INCOME TAX

PAPER CODE: BBA/GEN/601

UNIT-I
Basic concepts of income tax, residential status and tax incidence, income exempted from
tax.

UNIT-II
Income from salaries, income from house property and income from profits and gains of
business and profession.

UNIT-III
Income from capital gains, income from other sources, set off and carry forward of losses,
clubbing of income, deduction of tax at source.

UNIT-IV
Deductions from gross total income, assessment of individuals.

Income Tax BBA/GEN/601 By Prof. (Dr.) Vishwajeet V. Jituri

 Income from Capital Gains

Simply put, any profit or gain that arises from the sale of a ‘capital asset’ is a capital gain. This gain or
profit is considered as income and hence charged to tax in the year in which the transfer of the capital
asset takes place. This is called capital gains tax, which can be short-term or long term.
Capital gains are not applicable when an asset is inherited because there is no sale, only a transfer.
However, if this asset is sold by the person who inherits it, capital gains tax will be applicable. The
Income Tax Act has specifically exempted assets received as gifts by way of an inheritance or will.
Here are some examples of capital assets: land, building, house property, vehicles, patents, trademarks,
leasehold rights, machinery, and jewellery. This includes having rights in or in relation to an Indian
company. It also includes rights of management or control or any other legal right.

The following are not considered capital asset:

1. Any stock, consumables or raw material, held for the purpose of business or profession
2. Personal goods such as clothes and furniture held for personal use
3. Agricultural land in rural India
4. 6½% gold bonds (1977) or 7% gold bonds (1980) or national defence gold bonds (1980) issued by the
central government
5. Special bearer bonds (1991)
6. Gold deposit bond issued under the gold deposit scheme (1999) or deposit certificates issued under
the Gold Monetisation Scheme, 2015

Income Tax BBA/GEN/601 By Prof. (Dr.) Vishwajeet V. Jituri

 Definition of rural area (from AY 2014-15) – Any area which is outside the jurisdiction of a municipality or
cantonment board, having a population of 10,000 or more is considered a rural area. Also, it should not
fall within a distance (to be measured aerially) given below – (population is as per the last census).

Income Tax BBA/GEN/601 By Prof. (Dr.) Vishwajeet V. Jituri

 Types of Capital Assets

Short-term capital asset An asset which is held for a period of 36 months or less is a short-term capital
asset. The criteria of 36 months have been reduced to 24 months in the case of immovable property
being land, building, and house property, from FY 2017-18.
For instance, if you sell house property after holding it for a period of 24 months, any income arising will
be treated as long-term capital gain provided that property is sold after 31st March 2017.

Long-term capital asset An asset that is held for more than 36 months is a long-term capital asset. The
reduced period of the aforementioned 24 months is not applicable to movable property such as
jewellery, debt oriented mutual funds etc. They will be classified as a long-term capital asset if held for
more than 36 months as earlier.

Some assets are considered short-term capital assets when these are held for 12 months or less. This
rule is applicable if the date of transfer is after 10th July 2014 (irrespective of what the date of purchase
is). The assets are:
1. Equity or preference shares in a company listed on a recognized stock exchange in India
2. Securities (like debentures, bonds, govt securities etc.) listed on a recognized stock exchange in India
3. Units of UTI, whether quoted or not
4. Units of equity oriented mutual fund, whether quoted or not
5. Zero coupon bonds, whether quoted or not

Income Tax BBA/GEN/601 By Prof. (Dr.) Vishwajeet V. Jituri

 When the above-listed assets are held for a period of more than 12 months, they are considered as long-
term capital asset.
In case an asset is acquired by gift, will, succession or inheritance, the period for which the asset was
held by the previous owner is also included when determining whether it’s a short term or a long-term
capital asset.
In the case of bonus shares or rights shares, the period of holding is counted from the date of allotment
of bonus shares or rights shares respectively.

Tax on Short-Term and Long-Term Capital Gains

Tax on long-term capital gain: The Long-term capital gain is taxable at 20%.

Tax on short-term capital gain when securities transaction tax is not applicable: If securities transaction
tax is not applicable, the short-term capital gain is added to your income tax return and the taxpayer is
taxed according to his income tax slab.

Tax on short-term capital gain if securities transaction tax is applicable: If securities transaction tax is
applicable, the short-term capital gain is taxable at the rate of 15%.

Income Tax BBA/GEN/601 By Prof. (Dr.) Vishwajeet V. Jituri

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

Income Tax BBA/GEN/601 By Prof. (Dr.) Vishwajeet V. Jituri

 Change in Tax Rules for Debt Mutual Funds
Debt mutual funds have to be held for more than 36 months to qualify as a long-term capital asset. It means that
investors would have to remain invested in these funds for at least three years to take the benefit of long term
capital gains tax. If redeemed within three years, the capital gains will be added to one’s income and will be taxed
as per one’s income tax slab.

Calculating Capital Gains

Capital gains are calculated differently for assets held for a longer period and for those held over a shorter period.
Full value consideration- The consideration received or to be received by the seller as a result of transfer of his
capital assets. Capital gains are chargeable to tax in the year of transfer, even if no consideration has been
received.
Cost of acquisition- The value for which the capital asset was acquired by the seller.
Cost of improvement- Expenses of a capital nature incurred in making any additions or alterations to the capital
asset by the seller. Note that improvements made before April 1, 2001, is never taken into consideration.
How to Calculate Short-Term Capital Gains?
1. Start with the full value of consideration
2. Deduct the following:
• Expenditure incurred wholly and exclusively in connection with such transfer
• Cost of acquisition
• Cost of improvement
3. This amount is a short-term capital gain

Short term capital gain = Full value consideration Less expenses incurred exclusively for such transfer Less cost
of acquisition Less cost of improvement.

Income Tax BBA/GEN/601 By Prof. (Dr.) Vishwajeet V. Jituri

 How to Calculate Long-Term Capital Gains?
1. Start with the full value of consideration
2. Deduct the following:
• Expenditure incurred wholly and exclusively in connection with such transfer
• Indexed cost of acquisition
• Indexed cost of improvement
3. From this resulting number, deduct exemptions provided under sections 54, 54EC, 54F, and 54B
4. This amount is a long-term capital gain

Long-term capital gain= Full value consideration

Less : Expenses incurred exclusively for such transfer
Less: Indexed cost of acquisition
Less: Indexed cost of improvement
Less: expenses that can be deducted from full value for consideration*

(*Expenses from sale proceeds from a capital asset, that wholly and directly relate to the sale or transfer
of the capital asset are allowed to be deducted. These are the expenses which are necessary for the
transfer to take place.)

Income Tax BBA/GEN/601 By Prof. (Dr.) Vishwajeet V. Jituri

 As per Budget 2018, long term capital gains (LTCG) on the sale of equity shares/ units of equity
oriented fund, realised after 31st March 2018, will remain exempt up to Rs. 1 lakh per annum. After that,
tax at @ 10% will be levied only on LTCG on shares/units of equity oriented fund exceeding Rs 1 lakh in
one financial year, without the benefit of indexation.

In the case of sale of shares, you may be allowed to deduct these expenses:
1. Broker’s commission related to the shares sold
2. STT or securities transaction tax is not allowed as a deductible expense
In the case of sale of house property, these expenses are deductible from the total sale price:
1. Brokerage or commission paid for securing a purchaser
2. Cost of stamp papers
3. Travelling expenses in connection with the transfer – these may be incurred after the transfer has
been affected.
4. Where property has been inherited, expenditure incurred with respect to procedures associated with
the will and inheritance, obtaining succession certificate, costs of the executor, may also be allowed in
some cases.
Where jewellery is sold, and a broker’s services were involved in securing a buyer, the cost of these
services can be deducted.
Note that expenses deducted from the sale price of assets for calculating capital gains are not allowed as
a deduction under any other head of the income tax return, and these can be claimed only once.

Income Tax BBA/GEN/601 By Prof. (Dr.) Vishwajeet V. Jituri

 Income from other sources
Income from other sources is a residual category used to classify income that is not classified taxed
under any other head of income. Income from other sources must be calculated by the taxpayer based
on the mercantile system used by the taxpayer, i.e. cash basis or accrual basis.

Items Classified as Income from Other Sources

Apart from income that cannot be classified under any other heads, there are certain types of incomes
which are always taxed under income from other sources. Such incomes are as under:

• Dividends are always taxed under income from other sources. However, dividends from domestic
company are normally exempt from tax, as the company declaring dividend pays dividend
distribution tax.
• Winnings from lotteries, crossword puzzles, races including horse races, card game and other game
of any sort, gambling or betting of any form is classified as income from other sources.
• Interest received on compensation or on enhanced compensation is taxed under the head “Income
from other sources”.
• Gifts received by an individual or HUF (which are chargeable to tax) are also taxed under this head.

Income Tax BBA/GEN/601 By Prof. (Dr.) Vishwajeet V. Jituri

 The following types of income can be classified as Income from Other Sources, if it is not taxed under
the head “Profits and gains of business or profession”:

• Any contribution to a fund for welfare of employees received by the employer.

• Income received by way of interest on securities.
• Income from letting out or hiring of plant, machinery or furniture.
• Income from letting out of plant, machinery or furniture along with building; both the lettings are
inseparable.
• Money received under a Keyman Insurance Policy including bonus.

Income Tax BBA/GEN/601 By Prof. (Dr.) Vishwajeet V. Jituri

 Tax Deduction Allowed for Income from Other Sources
The following deductions can be claimed while computing income from other sources:
• Commission or remuneration for realizing dividends or interest on securities.
• Any sum received by an employer from employees as contribution towards any welfare fund of such
employees is first included as income of the employee, and if the employer credits such sum to the
employee’s account under the relevant fund on or before the due date (of such fund), then such
amount (i.e., employee’s contribution) is deductible from the income of the employer.
• Current (not capital) repairs, insurance premium and depreciation in respect of plant, machinery,
furniture and buildings are deductible from rent income earned by letting out of plant, machinery,
furniture and building, which are chargeable to tax.
• A deduction of lower of Rs. 15,000 or 33 1/3% of such income is available, in case of income in the
nature of family pension (i.e., regular monthly amount payable by the employer to the family
members of the deceased employee).
• Deduction is available in respect of any other expenditure (not being in the nature of capital
expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such
income during the relevant previous year.

Income Tax BBA/GEN/601 By Prof. (Dr.) Vishwajeet V. Jituri

 Tax Deduction NOT Allowed
The following deductions cannot be claimed while computing income from other sources:
• Personal expenditure
• Interest chargeable and payable outside India on which tax has not been paid or deducted at source.
• Amount paid which is taxable under the head “Salaries” and payable outside India on which tax has
not been paid or deducted at source.
• Sum paid on account of wealth-tax that is not deductible.
• Amount specified under section 40A is not deductible.

Income Tax BBA/GEN/601 By Prof. (Dr.) Vishwajeet V. Jituri

 Set off and Carry forward of losses
Set off of losses means adjusting the losses against the profit/ income of that particular year. Losses that are
not set off against income in the same year, can be carried forward to the subsequent years for set off against
income of those years. A set-off could be:
1. An intra-head set-off
2. An inter-head set-off

a. Intra-head Set Off

The losses from one source of income can be set off against income from another source under the same
head of income.
For e.g.: Loss from Business A can be set off against profit from Business B where Business A is one source
and Business B is another source and the common head of income is “Business”.

Exceptions to an intra-head set off:

1. Losses from a Speculative business will only be set off against the profit of the speculative business. One
cannot adjust the losses of speculative business with the income from any other business or profession.
2. Loss from an activity of owning and maintaining race-horses will be set off only against the profit from an
activity of owning and maintaining race-horses.
3. Long-term capital loss will only be adjusted towards long-term capital gains. Interestingly, a short-term
capital loss can be set off against long-term capital gain or short-term capital gain.
4. Losses from a specified business will be set off only against profit of specified businesses. But the losses
from any other businesses or profession can be set off against profits from the specified businesses.

Income Tax BBA/GEN/601 By Prof. (Dr.) Vishwajeet V. Jituri

 b. Inter-head Set Off
After the intra-head adjustments, the taxpayers can set off remaining losses against income from other
heads.
E.g. Loss from house property can be set off against salary income.

Given below are few more such instances of an inter-head set off of losses:
1. Loss from House property can be set off against income under any head
2. Business loss other than speculative business can be set off against any head of income except income
from salary.
One needs to also note that the following losses can’t be set off against any other head of income:
1. Speculative Business loss
2. Specified business loss
3. Capital Losses
4. Losses from an activity of owning and maintaining race-horses

Income Tax BBA/GEN/601 By Prof. (Dr.) Vishwajeet V. Jituri

 Carry forward of losses
After making the appropriate and permissible intra-head and inter-head adjustments, there could still be
unadjusted losses. These unadjusted losses can be carried forward to future years for adjustments
against income of these years. The rules as regards carry forward differ slightly for different heads of
income. These have been discussed here:

Losses from House Property:

• Can be carry forward up to next 8 assessment years from the assessment year in which the loss was
incurred
• Can be adjusted only against Income from house property
• Can be carried forward even if the return of income for the loss year is belatedly filed.

Losses from Non-speculative Business (regular business) loss:

• Can be carry forward up to next 8 assessment years from the assessment year in which the loss was
incurred
• Can be adjusted only against Income from business or profession
• Not necessary to continue the business at the time of set off in future years
• Cannot be carried forward if the return is not filed within the original due date.

Income Tax BBA/GEN/601 By Prof. (Dr.) Vishwajeet V. Jituri

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

Specified Business Loss under 35AD:

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

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

Profit linked incentives for specified industries vis-a-vis investment-linked incentives – Section 35AD

Income Tax BBA/GEN/601 By Prof. (Dr.) Vishwajeet V. Jituri

 Losses from owning and maintaining race-horses:
• Can be carry forward up to next 4 assessment years from the assessment year in which the loss was
incurred
• Cannot be carried forward if the return is not filed within the original due date
• Can only be set off against income from owning and maintaining racehorses only

Points to note:
1. A taxpayer incurring a loss from a source, income from which is otherwise exempt from tax, cannot
set off these losses against profit from any taxable source of Income
2. Losses cannot be set off against casual income i.e. crossword puzzles, winning from lotteries, races,
card games, betting etc.

Income Tax BBA/GEN/601 By Prof. (Dr.) Vishwajeet V. Jituri

 Clubbing of income
‘Its all in the family’. It may seem ordinary to invest money for a non earning spouse by way of fixed
deposits, or other income earning assets or to set up bank accounts, mutual funds or other investments
for children to provide for their needs in future. Usually, you are only taxed for your own income, but
under certain special circumstances some incomes are ‘clubbed’ along with your income and you may
be liable to pay tax on such clubbed income.
The intention here is to make sure there is no tax that escapes, in case an individual is moving assets or
incomes in the family. In a situation where you have incurred a loss, such loss (wherever allowed to be
adjusted against an income) is also not allowed to be transferred to anyone and will be ‘clubbed’ to your
income.

Let’s understand in what circumstances you may attract this ‘clubbing’ of income –
In the case of Assets Transfer to Anyone

Transfer of Income – no transfer of assets: When you retain the ownership of an asset but decide to
transfer its income by doing an agreement or any other way, the Act will still consider that income as
your income and it will be added to your total income for taxation purposes.

Transfer of Asset – which is revocable: When you transfer the ownership of an asset and make such
transfer revocable, income from such an asset will continue to be added to your income.

Income Tax BBA/GEN/601 By Prof. (Dr.) Vishwajeet V. Jituri

 Clubbing of Spouse’s Income
Here are some situations when your spouse’s income will get clubbed to your income and you’ll have to
pay tax on it-

(1) Your spouse receives a salary from a company or a firm in which you have a substantial interest, then
such salary will be clubbed with your income. Substantial Interest means you alone or with your
relatives (husband, wife, brother, sister or your lineal ascendant or descendant) hold equity or voting
power of a company which is 20% or more. Or in case of a firm you are entitled to 20% or more of the
profits. Also, if both of your receive an income from such a firm or company, it will get taxed in the
hands of the person whose taxable income is higher. There is one exception to this – if your spouse
receives the salary due to his/her application of technical or professional knowledge & experience then
such salary will be taxed in the hands of the person receiving it and not clubbed.

(2) You transfer an asset to your spouse directly or indirectly without receiving adequate consideration
(does not include where asset is transferred as part of a divorce settlement) – income from this asset will
be clubbed with your income. For example – where the husband to reduce his tax liability transfers an
asset worth Rs 1,00,000 to his wife for Rs. 25,000. 3/4th of the income from this asset will be taxed in the
hands of the husband. If he receives no consideration, in that case the entire income from this asset will
be clubbed with the husband’s income.
Although the clubbing provisions here exclude house property – but in case you transfer a house
property to your wife and do not receive adequate consideration, as per the Act, you will still be
considered the ‘deemed owner’ and the income from the asset will be clubbed with your income.

Income Tax BBA/GEN/601 By Prof. (Dr.) Vishwajeet V. Jituri

 (3) You transfer an asset to a person or an association of persons, directly or indirectly, without adequate
consideration, so that the benefit arises to your spouse either now or on a deferred basis, income from
such an asset will be clubbed with your income.

(4) Assume a situation where you provide money to your spouse (who is non working) and that money is
invested by the spouse and a certain income is generated (from such money that you gave your
spouse).The income that arises from such investment done by her can be clubbed to your income.
However, if your spouse reinvests the income portion and earns further income then such income may
not be clubbed with your taxable income.

Income Tax BBA/GEN/601 By Prof. (Dr.) Vishwajeet V. Jituri

 Clubbing of Income of Minor Child (less than 18 years old)
(1) Some families make fixed deposits in the name of a minor child. Income of a minor is taxable in the
hands of the parent whose total income is higher (before including the minor’s income). If the parents
are divorced it is clubbed with the person who is maintaining the child. There is one exception to this
rule – if the minor has earned an income because of his own manual work, or used his talent or
specialized knowledge & experience OR in case of a minor who is disabled (based on de?nition of
disability in Section 80U) and earns an income, such income will not be clubbed.
(2) When your minor child’s income is clubbed to your income – exemption is available up to Rs 1500 for
each such minor child. Which means if clubbed income is more than Rs 1500, Rs 1500 is the maximum
exemption, however if clubbed income is say Rs 800 (less than Rs 1500) exemption is limited up to such
lesser amount, Rs 800 in this case.
Clubbing of Income of a Major Child (18 or more than 18 years old)
You may be giving over some money to your major child (who may not be earning), in this case if the
major child invests that money – any income from these investments will not be taxable in your hands
but will be taxed in the hands of the major child. So therefore, there will be no clubbing of income in
case of a major child.
Clubbing of Income of a Son’s Wife
You transfer an asset to your son’s wife directly or indirectly without receiving adequate consideration –
income from this asset will be clubbed with your income. Or you transfer an asset to a person or AOP,
for the immediate or deferred benefit of your son’s wife, without adequate consideration, directly or
indirectly – income from this asset will be clubbed with your income

Income Tax BBA/GEN/601 By Prof. (Dr.) Vishwajeet V. Jituri

 Deduction of Tax at Source

TDS stands for tax deducted at source. As per the Income Tax Act, any company or person making a
payment is required to deduct tax at source if the payment exceeds certain threshold limits. TDS has to
be deducted at the rates prescribed by the tax department.
The company or person that makes the payment after deducting TDS is called a deductor and the
company or person receiving the payment is called the deductee. It is the deductor’s responsibility to
deduct TDS before making the payment and deposit the same with the government.
TDS is deducted irrespective of the mode of payment–cash, cheque or credit–and is linked to the PAN of
the deductor and deducted.

TDS is deducted on the following types of payments:

• Salaries
• Interest payments by banks
• Commission payments
• Rent payments
• Consultation fees
• Professional fees

However, individuals are not required to deduct TDS when they make rent payments or pay fees to
professionals like lawyers and doctors.

Income Tax BBA/GEN/601 By Prof. (Dr.) Vishwajeet V. Jituri

 TDS is one kind of advance tax. It is tax that is to be deposited with the government periodically and the
onus of the doing the same on time lies with the deductor. For the deductee, the deducted TDS can be
claimed in the form of a tax refund after they file their ITR (income tax return).

TDS Return
A deductor has to deposit the deducted TDS to the government and the details of the same have to be
filed in the form of a TDS return. A TDS return has to be filed quarterly. Different types of TDS
deductions have to be filed using different TDS return forms.

Income Tax BBA/GEN/601 By Prof. (Dr.) Vishwajeet V. Jituri