rural (*) India
a. 6½% gold bonds (1977) or 7% gold bonds (1980) or National Defence gold bonds
(1980) issued by the central government
iv. Special bearer bonds (1991)

a. Gold deposit bond issued under the gold deposit scheme (1999) or deposit
certificates issued under the Gold Monetisation Scheme, 2015

Types of Capital Assets?

1. STCG (Short-term capital asset):
An asset held for a period of 36 months or less is a short-term capital asset.
The criteria is 24 months for immovable properties such as land, building and house
property. For instance, if you sell house property after holding it for a period of 24 months, any
income arising will be treated as a long-term capital gain, provided that property is sold after 31st
March 2017.
The reduced period of the aforementioned 24 months is not applicable to movable
property such as jewellery, debt-oriented mutual funds etc.
Some assets are considered short-term capital assets when these are held for 12 months
or less. This rule is applicable if the date of transfer is after 10th July 2014 (irrespective of what
the date of purchase is). These assets are:
 Equity or preference shares in a company listed on a recognized stock exchange in India
 Securities (like debentures, bonds, govt securities etc.) listed on a recognized stock
exchange in India

 Units of UTI, whether quoted or not

 Units of equity oriented mutual fund, whether quoted or not
 Zero coupon bonds, whether quoted or not

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2. LTCG (Long-term capital asset):
An asset held for more than 36 months is a long-term capital asset. They will be classified
as a long-term capital asset if held for more than 36 months as earlier.
Capital assets such as land, building and house property shall be considered as long-term
capital asset if the owner holds it for a period of 24 months or more (from FY 2017-18).
Whereas, below-listed assets if held for a period of more than 12 months, shall be
considered as long-term capital asset.
 Equity or preference shares in a company listed on a recognized stock exchange in India
 Securities (like debentures, bonds, govt securities etc.) listed on a recognized stock
exchange in India
 Units of UTI, whether quoted or not
 Units of equity oriented mutual fund, whether quoted or not
 Zero coupon bonds, whether quoted or not
Classification of Inherited Capital Asset
In case an asset is acquired by gift, will, succession or inheritance, the period for which the
asset was held by the previous owner is also included when determining whether it’s a short term
or a long-term capital asset. In the case of bonus shares or rights shares, the period of holding is
counted from the date of allotment of bonus shares or rights shares respectively.
Tax Rates – Long-Term Capital Gains and Short-Term Capital Gains

Tax Type Condition Applicable Tax

Long-term capital gains tax On sale of Equity shares/ units 10% over and above Rs 1 lakh
(LTCG) of equity oriented fund

Long-term capital gains tax Except on sale of equity 20%

(LTCG) shares/ units of equity
oriented fund

Short-term capital gains tax When Securities Transaction The short-term capital gain is
(STCG) Tax (STT)is not applicable added to your income tax
return and the taxpayer is
taxed according to income tax
slab rates.

Short-term capital gains tax When STT is applicable 15%.

(STCG)

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Tax on Equity and Debt Mutual Funds

Effective 11 July 2014 On or before 10 July 2014

Funds Short-Term Gains Long-Term Gains Short-Term Gains Long-Term Gains

Debt At tax slab rates At 20% with At tax slab rates of 10% without indexation
Funds of the individual indexation the individual or 20% with indexation
whichever is lower

Equity 15% 10% over and 15% Nil

Funds above ₹ 1 lakh
without indexation.

Tax Rules for Debt Mutual Funds

Debt mutual funds have to be held for more than 36 months to qualify as a long-term
capital asset. It means you need to remain invested in these funds for at least three years to get
the benefit of long-term capital gains tax. If redeemed within three years, the capital gains will be
added to your income and will be taxed as per your income tax slab rate.

Calculating Capital Gains

Capital gains are calculated differently for assets held for a longer period and for those held over a
shorter period.
Terms You Need to Know:
Full value consideration: The consideration received or to be received by the seller as a result of
transfer of his capital assets. Capital gains are chargeable to tax in the year of transfer, even if no
consideration has been received.
Cost of acquisition: The value for which the capital asset was acquired by the seller.
Cost of improvement: Expenses of a capital nature incurred in making any additions or alterations
to the capital asset by the seller.
Note:

i) In certain cases where the capital asset becomes the property of the taxpayer otherwise than by
an outright purchase by the taxpayer, the cost of acquisition and cost of improvement incurred by
the previous owner would also be included.
ii) Improvements made before April 1, 2001, is never taken into consideration.

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How to calculate Short-Term Capital Gains?
Step 1: Start with the full value of consideration
Step 2: Deduct the following:

 Expenditure incurred wholly and exclusively in connection with such transfer

 Cost of acquisition

 Cost of improvement
Step 3: This amount is a short-term capital gain
How to Calculate Long-Term Capital Gains?
Step 1: Start with the full value of consideration
Step 2: Deduct the following:

 Expenditure incurred wholly and exclusively in connection with such transfer

 Indexed cost of acquisition

 Indexed cost of improvement

Step 3: This amount is a long-term capital gain
Deductible Expenses

Sale of house property: These expenses are deductible from the total sale price:

 Brokerage or commission paid for securing a purchaser

 Cost of stamp papers

 Travelling expenses in connection with the transfer – these may be incurred after the
transfer has been affected

 Where property has been inherited, expenditure incurred with respect to procedures
associated with the will and inheritance, obtaining succession certificate, costs of the
executor, may also be allowed in some cases
Sale of shares: You may be allowed to deduct these expenses:

 Broker’s commission related to the shares sold

 STT or securities transaction tax is not allowed as a deductible expense

C. Where jewellery is sold: In case of sale of broker’s jewellery and where a broker’s services
were involved in securing a buyer, the cost of these services can be deducted. Note, that expenses
deducted from the sale price of assets for calculating capital gains are not allowed as a deduction
under any other head of income, and you can claim them only once.
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Indexed Cost of Acquisition/Improvement
The cost of acquisition and improvement is indexed by applying CII (cost inflation index). It is done
to adjust for inflation over the years of holding the asset. This increases one’s cost base and
lowers the capital gains.
Exemption on Capital Gains
Example: Many a bought a house in July 2004 for ₹ 50 lakh, and the full value of consideration
received in FY 2016- 17 is ₹ 1.8 crore.
Capital asset type: Since this property has been held for over 3 years, this would be a long-term
capital asset.
Cost of acquisition: The cost price is adjusted for inflation and indexed cost of acquisition is taken.
Using the indexed cost of acquisition formula, the adjusted cost of the house is ₹ 1.17 crore.
Capital gain: Hence, the net capital gain is ₹ 63, 00,000.
Tax: Long-term capital gains on sale of house property are taxed at 20%. For a net capital gain of
₹ 63, 00,000, the total tax outgo will be ₹ 12,97,800.
This is a significant amount of money to be paid out in taxes. This can be lowered by taking
benefit of exemptions provided by the Income Tax Act on capital gains when profit from the sale
is reinvested into buying another asset.
Section 54: Exemption on Sale of House Property on Purchase of another House Property

Capital gains exemption under Section 54:

Taxpayers can get an exemption from long-term capital gain from the sale of house
property by investing in up to two house properties against the earlier provision of one house
property with same conditions. However, the capital gain on the sale of house property must not
exceed ₹ 2 crores.
The exemption under Section 54 is available when the capital gains from the sale of house
property are reinvested into buying or constructing two another house properties (prior to Budget
2019, the exemption of the capital gains was limited to only 1 house property).
The exemption on two house properties will be allowed once in the lifetime of a taxpayer,
provided the capital gains do not exceed ₹. 2 crores. The taxpayer has to invest the amount of
capital gains and not the entire sale proceeds. If the purchase price of the new property is higher
than the amount of capital gains, the exemption shall be limited to the total capital gain on sale.

Conditions for availing this benefit:

 The new property can be purchased either 1 year before the sale or 2 years after the sale
of the property.
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 The gains can also be invested in the construction of a property, but construction must be
completed within three years from the date of sale.

 In the Budget for 2014-15, it has been clarified that only 1 house property can be
purchased or constructed from the capital gains to claim this exemption.

 Please note that this exemption can be taken back if this new property is sold within 3
years of its purchase/completion of construction.
Section 54F: Exemption on capital gains on sale of any asset other than a house property
Exemption under Section 54F is available when there are capital gains from the sale of a
long-term asset other than a house property. You must invest the entire sale consideration and
not only capital gain to buy a new residential house property to claim this exemption. Purchase
the new property either one year before the sale or 2 years after the sale of the property. You can
also use the gains to invest in the construction of a property. However, the construction must be
completed within 3 years from the date of sale.

In Budget 2014-15, it has been clarified that only 1 house property can be purchased or
constructed from the sale consideration to claim this exemption. This exemption can be taken
back, if this new property is sold within 3 years of its purchase. If the entire sale proceeds are
invested towards the new house, the entire capital gain will be exempt from taxes if you meet the
above-said conditions.
However, if you invest a portion of the sale proceeds, the capital gains exemption will be in
the proportion of the invested amount to the sale price LTCG exemption = Capital gains x Cost of
new house / Net consideration.
Section 54EC: Exemption on Sale of House Property on Reinvesting in specific bonds
Exemption is available under Section 54EC when capital gains from sale of the first
property are reinvested into specific bonds.

 If you are not keen to reinvest your profit from the sale of your first property into another
one, then you can invest them in bonds for up to ₹. 50 lakhs issued by National Highway
Authority of India (NHAI) or Rural Electrification Corporation (REC).

 The money invested can be redeemed after 5 years, but they cannot be sold before the
lapse of 5 years from the date of sale.

 The homeowner has six month’s time to invest the profit in these bonds. But to be able to
claim this

 exemption, you will have to invest before the tax filing deadline.

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When can you invest in Capital Gains Account Scheme?
Finding a suitable seller, arranging the requisite funds and getting the paperwork in place
for a new property is one time-consuming process. Fortunately, the Income Tax Department
agrees with these limitations. If capital gains have not been invested until the due date of filing of
return (usually 31 July) of the financial year in which the property is sold, the gains can be
deposited in a PSU bank or other banks as per the Capital Gains Account Scheme, 1988.

This deposit can then be claimed as an exemption from capital gains, and no tax has to be
paid on it. However, if the money is not invested, the deposit shall be treated as a short-term
capital gain in the year in which the specified period lapses.
Saving Tax on Sale of Agricultural Land

In some cases, capital gains made from the sale of agricultural land may be entirely
exempt from income tax or it may not be taxed under the head capital gains. See below:
Agricultural land in a rural area in India is not considered a capital asset and therefore any
gains from its sale are not chargeable to tax. For details on what defines an agricultural land in a
rural area, see above. Do you hold agricultural land as stock-in-trade? If you are into buying and
selling land regularly or in the course of your business, in such a case, any gains from its sale are
taxable under the head Business and Profession. Capital gains on compensation received for
compulsory acquisition of urban agricultural land are tax exempt under Section 10(37) of the
Income Tax Act.
ILLUSTRATION: 1
How will you calculate the period of holding in case of the following assets?

1. Shares held in a company in liquidation

2. Bonus shares
3. Flat in a co-operative society
Solution:
1) Shares held in a company in liquidation - The period after the date on which the company
goes into liquidation shall be excluded while calculating the period of holding. Therefore,
the period of holding shall commence from the date of acquisition and end with the date
on which the company goes into liquidation.
2) Bonus shares - The period of holding shall be reckoned from the date of allotment of
bonus shares and will end with the date of transfer.
3) Flat in a co-operative society - The period of holding shall be reckoned from the date of
allotment of shares in the society and will end with the date of transfer.

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Note – Any transaction whether by way of becoming a member of, or acquiring shares in, a co-
operative society or by way of any agreement or any arrangement or in any other manner
whatsoever which has the effect of transferring, or enabling enjoyment of, any immovable
property is a transfer as per section 2(47)(vi).
Hence, it is possible to take a view that any date from which such right is obtained may be
taken as the date of acquisition.

ILLUSTRATION: 2
A is the owner of a car. On 1-4-2021, he starts a business of purchase and sale of motor
car. He treats the above car as part of the stock-in-trade of his new business. He sells the same on
31-3-2022 and gets a profit of ₹ 1 lakh. Discuss the tax implication in his hands under the head
“Capital gains”.
Solution:
Since car is a personal asset, conversion or treatment of the same as the stock-in-trade of
his business will not be trapped by the provisions of section 45(2). Hence, A is not liable to capital
gains tax.

ILLUSTRATION: 3
X converts his capital asset (acquired on June 10, 2003 for ₹ 60,000) into stock-in-trade on
March 10, 2021. The fair market value on the date of the above conversion was ₹ 5,50,000. He
subsequently sells the stock-in-trade so converted for ₹ 6,00,000 on June 10, 2021. Discuss the
year of chargeability of capital gain and business income.
Solution:
Since the capital asset is converted into stock-in-trade during the previous year 2020-21
relevant to the A.Y. 2021-22, it will be a transfer under section 2(47) during the P.Y. 2020-21.
However, the profits or gains arising from the above conversion will be chargeable to tax during
the A.Y. 2022-23, since the stock-in-trade has been sold only on June 10, 2021. For this purpose,
the fair market value on the date of such conversion (i.e. 10th March, 2021) will be the full value
of consideration for computation of capital gains. The business income of ₹ 50,000 (i.e., ₹
6,00,000

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ILLUSTRATION: 4
M held 2000 shares in a company ABC Ltd., an Indian company. This company
amalgamated with another Indian company XYZ Ltd. during the previous year ending 31-3-2022.
Under the scheme of amalgamation, M was allotted 1000 shares in the new company. The market
value of shares allotted is higher by ₹ 50,000 than the value of holding in ABC Ltd. The Assessing
Officer proposes to treat the transaction as an exchange and to tax ₹ 50,000 as capital gain. Is he
justified?
Solution:

In the above example, the transaction is squarely covered by the exemption explained
above and the proposal of the Assessing Officer to treat the transaction as a transfer is not
justified.

ILLUSTRATION: 5
In which of the following situations capital gains tax liability does not arise?
(i) Mr. A purchased gold in 1970 for ₹ 25,000. In the P.Y. 2021-22, he gifted it to his son at the
time of
marriage. Fair market value (FMV) of the gold on the day the gift was made was ₹ 1,00,000.
(ii) A house property is purchased by a Hindu undivided family in 1945 for ₹ 20,000. It is given to
one of the family members in the P.Y. 2021-22 at the time of partition of the family. FMV on the
date of partition was ₹ 12,00,000.
(iii) Mr. B purchased 50 convertible debentures for ₹ 40,000 in 1995 which are converted into 500
shares
worth ₹ 85,000 in November 2021 by the company.

Solution:
We know that capital gains arises only when we transfer a capital asset. The liability of capital
gains tax in the situations given above is discussed as follows:
i. As per the provisions of section 47(iii), transfer of a capital asset under a gift is not
regarded as transfer for the purpose of capital gains. Therefore, capital gains tax liability
does not arise in the given situation.
ii. As per the provisions of section 47(i), transfer of a capital asset (being in kind) on the total
or partial partition of Hindu undivided family is not regarded as transfer for the purpose of
capital gains. Therefore, capital gains tax liability does not arise in the given situation.
iii. As per the provisions of section 47(x), transfer by way of conversion of bonds or
debentures, debenture stock or deposit certificates in any form of a company into shares
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or debentures of that company is not regarded as transfer for the purpose of capital gains.
Therefore, capital gains tax liability does not arise in the given situation.
ILLUSTRATION: 6
Mr. Abhishek a senior citizen, mortgaged his residential house with a bank, under a
notified reverse mortgage scheme. He was getting loan from bank in monthly instalments. Mr.
Abhishek did not repay the loan on maturity and hence gave possession of the house to the bank,
to discharge his loan. How will the treatment of long-term capital gain be on such reverse
mortgage transaction?

Solution:
Section 47(xvi) provides that any transfer of a capital asset in a transaction of reverse
mortgage under a scheme made and notified by the Central Government shall not be considered
as a transfer for the purpose of capital gain.
Accordingly, the mortgaging of residential house with bank by Mr. Abhishek will not be
regarded as a transfer. Therefore, no capital gain will be charged on such transaction.
Further, section 10(43) provides that the amount received by the senior citizen as a loan,
either in lump sum or in installment, in a transaction of reverse mortgage would be exempt from
income-tax. Therefore, the monthly installment amounts received by Mr. Abhishek would not be
taxable.

ILLUSTRATION: 7
Singhania & Co., a sole proprietorship owns six machines, put in use for business in March,
2021. The depreciation on these machines is charged@15%. The opening balance of these
machines after providing depreciation for P.Y. 2021-22 was Rs.8,50,000. Three of the old
machines were sold on 10th June, 2022 for Rs.11,00,000. A second hand plant was bought for
Rs.8,50,000 on 30th November, 2022. You are required to:
i. determine the claim of depreciation for Assessment Year 2023-24.
ii. compute the capital gains liable to tax for Assessment Year 2023-24.
iii. If Singhania & Co. had sold the three machines in June, 2021 for ₹ 21,00,000, will there be
any
Difference in your above workings? Explain.

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Solution:
(i) Computation of depreciation for A.Y.2023-24

Particulars Rs.

Opening balance of the block as on 1.4.2021 [i.e., W.D.V. as 8,50,000

on 31.3.2021 after providing depreciation for P.Y. 2020-21]
Add: Purchase of second hand plant during the year 8,50,000

17,00,000
Less: Sale consideration of old machinery during the year 11,00,000

W.D.V of the block as on 31.03.2022 6,00,000

INCOME FROM OTHER SOURCES:

Heads of Income
The Income Tax Department breaks down income into five heads of income for the
purpose of income tax reporting:

 Income from Salary

 Income from House Property

 Income from Capital Gains/Loss

 Income from Business and Profession

 Income from Other Sources

 Income from Other Sources covers income that does not fall under any of the other heads
of income.
Savings Bank Account – Interest Income
Interest that gets accumulated in your savings bank account must be declared in your tax
return under income from other sources. Do note that bank does not deduct TDS on savings bank
interest. Interest from both fixed deposit and recurring deposits is taxable while interest from
savings bank account and post office deposits are tax-deductible to a certain extent. But they are
shown under income from other sources. Interest income from a savings bank account or a fixed
deposit or from a post office savings account are all shown under this head.

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Deduction on Interest Income Under Section 80TTA

 For a residential individual (age of 60 years or less) or HUF, interest earned upto ₹ 10,000
in a financial year is exempt from tax. The deduction is allowed on interest income earned
from: savings account with a bank;

 savings account with a co-operative society carrying on the business banking or

 savings account with a post office

 Senior citizens are not entitled to benefits under section 80TTA.

Tax on Fixed Deposits
Fixed deposit interest that you receive is added along with other income that you have
such as salary or professional income, and you’ll have to pay tax on that income at a tax rate
that’s applicable to you. TDS is deducted on interest income when it is earned, though it may not
have been paid.
Example: The bank will deduct TDS on interest accrued each year on a FD for 5 years.
Therefore, it is advisable to pay your taxes on an annual basis instead of doing it only when the FD
matures.Senior citizens, with effect from 1 April 2018, will enjoy an income tax exemption upto
Rs. 50,000 on the interest income they receive from fixed deposits with banks, post offices etc
under Section 80 TTB.
Avoiding TDS on Fixed Deposits
Banks are required to deduct tax when interest income from deposits held in all the bank
branches put together is more than ₹ 40,000 in a year (Prior to FY 2019-20, it was ₹ 10,000). A
10% TDS is deducted if PAN details are available. It is 20% if the bank does not have your PAN
details.The details of TDS deducted on Fixed Deposit Interest is in the Form 26AS.If your total
income is below the taxable limit, you can avoid tax deduction on fixed deposits by submitting
Form 15G and Form 15H to the bank requesting them not to deduct any TDS. Form 15H is for
senior citizens (60 years or older); Form 15G is for everybody else.These forms are for residents
only and for those whose taxes add up to zero. These forms must be submitted at the start of the
financial year. If you missed submitting them, then you can claim a refund by filing an income tax
return.These forms are valid for one year only. Therefore, they must be submitted each year to
keep banks from deducting tax.
Reporting Fixed Deposit and Recurring Deposits in Your Tax Return Reporting Fixed Deposits
If you have three FDs open, then add up all the interest income and enter it under ‘Other interest
income’.

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Reporting recurring deposit
Starting June 2015, when interest income from all the branches of the bank including from
recurring deposits, exceeds Rs. 10,000 in a financial year, a 10% tax on interest earned will be
deducted. The interest earned should be shown in ‘income from other sources.
Exempt Income
The PPF and EPF amount you withdraw after maturity is exempt from tax and must be
declared as exempt income from income from other sources. Note that: The EPF is only tax
exempt after five years of continuous service. Read in detail the rules of EPF withdrawal and
taxability thereof.
Family Pension
If you are collecting pension on behalf of someone who is deceased, then you must show
this income under income from other sources. There is a deduction of Rs. 15,000 or one-third of
the family pension received whichever is lower from the Family Pension Income. This will be
added to the taxpayer’s income and tax must be paid at the tax rate that is applicable.
Taxation of Winnings from Lottery, Game Shows, Puzzles
If you receive money from winning the lottery, Online/TV game shows etc., it will be
taxable under the head Income from other Sources. The income will be taxable at the flat rate of
30% which after adding cess will amount to 31.2%
Expenses allowed to be deducted from certain income sources
Similar to freelancers and business who can deduct certain expenses from their income, a
taxpayer earning income from other sources can claim deductions for expenses as given below:

 Commission or remuneration for realising dividends (if not covered under Section 115-O
which is exempt) or interest on securities. If any money or commission has been paid for
realising a dividend, such expenses are allowed to be deducted from the dividend income
which is taxed as income from other sources.

 Expenses (not capital expenses) such as repairs, insurance premium, and depreciation in
respect of plant, machinery, furniture and buildings are deductible from rental income
earned by letting out of plant, machinery, furniture and building.

 The rental income from the plant and machinery is chargeable to tax under income from
other sources. The expenses incurred in respect of such plant and machinery are allowed
to be deducted.

 A standard deduction is allowed on family pension, i.e. a deduction which is the lower of
₹.15,000 and one- third of such income is available in case of income in the nature of
family pension which is paid monthly to the family members of a deceased employee.

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 In case, interest on compensation or enhanced compensation is received, 50% of the
interest is allowed to be deducted (applicable starting from the assessment year 2010-11).

 As per Section 57(iii), a deduction is allowed for any other expense (which is not a capital
expense) which has been spent wholly and exclusively for making or earning such income.

ILLUSTRATION: 1

Rahul, a resident Indian, holding 28% of equity shares in a company, took a loan of Rs.
5,00,000 from the same company. On the date of granting the loan, the company had
accumulated profit of Rs. 4,00,000. The company is engaged in some manufacturing activity.
(i) Is the amount of loan taxable as deemed dividend, if the company is a company in which
the public are substantially interested?

(ii) What would be your answer, if the lending company is a private limited company (i.e.
which is not a company in which the public are substantially interested)?

Solution:
Any payment by a company, other than a company in which the public are substantially
interested, of any sum by way of advance or loan to an equity shareholder, being a person who is
the beneficial owner of shares holding not less than 10% of the voting power, is deemed as
dividend under section 2(22)(e), to the extent the company possesses accumulated profits.

(i) The provisions of section 2(22)(e), however, will not apply where the loan is given by a
company in which public are substantially interested. In such a case, the loan would not be
taxable as deemed dividend.

(ii) However, if the loan is taken from a private company (i.e. a company in which the public
are not substantially interested), which is a manufacturing company and not a company
where lending of money is a substantial part of the business of the company, then, the
provisions of section 2(22)(e) would be attracted, since Rahul holds more than 10% of the
equity shares in the company. The amount chargeable as deemed dividend cannot,
however, exceed the accumulated profits held by the company on the date of giving the
loan. Therefore, the amount taxable as deemed dividend would be limited to the
accumulated profit i.e., Rs. 4,00,000 and not the amount of loan which is Rs. 5,00,000.

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ILLUSTRATION: 2
Mr. A, a dealer in shares, received the following without consideration during the P.Y.
2022-23 from his friend Mr. B,
1) Cash gift of Rs. 75,000 on his anniversary, 15th April, 2022.
2) Bullion, the fair market value of which was Rs. 60,000, on his birthday, 19th June, 2022.
3) A plot of land at Faridabad on 1st July, 2022, the stamp value of which is Rs. 5 lakh on that
date. Mr. B had purchased the land in April, 2010.
Mr. A purchased from his friend Mr. C, who is also a dealer in shares, 1000 shares of X Ltd. @
Rs. 400 each on 19th June, 2022, the fair market value of which was ₹ 600 each on that date. Mr.
A sold these shares in the course of his business on 23rd June, 2022.
Further, on 1st November, 2022, Mr. A took possession of property (office building) booked by
him two years back at Rs. 20 lakh. The stamp duty value of the property as on 1st November,
2022 was Rs. 32 lakh and on the date of booking was Rs. 23 lakh. He had paid Rs. 1 lakh by
account payee cheque as down payment on the date of booking.
On 1st March, 2023, he sold the plot of land at Faridabad for Rs. 7 lakh. Compute the income
of Mr. A chargeable under the head “Income from other sources” and “Capital Gains” for A.Y.
2023-24.
Solution:
Computation of “Income from other sources” of Mr. A for the A.Y. 2023-24

S.No Particulars ₹

1 Cash gift is taxable under section 56(2)(x), since it exceeds ₹ 50,000 75,000
2 Since bullion is included in the definition of property,
therefore, when bullion is received without consideration, the same is
taxable, since the aggregate fair market value exceeds ₹ 50,000 60,000
3 Stamp value of plot of land at Faridabad, received without
consideration, is taxable under section 56(2)(x)
Difference of ₹ 2 lakh in the value of shares of X Ltd. purchased from 5,00,000
Mr.
4 C, a dealer in shares, is not taxable as it represents the stock-in-trade
of Mr.

A. Since Mr. A is a dealer in shares and it has been mentioned that the

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shares were subsequently sold in the
course of his business, such shares represent the stock-in-trade of Mr.
A.
Difference between the stamp duty value of ₹ 23 lakh on the date of
booking and the actual consideration of ₹ 20 lakh paid is taxable under
section 56(2)(x) since the difference exceeds ₹ 2,00,000, being the
higher of
5 ₹ 50,000 and 10% of consideration

3,00,000

Income from Other Sources 9,35,000

Computation of “Capital Gains” of Mr. A for the A.Y.2023-24

Particulars ₹

Sale Consideration 7,00,000

Less: Cost of acquisition [deemed to be the stamp value
charged to tax under section 56(2)(x) as per section 49(4)] 5,00,000

Short-term capital gains 2,00,000

ILLUSTRATION: 3
Discuss the taxability or otherwise of the following in the hands of the recipient under section
56(2)(x) the Income-tax Act, 1961 -
(i) Akhil HUF received Rs. 75,000 in cash from niece of Akhil (i.e., daughter of Akhil’s sister).
Akhil is the Karta of the HUF.
(ii) Nitisha, a member of her father’s HUF, transferred a house property to the HUF without
consideration. The stamp duty value of the house property is Rs. 9,00,000.
(iii) Mr. Akshat received 100 shares of A Ltd. from his friend as a gift on occasion of his 25th
marriage anniversary. The fair market value on that date was Rs. 100 per share. He also
received jewellery worth Rs. 45,000 (FMV) from his nephew on the same day.

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Solution:

S.No Taxable/Non- Amount liable to tax Reason

taxable
(₹)

i Taxable 75,000 Sum of money exceeding ₹ 50,000

received without consideration from a
non-relative is taxable under section
56(2)(x). Daughter of Mr. Akhil’s sister
is not a relative of Akhil HUF, since she
is not a member of Akhil HUF.

ii Non-taxable Nil Immovable property received without

consideration by a HUF from its
relative is not taxable under section
56(2)(x). Since Nitisha is a member of
the HUF, she is a relative of the HUF.
However, income from such asset
would be included in the hands of
Nitisha under 64(2).

iii Taxable 55,000 As per provisions of section 56(2)(x), in

case the aggregate fair market value of
property, other than immovable
property, received without
consideration exceeds ₹ 50,000, the
whole of the aggregate value shall be
taxable. In this case, the aggregate fair
market value of shares (₹ 10,000) and
jewellery (₹ 45,000) exceeds
₹50,000. Hence, the entire amount of ₹
55,000 shall be taxable.

iv Non-taxable Nil Car is not included in the definition of

property for the purpose of section
56(2)(x), therefore, the same shall not
be taxable.

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ILLUSTRATION: 4
(i) Examine under which heads the following incomes are taxable:
(ii) Rental income in case property held as stock-in-trade for 3 years
(iii) Dividend on shares in case of a dealer in shares
(iv) Salary received by a partner from his partnership firm

(v) Rental income of machinery Winnings from lotteries by a person having the same as
business activity
(vi) Salaries payable to a Member of Parliament
(vii) Receipts without consideration
(viii) In case of retirement, interest on employee’s contribution if provident fund is
unrecognized.
(ix) Rental income in case of a person engaged in the business of letting out of properties.
Solution:

S.No Particulars Head of Income

1 Rental income in case property held as Income from house property

stock-in trade for 3 years

2 Dividend on shares in case of a dealer in Income from other sources

shares

3 Salary by partner from his partnership Profits and gains of business or

firm Profession

4 Rental income of machinery (See Note Profits and gains of business or

below) profession/Income from other sources

5 Winnings from lotteries by a person Income from other sources

having the same as business activity

6 Salaries payable to a Member of Income from other sources

Parliament

7 Receipts without consideration Income from other sources

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8 In case of retirement, interest on Income from other sources
employee’s contribution if provident fund
is unrecognized

9 Rental income in case of a person Profits and gains from business or

engaged in the business of letting out of profession
properties

ILLUSTRATION: 5
Examine whether the following are chargeable to tax and the amount liable to tax :
(i) A sum of Rs. 1,20,000 was received as gift from non-relatives by Raj on the occasion of the
marriage of his son Pravin.
(ii) Interest on enhanced compensation of Rs. 96,000 received on 12-3-2023 for acquisition of
urban land, of which 40% relates to P.Y.2021-22.

Solution:

S.No Taxable/Not Taxable AnswerAmount liable to Reason

tax (₹)

1 Taxable 1,20,000 The exemption from applicability of

section 56(2)(x) would be available
if, inter alia, gift is received from a
relative or gift is received on the
occasion of marriage of the
individual himself. In this case,
since gift is received by Mr. Raj
from a non-relative on the occasion
of marriage of his son, it would be
taxable in his hands under section
56(2)(x).

As per section 145B(1), interest

received by the assessee on
enhanced

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compensation shall be deemed to
be the income of the year in which
it is received, irrespective of the
method of accounting followed by
the assessee. Interest of ₹ 96,000
on enhanced compensation is
chargeable to tax in the year of
receipt i.e. P.Y. 2021-22 under
section 56(2) (viii) after providing
deduction of 50% under section
57(iv). Therefore, ₹ 48,000 is
chargeable to tax under the head
2 Taxable 48,000 “Income from other sources”.

ILLUSTRATION: 6
On 10.10.2022, Mr. Govind (a bank employee) received ₹ 5,00,000 towards interest on
enhanced compensation from State Government in respect of compulsory acquisition of his land
effected during the financial year 2015-16.
Out of this interest, Rs. 1,50,000 relates to the financial year 2016-17; Rs. 1,65,000 to the
financial year 2017-18; and Rs. 1,85,000 to the financial year 2018-19. He incurred Rs. 50,000 by
way of legal expenses to receive the interest on such enhanced compensation.
How much of interest on enhanced compensation would be chargeable to tax for the assessment
year 2032-24
Solution:
Section 145B provides that interest received by the assessee on enhanced compensation
shall be deemed to be the income of the assessee of the year in which it is received, irrespective
of the method of accounting followed by the assessee and irrespective of the financial year to
which it relates.
Section 56(2)(viii) states that such income shall be taxable as ‘Income from other sources’.
50% of such income shall be allowed as deduction by virtue of section 57(iv) and no other
deduction shall be permissible from such Income.
Therefore, legal expenses incurred to receive the interest on enhanced compensation
would not be allowed as deduction from such income.

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Computation of interest on enhanced compensation taxable as “Income from other sources” for
the A.Y 2022-23:

Particulars Rs.

Interest on enhanced compensation taxable u/s 56(2)(viii) 5,00,000

Less: Deduction under section 57(iv) (50% x ₹ 5,00,000) 2,50,000

Taxable interest on enhanced compensation

2,50,000

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UNIT - 5
SET OFF AND CARRY FORWARD OF LOSSES
Set off of losses
Set off of losses means adjusting the losses against the profit or income of that particular
year. Losses that are not set off against income in the same year can be carried forward to the
subsequent years for set off against income of those years. A set-off could be an intra-head set-off
or an inter-head set-off.
Intra-head Set Off
The losses from one source of income can be set off against income from another source
under the same head of income.
For eg: Loss from Business A can be set off against profit from Business B, where Business A is one
source and Business B is another source and the common head of income is “Business”.
Exceptions to an intra-head set off:

 Losses from a Speculative business will only be set off against the profit of the speculative
business. One cannot adjust the losses of speculative business with the income from any
other business or profession.

 Loss from an activity of owning and maintaining race-horses will be set off only against the
profit from an activity of owning and maintaining race-horses.

 Long-term capital loss will only be adjusted towards long-term capital gains. However, a
short-term capital loss can be set off against both long-term capital gains and short-term
capital gain.

 Losses from a specified business will be set off only against profit of specified businesses.
But the losses from any other businesses or profession can be set off against profits from
the specified businesses.
Inter-head Set Off
After the intra-head adjustments, the taxpayers can set off remaining losses against
income from other heads. Eg. Loss from house property can be set off against salary income.
Given below are few more such instances of an inter-head set off of losses:

 Loss from House property can be set off against income under any head

 Business loss other than speculative business can be set off against any head of income
except income from salary.

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 One needs to also note that the following losses can’t be set off against any other head of
income:
 Speculative Business loss

 Specified business loss

 Capital Losses
 Losses from an activity of owning and maintaining race-horses
 Carry forward of losses
After making the appropriate and permissible intra-head and inter-head adjustments,
there could still be unadjusted losses. These unadjusted losses can be carried forward to future
years for adjustments against income of these years. The rules as regards carry forward differ
slightly for different heads of income.

Losses from House Property:

 Can be carry forward up to next 8 assessment years from the assessment year in which the
loss was incurred

 Can be adjusted only against Income from house property

 Can be carried forward even if the return of income for the loss year is belatedly filed.
Losses from Non-speculative Business (Regular Business) Loss
 Can be carry forward up to next 8 assessment years from the assessment year in which the
loss was incurred
 Can be adjusted only against Income from business or profession

 Not necessary to continue the business at the time of set off in future years
 Cannot be carried forward if the return is not filed within the original due date.
Speculative Business Loss
 Can be carry forward up to next 4 assessment years from the assessment year in which the
loss was incurred
 Can be adjusted only against Income from speculative business
 Cannot be carried forward if the return is not filed within the original due date.

 Not necessary to continue the business at the time of set off in future years

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Specified Business Loss under 35AD
 No time limit to carry forward the losses from the specified business under 35AD
 Not necessary to continue the business at the time of set off in future years
 Cannot be carried forward if the return is not filed within the original due date
 Can be adjusted only against Income from specified business under 35AD

Capital Losses
 Can be carry forward up to next 8 assessment years from the assessment year in which the
loss was incurred
 Long-term capital losses can be adjusted only against long-term capital gains.
 Short-term capital losses can be set off against long-term capital gains as well as short-
term capital gains
 Cannot be carried forward if the return is not filed within the original due date

Let us understand with an example-

Mr P has invested in equity shares. Below are the details related to his capital gain/loss
transactions for different years.

A.Y STCL LTCL STCG LTCG STCG LTCG Balance

STCL and
during the during the during the during the taxable taxable
LTCL to be
year year year year
c/f

2016 3,000 1,000 - - - - STCL-

3,000
LTCL-
1,000

2017 - 1,300 5,600 - 2,600 - STCL-

(5,600- Nil

3,000) LTCL-
2,300
Set-off
against
LTCL

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2018 800 - - 7,000 - 4,700 STCL-
(7,000- Nil
2,300- LTCL-
800) Nil

Set-off
against
STCL and
LTCL

2019 1,200 4,000 3,000 9,000 3,000* 3,800* STCL-

(9,000- Nil
4,000- LTCL-
1,200) Nil
Set-off
against
STCL and
LTCL

Losses from owning and maintaining race-horses

 Can be carry forward up to next 4 assessment years from the assessment year in which the
loss was incurred

 Cannot be carried forward if the return is not filed within the original due date

 Can only be set off against income from owning and maintaining race-horses only

Section Losses to be carried Can set off against Time upto which Mandatory to file
forward Income losses can be return in the year
carried forward of loss

32(2) Unabsorbed Any income (other than No time limit No

depreciation salary)

71B Loss from House Income from house 8 years No

property property

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72 Loss from Normal Income from business 8 years Yes
business

73 Loss from Income from 4 years Yes

speculative business speculative business

73A Loss from specified Income from specified No time limit Yes
business business

74 Short term capital Short term capital gain 8 years Yes

loss (STCL) (STCG) and long term
capital gain (LTCG)

Long term capital LTCG 8 years Yes

loss (LTCL)

74A Loss from owning Income from owning 4 years Yes

and maintaining and maintaining horse
horse races races

Points to note:

 A taxpayer incurring a loss from a source, income from which is otherwise exempt from
tax, cannot set off these losses against profit from any taxable source of Income

 Losses cannot be set off against casual income i.e. crossword puzzles, winning from
lotteries, races, card games, betting etc.
DEDUCTION FROM GROSS TOTAL INCOME [SECTION 80C TO 80U]
Introduction

The aggregate of income computed under each head, after giving effect to the provisions
for clubbing of income and set off of losses, is known as “Gross Total Income”. In computing the
total income of an assesse, certain deductions are permissible under sections80C to 80U from
Gross Total income.

DEDUCTION UNDER CHAPTER VI-A IN RESPECT OF 'PAYMENTS'

Section Nature of Payment Who can Claim

80C Life Insurance Premium, Provident Fund Contribution Individuals

(Maximum : Rs. 1,50,000)

80CCC Pension Fund [ Maximum : Rs. 1,50,000 Individuals

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80CCD(1) Deduction available in respect of Employee’s / Assesses Individuals
Contribution to National Pension Scheme (NPS)
[Section80CCD(1)]

80CCD(1B) Additional Deduction of Rs. 50,000 is available in respect of Individuals

Employee’s / Assesses Contribution to National Pension
Scheme (NPS) [Section 80CCD(1B)]

80CCD(2) Deduction available in respect of Employer’s Contribution Employees

toNational Pension Scheme (NPS) [Section 80CCD(2)]

80D Deduction in respect of Health or Medical Insurance Individual/HUF

Premium

80DD Deduction in respect of Maintenance Including Medical Resident

Treatment of a Dependent who is a Person with Disability Individual/
Resident
HUF

80DDB Deduction in respect of Medical Treatment , etc. Resident Individu

al/

Resident HUF

80E Payment of interest of Loan taken for higher studies Individual

80EE Deduction in respect of Interest on Loan taken for Individual

ResidentialHouse Property

80G Deduction in respect of Donations to certain Funds, All Assesse

Charitable Institutions , etc. [Section 80G ]

80GG Deduction in respect of Rents Paid [Section 80GG] Individual

80GGA Deduction in respect of certain Donations for Scientific All assesses not
Research or Rural Development [Section 80GGA] having any
income
chargeable
underthe head
'Profits and gains
of business or
profession'

80GGB/GGC Contribution to Political Parties

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PROBLEM: 1
Mr. Vasanth previous year’s gross total income is Rs. 5, 00,000. He has made the following
donations. Calculate the net income.

 National foundation for communal harmony Rs. 10,000

 National children’s fund Rs. 20,000

 National defence fund Rs. 25,000

Solution

Date Particulars Amount Amount

Gross Total Income 5,00,000

Less: deduction u/s 80G 10,000
NFGH-100%-No limit 20,000
NCF-100%-No limit 25,000 55,000
NDF-100%-No limit

Net income 4,45,000

Problem: 2
Calculate the deduction allowable under section 80GG to an Assessee having the
following incomes for the assessment year 2013-24:

Particulars Amount

Business income 55,000

Interest from bank 5,000

Total income 60,000

Rent paid by him for a house occupied by him for the purpose of his residence is Rs. 1,250 per
month

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Solution
Computation of taxable income

Particulars Amount Amount

Less: standard deduction 40,000 90,000

u/s: 16(i)

Capital gain:

Long-term capital gain

Short-term capital gain 40,000 50,000

Income from other 10,000

sources:
Interest on bank savings

Interest on Govt.
securities

Winning from lotteries 15,000

Less: deductions: 4,000 39,000

(i) U/S 80C: 20,000

PPF

NSC 1,79,000

(ii) U/S 80U in respect

of handicapped

assessee

(iii) U/S 80TTA: savings 40,000

bank deposits

interest(least of Rs. 10,000 20,000

or 15,000)

60,000

75,000

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10,000

1,45,000

Taxable income 34,000

Types of Assessment
Under Income Tax Act, 1961, there are four types of assessment as mentioned below:

 Self-assessment –u/s 140A

 Summary assessment –u/s 143(1)

 Scrutiny assessment –u/s 143(3)

 Best Judgment Assessment –u/s 144

 Protective assessment

 Re-assessment or Income escaping assessment –u/s 147

 Assessment in case of search –u/s153A

Self- assessment

Submitting returns assesse is find whether he is liable for any tax or interest. For
thispurpose this section has been introduced in Income tax act.

Where any tax is payable on the basis of any return required to be furnished under section 139or
section 142 or section 148 or section 153A, after deducting:
 Advance tax Paid, if any
 TDS/TCS
 Relief
 MAT credit

Then assesse shall pay tax & interest before furnishing return and proof of such payment will
be accompanied with the return of income.

Summary assessment
Assessment under section 143(1) is like preliminary checking of the return of income.
Under this section, Income tax department sent intimation u/s 143(1) in which comparative
Income Tax computation [i.e. as provided by Tax payer in Return of Income and as computed u/s
143(1)] is sent by Income Tax Department. At this stage no detailed scrutiny of the Return of
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Income is carried out. At this stage, the total income or loss is computed after making the
following adjustment (if any), namely:
 Any arithmetical error in the return.
 An incorrect claim, if such incorrect claim is apparent from any information in the return.
 Disallowance of loss claimed, if return of the previous year for which set off of loss is
claimed was furnished beyond the due date specified under section 139(1).
 Disallowance of expenditure indicated in the audit report but not taken into account in
computing the total income in the return.
Assessment u/s 143(1) can be made within a period of one year from the end of financial year
in which the return of income is filled.
Scrutiny Assessment
Scrutiny assessment refer to the examination of a return of income by giving opportunity
to the assesse to substantiate the income declared and the expenses, deduction, losses,
exemptions, etc. claimed in the return with the help of evidence. During the course of scrutiny,
the assessing officer gets opportunity to conduct enquiry as he deemed fit from the assesse and
from third parties. The exercised is aimed at ascertaining whether the income in the return is
correctly shown by the assesse and whether the claims for deductions, exemptions etc. are
factually and legally correct. If any omission, discrepancies, inaccuracies, etc. comes light to as a
result of examination, the assessing officer makes his own assessment of the assesse’s taxable
income after taking into consideration all the relevant facts. These assessments are made under
section 143(3) of the income tax act.

The case selected for Scrutiny Assessment can be of by two types - i.e.
 Manual scrutiny cases
 Compulsory Scrutiny cases.
Manual scrutiny cases
Following can be reason for manual scrutiny case:

 Not filing Income Tax Return

 Declaring lesser income compared to earlier year or Declaring more loss compared to
earlier year.
 Mismatch in TDS credit between claim and 26AS.
 Non declaration of exempt income.
 Claiming large refunds in return of Income.
 Taking double benefit due to change in Job.
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 High Value Transaction (as reflected in AIR).
Compulsory Scrutiny cases
The following cases are compulsorily selected for scrutiny:
 Cases involving addition in the earlier assessment year in excess of Rs. 10 lakhs on a
substantial and recurring question of law or fact which is confirmed in appeal or is pending
before an appellate authority may come under compulsory scrutiny.
 Cases involving addition in an earlier year on the issue of transfer pricing in excess of Rs. 10
crore or more on a substantial and recurring question of law or fact which is confirmed in
appeal or is pending before an appellate authority.
 Computer Added Scrutiny Selection (CASS): cases are also being selected under CASS on
the basis of broad based selection filters. List of such cases shall be separately intimated in
due course by DGIT (system) to the jurisdictional concerned. The cases for this purpose are
mostly selected through the process of computer assisted scrutiny selection (CASS) and
there is no element of subjectivity in this process.
 Cases in respect of which specific and verifiable information pointing out tax evasion is
given by Government Department/ Authorities. The Assessing Officer shall record reasons
and take prior approval from Pr. CCIT/CCIT/Pr. DGIT/DGIT concern before selecting such a
case for scrutiny.

 Cases where order denying the approval u/s 10 (23C) of the Act or withdrawing the
approval already granted has been passed by the competent authority, yet the assesse
found claiming tax exemption under the aforesaid provision of the Act.

Types of scrutiny assessment

1) Limited scrutiny assessment
2) Complete Scrutiny Assessment.
When case is selected for Limited scrutiny assessment, assessing officer can ask only the
details regarding the reason behind the selection of any specific matter. However, in case of
Complete Scrutiny Assessment, Assessing officer can ask complete details of transaction reflecting
in the return of the income.
Best Judgment Assessment
Section 144 of Income tax act, 1961 speaks about Best Judgment Assessment. In the best
judgment assessment, an assessing officer makes an assessment based on his best reasoning.
Assesse should neither be dishonest in his assessment nor have a vindictive attitude.

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There are two types of Best Judgment Assessment
Compulsory best judgment assessment: It is done when assessing officer finds that there is an act
amounting to non-co-operation by the assesse or where assesse is found to be a defaulter in
supplying information to the department.
Discretionary best judgment assessment: It is done in cases where assessing officer is dissatisfied
with the authenticity of the accounts given by the assesse or where no regular method of
accounting has been followed by the assesse.
The process of Best Judgment Assessment is applied in conformity with the Principle of
Natural justice. As per the provision of Section 144 of the Income Tax Act, 1961, the Assessing
officer is supposed to make an assessment of the income of an assessed to the best of his
Judgment in the following cases:

 If the person fails to make return u/s as required 139(1) and has not made a return or a
revised return under sub-section (4) or (5) of that section; or

 If any person fails to comply with all the terms of a notice under section 142(1) or fails to
comply with the direction requiring him to get his account audited in terms of section
142(2A); or

 If any person after having filed a return fails to comply with all the terms of a notice under
section 143(2) requiring his presence or production of evidence and documents; or

 If the Assessing officer is not satisfied about the correctness or the completeness of the
accounts of assesse or if no method of accounting has been regularly employed by the
assesse.

In the case of best judgment assessment, an assesse has a right to file an appeal u/s 246or to
make an application for revision u/s 264 to the commissioner.

One should also keep in view the following

The best judgment assessment can only be made after giving the assesse an opportunity of
being heard. Such opportunity shall be given by issue of a notice to the assesse to show because
why the assessment should not be completed to the best of his Judgment and that opportunity
for hearing will not be necessary where notice u/s 142(1) already been issued.

Protective assessment
Though there is no provision in the income tax act authorizing the levy of income tax on a
person other than whom the income tax is payable, yet it is open to the authorities to make a
protective or alternative assessment if it is not ascertainable who is really liable to pay the tax
among a few possible persons.

In making a protective assessment, the authorities are merely making an assessment and
leaving it as a paper assessment until the matter is decided (as to whom the asset owned by) one

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way or another. Furthermore, a protective order of assessment can be passed but not a protective
order of penalty must, however be noted that while protective assessment is permissible, a
protective order for recovery is not permissible.

Re-Assessment (or) Income escaping assessment

Re-assessment is carried out if the Assessing officer has reason to believe that anyincome
chargeable to tax has escaped assessment for any assessment year
Points to keep in mind while filing a revised return:
 ITR form can be changed while revising of return.
 No penalty can be levied by the department for bonafide mistakes (unintentional)
 If the assessing officer discovers that the error/omission were intentional/fraudulent
return revision of return is not allowed and penalty may be levied.
 Interest under section 234B and 234C will be recalculated under every revised return.
 If the taxpayer has revised return after the survey/search and it was found that the
mistake in the original return was not bonafide then levy of penalty is justified
Assessment of Individuals
Introduction
Assessment of individuals include calculation of taxable income and the tax liability of an
assesse after giving effect to all rules and regulations that are incorporated by the Income Tax
authorities from time to time. Rules prevailing for the current financial year should be applied to
assess the tax liability of an individual. The following lines deal with the procedure of assessment
on income of an individual.
How income should be assessed?
The sum total of all the sources of income after giving effect to set-off and carry-forward
of losses reduced with sections 80 and rebate u/s 87A and 88 E should be considered as the
taxable income. The taxable income should be rounded-off to the nearest Rs.10 (rounding off) tax
rates, surcharge and education cess as applicable should be applied on the taxable income or net
income to identify the tax liability of an individual.
How to calculate Income Tax?

Date Particulars Amount Amount

Income from salary *****

Income from house property Income from *****

business or professionIncome from capital
*****
gain

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Income from other sources *****

*****

Gross total income

Less: deduction u/s 80 *****

*****

Total income *****

How to calculate tax liability?

Particulars Amount Amount

Total amount of tax *****

[total income rate of tax prescribed by the act]

Less: Rebate u/s 87 A

[for resident individual whose income does not exceed Rs. 5 *****

lakhs]

Add: surcharge *****

*****

Add: Education cess-2% *****

Secondary and higher education cess[SHEC]-1% ***** *****

Less: Advanced paid tax [if any] *****

Tax deducted at source[TDS][if any] ***** *****

Net amount to be paid as Tax/Tax Liability *****

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Tax Rates
1. In case of an Individual (resident or non-resident) or HUF or Association of Person or Body of
Individual or any other artificial juridical person
Taxable Income Rate

Up to Rs. 2,50,000 Nil

Rs. 2,50,000 to Rs 5,00,000 5%

Rs. 5,00,000 to Rs. 10,00,000 20%

Above Rs. 10,00,000 30%

2. In case of a resident senior citizen (who is 60 years or more at any time during the previous
year but less than 80 years on the last day of the previous year)
Taxable income Tax rate
Up to Rs. 3,00,000 Nil

Rs. 3,00,000 to Rs 5,00,000 5%

Rs. 5,00,000 to Rs. 10,00,000 20%

Above Rs. 10,00,000 30%
3. In case of a resident super senior citizen (who is 80 years or more at any time during the
previous year)
Assessment Year 2023-24

Taxable Income Tax

Up to Rs. 5,00,000 Nil
Rs. 5,00,000 to Rs. 10,00,000 20%
Above Rs. 10,00,000 30%
Add: Surcharge and Education Cess [see Note]

Assessment Year 2022-23

Taxable Income Tax
Rate
Up to Rs. 5,00,000 Nil
Rs. 5,00,000 to Rs. 10,00,000 20%
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Above Rs. 10,00,000 30%
Add: Surcharge and Health & Education Cess [see Note]

Surcharge:
Surcharge is levied on the amount of income-tax at the following rates if total income of an
Assesse exceeds specified limits:

Range of income

More than Rs.

50 lakh but up
Up to Rs.
to Rs.
Nature of Income 50 lakh
More than Rs. 1 crore
1 crore

Any Income Nil 10% 15%

The surcharge shall be subject to marginal relief:

 Where income exceeds Rs. 50 lakhs, the total amount payable as income-tax and
surcharge shall not exceed total amount payable as income-tax on total income of Rs. 50
lakhs by more than the amount of income that exceeds Rs. 50 lakhs

 Where income exceeds Rs. 1 crore, the total amount payable as income-tax and surcharge
shall not exceed total amount payable as income-tax on total income of Rs. 1 crore by
more than the amount of income that exceeds Rs. 1 crore.

 Health and Education Cess: The amount of income-tax and the applicable surcharge shall
be further increased by health and education cess calculated at the rate of four percent of
such income-tax and surcharge.
 Rebate under Section 87A: The rebate is available to a resident individual if his total
income does not exceed Rs. 3, 50,000. The amount of rebate shall be 100% of income- tax
or Rs. 2,500, whichever is less.

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Problem: 1
Calculate the tax liability of Mr. Alok for the assessment year for the particulars given below.
Income from salary Rs. 3.00.000 [computed]Income from house property Rs.74, 000 Income from
other sources Rs. 1, 50,000 Donation to national defense fund Rs. 8,000

Solution
Computation of taxable income

Date Particulars Amount Amount

Income from salary 3,00,000

Income from house property Income from other 74,000
sources
1,50,000

5,24,000
Gross total income Less: Deduction u/s 80G -100%
8,000
for NDF

Taxable income 5,16,000

Computation of Tax Liability

Date Particulars Amount Amount

(i) UptoRs. 2,50,000 Nil

(ii) Rs. 2,50,000 to Rs. 5,00,000

[2,50,000*5%] 12,500

(iii) Balance Rs. 16,000

[5,16,000-5,00,000]

[16,000*20/100] 3,200

Total Tax on income 15,200

Add: Education cess @ 4%

[15,700*4/100] 628

Surcharge Nil

Tax Liability 16,328

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Problem: 2
Calculate tax liability of Shri.Anand assuming he is a very senior citizen [81 years old] for
the assessment year from the following information.
a) Income from business Rs. 12,00,000
b) Half share of profit from business Rs. 45,000
c) Share of income from AOP Rs. 22,000

d) Share of loss from firm Rs. 16,500

Solution
Computation of Taxable Income

Date Particulars Amount Amount

Income from business 12,00,000

Taxable income 12,00,000

Computation of Tax Liability

Date Particulars Amount Amount

(i) UptoRs. 5,00,000 Nil

(ii) Rs. 5,00,000 to Rs. 10,00,000

[5,00,000*20%] 1,00,000

(iii) Balance Rs. 2,00,000

[12,00,000-10,00,000]

[2,00,000*30/100] 60,000

Total Tax on income 1,60,000

Add: Education cess @ 4%

[1,60,000*4/100] 6,400

Surcharge Nil

Tax Liability 1,66,400

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