Tax Synopsis PDF

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1.BASIC CONCEPT THAT ONE MUST KNOW

PROVISIONS IN BRIEF
Assessment year –
“Assessment year” means the period starting from April 1 and ending on March 31 of the next year. Income
of previous year of an assessee is taxed during the next assessment year at the rates prescribed by the
relevant Financial Act.
Previous year –
Income earned in a 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 income is taxable is known as assessment year. Previous year is the financial
year immediately preceding the assessment year. All assesses are required to follows financial year (i.e.,
April 1 to March 31) as the previous year. This uniform previous year has to be followed for all sources of
income.
Previous year in the case of newly set-up business/profession –

In the case of a newly set-up business/ profession or in the case of a new source of income, the previous year
is determined as follows –
The first previous year commences on the date of setting up of the business/profession (or, as the
case may be, the date on which the source of income newly comes into existence) and ends on the
immediately following March 31. Thus, in the case of a newly set-up business/profession or new
source of income, the first previous year is a period of 12 months or less than 12 months. It can never
exceed 12 months.
The second and subsequent previous years are always financial years. The second and subsequent
previous years are always of 12 months each (i.e., April to March).
Connection between previous years and assessment years –

Rule – Income of a previous year is taxable in the immediately following assessment year.
Exception – In the following cases income of previous year is taxable in the previous year itself –
a) income of a non-resident from shipping;
b) income of persons leaving India either permanently or for long period of time;
c) income of bodies form for short duration;
d) income of a person trying to alienate his assets with a view to avoiding payment of tax ; and
e) income of a discontinued business.
In these cases, income of a previous year may be taxed as the income of the assessment year immediately
preceding the normal assessment year.
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Person –
The term “person” includes ;
a) an individual ;
b) a Hindu undivided family ;
c) a company ;
d) a firm ;
e) an association of persons or body of individuals, whether incorporated or not ;
f) a local authority ; and
g) every artificial juridical person not falling within any of the preceding categories.
These are seven categories of persons chargeable to tax under the Act. The aforesaid definition is inclusive
and not exhaustive.
Assessee –
“Assessee” means a person by whom income-tax or any other sum of money is payable under the Act. It
includes every person in respect of whom any proceeding under the Act has been taken for the assessment
of his income or loss or the amount of refund due to him. It also includes a person who is assessable in
respect of income or loss of another person or who is deemed to be an assessee, or an assessee in default
under any provision of this Act.
Income –
As generally understood – income is a periodical monetary return with some sort of regularity. It may be
recurring in nature. It may be broadly defined as the true increase in the amount of wealth, which comes to a
person during a fixed period of time.
Extended meaning given under section 2(24) – Under section 2(24), the term ‘’income” specifically includes
the following :
1. Profits and gains
2. Dividend
3. Voluntary contributions received by a trust
4. Perquisites in the hands of employee
5. Any special allowance or benefit
6. City compensatory allowance/dearness allowance
7. Any benefit or perquisite to a director
8. Any benefit or perquisite to a representative assessee
9. Any sum chargeable under section 28,41 and 59
10. Capital gains
11. Insurance profit
12. Banking income of co-operative society
13. Winnings from lottery
14. Employees contribution towards provident fund
15. Amount received under keyman insurance policy
16. Amount exceeding Rs.50,000 by way of gift received by an individual or a Hindu undivided family
Gross Total Income [GTI] -

As per section 14, income of a person is computed under the following five heads :
1. Salaries
2. Income for house property
3. Profits and gains of business
4. Capital gains
5. Income for other sources.
The aggregate income under these heads is termed as “gross total income”
In other words, gross total income means total income computed in accordance with the provisions of the
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Act before making any deduction under section80C to 80U.

Rounding-off of income and tax -
The taxable income and tax liability shall be rounded off to the nearest multiple of ten rupees.
Exemption vs. Deduction -
If an income is exempt from tax, it is not included in the computation of income. Exemption can never exceed
the amount of income. Deduction is generally given from income chargeable to tax. Deduction can be less
than or equal to or more than amount of income. If amount deductible is more than the amount of income,
the resulting amount will be taken as loss.
Capital receipts vs. Revenue receipts -
Receipts are of two types-capital receipts and revenue receipts. Capital receipts are exempt from tax unless
they are expressly taxable. For instance, capital gains are taxable under section 45 even if they are capital
receipts. On the other hand, revenue receipts are taxable, unless they are expressly exempt from tax. For
instance, income exempt under section 10.
Method of accounting -
Income chargeable under the head “profits and gains of business or profession” or ‘’Income from other
sources’’ is to be computed in accordance with the method of accounting regularly employed by the assessee.
For instance, if a trader follows mercantile system of accounting, his business will be taxable on ‘’accrual’’
basis and business expenses will be deductible on ‘’due’’ basis. If a professional follows cash system of
accounting, his professional income will be taxable on ‘’receipt’’ basis and professional expenses will be
deductible on ‘’payment’’ basis.
In other cases, method of maintaining books of account is irrelevant.
Types of accounting methods -
Mainly there are two types of accounting methods-mercantile system and cash system.
1. Mercantile system – under mercantile system, income and expenditure are
recorded at the time of occurrence during the previous year.
2. Cash system – Under cash system of accounting, revenue and expenses are
recorded only when received or paid
Tax rates -
Tax rates (including surcharge, education cess and secondary and higher education cess) are given in
Appendix 1.
Rebate under section 87A- Rebate under section 87A is deductible from income-tax (before adding
surcharge and education cess). It can be claimed only by a resident individual who has taxable income of
Rs.5,00,000 or less. Quantum of rebate is 100 per cent of income-tax or Rs.2,000,whichever is lower.
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2. RESIDENTIAL STATUS AND ITS EFFECT ON TAX INCIDENCE

PROVISIONS IN BRIEF
Relevance of residential status -

There are two types of tax payers – residence in India and non-residence in India. Indian income is taxable in India
whether the person earning income is resident or non-resident. Conversely, foreign income of a person is taxable in
India only if such person is resident in India. Foreign income of a non-resident is not taxable in India.
Types of residential status –

For different tax payers residential status is as follows –
Individuals/Hindu undivided family -
Ordinarily resident
Resident in India
Non-ordinarily resident
Non-resident in India
Firms, association of a person, joint stock company and every other person –
Resident in India
Non-resident in India
Significance of residential status –

In the case of non-resident, Indian income is taxable but foreign income is not chargeable to tax. In the case of
residence but not ordinarily resident, Indian income is taxable but foreign income is taxable only in two cases. In the
case of resident (or resident or ordinarily resident) Indian income as well as foreign income are chargeable to tax.
Rules for determination of residential status –

Residential status of an individual –
The tables given below summarize the rule of residence for the assessment year 2014-15 :
Resident and ordinarily resident (1) Resident but not ordinarily resident (2) Non-resident
Must satisfy at least one of the basic Must satisfy at least one of the basic Must satisfy non of the
conditions and both of the additional conditions and one or non of the basic conditions.
conditions. additional conditions.
BASIC CONDITIONS AT A GLANCE

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In the case of an Indian citizen or a person In the case of an

In the case of an Indian citizen who leaves of Indian origin (who is abroad) who come individual [other than
India during the previous year for the on a visit to India during the previous year. that mentioned in
purpose of employment (or as a member of (2) columns (1) and (2)].
a crew of an Indian ship). (1)
(3)
a) Presence of at least 182 days in India a) Presence of at least 182 days in India a) Presence of at least
during the previous year 2013-14 during the previous year 2013-14. 182 days in India during
b) Non-functional b) Non-functional the previous year 2013-
14.
b) Presence of at least 60
days in India during the
previous year 2013-14
and 365 days during 4
years immediately
preceding the relevant
previous year (i.e., during
April 1, 2009 and March
31, 2013).
ADDITIONAL CONDITIONS AT A GLANCE
i. Resident in India in at least 2 out of 10 years immediately preceding the relevant previous year [or must satisfy
at least one of the basic conditions, in 2 out of 10 immediately preceding previous years(i.e., 2003-04 to 2012-
13)].
ii. Presence of at least 730 days in India during 7 years immediately preceding the relevant previous years (i.e.,
during April 2006 and March 31, 2013).
Residential status of a person other than an individual –
Taxpayers other Control and management of the affairs of the taxpayer are :
than an individual
Wholly in India Wholly outside India Partly in India and
partly outside in
India
Hindu undivided Resident Non-resident Resident

family
Firm Resident Non-resident Resident

Association of Resident Non-resident Resident
persons
Indian company Resident Resident Resident
Non-Indian Resident Non-resident Non-resident
company
Any other person Resident Non-resident Resident
except an individual
Note :
1. A resident Hindu undivided family is either ordinarily resident or not ordinarily resident. A resident Hindu
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undivided family is ordinarily resident in India if karta or manager of the family (including successive kartas) satisfies
the following two additional conditions as laid down by section 6(6)(b):
a) he has been resident in India in at least 2 out of 10 previous years immediately preceding the relevant previous
year; and
b) he has been present in India for a period of 730 days or more during 7 years immediately preceding the previous
year.
If karta or manager of resident Hindu undivided family does not satisfy the additional two conditions, the family is
treated as resident but not ordinarily resident in India.
2. In order to determine the residential status of the aforesaid taxpayers, the residential status of the karta of the
family (except as stated in 1 supra), partners of the firm, members of the association, directors of the company, etc, is
not relevant. For instance, it is possible that partners of the firm are resident in India but the firm is controlled from a
place outside in India and, consequently, the firm is a non-resident in India.
Indian income and foreign income – when taxable/not taxable –

In order to understand the relationship between residential status and tax liability, one must understand the meaning
of “Indian income” and “foreign income”.
Indian income – Any of the following three is an Indian income –
1) If income is received (or deemed to be received) in India during the previous year and at the same time it accrues
(or arises or is deemed to accrue or arise) in India during the previous year.
2) If income is received (or deemed to be received) in India during the previous year but it accrues (or arises) outside
India during the previous year.
3) If income is received outside India during the previous year but it accrues (or arises or is deemed to accrue or arise)
in India during the previous year.
Foreign income – If the following two conditions are satisfied, then such income is “foreign income”. –
a) Income is not received (or not deemed to be received) in India; and
b) Income does not accrue or arise (or does not deemed to accrue or arise) in India.
Board conclusions –
Indian income – Indian income is always taxable in India irrespective of the residential status of the taxpayer.
Foreign income – Foreign income is taxable in the hands of resident (in the case of a firm, an association of person, a
joint stock company and every other person) or resident and ordinarily resident (in case of an individual and a Hindu
undivided family) in India. Foreign income is not taxable in the hands of non-resident in India.
In the hands of resident but not ordinarily resident taxpayer, foreign income is taxable only if it is (a) business income
and business is controlled wholly or partly in India, or (b) professional income from a profession which is set up in
India. In any other cases, foreign income is not taxable in the hands of resident but not ordinarily resident taxpayers.
Receipt of income in India –
If income is received in India, it is always chargeable to tax. The “receipt” of income refers to the first occasion when
the recipient gets the money under his control. Once an amount is received as income, any remittance or transmission
of the amount to another place does not result in “receipt” at the other place.
Income deemed to be received in India –

The Act enumerates the following as income deemed to be received in India :
Interest credited to recognized provident fund account of an employee in excess of 9.5 per cent.
Excess contribution of employer in the case of recognized provident fund (i.e., the amount contributed in
excess of 12 per cent of salary).
Transfer balance.
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Contribution by the Central Government or any other employer to the account of an employee under a notified
pension scheme referred to in section 80CCD.
Tax deducted at source.
Deemed profit under section 41.
Accrual of income –
Income accrued in India is chargeable to tax in all cases irrespective of residential status of an assessee. The word
“accrue” and “arise” are used in contradistinction to the word “received”. Income is said to be received when it reaches
the assessee. When the right to received the income become vested in the assessee, it is said to accrue or arise.
Income deemed to accrue or arise in India –

In some cases, income is deemed to accrue or arise in India under section 9 even though it may actually accrue or arise
outside India. The cases enumerated by section 9 are given below –
Income from business connection in India.
Income from any property, asset or source of income in India.
Capital gain on transfer of a capital asset situated in India.
Income from salary if service is rendered in India.
Income from salary (not being perquisite/allowance) if service is rendered outside India (provided the
employer is Government of India and the employee is a citizen in India).
Dividend is paid by the Indian company (this point does not have much practical utility. Normally in the hands
of shareholders, dividend from an Indian company is exempt from tax, as an Indian company has to pay
dividend tax).
Interest royalty or technical fees received from the government of India.
Interest royalty or technical fees received from a resident (except when the payment pertains to business
carried out by the payer outside in India).
Interest, royalty or technical fees received from a non-resident if the payment pertains to business carried on
by the payer in India.
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3. INCOME UNDER THE HEAD “SALARIES” AND ITS COMPUTATION
PROVISIONS IN BRIEF
Basis of charge –
Salary is taxable on due or receipt basis whichever is earlier as per section 15.
Computation of income under the head “Salaries” – Rs.
Salary XXXX
Allowances XXXX
Perquisites XXXX
Gross salary XXXX
Less - deduction under section 16
Entertainment allowance deduction [Sec. 16(ii)] XXXX
Professional tax [Sec. 16(iii)] XXXX
Income under the head “Salaries” XXXX
Note – Professional tax is deductible on “payment basis”. If it is paid by the employer on behalf of the
employee, it is first included in gross salary as perquisite and then deduction is allowed under section 16 (iii).
Different forms of Salary-
Basic salary – Taxable.
Dearness allowance/pay – Taxable.
Advance salary - Taxable in the year of receipt.
Arrears of salary – Taxable in the year of receipt, if not taxed on due basis earlier.
Leave encashment while in service - Taxable
Leave encashment at the time of retirement or at the time of leaving the job-
1. In case of Government employees, it is
fully exempt from tax.
2. In case of non-Government employees, it
is exempt from tax to the extent of the least of the following :
a. Cash equivalent of leave salary in respect
of the period of earned leave at the credit of employee at the time of retirement (which cannot exceed 30
days’ “average salary” for every completed year of service); or
b. 10 months “average salary” ; or
c. Amount specified by the Government,
i.e., Rs. 3,00,000 ; or
d. Leave encashment actually received at
the time of retirement.
Notes –
1. Government employee for this purpose is
a Central Government employee or a State Government employee.
2. “Average salary” for this purpose is to be
calculated on the basis of average salary drawn during the period of 10 months immediately
preceding the retirement.
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Salary in lieu of notice – Taxable

Salary to partner – Not chargeable under the head “Salaries” but taxable under head “Profits & gains of
business or profession”.
Fees & commission – Taxable.

Bonus – Taxable on receipt basis if not taxed earlier on due basis.
Gratuity –
1. In case of Government employee it is fully
exempt from tax.
2. In case of non-Government employee
covered by the Payment of Gratuity Act, 1972 it is exempt from tax to the extent of the least of the
following :
a. 15 days salary of each year of service (or
part thereof exceeding 6 months);
b. Rs. 10,00,000 ; or
c. Gratuity actually received.
3. In case of non-Government employee
(not covered by the Payment of Gratuity Act) it is exempt from tax to the extent of the least of the
following :
a. Rs. 10,00,000 ;
b. Half month’s salary for each completed
year of service ; or
c. Gratuity actually received.
Note – “Average salary” for this purpose is to be calculated on the basis of average salary drawn during the
period of 10 months immediately preceding the month in which the employee has retired.
Pension – Uncommuted pension is taxable in all cases. Commuted pension is fully exempt from tax in the case
of a Government employee (i.e., an employee of the Central Government, State Government, local authority
and statutory corporation). In the case of non-Government employee, commuted pension is exempt to the
extent given below –
a. One-third of normal pension is exempt if
the employee received gratuity ; or
b. One-half of normal pension is exempt
from tax if the employee does not received gratuity.
Pension under new pension scheme (popularly known as NPS)in the case of a government employee or any
other employee joining on or after January 1, 2004 –
1. Employers contribution is first included in
salary & then a deduction is available (to the extent of 10% of salary) under section 80CCD.
2. Employee’s contribution is deductible
under section 80CCD to the extent of 10% of salary.
3. When pension is received out of the
aforesaid amount, it will be taxable in the year of receipt.
Annuity from employer – Taxable as salary.

Annual accretion to the credit balance in recognized provident fund –
1. Excess of employer’s contribution over
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12% of salary is taxable.

2. Excess of interest over notified interest is
taxable (notified rate of interest is 9.5%)
Retrenchment compensation – Exempt from tax to the extent of least of the following :
a. Amount calculated under section 25F(b)
of the Industrial Disputes Act; or
b. An amount specified by the Government
(i.e., Rs. 5,00,000).
Remuneration for extra duties - Fully taxable under section 15.
Compensation received under voluntary retirement scheme (VRS)-

Exempt up to Rs. 5,00,000, if a few conditions are satisfied. One of the condition is the amount payable on
account of voluntary retirement or voluntary separation of the employees does not exceed
(a) the amount equivalent to three months salary for each completed year of service, or
(b) Salary at the time of retirement multiplied by the balance months of service left before the date of his
retirement on superannuation, whichever is more. Relief under section 89 is not available.
Salary from UNO – Not chargeable to tax.

Salary received by a teacher/ researcher from a SAARC member State – Not taxable up to 2 years.
Different allowances –
City compensatory allowance – Fully taxable under sec. 15.
House rent allowance – exempt from tax to the extent of the least of the following –
a. 50% of salary in Delhi, Bombay, Calcutta, Madras or 40% of salary in other cases ;
b. House rent allowance ; or
c. The excess of rent paid over 10% of salary.
Entertainment allowance – this allowance is first included in salary and thereafter a deduction is allowed. In
the case of Government employees, least of the following is deductible –
a. Rs. 5,000 ;
b. 20% of salary ; or
c. Entertainment allowance.
Children education allowance – It is exempt from tax to the extent it does not exceed Rs. 100 per month per
child for a maximum of two children (actual expenditure is not taken into consideration).
Hostel expenditure allowance - It is exempt from tax to the extent it does not exceed Rs. 300 per month per
child for a maximum of two children (actual expenditure is not taken into consideration). Exemption is in
addition to the exemption available in the case of children education allowance.
Transport allowance – it is given to an employee to meet his expenditure for the purpose of commuting
between office & residence. It is exempt up to Rs. 800 per month (actual expenditure is not taken into
consideration). The exemption is Rs. 1,600 per month in the case of an employee who is blind or
orthopedically handicapped. In the case of serving Chairman & members of UPSC, transport allowance is
exempt from tax without any monetary ceiling.
Allowance for transport employees - It is given to employees of transport undertaking to meet their personal
expenditure during duty performed in the course of running of such transport from one place to another place.
The amount is exempt to the extent it does not exceed (a) 70% of the allowance or (b) Rs. 10,000 per month,
whichever is lower (actual expenditure is not taken into consideration).
Tribal area allowance – Exempt up to Rs. 200 per month in some cases.
Travelling allowance, conveyance allowance, helper allowance, research allowance, uniform allowance -
These allowances are given to meet specific expenditure in performance of duties of an office. Exemption is
available to the extent the amount is utilized for the specific purpose for which the allowance is given.
Transfer allowance –It is exempt from tax to the extent expenditure is incurred in connection with transfer,
packing and transportation of personal effects on transfer from one place to another place.
Foreign allowance – Exempt from tax if paid outside India by the Government to an Indian citizen for
rendering service outside India.
Tiffin allowance – Taxable.
Fixed medical allowance – Taxable.
Allowance received by a teacher/researcher from a SAARC member State – Not taxable up to 2 years.
Sumptuary allowance to serving Chairman/members of UPSC - Not chargeable to tax.
Allowance to retired Chairman & retired members of UPSC – An allowance (subject to a maximum of Rs.
14,000 per month) for defraying the service of an orderly and for meeting expenses incurred towards
secretarial assistance on contract basis, is not chargeable to tax.
Perquisite -
Rent-free unfurnished house –
In the case of Government employee (i.e., Central Government employee, State Government employee or
a Government employee on deputation to a public sector undertaking if house is allotted by the
Government): Taxable value is the license fees of the house as per house allotment scheme of the
Government.
In the case of non-Government employees :
- If the house is owned by employer : Taxable value is 15% of salary of employee of the relevant period
(7.5% if population is 10 lakh or less or 10% if population is above 10 lakh but not more than 25 lakh)
- If house is taken on lease by employer: Taxable value is either 15% of the salary or lease rent,
whichever is lower.
Rent-free furnished house – Value of “furniture” will be added to the value of rent-free unfurnished house as
computed above. Value of furniture is 10% per annum of cost of furniture to the employer or rent paid/payable
of the furniture by the employer, as the case may be.
Concession in rent – value of the perquisite in respect of rent-free furnished/unfurnished house will be
calculated as given above. From the amount so calculated, rent charged by employer shall be deducted. The
balance (if it is positive) is taxable value of the perquisite in respect of concession in rent.
Rent-free/ concessional furnished/unfurnished house in special cases –

Not chargeable to tax if provided in “remote area”.
Hotel accommodation/guest house accommodation provided to an employee is taxable at the rate of 24% of
salary of the relevant period or hotel tariff, whichever is lower.
Hotel accommodation for 15 days (in aggregate in previous year) can be provided immediately after transfer at
the new location as a tax free perquisite. Further, if an employee is transferred and housing facility is provided
to him at the new location (he has yet to vacate the house given at the old location), for a period of 90 days
immediately after transfer only one house (at the option of employee at the old location or new location) is
chargeable to tax.
Perquisite in respect of rent-free furnished/unfurnished house is not taxable if provided to a High Court Judge,
Supreme Court Judge, Union Minister, leader of opposition in Parliament, an official in parliament & serving
Chairman/members of UPSC.
Free domestic servants – Actual expenditure of the employer as reduced by any amount paid by the employee
is a taxable perquisite in the hands of an employee.
Gas, electricity or water supplied after purchasing from outside agency –

Actual amount spent by the employer as reduced by any amount recovered from the employee is a taxable
perquisite in the hands of an employee.
Free education facility – Expenditure relating to providing training to employees is not taxable. If education
facility is provided to the family members of employee, expenditure incurred by the employer is the taxable
value of perquisite. if education facility is provided to the family members in an educational institute owned or
maintained by the employer, then reasonable cost of education in a similar institute in or near the locality is
taxable. Up to Rs.1,000 Per month per child is not taxable if the employer provides education facility to the
children of an employee in an educational institution owned/maintained by the employer.
Leave travel concession (LTC) – Only 2 journeys in a block of 4 years is exempt (however, carry over
concession is available). Exemption is based upon actual expenditure relating to travel fare only in respect of
the shortest route from the place of origin to farthest point.
Employee’s obligation met by employer – Taxable in all cases.
Interest-free concession loan – Find out the maximum outstanding balance on the last day of each month. It
shall be multiplied by SBI landing rate on the first day of the previous year. Amount recovered from the
employee on account of interest is deductible. Perquisite is not taxable if the aggregate amount of original loan
does not exceed Rs. 20,000. Moreover, if loan is given by employer for medical treatment (given in rule 3A) of
the employee or his family members, it is not chargeable to tax.
Use of employer’s movable asset – 10% per annum of actual cost of asset to the employer or higher charges as
reduced by any amount recovered from the employee is a taxable perquisite in the hands of an employee.
Nothing is, however, taxable in the case of computer/laptop.
Sale of movable assets – actual cost to the employer minus normal wear & tear minus sale consideration paid
by the employee, is taxable (normal wear and tear for each year of use is calculated as follows –
computer/electronic items : 50% per annum by reducing installment method; car 20% p.a. by reducing
installment method, any other asset: 10% p.a. of cost).
Medical facilities –
1. Medical facility provided in a hospital owned or maintained by the employer is not chargeable to tax .
2.Medical facility provided by an employer in a Government hospital, approved hospital (if a few conditions
are satisfied) or a private hospital (if such private hospital is recommended by the Government for the medical
treatment of Government employees) is not chargeable to tax.
3. Medical insurance premium paid or reimbursed by the employer is not chargeable to tax.
4. Any other expenditure incurred or reimbursed by the employer for providing medical facility in India is not
chargeable to tax up to Rs. 15,000 in aggregate per assessment year (fixed medical allowance is fully
chargeable to tax).
5. Expenditure on medical treatment outside India is not chargeable to tax, if a few conditions are satisfied.
6. Further, the perquisite in respect of medical facility is not taxable if the employee is a non-specified
employee.
Motor car – Car owned or hired by employer, expenses incurred by employer and used for partly official &
partly personal purposes – Rs.1,800 per month (1600cc or less)/Rs.2,400 per month (above 1600 cc)/Rs. 900
per month for driver. Expenditure recovered from employee is not deductible.
Car owned or hired by employer, expenses incurred by employer and used wholly for personal purposes –
Entire expenditure incurred by employer including depreciation at the rate of 10% per annum of actual cost of
the car, is taxable in the hands of employer. Expenses recovered from employee are deductible.
Car owned or hired by employer, used for partly official and partly personal purposes, expenses for private
purposes incurred by employee – Rs. 600 per month (1600 cc or less) / Rs. 900 per month (above 1600 cc) for
car and Rs. 900 per month for driver. Expenditure recovered from employee is not deductible.
Car owned by employee, expenses incurred by employer and used for partly official and partly personal
purposes – Actual expenditure incurred by employer minus expenditure pertaining to official use minus
anything recovered from employee, is taxable in the hands of employee. Expenditure pertaining to official use
can be calculated as per logbook of the car. Alternatively, expenditure pertaining to official use can be
calculated at the rate of Rs. 1800 per month (1600 cc or less) / Rs. 2,400 per month (above 1600 cc) for car and
Rs. 900 per month for driver
Conveyance facility when not taxable – Conveyance facility between office and residence is not chargeable to
tax in the case of any employee of any organization. Moreover, conveyance facility to a High Court Judge,
Supreme Court Judge and serving Chairman / members of UPSC, is not chargeable to tax.
Free transport - Taxable as a perquisite in the hands of an employee on the basis of value at which the
employer offers such benefit to the public as reduced by any amount recovered from the employee (tax free
perquisite in the hands of employees of railways/airlines).
Lunch, refreshment, etc. –

Food and non-alcoholic beverages are provided in working hours in remote area or in an off shore installation:
Fully exempt from tax.
Lunch/refreshment is provided in working hours at any other place: Cost to the employer in excess of Rs. 50 per
meal (as reduced by the amount recovered from the employee) is the taxable value of perquisite in the hands
of the employee (tea and snacks in working hours is tax-free perquisite).
Travelling, touring, accommodation –

When such facility is available uniformly to all employees: Taxable as a perquisite in the hands of an employee
on the basis of actual expenditure of the employer as reduced by any amount recovered from the employee.
When such facility is not available uniformly to all employees: Taxable as a perquisite in the hands of an
employee on the basis of value at which such facilities are offered by other agencies to the public as reduced by
any amount recovered from the employee.
Gifts, voucher or token – Taxable as a perquisite in the hands of an employee on the basis of actual expenditure
of employer (gift may be made either to employee or any member of his household. Gift-in-kind up to Rs.
5,000 per annum is exempt).
Credit card - Expenditure incurred by the employer minus expenditure pertaining to official use minus
anything recovered from employee, is taxable.
Club - Expenditure incurred (including annual or periodical fees) by the employer minus expenditure
pertaining to official used minus anything recovered from employee, is taxable. Health club/sports club facility
given uniformly to all employees in employer’s premises, is not taxable. The initial one time deposits or fees
for corporate or institutional membership, where benefit does not remain with particular employee after
cessation of employment, are exempt.
Specified security or sweat equity shares allotted on or after April 1, 2009 - Amount taxable is the fair market
value of shares/securities on the date on which option is exercised by the employee. Amount, if any, recovered
from the employee is deductible.
Employer’s contribution towards approved superannuation fund – Amount in excess of Rs. 1 lakh per
assessment year is taxable in the hands of employee.
Perquisite received by a teacher/researcher from a SAARC member State – Not taxable up to 2 years.
Telephone/mobile phone – Not taxable
Residential telephone to retired Chairman/members of UPSC – Value of a residential telephone free of cost
and the number of free calls to the extent of Rs. 1,500 p.m.(over and above the number of free calls per month
allowed by telephone authorities), is not taxable.
Any other facility (not being telephone/mobile phone and not being reimbursement of expenditure on books
for office purpose) – Taxable as a perquisite in the hands of an employee on the basis of actual expenditure of
the employer as reduced by any amount paid by the employee.
Employee’s provident fund –
Statutory provident fund - Deduction under section 80C on employee’s contribution is available. All other
contributions/interest/lump sum payment exempt from tax.
Recognized provident fund - Deduction under section 80C on employee’s contribution is available. Excess of
employer’s contribution over 12% of salary is taxable (exempt up to 12% of salary). Excess of interest over
9.5% is taxable. Lump sum payment at the time of retirement exempt in certain cases.
Unrecognized provident fund - Deduction under section 80C on employee’s contribution is not available.
Employer’s contribution & interest are exempt from tax. Lump sum payment (except employee’s contribution)
at the time of retirement taxable.
Deduction under section 80C : Up to Rs. 100,000.
Meaning of “Salary” for different calculations –
For the purpose of calculating (a) house rent allowance, (b) gratuity (not being gratuity under the payment of
Gratuity Act), (c) leave encashment at the time of retirement, (d) NPS contribution and (e) employer’s
contribution towards recognized provident fund, not chargeable to tax – For these purposes, “Salary” means
basic salary, dearness allowance*/pay if part of salary for computing retirement benefits and commission (if
paid as a percentage of turnover achieved by an employee).
For the purpose of calculating gratuity received under the Payment of Gratuity Act, 1972, not chargeable to tax
- For this purpose, “Salary” means basic salary, dearness allowance whenever dearness allowance is paid. The
same rule is applicable in the case of retrenchment compensation.
For the purpose of calculating perquisite value of rent-free/concessional house – For this purpose, “salary”
means basic salary, dearness allowance/ pay if part of salary for computing retirement benefits, bonus,
commission, fees, taxable allowances and any monetary benefit otherwise chargeable to tax. However,
“salary” does not include tax-free allowances, value of perquisite and employer’s contribution towards
provident fund and lump-sum payments received at the time of termination of service or superannuation or
voluntary retirement, like gratuity, severance pay, leave encashment, voluntary retrenchment benefits,
commutation of pension and similar payments.
For the purpose of entertainment allowance, not chargeable to tax – For this purpose, “salary” means basic
salary.
Meaning of “Government employee” for different purposes –
The following are treated as Government employees (Govt.) or non-Government employees (N Govt.) –
For the purpose of computation of Central/State Employees of Employees Other employees
taxable amount Government local of statutory
employees authorities corporations
Leave encashment Govt. N Govt. N Govt. N Govt.
Gratuity Govt. Govt. N Govt. N Govt.
Commuted Pension Govt. Govt. Govt. N Govt.
Rent-free house Govt. N Govt. N Govt. N Govt.
4. INCOME FROM HOUSE PROPERTY
Basis of charge
Income is taxable under the head “income from house property” only when thefollowing three conditions are satified –
1. The property should consist of any building or lands appurtenant thereto.
2. The assessee should be owner of the property.
3. The property should not be used by the owner for the purpose of any business or profession carried on by him,
the profit of which are chargeable to income tax.
Computation of income of let out house property
Income from let out house property is computed as under : Rs.
Gross annual value XXXX
Less : XXXX
Net annual value XXXX
Less : deduction under sec. 24
- Standard deduction XXXX
- Interest on borrowed capital XXXX
Income from house property XXXX
Gross annual value
Gross annual value will be calculated as follows –
Step1 :Find out reasonable expected rent of the property
Step 2 : Find out rent actually received or receivable after excluding unrealized rent but before deducting loss due to
vacancy.
Step 3: Find out which one is higher – amount computed in step 1 or step 2.
Step 4 : find out loss because of vacancy.
Step 5 : step 3 minus step 4 is gross annual value.
Reasonable expected rent – The higher of municipal value (MV) & fair rent (FR), subject to maximum of
standard rent (SR) (i.e., rent as per the Rent Control Act), is reasonable expected rent
Rent actually received or receivable- It shall be calculated as follows –
Rent of the previous year (or that part of the previous year)
For which the property is available for letting out XXXX
Less: Unrealized rent if a few conditions are satisfied XXXX
Rent received/receivable before deducting lossdue to vacancy XXXX
Loss due to vacancy – It is separately deducted under step 4. Not be deducted under step 2 from actually
received or receivable.
Municipal taxes –
Deductible only if (a) thesetaxes are borne by the owner, & (b) are actually paid by him during the previous year
Deduction under section 24 – Two deductions are available under section 24 – (a) standard deduction; & (b) interest on
borrowed capital. The list of allowance of section 24 is exhaustive. In other words, no other deduction can be claim
under section 24.
Standard deduction – 30% of net annual value is deductible irrespective of any expenditure incurred by the tax
payer
Interest on borrowed capital – Deductible, if capital is borrowed for thepurpose of purchase, construction,
repair, renewal or reconstruction of the property.
Interest of preconstruction period is deductible in 5 years in 5 equal instalment is deductible in the year in which
construction of property is completed or in which property is acquired. For this purpose “preconstruction period” means
the period commencing on the the date of borrowing & ending on (a) March 31st immediately prior to the date of
completion of construction/date of acquisition or (b) date of repayment of loan, whichever is earlier.
Computation of income from self occupied property –
If a property is occupied for own business, nothing is taxable under the head “ Income from house property”. If one
house property is occupied for own residential purposes by an individual or by a Hindu undivided family (for residence of
members), gross annual value of such property is nil. Municipal tax is not deductible. However, interest on borrowed
capital is deductible upto a maximum ceiling of Rs. 30,000 (Rs. 1,50,000 in a few cases). If two or more properties are
occupied for own residential purposes, only one property can be treated as self occupied property & other remaining
property or properties shall be “deemed to be let out property”.
How to compute gross annual value of one self occupied property-
Gross annual value (GAV) of one
at some other place (it is not let out or put to any other use). GAV is nil
Self occupied property shall be calculated under different situations as follows –

If such property is used throughout the previous year for own residential purposes, it is not let out or put to any other
use. GAV is nil
If such property could not be occupied through out of previous year because employment, business or profession of
the owner is situated When a part of the property (being independent residential unit) is self occupied & the other
part is let out so nil. GAV of the unit which is self occupied,
is nil. GAV of the unit which is let out is calculated as if the unit is let out.
When such property has only one residential unit which is self occupied for a part of the year & let out for the other part
of the year.
GAV shall be calculated as if the property is let out.
When interest is deductible up to Rs. 1,50,000 :
Interest is deductible up to Rs. 1,50,000 in the case of one self occupied property if the following conditions are
satisfied-
1. Capital is borrowed on or after April 1, 1999 for acquiring or constructing a property.
2. The acquisition or construction should be completed within 3 years from the end of financial year in which the
capital was borrowed.
3. The person extending the loan certified that such interest is payable in respect of the amount advanced for
acquisition or construction of the house or as re-finance of the principal amount outstanding under an earlier
loan taken for such acquisition or construction.
If capital is borrowed for any other purpose (e.g., if capital is borrowed for reconstruction, repairs or renewals of
a house property ), then the maximum amount of deduction on account of interest is Rs. 30,000 (& not Rs.
1,50,000)
When unrealized rent is realized subsequently -
When an assessee could not realized rent from a property let to a tenant &, subsequently, the assessee has realized any
amount in respect of such rent, the amount so realized (to the extent it has not been included in annual value earlier),
shall be deemed to be income chargeable under the head “Income from house property”. It will be chargeable to tax in
the previous year in which such unrealized rent is collected.
When arrears of rent pertaining to earlier years is collected in a subsequent year-

The relevant provisions are given below –
1. The tax payer is (or was) the owner of any property which has been let out to a tenant.
2. He has received any amount, by way of arrears of rent from such property, not charged to income tax for any
earlier previous year.
3. The amount so received (after deducting a sum equal to 30 per cent of such amount) shall be deemed to be the
income chargeable under the head “Income from house property”.
4. It is taxable in the previous year in which it is received.
5. It is taxable even if the assessee is not the owner of that property in the year in which he has received arrears of
rent.
5. “PROFIT AND GAINS OF BUSINESS OR PROFESSION”
Significance of method of accounting

Income from a business or profession is calculated on the basis method of accounting regularly employed by the
assessee.
If the assessee has adopted mercantile system of accounting, then income is calculated on accrual basis as well as
admissible expenses are deducted on accrual basis.
If the assessee has adopted cash system of accounting, income is calculated on receipt basis. Admissible expenses will
be deducted only on payment basis.
Specific deductions
Sections 30 to 37 cover expenses, which are expressly allowed as deduction while computing business income
Specific disallowances
Sections 40, 40A and 43B cover expenses which are not deductible
Rent, rates, taxes, repairs and insurance for building [Sec. 30]
Deduction is allowed in respect of rent, rates, taxes, land revenue, repairs and insurance for premises used for the
purpose of business or profession. Rent of building is not deductible if building is owned by the assessee. Capital
expenditure on repair is not deductible.
Repairs and insurance of machinery, Plant and Furniture [Section 31]
The expenditure incurred on current repairs (not being capital expenditure) and insurance in respect of plant,
machinery and furniture used for business purposes is allowable as deduction.
Depreciation [Sec. 32]
A few conditions should be satisfied.
Conditions
1. Asset must be owned by the assessee.
2. It must be used for the purpose of business or profession
3. It should be used during the relevant previous year.
4. Depreciation is available on tangible as well as intangible assets.
If the above conditions are satisfied, depreciation is available whether (or not) the assessee has claimed the deduction
for depreciation in computing his total income.
Computation of normal depreciation
Written down value of the block of assets on the last day of the previous year x rate of depreciation
Block of assets - A group of assets falling within a class of assets comprising -
a. tangible assets, being buildings, machinery, plant or furniture;
b. intangible assets, being know-how, patents, copyrights, trademarks, licenses, franchises or any other business or
commercial rights of similar nature,
in respect of which the same percentage of depreciation is prescribed.
Written down value of the book of asset - Written down value for the assessment year 2014-15 will be determined as
under:
1. Find out the depreciated value of the block April 1, 2013
2. To this value add “actual cost” of the asset (falling in the block) acquired during the previous year 2013-14.
3. From the resultant figure, deduct money received/ receivable (together with scrap value) in respect of that asset
(falling within the block of assets) which is sold, discarded, demolished or destroyed during previous year 2013-14.
The resulting figure (if positive) is written down value of the block of assets on the March 31, 2014
Rate of depreciation - A taxpayer may have 13 different blocks of assets for the purpose of computing depreciation.
Nature of Asset Rate
1. Buildings - Residential buildings
2. Buildings - Office, factory, godowns or buildings which are not mainly used for residential purpose 5%
3. Buildings - Buildings for installing machinery and plant forming part of water supply project or water
treatment system; and temporary erections such as wooden structures. 10%
4. Furniture - Any furniture/fittings including electrical fittings.
5. Plant and machinery - Any plant or machinery [not covered by block 6,7,8,9,10,11,12] and motor cars 100%
(other than those used in a business of running the on hire)
6. Plant and machinery - Ocean - going ships, vessels ordinarily operating on inland waters including speed 10%
boats.
7. Plant and machinery - Buses, lorries and taxies used in the business of running them on hire. 15%
8. Plant and machinery – Aero planes, commercial vehicle (certain specified) and life saving medical 20%
equipment. 30%
9. Plant and machinery - Containers made of glass or plastic used as refills new commercial vehicle (certain 40%
specified). 50%
10. Plant and machinery - Computers including computer software and new commercial vehicle (certain 60%
specified).
11. Plant and machinery - Energy saving devices; renewal energy devices; rollers in flour mills, sugar works
and steel industry (however, it does not include windmills or any special device, which run on windmills 80%
installed after March 31.2012.)
12. Plant and machinery - Air pollution control equipments; water pollution control equipments; solid waste 100%
control equipments, recycling and resource recovery systems; etc.
13. Intangible assets (acquired after march 31, 1998) - Know - how, patents, copyrights, trademarks, licenses, 25%
franchises and any other business or commercial rights of similar nature.
Exceptions
Exceptions one - No depreciation is admissible where written down value has been reduced to zero, though the block
of assets does not cease to exist on the last day of the previous year.
Exception two - If a block of assets ceases to exist or if all assets of the block have been transferred and the block of
assets is empty on the last day of the previous year, no depreciation is admissible in such case.
Exception three - If an imported car was acquired during March 1, 1975 and March 31, 2001, depreciation is not
admissible. If, however, such imported car is used in the business of running it on hire for tourist or for the purpose of
business or profession outside India, then depreciation is admissible at the usual rate.
Exception four - In the case of transfer of depreciable assets because of succession, amalgamation, business
reorganization or demerger in the previous year, depreciation is first calculated as if there is no transfer of depreciable
assets and the quantum of depreciation so calculated shall be apportioned between the predecessor and successor in
the ratio of number of days for which the assets are used by them during the previous year.
Exception five - If in the first year (in which an asset is acquired), it is put to use for less than 180 days, depreciation is
available at half of the normal rate.
Additional Depreciation
To claim additional depreciation, the following conditions should be satisfied -
1. The assessee must be engaged in manufacture/production of any article or thing or (with effect from the
assessment year 2013-14) generation or generation and distribution of power.
2. New plant and machinery should be acquired and installed after March 31, 2005.
3. It should be an eligible plant and machinery. Additional depreciation is not available in the case of ships, aircrafts,
second hand assets, assets installed in office/ residence/ guest house, office appliances, road transport vehicles and
those assets which are qualified by 100 percent deduction in the first year itself under any provision of the Act.
Amount of additional depreciation allowance - In case the above three conditions are satisfied, additional depreciation
shall be available @20 per cent of the actual cost of new plant and machinery. If, however, the asset is put to use for
less than 180 days in the year in which it is acquired, the rate of additional depreciation will be 10 percent (the
remaining 10 percent shall be allowed as deduction in the next year).
Unabsorbed Depreciation
1. Depreciation allowance of the previous years is first deductible from the income chargeable under the head “profits
and gains of business or profession”.
2. If depreciation allowance is not fully deductible under the head “Profits and gains of business or profession”
because of absence or inadequacy of profits, it is deductible from income chargeable under other heads of income
[except income under the head “Salaries”] for the same assessment year.
3. If depreciation allowance is still unabsorbed, it can be carried forward to the subsequent assessment year(s) by the
same assessee. No time-limit is fixed for the purpose of carrying forward of unabsorbed depreciation
Investment allowance [Sec. 32AC]
A corporate - assessee, engaged in manufacture or production of any article or thing, can claim investment allowance
if a new plant/machinery (subject to a few exceptions) is purchased and installed on or after April 1, 2013 but before
April 1, 2015. To avail investment allowance (which is over and above depreciation), the actual cost of plant and
machinery installed during the period given above should be more than Rs. 100 crore. Quantum of investment
allowance is 15 percent of actual cost of new plant and machinery.
Expenditure on scientific research [Sec. 35]
1. Revenue expenditure on scientific research is deductible in the year in which the expenditure is incurred, if such
research relates to the business. Revenue expenses (Other than expenditure on providing perquisites to employees)
incurred before the commencement of business (but within three years immediately before commencement of
business) on scientific research related to the business are deductible (to the extent it is certified by the prescribed
authority) in the previous year in which the business is commenced.
2. Capital expenditure (not being cost of land) on scientific research related to the business of taxpayer is fully
deductible in the year in which the expenditure is incurred. Capital expenses incurred before commencement of
business (but within three years immediately before the commencement of business) on scientific research related to
the business are deductible in the previous year in which the business is commenced. In such case, depreciation is not
deductible.
3. Contribution to approved research association, approved university / college/ other institutions is deductible at the
rate of 175 percent of actual contribution.
4. Contribution to an approved university, college or other institution for the purpose of research in social science or
statistical research is deductible at the rate of 125 percent of actual contribution.
5. Contribution to an approved national lab, university, IIT, specified person is deductible at the rate of 200 percent
of the contribution if such contribution is given for an approved research programme.
6. Expenditure on approved in-house research and development facilities of a company is qualified for deduction at
the rate of 200 percent of the expenditure if a few conditions are satisfied. One of the conditions is that the company
should be engaged in business of bio-technology or in any business of manufacture or production of any article or
thing except those specified in Eleventh Schedule. Moreover, no deduction is available in the case of cost of land and
building. Cost of building can be claimed as deduction under point 2 given above.
Amortization of telecom license fees [Sec. 35ABB]

The following conditions should be satisfied -
1. The expenditure is capital in nature.
2. It is incurred for acquiring any right to operate telecommunication services.
3. The expenditure is incurred either before the commencement of business or thereafter at any time during any
previous year.
3. The payment for the above has been actually made to obtain license.
Amount of deduction - The payment will be allowed as deduction in equal installments over the period starting from
the year in which such payment has been made and ending in the year in which the license comes to an end. It may be
noted that the deduction starts from the year in which actual payment of expenditure is made irrespective of the
previous year in which the liability for the expenditure is incurred according to the method of accounting regularly
employed by the assessee.
Where deduction is claimed and allowed under section 35ABB, no deduction will be available in respect of the same
expenditure under section 32.
Investment linked tax incentive [ Sec. 35AD]
The following conditions should be satisfied -

1. The taxpayer should be in the business of (1) setting up and operating a cold chain facility , (2) setting up and
operating a warehousing facility for storage of agricultural produce, (3) approved laying and operating a cross
country natural gas or crude or petroleum oil pipeline network for distribution, including storage facilities being an
integral part of such network, (4) building and operating, anywhere in India, a hotel of two star or above category as
classified by the Central Government, (5) building and operating, anywhere in India, a hospital with at least 100 beds
for patients, (6) developing and building a housing project under a scheme for slum redevelopment or rehabilitation
framed by the Central Government / State Government and notified by the Board in accordance with prescribed
guidelines, (7) developing and building a notified affordable housing project, (8) production of fertilizers in India, (9)
setting up and operating an inland container depot or a container freight station, (10) bee-keeping and production of
honey and beeswax, (11) setting up and operating a warehousing facility for storage of sugar.
2. The aforesaid activities should commence on or after April 1, 2009. However, this date is April 1, 2007 in the case
of lying and operating a cross- country natural gas pipeline network for distribution or storage, April 1, 2010 in the
case of hotel, hospital and housing and production of fertilizer, and April 1, 2012 if the specified business is of
the nature referred to in Point Nos. (9), (10) and (11). 3. The aforesaid business should be a new business (i.e., not set
up by splitting up, or reconstruction of, of an existing business). If the aforesaid conditions are satisfied, 100 per cent
of the capital expenditure is deductible in the year in which the expenditure is incurred. However, expenditure
incurred on the acquisition of any land or goodwill or financial instrument is not eligible for any deduction under
section 35AD. If the specified business is of the nature referred to in Point Nos. 1, 2, 5, 7, 8 (Supra) and has
commenced its operation on or after April 1, 2012, it will be eligible for weighted deduction at the rate of 150 per
cent of qualifying expenditure. Expenditure incurred prior to the commencement of operation, wholly and
exclusively, for the purpose of any specified business, shall be allowed as deduction
during the previous year in which the assessee commences the operation of his specified business, if the amount is
capitalized in the books of account of the assessee on the date of commencement of operation. Where an assessee
builds a two-star (or above category) hotel and, subsequently, while continuing to own the hotel, transfers the
operation thereof to another person, the assessee shall be deemed to be carrying on the specified business of building
and operating hotel for the purpose of section 35AD (applicable from the assessment year 2011-12).
Weighted deduction for expenditure incurred on agricultural extension project [Sec. 35CCC]
Where an assessee incurs any expenditure on notified agricultural extension project, then he will be eligible to claim
a weighted deduction of 150 per cent of such expenditure
Weighted deduction for expenditure for skill development [ Sec. 35CCD]
Where a company incurs any expenditure (not being expenditure in the nature of cost of any land or building) on any
notified skill development project, then such company can claim a weighted deduction of 150 per cent of such
expenditure
Amortization of preliminary expenses [ Sec. 35D]
Certain preliminary expenses are deductible under section 35D. Deduction under section 35D is available in case of
an Indian company or a resident non-corporate assessee. One-fifth of the qualifying expenditure is allowable as
deduction in each of the five successive years beginning with the year in which the business commences, or as the
case may be, the previous year in which extension of the undertaking is completed or the new unit commences
production or operation.
Amortization of expenditure in the case of amalgamation/Demerger [Sec. 35DD]
The expenditure is allowed as deduction in five successive years in five equal installments. The first installment is
deductible in the previous year in which amalgamation or demerger takes place. No deduction shall be allowed in
respect of the above expenditure under any other provision of the Act.
Amortization of expenditure under voluntary retirement scheme [ Sec. 35DDA]
One fifth of the amount so paid shall be deducted in computing the profits and gains of the business for that previous
year, and the balance shall be deducted in equal installments for each of the four immediately succeeding previous
years. This rule is applicable even if the scheme of voluntary retirement has not been framed in accordance with
guidelines prescribed under section 10(10C).
Deduction under section 36
The following expenses are deductible under section 36 -
Insurance premium
Premium paid in respect of insurance against risk of damage or destruction of stocks or stores, used for the purpose
of business or profession, is allowable as deduction.
Premia for insurance on health of employees

Premia paid by employer (by any mode other than cash) for insurance on the health of his employees in accordance
with the scheme framed by the General Insurance Corporation and approved by the Central Government or any other
insurer and approved by IRDA, is allowable as deduction.
Bonus or commission to employees
Allowable as deduction if not otherwise payable as profit or dividend. Deduction is available on payment basis.
Where, however, payment is made after the end of the previous year but on or before the due date of furnishing
return of income, deduction is available on accrual basis.
Interest on borrowed capital

Allowable as deduction subject to fulfillment of three conditions :
1. The assessee must have borrowed money.
2. The money so borrowed must have been used for the purpose of business.
3. Interest is paid or payable on such borrowing.
Discount on zero coupon bonds
Discount is the difference between amount received and the amount payable on redemption/maturity by the issuing
company. It is allowed as deduction on pro rata basis having regard to the period of life of such bond. “Period of life
of the bond” means the period commencing from the date of issue of the bond and ending on the date of the maturity
or redemption of such bond.
Employer’s contribution to recognized provident fund, approved superannuation fund and notified pension scheme
Allowable as deduction subject to the limits laid down for the purpose of recognized provident fund (RPF) or
approving superannuation fund. Employer’s contribution towards notified pension scheme (NPS) is deductible (to the
extent of 10 per cent of
“Salary” of employees). Meaning of “Salary” for this purpose and for the purpose of calculation house rent allowance
exemption is the same.
Contribution towards approved gratuity fund
Employer’s contribution towards an approved gratuity fund created by him exclusively for the benefit of his
employees under an irrevocable trust is allowable as deduction.
Employee’s contribution towards staff welfare schemes
Any sum received by the taxpayer as contribution from his employees towards provident fund or any welfare fund of
such employees, shall be allowed as deduction only if such sum is credited by the taxpayer to the employee’s account
in the relevant fund on or before the due date. For this purpose, “ due date” means the date by which the employer is
required to credit such contribution to the employee’s account in the relevant fund under the provisions of any law or
term of contract of service or otherwise.
Bad debts
Bad debt written off in the books of account is deductible. However, the following conditions should be satisfied –
1. Debt must be incidental to the business or profession of the assessee.
2. Debt must have been taken into account in computing assessable income.
3. Adjustment at the time of recovery – Where debt ultimately recovered is less than the difference between the
amount of debt and bad debt allowed as deduction, such deficiency will be deductible in the previous year in
which the ultimate recovery is made, provided such deficiencies is written off in the books of account. Conversely,
where the debt ultimately recovered is more than the difference between the debt and the amount of bad debt
deducted, such excess amount will be chargeable to tax in the year of recovery.
Provision for bad and doubtful debts relating to rural branches of scheduled commercial banks
Amount deductible in respect of provision for bad and doubtful debts
In the case of a In the case of In the case of a foreign bank
scheduled bank [ other public Financial
than a foreign bank], a institution, State
non-scheduled bank financial
and a cooperative corporation, State
bank industrial
investment
corporation
• Total income 7.5 per cent of such 5 per cent of such 5 per cent of such income
(Computed before income income
this deduction and
amount
deductible under
sections 80C to
80U)
• Aggregate 10 per cent of such
average advances advances - -
made by rural
branches
Family planning expenditure
Revenue expenditure is fully allowable as deduction. If, however, such expenditure is of capital nature, one-fifth of
such expenditure is allowable as deduction for the previous year in which it was incurred and the balance is
deductible in equal installments in the next four years.
Non-corporate assessee cannot claim this deduction [deduction may be claimed by a non-corporate assessee under
sections 32 and 37(1) if the relevant conditions are satisfied].
Any family planning expenditure which is not allowed as deduction due to inadequacy of profit, shall be set off and
carried forward as if it is unabsorbed depreciation.
Securities transaction tax
It is deductible only if the assessee is a dealer in securities.
Commodities transaction tax
Deductible from the assessment year 2014-15 (if income is computed under the head “ Profit and gains of business or
profession”)
General deduction [ Sec. 37(1)]
Section 37(1) is a residuary section. To avail deduction, the following conditions should be satisfied –
1. The expenditure should not be of the nature described under sections 30 to 36
2. It should not be in the nature of capital expenditure.
3. It should not be personal expenditure of the assessee.
4. It should have been incurred in the previous year.
5. It should be in respect of business carried on by the assessee.
6. It should have been expended wholly and exclusively for the purpose of such business.
7. It should not have been incurred for any purpose, which is an offence or is prohibited by any law.
Disallowance under section 37(2B)
No deduction is available in respect of expenditure incurred by an assessee on advertisement in any souvenir,
brochure, tract, etc., published by a political party.
Disallowances under Sec. 40
If the following three conditions are satisfied, the assessee (i.e., the payer) is supposed to deduct tax at source (TDS)
under section 195 –
Interest, royalty, fees for technical services payable outside India or payable to a non-resident [ Sec. 40(a) (i)]
1. The amount paid is interest, royalty, fees for technical services or other sum.
2. The aforesaid amount is chargeable to tax under the Act in the hands of the recipient.
3. The aforesaid amount is paid/payable (a) outside India to any person; or (b) in India to a non-resident.
If the above three conditions are satisfied, the assessee (the payer) is supposed to deduct tax at source and deposit
the same with the Government within the time limit specified by section 200(1) [ generally this time limit is
seven days from the end of the month in which tax is deducted. In some cases, time limit is different].
• If tax is deductible but it is not deducted, the expenditure is not allowable as deduction. If tax is deducted and it
is deposited with the Government in the same financial year, this disallowance is not applicable. If tax is deducted
but it is deposited in the next year after the due date under section 200(1), then it will be disallowed for the
current year.
• The amount which is disallowed during the current year, will be allowed as deduction in the year in which tax is
deposited.
Payment to a resident [ Sec. 40(a) (ia)]

Tax is deductible under different sections in respect of payment of interest, commission/ brokerage, rent, fees for
technical/ professional services, royalty to a resident and payment to a resident contractors / Sub contractors.
• Case 1 – If tax is deductible but not actually deducted, the payment will be disallowed in the current year.
•Case 2 – If tax is deductible (and it is so deducted) during the current financial year but it is not deposited on or
before the due date of submission of return of income, it will be disallowed in the current year.
•When amount is deductible in Case 1 and Case 2 – The amount which is disallowed in Case 1 or Case 2 during the
current year, will be allowed as deduction in the year in which tax is deposited by the person incurring expenditure.
• Relaxation given be the Finance Act, 2012 – The above provisions have been amended by the Finance Act, 2012
with effect from the assessment year 2013-14. Under the amended provisions, a relief is given in Case 1 (and not in
Case 2), if the payer is not deemed to be an assessee – in-default under the first proviso to section 201(1). Under the
first proviso to section 201 (1), the payer is not deemed to be an assessee- in –default if –
a. The resident recipient has furnished his return of income under section 139;
b. The resident recipient has taken into account the above income in such return of income;
c. The resident recipient has paid the tax due on the income declared in such return of income; and
d. The payer furnishes a certificate to this effect from a chartered accountant in Form No. 26A.
If the above conditions are satisfied, then for the purpose of section 40(a) (ia) it shall be deemed that the payer
has deducted and paid the tax on such amount on the date of the furnishing of return of income by the resident
recipient.
Fringe benefit tax, income-tax and wealth-tax
These are not deductible. Any fine, interest, penalty, etc., in respect of these taxes are also not deductible.
Royalty, license fee, service fee, privilege fee, service charge, etc.
The following are not deductible from the assessment year 2014-15 –
1. Any amount paid by way of royalty, license fee, service fee, privilege fees, service charge or any other fee or charge
(by whatever name called), which is levied exclusively on a State Government undertaking by the State Government.
2. Any amount which is appropriated (directly or indirectly) from a State Government Undertaking by the State
Government.
Salary payable to a non -resident or payable outside India
It is not deductible if tax is not deducted at source and it is not paid to the Government
Tax on perquisite paid by the employer
The employer provides non-monetary perquisites to employees. Tax on non-monetary perquisites is paid by the
employer. The tax so paid by the employer is not taxable in the hands of employees by virtue of section 10 (10CC).
While calculating income of the employer, the tax paid by the employer on non-monetary perquisites, is not
deductible.
Salary and interest to partners
Salary and interest paid/payable by a firm to its partners are deductible only if conditions of sections 184 and 40(b)
are satisfied. One of the conditions is that these payments should be permitted by the partnership deed. Rate of
interest cannot be more than 12 per cent (excess interest will be disallowed in the hands of firm). Salary and
remuneration to partners cannot exceed a specified percentage of book profit if the aggregate payment exceed a
specified percentage of book profit if the aggregate payment exceeds Rs. 1,50,000 (excess payment if any shall be
disallowed). Maximum remuneration to partners which is deductible is as follows –
On the first Rs. 3 Lakh of book profit (or in the case of loss) : Rs. 1,50,000 or 90 per cent of book profit whichever is
more.
On the balance of book profit : 60 Percent of book profit.
Salary and interest by an AOP/BOI to its members
Not deductible.
Disallowance under Sec. 40 A
Any expenditure incurred by an assessee in respect of which payment has been made to specified persons (e.g.,
relatives, inter-connected concerns) is liable to be disallowed in computing business profit to the extent such
expenditure is considered to be excessive or unreasonable, having regard to the fair market value of goods or services
or facilities, etc. From the assessment year 2013-14, this disallowance shall not be made if the aggregate value of
such transactions is more than Rs. 5 Crore and these transactions at arm’s length price [ as defined in section 92F
(ii)].
Expenditure exceeding Rs. 20,000 pad by a mode other than account payee cheque/ draft [ Sec. 40A(3)/ (3A)]
If the following conditions are satisfied, payment is not deductible –

1. The assessee incurs any expenditure, which is otherwise deductible under the other provisions of the Act for
computing business/ profession income (e.g. expenditure for purchase of raw material, trading goods, expenditure on
salary, etc.) The amount of expenditure exceeds Rs. 20,000.
2. A payment (or aggregate of payments made to a person in a day) in respect of the above expenditure exceeds Rs.
20,000.
3. The payment mentioned above is made otherwise than by an account payee cheque or an account payee demand
draft (it is made in cash or by a bearer cheque or by a crossed cheque or by a crossed demand draft).
If all the above conditions are satisfied, 100 per cent of such payment will be disallowed. However, the limit of
Rs. 20,000 has been increased to Rs. 35,000 in the case of payment made for plying, hiring or leasing goods
carriages.
If an outstanding liability was allowed as deduction in any of the earlier years and during the current year
payment in respect of such liability is made otherwise than by an account payee cheque or draft and if such
payment to a person in a day exceeds Rs. 20,000 (Rs. 35,000 in the case of payment for plying, hiring or leasing
goods carriages). The payment so made shall be chargeable to tax as business income in the year of payment.
Contribution towards unapproved gratuity fund
Not deductible.
Employer’s contribution towards non-statutory funds
Employer’s contribution towards non-statutory fund (like unrecognized provident fund) is not deductible.
Amount not deductible in respect of certain unpaid liabilities [ Sec. 43B]
Disallowance under section 43B is applicable only if the taxpayer maintains books of account on the basis of
mercantile system of accounting.
The provisions of section 43B are given below –
General rule – Certain expenses are deductible on payment basis – the following expenses (which are otherwise
deductible under the other provisions of the Income-tax Act) are deductible on payment basis –
a. Any sum payable by way of tax, duty, cess or fee (by whatever name called under any law for the time being in force)
b. Any sum payable by an employer by way of contribution to provident fund or superannuation fund or any other fund
for the welfare of employees;
c. Any sum payable as bonus or commission to employees for service rendered;
d. Any sum payable as interest on any loan or borrowing from a public financial institution (i.e. ICICI, IFCI, IDBI,LIC and
UTI) or a state financial corporation or a state industrial investment corporation;
e. Interest on any loan or advance taken from a scheduled bank including a co-operative bank; and
f. Any sum payable by an employer in lieu of leave at the credit of his employee.
The above expenses are deductible in the year in which payment is actually made. There is, however, one
exception, which is given below:
Exception – When deductible on accrual basis – the above payments are deductible on accrual basis if the
payment is actually made on or before the due date of submission of return of income.
Recovery against any deduction [ Sec. 41 (1)]

1. In any of the earlier years a deduction was allowed to the taxpayer in respect of loss, expenditure (revenue or capital
expenditure) or trading liability incurred by the assessee.
2. During the current previous year, the taxpayer –
a. Has obtained a refund of such trading liability (it may be in cash or any other manner); or
b. Has obtained some benefit in respect of such trading liability by way of remission or cessation thereof (“remission
or cessation” for this purpose includes unilateral act of the assessee by way of writing-off of such liability in his
books of account).
If the above two conditions are satisfied, the amount obtained by such person (or the value of benefit accruing
to the taxpayer) shall be deemed to be profits and gains of business or profession and, accordingly, chargeable
to tax as the income of that previous year.
Sale consideration for transfer of immovable property [ Sec. 43CA]
From the assessment year 2014-15, stamp duty value (adopted, assessed or assessable) is taken as consideration for
transfer of an asset (other than capital asset) being land and/ or building if the actual consideration is lesser than
stamp duty value.
Compulsory audit of books of account [ Sec. 44AB]
Difference taxpayers When they are covered by the provisions of compulsory audit under section
44AB (audit report should be obtained on or before the due date of submission
of return of income)
A person carrying on business If the total sales, turnover or gross receipt in business for the previous year(s)
relevant to the assessment year exceed or exceeds Rs. 60 Lakh (Rs.1 Crore for
the assessment year 2013-14).
A person carrying on profession If his gross receipts in profession for the previous year(s) relevant to the
assessment year exceeds Rs. 15 lakh (Rs. 25 Lakh for the assessment year
2013-14).
A person covered under section If such person claims that that the profits and gains from the business are
44AD, 44AE, 44BB or 44BBB lower than the profits and gains computed under these sections (irrespective of
his turnover).
Presumptive taxation [ sec. 44AD]
Section 44AD is applicable if the taxpayer is a resident individual, resident Hindu undivided family or a resident
partnership firm (not being a limited liability partnership). The taxpayer is engaged in any business [ but not (a)
carries on profession as referred to in section 44AA (1), (b) earn income in the nature of commission or brokerage,
(c) carries on any agency business, or (d) one who is in the business of plying, hiring or leasing goods carriages].
The turnover does not exceed Rs. 60 lakh (Rs. 1 crore from the assessment year 2013-14). Income is computed on
estimated basis at the rate of 8 percent of turnover. The rate of 8 percent comprehensive [ i.e., no further deduction is
allowed under any other section except remuneration and interest to partners].
Presumptive taxation [ sec. 44AE]
Section 44AE is applicable, if the taxpayer is engaged in the business of plying, hiring and leasing goods carriages
and he/it does not own more than 10 goods carriages at time during the previous year. In such a case, income would
be calculated on estimated basis at the rate of Rs. 5,000 (for heavy goods vehicle) / Rs. 4,500 (for light goods
vehicle) for every month (or part of a month) during which the goods carriage is owned by the taxpayer. No further
deduction is allowed under any other section except remuneration and interest to partners.
•However, remuneration / Interest to partners is deductible as per section 40(b)
•A resident individual / Hindu undivided family, opting from the above scheme, can submit return of income in
ITR-4S (ITR-4S is a simplified form as compared to other forms).
6. INCOME UNDER THE HEAD “CAPITAL GAINS” AND IT’S COMPUTATION
PROVISIONS IN BRIEF
Basis of charge –
Income under the head “Capital Gains is ” is chargeable to tax if the following conditions are satisfied –
• There is a capital asset.
• It is transferred during the previous year.
• Capital gain is generated because of transfer
• Capital gain is not exempt from tax.
Meaning of “capital asset” –

The expression “capital asset” means property of any kind held by an assessee, whether or not connected with
his business or profession. “property” includes any rights in or in relation to an Indian company, including
rights of management or control or any other rights whatsoever. However, the following are not capital assets –
• Any stock-in-trade, consumable stores or raw materials held for the purposes of business or profession.
• Personal effects.
• Agricultural land in a rural area in India.
• A few gold bonds & special bearer bonds (this points does not have any practical utility).
• Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999.
Personal effects– Any movable property (including wearing apparel and furniture) held for personal use of the
owner or for the use of any member of his family dependent upon him, is not a “capital asset” for the purpose of
income under the head “capital gains”. However, the following are not “personal effects” (in other words ,the
following are “capital assets”) even if these are for personal use – jewellery, archaeological collections,
drawings, paintings, sculptures, or any work of art.
Agricultural land in a rural area in India – it should not be situated in Area A or Area B.
Area A – any area within the jurisdiction of a municipality or a cantonment board having a population of 10,000
or more.
Area B – 2 kilometers (to be measured aerially) from the local limits of municipality/cantonment board (if
population is above 10,000 but not more than 1 lakh) [it is 6 kilometers (if population is above 1 lakh but not
more than 10 lakh) or it is 8 kilometers (if population is above 10 lakh)].
Types of capital assets – There are two types of capital assets – Short term & Long terms. If period of holding is
more than 36 months, the capital asset is long term, otherwise it is short term. However, in the following cases,
the capital assts held for more than 12 months is treated as long term capital assets – any share in any company,
government securities, listed debentures, units of UTI/mutual funds and zero coupon bonds.
Transfer – capital gains arises on transfer of capital assets. If the asset transferred is not a capital asset, no
capital gains will arise. Transfers includes sale, exchange or relinquishment of the asset; or the extinguishment
of any rights therein; or the compulsory acquisition thereof under any law. However, the following are not
treated as “transfer”(in other words, in the following cases, there is no capital gains) –
• Distribution of assets in kind by a company to its shareholders on its liquidation.
• Any distribution of capital assets in kind by a Hindu undivided family to its members at the time of total
or partial partition.
• Any transfer of capital assets under a gift or a will or an irrevocable trust (exception – gift of ESOP
shares is chargeable to tax and fair market value of the share on the date of gift is taken as sale
consideration).
• Transfer of capital asset between holding company and its 100% subsidiary company, if the transferee-
company is an Indian company.
• Transfer of capital asset in the scheme of amalgamation/demerger, if the transferee-company is an
Indian company.
• Transfer of share in amalgamating company/demerged company in lieu of allotment of shares in
amalgamated company/resulting company in the above case.
• Transfer of capital asset in a scheme of amalgamation of a banking company with a banking institution.
• Transfer of shares in an Indian company held by a foreign company to another foreign company in a
scheme of amalgamation/demerger of the two foreign companies, if a few conditions are satisfied.
• The transfer of a capital asset by a non-resident of foreign currency convertible bonds or Global
Depository Receipts to another non-resident if the transfer is made outside India and few conditions are
satisfied.
• Transfer of any work of art, archaeological, scientific or collection, book, manuscript, drawing, painting,
photograph or print, to the Government or a University or the National Museum, National Art Gallery,
National Archives or any other notified public museum or institution.
• Any transfer by way of conversion of bonds or debentures, debenture stock or deposit certificate in any
form, of a company into shares or debentures of that company.
• Land transfer by a sick industrial company, if a few conditions are satisfied.
• Transfer of a capital asset by a private company/ unlisted public company to a limited liability
partnership in the case of conversion of company into LLP.
• Transfer of capital asset at the time of conversion of a firm/sole proprietary concern in a company, if a
few conditions are satisfied.
• Any transfer involved in a scheme for lending of any securities, if a few conditions are satisfied.
• Any transfer of capital asset in a reverse mortgage.
Computation of capital gain –
Short- term capital gain – It arises on transfer of short-term capital asset and it is calculated as follows –
Full value of consideration minus cost of acquisition minus cost of improvement minus expenditure pertaining
to transfer incurred by the transferor.
Long-term capital gain - It arises on transfer of long term capital asset and it is calculated as follows –
Full value of consideration minus indexed cost of acquisition minus indexed cost of improvement minus
expenditure pertaining to transfer incurred by the transferor.
However, in the following cases the benefits of indexation is not available ever if the capital asset is long term
capital asset –
• Bonds or debentures, but other than capital indexed bonds issued by the Government.
• Depreciable assets.
• Slump sale.
• Units/GDR/securities given in sections 115AB, 115AC, 115ACA & 115AD.
• Shares and debentures in Indian acquired by a non-resident in foreign currency, if a few conditions
are satisfied.
Cost of improvement – It does not include any expenditure on improvement incurred before April 1,
1981.
How to convert cost of acquisition into indexed cost of acquisition – cost of acquisition X cost inflation
index (CII) of the year of which the capital asset is transferred divided by CII of the year in which the
asset was first held by the assessee[or previous owner, in cases covered by section 49(1)]. However,
indexation benefit is available from 1981-82.
Cost inflation index for different previous years –
1981-82 100 1990-91 182 1999-00 389 2008-09 582

1982-83 109 1991-92 199 2000-01 406 2009-10 632
1983-84 116 1992-93 223 2001-02 426 2010-11 711
1984-85 125 1993-94 244 2002-03 447 2011-12 785
1985-86 133 1994-95 259 2003-04 463 2012-13 852
1986-87 140 1995-96 281 2004-05 480 2013-14 939
1987-88 150 1996-97 305 2005-06 497
1988-89 161 1997-98 331 2006-07 519
1989-90 172 1998-99 351 2007-08 551
How to convert cost of improvement into indexed cost of improvement -

cost of improvement × cost inflation index (CII) of the year in which the capital asset is transferred ÷ CII of the
year in which improvement took place.
Exempt capital gains - In the following cases, capital gain is exempt under section 10 -
1. Transfer of units of US64.
2. Compulsory acquisition of urban agricultural land in India owned by an individual or HUF, if the land was
used for agricultural purposes by the owner (or any of his parents) during two years immediately prior to
acquisition.
3. Long-term capital gains on transfer of shares/units, if securities transactions tax is applicable.
4. Capital gains which arise on conversion of an Indian branch of a foreign bank into an Indian subsidiary, if
the conversion takes place in accordance with the scheme framed by RBI and subject to the conditions notified
by the Central Government(applicable from the assessment year 2013-14).
Computation of capital gains in special cases –
special cases are -
When cost of asset to the previous owner is taken into consideration -
When an assessee acquired capital asset by any mode given in section 49, then at the time of its transfer, cost of
acquisition to the previous owner is taken as cost of acquisition.
• Acquisition modes given under section 49 – In the following cases, cost of acquisition of asset to the
previous owner is considered –
1. Acquisition of a property by a member at the time of partition of Hindu undivided family.
2. Acquisition of a property by gift/will or by succession, inheritance, etc.
3. Acquiring a capital asset by a holding company from its 100% subsidiary company or vise-versa, if the
transferee company is an Indian company.
4. Acquisition of property in a scheme of amalgamation, if the transferee company is an Indian company.
5. Acquisition of property under a scheme of conversion of private company/unlisted company into LLP.
6. Acquisition of property under a scheme of conversion of firm/sole proprietary concern into company.
Special points – The following are special points –
1. The benefit of indexation is available from the year in which previous owner acquired the property.
2. To determine whether the asset is short-term or long-term, the period of holding by the previous owner is
also considered.
Fair market value on April 1, 1981 – If the capital asset was acquired by the assessee (or by the previous owner
in the case given above) before April 1, 1981, the fare market value of the capital asset on April 1, 1981 can be
taken (at the potion of the assessee) as cost of acquisition.
Special points – The following are special points
1. This rule is optional. The assessee may or may not adopt the fair market value on April 1, 1981 as cost of
acquisition.
2. The potion is not available in the case of transfer of following capital assets – depreciation assets, goodwill
of a business, trade-mark/brand name associated with a business, right to manufacture/produced an article, right
to carry on business, route permits & loom hours.
Depreciable assets- If a depreciable assets is transferred, capital gain (loss) shall be calculated only in two cases
–
1. When the written down value of the block of assets on the last day of the previous year becomes zero.
2. When the block of assets becomes empty on the last day of the previous year. Only in these two cases,
capital gain (loss) arises on the transfer of a depreciable assets. Cost of acquisition in such case will be the
depreciable value of the block of assets on the first day of the previous year plus actual cost of assets (failing in
the same block of assets) acquired any time during the previous year.
Other points – capital gain or loss, which arises on transfer of depreciable assets, is always taken as short term
gain or loss.
Forfeiture of advance money – At the time of negotiating transfer of capital assets, the transferor has forfeited
any advance money. It is forfeited because the purchaser could not pay the balance consideration within the
stipulated period (or it may be forfeited because of any other non-performance). The advance money so
forfeited, is deductible from cost of acquisition for calculating capital gain when the asset is ultimately
transferred.
Conversion of capital asset into stock-in-trade – If capital asset is converted into stock-in-trade during a
previous year relevant to the assessment year 1985-86 (or any subsequent year), the following special rules are
applicable –
1. It will be assumed that capital asset is transferred in the year in which conversion takes place.
2. Fair market value of the asset on the date of conversion will be taken as full value of consideration.
3. However, capital gain will not be taxable in the year of conversion. It will be taxable in the year in which
stock-in-trade is transferred.
Transfer of capital assets to a firm by way of capital contribution by a partner –
It is treated as transfer. The amount recorded in the books of account is taken as full value of consideration.
Distribution of a capital asset by a firm to partners at the time of dissolution –
It is treated as transfer. Capital gain is taxable in the hands of the firm. Fair market value of the asset on the date
of distribution is taken as full value of consideration.
Compulsory acquisition of a capital asset – Initial compensation is taken as full value of consideration. Capital
gain is chargeable to tax in the year in which the initial compensation (or part thereof) is first received.
Indexation benefit is, however, available up to the year in which the asset is compulsorily acquired.
• When additional compensation is received – If a Court/Tribunal/authority enhances compensation, it

will be taxable in the year in which enhanced compensation or additional compensation is received. For
this purpose cost of acquisition and cost of improvement are taken as nil. However, litigation expenses
or incidental expenditure for obtaining additional compensation is deductible.
Capital gain on transfer of shares/debentures in the hands of non-residents –
If a non-residents acquires shares in, or debentures of, an Indian company by utilizing foreign currency, the gain
will be calculated in the same foreign currency, which was initially utilized in acquiring shares/debentures.
After calculating capital gain in foreign currency, it will be converted into Indian currency. This rule is not
optional, it is compulsory. The benefit of indexation is not available.
Self generated assets – in the case of transfer of self generated goodwill of and business, right to
manufacture/produce an article/thing or right to carry on business, the cost of acquisition & cost of
improvement are taken as nil. In the case of transfer of self generated assets being tenancy right, route permit,
loom hours, trade names or brand names, cost of acquisition is taken as nil. In these cases, the option of
adopting fair market value on April 1, 1981 is not available. On transfer of any other self generated asset,
capital gain is always zero. If capital asset being goodwill of the business, right to manufacture/produce an
article/thing or right to carry on business, is purchased, then at the time of its transfer, cost of improvement is
taken as nil.
Bonus shares – If bonus shares were allotted before April 1, 1981, cost of acquisition is the fair market value on
April 1, 1981, cost of acquisition is the fair market value on Aril 1, 1981. If bonus shares are allotted after April,
1,1981, cost of acquisition is taken as zero.
Transfer of rights entitlement - Amount realized by an existing shareholder by selling rights entitlement (i.e.,
right to acquire additional shares in the company at a pre-determined price) is taxable in the year of the right
entitlement. Cost of acquisition of right entitlement is always taken as zero and the capital gain deemed as short
term capital gain.
Conversion of debentures/bonds into shares – Conversion is not taken as transfer. Cost of acquisition of
debentures/bonds will become cost of acquisition of shares. To find out whether shares are short-term or long-
term capital asset. The period of holding shall be counted from the date of allotment of shares.
Securities in demat form – the cost of acquisition and period of holding any security in demat form shall be
determined on the basis of first-in-first-out (FIFO) method.
Insurance compensation – it is taxable on the year in which compensation is received. The amount of
compensation will be taken as full value of consideration. However, this rule is applicable only when insurance
compensation is received because of damage to, or destruction of, any capital asset because of –
a) Flood typhoon, hurricane, cyclone, earthquake or other convulsion of nature;

b) Riot or civil disturbance ;
c) Accidental fire or explosion; or
d) Action by an enemy or action taken in combating an enemy.
If insurance compensation is received in respect of a capital asset because of any other reason, it is not
chargeable to tax.
Transfer of sweat equity shares – If sweat equity shares are allotted during 1999-2000 or on or after April 1,
2009, cost of acquisition is fair market value on the date of exercise of option. If shares are allotted during April
1, 2007 and March 31, 2009, the fair market value on the date of vesting of option, will be cost of acquisition. If
shares are allotted before April 1, 2007 (not being during 1999-2000), cost of acquisition will be the amount
actually paid by the employee.
Transfer of land and building(sec. 50C) – if the sale of consideration is less than the value adopted(or
assessable) by stamp duty authority for the purpose of collecting stamp duty, stamp duty value shall be taken as
full value of consideration. The transferor before the stamp duty authorities can challenge stamp duty valuation.
Alternatively it can be challenged before the assessing officer.
If consideration is received or accruing as a result of transfer of a capital asset is not ascertainable or cannot
be determined – Fair market value on the date of transfer is taken as “full value of consideration”(applicable
from the assessment year 2013-14).
Exemption under section 54 to 54GB – aggregate amount of exemption cannot exceed the quantum of capital
gain.
Exemption under section 54 –
Who can claim exemption – An individual or a Hindu undivided family.
Which specific asset is eligible for exemption – A residential house property (long-term asset the taxpayer
should acquire to get the benefit of exemption).
Which specific asset is eligible for exemption – A residential house property (long-term).
Which asset the taxpayer should acquired to get the benefit of exemption – Residential house property.
What is time limit for acquiring the new asset – purchase: 1 year backward or Purchase: 2 years forward
construction: 3 years forward.
How much is exempt - Investment in the new asset or capital gain, whichever is lower. The new asset should not
be transferred within 3 years from the date of the acquisition of new asset.
Exemption under section 54B –
Which specific asset is eligible for exemption – Agricultural land if it was used by the individual or his parents
[or (with effect from the assessment year 2013-14) by the Hindu undivided family] for agricultural purpose
during at least 2 years immediately prior to transfer.
Which asset the taxpayer should acquire to get the benefit of exemption – Agricultural land (may be in rural
area or urban area).
What is time limit for acquiring the new asset – Purchase: 2 years forward.
Exemption under section 54D –
Who can claim exemption – Any tax payer.
Which specific asset is eligible for exemption – Land or building forming part of an industrial undertaking
which is compulsorily acquired by the Government and which is used during 2 years for industrial purposes
prior to its acquisition.
Which asset the taxpayer should acquire to get the benefit of exemption – land or building for industrial
purposes
What is time limit for acquiring the new asset – Purchase: 3 years forward.
Exemption under section 54EC –

Who can claim exemption – Any tax payer.
Which specific asset is eligible for exemption – Any long-term capital asset transferred after March 31, 2000.
Which asset the taxpayer should acquire to get the benefit of exemption – Bonds of National Highway Authority
of India or Rural Electrification Corporation. Maximum investment in one financial year is Rs.50 lakh.
What is time limit for acquiring the new asset – 6 months forward.
be transferred within 3 years. Moreover, the new asset should not be converted into money or any loan or
advance should not be taken on the security of the new asset within 3 years from the date of the acquisition of
new asset.
Exemption under section 54F –
Who can claim exemption – An individual or a HUF.
Which specific asset is eligible for exemption – Any long-term capital asset (other than a residential house
property) provide on the date of transfer the taxpayer does not own more than one residential house
property(except the new house property is given below).
Which asset the taxpayer should acquire to get the benefit of exemption – A residential house property.
What is time limit for acquiring the new asset – purchase: 1 year backward or Purchase: 2 years forward
construction: 3 years forward.
be transferred within 3 years. Moreover, the new asset should not be converted into money or any loan or
advance should not be taken on the security of the new asset within 3 years from the date of the acquisition of
new asset.
Exemption under section 54G -
Who can claim exemption – Any taxpayer.
Which specific asset is eligible for exemption – Land, building, plant or machinery in order an industrial
undertaking from urban area to rural area.
Which asset the taxpayer should acquire to get the benefit of exemption – land, building, plant or machinery in
order to shift undertaking to rural area.
What is time limit for acquiring the new asset – 1 year backward or 3 years forward.
be transferred within 3 years from the date of its acquisition.
Exemption under section 54GA –
Who can claim exemption – Any taxpayer.
Which specific asset is eligible for exemption – Land, building, plant or machinery in order to shift an industrial
undertaking from urban area to any special economic zone.
Which asset the taxpayer should acquire to get the benefit of exemption – land, building, plant or machinery in
order to shift undertaking to any special economic zone.
What is time limit for acquiring the new asset – 1 year backward or 3 years forward.
be transferred within 3 years from the date of its acquisition.
Exemption under section 54GB –
Which specific asset is eligible for exemption – Long-term residential property (a house or a plot of land) if
transfer takes place during April 1, 2012 and march 31, 2017.
Which asset the taxpayer should acquire to get the benefit of exemption – equity shares in an “eligible
company”.
What is the time-limit for acquiring the new asset – equity shares in an “eligible company” should be acquired
on or before the due date of furnishing of return of income under section 139(1).
The “eligible company” should utilized this amount for the purchase of a “new asset” within one year from the
date of subscription in equity shares.
How much is exempt - Investment in “new asset” by the eligible company ÷ Net sale consideration × Capital
gain. Exemption cannot exceed capital gain.
It is possible to revoke the exemption – in the following cases, exemption will be taken back and the amount of
exemption (or proportionate exemption) given earlier under section 54GB will become long-term capital gain of
the assessee (i.e., transferor of residential property). It shall be taxable in the year in which the assessee or the
eligible company commits the following defaults –
1. If the equity shares in the eligible company are sold or otherwise transferred by the assessee within 5 years
from the date of acquisition.
2. If the “new asset” is sold or otherwise transferred by the eligible company within 5 years from the date of
acquisition.
Eligible company – it is a manufacturing company (i.e., where the investment in plant and machinery is more
than Rs. 25 lakh but not more than Rs. 10 crore) incorporated on or after April 1 (of the previous year in which
residential property is transferred) but on or before the due date of submission of return of income under section
139(1) by the assessee (i.e., transferor of residential property).
How to compute tax on capital gains –
Long-term capital gain – Long-term capital gains are taxable under section 112 at the rate of 20 per cent. The
following points should be noted –
1. No deduction is available from long-term capital gain under section 80C to 80U.
2. The benefit of exemption limit is available only in the case of a resident individual or a resident Hindu
undivided family.
3. In the case of listed security, any unit of UTI/mutual fund or zero coupon bonds, if indexation benefit is not
taken, capital gain will be taxable at the option of the taxpayer at the rate of 19 per cent.
4. In the case of long-term capital gain covered by section 115AB, 115AC, 115AD or 115E, tax rate is 10 per
cent.
5. If unlisted securities (i.e., unlisted shares, unlisted debentures, etc.) are transferred by a non-resident/foreign
company, long-term capital gain is taxable at the rate of 10 per cent from the assessment year 2013-14.
However, this rule is applicable only if indexation benefit is not claimed and capital gain is calculated in Indian
currency.
Short-term capital gains –

If securities transaction tax is applicable – it is taxable at the rate of 15 per cent under section 111A. No
deduction is available from such short-term capital gains under section 80C to 80U. The benefit of exemption
limit is available only in the case of a resident individual or a resident Hindu undivided family.
Other short-term capital gains – Taxable like revenue income.

7. INCOME FROM OTHER SOURCES
Basis of Charge
Income from other sources is the last and residual head of income. It covers any income, which does not fall
under any other head of income. In other words, the following conditions should be satisfied –
There is an “ income”
Than income is not exempt from tax under sections 10 to 13 A.
That income is neither salary income, nor rental income from house property, nor income from business /
profession, nor capital gains.
If the above three conditions are satisfied, income is taxable under section 56 (1) under the head “Income
from other sources”.
Special provisions [ Sec. 56 (2)]
The following 9 incomes are always taxable under the head “Income from other sources”.
1. Dividend
2. Winning from lotteries, etc.
3. Employees’ contribution towards staff welfare scheme.
4. Interest on securities (debentures, Government securities / bonds)*
5. Rental income of machinery, plant or furniture let on hire.
6. Rental income of letting out of plant, machinery or furniture along with letting out of building and the two
meetings are not separable.
7. Sum received under Keyman insurance policy including bonus.
8. Gift.
9. Interest on compensation or enhanced compensation.
Income mentioned at point numbers 3, 4, 5, 6 and 7 are taxable under the head “Income from other sources”
only if the same is not taxable under section 28 as business income.
Dividend
Dividend from an Indian company is not taxable in the hands of shareholders (company declaring dividend will
have to pay dividend tax under section 115-O). However, deemed dividend under section 2(22)(e) from an
Indian company or any dividend from a foreign company, is taxable in the hands of shareholders under the head
“Income from other sources”.
Winnings from lotteries, crossword puzzles, horse races and card games, etc.
Gross winnings from lotteries, crossword puzzles, races including horse races (other than income from the
activity of owing and maintaining race horses), card games and other games of any sort or from gambling or
betting (of any nature whatsoever) are chargeable to income-tax. These incomes are taxable at a flat rate of 30%
(+SC+EC+SHEC) on the gross winnings (without claiming any allowance or expenditure).
Interest on securities
Taxable on “receipt” basis, if the assessee maintain books of account on “cash basis”. It is taxable on “due”
basis when books of account are maintained on mercantile system. Interest becomes due on due dates specified
on securities.
Grossing up of interest
Gross interest [ i.e., net interest plus tax deducted at source] is taxable. Net interest (if tax is deducted at source)
in the hands of the recipient should be grossed up by multiplying it by the following fraction: 100/(100-Rate of
tax deduction at source).
Income from composite letting of building, machinery, plant or furniture
If there is letting of machinery, plant and furniture and also letting of the building and the two lettings from part
and parcel of the same transaction or the two lettings are inseparable (in the sense that letting of one is not
acceptable to the other party without letting of the other, for instance, letting of cinema house along with letting
of furniture) then such income is taxable under the head “Income from other sources” (if it is not taxable as
business income). This rule is applicable even if sum receivable for the two lettings is fixed separately.
Receipts without consideration
Receipts without consideration are taxable as follows-
1. When a sum of money/property is received by an individual / HUF without consideration or for an
inadequate consideration on or after October 1, 2009 [Sec. 56(2)(vii)].
2. When a sum of money is received without consideration by an individual/HUF before October 1, 2009 [Sec.
56(2)(vi)].
3. When shares are received without consideration or inadequate consideration by a firm/closely held company
on or after June 1, 2010 [Sec. 56(2)(viia)]
4. When a closely held company receives consideration for issue of shares at premium and the consideration so
received is more than the fair market value of shares [Sec. 56(2)(viib)]
Sum of money/property without consideration (or inadequate consideration in some cases on or after October
1, 2009 [ Sec. 56(2)(vii)]
The following five are taxable in the hands of an individual/HUF-
1. Receipt of sum of money without consideration (if the aggregate amount received from all persons during the
previous year but on or after October 1, 2009, exceeds Rs. 50,000).
2. Receipt of immovable property (as a capital asset) without consideration (if stamp duty value of an
immovable property is more than Rs. 50,000, the stamp duty will be taxable).
3. Receipt of immovable property (as a capital asset) for a consideration which is less than the stamp duty value
of the property by an amount exceeding Rs. 50,000 (the difference between stamp duty value and consideration
is chargeable to tax) (applicable from the assessment year 2014-15).
4. Receipt of movable property (as a capital asset) without consideration (if aggregate fair market value of
movable properties received during the previous year but on or after October 1, 2009, exceeds Rs. 50,000, fair
market value of all movable properties will be taxable). Movable property for this purpose (and for point
number 5 given below) means shares and securities, jewellery, archaeological collections, drawings, paintings,
sculptures, or any work of art or bullion.
5. Receipt of movable property (as a capital asset) for an inadequate consideration ( if the difference between
aggregate fair market value of all properties and aggregate consideration paid for all properties during the
previous year but on or after October 1, 2009, exceeds Rs. 50,000, the difference between fair market value and
consideration will be taxable).
Exceptions – However, the receipt of following shall not be taxable –

a. money/ property received from a relative.
b. money/property received on the occasion of the marriage of the individual.
c. money/property received by way of will/ inheritance.
d. money/property received in contemplation of death of the payer.
e. money/ property received from a local authority.
f. money/property received from any fund, foundation, university, other educational institution, hospital,
medical institution, any trust or institution referred to in section 10 (23C).
g. money received from a charitable institute registered under section 12AA.
Relative – following are treated as relatives from the above purpose-
1. Spouse of the individual
2. Brother or sister of the individual

3. Brother or sister of the spouse of the individual
4. Brother or sister of either of the parents of the individual
5. Any lineal ascendant or descendant of the individual
6. Any lineal ascendant or descendant of the spouse of the individual
7. Spouse of the person referred to in (2) to (6)
Moreover, gift received by a Hindu undivided family from its members is treated as gift received from a
“relative”.
Valuation rules – The following points should be noted-
1. In the case of an immovable property, stamp duty value is taken as fair market value.
2. In the case of transfer of shares/ securities through a stock exchange is taken as fair market value.
3. In case of other quoted shares/securities, the lowest price on the transaction date (or immediately
preceding date in case there is no transaction on transaction date) shall be taken as fair market value.
4. Unquoted equity shares shall be valued on the basis of net worth of the company. Alternatively (at the
option of the assessee), the fair market value of the unquoted equity shares shall be determined by a
merchant banker or an accountant as per the Discounted Free Cash Flow method.
5. If jewellery, archaeological collections, etc., are received by the way of purchase on the valuation date,
from a registered dealer (under sales tax or VAT), the invoice value of these properties shall be the fair
market value. If these properties are purchased at invoice value, nothing will be taxable on account of
inadequacy of consideration.
6. If jewellery, archaeological collections, etc., are received by any other mode and the value of the
properties exceeds Rs. 50,000, then assessee may obtain the report of registered valuer in respect of the
price it would fetch if sold in the open market on the valuation date.
7. In other cases, open market value shall be taken as fair market value.
When property so received is later on transferred – The value which is adopted for payment of tax under
section 56(2)(vii) will become cost of acquisition.
Interest received on compensation/enhanced compensation shall be taxable in the year in which is
received. However, 50 per cent of such interest is deductible under section 57. In other words, 50 per
cent of interest received on compensation/enhanced compensation is effectively chargeable to tax.
Permissible deductions
Any revenue expenditure (not being personal expenditure) for earning income chargeable to tax as income from
other sources, is deductible. However, the following special rules should be noted-
1. Any sum received by a taxpayer as contribution from his employees towards any welfare fund of such
employees, is allowable only if such sum is credited by the taxpayer to the employee’s account in the relevant
fund before the due date.
2. In the case of income in the nature of family pension, the amount deductible is Rs. 15,000 or 331/3 % of such
income, whichever is less.
3. In the case of depreciable assets, depreciation is deductible as per section 32.
4. In case of interest on enhanced compensation, 50 per cent of such interest is deductible (actual expenditure is
not taken into consideration).
5. Any interest chargeable under the Act which is payable outside India on which tax has not been deducted at
source, is not deductible.
6. Any payment chargeable under the head “Salaries” and payable outside India, is not deductible if tax has not
been paid or deducted therefrom.
7. Any sum paid on account of wealth-tax is not deductible.
8. No deduction shall be allowed under any provision of the Act in computing the income by way of any
winnings from lotteries, crossword puzzles, races including horse races, card games and other games of any sort
or from gambling or betting of any form or nature.
8. Chapter VI a Deductions
Basic rules governing deductions under sec. 80C to 80U

• These deductions are allowed from gross total income.
• Aggregate amount of deductions under sections 80C to 80U cannot exceed (gross total income minus short-
term capital gain under section 111A minus any long-term capital gain).
• Deductions under sections 80-IA to 80U is admissible in respect of “net income” computed under the
provisions of the Act (i.e., income arrived at after deducting permissible deductions and adjusting current or
brought forward losses).
• Deduction under sections 80-IA, 80-IAB, 80-IB, 80-IC and 80-ID is not available if return of income is not
submitted on or before the due date of submission of return of income.
• Deduction in respect of profits and gains shall not be allowed under any provisions of section 10A or section
10AA or section 10B or section 10BA or under sections 80H to 80RRB, if a deduction in respect of same
amount under any of the aforesaid sections has been allowed in the same assessment year. The aggregate
deductions under these provisions shall not exceed the profits and gains of the undertaking or unit or enterprise
or eligible business, as the case may be. No deduction under the above provisions shall be allowed if the
deduction has not been claimed in the return of income.
• For the purpose of claiming deduction under section 35AD or under Chapter VI-A (i.e., sections 80C to 80U),
the transfer price of goods and services between the undertaking (i.e., unit or enterprise eligible for these
deductions) and any other undertaking or unit or enterprise or business of the assessee, shall be determined at
the market value or arm’s length price, of such goods or services as on the date of transfer.
Deduction in respect of life insurance premia, contributions to provident fund, etc. [ Sec.
80C]
•Deduction under section 80C is available only to an individual or a Hindu Undivided family.
•Deduction is available on the basis of specified qualifying investments/ contributions/deposits/payments
(hereinafter referred to as “ gross qualifying amount”) made by the taxpayer during the previous year. Such
investment, deposit, etc., can be made out of taxable income or otherwise.
• Amount deductible under section 80C cannot be more than Rs. 1 Lakh.
• The maximum amount deductible under sections 80C, 80CCC and 80CCD cannot exceed Rs. 1 Lakh.
However, from the assessment year 2012-13, employer’s contribution towards notified pension scheme under
section 80CCD(2) (to the extent of 10 per cent of employee’s salary) shall not be considered for the ceiling of
Rs. 1,00,000.
Qualifying investment
1. Life insurance premium [subject to a maximum of 20% of sum assured (if policy is issued before April 1,
2012) or 10% of sum assured (if policy is issued on or after April 1, 2012)]
2. Payment in respect of non-commutable deferred annuity
3. Any sum deducted from salary payable to a Government employee for the purpose of securing him a
deferred annuity (subject to a maximum of 20% of salary)
4. Contribution (not being repayment of loan) towards statutory provident fund and recognized provident
fund
5. Contribution (not being repayment of loan ) towards 15-year public provident fund [ under the public
provident fund [ under the public provident fund scheme, the maximum contribution is Rs. 1,00,000
(before December 1, 2011 : Rs. 70,000) per year]
6. Contribution towards an approved superannuation fund
7. Subscription to National Savings Certificates, VIII Issue or IX Issue
8. Contribution for participating in the Unit-Linked Insurance Plan (ULIP) of Unit Trust of India
9. Contribution for participating in unit-linked insurance plan (ULIP) of LIC Mutual Fund
10. Payment for notified annuity plan of LIC or any other insurer.
11. Subscription towards notified units of Mutual Fund or UTI
12. Contribution to notified pension fund set up by Mutual Fund or UTI (i.e., Retirement Benefit Pension
Fund of UTI)
13. Any sum paid (including accrued interest) as subscription to Home Loan Account Scheme of the National
Housing Bank or contribution to any notified pension fund set up by the National Housing Bank.
14. Any sum paid as subscription to any scheme of-
a. Public sector company engaged in providing long-term finance for purchase/construction of
residential houses in India (i.e., public deposit scheme of HUDCO)
b. Housing board constituted in India for the purpose of planning development or improvement of
cities/towns
15. Any sum paid as tuition fees (not including any payment towards development fees/donation/payment
of similar nature) whether at the time of admission or otherwise to any university/ college/educational
institution in India for full time education of any two children of the assessee
16. Any installment or part payment towards the cost of purchase / construction of a residential property to
a housing board or co-operative society (or repayment of housing loan taken from Government, bank,
co-operative bank, LIC, National Housing Bank, assessee’s employer where such employer is public
company / public sector company/ university / co-operative society)
17. Amount invested in approved debentures of, and equity shares in, a public company engaged in
infrastructure including power sector or units of a mutual fund proceeds of which are utilized for the
developing, maintaining, etc., of a new infrastructure facility.
18. Amount deposited as term deposit for a period of 5 years or more in accordance with a scheme framed
by the Government.
19. Subscription to any notified bonds of National Bank for Agriculture and Rural Development (NABARD).
20. Amount deposited under Senior Citizens Saving Scheme.
21. Amount deposited in five-year time deposit scheme in post office.
Notes-
• Interest on NSC will be chargeable to tax on the basis of annual accrual. Moreover, the accrued
interest for any year (except last year) is deemed as re-investment and the same is entitled for
deduction under section 80C.
• Investment / deposits are qualified on payment basis.
Deduction in respect of pension fund [ Sec. 80CCC]
Amount paid or deposited under an annuity plan of the LIC of India or any other insurer for received pension, is
deductible in the hands of an individual. Amount should be paid or deposited out of income chargeable to tax.
Deduction cannot exceed Rs. 1 lakh. Moreover, the aggregate deduction under sections 80C, 80CCC and
80CCD cannot exceed Rs. 1,00,000. However, from the assessment year 2012-13, employer’s contribution
towards notified pension scheme under section 80CCD(2) (to the extent of 10 per cent of employee’s salary)
shall not be considered for the ceiling of Rs. 1,00,000.
Amount of deduction under section 80CCD
1. Employee’s contribution to the notified pension scheme is deductible in the year in which contribution is made.
However no deduction is available in respect of employee’s contribution, which is in excess of 10 per cent of the
salary of the employee. If contribution is made by a person (other than an employee), no deduction is available
in respect of his contribution, which is in excess of 10 per cent of his gross total income.
2. Contribution by the employer to the notified pension scheme is deductible 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 per cent of the salary of the employee.
3. The aggregate amount of deduction under section s80C, 80CCC and 80CCD cannot exceed Rs. 1,00,000.
However, from the assessment year 2012-13, employer’s contribution towards notified pension scheme under
section 80CCD (2) (to the extent of 10 per cent of employee’s salary) shall not be considered for the ceiling of Rs.
1,00,000.
4. The amounts standing to the credit of the assessee in the pension account, for which a deduction has already
been claimed by him, and accretions to such account, shall be taxed as income in the year in which such
amounts are received by the assessee (or his nominee) on closure of the account or his opting out of the said
scheme or on receipt of pension from the annuity plan. If, however, the amount of pension received from the
pension account is used for purchasing an annuity plan in the same previous year, then it will be exempt from
tax.
5. “Salary” includes dearness allowance, if the terms of employment so provide, but excludes all other allowances
and perquisites.
Deduction in respect of investment made under any equity saving scheme [ Sec. 80CCG]
A resident individual (not having gross total income exceeding Rs. 10 lakh) (Rs. 12 lakh from the assessment
year 2014-15) can claim deduction under section 80CCG if he is a new retail investor as specified in a scheme
notified by the Government and has acquired shares (or listed units from the assessment year 2014-15) in
accordance with the notified scheme. Such investment is locked-in for a period of 3 years. Amount of deduction
is 50 per cent of investment or Rs. 25,000, whichever is less.
Deduction in respect of medical insurance premia [ Sec. 80D]
An individual / HUF can claim deduction under section 80D if payment is made out of income chargeable to
tax. Payment should be made by any mode other than cash. However, payment on account of preventive health
check-up can be made by any mode (including cash). Deductible amount and other relevant provisions are
given below –
Individual
Family Parents HUF
• For whose benefits payment can be made Assessee, Parents Any
Spouse and member of
dependent family
children
• Nature of payment
a. Mediclaim premium Qualified Qualified Qualified
b. Contribution made to Central Government Health Scheme
or (from the assessment year 2014-15) any scheme notified
by the Central Government Qualified - -
c. Payment on account of preventive health check-up Qualified Qualified -
onwards
• Maximum amount of deduction
- General deduction [ applicable in respect of (a), (b) and (c)
given above but payment on account of preventive health
check-up of self, spouse, dependent children and parents
cannot exceed Rs. 5,000] Rs. 15,000 Rs. 15,000 Rs. 15,000
- Additional deduction (applicable only in the case of
Mediclaim insurance premium when policy is taken on the
life of a senior citizen*) Rs. 5,000 Rs. 5,000 Rs. 5,000
Maintenance including medical treatment of a dependant being a person with disability
[ Sec. 80DD]
A resident taxpayer ( being an individual/ Hindu undivided family) can claim deduction under section 80DD if
he/ it has incurred an expenditure for the medical treatment ( including nursing), training and rehabilitation of a
dependant relative (being a person with a disability). Deduction can also be claimed if the taxpayer has paid or
deposited under any approved scheme of LIC (or any other insurer) or UTI for the maintenance of such
dependent relative. A fixed deduction of Rs. 50,000 is available. A higher deduction of Rs. 1 lakh is available if
such dependent relative is suffering from a severe disability. Deduction under this section is available regard
less of actual expenditure.
Deduction in respect of medical treatment, etc. [ Sec. 80DDB]

1. A resident taxpayer ( being an individual/ HUF) can claim deduction under section 80DDB if he/ it has actually
incurred an expenditure for the medical treatment of a disease or ailment as prescribed by the Board.
2. Expenditure should be incurred for medical treatment of the assessee himself or wholly / mainly dependent
husband / wife, children, parents, brothers and sisters of the individual (any member of the family in the case of
HUF).
3. The assessee shall have to submit a certificate in the prescribed form from a specialist, as may be prescribed,
working a Government hospital.
Amount of deduction
RS. 40,000 or the expenditure actually incurred, whichever is lower [ Rs. 60,000 or actual expenditure,
whichever is lower, in case of a senior citizen*]
• Deduction under this section shall be reduced by the amount received, if any, under insurance from an insurer,
or reimbursed by an employer, for the medical treatment of the person referred to above.
Payment of interest on loan taken for higher education [ Sec. 80E]
If loan is taken by an individual for any study (i.e., any study after passing senior secondary examination or its
equivalent) from a bank, financial institution or an approved charitable institution, interest is deductible. Interest
is deductible (no monetary ceiling) for the year in which the assessee starts paying interest on loan and
subsequent 7 years or until interest is paid in full. Interest is deductible if loan is taken for pursuing his own
higher education or for the higher education of his relatives (i.e., spouse, children or any student for whom the
individual is the legal guardian). However, interest is deductible only if interest is paid out of his income
chargeable to tax.
Interest on loan taken for residential house property [Sec. 80EE]
If an individual has taken a loan (not exceeding Rs. 22 lakh) from a bank / finance company for acquisition of a
residential house property (value being Rs. 40 lakh or less), Interest payable on such loan for the previous year
2013-14 is deductible (subject to a maximum of Rs. 1 lakh). If, however, the amount of interest for the previous
year 2013-14 is less than Rs. 1 lakh, the balance is deductible in the next year. Deduction under section 80EE is
available only if loan is sanctioned during the financial year 2013-14, the assessee does not own a residential
property on the date of sanction of loan and deduction is not claimed under any other provision of the Act.
Donations to certain funds, charitable institutions, etc. [ Sec. 80G]
Any taxpayer can claim this deduction. Donation to the following is deductible from gross total income ( the
amount of deduction is given in the last column) –
Donee Maximum Deduction
limit (as a% of
net
qualifying
amount)
a. National Defence Fund NA 100
b. Jawaharlal Nehru Memorial Fund NA 50
c. Prime Minister’s Drought Relief Fund NA 50
d. Prime Minister’s National Relief Fund NA 100
e. Prime Minister’s Armenia Earthquake Relief Fund NA 100
f. Africa (Public Contributions –India) Fund NA 100

g. National Children’s Fund NA 50
h. Indira Gandhi Memorial Trust NA 50
i. Rajiv Gandhi Foundation NA 50
j. National Foundation for Communal Harmony NA 100
k. An approved university / educational institution NA 100
l. Maharashtra Chief Minister’s Relief Fund NA 100
m. Any fund set up by the Government of Gujarat for providing relief to victims of NA 100
earthquake in Gujarat
n. Zila Saksharta Samiti NA 100
o. National Blood Transfusion Council and State Council for Blood Transfusion NA 100
p. Fund set up by a State Government for the medical relief to the poor NA 100
q. Central Welfare Fund of the Army and Air Force and the Indian Naval Benevolent NA 100
Fund
r. Andhra Pradesh Chief Minister’s Cyclone Relief Fund NA 100
s. National Illness Assistance Fund NA 100
t. Chief Minister’s Relief Fund or Lieutenant Governor’s Relief Fund NA 100
u. National Sports Fund or National Cultural Fund or Fund for Technology NA 100
Development and Application
v. Any other fund or any institution which satisfies conditions mentioned in section As given 50
80G(5) below
w. Government or any local authority to be utilized for any charitable purpose other As given 50
than the purpose of promoting family planning below
x. Any authority constituted in India by (or under) any law enacted either for the As given 50
purpose of dealing with and satisfying the need for housing accommodation or for below
the purpose of planning, development or improvement of cities, towns and
villages, or for both
y. Any corporation specified in section 10(26BB)for promoting interest of minority As given 50
community below
z. Government or any approved local authority, institution or association to be As given 100
utilized for the purpose of promoting family planning below
za. Any notified temple, mosque, gurdwara, church or other place (for As given 50
renovation or repair) below
zb. Indian Olympic Association or to an institute notified by the Central As given 100
Government for the development of infrastructure for sports and games in India; or below
the sponsorship of sports and games in India (only donation by a company)
zc. Any trust, institution or fund to which section 80G(5C) applies for providing NA 100
relief for victims of earthquake in Gujarat
zd. National Trust for Welfare of Persons with Autism, Cerebral Palsy, Mental NA 100
Retardation and Multiple Disabilities
Maximum amount – Where the aggregate of the sums mentioned in (v), (w), (x), (y), (z), (za), or (zb) supra
exceeds 10 per cent of the adjusted gross total income, then the amount in excess of 10 per cent of the adjusted
gross total income will be ignored while computing the aggregate of the sums in respect of which deduction is
to be allowed.
Mode of payment – Donation can be given in cash or by cheque or draft. However, no deduction shall be
allowed under section 80G in respect of donation in cash of an amount exceeding Rs. 10,000 from assessment
year 2013-14.
Adjusted gross total income
Gross total income minus the following is adjusted gross total income.
a. Amount deductible under sections 80C to 80U (but not section 80G);
b. Such incomes on which income-tax is not payable;
c. Long-term capital gains;
d. Short –term capital gain which is taxable under section 111A at the rate of 15 per cent ; and
e. Incomes referred to in section 115A, 115AB, 115AC or 115AD.
Deduction in respect of rent paid [ Sec. 80GG]

1. The taxpayer is an individual.
2. The taxpayer is a self-employed person. Alternatively, the taxpayer is an employee but he does not get house
rent allowance from the employer at any time during the previous year.
3. The following persons should not own any residential accommodation at the place where the taxpayer resides,
performs the duties of his office, or employment or carries on his business or profession –
a. The taxpayer;
b. His / her spouse;
c. His / her minor child (including minor step child and minor adopted child); and
d. The Hindu undivided family of which the taxpayer is a member.
4. If the taxpayer owns a residential accommodation at a place other than the place noted above, then in respect
of that house the concession in respect of self-occupied property is not claimed by him.
5. The taxpayer files a declaration in Form No. 10BA regarding the expenditure incurred by him towards payment
of rent.
Amount of deduction
The amount deductible under section 80GG is the least of the following –
a. Rs. 2,000 per month;
b. 25 per cent of “ total income”; or
c. The excess of actual rent paid over 10 per cent of “ total income”.
“Total income”, for this purpose, is gross total income minus long-term capital gains, short-term capital
gains under section 111A, deductions under sections 80C to 80U (not being section 80GG) and income
under section 115A.
Mode of Payment – Donation can be given in cash or by cheque or draft. However, no deduction shall be
allowed under section 80GGA in respect of a cash contribution (exceeding Rs. 10,000) from the assessment
year 2013-14.
Certain donations for scientific research or rural development [ Sec. 80GGA]
An assessee (other than an assessee whose gross total income includes income chargeable under the head
“Profits and gains of business or profession”) is entitled to deduction in the computation of his total income in
respect of payment / donations for scientific research or rural development.
Deduction in respect of contributions given to political parties [ Secs. 80GGB and 80GGC]
Contribution to a political party is deductible under section 80GGB (if a contribution is made by an Indian
company) or under section 80GGC (if a contribution is made by a person other than an Indian company).
Expenditure by way of advertisement to a magazine owned by a political party is treated as “contribution” to a
political party for the purpose of section 80GGB, but not for the purpose of section 80GGC. In other words,
advertisement expenditure (in a magazine owned by a political party) is deductible under section 80GGB if the
taxpayer is an Indian company but the same is not deductible under section 80GGC if the taxpayer is a person
other than an Indian company.
Deduction under sections 80GGB and 80GGC is not available to a local authority and any artificial juridical
person wholly or partly funded by the Government.
From the assessment year 2014-15, no deduction shall be allowed in respect of any sum contributed by way of
cash.
Profits and gains from industrial undertaking or enterprises engaged in infrastructure
development, etc. [ Sec. 80-IA]

Section 80 – IA covers the following cases –
Case 1 – Provision of infrastructure facility.
Case 2 – Telecommunication services.
Case 3 – Industrial parks.
Case 4 – Power generation, transmission and distribution or substantial renovation and modernization of
existing distribution lines.
Case 5 – Undertaking set up for reconstruction of a power unit.
Case 6 – A cross-country natural gas distribution network.
Case 1 : Infrastructure facility
An Indian company can claim this deduction if the following conditions are satisfied-
1. It should provide infrastructure facility. The enterprise must carry on the business of (a) developing, or (b)
maintaining and operating, or (c) developing, maintaining and operating any infrastructure facility.
2. There should be an agreement with the Central Government.
3. It should start operation on or after April 1, 1995.
4. Deduction should be claimed in the return of income. Return of income should be submitted on or before the
due date of submission of return of income. Books of account should be audited.
Amount of deduction - 100 per cent of the profit is deductible for 10 years. The deduction commences from
the initial assessment year.
What is initial assessment year – Initial assessment year, for this purpose, means the assessment year
specified by the assessee at his option to be the initial year. But it should not fall beyond the fifteenth* of
assessment year starting from the previous year in which the enterprise begins operating and maintaining the
infrastructure facility.
However, the benefit of deduction is available only for 10 consecutive assessment years falling within a
period of fifteenth* assessment years beginning with the assessment year in which an assessee begins
operating and maintaining infrastructure facility.
Twentieth if the “ infrastructure facility “ is a highway project including housing or other activities being
an integral part of the highway project and road including tool road, a bridge or a rail system, a water
supply project, water treatment system, irrigation project, sanitation and sewerage system or solid waste
management system.
Infrastructure facility – It means –

a. A road including toll road, a bridge or a rail system;
b. A highway project including housing or other activities being an integral part of the highway project;
c. A water supply project, water treatment system, irrigation project, sanitation and sewerage system or solid
waste management system; and
d. A port, airport, inland waterway or inland port or navigational channel in the sea.
Case 2 : Telecommunication services
The following conditions should be satisfied –
1. It should be a new undertaking.
2. It should not be formed by transfer of old plant and machinery.
3. The undertaking should be engaged in providing telecommunication services. It should start providing
telecommunication services (whether basic or cellular including radio paging, domestic satellite service or
network of turnking broadband network and internet services and electronic data inter-change service) at any
time after March 31, 1995 but before Mach 31, 2005. “Domestic satellite” for this purpose means a satellite
owned and operated by an Indian company for providing telecommunication service.
Amount of deduction – 100 per cent of the profit is deductible in the first 5 years and 30 per cent of the
profit is deductible in the next 5 years.

Deduction starts from the initial assessment year. Initial assessment year means the assessment year
specified by the assessee at his option to be the initial year not falling beyond the fifteenth assessment year
starting from the previous year in which the undertaking begins providing telecommunication services.
Case 3: Industrial park or special economic zone
1. It develops, develops and operates or maintains and operates an industrial park or a special economic zone.
2. The industrial park must start operating during April 1, 2007 and March 31, 2011 or the special economic zone
must start operating during April 1, 2007 and March 31, 2011 or the special economic zone must start operating
during April 1, 1997 and March 31, 2005.
Amount of deduction – If all the aforesaid conditions are satisfied 100 per cent of profit is deductible for 10
years commencing from the initial assessment year. Initial assessment year means the assessment year
starting from the previous year in which the undertaking begins operating/developing an industrial park.
Case 4 : Power generation / distribution
1. It should be a new undertaking. It should not be formed by transfer of old plant and machinery.
2. The undertaking must be set up in any part of India for the generation or generation and distribution of power
during April 1, 1993 and March 31, 2014. Alternatively, the undertaking should start transmission or distribution
at any time between April 1, 1999 and March 31, 2014. Alternatively, it undertakes substantial renovation and
modernization of the existing transmission / distribution lines between April 1, 2004 and March 31, 2014.
Amount of deduction – If all the aforesaid conditions are satisfied, 100 per cent of the profit is deductible for
10 years commencing from the initial assessment year. Initial assessment year means the assessment year
starting from the previous year in which the undertaking generates power or commences transmission or
distribution of power.
Case 5: Reconstruction of power unit
1. It should be owned by an Indian company and set up for reconstruction or revival of a power generating
plant.
2. It should be formed before November 30, 2005 with majority equity participation by public sector companies
for the purposes of enforcing the security interest of the lenders to the company owning the power generating
plant and such Indian company is notified before December 31, 2005 by the Central Government.
3. Such undertaking begins to generate or transmit or distribute power before March 31, 2011.
Amount of deduction – See Case 1
Case 6 : Laying and operating cross-country natural gas distribution network
1. The undertaking is owned by an Indian company or by a consortium of such companies or by an authority or
a board or a statutory corporation.
2. The undertaking has been approved by the Petroleum and Natural Gas Regulatory Board and notified by the
Central Government.
3. One-third of its total pipeline capacity is available for use on common carrier basis by any person other than
the assessee or an associated person.
4. It starts functioning on or after April 1, 2007.
5. It fulfils such other conditions as may be prescribed.

6. The undertaking should not be formed by way of reconstruction or splitting up or by transfer to a new
business of old plant and machinery (subject to certain exceptions).
Amount of deduction – 100 per cent deduction will be available for 10 consecutive assessment years out of 15
years beginning from the year in which an undertaking lays and begins to operate the cross- country natural gas
distribution network.
Profits and gains by an undertaking or enterprise engaged in development of Special
Economic Zone [ Sec. 80 – IAB]
1. The taxpayer is a developer of a special economic zone.
2. The gross total income of the taxpayer includes profits and gains derived by an undertaking from any
business of developing a special economic zone.
3. Such special economic zone is notified on or after April 1, 2005.
Amount of deduction – 100 per cent deduction is available in respect of the aforesaid profit. Deduction is
available for 10 consecutive assessment years. The deduction may be claimed, at the option of the taxpayer, for
any 10 consecutive assessment years out of 15 years beginning from the year in which the special economic
zone has been notified by the Central Government.
Profits and gains from certain industrial undertaking other than infrastructure development
undertakings [ Sec. 80-IB]
Section 80-IB covers the following cases –
Case 1 –Business of an industrial undertaking.
Case 2 – Operation of ship.
Case 3 – Hotels.
Case 4 – Industrial research.
Case 5 – Production of mineral oil.
Case 6 – Developing and building housing projects.
Case 7 – The business of processing, preservation and packaging of fruits or vegetables or integrated, handling,
storage and transportation of food grain units.
Case 8 – Multiplex theatres.
Case 9 – Convention center.
Case 10 – Operating and maintaining a hospital in rural area.
Case 11 – Hospital located in certain areas.
Case 1 : Business of an industrial undertaking
1. It should be a new undertaking. It should not be formed by transfer of old plant and machinery.
2. It should manufacture or produce articles other than non-priority sector items given in the Eleventh Schedule.
This condition is, however, not applicable in the case of small scale industrial undertaking or an undertaking in
a backward State.
3. Manufacture or production should be started within a stipulated time limit – small scale industrial
undertaking during April 1, 1991 and March 31, 2002, industrial undertaking in a backward State during April
1, 1993 and March 31, 2004, in the case of State of Jammu & Kashmir during April 1, 1993 and March 31,
2012, industrial undertaking in a backward State during October 1, 1994 and March 31, 2004, cold chain
facility during April 1, 1999 and March 31, 2004.
4. It should employ 10 workers (where manufacturing process is carried on with the aid of power) or 20 workers
(where manufacturing process is carried on without the aid of power)
Amount of deduction – If the above conditions are satisfied 100 per cent of the profit is deductible for the first 5
years and 30 per cent (25 per cent in the case of non-corporate assessee) is deductible for the next 5 years. In the
case of a small scale industrial undertaking deduction is available at the rate of 30 per cent (25 per cent in the
case of non-corporate assessee) for first 10 years. Tax holiday period is 10 years (12years in the case of a co-
operative society). However, in the case of an industrial undertaking in a category B backward district, 100 per
cent tax holiday is available for first 3 year and for remaining period of tax holiday the partial deduction of 25
or 30 per cent is available. Deduction commences from the previous year in which the industrial undertaking
begins to manufacture or produce articles or things, or to operate its cold storage plant or plants.
Case 2 – Operation of a ship
No deduction is available now-a-days.
Case 3 – Hotel industry
Certain hotels (which started functioning before April 1, 2001) were qualified for deduction under section 80-IB
for 10 years. 10 year limit expired with the assessment year 2010-11. No deduction is, therefore, available for
the assessment year 2011-12 onwards.
Case 4 – Companies engaged in industrial research
1. The taxpayer is a company registered in India.
2. Such company has scientific and industrial research and development as its main object.
3. It is for the time being approved by the prescribed authority (i.e., Secretary, Department of Scientific and
Industrial Research).
Amount of deduction – 100 per cent of profit is deductible. Deduction is available for a period of first 5 years if
the prescribed authority approves the company at any time before April 1, 1999. However, if the prescribed
authority approves the company after March 31, 2000 but before April 1, 2007, deduction is available for a
period of first 10 years.
Case 5 – Mineral oils
1. It should be a new undertaking. It should not be formed by transfer of machinery or plant previously used for
any purpose.
2. The undertaking should be located anywhere in India.
3. It should commence production of mineral oil after March 31, 1997 (in some cases not after March 31, 2011)
or refining of mineral oil during October 1, 1998 and March 31, 2012 or production of natural gas (in a
specified blocks) on or after April 1, 2009.
Amount of deduction – 100 per cent profit is deductible for the first 7 years.
Case6 – Developing and building housing projects

1. The project should be approved by a local authority before March 31, 2008.
2. The size of the plot of land is a minimum of one acre.
3. The undertaking commences development and construction of the housing project after September 30, 1998
and it should complete construction within 4 years from the end of the financial year in which the housing
project is first approved or before April 1, 2008, whichever is later. If, However , the housing project is
approved on or after April 1, 2005, the project should be completed within 5 years from the end of the financial
year in which the project is approved by the local authority.
4. With effect from the assessment year 2010-11, the built-up area of the shops and other commercial
establishments included in the housing project should not exceed 3 per cent of the total built-up area of the
housing project or 5,000 sq. ft., whichever is more.
5. The built-up area of each residential unit should not be more than 1,500 sq. ft.(1,000 sq. ft. in the cities of
Delhi and Mumbai and any area within 25 kilometers).
6. Not more than 1 residential unit should be allotted to the same person. If allottee is an individual, no other
residential unit in the housing project should be allotted to the individual, his /her spouse, minor children, Hindu
undivided family, etc.
Amount of deduction – 100 per cent of the profit of the housing project is deductible.
Case 7 – Business of processing, preservation and packaging of fruits or vegetables, etc.
An undertaking deriving profit from the business of processing, preservation and packaging of fruits or
vegetables or meat or meat products or poultry / marine / dairy products or from the integrated business or
handling, storage and transportation of food grains is qualified for deduction at the rate of 100 per cent of the
profit for the first 5 years and 30 per cent (25 per cent in the case of non-corporate assessee) for the next 5
years. Deduction should be claimed in the return of income. Return of income should be submitted on or before
the due date of submission of return of income. Books of account should be audited.
Case 8 – Multiplex theatres
No Deduction available now-a-days.
Case 9 – Convention Centre
No Deduction available now-a-days.
Case 10 – Operating and maintaining a hospital in rural area
1. The assessee owns an undertaking deriving profits from the business of operating and maintaining a hospital
in a rural area.
2. Such hospital is constructed at any time during October 1, 2004 and ending on March 31, 2008. For this
purpose a hospital shall be deemed to have been constructed on the date on which a completion certificate in
respect of such construction is issued by the concerned local authority,
3. The hospital has at least 100 beds for patients.
4. The construction of the hospital is in accordance with the regulations, for the time being in force, or the local
authority.
Amount of deduction- 100 per cent profit is deductible for the first 5 years.
Case 11 – Hospitals located in certain areas
If a few conditions are satisfied, 100 per cent profit is deductible for the first 5 years, if hospital is situated
anywhere in India. (but other than excluded area i.e., Delhi, Mumbai, Kolkata, Chennai, Hyderabad, Bangalore,
Ahmedabad, Faridabad, Gurgaon, Ghaziabad, Gautam Budh Nagar, Gandhi Nagar or Sikandrabad). The
hospital should start functioning during April 1, 2008 and March 31, 2013. Deduction should be claimed in the
return of income. Return of income should be submitted on or before the due date of submission of return of
income. Books of account should be audited.
Profits and gains of certain undertaking in certain special category of States [ Sec. 80-IC]
1. The industrial undertaking is not formed by splitting up, or the reconstruction, of a business already in
existence.
2. The industrial undertaking should be set up in Sikkim, Himachal Pradesh, Uttaranchal or in North Eastern
State.
3. It should manufacture any article but other than those given in the Thirteen Schedule if it is situated in the
industrial zone of the relevant State. In other remaining area, it can manufacture any article given in the
Fourteenth Schedule.
4. Deduction is available in the case of new industrial undertaking or in the case of completion of substantial
expansion of an existing undertaking. These activities should take place in the case of Sikkim during December
23, 2002 and March 31, 2007, in the case of Himachal Pradesh or Uttaranchal during January 7, 2003 and
March 31, 2012 and North Eastern State during December 24, 1997 and March 31, 2007.
Amount of deduction – 100 per cent deduction is available for the first 10 years [however, in the case of
Himachal Pradesh or Uttaranchal, it is 100 per cent for the first 5 years and 30 per cent (25 per cent in the case
of non-corporate assessee) for the next 5 years].
Profit and gains from business of hotel / convention centre in NCR [ Sec. 80-ID]
1. The taxpayer is engaged in the business of hotel located in a specified area. Alternatively, the tax payer is
engaged in the business of building, owning and operating a convention centre located in specified area.
2. The aforesaid business is a new business. It is not formed by the splitting up, or the reconstruction, of a
business already in existence. It should not be formed by the transfer to a new business of machinery or plant
previously used for any purpose.
Amount deduction – 100 per cent profit is deductible for the first 5 years.
Specified area – 2/3/4 star hotel or convention center in NCR (i.e., Delhi, Faridabad, Gurgaon, Gautam Budh
Nagar and Ghaziabad). Construction should be completed and hotel or convention center should start
functioning during April 1, 2007 and July 31, 2010. Deduction is also available in the case of 2/3/4 star hotel at
a World heritage site (i.e., districts of Agra, Jalgaon, Aurangabad, Kancheepuram, Puri, Bharatpur, Chhatarpur,
Thanjavur, Bellary, South 24 Parganas (excluding areas falling within the Kolkata Urban Agglomeration),
Chamoli, Raisen, Gaya, Bhopal, Panchamahal, Kamrup, Goalpara, Nagaon, North Goa, South Goa, Darjeeling
and Nilgiri). In the case of World heritage site, the hotel should be constructed and started functioning during
April 1, 2008 and March 31, 2013.
Certain undertakings in North-Eastern States [ Sec. 80-IE]
The following conditions should be satisfied-
1. The taxpayer begins manufacture or production of goods or undertakes substantial expansion during April 1,
007 and March 31, 2007. Alternatively, the taxpayer has begun to provide eligible services during April 1, 2007
and March 31, 2017.
2. Deduction under this section is not available in respect of manufacture or production of tobacco, pan masala,
plastic carry bags or less than 20 microns or goods produced by petroleum oil and gas refineries. Eligible
services for this purpose are hotel (3 star or above), nursing home (25 beds or more), old age homes, vocational
training institutes (such as hotel management, catering, entrepreneurship development, nursing and
paramedical, civil aviation related training, fashion designing and industrial training), IT related training
centres, IT hardware units and bio-technology.
3. The aforesaid activity takes place in any North-Eastern States.
4. The aforesaid business is not formed by the splitting up, or the reconstruction, of a business already in
existence. It is not formed by the transfer to a new business of machinery or plant previously used for any
purpose.
Amount of deduction – 100 per cent profit is deductible for first 10 years.
Business of processing of bio-degradable waste [ Sec. 80JJA]
1. The taxpayer is in the business of collecting, processing or treating of bio-degradable waste for generating
power or producing bio-fertilizers, bio-pesticides or other biological agents or for producing bio-gas or making
pellets or briquettes for fuel or organic manure.
2. Deduction should be claimed in the return of income.
Amount of deduction – 100 per cent profit from the above activity is deductible for first 5 years.
Deduction in respect of employment of new workmen [ Sec. 80JJA]
1. The taxpayer is an Indian company.
2. The Indian company derives profits from manufacture of goods in its factory (this condition is applicable
from the assessment year 2014-15.
3. Income of the taxpayer includes any profits and gains derived from any industrial undertaking engaged in the
manufacture or production of article or thing.
4. The industrial undertaking is not formed by splitting up or reconstruction of an existing undertaking or
amalgamation with another industrial undertaking.
5. A report from a chartered accountant in Form No. 10DA should be taken.
Amount of deduction – The amount of deduction is equal to 30 per cent of “ additional wages” (i.e., wages paid
to new “regular workmen” in excess of 100 “workmen” employed by the assessee in the previous year. The
deduction is available for three assessment years including the assessment year relevant for the previous year
in which such employment is provided. No deduction is, however, available if the increase in number of
“regular workmen” employed during the year is less than 10 per cent of the existing number of “ workmen”
employed in the undertaking as on the last day of the preceding year.
Certain income of Offshore Banking Units and International Financial Services Centre [
Sec. 80LA]
A scheduled bank / foreign bank having an offshore banking unit in a special economic zone; or a unit of
International Financial Services Centre can claim deduction under section 80LA if a few conditions are
satisfied. Amount of deduction is 100 per cent of the aforesaid income for 5 years.
Income of a co-operative society [ Sec. 80P]
The whole of the amount of the profits attributable to specified activities in the case of a co-operative society is
allowable as deduction
Royalty income of authors [ Sec. 80QQB]
1. The taxpayer is an individual resident in India.
2. He is an author or joint author.
3. The book authored by him is work of literary, artistic or scientific nature. However, the “ books” shall not
include brochures, commentaries, diaries, guides, journal, magazines, newspapers, pamphlets, text-books for
school, tracts and other publications of similar nature, by whatever name called.
4. The gross total income of the taxpayer includes the following-
a. royalty or copyright fees (payable in lump sum or otherwise) in respect of aforesaid book ( it also includes
advance payment which is not returnable); and
b. lump-sum consideration for transfer (or grant) of any interest in the copyright of the book.
5. The taxpayer shall have to obtain a certificate in Form No. 10CCD from the person responsible for paying the
income.
6. Where the eligible income is earned outside India, deduction is not available unless such income is brought
into Indian in convertible foreign exchange on or before September 30 of the assessment year. A certificate of
foreign inward remittance should be taken in Form No. 10H from a prescribed authority (i.e., RBI or an
authorized bank).
Amount of deduction - The amount of royalty is deductible up to Rs. 3 lakh. Moreover, for calculating deduction
under section 80QQB, if rate of royalty is more than 15 per cent, the excess amount shall be ignored.
Royalty on patents [ Sec. 80RRB]
1. The taxpayer is an individual and resident in India.
2. He is a patentee (he may be a co-owner of patent).
3. He is in receipt of any income by way of royalty in respect of patent, which is registered.
4. The taxpayer shall have to obtain a certificate in Form No. 10CCE from the person responsible for paying the
income.
5. Where the eligible income is earned outside India, deduction is not available unless such income is brought
into Indian in convertible foreign exchange on or before September 30 of the assessment year. A certificate of
foreign inward remittance should be taken in Form No. 10H from a prescribed authority (i.e., RBI or an
authorized bank)
Amount of deduction – The amount of royalty is deductible up to Rs. 3 lakh.
Deduction in respect of interest on deposits in savings accounts [ Sec. 80TTA]
An individual / HUF can claim a deduction up to Rs. 10,000 in aggregate in respect of saving account interest
with a bank / co-operative bank/ Post Office (applicable from the assessment year 2013-14).
The above deduction of section 80TTA is in addition to the exemption available under section 10(15)(i). Under
section 10(15)(i), post office savings bank interest is : (a) fully exempt up to the assessment year 2011-12. (b)
exempt up to Rs. 3,500 (in an individual account) and Rs. 7,000 (in a joint account) from the assessment year
2012-13.
Deduction in the case of a person with disability [ Sec. 80U]
1. The taxpayer is an individual.
2. He is resident in India.
3. The taxpayer suffers 40 per cent or more than 40 per cent of any disability (i.e., blindness, low vision,
leprosy-cured, hearing impairment, locomotor disability, mental retardation, mental illness).
4. The taxpayer shall have to furnish a copy of the certificate issued by the medical authority.
Amount of deduction - Fixed deduction of Rs. 50,000 is available. A higher deduction of Rs. 1 lakh is allowed
in respect of a person with sever disability (i.e., having disability of 80 per cent or above).
Rebate under section 87A (applicable from the assessment year 2014-15)
A resident individual (whose total income does not exceed Rs. 5 Lakhs) can claim a rebate from income-tax.
The amount of rebate is income-tax on total income or Rs. 2,000 whichever is less).
9. FIRMS AND AOP
Scheme of taxation of firms

A firm is taxed as a separate entity. Rules given below are applicable whether a firm is a traditional firm or limited
liability partnership.
Partner’s share in the income of a firm is not chargeable to tax in the hands of partners.
Any salary, bonus, commission or remuneration (by whatever name called), paid/payable to partners is allowed as a
deduction to the firm. However, the deduction is subject to certain restrictions in the hands of the firm. The amount
which is allowed as deduction to the firm is taxable in the hands of the partners.
Where a firm pays interest to any partner, the firm can claim deduction of such interest from its total income.
However, the maximum rate at which interest can be allowed to a partner is 12 per cent per annum. The amount of
interest, allowed as deduction in the hands of the firm, is taxable in the hands of partner.
The income of the firm is taxed at a flat rate, i.e., 30 percent (+SC+EC+SHEC). For the assessment year 2014-15, the
effective rate of tax is 30.9 percent (if total income is Rs. 1 crore or less) or 33.99 percent (if total income is above
Rs. 1 crore).
Firm (including limited liability partnership) is subject an alternate minimum tax.
When remuneration is deductible
Any expenditure by a business entity (including remuneration / interest to partners) is deductible only if it
comes within the parameters of sections 30 to 37*. In the case of a firm , if it claims deduction in respect of
remuneration/interest to partners , it has to prove that it also satisfies the following-
1. conditions of section 184
2. conditions of section 40(b).
Conditions a firm should fulfill under section 184
Section 184 requires the following-
1. A firm must be evidenced by a partnership deed.
2. Individual share of partners must be specified in partnership deed.
3. Certified copy of the partnership deed should be submitted along with return of income for the first year*.
4. Revised partnership deed should be submitted whenever there is change in the constitution of firm/profit-
sharing ratio*.
5.There should not be any failure as is mentioned in section 144.
*However, under new income tax return form (i.e., ITR-5), it is not possible to submit any annexure/
certificate/report/document along with the return of income. Certified copy of partnership deed should be
retained by the firm & it can be produced whenever it is demanded by the Assessing Officer.
Conditions for claiming deduction of remuneration of partners under section 40(b)
Section 40(b) requires the following –

1 Remuneration should be paid only to a working partner (i.e., an individual who is actively engaged in conducting
the affairs of the firm).
2 Remuneration must be authorized by the partnership deed & it should be paid according to the terms of
partnership deed.
3 Remuneration should not [Pertain to a period prior to partnership deed (in other words, partnership deed
cannot be amended with a retrospective effect to make a provision for payment of remuneration).
4 Remuneration should not exceed the permissible limit given below-
- On the first Rs.3,00,000 of book profit or in the case of loss : Rs. 1,50,000 or 90% of book profit,
whichever is more.
- On the balance of book profit : 60% of book profit.
Book profit - it is calculated as follows-
1 Find out the net profit of the firm as per Profit & Loss Account.
2 Make adjustments as provided by section 28 to 44DB.
3 Add remuneration to partners if debited to the Profit & Loss Account.
The resulting amount is “book profit”. However, the following points should be noted –
a. income chargeable to tax under the heads of “income from house property”, “Capital gains” & “Income from
other sources” is not part of “book profit”;
b. brought forward business losses are not to be deducted from “book profit”(one can, however, deduct
brought forward unabsorbed depreciation); and
c. permissible deductions from gross total income under section 80C to 80U shall be ignored for computing
“book profit”.
When interest is deductible

Interest is deductible only when a firm satisfies conditions of section 184.
Besides, these conditions, a firm should also satisfy the requirements of section 40(b), which are given below –
1 Payment of interest should be authorized by the partnership deed.
2 Payment of interest should pertain to the period after the partnership deed.
3 Rate of interest should not exceed 12%.
Carry forward & set off of loss in the case of change in the constitution of firm
Section 78 provides that where there is a change in the constitution of the firm on account of death/retirement,
the firm shall not be entitled to carry forward of so much of the loss as is attributable to such partner. This
provision covers when a partner goes out of the firm (i.e., the case of retirement/death). It does not, however,
cover the case of change in profit-sharing ratio or the case of admission of a partner.
Carry forward of house property loss, business loss, capital loss & loss from the activity of owning &
maintaining race horses – These losses can be set off carried forward by a firm in the case of change in the
constitution of the firm, as per the provision of section 78 :
1 First ascertain the share of outgoing partner in the profit/loss of the firm in the year of change in constitution of
firm.
2 Compute the share of loss of outgoing partner in the brought forward loss.
3 The difference between the two (in the case of profit in the year of change) or the aggregate of two (if there is
loss in the year of change in the constitution of firm) cannot be allowed to be set off & carry forward.
Carry forward of unabsorbed depreciation – As section 78 is not applicable in the case of unabsorbed
depreciation & unabsorbed capital expenditure on scientific research.
Computation of tax liability of the firm
Income of firm is taxable at the rate of 30%.However, the following income are taxable at special rates given
below –
1 Short-term capital gain under section 111A : 15%
2 Long-term capital gain (Sec. 112) : 20% (without indexation in some cases at the rate of 10%).
3 Winnings from lottery, races, etc. : 30%. Surcharge is not applicable. However, education cess at the rate of 2%
& secondary & higher secondary cess at the rate of 1% is applicable.
Alternate minimum tax

Alternate minimum tax is applicable in the case of (a) limited liability partnership from the assessment year
2012-13, & (b) any non corporate assessee (including a firm/LLP) from the assessment year 2013-14.
Alternate minimum tax is @ 18.5% (+SC+EC+SHEC) of adjusted total income. Adjusted total income is
total income (or taxable income) before giving any deduction under sections 10AA & 80H to 80RRB
(except section 80P). However, from the assessment year 2013-14, alternate minimum tax is not applicable,
if a person has not claimed any deduction under sections 10AA & 80H to 80RRB (except section 80P).
Computation of taxable income of partners of a firm

Share of profit – Exempt from as per section 10(24).
Remuneration or interest – If condition of section 184 & section 40(b) are satisfied then interest, salary, bonus,
commission or remuneration paid/payable by the firm to partners is taxable in the hands of partners (to the
extent these are allowed as deduction in the hands of the firm).
The following points one should noted –
1 Remuneration & interest are taxable as business income.
2 Any expenditure incurred in order to earn salary/interest income can be claimed as a deduction under Sec. 30 to
37 from such income.
3 If salary /interest is disallowed in the hands of firm under Sec. 40(b) and/or section 184, then the same is not
taxable in the hands of the partners.
Computation of income of AOP or BOI
1 If any salary or interest is paid by the AOP/BOI to its members, it will not be deductible [Section 40(ba)].
2 Total income of the AOP/BOI is taxable either at the rates applicable to an individual, or at the maximum
marginal rate or at a rate higher than maximum marginal rate.
When income of AOP is taxable at the rate applicable to an individual
When shares of members are determinate, none of the members has personal income exceeding the exemption
limit & none of the members is a company, then income of AOP is taxable at the rate applicable to an
individual. Share of members shall be included in the income of individual members. However, if AOP has paid
tax, a rebate under section 86 is available to the members.
When income of AOP is taxable at the maximum marginal rate or at higher rate
In the following cases, income of AOP is taxable at the maximum marginal rate.
1. When one or more member has personal income of more than exemption limit.
2. When shares of members are indeterminate.
In these two cases, if any member of an AOP is a company, tax will be payable by the AOP at the higher rate
(i.e., at the rate applicable to company on share of profit of the company & remaining amount is taxable at the
maximum rate). When income of AOP is taxable at the maximum marginal rate or at a higher rate, share of
profit will not be taxable in the hands of members.
10. Return of Income

Provisions In Brief
Who has to submit his/its return of income on voluntary basis as a statutory obligation –
The following persons shall submit return of income on compulsory basis (these rules are applicable even in the
case of a non-resident)-
Company or firm – A company /firm has to submit return of income whether there is any income or loss.
A person other than a company or firm – Compulsory return if taxable income(plus deductions under sections 10A,
10B, 10BA and sections 80C to 80U) exceeds the exemption limit. In case of an individual (not having income
exceeding Rs.5,00,000), the government has provided an exemption to submit (or not to submit) his return of
income, if a few conditions are satisfied.
A person in receipt of income derived from property held under a trust for charitable or religious purposes – If the
income (without giving exemption under section 11 or 12) exceeds the amount not chargeable to tax.
Chief executive officer of every political party – If the income (without giving exemption under section 13A)
exceeds maximum amount not chargeable to tax.
Research association, news agency, association/institute for control or supervision of a profession/institute for
development of khadi and village industries, fund/institution referred to in section 10(46)/(47), 10(23C)(iv)(v),
educational/medical institution, trade union - If – If the income (without giving exemption under section 10)
exceeds maximum amount not chargeable to tax.
Any university/collage/other institution referred to in section 35(1)(ii)/(iii) – Any income or loss (return has to be
submitted whether there is income or loss. Such return has to be submitted even if it is not required by any other
provision).
Compulsory filing of income-tax return in relation to assets located outside India- From the assessment year 2012-
13 onwards, it is mandatory to furnish return of income if the following conditions are satisfied-
a. The person is resident in India (but other than not ordinarily resident), and
b. He or it has any asset (including financial interest in any entity) located outside India or signing authority
in any account located outside India.
Return forms:
ITR – 1 (i.e. sahaj*) – For individuals having income from salary, one house property (excluding loss brought
forward from previous years) and income from other sources (not being any loss and not being winnings from
lottery and income from race horses).
ITR – 2 – For individuals and HUFs not having business / professionals income.
ITR – 3 – For individuals/HUFs being partner in firms and not carrying out business or profession under any
proprietorship.
ITR – 4 – For individuals and HUFs having income from a proprietary business or profession.
ITR – 4S(i.e.,Sugam*) – For individuals/HUFs deriving business income and such income is scomputed in
accordance with special provisions referred to in sections 44AD and 44AE.
ITR- 5-For firms, AOPs and BOIs.
ITR – 6- For companies (other than companies claiming exemption under section 11).
ITR – 7 –For persons (including companies) required to furnish return under section 139(4A)/(4B)/(4C)/(4D).
ITR- v- Where the data of the return of income in forms ITR-1, ITR-2, ITR-3,ITR-4, ITR-4S, ITR-5, ITR-6 and
ITR-7 transmitted electronically without digital signature.
Mode of submission:
ITR -7 should be submitted in paper format or electronically (with or without digital signature)
A company should submit its return in ITR – 6 electronically under digital signature.
A person (not being a company and person required to furnish return in ITR – 7) who has total income exceeding
Rs.5, 00, 000 shall furnish return of income in ITR – 1/ ITR- 2/
ITR-3/ ITR-4/ ITR – 5 electronically with or without digital signature.
A resident and ordinarily resident individual/HUF having assets (including financial interest in any entity)
located outside India or signing authority in any account located outside India, shall submit return of income in
ITR-2 / ITR-3 /ITR-4 electronically with or without digital signature. ITR- 1 or ITR – 4S is not applicable in such a
case.
A person claiming relief/deduction under sections 90 , 90A and 91, shall furnish return of income electronically
with or without digital signature. ITR- 1 or ITR – 4S is not applicable in this case.
When books of account are required to be audited under section 44AB and the taxpayers is a firm, individual or
Hindu undivided family, return should be submitted in ITR-4 / ITR – 5 electronically with digital signature.
Other taxpayers can submit their return in paper format or electronically with or without digital signature.
If return is submitted electronically without digital signature, then after submission of return electronically, the
tax payer will have to submit verification of return in paper format in ITR-V. ITR-V should be sent within
“specifies period” by ordinary post (or speed post) to “Income-tax department –CPC, Post Box No.1, Electronic
City Post Office, Bengaluru-560100,
Karnataka”. “Specified Period” for this purpose is 120 days from the date of uploading the electronic return.
No document, audit report, statement, accounts, etc., can be attached with these return forms. However, the
report of a chartered accountant as required under sections 44AB, 92E (pertaining to international transactions) and
section 115JB shall be furnished electronically.
If return is uploaded with digital signature, date of uploading shall be taken as the date of furnishing the return.
If return is uploaded without digital signature and ITR-V has been furnished within the specified period given
above, the date of uploading shall be taken as the date of furnishing the return. If return is uploaded without digital
signature and ITR-V has not been furnished within the specified period given above, then it will be deemed that the
assessee has not submitted his return of income. In such a case, the assessee will have to re-submit the return.
Due date of submission of return:
Different persons Due date of the assessment year
A. If the assessee is (a) company, or (b) a person
whose books of accounts are required to be
audited under any law, or (c) a working
partner in a firm whose books of accounts
are required to be under any law. September 30
B. If the assessee is any other person
July 31
Transfer pricing transactions- If an assessee is required to furnish a report under section 92E pertaining to
international transactions and / or specified domestic transactions, the due date of submission of return of income(in
two cases given above) is November 30 of the assessment year.
Return of loss:
The return of loss should be filed in the prescribed form and within the time given above.
The following losses cannot be carried forward if the return of loss is not submitted in time - (a) business loss
(speculative or otherwise); (b) capital loss; and (c) loss from activity of owning and maintaining race horses.
However, the delay may be condoned if a few conditions are satisfied.
Belated return:
If the return is not furnished within the time- limit given above or within the time allowed under section 142(1), it
may be submitted after due date. However, the belated return can be submitted only before the end of one
assessment, whichever is earlier.
Consequences of late submission:
If return is submitted after the due date of submission of return of income, the following consequences will be
applicable. These rules are applicable even if a belated return is submitted within the time-limit given above –
1. The assessee will be liable for penal interest under section 234A.
2. A penalty of Rs.5000 may be imposed under section 271F if belated return is submitted after the end of
assessment year.
3. If return of loss is submitted after the due date, a few losses cannot be carried forward.
If return is submitted after the due date, deduction under sections 10A, 10B, 80-IA, 80- IB, 80 – IC, 80 – ID and 80
- IE will not be available.
Revised return:
A return can be revised only if such return is furnished under section 139(1) or in pursuance of a notice under
section 142(1). A belated return cannot be revised. Revised return can be filed only if the assessee discovers any
omission or wrong statement in return originally filed. Revised return can be filed at any time before the expiry of
one year from the end of the relevant assessment year or before the completion of the assessment, whichever is
earlier.
Defective or incomplete return:

If the Assessing Officer considers that the return submitted by the taxpayer is defective or incomplete, he may give
the assessee an opportunity to rectify the defect within a period of 15 days from the date of such intimation. This
time-limit may be extended by the Assessing Officer on an application by the assessee. If the defect is not rectified
by the assessee within the period of 15 days (or such further extended period), then the Assessing Officer shall treat
the return as an invalid return and the other provisions of the Act will apply as if the taxpayer had failed to furnish
the return. Where the assessee rectifies the defect after the expiry of the period of 15 days (or such other extended
period) but before assessment is made, the Assessing Officer may condone the delay and treat the return as a valid
return.
Permanent account number (PAN):
The following persons are required to obtain a permanent account number:
If income exceeds exemption limit or turnover exceeds Rs.5, 00, 000. Application should be submitted to obtain the
permanent account number before May 31 of the assessment year for which the income exceeds the maximum
amount chargeable to tax or before the end of accounting year for which the gross turnover or receipts exceed Rs.5,
00, 000.
Charitable trust- A person who is required to furnish return of income under section 139(4A) (i.e., charitable trust)
is required to obtain PAN.
Person specified by the central Government. The Central Government has power to notify (for collection of any
information) any person to apply for PAN. Persons notified by the Central Government are – exporters, importers,
assessees under central excise/service tax/sales tax. These persons should apply for PAN.
Besides above cases, the Assessing Officer may also allot a PAN to any other person by whom tax is payable. Any
other person may also apply for a PAN.
Scheme to facilitate submission of returns through TAX Return Preparers(TRP):
The Tax Return Preparer shall assist the persons furnishing the return of income, and shall also affix his signature
on such return.
A Tax Return Preparer may be an individual other than a person referred to in section 288(2)(ii)/(iv) or an
employee of the specified class or classes of persons, who has been authorized to act as a Tax Return Preparer
under the above scheme.
The above scheme also provides the manner in which a Tax Return Preparer shall be authorized, the educational
and other qualifications to be possessed, and the training and other conditions required to be fulfilled, by a person
to act as a Tax Return Preparer, the code of conduct for the Tax Return Preparer, the duties and obligations of the
Tax Return Preparer, the manner in which the authorization may be withdrawn, and any other matter which is to be
required or may be specified.
Return by whom to be signed:
Individual- By the individual himself or some person duly authorized by him on his behalf.
Hindu undivided family- By the karta, or where the karta is absent from India, by any other adult member of the
family.
Company- By the managing director thereof, or where, for any unavoidable reason, such
Managing director is not able to sign, or where there is no managing director, by any director of the company.
Firm: By the managing partner or where there is no managing partner, by any partner thereof not being a minor.
Limited liability partnership: By the designated partner. If, designated partner is not able to sign or if there is no
designated partner, return can be signed by any partner.
Local authority: By the principal officer thereof.
Political party: By the chief executive officer of such party.
Any other association- By any member of the association or the principal officer thereof.
Any other person- By that person or by some other person competent to act on his behalf.
Self-assessment:
Before submitting the aforesaid return, an assessee is supposed to find out whether any tax and/or interest is
payable. If any tax and or/interest is payable (after adjusting advance tax, tax deducted/ collected at source, MAT
credit under section 115JAA, alternate minimum tax credit under section 115JD), it shall be deposited by the
assessee before submitting return of income. Interest under sections 234A and 234B shall be calculated on the basis
of income declared in the return of income.
Where the amount paid by the assessee falls short of the aggregate of tax and interest, as determined above, the
amount so paid shall first be adjusted towards interest payable and the balance, if any, shall be adjusted towards tax
payable.
Summary assessment without calling the assessee [ sec. 143(1)]:
Under section 143(1), the Assessing Officer can complete the assessment without passing a regular assessment
order. The assessment is completed on the basis of return submitted by the assessee. The Assessing Officer can,
however, make the following adjustments to the total income declared in the return of income-
a. Any arithmetical error in the return, or
b. An incorrect claim, if such incorrect claim is apparent from any information in the return.
An intimation shall be prepared or generated and sent to the assessee specifying the sum determined to be payable
by, or the amount of refund due to, the assessee shall be granted to him. No intimation shall be sent after the expiry
of one year from the end of the financial year in which the return is made. The acknowledgement of the return shall
be deemed to be the intimation in a case where no sum is payable by, or refundable to, the assessee, and where no
adjustment has been made.
”Incorrect claim” – It means such claim on the basis of an entry, in the return-
a. Of an item, which is inconsistent with another entry of the same or some other item in such return;
b. In respect of which, information required to be furnished to substantiate entry, has not been furnished
under the Act; or
c. In respect of a deduction, where such deduction exceeds specified statutory limit which may have been
expressed as monetary amount or percentage or ratio or fraction.
Summary assessment not necessary in some cases- processing of a return under section 143(1) is not necessary,
where a scrutiny notice has been issued to the assessee.
Scrutiny assessment under section 143(3):
The Assessing Officer will issue a notice to the assessee under section 143(2) to take the case in scrutiny. Such
notice shall be served on the assessee within a period of 6 months from the end of the financial year in which return
is furnished.
After hearing such evidence as the assessee may produce and after taking into account all relevant materials which
the Assessing Officer has gathered, he shall pass an assessment order in writing determining (a) the total income or
loss of the assessee, and (b) the sum payable by (or refundable to) the assessee on the basis of such assessment
order.
Best judgment assessment [sec. 144]:
The Assessing Officer, after considering all relevant material which he has gathered, is under an obligation to make
an assessment of the total income or loss to the best of his judgment in some cases. Such cases are-
a. If any person fails to submit his return;
b. If any person fails to comply with all the terms of a notice under section 142(1)
c. If a person fails to comply with the direction to get his accounts audited;
d. If a person fails to respond to a scrutiny notice under section 143(2); or
e. If the Assessing Officer is not satisfied about the correctness or the completeness of the accounts.
A best judgment assessment can only be made after giving the assessee an opportunity of being heard.
Income escaping assessment [sec. 147]:
If the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment, he may
assess/reassess such income. For this purpose, a notice shall be issued under section 148. Once an assessment has
been reopened, any other income which has escaped assessment and which comes to the notice of the Assessing
Officer subsequently in the assessment.
There are two conditions-
1. The Assessing Officer must have reason to believe that income or profits or gains chargeable to income-tax
had escaped assessment.
2. Such escapement had occurred by reason of either omission or failure on the part of the assessee to
disclose fully or truly all material facts necessary for his assessment of that year.
Both these conditions should be satisfied if the original assessment was made under section 143(3)/147
and the Assessing Officer wants to take action after the expiry of 4 years from the end of the assessment
year.
However, only condition 1 should be satisfied in the following cases-
a. If the Assessing Officer wants to take action within 4 years (from the end of the assessment year) and
the original assessment was completed under section 143(1), 143(3), 144 or 147; or
b. If the Assessing Officer wants to take action after the expiry of 4 years and the original assessment was
completed under section 143(1) or 144.
Moreover, the rules stated above will not be applicable where any income in relation to any asset
(including financial interest in any entity) located outside India, chargeable to tax, has escaped assessment
for any assessment year (applicable from July 1, 2012 and also for any assessment year beginning on or
before April 1, 2012)
Notice for reassessment [ sec. 148]
Before making the assessment, reassessment or re-computation under section 147, the Assessing Officer
should serve on the assessee a notice require him to furnish a return of income. Before issuing a notice,
the Assessing Officer is required to record reasons for doing so.
Time-limit for issue of notice – Notice can be issued within 4 years from the end of relevant assessment
year. If however, the escaped income is Rs.1, 00, 000 or more, notice can be issued within 6 years from the
end of the relevant assessment year. Where income in relation to any asset (including financial interest in
any entity) located outside India, chargeable to tax, has escaped assessment, notice can be issued within
16 years from the end of the relevant assessment year.
If the person on whom notice under section 148 is to be served is a person treated as an agent of non-resident
(under section 163), then notice shall not be issued after the expiry of 6 years from the end of the relevant
assessment year.
Rectification of mistakes:
To rectify any mistake apparent from record, an income-tax authority may amend an order/intimation passed under
any provision of the Act. If, however, an order is subject matter of an appeal before any appellate authority, that
order cannot be amended by the Assessing Officer so long as it pertains to matter considered and decided in
appeal/revision.
Mistakes which can be rectified:
An error of law or fact, a clerical or arithmetical mistake, error in determining written down value, overlooking the
obligatory provisions of the Legislature, and mistake arising as a result of subsequent retrospective amendment of
law.
Mistakes which cannot be rectified:
Where controversy can be resolved only by way of a complicated process of investigation or on a question of
construction of law where two views are possible or a question on which there is difference of opinion among two
judges of High Court, cannot be rectified under section 154.
Time-limit for rectification:
A rectification order can be made within 4 years from the end of the financial year in which the order sought to be
amended was passed. The point at which the period of limitation commences is 4 years from the date of order
sought to be amended (and not the date of original order). Moreover, an application for rectification made by the
assessee shall be disposed off by the authority within 6 months from the end of the month in which the application
is received by it, either making the amendment or refusing to allow the claim.
Time-limit for completion of assessments/reassessments[sec.153]:
An assessment under section 143 or 144 shall be completed within 2 years from the end of the relevant assessment
year. An assessment or reassessment under section 147 must be completed within one year from the end of the
financial year in which notice under section 148 was served.
Special points – The following special points shall be noted-
1. The time limit specified above in cases where reference is made to Transfer Pricing Officer (TPO) shall be
extended by 12 months.
2. If assessment is set aside or cancelled by virtue of an order of commissioner (Appeals) or the order of
tribunal or a revision order of the commissioner, fresh assessment shall be completed within 1 year from
the end of the financial year in which the order cancelling/setting aside is received/passed by the
commissioner.
3. Reassessment/re-computation can be completed at any time where such order is passed in consequence
of or to give effect to any finding/direction contained in an order of appeal/revision of an appellate
authority/commissioner/any court.
Period to be excluded – in computing the above period of limitation, the following period shall be excluded- the
period during which assessment proceeding is stayed by a court order, time taken in getting withdrawal of certain
approval, period for getting special audit, time taken when there is rejection of settlement commission
application/advance ruling application, etc.
Where immediately after the exclusion of the aforesaid time, the period of limitation available to the Assessment
Officer for making order is less than 60 days, the remaining period shall be extended to 60 days and the aforesaid
period of limitation shall be deemed to be extended accordingly.
Obligation to furnish annual information return(AIR) section 285BA –
The following person shall submit AIR in respect of transaction given below –
A banking company – cash deposits aggregating to Rs.10 lakhs or more in a year in any saving account of a person
maintain in that bank.
A banking company or any other company or institution issuing credit card – Payment made by any person against
bill raised in respect of a credit card issued to that person, aggregating to Rs2 lakh or more in the year.
A trustee of a mutual fund – Receipt from any person of an amount of Rs.2 lakh or more for acquiring units of that
fund.
A company or institution issuing bonds or debentures – receipt from any person of an amount of Rs.5 lakh or more
for acquiring bonds or debentures issued by the company or institution.

A company issuing shares through a public or rights issue – receipt from any person of an amount of Rs.1 lakh or
more for acquiring shares issued by the company.
Registrar or Sub-Registrar appointed under the Registration Act – purchase or sale by any person of immovable
property valued of Rs.30 lakh or more.
A person being an officer of the RBI or a person authorized by RBI – receipt from any person of an amount or
amounts aggregating to Rs.5 lakh or more in a year for bonds issued by the Reserved Bank Of India.
Time-limit – AIR should be submitted on or before August 31 immediately following the financial year in which
transaction is registered/recorded.
Return form - Return should be submitted in Form No. 16A on computer readable media.
Requirement of submission of statement by a non-resident having liaison officer of India [section 285] –
Under section 285 every person (being a non-resident) having a liaison officer in India is required to file a
statement in Form No. 49C pertaining to the liaison officer within 60 days from the end of the financial year(i.e., on
or before May after the end of the financial year).
11. VALUE ADDED TAX

PROVISIONS IN BRIEF
VAT (Value Added Tax) -
VAT is based on the value addition to the goods, and the related VAT liability of the dealer is calculated
by deducting input tax credit from tax collected on sales during the payment period.
Input tax credit -

The essence of VAT in providing set off for the tax paid earlier, and this is given effect through the
concept of input tax credit/ rebate. This input tax credit in relation to any period means setting off the amount
of input tax by a registered dealer against the amount of his input tax.
Coverage of setoff input tax credit -

Input tax credit is generally given for the entire VAT paid within the State on purchases of taxable goods
meant for resale/manufacture of taxable goods. However, generally no credit is available in respect of
purchases given below –
1. Goods purchased form unregistered dealer.
2. Goods purchased from other States/ Countries.
3. Purchase of goods used in manufacture of exempted goods.
4. Purchase of capital goods (in some cases credit is available in installments).
5. Purchase of goods used as fuel in power generation.
6. Purchase of goods to be dispatched as branch transfers outside states.
7. Purchase of goods used in manufacture of goods to be dispatched outside any State as branch
transfer/consignments.
8. Purchase of goods in cases where the dealer does not have invoices showing amounts of tax
charged separately by the selling dealer.
9. Purchase of non-creditable goods (these goods may be defined in the law regulating VAT in a
particular set).
10. Purchases from a dealer who has opted for composition scheme (these schemes may be specified
in the law regulating VAT in a particular set).
Carrying over of tax credit -
If the tax credit exceeds the tax payable on sales in a period, it shall be carried over to the next period.
If there is any excess unadjusted input tax credit at the end of the financial year, it shall be eligible for refund.
In some cases, if VAT collected in a tax period is lower than input tax credit in respect of local purchases and
inter-state purchases, only the balancing the balancing amount is carried forward to the next tax period & it
will be adjusted in the next tax period on the same basis. However, unadjusted tax credit at the end of the
financial year is generally refunded.
Input tax credit on capital goods is also available for traders & manufacturers. Tax credit on capital
goods may be adjusted over a maximum of 36 equal monthly installments. States may at their option reduce
this number of installments. Generally, there is a negative list for capital goods not eligible for input tax
credit.
Treatment of exports -
For all exports made out of the country, VAT paid within the State will be generally refunded in full
within a stipulated period (generally it is 3 months). Moreover, units located in SEZ & EOU will be generally
granted either exemption from payment of input tax or refund of the input tax paid within the aforesaid
period.
Inputs procured from other states -
Tax paid on inputs procured from other States through inter-state sale and stock transfer, will not be eligible
for credit.
However, it appears that a decision has been taken for duly phasing out central sales tax.
Variants of VAT
Three specific variants, viz., (a) Gross product variant, (b) Income type variant, and (c) Consumption type
variant. These variants could be further distinguished through their methods of calculation, viz., addition
method and subtraction method. The subtraction method could be further analyzed into (a) direct, (b)
intermediate, and (c) indirect subtraction method.
Gross product variant
This variant allows deductions for all purchases of raw materials and components but no deduction is allowed
for capital inputs. In this way, capital goods such as plant and machinery are not deductible from the tax base
in the year of purchase and depreciation on the plant and machinery is not deductible in the subsequent years.
One may say that the economic base of gross product variant is equivalent to GNP (gross national product).
Under this system, capital goods carry a heavier tax burden as they are taxed twice. Modernization and
upgrading of plant and machinery is delayed due to this dual tax treatment.
Income variant
In this variant of VAT, deductions are allowed for purchases of raw materials and components as well as
depreciation on capital goods. The economic base of the income variant is equivalent to net national product.
However, in practice, there are many difficulties connected with specification of any method of measuring
depreciation, which basically depend on the life of an asset as well as on the rate of inflation.
Consumption variant
Under this variant, deduction is allowed for all business purchases including capital assets. In other words, the
economic base of the tax is equivalent to total private consumption. It does not distinguish between capital
and current expenditures. Moreover, under this system, there is no need to specify the life of asset or
depreciation allowance for different assets. This form is neutral between different modes of production. In
other words, there will not be any effect on tax liability due to the method of production.
The consumption variant is more in harmony with the destination principle. In the foreign-trade sector, this
variant relieves all exports from taxation while imports are taxed. Finally, this variant is convenient from the
point of administrative expediency as it simplifies tax administration by obviating the need to distinguish
between purchases of intermediate and capital goods on the one hand and consumption goods on the other.
Different modes of computation of VAT
VAT is computed by adopting three alternative methods. These are (i) addition method (ii) subtraction
method (iii) tax credit or Invoice method. These methods can be used to arrive at the VAT liability.
Addition method
This method is based on the identification of value-added, which can be estimated by summation of all the
elements of value-added (i.e., wages, profits, rent and interest). This method is known as addition method or
income approach. This is in line with the income method of calculating national income. The chief drawback
of this method is that it does not require matching of invoices in order to check tax evasion.
Subtraction method
The subtraction method estimates value-added by means of difference between outputs and inputs [(i.e. T=t
(Output-Input)]. This is also known as product approach and has further variants in the way subtraction is
attempted from among (a) direct subtraction method, (b) intermediate subtraction method, and (c) indirect
subtraction method. Direct subtraction method is equivalent to a business transfer tax whereby tax is levied on
the difference between the aggregate tax-exclusive value of sales and aggregate tax-exclusive value of
purchases. Intermediate subtraction method is based on deduction of the aggregate tax-inclusive value of
purchases from the aggregate tax-inclusive value of sales and taxing the difference between them.
Tax-credit method
The tax on inputs is deducted from the tax on the sales to arrive at the VAT payable by the dealer. The
indirect subtraction method entails deduction of tax on inputs from tax on sales for each tax period, [i.e., t
(output) – t (input)]. This method is also known as tax credit method or invoice method. In practice, most
countries use this method and employ net-consumption VAT.
VAT payable = Total tax charged on the outputs or sales
Minus
Total tax paid to the suppliers on inputs or purchases
Tax Credit or Invoice Method has been adopted universally because of the inherent advantages in the credit
method of calculating tax liability. The other methods namely addition method and subtraction method are not
workable in the case of a manufacturer when the rate of tax is different in respect of inputs and outputs.
Administrative procedures generally adopted by different States –
Generally the following procedures are adopted –
Issue of tax invoice, cash memo or bill –

The entire design of VAT with input tax credit is crucially based on documentation of tax invoice, cash
memo or bill. Every registered dealer, having turnover of sales above an amount specified, shall issue to the
purchaser serially numbered tax invoice with the prescribed particulars. This tax invoice will be signed &
dated by the dealer or his regular employee, showing the required particulars. The dealer shall keep a
counterfoil or duplicate of such tax invoice duly signed & dated. Failure to comply with the above will attract
penalty.
Registration, small dealers & consumption scheme -

Registration of dealers with gross annual turnover above a specified amount (say, Rs. 5 lakh) is compulsory.
Generally, there is a provision for voluntary registration. Moreover, all dealers under the old system of local
sales tax have been automatically registered under the VAT Act. A new dealer is generally allowed 30 days
time from the date of liability to get registered. Small dealers with gross annual turnover not exceeding a
specified amount (say, Rs.5 lakh ) are not generally liable to pay VAT. Small dealers with annual gross
turnover not exceeding a specified amount (say, Rs. 50 lakh) who are otherwise liable to pay VAT, shall
however have the option for a composition scheme with payment of tax at a small percentage of gross
turnover. The dealers opting for this composition scheme will not be entitled to input tax credit.
Taxpayers identification number (TIN)-

The Taxpayers identification number will consist of 11digit numerals throughout the country. First two
characters will represent the State Code as used by the Union Ministry of Home Affairs, Government of India
(census code). The set up of the next nine characters may, however, be different in different States. This will
include 2 check digits.
Returns –
Under VAT, simplified form of returns has been notified. Returns are to be filed monthly/quarterly as
specified in the State Acts/Rules, & will be accompanied with payment challans. Every return furnished by
dealers will be scrutinized expeditiously within prescribed time-limit from the date of filing of return. If any
technical mistake is detected on scrutiny, the dealer will be required to pay the deficit appropriately.
Self-assessment –
The measure contribution of VAT is simplification. VAT liability will be self assessed by the dealers
themselves. Voluntary return will be submitted after setting of the tax credit. There is no longer a compulsory
assessment at the end of each year as was applicable under the old system. If no specific notice is issued
proposing departmental audit of the books of accounts of the dealer within a stipulated time, the dealer will be
deemed to have been self-assessed on the basis of returns submitted by him.
Audit –
Correctness of self assessment will be checked through a system of departmental audit. A certain percentage
of the dealer will be taken up for audit every year on a scientific basis. If, however, evasion is detected on
audit, the concerned dealer may be taken up for audit for previous periods. This Audit Wing will remain de-
linked from tax collection wing to remove any bias. The audit team will conduct is work in a time bound
manner & audit will be completed within a stipulated period. The audit report will be transparently sent to the
dealer also.
Coverage of goods under VAT-

In general, all the goods including declared goods will be covered under VAT & will get the benefit of input
tax credit. However, there are a few goods which are outside VAT. Generally, exempted category includes
liquor, lottery tickets, petrol, diesel, aviation turbine fuel & other motor spirit since their prices are not fully
market determined. These will continued to be taxed under the Sales Tax Act or any other State Act or even
by making special provisions in the VAT Act itself, & with uniform floor rates.
VAT rates & classification of commodities-

Under the VAT system covering about 550 goods, there will be only two basis VAT rates of 4% & 12.5%.
Moreover, there is a specific category tax exempted goods. Besides, a special VAT rate of 1% is applicable
only for gold & silver ornaments, etc. Thus the multiplicity of rates under the old structure have been omitted.
Exempted category generally included natural and unprocessed products in unorganized sector, items
which are legally barred from taxation & items which have social implications. Included in this exempted
category is a set of commodities flexibly chosen by individual States from a list of goods (finalized by the
Empowered Committee formed for the purpose of introduction of VAT) which are of local social importance
for the individual States without having any inter- state implication.

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SIDDHARTH ACADEMY 1

1.BASIC CONCEPT THAT ONE MUST KNOW

Previous year in the case of newly set-up business/profession –

Connection between previous years and assessment years –

Gross Total Income [GTI] -

Act before making any deduction under section80C to 80U.

2. RESIDENTIAL STATUS AND ITS EFFECT ON TAX INCIDENCE

Relevance of residential status -

Types of residential status –

Significance of residential status –

Rules for determination of residential status –

BASIC CONDITIONS AT A GLANCE

In the case of an Indian citizen or a person In the case of an

ADDITIONAL CONDITIONS AT A GLANCE

Residential status of a person other than an individual –

Hindu undivided Resident Non-resident Resident

Firm Resident Non-resident Resident

Indian income and foreign income – when taxable/not taxable –

Receipt of income in India –

Income deemed to be received in India –

Income deemed to accrue or arise in India –

3. INCOME UNDER THE HEAD “SALARIES” AND ITS COMPUTATION

Salary in lieu of notice – Taxable

Fees & commission – Taxable.

Annuity from employer – Taxable as salary.

12% of salary is taxable.

Remuneration for extra duties - Fully taxable under section 15.

Compensation received under voluntary retirement scheme (VRS)-

Salary from UNO – Not chargeable to tax.

whichever is lower (actual expenditure is not taken into consideration).

Rent-free/ concessional furnished/unfurnished house in special cases –

Gas, electricity or water supplied after purchasing from outside agency –

Employee’s obligation met by employer – Taxable in all cases.

Lunch, refreshment, etc. –

Travelling, touring, accommodation –

Telephone/mobile phone – Not taxable

Meaning of “Salary” for different calculations –

Meaning of “Government employee” for different purposes –

4. INCOME FROM HOUSE PROPERTY

Self occupied property shall be calculated under different situations as follows –

When arrears of rent pertaining to earlier years is collected in a subsequent year-

5. “PROFIT AND GAINS OF BUSINESS OR PROFESSION”

Significance of method of accounting

Amortization of telecom license fees [Sec. 35ABB]

The following conditions should be satisfied -

Premia for insurance on health of employees

Interest on borrowed capital

Payment to a resident [ Sec. 40(a) (ia)]

If the following conditions are satisfied, payment is not deductible –

Recovery against any deduction [ Sec. 41 (1)]

6. INCOME UNDER THE HEAD “CAPITAL GAINS” AND IT’S COMPUTATION

Meaning of “capital asset” –

Cost inflation index for different previous years –

1981-82 100 1990-91 182 1999-00 389 2008-09 582

How to convert cost of improvement into indexed cost of improvement -

Special points – The following are special points

Transfer of capital assets to a firm by way of capital contribution by a partner –

Distribution of a capital asset by a firm to partners at the time of dissolution –

• When additional compensation is received – If a Court/Tribunal/authority enhances compensation, it

Capital gain on transfer of shares/debentures in the hands of non-residents –

a) Flood typhoon, hurricane, cyclone, earthquake or other convulsion of nature;

b) Riot or civil disturbance ;

c) Accidental fire or explosion; or