You are on page 1of 19

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.

one lakh but does not exceed rupees five lakh .e. 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. 20. It is determined with reference to its 'annual value'. the sum for which the property might reasonably be let from year to year. i.Rs. It is for this reason remuneration received as a partner is not taxable as 'salary'.4.2.NIL Deduction for profession or employment tax levied by State Government is also allowed. . Where salary income exceeds Rs. Where salary income exceeds rupees five lakh .000/. ii. 4.33-1/3% or Rs. iii.2 In computing the salary income for the assessment year 1999-2000.1 In order to be taxable under the head 'Salaries'.2.3 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.whichever is less. a standard deduction is allowed as under:i. the actual annual rent received or receivable is taken as the annual value of the property.000/-. one lakh . 25. it is necessary that there is a relationship of employer and employee between the payer and the receiver. Income from house property 4. Where salary income is upto Rs. However.

All these deductions are not allowed in respect of the house property in the occupation of the owner for his own residence. In such a case deduction is allowed only for interest and that too upto . 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. ground rent. 4. business or profession carried on at any other place. insurance charges in respect of property.4. 4. 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 proportionately.1 From the annual value of a house property in the occupation of a tenant. But if such a property is let out during any part of the previous year.3. any annual charge. the annual value of which is taken at Nil.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.3.3. its annual value is taken as Nil. unrealised rent are allowed. interest paid on any money borrowed for the building. Further. 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. he has to reside at that other place in a building not belonging to him. determined as above deductions on account of annual repairs and collection expenses (1/4th of the net annual value irrespective of actual expenditure). land revenue.

he is entitled to have such loss set off against income under other heads.from that property is taxable in the hands of that person.00.3. a person can be deemed to be the owner of the house property and in such a case the income . . Act. Compensation received for the termination or for modifications in terms and conditions of any managing agency agreement.4. 4.T. Apart from income from any of these activities the income chargeable under this head includes the following receipts as well:i. 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.3.4 Under the circumstances mentioned in Sec. professional and similar associations from specific services performed ii.2003. Income of trade. 1. The expression 'business or profession' includes any trade commerce or manufacture or vocation.000 only provided the house was constructed or acquired after 1.1999 but before 1.5 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.Rs.4. 27 of the I. Profits and gains of business or profession 4.4 Income from business or profession is computed in accordance with the provisions of sections 28 to 44D of the Act.

commission or remuneration due to or received by a partner of a firm from such firm. Profit on sale of a replenishment license. However. . whatever constitutes a legitimate outgoing of revenue nature of a business is allowed as a deduction in computing the business income.iii. certain deductions are allowed in the Act as per the specific provisions made with regard to those deductions and certain deductions. rates.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. Thus. cash assistance or refund of duty drawback granted to the exporters. bonus. 4. though business related. for its members.4. Any sum received under a keyman insurance policy including bonus on such policy. taxes. are not allowed because of specific bar on their allowance under the Act. vi. Value of any benefit or perquisite arising from any business or profession. v. repairs and insurance of premises used for the purpose of business or profession. Any interest. iv.4. rent. 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. salary.

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

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

which are not allowed as deduction are i. even though business-related. royalty. of a political party. expenditure on advertisement in any souvenir etc. any interest. iii.4. income tax. 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. 4.3 In addition. ii. . iv. 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. salary. Wealth tax. fees for technical services or other sum payable outside India from which due tax has not been deducted at source. 4.g.4 Expenses. any tax calculated on the basis of profits or gains of the business or profession e.4.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.

000/.4. whichever is higher. whichever is higher. 1. 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. 2. However. . there exist certain special provisions under the Act which deal exclusively with taxation of business income from certain specific activities.800/. or restrict the deduction to a reasonable level.4.are not made by a crossed cheque or a crossed bank draft.000/. where the assessee does not own more than ten goods carriages (Sec.per month or part of a month for other vehicles.per month or part of a month for heavy goods vehicle and Rs. Profit as declared in the return of income or the sum calculated at Rs. 4.5 Apart from these. 44AE) Profit as declared in the return or the sum equal to 8% of the gross receipts of the previous year. 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. 10.6 The above stated principles of computation of business income apply uniformly to all forms of business activities.44AD) (ii) Business of plying. hiring or leasing goods carriage. where the payments are made to any close relative or a business associate. Claims are also to be disallowed to the extent of 20% where payments in excess of Rs. the tax authorities may disallow.4.

Such provisions also exist for taxation of income from certain dividends. Persons engaged in activities mentioned in para 4.4. A detailed discussion about such provisions is made in Chapters VIII and X. etc. authorised representatives. whichever is rupees. higher. accountancy.7 It is obligatory on persons engaged in certain specific professions such as legal. medical. architectural.(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. in certain turnkey power projects. . technical consultancy. Further there are special provisions for computing presumptive income in the case of non-residents engaged in the business of shipping. 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. film artists etc. interior decoration. to maintain books of accounts in a manner which may enable the assessing officer to compute their taxable income.6 are exempted from such obligation.. 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 1.000 or the turnover/receipts in any of the preceding three years exceeded rupees ten lakhs.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. engineering. 4. exploration. operation of aircraft and civil construction etc.20. of mineral oils.

listed security. All other gains i. 4. 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. every person carrying on business or profession in India must have his accounts audited by a chartered accountant if his turnover exceeds Rs. 40 (b) introduced by Finance Act 1992. 10 lakhs for professional receipt). 40 lakhs (Rs. this period is 12 months.4.1 Capital gain is computed by deducting from the full value of transfer consideration the following:- . unit of Unit Trust of India or of any other specified mutual fund. The requirement to get the accounts audited does not apply to persons enaged in activities mentioned in para 4. A gain is short term if the asset was held for a period upto 36 months.4. those arising from assets held for more than this period are called 'Long-term capital gains'.4. Certain other particulars are required to be filed alongwith the return of Income.8 Further. 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. In the case of share of a company.5. Capital Gains 4.6.5 Sections 45 to 55A deal with the provisions relating to computation of income from capital gains.e.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. 4.

5. the law provides for the cost of acquisition to be taken as 'NIL' :i. Goodwill or a right to manufacture produce or process any article or thing. In such cases.a. b. Tenancy rights Stage carriage permit Loom hours 4. its net worth is to be taken as cost of acquisition. the actual cost can be taken to be its fair market value as on 1st April. iv. For those assets which are acquired prior to 1st April.2 In case of the following self-generated assets where there is no cost incurred by the assessee. 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. 1981. the cost of acquisition (or the written down value) of and cost of improvement in the asset. ii. 4.4 There are special provisions for computation of long term capital gains. 4. This cost of acquisition is not to be indexed as stated in para 4. 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.3 In case of slump sale of an undertaking or a division thereof.5.4.5. iii.5. 1981 . the amount of expenditure incurred in connection with such transfer.

1996-97 17. 1986-87 7. 1992-93 13. 1990-91 11. 1994-95 15. 1991-92 12. 1982-83 3. 1998-99 19. Exceptions are made in the case of certain categories of non-residents and . 1985-86 6. 1989-90 10.5.which is than adjusted for inflation in the same manner. Financial Year 1. 1988-89 9.5 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. 1984-85 5.No. 1993-94 14. 1995-96 16. The notified cost inflation index is as under:S. 1999-2000 Cost Index 100 109 116 125 133 140 150 161 172 182 199 223 244 259 281 305 331 351 389 4. 1997-98 18. 1981-82 2. 3987-88 8. 1983-84 4.

3. Exemption from tax is also provided. transfer of a capital asset being shares in Indian companies from one foreign company to another.3.4 and 11. The manner of granting such protection is mentioned in para 7.5. in a scheme of amalgamation or demerger would not be regarded as a transfer if certain conditions are satisfied (para 7.NRIs (Refer para 7.2).3).20% will be limited to 10% of capital gain worked out without indexation benefit. . 4. when assets are transferred as a result of succession of a sole proprietory concern or a firm by a company.5. 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.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. 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. Further. 4.3. 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.1 of Chapter VII.6 In case of non-residents. In respect of gains arising from transfer of listed securities or unit tax so computed @.

agricultural land and from transfer of industrial undertaking (For details sections 54.8 In case the capital gain arising from transfer of an asset is used for acquiring similar assets within a specified period. 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 . 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. debentures. In the event of such transfer or conversion. 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. 54F). 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. 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. 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.5. within a period of six months. 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). in any of the bonds.4. 54B and 54G may be referred to).

Highways Authority of Indian which are redeemable after five years. Income such as a.4 in Chapter VII.6 Sections 56 to 59 deal with the provisions for computation of income under the head 'income from other sources'.5.2000 will be required to be invested only in bonds issues by National Bank for Agriculture. card games or iii.3. Ground rent or rent received or sub-letting a property. cross-word puzzles. Interest including 'interest on securities' if it is not taxable under the head 'Profits and gains of business or profession'. ii. 4.3. . 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. Income from other sources 4. These provisions are explained at 7. Winning from lotteries. races including horse races.9 Special provisions exist for taxation of capital gains arising to offshore funds from transfer of units purchased in foreign currency.under any of the heads mentioned earliers. Dividends or income from units of mutual fund. Some of the types of income which are assessable under this head are mentioned belows :i. However gains arising from transfers after 31. b. This is a residuary head covering all incomes which do not specifically fall .

Besides. any salaries or interest payable outside India from which tax is deductible at source under the Act but has not been deducted. any personal expenditure of the tax payer. In assessing income from letting the machinery. from gambling or betting etc. 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. plant or furniture on hire. in assessing dividend income. Income from hiring of machinery. however. ii. 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. 15.whichever is less is .1 In computing the taxable income under this head. allowed in respect ofi.6.iv. Such income is taxable at a flat rate of 40 per cent under the provisions of Section 115BB.6 above.000/. 4. Family pension. 4.2 Further. 4.6. no deduction in respect of any expenditure or allowance is made in computing income from winnings referred in (iii) (b) of para 4. c. plant or furniture unless such a hiring is the business of the taxpayer.6.3 A standard deduction equal to 33-1/3% of the pension amount or Rs. any remuneration or commission paid for realising such income is allowed as deduction. No deduction is.

ii. from activities in the same category in that year. if any. demerged company or the predecessor concern will. amalgamation of company owning industrial undertaking or a ship with another company. does not apply to losses from speculative transactions. This. In case of i. subject to fulfillment of certain . such loss can be set off against income under any other head (including capital gains) in the same year. a demerger of a company.7 In case of computation of income under any of the heads of income results in a loss figure. a reorganisation of business resulting in succession of a firm or a proprietory concern by a company. Losses of these excluded categories can be set off only against income. Carry Forward of Losses 4.allowed in computing income from family pension. losses from owning and maintaining race horses or to losses under the head 'Capital Gains'. the accumulated losses or unabsorbed depreciation of the amalgamating company. however. iii. Set off of Losses 4.8 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.

8. 4. if any.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. 4. 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. the company will not be able to carry forward losses incurred before such change. in those years.8. . be treated as losses or depreciation of amalgamated company. 72A).3 If 51% or more of the voting power changes hands in an unlisted company.conditions (sec. 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.