Taxable income is computed under the respective heads (para 1.2.

4) after allowing from gross receipts admissible deductions for cost and expenses. The net income under each of these heads is then aggregated to arrive at the 'Gross total Income'. Computation of income under individual heads is explained in paragraphs following. Salaries 4.2 Income from salaries is computed in accordance with the provisions of section 15 to 17 of the Act. 'Salary' means all remuneration paid or due under the contract of employment. It includes wages, annuity, pension, gratuity, fees, commission, perquisites, profits in lieu of or in addition to any salary or wages, any advance of salary, leave salary encashment or any other payment by the employer for services rendered. The annual accretion to the balance at the credit of an employee participating in a recognised provident fund in excess of the prescribed limit is includible in the salary income of the employee. 'Perquisites' mean the benefits or amenities provided in kind by the employer free of cost or at a concessional rate. The value of these is regarded as part of salary. Rule 3 of the Income Tax Rules lays down the methods for determining the value of certain perquisites. For others the general rule of valuing the perquisites in the hands of the employee is to take the cost to the employer in providing the benefit or amenity. It has been clarified that securities allotted to an employee free of cost or at concessional rate under ESOP or as sweat equity shares will not be taxable as perquisite.

ii.2. . the actual annual rent received or receivable is taken as the annual value of the property. 20. However. It is for this reason remuneration received as a partner is not taxable as 'salary'. iii.4.e. Where salary income exceeds rupees five lakh . the sum for which the property might reasonably be let from year to year. it is necessary that there is a relationship of employer and employee between the payer and the receiver. one lakh .2.whichever is less.1 In order to be taxable under the head 'Salaries'. where any property is tenanted and the annual rent received or receivable by the owner is in excess of the sum for which the property might reasonably be expected to be let from year to year.000/.3 Income from house property is computed in the hands of the owner in accordance with the provisions of sections 22 to 27 of the Act. Where salary income exceeds Rs. one lakh but does not exceed rupees five lakh .33-1/3% or Rs. 25. 4.Rs.000/-. It is determined with reference to its 'annual value'. Where salary income is upto Rs.2 In computing the salary income for the assessment year 1999-2000. a standard deduction is allowed as under:i. Income from house property 4. i.NIL Deduction for profession or employment tax levied by State Government is also allowed.

3.2 Where the property consists of a house or a part of a house which is in the occupation of the owner for his own residence. taxes levied by any local authority in respect of the property to the extent such taxes are borne by the owner are deductible on actual payment basis to arrive at the 'net annual value'. its annual value is taken to be nil provided the house is not actually let out and no other benefit is derived by the owner from it. its annual value is taken as Nil. the annual value of which is taken at Nil. But if such a property is let out during any part of the previous year. business or profession carried on at any other place.3.1 From the annual value of a house property in the occupation of a tenant. In such a case deduction is allowed only for interest and that too upto . interest paid on any money borrowed for the building. any annual charge. insurance charges in respect of property. unrealised rent are allowed. where the owner has only one resedential house and the house cannot be actually occupied by reason of the fact that owing to his employment.3 From the net annual value. Further. he has to reside at that other place in a building not belonging to him. its annual value is taken proportionately. All these deductions are not allowed in respect of the house property in the occupation of the owner for his own residence. 4. ground rent.4. land revenue. determined as above deductions on account of annual repairs and collection expenses (1/4th of the net annual value irrespective of actual expenditure).3. 4.

Profits and gains of business or profession 4.T. professional and similar associations from specific services performed ii. he is entitled to have such loss set off against income under other heads.000 only provided the house was constructed or acquired after 1. Income of trade.4.4. Compensation received for the termination or for modifications in terms and conditions of any managing agency agreement. Act.4 Under the circumstances mentioned in Sec.Rs. 4. The expression 'business or profession' includes any trade commerce or manufacture or vocation. .2003.5 Where the net result of computation of income from house property is loss and the assessee has income assessable under any other head of income.3.3. a person can be deemed to be the owner of the house property and in such a case the income . 1. Apart from income from any of these activities the income chargeable under this head includes the following receipts as well:i.4 Income from business or profession is computed in accordance with the provisions of sections 28 to 44D of the Act. 27 of the I.1999 but before 1. 4. Any loss remaining unadjusted can be carried forward to the following assessment year for setoff against income from house property in that years and in succeeding seven years.00.from that property is taxable in the hands of that person.

salary.4.1 Primarily the business or professional income is computed as per the accepted business and accounting norms and in accordance with the method of accounting regularly employed by the tax payer. vi.4. taxes. . Value of any benefit or perquisite arising from any business or profession. repairs and insurance of premises used for the purpose of business or profession. are not allowed because of specific bar on their allowance under the Act. Any interest. bonus.iii. v. cash assistance or refund of duty drawback granted to the exporters. rates. However. though business related. commission or remuneration due to or received by a partner of a firm from such firm.2 Some of the specific provisions made in law for permissible deductions in computation of business or professional income relate to the following items of expenditure and outgoings:i. whatever constitutes a legitimate outgoing of revenue nature of a business is allowed as a deduction in computing the business income. for its members. 4. Thus. Any sum received under a keyman insurance policy including bonus on such policy. rent. certain deductions are allowed in the Act as per the specific provisions made with regard to those deductions and certain deductions. iv. 4. Profit on sale of a replenishment license.

Contribution to an approved University. know how. c. repairs and insurance of machinery. d. patents copy rights. association or institution for scientific research including research in social science or statistical research.. plant and furniture used for the purpose of business of profession.ii. licences. b. machinery. Expenditure in respect of scientific research:a. These are:14 years (a) On acquisition of patent . trade marks. depreciation of tangible assets viz. v. a weighted deduction equal to one and one-fourth time the sum paid is allowable. plant and furniture and intangible assets viz. For payment to a National Laboratory or a University or an Indian Institute of Technology for scientific research under an approved programme.. Capital expenditure (except expenditure on land) in relation to the research related to the business. On in-house research related to the business of the assessee. college. iii. franchises or any other business or commercial rights of similar nature owned by the tax payer and used for the purpose of business or profession. building. Expenditure of deffered revenue nature which are amortised over a number of years. iv.

bad debts. xi.rights and copy rights (Sec. and payments to notified Rural Development Fund (upto A. bonus and commission to employees. interest on capital borrowed for the business or profession. ix. an approved superannuation fund or an approved gratuity fund. vi. premium in respect of health insurance of the employees.Y. premium in respect of insurance against risk of damage or destruction of stock and stores used for business or profession. . contribution to a recognised provident fund. xii. viii.Y.35AB) (c) Preliminary expenses on setting up of business (Sec. 35A) (b) On acquisition of know-how (Sec. 1998-99) 5 years vii. 35D) (d) On prospecting for or 10 years extraction or production of mineral deposits (Sec. 35ABB) force.35E) (e) Expenditure in the nature of Years during capital expenditure on which the obtaining licence to operate licence telecommunication services remains in (Sec. 1998-99) 6 years (upto A. x.

fees for technical services or other sum payable outside India from which due tax has not been deducted at source. even though business-related.g. any interest. Wealth tax. any tax calculated on the basis of profits or gains of the business or profession e.3 In addition.4. of a political party. 4. . which are not allowed as deduction are i. iv. royalty.4 Expenses. 4. there is a residuary provision under which the tax payer can claim deduction in respect of any expenditure incurred wholly and exclusively for the purpose of the business or profession. This omnibus clause is not available for claiming any expenditure for which a specific provision is made or for expenses of capital or personal nature or expenditure for any purpose which is an offence or which is prohibited by law. iii. income tax. ii. expenditure on advertisement in any souvenir etc.or to National Urban Poverty Eradication Fund or to approved organisation/institutions enaged in activities of conservation of natural resources or afforestation or for carrying out eligible projects or schemes approved by the National Committee. salary.4.

4. These are:(i) Business of civil construction or supply of labour for civil construction where the total receipts do not exceed 40 lakh rupees (Sec. whichever is higher.5 Apart from these. 44AE) Profit as declared in the return or the sum equal to 8% of the gross receipts of the previous year. Profit as declared in the return of income or the sum calculated at Rs. Claims are also to be disallowed to the extent of 20% where payments in excess of Rs.000/. there exist certain special provisions under the Act which deal exclusively with taxation of business income from certain specific activities. whichever is higher.6 The above stated principles of computation of business income apply uniformly to all forms of business activities.000/.44AD) (ii) Business of plying.4. 2. 1.are not made by a crossed cheque or a crossed bank draft. the tax authorities may disallow.per month or part of a month for heavy goods vehicle and Rs. where the payments are made to any close relative or a business associate.per month or part of a month for other vehicles. or restrict the deduction to a reasonable level.4. These provisions make departure from the normal manner of computing income as explained above and prescribe for working out the taxable income on presumptive basis as per the norms laid down. hiring or leasing goods carriage. . where the assessee does not own more than ten goods carriages (Sec. 4. 10. However.800/.

.6 are exempted from such obligation. etc. operation of aircraft and civil construction etc.4. For the business or profession which is newly set up the obligation arises if the income or turnover/receipts is likely to exceed these amounts in the previous year. architectural. of mineral oils. exploration. engineering. film artists etc. Persons engaged in activities mentioned in para 4.000 or the turnover/receipts in any of the preceding three years exceeded rupees ten lakhs. higher.20. in certain turnkey power projects. whichever is rupees. Such provisions also exist for taxation of income from certain dividends.7 It is obligatory on persons engaged in certain specific professions such as legal. 4. technical consultancy.(iii) Retail trade in goods or Profit as declared in the return merchandise where the total of income or the sum equal to turnover of the previous year 5% of total turnover of the does not exceed forty lakh previous year. medical. The obligation to maintain such books of accounts is also on all other professions and business if the income in any of the preceding three years exceeded rupees 1. A detailed discussion about such provisions is made in Chapters VIII and X. authorised representatives. accountancy. . interior decoration. interest and units derived by a non-resident or a foreign company and from royalty or fees for technical services derived by a foreign company. Further there are special provisions for computing presumptive income in the case of non-residents engaged in the business of shipping.4. to maintain books of accounts in a manner which may enable the assessing officer to compute their taxable income.

listed security.9 In case of a partnership firm deducation for certain payments made to its partners like interest and remuneration is subject to ceiling laid down in sec. The requirement to get the accounts audited does not apply to persons enaged in activities mentioned in para 4.8 Further.6. unit of Unit Trust of India or of any other specified mutual fund. Certain other particulars are required to be filed alongwith the return of Income.1 Capital gain is computed by deducting from the full value of transfer consideration the following:- . A gain is short term if the asset was held for a period upto 36 months. A copy of the audited accounts and auditor's report are required to be furnished by the due date of filing the retrun of income.4.5.5 Sections 45 to 55A deal with the provisions relating to computation of income from capital gains. 40 lakhs (Rs. In the case of share of a company. 10 lakhs for professional receipt). 4.4. every person carrying on business or profession in India must have his accounts audited by a chartered accountant if his turnover exceeds Rs. All other gains i. 40 (b) introduced by Finance Act 1992.4.e. this period is 12 months. those arising from assets held for more than this period are called 'Long-term capital gains'. Capital Gains 4. Gains arising from the transfer of a capital asset are either short-term or long-term depending upon the period for which the assets giving rise to capital gains were held by the tax payer.4. 4.

4 There are special provisions for computation of long term capital gains. Goodwill or a right to manufacture produce or process any article or thing. 1981. the amount of expenditure incurred in connection with such transfer.5.5. 1981 .4. In such cases. the cost of acquisition (or the written down value) of and cost of improvement in the asset. b.5. ii. The resultant amount in case of short term capital gains is taxable in full at the normal rate of taxation applicable to the tax payer. 4. iv. the actual cost of acquisition and the cost of improvement of the asset is adjusted to take account of inflation in terms of the Cost Inflation Index which is notified by the Central Government every year. its net worth is to be taken as cost of acquisition.2 In case of the following self-generated assets where there is no cost incurred by the assessee. For those assets which are acquired prior to 1st April.a. 4. iii. Tenancy rights Stage carriage permit Loom hours 4.5. the law provides for the cost of acquisition to be taken as 'NIL' :i.3 In case of slump sale of an undertaking or a division thereof. the actual cost can be taken to be its fair market value as on 1st April. This cost of acquisition is not to be indexed as stated in para 4.

which is than adjusted for inflation in the same manner. 1997-98 18. 1992-93 13. 1994-95 15. Financial Year 1. 1983-84 4. 1999-2000 Cost Index 100 109 116 125 133 140 150 161 172 182 199 223 244 259 281 305 331 351 389 4. 1996-97 17. 3987-88 8. 1998-99 19.No. 1982-83 3. 1989-90 10.5. Exceptions are made in the case of certain categories of non-residents and . 1990-91 11. 1991-92 12. 1993-94 14. 1986-87 7. The notified cost inflation index is as under:S.5 Long term capital gains computed after taking into consideration the indexed cost of acquisition and/or cost of Irnprovement is taxable for and from the assessment year 1988-89 at the flat rate of 20% irrespective of the residential status of the assessee. 1985-86 6. 1984-85 5. 1981-82 2. 1995-96 16. 1988-89 9.

4 and 11. subject to fulfillment of certain condition. This is done to ensure that the amount of capital gains chargeable to tax is not influenced by the exchange rate fluctuation and represents only the accretion in value. in a scheme of amalgamation or demerger would not be regarded as a transfer if certain conditions are satisfied (para 7.5. In respect of gains arising from transfer of listed securities or unit tax so computed @.3.3.7 Transfer of a capital asset in a scheme of amalgamation or demerger is not regarded as a transfer for the purpose of capital gains when the amalgamated or the resulting company is an Indian company. protection against loss arising from fluctuation in rupee value is provided in computation of capital gains if the share or debenture of an Indian company was acquired by utilising foreign currency. 4. The manner of granting such protection is mentioned in para 7. 4. Further.3).5.20% will be limited to 10% of capital gain worked out without indexation benefit.1 of Chapter VII.2).6 In case of non-residents. No indexation benefit is available on bonds and debentures as also in respect of Global Depository Receipts purchased by a resident employee under ESOP in foreign currency. .NRIs (Refer para 7.3. transfer of a capital asset being shares in Indian companies from one foreign company to another. Exemption from tax is also provided. when assets are transferred as a result of succession of a sole proprietory concern or a firm by a company.

8 In case the capital gain arising from transfer of an asset is used for acquiring similar assets within a specified period. 54B and 54G may be referred to). in any of the bonds. shares of a public company or units of a mutual fund specified by the Board for the purpose of Section 54EA and notified in the official gazette.5. debentures. the gains exempted on investment are brought to tax in the year of transfer or conversion of new assets and Rural Development or by the National . In the event of such transfer or conversion.4. Such cases are gains from residential house. The new assets cannot be transferred or converted into money within three years (if the net consideration was invested) and within seven years (if the capital gain only was invested). The assessee has the option to invest only the amount of capital gain in assets specified by the Board for the purpose of Section 54EB in which case the gain will be wholly or proportionately exempt depending upon whether whole or part of the gain is so invested. the whole or the proportionate amount of capital gain is not included in the income depending upon whether the whole of the capital gains is so used or only part of it is used for acquiring a new asset. Gains from any long term asset if used for purchase or construction of residential house where the person has only one residential house is also exempt (Sec. agricultural land and from transfer of industrial undertaking (For details sections 54. Similarly gain arising from transfer of any long-term capital asset is exempt-wholly or proportionately as the case may be-if the net consideration in respect of such transfer is wholly or partly invested. 54F). within a period of six months.

to non-residents from transfer of bonds or shares purchased in foreign currency and to Foreign Institutional Investors from transfer of listed securities purchased in foreign currency.3. Winning from lotteries.6 Sections 56 to 59 deal with the provisions for computation of income under the head 'income from other sources'. races including horse races. However gains arising from transfers after 31. Some of the types of income which are assessable under this head are mentioned belows :i. Income such as a.4 in Chapter VII.Highways Authority of Indian which are redeemable after five years. Interest including 'interest on securities' if it is not taxable under the head 'Profits and gains of business or profession'. .3. Ground rent or rent received or sub-letting a property.2000 will be required to be invested only in bonds issues by National Bank for Agriculture.5.9 Special provisions exist for taxation of capital gains arising to offshore funds from transfer of units purchased in foreign currency. ii. This is a residuary head covering all incomes which do not specifically fall . Income from other sources 4.under any of the heads mentioned earliers. card games or iii. cross-word puzzles. Dividends or income from units of mutual fund. b. 4. These provisions are explained at 7.

4.1 In computing the taxable income under this head. No deduction is. 15. ii.6.3 A standard deduction equal to 33-1/3% of the pension amount or Rs. In assessing income from letting the machinery. in assessing dividend income. from gambling or betting etc.6 above. any salaries or interest payable outside India from which tax is deductible at source under the Act but has not been deducted.2 Further.iv. Income from hiring of machinery. the depreciation on the value of such assets calculated in the same manner as in respect of assets used in a business or profession is allowable as a deduction. c. plant or furniture on hire. no deduction in respect of any expenditure or allowance is made in computing income from winnings referred in (iii) (b) of para 4.6. any remuneration or commission paid for realising such income is allowed as deduction. plant or furniture unless such a hiring is the business of the taxpayer. Family pension. 4. allowed in respect ofi.000/.6. any personal expenditure of the tax payer. 4. Such income is taxable at a flat rate of 40 per cent under the provisions of Section 115BB. deduction is allowable for expenditure (other than capital expenditure) which is incurred by the tax payer wholly and exclusively for the purpose of earning such income. however.whichever is less is . Besides.

ii. subject to fulfillment of certain . the accumulated losses or unabsorbed depreciation of the amalgamating company.8 Losses under the head 'Profits and Gains of business or profession' except those sustained from speculative activities which cannot be set off against income under any other head within the same year can be carried forward to the succeeding eight years and set off only against income under the same head in those years. however. Set off of Losses 4. Carry Forward of Losses 4.allowed in computing income from family pension. a demerger of a company. Losses of these excluded categories can be set off only against income. if any. This. iii. from activities in the same category in that year. does not apply to losses from speculative transactions. demerged company or the predecessor concern will. amalgamation of company owning industrial undertaking or a ship with another company. losses from owning and maintaining race horses or to losses under the head 'Capital Gains'.7 In case of computation of income under any of the heads of income results in a loss figure. such loss can be set off against income under any other head (including capital gains) in the same year. a reorganisation of business resulting in succession of a firm or a proprietory concern by a company. In case of i.

the company will not be able to carry forward losses incurred before such change.3 If 51% or more of the voting power changes hands in an unlisted company. be treated as losses or depreciation of amalgamated company. resulting company or the successor concern and will be allowed to be set off and carried forward as their own loss or depreciation Gains which would not be set off against income of respective nature in any year can be carried forward for eight succeeding years for set off against income of similar nature.8. if any. Losses in the activity of owning and maintaining race horses can be carried forward for set off against profits of similar activities in succeeding four years only. .conditions (sec. in those years.2 Losses under the head income from house property which could not be set off against income under any other head can be carried forward for eight succeeding years for set off against income under this head in those years. 72A).8. 4. 4.

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