Income Tax Material

INCOME TAX MATERIAL
Unit 1 – Introduction
Tax: Tax is fee charged by a Government on a product, income or activity. There are two types of taxes – direct
taxes and indirect taxes.
Direct taxes: If tax is levied directly on the income or wealth of a person, then it is a direct tax.
Indirect taxes: If tax is levied on the price of a good or service, then it is an indirect tax e.g. Goods and Service
Tax or Custom duty.
Why are taxes Levied ?

The reason for levy of taxes is that they constitute the basic source of revenue to the government. Revenue so
raised is utilized for meeting the expenses of Government like defence, provision of education, health care,
infrastructure facilities like roads, dams, etc,.
Power to Levy taxes?

Constitution of India gives the power to levy and collect taxes, whether direct or indirect, to Central and State
Government. The Parliament and State Legislature are empowered to make laws on the matters enumerated in
the Seventh Schedule by Virtue of Article 246 of the Constitution of India. Article 246 contains three lists which
enumerate the matters under which the Parliament and the State Legislature have the authority to make laws for
the purpose of levy of taxes.
The Following are the lists:

a. Union List: Parliament has the exclusive power to make laws on the matters contained in Union List.
b. State List: The Legislature of any State has the exclusive power to make laws on the matters contained
in the State List.
c. Concurrent List: Both Parliament and Statement Legislature have the power to make laws on the
matters contained in the Concurrent List.
Income-tax is the most significant direct tax. Entry 82 of the Union List i.e., List I in the Seven Schedule
to Article 246 of the Constitution of India has given the power to the Parliament to make laws on taxes on
income other than agricultural income.
➢ Income tax Act, 1961:

The levy of income-tax in India is governed by the Income-tax Act, 1961. It came into force on 1st April,
1962 and it contains 298 sections and XIV schedules.
➢ Finance Act:
When the Finance Bill is passed by both the houses of the Parliament and gets the assent of the
President, it becomes the Finance Act. Amendments are made every year to the Income-tax Act, 1961 and
other tax laws by the Finance Act. [Relevant - Finance Act 2018]
CHRIST (Deemed to be University) – B.Com (F&A) Page 1

INCOME TAX MATERIAL
First Schedule to the Finance Act

Part – I Part-II Part – III Part – IV
Rates of Tax Rates at which tax is Rates for calculating income-tax Rules for computing
applicable for the deductible at source for for deducting under the head net agriculture
current Assessment the current Financial ‘Salaries’ and computation of income.
Year. Year Advance Tax.
➢ Income-tax Rules, 1962: Administration of direct taxes is looked after by the Central Board of Direct
taxes (CBDT) and CBDT is empowered to make rules for carrying out the purposes of the Act.
➢ Circulars and Notifications:

Circulars are issued by the CBDT from time to time to deal with certain specific problems and to clarify
doubts regarding the scope and meaning of certain provisions of the Act. The department is bound by the
circulars. While such circulars are not binding on the Assesees, they can take advantage of beneficial
circulars.
➢ Case Laws: The study of case laws is an important and unavoidable part of the study of Income-tax law.
It is not possible for Parliament to conceive and provide for all possible issues that may arise in the
implementation of any Act. Hence the judiciary will hear the disputes between the assesses and the
department and give decisions on various issues.
The Supreme Court is the Apex Court of the Country and the law laid down by the Supreme Court is the
law of the land. The decisions given by various High Courts will apply in the respective states in which
such High Courts have jurisdiction.
Interpretation of Statutes: ‘Interpretation’ is the process by which the real meaning of an Act and the
intention of the legislature in enacting it is ascertained. ‘Interpretation’ signifies expounding the meaning of
abstruse words, writings, etc,. making out of their meaning, explaining, understanding them in a specified
manner.
The purpose of a definition clause is two-fold: (i) to provide a key to the proper interpretation of the enactment
and (ii) to shorten the language of the enacting part by avoiding repetition of the same words contained in the
definition part.
Process of Interpretation

INCOME TAX MATERIAL
Restrictive and extensive definitions: The definition of a word or expression in the definition section may
either be restricting of its ordinary meaning or may be extensive of the same.
When a word is defined to ‘mean’ such and such, the definition is ‘prima facie’ restrictive and exhaustive we
must restrict the meaning of the word to that given in the definition section.
But where the word is defined to ‘include’ such and such, the definition is ‘prima facie’ extensive: here the word
defined is not restricted to the meaning assigned to it but has extensive meaning which also includes the
meaning assigned to it in definition.
Means and includes Restrictive and Exhaustive

To apply to and include Inclusive or Extensive
Is deemed to include Inclusive or Extensive
Charge/Levy of Income Tax (Section:04):

Income-tax is, levied on the total income of the previous year of every person, at any rate or rates
in charge for assessment year.
Section 4 of the Income-tax Act, 1961 is the charging section which provides that:
i) The charge is on every person [section 2(31)];
ii) Tax is chargeable on the total income earned during the previous year [section-03] and not the
assessment year [section-2(9)].
iii) Tax shall be charged at the rates prescribed for the year by the Annual Finance Act.
iv) Tax shall be levied in accordance with and subject to the various provisions contained in the Act.
➢ Gross Total Income [Section - 14]:

As per sec-14, the aggregate income under these heads is termed as “gross total income”
1. Income from Salaries.
2. Income from house property.
3. Profits and gains of business or profession.
4. Capital gains.
5. Income from other sources.
In other words, gross total income means total income computed in accordance with the provisions of the
Act before making any deduction u/s 80C to 80U.
➢ Income [Section - 2(24)]:

1) Concept of Income under Act
✓ Regular receipt vis-a-vis casual receipt: Income, in general, means a periodic monetary return
which accrues or is expected to accrue regularly from definite sources. However, under the Income-tax
Act, 1961, even certain incomes which do not arise regularly are treated as income for tax purposes e.g.
Winnings from lotteries, crossword puzzles.
✓ Revenue receipt vis-a-vis Capital receipt: Income normally refers to revenue receipts. Capital
receipts are generally not included within the scope of income in general parlance. However, the Income-
tax Act, 1961 has specifically included certain capital receipts within the definition of income e.g., Capital
gains i.e., gains on sale of a capital assets like land

INCOME TAX MATERIAL
✓ Net receipt vis-a-vis Gross receipt: Income means net receipts and not gross receipts. Net receipts
are arrived at after deducting the expenditure incurred in connection with earning such receipts. The
expenditure which can be deducted while computing income under each head is prescribed under the
Act.
✓ Due basis vis-a-vis receipt basis: Income is taxable either on due basis or receipt basis. For
computing income under the heads “Profits and gains of business or profession” and “Income from other
sources”, the method of accounting regularly employed by the assessee should be considered, which can
be either cash system or mercantile system. Some receipts are taxable only on receipt basis, like, income
by way of interest received on compensation or enhanced compensation.
✓ Illegal Income: Act does not make any distinction between income accrued or arisen from a legal
source and income tainted with illegality.
2) Statutory Definition - The definition of income as per the Income-tax Act, 1961 begins with the words
“Income includes”. Therefore, it is an inclusive definition and not an exhaustive one. Such a definition
does not confine the scope of income but leaves room for more inclusions within the ambit of the term.
Sec. 2(24) - the term “income” includes:
(i) Profits and gains.
(ii) Dividends.
(ii)(a) Voluntary contribution received by a trust/institution created wholly or partly for charitable or
religious purposes or by certain research association or universities and other educational institutions
or hospitals and other medical institutions or an electoral trust.
(iii) The value of any perquisite or profit in lieu of salary taxable under section 17.
(iii)(a) Any special allowance or benefit, other than the perquisite included above, specifically
granted to the assessee to meet expenses wholly, necessarily and exclusively for the performance of
the duties of an office or employment of profit.
(iii)(b) Any allowance granted to the assessee to meet his personal expenses at the place where the
duties of his office or employment of profit are ordinarily performed by him or at a place where he
ordinarily resides or to compensate him for the increased cost of living.
(iv) The value of any benefit or perquisite whether convertible into money or not, obtained from a
company either by a director or by a person who has a substantial interest in the company or by a
relative of the director or such person and any sum paid by any such company in respect of any
obligation which, but for such payment would have been payable by the director or other person
aforesaid.
(iva) The value of any benefit or perquisite, whether convertible into money or not, which is obtained
by any representative assessee or by any beneficiary or any amount paid by the representative
assessee for the benefit of the beneficiary which the beneficiary would have ordinarily been required to
pay.
(v) Deemed profits chargeable to tax under section 41 or section 59.
(v)(a)(b)(c)(d)(e) Profits and gains of business or profession chargeable to tax under section 28.
(vi) Any capital gains chargeable under section 45.
(vii) The profits and gains of any insurance business carried on by Mutual Insurance Company
or by a cooperative society or any surplus taken to be such profits and gains by virtue of the provisions
contained in the first Schedule to the Act.

INCOME TAX MATERIAL
(viia) The profits and gains of any banking business (including providing credit facilities) carried on
by a co-operative society with its members.
(ix) Any winnings from lotteries, cross-word puzzles, races including horse races, card
games and other games of any sort or from gambling, or betting of any form or nature whatsoever.
(x) Any sum received by an employer from his employees as employees’ contribution to any
provident fund, superannuation fund, or staff welfare fund, is taxable as income of employer.
However, Employer can claim deduction u/s 36(1)(va), if such sum is credited by the employer to
the employees’ account in the relevant fund before the due date (under provident fund regulations).
(xi) Any sum received under a keyman insurance policy (including bonus) is treated as “income” in
the hands of recipient.
(xii) Any sum referred to in section 28(va). Thus, any sum, whether received or receivable in cash
or kind, under an agreement for not carrying out any activity in relation to any business or
profession; or not sharing any know-how, patent, copy right, trade-mark, licence, franchise, or any
other business or commercial right of a similar nature, or information or technique likely to assist in the
manufacture or processing of goods or provision of services, shall be chargeable to income tax under the
head “profits and gains of business or profession”.
(xiia) Fair market value for inventory which is converted into stock – in – trade or treated
as a capital asset.
(xiii), (xiv) & (xv) Any sum of money or value of property received without consideration or for
inadequate consideration by any person [Gift] [Section 56(2)(v)(vi)(vii)(viia)].
(xvi) Any consideration received for issue of shares [as exceeds fair market value of shares
referred to in section 56(2)(viib).
(xvii) Any sum of money received as advance money if such sum is forfeited consequent to failure
of negotiation for transfer of a capital asset [Section 56(2)(ix)].
(xviia) Any sum of money or value of property received without consideration or for inadequate
consideration by any person [Gift] [Section 56(2)(x)].
(xviib) Any compensation or other payment, due to or received by any person, in connection with
termination of his employment or the modification of the term and conditions relating
thereto [Section 56(2)(xi)].
➢ (xviii) Assistance in the form of a subsidy or grant or cash incentive or duty drawback or
waiver or concession or reimbursement, by whatever name called, by the Central Government
or a State Government or any authority or body or agency in cash or kind to the assessee is
included in the definition of income.
➢ Person [Section - 2(31)]:

The term “person” includes:
a. an individual;
b. a Hindu Undivided family;
c. a company;
d. a firm;
e. an association of persons or a body of individuals, whether incorporated or not;
f. a local authority; and
g. every artificial juridical person not falling within any of preceding categories.

INCOME TAX MATERIAL
These are seven categories of persons chargeable to tax under the Act. The aforesaid definition is
inclusive and not exhaustive. Therefore, any person, not falling in the above – mentioned seven
categories, may still fall in the four corners of the term “person” and accordingly may be liable to tax
under section – 4.
Notes:
1. Individual means only a natural person, i.e., a human being it includes both males and females.
2. “Hindu undivided family” has not defined under the Income-tax Act. The expression is, however, defined
under the Hindu Law as a family, which consists of all males lineally descended from a common
ancestor and includes their wives and daughters.
A Hindu Coparcenary includes those persons who acquire an interest in Joint family property by birth
i.e., male descendants and their daughters by birth shall become a coparcener in her own right in
the same manner as the son. HUF may contain many members, but members within four degrees
including the head of the family (Karta) are called co-parceners. It may be noted that only the
coparceners have a right to partition. Jain undivided families and Sikh undivided families would be
assessed as a HUF under Act.
Schools of Hindu Law –
a) Dayabaga school of Hindu Law prevalent in West Bengal and Assam. Nobody acquires the right,
share in the property by birth as long as the head of family is living.
b) Mitakshara school of Hindu Law prevalent in rest of India. One acquires the right to the family
property by his birth and not by succession irrespective of the fact that his elders are living.
3. Classes of Companies.
a. Domestic Company [Sec. 2(22A)] – means an Indian company or any other company which, in
respect of its income liable to income-tax, has made the prescribed arrangements for the
declaration and payment of dividends (including dividends on preference shares) within India,
payable out of such income.
[Indian company (Sec. 2(26) – means a company should have been formed and registered under the
Companies Act, 1956 or under any law relating to companies which was or is in force in any part of
India or a corporation established by or under a Central, State or Provincial Act and the registered
office or principal office of the company should be in India]
b. Foreign company [Sec.2(23A)] – Foreign company means a company which is not a domestic
company.
4. A partnership is the relation between persons who have agreed to share the profits of business carried on
by all or any of them acting for all. The persons who have entered into partnership with one another are
called individually ‘partners’ and collectively a ‘firm’.
5. In order to constitute an association, persons must join for a common purpose or action and their

INCOME TAX MATERIAL
object must be to produce income, it is not enough that the persons receive the income jointly and they
do not in law constitute a partnership. Co-heirs, co-legatees or co-donees joining together for a common
purpose or action would be chargeable as an AOP.
6. Body of Individuals denotes the status of persons like executors or trustees who merely receive the
income jointly and who may be assessable in like manner and to the same extent as beneficiaries
individually. Thus, co-executors or co-trustees are assessable as a BOI as their tittle and interest are
indivisible.
7. Local Authority means a municipal committee, district board, body of port commissioners or other
authority legally entitled to or entrusted by the Government with control or management of a municipal
or local fund.
8. Artificial Juridical Persons is residuary clause cover every person not falling under other heads. An idol,
or deity would be assessable in the status of an artificial juridical person.
➢ Previous Year [Section - 03]:

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.
Uniform previous year – All assesses are required to follow financial year (i.e., April 1, to March 31)
as previous. This uniform previous year has to be followed for all sources of income. However, it is not
necessary that one should maintain books of account on the basis of financial year.
In the case of a newly set-up business/profession or in case of a new source of income, the previous year
is determined as follows –
First Previous Year – 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 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.
Second or Subsequent Previous Year – The second and subsequent previous year are always
financial years. The second and subsequent previous year are always of 12 Months each (i.e., April to
March).
➢ Assessment Year [Section 2(9)]:

Assessment Year means the period starting from April 01, and ending on March 31, of the next year. For
instance, the assessment Year 2018-19 will commence on April 1, 2018 and end on March 31, 2019.
Income of Previous year of an assesse is taxed during the next following assessment year at the rates
prescribed by the relevant Finance Act.
Exception:
When income of the previous year is not taxable in the immediately following assessment year – The rule
that the income of the previous year is assessable as the income of the immediately following assessment
year has certain exceptions. These are:
a. income of non-resident from shipping;

INCOME TAX MATERIAL
b. income of persons leaving India either permanently or for a long period of time;
c. income of bodies formed for short durations;
d. income of 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.
Note: Financial Year has double role to play – It is previous year as well as an assessment year.
➢ Assessee [Section - 2(7)]:

“Assessee” means person by whom income-tax or any other sum of money is payable under the Act. It
includes –
a) First Category – A person by whom any tax or any other sum of money (including interest and
penalty) is payable under the Act (irrespective of the fact whether any proceeding under Act has been
taken against him or not).
b) Second Category – A person in respect of whom any proceedings under the Act has been taken
(whether or not he is liable for any tax, interest or penalty). Proceeding may be taken –
i. either for the assessment of the amount of his income or of the loss sustained by him or
ii. of the income (or loss) of any other person in respect of whom he is assessable; or
iii. of the amount of refund due to him or to such other person.
c) Third Category – Every person who is deemed to be an assesse. For instance, a representative assesse
is deemed to be an assesse by virtue of section 160(2).
d) Fourth category – Every person who is deemed to be an assesse in default under any provision of the
Act. For instance, under section 201(1), any person who does not deduct tax at source, or after
deducting fails to pay such tax, is deemed to be an assesse in default. Likewise, under section 218, if a
person does not pay advance tax, then he shall be deemed to be an assesse in default.

INCOME TAX MATERIAL
Rates of Tax:
➢ Normal Rates of Tax - Finance Act 2019 - AY 2020-2021 PY 2019-20
1) Individual, HUF, AOP, BOI, Artificial Juridical Person. [Slab Rate]

A. For individual, HUF, AOP, BOI, AJP (Resident or Non-resident)
Total Income Tax Rate
Upto Rs. 2,50,000 (Basic Exemption Limit) Nil
> Rs. 2,50,000 upto Rs. 5,00,000 5%
> Rs. 5,00,000 upto Rs.10,00,000 20%
> Rs.10,00,000 30%
B. For Senior Citizen (Resident Individual age 60 years or more in PY)

> Rs. 3,00,000 upto Rs. 5,00,000 5%
> Rs. 5,00,000 upto Rs.10,00,000 20%
> Rs.10,00,000 30%
C. For Super Senior Citizen (Resident Individual age 80 years or more in PY)
> Rs. 5,00,000 upto Rs.10,00,000 20%
> Rs.10,00,000 30%
Note: Clarification regarding attaining prescribed age of 60 years/80 years on 31st March itself, in case of
senior/very senior citizens whose date of birth falls on 1st April [Circular No.28/2016, dated 27-07-2016].
Surcharge:
Net Total Income > 50 Lakhs upto 1Cr 10% of income- tax
Net Total Income > 1Cr 15%
2) For Partnership Firm/ LLP/Local Authority - On the whole of the total income - 30% [Flat Rate]
3) For Cooperative society: [Slab Rate]

(i) 0 – 10,000 10%
(ii) 10,001 – 20,000 20%
(iii) 20,001 – above 30%
4) For Company: [Flat rate]

Tax Rate
A. Domestic Company
i) Total Turnover or Gross Receipts of PY 25% of the total income.
17-18 upto Rs. 400 Crore
ii) In other cases 30% of the total income
B. Foreign Company 40% of the total income

INCOME TAX MATERIAL
➢ Special Rates of Tax: The above rates are prescribed by the Finance Act, 2018. However, in respect of
certain types of income, as mentioned below, the Income-tax Act, 1961 has prescribed specific rates -
S. No. Section Income Rate of Tax
(a) 112 Long term capital gains (other than LTCG taxable as per section 112A) 20%
(b) 112A Long term capital gains on transfer of – 10% [On
• Equity share in a company LTCG > Rs.1
• Unit of an equity-oriented fund
• Unit of business trust Lakh]
Condition for availing the benefit of this concessional rate is Securities
Transaction tax should have been paid–
In case of (Capital Asset) Time of payment of STT
Equity shares in a company both at the time of acquisition
and transfer
Unit of equity-oriented fund At the time of transfer
or unit of business trust
Note: LTCG upto 1 lakh is exempt. LTCG exceeding Rs.1 Lakh is
taxable @ 10%.
(c) 111A Short-term capital gains on transfer of – 15%

• Equity shares in a company
• Unit of an equity-oriented fund
• Unit of business trust
The conditions for availing the benefit of this concessional rate are –
(i) the transaction of sale of such equity share or unit should be
entered into on or after 1.10.2004; and
(ii) such transaction should be chargeable to securities transaction tax.
(d) 115 BB Winnings from 30%
• Lotteries;
• Crossword puzzles;
• Races including horse races;
• Card games and other games of any sort;
• Gambling or betting of any form or nature
(e) 115BBDA Income by way of dividend exceeding Rs.10 lakhs in aggregate 10%
(f) 115 BBE Unexplained money, investment, expenditure, etc. deemed as income 60%
under section 68 or section 69 or section 69A or section 69B or section
69C or section 69D
Surcharge:
If total income is in the 0 -Rs. 50 >Rs. 50 > Rs. 1 > Rs. 1 > Rs. 5 Crore > Rs.10
range of Lakhs Lakhs-Rs. Crore - Rs. Crore-Rs. 5 – Rs.10 Crore Crore
1 Crore 2 Crore Crore
- Individuals/ HUF/ Nil 10% 15 % 25% 37% 37%
AOP/ BOI/ Artificial
juridical person
-Firm/ co-operative Nil Nil 12% 12% 12% 12%
society/ local authority
-Domestic company Nil Nil 7% 7% 7% 12%
-Foreign company Nil Nil 2% 2% 2% 5%

INCOME TAX MATERIAL
Health and Education Cess on Income-tax:

The amount of income-tax as increased by the union surcharge, if applicable, should be further increased by
an additional surcharge called the “Health and Education cess on income-tax”, calculated at the rate
of 4% of such income-tax and surcharge, if applicable. Health and Education Cess is leviable in the case
of all assesses i.e., individuals, HUF, AOP/BOI, Firms Local authorities, co-operative societies and
companies.
Marginal Relief:
It is applicable in case of All Assessee where surcharge is applicable. You have to check marginal relief
concept when the total income is little bit more than Rs.50 Lakhs (in case of Ind, HUF, AOP, BOI, AJP) or
Rs.100 Lakhs (in case of all assesse) or Rs.10 Cr (in case of company).
Marginal Relief = Extra Tax – Extra Income
Rebate u/s 87A:

In order to provide tax relief to the Individual tax payers who are in 5% tax slab, Sec 87A provides a
rebate from tax payable by an assessee, being an individuals resident in India having Total Income not
exceeding Rs. 500,000. Rebate shall be
a) 100% of tax payable.

b) Rs.12,500
Whichever is Lower. This shall be reduced before adding health and education cess. Consequently, any
individual having total income upto Rs.5,00,000 will not required to pay any tax.
Note: Rebate under section 87A is, however, not available in respect of tax payable @ 10% on long-term
capital gains taxable under section – 112A.
Average Rate of tax – means the rate arrived at by dividing the amount of Income-tax calculated on total
income, by such total income.
Maximum Marginal Rate – to means the rate of income-tax (including surcharge on the income-tax, if
any) applicable in relation to the highest slab of income in the case of an individual, AOP or BOI, as the case
may be, as specified in Finance Act of the relevant year.
Rounding off of income [Sec. 288A] – The taxable income shall be rounded off to the nearest multiple
of ten rupees and for this purpose any part of a rupee consisting of paisa shall be ignored and thereafter, if
such amount is not a multiple of ten, then, if the last figure in that amount is five or more, the amount shall
be increased to the next higher amount which is multiple of ten and if the last figure is less than five, the
amount shall be reduced to the next lower amount which is a multiple of ten.
Rounding off of tax [Sec. 288B] – The amount payable by the assesse and the amount of refund due,
under the provisions of the Act shall be rounded off to the nearest ten rupees.

INCOME TAX MATERIAL
Unit 2 – Residential Status, Scope of Total Income & Exempt Income
Part – I : RESIDENTIAL STATUS AND ITS EFFECT ON TAX INCIDENCE

The incidence of tax on any assesse depends upon his residential status under the Act. For all purposes of
Income-tax, taxpayers are classified into three broad categories on the basis of their residential status viz
Resident and Ordinarily resident, Resident but not ordinarily resident and Non-resident.
CONCEPT OF RESIDENT AND NON-RESIDENT:
INDIVIDUAL [Sec-6(1) read with Sec-6(6)]:

Basic Conditions to test as to when an individual is resident in India – Under Section 6(1) an
individual is said to be resident in India in any previous year, if he satisfies at least one of the following basic
conditions –
a) He is in India in the previous year for a period of 182 days or more. “OR”
b) He is in India for a period of 60 days or more during the previous year and 365 days or more during 4 years
immediately preceding the previous year.
Exceptions – Basic condition (b) is not taken into consideration in two special cases given below:
1. Indian citizen who leaves India during the previous year for the purpose of employment outside India or an
Indian citizen who leaves India during the previous year as a member of the crew of an Indian ship. For this
purpose, the requirement is not leaving India for taking employment outside India but leaving India for the
purpose of employment (the employment may be India or may be outside India).
2. Indian citizen or a person of Indian origin who comes on a visit to India during the previous year. (A person
is deemed to be of Indian origin if he, or either of his parents or any of his grand – parents, was born in
undivided India. It may be noted that grand-parents include both maternal and paternal grand-parents).
In these two special cases, an individual will be resident in India only if he is in India during
the relevant previous year for at least 182 days.

INCOME TAX MATERIAL
Additional conditions to test as to when a resident individual is ordinarily resident in India –

Under section 6(6), a resident individual is treated as “resident and ordinarily resident” in India if he satisfies the
following two additional conditions –
i. He has been resident in India in at least 2 out of 10 previous year immediately preceding relevant
previous year. “And”
ii. He has been in India for a period of 730 days or more during 7 years immediately preceding the relevant
previous year.
In brief it can be said that an individual becomes resident and ordinarily resident in India if he satisfies at
least one of the basic conditions [i.e., (a) or (b)] and the two additional conditions [i.e., (i) and
(ii)].
Resident but not ordinarily resident:

An individual who satisfies at least one of basic conditions [i.e., condition (a) or (b)] but does not satisfy
the two additional conditions [i.e., conditions (i) and (ii)] is treated as a resident but not ordinarily resident
in India.
Non-resident – An individual is a non-resident in India if he satisfies none of the basic conditions [i.e.,
condition (a) or (b)]. In case of non-resident, additional conditions [i.e., (i) and (ii)] are not relevant.

INCOME TAX MATERIAL
According to Rule 126, for the purposes of section 6(1), in case of an Individual, being a citizen of india and a
member of the crew of a ship, the period or periods of stay in India shall, in respect of an eligible voyage, not
include the following period:
Period to be excluded
Period commencing from Period ending on
The date entered into the Continuous And The date entered into the Continuous
Discharge Certificate in respect of joining Discharge Certificate in respect of signing off
the ship by the said individual for the by that individual from the ship in respect of
eligible voyage. such voyage.
Eligible Voyage: A voyage undertaken by a ship engaged in the carriage of passengers or freight in
international traffic where –
i) for the voyage having originated from any port in India, has as its destination any port outside
India; and
ii) for the voyage having originated from any port outside India, has as its destination any port in
India.
Notes:
a) The term “stay in in India” includes stay in the territorial waters of India (i.e. 12 nautical miles into
the sea from the Indian coastline). Even the stay in a ship or boat moored in the territorial waters of
India would be sufficient to make the individual resident in India.
b) It is not necessary that the period of stay must be continuous or active nor is it essential that the stay
should be at the usual place of residence, business or employment of the individual.
c) For the purpose of counting the number of days stayed in India, both the date of departure as well as
the date of arrival are considered to be in India.
d) The residence of an individual for income-tax purpose has nothing to do with citizenship, place of
birth or domicile. An individual can, therefore, be resident in more countries than one even though
he can have only one domicile.

INCOME TAX MATERIAL
PART – II : SCOPE OF TOTAL INCOME:

Section -05 provides the scope of total income in terms of the residential status of the assessee because the
incidence of tax on any person depends upon his residential status. The scope of total income of an assessee
depends upon the following three important considerations:
(i) The residential status of the assesse.
(ii) the place of accrual or receipt of income, whether actual or deemed and
(iii) the point of time at which the income had accrued to or was received by or on behalf of the assesse.
Brevity of provision all sorts of income is broadly classified into two types depending on place of receipt and
place of accrual.
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.
I. Individual and Hindu undivided family

Resident and ordinarily Resident but not ordinarily Non-resident in India
resident in India resident in India
Indian income Taxable in India Taxable in India Taxable in India
Foreign income Taxable in India Only two types of foreign Not taxable in India
incomes (i.e., Case 1 and Case 2
given below) are taxable in India
The following foreign incomes are taxable in the hands of s resident but not ordinarily resident in India –
Case 1 – If it is business income and business is controlled wholly or partly from India.
Case 2 – If it is income from profession which is set up in India.
No other foreign income (like salary, rent, interest, etc.) is taxable in India in the hands of a resident but not
ordinarily resident taxpayer.
II. Any other taxpayer (like company, firm, co-operative society, association of persons, body of individual,
etc.)
Resident in India Non-resident in India
Indian income Taxable in India Taxable in India
Foreign income Taxable in India Not taxable in India
Meaning of Income Received or Deemed to be received:

All assessees are liable to tax in respect of the income received or deemed to be received by them in India
during the previous year irrespective of –
(i) their residential status, and

INCOME TAX MATERIAL
(ii) the place of its accrual.
Income is to be included in the total income of the assessee immediately on its actual or deemed receipt. The
receipt of income refers to only the first occasion when the recipient gets the money under his control.
Therefore, when once an amount is received as income, remittance or transmission of that amount from one
place or person to another does not constitute receipt of income in the hands of the subsequent recipient or
at the place of subsequent receipt.
Income deemed to be received in India [Section - 07]: Income even if not received immediately but
still deemed to be received in the following cases -
(i) Contribution in excess of 12% of salary to recognized provident fund or interest credited in excess of
9.5% p.a.
(ii) Contribution by Central Government or any other employer in the P.Y. under a pension scheme
referred u/s 80CCD.
(iii) Amount transferred from unrecognized provident fund to recognized fund (being the employers
contribution and interest thereon).
Meaning of Income ‘accruing’ and ‘arising’:

Accrue refers to the right to receive income, whereas due refers to the right to enforce payment of the same.
For e.g. salary for work done in December will accrue throughout the month, day to day, but will become due
on the salary bill being passed on 31st December or 1st January.
Explanation 1 to section 5 specifically provides that an item of income accruing or arising outside India shall
not be deemed to be received in India merely because it is taken into account in a balance sheet prepared in
India.
Explanation 2 to section 5 makes it clear that once an item of income is included in the assessee’s total
income and subjected to tax on the ground of its accrual/deemed accrual, it cannot again be included in the
person’s total income and subjected to tax either in the same or in a subsequent year on the ground of its
receipt - whether actual or deemed.
Income Deemed to Accrue or Arise in India [Section - 09]: Certain types of income are deemed to
accrue or arise in India even though they may actually accrue or arise outside India.
1. Any Income accruing or arising to an assesse in any place outside India whether directly
or indirectly from business connection in India [Sec. 9(1)(i)] – The following conditions should
be satisfied.
(i) The taxpayer has a “business connection” in India.
(ii) By virtue of “business connection” in India, income actually arises outside India.
If the above conditions are satisfied, income which arises outside India because of “business connection” in
India, is deemed to accrue or arise in India.
‘Business connection’ shall include any business activity carried out through a person acting on behalf of the
non-resident [Explanation 2 to section 9(1)(i)]
For a business connection to be established, the person acting on behalf of the non-resident –
(i) must have an authority, which is habitually exercised in India, to conclude contracts on behalf of the
non-resident or habitually concludes contracts or plays the principal role leading to conclusion of
contracts by that non-resident and such contracts should be
- in the name of the non-resident; or
- for the transfer of the ownership of, or for the granting of the right to use, property owned by that
non-resident or that non-resident has the right to use; or

INCOME TAX MATERIAL
- for the provision of services by that non-resident.

(ii) In a case, where he has no such authority, but habitually maintains in India a stock of goods or
merchandise from which he regularly delivers goods or merchandise on behalf of the non-resident, or
(iii) habitually secures orders in India, mainly or wholly for the non-resident.
Further, there may be situations when the person acting on behalf of the non-resident secure order for other
non-residents. In such situation, business connection for other non-residents is established if,
a) such other non-resident controls the non-resident or
b) such other non-resident is controlled by the non-resident or (c) such other non-resident is subject to
same control as that of non-resident.
In all the three situations, business connection is established, where a person habitually secures orders in
India, mainly or wholly for such non-residents.
Business connection, however, shall not be established, where the non-resident carries on business activity
through a broker, general commission agent or any other agent having an independent status,
if such a person is acting in the ordinary course of his business.
A broker, general commission agent or any other agent shall be deemed to have an independent status
where he does not work mainly or wholly for the non-resident. He will, however, not be
considered to have an independent status in the three situations explained above, where he works
mainly or wholly on behalf of such a non-resident.
Where a business is carried on in India through a person referred to in (i), (ii) or (iii) of (a) above, only so
much of income as is attributable to the operations carried out in India shall be deemed to accrue or
arise in India.
Instance of Business Connection – Some illustrative instances of anon-resident having business connection
in India are –
a. maintaining a branch office in India for the purchase or sale of goods or transacting other business;
b. appointing an agent in India for the systematic and regular purchase of raw material or other
commodities or for the sale of the non-resident goods or for other business purposes;
c. erecting a factory in India where the raw produce purchased locally is worked into a form suitable for
export abroad;
d. forming a local subsidiary company to sell the products of the non-resident parent company.
e. having financial association between a resident and a non-resident company.
Operations not taken as Business Connections – the following operations do not amount to “business
connection” –
a. If all business operation are not carried out in India, the income of the business deemed to accrue or
arise in India shall be only such part of income as is reasonably attributable to the operations carried out
in India. [Explanation 1(a) to Sec. 9(1)(i)].
b. In the case of non-resident, no income shall be deemed to accrue or arise in India to him through or from
operations which are confined to the purchase of goods in India for the purpose of export. [Explanation
1(b) to Sec. 9(1)(i)]
c. No income arises to a non-resident from the activity of collection of news and views in India for
transmission out of India. [Explanation 1( c) to Sec. 9(1)(i)]
d. No income arises to a non-resident from the activity of shooting of any cinematograph film in India, if a
few conditions are satisfied. [ Explanation 1(d) to Sec. 9(1)(i)]
e. In case of a foreign company engaged in the business of mining of diamonds, no income shall be deemed
to accrue or arise in India through or form the activities which are confined to the display of uncut and

INCOME TAX MATERIAL
unassorted diamond (without any sorting or sale) in any special zone notified by the Central
Government. [Explanation 1(e) to Sec. 9(1)(i)]
2. Income through or from any property, asset or source of income in India [Sec. 9(1) (i)] -
Income from any property (movable, immovable, tangible and intangible asset) in India is deemed to
accrue or arise in India
3. Income through the transfer of capital asset situated in India [Sec. 9(1)(i)] –
Capital gains arising through or from the transfer of a capital asset situated in India would be deemed to
accrue or arise in India in all cases irrespective of the fact whether
i) the capital asset is movable or immovable, tangible or intangible;

ii) the place of registration of the document of transfer etc., is in India or outside; and
iii) the place of payment of the consideration for the transfer is within India or outside.
Accordingly, the expression “through” shall mean and include and shall be deemed to have always meant
and include “by means of”, “in consequence of” or “by reason of”. [Explanation 4 to section 9(1)(i)]
An asset or a capital asset (being any share or interest in a company or entity registered or incorporated
outside India) shall be deemed to be and shall always be deemed to have been situated in India if the
share or interest derives, directly or indirectly, its value substantially from the assets located in India. [
Explanation 5 to section 9(1)(i)]
4. Income from salaries earned in India [Sec. 9(1)(ii)] – Income of an individual which falls under
the head “Salaries” is deemed to accrue or arise in India if service is rendered in India.
5. Salary payable abroad by the Government to a citizen of India [Sec. 9(1)(iii)] – Salary
received by India national from the Indian Government, out of India, is deemed to accrue or arise in
India. By virtue section 10(7), any allowance or perquisite paid abroad is however, fully exempt from tax.
6. Dividend paid by an Indian Company Outside India [Sec. 9(1)(iv)] – Dividend received by a
shareholder from an Indian company is always deemed to accrue or arise in India.
7. Income by way of interest, royalty and technical fees [ Sec. 9(1)(v)/(vi)/(vii)] – These are
deemed to accrue or arise in India in the following cases –
Royalty means consideration for transfer of all or any rights, imparting of any information, use of
patent, use or right to use any equipment, transfer of all rights in respect of copy right, and rendering of
any service in connection with the above activities.
Fees for technical services mean any consideration (including any lumpsum consideration) for the
rendering of any managerial, technical or consultancy services (including providing the services of
technical or other personnel). However, it does not include consideration for any construction, assembly,
mining or like project undertaken by the recipient or consideration which would be income of the
recipient chargeable under the head ‘Salaries’
Rule 1 – When received from Government – Interest, royalty or technical fees received from the
Central Government / any State Government, is deemed to accrue or arise in India.
Rule 2 – When received from a person resident in India – Interest, royalty or technical fees
received from a resident person, is deemed to accrue or arise on India in the hands of recipient. However,
this rule is not applicable in the following cases –

INCOME TAX MATERIAL
a. if borrowed money is utilized by the payer for carrying on a business / profession outside India or for
earning any income outside India or
b. payment of royalty / technical fees pertains to a business / professional carried on by the payer
outside India or earning any income outside India.
Rule 3 – When received from a non-resident – Interest, royalty or technical fees received from a
non-resident, is deemed to accrue or arise in India in the hands of recipient, in the following cases –
a. borrowed money is utilized by the payer for carrying on a business / profession in India or
b. payment of royalty / technical fees pertains to a business / profession carried on by the payer in India
or earning any income in India.
Interest received outside India by a foreign bank its branch in India – From the assessment year 2017-18.
in the hands of recipient, income shall be deemed to accrue or arise in India.
Note: Lumpsum royalty not deemed to accrue arise in India: Lumpsum royalty payments made by a
resident for the transfer of all or any rights (including the granting of a license) in respect of computer
software supplied by a non-resident manufacturer along with computer hardware under any scheme
approved by the Government under the Policy on Computer Software Export, Software Development and
Training, 1986 shall not be deemed to accrue or arise in India.
Part-III - Income that is exempt from tax
In the following cases, income is exempt from tax, as it does form part of total income. The burden of proving
that a particulars item of income falls within this section is on the assesse.
Section 10: In computing the total income of a previous year of any person, any income falling within any of the
following clauses shall not be included:
Section Particulars
10(1) Exempts Agricultural Income.
[Note 1]
Sec-2(1A) defined “agricultural income” means
1. Any rent or revenue derived from land which is situated in India and is used for agricultural
purposes
2. Any income derived from such land by agricultural operations including processing of the
agricultural produce, raised or received as rent-in-kind so as to render it fit for the market or
sale of such produce.
3. Income attributable to a farm house subject to certain conditions.
10(2) Payments received by a member from the income of the family.
Any sum received by an individual as a member of a Hindu Undivided family either out of income
of that family or out of income of estate belonging to the family is exempt from tax. Such receipts
are not chargeable to tax in the hands of an individual member even if tax is not paid or payable by
the family on its total income.
10(2A) Exempts from tax a partner’s share in the total income of the firm. In other words, the partner’s
share in the total income of the firm determined in accordance with the profit-sharing ratio will be
exempt from tax.
10(6) Remuneration received by foreign diplomats of all categories.

10(6)(vi) Salary received by a foreign citizen as an employee of a foreign enterprises provided his stay in
India does not exceed 90 days.
10(6)(viii) Salary received by a non-resident foreign citizen as a member of ship’s crew provided his total stay

INCOME TAX MATERIAL
in India does not exceed 90 days.
10(6)(xi) Remuneration received by employee being a foreign national, of foreign government deputed in
India for training in a government established or public sector undertaking.
10(10BB) Payment to Bhopal Gas Victims is exempt.

10(10BC) Compensation received or receivable from the Central Government, State Government or local
authority by an individual or his legal heir on account of any disaster is exempt except to the extent
of loss or damage allowed as deduction under the Act.
10(10D)
Nature of Policy Whether exemption is available u/s 10(10D)
1. Any sum received u/s 80DD(3) Exemption not available
2. Keyman insurance policy Exemption not available
3. Any other policy (sum received on the Exemption available, nothing is chargeable to tax.
death of a person)
4. Any other policy (not being the case when sum received on the death of a person).
a. Policy issued before April 1, 2003 Exemption available, nothing is chargeable to tax.
b. Policy issued on or after April 1, 2003 Exemption available only when annual premium
but before April 1, 2012. payable is not more than 20% of sum assured.
c. Policy issued during 2012-13 Exemption available only when annual premium
payable is not more than 10% of sum assured.
d. Policy issued on or after April 1, 2013 Exemption available only when annual premium
payable is not more than 10% / 15% of sum assured.
10(11A) Any payment from Sukanya Samriddhi Account
10(16) The value of scholarship granted to meet the cost of education would be exempt from tax in the
hands of the recipient irrespective of the amount or source of scholarship.
10(17) Daily allowance received by any Member of Parliament or of State Legislatures or any Committee
[Note 2] thereof are exempt.
10(17A) Awards for literary, scientific and artistic works and other awards by the Government are exempt.
10(18) Pension received by individual who has been in service of Central or State Government and has
awarded “ParamVir Chakra” or “MahaVir Chakra” or “Vir Chakra” such other gallantry award as
the Central Government notifies is exempt from tax.
10(26) Income from any source in the specified areas or States in which member of a Scheduled Tribe is
residing or income by way of dividend or interest on securities is exempt in the hands of member of
the Scheduled Tribe.
10(26AAA Income from any source in the state of Sikkim, dividend income and interest on securities is
) exempt in the hands of a Sikkimese individual. This exemption is not available to a Sikkimese
woman who, on or after 1st April, 2008, marries a non-Sikkimese individual.
10(30) The amount of any subsidy received by any assessee engaged in the business of growing and
manufacturing tea in India through or from the Tea Board will be wholly exempt from tax.

INCOME TAX MATERIAL
1. Taxation of Agriculture income and Non-agriculture income.

➢ Apportionment of income between business income and agricultural income:
a. Rule – 7: Income from growing and manufacturing of any product

Where income is partially agricultural income and partially income chargeable to income-tax as business
income, the market value of any agricultural produce which has been raised by the assesse or received by him
as rent in kind and which has been utilized as raw material in such business or the sale receipts of which are
included in the accounts of the business shall be deducted. No further deduction shall be made in respect of
any expenditure incurred by the assesse as a cultivator or receiver of rent in kind.
Determination of market value – There are two possibilities here:

(i) The agricultural produce is capable of being sold in the market either in its raw stage or after
application of any ordinary process to make it fit to be taken to the market. In such case, the value
calculated at the average price at which it has been so sold during the relevant previous year will be
the market value.
(ii) It is possible that the agricultural produce is not capable of being ordinarily sold in the market in its
raw form or after application of any ordinary process. In such case the market value will be total of
the following : -
• The expenses of cultivation;
• The land revenue or rent paid for the area in which it was grown; and
• Such amount as the Assessing Officer finds having regard to the circumstances in each case to
represent at reasonable profit.
b. Incase of following specific agriculture produce:
Rule Apportionment of Income in certain cases Agricultural Business

Income Income
7A Income from growing and manufacturing of rubber 65% 35%
7B Income from growing and manufacturing of coffee
- Income derived from the sale of coffee grown 75% 25%
and cured
- Income derived from sale of coffee grown, 60% 40%
cured, roasted and grounded
8 Income from growing and manufacturing of tea 60% 40%
Examples of
1. Agriculture Income
a. Income derived from the sale of seeds.
b. Income from growing of flowers and creepers.
c. Rent received from land used for grazing of cattle required for agricultural activities.
d. Income from growing of Bamboo.
2. Non-agricultural Income
a. Income from breeding of livestock.
b. Income from poultry farming.
c. Income from fisheries.
d. Income from dairy farming.
➢ Partial Integration of agricultural income with non-agricultural income
This concept is known as partial integration of agricultural income with non-agricultural income. It is
applicable to individuals, HUF, AOPs, BOIs, and artificial juridical persons. Two conditions which need to be
satisfied for partial integration are:
1. The net agricultural income should exceed Rs.5,000 p.a. and

2. Non-agricultural income should exceed the maximum amount not chargeable to tax. (i.e., Rs.5,00,000
for resident super senior citizen, Rs.3,00,000 for resident senior citizens, Rs.2,50,000 for all others).
Tax calculation in such cases is as follows:

INCOME TAX MATERIAL
Step 1: Add non-agricultural income with net agricultural income. Compute tax on the aggregate amount.
Step 2: Add net agricultural income and the maximum exemption limit available to the assesse (i.e.,
Rs.2,50,000/ Rs.3,00,000/Rs.5,00,000). Compute tax on the aggregate amount.
Step 3: Deduct the amount of income tax calculated in step – 2 from the income tax calculated in step 1 –
step 2.
Step 4: The sum so arrived at shall be increased by surcharge, if applicable. It would be reduced by the
rebate, if any, available u/s 87A.
Step 5: Thereafter, it would be increased by health and education cess@4%.
2. Daily allowances of Member of Parliament [Sec. 10(17)]: provides exemption to Members of

Parliament and State Legislature in respect of the following allowances:
Cases Nature of allowance How much is exempt

Case 1 Daily allowance Entire amount is exempt
Case 2 Any other allowance received by a Member of Parliament Entire amount is exempt
under the Members of Parliament (Constituency Allowance)
Rules, 1986
Case 3 Constituency received by any person by reason of his Entire constituency allowance
membership of any State Legislature is exempt

INCOME TAX MATERIAL
Unit 3 - Income from Salary
1. Employer-employee relationship: Every payment made by an employer to his employee for service
rendered would be chargeable to tax as salaries.
2. Full-time or part-time employment: It does not matter whether the employee is a full-time
employee or a part-time one.
3. Foregoing of salary: Once salary accrues, the subsequent waiver by the employee does not absolve
him for liability to income-tax. Such waiver is only an application and hence, chargeable to tax.
4. Surrender of salary: However, if an employee surrenders his salary to the Central Government under
section 2 of the Voluntary Surrender of Salaries (Exemption from Taxation) Act, 1961, the salary so
surrendered would be exempt while computing his taxable income.
5. Salary paid tax-free: means that the employer bears the burden of the tax on the salary of the
employee. In such a case, the income from salaries in the hands of the employee will consist of his salary
income and also the tax on this salary paid by the employer.
6. Place of accrual of salary: As per sec - 9(1)(ii), place of accrual is a place where service is rendered.
Accordingly salary earned in India is deemed to accrue or arise in India even if it is paid outside or it is
paid or payable after the contract of employment in India comes to an end.

INCOME TAX MATERIAL
Section 15:- CHARGING SECTION:

Basis of charge as per section 15 – salary consists of –
a. Any salary due from an employer (or a former employer) to an assessee in the previous year,
whether actually paid or not;
b. Any salary paid or allowed to him in the previous year by or on behalf of an employer (or a former
employer) though not due or before it became due; and
c. Any arrears of salary paid or allowed to him in the previous year by or on behalf of an employer
(or former employer), if not charged to income tax for any earlier previous year.
Advance of Salary Advance against salary Arrears of Salary

Advance of salary is taxable Advance against salary is loan and Normally, Salary arrears must
when it is received by the different from advance salary. It is an be charged on due basis.
employee irrespective of the advance taken by employee form his However, there are
fact whether it is due or not. employer. This advance is generally circumstances when it may not
adjusted with his salary over a specified be possible to bring the same to
time period. It cannot be taxed as salary. charge on due basis.
➢ Salary:
The meaning of the term ‘salary’ for purposes of income-tax is much wider than what is normally
understood. The term ‘salary’ for the purposes of Income-tax Act 1961 will include both monetary
payments (e.g. basic salary, bonus, commission, allowances, etc.) as well as non-monetary facilities (e.g.
housing accommodation, medical facility, interest free loans, etc.
Section 17(1) - Salary is defined to include:

a. Wages;
b. Any annuity or pension;
c. Any gratuity;

INCOME TAX MATERIAL
d. Any fees, commission, perquisites or profits in lieu of or in addition to salary or wages;

e. Any advance of salary;
f. Any payment received in respect of any period of leave not availed by him. i.e., leave salary or leave
encashment.
g. The portion of annual accretion in any previous year to the balance at the credit of an employee
participating in a recognized provident fund to the extent it is taxable.
h. Transferred balance in a recognized provident fund to the extent it is taxable; and
i. The contribution made by the Central Government or any other employer in the previous year to the
account of an employee under a notified pension scheme referred to in section 80CCD.
Statement of salary:
Name of the Assesse _________________________________ PY 2019-20 AY 2020-21
Sl. Particulars Note Taxability Exemption Amount

No.
1. Wages/Basic Salary 1 Fully Taxable - XXX
2. Dearness Allowance 2 Fully Taxable - XXX
3. Commission 3 Fully Taxable - XXX
4. Bonus 4 Fully Taxable - XXX
5. Advance Salary / Arrears salary 5 Fully Taxable - XXX
6. Gratuity 6 Partly Taxable Sec -10(10) XXX
7. Pension 7 Partly Taxable Sec-10(10A) XXX
8. Leave Salary 8 Partly Taxable Sec- XXX
10(10AA)
9. Allowances 9 Partly Taxable Sec-10(13A), XXX
Sec-10(14)
10. Provident Fund 10 Partly Taxable Sec-10(11), XXX
Sec-10(12)
11. Super Annuation fund 11 Partly Taxable Sec-10(13) XXX
12. Retrench Compensation 12 Partly Taxable Sec-10(10B) XXX
13. Voluntary Retirement Compensation (VRS) 13 Partly Taxable Sec-10(10C) XXX
14. Perquisite 14 Partly Taxable Sec-17(2) XXX
Gross Salary XXXX
Less: Deduction u/s 16
1. Standard Deduction 15 (XXX)
2. Professional Tax 16 (XXX)
3. Entertainment Allowance 17 (XXX)
Net taxable salary XXXX
Notes:
1. Wages:
Wages means fixed regular payment earned for work or service. The words “wages”, “salary”, “basic
salary” are used interchangeably. Moreover, the payments in the form of Bonus, Allowances, etc. made to
the employee are also included within the meaning of salary.
2. Annuity or Pension:
Annuity: If a person invests some money entitling him to series of equal annual sums, such annual
sums are annuities in the hands of the investor.
Pension: Concise Oxford Dictionary defines ‘pension’ as a periodic payment made especially by
Government or a company or other employers to employee in consideration of past service payable after
his retirement.
3. Dearness Allowance (D.A.):

Dearness Allowance is fully taxable whether it is provided “in terms of retirement benefits” or “not in
terms of retirement benefits”.

INCOME TAX MATERIAL
DA in terms means DA which is forming part of retirement benefit calculation. In all the formulas, DA is
considered only if it is “in terms”.
If nothing is given about DA then assume it is “not in terms”.
4. Commission:
Commission is fully taxable whether it is Turnover commission, Sale commission or any other
commission.
5. Bonus:
It is taxable on receipt basis. It only declared is given then it should be ignored.
6. Advance & Arrears Salary:

(A) Advance salary
Advance salary is taxable on receipt basis. Its advance against salary is given or only advance is given
then it should be ignored because it is treated as loan.
(B) Arrears salary

It means salary under dispute or increase of salary retrospectively. It is taxable in the year in which it is
received if not taxed earlier.
7. Gratuity:
Gratuity is a voluntary payment made by an employer in appreciation of services rendered by the
employee. Now-a-days gratuity has become a normal payment applicable to all employees. In fact,
Payment of Gratuity Act, 1972 is a statutory recognition of the concept of gratuity. Almost all the
employers enter into an agreement with employees to pay gratuity.
1. Gratuity received during the employment – fully taxable for all employees (Government as well as
non-government employees).
2. Gratuity received at the time of retirement –
Exempt u/s 10(10)
Govt Employee Other Employee
Fully Exempt POGA E‘ee Non-POGA E‘ee

. [Employer is covered under POGA, 1972]
Other Employees:
(A) Covered by the Payment of Gratuity Act, 1972
Any death-cum-retirement gratuity is exempt from tax to the extent of least of the following:
(a) 15/26 x last drawn salary x No. of yrs of completed year of service or part thereof in excess of 6
months. [Rounding off allowed]
(b) Actually received
(c) Statutory Limit – Rs. 20,00,000
Note: Salary means basic salary and dearness allowance (Both in terms and not in terms).
(B) Not covered by the Payment of Gratuity Act, 1972:

INCOME TAX MATERIAL
Any death cum retirement gratuity received by an employee on his retirement or his becoming
incapacitated prior to such retirement or on his termination or any gratuity received by his widow,
children or dependents on his death is exempt from tax to the extent of least of the following:
(a) 1/2 x salary p.m. (Average of last 10 months salary) x No. of years of completed service [Rounding
off not allowed]
(b) Actual Amount received
(c) Statutory Limit – Rs. 20,00,000
Note: Salary means basic salary and dearness allowance, if provided in terms of employment for
retirement benefits, and turnover commission.
3. Where gratuity is received from 2 or more employers in the same year then aggregate amount of
gratuity exempt from tax cannot exceed Rs.20,00,000.
4. Where gratuity is received in any earlier yea from former employer and again received from another
employer in a later year, the limit of Rs.20,00,000 will be reduced by the amount of gratuity exempt
earlier.
5. Government employee are employees of Central Government/local authorities/ Statutory

Corporation/ members of the Civil Services/ Defence Services.
8. Annuity or Pension:
Annuity is a sum payable in respect of particular year. It is a yearly grant. If a person invests some money
entitling him to series of equal annual sums.
Annuity received from Taxable as
1. Present employer Salary
2. Past employer Profit in lieu of salary
3. Other than an employer Income from other sources
Pension is a periodic payment made especially by the Government or a company or other employers to
the employee in consideration of past service payable after his retirement.
- Uncommuted pension (monthly pension): Uncommuted pension refers to pension received

periodically. It is fully taxable in the hands of both government and non-government employees.
- Commuted pension (lumpsum pension): Commutation pension means lump sum amount
taken by commuting the whole or part of the pension. Many persons convert their future right to
receive pension into a lumpsum amount receivable immediately.
Exempt u/s 10(10A) in respect of commuted pension after retirement.
(A) Government Employee: Fully Exempt.

(B) Other Employees: Any commuted pension received is exempt from tax in the following
manner:
If the employee is in receipt of gratuity
If the employee does not received any

gratuity

INCOME TAX MATERIAL
9. Leave Salary or Leave Encashment:
Employees are allowed to take leave during the period of service. Employee may avail such leave or in
case the leave is not availed, then the leave may either lapse or be accumulated for future or allowed
to be encashed every year or at the time of termination/retirement as Leave Salary.
(A) Leave salary during employment - Fully taxable for all employees.
(B) Leave salary at the time of retirement.
Exemption u/s – 10(10AA)

(a) Government employees: Fully exempt.
(b) Non-government employees: Least of the following is exempt:

1) Leave credit x Salary p.m. (Average of last 10 months)
2) 10 Months x Salary p.m. (Average of last 10 months
3) Actual amount received
4) Statutory Limit - Rs. 3,00,000
(Whichever is lower)
Notes:
1. Salary means basic salary, dearness allowance, if provided in terms of employment for retirement
benefits, and turnover commission.
2. Leave Credit =Leave allowed [Max 30 days for every completed year of service] – Actual Leaves taken
3. Where leave salary is received from two or more employers in the same year then the aggregate
amount of leave salary exempt from tax cannot exceed Rs.3,00,000.
4. Where leave salary is received in any earlier year from a former employer and again recived from
another employer in a later year, the limit of Rs.3,00,000 will be reduced by the amount of leave
salary exempt earlier.
10. Allowances:
Allowances
Fully Taxable Partly Taxable Fully Exempt
1. Entertainment Allowance 1. House Rent 1. Allowances to High court
Allowance [u/s judges
10(13A)]
2. Dearness Allowance 2. Special Allowances 2. Allowance paid by the United
[u/s 10(14)] Nations Organisation
3. Overtime Allowance 3. Compensatory Allowances
4. Fixed Medical Allowance 4. Sumptuary allowance
5. City Compensatory Allowance 5. Allowance granted to
Government employees o/s
India.
6. Interim Allowance
7. Servant Allowance
8. Project Allowance
9. Tiffin/Lunch/Dinner
Allowance
10. Any other cash allowance
11. Warden Allowance
12. Non-practicing Allowance
13. Transport Allowance to
employee other than
blind/deaf and
dumb/handicapped employee

INCOME TAX MATERIAL
(A) Allowances which are fully taxable

(1) Entertainment allowances: This allowance is given to employees to meet the expenses towards
hospitality in receiving customers etc,.
(2) City compensatory allowances: City Compensatory Allowance is normally intended to
compensate the employees for the higher cost of living in cities.
(3) Transport allowance: Transport allowance granted to an employee to meet his expenditure for
the purpose of commuting between the place of his residence and the place of his duty is fully
taxable. However, in case of blind/deaf and dumb/handicapped
(B) Allowances which are partially taxable

(1) House rent allowance [Sec 10(13A)]: HRA is a special allowance specially granted to an employee
by his employer towards payment of rent for residence of the employee.
Metro Cities (i.e., Delhi, Kolkata, Mumbai, Other Cities
Chennai)
1) 50% of salary for the relevant period 1) 40% of salary for the relevant period
2) Rent Paid – 10% of salary for the period 2) Rent Paid – 10% of salary for the period
3) HRA Actually received 3) HRA Actually received
Note: Salary = Basic Salary, Dearness Allowance (in terms of retirement benefits) and Turnover
commission.
Relevant period means the period during which the said accommodation was occupied by the
assesse during the previous year.
(2) Special Allowance [Sec 10(14)]:
Particulars
Rule 2BB
Professional Allowance
Allowances granted to meet expenses incurred wholly, necessarily and exclusively in the
performance of the duties of an office or employment of profit. Sec - 10(14)(i) – There is no limit on
the amount which the employee can receive from the employer, but whatever amount is received
should be fully utilized for the purpose for which it was given to him
Travelling Allowance - To meet cost of travel on tour or on transfer.

Daily Allowance – To meet the ordinary daily charges incurred by an employee on account of
absence from his normal place of duty.
Conveyance Allowance – To meet the expenditure incurred in conveyance in performance of duties
of an office.
Helper Allowance – To meet the expenditure incurred on helper where such helper is engaged in the
performance of the duties.
Research Allowance – To encouraging the academic, research, and training pursuits in educational
and research institutions.
Uniform Allowance – To meet expenditure on the purchase or maintenance of uniform.
Personal Allowance
Allowances granted to meet his personal expenses at the place where prescribed for the purposes of
section 10(14)(ii)- There is a limit on the amount which the employee can receive from the employer.
Any amount in excess of these specified limits will be taxable.
Allowances Limits
Special Compensatory (Hilly Areas) Allowance Rs.800 or Rs.300 p.m. depending upon the
specified locations
INCOME TAX MATERIAL
Rs.7,000 pm in Siachen area of Jammu &

Kashmir
Border area allowance or remote locality allowance Rs.1,300 or Rs.1,100 or Rs.1050 or Rs.750 or
or difficult area allowance or disturbed area Rs.300 or Rs.200 pm depending upon the
allowance specified locations
Special Compensatory (Tribal/Schedule Rs.200 pm
Areas/Agency Areas) Allowances
Allowance granted to an employee working in any 70% of such allowance upto a maximum of
transport system Rs.10,000 pm
Children Education Allowance Rs.100 pm per child upto a maximum of two
children
Children Hostel Allowance Rs.300 pm per child upto a maximum of two
children
Compensatory Field Area Allowance Rs.2,600 pm
Compensatory Modified Field Area Allowance Rs.1,000 pm
Counter insurgency allowance Rs.3,900 pm
Transport allowance granted to an employee who Rs.3,200 pm
is blind or deaf and dumb or orthopedically
handicapped.
Underground Allowance Rs.800 pm
High Altitude Allowance
For Altitude 9,000 -15,000 fts Rs.1,060 pm
For above 15,000 fts Rs.1,600 pm
Special compensatory highly active field area Rs.4,200 pm
allowance
Island (duty) allowance granted to the member of Rs.3,250 pm
the armed forces in Andaman & Nicobar and
Lakshadweep Group of Islands.
11. Provident Fund

Provident fund scheme is a scheme intended to give substantial benefits to an employee at the time of his
retirement. Under this scheme, a specified sum is deducted from the salary of the employee as his
contribution towards the fund. The employer also generally contributes the same amount out of his
pocket to the fund. The contributions of the employer and the employee are invested in approved
securities. Interest earned thereon is also credited to the account of the employee.
a. Statutory Provident Fund (SPF)

The SPF is governed by Provident Funds Act, 1925. It applies to employees of government, railways,
semi-government institutions, local bodies, universities and all recognized educational institutions.
b. Recognized Provident Fund (RPF)

RPF means a provident fund recognized by the Commissioner of Income Tax for the purposes of
income tax. It is governed by Part A of Schedule IV to the Income-tax Act, 1961.
c. Unrecognised Provident Fund (URPF):

A fund not recognized by the Commissioner of Income Tax is Unrecognised Provident Fund.

INCOME TAX MATERIAL
d. Public Provident Fund (PPF):

Public provident fund is operated under the Public Provident Fund Act, 1968. A membership of the
fund is open to every individual though it is ideally suited to self-employed people. A salaried
employee may also contribute to PPF in addition to the fund operated by his employer.
Particulars Recognised PF Unrecognised PF Statutory PF Public PF

Exemption 10(12) Not Applicable Sec – 10(11)
Employer’s Amount in excess Not taxable Fully exempt N.A.(as there is
Contribution of 12% of salary is only assessee’s
taxable own contribution)
Employee’s Eligible for Not eligible for Eligible for Eligible for
Contribution deduction u/s deduction deduction u/s deduction u/s 80
80C 80C C
Interest Credited Amount in excess Not taxable yearly Fully exempt Fully exempt
of 9.5% p.a. is
taxable
Lumpsum Exempt subject to Fully Taxable Fully Exempt Fully Exempt
conditions [Note [Note -2]
-1]
Note: Salary = Basic Salary +Dearness Allowance (if provided in terms for retirement benefits) and
Turnover commission.
Notes:
1. Lumpsum amount received from RPF is exempt u/s 10(12) if employee has rendered service of 5 years or
more. if employee rendered service less than 5 years the exemption allowed in respect of employer’s
contribution and interest shall be withdrawn. However in the following three cases exemption shall not
be withdrawn even though service is less than 5 years.
a) Employee retired due to ill health

b) Employee retired due to shut down of employer’s business.
c) Any other cause beyond the control of employee.
d) Employee has retired with the instruction that his balance in RPF should be transferred to new
employer or to his NPS account.
2. Amount received on the maturity of URPF

a) Employee’s contribution is not taxable
b) Interest on Employee’s contribution is taxable under Income from Other sources.
c) Employer’s contribution and interest thereon is taxed as Salary.
12. Superannuation Fund
Particulars Approved Superannuation Fund Unapproved Superannuation Fund

Employer contribution Amount in excess of Rs.1,50,000 p.a. Not taxable
Employee contribution Ignore no deduction u/s – 80C Ignore
Interest credited Fully Exempt Not taxable
Lumpsum Fully Exempt Taxable same as URPF
➢ Profit in lieu of salary [Sec.17(3)] - It includes the following:

1. The amount of any compensation due to or received by an assesse from his employer or former employer
at or in connection with the termination of his employment.
at or in connection with the modification of the terms and conditions of employment.
3. Any payment due to or received by an assesse from his employer or former employer except the
following:
a. payment of gratuity exempted under section 10(10);

INCOME TAX MATERIAL
b. payment of house rent allowance exempted under section 10(13A);

c. payment of commuted pension exempted under section 10(10A);
d. payment of retrenchment compensation exempted under section 10(10B);
e. payment from an approved Superannuation Fund under section 10(13);
f. payment from statutory provident fund or public provident fund;
g. payment from recognized provident fund to the extent it is exempt under section 10(12).
4. Any payment from unrecognized provident fund or such other fund to the extent to which it does not
consist of contributions by the assesse or interest on such contributions.
13. Retrenchment Compensation

The retrenchment compensation means the compensation paid under industrial Disputes Act, 1947 or
under any Act, Rule, Order or Notification.
It may be noted that compensation on account of termination and due to modification in terms and
conditions of employment would be taxable as “profit in lieu of salary”. However, the retrenchment
compensation would be exempt u/s 10(10B),
a) Amount of compensation calculated as per Industrial Dispute Act, 1947

(i.e., 15/26 x Avg. Salary of last 3 months x No. of years of completion of service)
b) Statutory limit – Rs.5,00,000
c) Actually received
Whichever is lower.
Note: Salary = Basic salary + Dearness allowances + Commission + all other taxable monetary
allowances + perquisites such as rent free accommodation, supply of light, water, medical attendance or
any other amenity, supply of food grains or other articles.
Does not include:

- Any bonus;
- Contribution to a retirement benefits scheme; and
- Any gratuity payable on the termination of his service.
14. Voluntary Retirement Receipts [Exempt 10 (10C)]

Lumpsum payment or otherwise received by an employee at the time of voluntary retirement would be
taxable as “profit in lieu of salary”. However, it would be exempt u/s 10(10C),
1) Salary p.m. x 3 months x No. of years of completed year of service.

2) Salary p.m. x No. of remaining months of service.
3) Actual amount received.
4) Maximum 5,00,000.
Note: Salary p.m. = Basic Salary + Dearness Allowance (in terms of retirement benefits) + Turnover
Commission.
Note:
1. As per Rule 2BA prescribes the following guidelines
a. It applies to an employee who has completed 10 years of service or completed 40 years of age.
b. It applies to all employees of a company.
c. The vacancy caused by the voluntary retirement or separation must not be filled up.
d. The retiring employee of a company shall not be employed in another company or concern
belonging to the same management.
2. Where exemption for VRS u/s 10(10C) has been allowed in any assessment year, then no exemption
thereunder shall be allowed to him in any other assessment year.

INCOME TAX MATERIAL
15. Perquisites [Sec 17(2)]:

It means extra benefit offered by employer to employee. It may be monetary or non-monetary. the term
“perquisites” to include:
i. the value of rent-free accommodation provided to the assessee by his employer.

ii. the value of any concession in the matter of rent respecting any accommodation provided to the assesse
by his employer.
iii. the value of any benefit or amenity granted or provided free of cost or at concessional rate in any of the
following cases:
a. by a company to an employee who is director thereof;
b. by a company to an employee, being a person who has substantial interest in the company;
c. by any employer (including a company) to an employee to whom provisions of (i) and (ii) above do
not apply and whose income under the head “Salaries” exclusive of the value of all benefits or
amenities not provided for by way of monetary benefits, exceeds Rs.50,000 [Sec.17(2)(iii)];
iv. any sum paid by the employer in respect of any obligation which but for such payment would have been
payable by the assesse;
v. any sum payable by the employer, whether directly or through a fund other than a recognized provident
fund or approved superannuation fund or a deposit-linked insurance fund, to effect an assurance on the
life of the assesse or to effect a contract for an annuity;
vi. the value of any specified security or sweat equity shares allotted or transferred, directly or indirectly by
the employer, or former employer, free of cost or at concessional rate to the assesse.
vii. the amount of any contribution to an approved superannuation fund by the employer in respect of the
assesse, to the extent it exceeds Rs.1,50,000;
viii.the value of any other fringe benefit or amenity as may be prescribed.
Difference between allowance & perquisites

a. Allowance – It means monthly fixed amount received by employee from employer whether actual
expenditure is incurred or not. It is part of salary.
eg. HRA, Medical Allowances, etc.
b. Perquisites – It means benefits or facility provided by employer. It is received when actual expenditure is
incurred.
eg. Medical facility, car facility etc.

INCOME TAX MATERIAL
Perquisites taxable in the case of all employees:
1. Furnished / unfurnished house without rent or at concessional rent:
RENT FREE ACCOMODATION (HOUSE FACILITY)
Govt. Employee Other Employee
Taxable as per License

fees decided by Govt.
Owned by Employer Hired by Employer
Taxable amount = Taxable amount =
7.5%/10%/15% of Salary (i) 15% of salary .
(ii) Hire charge paid by ‘er
[Whichever is lower]
Furniture also provided
Owned by Employer Hired

10% of cost Hire charges paid by Employer
Note:
1. Population upto 10 Lakhs = 7.5%.
> 10 Lakhs upto 25 Lakhs = 10%.
> 25 Lakhs = 15%.
2. Meaning of Salary – BDBACM

B – Basic Salary A – Taxable Allowances
D – Dearness Allowance C – Commission (All)
B-Bonus M – Other monetary income excluding perks.
3. For computing BDBACM perks should not be considered.

4. BDBACM should be calculated on due basis, means salary of current period should be considered.
Advance salary, arrears salary should be ignored.
5. For computing BDBACM, retirement benefit should not be considered i.e., gratuity, pension, leave salary,
VRS, retrenchment compensation, lumpsum, amount from provident, etc,.
6. BDBACM should be considered for that much time for which assesse occupied such house.
7. Employer contribution towards PF & interest on PF should also be not considered.
In case of Hotel Accommodation Benefit:

Taxable amount = i) 24% of salary (BDBACM)
ii) Hire (Rent) charges paid by Employer.
Note:
a. If hotel facility is provided at the time of transfer of employee & if it is upto 15 day, the it is not
taxable.
b. In house facility & hotel facility if employer recover any rent from employee then such rent should be
deducted from above taxable amount.
2. Medical facility.
a. Treatment in India
Treatment in Govt. Hospital Otherwise

Treatment in Employer’s Own Hospital
Treatment in Govt. Recognised Hospital Exempt upto
Rs. 15,000

INCOME TAX MATERIAL
b. Treatment Outside India
Benefit of treatment Benefit of stay Benefit of Travel
Exempt upto limit prescribed by RBI It is fully exempt if

GTI is upto Rs. 200,000
Otherwise it is Fully taxable
Note:
i) Medical insurance premium is fully exempt.
ii) Exemption for treatment is allowed for employee spouse, children & dependent relative (Mother,
Father, Brother & Sister).
iii) Exemption of stay & travel is allowed only for one patient & one attendant.
3. Providing use of movable asset.

a. Computer / Laptop – Fully exempt.
b. Other asset (TV, AC, etc)
Owned by Employer Hired by Employer

Taxable amount = 10% of cost Taxable amount = Hire charges paid by ‘er
4. Transfer of movable asset.
Computer / Laptop Car Any other asset
Taxable amount Taxable amount Taxable amount

=WDV – Consideration =WDV – Consideration =WDV -Contribution
Dep” @ 50% on WDV Dep” @ 20% on WDV Dep” @ 10% on SLM

Method Method Method
Note: Dep” should be computed for every Completed for year.
5. Amount paid by an employer in respect of any obligation which otherwise would have
been payable by the employee.
e.g. Tax borne by employer on non-monetary perquisites of employee.
6. Amount payable by an employer directly or indirectly to effect an assurance on the life of

employee or to effect a contract of an annuity
e.g. Contribution to provident fund, contribution to NPS.
7. Interest-free / concessional loan.

i) If aggregate amount of original loan does not exceed Rs.20,000, the perquisite is not taxable.
ii) Loan for medical treatment (given in rule 3A) is not taxable subject to a few conditions.
8. Transport facility by a transport undertaking

a. Not taxable if it is provided by an airline or the railways.
b. Not taxable if the employee is a non-specified employee.

INCOME TAX MATERIAL
9. Free food and beverage

a. Food and non-alcoholic beverages provided in working hours in remote area or in an off-shore
installation are exempt from tax.
b. Tea, coffee or non-alcoholic beverages and snacks in working hours are tax-free perquisites.
c. Meals (lunch and/or dinner) in office hours is not taxable if cost to the employer is Rs.50(or less) per
meal. [i.e., if cost of food is more then 50 per day, then entire amount is taxable in the hands of
employee]
10. Gift or gift voucher

Gift in kind upto Rs. 5,000 is exempt. [ i.e., if gift is more then Rs.5000, then entire gift is taxable]
11. Value of any specified security / sweat equity shares allotted or transferred to an
employee or former employee.
It means company offer shares to employee at concessional rates.
Taxable amount = FMV of shares - Issue price
FMV should be taken on the date on which option is exercised by employee.
Perquisites exempt from tax in all cases
Telephone Telephone provided by an employer to an employee at his

residence
Transport Facility Transport facility provided by an employer engaed in the
business of carrying of passengers or goods to his employees
either free of charge or at concessional rate.
Privilege passes and privilege ticket Privilege passes and privilege ticket orders granted by Indian
Railways to its employees;
Perquisites allowed outside India by the Perquisites allowed outside India by the Government to a
government citizen of India for rendering service outside India
Employer’s contribution to staff group Employer’s contribution to staff group insurance
insurance scheme.
Annual Premium by employer on Payment of annual premium by employer on personal accident
personal accident policy policy effected by him on the life of the employee.
Recreational facilities Recreational facilities, including club facilities, extended to
employees in general i.e., not restricted to a few select
employees;
Amount spent on training of employees Amount spent by the employer on training of employees or
amount paid for refresher management course including
expenses on boarding and lodging
Leave Travel Concession Leave travel concession is exempt subject to conditions as per
Sec – 10(5) [Refer Note: 1].
Conveyance facility Conveyance facility provided to High Court Judges, Supreme
Court Judges.
1. Leave travel concession:

Exempt u/s 10(5)
Travel by Air Travel by any other mode
Railway facility available Railway facility not available

INCOME TAX MATERIAL
Amount exempt from reimbursement of travel expenditure paid by employer to employee:
Incase of Travel by Air:
i) Actual Expense xx
ii) Economy Class fare xx
In case of Travel by any other mode:
➢ Railway facility is available

i) Actual Expenses xx
ii) 1st class Railway A/c fare xx
➢ Railway facility is not available

a. Recognised transport facility is available
Exempt
i) Actual Expenses xx
ii) Delux class bus fare xx
b. Recognised transport facility is not available

i) Actual Expense xx
ii) 1st class railway fare of similar distance xx
Note:
1. LTC exemption is available for the travel of employee, his spouse, children & dependent relative –
(Mother, Father, Brother, Sister)
Exemption of LTC is available only for 2 children born on or after 1/10/1998.
i) 1st time = 1 child 2nd time = Twins
Total 3 children = Exemption allowed to all 3 children.
ii) 1st time = Twins 2nd time = 1 child
Total 3 children = Exemption allowed to only 2 children.
2. LTC exemption is available for 2 years during the block of 4 years (current block is 2014-17).
Perquisites taxable only in case of specified employees:
1. Car or any other automotive conveyance

a. Car is used for fully office purpose – Fully Exempt.
If Employer maintains record of each journey & Employer issue a certificate that car is used
exclusively for office purpose.
b. Car is used for fully personal purpose.

Car of owned by Employer = 10% of cost
or
Hired by Employer = Hire charges paid by Employer
Plus Driver’s Salary (if paid by Employer) = XXX
Plus Running & maintenance charges (if paid by Employer) = XXX

INCOME TAX MATERIAL
c. Car is used for partly office & partly personal purpose. (POPP)
POPP
Car owned by Employer Car owned by Employer & Expense
Running & maintenance charges
paid by Employee Employer
Taxable Amount Taxable Amount
Employee Employer [600 p.m. / 900 p.m.] [1800 p.m./2400 p.m.]
[Upto 1600cc/ >1600 cc] [Upto 1600/ >1600 cc]
No benefit Taxable Amount
Not Taxable Running & Maintenance charges
paid by Employer xxx
(-) 1800 p.m. / 2400 p.m. (xxx)
Balance Taxable Amount xxx
[upto 1600 cc – 1800 p.m.] [> 1600 cc – 2400 p.m.]
Note:
1. If employer also provided driver, then Rs.900 p.m. should be added to above taxable amount.
2. If more than one car is provided for POPP then one car is taxable according to above standard amount &
other car shall be taxable on the assumption that it is fully used for personal purpose.
Note:
a. If employer also provided driver, then Rs.900 p.m. should be added to above taxable amount.
b. If more than one car is provided for POPP then one car is taxable according to above standard
amount & other car shall be taxable on the assumption that it is fully used for personal purpose.
2. Education facility to employee’s family members

For Specified Employee:
(i) For employee – Fully exempt.
(ii) For children – It is exempt if value of education is upto Rs. 1000 p.m. per child & education is
provided in employer’s own institution or institution where employer have tie-ups, otherwise
fully taxable.
(iii) For other relatives – Fully taxable.
3. Service of a sweeper, gardener, watchman or personal attendant.

For specified employee:
The value of benefit to the employee or any member of his household resulting from the provision by the
employer of the services of a sweeper, a gardener, a watchman or personal attendant, shall be the actual
cost to the employer.
4. Supply of gas, electricity or water for household purposes.

For specified employee:
Circumstances Value of benefit
If payment is made to agency supplying of gas, Sum equal to the amount paid on that account by
electricity, etc,. the employer to the agency supplying the gas,
electric energy or water
If supply is made from resources owned by the Manufacturing cost per unit incurred by the
employer employer

INCOME TAX MATERIAL
Deduction form Gross Salary Income [Sec. 16]
Sec.16(iia) – Standard Deduction
A standard deduction of Rs. 40,000 or the amount of salary, whichever is lower, is to be provided to the
employees.
Sec.16(ii) – Professional tax:
It means tax on employment. If it is paid by employer on behalf of employee, then first it should be
taxable and thereafter deduction allowed u/s 16(ii). If it is paid by employee then only deduction is
allowed.
Sec.16(iii) Entertainment allowance:
It is fully taxable for all employee. But deduction is allowed to government employees u/s 16(iii) as
follows:
(i) 20% of Basic Salary.

(ii) Actual amount received.
(iii) Maximum Rs.5,000.
Salary Definition*
Definitions of Salary
1. Gratuity – POGA Basic Salary + Dearness Allowance (Both)
2. Gratuity – Non POGA Basic Salary + Dearness Allowance (in terms of retirement) + Turnover
3. Leave Encashment commission.
4. Contribution to PF
5. Voluntary retirement
scheme compensation
6. Retrenchment Salary = Basic salary + Dearness allowances + Commission + all other
compensation taxable monetary allowances + perquisites such as rent free accommodation,
supply of light, water, medical attendance or any other amenity, supply of
food grains or other articles.
7. Rent Free Basic Salary, Dearness Allowance, Bonus, Commission, taxable allowance,
Accommodation and other monetary income excluding perks.
8. Entertainment Allowance Basic Salary
Profit in lieu of salary [Sec.17(3)] - It includes the following:
at or in connection with the termination of his employment.
at or in connection with the modification of the terms and conditions of employment.
7. Any payment due to or received by an assesse from his employer or former employer except the
following:
h. payment of gratuity exempted under section 10(10);
i. payment of house rent allowance exempted under section 10(13A);
j. payment of commuted pension exempted under section 10(10A);
k. payment of retrenchment compensation exempted under section 10(10B);
l. payment from an approved Superannuation Fund under section 10(13);
m. payment from statutory provident fund or public provident fund;
n. payment from recognized provident fund to the extent it is exempt under section 10(12).
8. Any payment from unrecognized provident fund or such other fund to the extent to which it does not
consist of contributions by the assesse or interest on such contributions.

INCOME TAX MATERIAL
Unit – 4: Income from House Property Income
❖ Section 22: Charging Section
Rental income (Annual Value) is taxable under the head income from house property if following two conditions
are satisfied:
1. There should be House Property.

2. Assessee should be Owner of that house property.
1. Property should consist of any building or land appurtenant thereto.

(a) Buildings include not only residential buildings, but also factory buildings, offices, shops, godowns
and other commercial premises.
(b) Land appurtenant means land connected with the buildings like garden, garage, etc,.
Note: Income from letting out of vacant land is, however, taxable under the head “Income from other
courses” or “Profits and gains from business or profession”, as case may be.
2. Assessee must be the owner of the property.

(a) Owner is the person who is entitled to receive income from the property in his own right.
(b) Ownership includes both free-hold and lease-hold rights.
(c) Ownership includes deemed ownership.
(d) The person who owns the building need not also be the owner of the land upon which it stands.
Computation of Income from House Property: PY 18-19 AY 2019-20
Particulars Amount
Gross Annual Value (GAV) -
( - ) Municipal taxes paid -
Net Annual Value (NAV) -
( - ) Deduction u/s 24
(i) Standard deduction @ 30% of NAV -
(ii) Interest on Loan (XX)
Income from house property (XX)
❖ Gross annual value is determined as follows –
Step I – Find out reasonable expected rent of property [Sec.23(1)(a)]:
Reasonable expected rent is deemed to be the sum for which the property might reasonably be expected to be let
out from year to year.
the reasonable rent is computed on the basis of three factors namely –
a. Municipal valuation (MV): It means value of property as per municipality record.

b. Fair rent of the property (FR): It means rent of similar property in same locality. It is also known as
reasonable rent/reasonable letting value.
c. Standard rent of the property (SR): It means rent as per Rent Control Act. It is the maximum amount of
rent that can be legally recovered by Owner from tenant.
Reasonable Rent = Higher of Municipal Value or Fair Rent subject to maximum of Standard Rent.
Step II – Find out rent actually received or receivable after excluding unrealized rent but before
deducting loss due to vacancy –

INCOME TAX MATERIAL
Rent of the previous (or that part of the previous year) for which the property is available XXXX
for letting out
Less: Unrealised rent if a few conditions are satisfied (XXX)
Rent received or receivable before deducting loss due to vacancy XXXX
Unrealised Rent: It means rent which is not recovered by owner from tenant. It is like Bad debts of rent. It is
deductible while calculating actual rent if the following four conditions of Rule 4 are satisfied:
1. Tenancy should be bonafide.

2. Tenant should have vacated that house property.
3. Such tenant should not occupy any other house property of same assesse.
4. Reasonable step should have been taken for recovery of unrealized rent.
Step - III – Find out amount in Step – I or Step – II whichever is higher.
Step - IV: Loss due to vacancy.
Step - V: Gross Annual Value (Amount as per Step – III less Loss due to vacancy as per Step – IV).
Sl. No. Situation Gross Annual Value

1. Where property is let out for whole year There is no loss due to vacancy,
GAV > 0.
2. Where let out property is vacant for part of the year [Sec - 23(1)(c) Benefit of loss due to vacancy
deducted from Amount as per
Step – III, GAV > 0
3. In case of self-occupied property or unoccupied property [Sec - 23(2)] GAV = Nil
Where the property is self-occupied for won residence or unoccupied

throughout the previous year.
The benefit of “Nil” Annual value is available for only for upto two self
occupied or unoccupied house properties.
4. Where a house property is let-out for part of the year and self – Reasonable rent for whole year
occupied for part of the year [Sec - 23(3)] shall be compared with the
actual rent for the let out period
and whichever is higher is GAV.
GAV > 0.
5. In case of deemed to be let out property [Sec – 23(4)] Such SOP/UOP shall be deemed
to be let-out property.
Where the assesse owns more than two properties for self –
occupation, then the income from any two properties, at the option of GAV >0.
the assesse, shall be computed under the self – occupied property
category.
The other self-occupied/unoccupied properties shall be treated as
“deemed let out properties”.
6. In case of a house property held as stock-in-trade [Sec 23(5)] GAV = Nil for two years from
end of the financial year in
In some cases, property consisting of any buildings or lands which certificate of completion is
appurtenant thereto may be held as stock-in-trade, and the whole or received.
any part of the property may not
7. In case of a house property, a portion let out and a portion self – MV/FR/SR, if not given
occupied separately, shall be apportioned
between the let-out portion and
Income from any portion or part of a property which is let out shall be self-occupied portion on
computed separately under the “let out property” and the other reasonable basis – plinth are or
portion which is self-occupied under the “self-occupied property” built-up floor space.
GAV >0.

INCOME TAX MATERIAL
❖ Municipal Taxes paid:

Property taxes are allowable as deduction from GAV subject to conditions;
a. It should be borne by the assesse (owner) and
b. It should be actually paid during the previous year.
c. If in any subsequent year, the arrears are paid, then the amount so paid is allowed as deduction in
computation of income for that year.
d. In case of the property situated outside India, taxes levied by local authority of the country in which
the property is situated is deductible.
e. In respect off self-occupied/unoccupied house property/ properties for which GAV = Nil, deduction
of municipal taxes paid is not allowable.
❖ Deduction from Net Annual Value [Section – 24]:
1. Standard Deduction [Sec.24(a)] – 30% of Net annul value.

a. This is a flat deduction and is allowed irrespective of the actual expenditure incurred.
b. In case of self-occupied/unoccupied property or property held as stock-in-trade upto two years, as a
case may be, no deduction available.
2. Interest on Loan [Sec. 24(b)] - Interest on borrowed capital is allowable as deduction, if loan is
borrowed for the purpose of purchase, construction, repair, renewal, or reconstruction of the property.
the following points should also be kept in view –

✓ Interest on borrowed capital is deductible on “accrual” basis. It can be claimed as deduction on yearly
basis, even if the interest is not actually paid during the year. [ Paid – Allowed; O/S – Allowed]
✓ Interest on unpaid interest [Penal Interest] is not deductible.
✓ Interest on a fresh loan, taken to repay the original loan raised for the aforesaid purposes, is
allowable as deduction.
✓ Interest paid outside India shall not be allowed as deduction if TDS not deducted on such interest.
Interest on pre-construction period:

Pre-construction / Acquisition interest: Interest payable by an assesse in respect of funds borrowed
for the acquisition or construction of a house property and pertaining to a period prior to the
previous year in which such property has been acquired or constructed, to the extent it is not allowed
as a deduction under any other provision of the Act, it is allowed in Five equal instalments from
the previous year in which acquired/construction was completed.
“Pre-construction period” means the period commencing on the date of borrowing and ending on
March 31 immediately prior to the date of completion of construction / date of acquisition.
Interest for the year in which construction is completed / property is acquired:

Interest relating to the year of completion of construction/acquisition of property can be fully
claimed in that year irrespective of the date of completion/acquisition.

INCOME TAX MATERIAL
✓ Limit on Interest [ including pre-construction interest] amount deduction u/s 24(b)
LOP/DLOP SOP/UOP
No Limit Special case Normal case

(Total Int allowed)
Max Rs.2,00,000 Max Rs. 30,000

(1) Loan is taken on or after 1.4.1999
(2) Loan taken for purchase or construction
of house property.
(3) If loan is taken for construction then,
construction should be completed within
5 years w.e.f. A.Y. 2017-18 from the end of
the year in which loan was taken.

INCOME TAX MATERIAL
❖ Recovery of un-realised rent or arrears of rent [ Sec. 25A]:
Recovery is taxable in the year in which it is recovered, received under the head house property, whether the
assesse is the Owner of the property or not in that Financial Year. Any expenditure for such recovery shall be
IGNORED.
Taxable amount = Recovery X 70% [30% Standard Deduction].
❖ Concept of Joint Ownership:
Joint ownership (co-ownership) means property is owned by more than one owner. In this case, income from
house property is calculated normally & thereafter it should be divided between co-owners in their ownership
ration.
Interest on Loan
LOP/DLOP SOP
Full Interest Allowed Rs.30, 000/ Rs.2, 00,000 X No. of co-owner.
❖ Concept of composite rent:
The owner of a property may sometimes receive rent in respect of building as well as –
1. Other assets like furniture, plant and machinery.

2. For different services provided in the building.
a. Lifts
b. Security
c. Power backup
The amount so received is known as “Composite rent”
Composite rent = Rent of House property + Rent of other assets & amenities.
Agreement is separable Agreement not separable
Rent of HP Rent of other assets Total rent taxable
Taxable under IFHP Taxable under IFOS/ PGBP under IFOS/PGBP
Note: If let out of property not feasible without other asset then total rent is taxable under the head income from
Business / Profession or income from other sources whether agreement is separable or not. E.g. Hotel

INCOME TAX MATERIAL
❖ Deemed Owner [Sec. 27]:

1. If any individual transfers any house property to his /her spouse for without consideration or inadequate
consideration then such transferor is treated as Deemed owner of such property.
Exception: Transfer in connection of live apart.
2. If any individual transfer any house property to minor child (other than minor married daughter) for
without consideration or inadequate consideration then such transferor is treated as deemed owner.
3. In case of co-operative society, shareholders is treated as deemed owner of such property.
4. Holder of an impartible estate.
The impartible estate is a property which is not legally divisible. The holder of an impartible estate shall
be deemed to be the individual owners of all properties comprised in the estate.
5. Person in possession of a property – A person who is allowed to take or retain the possession of any
building or part thereof in part performance of a contract of the nature referred to in section 53A of the
Transfer of Property Act shall be the deemed owner of that house property. This would include cases
where the –
a. Possession of property has been handed over to buyer.
b. Sale consideration has been paid or promised to be paid to the seller by the buyer.
c. Sale deed has not been executed in favour of the buyer, although certain other documents like power
of attorney/agreement to sell/will etc. have been executed.
6. Person having right in a property for a period not less than 12 years – A person who acquires any rights
in or with respect to any building or part thereof, by virtue of any transaction as is referred to in section
269UA(f) i.e. transfer by way of lease for not less than 12 years, shall be deemed to be the owner of that
building or part thereof.
❖ Income from House Property situated Outside India.
(i) In case of a resident in India (resident and ordinarily resident in case of individuals and HUF),
income from property situated outside India is taxable, whether such income is brought into
India or not.
(ii) In case of a non-resident or resident but not ordinarily resident in India, Income from property
situated outside India is taxable only if it is received in India.

INCOME TAX MATERIAL
Unit 5 - Profit & Gains Business & Profession
Business Profession
Sec – 2(13) ‘Business’ include any trade, commerce or Profession means an occupation requiring some
manufacture or any adventure or concern in the degree of learning. Th term ‘profession’ includes
nature of trade, commerce or manufacture. vocation as well”.
Business necessarily means a continuous exercise of Example – a Painter, a sculptor, an author, an
an activity; nevertheless, profit from a single venture auditor, a lawyer, a doctor, an architect and even an
in the nature of trade may also be treated as business. astrologer are persons who can be said to be carrying
on profession but not business.
Method Accounting:
Sec – 145: Income chargeable under the heads “Profits and gains of business or profession” or “Income from
other sources” shall be computed in accordance with either the cash or mercantile system of accounting regularly
employed by the assesse expect (145B)
1. Interest received by an assesse on compensation or on enhanced compensation, shall be deemed to be
income of the year in which it is received.
2. Assistance in the form of a subsidy or grant or cash incentive or duty drawback or waiver or concession or
reimbursement by government shall be deemed to be income of the year in which it is received
Notified ICDS have to be followed by all assesse (other than an individual or a Hindu undivided family who is not
required to get his accounts of previous year audited in accordance with Sec – 44AB) following the mercantile
system of accounting, for the purposes of computation of income chargeable under “Profits and gains of business
or profession” or Income from other sources”.
Section – 28: Charging Section.

Following income shall be taxable under the head PGBP.
1. Any profit or gain of any business/Profession.
2. Profit on sale of import entitlement license.
3. Cash compensatory support or duty drawback.
4. Profit on sale of Duty entitlement pass book scheme [DEPB ] or Duty Free Replenishment Certificate
[DFRC].
5. Any amount received under Key-Man Insurance Policy.
6. Any gift/benefit/perquisite arising due to business or profession.
7. Any interest, salary, bonus, commission received by partner from partnership firm [to the extent allowed
u/s 40(b) to firm]
8. Non-compete fees [not carrying in relation to any business or profession or not sharing any know-how,
patent, copyright, trade-mark, etc,.

INCOME TAX MATERIAL
9. Income derived by a trade, professional or similar association from specific service perform for its
member.
10. FMV of inventory as on the date on which it is converted into Capital Asset.
11. Any compensation or other payment due to or received by any person at or in connection with the
termination or modification of the terms and conditions of any contract relating to his business.
Speculation Business:
It means a transaction in which a contract for the purchase or sales of any commodity including stocks and
shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or
scrips.
Transactions not deemed to be speculative transaction

a. Hedging contract in respect of raw materials or merchandise or stocks and shares.
b. Forward contract
c. Trading in derivatives through recognized association, which is chargeable to commodities transaction tax.
Section – 29 : How to compute PGBP

PGBP are to be computed in accordance with provisions contained in sections 30 to 43D.
Format for computation of Profits and Gains of Business or Profession

Sl. No. Particulars Amount
Net profit as per statement of profit and loss ****
Add: Expenses debited but not allowable ****
Less: Expenditure allowable as deduction but not debited. (***)
Less: Income credited in statement of profit and loss but not taxable / taxable under (***)
any other head.
Add: Deemed income ***
Profits and gains from business or profession ****

INCOME TAX MATERIAL
Section – 30: Rent, Rates, Taxes, Repairs & Insurance of building.

Rent Rates & Insurance Revenue Repair Capital Repair
taxes
Owner Not Allowed Allowed Allowed Allowed Not Allowed
Tenant Allowed Allowed Allowed Allowed Not Allowed *
* Added to Cost of Asset
Section 31: Insurance & Repairs of Plant & Machinery, & Furniture.
Rent Insurance Revenue Repair Capital Repair
Owner Not Allowed Allowed Allowed Not Allowed
Tenant Allowed [Sec – 37] Allowed Allowed Not Allowed *
Notes:
1. Premises used partly for business and partly for other purposes: where the premises are used partly for
business and partly for other purposes, only a proportionate part of the expenses attributable to that part of
the premises used for purpose of business will be allowed as a deduction.
2. Cost of repairs and current repairs of capital nature not to be allowed as deduction [Explanation to sec – 30].
Section 32: Depreciation

Explanation 5 provides that deduction on account of depreciation shall be made compulsorily, whether or not the
assesse has claimed the deduction in computing his total income.
A. Conditions to claim depreciation

1. Asset should be either of buildings, machinery, plant or furniture, being tangible assets and know-how,
patent, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar
nature, being intangible assets.
2. Assets should be used for business / profession purposes (active or passive)
3. Assessee should be Owner of such asset (wholly or partly)
Note:
1. Depreciation is allowed if assessee is beneficial owner.
2. In case of Lease, depreciation is always claimed by lessor whether it is Financial Lease or Operating
Lease.
3. In case of Hire Purchase, assessee gets the ownership only after payment of last instalment but he can
claim depreciation from beginning, assuming assessee is the owner from beginning.
4. Depreciation on asset partially owned by the assessee shall be allow to him, to the extent of his share in
asset.

INCOME TAX MATERIAL
B. Classification of Depreciable assets

Sl. Rates of Depreciation Rate (%)
No.
1. Building
i. Residential 5
ii. General 10
iii. Temporary structure 40
2. Furniture & Fittings 10
3. Plant & machinery
i. Motor vehicles
• Used in a business of running them on Hire 30
• Other Motor Vehicle 15
ii. Ships 20
iii. Aircraft 40
iv. Computer/Laptop 40
v. Books
• Normally 40
• Annual Publication 40
• Libraries Business 40
vi. Windmills & its equipment’s.
• Installed before 01-04-2014 15
• Installed on or after 01-04-2014 40
vii. Pollution control equipment’s 40
viii. Other plant & machinery 15
ix. Oil wells 15
4. Intangible assets 25
C. Method of Depreciation
Business of Generation or Generation & distribution of power Other assesse
Option to follow SLM or WDV Method Always follow WDV Method
D. WDV Method [Block of Asset System]

Sl. No. Particulars Amount
Opening WDV of Block *****
Add: Actual Cost of asset acquired during PY
➢ Put to use 180 days or more ***
➢ Put to use less than 180 days ***

INCOME TAX MATERIAL
➢ Acquired but not put to use ***

Less: Money payable (selling price of asset) (***)
Less: WDV of assets transferred in Slump Sale (compute WDV of asset (**)
assuming this is only asset in block)
WDV of block for Depreciation *****
Less: Depreciation actually allowed (**)
Closing WDV of Block *****
Notes:
1. If asset acquired during current PY & not put to use then depreciation shall not be allowed for such asset
but that asset should be added to Block of asset.
2. Actual sale price of asset shall be reduced and not the FMV of asset sold.
3. Money Payable means sale price or insurance compensation in respect of asset sold, discarded,
demolished, or destroyed during the PY and the amount of scrap value.
Sec – 43(1) Actual Cost of asset means

Cost of asset (purchase price) ***
(+) Installation charges ***
Transportation expenses for asset ***
Trial run/ test run expenses ***
Taxes & Duties (if ITC not available) ***
Interest on Loan taken for acquisition of asset (upto the date of asset put to use) ***
*****
(-) Amount received on sale of trail run product (***)
****
(-) Subsidy / Govt Grants received for acquisition of assets (***)
Actual Cost ****
# Proviso to Sec – 32(1)

Depreciation is restricted to 50% if asset put to use for less than 180 days in the year of acquisition, Restriction
applies only in the year of acquisition.
32(1)(iia) Additional Depreciation

Assessee – engaged in the business of manufacture of any article or generation, transmission or distribution of
power.
Additional Depreciation @ 20% allowed on actual cost of plant & machinery
Plant & Machinery excludes following:
i. Any second hand P&M was used within or outside India by any person.
ii. Any P&M installed in office premises or residential accommodation or in any guest house.

INCOME TAX MATERIAL
iii. Ships, aircraft, road transport vehicles & office appliances.

iv. Any P&M on which 100% deduction allowed.
# Additional depreciation is allowed only in the first year in which it is put to use. If put to use for less than 180
days then 10% depreciation shall be allowed
# Proviso to 32(1)(iia) additional depreciation @ 35% available (instead @20%) if undertaking is set-up on or
after 01/04/2015 in the notified backward area of Bihar, Andhra Pradesh, Telangana or West Bengal for
manufacturing if any article.
The CBDT has vide Circular clarified that the business of printing or printing and publishing amounts to
manufacture or production of an article or thing and is, therefore eligible for additional depreciation.
E. SLM Method – Individual asset system shall apply (power units)

If power units follows SLM method then they are subject to individual asset system profit & loss is calculated
on every sale.
Terminal Depreciation: In case of power concern follows SLM method, if any asset is sold, discarded,
demolished, or otherwise destroyed in the previous year the depreciation amount will be the amount by
which the moneys payable in respect of such asset together with the amount of scrap value, if any falls short
of the written down value thereof. The depreciation will be available only if the deficiency is actually written
off in the books of the assesse.
F. Sec – 32(2) - Carry forward and set off of depreciation

Where in any previous year the profits or gains chargeable are not sufficient to give full effect to the
depreciation allowance, the unabsorbed depreciation shall be added to the depreciation allowance for the
following previous year and shall be deemed to be part of that allowance. Th effect of this provision is that
the unabsorbed depreciation shall be carried forward indefinitely till it is fully set off.
Order of set-off:
Firstly unabsorbed business losses.
Secondly unabsorbed depreciation.
Notes:
1. Since the unabsorbed depreciation forms part of the current year’s depreciation, it can be set off against
any other head of income expect “Salaries”.
2. The unabsorbed depreciation can be carried forward for indefinite number of previous years.
3. Set off will be allowed even if the same business to which it relates is no longer in existence in the year in
which the set off takes place.
G. Proviso to Sec – 32(1) : Depreciation in case of Amalgamation / Demerger / Succession

INCOME TAX MATERIAL
In these cases depreciation is calculated normally & after that it shall be distributed between
Amalgamating Co./ Demerged Co./ Predecessor And Amalgamated Co./Resulting Co./Successor in the
ratio of the number of days for which assets were used by them.
H. Sec – 38(2) Asset partly used for other purpose
If asset is not exclusively used for the purpose of business or profession, the deduction on account of
expenses u/s 30, 31, & 32 shall be restricted to a proportionate part as determined by AO.
Section – 32AD Investment Allowance

1. Eligible Assessee: Every assesse setting up an undertaking for manufacture or production of any article on or
after 01/04/2015 in any notified backward areas of Andhra Pradesh, Bihar, Telangana, West Bengal.
2. Amount of deduction: 15% of Actual Cost of New P&M acquired & installed during 01/04/2015 to
31/03/2020 (Deduction in the year of Installation)
3. Assessee should not transfer P&M [on which investment allowance claimed] within 5 years from the date of
its installation. If it is transferred within 5 years then deduction allowed u/s 32AD shall be taxable under
PGBP in the year in which P&M sold or otherwise transferred [Exception – Amalgamation, Demerger, or Re-
organization].
4. Plant & Machinery does not include
- Second hand P&M
- Plant & Machinery installed in office premises or residential accommodation
- Ship, Aircraft & Road Transport Vehicles
- P & M on which 100% deduction allowed.
5. This deduction is addition to depreciation & additional depreciation.
6. This is deduction shall not be reduced from WDV of block of asset.
7. This deduction shall not be restricted to 50% if P&M used for less than 180 days.
Section - 33AB/33ABA
33AB: Deduction for Tea, Coffee, Rubber 33 ABA: Deduction for Petroleum & Natural
Business Gas business
Assessee All assesse engaged in the business of Growing All assesse engaged in the business of
& Manufacturing of Tea, Coffee, Rubber in prospecting, extraction, production of natural
India
Deposit Deduction is allowed if some amount is Deduction is allowed if some amount os
deposited in NABARD upto the due of return deposited in SBI [Site Restoration A/c] upto
filing the end of the PY
Deduction (i) Actual amount deposited or (i) Actual Amount deposited or
Amount (ii) 40% of PGBP [Before this deduction] (ii) 20% of PGBP [before this deduction]
Whichever is lower Whichever is lower
Utilization Deposited amount should be utilized for Deposited amount should be utilized for
purpose prescribed by Tea, Cofffee, Rubber purpose prescribed by Ministry of Petroleum

INCOME TAX MATERIAL
Board & Natural gas Govt of India.

Mis – If deposited amount is mis-utilised then If deposited amount is mis-utilized then
Utilization deduction allowed earlier shall be withdrawn & deduction allowed earlier shall be withdrawn
taxable under PGBP. & taxable under PGBP.
Notes:
1. If any amount is withdrawn from NABARD/ Site Restoration A/c should be utilized in year of withdrawal
only, otherwise such amount shall be taxable.
2. If any amount is utilized for following purposes then deduction claimed earlier shall be withdrawn:
• For P&M used in office premises or residential accommodation
• For office appliances [not being computer].
• P&M on which 100% deduction already allowed under the head PGBP.
3. For the purpose of Sec – 33AB withdrawal of Deposit
Closure of business Taxable
Dissolution of the firm Taxable
Death of an assesse Not Taxable
Partition of a HUF Not Taxable
Liquidation of a company Not Taxable
Section - 35: Expenditure incurred on scientific research

Section Expenditure incurred / Contribution made to Deduction (as a % of
contribution made)
35(1)(i) Revenue expenditure incurred on scientific research related to the 100%
assessee’s business
35(1)(ii) Nootified approved research association / university / college / other 150%
institutions for scientific research
35(1) (iia) An approved Indian company for scientific research 100%
35(1)(iii) Notified Nootified approved research association / university / college / 100%
other institutions for Social science or statistical research
35(1)(iv) Capital expenditure (other than expenditure on land) incurred on 100%
scientific research related to the assesses business
35(2AA) An approved National Laboratory/University/ IIT/ Specified person for 150%
scientific research undertaken under an approved programmed.
35(2AB) Expenditure incurred by a company engaged in the business of Bio- 150%
technology or any business of production or manufacture of article or
thing, not being listed in Eleventh Schedule on approved in-house
research and development facility

INCOME TAX MATERIAL
Section – 35ABB Expenses for obtaining Telecommunication License/[Sec – 33ABA – Spectrum Fee]
License obtained before commencement if Business License obtained after commencement of business
[license fees already paid]
Deduction shall be allowed from PY in which business Deduction shall be allowed from PPY in which fees
commences till P.Y, in which license expires paid till the PY in which license expires.
Notes:
If there is a Amalgamation or Demerger, then remaining deduction shall be allowed to Amalgamated Company /
Resulting Company as they would have allowed to Amalgamating Co. / Demerged Co.
Section – 35CCC: Expenditure on Agriculture Section – 35CCD: Expenditure for Skill Development
Extension Project Project
150% allowed, if expenses (except L&B as per CBDT 150% allowed, if any expenditure incurred (expect
Notification) incurred for notified agriculture Land & building ) for notified skill development
extension project. This deduction is allowed to all project. This deduction is allowed only to companies.
assesses
Section 35D: Preliminary expenses

Meaning:
a) Preparation of feasibility study/project report
b) Market survey
c) Engineering services
d) Drafting & Printing of MOA/AOA
e) Legal fees
f) Expenses related to public issue of shares & Debentures
g) Other expenses may be notified by CBDT
Deduction allowed to resident assesse who incurs preliminary expenses before commencement of business or
after commencement for extension or for setting up a new unit.
Amount of Deduction
Indian Co. Other resident
a. Actual Preliminary a. Actual preliminary
b. 5% of COP/CE ** b. 5% of COP
** COP or CR whichever is Higher
Notes:
1. Above deduction is allowed in 5 equal instalments.
2. COP = Cost of project [Amount invested in fixed asset of new project or extension or setup new unit]
3. CE = Capital employed [Share Capital + debentures + Long term borrowing for new project or extension or
setup new unit]
4. Reserves & Surplus (including securities premium) shall not be part of CE.

INCOME TAX MATERIAL
Section – 35DD Expenses on Amalgamation & Demerger

Assesse: Only Indian Company
Deduction allowed in 5 equal instalments
Note: Deduction is allowed to the assesse who has incurred such expenditure
Section – 35DDA: Expenditure on Voluntary Retirement scheme

Assessee: All Assesses
Deduction allowed in 5 equal instalments.
Section 35AD: Specified Business

No. Business Commencement % of
on or after deduction
1 Setting up & operating a cold chain facility 01.04.2009 100
2 Setting up & operating a warehousing facility for agricultural produce 01.04.2009 100
3 Laying & operating cross country pipeline for distribution of petroleum 01.04.2009 100
oil, natural gas
4 Building & operating a Hotel of 2 star or above 01.04.2010 100
5 Building & operating a Hospital with minimum 100 patient beds 01.04.2010 100
6 Developing & Building a housing project under slum development 01.04.2010 100
scheme
7 Developing & Building a housing project under affordable housing 01.04.2011 100
scheme
8 Production of Fertilizers in India 01.04.0211 100
9 Setting up & operating inland container depot or container freight station 01.04.2012 100
10 Bee keeping and production of bee’s honey & wax 01.04.2012 100
11 Setting up & operating a warehousing facility for sugar 01.04.2012 100
12 Laying & operating a slurry pipeline for transportation of Iron ore 01.04.2012 100
13 Setting up & operating a Semi-conductor water fabrication 01.04.2012 100
manufacturing unit
14 Developing, or maintaining and operating or developing, maintaining 01.04.2017 100
and operating a new infrastructure facility
Notes:
1. Not formed by splitting or reconstruction of existing business means business should be New.
2. P&M should be New
Exception:
a. Imported old P&M (P&M on which dep, not claimed under IT Act)
b. 20% of total P&M can be old (Second Hand)
3. Deduction allowed on all capital expenses except
a. Land

INCOME TAX MATERIAL
b. Goodwill
c. Financial instruments
Further, any expenditure in respect of which payment or aggregate of payment made to a person of an
amount exceeding Rs.10,000 in a day otherwise than by a/c payee cheque or an a/c payee DD or use of
electronic clearing system through a bank account would not be eligible for deduction.
4. Depreciation not allowed if deduction claimed u/s 35AD.
5. Loss of specified business can be carried forward indefinitely
6. If asset (on which deduction claimed u/s 35AD is allowed) sold, then the entire sales price shall be
taxable as PGBP.
7. Loss of specified business can be set off only against specified business income irrespective of whether
the latter is eligible for deduction under section 35AD.
8. Asset (on which deduction claimed u/s 35AD) should be exclusively used for specified business for
minimum 8 years from the year of acquisition.
Section 36 : Certain deduction u/s 36

Sec 36(1)(i) Premium for insurance of stock-in-trade
Sec 36(1)(ib) Health insurance premium for employees
Sec 36(1)(ii) Bonus or commission to employees
Sec 36(1)(iii) Interest on loan – Loan from schedule Bank, PFI, State Financial Corp. State Industrial
Investment corp or others.
Sec 36(1)(iiia) Discount on Zero Coupon Bonds (ZCB) – Pro-rata amount of discount shall be amortized over
the life (calendar months) of ZCB
Sec Employers contribution for the benefit of the Employee – statutory provident fund,
36(1)(iv)/(v) recognized provident fund, approved super annuation fund, approved gratuity fund and any
other fund as per law.
Sec 36(1)(iva) Employer contribution towards pension scheme referred u/s 80CCD
(i) Actual contribution
(ii) 10% of salary [Basic + DA(Terms)]
Whichever is lower
Sec 36(1)(va) Employees contribution towards welfare fund
Any sum received by Employer from Employee as contribution to PF, Super annuation fund,
ESI, etc,. is deemed to be PGBP if such sum is not deposited in respective fund upto the due
date to such fund.
Sec 36(1)(vi) Animals used in Business
Deduction is allowed in the year in which such animal become permanently useless or died.
Deduction = Cost of animal – Scrap Value
Note: Depreciation u/s 32 not allowed on animals
Sec 36(1)(vii) Bad debts related to sales is allowed but provision for bad debts not allowed [Exception –
banks]

INCOME TAX MATERIAL
Note:
1. Bad debts should be written off in the books of A/c’s of Assessee in the PY in which
deduction is claimed.
2. The debt should have been taken into account for computing income for PY or earlier PY
Sec 36(1)(viia) Provision for bad debts of banks
Indian Banks - Foreign Bank
- Public financial institutions
- State financial corporation
- State Industrial Investment Corporation
- Non-banking financial co.
8.5% of GTI (before this dedn) 5% of GTI (before this dedn)
+
10% of aggregate Avg. Advance made by
Rural branches
Sec 36(1)(ix) Company incurring expenses on promotion of family planning of employees.
Revenue Expenses Capital Expenses
100% deduction allowed Allowed in 5 equal instalment
Sec Securities Transaction Tax/ Commodities Transaction tax – It is allowed as deduction if
36(1)(xv)/(xvi) assesse held shares/units/commodities as stock-in-trade.
Sec 36(1)(viii) Transfer to Special Reserve
This deduction is allowed to Financial Corporation engaged in providing Long term finance [5
years or more]
Amount of deduction:
(i) Actual amount transferred to special reserve
(ii) 20% of PGBP (before this deduction)
(iii) [200% of (share capital + general reserve)] – opening balance in special reserve
Whichever is lower
Note: Any amount withdrawn from reserve shall be taxable under PGBP.
Sec 36(1)(xvii) Purchase of sugar cane
Expenditure incurred by cooperative society engaged in business of manufacturing of sugar
for purchase of sugar cane at a price which is equal to or less than the price fixed by Govt
allowed as deduction.
Section – 37: General Deduction

Any expenditure [other than covered u/s 30 to 36] shall be allowed as deduction if the following conditions are
satisfied:
1. Expenses should be incurred wholly or exclusively for the purpose of Business or Profession.
2. Expenses should be revenue in nature.
3. Expenses should be legal (It should not be illegal like Hafta, Bribes, Secret, Commission, etc,.)

INCOME TAX MATERIAL
Corporate social responsibility (CSR) Expenses. It is not treated as Business expenses, so not allowed.
Advertisement in brochure, souvenir, newspaper, pamphlet, published by political party Not allowed
Gift to employee Allowed
Customary expenses (Puja at the time of new year, Diwali) Allowed
Expenses incurred by CA’s for attending CPE seminars Allowed
Dividend & DDT Not Allowed
Provision for loss of subsidiary, provision for deffered tax, Provision for diminution in Not Allowed
value of asset, provision for un-ascertain liability
Shares & Debentures issue expenses Revenue Expenses –
Allowed
Capital Expenses –
Not Allowed
Taxes, Interest, & Penalties Penalty – Breach of
law – Not Allowed
Breach of Contract
(Contract of Revenue
Nature) – Allowed
Freebies (gifts, cash, travel facility provided by pharmaceutical company to doctors Illegal expenses – Not
allowed
Interest on loan taken for payment of income tax Not Allowed
Tax audit fees or litigation expenses in relation to income tax cases Allowed
Premium paid by the firm on the Keyman insurance policy of a partner Allowed
Sec 40: Amount specifically not deductible

Sec. 40(a)(i) – Payment made to Non-resident
Amount paid or credited to Non-resident or foreign Co. & if:
a. TDS has not been deducted in PY or
b. TDS deducted but not paid to Govt upto due date of return filing
- Then such sum (100%) shall not be allowed as deduction in current PY.
Sec. 40(a)(ia) – Payment made to Resident
Any amount paid or credited to resident & if:
a. TDS has not been deducted in PY.
b. TDS deducted but not paid to Govt upto due date of return filing
- Then 30% of such sum shall not be allowed as deduction in current PY.
Note: If TDS deducted in subsequent year or deducted in PY but paid to Govt after due date of return filing then
such sum (100%/NR)/(30%/Resident) shall be allowed as a deduction in the PY in which such TDS has been
paid to Govt.
Sec. 40(a)(iii) TDS on salary payable outside India or NR
Any salary payable outside india or to NR in India and if:

INCOME TAX MATERIAL
a) TDS not deducted or

b) TDS deducted but not paid to Govt upto due date of TDS payment.
- Then such sum shall not be allowed as deduction.
Notes: If TDS deposited late even by one day, the salary shall not be allowed as deduction.
Sec 40A(2) – Payments to specified persons (Relatives)
If payment of expenditure made to relative then AO can disallow excessive or unreasonable amount.
Specified person (Relative) for Sec. 40A(2)
Assessee Relative Individual
Individual S, M, F, B, S, LA, LD
HUF Members & their relatives
Firm/LLP Partners & their relatives company
Company Director & their relatives
AOP/BOI Member & their relatives
Any person Having substantial interest in any other person
Holding Co. Subsidiary co. & fellow subsidiary co.
Sec 40A(3) Cash payment > 10,000 to single person in a single day
If assesse makes payment for any expenditure to any person otherwise than A/c Payee Cheque or Demand Draft
or use of electronic clearing system through a bank account is more than Rs.10,000 in a single day then such
expenditure shall be disallowed.
Expect
1. If payment made to transporter then limit is Rs.35,000.
2. If the expenditure is claimed as deduction in earlier year on due basis & if such expenses is subsequently
paid in cash or bearer cheque then deduction allowed earlier shall be withdrawn & taxable as PGBP.
Exceptions [Rule 6DD]
1. Payment made to RBI/LIC/Banks/Govt.
2. Payment made through NEFT/RTGS/Debit Card/ECS/Credit Card.
3. Payments by book adjustment
4. Payment of producers of agriculture product, forest product, poultry product, fish product, live-stock,
etc,.
5. Payment required to be made on a day when banks are closed.
6. Payment of retirement benefits provided such payment is upto Rs.50000.
7. Payment of salary to an employee who is posted to any other place for 15 days or more other than his
normal place of duty.
8. Payment made where banking facility not available payment is made by any person to his agent who is
required to make payment in cash for goods or services on behalf of such person.
9. Payment is made by an authorised dealer or a money changer against purchase of foreign currency or
travellers cheques in the normal course of his business.

INCOME TAX MATERIAL
Sec 40A(7): Provision of Gratuity – Not allowed

Only payment to Approved Gratuity Fund or Provision for gratuity actually become payable during the PY (due
basis) is allowed as Deduction.
Sec 43B Expense allowed on Payment Basis
Following expenses are allowed only if they are paid upto the due date of return filing as per sec 139(1).
a) Any tax, duty, cess.
b) Employers contribution towards SPF, RPF, Approved Gratuity Fund, Approved Super Fund, New
pension scheme, any fund as per law.
c) Bonus or Commission to Employees
d) Interest on loan to any PFI, State Financial Corp, State Industrial Investment Corp, Schedule Banks
[scheduled bank include co-operative bank other than a primary agricultural credit society or a primary
co-operative agricultural and rural development bank].
e) Leave encashment to employees.
f) Any sum payable made after due date of return filing then such expenses shall be allowed in the year of
actual payment.
Sec 41 Deemed PGBP

Sec 41(1) Recovery against any deductions already claimed
If assesse was allowed a deduction in a earlier PY by way of expenditure, loss, trading liability & now during the
current PY assesse has obtained a refund of such liability or there is remission/cessation of such trading liability,
then such refund / remission shall be taxable under PGBP.
Example:
a) Sales Tax refund.
b) Stock in trade is destroyed by fire & allowed as trading loss & later on insurance compensation is received by
assesse.
Sec 41(2):Balancing charge
In case of assets which is depreciated on SLM basis, if such asset is sold then value upto the original cost is
taxable as balancing charge.
Sec 41(3): sale of scientific research assets
Sale without use in Business Sale after use in Business
a) Sale price Add to Block of asset
b) Deduction already claimed u/s 35(1)(iv) Actual Cost = Nil
Whichever is lower Explanation 1 of Sec 43(1)
Taxable as PGBP At the time of sale Sec. 50 will arise
If SP > cost then capital gain also arise [Full block/part block sold]
Sec 41(4): Recovery of Bad Debts
Where deduction has been allowed in respect of bad debts, recovery shall be taxable as PGBP in the year of
recovery. This shall apply even if the business or profession is not in existence in the previous year in which
recovery.

INCOME TAX MATERIAL
Sec 44AA : Compulsory maintenance of Books of accounts
Part A: Specified / notified profession

In case of specified profession, if gross receipt is more than Rs.1,50,00 in all 3 years preceding the previous year
or likely to exceed if the profession is newly setup then, assesse is required to maintain books of accounts as per
Rule – 6F, otherwise he is required to maintain such books of accounts or documents from which AO is able to
complete the assessment.
Specified Professions
1. Medical 2. Legal 3. Accountancy
4. Film Artist 5. Engineering 6. Technical consultancy
7. Architectural 8. Interior decorator 9. Company Secretary
10. Any other profession which may be notified by CBDT
Specified books as per Rule 6F

1. Cash book 2. Journal 3. Ledgers
3. Carbon copies of bill exceeding Rs.25/-
4. Original bill for expenditure exceeding Rs.50/-
In case of medical practitioner additional books i.e. daily case register & medical inventory register has to be
maintained.
Part B : Other Assessee (business)

In case of other assesse, if PGBP is more than Rs.1,20,000/- or Total Sales/Gross receipt is more than
10,00,000/- in any of the 3 years preceding the previous year or likely to exceeding in case of newly setup
business/profession the previous year or likely to exceeding case of newly setup business/profession, then
assesse is required to maintain any books of accounts or documents from which AO is able to complete the
assessment otherwise the assesse is not required to maintain any books of accounts.
However, in case of individual & HUF, limit will be Rs.2,50,000 for total income for business or profession and
Rs.25,o0,000 for Turnover or Gross receipts.
Note: As per Sec.271A, if the assesse fails to maintain books of accounts as per Sec.44AA then penalty of
Rs.25,000 may attract.
Sec. 44AB: Compulsory audit of Books of A/cs (Tax Audit)
Tax audit is compulsory in following cases:

a) Business - If T/O > Rs.1 crore during the PY
b) Profession – If Gross receipts > Rs.50 lakhs during PY
c) If assesse covered by Sec. 44AD & Sec. 44ADA and assesse claimed income less than 8%/6% or 50% &
his total income is more than basic exemption.
d) If assesse covered by Sec. 44AE, 44BB, 44BBB and assesse claimed income less than PGBP deemed
under those sections.
Note:
1. Audit can be done by CA.
2. Due date 30 – Sept of AY.
3. Penalty u/s 271B if assesse fails to get A/cs audited
a. 0.5% of T/O or Gross receipts
b. Rs.1,50,000
Whichever is lower

INCOME TAX MATERIAL
Presumptive Taxation
Sec. 44AD: Profits & Gains of Business or Presumptive Basis
a) Eligible assesse: Resident Individual/Resident HUF/Resident Firm (excluding LLP) who has not claimed
deduction u/s 10AA or 80IA to 80RRB.
b) This section is applicable for any business except:
- Sec. 44AE Business
- Agency Business
- Commission & Brokerage business
And Turnover / gross receipts is upto Rs. 2 crore.
c) Presumptive PGBP Income = Turnover / Gross Receipts x 8%
“If Turnover / Gross Receipts realized by Account Payee Cheque/DD/Electronic Payment through Bank Account
upto due date of Return Filing then PGBP = T/O x 6%.
d) If section 44AD is applied then deduction of expenditure u/s 30 to 38 shall not be allowed (assume its
deemed to be already allowed)
e) Partners renumeration, salary, interest etc., as per sec. 40(b) shall not be deductible while computing income
u/s 44AD
f) If assesse declares income as per sec. 44AD and whose T/O is upto Rs. 2 cr then assesse is not required to
maintain books of account & get it audited.
g) If assesse declares income for any PY as per 44AD & he doesn’t declare income as per 44AD
h) If assesse declares income for any PY as per 44AD & he does not declare income as per sec 44AD in any of
the five consecutive PYs then he shall not eligible to claim benefit of sec. 44AD for 5 years subsequent to the
year in which assesse not declare income as per Sec. 44 AD
Sec. 44ADA: PGBP on presumptive basis for professional
a) Eligible assesse: Resident assesse engaged in profession as referred in Sec. 44AA

b) This section is applicable if Gross Receipt is upto Rs.50 Lakhs
c) Presumptive PGBP Income = Turnover / Gross Receipts x 50%
d) Deduction of expenses u/s 30 to 38 shall not be allowed.
e) If assesse declares income as per sec. 44ADA then, he is not required to maintain books of accounts & get it
audited.
f) If section 44AD is applied then deduction of expenditure u/s 30 to 38 shall not be allowed (assume its
deemed to be already allowed)
g) Partners renumeration, salary, interest etc., as per sec. 40(b) shall not be deductible while computing income
u/s 44ADA
Sec. 44AE: Presumptive Taxation for Transporters.

If assesse engaged in the business of plying, hiring, leasing such goods carriage then PGBP will be –
➢ Heavy goods vehicle – Rs.1,000 per ton of gross vehicle weight or unladen weight as the case may be, for
every month or part of a month
➢ Other vehicle – Rs.7,5oo for every month or part of a month.
The assesee can also declare a higher amount in his return of income. In such case, the latter will be considered
to be his income.
Note:
1. This section is applicable if assesse owns Max 10 vehicles. If assesse owns more than 10 vehicles at any time
during the PY then this section shall not apply.
2. Partners renumeration, salary, interest etc as per 40(b) shall be deductible while computing income u/s
44AE.
3. Heavy goods vehicle means any goods carriage, the gross vehicle weight of which exceeds 12,000 kilograms
(12 tons)

INCOME TAX MATERIAL
Unit 6 – Capital Gains

Section – 45(1)
Any profit and gain arising from Transfer of a Capital Asset shall be chargeable under the head capital gain in the
PY in which transfer took place.
Sec 2(14): Capital means

A) Property of any kind held by assesse whether or not connected with business or profession.
B) Any securities held by a Foreign Institutional Investors (FII)
But Capital Asset does not include (excludes)
a. Stock in trade (RM/WIP/FG)
b. Movable personal property (used by assesee or his dependent family member for personal purpose)
But excludes: Jewellery, Drawings, Paintings, Sculpture, Archaeological Collection or Any other work of
Art.
c. Rural agricultural land in India.
d. Gold deposit bonds 1999 or Deposit certificate issued under the Gold Monetisation Scheme, 2015.
Notes:
1. Assets used for personal purpose of assesse
T.V., Car, Mobile, etc – Not a Capital Asset – CG not Applicable
Jewellery, Drawings, Paintings – Capital Asset – CG Applicable
2. Gold utensils, Silver Bars, Sliver Coins were held not to be Personal Effect – Capital Gain Applicable.
3. Silver Utensils held to be Personal Effect – No Capital Gain
4. Car used in the business treated as capital asset.
5. Jewellery means –
a) Ornaments made of gold, silver, platinum or any other precious metal or any alloy containing such
metals.
b) Precious stones whether or not set in any furniture, utensil or other article.
Sec 2(47): Transfer
‘Transfer’ includes
a. The sale, exchange, or relinquishment of the asset or
b. The extinguishment of any right there in or
c. Compulsory acquisition there of under any law or
d. Conversion of capital asset into stock in trade or
e. Allowing the possession of any immovable property to be taken or retained in part performance of a
contract.
f. Any transaction (like becoming a member of, or acquiring shares in co. operative society) which has the
effect of transferring or enabling the enjoyment of immovable property.
g. The redemption of zero-coupon bonds (ZCB)

INCOME TAX MATERIAL
Classification of Capital Gains based on period of holding of assets:

Particular Period of holding Classification of Assets
Category – I Held for up to 12 months (i.e., less Short-term capital gains
a) Security (other than unit) listed then or equal to 12 months)
in a Recognised Stock Exchange
in India.
Held for more then 12 months Long-term capital gains
b) Units of UTI/Equity Oriented
MF
c) Zero Coupon Bond
Category – II Held for up to 24 months (i.e., less Short-term capital gains
a) Unlisted shares (shares not then or equal to 24 months)
listed in recognized stock
Held for more then 24 months Long-term capital gains
exchange in India)
b) Immovable property
Category – III Held for up to 36 moths Short-term capital gains
Any other asset Held for more then 36 months Long-term capital gains
Sec 48: Computation of Capital Gains

Particulars Amount (Rs.)
Gross Sale Consideration ****
(-) Expenses incurred in connection of transfer (***)
Net Sale Consideration ****
(-) Cost of Acquisition (COA) (***)
(-) Cost of Improvements (COI) (***)
Capital Gain ****
(-) Exemptions u/s 54 (***)
Taxable capital gains ****
Note: Site and building are separate assets for the purpose of capital gain.
# Second proviso (exception) : Indexation
In case of LTCA, COA & COI should be indexed.
a) ICOA
𝐶𝐼𝐼 𝑓𝑜𝑟 𝑡ℎ𝑒 𝑦𝑒𝑎𝑟 𝑜𝑓 𝑡𝑟𝑎𝑛𝑠𝑓𝑒𝑟
COA X 𝐶𝐼𝐼 𝑓𝑜𝑟 𝑡ℎ𝑒 𝑓𝑖𝑟𝑠𝑡 𝑦𝑒𝑎𝑟 𝑖𝑛 𝑤ℎ𝑖𝑐ℎ 𝑎𝑠𝑠𝑒𝑡 𝑤𝑎𝑠 ℎ𝑒𝑙𝑑 𝑏𝑦 𝑎𝑠𝑠𝑒𝑠𝑠𝑒 𝑜𝑟 2001−02,𝑤ℎ𝑖𝑐ℎ𝑒𝑣𝑒𝑟 𝑖𝑠 𝑙𝑎𝑡𝑒𝑟
b) ICOI

INCOME TAX MATERIAL
𝐶𝐼𝐼 𝑓𝑜𝑟 𝑡ℎ𝑒 𝑦𝑒𝑎𝑟 𝑜𝑓 𝑡𝑟𝑎𝑛𝑠𝑓𝑒𝑟

COI X
𝐶𝐼𝐼 𝑓𝑜𝑟 𝑡ℎ𝑒 𝑓𝑖𝑟𝑠𝑡 𝑦𝑒𝑎𝑟 𝑖𝑛 𝑤ℎ𝑖𝑐ℎ 𝑎𝑠𝑠𝑒𝑡 𝑤𝑎𝑠 ℎ𝑒𝑙𝑑 𝑏𝑦 𝑎𝑠𝑠𝑒𝑠𝑠𝑒 𝑜𝑟 2001−02,𝑤ℎ𝑖𝑐ℎ𝑒𝑣𝑒𝑟 𝑖𝑠 𝑙𝑎𝑡𝑒𝑟
FY CII FY CII FY CII

2001-02 100 2007-08 129 2013-14 220
2002-03 105 2008-09 137 2014-15 240
2003-04 109 2009-10 148 2015-16 254
2004-05 113 2010-11 167 2016-17 264
2005-06 117 2011-12 184 2017-18 272
2006-07 122 2012-13 200 2018-19 280
2019-20 289
c) Asset acquired before 1-4-2001

COA = Actual Cost or FMV as on 1-4-2001, whichever is higher
d) Improvement done before 1-4-2001 – should be ignored.
# Third Proviso
First & Second proviso Not applicable for computation of LTCG in case of Equity shares, Equity Shares,
Equity Oriented Units, Units of Business Trust referred u/s – 112A.
# Fourth Proviso
Index benefit not allowed in case of bonds / debentures except Capital Indexation Bonds and Sovereign Gold
Bonds issued by RBI.
# Fifth Proviso
Foreign Exchange Fluctuation gain on RDB in case of Non-resident assesse –
Any gain arising on rupee appreciation against foreign currency at the time of redemption of RDB (Rupee
Denominated Bonds) of Indian company, shall be ignored for the purpose of computation of gross sale
consideration.
# Seventh Proviso
STT paid on sale / purchase of shares / unit shall not be allowed under capital gain
If it is paid at the time of Sale – not treated as transfer expense
If it is paid at the time of Purchase – not added to the cost of acquisition
Cost of Acquisition (COA)

1. In case of
- Goodwill of Business (not profession)
- Trademark
- Brand name

INCOME TAX MATERIAL
- Right to manufacture, produce, process any article or things (patent & copyright)
- Right to carry on any business or profession
- Tenancy right
- Loom hours
- Route permits
Cost of Acquisition a) Self – generated = Nil
b) Purchased = Purchase price
Note 1: Benefit of FMV as on 01-04-2001 not available in case of above assets.
2. Bonus shares / security
If acquired before 01-04-2001 If acquired on or after 01-04-2001
FMV as on 01-04-2001 Nil
POH case of shares / securities – from allotment date of transfer
3. Right shares / security
If acquired by shareholder Renouncement of right
COA = Amount paid to Company CG Applicable
POH = From allotment date GSC = Renouncement price
COA = Nil
STCG = ***
[POH = from offer date to renouncement date]
In hands of purchaser of right
COA = Amount paid to Company for shares + Amount paid for purchase of right
POH = fr0m date of allotment of shares
4. In relation to other Capital Assets
a. Asset acquired before 01-04-2001
(i) Cost of acquisition ***
(ii) FMV as on 01-04-2001 ***
[whichever is higher]
b. Asset acquired on or after 01-04-2001 : cost of acquisition
Cost of Improvement [COI]

1. In case of goodwill of business, patent, copyright, right to carry on any business or profession – always
Nil.
2. In case of other assets: capital expenses incurred on improvement on or after 01-04-2001
Improvement done before 01-04-2001 should be ignored in call cases
Exception to Section 45(1): As per sec – 45(1), capital gain is chargeable to tax in the year of transfer but
in the following four cases capital gain is not taxable in the year of transfer
Sec – 45(2) : Conversion of capital asset into stock in trade
Conversion of capital asset into stock-in-trade is treated as transfer, capital gain shall arise where an

INCOME TAX MATERIAL
assesse converts capital asset into stock in trade.

Capital gain shall be taxable in the year in which such stock in trade is sold.
Sec – 45(5) : Compensation on compulsory acquisition under any law
Normally capital gain is taxed in the year of transfer but in case of compulsory acquisition of capital
asset, capital gain will be taxable in the year in which compensation is received.
Sec – 45(1A) : Insurance claims for Damage or Destruction of Capital Asset
Normally capital gain is taxed in the year of transfer but in case of destruction of capital asset, Capital
Gain will be taxable in the year in which insurance claim is received.
Note:
1. Where capital asset is destroyed due to fire, flood, earthquake, tsunami, riot, civil disturbance,
enemy action or any other natural calamity and insurance claim is received then capital gains is
applicable.
2. If no claim received, no capital gain shall arise.
Sec – 45(5A): Capital Gain in case of Joint Development Agreement (JDA)
- In case of an assesse being Individual or HUF
- Who entered into a specified agreement for development of project, the capital gain on
transfer of Land or building or both, shall be taxable in the year in which Certificate of
Completion (CC) for the whole or part of project issued by competent authority.
Year of Transfer = Year in which possession of immovable property is transfer in JDA
Year of Tax = Year in which CC issued by Competent Authority
Gross Sale Consideration = SDV on the date of issue of CC of his share in project + Consideration
received in Cash.
Note: Above provisions not apply if assesse transfer his share in project on or before the date of issue of
CC and capital gain will be taxable in the year in which transfer took place i.e., possession transfer in
JDA.
Year of Conversion of CA into Compulsory Acquisition Destruction of CA Immovable

SIT of Asset property transfer in
JDA
- Transfer Year of Conversion of Year in which Year of Destruction Year in which
CA into SIT Compulsorily Acquired possession transfer
- Tax Year in which stock is Year in which Year in which claim Year in which CC of
sold compensation received received project issued
Sec – 50C : Stamp duty value shall be treated as Gross Sale Consideration.
In case of land or building or both (immovable property) held as capital asset, if sales consideration less than
SDV (assessed/assessable by stamp valuation authority) , then such SDV shall be deemed to be gross sale
consideration (FVOC). However, where the SDV does not more than 105% of Consideration, then Sale

INCOME TAX MATERIAL
Consideration shall be treated as GSC.

Where assesse claims that SDV is more than FMV of the property & such SDV has not been disputed in any
appeal then AO may refer the valuation to valuation officer (VO).
Sec – 50CA : FMV of unquoted shares shall be treated as GSC.
In case of shares of a company (other than Quoted shares) held as capital asset, if sale consideration is less
than FMV, then such FMV shall be treated as GSC.
Quoted share means the share quoted on any recognized stock exchange with regularity from time to time,
where the quotation of such share is based on current transaction made in the ordinary course of business.
Sec -50D : where sales consideration is not ascertainable or cannot be determined
Then FMV of such asset as on the date of transfer shall be GSC.
Certain special transactions:

Sec – 50B : Slump sale
Slump sale means assesse transfers the entire undertaking / division for lumpsum consideration without
assigning value / selling price of individual asset.
Computation of capital gain

GSC (Lumpsum Consideration) ****
(-) Transfer expenses (***)
Net consideration ****
(-) Cost of acquisition (net-worth of undertaking) (***)
[No Indexation]
STCG / LTCG ****
1. Computation of Net worth

Assets
Depreciable Asset Value (WDV) as per Income Tax
Other Assets Book Value
****
Less: Liabilities (Book value)
Net worth ****
2. Revaluation of asset shall be ignored.

3. If Net-worth comes negative then COA = Nil.
4. No profit under PGBP shall arise even if stock is transferred in slump sale.
5. For computing net worth, if asset (on which deduction u/s 35AD was claimed) is transferred, value
shall be taken as nil.

INCOME TAX MATERIAL
6. Nature of capital gain

a. If undertaking held for more than 3 years - LTCG
b. If undertaking held for 3 years or less - STCG
Sec – 51 : Advance money forfeited (token money)
If any advance money/token money/earnest money is forfeited by the assesse (present owner) before 01-04-
2014, then it shall be reduced from “cost of acquisition” before indexing
Any advance money forfeiture on or after 01-04-2014 shall be charged to tax in the year of forfeiture under
the head “income from other sources” u/s 56(2)(ix)
Sec – 47 : Certain Transaction not regarded as Transfer (Exempt transfer)

Following transactions are not regarded as transfer. Therefore, no capital gain will arise.
1. Distribution of capital asset on the partial or total partition of HUF.
2. Transfer of capital asset under gift, will, irrecoverable trust.
3. Transfer under amalgamation by amalgamating co. to amalgamated co. provides amalgamated co is an
Indian Co.
4. Transfer of capital asset by holding co. to its subsidiary co. or subsidiary co. to its holding co. provided
following conditions are satisfied.
a. Holding co. holds 100% shareholding of subsidiary co.
b. Transferee co. should be Indian co.
Note: This exemption is not allowed if capital asset is transferred as stock in trade.
5. Transfer of shares in Indian Co. in the scheme of amalgamation/demerger of companies.
6. Transfer of bonds / GDR by one non-resident to another non-resident outside India.
7. Transfer of Rupee Denominated Bond of an Indian Company by one NR to another NR outside India.
8. Transfer of a govt security made outside India by one non-resident to another non-resident, through an
intermediary dealing in settlement of securities.
9. Conversion of bonds / debentures / deposit certificates of a co. into debentures share of that co.
10. Conversion of preference shares of Company into Equity shares of that Co.
11. Conversion of a sale proprietary concern into a company.
12. Conversion of a partnership firm into company.
13. Conversion of a private co. or an unlisted public co into a limited liability partnership(LLP).

INCOME TAX MATERIAL
Capital gain on sale of Capital gain on sale of urban Compulsory acquisition of

Residential Property & used agricultural land & used for Industrial Land &
for Residential Purpose [Sec another agricultural land [Sec Building [Sec – 54 D]
– 54] – 54B]
Assesse Individual / HUF Individual / HUF Any person
Nature of Asset LTCA LTCA / STCA STCA / LTCA
Assets transfer Residential House property Agricultural land use by Compulsory acquisition of
being building & land Individual or his parents for land or building which
appurtenant there to Agri purpose during 2 years was used by assesse in the
before the transfer business of industrial
undertaking during 2 yrs
prior to date of transfer
New assets to One residential HP in India Agricultural land (in rural or New land or building for
be purchased or urban area) the industrial undertaking
constructed
Time limit of Purchase : within 1 yr before Purchase: within 2 yrs after Within 3 years from date
purchased or or 2 yrs after the date of the date of transfer of receipt of compensation
constructed transfer
Construction: complete -
construction within 3 yrs
after date of transfer
Deposit scheme Applicable Applicable Applicable
Amount of (1) Capital gains or (1) Capital gains (1) Capital gains
exemption (2) CNA / deposit amt (2) CNA / Deposit amt (2) CNA / Deposit Amt
Whichever is lower Whichever is lower Whichever is lower
Transfer of new New asset transferred within New asset transferred within New asset transferred
assets 3 yrs from date of purchase 3 yrs from the date of within 3 yrs from date of
or construction, then cost of purchase then cost of purchase / construction
acquisition of new asset acquisition of new asset then cost of acquisition of
reduced by exempted capital reduced by exempted capital new asset is reduced by
gains gains exempted CG
CNA Cost of New Asset

INCOME TAX MATERIAL
Investment in certain bonds Capital gain on sale of LTCA Shifting of undertaking to

[Sec – 54EC] not to be charged in case of rural area [Sec – 54 G]
investment in residential
house [Sec – 54F]
Assessee Any person Individual / HUF Any person
Nature of Asset LTCA LTCA STCA / LTCA
Assets transfer Land, Building or Both Any capital assets not being Transfer of plant
residential house property machinery or land or
building for shifting.
New assets to Bonds redeemable after 5 One residential house in a) Purchase /
be purchased or years issued, by India i.e., building & land construction of new
constructed a) NHAI or b) RECL appurtenant thereto. plant & machinery,
c) PFCL or d) IRFCL land or building in
Max 50 lacs such rural area.
b) Shifting original assets
to that area or
c) Incurring notified
expenses
Time limit of Within 6 months from date Purchase: within 1 yrs before Within 1 year before or 3
purchased or of transfer of original asset or 2 yrs after the date of years after the date of
constructed transfer transfer.
Construction: Complete
construction within 3 yrs
from date of transfer.
Deposit scheme Not Applicable Applicable Applicable
Amount of (1) Capital gains or Cost of (1) Capital gains
𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝐺𝑎𝑖𝑛𝑠
exemption (2) CNA New Asset X 𝑁𝑒𝑡 𝑐𝑜𝑛𝑠𝑖𝑑𝑒𝑟𝑎𝑡𝑖𝑜𝑛 (2) CNA / Deposit Amt
Transfer of new New asset transferred within New asset transferred within New asset transferred
assets 5 yrs from date of 3 yrs from the date of within 3 yrs from date of
acquisition then exempted purchase/construction then purchase / construction
capital gains will be taxable exempt CG taxable in PY of then cost of acquisition of
in the year of transfer / transfer of new asset & new asset is reduced by
conversion. treated LTCG. exempted CG

INCOME TAX MATERIAL
Shifting of undertaking to Transfer of residential Investment in units of

SEZ [Sec – 54GA] property / plot of land [Sec – funds notified by CG [Sec
54GB] – 54 EE] [funds to
promote start up]
Assessee Any person Individual / HUF Any person
Nature of Asset STCA/LTCA LTCA LTCA
Assets transfer Transfer of plant, machinery Residential property (a house Any LTCA
or land or building for or a plot of land)
shifting industrial
undertaking from urban
area to SEZ
New assets to a) Purchase/construction Subscription in equity shares Units of fund notified by
be purchased or of plant, machinery, of eligible company & co. CG
constructed land or building in such within year from date of
SEZ or subscription utilized amount
b) Shifting original assets for purchase of new asset
to that area or (P&M)
c) Incurring notified
expenses
Time limit of Within 1 year before or 3 Shares should be subscribed Within 6 months from the
purchased or years after the date of upto due date of return filing date of transfer of original
constructed transfer asset max exemption limit
being Rs.50 lacs within
prescribed limit (6
months)
Deposit scheme Applicable Applicable (for company) Not applicable
Amount of (1) Capital gains or Cost of (1) Capital gains
𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝐺𝑎𝑖𝑛𝑠
exemption (2) CNA P &M X 𝑁𝑒𝑡 𝑐𝑜𝑛𝑠𝑖𝑑𝑒𝑟𝑎𝑡𝑖𝑜𝑛 (2) CNA
Transfer of new New asset transferred within If equity shares or new p&M New asset is or converted
assets 3 yrs from date of purchase transferred within 5 yrs from into money within 3 yrs
/ construction, then COA of date of subscription / from date of acquisition
new asset reduced by acquisition then exempt then exempt LTCG taxable
exempted CG. capital gains taxable in PY of in the year of transfer/
transfer of equity share or conversion.
new P&M in hands of assesse
(Ind/HUF)

INCOME TAX MATERIAL
Unit 7 – Income from Other Sources

Any income which is not taxable under Salary, IFHP, PGBP, Capital Gain, that income shall be taxable under
IFOS.
Items taxable under the head ‘IFOS’
1. Interest on securities (if security held as stock-in-trade, then interest taxable under PGBP)
2. Rent from letting out of plant, machinery, furniture.
3. Dividend on shares.
4. Winning from lotteries, puzzles, card games, etc,.
5. Interest on bank deposit & loan given.
6. Royalty income.
7. Directors sitting fees.
8. Agricultural income from land located outside India.
9. Income from sub-letting of house property
10. Salary of MP/MLA/MLC
11. Interest on income tax refund.
12. Income on any investment
13. Amount received under family pension [Deduction u/s 57]
Allowed: (i) 1/3 of family pension
(ii) Rs.15,000
Whichever is less
14. Interest on compensation of compulsory ac1uisition of capital asset [50% deduction u/s 57]
15. Gift, Etc,.
Taxation of Gift
1. Any gift received by employee from employer due to employee – Always taxable under Income from salary
employer relationship
2. Any benefit/gift/perquisite arising due to business or profession Always taxable under PGBP
3. Other Gift – IFOS Any gift/asset acquired for low
consideration by any person.
a. M.R.I.D.H.U.T.L.A.I.T.C [Note – 1] Not taxable
b. Otherwise [Note – 2] Taxable
Note – 1: Money/property not taxable if it is received

M – on the occasion of Marriage.
R – from any Relative
I – under will or way of Inheritance
D – in contemplation of Death
T – from or by any Trust registered u/s 12AA
H – from any Hospital or Medical Institution

INCOME TAX MATERIAL
U – from any University or educational Institution

LA – from any Local Authority defined u/s 10(20)
I – from an individual by a trust created solely for the benefit of the relative of the individual
T – by any Fund, Trust, Hospital, Medical Institution, University edu, Institution referred in sec – 10(23C)
C – by way of transaction not regarded as transfer u/s 47.
Note 2: Otherwise
Money (without consideration) If aggregate Money > Rs.50,000 then whole of money shall be
taxable
Movable Property (s.s.j.d.p.s.a.o.b) Without consideration
If Agg. FMV > Rs.50,000 then entire FMV shall be taxable
Inadequate consideration
If agg. (FMV – Consid.) > Rs.50,000 then different between
FMV & consideration shall be taxable.
Immovable Property Without consideration
If per property SDV > Rs.50,000, then entire SDV shall be
taxable
Inadequate consideration
If per property
a) (SDV – Consideration) > Rs.50,000
And
b) SDV is more than 105% of consideration
Then different between SDV & Consideration shall be
taxable.
Note – 2 : Property (movable & immovable)

Shares & securities, Jewellery, Drawing, Painting, Archaeological collection, Sculptures, Any other work of art,
Bullion, Immovable property.
Any property received as gift or acquired for low consideration other than above, Sec 56(2)(x) Not applicable –
Not taxable
Car, iphone – x, T.V., Furniture, Wrist Watch, etc., received then not taxable even value is more than
Rs.50,000/-.
Relative
a) In case of Individual
Assessee, his spouse, mother/father and their brother/sister -spouses, lineal ascendant & their spouses,
lineal ascendant & their spouses, brother/sister & their spouses, mother/father & brother/sister & their
spouses of his spouse.
b) In case of HUF

INCOME TAX MATERIAL
Any member of HUF.
Sec – 56(2)(viib) : Shares issued on premium

If any closely held company issues shares to any resident share holder on premium then –
[Issue price of share – FMV of such shares]
Shall be taxable in the hands of company under IFOS
Sec – 56(2)(xi) : Compensation on termination of Employment

Any compensation or other payment, due or received by any person in connection with termination of his
employment (or modification of terms of employment) is treated as income under sec – 56(2)(xi) (applicable
from AY 2019-20. This section is applicable only if compensation is received from a person other than employer.
However, if it is received from employer, then it is taxable as profits in lieu of salary under section 17(3)(i) under
the head “Salaries”

INCOME TAX MATERIAL
Unit 8 – Clubbing & Set off – Carry forward of losses
Clubbing of Income:
Sec – 64(1A): Income of a minor child
Income of a minor child is taxable in hands of the parent whose income is more before clubbing minor’s income
Exception:
1. Income is due to manual work
2. Income is due to skill & talent
3. Minor child suffering from disability
Notes:
a. If minor child’s income is clubbed in the hands of parent then exemption u/s 10(32) of Rs.1500 p.a. per child
is allowed to a parent.
b. Where the marriage of the parents does not subsist, the income of the minor will be includible in the income
of that parent who maintains are attracted even in respect of that individual
c. It may be noted that the clubbing provisions are attracted even in respect of income of minor married
daughter.
d. Child in relation to an individual includes a step-child and an adopted child of that individual.
Sec – 64(1)(iv) – Asset transferred to spouse
If any individual transfer any asset to his or her spouse without consideration or for inadequate consideration
then income from such asset is received by spouse but tax on such income is paid by transferor (Assessee).
Note:
1. The above provision is applicable only if relationship of husband & wife should exist at the time of transfer of
asset as well as at the time of generating the income.
2. The above provision is not applicable if asset is transferred in connection with agreement to live apart.
3. If a house property is transferred by an individual to his spouse or minor child (not being a minor married
daughter) without / inadequate consideration then such individual is treated as Deemed owner as per Sec
27A & Sec 64 shall not apply.
Set off & Carry forward of Losses:

Sec – 70 : Intra head adjustment
It means loss from one source of income can be set off against income from another source of income but in the
same head of income
Exceptions:
1. Speculative business loss can be set off against only speculative business income.
2. Specified business loss can be set off against specified business income.
3. Long term capital loss can be set off against long terms capital gains.
4. Loss from owning & maintaining race horses can be set off against income from owning & maintaining
race horses.

INCOME TAX MATERIAL
Sec – 71 : Inter head adjustment

It means loss under one head of income can be set off against income from another head of income but in the
same previous year
Exceptions
1. Speculative business loss can be set off against only speculative business income
2. Specified business loss can be set off against specified business income
3. Long term capital loss can be set off against long term capital gain.
4. Loss from owning & maintaining race horses can be set off against owning & maintaining race horses
income.
5. Short term capital loss (STCL) can be set off only against STCG/LTCG
6. Loss from Business cannot be set off against salary.
Note:
1. It is to be remembered that once a particular loss is carried forward, it can be set off only against the income
from the same head in the forthcoming assessment years.
2. the maximum loss from house property which can be set-off against income from any other head is Rs.2
lakhs.
Carry Forward & Set off of losses

Section Losses to be carried forward Brought forward losses set Time limit Mandatory
off against filing off return
71B Loss from HP House Property Income 8 Years No
72 Normal business loss Business income 8 Years Yes
73 Speculative business loss Speculative business 4 years Yes
income
73 A Specified business loss Specified business income Unlimited Yes
74 Short term / STCG & LTCG 8 Years Yes
Long term capital loss LTCG 8 Years Yes
74A Loss form owning & maintaining Income form owning & 4 Years Yes
race horses maintaining race horses
32(2) Unabsorbed depreciation Any income other than Unlimited No
salary
Notes:
1. Whenever income is exempt then losses does not have any tax treatment means it should be ignored.
2. Loss from any lottery, card games, races, card games , etc,. are Not eligible for set off & c/f & losses cannot be
set off against the income referred u/s 115BB i.e., lottery income, crossword puzzles, income in TV shows,
etc,.
3. B/f losses from a business can be set off even if such business is Not continued.

INCOME TAX MATERIAL
4. Order for set off of losses

a. Current year depreciation
b. B/f loses from business or profession
c. Unabsorbed depreciation
5. If there is income under any head & eligible losses under any other head, such loss shall be first set off
against the income before set off & c/f of losses
6. Set off of losses not permissible against unexplained income, investment, money, etc,.

INCOME TAX MATERIAL
Unit 9 – Deductions
Deductions under chapter VI -A is restricted to Gross Total Income & deduction cannot be carry forward.
Deduction under chapter VI-A is not allowed against LTCG, LTCG u/s 112A, STCG u/s 111A &
special rates of tax income.
Part A : Payment Related Deductions
Sec 80C : Specified Investments

a. Eligible Assessee: Individual & HUF
b. Amount of deduction Rs.1,50,000 [Maximum Limit]
c. Eligible Investments:
1. Life insurance premium:
Amount deduction
If policy issued before 01-04-2012 a. Premium paid
b. 20% of Policy value
Whichever is lower
If policy issued on or after 01-04-2012 a. Premium paid
b. 10% of Policy value
Whichever is lower
If policy issued on or after 01-04-2013 for person a. Premium paid
with disability u/s 80U or person suffering from b. 15% of Policy value
specified disease (u/s 80DDB) Whichever is lower
2. Amount deposited in Public Provident Fund (PPF)

(For assesse, spouse, children)
3. Employee’s contribution to Statutory Provident Fund, Recognised Provident fund (SPF & RPF)
4. Amount invested in NSC as well as interest accrued on NSC.
5. Repayment of loan taken banks & financial institution for purchase or construction of House.
6. Fixed deposit in a scheduled bank or post office for 5 years or more.
7. Tuition fees paid for education of children.
[Max 2 children for full time education in India]
8. Deposit in notified bonds of NABARD
9. Deposit in Senior Citizen Saving Scheme.
10. Contribution towards Unit Linked Insurance Plan (ULIP)
11. Notified units of Mutual Funds or UTI.
12. Notified pension scheme of UTI or MF.
13. Deposit in Sukanya Samridhi Scheme A/c. [for individual himself/herself or any girl child of
individual or girl child for whom such individual is a legal guardian]
14. Stamp duty, registration fee for acquisition of house property.

INCOME TAX MATERIAL
Sec 80CCC: Contribution to Pension Fund of LIC or other insurance company

Eligible Assessee: Individual
Amount of Deduction: Max Rs.1,50,000
Sec 80CCD: Contribution to Pension scheme of Central Govt. / New pension Scheme/ Atal Pension Yojna
Eligible Assesee: Individual
Amount of deduction
Salaried Employee Other Individuals
Employees contribution **** Assesee’s contribution ****
10% of salary **** 20% of GTI ****
.
Sec 80CCD(1B): Additional deduction upto Rs.50,000 shall be allowed other than contributions u/s 80CCD(1).
Sec 80CCD(2): Employers contribution to NPS for the benefit of Employee
Employer contribution is first taxable under the head salary in hands of Employee & then he gets deduction u/s
80CCD(2) Contribution is by
Central Government being Employer Other Employer
a. Employers Contribution **** c. Employers Contribution ****
b. 14% of salary **** d. 10% of salary ****
Sec 80CCE : Aggregate deduction u/s 80C+80CCC+80CCD(1) is restricted to Maximum Rs.1,50,000
Sec 80D: Deduction in respect of Medical insurance premium, central govt. Health Scheme, Preventive Health
checkup & Medical Treatment
• Eligible Assesse: Individual & HUF
• For whom:
Individual – Self, House, Parents & dependent children
HUF – Any member of HUF.
• Mode of payment
Any mode other than cash, but payment of preventive health checkup can be made in cash.
• Amount of deduction
Individual HUF
Category – A Self, Spouse, Dependent Parents Members
Children
a. Medical insurance premium Yes Yes Yes
b. CG Health Scheme Yes  
c. Preventive Health checkup Yes Yes 
General deduction (a+b+c) Max Rs.25,000 Max Rs.25,000 Max Rs.25,000

INCOME TAX MATERIAL
+
Additional deduction (when medical Max Rs.25,000 Max Rs.25,000 Max Rs.25,000
insurance policy taken on the life of
senior citizen) Age 60 or more
Category - B
Medical Expenditure of senior citizen Max Rs.50,000 Max Rs.50,000 Max Rs.50,000
(age 60 or more) & Mediclaim
premium not paid for such person.
Maximum deduction (A+B) Max Rs.50,000 Max Rs.50,000 Max Rs.50,000
Notes:
1. Aggregate payment for preventive health checkup of self, spouse, dependent children & parents to the
extent of Rs.5,000. However the said deduction of Rs.5,00/- is within the overall limit of Rs.25000 or Rs.
50,000/-.
2. Deduction where premium for health insurance is paid lump sum.
Appropriate fraction of lump sum premium allowance as deduction: In a case where Mediclaim premium
is paid in lumpsum for more than one year, then, the deduction allowable under this section for each of
the relevant previous year would be equal to the appropriate fraction of such lump sum payment.
Sec 80DD: Deduction in respect of Medical treatment & Maintenance of Handicapped dependent relative.
a. Eligible Assessee: Resident Individual & HUF
b. Amount of deduction: Flat deduction
i. Normal disability = Rs.75,000
ii Severe diability = Rs.1,25,000
c. Assessee should incur expenses on medical treatment or deposit any amount for maintenance of such
handicapped dependent relative
d. Relative Individual – spouse, brother, sister, children, mother, father.
HUF – Any member of HUF.
Sec 80DDB: Deduction in respect of medical treatment of specified diseases
a. Eligible Assessee: Resident Individual / HUF
b. Amount of deduction
Actual Expenses ****
Or
Maximum Rs.40,000/Rs.1,00,000 ****
Whichever is lower
Notes:
1. Assesee should incur expenses on medical treatment or deposit any amount for maintenance of such
handicapped dependent relative.
2. Relative Individual – Spouse, brother, sister, children, mother, and father.

INCOME TAX MATERIAL
3. In case of HUF – Any member of HUF

Sec – 80U Deduction for handicapped assesse
a. Eligible Assessee: Resident Individual
b. Amount of deduction: Flat deduction
Normal Disability : Rs.75,000
Sever Disability : Rs.1,25,000
Sec - 80E Sec - 80EE

Assessee Individual Individual
Loan Loan for pursuing his higher education for Loan for acquisition of residential house
himself or his relative property
Amount of Interest amount for a period of 8 consecutive Max Rs.50,000
deduction years starting first deduction should be claimed u/s24(b) of
house property (upto 2,00,00o) & remaining
int deduction u/s 80EE
Conditions a. Loan should be taken from bank or
financial institution for acquisition of
residential property
b. Purchase price of house upto Rs.50 lakh
c. Loan should be sanctioned between 1-4-
2016 to 31-3-2017
d. Loan amount upto Rs.35 lakh
e. Assessee doea not own any residential
house on date of sanction of loan.
80EEA 80EEB
Assessee Individual Individual
Loan Loan for acquisition of residential house Loan for electric vehicle
property
Amount of Max Rs.1,50,000 Max Rs.1,50,000
deduction first deduction should be claimed u/s24(b) of first deduction should be claimed u/s24(b) of
house property (upto 2,00,00o) & remaining house property (upto 2,00,00o) & remaining
int deduction u/s 80EE int deduction u/s 80EE
Conditions a. Loan should be taken from bank or a. Loan should be taken for purchase of an
financial institution for acquisition of electric vehicle.
residential property b. Loan should be sanctioned between 1-4-
b. Purchase price of house upto Rs.45 lakh 2019 to 31-3-2023
c. Loan should be sanctioned between 1-4- c. Loan should be sanctioned by a FI (bank or

INCOME TAX MATERIAL
2019 to 31-3-2020 specified NBFC’s)

d. The individual should not be eligible to d. The assesse should be an individual.
claim deduction u/s 80EE
e. Assessee does not own any residential
house on date of sanction of loan.
Donation
Sec – 80G
a. Eligible assesse: Any person
b. Quantum of deduction:
I I. Donation qualifying for 100% deduction, without any qualifying limit
1. The National Defence Fund set up by the central government
2. Prime Minister’s National Relief Fund
3. Prime Minister’s Armenia Earthquake Relief Fund
4. The Africa (Public Contributions-India) Fund
5. The National Children’s Fund
6. The National Foundation for Communal Harmony
7. Approved University or educational institution of national eminence
8. Chief Minister’s Earthquake Relief Fund, Maharashtra
9. Any fund set up by the State Government of Gujarat exclusively for providing relief to the victims of
the Gujarat earthquake
10. Any Zila Saksharta Samiti constituted in any district for improvement of primary education in
villages and towns and for literacy and post-literacy activities
11. National Blood Transfusion Council or any State Blood Transfusion Council
12. Any State Government Fund set up to provide medical reliefs to the poor
13. The Army Central Welfare Fund or Indian Naval Benevolent Fund or Air Force Central Welfare
Fund
14. The Andhra Pradesh Chief Minister’s Cyclone Relief Fund, 1996
15. The National illness Assistance Fund
16. The Chief Ministers Relief Fund or Lieutenant Governor’s Relief Fund in respect of any state or
union territory
17. The National Sports Fund set up by the Central Government
18. The National Cultural Fund set up by the Central Government
19. The Fund for Technology Development and Application set up by the Central Government
20. Nation Trust for welfare of persons with Autism, Cerebal Palsy, Mental Retardation and Multiple
Disabilities
21. The Swach Bharat Kosh

INCOME TAX MATERIAL
22. The Clean Ganga

23. The National Fund for Control of Drug Abuse
II Donation qualifying for 50% deduction, without any qualifying limit

1. The Jawaharlal Nehru Memorial Fund
2. Prime Minister’s Drought Relief Fund
3. Indira Gandhi Memorial Trust
4. Rajiv Gandhi Foundation
III Donation qualifying for 100% deduction, subject to qualifying limit

1. The government or to any approved local authority, institution or association for promotion of
family planning.
2. Sum paid by company as donation to the Indian Olympic Assocaition or any other
association/institution established by the govt for development of infra for sports or games, or the
sponsorship of sports and games in India.
IV Donation qualifying for 50% deduction, subject to qualifying limit

1. Any institution or Fund established in India for charitable purposes fulfilling prescribed conditions
2. The government or any local authority for utilization for any charitable purpose other than the
purpose of promoting family planning
3. An authority constituted for housing accommodation or for purpose of planning, development or
improvement of cities, towns, and villages, or both.
4. Any corporation established for promoting the interests of the members of a minority community
5. For renovation or repair of temple, mosque, gurdwara, church or other place of historic,
archaeological or artistic importance or which is a place of public worship
Qualifying limit:
Step 1: Adjusted total income i.e., GTI reduced by the following:
a. Deductions under chapter VI-A, expect under section 80G
b. Short-term capital gain taxable u/s 111A
c. Long-term capital gains taxable u/s 112 & 112A
d. Any income on which income tax is not payable.
Step 2: Calculate 10% of adjusted total income
Step 3: Calculate the actual donation
Step 4: Lower of Step 2 or Step 3
Step 5: the said deduction is adjusted first against donations qualifying for 100% deduction. Thereafter,
50% of balance qualifies for deduction u/s 80G.

INCOME TAX MATERIAL
Note: No deduction shall be allowed in respect of donation of any sum exceeding Rs.2,000 unless such sum
is paid by any mode other than cash.
.
Sec – 80 GG
a. Eligible Assessee: Any assessee who is not in receipt of HRA qualifying for exemption u/s 10(13A) from
employer and who pays rent for accommodation occupied by him for residential purpose.
b. Conditions
1. The assesse should not be receiving any HRA.
2. Expenditure incurred by him on rent exceed 10% of hi total income.
3. Accommodation should be occupied by the assesse for the purpose of his own residence.
4. Assessee or his spouse or his minor child or a HUF should not own any accommodation at the place
where he resides or perform duties of his office or employment or carries on his business or
profession.
c. Quantum of deduction:
1. Actual rent paid – 10% of adjusted total income
2. 25% of adjusted total income
3. Rs.5,000 p.m.
Whichever is lower
Sec – 80GGA
a. Eligible assesse: Any assesse not having income under “Profits and gains of business or profession”,
who makes donations to scientific research or rural development.
b. Quantum of deduction: Entire amount of donations.
Note: No deduction shall be allowed in respect of donation of any sum exceeding 10,000 unless such sum is
paid by any mode other than cash.
Sec – 80GGB
a. Eligible assesse: Indian company
b. Quantum of deduction: entire of donation
Sec – 80GGC
a. Eligible assesse: Any person
b. Quantum of deduction: Entire amount of donations.
Political Party means a political party registered under sec – 29 A of The Representation of the People Act,
1951.
Sec – 80JJAA Deduction in respect of Employment of new employees
Eligible Assessee: Any assesse engaged in Business & to whom Sec 44Ab applies (i.e., T/O exceeds Rs.1 cr)
Amount of deduction: 30% Additional Employee cost (deduction allowed for 3 consecutive years)
Additional Employee cost: total employment paid or payable to additional employees employed during the PY.
1. In case of existing business, additional employee cost shall be Nil, if

INCOME TAX MATERIAL
a. There is no increase in the total number of employees.

b. Emoluments paid otherwise than by A/C payee Cheque/ Draft/NEFT/RTGS (means paid in cash)
2. In case of New Business – Additional employee cost shall be emoluments paid / payable to employees
employed during that PY.
3. Additional employees do not include –
- Employee whose emoluments > Rs.25,000 p.m.
- Employee employed for less than 240 days in PY (in case of manufacture of apparel or footwear or
leather products then 150 days)
- Employee does not participate in RPF.
- Employee for whom the entire contribution is paid by Government under Employees Pension
Scheme notified in accordance with the provision of Employees Provident Funds & Miscellaneous
Provision Act, 1952.
Note – If an employee is employed during the previous year for less than 240 days or 150 days, as the case may
be, in the immediately succeeding year, he shall be deemed to have been employed in the succeeding year.
Accordingly, the employer would be entitled to deduction of 30% of additional employee cost of such emloyees
in the succeeding year.
Part B : Revenue based deduction

Section Eligible Assessee Eligible Income Permissible Deduction
80QQB Resident Individual, Royalty income etc,. of authors of Income derived in the exercise of
being an author certain books other than text profession or Rs.3,00,000
books. whichever is less.
80RRB Resident Individual Royalty on patents Whole of such income or
being a patentee Rs.3,00,000 whichever is less.
80 TTA Individual or a HUF, Interest on deposits in saving Actual Interest Or
Other than a resident account Rs.10,000
senior citizen Whichever is lower
80 TTB Resident Senior Interest on deposits with banking Actual Interest Or
Citizen company, co-operative society Rs.50,000
engaged in banking or a post Whichever is lower

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INCOME TAX MATERIAL

Why are taxes Levied ?

Power to Levy taxes?

The Following are the lists:

➢ Income tax Act, 1961:

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First Schedule to the Finance Act

➢ Circulars and Notifications:

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Means and includes Restrictive and Exhaustive

Charge/Levy of Income Tax (Section:04):

➢ Gross Total Income [Section - 14]:

➢ Income [Section - 2(24)]:

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(v) Deemed profits chargeable to tax under section 41 or section 59.

(vi) Any capital gains chargeable under section 45.

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➢ Person [Section - 2(31)]:

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➢ Previous Year [Section - 03]:

➢ Assessment Year [Section 2(9)]:

a. income of non-resident from shipping;

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➢ Assessee [Section - 2(7)]:

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1) Individual, HUF, AOP, BOI, Artificial Juridical Person. [Slab Rate]

B. For Senior Citizen (Resident Individual age 60 years or more in PY)

3) For Cooperative society: [Slab Rate]

4) For Company: [Flat rate]

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(c) 111A Short-term capital gains on transfer of – 15%

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Health and Education Cess on Income-tax:

Marginal Relief = Extra Tax – Extra Income

Rebate u/s 87A:

a) 100% of tax payable.

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Unit 2 – Residential Status, Scope of Total Income & Exempt Income

Part – I : RESIDENTIAL STATUS AND ITS EFFECT ON TAX INCIDENCE

CONCEPT OF RESIDENT AND NON-RESIDENT:

INDIVIDUAL [Sec-6(1) read with Sec-6(6)]:

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Additional conditions to test as to when a resident individual is ordinarily resident in India –

Resident but not ordinarily resident:

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PART – II : SCOPE OF TOTAL INCOME:

Indian Income – Any of the following three is an Indian Income –

I. Individual and Hindu undivided family

Meaning of Income Received or Deemed to be received:

(i) their residential status, and

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(ii) the place of its accrual.

Meaning of Income ‘accruing’ and ‘arising’:

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- for the provision of services by that non-resident.

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i) the capital asset is movable or immovable, tangible or intangible;

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Part-III - Income that is exempt from tax

10(2) Payments received by a member from the income of the family.

10(6) Remuneration received by foreign diplomats of all categories.

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