Unit I: General Introduction of Income Tax Act, 1961

CONTENTS:
 Basic concept Income
 Agriculture Income
 Previous Year and Assessment Year
 Gross Total Income and Total Income
 Person
 Assessee
 Residential status and Tax Liabilities
 Exempted Income

The constitution authorises the Central Government to levy and collect tax on
income other than agricultural income under Income Tax Act, 1961. The proceeds
of income tax are shared between the Union and the State Governments as per the
recommendations of the Finance Commission. Income tax is chargeable on the
total income of the previous year of a person at the rates prescribed by Finance Act
every year. Income Tax can be classified in two parts viz. Personal Income Tax and
Corporate Tax. Income tax levied on individuals, hindu undivided families (HUFs),
firms, association of persons (AOPs), body of individuals (BOIs), local authorities
and artificial juridicial persons is called Personal Income Tax and income tax levied
on companies is called Corporate Tax. The incidence of tax on any person depends
upon the place of origin of income and the residential status of the taxpayer.
According to their residential status, persons have been classified into three broad
categories:

1. Resident
2. Resident but not ordinarily resident
3. Non-Resident

The residential status of an assessee is ascertained with reference to each previous

year. A non-resident is required to pay tax in respect of income received or deemed
to be received in India and accrued or deemed to accrue to him in India. A resident
of India is charged to tax in respect of all the income i.e. received or deemed to be
received in India or outside India, accrued or deemed to accrue in India or outside
India during the relevant previous year. However, the total income of a resident but
not ordinarily resident is not to include income which accrues to him outside India,
unless it is derived from a business or profession controlled in India. For the
purpose of computing total income and charging tax thereon, income from various
sources is classified under the following heads:

1. Income from salary

2. Income from house property
3. Profits & Gains of business or profession
4. Capital gains
5. Income from other sources

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These five heads of income are mutually exclusive. If any income falls under one
head, it cannot be considered under any other head. Income under each head has
to be computed as per the provisions under that head. Aggregate of assessable
income of all heads, after giving effect to the provisions for clubbing of income and
set off and carry forward of losses, is called the gross total income (GTI). Out of
GTI, deductions under chapter VI-A are allowed and the balance amount left is
called total income. Gross amount of income tax payable is calculated on total
income according to the rates prescribed by the Finance Act for the relevant
assessment year and the rates prescribed under different sections of the Act. From
the gross tax payable, tax rebate under Section 88E and relief under Section 89(1)
is to be deducted. The balance is the net tax liability subject to any advance tax
paid or tax deducted or collected at source.
Every individual and HUF has to furnish the return of his income if his total
income before allowing deduction under Chapter VI-A exceeds the maximum
amount which is not chargeable to income tax. An essential feature ofthe Indian
Income Tax law is that it provides various tax incentives to ensure savings,
development of particular industry and areas, exports etc. in the desired manner.
Income tax is levied at a flat rate in case of corporate, firms and body of individual
assessees. Income tax is levied on slab system in case of individuals and HUFs
assessees. Thus, the income tax system is progressive i.e. the applicable tax rate
increases as total income increases.

Assessment Year

Section 2(9) of the Act stipulates, "assessment year” means the period of twelve
months commencing on the 1stday of April every year In reality, it means the
period of twelve months starting from April 1 of every year and ending on March 31
of the next year. The period of assessment year is thus fixed by the statute.
Income in the previous year is taxed in the following year at the rates prescribed for
such assessment year by the relevant Finance Act.
Previous Year
Section 3 of the Act titled “‘previous year’ defined” reads -for the purposes of this
Act, ‘previous year’ means the financial year immediately preceding the assessment
year. Income earned in a particular year is taxable in the next year. The year in
which income is earned is known as ‘previous year’ and the next year in which it
becomes taxable is known as ‘assessment year’. For example, the income earned in
the previous year 2000-01 is taxable in the immediately following assessment year,
i.e. 2001-02. From the assessment year 1989-90 onwards, all assessees are
required to follow the financial year (i.e. April 1 to March 31) as the previous year,
for all sources of income. The Section also has a Proviso that reads, “Provided that
in the case of a business or profession newly set up, or a source of income newly
coming into existence, in the said financial year, the previous year shall be the
period beginning with date of setting up of the business of profession or, as the
case may be, the date on which the source of income newly comes into existence
and ending with the said financially earn. As a result of this Proviso, in the case of
newly set up business or profession or a source of income newly coming into
existence, the first previous year will be the period commencing from the date of
setting up of the business/profession or the date on which the source of income
comes into existence and ending on March 31 of the immediately following
calendar year. Thus, for a newly set up business, profession or a source of income,
could be for a period less than 12 months and the second and the subsequent
‘previous years’ would be of 12 months each (April to March)

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The rule that the income of the previous year is assessable as the income of the
immediately following assessment year has certain exceptions, namely,

1. Shipping business of non-residents (Sec. 172). The section is applicable if the

following conditions are satisfied –

(a) The taxpayer is a non-resident,

(b) He owns a ship or ship is chartered by the non-resident taxpayer;
(c) The ship carries passengers, livestock, mail or goods shipped at a port in India;
(d) The non-resident taxpayer may (or may not) have an agent/ representative in
India.

If the above conditions are satisfied, 7.5 per cent of amount paid (or payable) on
account of such carriage (including demurrage charge of handling charge or similar
amount) to the non-resident tax payer shall be deemed to be the income of the tax
payer. For this purpose, the master of the ship shall submit a return of income
before the departure of the ship from the Indian port. Unless the tax has been paid,
a port clearance shall not be granted by the Collector of Customs. The 7.5 percent
of amount off right, fare, etc., is deemed as income of the non-resident taxpayer
and taxis payable in the rate Applicable to a foreign company. Income is thus
taxable in the same year in which freight, fare, etc., is collected and not in the
immediately following assessment year.

2. Persons leaving India (Sec. 174). The Section becomes applicable when
(a) It appears to the Assessing Officer that an individual may leave India during the
current assessment or shortly thereafter;
(b) The person has no present intention of returning to India;
(c) The total income of such person upto the probable date of his departure from
India shall be chargeable to tax in that assessment year. His income is thus
taxable in the same year and not in the immediately following assessment year.

3. Persons likely to transfer property to avoid tax (Sec. 175). The salient features of
this Section are:
(a) It appears to the Assessing Officer during any current assessment year that a
person is likely to charge, sell, transfer, dispose of, or otherwise part with, any of
his asset;
(b) Such asset may be movable or immovable;
(c) The taxpayer is likely to part with the asset with a view to avoid payment of any
liability under the Income-tax Act;
(d) The total income of such person from the first day of assessment year to the
date when proceeding is started under the Income-tax Act. His income is, thus,
taxable in the same year and not in the immediately following assessment year.

4. Discontinued business/profession (Sec. 176). The salient features of this '

Section are:
(a) A business or profession is discontinued in any assessment year;
(b) Income of the business/profession from April 1 of the assessment year (in
which the business/profession is discontinued) to the date of discontinuation may
be taxable in the assessment year in which the business/profession is
discontinued;
(c) The above income is taxable at the discretion of the Assessing Officer in the
assessment year in which business/profession is discontinued or it may be taxed

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in the normal assessment year (i.e. assessment year immediately following the
previous year);
(d) If it is taxable in the assessment year in which the business/profession is
discontinued, then it is chargeable to tax at the rate applicable to that assessment
year.
It may be noted that in the first three exceptions (shipping business of non
residents, persons leaving India and transfer of property), tax shall be’ charged in
the previous year itself (it is mandatory on the part of the Assessing Officer), but in
the case of discontinued business/profession, it is at the discretion of the
Assessing Officer.

Person
According to Section 2(31) of the Act, ‘person’ includes:
(i) an individual,
(ii) a Hindu undivided family,
(iii) a company,
(iv) a firm,
(v) an association of persons or a body of individuals, whether incorporated
or not,
(vi) a local authority, and
(vii) every artificial juridical person,

Thus, there are seven categories of persons chargeable to tax under the Act. The
dilution of ‘Person’ also is inclusive and not exclusive. Therefore, any person not
falling in these categories, may still fall in the four comers of the term ‘Person’ and
may be liable to tax.
(1) Under this Section, ‘an individual’ means only a natural person, i.e. a
human being, and also includes a minor or a person of unsound mind1 or a
group of individuals.
(2) ‘A Hindu undivided family’ (HUF) consists of all persons lineally descended
from a common ancestor and includes their wives and unmarried daughters.
Profits made by a joint Hindu family are chargeable to tax as income of the
Hindu undivided family as a distinct entity or unit of assessment. Some
further discussion is necessary in this respect.
Meaning of HUF: Under the Act, a HUF is treated as a separate entity for the
purpose of assessment. The Hindu law defines HUF as a family which
consists of all persons lineally descended from a common ancestor and
includes their wives and unmarried daughters. The relation of a HUF does
not arise from a contract but arise from status.
Assessment of HUF: Income of a joint Hindu family may be assessed as an
income of the HUF, if the following two conditions are satisfied:
(a) There should be a coparcenership (that is, those persons who acquire by
birth an interest in the joint family property and its male members have the
right to enforce partition). Once the income of a joint Hindu family is
assessed as that of an HUF, it continues to be assessed as such in
subsequent assessment years till partition is claimed by its coparceners.
(b) There should be a joint family property which consists of ancestral property,
property acquired with the aid of ancestral property and property
transferred by its members.

Assessee

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Under Sec.2(7) of the Act, an ‘assessee’ means a person by whom any tax or any
other sum of money such as penalty or interest, is payable under the Act. The term
includes the following persons:
1. First Category: A person, i.e. an individual, an HUF, a company, a firm, an
association of persons or body of individuals, whether incorporated or not, a
local authority and every artificial juridical person, by whom any tax or
other sum of money, including interest and penalty, is payable under the
Act, irrespective of the feet whether any proceeding under the Act has been
taken against him or not.
2. Second Category: A person in respect of whom any proceeding under the Act
has been taken, whether or not he is liable for any tax, interest or penalty.
Proceedings may be taken –

(a) Either for the assessment of the amount of his income or of the loss
sustained by him; or
(b) Of the income (or loss) of any other person in respect of whom he is
assessable; or
(c) Of the amount of refund due to him or to such other person.
3. Third Category: Every person who is deemed to be an assessee. For
instance, a representative assessee is deemed to be an assessee by virtue of
Sec. 160(2).
4. Fourth Category: Every person who is deemed to be an assessee in default
under any provision of the Act. For instance, under Sec. 29(1), any person
who does not deduct tax at source, or after deducting fails to pay such tax,
is deemed to be an assessee in default. Likewise, under Sec.218, if a person
does not pay advance tax, then he shall be deemed to be an assessee in
default

Income
The definition of the term ‘income’ in Sec.2 (24) is inclusive. It not only includes
those things which are included in Sec.2 (24) but also includes such things which
the term signifies according to its general and natural meaning. Following are some
of the broad principles clarifying the concept of ‘Income’ under the Act:
1. Regular and definite source: The term ‘income’ connotes a periodical
monetary return coming in with some sort, of regularity. However, it must
be read with reference to facts of each case.
2. Different forms of income: Income may be received in cash or in kind. When
income is received in kind, its valuation is to be made according to the rules
prescribed in the Income-tax Rules. If, however, there is no prescribed rule,
valuation thereof is made on the basis of market value.
3. Receipt vs. Accrual: Income arises either on receipt basis or on accrual
basis. Income may accrue to a taxpayer without its actual receipt. Tax
incidence arises either on ‘accrual’ or on ‘receipt’ basis.
4. Illegal income: The income-tax law does not make any distinction between
income accrued or arisen from a legal source and income tainted with
illegality.
5. Disputed title: Income-tax assessment cannot be held up or postponed
merely because of existence of a dispute regarding the title of income. The
recipient is, therefore, chargeable to tax, though there may be rival claims to
the source of the income. A mere claim, on the other hand, by a person
against the recipient of income is not sufficient to make income accrue to
the claimant and render him liable for tax.

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 6. Relief or reimbursement of expenses not treated as income: Mere relief or
reimbursement of expenses is not treated as income.
7. Diversion of income by overriding title vs. application of income: There is a
thin dividing line between diversion of income and application of income.
While application of income may be of little consequence, diversion of 85
income has to be examined carefully.
8. Surplus from mutual activity: A person can not make a taxable profit out of
a transaction with himself. Income must, therefore, come from outside.
9. Appropriation of payment between capital and interest: Where interest is
due on a capital sum and the creditor gets an open payment from the
debtor, the creditor is at liberty to appropriate the payment towards
principal. If, however, neither the creditor nor the debtor makes any
appropriation of payment as between capital and interest, the Income-tax
Department is entitled to treat the payment as applicable to the outstanding
interest and assess it as income.
10. Temporary and permanent income: For the purpose of income-tax, there. is
no distinction between temporary and permanent income. Even temporary
income is taxable.
11. Lump sum receipt: Income, whether received in lump sum or in
installments, is liable to tax. For instance, arrears of bonus, received in
lump sum, is income and taxable as salary.
12. Personal gifts: Gifts of a personal nature, e.g. birthday gifts, marriage gifts,
etc., do not constitute income and, therefore, recipient of such gifts is not
liable to income-tax.
13. Tax-free income: If a person receives tax-free income on which tax is paid
by the person making payment on behalf of the recipient, it has to be
grossed up for inclusion in his total income.
14. Receipt on account of Dharmada : Receipt on account of Dharmada,
Gaushala and Pathshala is not income and, therefore, not liable to tax.
15. Devaluation of currency : The extra money received on account of
devaluation of currency is taxable.
16. Income includes loss: While income and profits and gains represent ‘plus
income’, losses are present ‘minus income’. Hence, while calculating the
‘total income’, both negative and positive incomes should be taken into
account.
17. Prizes and winnings: Winnings from lotteries, crossword puzzles, races, card
games and other games of any sort or from gambling or better of any form or
nature are taxable under the Act.
18. Same income cannot be taxed twice: It is a fundamental rule of the law of
taxation that, unless otherwise expressly provided, the same income cannot
be taxed twice.
19. Income should be real and not fictional: Income means real income and not
fictional income. In determining the question whether the income is real or
fictional, various factors will have to be taken into account.
20. Mere production does not amount to income : Mere production or receipt of
a commodity which may be converted into money certainly cannot be
construed to be an income in its normal connotation of ‘income’.
21. Source of income need not exist in the assessment year: It is not necessary
that the source of income should exist in the assessment year. If there is an
* » income during the previous year, it is chargeable to tax in the following
assessment year.

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 22. Pin money - Pin money received by wife for her dress/personal expenses and
small savings made by a woman out of money received from her husband for
meeting household expenses is not treated as her income.
23. Award received by a sports man: Award money received by a professional
sportsman is taxable, but the award money received by a non-professional/
amateur sportsman is not liable to tax.
24. Entries in books of accounts are not conclusive of income: The way in which
entries are made by the assessee in his books of account is not
determinative ofthe question whetherthe assessee has earned any profit or
suffered any loss.
25. Income of a State is not liable for Union Taxation : By virtue of Article 289(1)
of the Constitution, the property or income of a State is not liable for Union
taxation.
26. Revenue receipt vs. Capital receipt: Are venue receipt is taxable as income,
unless it is expressly exempt under the Act. But a capital receipt is generally
exempt from tax, unless it is expressly taxable under Sec.4

Gross Total Income

As per Sec. 14 of the Act, the income of a person is calculated under the following
five-heads: (i) Salaries, (ii) Income from house property, (iii) Profits and gains of
business or profession, (iv)Capital gains, (v) Income from other sources. :
The aggregate income under these heads is termed as ‘gross total income’. The
several heads into which income is divided do not make different kinds of taxes.
Taxis always one but it may arise under different heads to which different rules of
computation have to be applied. These heads are in a sense exclusive to one
another and income which falls within one head cannot be assigned to or taxed
under another head. Income has to be brought under one of the heads under Sec.
14 and can be charged to tax only if it is chargeable under the computing section
corresponding to that head. The method of book keeping followed by an assessee
cannot decide under which head a particular income should go.

Total Income and Tax Liability

According to Sec.2(45), total income of an assessee is gross total income as reduced
by the amount deductible under Secs.80CCC to 80U. The Income-tax Act contains
the provisions for computing taxable income, but the rate of tax is given by the
Finance Act passed by the Parliament along with the Union Budget every year.

Agricultural Income
By virtue of Sec.2(lA), the expression ‘agricultural income’ means:
(a) any rent or revenue derived from land which is situated in India and is used
for agricultural purposes;
(b) any income derived from such land by agricultural operations including
processing of the agricultural produce, raised or received as rent-in-kind so
as to render it fit for the market or sale of such produce;
(c) income attributable to farm house subject to the conditions that the
building is situated on or in the immediate vicinity of the land and is used
as a dwelling house, store house or other outbuilding and the land is
assessed to land revenue or a local rate or, alternatively, the building is
situated on or in the immediate vicinity of land which (though not assessed

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 to land revenue or local rate)is situated outside the urban areas, i.e. any
area which comprised within the jurisdiction of a municipality or
cantonment board having a population of10000 or more in any area within
such notified distance (up to 8 kilometres) from the local limits of such
municipality or cantonment board.

Sec. 10(1) exempts agricultural income from tax. The reason of exemption of
agricultural income from central taxation is that the Constitution gives exclusive
power to make laws with respect to taxes on agricultural income to the State
Legislature. However, in some cases, agricultural income is taken into
consideration to determine tax on non-agricultural income.

Assessment
Under See.2(8), the word ‘assessment’ is defined to include reassessment. In
general context, the word ‘assessment’ means computation of tax and procedure
for imposing tax liability. Under the Act, there are seven kinds of assessments –
self-assessment, provisional assessment, regular assessment, best judgment
assessment, reassessment, jeopardy assessment under Secs. 172 and 174 to 176
and precautionary assessment. An assessment is said to be complete when both
the assessment order is made and the tax payable by the assessee is determined.
Assessments have to be made for every year and cannot be held up until the final
result of a legal proceeding, which may pass through several courts, is announced.
Assessment includes imposition of penalty. On the whole, the Act is rather
ambivalent on the issue of ‘assessment’ and hence, even the minute details of the
procedure have been fought right up to the Supreme Court. As a result, now there
is abundance of case-law on the matter

Residential status of an assessee is important in determining the scope of income

on which income tax has to be paid in India. Broadly, an assessee may be resident
or non-resident in India in a given previous year.
The incidence of liability to income-tax depends in every case upon the residential
status and source of income of the assessee. Residential Status is calculated for all
kind of Assessee that is of
• Individual
• HUF
• AOP/BOI/FIRM
• Company

Following are the basic rules about Residential Status

• An assessee may be residential of more than one country at the same time
• Residential Status is calculated for every previous year
• Residential status may be different for every previous year.

Residential Status of an Individual

Resident of India:
Under Section 6(1) of the Income-tax Act, an individual is said to be resident in
India in any previous year if he:

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a) is in India in the previous year for a period or periods amounting in all the one
hundred and eighty-two days or more i.e., he has been in India for at least 182
days during the previous year;
or

b) has been in India for at least three hundred and sixty-five days during the four
years preceding the previous year and has been in India for at least sixty days
during the previous year

Exception:
• Citizen of India, who leaves India in any previous year as a member of the crew of
an Indian ship, or for the purpose of employment outside India,

• Citizen of India or Person of Indian origin engaged outside India (whether for
rendering service outside or not) and who comes on a visit to India in the any
previous year.

Residential Status is calculated only on the basis of first condition that is of 182
days and not on the basis of second condition that is sixty-five days during the
four years proceeding the previous year and has been in India for at least sixty
days during the previous year.

Stay in Territorial Waters:

If any person has stayed in Indian territorial waters, it will be considered to be stay
in India. Territorial waters extend upto 12 nautical miles from the base line on the
coast of India and include any bay, gulf, harbour, creek or tidal river

Person of Indian origin: A person is deemed to be of Indian origin if he, or either of

his parents or any of his grand parents, was born in Undivided India. It may be
noted that grand parents include both material and paternal grand parents.

Non Resident of India: If an individual does not satisfy any of the above condition
he will be said to be NON-RESIDENT.

Resident and Ordinary Resident of India: An Individual is said to be Resident and

Ordinary Resident of India if he is a resident and full fills both of the following
conditions

i. He is a resident in any two out of the ten previous years preceding the previous
year,
and
ii. He has been in India for 730 days or more during the seven previous years
preceding the relevant previous year.

Resident But Non Ordinary Resident of India:

An Individual is said to be Resident But Non Ordinary Resident of India if he is a
resident and does not full fills any or both of the following conditions:

i. He is a resident in any two out of the ten previous years preceding the previous
year,

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and
ii. He has been in India for 730 days or more during the seven previous years
preceding the relevant previous year.

Points to remember
1. It is not necessary that the period of stay must be continuous or at the same
place.

2. In computing the period of 182 days, the day he enters India and the day he
leaves India should both be treated as stay in India. However, in borderline cases
where stay in India is near about 182 days his stay in India has to be calculated on
hourly basis and a total of 24 hours will be taken as one day. For example, if a
person is in India for 82 days and 6 hours and then again he comes to India for 20
days and 20 hours, his stay in India will be taken as 103 days.

3. Meaning of ‘employment outside India’:

• Where an unemployed person leaves India for the purpose of employment outside
India, he can take benefit of the exception given as above.
• An individual need not be an unemployed person who leaves India for
employment outside India - British Gas India (P.) Ltd.(AAR - New Delhi).
In other words, there may be two cases, where one can take benefit of this section,
i. the unemployed person leaving India for taking employment outside India,
ii. the person employed in India who leaves India for the purpose of such current
employment.

For example, Mr. Ram, an employees of a private company in Delhi, leave India for
the purpose of executing some overseas projects of its employer company. So in the
instant case, Mr. Ram can take benefit of the exception given as above.

Example 1
Shane Warne, the Australian cricketer comes to India for 100 days every year. Find
out his residential status for the Assessment Year 2010-11.

Solution:

Checking the conditions of being Resident:

The total stay of Shane Warne in the last 4 years preceding the previous year is
400 days and his stay in the previous year is 100 days. Therefore, since he has
satisfied the condition (b) of section 6(1), he is a resident.

Checking the conditions of being Ordinary Resident:

Since his total stay in India in the last 7 years preceding the previous year is 700
days, he does not satisfy the minimum requirement of 730 days in 7 years. Any
one of the conditions referred in section 6(6) not being satisfied, the individual is
resident but not ordinarily resident.

Therefore, the residential status of Shane Warne for the assessment year 2010-11,
is resident but not ordinarily resident.

Example 2
Mr. Mickle Jackson comes to India for the first time during the P.Y.2005-06.
During the financial years 2005-06, 2006-07, 2007-08, 2008-09 and 2009-10, he

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was in India for 155 days, 60 days, 90 days, 50 days and 70 days respectively.
Determine his residential status for the A.Y.2010-11.

Solution:
During the previous year 2009-10, Mr. Mickle Jackson was in India for 70 days
and during the 4 years
preceding the previous year 2009-10, he was in India for 355 days (i.e. 155+ 60+
90+ 50 days).

Since, he does not satisfy the conditions of section 6(1), therefore, he is a non-
resident for the previous year 2009-10.

Example 3
Mr. Morimoto, a Japanese citizen left India after a stay of 10 years on 1.06.2007.
During the financial year 2008-09, he comes to India for 46 days. Later, he returns
to India for 1 year on 10.10.2009. Determine his residential status for the A.Y.
2010-11.

Solution:
Stay during the P.Y. 2009-10, is 173 days (i.e. 22+ 30+ 31+ 31+ 28+ 31 days).
His stay in the last 4 years is:

P.Y. 2008-09 : 46 days

P.Y. 2007-08 : 62 days (i.e. 30+31+1)
P.Y. 2006-07 : 365 days(since he left India after 10 years)
P.Y. 2005-06 : 365 days(since he left India after 10 years)

Total 838 days

Mr. Morimoto is a resident since his stay in the previous year 2009-10 is 173 days
and in the last 4 years is more than 365 days.
For the purpose of being ordinarily resident, it is evident from the above
calculations, that:

i. his stay in the last 7 years is more than 730 days and
ii. since he was in India for 10 years prior to 1.6.2007, he was a resident in at least
2 out of the last 10 years preceding the relevant previous year.

Therefore, Mr. Morimoto is a resident and ordinarily resident for the A.Y.2010-11.

Example 4
Mr. Dayal, an Indian citizen, leaves India on 22.9.2009 for the first time, to work as
an officer of a company in Canada. Determine his residential status for the A.Y.
2010-11.

Solution:
During the previous year 2009-10, Mr. Dayal was in India for 175 days (i.e. 30+
31+ 30+31+ 31+22 days). He does not satisfy the minimum criteria of 182 days.
Also, since he is an Indian citizen leaving India for the purposes of employment,
the second condition under section 6(1) is not applicable to him.

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Therefore, Mr. Dayal is a non-resident for the A.Y.2010-11.

UNIT II
CONTENTS:
 Income from salary
 Income from House Property

DEFINITION OF SALARY:

For the purpose of Sections 15 and 16 of the Income Tax Act the term 'salary'
includes:
 Wages
 Any annuity or pension
 Any gratuity
 Any fees, commissions, perquisites or profits in lieu of or in addition to any
salary or wages
 Any advance of salary
 Any payment received by an employee in respect of any period of leave not
availed by him i.e., encashment of leave salary.
 The annual accretion to the recognized provident fund of a n employee to the
extent provided in the rules. This may take two forms.

I. Employer's contribution to Provident Fund.

II. Interest credited on the accumulated balance of recognized provident
fund standing to the credit of the employee.

As per rules employer's contribution to the P F in excess of 12% of the salary of the
employee and the interest credited to the PF accumulations in excess of 9.5% will
be considered as salary.

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Amount of the transferred balance of recognized provident fund to the extent to
which it is taxable.
Tax-free salary: Sometimes the employer deducts the tax at source and pays net
salary to the employee. In such cases the individual has to show the aggregate
salary i.e., net salary plus tax paid in his gross total income.

RULES REGARDING SALARY:

Relation between Payer and Payee: The relation between payer and payee should
be that of employer and employee. In other words for an income to be taxed under
head salaries the relation between payer and payee should be of employer and
employee. Employer may be an Individual, firm, AOP etc and an employee may be
full time or part time employee. If the relation between payer and payee is not that
of employer and employee income received cannot be charged under head Salaries
it would be charged under other heads.

Salary and wages: Income tax does not differentiate between salary and wages.

Salary from more than one source: If an Individual receives salary from more
than one employer during same previous year, salary from each source is taxable
under the head Salaries.

Overtime payment: Any over time payment received by an employee is added to

Gross Salary.

Basis of Charge: As per section 15

 Any salary due from an employer, or former employer in the previous year,
whether paid or not
 Any salary paid or allowed to an employee in the previous year by or on
behalf of an employer though not due or before it becomes due to him
Hence salary is taxable on due or receipt basis whichever is earlier.

Fee and Commission: Any fee or commission paid by employer to his employee on
Net profit or Turnover is added to Gross Salary.

Grade system: Under this system the normal annual increments to be given to the
employee is already fixed. Annual increment is given on the same date on which
employee joins the employment.

Employer employee relation: Income can be charged under head Salaries only if
relation between receiver and giver of payment is of employee and employer.
Employer may be individual, firm, company, AOP, BOI, Govt., etc.
 Income by way of examinership fees received by a professor from the
same university in which he is employed would not be chargeable to tax
under this head but must be taxed as Income from other sources under
Section 56.
 Income by way of remuneration received by a managing director would
be taxable as his salary income whereas the income received by him as
director‘s fees in his capacity as director for attending the meetings of the
Board would be assessable under the head Income from other sources.

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  An official liquidator appointed by the Court or by the Central Government
would also become an employee of the Central Government under Section
448 of the Companies Act, 1956 and consequently the remuneration due to
him would also be assessable under the head Salaries.
 Remuneration received by a manager of a company even if he is wrongly
designated as a director or by any other name would be chargeable to tax
under this head regardless of the fact that the amount is payable to him
monthly or is calculated at a certain percentage of the company‘s profits.
 Any money from his employer as part of the terms of employment for not
carrying on any profession, such income must be taxed as salary income.
 Any salary, commission, bonus etc received by partner of a firm will be
charged under head PGBP.
 Salary received by Member of Parliament is to be charged under head Other
sources and not under head Salary.

Allowances
Allowance is a fixed monetary amount paid by the employer to the employees for
meeting particular expense, whether personal or for the performance of duties.
Allowances are generally taxable and are included in the gross salary unless a
specific exemption has been provided in respect of any such allowance. Specific
exemption in respect of allowances is provided under the following sections.

 House Rent Allowance

 Prescribed Special Allowances.

HOUSE RENT ALLOWANCE:

House Rent Allowance is given by the employer to the employee to meet the
expenses in connection with rent of accommodation which the employee might
have to take. HRA is taxable under head Salaries to the extent it is not exempt
under section 10(13A). HRA is exempt under section 10(13A) to the extent of the
minimum of the following three.
 Actual HRA Received by the employee
 Excess of Rent paid for the accommodation occupied by him over 10% of the
salary for the relevant period, that is Rent paid – 10% of Salary
 50% of the salary where the residential house is situated at Mumbai,
Kolkata, Delhi or Chennai and 40% of the salary where the house is situated
at any other place.

Salary for the purpose of calculating HRA means

Basic Salary
DA
Commission for fixed percentage of turnover achieved by employee as per
employment contract.

Any excess of HRA received over the exempted amount will be taxed as salary. The
exemption in respect of HRA will not be available if the
(a) Residential accommodation occupied by the assessee is owned by him or
(b) The assessee has not actually incurred expenditure on payment of rent in
respect of the residential accommodation occupied by him.

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Example: X a resident of Ajmer, receives Rs. 1,92,000 per annum as basic salary
during the previous year 2012-13. In addition, he gets Rs. 19,200 per annum as
dearness allowance forming part of basic salary, 7 percent commission on sales
made by him (sale made by X during the relevant previous year is Rs. 86,000) and
Rs. 24,000 per annum as house rent allowance. He, however, pays Rs. 21,500 per
annum as house rent. Determine the quantum of house rent allowance exempt
from tax.
Solution :- “Salary”, for the purpose of computing house rent allowance exempt from
tax, works out to be Rs. 2,17,220 (i.e. basic salary : Rs. 1,92,000 + darkness
allowance : Rs. 19,200 + commission @ 7% on Rs. 86,000 : Rs. 6,020)
Out of the house rent allowance of Rs. 24,000, the least of the following is exempt
from tax.
a. Rs. 86,888 (being 40% of salary)
b. Rs. 24,000 (being the amount of house rent allowance); or
c. Nil (being the excess of rent paid [i.e. Rs. 21,500) over 10% of salary (i.e. Rs.
21,722)]
As the least of the three sum is nil, the entire house rent allowance is chargeable to
tax.

PRESCRIBED SPECIAL ALLOWANCES:

Prescribed special Allowance can be classified under two heads

Special Allowance for Performance of official Duties

Allowance to meet personal Expenses.

Special Allowance for Performance of official Duties: These allowances are

provided for meeting expensed incidental with performance of job and hence are
exempted to the minimum of

 Actual Amount spent on the purpose for which allowance was provided
 Actual amount received.

These allowances are

 Travelling Allowance: Allowance paid to meet the expenses of official tour or

on transfer of duty
 Daily Allowance: Allowance paid to an employee to meet his daily expenses
who is on tour or due to transfer is absent from his normal place of duty.

 Conveyance Allowance: Allowance granted to meet the expenditure incurred

on conveyance in performance of duties of an office or employment of profit
provided free conveyance is not provided.

 Uniform Allowance: Any allowance by whatever name called granted to meet

the expenditure incurred on the purchase or maintenance of uniform for wear
during the performance of the duties of an office or employment.

 Academic Allowance: Allowance provided to encourage further studies or

research.

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Allowance to meet personal Expenses: These allowances are provided to meet
personal expenses of the employee and can be sub divided in two catagories.

Allowances which are exempted to the extent of amount received or the limit
specified
Allowances which are fully taxable

Allowances which are exempted to the extent of amount received or the limit
specified: These allowances are exempted to the amount received or the limited
specified whichever is less.

o Children Education Allowance: It is exempt upto Rs.100 P.M. per

child upto maximum of two children or the amount received
whichever is less.

o Hostel Expenditure Allowance: It is exempt upto Rs.300 P.M. per

child upto maximum of two children or the amount received
whichever is less.
o Transport Allowance: Allowance provided to meet the expensed of
commuting from residence to place of work and back is exempted
upto Rs. 800 P.M.

Allowances which are fully taxable

 Dearness Allowance, Additional Dearness Allowance and Dearness
Pay: This is a very common allowance these days on account of
high prices. Sometimes Additional Dearness Allowance is also
given. It is included in the income from salary and is taxable in
full
 Fixed Medical Allowance: It is fully taxable.
 Tiffin Allowance: It is given for lunch and refreshments to the
employees.
 Servant Allowance: It is fully taxable even if it is given to a low
paid employee, not being an officer, i.e., it is taxable for all
categories of employees.
 Non-practising Allowance: It is generally given to those medical
doctors who are in government service and they are banned from
doing private practice. It is to compensate them for this ban. It is
fully taxable.
 Hill Allowance: It is given to employees working in hilly areas on
account of high cost of living in hilly areas as compared to plains.
It is fully taxable, if the place is located at less than 1,000 metres
height from sea level.
 Warden Allowance and Proctor Allowance: These allowances are
given in educational institutions for working as Warden of the
hostel and/or working as Proctor in the institution. These
allowances are fully taxable.
 Deputation Allowance: When an employee is sent from his
permanent place of service to some other place or institution or
organisation on deputation for a temporary period, he is given this
allowance. It is fully taxable.
 Overtime Allowance:

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  Other Allowances like Family allowance, Project allowance,
Marriage allowance, City Compensatory allowance, Dinner
allowance, Telephone allowance etc. These are fully taxable.

ENTERTAINMENT ALLOWANCE: Deduction for entertainment Allowance is

available only to Government Employees only. Entertainment Allowance is first
included in the Salary and then deduction is made. Amount deducted is least of
the following Three

 Actual Entertainment Allowance Received

 20% of salary exclusive of any allowance, benefit or perquisite
 5000

Perquisites

Definition: As per section 17 Perquisite means:

o The value of rent-free accommodation provided to the assessee by his
employer;
o The value of any concession in the matter of rent respecting any
accommodation provided to the assessee by his employer;
o The value of any benefit or amenity granted or provided free of cost or
at concessional rate to specified employees
o The value of any specified security allotted or transferred, directly or
indirectly, by any person free of cost or at concessional rate, to an
individual who is or has been in employment of that person
o Any sum paid by the employer in respect of any obligation which but
for such payment, would have been payable by the assessee;
o Any sum payable by the employer, whether directly or through a
fund, other than a recognized provident fund or an approved
superannuation fund or a Deposit-linked Insurance Fund
o Any sum paid by the employer in respect of any expenditure actually
incurred by the employee on his medical treatment or treatment of
any member of his family

Taxability of Perquisites

Perquisites which are taxable in hands of all employee:

o The value of rent-free accommodation provided to the assessee by his

employer;
o The value of any concession in the matter of rent respecting any
accommodation provided to the Assessee by his employer;
o The value of any benefit or amenity granted or provided free of cost or
at concessional rate to specified employees
o The value of any specified security allotted or transferred, directly or
indirectly, by any person free of cost or at concessional rate, to an
individual who is or has been in employment of that person
o Any sum paid by the employer in respect of any obligation which but
for such payment, would have been payable by the Assessee;
o Any sum payable by the employer, whether directly or through a
fund, other than a recognized provident fund or an approved
superannuation fund or a Deposit-linked Insurance Fund

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 o The value of any other fringe benefits as may be prescribed.

Perquisites which are taxable in hands of specified employee:

 Gas, electricity or water supplied free for household consumption

free or at concessional rates.
 Service of sweeper Gardner watchmen or personal assistance
 Free or concessional educational facilities.
 Motor car
 Personal or private journey provided free of cost or at a
concessional rate to employee or any member of his household

These perquisites are taxable only in case of specified employees if such services
are provided. In case monetary reimbursement is provided then it will taxable in
hands of all employees.

SPECIFIED EMPLOYEES

The following are the specified employee for the purpose of the section-17(2)(iii):
 A director employee of Employer Company.
 An employee who has substantial interest in the employer company.
 An employee (not covered by above) whose income under the head ‘salaries’
(whether due from, or paid or allowed by, one or more employers)
excluding the value of all non-monetary benefits and amenities, exceeds
Rs.50,000.
While computing the limit of Rs.50, 000 the following are deducted/ excluded:
 all non-monetary benefits;
 deduction u/s.16 (ii), & (iii) i.e., deduction for entertainment allowance and
profession tax.

Valuation of Perquisites

VALUE OF ACCOMMODATION PROVIDED RENT FREE OR AT CONCESSIONAL

RATES.

Accommodation: Accommodation provided by the employer to an employee may

be
 Free Accommodation
 Accommodation at concessional Rate.

Rent Free Accommodation: Rent free accommodation is the accommodation

provided by employer for free of cost to its employee. It may be
 Furnished
 Unfurnished.

Unfurnished Rent Free Accommodation Provided by Govt: License fee

determined by Union or State Government in respect of accommodation in
accordance with the rules framed by that government as reduced by the rent
actually paid by the employee.

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Furnished Rent Free Accommodation Provided by Govt:
Calculate Value of accommodation as unfurnished
Add 10% p.a. of the cost of furniture
Add if such furniture is hired from a third party, the actual hire charges
payable for the same reduced
Less any charges paid or payable for the same by the employee during
the previous year.

Where the Rent Free Accommodation is provided by any other employer

and the accommodation is owned by the employer: Value of perquisite will be

15% of salary in cities having population exceeding 25

10% of salary in cities having population exceeding `10 lakh but not exceeding 25
lakh as per census of 2001,
7.5% of salary on other cities

Where the Rent Free Accommodation is provided by any other employer

and the accommodation is not owned by the employer:

Value of perquisite will be

15% of salary
Or
Actual amount of lease rental paid or payable by the employer

Whichever is lower as reduced by the rent, if any, actually paid by the employee.

In case Accomodation is provided in a Hotel for all employees: 24% of salary

paid or payable for the previous year or the actual charges paid or payable to such
hotel, which is lower, for the period during which such accommodation is provided
as reduced by the rent, if any, actually paid or payable by the employees.

Basic Salary + D.A. forming part of retirement benefits +Bonus +Any other
allowance + pension received from old employer.

Exceptions:
1. Temporary Accommodation provided in remote area (location which is 40KM
from a town whose population is less than 20,000) whose area is less than
800 sq ft.

2. Accommodation provided at new place of posting on transfer while retaining

the accommodation at the other place for 90 days of less. In such case value
of only one accommodation is taxed upto 90days and beyond that both
accommodation are taxable as perquisites.

3. Accommodation provided in hotel

 For 15days or less
 Due to transfer from one place to another.

VALUATION OF MONETARY OBLIGATION OF EMPLOYEE DISCHARGED BY

THE EMPLOYER

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Following are some of the monetary obligation that will be taxable in hands of
specified employees if the employer pays for such services. However in case
employer reimburses for the expense then it will be taxable in hands of all
employees.

 Gas, Electric Energy or Water bill

 Sweeper, Gardener, Watchman or a Personal Attendant
 Medical expenses reimbursed in excess to Rs. 15,000

INTEREST FREE OR CONCESSIONAL LOAN

The value of the benefit to the assessee resulting from the provision of interest free
or concessional loan made available to the employee or any member of his
household during the relevant previous year by the employer or any person on his
behalf shall be determined as the sum equal to the simple interest computed at the
rate charged by the State Bank of India on 1st April of Relevant PY in respect of
loans for house and conveyance and at the rate charged by the State Bank of India
for other loans on the maximum outstanding monthly balance as reduced by the
interest, if any, actually paid by him or any such member of his household.

Exceptions:
 For medical treatment in respect of diseases specified in rule 3A
 The amount of loans does not exceeds in the aggregate Rs. 20,000.

In case any amount is reimbursed to employee under any medical insurance

scheme then such loan which acquired for treatment of diseases specified in Rule
3A will be taxable from the month in which such reimbursement is received up to
the month in which employer repays the employer.

In case any interest is recovered from employee then such amount will be reduced
from value of perquisite.
In case any amount is recovered from employee then such amount will be reduced
from value of perquisite.

VALUE OF ANY GIFT VOUCHER OR TOKEN

If the aggregate value of gifts received by the employee or any member of house
hold in relevant exceeds Rs. 5000 then such amount which exceeds Rs. 5000 will
be taxable in hands of employee.

If the aggregate value of gifts received by the employee or any member of house
hold in relevant is less than Rs. 5000 then such gift will not be taxable.

EXPENSES ON CREDIT CARD

If credit card is used by employee or any member of his house hold for personal
expenses and is reimbursed by the employer then amount of such expenses
including credit card membership fee will be taxable in hands of employee to the
extent such amount is paid by the employer for house hold expense.

In case credit card is used only for official purpose then value of perquisite will be
NIL

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If the aggregate value of gifts received by the employee or any member of house
hold in relevant exceeds Rs. 5000 then such amount which exceeds Rs. 5000 will
be taxable in hands of employee.

In case any amount is recovered from employee then such amount will be reduced
from value of perquisite.

TELEPHONE OR MOBILE PHONE PROVIDED TO EMPLOYEE BY EMPLOYER:

Value of perquisite is NIL

CLUB MEMBERSHIP FEE

In case club member ship fee is paid by employer for employee or any member of
his house hold for their personal entertainment then such amount will be taxable
in hands of employee

In case club member ship fee is paid by employer for employee which is exclusively
for official purpose then value of perquisite will be NIL.

In case any amount is recovered from employee then such amount will be reduced
from value of perquisite.

USE OF MOVEABLE ASSESTS

In case assets is a Lap top or computer value of perquisite will be Nil

In case of any other asset it will be

 10% value of asset if owned by employer or
 Actual hire charges paid by employer if not owned by employer.

In case any amount is recovered from employee then such amount will be reduced
from value of perquisite.

TRANSFER OF ANY OTHER MOVEABLE ASSET

Computers and electronic items: Value of perquisite will be

Value of Asset to employer – Depreciation @50% WDV for every completed year
during

Motor Cars: Value of perquisite will be

Value of Asset to employer – Depreciation @20% WDV for every completed year

Any other Asset: Value of perquisite will be

Value of Asset to employer – Depreciation @10% SLM for every completed year

In case any amount is recovered from employee then such amount will
be reduced from value of perquisite.

PERQUISITES WHICH ARE TAXABLE IN HANDS OF SPECIFIED EMPLOYEES

ONLY

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GAS, ELECTRIC ENERGY OR WATER BILL:
In case supply if from resource owned by the employer then manufacturing cost to
the employer
In other cases amount paid by the employer for acquire such supply.

In case any amount is recovered from employee then such amount will be reduced
from value of perquisite.

FREE OR CONCESSIONAL EDUCATIONAL FACILITIES TO ANY MEMBER OF

HOUSE HOLD.

In case institution is owned by the employer

Cost of education in similar institute – Rs 1000 per child.

In case cost education in similar institute is less than 1000 then value of perquisite
is NIL
In case institution is not owned by the employer
Cost of education in similar institute – Rs 1000 per child.
In case cost education in similar institute is less than 1000 then value of perquisite
is NIL
In case any amount is recovered from employee then such amount will be reduced
from value of perquisite.

ANY SECURITY OR SWEAT EQUITY PROVIDED TO EMPLOYEE

Value of perquisite will be the fair market value of equity or security on the date
option is exercised by the employee.
Fair market value is

 In case share/security is listed in one stock exchange.

Average of opening and closing price of share on that date

 In case share/security is listed in more than one stock exchange.

Average of opening and closing price of share on that date of stock exchange in
which highest trading takes place.

 In case share/security is not listed in any one stock exchange.

As determined by a merchant banker.

MOTOR CAR

Conditions Engine is less than 1.6 Engine is more than 1.6

lts/1600 CC lts/1600 CC
Where motor car is
owned or hired by the
employer and
maintenance expenses
are met or reimbursed
by the employer
Value of Perquisite is NIL Value of Perquisite is NIL

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It is used onlyfor 10% value of car if owned 10% value of car if owned
official use by employer/Actual rental by employer/Actual rental
charges Paid by him charges Paid by him
Used only for private + +
use of the employee or Amount paid to Driver if Amount paid to Driver if
any member of his provided provided
household. + +
Any other Any other
maintenance/running maintenance/running
charged paid by employer charged paid by employer

Partly used for private

use and partly for
personal use of
employee
1800 PM + 900 for Driver 2400 PM + 900 for Driver
In case all expenses are if provided if provided
paid by employer
600 PM + 900 for Driver if 900 PM + 900 for Driver if
In case all expenses are provided provided
paid by employee

When car is owned by the employee

Conditions Engine is less than 1.6 Engine is more than 1.6

lts/1600 CC lts/1600 CC
Used for official purpose
only and amount is such Value of Perquisite is NIL Value of Perquisite is NIL
expenses are reimbursed
by the employer.

Used for personal purpose Actual expenses Actual expenses

only and amount is such + Driver Salary + Driver Salary
expenses are reimbursed – Amount Recovered from – Amount Recovered from
by the employer. Employee Employee

Used for personal and Actual expenses – (1800 Actual expenses – (2400
official purpose and + 900 if Driver is + 900 if Driver is
amount is such expenses provided) provided)
are reimbursed by the
employer.

Two
wheeler
Conditions Engine is less than 1.6

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 lts/1600 CC
In case employee owns any other automotive and
expenses are paid by the employer

For official purpose only NIL

For official and personal purpose of employee Actual Expenses - 900

Meaning of month
The term ‘calendar month’ will mean a month reckoned according to the British
calendar i.e., the period from any day upto and inclusive of the day preceding the
corresponding day in the succeeding calendar month. Thus, the periods 28th Jan.
to 27th Feb., 29thMay to 28th June or 28th Feb. to 27th March will all represent
one calendar month. In the computation of calendar month for evaluating the
perquisite, only full calendar months must be considered and fractions of calendar
months must be ignored.

In case amount more than specified for expenses is to be claimed then following
documents must be provided/ maintained

 Employer had maintained complete detail of the journey taken by employee

for official purpose including date, destination, mileage and amount of expense

 Employer provides a certificate that journey was exclusively for official

purpose.

TAX-FREE PERQUISITES

Medical facility

 The value of any Medical facility provided to an employee or his family

member in any hospitals, clinics, etc. maintained by the employer.
 Reimbursement of expenditure actually incurred by the employee on
medical treatment for self or for his family members in any hospitals,
dispensaries etc. maintained by the Government or local authority or in a
hospital approved under the Central Health Scheme or any similar scheme
of the state Government or in a hospital, approved by the chief
commissioner having regard to the prescribed guidelines for the purposes of
medical treatment of the prescribed diseases or ailments
 Group medical insurance obtained by the employer for his employees
including family members of the employees
 Reimbursement of medical expenses actually incurred by the employee upto
a maximum of ` 15,000 in the aggregate in a year, in a private hospital for
his and his family

Recreational facilities: The value of recreational facilities provided is exempt only

in case such facility is open to all employees.

Training provided to employees.

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Food and beverages.
 Non alcoholic beverages provided at work place during working hours.
 Free meals provided in remote area or on off shore drillin
 Free meals provided at the place of work upto Rs 50

Interest free loan upto Rs. 20,000 or for treatment of a disease specified in Rule
3A.

Rent-free house to

 Supreme/High Court Judges

 Officer of Parliament,
 a Union Ministry and a
 Leader of opposition in Parliament.
 Members of UPSC.

Conveyance facility to High Court and Supreme Court judges.

Leave travel concession exempt as per provision of Section 10.

Sum payable by an employer through a Recognised Provident Fund upto 12% of
salary.

Sale/Gift of an asset other than car/electronic item to an employee after using

the same by the employer for 10 years or more is a perquisite in the hands of
employee

LEAVE TRAVEL CONSESSION (LTC/LTA)

Employee is entitled to exemption under section10(5) in respect of the value of

travel concession from his employer or former employer for himself or his family.
This concession is available only for travel within India.

Exemption will be subject to following limit or the amount spent whichever is

lower.

In case journey is performed by air maximum exemption shall be the amount not
exceeding the air economy fare of the National Carrier by the shortest route to the
place of destination.

In case place of origin and destination is connected through rail and journey is
performedby any mode other than air then maximum exemption shall not be more
than first class AC rail fare by the shortest route.

In case place of origin and destination are not connected through railways and
journey is performed by any means other than air
 And a recognized transport system exist amount not exceeding 1 st class or
deluxe class fare.
 In case no recognized transport system exits then fare of first class rail
between the same distances.

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Number of Exemptions: Exemption can be claimed only two times in a block of 4
yrs starting 1986-89.
In case assessee has not availed one or both exemption in a block then only one
can be carried forward to the next block which can be availed only in the first year
of the successive block.

Exemption can be claimed only for two surviving children born after 1 Oct 1998.
Multiple births are considered as a single child. This rule is not applicable on
children born before 1 Oct 1998.

RETIREMENT BENEFITS

GRATUITY
Gratuity is the amount paid to an employee for continuous service for not less
than 5 yrs. So the exemption of Gratuity is available only when
 Employer employee relation Exists
 On termination of employment due to death, accident, resignation,
retirement etc.

In case of Govt Employees: It is wholly exempt from tax under Section 10(10)(i) of
the Act.

Other Employees covered under The Payment of Gratuity Act, 1972: In case of
employees covered under Gratuity Act 1972 Death Cum Retirement Gratuity will
be exempted to the minimum of the following

a. Actual Amount Received

b. Last Salary × 15 × Completed years/26
c. Rs. 10,00,000.

Completed year: It means every completed year and part of year above Six months
Example.
11 yrs 6 month 0 days = 11 yrs
11 yrs 6 month 10 days = 12 yrs

Salary means Last salary Drawn by the employee including

Basic + DA forming part of retirement Benefit + Commission based on fixed
percentage of turnover

Other Employees not covered under The Payment of Gratuity Act, 1972: In
case of employees covered under Gratuity Act 1972 Death Cum Retirement
Gratuity will be exempted to the minimum of the following

a. Actual Amount Received

b. Average Salary × 15 × Completed years/30
c. Rs. 10,00,000.

Completed year: It means only completed year Example.

11 yrs 6 month 0 days = 11 yrs
11 yrs 11 month 15 days = 11 yrs

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Average salary means 10 month average salary immediately preceeding the month
in which retirement/termination takes place.

In case employee retires on 15 Jan 2012 average will be taken from 1 Mar 2011 to
31 Dec 2011.

In case of seasonal worker gratuity is paid for 7 days.

In case of Piece rated employee daily wages shall be calculated on average of 3

months immediately preceding the termination of employment. This excludes any
over time payment.

In case gratuity is received from two different employer in two different PY then
amount of exemption availed during first time gratuity was received would be
reduced from the maximum amount of exemption.

PENSION
Pension is a payment made by the employer after the retirement/death of the
employee.

In case pension is paid to employee after retirement it is taxable under head salary.

However in case pension is paid to employee’s family after his death it is known as
family pension and is taxable under head Other Sources.

UnCommuted Pension: When pension is paid on monthly basis it is known as

commuted pension and is taxable in hands of all employees (Govt and other).

Commuted Pension: When lump sum amount is paid to employee against part of
pension this is known as commuted pension

Commuted Pension in case of Govt employees, local Authorities, Statutory

Corp: It is paid as per Civil pension rules of central govt and hence is fully
exempt.

Commuted pension in case of other employees.

 When Gratuity is also received: Amount of exemption will be 1/3rd value of

which assessee is entitled to receive. In other words Amount exempt shall be one
third of commuted value of full pension. In this case exemption will be calculated
as
 When Gratuity is not received: Amount of exemption will be 1/2 value of
which assessee is entitled to receive. In other words Amount exempt shall be half of
commuted value of full pension. In this case exemption will be calculated as

ENCASHMENT OF EARNED LEAVE

Leave Encashment During tenure of Service: Leave encashment to an employee

while he continues to be in service with the same employer is taxable in case of all
employees (Govt and others) under head Salary.

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Leave Encashment at the time of retirement:

 In case of Govt Employees: Leave encashment to a govt employee at time of

retirement/resignation is fully exempt.

 In case of Other Employees/Local Authourity/Public Sector Under taking. It

is exempt to the extent of least of following.

 Amount Rcvd

 10 months Salary

 Average Salary × No. of unavailed leaves on the basis of 30days entitlement

per yr
 30

 Rs. 3,00,000 less any previous exemption

Meaning of Salary: Salary means Basic+DA (forming part of retirement benefit) +

Commisison earned on fixed turnover.

Average Salary: Average salary is to be taken 10 month average salary immediately

preceding retirement.

In case Date of Retirement is 15 Jan 2012 so average will be taken from 16 April
2011 to 15 Jan 2012.

Unavailed 30 days leave will be calculated only for completed years only.
Any exemption availed during previous retirement is to reduced from limit of Rs.
3,00,000

RETRENCHMENT COMPENSATION
Any compensation received by a workman under the Industrial Disputes Act, 1947
or under any other Act or rules, orders or notifications issued thereunder or under
any standing orders or under any award, contract of service or otherwise, at the
time of his retrenchment. The amount is exempt under this clause to the extent of
least of the following limits:

1. Actual amount received.

2. Rs .5,00,000
3. 15 Days Salary for every completed year of part of year above six
months.

PAYMENT RECEIVED ON VOLUNTARY RETIREMENT

Any amount received or receivable by an employee of
 A public sector company or
 Of any other company or
 An authority established under Central, State or Provincial Act or a local
authority, or any State Government or Central Government or
 The Institution having importance throughout India or
 A recognized management institute,

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on his voluntary retirement or termination of his service, in accordance with any
scheme or schemes of voluntary retirement or in the case of a public sector
company, a scheme of voluntary separation. The scheme of voluntary retirement
are to be framed in accordance with such guidelines as may be prescribed which
may include among other things the criteria of economic viability.

The amount of exemption is the

 actual amount of compensation or
 Rs. 5,00,000,

Whichever is less.

This exemption is available only once in the life time of an assessee.

PROVIDENT FUND

Provident Fund scheme is a welfare scheme for the benefit of the employees. Under
this scheme a certain sum is deducted by the employer from the employee’s salary
as his contribution to the provident fund. Employer also contributes a certain
percentage of the salary of the employee to the provident fund. This amount is
invested in the name of the employee. Interest earned is also credited PF A/c. some
other points are

Kinds of PF

Statutory PF: It is set up under PF Scheme 1925 for Govt and Semi Govt
Employees, university/educational institutions.

 Employee’s contribution is out of their income so it is not taxed again.

 Employers contribution and the interest thereon is also fully exempt.

Recognized PF: It is set up under PF scheme 1952 and is compulsory for every
employer who has 20 or more employees to run this scheme in his organization.
For others it is discretionary.

 Employee’s contribution is out of their income so it is not taxed again.

 Employers contribuition in excess to 12% is taxable in hands of employee
 Interest credited in excess to 9.5% is taxable is taxable in hands of employee

UnRecognised PF: PF scheme which is not approved by Commissioner of PF and

Income tax is known as unrecognized PF. In case it is approved by Commissioner
of PF but not by IT it would still be known as unrecognized PF.

 Employee’s contribution is out of their income so it is not taxed again.

 Employer’s contribution is not taxable every year however total employers
contribution is taxable under head Salary in the year in which it is paid to
employee or when it is credited to recognized PF Ac.
 Only interest on employer’s contribution is taxable under head Other
Sourcesin the year in which it is paid to employee or when it is credited to
recognized PF Ac.

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 Public Provident Fund (PPF): The Central Government has established a fund for
the benefit of public to mobilize personal savings. Any member of the public,
whether salaried or self-employed; and contributed to the fund by opening a
provident fund account at any branch of the State Bank of India or its subsidiaries
or other nationalized bank.

Even a salaried employee can simultaneously become a member of employee’s

provident fund (whether statutory, recognized or unrecognized) and public
provident fund. Any amount in multiple of Rs.5 (subject to minimum of Rs.1000
and maximum of Rs.100, 000 p.a.) May be deposited in this account. Interest is
credited every year but payable only at the time of maturity.

Interest earned on this fund is exempted from tax u/s 10(11).

APPROVED SUPERANNUATION FUND.

 Employers contribution in excess to Rs. 1,00,000 is taxable in hands of

employee.
 Employee’s contribution qualifies for tax deduction under section 80C.
 Interest on accumulated balance is exempt from tax.

DEDUTION FROM SALARIES U/S 16

Entertainment Allowance 16(ii): Deduction for entertainment Allowance is

available only to Government Employees only. Entertainment Allowance is first
included in the Salary and then deduction is made. Amount deducted is least of
the following Three

 Actual Entertainment Allowance Received

 20% of salary exclusive of any allowance, benefit or perquisite
 5000

Professional Tax Paid 16(iii):Any sum actually paid by the assessee on account of
professional tax / tax on employment shall be allowed as deduction from Gross
Salary.
However if Professional Tax is paid by employer on behalf of employee, then first it
will be included in Gross Salary and then deducted from Gross Salary. Professional
Tax due but not paid shall not be allowed as deduction.

INCOME FROM HOUSE PROPERTY

What is house property? House property means any building of which the assessee
is the owner. Ownership of the building is must in case of calculation of income
from house property.
Notes:
 Income from sub-letting of the house property is taxable under the head “Income
from other sources”.
 If rent of furniture is received along with the house rent, the rent from furniture
will be treated as “Income from other sources” not as income from house property.

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 Meaning of Annual Value:- annual value of house property means the sum which
might reasonably be expected to fetch if the property is let from year to year.
Incomes not to be treated as income from house property: Following are some
incomes which are not the part of income from house property:-
1. House property used for business purpose.
2. Rent received from vacant land.
3. Income from house property in the immediate vicinity of agricultural land and is
used as a store house or dwelling house etc. by the cultivators.
Incomes to be treated as income from house property:- Followings are some incomes
which are to included in the income from house property:-
1. Rental Income from any farm house or agriculture land for any purpose other than
agriculture.
2. Any arrears of rent, which has not been taxed, received in subsequent year, shall
be taxable as income from house property in the year of receipt.
3. Any unrealized rent received in subsequent year, will be added in rental income
without any deduction.

DEDUCTIONS ALLOWED FROM INCOME FROM HOUSE PROPERTY

Following deduction are allowed against the income from house property:-
A. Standard Deductions:- Repair & collection charges @ 30% of the net annual value
shall be allowed. (Net Annual Value means Rent received minus Property tax paid).
B. Interest on borrowed capital:- (On accrual basis)Interest on borrowed capital will
be allowed without any limit after the completion of construction. If interest is paid
prior to construction or acquiring the property, will be deducted in 5 installments
commencing from the previous year in which the house was acquired or
constructed.
C. If fresh loan has been raised to repay the original loan, the interest paid on the
second loan, would also be allowed.
AMOUNTS NOT TO BE DEDUCTED FROM INCOME FROM HOUSE PROPERTY
1. Any interest paid out of India against which no tax has been deducted at source.
2. Interest payable on interest, will not be allowed.
3. Any brokerage, commission paid to arrange a loan, will not be allowed.
4. Electricity exp., water exp., salary of lift man or watchman, Ground rent, Insurance
premium etc. will not be deducted as expenditure against income from house
property.

HOW TO CALCULATE THE INCOME FROM HOUSE PROPERTY

Rental income received or receivable during the year

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 Less: House Tax/Local tax paid such as municipal tax, water and sewage tax, fire
tax etc. (on actual payment basis only).
Net Annul Value
Less: 30% standard deductions for repair etc of net annual value
Less: Interest on borrowed capital
Net income from house property

HOW TO CALCULATE THE INCOME OF SELF OCCUPIED PROPERTY

 No deduction is allowed for repair and collection @30% and house tax since the
value is being taken as NIL.
 If any interest is paid on loan before 01.04.1999, maximum amount up to
Rs.30000/= is allowed as deduction.
 If the loan is taken after 01.04.1999, and house is self occupied only, the interest
up to Rs.150000/= will be allowed. It can be adjusted against income from other
property or even from other income. With effect from Financial Year 2014-15, the
interest limit for self occupied house is increased from Rs.1,50,000/= to
Rs.2,00,000/=.
 If the house is partly let out, interest can be adjusted up to any limit.
 Repayment of Principal loan can be claimed u/s 80-C (Over all limit of deduction
u/s 80-C is Rs.1,50,000/=)
Set off loss from House Property
 Any loss under income from house property can be set off against the income
under any other house property.
 Any loss under income from house property can be set off against the income
under any other head.
 Any loss under the head income from house property, which can not be and is not
wholly set off against income under any other head, may be carried forward for
eight years to be set off against income from house property in those years.

Illustration-1:

Mr. X has got the following details in respect of income from house property during
financial 2016-17 (Assessment Year 2017-18):-
Rent received Rs.240000/=
Property tax paid Rs.25000/=
Insurance of building Rs.5000/=
Interest paid on borrowed capital Rs.60000/=
Calculate the income from house property?

Solution:

COMPUTATION OF INCOME FROM HOUSE PROPERTY

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 Rent Received (Annual Value) 240000

Less: Property Tax paid 25000

Net Annual Value 215000

Less: Standard Deduction @ 30% 64500

(For repair etc.)

Less: Interest on borrowed capital 60000 124500

Income from House Property 90500

Note: Insurance expenses will not be allowed as deduction against income from
house property.

Illustration-2:
Mr. Y purchased a house on 15.02.2008 and it was fully occupied by him during
financial year 2016-17 (Assessment Year 2017-18). Other details are as under:-
Property Tax paid Rs.15000/=
Insurance of House Rs.3000/=
Interest paid on borrowed money for house Rs.220000/=
Compute his income under the head “Income from House Property”?

Solution:

COMPUTATION OF INCOME FROM HOUSE PROPERTY

Annual Value of Self Occupied House 0

Less: Interest on borrowed capital allowed 200000

Loss from House Property 200000

Notes:
1. No expenditure other than interest on borrowed capital will be allowed as
deduction against income from self occupied property.
2. Since the house was purchased after 01.04.1999, the amount of deduction against
interest will be allowed Rs.200000/= during financial year 2016-17.

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 UNIT III
CONTENTS:
 Income from Business and Profession
 Income from Capital Gain
 Income from Other Source
PROFITS AND GAINS OF BUSINESS OR PROFESSION

“Profit and gains of business or profession” is one of the heads of income under
Income Tax. While filing income tax return, the taxpayer must declare the amount
of profits and gains of business or profession. In this article, we look at the
procedure for calculating Profits and Gains of Business or Profession in detail.

List of Incomes Chargeable to Profits and Gains of Business or Profession

The following incomes will be chargeable to income tax under the head “Profits and
gains of business or profession”:

1. Protis and gains of any business which was carried on by the assessee at
any time during the previous year/
2. Any compensation or other payment due to or received by:
1. Any person in connection with termination/modification of his/her
agreement for managing the whole or substantially the whole of
affairs of an Indian company or any other company.
2. Any person holding an agency in India for any part of the activities
relating to the business of any other person at or in connection with
the termination or modification of the terms of the agency.
3. Any person for or in connection with the vesting in the Government,
or in any corporation owned by or controlled by the Government,
under any law for the time being imposed, of the management of any
property or business.
3. Income derived by trade, professional or similar association from specific
services performed for its members. This is an exception to the general
principle that a surplus arising to mutual association cannot be regarded as
income chargeable to tax.
4. Export incentives which include:
1. Profits on sales of import licenses granted under Imports (Control)
Order on account of exports.
2. Cash assistance, by whatever name called, received or receivable
against export.
3. Duty drawbacks of Customs and Central Excise duties.
4. Any profit on the transfer of the Duty Entitlement Pass Book Scheme.

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 5. Any profit on the transfer of the Duty Free Replenishment Certificate.
5. Value of any benefit or perquisite, whether convertible into money or not,
arising during the course of the carrying on of any business/profession.
6. Any interest, salary, bonus, commission or remuneration due to or received
by a Partner of a Firm from the firm in which he is a partner.
7. Any sum received or receivable in cash or in kind under an agreement for:
1. Not carrying out activity in relation to any business or profession.
2. Not sharing any know-how, patent, copyright, trademark, license,
franchise or any other business or commercial right of similar nature
or information or technique likely to assist in the manufacture or
processing of goods or services.
8. Any sum received under a Keyman Insurance Policy including the sum
allocated by way of bonus on such policy.
9. Any sum whether received or receivable, in cash or kind, on account of any
capital asset being demolished, destroyed, discarded or transferred, if the
whole of the expenditure on such capital asset has been allowed as a
deduction under Section 35AD.

Classifying Income Under Profits and Gains of Business or Profession

In case you weren’t able to find a types of income under the list above, the
following conditions can be used to verify if an income would fall under Profits and
gains of business or profession. According to Section 28, the following are the main
clause that requires an income tot be charged under profits and gains of business
or profession:

1. There should be a business or profession.

2. The business or profession should have been carried on by the assessee.
3. The business or profession should be carried on for sometime during the
previous year.
4. The charge is in respect of the profits and gains of the previous year of the
business or profession.
5. The charge extends to any business or profession carried on.
Under Section 28, one of the main aspects on determining if an income must be
classified under profits and gains of business or profession is that if a business
was carried on by the assessee at anytime during the previous year. It is however,
not necessary that the business be carried out throughout the previous year or till
the end of the previous year.

Other Income Classified as Profits and Gains of Business

There are certain exceptions to the above rules. The following incomes must be
classified under Profits and Gains of Business, even if a business was not carried
on by the assessee during the previous year.

 Recovery against any loss, expenditure or trading liability earlier allowed as

a deduction.
 Balancing charge in case of electricity companies.
 Sale of capital asset used for scientific research.
 Recovery against bad debts.
 Amount withdrawn from Special Reserve.

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  Receipt of discontinued business under cash system of accounting.

INCOME FROM CAPITAL GAINS

To make more money out of the said investments, of course. You invest in mutual
funds because you want to earn a fixed income or considerable returns after
maturity. People invest in properties so that they can either occupy it themselves
(thus saving on rent) or sell them later at higher prices. In this article, we will
explore capital gains in detail.

1. What is a Capital Gain?

2. Defining Capital Assets
3. Types of Capital Assets?
4. Calculating Capital Gains
5. Exemption on Capital Gains
6. Saving Tax on Sale of Agricultural Land

1. What is a Capital Gain?

Simply put, any profit or gain that arises from the sale of a ‘capital asset’ is a
capital gain. This gain or profit is considered as income and hence charged to tax
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 when an asset is inherited because there is no sale, only a transfer.
However, if this asset is sold by the person who inherits it, capital gains tax will be
applicable. The Income Tax Act has specifically exempted assets received as gifts by
way of an inheritance or will.

2. Defining Capital Assets

Here are some examples of capital assets: land, building, house property, vehicles,
patents, trademarks, leasehold rights, machinery, and jewellery. This includes
having rights in or in relation to an Indian company. It also includes rights of
management or control or any other legal right. The following are not considered
capital asset:

a. Any stock, consumables or raw material, held for the purpose of business or
profession
b. Personal goods such as clothes and furniture held for personal use
c. Agricultural land in rural India
d. 6½% gold bonds (1977) or 7% gold bonds (1980) or national defence gold bonds
(1980) issued by the central government
e. Special bearer bonds (1991)
f. Gold deposit bond issued under the gold deposit scheme (1999)
Definition of rural area (from AY 2014-15) – Any area which is outside the
jurisdiction of a municipality or cantonment board, having a population of 10,000
or more is considered a rural area. Also, it should not fall within a distance (to be
measured aerially) given below – (population is as per the last census).

Distance Population

2 kms from local limit of If the population of the municipality/cantonment

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municipality or cantonment board is more than 10,000 but not more than 1
board lakh

6 kms from local limit of If the population of the municipality/cantonment

municipality or cantonment board is more than 1 lakh but not more than 10
board lakh

8 kms from local limit of If the population of the municipality/cantonment

municipality or cantonment board is more than 10 lakh
board

3. Types of Capital Assets?

1. Short-term capital asset An asset which is held for not more than 36 months
or less is a short-term capital asset. The criteria of 36 months have been reduced
to 24 months in the case of immovable property being land, building, and house
property, from FY 2017-18. For instance, if you sell house property after holding it
for a period of 24 months, any income arising will be treated as long-term capital
gain provided that property is sold after 31st March 2017.

2. Long-term capital asset An asset that is held for more than 36 months is a
long-term capital asset. The reduced period of aforementioned 24 months is not
applicable to movable property such as jewellery, debt-oriented mutual funds etc.
They will be classified as a long-term capital asset if held for more than 36 months
as earlier. 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). The assets are:
a. Equity or preference shares in a company listed on a recognized stock exchange
in India
b. Securities (like debentures, bonds, govt securities etc.) listed on a recognized
stock exchange in India
c. Units of UTI, whether quoted or not
d. Units of equity oriented mutual fund, whether quoted or not
e. Zero coupon bonds, whether quoted or not
When the above-listed assets are held for a period of more than 12 months, they
are considered as long-term capital asset. In case an asset is acquired by gift,
will, succession or inheritance, the period this 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 on Short-Term and Long-Term Capital Gains

Tax on long-term capital gain: Long-term capital gain is taxable at 20% +
surcharge and education cess. Tax on short-term capital gain when securities
transaction tax is not applicable: If securities transaction tax is not applicable,
the short-term capital gain is added to your income tax return and the taxpayer is
taxed according to his income tax slab.Tax on short-term capital gain if
securities transaction tax is applicable: If securities transaction tax is
applicable, the short-term capital gain is taxable at the rate of 15% +surcharge and
education cess.

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Tax on Equity and Debt Mutual Funds
Gains made on the sale of debt funds and equity funds are treated differently.
Funds that invest heavily in equities, usually exceeding 65% of their total portfolio,
is called an equity fund.

Funds Effective 11 July 2014 On or before 10 July 2014

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

Gains Gains Gains

Debt At tax slab At 20% with At tax slab 10% without

Funds rates of the indexation rates of the indexation or 20%
individual individual with indexation
whichever is lower

Equity 15% Nil 15% Nil

Funds

Change in 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. This change, in effect from last year’s Budget, means that
investors would have to remain invested in these funds for at least three years to
take the benefit of long-term capital gains tax. If redeemed within three years, the
capital gains will be added to one’s income and will be taxed as per one’s income
tax slab.

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4. 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
in exchange for his assets, which he has transferred. 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 incurred to make improvements to the capital asset by
the seller. Note that improvements made before April 1, 1981, is never taken into
consideration.

How to Calculate Short-Term Capital Gains?

1. Start with the full value of consideration

2. Deduct the following:

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 o Expenditure incurred wholly and exclusively in connection with such
transfer
o Cost of acquisition
o Cost of improvement
3. This amount is a short-term capital gain
Short term capital gain = Full value consideration Less expenses incurred
exclusively for such transfer Less cost of acquisition Less cost of improvement.

How to Calculate Long-Term Capital Gains?

1. Start with the full value of consideration

2. Deduct the following:
o Expenditure incurred wholly and exclusively in connection with such
transfer
o Indexed cost of acquisition
o Indexed cost of improvement
3. From this resulting number, deduct exemptions provided under sections 54,
54EC, 54F, and 54B
4. This amount is a long-term capital gain

Long-term capital gain Full value consideration Less : Expenses incurred

exclusively for such transfer Less: Indexed cost of acquisition Less: Indexed cost of
improvement Less expenses that can be deducted from full value for
consideration* (*Expenses from sale proceeds from a capital asset, that wholly and
directly relate to the sale or transfer of the capital asset are allowed to be deducted.
These are the expenses which are necessary for the transfer to take place.) As per
Budget 2018, long term capital gains on the sale of equity shares/ units of equity
oriented fund if more than Rs 1 lakh will be taxed at @ 10% without the benefit of
indexation. Uptil 31st March 2018, investors had a relief to exempt amount of
capital gains up to 31 Jan 2018. The amount of Gains made thereafter the cut-off
date will be taxed. Example: Mr A purchased shares for Rs. 100 on 30th
September 2017 and sold them on 31st December 2018 at Rs 120. The Value of
the Stock was Rs. 110 as of 31st January 2018. Out of the capital gains of Rs. 20
(i.e 120-100), Rs. 10 (i.e 110-100) is not taxable. Rest Rs. 10 is taxable as Capital
gains @ 10% without indexation. In the case of sale of house property, these
expenses are deductible from the total sale price:
a. Brokerage or commission paid for securing a purchaser
b. Cost of stamp papers
c. Travelling expenses in connection with the transfer – these may be incurred after
the transfer has been affected.
d. 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.
In the case of sale of shares, you may be allowed to deduct these expenses:
a. Broker’s commission related to the shares sold
b. STT or securities transaction tax is not allowed as a deductible expense

Where jewellery is sold, and 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

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under any other head of the income tax return, and these can be claimed only
once. Indexed Cost of Acquisition/Improvement

Cost of acquisition and improvement is indexed by applying CII (cost inflation

index). It is done to adjust for inflation over the years. This increases one’s cost
base and lowers the capital gains. Indexed cost of acquisition is calculated
as Cost of acquisition / Cost inflation index (CII) for the year in which the asset
was first held by the seller, or 1981-82, whichever is later X cost inflation index
for the year in which the asset is transferred. Indexed cost of improvement is
calculated as: Indexed cost of acquisition = Cost of acquisition * Cost Inflation
Index (CII) of the year in which the asset is transferred Cost inflation index (CII)
of the year in which asset was first held by the seller or 1981-82 whichever is
later. Indexed cost of improvement = Cost of improvement *Cost inflation index
of the year in which the asset is transferred Cost inflation index of the year in
which improvement took place (Note: From FY 2017-18, the base year of
2001-02 will be considered instead of 1981-82)

5. Exemption on Capital Gains

Example: Manya bought a house in July 2004 for Rs 50 lakh, and the full value of
consideration received in FY 2016-17 is Rs 1.8 crore. Since this property has been
held for over 3 years, this would be a long-term capital asset. 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 Rs 1.17 crore. The net
capital gain is Rs 63, 00,000. Long-term capital gains are taxed at 20%. For a net
capital gain of Rs 63, 00,000, the total tax outgo will be Rs 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
Exemption under section 54 is available when the capital gains from the sale of
house property are reinvested into buying another house property. 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 number of capital gains, the
exemption shall be limited to the total capital gain on sale. The new property can
be purchased either 1 year before the sale or 2 years after the sale of the property.
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. It’s important to 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 sale of
a long-term asset other than a house property. Entire sale consideration and not
only capital gain should be invested to buy a new residential house property must
be purchased to claim this exemption. The new property can be purchased either
one year before the sale or 2 years after the sale of the property. The gains can also

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be invested in the construction of a property, but 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 capital gains to
claim this exemption. It’s important to note that this exemption can be taken back
if this new property is sold within 3 years of its purchase. The entire sale proceeds
towards the new house will be exempt from taxes if you meet the above-said
conditions. However, if you invest a portion of the sale proceeds, the exemption will
be the proportion of the invested amount to the sale price or exemption = cost of
new house x capital gains/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 very keen to reinvest your profit from sale of your first
property into another one, then you can invest them in bonds for up to Rs.
50 lakhs issued by National Highway Authority of India (NHAI) or Rural
Electrification Corporation (REC).
 The money invested can be redeemed after 3 years, but they cannot be sold
before the lapse of 3 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.

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 date of filing of return (usually 31st 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 short-term
capital gains in the year in which the specified period lapses

5. Saving Tax on Sale of Agricultural Land

In some cases, capital gains made from sale of agricultural land may be entirely
exempt from income tax or it may not be taxed under the head capital gains.
a. 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.
b. 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.
c. Capital gains on compensation received for compulsory acquisition of urban
agricultural land are exempt from tax, under Section 10(37) of the Income Tax Act.
If your agricultural land wasn’t sold in any of these cases, you can seek exemption
under Section 54B.

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 Section 54B: Exemption on Capital Gains From Transfer of Land Used for
Agricultural Purpose

When short-term or long-term capital gains are made from transfer of land used for
agricultural purpose by the taxpayer or his parents for 2 years immediately prior to
the sale, exemption is available under Section 54B. The amount, investment in the
new asset or capital gain, whichever is lower, that is reinvested into a new
agricultural land within 2 years from the date of transfer is exempt. The new
agricultural land, which is purchased to claim capital gains exemption should not
be sold within a period of 3 years from the date of its purchase. In case you are not
able to purchase agricultural land before the date of furnishing of your income tax
return, the amount of capital gains must be deposited before the date of filing of
return in the deposit account in any branch (except rural branch) of a public sector
bank or IDBI Bank according to the Capital Gains Account Scheme, 1988.
Exemption can be claimed for the amount which is deposited. If the amount which
was deposited as per Capital Gains Account Scheme was not used for purchase of
agricultural land, it shall be treated as the capital gain of the year in which the
period of 2 years from the date of sale of land expires. If you wish to know more
about investment choices with good capital gains potential, please invest with
ClearTax Invest. Our handpicked plans can help you build a portfolio that is best
suited to your financial goals and risk profile.

INCOME FROM OTHER SOURCES

Any income which does not fall under any other head of income i.e. Income from
business/profession, Income from salary, capital gains and house property then it
will be called as income from other sources. Following are few examples of income
which are treated as income from other sources as per Indian income tax act:-

1. Any amount received as rent from plant, machinery, furniture let on hire.
2. Any income from crossword puzzles, horse races, game, card games, television
game, shows and other entertainment programmes in which people win prizes and
lottery etc.
3. Rent from sub-letting.

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4. Dividend except which is exempt u/s 10 of Indian income tax act.`
5. Any contributions received by the employer from his employee and if that amount
is not shown as business income then it will be treated as income from other
sources.
6. Interest received from banks on saving bank accounts.
7. Interest from Post Office Saving Accounts.
8. Interest from Monthly Income Scheme from Post Office.
9. Pension received from Life Insurance Corporation under LIC pension scheme.
10. Interest from recurring deposit accounts from bank or post offices.
11. Interest received from banks on fixed deposits.
12. Interest received from banks on accounts other than saving bank accounts and
fixed deposit accounts.
13. Interest received against personal loans.
14. Interest received from bonds/debentures.
15. Any amount received under Keyman Insurance Policy, which is not taxable under
the head of Income from salaries or Income from business/profession.
16. Any Cash gift or sum of money, received from any person without consideration
exceeding Rs.50000/= during a financial year subject to certain exemption
under gift tax act.
17. Interest received on compensation.
18. Interest received on refund of any tax amount from tax authorities.
19. Withdrawal under NSS 1987 including interest.
20. Interest and premium received on redemption of debentures.
21. Fees from tuition and examinations fees etc. received by an individual who is not
engaged in a profession.
22. Royalty received.
23. Any income received by beneficiary of a trust.
24. Amount of Interest accrued on National Saving Certificate, National Saving Scheme
Account, Kisan Vikas Patra etc.
25. Any income from agricultural land which situated outside India.
26. Any amount received as Family Pension by a family member of the deceased from
the employer will be treated as income from other sources in hand of the member
who receives the money.
27. Any casual income.
28. Income received as insurance commission.
29. Rent received from plot of land and ground rent.

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30. Any income received from any undisclosed sources.
31. Salary received by Members of Parliament.
32. Income received from letting out the space for display of hoardings.
33. Income received on share application money.
34. Interest received on debenture application money.
35. Interest on tax refunds.

PERMISSIBLE DEDUCTIONS AGAINST INCOME FROM OTHER SOURCES

Following expenditures are allowed as deductions under Indian income tax act
against the income from other sources:-

In case of Income from letting out of furniture, machinery and plant etc then the
following expenses will be allowed as deduction:-

 Any amount spent on repair and maintenance of plant, machinery and furniture.
 Any amount paid as insurance premium against the risk of damages of machine,
plant and furniture.
 Any amount of depreciation allowed as per Indian income tax act.
1. In case of family pension, a deduction of one third of such income or Rs.15000/= ,
whichever is less.
2. Any other expenditure other than capital expenditures, incurred for making such
earnings.
3. Any expenses or allowance in connection with owning or maintaining the race
horses.

EXPENSES NOT TO BE DEDUCTED FROM INCOME FROM OTHER SOURCES

Following expenses cannot be allowed against income from other sources:-

1. Any personal expenses of the income tax payee.

2. Any interest paid outside India if no tax has been deducted at source.
3. Any amount of salary paid outside India if no tax has been deducted at source
against that salary.
4. Any amount paid as wealth tax.

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5. Any expenditure exceeding Rs.10000/= [Rs.20000/= for F.Y.2016-17] (Rs.35000/=
in case transportation) paid in cash. It means any expenditure made exceeding
above limit must be paid by account payee cheque or demand draft.
6. Any expenses in connection with lotteries, crossword puzzles, card games and
gambling etc.

UNIT IV
CONTENTS:
 Set off and carry forward of losses
 Deduction from Gross Total Income
 Clubbing of Income

SET OFF AND CARRY FORWARD THE LOSSES:

As per Income Tax Act 1961, a Person as defined in Section 2(31) can set off and
Carry forward the losses incurred. It is a big boon to a Person, because it plays an
important role on the financial condition of a Person who has incurred such
Losses. So he can get relax to some extent.

Note: Loss from exempt source of Income cannot be set off against profit from any
taxable source of Income, and no losses can be set off against casual income.e g.
Winning from lotteries, crossword puzzles,races,card games, betting etc.

Meaning of Set off and Carryforward. Set off means adjusting the losses against the
profit of that Financial year. In case if there is no adequate profits to set off the
entire loss it can be carry forward to next Assessment Years subject to the

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conditions stated in the Act. The sequence for set-off & carry forward of losses

1. Inter Source Adjustments:(Section 70) Under this an Assessee can set off the
Losses incurred in one source against the profits from any other source under the
same head. It is not possible for an Assessee to do intersource adjustment in the
following cases.

a. Speculative Business Losses: An Assessee can set off the Losses incurred in
speculation Business only against the profits of any other speculation Business. It
is not permissible to set off speculative Loss against any other Business or
Professional Income. An Assessee has an Opportunity to set off any other Business
Loss with the profits of speculation Business.

b. Long Term Capital Losses: A long term Capital Loss can be set off only against
the profits of any other long term capital gains, but short term capital loss can be
set off against both short term and long term capital gains.

c. Loss from owning and maintaining race horses:

This loss can be set off only against the income from owning and maintaining race
horses.

d. Loss of specified Business under section 35AD:

Specified Business loss can be set off only against profit from such specified
business, but loss from other business can be set off against the profit of the
specified business.

2. Interhead Adjustments: (Section 71)

It is the second step in setting off of losses. If it is not possible for an Assessee to
set off of losses under inter source adjustment he can set off the losses under inter

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head adjustments. Under this, an Assessee can set off the losses incurred under
one head against the profits earned under other heads of Income in that financial
year.

a. House Property Losses: House Property Losses can be set off against profits
from other heads. It can be set off against salary income, Business income,
Income from capital gain, and income from other sources except casual
income.
b. Non Speculative Business Losses: Non speculative Business Losses can be
set off under any other head except income from salary. Means it can be set
off from income from house property, income from capital gain and Income
from other sources except casual income.

In the following cases losses cannot be set off under interhead adjustments.
a. Speculative Business Losses.
b. Specified Business Losses.
c. Capital Gain Losses.(Both short term capital loss and long term capital
loss).
d. Losses from owning and maintaining race Horses.

3. Carry forward of Losses: It is third step in Set off and Carry forward of losses. If
it is not possible for an Assessee to set off the losses under intersource
adjustments and interhead adjustments he can carry forward the same to the next
Assessment Years. (Subject to the conditions given in the Act) It is important to
know that Carry forward Losses can be set off only against that head of income.It
must be noted that an Assessee must file the Income Tax Return within the due
date prescribed (under section 139(1)) to carry forward the losses except in the
cases loss arising under the head

house property (under section 71B) and carry forward of unabsorbed depreciation
(under Section 32(2)).

a. House Property Losses: (Section71B) An Assessee can carry forward the

losses incurred under the head house property up to 8 years immediately
succeeding the Assessment year in which the loss has incurred. It can be
adjusted only against Hose property Income. In this case an Assessee can
file belated return.

UPDATE : Finance Act, 2017 has inserted Sec 71(3A) which has restricted
the inter-head set-off of loss from House Property to Rs 2 Lakhs.

Illustration : If an assessee has loss under the head ‘House Property’ of Rs 7

Lakhs & income under the head ‘PGBP’ of Rs 10 Lakhs in AY 18-19, then
only Rs 2 Lakh loss can be set off from business income. Balance Rs 5 Lakh
loss shall be carried forward to the next A/Y and would be eligible for set off
against the income from House Property only.

b. Non Speculative Business Losses:(Section 72) An Assessee can carry forward

Non speculative business loss up to 8 years immediately succeeding the
Assessment Year in which the loss has incurred. An Assessee must file
Income Tax Return within duedate prescribed under section139 (1) of

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 Income Tax Act 1961, Otherwise he cannotcarry forward the losses. It can
be set off only against business income.

c. Speculative Business Losses:(Section 73) An Assessee must file the Income

Tax Return within due date prescribed under section 139(1) to carry forward
the losses from speculation Business. Itcan be Carry forward up to 4 years
immediately succeeding the Assessment year in which the loss has incurred.
It can be adjusted only against income from speculation Business.

d. Specified Business Losses:(Section 73A) It can be Carry forward subject to

the following conditions: An Assessee must file Income Tax Return within
Due date prescribed under section 139(1). It can be adjusted only against
the income from specified businesses. It can be carry forward for any
number of years.

e. Long term/Short term Capital Losses:(Section 74) An Assessee can carry

forward the long term or short term Capital losses subject to the following
conditions. An Assessee must file Income Tax Return within due date
prescribed under section 139(1). It can be carry forward up to 8 years
immediately succeeding the Assessment year in which the loss has incurred.
Long term capital loss should be adjusted with only long term capital gains,
but short term capital loss can be adjusted with short term capital gains or
long term capital gains.

f. Loss from Owning and maintaining race horses:(Section 74A) An Assessee

can carry forward these losses up to 4 years immediately succeeding the
Assessment year in which the loss has incurred. It can be set off only
against that income and an Assessee must file the Income Tax Return within
due date prescribed under section 139(1).

DEDUCTIONS FROM GROSS TOTAL INCOME SECTION 80C (CHAPTER VI-A)

Deductions under section 80C to 80 U of Income Tax Act 1961 AY 2019-20 | FY

2018-19Deductions from gross total income under section 80C to 80 U of
Income Tax Act 1961 [Relevant for Assessment Year 2019-20/Financial Year 2018-
19 as proposed by Finance Bill 2018]
Relevant deductions from gross total income under section 80 C to 80 U [Chapter
VI-A] of income tax are given below:

Section 80C provides for a deduction of savings in specified modes of Investments

form gross total income. It is available only to an Individual or HUF. The
Maximum permissible deduction is Rs.1.5 lakh along with deduction u/s 80CCC
& 80CCD.

Admissible Deductions
1. Premium paid on insurance on life of the Individual or HUF.
2. Sum paid under the contract for deferred on life of the Assessee or his/her spouse or
children.
3. Sum deducted by the government from the salary of an employee for securing a

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 deferred annuity for self, spouse or children.The sum so deducted should not exceed
one-fifth of the salary.
4. Contribution to any Public Provident Fund governed by Provident Funds Act, 1925
5. Contribution by an employee to Recognized Provident Fund.
6. Contribution by an employee to an Approved Superannuation Fund.
7. Contribution made to any Public Provident Fund set up by the Central Government.
8. Subscription to any deposit scheme or contribution to any Pension fund set up by
the National Housing Bank.
9. Payment of Tuition fees by an Individual Assessee at the time of admission to any
university, college, school or other educational institutions within India for the
purpose of full time education of any two children.
10. Subscription to deposit scheme of Public Sector, engaged in providing housing
finance.
11. Principle repayment of Housing Loan.[ You May Also Refer Restriction on set-off of
loss from House property [Finance Act 2017]]
12. Subscription to units of Mutual funds notified u/s 10(23D).
13. Sum deposited in Fixed Deposits (FDs) with tenure of five years.
14. Sum deposited in 5 yrs Post Office Time Deposit (POTD) scheme.

DEDUCTION IN RESPECT OF CONTRIBUTION TO CERTAIN PENSION FUNDS

(SECTION 80CCC)
Deduction in respect of Payment of premium for annuity plan of LIC or any other
Insurer is provided. The Premium must be deposited to keep in force a contract for
annuity plan of LIC or any other insurer for receiving pension from the fund. For
this purpose, the Interest or Bonus accrued or credited to the Assessee’s
Account shall not be reckoned as Contribution. The Maximum Deduction allowed
is Rs.1.5 lakh.

DEDUCTION IN RESPECT OF CONTRIBUTION TO PENSION SCHEME OF

CENTRAL GOVERNMENT (SECTION 80CCD)
Contribution towards NPS by Employee[80CCD(1)]: Tax payer is an individual
and he is employed by the central government (on or after January 1, 2004), or
employed by any other person or self employed. He has in the previous year
deposited any amount in his account under NPS. Under this, Employee is to
contribute 10% of their salary or more and deduction is available under section
80CCD(1) which is restricted to 10% of the salary and for person other than
employee deduction is restricted to 10% of GTI.

80CCD(1B) Tax payer shall be allowed a deduction in computation of his total

income of the whole of the amount paid or deposited in the previous year in
his account under a pension scheme notified by the Central Government,
which shall not exceed fifty thousand rupees.

Contribution towards NPS by Employer [80CCD(2)]: Contribution by the employer

to NPS is deductible under section 80CCD(2) in the hands of the concerned
employee in the year in which contribution is made. However no deduction is
available in respect of employer’s contribution which is in excess of 10 percent of
the salary of the employee.

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LIMIT ON DEDUCTION U/S 80C, 80CCC, 80CCD

The Limit for maximum deduction available u/s 80C, 80CCC, 80CCD (combined
together) is Rs.1.5 Lakh only.
Assessee gets an additional deduction of 50,000 if he makes investment in
NPS scheme notified by the Central Government. This means the Limit
for maximum deduction available u/s 80C, 80CCC, 80CCD+80CCD(1B) is Rs. 2
Lakh.

DEDUCTION IN RESPECT OF INVESEMENT BY A RESIDENT INDIVIDUAL IN

LISTED EQUITY SHARES (SECTION 80CCG)
Tax Benefits of Rajiv Gandhi Equity Savings Scheme (RGESS) under section 80CCG
has been withdrawn. However, if you have claimed this deduction in current FY
2016-17, you can claim the deduction for the next two Financial Years too.

DEDUCTION IN RESPECT OF MEDICAL INSURANCE PREMIUM (SECTION 80D)

*As amended by Finance Bill 2018

This Section provides for a deduction of Rs. 25,000 in respect of premium paid
towards a health insurance policy for the Assessee or his family (spouse and
dependent children) or any contribution made to the Central Government Health
Scheme in aggregate and a further deduction of Rs. 25000 is allowed of premium
paid in respect of health insurance policy for parents. An increased deduction
of Rs. 30000 is allowed in case any of the persons mentioned above are senior
citizens (i.e. of age 60 years or above).
It has been proposed by finance bill 2018 that the upper limit of this
increased deduction should be raised to Rs. 50,000.
Further it is provided that for claiming such deduction u/s 80D the payment must
be by any mode other than cash.

Further Deduction of Rs. 5000 shall be allowed in respect of payment made on

Account of preventive health check-up of self, spouse, children or parents made
during the previous year. For claiming this deduction payment can be by any mode
including cash.

The Analysis of proposed amendment is provided in the table given below:

Nature of amount Family Member Parents

spent Age below 60 Age 60 years or Age below 60 Age 60 years or
years more years more
Medical Insurance 25,000 50,000 25,000 50,000
CGHS 25,000 50,000 – –
Health Check-up 5,000 5,000 5,000 5,000
Medical Expenditure – 50,000 – 50,000
Maximum 25,000 50,000 25,000 50,000
deduction

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Bare Text of Proposed Amendment has been given below for your reference:

Deductions available to senior citizens in respect of health insurance

premium and medical treatment
Section 80D, inter-alia, provides that a deduction upto Rs 30,000/- shall be allowed
to an assessee, being an individual or a Hindu undivided family, in respect of
payments towards annual premium on health insurance policy, or preventive health
check-up, of a senior citizen, or medical expenditure in respect of very senior
citzen. It is proposed to amend section 80D so as to raise this monetary limit
of deduction from Rs 30,000/- to Rs 50,000/-.
In case of single premium health insurance policies having cover of more than one
year, it is proposed that the deduction shall be allowed on proportionate basis for the
number of years for which health insurance cover is provided, subject to the specified
monetary limit. .
These amendments will take effect, from 1st April, 2019 and will, accordingly, apply
in relation to the assessment year 2019-20 and subsequent assessment years.

7. DEDUCTION IN RESPECT OF REHABILITATION OF HANDICAPPED

DEPENDENT RELATIVE (SECTION 80DD)
It provides for a deduction to an Assessee being an individual or HUF who is a
resident in India. Deduction of Rs. 75,000 is available in respect of any Amount
paid for the medical treatment (including nursing), training and rehabilitation of a
dependent, or any amount paid or deposited under a scheme framed in this behalf.
In case of severe disability (i.e. a person with 80% or more disability), the deduction
of Rs. 1,25,000 shall be available.

Dependent means In the case of an Individual the spouse, children, parents,

brothers, sisters, of the individual and in the case of HUF, any member who is
wholly dependent on the assessee.

8. DEDUCTION IN RESPECT OF MEDICAL TREATMENT (SECTION 80DDB)

*As amended by Finance Bill 2018
The deduction of Rs. 40000 or Amount actually paid whichever is less shall be
allowed to an Assessee who is resident in India being an Individual or HUF.
Deduction shall be allowed of any amount paid for the medical treatment of such
disease or ailment as may be specified in the rules.

It has been proposed that in case the amount is paid in respect of a senior
citizen/very senior citizen then the deduction would be Rs.100,000 or the
amount actually paid whichever is less.[Earlier the limit was Rs. 60,000 for
Senior Citizen & Rs. 80,000 for very senior citizen.]

Bare Text of Proposed Amendment has been given below for your reference:

Enhanced deduction to senior citizens for medical treatment of specified

diseases
Section 80DDB of the Act, inter-alia, provide that a deduction is available to an
individual and Hindu undivided family with regard to amount paid for medical

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treatment of specified diseases in respect of very senior citizen upto Rs 80,000/- and
in case of senior citizens upto Rs 60,000/- subject to specified conditions. It is
proposed to amend the provisions of section 80DDB of the Act so as to raise
this monetary limit of deduction to Rs 1,00,000/- for both senior citizens and
very senior citizens.
This amendment will take effect, from 1st April, 2019 and will, accordingly, apply in
relation to the assessment year 2019-20 and subsequent assessment years.

9. FIRST TIME HOME BUYERS CAN CLAIM AN ADDITIONAL TAX DEDUCTION OF

UP TO RS 50,000 ON HOME LOAN INTEREST PAYMENTS U/S 80EE.
THE BELOW CRITERIA HAS TO BE MET FOR CLAIMING TAX DEDUCTION
UNDER SECTION 80EE.

 The home loan should have been sanctioned during / after FY 2016-17.
 Loan amount should be less than Rs 35 Lakh.
 The value of the house should not be more than Rs 50 Lakh &
 The home buyer should not have any other existing residential house in his
name.
10. LOAN FOR HIGHER STUDIES
If you take any loan for higher studies (after completing Senior Secondary Exam),
tax deduction can be claimed under Section 80E for interest that you pay towards
your Education Loan. This loan should have been taken for higher education for
you, your spouse or your children or for a student for whom you are a legal
guardian. Principal Repayment on educational loan cannot be claimed as tax
deduction.
There is no limit on the amount of interest you can claim as deduction under
section 80E. The deduction is available for a maximum of 8 years or till the interest
is paid, whichever is earlier.

11. CONTRIBUTIONS MADE TO CERTAIN RELIEF FUNDS AND CHARITABLE

INSTITUTIONS:
Contributions made to certain relief funds and charitable institutions can be
claimed as a deduction under Section 80G of the Income Tax Act. This deduction
can only be claimed when the contribution has been made via cheque or draft or in
cash. In-kind contributions such as food material, clothes, medicines etc do not
qualify for deduction under section 80G.

The donations made to any Political party can be claimed under section
80GGC.W.e.f F.Y. 2017-18, the limit of deduction under section 80G / 80GGC for
donations made in cash is reduced from current Rs 10,000 to Rs 2,000 only.

12. SECTION 80GG: APPLICABLE FOR ALL THOSE INDIVIDUALS WHO DO NOT
OWN A RESIDENTIAL HOUSE & DO NOT RECEIVE HRA
The Tax Deduction amount under 80GG is Rs 60,000 per annum. Section 80GG is
applicable for all those individuals who do not own a residential house & do not
receive HRA (House Rent Allowance).
The extent of tax deduction will be limited to the least amount of the following;

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  Rent paid minus 10 percent the adjusted total income.
 Rs 5,000 per month.
 25 % of the total income.
(If you are claiming HRA (House Rent Allowance) of more than Rs 50,000 per month
(or) paying rent which is more than Rs 50,000 then the tenant has to deduct TDS @
5%. Tax could be deducted at the time of credit of rent for the last month of the tax
year or last month of tenancy, as applicable.)

13. DEDUCTION IN RESPECT OF DONATIONS FOR SCIENTIFIC RESEARCH AND

RURAL DEVELOPMENT (SECTION 80GGA)
Admissible Deductions:-

 Any sum paid by the Assessee to the Research Association which has, as its
object, the undertaking of scientific research

 Any sum paid to an Association or Institution which has, as its object, the
undertaking of any programme of Rural Development to be used for carrying
for carrying out any programme of Rural Development.

 Any sum paid to Research Association which has, as its object the
undertaking of research in Social Science or Statistical Research.

 Any sum paid to Public Sector company or a local authority for carrying out
any eligible project or scheme.

 Any sum paid to Rural Development fund.

Any sum paid to National Urban Poverty Education Fund (NUPEF).

Sub-section (2A) has been inserted which provides that no deduction shall be
allowed in respect of donation of any sum exceeding Rs. 10000 unless such sum is
paid by any mode other than cash.

14. DEDUCTION IN RESPECT OF CONTRIBUTIONS GIVEN BY COMPANIES TO

POLITICAL PARTIES (SECTION 80GGB)
This provides of deduction of any sum contributed in the Previous Year by an
Indian Company to any Political Party or an Electoral Trust. From assessment year
2014-15, no deduction shall be allowed in respect of any sum contributed by way
of cash.

15. DEDUCTION IN RESPECT OF CONTRIBUTIONS GIVEN BY ANY PERSON TO

POLITICAL PARTIES (SECTION 80GGC)
This provides for deduction of any sum contributed in the Previous Year by any
Person to a Political Party or an Electoral Trust. It will not be available to a
Local Authority and an Artificial Judicial Person. No deduction shall be allowed in
respect of any sum contributed by way of cash.

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16. SAVING INTEREST
*As amended by Finance Bill 2018
Deduction from gross total income of an individual or HUF, up to a maximum of
Rs. 10,000/-, in respect of interest on deposits in savings account with a bank, co-
operative society or post office can be claimed under this section. Section 80TTA
deduction is not available on interest income from fixed deposits.

It has been proposed to insert a new provision to allow deduction of up to Rs.

50,000 to the senior citizen who has earned interest income from deposits
with banks or post office or co-operative banks. Interest earned on saving
deposits and fixed deposits both shall be eligible for deduction under this
provision.
Deduction under Section 80TTA shall not be available to senior citizens in
respect of interest on saving deposits.
Bare Text of Proposed Amendment has been given below for your reference:

Deduction in respect of interest income to senior citizen

At present, a deduction upto Rs 10,000/- is allowed under section 80TTA to an
assessee in respect of interest income from savings account. It is proposed to insert a
new section 80TTB so as to allow a deduction upto Rs 50,000/- in respect of interest
income from deposits held by senior citizens. However, no deduction under section
80TTA shall be allowed in these cases.
This amendment will take effect from 1st April, 2019 and will, accordingly, apply in
relation to the assessment year 2019-20 and subsequent assessment years.
It is also proposed to amend section 194A so as to raise the threshold for deduction
of tax at source on interest income for senior citizens from Rs 10,000/- to Rs
50,000/-.
This amendment will take effect, from 1st April, 2018.

17. STANDARD DEDUCTION ON SALARY INCOME

*As amended by Finance Bill 2018
It is proposed to allow a standard deduction upto Rs 40,000/- or the amount of
salary received, whichever is less. Consequently the present exemption in respect
of Transport Allowance (except in case of differently abled persons) [Rs 1600*12=Rs
19200] and reimbursement of medical expenses [Rs 15000] is proposed to be
withdrawn.

Bare Text of Proposed Amendment has been given below for your reference:

Standard deduction on salary income

Section 16, inter-alia, provides for certain deduction in computing income chargeable
under the head “Salaries”. it is proposed to allow a standard deduction upto Rs
40,000/- or the amount of salary received, whichever is less. Consequently the
present exemption in respect of Transport Allowance (except in case of differently
abled persons) and reimbursement of medical expenses is proposed to be
withdrawn.
These amendments will take effect from 1st April, 2019 and will, accordingly, apply
in relation to the assessment year 2019-20 and subsequent assessment years

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18. NEW DEDUCTION INTRODUCED FOR FARM PRODUCER COMPANIES
*As amended by Finance Bill 2018
To promote agricultural activities a new section 80PA is proposed to be inserted.
This new provision proposes 100% deductions of profits for a period of 5 years to
farm producer companies who have total turnover of up to Rs. 100 crores during
the financial year.

For claiming this deduction the gross total income of producer companies should
include income from:

a. The marketing of agricultural produce grown by its members.

b. The purchase of agricultural implements, seeds, livestock or other articles intended
for agriculture for the purpose of supplying them to its members.
c. The processing of the agricultural produce of its members.
Bare Text of Proposed Amendment has been given below for your reference:
Deduction in respect of income of Farm Producer Companies
Section 80P provides for 100 percent deduction in respect of profit of cooperative
society which provide assistance to its members engaged in primary agricultural
activities.
It is proposed to extend similar benefit to Farm Producer Companies (FPC), having a
total turnover upto Rs 100 Crore, whose gross total income includes any income from
(i) the marketing of agricultural produce grown by its members, or
(ii) the purchase of agricultural implements, seeds, livestock or other articles intended
for agriculture for the purpose of supplying them to its members, or
(iii) the processing of the agricultural produce of its members
The benefit shall be available for a period of five years from the financial year 2018-
19.
This amendment will take effect from 1st April, 2019 and will, accordingly, apply in
relation to the assessment year 2019-20 and subsequent assessment years.
19. 80-JJAA : INCENTIVE FOR EMPLOYMENT GENERATION
*As amended by Finance Bill 2018
Deduction of 30% is allowed in addition to normal deduction of 100% in respect of
emoluments paid to eligible new employees who have been employed for a
minimum period of 240 days during the year.

However, the minimum period of employment is relaxed to 150 days in the case of
apparel industry, the same has been extend to footwear and leather industry.
Manufacturers are often denied the deduction if an employee is employed in 1st
year for a period of less than 240 days/150 days, but continues to remain
employed for more than 240 days/150 days in the 2nd year. To overcome this
difficulty, the requirement of period of employment has been proposed to be
relaxed. Now as per the proposed provision the deductions shall be allowed to
the manufacturer in respect of an employee hired in 1st year, if he continues
to remain in employment in current year(2nd year) for more than 240/150
days, as the case may be.
Bare Text of Proposed Amendment has been given below for your reference:
Incentive for employment generation

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At present, under section 80-JJAA of the Act, a deduction of 30% is allowed in
addition to normal deduction of 100% in respect of emoluments paid to eligible new
employees who have been employed for a minimum period of 240 days during the
year.
However, the minimum period of employment is relaxed to 150 days in the case of
apparel industry. In order to encourage creation of new employment, it is proposed to
extend this relaxation to footwear and leather industry.
Further, it is also proposed to rationalize this deduction of 30% by allowing the
benefit for a new employee who is employed for less than the minimum period during
the first year but continues to remain employed for the minimum period in
subsequent year.

UNIT V
CONTENTS:
 Procedure for calculation of total income
 Rate slab of Income Tax
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Computation of Total Income and Tax Liability of Individuals

Income-tax is levied on an assessee’s total income. The total income has to be

computed as per the provisions of the Income-tax Act, 1961. Following steps are
considered for computing total income and to charge tax.

Step 1 – Determination of the residential status of the Assessee: First all we want
determine the residential status of the assessee. The residential status of a person
has to be determined to find out which income is to be included in computing the
total income. It decides whether the individual is to be taxed or not. The residential
status of an individual is determined on the basis of the duration of time spend by
him in India. . Based on the time spent by him, he may be (a) resident and
ordinarily resident, (b) resident but not ordinarily resident, or (c) non-resident.

Step 2 – Classification of income under different heads The Act specifies five heads
of income. These heads of income consist of all possible types of income that can
accrue to or be received by an individual. An individual is required to classify the
income earned by him under the appropriate heads of income.

Step 3 – Exclusion of income not chargeable to tax: There are certain incomes
which are wholly exempt from income-tax e.g. agricultural income. These incomes
have to be excluded while calculating Gross Total Income. T the same time certain
incomes are partially exempt from income tax e.g. House Rent Allowance,
Education Allowance etc.. These incomes are excluded only to the extent of the
limits specified in the Act. The balance income over and above the prescribed limits
would enter computation of total income and have to be classified under the
relevant head of income.

Step 4 – Computation of income under each head:

Income is to be computed in accordance with the provisions governing a particular
head of income. As per the rules certain deductions and allowances are allowed.
These deductions are allowed while computing income under each head.

Step 5 – Clubbing of income of spouse, minor child etc.:

In case of individuals, income-tax is levied on a slab system on the total income.
The tax system is progressive. That means if income increases the tax amount to
be paid also increases. We can see that some taxpayers who have the higher
income bracket have a tendency to divert some portion of their income to their
spouse, minor child etc. to minimize their tax burden. In order to prevent such tax
avoidance, clubbing provisions have been included in the Income-tax Act. As per
the provisions of income tax act income arising to certain persons (like spouse,
minor child etc.) have to be included in the income of the person when it is seen
that the income is diverted for avoiding tax.

Step 6 – Set-off or carry forward and set-off of losses:

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An individual may have different sources of income under the same head of
income. He might have profit from one source and loss from the other. As per the
provision we can set off the losses under one head or form other heads or can carry
forwards for the coming assessment years. All provisions related to that should be
considered while computing total income of the Assessee.

Step 7 – Computation of Gross Total Income:

The final figures of income or loss under each head of income, after allowing the
deductions, allowances and other adjustments, are then aggregated, after giving
effect to the provisions for clubbing of income and set-off and carry forward of
losses, to arrive at the gross total income.

Step 8 – Deductions from Gross Total Income:

There are deductions prescribed from gross total income. The allowable deductions
in case of an individual are deductions under sections 80C, 80CCC, 80CCD,
80CCF, 80D, 80DD, 80DDB, 80E, 80G, 80GG, 80GGA, 80GGC, 80-IA, 80-IAB, 80-
IB, 80-IC, 80-ID,80-IE, 80JJA, 80QQB, 80RRB, 80TTA and 80U. These deductions
are allowed as per the rules prescribed in the income tax act.

Step 9 – Compute Total income:

After allowing all deductions allowable, we can compute total income.

Step 10 – Application of the rates of tax on the total income:

Different slab of tax rates are available on basis of status and age of individual.
There also will be basic exemption limit. The basic exemption limit is Rs 2, 00,000
for the assessment year 2013- 14. This means that no tax is payable by individuals
with total income of up to Rs 2,00,000. Level of total income Rate of tax

A) Normal Rates :
Up to Rs: 2,00,000 : Nil
Rs: 2,00,001 to 5,00,000 : 10%
Rs: 5,00,001 to 10,00,000 : 20%
Above Rs: 10,00,000 : 30%

B) Individual- Senior citizen (60 years or more but less than 80 years):
Up to Rs: 2,50,000 : Nil
Rs: 2,50,001 to 5,00,000 : 10%
Rs: 5,00,001 to 10,00,000 : 20%
Above Rs:10,00,000 : 30%

C) Individual- Super senior citizen (80 years or more):

Up to Rs: 5,00,000 : Nil
Rs: 5,00,001 to 10,00,000 : 20%
Above Rs:10,00,000 : 30%
Surcharge: Nil
Education Cess: 3% on the amount of income tax.

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