Nmims: Taxation-Direct and Indirect

Taxation- Direct and Indirect
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COURSE DESIGN COMMITTEE
Chief Academic Officer

Dr. Arun Mohan Sherry
M.Sc. (Gold Medalist), M.Tech.
(Computer Science -IIT Kharagpur), Ph.D.
NMIMS Global Access – School for Continuing Education
Content Reviewer Content Reviewer

Dr. Sadaf Hashmi CA Chetan Jain
Visiting Faculty, NMIMS Global Visiting Faculty, NMIMS Global
Access - School for Continuing Education Access - School for Continuing Education
Specialization: Finance Specialization: Strategy, Finance,
Accounts & Taxation
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TOC Reviewer Content Reviewer
CMA (Dr.) Kinnarry Thakkar CA Purva Shah
Visiting Faculty, NMIMS Global Assistant Professor, NMIMS Global
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Access - School for Continuing Education Access - School for Continuing Education
Specialization: Finance, Accountancy and Specialization: Finance and Taxation
Direct Indirect Taxation
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Author : Shikha Kamboj

Reviewed By: CA Chetan Jain, CA Purva Shah & Dr. Sadaf Hashmi
Copyright:
2018 Publisher
ISBN:
978-93-5119-497-2
Address:
4435/7, Ansari Road, Daryaganj, New Delhi–110002
Only for
NMIMS Global Access - School for Continuing Education School Address
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NMIMS Global Access - School for Continuing Education

CON T EN T S
CHAPTER NO. CHAPTER NAME PAGE NO.
1 Introduction to Taxation 1
2 Residential Status 53
3 Income from Salaries 93
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4 Income from House Property 143
5 Profits and Gains of Business or Profession 181

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6 Income from Capital Gains 229
7 Income from Other Sources 277

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8 Deductions to be Made in Computing Total Income 295

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9 Exemptions & Rebates 333
10 Computation of Total Income 357
11 Indirect Taxation – Goods and Services Tax 385
12 International Taxation 409
13 Case Studies 423

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Taxat i o n - Dir e ct a nd In dir e ct
c u r r i c u l um
Introduction to Taxation: Meaning and Nature of Taxes; Vital Attributes of Tax; Objectives of
Taxation; What is Income Tax?; Tax Planning, Avoidance and Evasion; Types of Taxes; Direct
Tax; Indirect Tax; Terms Related to Income Tax (Sections 2 and 3); Heads of Income; Income Tax
Rates and Slabs; Concept of Tax Deducted at Source (TDS); TDS rates on Different Transactions;
Obligations of Tax Deductor; Implications of not following TDS provisions.
Residential Status: Residential Status of Different Kinds of Assessees; Residential Status of an

Individual; Residential Status of HUF; Residential Status of a Company Assessee; Residential Status
of Firm/Association of Persons (AOP); Scope of Total Income; Income Deemed to be Received in
India; Income Deemed to Accrue or Arise in India.
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Income from Salaries: Basis of Charge and Place of Accrual of Salary; Employer-Employee
Relationship; What is Salary?; Definition of Salary under Sec. 17(1) of Income Tax Act, 1961; Arrears
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of Salary; Remuneration Received By Working Partner of PFAS; Type of Emoluments/ Perquisite;
Gratuity; Commutation of Pension; Leave Encashment; Retrenchment Compensation; Prescribed
Guidelines (Rule 2BA); Keyman Insurance Policy; Value of Leave Travel Concession; Valuation
in Respect of Unfurnished Rent Free Accommodation; Provisions of Household’s Material of an
Employee; Provisions of Educational Facilities for Employee’s Family; Interest Free Loan & Loan
at Concessional Rate of Interest; Profits in lieu of Salary; Medical Facilities Treated as Perquisite;
Perquisite for Motor Car; Deductions from Salary; Tax Treatment on Provident Funds; Computation
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of Income from Salaries.
Income from House Property: Income from House Property; Essential Conditions for Taxing under
Head “Income from House Property”; House Property not Chargeable to Tax; Deemed Owner;
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Determination of Annual Value of House Property; Deductions of Income from House Property;
Special Provision for Arrears of Rent and Unrealised Rent Received Subsequently; Property
Owned by Co-owners; Income from Let-out Property; Income from Self Occupied Property; Set off
and Carry Forward of Loss.
Profits and Gains of Business or Profession: General Principles of Business and Profession;
Incomes under the Head Profits and Gains of Business or Profession (Section 28); Computation
of Income from Profits & Gains of Business and Profession (Section 29); Deductions Expressly
Allowable u/s 30 – 43D; Deduction for Rent, Rates, Repairs and Insurance of Building (Section 30);
Deduction for Repairs and Insurance of Machinery, Plant and Furniture (Section 31); Deduction for
Depreciation including concept of Block of Assets (Section 32); Expenditure on Scientific Research
(Section 35); Other Deductions (Bonus or Commission Paid to Employee; Interest on Borrowed
Capital; Bad Debts; Contribution to Pension Scheme; Contribution to Approved Gratuity Fund;
Contribution Received from Employees; Expenditure on Advertisement) (Section 36); General
Expenditure for the Purpose of Business and Profession (Section 37); Expenditure Allowable for
Advertisement (Section 37 (2B)); Amounts not Deductible u/s 40; Section 40(A), Section 40A (2) (B),
and Section 43(B); Set-off of Business Loss (Section 72).

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Income from Capital Gains: Basis of Charge; Capital Asset u/s 2(14); Capital Assets and its Types;
Short-term Assets & Long-term Assets; Period of Holding; Capital Gains (Section 45); Transfer as
Defined u/s 2(47); Computation of Capital Gain (Sections 48 and 50); Full Value of Consideration; Cost of
Acquisition; Cost of Transfer; Cost of Improvement; Capital Gain on Transfer of Securities; Capital Gain
on Transfer of Capital Assets (other than Securities); Indexation; Cost of Inflation Index; Short-Term
Capital Gain; Long-Term Capital Gain; Set off & Carry Forward of Capital Loss; Exemptions/Deductions
under Capital Gains (u/s 54, 54B, 54D, 54EC, 54F, 54G, 54GA); Deemed Full Value Consideration (DFVC):
Special Cases.
Income from Other Sources: Taxable Income (Section 56); Deductions (Section 57); Amounts not
Deductible (Section 58); Taxable Profit (Section 59).
Deductions to be made in Computing Total Income: Deduction v/s Exemption; Deductions to be made
in Computing Total Income (Section 80A); Deductions in respect of Life Insurance Premium, Deferred
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Annuity, Contribution to Provident Fund, Subscription to Certain Equity Shares or Debentures
etc. (Section 80C); Deduction in respect to Contribution to Pension Fund (Section 80CCC); Limit of
Deduction u/s 80C, 80CCC, 80CCD (Section 80CCE); Deduction in respect of Health Insurance Premia
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(Section 80D); Deduction in respect of Maintenance including Medical Treatment of a Dependent who
is a Person with Disability (Section 80DD); Deduction in respect of Loan taken for Higher Education
(Section 80E); Deduction in Respect of Interest on Deposits in Savings Account (Section 80TTA);
Deduction in the Case of Person with Disability (Section 80U)
Exemptions & Rebates: Incomes not included in Total Income (Exemptions u/s 10); Agricultural Income
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[Section 10(1)]; Receipts from HUF [Section 10(2)]; Partners Share in the Income of the Firm [Section
10(2A)]; Gratuity [Section 10(10)]; Commutation of Pension [Section 10(10A)]; Leave Salary [Section
10(10AA)]; Leave Travel Concession [Section 10(5)]; Amount Received under a Life Insurance Policy
[Section 10(10D)]; Payment from Provident Fund [Section 10(11)]; House Rent Allowance [Section
10(13A)]; Scholarship [Section 10(16)]; Awards [Section 10(17A) and 10(18)]; Clubbed Income of a
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Minor Child [Section 10(32)]; Family Pension [Section 10(18) and 10(19)]; Income by the Way of Interest,
Dividend, Premium on Redemption or other Payment from Securities (Bonds, Mutual Funds, Shares
etc.) [Section 10(15)]; Rebates of Income Tax.
Computation of Total Income: Computation of Income Tax; Income Tax Slab Rates; Income Tax Rates
for Individuals; Income Tax Rates for Senior Citizens; Income Tax Rates for Super-senior Citizens;
Income Tax Rates for Partnership Firms; Income Tax Rates for Local Authority; Income Tax Rates for
Co-operative Society.
Indirect Taxation – Goods and Services Tax: What is GST?; Importance of GST; Need & Evolution
of GST; Levy and Collection of GST (Charging Section); Objectives and Salient Features of the Indian
GST System; Applicability and Mechanism of GST; Tax Rates under GST; Advantages of GST; Impact
of GST on Various Sectors; Transitional Provisions.
International Taxation: Concept of International Taxation; Objectives of International Taxation;

Central Principles of International Taxation; Double Taxation; Relief From Double Taxation; Double
Taxation Avoidance Agreement (DTAA); Implication of Section 195.

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Ch a
1 pt e r
Introduction to Taxation
CONTENTS
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1.1 Introduction
1.2 Meaning and Nature of Taxes
1.2.1
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Vital Attributes of Tax
1.2.2 Objectives of Taxation
1.2.3 What is Income Tax?
1.2.4 Tax Planning, Avoidance and Evasion
Self Assessment Questions
Activity
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1.3 Types of Taxes

1.3.1 Direct Tax
1.3.2 Indirect Tax
Activity
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1.4 Terms Related to Income Tax (Sections 2 and 3)

Activity
1.5 Heads of Income
Activity
1.6 Income Tax Rates and Slabs
Activity
1.7 Concept of Tax Deducted at Source (TDS)
1.7.1 TDS Rates on Different Transactions
1.7.2 Obligations of Tax Deductor
1.7.3 Implications of not Following TDS Provisions
Activity
1.8 Summary
1.9 Descriptive Questions
1.10 Answers and Hints
1.11 Suggested Readings & References

2 Taxation – Direct and Indirect
Introductory Caselet
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TAX PLANNING FOR SALARIED CLASS
Most of the persons who work for a salary under registered or-
ganisations usually know that their income is subject to tax if it
exceeds a certain amount. Salaried people are also accustomed
to receiving reminders from the Human Resource Executives to
submit their tax saving or investment proofs. Any salaried per-
son whose salary falls into taxable category must plan his invest-
ments and schedule his deductions from monthly salary. If such
planning is not done, the person may find him/herself in trouble
because the entire tax amount might be deducted from the salary
of the last month of the financial year, i.e. March.
For salaried people, there are basically three ways to plan and
optimise their taxes:
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i. Claiming tax free income
ii. Incidental actions that bring tax benefits
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iii. Investing or saving for tax benefits
In the first case, when a salaried employee wants to claim tax-free

income, the employee must submit his/her documents and claim
all tax-free deductions which include:
House Rent Allowance (HRA) is fully tax free if the employee
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is staying in a rented accommodation and submits the rent

receipt from the owner.
Medical allowances become tax free if employees submit med-
ical bills for the entire year.
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Leave Travel Allowance (LTA) becomes tax free when the em-
ployee submits all his travel proofs.
Conveyance allowance is tax free.
In the second case, the employee can attain tax benefits in the
following ways:
Interest payment on home loans as well as the payment of
principal on home loan both can be used for tax benefits.
However, tax deduction for interest payment is governed as
per Section 24 of the Act whereas deduction with respect to
principal payment is governed as per Section 80C of the Act.
Tax deduction can also be claimed for insurance premium
paid for the year. However, all interest payment receipts must
be submitted.
Employees who have children and pay school fees can claim
tax deduction for tuition fees paid.

Introduction to Taxation 3
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Employee’s contribution in the employee provident fund is

also deductible.
Premium paid for Mediclaim can also be claimed for tax ben-
efits.
Interest paid on education loans can also be claimed for tax
benefits.
Please note that insurance and mediclaim are primarily the

means to compensate for a possible loss or damage. They are not
investment avenues or instruments in true sense and hence are
included here in the second category instead of the third one.
In the third case, the employee can invest or plan his income in
order to manage the net payable tax. Investments and deposits
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for the purpose of saving tax involve dealing with various provi-
sions under Sections 80C, 80CCC, 80G and 80CCG. Some of the
options which can be used by tax payers to seek deductions under
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these sections include PPF, Tax-Saver FD, Mutual Funds, ELSS,
Unit Linked Insurance Plans (ULIPs), National Savings Certifi-
cates (NSCs) and pension plans.
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learning objectives
After studying this chapter, you will be able to:

>> Explain the meaning and nature of taxes, its attributes and
objectives
>> Describe the concepts of tax planning, tax avoidance and tax
evasion
>> Discuss two types of taxes namely direct and indirect taxes
>> Explain various terms related to income tax
>> Summarise various heads of income
>> Explain and outline the applicable income tax rates and
slabs for different categories of tax payers
>> Describe the concept of Tax Deducted at Source (TDS)
1.1 Introduction
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A country is governed by its government. The government of the
country is responsible for maintaining law and order in the country
and ensuring that all its citizens are able to attain a basic minimum
standard of living. In all countries, there exists a disparity of income
among the rich and the poor; however, the degree of this disparity
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may vary. In country like Indias, this disparity is widespread. It is the

duty and obligation of the government of a country to implement a
system that would help in lowering such disparity in the society at
large. The government needs to come to rescue of the downtrodden
and carry out development work. Therefore, in order to achieve this,
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a taxation and subsidy system must be established.
Taxation in India dates back to historic times. It existed in one form or

the other. A lot of references regarding taxes can be found in ancient
texts such as Manu Smriti and Arthshastra. During the ancient times,
taxes were levied on different professionals such as actors, dancers,
singers, dancing girls, etc. As against today’s tax that is charged in
purely monetary terms, taxes in those times could be paid in the form
of gold coins, cattle, raw materials or by rendering certain services.
However, the history of taxation in modern India dates back to 1860
when Income Tax Act was formally introduced by James Wilson, the
first Finance Minister of British India. The first Income Tax Act be-
came operational on 24 July 1860 and it was levied only on rich royalty
and Britishers only. It was revoked in 1865 and reintroduced in 1867.
Thereafter, a combination of license tax and igncome tax was intro-
duced in 1886.
The most important reform in Income tax law came in 1922 when the
‘1919 Chelmsfod Reforms’ were implemented. According to these re-
forms, distinction was introduced between the functions and resourc-

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es of the State and the Central Governments. As per this Act, the tax
revenues became the primary source of a Government’s revenue.
After India got independence, Direct Taxes Administration Enquiry
Committee was setup in 1958. On the basis of the recommendations of
the Law Commission and of the Enquiry Committee, Income Tax Act,
1961 came into existence with effect from 1 April 1962.
Taxation is a legal system for assessing and collecting taxes. Under the
taxation system, the government makes it mandatory for all individu-
als and corporates earning over and above a particular amount to pay
a part of their income as income tax. The rates at which the income of
an individual and corporate is taxed are set by the Ministry of Finance
and is revised from time to time.
Taxes are the major source of a government’s revenue apart from non-
tax revenues such as interest receipts, surplus profits of RBI, railways
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and profits from public enterprises. These revenues are then redirect-
ed towards various welfare schemes, subsidies, etc. A well-developed
taxation system is indicative of the maturity of a country. The taxation
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system has to be designed carefully so that it should not put undue
pressure on the working class and corporates.
This book will make you aware of the taxation system in India. In In-
dia, various kinds of taxes are levied and collected by different enti-
ties such as the central government, state government and various
local bodies such as municipality. Article 265 of the Indian Constitu-
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tion which states, ‘No tax can be collected or levied on any individual
or firm except by the authority of law’ grants the right to levy taxes
exclusively to the government. It means that the government cannot
impose any tax unless it is passed as a law.
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Primarily, there are two kinds of taxes imposed by the government,

namely, direct tax and indirect tax. This book will introduce you to
both of these types of taxes. Direct tax has been covered in a detailed
manner. In this chapter, you will study the meaning and nature of tax-
es and the history of income tax in India. Subsequently, you will study
about basic concepts of direct and indirect taxes and corporate taxa-
tion. The later sections of this chapter will introduce various heads of
income and the tax rates applicable for different categories of taxpay-
ers.
1.2 Meaning and Nature of Taxes

The word ‘tax’ has its origin in a Latin word Taxo. Taxes refer to a
kind of financial charge that is imposed on an individual or a com-
pany by the Government of India or state governments or any other
recognised local body. The taxation system of a country is important
for the successful working of the overall economy. The purpose of col-
lecting taxes is to construct a pool of money that can be used to fund

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various public expenditures such as providing subsidies, carrying out

developmental activities, etc. In other words, we can say that the gov-
ernment charges taxes in order to accomplish its economic and social
objectives and to reduce economic disparity.
India has a three-tier tax structure. It means that the central govern-
ment, state governments and local municipal bodies are allowed to
levy and collect taxes as per Article 256 of the constitution.
You might have heard about various types of financial charges (taxes
and cesses) such as sales tax, income tax, Value Added Tax (VAT), ex-
cise duty, customs duty, cess, etc. All these types of taxes can be clas-
sified into two major categories: direct tax and indirect tax. A few of
them are non-existent as they have been subsumed under the newly
introduced Goods and Service Tax (GST).
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In India, tax is levied on the income generated by a person or an or-
ganisation in a financial year. Income tax and corporate tax are the
most important sources of revenue for the Indian government. The
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Income Tax Department functions under the Central Board of Direct
Taxes (CBDT) which further works under the Department of Reve-
nue, Ministry of Finance, Government of India. Another board called
the Central Board of Excise and Customs (CBEC) works under the
Department of Revenue, Ministry of Finance, Government of India.
Figure 1.1 shows the hierarchy of bodies related to taxation.

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Department of Central Board of

Economic Affairs Direct Taxes
(CBDT)
Government of Department of
Ministry of Finance
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India Revenue
Central Board of
Department of Customs and
Expenditure Excise(CBEC)
Figure 1.1: Hierarchy of Bodies Related to Taxation
note
On February 4, 2018, the Finance Minister Arun Jaitley in his bud-

get speech announced that with the roll-out and implementation of
GST, the name of the Central Board of Customs and Excise (CBEC)
will be changed to the Central Board of Indirect Taxes and Cus-
toms (CBIC). The Finance Bill 2018 proposes to amend the Central
Boards of Revenue (CBR) Act, 1963, as well as the Central Goods
and Services Tax Act, 2017, and to replace CBEC with CBIC.
You must also note that as of February 2018, the Finance Bill, 2018
is in Parliament and has not been cleared yet. After it is cleared, it
will become the Finance Act, 2018.

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1.2.1 Vital Attributes of Tax
Vital attributes or characteristics of a tax are as follows:

Taxes must be paid within the defined timelines.
Tax is levied on assets owned by persons.
Taxes must be paid regularly at the prescribed time periods.
Taxes are levied for achieving economic parity in the society.
Tax is collected on the income generated by persons and by prop-
erty owned by people.
1.2.2 Objectives of Taxation
As stated earlier, taxes are an instrument of social and economic poli-
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cy in the hands of the government. Other important objectives of tax-
ation are as follows:
Revenue generation (Social objective): All government expenses
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(such as developmental work) are funded by the taxes collected
from the general public and corporate houses.
Preventing the concentration of wealth in a few hands (Equal-
ity objective): In countries such as India, there is widespread in-
equality in terms of the distribution of wealth. A very small section
of the population (minority) holds the majority of wealth of the
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country. This section comprises mainly business people and those

who have inherited wealth. Tax authorities charge tax from them
at a higher rate based on a progressive tax system. This prevents
wealth being concentrated in a few hands. Thus, narrowing the
gap between rich and poor is another objective of tax.
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Redistribution of wealth (Redistribution objective): The taxes

collected from the rich are redistributed among the whole com-
munity by the way of subsidies and various welfare schemes/ac-
tivities.
Providing boost to the economy (Economic growth objective): It
is not that the government provides welfare only for the poor of the
country. The government also provides tax holidays or tax waiv-
ers to new start-up firms for a certain period, until they become
operationally efficient and start making profits. The government
also manages the economy by providing concessions and rebates
to other stakeholders. Occasionally, the government also imposes
taxes to save domestic industries such as increasing import duties
to discourage imports and thus helps in striking a balance in inter-
national payments.
Reducing unemployment (Employment objective): The govern-
ment provides incentives and softens its tax regime for entrepre-
neurs and companies that establish facilities and offices in remote
or underdeveloped areas. This is because it is a way of increasing

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the employment level of the particular area as well as the entire

nation. Moreover, it is a way to achieve development of those re-
mote/underdeveloped areas.
Eliminating regional disparities (Regional equality objective):
When companies set up facilities and industries in remote places,
it tends to boost the economic activities in those areas, which in
turn leads to the development of those areas and thereby reducing
regional disparities.
1.2.3 What is Income Tax?
Before we understand the concept of income tax; it is important to un-

derstand the tax structure of India. The tax structure has undergone a
lot of changes in the past few years. Let us revisit the earlier tax struc-
ture of India which is shown in Figure 1.2:
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Income Tax
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Wealth Tax (Now
Excise
Abolished)
Old Tax Structure Central Tax Service Tax
Custom
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Indirect Tax
VAT/Sales/CST
State Tax Miscellaneous

Taxes (Entry Tax
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Luxury Tax,
LotteryTax, Etc.)
Figure 1.2: Old Tax Structure of India
The new tax structure of India post introduction of GST is shown in

Figure 1.3:
Income Tax
Direct Tax
Wealth Tax (Now
Abolished)
New Tax Structure CGST (Central)
Intra-state
Indirect Tax=GST SGST (State)

except Custom
Intra-state IGST (Central
Figure 1.3: New Tax Structure of India

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Income tax is a direct tax that is levied by the government of a country

on the personal income of an individual or corporate. Some important
features of Income tax are as follows:
The incidence and impact of tax falls on the same individual or
assessee.
It is a progressive tax.
It is levied upon and collected from the assessee.
The burden of tax cannot be shifted from one assesse to another.
It is levied on the annual income of an assessee.
Itis governed by the Income Tax Act, 1961 which is subject to
amendments made to the act by the Finance Act passed each year.
Determination of taxable income, tax liability and procedure for
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tax assessment, appeal, penalties and prosecutions are done as per
extant laws.
The Government enacts the law in the Parliament whereas it is
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administered by the Central Board of Direct Taxes (CBDT).
Section 295 of IT the Act empowers the CBDT to frame rules
(called Income Tax Rules) from time to time in order to implement
amendments in tax provisions for proper administration of the Act.
CBDT frames rules which in turn prescribe forms, procedures and
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principles of valuation of perquisites under the Act.

Section 119 of the IT Act, prescribes that CBDT can issue circulars
and notifications from time to time.
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note
Circulars and notifications issued by the CBDT help in clarifying

the scope and meaning of various provisions of the IT Act. These
are used by IT officers and assessees. These are binding upon IT
Assessing Officers. It is important that CBDT circulars are not in
contrast to the provisions of the IT Act.
Notifications and circulars issued by CBDT is called Subordinate
Legislation.
With respect to legal disputes, it is clearly laid that the Supreme Court
and the High Court can give judgment only on the question of law.
Also, the decision of High Court will apply in the respective states,
within its jurisdiction.
Under the IT Act, the Income Tax is charged at the rates that have
been fixed for the year as finalised in the Finance Act for the Assess-
ment Year. The rates applicable for taxation are provided in the First
Schedule of the Finance Act. Part I of this schedule contains rates ap-

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plicable to the income of various types of assessees for the Assessment

Year. Part II contains TDS rates for the current Financial Year. Part III
contains TDS rates for salary and advance tax.
note
Income Tax in India is governed by Income Tax Act, 1961. As per

Section 1(2) of the Income-tax Act, 1961, it extends to the whole of
India. However, there is one exception. As per Sec. 269S of the Act,
the provisions of Chapter XXA – Acquisition of immovable prop-
erties in certain cases of the transfer to counteract evasion of tax’
shall not extend to the State of Jammu and Kashmir.
1.2.4 Tax Planning, Avoidance and Evasion
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Terms Tax Planning, Tax Avoidance and Tax Evasion, all are methods
of reducing the tax liability of a person or a corporate body or any as-
sessee. Before explaining these concepts in detail, let us first look at
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their definitions.
Tax Planning refers to the practice of availing all available exemp-

tions, deductions and rebates provided in the Act in order to reduce
an assessee’s tax liability. Methods using which an assessee can re-
duce his/her tax burden are provided in the Income Tax Act itself. For
example, allowable exemptions are provided under Section 10 of the
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Act; allowable deductions are provided under Sections 80C to 80U of

the Act; and allowable rebates and reliefs are provided under Sections
87–89 of the Act.
Tax Avoidance is an act of dodging tax without breaking the Law.

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When an assessee indulges in tax avoidance, he/she arranges his/

her financial activities in such a manner which takes advantages of
loopholes present in the Tax Law without breaking any law or doing
anything illegal. This is done for reducing an assessee’s overall tax
liability.
Tax Evasion refers to the use of any illegal methods that lead to the
reduction of tax liability of an assessee. Tax evasion is achieved using
dishonest means such as concealing income, claiming excessive ex-
penditure, forging accounts, etc.
Let us now discuss these concepts in detail.
Tax planning refers to an act of lowering the tax liability of a person

by using various provisions as stated in tax laws. The government and
tax laws have provisions for deductions and exemptions, which can be
used to lower the tax liability. A person or a corporate body must plan
all his/its incomes and expenses in such a manner that they can lower
their tax liability to a minimum by claiming maximum deductions and
exemptions. For example, Section 80C of the Income Tax Act, 1961

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provides that a person can claim a deduction of up to `1,50,000 by in-

vesting in instruments such as Public Provident Fund (PPF) Account
and Tax Saving Fixed Deposits. Remember, tax planning is done by
using complete legal means; thus, all taxpayers are advised to engage
in tax planning. According to section 3, previous year is the financial
year immediately preceding the assessment year. Here, the financial
year means where the year begins on 1st April and ends on 31st March.
Tax avoidance is another way through which the taxpayer may re-
duce his tax liability. There is a very minute difference between tax
planning and tax avoidance. Tax planning and tax avoidance both are
done 100% in accordance with the existing laws. In tax planning, the
taxpayer does what the government tells him/her to do (by exhaust-
ing the provisions for deductions and exemptions). In contrast, in tax
avoidance, the taxpayer cleverly takes advantage of the loopholes
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present in the tax law and does not go according to what has been
mandated by the government, making it an acceptable way of reduc-
ing the tax liability. The government keeps introducing new amend-
ments from time to time in the finance budgets to eliminate any loop-
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holes in the tax laws and to lower the incidences of tax avoidance.
Tax planning and tax avoidance are 100% legal ways of reducing tax li-
abilities. On the contrary, tax evasion is an illegal practice. Tax evasion
is the practice of reducing the tax liability by manipulating the expens-
es and income in such a way that the income is shown as being less
and the expenses are shown as being high. Using this practice, persons
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or corporates are able to reduce their net taxable income. Taxpayers

usually do not show some income and expense statements in order to
evade tax. However, to avoid this practice, the income tax department
keeps a close watch on all major financial activities of taxpayers or
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assessees. The department tallies the actual transactions done and the
transactions mentioned by the taxpayer in his/her income statements.
In case of any discrepancies, the department is authorised to take ac-
tion (such as raids, arrests) in accordance with the law.
self assessment Questions
1. According to Article _______ of the Constitution, “No tax shall

be levied or collected except by the authority of law”.
a. 250
b. 256
c. 260
d. None of these
2. Which of the following is not an objective of taxation?
a. Revenue generation

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b. Redistribution of wealth
c. Increasing the GDP of the country
d. Reducing unemployment
3. _________ is a method of reducing an assesee’s tax liability by
using certain illegal methods.
Activity
Describe the importance of tax planning for corporates. Also, make

a list of methods commonly employed by corporates in order to re-
duce their tax liability.
1.3 Types of Taxes
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All the taxes which are the liability of an assessee (taxpayer) come
under the category of direct tax. Examples include income tax, capital
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gains tax (CGT), perquisite tax, wealth tax (now abolished) and corpo-
rate tax. On the contrary, all those taxes which an assessee can recover
from other person(s), but the liability of payment of which lies with
him/her are called indirect taxes. For example, income tax is a direct
tax whereas GST is an indirect tax.
As you have studied earlier, the tax system of India is primarily a

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three-tier system that includes the Central Government, State Govern-

ments and some local government bodies. The Central Government
levies income tax, Central GST (CGST) and customs duty. The state
governments have the right to levy taxes such as State GST (SGST).
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Let us now study direct and indirect taxes in detail.
1.3.1 Direct Tax
As explained earlier, direct taxes are the taxes that are to be paid by
an assessee or the taxpayer (person or corporate) directly to the gov-
ernment. The tax has to be paid by the taxpayer only and cannot be
transferred to any other person. Various types of direct taxes include
income tax, capital gains tax, securities transaction tax, perquisite tax,
corporate tax, etc. Direct taxes are overseen by the Central Board of
Direct Taxes (CBDT). The CBDT was formed in accordance with the
Central Board of Revenue Act, 1924. The CBDT is headed by a chair-
man along with six other members. The chairman acts as the special
secretary to the Government of India.
Some of the important direct taxes imposed in India are as follows:

1. Income Tax: This is the most important direct tax. Almost
everybody is acquainted with the concept of income tax. The
CBDT fixes the annual income range till which a person has to

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pay no income tax. However, on exceeding this limit, the assessee

becomes liable to pay tax on the income over and above the fixed
limit. TDS is a concept related to direct taxation, wherein taxes
are deducted at the very source of the origin of the income. This
system of tax collection is based on the concepts of ‘pay tax as you
earn’ and ‘collect tax as and when the income is being earned’.
2. Corporate Tax: Corporate tax is a type of tax that is levied
on the income generated by a business after making
deductions of expenses allowed under the Income Tax Act for
depreciation, COGS (Cost of Goods Sold) and Selling, General
and Administrative expenses (SG&A). For calculating taxes,
companies operating in India are categorised at a broad level
into two types:
i. Domestic companies
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ii. Foreign companies
3. Property Tax: In India, property is considered to be a source
of income. Therefore, tax is levied on properties such as
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buildings, flats, shops and land appurtenant to the building
(Land appurtenant to buildings means the land that is attached
to buildings). This tax is known as property tax. However, an
empty land without any adjacent building cannot be taxed,
although it can be taxed under income from other sources. The
amount of property tax is based on the value of the property. The
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authority to levy and collect property tax lies with the municipal
authority of a state. The municipality levies the property tax for
maintenance of all basic civic services in the city/state. In India,
the liability of paying property tax lies with the owner of the
property as against the occupier of the property. Various types of
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properties that are taxable in India include:

Residential property
Office spaces
Factory spaces
Warehouses (godowns)
Flats
Shops
4. Inheritance Tax (Now abolished): Inheritance tax was also

known as estate tax or death duty. It was a kind of tax levied
on the total value of the money and property of a deceased
person. In India, the Estate Duty Tax came into effect in 1953
and continued until 1985. In 1984, the government abolished the
Estate Duty on agricultural land by making an amendment in the
Estate Duty Act (Estate Duty (Amendment) Act, 1984). In 1985,
the Estate Duty Act was amended again and it was laid down
that the property inherited by a person on or after 16th March

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1985 would also not be taxable. In India, inheritance tax is not

levied because any amount received by way of will or inheritance
is not taxable as per Section 56(ii) of the Income Tax Act, 1961.
5. Gift Tax (Now abolished): Gift tax is a kind of tax that is imposed
after a living person gifts certain money or property to another
living person. Gift tax in India is governed by the Gift Tax Act,
which was introduced in April 1958. It was applied in all parts
of the nation apart from Jammu and Kashmir. According to the
Gift Tax Act 1958, all endowments (gifts) exceeding the value of
`25,000 were taxable. The gift could be in the form of money,
draft, cheque, etc., which is received from a person who is not
a relative (no blood relation) of the beneficiary. With effect from
October 1998, gift tax was abolished. However, in 2004, the gift
tax was reintroduced. According to the present gift tax norms, all
gifts received by a beneficiary (individual/HUF) exceeding the
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value of `50,000 are taxable.
1.3.2 Indirect Tax
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Indirect tax refers to a group of tax laws and regulations. In India, it is
levied on various business activities including manufacturing, trading,
imports and exports, stamp duty, registration, transfer, etc. It is levied
by both central and state governments. In recent years, the indirect
taxation system in India has undergone extensive reforms in order to
meet the requirements of international markets.
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Till the F.Y. 2016-17, and for the first quarter of F.Y. 2017-18, India had
in place of a host of indirect taxes such as sales tax, service tax, Cen-
tral Excise Duty, Additional Excise Duties, The Excise Duty levied un-
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der the Medicinal and Toiletries Preparation Act, Additional Customs

Duty or the Countervailing Duty (CVD), Special Additional Duty of
Customs – (SAD), Surcharges, Cesses, VAT/Sales tax, Entertainment
tax (unless it is levied by the local bodies), Luxury tax, Taxes on lot-
tery, betting and gambling, state cesses, surcharges related to supply
of goods and services, Entry tax, etc.
The Government of India rolled out the Goods and Service Tax (GST)
on July 01, 2017. GST is a tax that subsumed a number of state and
central indirect taxes. The taxes subsumed under GST are as follows:
Central excise duty
Duties of excise (medicinal and toilet preparations)
Additional duties of excise (goods of special importance)
Additional duties of excise (textiles and textile products)
Additional duties of customs (CVD)
Special additional duty of customs (SAD)

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Service tax
Central surcharges and cesses so far as they relate to supply of
goods and services
State VAT
Central sales tax
Luxury tax
Entry tax (all forms)
Entertainment and amusement tax (except when levied by the lo-
cal bodies)
Taxes on advertisements
Purchase tax
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Taxes on lotteries, betting and gambling
State surcharges and cesses so far as they relate to supply of goods
and services
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India has adopted a dual model of GST under which the GST is levied
and collected by both the Centre and the State. Prior to the introduc-
tion of GST, the Centre was responsible for taxing the manufactur-
ing of goods whereas the State was responsible for taxing the sales of
goods. With respect to services, only the Centre had the authority to
levy Service Tax. If GST was to be introduced, this segregation of pow-
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er would have become a roadblock. Therefore, an amendment was

made to the Constitution Act, 2016 in order to allow both the Centre
and the States to levy and collect this tax. All this was done in order to
smoothly implement GST.
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Exhibit
Exhibit: Difference between Direct and Indirect Taxes
S. No. Direct Tax Indirect Tax

1. Direct tax is levied on and Indirect taxes are filed by busi-
is paid by entities such as nesses but are ultimately paid
individuals, HUFs, and com- for by the end-consumer of a
panies, etc. For example, any good or service. For example,
company that earns a profit 5% GST is applicable for selling
has to file direct tax. space for advertisement in
print media. The cost of adver-
tisement includes the GST and
is charged by the print media
from the customer who gives
the advertisement but it is paid
by the concerned print media.

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2. Burden of tax cannot be Burden of tax can be shifted.
shifted. For example, an For example, addition of GST
individual must pay his tax on a luxury tax increases the
in his own name. cost of the product and shifts
the burden on the purchaser.
3. Direct taxes may help in Indirect taxes may lead to
decreasing inflation. During increased inflation. Increas-
periods of high inflation, the ing the amount of indirect tax
government may increase leads to increased price of the
the tax rate which leads to product or service which is an
a decrease in consumption inflationary act. In addition,
demand which in turn helps this may lead to an inflationary
in reducing the inflation. spiral if workers are involved
in production of goods and ser-
vices start demanding greater
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wages.
4. Collection of direct taxes is Collection of indirect tax is a
easier and less costly lead- bit tough as they have to be
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ing to better allocation. It is collected from multiple sourc-
easier to collect direct taxes es. Indirect taxes are difficult
because they have to be col- to collect because its collection
lected from known parties. has to be done from various
For example, tax is collected scattered parties. In addition,
from wage and salary earn- indirect taxes lead to price var-
ers using the Pay-As-You- iations which lead to changes
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Earn (PAYE) system. in consumer preferences and

changes in indirect taxes that
would be collected.
5. Direct taxes are progres- Indirect taxes are regressive
sive taxes. A progressive taxes. A regressive tax means
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tax means that the people that the tax rate decreases as
who are earning more pay the amount subject to taxation
more taxes as compared to increases. In such cases, tax
people who are earning less. rate progresses from high to
It means that progressive low. The lower amount is sub-
taxes take into consideration ject to greater tax and higher
the taxpayer’s ability to pay. amounts are subject to lower
tax. Regressive taxes do not
take into consideration the tax-
payer’s ability to pay. Indirect
taxes are regressive because
the poor and the rich pay the
same price (hence same tax)
while purchasing the same
product and service.
6. They involve higher ad- They involve lower administra-
ministrative costs. It is so tive costs. It is so because they
because they involve a lot of involve convenient and stable
exemptions. collections.

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7. Direct taxes lead to reduc- Indirect taxes discourage
tion in savings and also consumption and encourage
discourage investments. investments. It is so because it
When individuals and or- motivates people to spend less
ganisations can clearly see and save more in order to de-
that a significant portion of crease taxes they pay. This also
their income is being direct- leads to less demand and less
ed to government, it dis- imports which leads to increase
courages them from saving in investments.
much or investing in other
avenues because the income
from these investments and
savings would again become
subject to taxation.
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8. Direct taxes are paid by only Indirect taxes have a very wide
those people who fall into coverage as it is paid by all the
the taxable income brack- people who buy any services or
ets. Therefore, it has a very goods. Anybody who purchases
narrow coverage. The tax
IM any goods or services are auto-
to GDP ratio of India is very matically charged with indirect
low. In the budget speech taxes as they are included in
made by Finance Minister the total cost of the product or
Arun Jaitley in February service which means that the
2017, he stated that for F.Y. coverage of indirect tax is quite
2015-16, 3.7 crore individ- wide.
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uals had filed tax returns

that year. Out of these, only
2.94 crore were below the
income tax limit of `2.5 lakh
per annum or fell in the first
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tax bracket between `2.5

lakh to `5 lakh. It was esti-
mated that only 1% of the
Indians pay income tax.
9. Direct tax rates remain fixed Additional indirect tax can be
for all the people belonging levied on harmful commodities
to one income tax bracket. such as alcohol and cigarettes.
For example, all the resi- It helps in discouraging the
dent individuals (below age use of such products. Central
60) having taxable income government has the authority
between a range of `2,50,000 to impose excise duty in addi-
to `5,00,000 have to pay a tax tion to the GST for tobacco and
at rate of 5%. tobacco products.
Taxes are majorly differentiated on the basis of nature, incidence

and impact, evasion, transfer of burden, impact on inflation, costs
involved in collection, collection coverage, etc.

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Understanding Indirect Tax System in India: GST
Prior to July 2017, indirect taxes in India were a complex set of tax
laws. A host of taxes such as sales tax, service tax, customs duty, ex-
cise tax, VAT and so on existed. It was a complex task to account for
so many taxes, cesses and duties. A need was felt for structuring and
introducing a convenient method for indirect taxation. Therefore, on
1 July 2017, the Government of India introduced the Goods and Ser-
vice Tax (GST) by making the 101st amendment to Constitution and
passing the GST Act. It is considered to be country’s most significant
indirect tax reform till date.
The major reason for subsuming or amalgamating a large number of

Central and State taxes into a single tax was to mitigate cascading or
double taxation effects. It was also done in order to create a national
common market. It was estimated that consumers had to pay approx-
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imately 25-30% tax before the introduction of GST and after its intro-
duction, the overall tax burden would decrease.
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Goods and Services Tax or GST is a comprehensive, multi-stage and
value-added tax that is levied at all points in the supply chain and is
applicable on both goods and services, having minimum exemptions.
GST would be levied on manufacturing, sale and consumption of
goods and services across India. In India, GST is levied and collected
by both the Centre (CGST) and the states (SGST).
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Before the introduction of GST, taxes were levied in a pattern as

shown in Figure 1.4:
Buy Raw Material

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VAT
Manufacture
VAT+Excise Duty
Sale to Wholeseller or Warehouse Manufactured

Goods
VAT
Sale to Retailer
VAT
Final Sale to Customer
Figure 1.4: Pattern of Tax Levy before GST

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After the introduction of GST, taxes are levied in the pattern as shown
in Figure 1.5:
Buy Raw Material
GST
Manufacture
GST
Sale to Wholeseller or Warehouse Manufactured
Goods
GST
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Sale to Retailer
IM GST
Final Sale to Customer
Figure 1.5: Pattern of Tax Levied After GST

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The salient features of GST are as follows:

GST is levied on the supply of goods or services. Earlier the tax
was levied on the sale and manufacture of goods and on provision
of services.
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GST focuses on destination-based consumption instead of origin-

based taxation.
Indian GST is based on the dual GST model under which both the
centre and the state levy and collect the GST.
GST levied by the Centre is called as Central GST (CGST).
GST levied by States and Union Territories’ having their legisla-
tures are called State GST (SGST).
GST levied by Union Territories’ not having their legislatures are
called Union GST (UTGST).
CGST, SGST and UTGST are levied on intra-state supply.
GST levied and collected by the Centre on inter-state supply is
called Integrated GST (IGST).
Import of goods is considered to be inter-state supply and is sub-
ject to IGST in addition to the customs duty.
Import of services is considered to be inter-state supply and is sub-
ject to IGST.

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GST has replaced the following taxes that were levied and collect-
ed by the centre:
Central excise duty
Duties of excise (medicinal and toilet preparations)
Additional duties of excise (goods of special importance)
Additional duties of excise (textiles and textile products)
Additional duties of customs (commonly known as CVD)
Special additional duty of customs (SAD)
Service tax
Cesses and surcharges insofar as they relate to the supply of
goods or services
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GST has replaced the following taxes that were levied and collect-
ed by the centre:
State VAT
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Central sales tax (CST)
Purchase tax
Luxury tax
Entry tax (All forms)
Entertainment tax (except those levied by the local bodies)
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Taxes on advertisements
Taxes on lotteries, betting and gambling
State cesses and surcharges insofar as they relate to supply of
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goods or services.
GST is applicable to all products and services except alcohol meant
for human consumption.
GST is applicable to tobacco and tobacco products and the govern-
ment is authorised to levy additional excise duty.
GST will also be applicable on five specified petroleum products
including crude, petrol, diesel, ATF and natural gas from a date to
be recommended by the GST Council.
Some of the major advantages of GST are as follows:

An exhaustive tax base that would help in lowering tax rates and
eliminating classification disputes.
GST helps to eliminate multiplicity of taxes or cascading effect.
GST helps to simplify compliance procedures.
GST requires lesser compliances.

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GST seeks to regulate the unorganised sector.

GST increases efficiency in logistics.
Apart from GST, a few other types of indirect taxes are as follows:
Customs duty: Customs duty is a kind of tax that is imposed on
the import and export of goods. Customs duty on imports is called
import duty, whereas that on exports is called export duty. There
are distinctive standards for diverse products and divisions. The
government continuously revises these rates to advertise imports
and exports of particular products. The Customs Act was passed in
1962 to anticipate unlawful imports and exports of products. Du-
ties are imposed on merchandise imported or traded from India at
the rate detailed under the Custom Tariff Act, 1975. The rates are
revised regularly.
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Stamp duty: Stamp duty is a tax that is levied on the sale and
transfer of immovable property in the states. It is collected by state
governments and the rate varies from one state to another. For ex-
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ample, in Delhi, stamp duty and transfer duty are 4% if the vendee
(buyer) is a female and 6% if the vendee is a male. In addition,
there is a registration fee of 1% of the total value of the sale deed
plus `100/- pasting charges.

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4. Taxes which an assessee can recover from other person(s), but

the liability of payment of which lies with him/her are called
____________.
a. Direct tax
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b. Indirect tax
c. GST
d. Sales tax
5. Property tax is levied and collected by __________.
a. Central government
b. State government
c. Municipal authority
d. Governer
6. The GST levied and collected by The centre on inter-state
supply is called
a. Central GST (CGST)
b. State GST (SGST)
c. Union GST (UTGST)
d. Integrated GST (IGST)

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Activity
Write a report regarding the applicability of GST on alcohol meant

for human consumption and why it has not been covered under
GST till now. Also comment on rates applicable on tobacco and re-
lated products.
Terms Related to Income Tax

1.4
(Sections 2 and 3)
Section 2 of the Income Tax Act, 1961 (as amended by the Finance Act
2017) contains definitions used frequently in relation to income tax
and the Income Tax Act. Similarly, Section 3 of the Income tax Act,
1961 defines the meaning of ‘Previous Year’.
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Let us now study some of the basic terms and their definitions as per
Sections 2 and 3 of the Act.
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Assessee
As per Clause 7 of Section 2 of the Act, Assessee means a person by

whom any tax or any other sum of money is payable under this Act,
and includes—
every person in respect of whom any proceeding under this Act
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has been taken for the assessment of his income or assessment of

fringe benefits or of the income of any other person in respect of
which he is assessable, or of the loss sustained by him or by such
other person, or of the amount of refund due to him or to such
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other person;
every person who is deemed to be an assessee under any provision
of this Act;
every person who is deemed to be an assessee in default under any
provision of this Act;
Income
As per Clause 24 of Section 2 of the Act, Income majorly includes the

following:
profits and gains;
dividend;
voluntary contributions received by a trust created wholly or part-

ly for charitable or religious purposes or by an institution estab-
lished wholly or partly for such purposes.
the value of any perquisite or profit in lieu of salary taxable under
the head of ‘Salaries’

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any special allowance or benefit, other than perquisite

any allowance granted to the assessee either 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.
any sum chargeable to income-tax under head of ‘Profits and
Gains of Business’
any sum chargeable to income-tax under the head of ‘Capital
Gains’
Assessment Year (A.Y.)
It refers to the period of twelve months commencing on the 1st April
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every year and ending on 31st March of the next year.
Hindu Undivided Family (HUF)

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A HUF refers to a family unit and is a means to save taxes. Under a
HUF, a family unit is created and assets of a HUF are pooled together.
Under this concept, the HUF and the members of a HUF are taxed
separately. Hindu, Buddhist, Jain and Sikh families can form an HUF.
A separate PAN number is assigned to an HUF and it also files tax
returns separately.
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Company
As per clause 17 of Section 2, a company means

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any Indian company or

any body corporate incorporated by or under the laws of a country
outside India, or
any institution, association or body which is or was assessable or
was assessed as a company for any assessment year under the In-
dian Income-tax Act, 1922 (11 of 1922), or which is or was assess-
able or was assessed under this Act as a company for any assess-
ment year commencing on or before the 1st day of April, 1970, or
any institution, association or body, whether incorporated or not
and whether Indian or non-Indian, which is declared by general
or special order of the Board to be a company:
Provided that such institution, association or body shall be deemed

to be a company only for such assessment year or assessment years
(whether commencing before the 1st day of April, 1971, or on or after
that date) as may be specified in the declaration;

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Firm
As per Clause 23 (i) of Section 2, a firm shall have the meaning as-
signed to it in the Indian Partnership Act, 1932 (9 of 1932), and shall
include a limited liability partnership as defined in the Limited Liabil-
ity Partnership Act, 2008 (6 of 2009).
According to Section 4 (Chapter II) of the Indian Partnership Act, 1932

(9 of 1932), “Partnership” is the relation between persons who have
agreed to share the profits of a business carried on by all or any of
them acting for all. Persons who have entered into partnership with
one another are called individually “partners” and collectively “a
firm”, and the name under which their business is carried on is called
the “firm name”.
According to Section 2 (1) (n) of the Limited Liability Partnership Act,
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2008 (6 of 2009), Limited Liability Partnership (LLP) means a partner-
ship formed and registered under this Act.
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Person
As per Clause 31 of Section 2 of the Act, a person includes:

an individual
a Hindu undivided family
a company
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a firm
an association of persons or a body of individuals whether incor-
porated or not
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a local authority, and

every artificial juridical person, not falling within any of the pre-
ceding sub-clauses.
It the must be remembered that an association of persons or a body

of individuals or a local authority or an artificial juridical person shall
deemed to be a person, whether or not such person or body or author-
ity or juridical person was formed/established/incorporated with the
object of deriving income, profits or gains.
Association of Persons (AOP) and Body of Individuals

(BOI)
In context of Income Tax Act, an AOP refers to an entity of assessment.

When two or more persons come together for a common purpose and
earn money, it is called an AOP. In AOP, the person may include com-
panies, associations or bodies of individuals whether incorporated or
not. It is not necessary for two individuals in the AOP to be bound by
a contract. Which implies, a formal partnership is not required. Two

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or more persons who join hands for carrying out a business can be as-
sessed as an AOP. However, it must be remembered that a combination
of two or more persons can be called AOP only if they come together
for a business and money generating (income-producing) purpose.
Another concept similar to AOP is that of the BOI. A BOI means a

combination of two or more individuals who carry out business with
an aim of producing income. It must be remembered that only individ-
uals can form a BOI and companies, associations and bodies cannot
become the members of BOI.
Capital Asset
As per Clause 14 of Section 2 of the Act, capital asset means:

(a) property of any kind held by an assessee, whether or not
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connected with his business or profession;
(b) any securities held by a Foreign Institutional Investor which has
invested in such securities in accordance with the regulations
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made under the Securities and Exchange Board of India Act,
1992 (15 of 1992).
Capital asset does not include:

stock-in-trade
personal effects (movable property including wearing apparel and

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furniture held for personal use)

agricultural land
6½ per cent Gold Bonds, 1977, or 7 per cent Gold Bonds, 1980, or
National Defence Gold Bonds, 1980, issued by the Central Govern-
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ment
Special Bearer Bonds, 1991, issued by the Central Government
Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999
or deposit certificates issued under the Gold Monetisation Scheme,
2015 notified by the Central Government.
Advance Tax
As per Clause 1 of Section 2 of the Act, advance tax refers to the tax
that is payable by an assessee (tax payer) in accordance with the pro-
visions of Chapter XVII-C (related to Collection of Taxes at Source).
Block of Assets
As per Clause 11 of Section 2 of the Act, Block of Assets refers to a

group of assets falling within a class of assets comprising—
(a) tangible assets, being buildings, machinery, plant or furniture;

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(b) intangible assets, being know-how, patents, copyrights, trade-

marks, licences, franchises or any other business or commercial
rights of similar nature, in respect of which the same percentage
of depreciation is prescribed;
Previous Year
As per Section 3 of the Act, “previous year” means the financial year
immediately preceding the assessment year. Provided that, in the case
of a business or profession newly set up, or a source of income new-
ly coming into existence, in the said financial year, the previous year
shall be the period beginning with the date of setting up of the busi-
ness or profession or, as the case may be, the date on which the source
of income newly comes into existence and ending with the said finan-
cial year.
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Another term that is commonly used in the context of Income Tax is
Permanent Account Number (PAN). PAN is a 10 digit unique number
that is issued by the Income Tax Department. It is issued to all the tax
IM
payers and to anyone who wishes to do business in India. Nowadays,
PAN is required for carrying out a number of transactions.
Different types of entities such as individuals, firms, enterprises, as-

sociations, HUF, Minors, Indian citizens residing abroad, companies,
partnership firms, LLPs, trusts, local authorities, artificial judicial
person, entities having no office in India can apply for the PAN num-
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ber. However, the eligibility criteria and documents required in each

case differ.
A PAN number is issued by income tax authorities and a physical card

is provided to the applicant. PAN number helps authorities in iden-
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tifying the taxpayers and ensuring that these entities have paid their
taxes in accordance with tax slabs they fall under. It is required while
an entity files his/her/its income tax returns.
7. Which of the following items do not attract income tax?

a. Profits and gains
b. Dividend income
c. Income from salaries
d. Agricultural income
8. Which of the following is a capital asset?
a. Property of any kind
b. Stock-in-trade
c. Agricultural land
d. Special Bearer Bonds

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Activity
Make an exhaustive list of terms defined in Section 2 of the Income

Tax Act, 1961. Also, define all the terms that have not been dis-
cussed in the above mentioned text.
1.5 Heads of Income

The major sources of income for any individual or entity are described
as follows:
Profitsand gains from business or profession: This incorporates
income earned from a business i.e., income earned by carrying out
some type of profession.
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Income from dividend: It refers to an income which a person re-
ceives in the form of dividend.
Salary,perquisite and profits in lieu of salary: This incorporates
IM
any amount or sum received by an employee from his/her employ-
er apart from the salary amount. It includes allowances such as
HRA and Medical allowance granted to the assessee to meet the
expenses incurred for performing his/her duties effectively.
Capital gains: Capital gain refers to any benefit that is derived
from the sale of a capital asset.
M
Income from winnings lotteries, crossword puzzles, races, etc.:

An individual may derive some or whole of his income by means
of lotteries, crossword puzzles, races including horse races, card
games and other games of any sort or gambling or betting.
N
Income from specific funds: Employees may also receive an

amount from funds that are created specifically for them such as
employee provident fund.
Chapter IV (Computation of Total Income) of the Income Tax Act de-

tails out various Heads of Income. According to Section 14 (Heads of
income) of the Act, all income shall, for the purposes of charge of in-
come-tax and computation of the total income, be classified under the
following heads of income:—
A. Salaries
B. [***] Omitted by Finance Act, 1988 w.e.f. 1st April 1989
C. Income from house property
D. Profits and gains of business or profession
E. Capital gains
F. Income from other sources

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Income of a person may be received in cash and/or kind. Provision

of five major heads of income means that any income of a person can
be categorised into one of the five heads of income. These five major
heads of income as described in the Act are as follows:
1. Income from salaries: Income earned by an individual by means
of salary from any company or organisation is taxable and is
taxed under the ‘Income from Salaries’ head.
2. Income from residential property: Income received by a person
in the form of rent received against renting his/her immoveable
property to another person(s) or business is taxable and is taxed
under the ‘Income from Residential Property’ head.
3. Profits and gains of business or profession: The income received
by an individual in the form of profit generated from his business
or profession net off the expenses is taxable under the ‘Profits
S
and Gains of Business or Profession’ head.
4. Income from capital gains: Any profit or gain made as a result of
transfer of capital assets in a financial year is treated as a capital
IM
gain and is taxable under the head ‘Income from Capital Gains’.
This head of income levies taxes on the income earned from
the sale of assets such as gold, jewellery, shares or immoveable
property.
5. Income from other sources: Any income or profit made by an
individual that cannot be categorised in the above four heads of
M
income is taxable under the ‘Income from Other Sources’ head.

Any income such as the money won by the way of gambling,
horse race, camel race, or any other speculation based activity,
interest income, etc. are liable to be taxed under this head of
N
income.
Let us now briefly discuss each head of income.
(A) Income from Salary (Sections 15 – 17)
Income from salary refers to any remuneration received by an individ-

ual for services provided by him/her in respect of a contract of employ-
ment. The remuneration is considered for being taxed only if there ex-
ists an employer-employee relationship between the payer and payee.
Salary includes basic wages/salary. Advance salary, pension, commis-
sion, gratuity, perquisites and annual bonuses. Allowances are mone-
tary amount that is paid by employer to employee for expenses made
by the employee for performance of his duties. Allowances are usually
included in the salary and hence are taxable except in case of non-tax-
able allowances. For example, conveyance allowance upto `1600 is
exempt from tax. Also, if an employee is living in his own home, the
House Rent allowance (HRA) is fully taxable. Other important allow-
ances include medical allowances, Leave Travel Allowances, etc.

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For example, Mr. Lovely earns a monthly salary of `25,000. Therefore,

his income under head salaries will amount to `3,00,000 p.a.:
(B) Sections 18–21 Omitted by Finance Act, 1988 W.E.F. 1ST

April 1989
(C) Income from House Property (Sections 22–27)
Income from Residential Property is defined in Section 22 of the In-

come Tax Act, 1961. The income from house property under this head
is taxable when the house property consists of any building or land
and is owned by the taxpayer. Also, the house property should not be
used for the any business purpose or for the profession of the taxpayer.
Gross Annual Value of the house property shall be higher of the fol-
S
lowing:
(a) Expected rent, i.e., the sum for which the property might
reasonably be expected to be let out from year to year. Expected
IM
rent shall be higher of municipal valuation or fair rent of the
property, subject to maximum of standard rent;
(b) Rent actually received or receivable after excluding unrealized
rent but before deducting loss due to vacancy. Out of the sum
computed above, any loss incurred due to vacancy in the house
property shall be deducted and the remaining sum so computed
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shall be deemed to the gross annual value.
For example, Ms. Yamini has rented her two-room flat to a family and
receives a rent of `25,000 per month. If the expected rent of the flat is
`15,000 per month; then, the Gross Annual Value of the house proper-
N
ty would be higher of (3,00,000; 1,80,000) which is `3,00,000.
(D) Profits and Gains of Business or Profession

(Sections 28–44DB)
The income earned by an individual or entity as a result of carrying

out business or profession will be charged under this head. The profit
shall be calculated as the excess of revenue over expenses of the busi-
ness or the professional. Income chargeable under this head includes:
Profits earned by the assessee during the assessment year
Profits on income by an organisation
Profits on the sale of a certain license
Cashassistance received by an individual on export under a gov-
ernment scheme
Profit, salary or bonus received as a result of a partnership in a
firm
Benefits or perquisites received in a business

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For example, assume that an organisation has generated a total sale

of `25 crore in a year. Also, it had incurred expenses to the tune of `12
crore on miscellaneous items such as purchase of license, advertise-
ment and other miscellaneous items. Then, the total taxable income of
the organisation under the head Profits and Gains of business would
be `13 crore.
(E) Income from Capital Gains (Sections 45–55A)
Any profit or gain arising from transfer the of a capital asset effected
in a financial year would be chargeable to tax under this head and
would be considered as an income of the year in which the transfer
took place unless the capital gain is exempted under Sections 54, 54B,
54D, 54EC, 54ED, 54F, 54G or 54GA.
S
For example, if a person purchased a property for `60 lakhs on 27th
August 2017 and sells it on 27th March 2018 for `90 lakhs (held for 1
year and 212 days), then the capital gains tax applicable would be on
amount of `30 lakhs.
IM
(F) Income from Other Sources (Sections 56–59)
It is considered as a residual head of income. Any income that is not

taxed specifically under the four above-mentioned heads, is taxed un-
der this head. Also, there are certain incomes which are always taxed
under this head and include: dividends, interest income, income from
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winning crosswords, puzzles, lotteries, horse races, etc., gifts, etc.
For example, dividend amount of `1,20,000 received by Mr. Ajay from

a company; an amount of `25 lakh won by Mr. Vijay in horse race; and
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`80,000 received by Ms. Rina from her friend on her birthday all will
be taxed under the head of income from other sources.
9. For charging income tax, the income of an individual or entity

can be categorised into _______ major heads.
a. three
b. four
c. five
d. six
10. The HRA paid to a salaried employee fully taxable if
a. employee is living in his own house
b. the rent paid by employee is below `8000
c. the rent is paid to a relative of employee
d. none of these

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Activity
Make a comprehensive list of what constitutes capital assets. Also

discuss the chargeability of income tax over each type of capital
asset in your list as per the Income Tax Act, 1961.
1.6 Income Tax Rates and Slabs

Different tax rates have been furnished for several sections of taxpay-
ers and for varied sources of income. Individuals, Hindu Undivided
Families (HUFs), Association of Persons (AOP), Body of Individuals
(BOI) or Artificial Juridical Person (AJP) are taxed as per different
income tax rates. However, companies are taxed at a fixed rate bar-
ring some exceptions. Tax rates applicable to two classes of taxpayers
S
namely, domestic and foreign companies, for Assessment Year 2018-19
have also been discussed. Tax rates applicable to all other categories
of taxpayers for Assessment Year 2018-19 are as follows:
IM
1. Tax rates for Individuals (resident or non-resident) aged below
60 years (on the last day of the relevant previous year) or any
other HUF or AOP or BOI or any other AJP are shown in
Table 1.1:
Table 1.1: Income Tax Applicable for Individu-

als (resident or non-resident) Aged Below 60
M
Years or any Other HUF or AOP or BOI or any

Other AJP for Assessment Year 2018-19
S. No. Tax Slab/Taxable Income Tax Rate
1. Upto `2,50,000 Nil
N
2. `2,50,000 to `5,00,000 5% of the amount by which the

total income exceeds `2,50,000;
3. `5,00,000 to `10,00,000 `12,500 plus 20% of the amount
by which the total income ex-
ceeds `5,00,000;
4. `10,00,000 and above `1,12,500 plus 30% of the
amount by which the total in-
come exceeds `10,00,000.
Less: Rebate as per Section The rebate is available to a res-
87(A) ident individual if his total in-
come does not exceed `3,50,000.
The amount of rebate shall be
100% of income-tax or `2,500,
whichever is less.
Add: Surcharge 10% of Income Tax, where total
income exceeds `50 lakhs upto
`1 crore.

n o t e s

15% of the Income Tax, where
total taxable income exceeds `1
crore.
Surcharge amount of 10% or
15% as applicable, shall not ex-
ceed the amount of income that
exceeds `50 lakhs or `1 crore,
as applicable.
Add: Education and Health 3% of Income Tax plus
Cess Surcharge
2. Tax rates for resident senior citizen (who is 60 years or more at
any time during the previous year but less than 80 years on the
last day of the previous year) are shown in Table 1.2:
S
Table 1.2: Income Tax Applicable for Resident
Senior Citizen for Assessment Year 2018-19
S. No. Tax Slab/Taxable Tax Rate
IM
Income
1. Up to `3,00,000 Nil
2. `3,00,000 to `5,00,000 5% of the amount by which the total
income exceeds
`3,00,000;
3. `5,00,000 to `10,000 plus 20% of the amount
M
`10,00,000 by which the total income exceeds

`5,00,000;
4. `10,00,000 and above `1,10,000 plus 30% of the amount
by which the total income exceeds
N
`10,00,000.
Less: Rebate as per Sec- The rebate is available to a resident
tion 87(A) individual if his total income does
not exceed `3,50,000. The amount of
rebate shall be 100% of income-tax
or `2,500, whichever is less.
Add: Surcharge 10% of Income Tax, where the total
income exceeds `50 lakhs upto `1
crore.
15% of the Income Tax, where total
taxable income exceeds `1 crore.
Surcharge amount of 10% or 15%
as applicable, shall not exceed the
amount of income that exceeds `50
lakhs or `1 crore, as applicable.
Add: Education and 3% of Income Tax plus Surcharge
Health Cess

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3. Tax rates for resident super senior citizen (who is 80 years

or more at any time during the previous year) are shown in
Table 1.3:
Table 1.3: Income Tax Applicable for Resident

Super Senior Citizen for Assessment Year
2018-19
Income
1. Up to `5,00,000 Nil
2. `5,00,000 to 20 % of the amount by which the
`10,00,000 total income exceeds
`5,00,000;
3. `10,00,000 and above `1,00,000 plus 30% of the amount
S
by which the total income exceeds
`10,00,000.
Add: Surcharge 10% of Income Tax, where total
income exceeds `50 lakhs upto `1
IM
crore.
15% of the Income Tax, where total
Surcharge amount of 10% or 15%
as applicable, shall not exceed the
amount of income that exceeds `50
M
lakhs or `1 crore, as applicable.

Health Cess
4. Tax rates for Co-operative Society are shown in Table 1.4:
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Table 1.4: Income Tax Applicable for Co-oper-

ative Society for Assessment Year 2018-19
Income
1. Up to `10,000 10% of total income
2. `10,000 to `20,000 `1,000 plus 20% of the amount by
which the total income exceeds
`10,000;
3. `10,000 and above `3,000 plus 30% of the amount by
which the total income exceeds
`20,000.
Add: Surcharge 12% of Income Tax, where income
exceeds `1 crore.
Health Cess

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5. Tax rates for partnership firm including LLPs are shown in Table
1.5:
Table 1.5: Income Tax Applicable for A

Partnership Firm including LLPs for
Assessment Year 2018-19
1. Total Income of Partnership 30% of the total income

Firm
Add: Surcharge 12% of Income Tax, where

income exceeds `1 crore.
Add: Education and Health Cess 3% of Income Tax plus Sur-

charge
S
6. Tax rates for Local Authority are shown in Table 1.6:
Table 1.6: Income Tax Applicable for Local

IM
Authority for Assessment Year 2018-19
1. Total Income of Local Au- 30% of the total income
thority
Add: Surcharge 12% of Income Tax, where
income exceeds `1 crore.
M
Add: Education and Health Cess 3% of Income Tax plus

Surcharge
7. Tax rates for Domestic Company are shown in Table 1.7:

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Table 1.7: Income Tax Applicable for Domestic

Company for Assessment Year 2018-19
1. Turnover or gross receipt 25% of the total income
of the company is upto `50
crore.
2. Turnover or gross receipt of 30% of the total income
the company is more than
`50 crore.
Add: Surcharge 7% of tax where total in-
come exceeds `1 crore
12% of tax where total in-
Surcharge

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8. Tax rates for a Foreign Company are shown in Table 1.8:
Table 1.8: Income Tax Applicable for a

Foreign Company for Assessment Year 2018-19
1. Total income of the company 40%
Add: Surcharge 2% of tax where total in-
5% of tax where total in-
Surcharge
S
11. For Assessment Year 2018-19, the amount of rebate under
Section 87(A) available for Super Senior Citizens is __________.
a. `5000
IM
b. `2500
c. `10000
d. `0
12. TrustMe is a domestic company and this company received an
amount of `51 lakh in gross receipts during Assessment Year
M
2018-19. It will be subject to a tax rate of ___________.

a. 10%
b. 20%
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c. 25%
d. 30%
Activity
Make a comparative table of tax rates applicable for different class-

es of tax payers from Assessment Years 2017-18 and 2018-19. High-
light major changes and comment on their impact for each class of
tax payer.
Concept of Tax Deducted at

1.7
Source (TDS)
Tax Deducted at Source (TDS) is defined as a means of collection of
tax by Indian authorities, and is governed by the Income Tax Act,
1961. TDS is managed by the Central Board of Direct Taxes (CBDT),
which is a part of the Indian Revenue Service (IRS). TDS is collected
so as to enable the government to maintain a stable revenue source

n o t e s
throughout the year, while at the same time ensuring that people do
not avoid paying taxes.
TDS is deducted at prescribed rates and is mandatory to be filed by

certain persons responsible for making payments. This tax is deduct-
ed at the source where income is generated and is deposited to the
government. The person concerned receives income after deducting
the tax amount. The person who receives the net income called the
Assessee needs to file a return stating that the TDS has been deduct-
ed and paid to the government. The person or the entity that deducts
the TDS amount is called TDS deductor and it must issue a TDS cer-
tificate to the deductee within a specified time. It is the duty of a de-
ductor to deduct the appropriate amount of TDS and deposit it the
government. The TDS must be deducted irrespective of the mode of
payment. It means that whether the income is paid to the deductee
S
in cash, cheque or credit, all will first be deducted for tax. The TDS is
always linked to the PAN of the deductor and deductee.
TDS is deducted on various types of payments (income and expendi-

IM
ture) including:
Salaries
Interest payments by banks

Commission payments
Rent payments
M
Consultation fees
Professional fees
Lotteries
N
TDS is a kind of advance tax. While making payments under such seg-
ments, a percentage of the overall payment is withheld by the source
that is making payments. TDS is one of the major sources of direct
taxes, which is paid to the government by the person on whom it is
imposed. The TDS concept is based on the system of ‘Pay As You Earn
(PAYE)’, which means the government obtains the benefit as soon as
others receive the net payment. The TDS is to be deducted when the
payment is to be made.
Different rates of TDS are prescribed for different items depending

upon the type of payment. Some instances where TDS is to be deduct-
ed and the associated rates are shown in Table 1.9:
Table 1.9: TDS Rates for Different items

Nature of Payment Relevant Section TDS Rate
Salaries 192 At relevant income
tax rates including
cess.

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Nature of Payment Relevant Section TDS Rate

Accumulated Taxable Part of 192A 10%
Provident Fund
Interest on Securities 193 10%
Deemed Dividend 194 10%
Interest other than Interest on 194A 10%
Securities
Winnings from lotteries, cross- 194B 30%
words or any sort of game
Winning from horse race 194BB 30%
Insurance commission received 194D 5%
by an individual
Life Insurance Policies not ex- 194DA 1% if the payment
empted under Section 10 (10) D in the F.Y. exceeds
S
`1 lakh.
Commission or brokerage 194H 5% if the payment
received except for insurance in the F.Y. exceeds
commission
IM `15,000.
Payment made while purchas- 194IA 1%
ing land or property
Payment of rent by individual 194IB 5%
or HUF the amount of which
exceeds `50,000 per month
M
note
The full list of TDS rates applicable for various payments are pro-
vided in Part II of the First Schedule of the Finance Act, 2017.
N
Some of the important terms used in the TDS concept are shown in
Figure 1.6:
Deductor
Deductee
TDS Returns
TDS Certificate
Figure 1.6: Important Terms Used in TDS

n o t e s
Let us now study these terms in detail.

Deductor: It refers to a person who is liable to deduct the tax.
Deductee: It refers to a person from whom tax is to be deducted.
TDS returns: Once the tax is deducted and paid, the deductor has
to file quarterly returns containing the details of the deductee and
payments made.
TDS certificates: After filing the TDS returns, the deductor is re-
quired to issue Form 16A (for non-salary/other payment deduct-
ees), and Form 16 (For salary deductees).
Some of the advantages of TDS are as follows:

Tax is automatically paid to the government at the time when pay-
ment is accrued.
S
Once the return is filed, the department gets to know about the
details of the deductor, deductee and taxes remitted.
TDS allows the regular flow of income.
IM
TDS makes it possible for taxes to be paid on behalf of the individ-
ual at regular intervals and there is no burden at the last moment.
TDS takes care of the time value of money.
It is the responsibility of the non-government deductor or payer to

deduct the tax and deposit the same amount with the government by
M
the 7th of the next month in which TDS is deducted. In contrast, a

government deductor must deposit the TDS amount by the last day
of the month in which TDS is deducted. For example, the TDS for the
month of March is to be paid by 30th March (by a government deduc-
N
tor) and by 7th April (by a non-government deductor). Once the taxes
are paid, the collecting bank branch provides an acknowledgement
for the taxes paid. Further, it is necessary that the bank mentions the
Challan Identification Number (CIN) on the counterfoil. Some of the
components of CIN are as follows:
Bank Branch Code/Basic Statistical Returns (BSR) Code of Col-
lecting Branch: It comprises 7 digits and is allotted by the RBI.
Challan Serial Number: It is up to 5 digits.
Date of Tender of Challan: It is in the format DD/MM/YYYY.
CORRECTION STATEMENT IN TDS
The collecting bank informs the details of tax deposited to the Tax
Information Network. If there is any mistake in challan, the correc-
tion has to be filed with the bank and corrections are tabulated in the
manner as shown in Table 1.10:

n o t e s
Table 1.10: Format of Correction made in Challan

Type of Correction Period
TAN/PAN Within 7 days of challan deposit
Minor Head Within 3 months of deposit
Assessment Year Within 7 days of deposit
Total Amount Within 7 days of deposit
Major Head Within 3 months of deposit
Nature of Payment Within 3 months of challan deposit
The returns prepared for the TDS are required to be correctly com-
pleted. However, if there is any mistake, the same shall be informed
to the assessee, who can further download the justification report to
analyse the reasons for the default. After analysing the reasons, the
same can be corrected and again the TDS return can be uploaded
S
with the department’s website after making the necessary modifica-
tions. A claim for refund, for the sum paid to the credit of the Central
government under Chapter XVII-B, shall be furnished by the deduc-
IM
tor in Form 26B electronically under a digital signature in accordance
with the procedures, formats and standards specified under sub-rule
(5).
There are prescribed rates which shall be followed and adhered to

for deducting the TDS. In the case of government deductors, the TDS
is to be deposited, without producing the Income Tax Challan, and it
M
is done through the book adjustment. Further, the non-government

deductors, the TDS must be deducted through TDS challan no. ITNS
281 into any branch of RBI or SBI or any authorised bank. Further,
modes of remittance of the tax can be explained in the following man-
ner:
N
For each section of payment, a separate challan is used; for exam-

ple, different challans are used for the payment of the contractor,
for interest, etc.
The nature of payment should be correctly mentioned.
The challan should have correctly mentioned the 10-digit TAN on
it.
The financial and the assessment year should be correctly men-
tioned in the challan.
All the companies and assessees who are required to undertake a

compulsory tax audit need to make payment of the TDS through elec-
tronic platforms provided by various banks to these assessees.
Some of the important points to be considered while deducting TDS

are as follows:
IfPAN of the deductee is not intimated to the deductor, tax will
be deducted at source by the virtue of section 206AA either at the

n o t e s
rate given in the table or at the rate or rates in force or at the rate
of 20%, whichever is higher.
Education Cess (EC) @ 2% and additional Secondary and Higher
Education Cess (SHEC) @ 1% is deductible in the cases of non-res
idents and foreign company. However, education cess is not pay-
able or deductible in case the payments are to be made to the Indi-
vidual/Body of Individuals (BOI)/Hindu Undivided Family (HUF)
or domestic company.
1.7.1 TDS Rates on Different Transactions
Finance Act 2017, prescribes rates in force that will be applicable for
deducting the tax from source in every case under the provisions of
sections 193, 194, 194A, 194B, 194BB, 194D, 194LBA, 194LBB, 194LBC
and 195 of the Income-tax Act. The selected provisions under the In-
S
come Tax Act, 1961 for TDS are as follows:
1. Section 192 – Payment of salary
IM
The employer is liable to deduct the tax at source if the salary is
paid in a year after considering exemptions u/s 10 of the Income
Tax Act, 1961 and Chapter VI-A, but no deductions for Section
80G (Donation) is to be made.
2. Other provisions regarding deduction of tax from salary
The concerned authorities responsible for deduction of tax from
M
the salary of the employee shall deduct the tax on the estimated
income of the employee. The income tax is required to be deducted
on the basis of the applicable tax rates. The salary is taxable on
a due basis or on a receipt basis, whichever is earlier, but TDS is
N
deducted only when the salary is paid. While computing TDS on

salary, the components that are to be added are shown in Figure
1.7:
Salary/Wage
Any annuity or pension

TDS on Salary
Any gratuity
Any fee or commission
Any salary paid in Advance
Amount in excess of 12% paid by

the employer
Figure 1.7: TDS on Salary

n o t e s
The list of fully taxable, partially taxable and non-taxable

allowances is presented in Table 1.11:
Table 1.11: Fully Taxable, Partially Taxable

And Non-Taxable Allowances
Fully Taxable Partially Taxable Non-taxable Allow-
Allowances Allowances ances
Dearness allowance HRA Allowances paid to
Govt. servants abroad
Entertainment allow- Fixed medical Sumptuary allowanc-
ance allowance es paid to judges of
HC and SC are not
taxed.
Overtime allowance Special allowance Allowance paid by
UNO
S
City compensatory Compensatory allow-
allowance ance paid to judges
Interim allowance
IM
Project allowance
Tiffin/meals allowance
Cash allowance
Non-practicing allow-
ance
Warden allowance
M
Servant allowance
Dearness allowance
Besides the above allowances, the other allowances/payments
that should be additionally taken care of are shown in Figure 1.8:
N
Taxability of Gratuity
Taxability of Pension
Taxability of Leave Encashment
House Rent Allowance (HRA)
Figure 1.8: Other Allowances

After determining the gross total income and taking into
consideration the above allowances and payments, the deductions
available under 80C, 80CCD (1), 80CCC, 80D, 80DDB and 80E
are to be deducted. It is important to note that the employer is
not bound to consider deductions made against the payment of

n o t e s
donation u/s 80G. Thereafter, the TDS on salary is deducted on

the basis of applicable rates.
3. Section 194 A – Payment of Interest
No TDS is liable to be paid by senior citizens on Deposit with
Banks, Deposit with Post Offices, Fixed Deposits Schemes and
Recurring Deposit Schemes u/s 194A if interest earned is upto
`50,000. Any person other than the bank is required to deduct
the tax at source @ 10%, if interest exceeds `5,000. Banks/co-
operative society/post-office shall deduct the TDS @ 10% if the
interest exceeds `10,000 in a year.
4. Section 194B: Winning form lottery/Crossword puzzles and
Section 194BB: Winning from horse races
The taxes shall be deducted at a source of 30% if the winning
S
amount exceeds `10,000 for lottery and `5,000 in the case of horse
races.
5. Section 194 C – Payment to Contractor:
IM
The tax shall be deducted if the payment is to be made to the
contractor. The quantum of deduction shall be 1% for individuals,
2% for organisations and nil for transporters. It should be further
noted that TDS shall only be deducted when a single payment
exceeds `30,000 and the aggregate payment exceeds `1,00,000
in a year. In the absence of PAN TDS will be charged at the rate
M
of 20%.
Important note: There are various cases wherein the contractor
provides not only the contract services but also other services
including installation and consultancy. In all such cases, the TDS
N
is to be deducted at two different rates, as on contract services,

the rate of TDS shall be 2% or 1% as the case may be, while in the
case of other services, the TDS rate shall be 10%.
6. Section 194 D – Insurance
If the payment is made towards the commission of the insurance
business, in that case, tax @ 5% shall be deducted. Further, the
tax shall only be deducted if the amount of payment exceeds
`20,000.
7. Section 194 I – Rent
If the rent payment exceeds `1,80,000 in a year, in that case, the
following rate of TDS is applicable:
TDS on rent of land and building is 10%
TDS on rent of plant and machinery is 2%
8. Section 194 J – Professional Fee, Technical Fee and Royalty
Any payment made in excess of `30,000 in a year shall attract

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TDS @ 10%. But, w.e.f. June 1, 2017, for sums payable to a person
who is engaged in the business of operation of call centre TDS
will be deducted at 2%.
9. Section 194IA – TDS on Purchase or Sale of Property other
than agricultural land
During the budget of 2013-14, a new concept of deducting TDS
on property was introduced. The objective of deducting TDS on
the immovable property was that in most cases, the immovable
property was undervalued and transactions even do not carry
the PAN number of the parties concerned.
A new section, 194IA, was introduced effective from 1st June,
2013, to improve reporting on truncations, such as sale of
property, according to which TDS @ 1% is to be deducted where
the amount of the property exceeds `50 lacs.
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The other important provision which was introduced in Section
194IA is that there is no requirement on mandatorily having the
TAN for depositing the TDS. All the details regarding the TDS
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on the property is required to be furnished in Form 26QB.
1.7.2 Obligations of Tax Deductor
The tax deductor has to fulfil a number of duties, some of which are
as follows:
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Obtain TAN: Tax Deduction and Collection Account Number

(TAN) is an identification number allotted to tax deductors for tax
deduction or collection on behalf of its nature of business. It is a
10-digit alphanumeric number; the first four digits of the TAN are
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alphabets, followed by five integers and an alphabet. For TDS, as

well as TCS, the same TAN is to be used. For obtaining the TAN,
the tax deductor is required to apply in Form 49B.
Identify the nature of payment: The identification of the nature
of payment is equally important, because only after doing so, the
rate at which the tax is to be deducted can be identified.
Deduct tax at the prescribed rate: After identifying the nature of
payment, the tax is to be deducted at the prescribed rates under
different heads at the following instances whichever is earlier:
At the time of payment or receipt of cash.
At the time of issuance or at time of receipt of cash or demand
draft.
Making credit entries or debit entries to the account of the buy-
er or the seller.
Remit in the government account in due time: The TDS deduct-
ed is to be deposited in the account of the government by the 7th
of the following month. For example, TDS deducted in the month

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of November shall be deposited by 7th of December, while the TDS

of March can be deposited by 30th of April.
File TDS statement on or before the due date: The TDS state-
ment is prepared and submitted on a quarterly basis, except for
the quarter ending 31st March. For the quarter ending 31st March,
the deadline is 15th May. The due dates of filing the TDS state-
ments are shown in Table 1.12:
TABLE 1.12: Due Dates of Filing the TDS

Particulars Due Date for Govt. Non-Govt. Deductor
Deductor
Quarter ending 30th 31st July 15th July
June
Quarter ending 30th 31st October 15th October
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September
Quarter ending 31st 31st January 15th January
December
Quarter ending 31st 15th May 15th May
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March
Issue TDS certificates on time: The deductor shall issue the TDS
certificate to the deductee in the form specified as per the applica-
ble Income Tax Rules. There are different forms specified for dif-
ferent types of tax deducted. The brief details of the forms (types
of TDS certificates) to be provided to the deductee are shown in
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Table 1.13:
TABLE 1.13: Due Dates of Filing the TDS

Description Period Form No. Due Date
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Deduction of tax Annually 16 By 31st May of follow-

from salary ing F.Y. when TDS is
deducted
Deduction of tax Quarterly 16A Within 15 days of
other than salary furnishing the TDS
statement.
TCS Quarterly 27D Within 15 days from
the due date of
furnishing the TCS
statement
Further, Table 1.14 shows forms that are required to be submitted

to the Income Tax Department for filing the returns:
TABLE 1.14: Forms Required to be Sumitted

Nature of Deduction Form No.
TDS on payments to residents for salary 24Q
TDS on payments made to residents other than 26Q
salary

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Nature of Deduction Form No.

TDS on payments made to foreigners and 27Q
non-residents other than salary
TCS 27EQ
Statements of non-deduction of TDS by the 27QAA
banking company
1.7.3 Implications of not Following TDS

Provisions
The following instances are considered as default in TDS:

Non-deduction or delay in the deduction of whole or a part of tax
at source.
Failure to deduct TDS
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Failureor delay in deduction to deposit the whole or part of a tax
deducted at source.
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Failure to apply the TAN within the prescribed time limits.
Failure to submit the TDS returns on time.
Failure to issue the TDS certificate on time.
Failure to quote PAN details of the deductee in all the
quarterly statements filed with the government.
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The consequences of the above defaults are as follows:

The tax deductor shall be treated as an assessee in default.
Penal interest can be levied under Section 201 (1A) (failure to de-
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duct tax at source/delay in payment of tax deducted at source).

Penalty can be levied under sections 221, 271C, 272A(2).
Prosecution can be launched under sections 276B and 277.
Penalties for default are shown in Figure 1.9:
Tax demand
Penalty
Interest
Prosecution
Figure 1.9: Penalties for Default in TDS

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Let us now study these penalties in detail.

Tax demand: Tax demand can be generated for the amount of tax
deductible but not deducted.
Penalty: Penalty can be levied on the amount of tax deductible but
not deducted. The penalty amount could be up to the amount of
the arrear.
Interest: If the TDS is deposited late, an interest @1% or 1.5% can
be levied. 1% rate is applicable for every month or part of a month
on the amount of such tax from the date on which such tax was de-
ductible to the date on which such tax is deducted; and 1.5% rate
is applicable for every month or part of a month on the amount of
such tax from the date on which such tax was deducted to the date
on which such tax is actually paid.
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Prosecution: Prosecution is also possible for a period of minimum
3 months and maximum 7 months along with the fine.
In addition, there are various other penalties imposed for different

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defaults made in following the provisions of TDS:
If TAN is not obtained within the prescribed time, a penalty of
`10,000 can be levied.
If TDS returns are not filed, a penalty of `100 can be levied on a
daily basis for the period of failure.
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If TDS certificates are not issued on time, a penalty of `100 can be

levied on a daily basis till the default continues.

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13. List two types of payments on which TDS is applicable.

14. TDS applicable for interest on securities is governed by
Section ________ of the Act.
a. 192
b. 192A
c. 193
d. 194
Activity
Using the Internet, find out the cases where TDS is not deducted.
Make a note of the same.
Select any retail outlet and gather information about the nature
of payments on which TDS is applicable and the rate at which the
TDS is deducted.

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1.8 Summary
Taxes refer to a kind of financial charge that is imposed on an in-
dividual or a company by the Government of India or the state
governments or any other recognised local body.
The government charges taxes in order to accomplish its econom-
ic and social objectives and reduce the economic disparity.
India has a three-tier tax structure.
The Income Tax Department functions under the Central Board of
Direct Taxes (CBDT).
Important objectives of taxation include revenue generation (so-
cial objective), preventing the concentration of wealth in a few
hands (equality objective), redistribution of wealth (redistribution
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objective), and providing boost to the economy (economic growth
objective), reducing unemployment, etc.
Income tax is a direct tax that is levied by the government of a
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country on the personal income of an individual or corporate.
Under the IT Act, the Income Tax is charged at the rates that have
been fixed for the year as finalised in the Finance Act for the As-
sessment Year.
Tax Planning refers to the practice of availing all the available ex-
emptions, deductions and rebates provided in Act in order to re-
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duce an assessee’s tax liability.

Tax Avoidance is an act of dodging tax without breaking the Law.
Tax Evasion refers to the use of any illegal methods that lead to
reduction of tax liability of an assessee.
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Allthe taxes which are the liability of an assessee (taxpayer) come

under the category of direct tax.
All those taxes which an assessee can recover from other person(s),
but the liability of payment of which lies with him/her are called
indirect taxes.
Indian GST is based on dual GST model under which both the
centre and the state levy and collect the GST.
An HUF refers to a family unit and is a means to save taxes. Under
an HUF, a family unit is created and assets of a HUF are pooled
together.
When two or more persons come together for a common purpose
and to earn money, it is called an Association of Persons (AOP).
A Body of Individuals (BOI) means a combination of two or more
individuals who carry out business with an aim of producing in-
come.

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As per Section 3 of the Act, “previous year” means the financial

year immediately preceding the assessment year.
According to Section 14 (Heads of income) of the Act, all income is
classified under five major heads of income: salaries, income from
house property, profits and gains of business or profession, capital
gains and income from other sources.
Different tax rates have been furnished for several Sections of tax-
payers and for varied sources of income. Individuals, senior citi-
zens, super senior citizens, partnership firms, local authority, do-
mestic company, foreign company and co-operative societies are
taxed as per different income tax rates.
Tax Deducted at Source (TDS) is defined as a means of collection
of tax by Indian authorities, and is governed by the Income Tax
Act, 1961.
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TDS is deducted at the source where income is generated and is
deposited to the government. The person concerned receives in-
come after deducting the tax amount. The person who receives the
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net income called the Assessee (TDS deductee).
The person or the entity that deducts the TDS amount is called the
TDS deductor.
The selected provisions under the Income Tax Act, 1961 for TDS
include: Section 192 - payment of salary; other provisions regard-
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ing deduction of tax from salary; Section 194 A - payment of in-

terest; Section 194 B: winning form lottery/crossword puzzles and
Section 194BB winning from horse races; Section 194C - payment
to contractor; Section 194D – insurance; Section 194I – rent; Sec-
tion 194J - professional fee, technical fee and royalty; and Section
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194IA - TDS on purchase or sale of property other than agricultur-

al land.
key words
Arrear: An overdue, unpaid debt or an unfulfilled obligation.

Deductee: A person from whom TDS is deducted and who is
eligible for a credit of the TDS deducted.
Deductor: A person who is liable to deduct the tax and get it
deposited with the bank.
TDS: It stands for Tax Deducted at Source, which is deducted
out of the total payment made to other parties.
TDS certificates: These are certificates issued for the TDS de-
ducted against the payment of salary (Form-16) and other pay-
ments (Form 16-A), respectively.

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1. Explain the meaning of term taxes. Also discuss the nature of
taxes. At the end, also explain the meaning of income tax.
2. Explain in detail the concepts of tax planning, tax avoidance
and tax evasion. Also describe major differences between tax
avoidance and evasion along with examples.
3. List and explain two major categories of taxes. Also give examples.
4. Define the following terms as per Section 2 and 3 of the Income
tax Act, 1961.
a. Assessee
b. Income
c. Assessment Year
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d. HUF
e. Company
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f. Firm
g. Previous Year
5. Describe major heads of income.
6. Explain in detail the concept of Tax Deducted at Source.
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Answers for Self Assessment Questions
Topic Q. No. Answer

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Meaning and Nature of Taxes 1. b. 256

2. c. Increasing the GDP of
country
3. Tax evasion
Types of Taxes 4. b. Indirect tax
5. c. Municipal authority
6. d. Integrated GST (IGST)
Terms Related to Income Tax 7. d. Agricultural income
(Sections 2 and 3)
8. a. Property of any kind
Heads of Income 9. c. five
10. a. employee is living in his
own house
Income Tax Rates and Slabs 11. d. `0
12. d. 30%

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Topic Q. No. Answer

Concept of Tax Deducted at 13. Salaries; Commission pay-
Source (TDS) ments
14. 193
Hints for Descriptive Questions

1. Taxes refer to a kind of financial charge that is imposed on an
individual or a company by the Government of India or state
governments or any other recognised local body. Taxes are levied
for achieving economic parity in the society. Refer to Section 1.2
Meaning and Nature of Taxes.
2. The terms Tax Planning, Tax Avoidance and Tax Evasion, all are
methods of reducing the tax liability of a person or a corporate
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body or any assessee. Both tax planning and tax avoidance are
done 100% in accordance with the existing laws whereas tax
evasion is an illegal practice. Refer to Section 1.2 Meaning and
Nature of Taxes.
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3. Direct taxes are the taxes that are to be paid by the assessee or
the taxpayer (person or corporate) directly to the government.
The tax has to be paid by the taxpayer only and cannot be
transferred to any other person. Indirect tax refers to a group of
tax laws and regulations. In India, it is levied on various business
activities including manufacturing, trading, imports and exports,
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stamp duty, registration, transfer, etc. Refer to Section 1.3 Types

of Taxes.
4. As per Section 3 of the Act, “previous year” means the financial
year immediately preceding the assessment year. An HUF refers
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to a family unit and is a means to save taxes. Under an HUF, a

family unit is created and assets of an HUF are pooled together.
Refer to Section 1.4 Terms Related to Income Tax (Sections 2
And 3).
5. Five major heads of income include: salaries; income from house
property; profits and gains of business or profession; capital
gains; and income from other sources. Refer to Section 1.5 Heads
of Income.
6. Tax Deducted at Source (TDS) is defined as a means of collection
of tax by Indian authorities, and is governed by the Income Tax
Act, 1961. TDS is deducted at prescribed rates and is mandatory
to be filed by certain persons responsible for making payments.
TDS is deducted on various types of payments such as salaries,
interest payments by banks, commission payments, etc. Refer to
Section 1.7 Concept of Tax Deducted at Source (TDS).

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Suggested Readings
Bhargava, U. (2017). Taxmann’s Income Tax Act As Amended by Fi-
nance Act 2017 (61st ed.). Jhajjar, Haryana: Taxmann.
Mishra, M. (1999). Freedom of trade and commerce and taxation in
India. New Delhi: Mittal Publications.
E-References
Tax Laws & Rules > Acts > Income-tax Act, 1961. (2018). Incom-
etaxindia.gov.in. Retrieved 16 February 2018, from https://www.
incometaxindia.gov.in/Pages/acts/income-tax-act.aspx
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Frequently Asked Questions. (2018). Incometaxindia.gov.in. Re-
trieved 16 February 2018, from https://www.incometaxindia.gov.in/
Pages/faqs.aspx
Income
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Tax Rates: AY 2018-19 (FY 2017-18) - Smart Paisa. (2018).
Smart Paisa. Retrieved 16 February 2018, from http://www.smart-
paisa.in/income-tax-rates-ay-2018-19-fy-2017-18/
(2018). Retrieved 16 February 2018, from https://cbec-gst.gov.in/
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Ch a
2 pt e r
Residential Status
Contents
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2.1 Introduction
2.2 Residential Status of Different Kinds of Assessees
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2.2.1 Residential Status of an Individual
2.2.2 Residential Status of HUF
2.2.3 Residential Status of a Company Assessee
2.2.4 Residential Status of Firm/Association of Persons (AOP)
Activity
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2.3 Scope of Total Income

Activity
2.4 Income Deemed to be Received in India
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Activity
2.5 Income Deemed to Accrue or Arise in India
Activity
2.6 Summary

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DETERMINATION OF RESIDENTIAL STATUS OF

AN INTERNATIONAL PLAYER
Chris Gayle, a West Indian cricketer, has been staying in India

for 110 days every year since the beginning of IPL tournament in
2008. The Income Tax Department considered him as ordinarily
resident and charged tax accordingly. This was more than what
he might have been charged if his residential status had not been
ordinary resident. He took advice of his chartered accountant to
get the understanding of his residential status in India.
The chartered accountant provided him information about the

basic and additional conditions pertaining to the determination
of residential status according to Section 6 of the Income Tax Act.
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It was observed that he was in India for more than 60 days during
the previous year 2017-2018. In addition, he was in India for more
than 365 days in four previous years immediately preceding the
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relevant previous year. So he was satisfying the second basic con-
dition and was considered to be the resident of India.
To determine whether he is an ordinary resident or not, addition-

al conditions were evaluated. It was observed that he was resident
in India in 2 previous years out of 10 previous years. In addition,
he was in India for more than 729 days in the 7 previous years im-
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mediately preceding the relevant previous year (2017-18).
It was assessed that he is a resident and ordinarily resident in In-

dia as he satisfies both of the additional conditions. Therefore, he
will be charged income tax as an ordinary resident.
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Residential Status 55
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learning objectives

>> Discuss various types of assessees as per the Income Tax Act
>> Describe the criteria for determining the residential status
of an Individual, HUF, Company and Firm/Association of
Persons (AOP)
>> Explain the scope of total income
>> Describe what is considered as income deemed to be re-
ceived in India
>> Discuss what is considered as income deemed to accrue or
arise in India
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2.1 Introduction
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In the last chapter, we discussed the concept of tax. Let us now study
the concept of residential status.
Living in a civilised society and having access to the minimum basic

infrastructure is considered to be a right of a country’s citizens. The
government cannot carry out development activities in the absence of
M
funds. Therefore, it is important for the government to acquire funds

so that they can be spent on developmental and societal work which
affects all the citizens of India. The Indian Government acquires funds
by the way of taxation system. You have already studied that direct
taxation is the most important source of government’s revenue. Direct
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taxation, in India, is governed by the provisions of the Income Tax

Act, 1961. This Act is amended each year in the Budget session. As of
February 2018, we have in place the Income Tax Act, 1961 as amended
by Finance Act, 2017.
The Income Tax Act determines what incomes of which persons are
taxable. Various sections of the Act lay down the law of income tax.
The Income Tax Act does not contain the prescribed rates of income
tax; they are published in the Schedules to each year’s Finance Act.
All over the world and in India, the chargeability of income tax de-
pends upon two major factors namely the scope of income tax and the
residential status of the assesses. There are three basic categories of
assesses for charge of income tax viz. ordinary resident, not-ordinary
resident and non-resident. Section 6 of the Act contains conditions
that must be tested to determine the residential status of various as-
sesses. The tests are based on the physical presence of the assesse in
India during the course of ‘previous year’.

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This chapter would also clarify the differences between the concepts
of citizenship and residence. This chapter starts by describing various
types of assesses viz. individual, HUF, company and firm/Association
of Persons (AOP). For calculating the total income of an assessee and
the amount of which is subject to tax in India is determined by making
use of concepts such as Indian income and foreign income, income
received in India, income deemed to be received in India, income ac-
crued or arisen in India and income deemed to accrue or arise in In-
dia.
Residential Status of Different

2.2
Kinds of Assessees
In any country, income tax serves as an important source of revenue
for the government. In India, it is levied by the government in accor-
S
dance with the provisions of the Income Tax Act, 1961. Section 4 of
this Act relates to the basis of charge of income tax. Important con-
cepts under Section 4 (Charge of income-tax) of the Act are:
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(i) Income-tax should be charged as per the rate(s) fixed by the
government for the Assessment Year by the annual Finance Act.
(ii) Income tax should be charged from all the persons or the
assessable entities covered under the definition of term ‘person’
as per Section 2 (31) of the Act.
(iii) Income earned by an assessee in the previous year is charged to
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tax and not the income earned in the assessment year.

(iv) The income tax is charged and computed on the total income of
the assesse in accordance and subject to the provisions of the
Act.
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Before discussing the tax liability for a person or entity, it is important

to know the following definitions:
Person: According to Section 2(31), a person includes individuals,
Hindu Undivided Family (HUF), companies, firms, Association Of
Persons (AOP) and Body of Individuals (BOI) (whether incorpo-
rated or not), local authority, and Artificial Juridical Person (AJP).
It must be remembered that for the purpose of this clause, an AOP
or BOI or local authority or AJP shall deemed to be a person ir-
respective of whether or not such person or body or authority or
juridical person was formed or established with the object of deriv-
ing income, profits or gains.
Assessee: According to Section 2(7), an assesse refers to any per-
son by whom any tax or any other sum of money is payable under
this Act.
Total income: Section 2(45) of the Act defines total income as the
total amount of income referred to in Section 5 that is computed in
a manner as described in this Act.

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Residential status: Section 6 of the Act discusses the concept of

residence in India for the purpose of charge of tax for different
assesses.
Rates of taxes: For various kinds of assesses, the rates of applica-
ble income tax rates are defined in the Finance Act of each year.
Finance Act lists the rates of income tax for the previous year as
well as for the assessment year.
The tax liability of a person depends on his/her residential status. It is

important to note that the concept of citizenship or nationality is not
related to the concept of residential status of an assessee. It is possible
that the citizen of one country is considered resident in another coun-
try as per his residential status. An individual, who is a citizen of India
can be non-resident for the purview of income tax purposes. Similarly
an American citizen can deemed to be resident of India for the pur-
S
pose of calculating his income tax liability as per the Income Tax Act.
The residential status of an assessee is calculated for each previous

year and the tax liability for the assessment year is calculated accord-
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ingly. In addition, the residential status of the same assesse can be
different in previous years. The tax liability of an assessee is assessed
as per his/her residential status. The residential status of an assessee
is evaluated for each previous year. It is important to note that the res-
idential status of an assessee can vary for each previous year. As per
Section 2(31) of the Income Tax Act, a person can be:
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An individual: An individual refers to a natural person who may

either be male, female or a minor child. However, the income of
a minor child is included in the income of the parent or the legal
guardian. If the minor is not competent to contract, then his in-
N
come shall be taxable through his legal guardian.

A Hindu Undivided Family: A Hindu undivided family refers to
a family that descends lineally from a common ancestor which in-
cludes their wives and daughters.
A Partnership Firm: According to Section 4 of the Indian Partner-
ship Act, 1932, “Partnership is defined as the relation between two
or more persons who have agreed to share the profits of a business
run by all or any one of them acting for all’.
A Company: According to Companies Act, 1956 a company means
“a company formed and registered under this Act or an existing
company.” Here, an existing company refers to a company that
was formed and registered under any of the earlier company acts.
An Association of Persons (AOP): An Association of Persons
(AOP) means two or more persons who come together for a com-
mon purpose in order to earn an income. This need not be on the
basis of a contract. In this scenario, when two or more people join
together to run a business but do not constitute a partnership, they
may be referred to as an Association of Persons (AOP).

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A Body of Individual (BOI): A Body of Individuals (BOI) refers

to an assembly of individuals who engage and carry on an activity
in order to earn an income. This body consists only of individuals.
Entities such as a company or a firm cannot be members of a body
of individuals.
A Local Authority (LA): A local authority refers to a Panchayat; or
Municipality; or Cantonment Board; or a Municipality Committee
and District Board who have been legally authorised or entrusted
by the government with the control and management of municipal
or local funds.
Artificial Juridical Entity: Artificial Juridical entity refers to
those persons who are not natural but are separate entities in the
eyes of law. Though they may not be sued directly but they can be
sued through persons responsible for managing them.
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Section 5 classifies the residential status of an assessee into two cate-
gories. They are:
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Resident (R) in India
Non-Resident (NR) in India
A resident can be further classified as being:

Ordinarily Resident (ROR)
Not Ordinarily Resident (RNOR/NOR)
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Therefore, for the purpose of taxation, we have three categories of

residential status namely ROR, RNOR and NR. Figure 2.1 shows dif-
ferent categories of residential status in India on the basis of the type
of ‘person’:
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Determination
of Residential
status in India
Individual/ Firm/AOP/ Any other

Company
HUF BOI person
Non
Resident Resident Resident
(NR)
Resident
Non
Ordinary
Resident
Resident
(NR)
(ROR)
Resident Not
Ordinary
Resident
(RNOR)
Figure 2.1: Different Categories of Residential Status in India on the

Basis of type of ‘Person’

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note
Section 6 – Residence in India is organised in the following manner:

6 (1) – Rules for determining the residential status of an individual
6 (2) – Rules for determining the residential status of an HUF
6 (3) – Rules for determining the residential status of a company
6 (4) – Rules for determining the residential status of every other
person
2.2.1 Residential Status of an Individual
According to Section 6(1), an individual is treated as resident in India

in the given previous year if he satisfies at least one of the following
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basic conditions:
Basic Condition (A): The individual was in India for a minimum
period of 182 days in the relevant previous year.
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Basic Condition (B):
i. The individual was in India for a minimum of 60 days in the
relevant previous year, and
ii. The individual was in India for a minimum of 365 days during
4 previous years immediately preceding the relevant previous
year.
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There are certain exceptions to the aforesaid rules as follows:

The period of 60 days will be extended to 182 days in the following
cases:
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An Indian citizen who leaves India for grabbing employment

opportunity outside India.
An Indian citizen leaves India as a member of a crew of an In-
dian ship in the previous year.
An Indian citizen or a Person of Indian Origin (PIO) who comes
on a visit to India during the previous year.
Using the above two basic conditions or rules; it can be determined

whether an individual or HUF is a resident or a non-resident. The
conditions for checking the residential status of an individual can be
explained using points mentioned in Table 2.1:
TABLE 2.1: Residential Status of Individuals

S. No. Basic Condition (A) Basic Condition (B)
1. Individual is in India for a Individual is in India for a period
period of 182 days or more. of 60 days or more during the PY
and 365 days or more during the
four years immediately preceding
the PY.

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S. No. Basic Condition (A) Basic Condition (B)

2. If an individual has stayed If in the PY, the individual has
for more than 182 days, there stayed for more than 60 days but
is no need to look at basic less than 182 days, you need to
condition (B). check basic condition (B).
3. For example, for PY 2017-18, For example, for PY 2017-18, if

tax authorities need to calcu- the number of days of stay of an
late whether the number of individual is more than 60 days
days of stay between 1st April but less than 182 days, then the
2017 and 31st March 2018 is tax authorities need to calculate
less than, equal to or more whether the number of days of
than 182 days. stay between 1st April 2013 and 31st
March 2017 is 365 days or more.
While calculating the total number of days of stay, the following points
S
must be borne in mind:
1. The total number of days of an individual need not be calculated
as continuous days of stay. The aggregate numbers of days of
IM
stay are considered.
2. The stay of the individual can be spread across multiple locations
such as place of residence, employment or business.
3. For calculating, number of days of stay, the days of departure
and arrival are both included. These dates can be verified by
M
stamping dates in the passport.

4. Stay on territorial waters (within 22 nautical miles of Indian
coastline), on ship, boat, and containers is also considered.
N
If the individual or an HUF is a resident, it is further required to de-

termine whether he/she resides ordinarily or not.
Let us now look at the additional conditions for testing ROR and
RNOR statuses. For RO, the following conditions must be satisfied:
Additional Condition 1: The individual/HUF has to be a resident
in India for at least 2 out of the 10 previous years immediately pre-
ceding the relevant previous year.
Additional Condition 2: The individual has been in India for a
minimum period of 730 days or more during 7 previous years im-
mediately preceding the relevant previous year.
Let us now clearly define ROR, NROR and NR in terms of Basic Con-
ditions and Additional Conditions of residence in India as follows:
1. An individual is said to be resident (R) if he/she:
Satisfies at least one of the basic conditions

n o t e s
2. An individual is said to be ordinarily resident (ROR) if he/she:

Satisfies at least one of the basic conditions, and
Satisfies both the additional conditions
3. An individual is said to be not ordinarily resident (NROR/NOR)
if he/she:
Satisfies at least one of the basic conditions, and
Satisfies one or none of the additional conditions
4. An individual is said to be non-resident (NR) if he/she:
Does not satisfy any of the basic conditions
The test of residence for an individual under the act can be presented
as shown in Figure 2.2:
S
Basic Condition (A): Yes
In India for 182 Days or more in the P.Y.
No
IM
In India for 60 Days or more in the P.Y. Yes
Resident
+
365 Days in 4 years preceding the relevant P.Y.
No
Non-Resident
M
Non-Resident in India for 9 out of the 10

Yes previous years immediately preceding
the relevent previous year
RNOR
No
Yes In India for 729 Days or less in the
N
7 years precending the relevant P.Y.
No
ROR
Figure 2.2: Test of Residence under the Income Tax Act
Let us now understand the above mentioned concept with the help of
some illustrations.
Illustration 1: Ms. Elizabeth Miller is an American citizen. She always

dreamt of visiting India and she came to India on 5 August 2017 and
visited four states. She finally left for America on 25 December 2017.
What will be her residential status for A.Y. 2018-19?
Solution: The total number of days of stay of Ms. Elizabeth during P.Y.
2017-18 = 143 days. Since she is in India for more than 60 days and
less than 182 days, we need to check Basic Condition (B). This was
Elizabeth’s first trip to India; therefore, the number of days of stay in
preceding four years = 0. Therefore, Elizabeth would be considered a
non-resident for taxation purposes.

n o t e s
Illustration 2: An Argentinian football player, Mr. White comes to In-

dia for playing yearly tournaments. For A.Y. 2018-19 calculate his res-
idential status if you are given the following data:
Year Number of Days of Stay

2017-18 85
2016-17 120
1015-16 140
2014-15 130
2013-14 110
Solution: Here, the relevant previous year is 2017-18. The number of

days of Mr. White in P.Y. is 85 days which is less than 182 days but
more than 60 days. Therefore, we need to check the Basic Condi-
tion (B). Number of days of stay of Mr. White in the four previous
years before the relevant or the current previous year = 500 days
S
(120+140+130+110). Since, Mr. White satisfies the Basic Condition B,
he is a resident for the previous year 2017-18.
Illustration 3: Refer Illustration 2 above. Find out whether Mr. White

IM
is ordinarily resident in India or not ordinarily resident if you are giv-
en the following additional information.

2012-13 80
2011-12 70
M
2010-11 60
Solution: The total number of stay of Mr. White in seven years pre-
ceding the previous year 2017-18 is 500 + 80 + 70 + 60 = 710 days.
Therefore, Mr. White is resident but not ordinarily resident in India
N
for the given previous year.
Illustration 4: Refer Illustration 2 and 3 above. Find out whether Mr.

White is ordinarily resident in India or not ordinarily resident if you
are given the following additional information.

2012-13 80
2011-12 80
2010-11 80
Solution: The total number of stay of Mr. White in seven years pre-
ceding the previous year 2017-18 is 500 + 80 + 80 + 80 = 740 days.
Therefore, Mr. White is resident and ordinarily resident in India for
the given previous year.
2.2.2 Residential Status of HUF
According to Section 6(2) of the Act, a Hindu Undivided Family (HUF)

is said to be resident in India if the control and administration of its

n o t e s
issues (affairs of the family) are completely or partially managed in

India. An HUF is said to be non-resident in India if the control and ad-
ministration of its undertakings are completely managed out of India.
Refer to Figure 2.1. The residential status of an HUF can be either

ordinary resident or not ordinary resident. With respect to HUF’s res-
idential status, the term control and management refers to carrying
out of the central control and management functions and not the sun-
dry day-to-day activities of business that are performed by servants,
employees or agents of the HUF.
A business may be carried out outside India and its control and man-
agement might be situated in India. It is important to note that the
place or control of a business may be different from the place of busi-
ness operations or even the business’s registered office.
S
If the HUF is a resident, then the residential status of the Karta of the
HUF is assessed in order to ascertain whether the HUF is ordinarily
resident or not ordinarily resident. An HUF is ordinarily resident if
its Karta is ordinarily resident and the HUF is not ordinarily resident
IM
if the Karta is not ordinarily resident. The rules for determining resi-
dent/not resident and ordinary resident/not ordinary resident used for
individual will also be followed here in the context of the Karta of the
HUF. In other words, the HUF would be considered ordinarily resi-
dent if the Karta of the HUF satisfies the following conditions:
The Karta has been a resident in India for at least 2 out of the 10
M
previous years immediately preceding to the relevant previous year

The Karta has been in India for minimum period of 730 days
during seven previous years immediately preceding the relevant
previous year
N
If one or none of the aforesaid conditions are satisfied; then, the HUF
is termed as resident but not ordinary resident.
note
An important ruling of the Supreme court w.r.t. HUF’s residential

status: CIT v. Nandlal Gandalal [1960] 40 ITR 1 (SC)
In its ruling, the SC said that in order to know as to who controls
and manages the affairs of the family, one has to see who actual-
ly controls the affairs and not merely the one who has the right
to control the affairs. Though normally, the right to control the af-
fairs of the family vests with the Karta, however, if the affairs of the
family are controlled by other members of the family in India, the
HUF will be considered as the resident in India even if Karta stays
abroad throughout the previous year.
Alternatively, the Supreme Court ruling can be understood as: the
control and management (or the head and brain) means the de-fac-
to control and management and not merely the right or power to
control and manage.

n o t e s
Let us now look at some illustrations to better understand the concept

of residential status of an HUF.
Illustration 5: Mahesh Murti is the Karta of the Mahesh Murti HUF.
During the entire previous year 2017-18, he was managing all his fam-
ily affairs from Long Beach, California. What is the residential status
of Mahesh Murti HUF?
Solution 5: For previous year 2017-18, Mahesh Murti was outside In-
dia for the whole year. Therefore, for the given previous year, he will
be considered as non-resident.
Illustration 6: Refer Illustration 5, if Mahesh Murti visited India on
July 1; 2017 and went back to Long Beach on 3 August 2017; then de-
termine the residential status of Mahesh Murti HUF?
Solution 6: Since the family of Mahesh Murti was being controlled
S
from India for more than a month and partly from outside, the HUF
would be considered as the resident in India.
Illustration 7: Mahesh Murti remained outside India for the previous

IM
year 2017-18. However, he delegated his responsibilities of managing
and controlling the business of HUF to his younger brother, Ramesh
Murti. Ramesh Murti is also a part of HUF. What will be the residential
status of the HUF in this case?
Solution 7: Now, in this case the actual Karta of the HUF remained
M
outside India for the whole previous year 2017-18 but the de-facto con-
trol and management of the HUF was being handled by Ramesh Mur-
ti. Therefore, it can be concluded that the HUF was resident in India
even if the Karta was outside India for entire previous year.:
N
Illustration 8: An HUF is managed by its Karta, Mr. Gagan Khattar.

He did not visit India during the previous year 2017-18. However, be-
fore this year, he has always been present in India. What is the resi-
dential status of Mr. Khattar for Assessment Year 2018-19?
Solution 8: In the given case, since, Mr. Khattar was always in India
before the previous year 2017-18, he satisfies both the additional con-
ditions for ordinary residency in India. However, he does not fulfil the
basic condition of residence. Therefore, Mr. Khattar will be non-resi-
dent in India for the Assessment Year 2018-19.
Illustration 9: Mr. Arnab Saxena is the Karta of an HUF. For the pur-
pose of business, he keeps travelling from India to various other loca-
tions. The details of his number of days of stay in India are given as
follows:

2017-18 35
2016-17 97

n o t e s

2015-16 102
2014-15 102
2013-14 105
2012-13 107
2011-12 101
2010-11 112
Comment on the residential status of the HUF for Assessment Year

2018-19.
Solution 9: For the given Assessment Year 2018-19/previous year

2017-18, the Karta was in India for 35 days; therefore, Karta is the res-
ident for the given previous year. Also, the number of days of Karta’s
S
stay during seven years preceding the given previous year is 727 days.
Therefore, Karta (and therefore the HUF) is not-ordinarily resident in
India for the given previous year.
IM
Illustration 10: Refer to Illustration 9. Comment on the residential
status of the HUF for Assessment Year 2018-19 if you are given the
following data:

2017-18 35
M
2016-17 102
2015-16 107
2014-15 103
2013-14 106
N
2012-13 108
2011-12 115
2010-11 111
Solution 10: Karta is resident for the given previous year because he
stayed in India for 35 days. Also, the number of days of Karta’s stay
during the seven years preceding the given previous year is 752 days.
Therefore, Karta (and therefore the HUF) is ordinarily resident in In-
dia for the given previous year.
2.2.3 Residential Status of a Company Assessee
According to Section 6 of the Act, Indian companies are taxable in

India on their worldwide income, irrespective of its source and ori-
gin. Foreign companies are taxed only on income which arises from
operations carried out in India or in certain cases, on income which is
deemed to have arisen in India. Thus, the tax-liability on income of a
company depends upon the residential status of the company.

n o t e s
A Company is said to be resident in India during any relevant previ-

ous year if:
It is an Indian Company; or
The control and management of its affairs are situated exclusively
in India.
In case of Resident Companies, the total income liable to tax in-
cludes [Section 5(1)]:
Any income which is received or is deemed to be received in
India in the relevant previous year by or on behalf of such com-
pany
Any income which accrues or arises or is deemed to accrue or
arise in India during the relevant previous year
S
Any income which accrues or arises outside India during the
relevant previous year
Similarly, a Company is said to be non-resident during any relevant

IM
previous year if:
It is not an Indian company, and
The control and management of its affairs are situated exclusively/
partially outside India
In case of Non-Resident Companies, the total income liable to tax
M
includes [Section 5(2)]:

Any income which is received or is deemed to be received in
India during the relevant previous year by or on behalf of such
company.
N
Any income which accrues or arises or is deemed to accrue or

arise to it in India during the relevant previous year.
At times, there could be situations where the same income becomes

taxable for the same company in more than one country. This is called
double taxation. The core reasons for double taxation may be due to
a company or a person being a resident of a particular country but
acquiring income from another country. Thus, the income becomes
taxable at both places.
Table 2.2 given below highlights the above mentioned details:
TABLE 2.2: Determination of Residential Status

of a Company
Place of Control An Indian A Company other than
Company an Indian Company
Control and Management of the
affairs of a company is situated:
zz Exclusively in India Resident Resident

n o t e s
Place of Control An Indian A Company other than

Company an Indian Company
zz Exclusively outside India Resident Non-Resident
zz Partly in India and partly out- Resident Non- Resident
side India
The BOI, AJP or LA is said to be resident in India if the control and

administration of its issues are completely or partially managed in In-
dia. On the other hand, they are said to be non-resident in India if the
control and administration of its undertakings are completely man-
aged out of India.
note
1. The residential status of individuals and HUFs is determined
S
on the basis of number of days of his/her stay in India.
2. The residential status of all other persons is determined on the
basis of place of incorporation and place of management.
IM
Let us now look at some illustrations to better understand the concept
of residential status of a company.
Illustration 11: Asha Electronics is an Indian company. It has regional

offices and operations in more than 60 countries. During the previous
year 2017-18, all board meetings of the company took place in its re-
gional offices. Determine the residential status of Asha Electronics for
M
Assessment Year 2018-19.
Solution 11: Since Asha Electronics is an Indian company, it will al-

ways be resident in India irrespective of where it conducts its business
meetings.
N
Illustration 12: Super Mini Inc. is a US-based company. Its head of-
fice is located in Texas. It also has an office in India. In the previous
year 2017-18, it conducted 12 board meetings out of which five were
held at its India office. Determine the residential status of Super Mini
for Assessment Year 2018-19.
Solution 12: Since the management and control of Super Mini was
partly in India and partly outside India for the previous year 2017-18,
it will be considered as non-resident.
Illustration 13: Ham Research is a German company. Its head office is

located in Lower Saxony. The company specialises in the production
of industrial robots and solutions for factory automation. Due to per-
ceived benefits, it started its production operations in India also. Since
the promoters wanted to ensure their new venture’s success, they
temporarily shifted base and started managing their entire business
from India so that special focus can be given to Indian operations. The
promoters stayed in India for two consecutive previous years 2017-18
and 2016-17. Determine the residential status of Ham Research for
Assessment Year 2018-19.

n o t e s
Solution 13: For the given situation, the control and management of
the company is being done wholly from India; therefore, it shall be
treated as resident in India.
2.2.4 Residential Status of Firm/Association of

Persons (AOP)
An AOP is said to be resident in India if the control and administration

of its issues is completely or partially managed in India. On the other
hand, an AOP is said to be non-resident in India if the control and ad-
ministration of its undertakings are completely managed out of India.
Table 2.3 given below highlights above mentioned details:
TABLE 2.3: Determination of Residential Status
S
of a Firm/Association of Persons (AOP)
Place of Control An Indian Firm/AOP Non-Indian Firm/AOP
Control and Manage-
ment of affairs of a
IM
firm/AOP is situated:
zz Exclusively in India Resident Resident
zz Exclusively outside Resident Non-Resident
India
zz Partly in Indian and Resident Resident
partly outside India
M
Let us now look at an illustration to better understand the concept of

residential status of a firm/AOP.
Illustration 14: Maverick Inc. is a US-based firm. Its head office is

N
located in New Jersey. It has recently established an office in India

also. In the previous year 2017-18, it conducted 12 board meetings out
of which five were held at its India office. Determine the residential
status of Maverick for Assessment Year 2018-19.
Solution 14: Since the management and control of Maverick was part-
ly in India and partly outside India for the previous year 2017-18, it
will be considered as a resident.
Exhibit
Exhibit: Taxability of Different Assessees

Worldwide Income of ROR is taxable
For RNOR, income accruing or arising in India; income re-
ceived or deemed to be received in India; and income arising
out of business controlled from India are taxable.
For NR, only income accruing or arising in India; income re-
ceived or deemed to be received in India is taxable.

n o t e s
1. Section 2 (31) of the Act defines

a. previous year
b. person
c. advance tax
d. assessee
2. _______ of the Act discusses the concept of residence in India
for the purpose of charge of tax for different assesses.
a. Section 4
b. Section 5
c. Section 6
S
d. Section 7
3. Tax liability of a person does not depend on
IM
a. Residential status of an assessee
b. Income earned by an assessee
c. Nationality
d. All of the above
4. Which of the following is not a legitimate category?
M
a. Ordinary resident Individual

b. Not ordinary resident HUF
c. Resident company
N
d. Not ordinary resident company

5. According to the second basic condition of residence in India,
an individual must be in India for a minimum of 60 days in
the relevant previous year. In addition, the individual should
have been in India for a minimum of ______ days during the 4
previous years immediately preceding the relevant previous
year.
a. 182
b. 600
c. 729
d. 365
6. For a company, when the same income of an assessee becomes
taxable in more than one country, it amounts to double
taxation. (True/False)

n o t e s
7. When the control and management of the affairs of a firm/

AOP is situated exclusively in India, then
a. Indian firm/AOP is considered as resident and Non-Indian
firm/AOP is considered as resident.
b. Indian firm/AOP is considered as resident and Non-Indian
firm/AOP is considered as non-resident.
c. Indian firm/AOP is considered as non-resident and Non-
Indian firm/AOP is considered as resident.
d. Indian firm/AOP is considered as non-resident and Non-
Indian firm/AOP is considered as non-resident.
Activity
Using the Internet as your primary source of information, find out
S
the names of a few prominent foreign companies in India that were
considered as resident for the purpose of taxation for Assessment
Year 2017-18 (Previous Year 2016-17).
IM
2.3 Scope of Total Income
Section 5 of the Act relates to the scope of total income for the purpose
of taxation. In other words, we can determine the incidence of tax for
different types of assesses by determining the income that should be
M
subject to taxation in India. According to this Section, the scope of to-

tal income of a person is determined on the basis of his/her residence
in India in the previous year.
Section 5(1) describes what constitutes the total income of a resident

N
person in a previous year whereas Section 5(2) describes what consti-

tutes total income in the case of non–residents.
The scope of total income of an assessee depends upon three import-

ant factors as follows:
1. Residential status of an assessee
2. Place of accrual or receipt of income, whether actual or deemed
3. Point of time at which the income had accrued to/was received
by the assesse or by anyone on behalf of the assessee
Scope of total income for the three different categories of assessees is

discussed as follows:
1. Scope of total income for Resident Ordinarily Resident (ROR)
As per provisions of Section 5(1) of the Act, the total income of a
resident assessee consists of:
i. income received or deemed to be received in India during the
previous year.

n o t e s
ii. income which accrues or arises or is deemed to accrue or

arise in India during the previous year.
iii. income which accrues or arises outside India even if it is not
received or brought into India during the previous year.
In essence, a ROR is liable to pay income tax to the Government
of India on his/her total income that is accrued or deemed to
accrue, received or deemed to be received in or outside India.
2. Scope of total income for Resident Not Ordinarily Resident
(RNOR)
A RNOR is liable to pay income tax to the Government of India
on his/her total income that is accrued or deemed to accrue,
received or deemed to be received in India only. Any income
accruing or arising to the assessee outside India is not included
S
in the assessee’s total income for the purpose of taxation.
There is also an exception to the above criteria. Any income
accruing or arising to the assessee outside India from a business
IM
controlled from or profession set up in India; then, it would be
included in the assessee’s total income for the taxation purpose
even though the income accrues or arises outside India.
3. Scope of total income for Non-Resident (NR)
As per provisions of Section 5(2) of the Act, the total income of a
M
non-resident assessee consists of:

i. income received or deemed to be received in India during the
previous year
ii. income which accrues or arises or is deemed to accrue or
N
arise in India during the previous year

From the above three points, it can be concluded that all the
categories of assessees are liable to pay tax in respect of their
income that is received/deemed to be received/accrued or arisen/
deemed to accrue or arise in India. On the contrary, only the
resident Indians are liable to pay tax in respect of income that
accrues or arises outside India.
note
If an item of income has been included in an assessee’s total income

and has been subjected to tax on the accrual or deemed accrual or
receipt basis; it cannot be included in the person’s total income and
subjected to tax in the same or in the subsequent years on accrual
or deemed accrual or receipt basis.

n o t e s
Figure 2.3 describes the scope of total income for different assessees.
Scope of Total
Income
Resident and Resident but Not

Non-Resident
Ordinarily Resident Ordinarily Resident
Income which is
Global Income is
received/deemed Income received/deemed
Taxable in India
to be received/accrued to be received/accrued or
or arisen/deemed arisen/deemed to accrue
to accrue or arise in india or arise in India.
Income which accrues

or arises outside India
being derived from
S
a business controlled
from or profession set
up in India.
IM Figure 2.3: Scope of Total Income for Different Assessees
Table 2.4 presents the scope of total income and taxability of different
types of income of different assesses:
TABLE 2.4: Scope of Total Income and Taxability

of the Different Types of Income of Different
M
Assesses
Nature of Income Resident and Resident Non-Resident
Ordinarily but Not
Resident Ordinarily
Resident
N
Income accruing or arising outside India and received in India, i.e.

Indian income
Income received in India Included Included Included
Income deemed to be re- Included Included Included
ceived in India
Income accruing or arising Included Included Included
in India
Income deemed to accrue Included Included Included
or arise in India
Income accruing or arising outside India and received outside India,
i.e. foreign income
1. From business con- Included Included Excluded
trolled from India or
profession set-up in
India
2. From a business con- Included Excluded Excluded
trolled outside India or
profession set-up outside
India

n o t e s
8. The scope of total income of an assessee does not depend

upon
a. Place of accrual or receipt of income
b. Legal jurisdiction of the place of accrual
c. Residential status of an assessee
d. Point of time at which the income had accrued to/was
received by the assesse
9. Which of the following foreign incomes will be excluded from
being taxed in India?
a. Income accruing or arising outside India and received
outside India from business controlled from India or
S
profession set-up in India for ROR
b. Income accruing or arising outside India and received
outside India from business controlled from India or
IM
profession set-up in India for RNOR
c. Income accruing or arising outside India and received
outside India from a business controlled outside India or
profession set-up outside India for RNOR
d. Income accruing or arising outside India and received
outside India from a business controlled outside India or
M
profession set-up outside India for ROR
Activity
Prepare a real-life case study related to the scope of income tax un-
N
der Section 5 of the Act.
Income Deemed to be Received in

2.4
India
In the previous Section, we used four terms viz. income received, in-
come deemed to be received, income accrued or arisen and income
deemed to accrue or arise quite extensively. We will discuss the first
two terms in this section while the latter two would be discussed in the
next Section.
Some important terms used in the context of scope of income are ex-
plained as follow:
Income received: It refers to the act of being given, presented
with or being paid a sum of money. The receipt of income (income
received) will be considered for the taxation purpose only when
it is received for the first time by the recipient. Any subsequent
transfer and remittance of the amount so received from one place

n o t e s
or person to another does not constitute receipt in hands of the

subsequent receiver.
Income deemed to be received: It is defined under Section 7 of
the Act.
Income accrued: Under financial accounting, there are two basic
methods of accounting. First is the cash basis of accounting under
which revenues are recognised as and when the cash is received
and not when services are provided or goods are sold. Similarly,
in the case of expenses, they are recognised when the cash is paid
and not when the expense incurs. Second is the accounting on ba-
sis of accrual under which the revenues and expenses are record-
ed when earned and incurred and not on the basis of when cash is
received or paid.
Arisen: An expense or revenue is said to have arisen when it
S
emerges or becomes apparent.
Income deemed to accrue/arise: It is defined under Section 9 of
the Act.
IM
When an assessee receives income in India, he/she is liable to pay tax
in India irrespective of his residential status and the place of accrual
of such income. This is the rule for taxing income received in India.
Now, let us discuss the concept of income deemed to be received in
India as per Section 7 of the Act.
M
Section 7 states that the following incomes shall deemed to be received

in the previous year:
(i) the annual accretion in the previous year to the balance at the
credit of an employee who is a member of a recognised provident
fund, to the extent provided in rule 6 of Part A of the Fourth
N
Schedule;
Explanation: Employer’s contribution towards the recognised
provident fund in excess of 12% of the employee’s salary along
with the credited interest to a recognised provident fund in
excess of 10% of the salary of the employee would be considered
as income received in India.
Exhibit
The Fourth Schedule – Rule 6 of Part A (Recognised provident

funds)
6. That portion of the annual accretion in any previous year to
the balance at the credit of an employee participating in a
recognised provident fund as consists of—
(a) contributions made by the employer in excess of 10%, of
the salary of the employee, and
(b) interest credited on the balance to the credit of the
employee in so far as it exceeds one-third of the salary of

n o t e s
the employee or is allowed at a rate exceeding such rate as

may be fixed by the Central Government in this behalf by
notification in the official Gazette, shall be deemed to have
been received by the employee in that previous year and
shall be included in his total income for that previous year,
and shall be liable to income-tax.
(ii) the transferred balance in a recognised provident fund, to the

extent provided in sub-rule (4) of rule 11 of Part A of the Fourth
Schedule;
Explanation: Balance transferred to a Recognised Provident
Fund (RPF) from an unrecognised provident fund would be
considered as income received in India.
(iii) the contribution made, by the Central Government or any other
employer in the previous year, to the account of an employee
S
under a pension scheme referred to in section 80CCD.
Explanation: Contribution made by an employer to the
employee’s account during the previous year on behalf of the
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notified contributory pension scheme under section 80 CCD
would be considered as income received in India.
Exhibit
Section 8 (Dividend income) of the Income Tax Act, 1961 (Amend-

M
ed 2017)
8. For the purposes of inclusion in the total income of an
assessee,—
(a) any dividend declared by a company or distributed or paid
N
by it in the following cases:

l any distribution of accumulated profits (capitalised or
not) by a company
l any distribution of debentures, debenture-stock,
deposit certificates, with or without interest by a
company to its shareholders
l any distribution of bonus shares to its preference
shareholders
l any distribution made to the shareholders of a company
upon liquidation
l any distribution by company on the reduction of its
capital to its shareholders
l any payment made by a company (other than a company
in which the public are substantially interested), to a
shareholder holding not less than 10% of the voting
power.

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(b) any interim dividend shall be deemed to be the income of

the previous year in which the amount of such dividend
is unconditionally made available by the company to the
member who is entitled to it.
10. According to Section 7, which of the following incomes is not

deemed to be received in the previous year?
a. the annual accretion in the previous year to the balance at
the credit of an employee who is a member of a recognised
provident fund, where contributions made by the employer
in excess of 10%, of the salary of the employee, and
b. transferred balance in a recognised provident fund
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c. dividend income received by an individual
d. the contribution made, by the Central Government or any
other employer in the previous year, to the account of an
employee under a pension scheme referred to in section
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80CCD.
Activity
Make a list of pension schemes covered under Section 80CCD.

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Income Deemed to Accrue or Arise

2.5
in India
N
Let us first discuss the meaning of accrual and arising of income.
Accrue refers to the right to receive income. An income or amount

of money becomes due after it has accrued over a period of time. For
instance, a mechanic who works in the workshop of an authorised ser-
vice centre works on each working day of the month and his salary
accrues throughout the month and becomes due at the end of that
month. In addition, interest payments that are payable to an assessee
as a result of his investments or savings arises on day to day basis but
becomes due on specific dates only. For example, most of banks credit
the interest on demand deposits twice in a year on the last working
day of the respective months:
note
Income that has been taxed on accrual basis cannot be charged to

tax again on receipt. It is so because the same amount cannot be
taxed twice and if done, amounts to double taxation.

n o t e s
Section 9 contains two sub-sections and first sub-section further con-

tains seven sub-sub-sections as shown in Table 2.5:
TABLE 2.5: Income Deemed to Accrue

or Arise in India
Section Income
9(1)(i) Business Income, Professional Income, House Property In-
come, Capital Gains, Income from Other Sources
9(1)(ii) Any salary income, if it is earned in India
9(1)(iii) Any salary payable by the Government to an Indian citizen for
service outside India
9(1)(iv) Dividend paid by an Indian company outside India
9(1)(v) Interest payable by Government, resident or non-resident
9(1)(vi) Royalty payable by Government, resident or non-resident
S
9(1)(vii) Fees for technical services payable by Government, resident or
non-resident.
9(2) Exemptions
IM
Figure 2.4 describes various components of income deemed to accrue
or arise in India as per Section 9(1) of the Act:
Income deemed to accrue or

arise in India [Section 9(1)]
Income Salary earned Salary payable Dividend Interest, if Fees for Royalty, if
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accruing or for services by Government paid by payable by technical payable by

arising outside rendered in to India citizen Indian service, if
India, directly India for services company payable by
or indirectly rendered outside
through or outside India India
from
Person Government A non-

Any business Any property/ Transfer of resident resident
N
connection in asset or source capital asset in India

India of income in situated in
India India Exception
If the money If the money If money If technical service

borrowed or borrowed or borrowed is or royalty service
technical service technical service used for is utilised for business
or royalty service or royalty service business or or profession in India
is utilised for is utilised for profession or making income from
business or making income in India any source in India
profession from any source
outside India outside India
Figure 2.5: Components of Income Deemed to Accrue or Arise in

India as per Section 9(1) of the Act
Various categories of income which are deemed to accrue or arise in

India are as follows:
1. Section 9(1)(i): Any income accruing or arising to an assessee
in any place outside India whether directly or indirectly.
According to this section, the following incomes would be
deemed to accrue or arise in India:
(A) Income generated through or from any business connection
in India

n o t e s
(B) Income generated through or from any property in India

(C) Income generated through or from any asset or source of
income in India
(D) Income generated through the transfer of a capital asset
situated in India.
Let us now discuss each of these in detail as follows:
(A) Income Generated through or from any Business
Connection in India
Please note that the Act defines the term business as referring
to any trade, commerce, manufacture or any adventure in
nature of trade, commerce or manufacture. However, there
is no definition of the expression business connection.
The term business connection has not been defined in the
Act. Nevertheless, the term business connection can be
S
understood as a relationship between a non-resident and a
business in India. In addition, the non-resident must have
earned an income through such connection. Lastly, such
business connection should be continuous.
IM
Three major ways of forming a business connection are:
99 Non-resident opens a branch office in India.
99 Non-resident appoints an agent in India.
99 Non-resident forms an association in India.
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Explanations for Section 9(1) (i)

Explanation 1: Exemptions
For non-resident Indians, certain connections are not considered
as business connection in India and hence no tax liability arises.
N
The exempted connections are:

a. For businesses wherein some part of business operations is
carried out in India and some part is carried out outside India;
only that part of the non-resident’s income of the business
would deemed to be accrued or arisen in India that can be
reasonably attributable to the operations carried out in India.
b. If a non-resident is involved in operations which are limited
to the purchase of goods in India for the purpose of export;
no part of such income shall be deemed to accrue or arise in
India.
c. If a non-resident Indian is engaged in the business of running
a news agency or publishing of newspaper/magazines/
journals; then no part of his/her income shall be deemed to
accrue or arise in India provided his/her activities are limited
to the collection of news and views in India for transmission
out of India.

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d. If a non-resident who is not a citizen of India or a firm which

does not have any partner who is a citizen of India or who
is resident in India or a company which does not have any
shareholder who is a citizen of India or who is resident in
India, is involved in operations pertaining to the shooting of
any cinematograph film in India; then, such an individual or
firm or company is not liable to pay tax and the income so
generated would not be deemed to accrue or arise in India.
e. If a foreign company that is engaged in the business of mining
of diamonds conducts activities that are limited to the display
of uncut and unassorted diamonds in any special zone notified
by the Central Government in its Official Gazette; then no
income shall be deemed to accrue or arise in India.
Explanation 2: Meaning of Business Connection
A business connection exists in the following cases:
S
a. When a business activity that is carried out through a person
who acts on behalf of a non-resident, and that person has the
authority (and exercises it) to conduct and conclude contracts
IM
on behalf of the non-resident. However, if the person’s activity
is limited to purchase of goods for the non-resident, it will not
be considered as a business connection.
b. When a person is not authorised but he/she maintains a stock
of goods or merchandise from which he makes delivery on
behalf of a non-resident as a habit.
M
c. When a person habitually secures orders in India, mainly

or wholly for the non-resident or for that non-resident and
other non-residents controlling, controlled by, or subject to
the same common control, as that non-resident. It means that
the person/agent is a dependent agent.
N
Explanation 3: Attribution of income

Where a business is carried out in India by an agent as given
in Explanation 2 above, only the part of income of the non-
resident shall be deemed to accrue or arise in India which can be
attributed to operations carried out in India.
Explanation 4: Meaning of “Through”
The term ‘through’ means and includes ‘by means of’, ‘in
consequence of’ or ‘by reason of’.
Explanation 5: Underlying asset transfer
An asset or a capital asset such as 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 its value substantially from the
assets located in India either directly or indirectly.

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Explanation 6: Share or interest defined

For explanation 6, the assets (share or interest) shall be deemed
to derive its value substantially from assets located in India if on
a specified date, the value of such assets exceeds an amount of
ten crore rupees and represents at least 50% of the value of all
the total assets owned by the company. In addition, the value
of such assets would be calculated on the basis of fair market
value on a specified date without the reduction of liabilities. For
deriving the value of assets, the accounting period shall mean
the period of 12 months beginning on 1st April and ending on 31st
March.
In case a foreign company outside India declares and pays
dividends in respect of shares that derive their value substantially
from assets situated in India; then such income would not
S
deemed to be accruing or arising in India.
Explanation 7: Exemption to transfer
a. If a company or an entity has been registered or incorporated
IM
outside India and owns assets situated in India directly or
indirectly, then if any of the assets are transferred to a non-
resident, the income of non-resident shall not deemed to have
been accrued or arisen in India.
b. If all the assets owned directly or indirectly by a company or
entity are not located in India are transferred outside India,
M
the income of a non-resident transferor would be deemed to

accrue or arise in India to the extent that part of income can
be reasonably attributable to assets located in India.
(B) Income Generated through or from any Property in India
In case any income arises from any property (tangible/
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movable/immovable assets) situated in India; it is deemed to

accrue or arise in India.
(C) Income Generated through or from any Asset or Source of
Income in India
In case any income arises from any asset whether tangible or
intangible, it is deemed to accrue or arise in India.
(D)Income Generated through the Transfer of a Capital Asset
Situated in India
In case any income accrues or arises as a result of transferring
capital asset; then, such income shall be chargeable to tax
under the head of ‘Capital Gain’. Here, a capital asset may be
tangible, intangible, movable or immovable.
2. Section 9(1) (ii): Salary earned for services rendered in India
Income that falls under the head of ‘Salaries’ is considered
as income earned in India if the income is paid for services
rendered in India or is paid for the periods of leave or rest that
are preceded and succeeded by services rendered in India.

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Salaries earned by foreign nationals under certain circumstances

and subject to certain conditions are exempted from being taxed
as per various provisions mentioned in Section 10(6) of the Act.
3. Section 9(1) (iii): Income from salaries payable by the
Government for services rendered outside India.
When an Indian citizen is paid a salary by the Indian Government
for his/her services rendered outside India; then, such salary/
income or income is deemed to accrue or arise in India and
would be chargeable to tax under the head of ‘Salaries’. And for
the purpose of taxing such citizens, the place of receipt of salary
and the residential status of the citizen is not relevant.
4. Section 9(1) (iv): Dividend paid by an Indian company outside
India.
S
Whenever any dividend is paid by an Indian Company to its
shareholders, it shall be chargeable to tax. Here, the residen-
tial status of the assesse is irrelevant.
Also,
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in case any dividend is paid by a foreign company in
India; it becomes taxable on a receipt basis.
Dividend paid by a domestic company to its shareholders is
not chargeable to tax.
For the purpose of taxation of dividends, the place of accrual
of dividend should be decided on the basis of place of regis-
M
tered office of the company. However, dividends can be de-

clared or paid at any place and have no impact on charge-
ability of tax.
5. Section 9(1)(v): Interest
N
When an assessee receives interest income that is paid by

the central government or the state government or by both,
the interest is deemed to have accrued or arisen in India and
hence becomes chargeable to tax.
When an assessee receives interest income that is paid by a
person resident in India; such income is chargeable to tax.
However, there is an exception to this. Any income that is
payable in respect of any money borrowed and used for the
purposes of a business or profession carried on by him out-
side India or for the purpose of making or earning any in-
come from any source outside India, it will not be deemed to
When interest is payable by a non-resident for any debt in-
curred or monies borrowed and used for the purpose of a
business or profession carried on in India by him; then such
interest is chargeable to tax. However, there is an exception to
this. When interest is paid by a non-resident for any purpose

n o t e s
other than a business or profession; it will not be deemed to

6. Section 9(1) (vi): Royalty
Any income received by an assessee by the way of royalty will be
deemed to accrue or arise in India and would be chargeable to
tax if it is payable by:
Government.
A person who is a resident, except where the royalty is pay-

able in respect of any right, property or information used or
services utilised for the purposes of a business or profession
carried on by such person outside India or for the purposes
of making or earning any income from any source outside
India.
S
A person who is a non-resident, where the royalty is payable
in respect of any right, property or information used or ser-
vices utilised for the purposes of a business or profession car-
IM ried on by such person in India or for the purposes of making
or earning any income from any source in India.
7. Section 9(1) (vii): Fees for technical services
Any income received by an assessee by the way of fees for
technical services will be deemed to accrue or arise in India and
would be chargeable to tax if it is payable by:
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(a) Government.
(b) Person who is a resident, except where the fees are payable in
respect of services utilised in a business or profession carried
on by such person outside India or for the purpose of making
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or earning any income from any source outside India.

(c) a person who is a non-resident, where the fees are payable in
respect of services utilised in a business or profession carried
on by such person in India or for the purposes of making or
earning any income from any source in India.
8. Section 9(2): Exemptions
As per this Section, any pension payable outside India to a
person residing permanently outside India shall not be deemed
to accrue or arise in India, if the pension is payable to a person
referred to in article 314 of the Constitution or to a person who
was appointed as a Judge of the Federal Court or of a High Court
before the 15th day of August, 1947.
Now that you are aware of the concepts related to scope of
total income, income received, income deemed to be received,
income accrued or arisen, and income deemed to accrue or arise;
let us now look at a few illustrations to better understand these
concepts.

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Illustration 15: Mr. Arun, a citizen of UK, came to India for the first
time in May 2013. During the previous years 2013-14, 2014-15, 2015-16,
and 2016-17, he was in India for 157 days, 73 days, 184 days and 162
days, respectively. He resided in India during the previous year 2017-
2018 for 85 days. Evaluate the residential status of Mr. Arun for the
assessment year 2018-2019.
Solution: Number of days Arun stayed in India during the previous

year 2017-2018 = 85 days.
Number of days Arun stayed in India in the four years preceding the
previous year = 157 + 73 + 184 + 162 = 576 days.
We can observe that Mr. Arun was in India for a minimum of 60 days
in the relevant previous year and has been in India for more than 365
days during the 4 previous years immediately preceding the relevant
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previous year. Therefore, Arun satisfies the second basic condition for
residence in India. Therefore, Arun is a resident of India for the pre-
vious year 2017-2018 and his income would be taxable for assessment
year 2018-2019.
IM
Now, since this is the case of an individual, we need to determine
whether he is ordinarily resident in India or not. Therefore, let us now
check additional conditions for ordinarily residence.
Condition 1: Arun was resident in India in at least 2 years out of 10

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previous years preceding previous year 2017-18.
We need to check the residential status of Arun for previous year 2016-
17 and 2015-16.
In 2016-17, he stayed for 162 days and also stayed in preceding 4 years
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for 184+73+157+Nil = 414 days. Here, the second basic condition is

being fulfilled. Therefore, Mr. Arun is resident in India for the previ-
ous year 2016-17.
In 2015-16, he stayed for 184 days which is more than 182 days re-
quired for satisfying first basic condition. Therefore, Mr. Arun is resi-
dent in India for previous year 2015-16.
Condition 2: To satisfy the second additional condition, Arun must

be resident in India for minimum of 730 days in the 7 previous years
preceding the relevant previous year (2017-18). Number of days, Arun
was in India in the 7 previous years preceding the relevant previous
year is equal to 162 days + 184 days + 73 days + 157 days + Nil + Nil
+ Nil = 576 days.
From analysis of both conditions, Arun does not satisfy the second
additional condition. Therefore, Arun is resident but not ordinarily
resident in India.

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Illustration 16: The following are the particulars of income of Ms.

Raksha for the previous year 2017-2018:
S. No. Particulars Amount (in `)

1. Rent received from a property in Punjab, 90000
received in Japan
2. Income from a business in Japan controlled 130000
from Punjab
3. Income from the business in Pune controlled 190000
from Japan
4. Rent from a property in Japan received there 70000
but remitted to India
5. Interest from deposits with an Indian compa- 30000
ny received in Japan
S
6. Profit for the year 2016-17 of a business in Ja- 85000
pan remitted to India during the previous year
2017-2018 that is not taxed earlier
7. Gifts received from her parents 55000
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Compute her income for the assessment year 2018-19 if she is:
i. Resident and ordinarily resident in India (ROR)
ii. Resident but not ordinarily resident in India (RNOR)
iii. Non-resident in India (NR)
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Solution: For the given situation, please note that the profit earned in
2016-17 is not the income pertaining to the previous year of 2017-18;
therefore, it would not be taxable in the assessment year 2018-2019. In
addition, gifts received from relatives are not considered as income.
N
Therefore, the incomes of Ms. Raksha under different residential sta-

tuses would be as follows:
Particulars ROR RNOR NR

Rent from property in Punjab, 90000 90000 90000
received in Japan
Income from business in Japan 130000 130000 NA
Income from business in Pune 190000 190000 190000
controlled from Japan
Interest from Indian company 30000 30000 30000
received in Japan
Rent from property in Japan re- 70000 NA NA
ceived there but remitted to India
Gross taxable income 510000 440000 310000
In the illustration above, note that the tax incidence is maximum for
an ordinary resident and least for a non-resident.
Illustration 17: The following are the particulars of income of Mr.

Badrinath for the previous year 2017-2018:

n o t e s

1. Remuneration for service rendered in Australia 5,00,000
but received in India
2. Income from business in Italy, received in the 2,10,000
United Kingdom but the business is controlled
from India
3. Pension for services rendered in India but re- 50,000
ceived in Japan
4. Income from profession in India but received in 78,000
Australia
5. Fees for technical service payable by a resident 1,50,000
Indian for a business carried out in India
6. Income from agriculture in Brazil 70,000
Compute the income for the assessment year 2018-19 if Mr. Badrinath
S
is a:
i. Resident but not ordinarily resident in India (RNOR)
ii. Non-resident in India (NR)
IM
Solution: For the given situation, incomes of Mr. Badrinath under dif-
ferent residential statuses would be as follows:
Particulars RNOR NR
Remuneration for service rendered in Australia 5,00,000 5,00,000
M
but received in India (Receipt Basis)

Income from business in Italy, received in the Unit- 2,10,000 NA
ed Kingdom but the business is controlled from
India
N
Pension for services rendered in India but received 50,000 50,000

in Japan
Income from profession in India but received in 78,000 78,000
Australia
Fees for technical service payable by an Indian 1,50,000 1,50,000
resident for a business carried out in India
Income from agriculture in Brazil NA NA
Gross taxable income 988000 778000
Illustration 18: The following are the particulars of income of Mr. Ab-
dul for the previous year 2017-2018:

1. Interest on Savings Deposit Account of 20,000
Oriental Bank of Commerce, Mumbai
2. Income from agriculture in Brazil and in- 7,000
vested in Malaysia

n o t e s

3. Dividend received from a UK company. Out 30,000
of the entire sum `5,000 were remitted to
India
4. Income from house property located in 2,00,000
Malaysia. Out of the total amount received,
80% is deposited in bank in Malaysia and
the rest amount is remitted to India.
5. Pension received in Malaysia for services 10,000
rendered in India to a limited company
Compute the income for the assessment year 2018-19 if Mr. Badrinath
is a:
i. Ordinary resident (ROR)
S
ii. Resident but not ordinarily resident in India (RNOR)
iii. Non-resident in India (NR)
Solution: For the given situation, incomes of Mr. Abdul under differ-
IM
ent residential statuses would be as follows:
Particulars ROR RNOR NR

Interest on Savings Deposit Account of Orien- 20,000 20,000 20,000
tal Bank of Commerce, Mumbai
Income from agriculture in Brazil and invest- 7,000 NA NA
M
ed in Malaysia
Dividend received from a UK company. Out of 30,000 NA NA
the entire sum `5,000 were remitted to India
Income from house property located in Ma- 2,00,000 NA NA
N
laysia. Out of the total amount received, 80%

is deposited in bank in Malaysia and the rest
amount is remitted to India.
Pension received in Malaysia for services ren- 10,000 10,000 10,000
dered in India to a limited company
Gross taxable income 2,67,000 30,000 30,000
11. Which of the following pairs is matched incorrectly?

a. Section 9(1)(i) – Royalty payable by Government
b. Section 9(1)(v) – Interest payable by Government, resident
or non-resident
c. Section 9(1)(ii) – Any salary income earned in India
d. Section 9(1)(vii) – Fees for technical services payable by
Government

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Activity
Prepare a case study on the treatment of income deemed to accrue

or arise in India with specific reference to dividend paid by an Indi-
an company outside India.
2.6 Summary
In India, income tax is levied by the government in accordance
with the provisions of the Income Tax Act, 1961.
Section 4 of the Income Tax Act relates to the basis of charge of
income tax.
Income earned by an assessee in the previous year is charged to
tax and not the income earned in the assessment year.
S
Chargeability of income tax depends upon two major factors
namely the scope of income tax and the residential status of the
assessees.
IM
As per Section 2(31) of the Income Tax Act, a person can be an
individual, a Hindu Undivided Family, a Partnership Firm, a Com-
pany, an Association of Persons (AOP), a Body of Individual (BOI),
a Local Authority (LA) or an Artificial Juridical Entity.
Section 5 classifies the residential status of an assessee into resi-
M
dent Indians and non-resident Indians.

The tests of residence for determining the residential status of dif-
ferent persons are described in Section 6 of the Act.
According to Section 6(1), an individual is treated as resident in
N
India in the given previous year if he satisfies at least one of the

two basic conditions which include:
Basic Condition (A): The individual was in India for a mini-
mum period of 182 days in the relevant previous year.
i. The individual was in India for a minimum of 60 days in
the relevant previous year, and
ii. The individual was in India for a minimum of 365 days
during the 4 previous years immediately preceding the
relevant previous year.
According to Section 6(2), of the Act, a Hindu Undivided Family
(HUF) is said to be resident in India if the control and administra-
tion of its issues (affairs of the family) are completely or partially
managed in India.
The tax-liability on income of a company depends upon the resi-
dential status of the company. According to Section 6 of the Act,

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Indian companies are taxable in India on their worldwide income,

irrespective of its source and origin. Foreign companies are taxed
only on income which arises from operations carried out in India
or in certain cases, on income which is deemed to have arisen in
India.
An AOP is said to be resident in India if the control and adminis-
tration of its issues is completely or partially managed in India. An
AOP is said to be non-resident in India if the control and admin-
istration of its undertakings are completely managed out of India.
According to Section 5, the scope of total income of a person is de-
termined on the basis of his/her residence in India in the previous
year. Section 5(1) describes what constitutes the total income of a
resident person in a previous year whereas Section 5(2) describes
what constitutes total income in the case of non–residents.
S
When an assessee receives income in India, he/she is liable to pay
tax in India irrespective of his residential status and the place of
accrual of such income. This is the rule for taxing income received
IM
in India.
Employer’s contribution towards the recognised provident fund in
excess of 12% of the employee’s salary along with the credited in-
terest to a recognised provident fund in excess of 10% of the salary
of the employee would be considered as income received in India.
Balance transferred to a Recognised Provident Fund (RPF) from
M
an unrecognised provident fund would be considered as income

received in India.
Contribution made by an employer to the employee’s account
during the previous year on behalf of the notified contributory
N
pension scheme under section 80 CCD would be considered as in-

come received in India.
Income deemed to accrue or arise in India includes: Business In-
come, Professional Income, House Property Income, Capital Gains,
Income from Other Sources (Section 9(1)(i)); Dividend paid by an
Indian company outside India (Section 9(1)(iv)); Interest payable
by Government, resident or non-resident (Section 9(1)(v)); etc.
key words
Capital asset: Any movable or immovable, tangible or intangi-

ble, fixed or circulating property held by an assessee.
Chargeability of income tax: A set of conditions that describe
when and how a particular income becomes chargeable to tax.
Karta: Eldest adult male in an HUF who is given the responsi-
bility and authority to manage the affairs and assets of the HUF.
Person of Indian Origin (PIO): People of Indian birth or de-
scent who live outside the Republic of India.

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Test of residence: Tests that help in determining the status of

residence of different entities defined as persons under Section
2(31) of the Income Tax Act, 1961.

1. Explain the criteria for determining the residential status of an
individual assessee.
2. Explain the criteria for determining the residential status of a
company assessee.
3. Describe the contents and implication of Section 5 of the Income
Tax Act, 1961.
4. Discuss various incomes which are deemed to be received in
India in accordance with Section 7 of the Income Tax Act, 1961.
S
5. List and explain various incomes which are deemed to be accrue
or arise in India in accordance with Section 9 of the Income Tax
Act, 1961.
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Answers for Self Assessment Questions
Topic Q. No. Answer

M
Residential Status of Different 1. b. person

Kinds of Assessees
2. c. Section 6
3. c. Nationality
N
4. d. Not ordinary resident com-

pany
5. d. 365
6. True
7. a. Indian firm/AOP is con-
sidered as resident and
Non-Indian firm/AOP is
considered as resident.
Scope of Total Income 8. b. Legal jurisdiction of the
place of accrual
9. c. Income accruing or arising
outside India and received
outside India from a busi-
ness controlled outside
India or profession set-up
outside India for RNOR
Income Deemed to be Re- 10. c. dividend income received
ceived in India by an individual

n o t e s
Topic Q. No. Answer

Income Deemed to Accrue or 11. a. Section 9(1)(i) – Royalty
Arise in India payable by Government
Hints for Descriptive Questions

1. According to Section 6(1), an individual is treated as resident
in India in the given previous year if he satisfies at least one of
the two basic conditions. Basic Condition (A) requires that an
individual must have been in India for a minimum period of 182
days in the relevant previous year. Basic Condition (B) requires
that an individual must have been in India for a minimum of
60 days in the relevant previous year, and for a minimum of
365 days during 4 previous years immediately preceding the
relevant previous year. Refer to Section 2.2 Residential Status
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of Different Kinds of Assessees.
2. According to Section 6 of the Act, Indian companies are taxable
in India on their worldwide income, irrespective of its source
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and origin. Foreign companies are taxed only on income which
arises from operations carried out in India or in certain cases,
on income which is deemed to have arisen in India. Refer to
Section 2.2 Residential Status of Different Kinds of Assessees.
3. Section 5 of the Act relates to the scope of total income for
the purpose of taxation. In other words, we can determine the
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incidence of tax for different types of assesses by determining

the income that should be subject to taxation in India. Refer to
Section 2.3 Scope of Total Income.
4. Section 7 of the Act states that three types of incomes shall
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be deemed to be received in the previous year. These include:

annual accretion in the previous year to the balance at the credit
of an employee who is a member of a recognised provident fund;
the transferred balance in a recognised provident fund; and the
contribution made, by the Central Government or any other
employer in the previous year, to the account of an employee
under a pension scheme referred to in section 80CCD. Refer to
Section 2.4 Income Deemed to be Received in India.
5. Incomes deemed to accrue or arise in India in the previous
year under Section 9 of the Act includes: Business Income,
Professional Income, House Property Income, Capital Gains,
Income from Other Sources (Section 9(1)(i)); Any salary income,
if it is earned in India (Section 9(1)(ii)); Any salary payable by
the Government to an Indian citizen for service outside India
(Section 9(1)(iii)); etc. Refer to Section 2.5 Income Deemed to
Accrue or Arise in India.

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Suggested Readings
Bhargava, U. (2017). Taxmann’s Income Tax Act As Amended by Fi-
Ahuja, D., & Gupta, D. (2017). Bharat’s Systematic Approach to Tax-
ation (37th ed.). Delhi: Bharat Law House.
Jain, M. (2016). Income Tax Granth. Delhi: Made Easy Publications.
E-References
Jain,S. (2018). Residential Status and Incidence of Tax on Income
under Income Tax Act, 1961. Indian Tax Updates. Retrieved 8 March
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2018, from https://www.indiantaxupdates.com/residential-status-
and-incidence-of-tax-on-income-under-income-tax-act-1961/
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etaxindia.gov.in. Retrieved 8 March 2018, from https://www.incom-
etaxindia.gov.in/pages/acts/income-tax-act.aspx
Cite a Website - Cite This For Me. (2018). Resource.cdn.icai.org.
Retrieved 8 March 2018, from https://resource.cdn.icai.org/
46234bos36354p4secAcp2.pdf
Cite a Website - Cite This For Me. (2018). Sircoficai.org. Retrieved 8
M
March 2018, from https://www.sircoficai.org/downloads/cpe-mate-

rials/01_Section_9.pdf
Fourth Schedule. (2018). Incometaxindia.gov.in. Retrieved 8
March 2018, from https://www.incometaxindia.gov.in/Acts/In-
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come-tax%20Act,%201961/1968/102120000002035558.htm#rfn1b

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Ch a
3 pt e r
INCOME FROM SALARIES
CONTENTS
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3.1 Introduction
3.2 Basis of Charge and Place of Accrual of Salary
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Activity
3.3 Employer-Employee Relationship
Activity
3.4 What is Salary?
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3.4.1 Definition of Salary under Sec. 17(1) of Income Tax Act, 1961
3.4.2 Arrears of Salary
3.4.3 Remuneration Received By Working Partner of PFAS
3.4.4 Type of Emoluments/ Perquisite
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3.4.5 Gratuity
3.4.6 Commutation of Pension
3.4.7 Leave Encashment
3.4.8 Retrenchment Compensation
3.4.9 Prescribed Guidelines (Rule 2BA)
3.4.10 Keyman Insurance Policy
3.4.11 Value of Leave Travel Concession
3.4.12 Valuation In Respect of Unfurnished Rent Free Accommodation
3.4.13 Provisions of Household’s Material of an Employee
3.4.14 Provisions of Educational Facilities for Employee’s Family
3.4.15 Interest Free Loan & Loan at Concessional Rate of Interest
3.4.16 Profits in lieu of Salary
3.4.17 Medical Facilities Treated As Perquisite
3.4.18 Perquisite for Motor Car
Activity

94 TAXATION- DIRECT AND INDIRECT
CONTENTS
3.5 Deductions from Salary

Activity
3.6 Tax Treatment on Provident Funds
Activity
3.7 Computation of Income from Salaries
Activity
3.8 Summary
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INCOME FROM SALARIES 95
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CHALLENGES WITH PERQUISITES
HomeDecor Pvt. Ltd. is a medium size wooden products man-

ufacturing company. Mr. Abhay recently joined HomeDecor as
the Human Resource Manager. The company has total five units
among which two are in south zone and remaining three are in
north zone. The company is paying perquisites/incentives to all
its employees since 1980 every year. The company has been fol-
lowing the system of unit-based incentives.
This year, as per the recommendations of Mr. Abhay, an employee

satisfaction survey was conducted. The survey revealed that 68%
of employees were not satisfied with the present incentive system
of the company. As the distribution of incentives in one unit is
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based upon merit system, the lower level employees feel that the
company only focuses on the interests of its executives. Mr. Abhay
decided to devise a new incentive system that would be followed
from the coming financial year. He followed the steps for devising
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a suitable incentive policy that are as follows:
Defining the objectives of the incentive policy
Collecting the facts about existing system of compensation
and incentive payment
Analysing the conditions under which the compensation sys-
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tem works
Determining the gap between actual and expected incentive
system
Preparing a draft of new incentive policy
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Analysing the feasibility of the proposed plan

Improving the unfeasible aspects of the plan and discussing
with trade unions, if required
Testing the suitability of the plan, if possible, through survey,
pilot test, and management consultation
Finalising and declaring the new policy before employees and
inviting them to ask questions
Mr. Abhay is sure that the change in the incentive plan will in-
crease the satisfaction level of employees with respect to incen-
tive schemes and total compensation of the employees.

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learning objectives

>> Describe the chargeability of income derived from salary
>> Explain the conditions for the existence of the Employer-
Employee Relationship
>> Define salary u/s 17(1) of Income Tax Act, 1961
>> Describe various components of salary and their tax
treatment.
>> Describe various perquisites that are added to salary and
their tax treatment.
>> Discuss deductions that are allowed u/s 16 of the Act
>> Determine the tax treatment in the case of Provident Funds
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>> Calculate the value of income under the head of salaries for
the purpose of taxation.
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3.1 INTRODUCTION
In the previous chapter, you studied the residential status of different
assessees. In this chapter, you will study various provisions of Income
Tax Act and tax incidences on various components of salary and other
perquisites attained by an employee which are offered by an employer.
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Salary refers to a fixed payment that is made at regular periods of

time generally at the end of every month. The paid amount is previ-
ously agreed-upon between the employer and the employee. Income
derived by an assessee from salary is taxable under the head “In-
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come from salaries” provided employer-employee relationship exists

between the employer and the employee. In the absence of the em-
ployer-employee relationship, income is not deemed as income from
salary.
For purpose of taxation, the term salary has been defined u/s 17(1)
of the Income Tax Act, 1961. In addition, important concepts such
as employer-employee relationship, arrears of salary, remuneration
received by working partner of Partnership Firm Accessed as Such
(PFAS) and the taxability of different types of perquisites have been
discussed at length. Perquisites have been defined u/s 17(2) of Income
Tax Act, 1961. The concept of profits in lieu of salary u/s 17(3) has also
been described.
Section 16 of the Act describes deductions that may be made from the
overall income generated from the salary. These include deduction
against entertainment allowance and professional tax. The chapter
also discusses the taxability of various components of the provident

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fund. The last section of the chapter presents illustrations that will
help you in working out problems which demand calculating the value
of income from salaries for an individual assesse.
BASIS OF CHARGE AND PLACE OF

3.2
ACCRUAL OF SALARY
As per Section 15 of the Income tax Act, 1961, income chargeable to
tax under the head salaries includes the following:
a. any salary due to an employee from an employer or from a
former employer to an assessee, whether paid or not during the
previous year.
b. any salary paid or allowed to an assessee in the previous year by
or on behalf of an employer or a former employer even though
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such amount is not due to the assesse in the accounting year.
c. any arrears of salary paid or allowed to the employee in the
previous year by or on behalf of an employer or a former employer
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will be charged to tax during previous year if they have not been
charged to income-tax in any of the earlier previous years.
However, the following salaries will not be charged to tax:

1. Any salary paid in advance that has been included in the total
income of any person for any previous year is not included again
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in the total income of the person when the salary becomes due.
2. Any salary, bonus, commission or remuneration (by whatever
name called) due to or received by a partner of a firm from the
firm is not be regarded as salary.
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For charging tax under Income from salary, the following points must
be remembered:
a. Salary income becomes chargeable to tax either on ‘due basis’ or
on ‘receipt basis’, whichever is earlier.
note
Due basis: When income is earned even if it is not received in

the P.Y. (Accrual of income)
Receipt basis: When income is received even if it is not earned
in the P.Y. (Advance payment of income)
b. Employee-employer relationship must exist between the payer

and payee in order to tax the income under this head.
c. Income from salary taxable during a year consists of the heads as
described under Section 15 discussed earlier.

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For taxing income under the head of Income from Salary, the place of
accrual of salary must be taken into account as follows:
a. Salary is considered to accrue at the place where the service has
been rendered even if it is paid outside India.
b. Salaries paid by foreign governments to their employees serving
in India are taxable under head salaries.
c. Leave salary (in respect of leave earned in India) is deemed to
accrue or arise in India even if it is paid abroad.
d. When an Indian citizen renders services outside India and
receives salary from the Government of India, it would be taxable
as salary is deemed to have accrued in India.
In India, tax is usually calculated on the due basis. It means that the
salary is taxable under the head of Salaries even if it has not been
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paid to (received by) the assessee. Contrary to this, if an assessee has
received his salary in advance even if it was not due to him becomes
chargeable to tax as and when received.
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1. Which of the following incomes are not chargeable to tax

under head salaries?
a. Salary due to an employee from a former employer not
paid during the previous year
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b. Arrears of salary paid in an earlier previous year

c. Salary paid in advance
d. Salary paid to an assessee not due to the assesse in the
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accounting year.
2. Which of the following is true in relation to taxability under
head salaries?
a. Salary accrues in India; it will be taxed
b. Service rendered in America by an NR and paid in America;
it will be taxed
c. Leave salary considered to accrue in India even if it is paid
outside India
d. None of these
Activity
Prepare a report that describes the impact of place of accrual on

the taxability of income from salary.

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3.3 EMPLOYER-EMPLOYEE RELATIONSHIP

Employer-employee relationship is the basis of liability under head
salaries. Before, the income of an assessee is charged under this head,
it must be ensured that there exists an employer-employee relation-
ship between the receiver and the payer. However, if this relationship
does not exist, then this income would not be considered as income
from salary. An employer may be an individual, firm, AOP, company,
corporation, central government, state government, public body or
any local authority. The employee may be working full-time or part-
time. The employer may operate in India or from outside India.
To determine whether an assessee receives a particular sum of income

as an employee or cannot be determined from facts of each specific
case. Let us look at an example.
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If a professor working in the Delhi College is appointed as its vice-prin-
cipal as well, then the income received by him as vice-principal would
be deemed as salary and will be chargeable under the head of sala-
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ries. However, if the same professor evaluates the answer sheets of
students of Upkar College, then the income that he earns for this ac-
ademic work would be deemed as “Income from Other Sources” be-
cause the professor is an employee of Delhi College and not Upkar
College. Similarly, the Managing Director on the board of an organi-
sation usually receives remuneration for working in the organisation
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as an employee. This is taxed under head salaries. In addition, he/she

may also receive fees for attending and participating in board meet-
ings. This is taxed under the head income from other sources.

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3. Before the income of an assessee is charged under the head

of salaries; it must be ensured that there exists a/an ________
relationship.
a. company-individual
b. employer-employee
c. receiver-payer
d. None of these
4. Ms. Neeta is a government school teacher. After she completes
her school duty, she teaches in a coaching centre (owned by
her sister-in-law) near her home. Which of the following is
true regarding taxation of Ms. Neeta’s incomes?
a. Income as a school teacher – To be taxed under the head of
other sources;
Income from coaching centre – To be taxed under head
salaries

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b. Income as a school teacher – To be taxed under head

salaries;
Income from coaching centre – To be taxed under head of
salaries
c. Income as a school teacher – To be taxed under head other
sources;
Income from coaching centre – To be taxed under the head
of other sources
d. Income as a school teacher – To be taxed under head
salaries;
Income from coaching centre – To be taxed under head of
other sources
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Activity
Study the recommendations of the International Labour Confer-

ence regarding the scope of employment relationship. Prepare a
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brief report regarding the same. Also comment on the extent to
which these recommendations are being applied in India.
3.4 WHAT IS SALARY?

Salary refers to fixed and regular payments that are paid by an em-
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ployer to his/her employees usually on a monthly basis. This amount

is paid by employer to employee in lieu of employee’s work. The salary
is often expressed as an annual sum and is mostly given to profession-
als and people doing white-collar jobs.
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This is the generic definition of salary. However, for the purpose of

taxation, salary has been defined under Section 17(1) of the Income
Tax Act, 1961.
3.4.1 DEFINITION OF SALARY SEC. 17(1) OF INCOME TAX

ACT, 1961
According to Section 17(1) of the Act, salary is defined to include:

i. Wages
ii. Annuity or pension
iii. Gratuity
iv. Fees, commission, perquisites, profits in lieu of or in addition to
salary or wages
v. Advance of salary

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va. Leave encashment

vi. Annual accretion to the balance at the credit of an employee
participating in a recognised provident fund
vii. Transferred balance in a recognised provident fund
viii. Contribution by the Central Government or any other employer
to Employees Pension Account as referred in Sec. 80CCD
There are various different forms of salary and all these are treated
for tax differently. Tax treatments for different types of salaries are
described as follows:
Advance salary
Arrear salary
Leave salary
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Salary in lieu of notice period
Salary paid to partner
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Fees or commission
Bonus
Gratuity
Pension
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Transferred amount
Retrenchment compensation
Let us study about the tax treatment of all these different types of sal-
aries in the upcoming sections.
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3.4.2 ARREARS OF SALARY
Salary is taxed on a due or received basis, whichever is earlier. If an

employee’s salary becomes due and is running in arrears, it will be
taxed in the assessment year of the previous year in which it became
due. However, if the arrear salary was not taxed earlier on a due basis,
it will be taxed in the year of receipt. In such cases, an employee can
claim relief in respect of arrears of salary under section 89 of the Act.
For example, Anup is a government servant. Assume that the govern-

ment announced an increase in dearness allowance for the previous
year 2017-18. If the increase has to be affected from 1.1.2012 then ar-
rears from 1.1.2012 to 31.3.2017 become due. These arrears would be
taxed for the assessment year of the relevant previous year in which
they are paid to Anup.

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note
Taxability of advance salary: Salary paid to an employee in ad-

vance is taxed for the assessment year of the relevant previous year
in which it was received. In such cases, an employee can claim re-
lief in respect of advance salary under section 89 of the Act.
3.4.3 REMUNERATION RECEIVED BY WORKING PARTNER

OF PFAs
When a business generates profits, it first needs to set aside a part of

its profits for necessary business operations such as payment of its
employees, loan repayments (EMIs), payment to business owners or
partners, etc. The part of profit that is paid to a business partner is
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taxed under the head of profits and gains of the business or profession.
Chapter XVI of the Income Tax Act, 1961 (the Act) contains provisions
which are related to the taxation of Partnership Firms (PF’s). With ef-
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fect from April 1, 1993, a firm shall be assessed as a Partnership Firm
Accessed as Such (PFAS) under section 184 of the Act, if the following
conditions are fulfilled:
The partnership is evidenced by an instrument called partnership
deed. The certified copy of the partnership deed is duly signed by
all partners and is filed along with the document called Return of
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Income (ROI). This instrument must also clearly state individual

shares (profit/loss) of all the partners.
The firm is further required to furnish a certified copy of the part-
nership deed, which needs to be duly signed by all partners along
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with the ROI document, whenever there are any changes in the
constitution of the firm.
The payments made to working partners of PFAs, are an allowable

expense duly authorised by the partnership deed, subject to the limits
which are stated in section 40(b)(iv) and (v) of the Act. The income/loss
share of the partners from the PFAS is exempted under section 10(2A)
of the Act.
3.4.4 TYPE OF EMOLUMENTS/ PERQUISITES
Emoluments or perquisite can be described as any reward or benefit

linked to an office or position in addition to salary or wages. Perquisite
is defined in the Section 17(2) of the Income Tax Act which includes
the following:
Value of rent-free/concessional rent accommodation provided by
the employer to the assessee.
Any sum paid by an employer in respect of an obligation which
was actually payable by the assesse.

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Value of any benefit/amenity granted free or at concessional rates

to specified employees such as the director or any person who has
substantial interest in the company.
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 rates to the assesssee.
The amount of any contribution to an approved superannuation
fund by the employer in respect of the assessee to the extent it ex-
ceeds `1, 50, 000 is chargeable as perquisites.
The value of any other fringe benefit or amenity as may be pre-
scribed.
3.4.5 GRATUITY
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Gratuity refers to a payment that is made in appreciation of an em-
ployee’s past services rendered by him/her to the employer. Gratuity
can be received by:
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the employee himself at the time of his retirement
the legal heir of the employee in the event of death of the employee
The gratuity which is received by an employee at the time of his re-

tirement is taxable under the head “Salary” whereas gratuity received
by the legal heir of the employee in the event of employee’s death is
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taxable under the head income from other sources.
Gratuity is exempt of tax up to a certain limit according to section

10(10). At present, this amount is fixed at `10,00,000. When gratuity is
received by the employee, salary would comprise only that part of the
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gratuity which is not exempt as under section 10(10).
Employees are divided into three different categories under section

10(10) for the purpose of exemption of gratuity. These are:
Government employees and employees of local authorities
Employees covered under the Payment of Gratuity Act, 1972
Other employees
It means that under the Income Tax Act, the tax treatment of gratuity
income is different for all three categories of employees mentioned
above.
EXEMPTION IN THE CASE OF GOVERNMENT EMPLOYEES AND

EMPLOYEES OF LOCAL AUTHORITIES [SEC 10(10)(i)]
The full amount of death-cum-retirement gratuity received by a gov-

ernment employees and employees of local authorities is fully exempt-
ed under Section 10 (10) (i) of the IT Act.

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Therefore, no amount received would be deemed taxable either under

the head salary or the head income from other sources.
According to Section 10(10)(ii) and 10(10)(iii), gratuity of employees

who are covered under the Payment of Gratuity Act, 1972 is exempted
from being taxed provided that it does not exceed the amount calcu-
lated in accordance with the provisions of Payment of Gratuity Act,
1972. As per the 7th Pay commission recommendations, government
employees can receive a maximum gratuity of `20 lakhs. As of March
2018, the bill to raise tax-free gratuity limit to `20,00,000 has been
passed in Lok Sabha. It is pending in Rajya Sabha.
According to section 4(1) of the Payment of Gratuity Act, 1972, gratuity

shall be payable to an employee on his termination after he has ren-
dered continuous service for a period of not less than 5 years:
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on his retirement or resignation
on his death or disablement due to accident or disease
on his superannuation
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However, complete five years of continuous service would not be
deemed necessary if his termination of employment is due to death or
disablement.
For employees covered under the Payment of Gratuity Act, 1972, the
minimum of the following amounts is exempt from taxation:
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The amount of gratuity actually received

`10,00,000
15 days salary for every year of completed service or a part there-

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of in excess of six months. However, in case of an employee who

works in a seasonal establishment, the exemption shall be for sev-
en days of wages for each season.
For non-government employees, who are not covered under the Pay-
ment of Gratuity Act, 1972, their gratuity amount may be fully or par-
tially taxable as per provisions of Section 10 (10) (iii). In such cases, the
amount of gratuity received by an employee on his retirement, or on
termination of his employment, or on his disablement, or by his legal
heirs on his/her death shall be exempt to the extent of the minimum of
the following amounts:
`10,00,000
Actual amount of gratuity received

Half month’s average salary for every completed year of service
Half month’s average salary for every completed year of service can be
calculated by using the formula:

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Illustration 1: Mr. Kshitij was an employee of Asiatech Ltd. After

completing 35 years of service, he retired on 25.3.17. He was drawing
a monthly salary of `75,000 (Basic `50,000 + DA `25,000). After retire-
ment, he received a gratuity of `12,00,000. Compute taxable gratuity.
Solution: Computation of taxable gratuity (Assuming employee not

covered by Payment of Gratuity Act, 1972)
Particulars Amount (`) Amount (`)

Amount received as gratuity 12,00,000
Less: Exemption u/s 10(10) (a) `12,00,000 10,00,000
(iii) (b) `15,14,423
Least of the followings: (c) `10,00,000
(a) Actual amount received
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(b) ½ × Average Salary (for 10
months period) × No. of fully
completed years of service
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[ ½ × 20,000 × 30]
(c) Maximum Limit
Taxable Gratuity 2,00,000
3.4.6 COMMUTATION OF PENSION
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Pension refers to a payment made by an employer to an employee on

his or her retirement or death as a reward for past service. Pension is
paid to an employee on a monthly basis. However, at the time of retire-
ment, the employee may decide to receive a particular percentage of
his/her monthly pensions for a particular period of time in a lump sum
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amount. This is called the commutation of pension. The pension can

be commuted either fully or partly. Therefore, there are two catego-
ries of pension namely commuted pension and uncommuted pension.
The treatment of these two kinds of pension is as follows:
Uncommuted pension is also known as periodical pension. Uncom-

muted pension is fully taxable in hands of both the government and
non-government employees.
In the case of government employees, commuted pension is fully ex-

empt from tax. For non-government employees, the commuted pen-
sion is partially exempt. Here, two scenarios may arise:
Where the employee receives gratuity also: The commuted value
of one-third of the pension amount which the employee is entitled
to receive is exempt from tax. Any amount that is received over
and above the exempted pension is taxable.
Where the employee does not receive any gratuity: The commut-
ed value of half of the pension amount which the employee is en-

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titled to receive is exempt from tax. Any amount that is received

over and above the exempted pension is taxable.
Illustration 2: Mr. Ajay was a government employee. He retired on

June 31, 2017. He got a monthly pension of `17,000 for six months up
to December 31, 2017. With effect from January 1, 2018, he gets one-
third of his pension commuted for `12,00,000. He is not in receipt of
gratuity. Calculate the total amount of uncommuted pension charge-
able to tax for Assessment Year 2018-19.
Solution: Government employees are exempted from tax on commut-

ed pension. However, uncommuted pension is always chargeable to
tax. In our case:
Commuted pension of `12,00,000/- is exempt from tax.
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The amount of taxable uncommuted pension is calculated as below:
Uncommuted pension from July 1 to Dec 31, 2017 = `17,000 × 6 =

`1,02,000
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Uncommuted pension Jan 2017 to March 2018 = `34,000
Total amount of uncommuted pension chargeable to tax = `1, 36, 000
NMIMS Global Access - School for

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3.4.7 LEAVE ENCASHMENT
During the tenure of service of employees, the employees are entitled

to various kinds of leaves. In case an employee has leaves to his/her
credit for the given year but he/she does not utilise some or all of those
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leaves; then the leaves may either be:

Lapsed (due to non-use)
Encashed each year
Accumulated and encashed after retirement or death
Whether the leaves are lapsed, encashed or accumulated depends on

the organisation’s leave policy. The organisation’s leave policy may
allow using accumulated leaves during the further service period of
employee. Alternatively, the organisation may also allow the encash-
ment of the accumulated leaves. When an employee surrenders his/
her leaves in lieu of payment for such leaves, it is termed as leave
encashment.
Now, before we discuss tax treatment in case of leave encashment, let

us define what constitutes salary and average salary as follows:
Salary: Salary includes basic salary and D.A. to the extent the
terms of employment provide. However, apart from D.A., no other

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allowances are added in the salary. Salary also includes commis-

sion based on a fixed percentage of turnover achieved by an em-
ployee.
Average salary: It is calculated as the average of the ten month’s
salary immediately preceding the month of retirement of an em-
ployee. For example, if an employee retired on 31st December
2017; then, his average salary will be calculated as the average of
months ranging from 1st March 2017 to 31st December 2017.
The treatment of leave encashment is discussed as under:

Encashment of leave during tenure of service If an employee en-
cashes his/her leaves while he is continuing his/her service in the
organisation, it is taxable. However, relief can be claimed under
section 89 of the Act.
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Encashment of accumulated leave at the time of retirement [Sec
10(10AA)]: If a leave is encashed at the time of retirement or su-
perannuation, it may or may not be taxable. However, in case it is
IM
taxable, exemption can be claimed under section 10AA of the Act.
For the purpose of exemption of accumulated leave encashment,
employees are categorised under two different heads:
Government employees (Central and State Government em-
ployees only) [Sec 10 (10AA) (i)]: Leave encashment of accu-
mulated leave at the time of retirement received by a govern-
ment employee is fully exempt from tax. Hence, it shall not be
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included in gross salary.

Other employees [Sec 10(10AA)(ii)]: Leave encashment of ac-
cumulated leave at the time of retirement received by other
employees (including employees of local authority and public
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sector undertakings) is exempt to the extent of the minimum of

the following amounts:
99 Leave encashment actually received at the time of retire-
ment
99 10 months average salary
99 Maximum amount specified by government `3,00,000 (for
employees retiring after 1st April 1998)
99 Cash equivalent of unavailed (earned) leaves (Period of
earned leaves in months × Average monthly salary)
Illustration 3: Mrs. Himani Chaudhary worked at Asmita Pvt. Ltd.

and she retired from the company on 30th August 2017. At retirement,
she encashed all her accumulated leaves for `6,50,000. The total peri-
od of her service was 28 years. She was entitled to 1.5 months (45 days)
leave per year. During her entire service she utilised 400 leaves. The
average basic salary of last ten months plus D.A. received by her was

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equal to `29,000. Calculate the amount of leave encashed that would

be subjected to tax.
Solution: Number of leaves for the entire period of 28 years of Himani

= 28 × 45 = 1260 days
Leaves availed = 400
Balance leaves = 1260 – 400 = 860 days
Average salary = `29,000
To calculate the amount of leave encashed subject to tax, we need to

calculate/consider the following components:
a. Actual amount received by Himani = `6,50,000
b. Maximum amount specified by government = `3,00,000
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c. Last 10 months average basic salary & dearness allowance before
leaving the job = `29,000 × 10 = `2,90,000
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d. Cash equivalent of the leave balance, subject to maximum of 30
days for each completed year of service. This comes out to be
`4,23,400 as per the calculations that follow.
Earned leave eligibility = 30 days × 28 = 840 days
Leaves used = 400 days

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Leaves eligible for encashment = 840 – 400 = 440 days (14.6 months)
Cash equivalent of earned leaves = 14.6 × 29,000 = `4,23,400
Tax exempted would be equal to minimum of above four value i.e.,

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`10 months average salary = `2,90,000
Therefore, taxable component = `6,50,000 – `2,90,000 = `3,60,000
3.4.8 RETRENCHMENT COMPENSATION
Retrenchment is defined as forced laying off of employees in order to

cut down the payroll. When an organisation decides to retrench cer-
tain workforce, the workmen are entitled to retrenchment compensa-
tion at the time of his retrenchment. Retrenchment compensation is
governed by the provisions of the Industrial Disputes Act, 1947. The
retrenchment compensation shall be exempt from tax to the extent of
minimum of the following limits:
Actual amount received as retrenchment compensation
15 days average pay for every completed year of service or part
thereof in excess of six months
`5,00,000

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Any compensation received by the employee in excess of the above

mentioned amount is taxable as salary. However, the assessee shall be
deemed as eligible for relief under section 89 of the Income Tax Act
with rule 21 A.
3.4.9 PRESCRIBED GUIDELINES (RULE 2BA)
The guidelines of the government for allowing exemption from tax in

respect of the Golden Handshake Scheme or Voluntary Retirement
Scheme (VRS) are as follows:
itapplies to an employee who has completed 10 years of service or
completed 40 years of age.
it should have been drawn to result in overall reduction in the ex-
isting strength of employees.
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the vacancies that become vacant due to voluntary retirement
would not be filled up by the employee who is taking retirement
nor shall he/she be employed in any other company or concern
belonging to the same management.
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itshould be applicable for all employees whether they may be
workers, executives of a company or of a cooperative society ex-
cept the Directors of a company or of a cooperative society
theamount receivable on account of voluntary retirement of an
employee does not exceed
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the amount equivalent of 3 months of salary for each complet-

ed year of service; or
salary at the time of retirement multiplied by the number of
balance months of service left before the actual date of the re-
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tirement of the employee.
The amount receivable by an employee can be either of the two afore-

said limits on account of his voluntary retirement. However, the ex-
empted amount shall be up to `5,00,000 under section 10(10C).
3.4.10 KEYMAN INSURANCE POLICY
A person whose service has a significant effect on the profitability of

the company is known as a keyman. A key person could be an em-
ployee or the director of a company with technical background, expe-
rience, entrepreneurial vision and/or market image whose death will
have a bearing on the profitability of the company. There can be more
than one key person within the same company who possesses the req-
uisite background, knowledge, experience, etc. It is not necessary for
a key person to hold the highest position.
The purpose of keyman insurance is to indemnify or protect the com-

pany against financial loss upon the death of a key employee. The

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death of a key person creates a vacuum in the company which eventu-

ally leads to a setback in profitability.
A keyman insurance policy is a life insurance policy taken by an em-

ployer on the life of the employee who is a key person in the company.
Three necessary ingredients of a keyman insurance policy are as fol-
lows:
1. Insurance so purchased is a life insurance policy.
2. Insurance policy is taken by one (first) person on the life of
another (second) person.
3. The relationship between the first and second persons should
be either that of an employer-employee or any other business
relationship.
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As per IRDA guidelines, only term plan can now be issued under Key-
man Insurance. The tax treatment for key person insurance policies
under the Income Tax Act is as follows:
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In the hands of the person taking the policy: The premium paid
by the person taking the Keyman Insurance Policy who would be
referred to as the first mentioned person is an allowable expen-
diture under section 37(1) of the Income Tax Act. If the keyman
policy matures in the hands of the first mentioned person; then
the whole amount received on maturity is taxable in the hands of
first-person under the head of business income.
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In the hands of Keyman: The premium paid by the first mentioned

person is not taken as a perquisite under section 17(2) in the hands
of the Keyman. This is because Keyman policy is for the benefit of
the first mentioned person and not the Keyman. Since no personal
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advantage or benefit is gained by the Keyman, it cannot be termed

as a perquisite in his hands.
note
In a keyman insurance policy, the employer is the beneficiary and

employee is the keyman.
Maturity proceeds in the hands of Keyman: Usually, a Keyman

Insurance Policy can mature in the hands of the first-mentioned
person only. The first mentioned person may however, assign
the policy in favour of the Keyman or any of his family members
with or without taking a consideration amount. After assignment
of keyman policy, it loses its keyman character and the maturity
value of such insurance will be covered under Section 10 (10D).
Section 56(2) implies that if the first mentioned person assigns the
policy in favour of the Keyman or any of his family members, then

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the surrender value will be taxable in the hands of the Keyman un-
der section 17(3) (under Income from profits in lieu of salary) or in
the hands of any of the family members under section 56(2) (under
income from other sources).
3.4.11 VALUE OF LEAVE TRAVEL CONCESSION
The employee is entitled to exemption under section 10(5) with re-

spect to the value of travel concession received by him or due from
his or her employer for himself/herself and his family. This exemption
would be provided to the employee in the following situations:
If the employee is on leave to any place in India.
If the employee is on leave to any place in India after retirement
from service or after the termination of his services.
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The exemption under section 10(5) shall be subjected to the following:
Where the journey is performed by air: The maximum exempted
amount shall not exceed the air economy fare of the National Car-
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rier by the shortest route to the possible destination.
Where places of origin of journey and destination are connected
by rail and the journey is performed by any mode of transport
other than by air: The maximum exempted amount shall not ex-
ceed the air-conditioned first class rail fare by the shortest route to
the place of destination.
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Where the places of origin of journey and destination or part

thereof are not connected by rail and the journey is performed
between such places:
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An amount not exceeding the deluxe class fare by the short-

est route to the place of destination where a recognised public
transport system exists.
An amount equivalent to air-conditioned first class rail fare by
the shortest route to the place of destination as if the journey
had been performed by rail where no recognised public trans-
port system exists.
The exemption rules required for calculating the LTC and to check
the eligibility for LTC are summarised as follows:
While travelling to any location, people usually incur several kinds
of expenses such as travel expense, food expense, boarding and
lodging expense, shopping, etc. However, not all of these expenses
are covered under Leave Travel Allowance (LTA). The employer
provides LTA to the employer and he bears only travel expenses.
Other expenses are not covered under LTA.

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To avail the LTA, the employee must present the proof of travel
because the same will be required during tax audits.
LTA can be availed for only two travels within a block of four years.
Current block year is 2018-21.
The amount of LTA that is exempted from being taxed depends on
the mode of transportation chosen and connectivity available to
the destination place.
3.4.12 VALUATION IN RESPECT OF UNFURNISHED RENT

FREE ACCOMMODATION
At times, some employers provide an additional perquisite to their

employees in the form of rent-free or concessional accommodation for
which the employee would have to incur charges. Such a perquisite
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is received and given in kind. However, it is taxable under the Income
Tax Act, 1961.
In case, the employer is providing rent free accommodation, there

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may arise the following cases:
Accommodation given by government entity
Furnished accommodation
Unfurnished accommodation
Accommodation given by non-government entity
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Furnished accommodation
Unfurnished accommodation
Here, we will discuss the valuation of rent-free unfurnished accommo-

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dation provided by government and non-government entities under

Rule 3(1) of Section 17(2)(i) as follows:
ACCOMMODATION PROVIDED BY THE GOVERNMENT TO ITS

EMPLOYEES
The license fee determined by the union or state government for the
accommodation provided to the government employee is reduced by
the rent actually paid by the employee for that same accommodation.
This results in taxable value of perquisite for unfurnished accommo-
dation.
ACCOMMODATION PROVIDED BY ANY OTHER EMPLOYER
For cases where a non-government employer provides rent-free un-

furnished accommodation to employees; it must first be determined
whether the accommodation so provided by the employer is owned by
him/her or it has been taken on lease.

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Table 4.1 depicts tax treatment under different scenarios related to

unfurnished accommodation:
TABLE 4.1: ACCOMMODATION OWNED OR TAKEN ON

LEASE OR RENT BY THE EMPLOYER
Nature of Accom- Accommoda- Accommoda- Accommoda-
modation tion provided tion provided tion provided
in a city having in a city having in any other
population population city having
exceeding 25 exceeding 10 population not
lakhs as per lakhs but not exceeding 10
2001 Census exceeding 25 lakhs
lakhs as per
2001 Census
Where the accom- 15% of salary in 10% of salary in 7.5% of salary
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modation is owned which the said which the said in which the
by the employer accommodation accommodation said accom-
was occupied was occupied modation was
by the employ- by the employ- occupied by the
ee during the
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ee during the employee dur-
previous year previous year ing the previous
year
Where the accom- Actual amount Actual amount Actual amount
modation is taken of lease or rent of lease or rent of lease or rent
on lease or rent by paid or payable paid or payable paid or payable
the employer by the employer, by the employer by the employer
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or 15% of salary or 15% of salary or 15% of salary

whichever is whichever is whichever is
lower lower lower
3.4.13 PROVISIONS OF HOUSEHOLD’S MATERIAL OF AN

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EMPLOYEE
Certain provisions of household’s material of an employee and their

tax implications are as follows:
Gas, electricity or water supply provided:
Where an employer has supplied gas, electricity or water for
household purposes from its own sources without having pur-
chased them from any outside agency, the value of such bene-
fits is the manufacturing cost incurred per unit by the employer
Where the employer has supplied gas, electricity or water for
household purpose, by purchasing them from any outside
agency, such value will be treated as an amount actually paid
by the employer.
Where any amount is paid by the employee such an amount
paid shall be deducted from value so arrived.

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Free domestic servants:

Actual cost to employer in respect of free services of a sweeper,
a gardener, a watchman or a personal attendant as reduced by
the amount paid by an employee.
3.4.14 PROVISIONS OF EDUCATIONAL FACILITIES FOR

EMPLOYEE’S FAMILY
Rule 3 of Income Tax relates to valuation of perquisites. Rule 3(5)

(Free Educational Facilities to Children of Employee’s Household)
provides the criteria using which the taxability of the amount spent
on education of a member of an employee’s household is determined.
The valuation of children’s education allowance depends on whether
the educational institute where household members are studying is
owned by the employer himself or not. The value of benefit received
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by the employee in each case is presented in Table 4.2:
TABLE 4.2: VALUATION IN RESPECT OF FREE OR

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CONCESSIONAL EDUCATIONAL FACILITIES TO ANY
MEMBER OF EMPLOYEES’ HOUSEHOLD
Circumstances Value of benefit
Where the educational institution The cost of education in a similar insti-
is maintained and owned by the tution in or near the locality. Though,
employer. if the education facilities are provided
to children of the employee (no other
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member of the household is covered),

the taxable value of this perquisite
shall be nil if the cost or value of ben-
efit of such education does not exceed
`1,000 per month.
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In case, the cost of education exceeds

`1,000 p.m., the taxable value will be
calculated as:
Cost to the employer minus – 1,000 –
any amount paid or received from the
employee.
Where free education facilities In this case, the taxable value would
for such members of employees’ be the actual amount of expenditure
household are in any other edu- incurred by the employer.
cational institution by the reason
of his being in employment of
that employer .
In situations where the cost of education exceeds `1,000 per month per
child, the whole amount shall be taxable and no deduction of `1,000
shall be allowed.
Please note that a member of the household may include spouse(s);

children and their spouses; parents; and servants and dependants.

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3.4.15 INTEREST FREE LOAN & LOAN AT CONCESSIONAL

RATE OF INTEREST
Employees (or any member of his/her household) may be provided in-

terest free loans or loans at concessional rates by his or her employer.
Interest free loans and concessional loans are taxable perquisites in
the hands of all employees.
The value of benefit arising from this perquisite is determined as the

sum (rupee value) equal to interest payable on similar loan provided
by the State Bank of India on the 1st day of the relevant previous year
with respect to the loans advanced for the same purpose advanced
by it. The interest benefit is calculated on the maximum outstanding
monthly balance as reduced by the interest paid by the employee.
Please note that Maximum outstanding monthly balance refers to the
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loan balance (outstanding) on the last day of each month.
However, no tax would be charged if such loans are provided to an

employee or any member of his/her household:
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where the amount of petty loans do not exceed `20,000.
where the loan is for the purpose of medical treatment with re-
spect to diseases specified in rule 3A which include neurological
diseases, cancer, AIDS, chronic renal failure, hemophilia (speci-
fied diseases).
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3.4.16 PROFITS IN LIEU OF SALARY
Profits in lieu of salary are referred to as payments that are received

by an employee in lieu of or in addition to his or her salary or wag-
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es. These are mentioned under Section 17(3) of the Income Tax Act.
These payments include:
Terminal compensation: It refers to any compensation that is re-
ceived or is due to be received by an assessee from his employer/
former in connection with the termination of his employment or
modification in terms and conditions related to profits in lieu of
salary.
Payment from an unrecognised provident fund or an unrec-
ognised superannuation fund: It refers to any compensation that
is received or due to be received by an assessee from one provi-
dent fund to another fund or a superannuation fund to the extent
to which such payment does not consist of contributions by the
employee or interest on employee’s contribution.
Payment under Keyman Insurance Policy: Any payment due to
or received by an employee under the Keyman Insurance Policy
which includes any bonus received on such policy shall be treated
as profits in lieu of salary.

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Any amount received or due to be received before joining or af-

ter cessation of employment: Any amounts that may either be due
in lump sum or otherwise by an assessee from any person before
his joining any employment with that person or after the cessation
of his employment with that person shall be treated as profits in
lieu of salary.
However, the following receipts shall not be termed as profits in lieu

of salary:
Death cum retirement gratuity
Commuted value of pension
Payment received from a SPF
Payment received from a RPF
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Payment received from a superannuation fund
Retrenchment compensation
House Rent Allowance (HRA)
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3.4.17 MEDICAL FACILITIES TREATED AS PERQUISITE
Medical facilities provided by an employer to his/her employees fall

under three broad categories namely medical allowances, medical in-
surance, and medical treatment and reimbursement.
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Usually, all medical allowances are taxable. However, medical reim-

bursements given by an employer to an employee are tax-free. Med-
ical reimbursement refers to an arrangement wherein employers
reimburse a particular percentage of the expenses incurred by an em-
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ployee on himself or his dependants.
Medical expenses incurred on medical treatment are not taxable pro-

vided the following criteria are satisfied:
Employee must have spent the amount on his/her own or on his/
her dependent’s medical treatment;
Amount spent by the employee must be reimbursed by the em-
ployer; and
Amount reimbursed by the employer must not exceed `15,000
in the financial year. (Medical reimbursements of amount up to
`15,000 paid by employer are exempted from tax.)
The taxability of medical insurance can be discussed as follows:

When a company pays the premium amount for the medical in-
surance of its employees to the insurance company approved by
IRDA, it is fully exempt from being taxed.
When an employee or any other member of his/her family pays
the premium amount for employee’s medical insurance and later

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claims it from the employee’s company, it is fully exempt from be-

ing taxed.
In case an employer incurs certain expenses on the treatment of him-

self or his/her family members, then such expenses incurred on doc-
tor’s fee, medicines and hospital bills amounting to `15,000 or less can
be reimbursed by the employer and will be fully exempt from tax.
The taxability of medical reimbursements received by an employee

also depends upon whether the employee has received the treatment
in India or outside India. Both the cases are discussed in the upcom-
ing text.
MEDICAL TREATMENT IN INDIA
In certain cases, medical expenses incurred on the medical treatment
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of the employee and/or his family members by the employer in addi-
tion to `15,000 are tax-free. These cases include:
Any expenses incurred by an employee on his or her family’s med-
IM
ical treatment in a hospital maintained by the employer are totally
tax-free without any limit.
Any medical reimbursement provided to the employee for medical
treatment of himself or his/her family with respect to prescribed
diseases or ailments as prescribed in rule 3A of the Income Tax
Rules in a hospital approved by the Principal Chief Commissioner
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or Chief Commissioner of Income Tax. If a certificate is received

from the hospital, the reimbursement is fully exempt without any
limit.
For any other cases, the reimbursement amount of up to `15,000 is
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exempt from tax.
MEDICAL TREATMENT OUTSIDE INDIA
Expenses incurred by an employer on the medical treatment of the

employee or his/her family members outside India are also treated as
tax-free perquisite in the following cases:
Boarding and lodging expenses incurred on the medical treatment
of the employee or any of his/her family members plus one atten-
dant, outside India would be treated as tax-free perquisite to the
extent permitted by the Reserve Bank of India.
Treatment expenses are exempted from tax up to an extent per-
mitted by the Reserve Bank of India.
Travel expenses of the patient (employee or his/her family mem-
ber) along with one attendant of patient shall be tax-free provid-
ed that the gross total income of the employee does not exceed
`2,00,000 p.a. For gross total income greater than `2,00,000 p.a.,
these will be fully taxable.

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note
Perquisites, whether monetary or non-monetary are taxable along

with salary under the head “Income from Salaries”.
3.4.18 PERQUISITE FOR MOTOR CAR
Though employees are paid salary, they are provided with certain ex-
tra benefits or perquisites in addition to salary that motivate and en-
courage them. One such perquisite is motor car perquisite. The motor
car perquisite is taxable under Section 10(14)(i) in the manner as pre-
scribed in Rule 3(2) of the Income Tax Act.
After abolition of the Fringe Benefit Tax (FBT) effective from financial
year 2009-10 onwards, many perquisites such as motor car facility are
S
also taxable. The motor car perquisite is taxed as follows:
No perk value is to be added where car is used for official purpose.
The
IM entire expense cost including the driver salary and deprecia-
tion of the motor car @10% will be added. This is applicable where
the car is owned by the employer and used for private purposes
only.
Where the car is used partly for official purpose, the rate has been
specified as per rules and hence, there is no role of estimation ei-
ther from employer or from the assessing officer’s side.
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There will be no perquisite valuation for cars which have been used
solely and exclusively for official purposes. The cars which have been
provided by the employer and have been used partly for official pur-
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poses and partly for personal purposes, the taxability will be as fol-
lows:
Small cars below 1.6 litres will have a perquisite value of `1,800 a
month while cars with an engine above 1.6 litre cubic capacity will
have a perquisite value of `2,400 a month, if expenses on mainte-
nance and running are reimbursed by the employer.
Table 4.3 depicts the taxability Motor Car as a perquisite:
TABLE 4.3: TAXABILITY OF MOTOR

CAR AS A PERQUISITE
S. Circumstances Engine Capacity Engine Capacity
No. upto 1600 cc (value above 1600 cc (value
of perquisite ) of perquisite)
1. Motor Car is owned or hired by the employer
1.1 Where maintenance and running expenses including salary of the
driver are met or reimbursed by the employer.
1.1- The car is used sole- Fully exempt if the Fully exempt if the
A ly for performing specified documents specified documents
official duties. are maintained. are maintained.

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1.1- The car is used sole- Actual amount of expenditure incurred by
B ly for the personal the employer on the running and main-
use of the employee tenance of motor car during the relevant
or any member of previous year including remuneration, if
his household. any, paid by the employer to the chauffeur
as increased 10% p.a. for depreciation of the
cost of motor car as reduced by any amount
charged from the employee for such use is
taxable
1.1- The car is used `1,800 per month `2,400 per month (plus
C partly for perform- (plus `900 per `900 per month, if
ing official duties month, if chauffeur chauffeur is also pro-
and partly for is also provided to vided to run the motor
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personal purposes run the motor car). car). Nothing is de-
of the employee or Nothing is deducti- ductible in respect of
any member of his ble in respect of any any amount recovered
household.
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amount recovered from the employee.
from the employee.
1.2 Where maintenance and running expenses are met by the
employee.
1.2- The car is used sole- Not taxable because Not taxable because it
A ly for official duties. it is not a perquisite is not a perquisite
1.2- The car is used Actual amount incurred by the employer on
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B exclusively for the the running and maintenance of the mo-

personal purposes tor car (i.e. hire charges, if car is on rent or
of the employee or normal wear and tear at 10% of actual cost
any member of his of the car) including the chauffeur’s salary
household. as reduced by the amount charged from the
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employee for such use.

1.2- The car is used `600 per month (plus `900 per month (plus
C partly for perfor- `900 per month, if `900 per month, if
mance of official chauffeur is also chauffeur is also pro-
duties and partly for provided to run the vided to run the motor
personal purposes motor car). Nothing car). Nothing is de-
of the employee or is deductible in re- ductible in respect of
any member of his spect of any amount any amount recovered
household recovered from the from the employee.
employee.
2. Motor Car is owned by the employee
2.1 Where maintenances and running expenses including remunera-
tion of the chauffeur are met or reimbursed by the employer.
2.1- The car is used ex- The reimbursement The reimbursement
A clusively for official is for the use of the is for the use of the
purposes vehicle wholly and vehicle wholly and
exclusively for offi- exclusively for official
cial purposes purposes

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2.1- The car is used Actual expenditure incurred by the employer
B exclusively for minus amount recovered from the employee
personal purposes
of the employee or
any member of his
household
2.1- The car is used part- Actual expenditure Actual expenditure in-
C ly for official pur- incurred by the curred by the employ-
poses and partly for employer minus the er minus `2400 per
personal purposes sum of `1800 per month and `900 per
of the employee or month and `900 per month (if chauffer is
any member of his month (if chauffer also provided) minus
household. is also provided) mi- amount recovered
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nus amount recov- from employee.
ered from employee.
3 Where the employee owns any other automotive conveyance and
IM actual running and maintenance charges are met or reimbursed
by the employer
3.1 Reimbursement Fully exempt subject Fully exempt subject
for the use of the to the maintenance to the maintenance of
vehicle wholly and of specified docu- specified documents
exclusively for offi- ments
cial purposes;
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3.2 Reimbursement for Actual expenditure Not Applicable

the use of vehicle incurred by the em-
partly for official ployer minus `900
purposes and partly per month minus
for personal purpos- amount recovered
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es of the employee. from employee
Specific documents to be maintained for S. No. 1 and 3 of the table are

as follows:
i. The employer must maintain complete details of the journey
undertaken for official purpose which may include information
pertaining to the date of journey, destination, mileage, and the
amount of expenditure incurred thereon;
ii. The employer gives a certificate that the expenditure was
incurred wholly and exclusively for the performance of his
official duty.
Exhibit
Meaning of Salary for the Purpose of Computation of

Income Tax
Salary includes pay, bonus, commission, or any other monetary

benefit given to the employee (by whatever name called). However,
it does not include:

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1. Dearness Allowance unless whole or some part of it is entered

into superannuation or retirement benefits of the employee.
2. Employers contribution towards the employee’s PF.
3. Value of perquisites specified in Section 17(2).
4. Allowances exempted from payment of tax.
5. Which of the following is not a characteristic of salary?

a. Paid by employer to employee
b. Nature of payment is fixed except for days taken off
c. Expressed as an annual sum
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d. Usually paid on a bi-monthly basis
6. Which of the following is not a type of salary covered under
the definition of Salary as per Section 17(1) of the Income Tax
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Act, 1961?
a. Retrenchment compensation
b. Leave salary
c. Employee’s monetary obligation paid by employer
d. Pension
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7. Mr. Ansh Gujral works for Fictitious Pvt. Ltd. His company
was running in losses and therefore, was not been able to
pay its employees’ salaries including Ansh’s salary. His three-
month’s salary for March, April and May 2017 was due with
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his employer. Which of the following is true in this case if he is

filing the returns for Assessment Year 2017-18?
a. Due salary of March 2017 will be considered in the total
taxable income
b. Due salary of April and May 2017 will be considered in the
total taxable income
c. Due salary of all three months will be considered in the
total taxable income
d. All due salaries will be taxed for Assessment Year 2018-19
8. Which of the following is not a perquisite as defined under
Section 17(2) of the Income Tax Act?
a. Accommodation at concessional rent
b. Amount of any contribution to an approved superannuation
fund by the employer

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c. Gratuity amount
d. Any benefit/amenity granted free or at concessional rates
9. According to Section 10(10), amount of gratuity exempted
from tax is _____________.
a. `20,00,000
b. `10,00,000
c. `5,00,000
d. `3,00,000
10. For calculating half month’s average salary for every completed
year of service, we use the formula:
a. Basic salary + Dearness Allowance
S
b. Basic salary + Commission
c. Basic salary + Dearness allowance + Value of all perquisites
d. Basic salary
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11. Mr. Sahil retired on 30th April 2017. For calculating the
encashment value of his leaves, the accountant of Sahil’s
company should calculate the average of salary of months
ranging from _____ to ______.
a. June 2016 to March 2017
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b. May 2016 to February 2017

c. February 2017 to December 2017
d. July 2016 to April 2017
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Activity
Prepare a case study that reflects the impact on taxable income of

a retiree if:
i. he gets only pension
ii. he gets pension along with gratuity
3.5 DEDUCTIONS FROM SALARY

Any individual or entity that carries out its usual activities also ex-
pends money towards certain expenses and investments. The Income
Tax Act has made provisions using which an assessee can reduce his/
her overall or net taxable income. The provision is called deduction.
Deduction against various allowable expenses and investments can be
claimed by an assessee under different sections of the Act.

n o t e s
You are already aware that the incomes of an assessee may be cat-
egorised into five major sub-heads known as income from salaries,
income from house properties, income from profits and gains of busi-
ness or profession, income from capital gains and income from other
sources. The Income Tax Act clearly defines various deductions that
can be claimed against each head of income. Apart from these deduc-
tions that can be claimed against each head of income; the Act also
allows deductions against certain payments that can be made in com-
puting the total taxable income. These deductions are described un-
der Sections 80A to 80VV in Chapter VIA (Deductions to be made in
Computing Total Income) of the Act.
Exhibit
Tax Rebate vs Tax Exemption vs Tax Deduction
S
Tax rebate, tax exemption and tax deduction, all these three terms
are related to taxation. All these practices are beneficial for the
tax assessee and reduce his/her overall tax burden. However, the
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meaning and treatment of all these terms is different. Before dis-
cussing the meaning of each of these terms, let us see the procedure
of calculating tax payable by an assessee.
Income from Salaries

Salary Received xxx xxx (A)
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Less Amount Exempted (xxx) (xxx)

Less Deduction from Salaries
Income from House/Properties
Rent Received xxx xxx (B)
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Less Income Tax Deduction (xxx)

Income from Business/Profession
Income Received xxx xxx (C)
Less Income Tax Deduction (xxx)
Income from Capital Gains
Capital Gains xxx xxx (D)
Less Amount Exempt (xxx)
Income from Other Sources
Income received from Other Sources xxx xxx (E)
Less Amount Exempt (xxx)
Gross Total Income xxx xxx (F)
Less Income Tax Deductions under Chapter (xxx)
VI-A

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Total Taxable Income xxx (F)

Tax on Total Taxable Income as per Income Tax xxx xxx (G)
Slabs (xxx)
Less Income Tax Rebate
Total Tax Payable xxx (G)
Income tax exemptions are those items of income which can be

claimed under specific heads of income and not from the total in-
come. For example, exemption can be claimed against LTC, pen-
sion income, leave encashment and HRA.
Income tax deduction can be claimed from total income under

each head of income and also from the gross total income. Such
deductions can be claimed when an assessee has made certain ex-
S
penditures or has made some specified investments. For example,
deduction can be claimed under Section 80C for specific types of
investments; under Section 80G for donations; etc.
IM
Section 87A of the Act relates to rebate in tax payable by an asses-
see. This Section mandates to marginally lower the tax payable by
individuals earning incomes below the specified limits. The pur-
pose of providing rebates is to reduce the tax burden of assesses
belonging to lower income brackets. For Assessment Year 2018-19,
an individual can claim a maximum rebate of `2,500. Here, it is im-
portant to note that income tax exemption and deduction is claimed
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from incomes whereas rebate is claimed from tax payable.
Section 16 of the Act is related to deductions from salaries. According

to this Section, the income chargeable under the head "Salaries" shall
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be computed after making certain deductions which are as follows:

Section 16(ii) of the Act states that a government employee can
claim deduction in respect of entertainment allowance specifical-
ly granted by his/her employer. It must be noted that this deduc-
tion can be claimed by government employees only. The amount
of deduction shall be equal to the minimum of the following three
amounts:
Actual amount of entertainment allowance received by em-
ployee during the previous year
Statutory limit of `5,000
1/5th of the basic salary
Section 16(iii) ofthe Act states that an assessee can claim a deduc-
tion of any sum paid by him/her on account of a tax on employment
(professional tax). This deduction can be claimed by any salaried
assesse. Professional tax is levied on all individuals having salaried
incomes, trades, employment and callings. Professional tax does

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not exceed `2500/year. It must be noted that the deduction against

professional tax can be claimed for the same year for which the
taxpayer is paying tax and no deduction can be claimed against
any overdue professional tax.
12. What is the maximum limit of professional tax that can be

charged by an employer from his/her employee?
a. `2,500/year
b. `5,000/year
c. `25,000/year
d. `50,000/year
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Activity
Explain briefly the relevance of professional tax and the process of

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collecting it.
TAX TREATMENT ON PROVIDENT

3.6
FUNDS
Provident Fund Scheme refers to a welfare scheme for employees
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wherein a certain percentage of an employee’s salary is deducted each

month as contribution towards the provident fund. The employer also
contributes a certain percentage of the employee’s salary into the fund
each month. This amount is deposited or invested and the interest
built up on investments is also credited to the provident fund account
N
of the employees. The interest thus keeps getting accumulated every

year and the final accumulated amount is given to the employee at
the time of the employee’s retirement or death, provided that certain
conditions are satisfied.
For taxability of the provident fund, the following points must be con-
sidered:
the contribution made by the employees has been provided out of
the income of the employees which has already been taxed
the contribution made by the employer is over and above the sal-
ary of the employee and is considered to have been received by
the employee even though it is not immediately made available to
him/her
the interest that has been credited to the account of the employee
is over and above the salary of the employee and is exempt from
taxation up to a certain limit

n o t e s
Before discussing the tax treatment of proceeds generated from prov-

ident fund, let us first study different types of provident funds as fol-
lows:
Statutory Provident Fund (SPF): This fund is specifically created
for the employees of government, universities and educational in-
stitutes that are affiliated to some university.
Recognised Provident Fund (RPF): Any organisation employing
20 or more employees can voluntarily opt for this scheme. How-
ever, all RPF schemes must be approved by the Commissioner of
Income Tax. An organisation may register itself under a gover-
nment approved scheme such as EPFO. Alternatively, the em-
ployer and the employees can together form a trust and start a PF
scheme.
Unrecognised Provident Fund (URPF): The employer and em-
S
ployees can start the PF scheme under an establishment which is
not approved by The Commissioner of Income Tax. Such Unrec-
ognised PF (URPF) schemes are treated differently than RPFs.
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Public Provident Fund (PPF): It is a PF scheme under the Public
Provident Fund 1968. This scheme can be adopted by any person
whether employed or self-employed. The minimum amount for
PPF is `500 p.a. whereas maximum amount is `1,50,000. The PPF
amount is released only after the completion of 15 years.
M
Various components of PF include employee’s contribution towards

PF, employers contribution towards PF, interest received on PF and
repayment of lump sum amount (of PF) on retirement or resignation
or termination of an employee.
N
Table 4.4 presents the tax treatment for various components of provi-
dent fund under different types of provident funds:
TABLE 4.4: TAX TREATMENT FOR VARIOUS COMPONENTS OF PROVI-

DENT FUND UNDER DIFFERENT TYPES OF PROVIDENT FUNDS
Particulars Statutory Recognised Unrecognised Provi- Public
Provident Provident Fund dent Fund (URPF) Provident
Fund (RPF) Fund (PPF)
(SPF)
Employee’s Deduction Deduction u/s No deduction u/s 80C Deduction
contribution u/s 80C 80C is available is available u/s 80C is
is availa- from gross total available
ble from income subject from gross
gross total to the limit spec- total income
income ified therein subject to
subject to the limit
the limit specified
specified therein
therein

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Particulars Statutory Recognised Unrecognised Provi- Public

Provident Provident Fund dent Fund (URPF) Provident
Fund (RPF) Fund (PPF)
(SPF)
Employer’s Fully ex- Exempt up to Not exempt but also Not applica-
contribution empt from 12% of salary. not taxable every ble as there
tax Amount in the year. is only as-
excess of 12% sessee’s own
is included in contribution
gross salary of
the employee.
Interest on Fully ex- Exempt u/s 10 Not exempt but also Fully ex-
Provident empt from up to 9.5% per not taxable every empt
Fund tax annum year.
Repayment Fully Exempt subject Accumulated em- Fully
of lump sum exempt u/s to certain condi- ployee’s contribution exempt u/s
amount on 10(11) tions: is not taxable 10(11)
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retirement If the employee Interest on employ-
or resig- leaves job after 5 ee’s contribution
nation or years. is taxable under
termination
Where period of income from other
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employment is sources.
less than 5 years, Accumulated em-
the termination ployer’s contribution
or discontinu- + interest thereon
ance of service is is taxable as income
due to ill health from salary (profit in
of employee or lieu of salary).
M
discontinuance
of the employ-
er’s business.
PF balance is
transferred to
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another RPF
with the new
employer.
note
For the purpose of calculating PF contributions; salary includes ba-

sic salary plus D.A. and commission as a fixed percentage of turn-
over.
13. Which of the following is true in respect of interest received by

an assessee from PPF?
a. Eligible for deduction under 80C
b. Exempt u/s 10 up to 9.5% per annum
c. Taxable under income from other sources
d. Fully exempt

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Activity
Make a list of at least recognised and unrecognised provident funds

operating in India.
COMPUTATION OF INCOME FROM

3.7
SALARIES
For purpose of calculating the amount of tax payable by an individual/
entity to the Government of India; it is important to calculate the total
income of each such individual/entity under different heads of income
(whichever are applicable) after applying appropriate exemptions and
after deducting the amounts as applicable.
S
In this section, you will study how income from salaries is calculated.
Income from salary chargeable to tax is calculated as shown in Table
4.5:
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TABLE 4.5: CALCULATION OF INCOME FROM SALARY
CHARGEABLE TO TAX
Amount (in `) Amount (in `)
Add: Components of Salary
Basic Salary xxx xxx
+ Dearness Allowance xxx
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+ Bonus xxx
+ Commission xxx
+ Arrears of Salary xxx
+ HRA xxx xxx
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- Exempted HRA (xxx)

+ LTA received xxx xxx
- Exempted LTA (xxx)
+ Perquisites xxx xxx
- Exempted Amount (xxx)
+ Other Allowances received xxx xxx
+ Retrenchment Compensation/VRS xxx xxx
+ Gratuity Received xxx xxx
- Exempted Gratuity Amount (xxx)
+ Leave Encashment xxx xxx
+ Pension xxx xxx
- Exempted Pension Amount (xxx)

n o t e s
Amount (in `) Amount (in `)

+ Employer’s Contribution to Salary in xxx
Excess of 12% of Salary of Employee
+ Interest Credited to Provident Fund xxx
in Excess of Notified Amount
Gross Salary XXX
Less: Deductions u/s 16
Entertainment Allowance xxx (xxx)
Professional Tax Paid xxx
Income Chargeable under head xxx
Salaries
Let us now understand the calculation of income from salaries charge-

able to tax by working out some illustrations.
S
Illustration 4: Calculate the amount of income chargeable to tax un-
der the head of salaries of Mr. Om Prakash for Assessment Year 2018-
19 if you are given the following information:
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1. Basic pay received by Om Prakash for 8 months is `20,000 and
for the remaining 4 months it is `22,000.
2. Om Prakash gets Dearness Allowance at the rate of 12% of basic
pay.
3. He also got a bonus amounting to 2.2 times of the salary he
M
received in the last month of the A.Y.

4. His employer makes contribution towards a RPF at the rate of
20%.
5. Om Prakash’s company pays a premium of `5,000 towards a life
N
insurance policy in his name. The insurance has been taken from
state insurer, LIC.
6. Om Prakash’s employer calculated the value of all taxable
allowances as `10,000.
7. Om Prakash’s employer calculated the value of rent-free
accommodation as `25,000.
8. Om Prakash spent `20,000 on his daughter’s hospitalisation and
his employer reimbursed him the maximum allowable amount.
Solution 4: Salary of Om Prakash chargeable to tax can be calculated

as shown.
Particulars Amount (in `)

Basic pay (20,000 × 8 + 22,000 × 4) 2,48,000
D.A. (12% of basic pay) 29,760
Bonus (2.2 × 22,000) 48,400

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Employer’s contribution towards a RPF in excess of 12% 22220.8
((20 – 12%) of basic + D.A.)
Medical insurance premium Exempted
Taxable allowances 10,000
Taxable perquisites
1. Rent–free accommodation – 25,000 30,000
2. Medical Reimbursement (20,000 – 15,000) – 5,000
Income from Salary Chargeable to Tax 388380.8
der the head of salaries of Mrs. Meera Gaur for Assessment Year 2018-
19 if you are given the following information.
S
Meera works in an MNC and gets a salary of `45,000 p.m. She has
been provided an accommodation in Gurgaon (population approxi-
mately 8.77 lakhs) for which her company deducts 10% of her basic
salary. Her company pays an actual rent of `2,00,000 for the accom-
IM
modation. Meera also gets an entertainment allowance of `400 p.m.
Meera’s company has also provided her a car, Maruti Suzuki Swift
having an engine capacity of 1586 cc (1.586 litres). Meera is allowed to
use the vehicle for both official as well as personal purposes but she
herself has to bear running and maintenance charges. At the time of
Diwali celebrations, she also received a bonus of `60,000. Meera also
M
paid `2,000 against professional tax.
Solution 5: Salary of Meera Gaur chargeable to tax can be calculated

as shown.
Particulars Amount (in `) Amount (in `)
N
Salary (`45,000 × 12) 5,40,000

Bonus 60,000
Entertainment Allowance 4800
Motor Car Perquisite (600 × 12) 7200
Value of Concessional Accommodation
Lower of: Actual amount of lease or 81,000 27,000
rent paid or payable by the employer (54,000)
(`2,00,000) and 15% of salary; i.e., lower
of `2,00,000 and `81,000
Less: Amount paid by employee
Gross Salary 6,39,000
Less: Deduction u/s 16
1. Entertainment Allowance Nil (N.A. ---
2. Professional Tax because (2,000)
Meera is not
a government
employee)
2,000
Income from Salary Chargeable to Tax 6,37,000

n o t e s

der the head of salaries of Mr. Rohit Sharma for Assessment Year
2018-19 if you are given the following information.
Rohit Sharma is a state government employee and works for Agricul-

ture Department in Indore. Rohit receives a basic pay of `25,600 p.m.
In addition, he also gets a D.A. of `6,000 p.m. Rohit is also paid `500
p.m. as entertainment allowance. Rohit invests `700 p.m. towards a
PPF. Interest amount of `52000 is credited towards PPF amount of Ro-
hit at the rate of 7.6%. Rohit receives a monthly HRA of amount `5000.
Solution 6: Salary of Rohit Sharma chargeable to tax can be calculat-

ed as shown.
S
Basic Salary (`25,600 × 12) 3,07,200
D.A. (`6,000 × 12) 72,000
Entertainment Allowance (`500 × 12) 6,000
HRA (`5000 × 12)
IM 60,000
Entertainment Allowance 5,000
Income from Salary Chargeable to Tax 4,40,200
M
Illustration 7: Calculate the amount of income of Mr. Piyush Garg

from salaries for Assessment Year 2018-19. You are given the following
information regarding Mr. Piyush.
1. Piyush is a staff writer for a popular magazine whose office is
located at Kottayam, Kerala. The population of Kottayam is
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approximately 27 lakhs.
2. His basic salary is `20,000 p.m.
3. D.A. = `4,000 p.m.
4. Education Allowance for one-child = `150 p.m.
5. Sales commission @ 1%; turnover = `24,00,000
6. Entertainment Allowance = `600 p.m.
7. His company has provided accommodation (owned by company)
to him. Market rent of house is `15,000 p.m. A watchman and a
cook have also been appointed and each of them are paid `500
p.m.
8. He has been provided a car having 2.0 ltr engine capacity for his
official and personal use. The running and maintenance costs
are borne by the company.
9. His employer contributes `3600 p.m. towards a RPF.
10. Piyush contributes `2880 p.m. towards a RPF.

n o t e s
11. At end of year, an interest amounting to `15,920 (@ 10%) was

credited in his account.
12. Rent recovered from Piyush = `2,000 p.m.
Solution 7: Salary of Piyush Garg chargeable to tax can be calculated

as shown.
Particulars Amount (in Amount

`) (in `)
Basic Salary (`20,000 × 12) 2,40,000
D.A. (`4,000 × 12) 48,000
Education Allowance (one-child @ `150 p.m.) 1800
Les: Exempted Education Allowance (@ `100 (1200) 600
p.m.)
S
Sales commission @ 1% of turnover `24,00,000 25,000
Entertainment Allowance = `600 p.m. 7200
Value of accommodation at concessional rates
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(15% of salary = 2,40,000 + 1200 + 24,000 + 40,860 16,860
7200 = `2,72,400)
24,000
Less: Rent deducted from Piyush’s Salary =
`24,000
Value of watchman facility (@ `500 p.m.) 6,000
Value of cook facility (@ `500 p.m.) 6,000
M
Value of Car facility (`2,400 p.m.) 28,800

Employer’s contribution to RPF (`3,600 p.m.) 43,200
Less: 12% of (basic + D.A. + Commission) 36,440 5760
Interest credited to RPF 15920 (=10%
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Less: Interest exempted @ 9.5% p.a. of total 796

amount in
PF account.
Therefore,
100% =
1,59,200)
15124
Income from Salary 3,85,016
Illustration 8: Calculate the amount of income of Ms. Rati Singh from

salaries for Assessment Year 2018-19. You are given the following in-
formation regarding Ms. Rati.
1. Basic salary = `22,000 p.m.
2. Bonus = `7,000 p.m.
3. D.A. = `4,000 p.m.
4. Reimbursement of bill of `30,000 for the treatment done in a
government hospital.

n o t e s
5. Travelling allowance `57,000 p.m.; out of this, Rati has spent

`25,000 on her own personal travel.
6. Rati’s company has provided her accommodation whose market
rent is `12,000 p.m. Rati pays a monthly rent of `1,800 p.m.
towards accommodation that has been leased by her company
@9,000 p.m. Assume that the accommodation is provided in a
city having population of 5 lakhs only.
7. Rati has also been provided with a cook and watchman to whom
a monthly salary of `600 each is paid by the employer.
8. Rati’s electricity bill of `3,000 was also paid by her employer.
9. Rati’s contribution towards PF `2,640 p.m.
10. Rati’s employer’s contribution towards PF `3,000 p.m.
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11. Rati’s company does not take into consideration the D.A. amount
for the purpose of PF.
Solution 8: Salary of Rati Singh chargeable to tax can be calculated

IM
as shown.

Basic Salary (`22,000 × 12) 2,64,000
D.A. (`4,000 × 12) 48,000
Bonus 7,000
M
Travelling allowance (57,000 – 25,000) 32,000

Electricity bill paid by employer 3,000
Medical reimbursement (at a govern- --
ment hospital is a tax-free perquisite)
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Value of accommodation will be taken as

the minimum of: 39,600 18,000
Actual amount of lease = `1,08,000 (21,600)
15% of salary = 3300 × 12 =`39,600
Less: Rent paid by Rati (`1,800 × 12)
Benefit of watchman 7,200
Benefit of cook 7,200
Employer’s contribution to PF in excess 36,000 4,320
of 12% of salary (12% of basic = `2,640 (31,680)
p.m.)
Illustration 9: Mr. Gaurav was working for TUV Ltd. On 31st October
2017, he met with a fatal accident and died on the spot. While he was
alive, he was earning the following:
1. Basic salary = `17,000 p.m.
2. D.A. = `8,500 p.m.; 25% of this amount was reserved for
retirement benefits

n o t e s
3. H.R.A = `10,000 p.m.

4. Gaurav has two children and receives education allowance at the
rate of `140 per child p.m.
5. After his death, all his salary and allowances dues were settled
and paid to his legal nomimee, Mrs. Ginni (his wife).
Apart from these, Ginni received the following amounts:
6. Gratuity for 15 years and 7 months = `1,52,000
7. Family pension w.e.f. 1st November 2017 = `8,000 p.m.
8. Payment from RPF = `5,60,000
9. Encashment of accumulated leave of 250 days = `3,75,000
(Gaurav was eligible for 30 days leave for each completed year of
service)
S
Ginni, being the recipient of money will have to file income tax on
Gaurav’s income. Assume that Ginni does not have any other source
of income. Calculate the total income of Ginni.
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Solution 9: Computation of total income of Gaurav (deceased) for As-
sessment Year 2018-19.
Particulars Amount Amount

(in `) (in `)
M
Income from Salary

Basic salary (`17,000 × 12) 2,04,000
D.A. 1,02,000
H.R.A received 1,20,000
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Education allowance received (140 × 2 × 12) 3360 960

Less: Exempted value (100 × 2 × 12) 2400
Since the income from salary of Mr. Gaurav is more than `2,50,000;
the income tax return on the taxable income of Gaurav for the current
Assessment Year will have to be filed by his legal hier, Ginni.
Apart from this, all the income received by Ginni from her husband’s
dues will be taxed on her as income from other sources. This is shown
as follows:

(in `) (in `)
Income from Other Sources
Payment from RPF (`5,60,000; fully exempted) ---
Gratuity received (`1,52,000; fully exempted) ---
Leave Encashment (fully exempted) ---

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(in `) (in `)
Family pension (`8,000 ×5) 40,000
Less: Exempted amount (`15,000 or 1/3rd of 13,333.34 26,666.66
uncommuted pension, whichever is lower)
Income from Other Sources 26,666.66
14. Which of the following is not a deduction allowable under

section 16 of the Act?
a. Entertainment tax
b. Professional tax
c. Standard deduction of `20,000
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d. None of these
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Activity
Refer to Illustration 8 above. Assume that Rati’s employer contrib-

utes 20% (towards PF) in excess of 12% of basic salary. Calculate
and show the impact of this change on her income from salary.
3.8 SUMMARY
M
As per Section 15 of the Income tax Act, 1961, income chargeable

to tax under the head salaries includes any salary due to an em-
ployee, any salary paid or allowed to an assessee in the previous
N
year, and any arrears of salary paid or allowed to the employee in

the previous year.
Salary income becomes chargeable to tax either on ‘due basis’ or
on ‘receipt basis’, whichever is earlier.
Before, the income of an assessee is charged under the head of sal-
aries, it must be ensured that there exists an employer-employee
relationship between the receiver and the payer.
The salary is often expressed as an annual sum and is mostly given
to professionals and people doing white-collar jobs. For the pur-
pose of taxation, Salary has been defined under Section 17(1) of
the Income Tax Act, 1961.
There are various different forms of salary and all these are treat-
ed for tax differently.
If an employee’s salary becomes due and is running in arrears, it
will be taxed in the assessment year of the previous year in which
it became due.

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Perquisite can be described as any reward or benefit linked to an

office or position in addition to salary or wages.
Gratuity refers to a payment that is made in appreciation of an
employee’s past services rendered by him/her to the employer. It
can be received either by the employee himself at the time of his
retirement or by the legal heir of the employee in the event of the
death of the employee.
Pension is paid to an employee on a monthly basis. However, at the
time of retirement, the employee may decide to receive a particu-
lar percentage of his/her monthly pensions for a particular period
of time in a lump sum amount. This is called the commutation of
pension.
In case an employee has leaves to his/her credit for the given year
but he/she does not utilise some or all of those leaves; then the
S
leaves may either be: lapsed (due to non-use); encashed each year;
or accumulated and encashed after retirement or death.
A person whose service has a significant effect on the profitability
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of the company is known as a keyman. A key person could be an
employee or the director of a company with technical background,
experience, entrepreneurial vision and/or market image whose
death will have a bearing on the profitability of the company. The
purpose of keyman insurance is to indemnify or protect the com-
pany against financial loss upon the death of a key employee.
M
The employee is entitled to exemption under section 10(5) with re-

spect to the value of travel concession received by him or due from
his or her employer for himself/herself and his family.
Rent-free accommodation is taxable under the Income Tax Act,
N
1961.
Employees (or any member of his/her household) may be provid-
ed interest free loans or loans at concessional rates by his or her
employer. Interest free loans and concessional loans are taxable
perquisites in the hands of all employees.
Profits in lieu of salary are referred as payments that are received
by an employee in lieu of or in addition to his or her salary or wag-
es. These include: terminal compensation; payment from an un-
recognised provident fund or an unrecognised superannuation
fund; payment under Keyman Insurance Policy; and any amount
received or due to be received before joining or after cessation of
employment.
Medical facilities provided by an employer to his/her employees fall
under three broad categories namely medical allowances, medical
insurance and medical treatment and reimbursement. Usually, all
the medical allowances are taxable.

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Themotor car perquisite is taxable under Section 10(14)(i) in the

manner as prescribed in Rule 3(2) of the Income Tax Act.
Section 16 of the Act is related to deductions from salaries. Ac-
cording to this Section, the income chargeable under the head
"Salaries" shall be computed after making certain deductions for
entertainment allowance and professional tax.
Differenttypes of provident funds: Statutory Provident Fund
(SPF); Recognised Provident Fund (RPF); Unrecognised Provi-
dent Fund (URPF); and Public Provident Fund (PPF).
key words
Encashment: Exchange of a tangible or intangible item such as

cheques and leaves for a sum of money.
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Key man: A person whose service has a significant effect on the
profitability of the company is known as a key man.
Legal hier: A person, whether male or female, who is entitled
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to receive and inherit the entire property of a person who dies
without declaring a will.
Retrench: Reducing something in its extent or quantity. It
is commonly used in the context of reducing the employee
strength.
Substantial interest: In the context of companies, a person or
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assessee is said to have substantial interest in a company who

holds more than 20% of shares or controls more than 20% of
board of director. It may also imply 20% or more of ownership.
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3.9 DESCRIPTIVE QUESTIONS

1. Explain the basis for chargeability of income from salary for the
purpose of income tax.
2. Define Salary as per Section 17(1) of the Act.
3. Describe the tax treatment of commuted pension in the hands of:
i. government employees, and
ii. non-government employees
4. Discuss the taxability of unfurnished accommodation provided
by a non-government employer to its employees in the following
cases:
i. accommodation is owned by the employer
ii. accommodation has been leased by the employer
5. Explain various deductions that can be claimed by an assessee
from income from salary under Section 16 of the Act.

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6. Calculate the amount of income of Ms. Durga from salaries

for Assessment Year 2018-19 if you are given the following
information regarding Ms. Durga:
i. Basic salary = `12,000 p.m.
ii. D.A = `6,000 p.m.
iii. Education allowance for two children = `300 p.m.
iv. HRA = `4,000 p.m.
v. Ms. Durga is a state government employee
vi. Entertainment allowance = `450 p.m.
vii. Durga contributes 15% of her basic salary towards a RPF.
viii. Durga’s employer contributes a sum equivalent to 18% of
her basic salary towards the RPF.
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ix. Ms. Durga’s mother is dependent on her. Durga’s mother was
admitted in a hospital for a chronic heart condition where
she had to spend 5 days before being discharged. Durga was
billed for `2 lakhs. This bill was subsequently reimbursed by
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her employer.
3.10 ANSWERS AND HINTS
ANSWERS FOR SELF ASSESSMENT QUESTIONS

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Topic Q. No. Answer

Basis of Charge and 1. c. Salary paid in advance
Place of Accrual of
Salary
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2. a. Salary accrues in India; it will be

taxed
Employer-Employee 3. b. employer-employee
Relationship
4. d. Income as a school teacher – To
be taxed under head salaries;
Income from coaching centre –
To be taxed under head of other
sources
What is Salary? 5. d. Usually paid on bi-monthly basis
6. c. Employee’s monetary obligation
paid by employer
7. a. Due salary of March 2017 will
be considered in total taxable
income
8. c. Gratuity amount
9. `10,00,000
b.
10. a. Basic salary + Dearness Allow-
ance

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Topic Q. No. Answer

11. d. July 2016 to April 2017
Deductions from Salary 12. a. `2,500/year
Tax Treatment on 13. d. Fully exempt
Provident Funds
Computation of Income 14. c. Standard deduction of `20,000
from Salaries
HINTS FOR DESCRIPTIVE QUESTIONS

1. Section 15 of the Income tax Act, 1961, describes what incomes
are chargeable to tax under head salaries. Under this Section,
salaries and arrears of salary are chargeable to tax. Refer to
Section 3.2 Basis of Charge and Place of Accrual of Salary.
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2. According to Section 17(1) of the Act, Salary is defined to
include: wages; annuity or pension; gratuity; fees, commission,
perquisites, profits in lieu of or in addition to salary or wages;
IM
advance of salary; leave encashment; annual accretion to the
balance at credit of an employee participating in a recognized
provident fund; transferred balance in a recognized provident
fund; and contribution by central government or any other
employer to employees’ pension account as referred in sec.
80CCD. Refer to Section 3.4 What is Salary?
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3. In case of government employees, commuted pension is fully

exempt from tax. For non-government employees, the commuted
pension is partially exempt. Refer to Section 3.4 What is Salary?
4. In case of non-government employer, the taxability of
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accommodation perquisites depends on two factors. First, the

city in which the accommodation has been provided. Second,
whether the accommodation so provided by employer is owned
by him/her or it has been taken on lease. Refer to Section 3.4
What is Salary?
5. According to Section 16 of the Act, income chargeable under the
head Salaries shall be computed after making deductions against
entertainment allowance and professional tax. Refer to Section
3.5 Deductions from Salary.
6. Durga’s gross income from salary after exemptions and before
applying any deductions can be calculated as shown:
(in `) (in `)
Salary (`12,000 × 12) 2,40,000
D.A (`6,000 × 12) 72,000

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(in `) (in `)
Education allowance for two children 3,600
(`300 × 12) (2,400) 1,200
Less: Exempted value (`100 × 2 × 12)
HRA (`4,000 × 12) 4,800
Entertainment allowance (`450 × 12) 5,400
Employer’s contribution in excess of 12% 56,160
of her basic salary (18% of 3,12,000 – 12% of (37,440) 18,720
3,12,000)
Medical reimbursement 2,00,000
Less: Exemption 15,000 1,85,000
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1. Entertainment Allowance (5,000)
2. Professional Tax --
IM Income from Salary Chargeable to Tax 5,16,720
Refer to Section 3.7 Computation of Income from Salaries.
3.11 SUGGESTED READINGS & REFERENCES
SUGGESTED READINGS
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Bhargava, U. (2017). Taxmann's Income Tax Act As Amended by Fi-

Ahuja, D., & Gupta, D. (2017). Bharat's Systematic Approach to Tax-
ation (37th ed.). Delhi: Bharat Law House.
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E-REFERENCES
(2018). Retrieved from http://www.icaiknowledgegateway.org/lit-
tledms/folder1/computation-of-total-income-and-tax-payable.pdf
Deductions allowable to tax payer. (2018). Incometaxindia.gov.in.
Retrieved 21 March 2018, from https://www.incometaxindia.gov.in/
Charts%20%20Tables/Deductions.htm
Perquisite, M. (2018). Medical Treatment / Medical Reimburse-
ment Perquisite - Taxability of Perquisites. teachoo. Retrieved 21
March 2018, from https://www.teachoo.com/160/52/Medical-Treat-
ment-/-Medical-Reimbursement-Perquisite/category/Taxabili-
ty-of-Perquisites/
Reddy, S. (2018). Provident Funds - Types & Income Tax Implica-
tions. ReLakhs.com. Retrieved 21 March 2018, from https://www.
relakhs.com/provident-funds-types-tax-implications/

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Satapathy, S. (2018). Computation of 'Profit in Lieu of Salary' (Sec-

17(3). Incometaxmanagement.com. Retrieved 21 March 2018, from
http://incometaxmanagement.com/Pages/Gross-Total-Income/Sal-
aries/Profit-in-Liew-of-Salary.html
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Ch a
4 pt e r
INCOME FROM HOUSE PROPERTY
CONTENTS
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4.1 Introduction
4.2 Income from House Property
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4.2.1 Essential Conditions for Taxing under Head “Income from House
Property”
4.2.2 House Property not Chargeable to Tax
4.2.3 Deemed Owner
4.2.4 Determination of Annual Value of House Property
4.2.5 Deductions of Income from House Property
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4.2.6 Special Provision for Arrears of Rent and Unrealised Rent Received
Subsequently
4.2.7 Property Owned by Co-owners
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Activity
4.3 Income from Let-out Property
Activity
4.4 Income from Self Occupied Property
Activity
4.5 Set off and Carry Forward of Loss
Activity
4.6 Summary

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SYED HYDER IMAM AND ORS. VS COMMISSIONER OF

INCOME TAX 12 JANUARY 1979
This case is related to tax on a property located in Patna owned

by Lt. Syed Hyder Imam. Lt. Syed Hyder Imam transferred this
property to his wife in discharge of dower debt (mehr) in 1961.
The transfer of property was done orally and not through a regis-
tered instrument.
The I-T department held this property taxable in the hands of as-
sessee Lt. Syed Hyder Imam for assessment years 1964-65 and
1966-67. The assessee had filed appeals before the Department of
Income Tax, Patna, and the Assistant Commissioner allowed the
appeals and accepted the assessee’s case that the income from
the house was not taxable in the hands of the assessee. After this,
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the I-T department filed appeal before the tribunal against the
assessee’s appeal. The tribunal allowed the appeal of the I-T de-
partment in respect of both the assessment years and restored the
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initial orders of the assessing officer, holding that the income from
the residential house in question was taxable in the hands of the
assessee.
At the instance of the assessee, the tribunal referred the following

questions for the opinion of the High Court of Bihar under section
256(1) of Income Tax Act, 1961:
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Whether, on the facts and in the circumstances of the case,

the gift of residential house, without a registered deed, is com-
plete and effective under the Mohammedan law by which the
assessee is governed?
N
Whether, on the facts and in the circumstances of the case, the

income from the house property falls for inclusion in the total
income of the assessee?
During the pendency of these two reference cases, the assessee

died and his heirs have been substituted in his place as petition-
ers in these tax reference cases. So far as the first question is con-
cerned, it was held by this court that where a Muslim transfers a
property valued over one hundred rupees, it has to be by a regis-
tered instrument and not orally. Learned counsels for the parties
agree that in view of the legal question decided in that case, the
decision with regard to the first question has to be against the
assessee.
So far as the second question is concerned, the lawyer of the as-

sessee, has submitted that even if the transfer of the house in lieu
of the dower debt was not valid, on account of its not having been
effected by a registered instrument, the fact remains that the wife

INCOME FROM HOUSE PROPERTY 145
n o t e s
was in possession of the residential house and the assessee de-

rived no income from the said house. Hence, the income from the
house could not be taxed in the hands of the husband.
Department lawyer, however, urged that in view of sections 22

and 23 of the IT Act, the income of the house was that of the own-
er and the husband being the owner of the house, in law, he was
liable to be assessed in respect of the house in question.
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learning objectives

>> Explain the concept of income from house property along
with relevant sections (22 to 27) of the Income Tax Act
>> Illustrate the calculation of the Income from Let-out
Property
>> Discuss the method of computing the annual value of self-oc-
cupied property (SOP)
>> Discuss the concept of deemed income
>> Describe the concept of Set off and Carry Forward of Loss
from house property
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4.1 INTRODUCTION
In the previous chapter, you studied the tax treatment of income un-
IM
der the head of salaries. This chapter will introduce you to income
tax laws and tax treatment of income from house property. For every
income tax assessee, it is mandatory that he/she discloses his/her in-
comes from various sources and attribute each income source to one
of the heads of income. Income from house property is one of the five
heads of income.
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The owner of a house property (in whose name the property stands) is
considered to be the assessee for the purpose of taxation. The basis of
taxability under this head is the annual value of house property.
The income from house property is the only income that is charged
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on the notional basis. It means that the incidence of tax depends not
only on the income earned from the property but also on the inherent
potential of the property to earn income. Tax has to be paid even in
cases where no income is being earned.
Income from House Property has been described under Sections 22 to

27 of the Income Tax Act, 1961. Section 22 of the Act relates to charge-
ability of the income from house property. Section 23 describes the
calculation of annual value of a property. Section 24 describes two
types of deductions that can be claimed by an assessee in respect of
the income received from house property. Section 25 describes the
amounts that cannot be deducted from the income received through
house property. Section 27 describes various terms related to income
from house property such as owner of house property, annual charge,
etc.
In this chapter, you will study about sections 22 to 27 of the Act relat-
ed to income from house property. In addition, you will study how to
determine the annual value of self-occupied and let-out properties.
The chapter also discusses the concept of deemed owner. The later

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sections of the chapter will discuss the concept of set off and carry
forward of loss.
4.2 INCOME FROM HOUSE PROPERTY

Usually, most individuals have a desire to own one or more houses or
properties. This desire emanates from a thought of living peacefully
with their family. House property means any building, flat or apart-
ment that is owned by an individual. If an individual has given his
house property on rent or lease and derives any income from it, it is
termed as income from house property.
In the process of taxing an individual, the incomes under various

heads have to be calculated. For calculating income from house prop-
erty, we need to study sections 22 to 27 of the Act. These are discussed
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in the upcoming sections.
4.2.1 ESSENTIAL CONDITIONS FOR TAXING UNDER HEAD

“INCOME FROM HOUSE PROPERTY”
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According to Section 22 of the Act, house property does not include
empty areas. Income received from an empty area is charged either
under the head “Income from Business or Profession” or under the
head “Income from Other Sources”, based on the source of income. If
an individual uses his property for his own business or profession, no
M
tax is levied under the head of income from house property. Rent and
other income from any flat, building or supportive land are generally
taxed under the head “Income from House Property”.
Let us understand with the help of an example.

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Mr. Ram has a house. It incorporates a large open area. The house
has been let out at a rent of `1,00,000 per month, out of which a lease
of `25,000 per month is attributable to the open area. In this situation,
the whole rental wage is assessable under the head house property.
Section 22 of the Income-tax Act, 1961, deals with the levying of tax on
house property. As per Section 22 of the Income-tax Act, 1961, “Annual
value of property consisting of any buildings or lands appurtenant there-
to of which the assessee is the owner other than such portions of such
property as he may occupy for the purposes of any business or profes-
sion carried on by him the profits of which are chargeable to income-tax
shall be chargeable to income-tax under the head Income from house
property.”
note
Here, annual value refers to the annual value as defined under Sec-
tion 23 of the Act.

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According to this section, land, buildings and the lands that are at-
tached to buildings are chargeable to tax provided that such house
property is not used for the purpose of business of the assessee’s own
business, the income of which is chargeable to tax.
The income from house property is calculated on the basis of its annu-
al value. As discussed earlier, the income from house property is the
only income that is taxed on a notional basis. Notional basis means
that the house property is taxed not based on actual income or rent
received from the house property but based on the potential of the
house property to generate income. Annual value of the property is
the amount or value for which the property may be assumed to be let
from year to year.
The person who owns the house property is liable to pay tax on the
income received from house property. Please note that building in-
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cludes residential building along with factory building, offices, shops,
godowns and various other related commercial spaces. For taxing an
income under the head, “Income from House Property”, three condi-
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tions must be fulfilled, as follows:
1. The property must consist of buildings and lands appurtenant
thereto.
Explanation: Here, it is important to understand that the
term property is used in a particular sense and it refers to only
buildings and land appurtenant to the buildings. It means that
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no empty land areas can be taxed under this head. However,

depending on the particular case, any empty land area can be
taxed under the head income from other sources or income from
business. Land appurtenant means land that is attached with a
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building, such as garden or a garage in a house.

2. The assessee must be the owner of such house property.
Explanation: The income of an individual derived from his
own property is taxable. However, income derived from house
property by means of sub-letting is not taxable. For example, if A
is the owner of the house and rents his property to B for ` 10,000
and B in turn sub-lets the property to C for ` 15,000; then, in such
a case, the income derived by B cannot be taxed under this head.
However, it can be taxed under the head income from other
sources or income from business or profession as the case may
be. For the purpose of this Act, ownership includes both free-
hold and lease-hold rights and also includes deemed ownership.
Deemed ownership has been explained in Section 27 of the Act.
We will describe Section 27 in the upcoming sections.
3. The property may be used for any purpose such as renting
or letting-out but it should not be used by the owner for the
purpose of any business or profession carried on by him, the

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profit of which is chargeable to tax. If the property is used for

own business or profession, it shall not be chargeable to tax.
Cases where income from house property is chargeable to tax under

the head income from house property are as follows:
Income received from own building that is utilised for running a
business and parts of the house are let out on rent
Income received as rent from running a business
Annual value of a property is obligated to be charged to income
tax even in a situation where the property is sold and no income is
received from it.
4.2.2 HOUSE PROPERTY NOT CHARGEABLE TO TAX
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Cases where income from house property is not chargeable to tax un-
der the head income from house property include:
House property does not include the empty area within the prop-
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erty; therefore, any income received from such an empty area is
charged either under the head “Income from Business or Profes-
sion” or under the head “Income from Other Sources”.
In case of rental income from a vacant plot; however, it can be
charged under profits and gains of business or profession or under
the income from other sources.
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In case the employer builds residential quarters for employees.

Income from sub-letting is charged under profits and gains of
business or profession or under the income from other sources.
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Income received as rent from furnishing and other facilities (A.C.,

lift etc.) provided in a rented property
Warehousing charges received for keeping merchandise; it is as-
sessable under the head income from business or profession.
Income from letting out surplus area of a non-processing plant
building including warehouses.
Income from a building owned or occupied by an agriculturalist
is not chargeable to tax if the building is located in the immediate
vicinity of agricultural land.
The income of property that is held for religious or charitable pur-
poses is exempted from being taxed.
Property that is used for own business or profession is taxable un-
der the head of income from business or profession.
No tax is charged on the self-occupied property of an assessee.

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House property of a registered trade union or authority is not

charged to tax.
Palaces of ex-rulers are exempted from being taxed.
4.2.3 DEEMED OWNER
An owner is an individual under whose name the document of title of

the property is registered. A deemed owner is an individual who does
not have the property registered in his name, but is liable to pay tax
for the income received from house property as per Section 27 of the
Income Tax Act. Let us study various provisions as laid down in sec-
tion 27 of the Act are as follows:
Section 27 – For the purposes of sections 22 to 26—
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27 (i) Transfer of house property to a spouse or a minor child: An
individual who transfers any house property to his or her spouse with-
out taking an adequate consideration (not being a transfer in connec-
tion with an agreement to live apart) shall deemed to be the owner of
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the house property so transferred.
An individual who transfers any house property to his or her minor

child without taking an adequate consideration shall deemed to be
the owner of the house property so transferred. However, this section
does not cover cases where the transfer is made to a minor married
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girl.
It must be noted that in cases, where an individual transfers certain

amount of money to his/her spouse or a minor child (transferee); and
the transferee buys a house property from such amount, then in such
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case, the transferor would not be deemed as the owner of the house
property.
For example: Mr. Rakesh Dubey transfers cash of `7, 00,000 to his wife
Mrs. Rashmi Dubey. Rashmi purchases a property (house) with that
money. In this case, the cash amount is tendered to Rashmi by her
husband and therefore, the purchase of property following the trans-
fer of cash shall not attract provision of Sec. 27(i); rather the income
from the property shall be clubbed in the hands of Mr. Dubey as per
the provision of Sec. 64(1) (iv) of the Act.
27 (ii) Holder of an impartible estate: The holder of an impartible

estate shall deemed to be the individual owner of all the properties
comprised in the estate. Please note that impartible estate refers to a
property that is not legally divisible.
For example: Mr. Rakesh Dubey has a property that comprises 6 floors
and a rooftop gymnasium. He gave 3 floors each to his two children, a
son and a daughter. He gave the ownership of gymnasium (but did not
transfer it) to his son. However, his daughter has the right to avail the

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benefits of the gymnasium. In this case, the son would be the holder of
the gymnasium (impartible estate).
27 (iii) Member of a co-operative society: A member of a co-operative

society, company or other association of persons to whom a building
or part thereof is allotted or leased under a house building scheme of
the society, company or association, as the case may be, shall deemed
to be the owner of that building or part thereof. Please note that in
such cases, the member of a co-operative society, company or other
association to whom the part or whole of building is allotted/ leased
will be treated as the deemed owner despite the fact that the legal
owner of the building is the co-operative society or the company.
27 (iiia) Person in possession of property: A person who is allowed

to take or retain possession of any building or part thereof in part
performance of a contract of the nature referred to in Section 53A of
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the Transfer of Property Act, 1882 (4 of 1882), shall deemed to be the
owner of that building or part thereof. Such cases include:
Cases where the possession of the property has been handed over
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to the buyer.
The sale consideration has been paid or promised to be paid by the
buyer to the seller.
Sale deed has not been executed in the name of the buyer but cer-
tain documents such as the power of attorney, agreement to sell,
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etc. have been executed.
In such cases, the buyer is deemed to be the owner of the house even
if the property has not been registered in his/her name.
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27 (iiib) Person having right in a property for a period not less than
12 years: A person who acquires any rights (excluding any rights by
way of a lease from month to month or for a period not exceeding one
year) in or with respect to any building or part thereof, by virtue of any
such transaction as is referred to in clause (f) of Section 269UA, shall
deemed to be the owner of that building or part thereof.
27 (vi) Taxes levied by a local authority: Taxes levied by a local au-

thority in respect of any property shall be deemed to include service
taxes levied by the local authority in respect of the property. The prop-
erty may be used for any purpose, but it should not be used by the
owner for the purpose of any business or profession carried on by him,
the profit of which is chargeable to tax. If the property is used for own
business or profession, it shall not be chargeable to tax.
note
If it is the business of the assessee to lend or rent out his property,

the income generated from it would still be chargeable under the
head of income from house property.

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Exhibit
Composite rent
At times, the house owner rents out the property along with certain
services or facilities such as lift, A.C., furniture, electricity, water,
etc. The amount received by the owner of the house in such case is
called composite rent. The composite rent is broken down into two
components namely income from house rent and the income by the
way of providing various facilities. The first component is taxable
under the head of income from house property and the second one
is taxable under the head of income from other sources.
4.2.4 DETERMINATION OF ANNUAL VALUE OF HOUSE
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PROPERTY
Annual value refers to the amount of money for which a property own-
er may rent his property from year-to-year. The annual value does not
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refer to the actual rent received for the property or the municipal val-
ue of the property. As stated earlier, annual value of the house proper-
ty is the notional amount of rent that can be derived from the property.
While determining the annual value of a house property, four factors

are taken into consideration. These are:
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Actual rent received or receivable (ARR): The annual value of

the property is based on the actual rent received by the owner or
the amount expected to be received by him/her. However, while
taxing the income of a house owner or the assessee receiving a
composite rent; the part of rent that is received as rent for house
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property must be charged under the head of income from house

property and the part of rent received in lieu of providing certain
facilities must be charged under the head of income from other
sources.
Municipal value (MV): Municipal value refers to the value deter-
mined by local municipal authorities based on which it collects
municipal taxes.
Fair rent of the property (FR): Fair rent of a property refers to the
amount of money that can be expected to be received in a year by
letting a property of similar size in the same locality.
Standard rent (SR): Standard rent refers to the rent that is fixed
under the Rent Control Act, 1958. Under this Act, the maximum
rent has been prescribed for all the localities.
All these four factors are taken into consideration while deciding or
computing the annual value of the house property. Clause 1 of Sec-

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tion 23 deals with the computation of annual value of a property as

described below:
Section 23(1), Computation of annual value of a property
23. (1) For the purposes of Section 22, the annual value of any property
shall be deemed to be—
(a) The sum for which the property might reasonably be expected to
let from year to year; or
(b) Where the property or any part of the property is let and the
actual rent received or receivable by the owner in respect thereof
is in excess of the sum referred to in clause (a), the amount so
received or receivable; or
(c) Where the property or any part of the property is let and was
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vacant during the whole or any part of the previous year and
owing to such vacancy the actual rent received or receivable by
the owner in respect thereof is less than the sum referred to in
clause (a), the amount so received or receivable:
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Provided that the taxes levied by any local authority in respect of the
property shall be deducted (irrespective of the previous year in which
the liability to pay such taxes was incurred by the owner according to
the method of accounting regularly employed by him) in determining
the annual value of the property of that previous year in which such
taxes are actually paid by him.
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For the purposes of clause (b) or clause (c) of this sub-section, the
amount of actual rent received or receivable by the owner shall not
include the amount of rent which the owner cannot realise.
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According to the Act, the annual value of a property is the value re-
ceived after deduction of municipal taxes (if any) paid by the owner. At
a broader level, the annual value of the property may be determined
in just two steps as shown in Figure 4.1:
Step I: Determine the gross annual value of house property
Step II: Deduct the municipal taxes actually paid

by the owner in the previous year from the gross
annual value calculated in step I.
Figure 4.1: Determination of Annual Value of House Property
The net annual value obtained after deducting municipal taxes is con-
sidered to be the annual value of the house property for all purposes
related to the Income Tax Act.

n o t e s
Exhibit
Cases when the annual value of the house

property is considered to be nil
There are certain cases when the annual value of the house proper-
ty is considered to be nil. These cases include:
The annual value of the property that is used by the owner for
his own accommodation (self-occupation) is considered to be nil
or zero if the owner does not derive any other income from that
accommodation.
If an individual owns more than one house properties, the an-
nual value of any one of them (as per owner’s choice) is consid-
ered to be nil. The actual or the notional income derived from
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all other properties is taxed.
If an individual owns only one house and he is unable to dwell
or live in that house due to employment at certain other location
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and he has to live in certain other house on rent, then also the
annual value of his/her property is considered to be nil.
For calculating the annual value, you must remember the following
points:
Municipal Value (M): As given in question
M
Fair Rent (F): As given in question

Standard Rent (SR): As given in question
Expected Realisable Rent (ERR): Higher of M and F; but not
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more than SR.

Actual Rent Received (ARR): As given in question
Illustration 1: Calculate the gross annual value of the following

houses.
Particulars House 1 House 2 House 3

Municipal Value (`) 22,000 21,000 50,000
Fair Rent (`) 24,000 21,000 52,000
Standard Rent (`) N.A. 16,000 45,000
Actual Rent (`) 24,000 17,000 35,000
Solution: The gross annual values of the given three houses are as
follows:
S. No. Particulars House 1 House 2 House 3

1. Municipal Value (`) 22,000 21,000 50,000
2. Fair Rent (`) 24,000 21,000 52,000
3. Standard Rent (`) N.A. 16,000 45,000

n o t e s
S. No. Particulars House 1 House 2 House 3

4. Expected Realisable Rent 24,000 16,000 45,000
(ERR) (`)
* (higher of 1 or 2, but not
more
than 3)
5. Actual Rent Received (`) 24,000 17,000 35,000
6. Gross annual value (`) 24,000 17,000 45,000
*(higher of 4 or 5)
Therefore, the gross annual value of House I, House II, and House III
are `24,000; `17,000; and `45000, respectively.
ANNUAL VALUE OF THE HOUSE PROPERTY HAS TO BE
S
CALCULATED FOR DIFFERENT CATEGORIES OF PROPERTIES
The annual value of the house property has to be calculated for differ-
ent categories of properties as follows:
IM
Case 1: House property which is let throughout the previous year.
Case 2: House property which is let and was vacant during the whole
or some part of the year.
Case 3: House property which is let for some part of the year and is
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self-occupied for some part of the year.
Case 4: House property which is self-occupied for residential purpose

but could not be occupied for residential purpose due to employment
at some other place.
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The method of calculating the gross annual value of the house prop-
erty differs in each of these cases. Let us discuss each case in detail.
CASE 1
For solving problems related to Case 1, we need to follow two steps,

which are as follows:
Step 1: Calculate the gross annual value of the properties
For a property that is let out throughout the year; according to Section
23 (1), the annual value of any property shall be deemed to be:
let from year to year (expected rent); or
received or receivable;

n o t e s
The above point (b) states that if the actual rent received or receivable
is more than the expected rent, then gross annual value will be the
actual rent received or receivable. On the other hand, if the actual
rent received or receivable is less than the expected rent, then gross
annual value will be the expected rent.
Stated simply, if a house property is let throughout the year, then the
gross annual value in this case would be the greater of ERR and the
ARR. The higher of the municipal value and fair rent value is taken as
the expected rent subject to maximum of standard rent.
Illustration 2: Calculate the gross annual value of all the three houses
belonging to Mr. Rohit.
Solution:
S
Municipal Value (`) 20,00,000 30,00,000 40,00,000
Fair Rent (`) 24,00,000 36,00,000 40,00,000
IM
Standard Rent (`) 20,00,000 40,00,000 35,00,000
Actual Rent (A) (`) 18,00,000 42,00000 30,00,000
Expected Rent (B) (`) 20,00,000 36,00000 35,00,000
Gross Annual Value (Higher of A and 20,00,000 42,00,000 35,00,000
B) (`)
M
Step 2: Deduct the taxes (such as municipal taxes) levied by the lo-
cal authorities in regard of properties from the gross annul value to
derive the net annual value.
However, the taxes would be allowed as deduction only if the same

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have been paid by the owner in the previous year and are not due for
payment.
From the net annual value, the deductions can be made in accordance
with Section 24 (a) and (b) and the balance so generated is called the
net annual value and this forms the taxable part of the income from
house property.
Illustration 3: Refer to Illustration 2. Assume that the municipal tax-

es paid by Mr. Rohit for houses I, II, and III are ` 0, `4 lakh, and ` 5
lakh. Calculate the net annual value of each house.
Solution:

Gross Annual Value (Higher of A and 20,00,000 42,00,000 35,00,000
B) (`)
Municipal Taxes Paid (`) 0 4,00,000 5,00,000
Net Annual Value (`) 20,00,000 38,00,000 30,00,000

n o t e s
CASE 2
According to Section 23 (1), for a House property that is let and was
vacant during the whole or some part of the year, the annual value of
any property shall deemed to be:
let from year to year; or
received or receivable; or
(c) Where the property or any part of the property is let and was
vacant during the whole or any part of the previous year and
owing to such vacancy the actual rent received or receivable by
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the owner in respect thereof is less than the sum referred to in
clause (a), the amount so received or receivable.
In this case, two conditions can be generated:

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Condition 1: Where the property or any part of the property is let and
the actual rent received or receivable by the owner in respect thereof
is in excess of the sum referred to in clause (a) even after the vacancy
period. In such a condition, the gross annual value will be higher than
the:
M
1. Expected rent
2. Actual rent received or receivable
Condition 2: Where the property or any part of the property is let and
the actual rent received or receivable by the owner in respect thereof
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is less than the sum referred to in clause (a) after the vacancy period.
In such a condition, the gross annual value will be the actual rent re-
ceived.
Illustration 4: Calculate the net annual value of a house if you are

given that the municipal value of the house is `1,00,000; fair rent is
`1,20,000 and the standard rent is `1,10,000. municipal taxes paid
during the year are `20,000. The house is rented for the year at `8,000
per month but it remains vacant for 4 months.
Solution:
Particulars Values
Municipal Value (`) 1,00,000
Fair Rent Value (`) 1,20,000
Standard Rent (`) 1,10,000
Expected Rent (`) 1,10,000
Actual Rent (`) 64,000

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Particulars Values
Gross Annual Value (`) 64,000 (Refer Section 23 (1)
(c))
Municipal Taxes (`) 20,000
Net Annual Value (`) 44,000
CASE 3
For a house property that is let for a part of the year and is self-occu-
pied for the remaining part of the year; the annual value of the house
property is calculated as if it had been let for that part of the year and
the period of self-occupation becomes irrelevant. The expected rent is
calculated for the entire period as per Section 23 (1) (a) but the actual
rent received is calculated for the period of occupation only and the
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gross annual value of the house property would be the higher of the
two.
Illustration 5: Calculate the net annual value of a house if you are

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given that the municipal value of the house is `1,00,000; fair rent is
`1,20,000 and the standard rent is `1,10,000. Municipal tax paid during
the year is `20,000. The house was self-occupied from 1.4.2015 till
31.8.2015; after this, it was rented for the rest of the year at `8,000 per
month.
Solution:
M
Particulars Values
Municipal Value (`) 1,00,000
Fair Rent Value (`) 1,20,000
N
Standard Rent (`) 1,10,000

Expected Rent (`) 1,10,000
Actual Rent (for 8 months @ `8,000 64,000
p.m.) (`)
Gross Annual Value (`) 1,10,000 (Refer Section 23 (1) (a))
Municipal Taxes (`) 20,000
Net Annual Value (`) 90,000
4.2.5 DEDUCTIONS OF INCOME FROM HOUSE PROPERTY
For the income chargeable under the head “Income from House Prop-
erty”, there are only two deductions, namely:
Standard deduction: 30% of the net annual value of house prop-
erty is allowed as standard deduction from the net annual value of
house property. The 30% standard deduction is fixed even if the
actual expenditure incurred by the house owner on the insurance,
repairs, electricity, water supply for the house etc. is higher or
lower.

n o t e s
Interest on borrowed capital: If an individual takes a (home) loan

for purchasing, construction, repair, renewal or reconstruction of
his/her house property, the interest paid by him/her is allowed as
a deduction from the Net Annual Value of the house property. The
deduction for interest is allowed on an accrual basis, i.e., it is im-
material whether the interest has been actually paid or not during
the assessment year. The assessee must calculate the interest paid
or payable during a year separately and claim the deduction for
the same in the relevant assessment year. When computing deduc-
tion on interest on borrowed capital, the loan is to be taken from
the bank or a financial institution as prescribed in the Income Tax
Act. Loan taken from family members, friends, relatives is not al-
lowed as deduction.
Some important points as stated in Section 24 of the Act are as follows:
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If an individual owns a house and occupies it for the purpose of
his own residence; or if he cannot actually occupy the house, due
to his employment, business or profession carried on at any other
IM
place, then the total amount of deduction cannot exceed `30,000.
If the house property under consideration is acquired or con-
structed with capital borrowed on or after 1st April, 1999 and such
acquisition or construction is completed within three years from
the end of the financial year in which capital was borrowed, the
maximum allowed amount of deduction under section 24 shall not
M
exceed `2,00,000. In addition, the deduction shall be made in equal

instalments for the said previous year and for each of the four im-
mediately succeeding previous years.
INTEREST ATTRIBUTABLE TO THE PERIOD PRIOR TO

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COMPLETION OF CONSTRUCTION (INTEREST OF

PRE-CONSTRUCTION/PRE-ACQUISITION PERIOD)
It is possible that an individual borrows money earlier in one year

and the acquisition or construction of the house property is complet-
ed in the subsequent year. During this time, the interest for the house
property becomes due. In such a case, the interest paid or payable for
the period prior to the year in which the property is acquired or its
construction is completed is aggregated and allowed to be deducted
in five successive financial years starting from the year in which the
acquisition/construction was completed. In addition, interest will be
aggregated from the date of borrowing till the end of the previous year
prior to the previous year in which the house is completed and not till
the date of completion of construction.
Under Section 24 of the Income Tax Act, apart from the standard de-
duction and interest on loan, no other deduction is allowed even in
case any amount is paid for brokerage or commission for arrangement
of the loan.

n o t e s
Pre-construction interest means interest that is permitted when a

loan is taken for purchase or construction of a house property. This is
not permitted when the loan has been taken for the purpose of house
repairs or reconstruction. The deduction for the pre-construction in-
terest is allowed over a period of five years in five equal instalments
subject to the maximum of the amounts permissible as mentioned un-
der Section 24.
Illustration 6: Mr. Ram owns three house properties in Delhi, the par-
ticulars of which are as under:

Municipal Value (`) 1,20,000 1,50,000 1,80,000
Fair Rent (`) 1,50,000 1,80,000 2,00,000
Standard Rent (`) 1,30,000 2,00,000 ---
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Actual Rent (`, per month) 10,000 14,000 25,000
Period of Vacancy Nil 2 month 3 months
Municipal Taxes for the Year 20% of 20,000 60,000
IM
Municipal
Value
Municipal Taxes Paid During the 20,000 40,000 40,000
Year (`)
Calculate the following:

M
(A) gross annual value before deductions for each house property.
(B) net annual value after deductions for each house property.
(C) income under the head income from house property of all three
house properties.
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Solution:
(A) Let us calculate the gross annual value before deductions for each
house property.
House I: As the house property is let out throughout the previous year
the gross annual value shall be determined as per clauses (a) and (b)
of Sec. 23(1) as follows:
Particulars Amount (`)

Step I: Calculate the gross annual value (higher of a and b)
a. Municipal Value or the Fair Rent 1,20,000 or 1,50,000 whichever is
whichever is higher subject to maxi- higher subject to maximum of
mum of Standard Rent 1,30,000
= 1,30,000
b. Actual rent received or receivable = 10,000 × 12
= 1,20,000
Gross Annual Value 1,30,000

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House II: As the house property is not let out throughout the previous
year the annual value shall be determined as per clauses (a) and (c) of
Sec. 23(1) as follows:

a. Municipal Value or the Fair Rent whichever is 1,80,000
higher
subject to maximum of Standard Rent (Municipal
Value
(1,50,000);
Fair Rent (1,80,000); Standard Rent (2,00,000))
b. Actual rent received or receivable (14,000 × 10) 1,40,000
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House III: As the house property is not let out throughout the previ-
ous year, the annual value shall be determined as per clauses (a) and
(c) of Sec. 23(1) as follows:
IM
a. Municipal value or the fair rent whichever is higher 2,00,000
subject to maximum of standard rent (Municipal Value
M
(1,80,000);
Fair Rent (2,00,000); Standard Rent (-))
b. Actual rent received or receivable (25,000 × 9) 2,25,000
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(B) Let us calculate the net annual value after deductions for each
house property.
House I:

Step II: Net Annual Value (= Gross Annual Value –Deductions)
Less: Municipal Tax Paid During the Previous Year 20,000
Net Annual Value (= Gross Annual Value – Municipal 1,10,000
Taxes)
House II:


n o t e s

Taxes)
House III:

Taxes)
(C) Let us calculate income under the head income from house prop-
S
erty of all the three house properties.
House I:
IM
Taxes)
Step III: Income from House Property (= Net Annual Value – Standard
Deduction)
Less: Standard deduction @ 30% of the Net Annual Value 33,000
M
Income from House Property 77,000
House II:
N

Taxes)
Deduction)
Income from House Property 70,000
House III:

Taxes)
Deduction)
Income from House Property 1,35,500

n o t e s
note
Where the owner is assessable in India for the rent received in for-
eign currency, Telegraphic Transfer Buying Rate (TT Buying Rate)
will be applicable as the rate of exchange for the conversion of such
foreign currency into Indian rupee on the specified date.
4.2.6 SPECIAL PROVISION FOR ARREARS OF RENT AND

UNREALISED RENT RECEIVED SUBSEQUENTLY
Unrealised rent refers to the amount of rent that is not realised from
a tenant. Unrealised or unrecovered rent can be deducted while cal-
culating the gross annual value of the house property if the following
conditions are met:
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Tenant has been given house property legitimately
Tenant has defaulted on his payment of rent
Necessary steps have been taken to vacate the tenant from the
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house property
Defaulting tenant must not reside in any other property of the as-
sesse
All possible legal steps have been taken to recover the rent from
the defaulting tenant or the tenant is not available for taking any
M
action
note
If in any previous year, the house property is not let out for the
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entire period of the relevant previous year, then there is a vacancy

period during the previous year. Vacancy period rent refers to the
rent for the duration for which a house property was vacant. It is
calculated as the product of the number of months a house proper-
ty is vacant and the actual rent of the property.
Section 25A of the Act is as follows:
25A. (1) The amount of arrears of rent received from a tenant or the

unrealised rent realised subsequently from a tenant, as the case may
be, by an assessee shall be deemed to be the income from house prop-
erty in respect of the financial year in which such rent is received or
realised, and shall be included in the total income of the assessee un-
der the head “Income from house property”, whether the assessee is
the owner of the property or not in that financial year.
(2) A sum equal to thirty per cent of the arrears of rent or the unreal-
ised rent referred to in sub-section (1) shall be allowed as deduction.

n o t e s
4.2.7 PROPERTY OWNED BY CO-OWNERS
According to Section 26 of the Act, when a house property (property

consisting of buildings or buildings and lands appurtenant thereto) is
owned by two or more persons; those persons are known as co-own-
ers of the property if their share in the property is definite and as-
certainable. In case the share is not definite, the co-owners shall be
assessed as an Association of Persons (AOP). In such cases, the share
of each co-owner in the income of the property as determined under
the head of income from house property shall be included in the total
income of such persons.
In such cases, each co-owner is entitled to get a benefit or relief of up

to `30,000 / `1,50,000 as the case may be if the house property is used
for own residence.
S
Exhibit
Steps for Calculating Income Taxable under

IM head of Income from House Property
GAV
Less: Municipal Taxes Paid during the Previous Year
= NAV
M
Less: Deductions under Section 24 (Standard deduction and inter-

est on loan)
= Income from house property

N
1. Income received from an empty area is charged under

a. income from business or profession
b. income from other sources
c. income from house property
d. either a or b
2. ___________ of the Income-tax Act, 1961, deals with the levying
of tax on house property.
3. What is the basis for charging income from house property?
4. Which of the following incomes will be charged under the
head of income from house property?
a. building that is located besides an agricultural land
b. self-occupied property of an individual

n o t e s
c. rent received by the owner of a commercial shop by his

tenant
d. residential quarters for employees
5. Mr. Manish transfers one of his house properties to his wife
Mrs.Mukta without taking any consideration. If this was not a
transfer in connection with an agreement to live apart; then,
Mr. Manish will be considered as the ________ of the house
property.
6. Rent fixed under the Rent Control Act, 1958 is called
___________.
7. What are the two deductions allowed under the head of income
from house property?
8. In case of property owned by co-owners, if the share of co-
S
owners is not definite; the co-owners shall be assessed as a/an
____________.
IM
Activity
Refer to the Illustration 6 in the preceding text. Assume that

there is an unrealised rent of `3,000 in each case. Demonstrate
the impact of same on the income from house property.
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4.3 INCOME FROM LET-OUT PROPERTY

For calculating Annual Value, House Property is divided into the fol-
lowing categories:
N
1. Let-out property
i. House property let out for whole of the previous year
ii. House property let out but remained vacant for part of the
previous year
iii. House property let out but remained vacant for whole of the
previous year
iv. House property not let out but remained vacant for whole of
the previous year
2. Self occupied property (property occupied for self residence)
i. One property occupied for self residence during previous
year [Sec. 23(2)]
ii. One property which could not be occupied for self residence
because of business/profession or employment [Sec. 23(2)]
iii. More than one house occupied for Self residence during
previous year [Sec. 23(4)]

n o t e s
3. Property partly self occupied and partly let out

i. House property self occupied for part of previous year and let
out for balance of previous year
Let us now discuss the calculation of annual value and income from
house property in different cases of let-out property.
Case 1: House property let out for whole of the previous year
In such cases, the house property is let out for the entire previous year
to a tenant. Annual value shall be determined as follows:
Step 1: Calculate Expected Rent Received or Receivable (ERR) for the

entire previous year (higher of municipal rent and fair rent subject to
maximum of standard rent, if applicable)
S
Step 2: Calculate Actual Rent Received/Receivable (ARR) for the en-
tire previous year
Step 3: Calculate Gross Annual Value (GAV = higher of ERR and ARR)
IM
Step 4: Net Annual Value = GAV– Municipal Tax Actually paid by
owner during the previous year
Step 5: Income from House Property (IHP) = Reduce the NAV by stan-
dard deduction @ 30% of NAV and Interest on Capital Borrowed for
acquisition or construction or renovation or repair of house property
M
note
1. Actual rent is the actual rent had the house property been let
out for whole of the year reduced by the unrealised rent but
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before reducing the loss due to vacancy.
Illustration 7: Calculate income under the head of ‘Income from

House property’ of Mr. Ayush who is owner of the house property. You
are given the following scenarios:
(All Amounts in ‘000 `)

Particulars Scenario 1 Scenario 2 Scenario 3 Scenario 4
Municipal Value 130 110 100 110
(MV)
Fair Rent (FR) 100 120 120 120
Standard Rent 150 90 140 90
(SR)
Actual Rent (AR) 240 180 156 132
(if let out whole
year)
No. of Months 0 1 2 3
Vacant

n o t e s

Municipal Taxes 0 10 20 30
paid
Interest on Loan 5 7 7 9
for purchasing
the property
Solution:

ERR (Higher 130 90 120 90
between MV &
FR, subject to
S
maximum of
SR)) (A)
ARR (before loss 240 180 156 132
due to vacancy)
IM
(B)
Higher of A and 240 180 - 15 156 132
B Less: Loss due
to vacancy
GAV 240 165 130 99
M
Less: Municipal 0 10 20 30
Taxes paid
NAV 240 155 110 69
Less:- Standard 72 46.5 33 20.7
Deduction @
N
30% of NAV
Less: Interest 5 7 7 9
on Loan for
purchasing the
property
IHP 163 101.5 70 39.3
Case 2: House property let out but remained vacant for part of pre-
vious year
In cases where a house property has been partly let out & partly va-
cant during the previous year, the IHP is calculated as follows:
Step 1: Calculate Expected Rent for the entire P/Y
Step 2: Calculate Actual Rent Received/Receivable for the period

property is let out.

n o t e s
Step 3: Calculate Gross Annual Value
Here,
i. If ARR > ERR; GAV = ARR
ii. If ARR < ERR because of vacancy; GAV = ARR
iii. If ARR < ERR due to rent being less; GAV = ERR
Step 4: Net Annual Value = GAV - Municipal Tax Actually paid by the
owner during previous year
Illustration 8: Calculate Income under the head of ‘Income from

House property’ of Ms. Piya who is the owner of the house property.
You are given the following scenarios:
S
Particulars Scenario 1 Scenario 2 Scenario 3
Municipal Value (MV) 150 90 90
Fair Rent (FR) 120 120 120
IM
Standard Rent (SR) 110 100 100
Actual Rent (AR) (for period let 180 95 48
out)
No. of Months Vacant 2 7 6
Municipal Taxes paid 0 8 5
M
Interest on Loan for purchasing 4 0 3

the property
Solution:
N

ERR (Higher 110 100 100
between MV &
FR, subject to
maximum of
SR)) (A)
ARR (B) 180 95 48
GAV (ARR>ERR); (ARR<ERR be- (ARR<ERR
GAV = 180 cause of vacan- because of less
cy); GAV = 95 rent); GAV =100
Less: Municipal 2 7 6
Taxes paid
NAV 178 88 94
Less:- Standard 53.4 26.4 28.2
Deduction @
30% of NAV

n o t e s

Less: Interest on 4 0 3
Loan for pur-
chasing the
property
IHP 120.6 61.6 25.2
Case 3: House property let out but remained vacant for whole of the
previous year
There are cases where the owner wants to let out the house property
during the previous year but it remained vacant throughout the previ-
ous year because no suitable tenant could be found. In such cases, the
IHP is calculated as follows:
S
Step 1: Calculate ERR for the entire previous year
Step 2: ARR will be ‘NIL’

IM
Step 3: GAV will be NIL as per Sec 23(1)(c)
Step 4: Net Annual Value = GAV - Municipal Tax Actually paid by

Owner during the previous year.
note
M
There may be instances of cases where the NAV is negative. This

situation arises when the municipal taxes paid by the owner is more
than the GAV.
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Case 4: House property not let out but remained vacant for whole
of previous year
There are cases where the owner does not want to let out the house
property during the previous year. As a result, house property remains
vacant throughout the previous year. In such cases, the IHP is calcu-
lated as follows:
Step 1: Calculate ERR for the entire previous year
Step 2: ARR will be NIL
Step 3: GAV = ERR (because benefit of vacancy is not available)
Step 4: Net Annual Value = GAV – Municipal Tax Actually paid by

owner during the previous year

n o t e s
9. In case a house property remains let out for whole of the

previous year, the GAV of property is calculated as higher of
_________ and _________.
10. If a house property has been partly let out & partly vacant
during the previous year and ARR < ERR due to________ ;
then, GAV = ERR.
Activity
Prepare two numerical examples that show the calculation of the

income from house property when the house property is not let out
by the owner and remains vacant for whole of the previous year.
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INCOME FROM SELF OCCUPIED
4.4
PROPERTY
IM
Section 23 (2), (3) and (4) contain rules for calculation of income from
a property that is self-occupied or which could not be occupied due to
employment at other location. Income from House Property is com-
puted after giving certain deductions from the gross annual value of
the property.
M
Self-occupied property (SOP) does not generate any income through

rent or by any other means. Therefore, in case an assessee resides in a
house, the annual value of such SOP is taken as nil. However, in case
of more than one SOP, the value of all SOPs except one is determined
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on a notional basis as if it had been let out, called deemed to be let out.
If assessee utilises property for residential purpose during the years
or if the property is not actually occupied by the owner and the prop-
erty is also not let out, its annual value is taken as nil. Proportionate
annual value is calculated if a property is let out for only a part of the
year.
Various scenarios can be generated related to computation of income

from house property. Let us discuss each scenario as follows:
1. According to Section 23 (2) (a) and (b), the annual value of a self-
occupied property would be nil if the house property consists of
a house or a part of the house which is:
a. Occupied by the owner of the house for the purpose of his
own residence
b. Cannot be occupied by the owner of the house due to
employment, business or profession carried out at any other
location

n o t e s
2. According to Section 23 (3), the annual value of a self-occupied

property would not be nil if:
a. The house property is let for whole or any part of the previous
year
b. The owner of the house is deriving any other benefit from the
house
For such cases, the value of income from house property is
derived as per the provisions of Section 23 (1) (a), (b), and (c).
3. According to Section 23 (4), when an individual or an HUF owns
more than one house for self-occupation; he has an option to
choose any one house as self-occupied. All other houses would
be deemed to be let out and the annual value for all such house
properties would be calculated in accordance with Section 23 (1)
(a). The assessee may exercise this option on a yearly basis. It
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must be remembered that if there is one house property that has
more than one residential unit, all of which are self-occupied;
then, the annual value of such house property would be taken
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as nil. The option to choose one house as being self-occupied is
available only for an individual or an HUF.
4. In case an individual owns a house which is in self-occupation
of the individual, the individual will not be given the standard
deduction of 30% as the annual value of the house itself is nil
(Deduction in respect of the house whose annual value is nil).
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However, the owner would be given deduction owing to the

interest including the 1/5th (20%) of the accumulated interest of
the pre-construction period as follows:
Deduction Allowed
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a. Where the property is ac- Actual interest payable subject to max-

quired or constructed by using imum of `2,00,000 if the assesse is able
loan amount received on or after to obtain a certificate from the person
1.4.1999 and if such acquisition to whom the interest is payable stating
or construction is completed the amount the assessee has to pay as
within 3 years of the end of the interest. However, if the given condi-
financial year in which the loan tions are not met (loan taken before
was taken. 1.4.1999 or the construction not com-
pleted within 3 years, then the owner
will be given deduction of maximum
`30,000 only.
b. All other cases, amount is tak- Actual interest payable subject to maxi-
en as a loan for repairs, renewals mum of `30,000.
etc. mentioned
Please note that in case of let out or deemed to be let out property, the
entire interest amount is allowed as deduction whereas in the case of
self-occupied property, a maximum deduction of `30,000 or `2,00,000

n o t e s
is allowed depending upon the case. Some of the important points for
calculating income from self-occupied property are as follows:
1. When a property is in the occupation of the owner and not let-
out during any part of the previous year, the annual value will be
taken as nil.
2. When an assessee holds (is the owner of) more than one house
property for self-occupation, then the annual value of any one of
the properties will be taken as nil at the owner’s choice. Other
properties are taxable and the tax is computed as though the
property is let-out.
3. When the annual value of a property is taken as nil, only
deduction allowed is for the interest paid on borrowed capital
for acquisition/construction if the construction/acquisition is
completed within 3 years from the end of financial year in which
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the loan was borrowed subject to a maximum of `2, 00,000 p.a.
under section 24.
4. Interest on housing loan taken for the construction of house
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property is allowed as deduction in five equal instalments for
the said previous year and for each of the four immediately
succeeding previous years. However, this will be within the
overall limit u/s 24(b) of the Act.
5. There is no limit for the interest on borrowed loan in respect of
let out property.
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Illustration 9: Ms. Barkha has three self-occupied houses. The details

of 3 houses for 2013-14 are as follows:

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Municipal Value (`) 3,00,000 9,00,000 9,30,000

Municipal Taxes Paid (`) 30,000 50,000 70,000
Fair Rent (`) 5,40,000 8,00,000 10,00,000
Standard Rent (`) 4,00,000 6,00,000 9,00,000
Repairs (`) 1,50,000 2,50,000 3,00,000
Ground Rent Paid (`) 20,000 25,000 30,000
Insurance Premium Paid (`) 5,000 6,000 7,000
Interest on Loan taken for 70,000 1,00,000 1,80,000
House Property (`)
Loan year 1998-99 1998-99 2006-07
Ms. Barkha suffers a loss of `3,50,000. You have to calculate her total
income and suggest which house she must use for the concession of
self-occupancy.

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Solution: Computation of income from house property under differ-

ent options:
Let us first assume that all properties are self-occupied:
Assuming that all the Properties are House 1 House 2 House 3

self-occupied (SO)
Annual Value Nil Nil Nil
Less: Interest on Loan (`) 30,000 30,000 1,80,000
Loss from House Property (`) 30,000 30,000 2,00,000
Let us now assume that all the properties are deemed let out.
Assuming that all the Properties are Deemed Let Out (DLO)
Gross Annual Value (`) 4,00,000 6,00,000 9,00,000
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Less: Municipal Taxes (`) 30,000 50,000 70,000
Net Annual Value (`) 3,70,000 5,50,000 8,30,000
Less: statutory deduction u/s 24(a) 1,11,000 1,65,000 2,49,000
(30% of NAV) (`)
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Less: Interest On Loan u/s 24(b) (`) 70,000 1,00,000 1,80,000
Income from House Property (`) 1,89,000 2,85,000 2,74,000
Total taxable income under different options of self-occupancy:
Particulars
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House 1 (`) –30,000 (SO) 1,89,000 (DLO) 1,89,000 (DLO)
House 2 (`) 2,85,000 (DLO) –30,000 (SO) 2,85,000 (DLO)

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House 3 (`) 4,01,000 (DLO) 4,01,000 (DLO) –2,00,000 (SO)
Income From House 6,56,000 5,60,000 3,24,000

Property (`)
Less Loss from 3,50,000 3,50,000 3,50,000

Business (`)
Total Income (`) 3,06,000 2,10,000 –76,000
Where, SO = Self-occupied and DLO = Deemed Let Out
To minimise tax liability, the house having either minimum income or

maximum loss should be opted for self-occupancy concession. In our
case, house 3 should be selected for self occupancy.
In the question it has been mentioned that Ms. Barkha suffered a loss
of `3,50,000. This has to be deducted at the time of calculation of which
house to be selected for self-occupancy.

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11. In case of more than one self-occupied property, the value of

all such properties except one is determined on a notional
basis as if they have been let out, called______________.
12. Mr. Reddy owns a property at Villupuram, Tamil Nadu.
He works under a central government department and is
currently deputed at Gurugram, Haryana. The annual value
of a self-occupied property would be___________.
Activity
List the differences between the calculations of annual value in

case of self-occupied property and let out properties.
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4.5 SET OFF AND CARRY FORWARD OF LOSS
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Set off of loss means that a particular amount of loss is equated and
negated by an equal amount of profit. Carry forward of loss means
that if instead of profit an assessee incurs losses and they are not being
set off by profits, they can be carried forward to the next assessment
year where they can be set off against the allowable profits.
Regarding the set off and carry forward of loss, the following points
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must be remembered:
1. Loss from a source of income that is exempted from tax cannot
be set off against any other income which is taxable. For example,
loss on the grounds of agricultural activity (which is exempted
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from tax) cannot be adjusted against profit or income from any

other taxable source of income.
2. In any year, if a taxpayer has incurred loss from any source under
a particular head of income; then, the taxpayer may adjust such
loss against income from any other source falling under the same
head of income. This process of adjustment of a loss from a source
under a particular head of income against income from some
other source under the same head of income is called intra-head
adjustment. For example, if an assessee runs two businesses X
and Y then loss from business X can be set off against profits
from business Y.
3. After making intra-head adjustments (if any); the next step is to
make inter-head adjustments. If in any year, the taxpayer has
incurred loss under one head of income and is having income
under other heads of income; then, he can adjust the loss from
one head against income from other head. For example, loss
under the head of house property can be adjusted against salary
income.

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4. At times, some part of the loss may still remain even after
making intra-head and inter-head adjustments. In such cases,
the unadjusted loss can be carried forward to the next year for
adjustment against subsequent years’ income. This is called
carry forward of loss. Different heads of income have different
provisions for carry forward of loss.
Provisions under the income-tax law in relation to carry forward

and set off of loss from house property:
If the loss from house property is not fully adjusted in the same year in
which the loss incurred, then, such loss can be carried forward to the
next year. However, such loss can only be adjusted against the head of
income from house property in the subsequent years. It means that
in the subsequent years, inter-head adjustment would not be allowed.
Such amount of loss can be carried forward for eight years succeeding
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the year in which the loss occurred.

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13. Loss from a source of income that is exempted from tax can be
set off against any other income which is taxable. (True/False)
14. Loss from house property can be carried forward for ______
years succeeding the year in which the loss occurred.
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Activity
Prepare a case study that reflects the impact of carry forward of a

loss on the taxable income of an individual.
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4.6 SUMMARY
The owner of a house property (in whose name the property
stands) is considered as the assessee for the purpose of taxation.
The basis of taxability under this head is the annual value of house
property.
The income from house property is the only income that is charged
on the notional basis.
Ifan individual has given his house property on rent or lease and
derives any income from it, it is termed as income from house
property.
For taxing an income under the head, “Income from House Prop-
erty”, three conditions must be fulfilled, as follows:
The property must consist of buildings and lands appurtenant
thereto.
The assessee must be the owner of such house property.

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The property may be used for any purpose such as renting or

letting-out but it should not be used by the owner for the pur-
pose of any business or profession carried on by him, the profit
of which is taxable. If the property is used for own business or
profession, it shall not be taxable.
A deemed owner is an individual who does not have the property
registered in his name, but is liable to pay tax for the income re-
ceived from house property as per Section 27 of the Income Tax
Act.
Annual value refers to the amount of money for which a property
owner may rent his property from year-to-year.
The annual value of the property is based on the actual rent re-
ceived by the owner or the amount expected to be received by him/
her (Actual rent received or receivable (ARR)).
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Municipal value refers to the value determined by local municipal
authorities based on which it collects municipal taxes.
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Fair rent of a property refers to the amount of money that can be
expected to be received in a year by letting a property of similar
size in the same locality.
Standard rent refers to the rent that is fixed under the Rent Con-
trol Act, 1958. Under this Act, the maximum rent has been pre-
scribed for all the localities.
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At a broader level, the annual value of the property may be deter-

mined in just two steps: Step I: Determine the gross annual value
of house property; and Step II: Deduct municipal taxes actually
paid by the owner in the previous year from the gross annual value
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calculated in step I.
For the income chargeable under the head “Income from House
Property”, there are only two deductions, namely: standard de-
duction and interest on borrowed capital.
The amount of arrears of rent received from a tenant or the unre-
alised rent realised subsequently from a tenant, as the case may
be, by an assessee shall deemed to be the income from house prop-
erty in respect of the financial year in which such rent is received
or realised, and shall be included in the total income of the asses-
see under the head “Income from house property”, whether the
assessee is the owner of the property or not in that financial year.
When a house property (property consisting of buildings or build-
ings and lands appurtenant thereto) is owned by two or more
persons; those persons are known as co-owners of the property
if their share in the property is definite and ascertainable. In case
the share is not definite, the co-owners shall be assessed as an As-
sociation of Persons (AOP).

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Self-occupied property (SOP) does not generate any income

through rent or by any other means. Therefore, in case an asses-
see resides in a house, the annual value of such SOP is taken as
nil. However, in case of more than one SOP, the value of all SOPs
except one is determined on a notional basis as if it had been let
out, called deemed to be let out.
Set off of loss means that a particular amount of loss is equated
and negated by an equal amount of profit. Carry forward of loss
means that if instead of profit an assessee incurs losses and they
are not being set off by profits, they can be carried forward to the
next assessment year where they can be set off against the allow-
able profits.
key words
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Actual rent: Actual rent received/receivable is a vital cause in
establishing the annual value of a property.
Annual charge: It is a charge to secure an annual liability, but
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does not include any tax in respect of property or income from
property imposed by a local authority, or the Central or a State
Government.
Deemed owner: A deemed owner is an individual who does not
have the property registered in his name but is liable to pay tax
for the income received from house property as per Section 27
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of the Income Tax Act.

Fair rent of the property: Fair rent is the rent, which similar
property can give in the similar locality, if it is given out for a
year.
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Municipal value: This is the value as established by munici-

pal authorities for charging Municipal taxes on house property.
Municipal establishment usually levy house tax/municipal tax-
es on the criteria of annual letting value of such type of house
property.
Notional basis: Notional basis of calculating annual value
means that the house property is taxed not based on actual in-
come or rent received from the house property but based on the
potential of the house property to generate income.
Standard rent: The standard rent is set under the Rent Control
Act. If the standard rent has been set for any property under the
Rent Control Act, the proprietor cannot be projected to obtain
a rent higher than the standard rent set under the Rent Control
Act.

n o t e s

1. Explain three essential conditions for taxing under head “Income
from House Property”.
2. Describe the concept of deemed owner.
3. Describe the basic method of determining the annual value of a
house property.
4. What kind of deductions can be claimed by an assessee in respect
of the “Income from House Property”?
5. Explain in detail how to compute the annual value of a self
occupied property.
6. Describe the concept of set off and carry forward of loss from
house property.
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Topic Q. No. Answer

Income from House Prop- 1. d. either a or b
erty
2. Section 22
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3. annual value
4. c. rent received by the owner of a
commercial shop by his tenant
5. deemed owner
6. standard rent
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7. Standard deduction; Interest on

borrowed capital
8. Association of Persons (AOP)
Income from Let-Out 9. ERR; ARR
Property
10. rent being less
Income from Self 11. deemed to be let out
Occupied Property
12. nil
Set Off and Carry 13. False
Forward of Loss
14. eight

1. There are three essential conditions for taxing a house property
under the head “Income from House Property”: The property
must consist of buildings and lands appurtenant thereto; the

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assessee must be the owner of such house property; and the

property may be used for any purpose such as renting or letting
out, but it should not be used by the owner for the purpose of any
business or profession carried on by him, the profit of which is
taxable. Refer to Section 4.2 Income from House Property.
2. A deemed owner is an individual who does not have the property
registered in his name but is liable to pay tax for the income
received from house property as per Section 27 of the Income
Tax Act. Refer to Section 4.2 Income from House Property.
3. At a broad level, the annual value of the property may be
determined in just two steps: Step I: Determine the gross annual
value; and Step II: From the gross annual value computed in
Step I, deduct Municipal Tax actually paid by the owner during
the previous year. Refer to Section 4.2 Income from House
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Property.
4. In respect of the “Income from House Property”, an assessee can
claim two deductions: standard deduction and the interest paid
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by him/her on borrowed capital subject to a maximum of 30,000
or 2,00,000 as the case may be. Refer to Section 4.2 Income from
House Property.
5. Section 23 (2), (3) and (4) contain rules for the calculation of
income from a property that is self-occupied or which could not
be occupied due to employment at other location. Income from
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a house property is computed after giving certain deductions

from the gross annual value of the property. Refer to Section
4.4 Computation of Annual Value of Self Occupied Property
(SOP).
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6. Set off of loss means that a particular amount of loss is equated

and negated by an equal amount of profit. Carry forward of loss
means that if instead of profit an assessee incurs losses and they
are not being set off by profits, they can be carried forward to
the next assessment year where they can be set off against the
allowable profits. Refer to Section 4.5 Set Off and Carry Forward
of Loss.
SUGGESTED READINGS
Singhania, Vinod, K., & Singhania, Monica, Students’ Guide to In-
come Tax. New Delhi: Taxmann Publications Pvt. Ltd.
Chandra, Mahesh, Goyal, S.P., & D.C. Shukla, D.C., Income Tax
Law and Practice. Delhi: Pragati Prakashan.
Lal, B.B., Income Tax Law and Practice. New Delhi: Konark Pub-
lications.

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E-REFERENCES
Business.gov.in. (2014). Business Portal of India: Taxation: Taxa-
tion of Individuals: Sources of Income: Income from House prop-
erty: Computation of income from let out property. Retrieved from,
<http://business.gov.in/taxation/house_computationletout.php>
Moneycontrol.com. (2014). What is income from house proper-
ty? Retrieved from, http://www.moneycontrol.com/glossary/proper-
ty-tax/what-is-income-from-house-property_4002.html
Yogi, I. (2014). How to calculate tax on house property income?
Business-standard.com. Retrieved from, http://www.business-stan-
dard.com/article/pf/how-to-calculate-tax-on-house-property-in-
come-114031200127_1.html
Tax and Income from Let out House Property. (2018). Be Money
S
Aware Blog. Retrieved 31 March 2018, from https://www.bemon-
eyaware.com/blog/tax-and-income-from-let-out-house-property/
Rent Can Be Taxed On Notional Basis - Karvy. (2018). Karvy.com.
IM
Retrieved 31 March 2018, from https://www.karvy.com/rent-can-
be-taxed-on-notional-basis
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Ch a
5 pt e r
PROFITS AND GAINS OF BUSINESS OR PROFESSION
CONTENTS
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5.1 Introduction
5.2 General Principles of Business and Profession
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Activity
5.3 Incomes under the Head Profits and Gains of Business or
Profession (Section 28)
Activity
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5.4 Computation of Income from Profits & Gains of Business and Profession
(Section 29)
Activity
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5.5 Deductions Expressly Allowable u/s 30 – 43D

5.5.1 Deduction for Rent, Rates, Repairs and Insurance of
Building (Section 30)
5.5.2 Deduction for Repairs and Insurance of Machinery, Plant and
Furniture (Section 31)
5.5.3 Deduction for Depreciation including concept of Block of
Assets (Section 32)
5.5.4 Expenditure on Scientific Research (Section 35)
5.5.5 Other Deductions (Bonus or Commission Paid to Employee; Interest
on Borrowed Capital; Bad Debts; Contribution to Pension Scheme;
Contribution to Approved Gratuity Fund; Contribution Received from
Employees; Expenditure on Advertisement) (Section 36)
5.5.6 General Expenditure for Purpose of Business and Profession (Section 37)
5.5.7 Expenditure Allowable for Advertisement (Section 37 (2B))
Activity

CONTENTS
5.6 Amounts not Deductible u/s 40

5.6.1 Section 40(A), Section 40A (2) (B), and Section 43(B)
Activity
5.7 Set-off of Business Loss (Section 72)
Activity
5.8 Summary
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PROFITS AND GAINS OF BUSINESS OR PROFESSION 183
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CATHOLIC SYRIAN BANK LTD. VS. COMMISSIONER

OF INCOME TAX
The assessee in C.A. No. 1143 of 2011, a Scheduled Bank, filed its
return of income for the assessment year 2002-2003 on 24th Oc-
tober, 2002, declaring the total income of ` 61,15,610. The return
was processed under Section 143(1) of the Income Tax Act, 1961
(for short `the Act’) and eligible refund was issued in favour of the
assessee. However, the assessing officer issued income tax notice
under Section 143(2) of the Act to the assessee, after which the
assessment was completed.
The assesse put forward the argument that the deduction allow-
able under Section 36(1) (vii) of the Act is independent of deduc-
tion under Section 36(1) (via) of the Act. Inter alia, the assessing
S
officer, while dealing with the claim of the assessee for bad debts
of ` 12,65,95,770, under Section 143(3) of the Act noticed that the
argument could not be accepted.
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He observed that the assessee already had a provision of `
15,01,29,990 for bad and doubtful debts under Section 36(1)(via)
of the Act. Hence, the assessee could not claim the amount of `
12,65,95,770 as deduction on account of bad debts because the bad
debts did not exceed the credit balance in the provision for bad
and doubtful debts account. Further, the requirements of clause
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(v) of Sub-section (2) of Section 36 of the Act were not satisfied.
Therefore, the assessee’s claim for the deduction of bad debts

written off from the account books was disallowed. This amount
was added back to the taxable income of the assessee, for which a
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demand notice and challan was accordingly issued. This order of

the assessing officer dated 24th January 2005, was challenged in
an appeal by the assessee on various grounds.
The Commissioner of Income Tax (Appeals) [hereafter referred

to as `the CIT(A)’], vide its order dated 7th April 2006, partly al-
lowed the appeal, particularly in relation to the claim of the appel-
lant Bank for bad debts. Relying upon the judgment of a Division
Bench of the Kerala High Court in the case of South Indian Bank
Ltd. v. CIT [(2003) 262 ITR 579], the CIT(A) held that the claim of
the appellant was fully supported by the said decision and since
the entire bad debts written off by the bank under Section 36(1)
(vii) were pertaining to urban branches only and not to the provi-
sion made for rural branches under Section 36(1)(viia), it was en-
titled to the deduction of the full claimed amount of ` 12,65,95,770.
For the years of assessment in question and being aggrieved from

the order of the CIT(A), the Revenue as well as the assessee filed

n o t e s
appeals before the Income Tax Appellate Tribunal, Cochin (for

short, the ‘ITAT’). All the appeals were heard together and vide
its order dated 16th April 2007, while relying upon the judgment
of the jurisdictional High Court in the case of South Indian Bank
Ltd. (supra), the ITAT dismissed the appeal of the Revenue on
this issue and also granted certain other benefits to the assessee
in relation to other items.
The Special Bench, vide its judgment dated 9th August 2002 had
answered the question of law in the affirmative, holding that debts
actually written off, which do not arise out of the rural advances,
are not affected by the proviso to clause (vii) and that only those
bad debts which arise out of rural advances are to be deducted
under Section 36(1) (via) in accordance with the proviso to clause
(vii).
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However, the Department of Income Tax, being dissatisfied with
the order of the ITAT in assessment year 2002-2003, filed an ap-
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peal before the High Court under Section 260A of the Act. The
Division Bench of the High Court of Kerala at Ernakulum hearing
the bunch of appeals against the order of the ITAT, expressed the
view that the judgment of that Court in the case of South Indian
Bank (supra) was not a correct exposition of law.
While dissenting there from, the Bench directed the matter to be

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placed before a Full Bench of the High Court.
That is how the matter came up for hearing before a Full Bench of
the High Court of Kerala at Ernakulum. Vide its judgment dated
16th December 2009 the Full Bench not only answered the ques-
N
tion of law, but also decided the case on merits. Consequently,

while answering the question in the favour of the assessee, the
court allowed the appeals of the assessees and dismissed the ap-
peals preferred by the Revenue. Further, the court directed that
all matters be remanded to the assessing officer for computation
in accordance with law, in light of the law enunciated in this judg-
ment.
Jury’s final decision was based on two questions –

1. Whether on the facts and circumstances of the case, the
assessee is eligible for deduction of bad and doubtful debts
actually written off in the view of Section 36(1) (vii) which
limits the deduction allowable under the proviso to the
excess over the credit balance made under the clause (via)
of Section 36(1) of Income Tax Act, 1961 (“ITA” for short)?
2. Under Section 36(1)(vii) of the ITA 1961, the tax payer
carrying on business is entitled to a deduction, in the

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computation of taxable profits, of the amount of any debt

which is established to have become a bad debt during the
previous year, subject to certain conditions.
The court found no merit in the objection raised by the Reve-

nue. Firstly, the Central Board of Direct Taxes (CBDT) itself rec-
ognised the position that a bank would be entitled to both the
deduction, one under clause (vii) on the basis of actual write off
and another, on the basis of clause (via) in respect of a mere pro-
vision. Further, to prevent double deduction, the proviso to clause
(vii) was inserted which says that in respect of bad debt(s) arising
out of rural advances, the deduction on account of actual write off
would be limited to the excess of the amount written off over the
amount of the provision allowed under clause (via).
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IM
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learning objectives

>> Discuss the general principles of business and profession
>> Describe the incomes under the head profits and gains of
business or profession
>> Explain the computation of income from profits & gains of
business and profession
>> Describe various deductions expressly allowable u/s 30 – 43D
>> Describe amounts not Deductible u/s 40
>> Describe the set-off of business loss
5.1 INTRODUCTION
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In the previous chapter, you studied about income from house prop-
erty. In this chapter, we will discuss profits and gains of business or
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profession. Under Section 28 to 44 of the Income Tax Act, 1961, we will
discuss profit and gains of business or profession chargeability/scope
of income under this head.
Profit and gains of business or profession needs to be computed by us-

ing either cash or mercantile (accrual) system of accounting regularly
employed by the assessee (Section 145). However, some expenses are
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allowed to be deducted on an actual payment basis, even if the asses-

see is following the mercantile system of accounting (Section 43B). In
some cases, the scheme of presumptive computation has been devel-
oped to dispense with the necessities of compulsory audit and mainte-
N
nance of accounts (Section 44AE, 44AD, 44AF, etc.).
The chapter begins with a discussion on the general principles of busi-

ness and profession. Next, the chapter explains the incomes under the
head profits and gains of business or profession. In addition, the chap-
ter discusses the computation of income from business. The chapter
also explains Deductions Expressly Allowable u/s 30 – 43D. Some oth-
er important topics covered in the chapter are amounts not deductible
u/s 40 and set-off of business loss.
GENERAL PRINCIPLES OF BUSINESS

5.2
AND PROFESSION
Profit and gains of business or profession are an important part of the
total income of an assessee. This is one of the most important heads of
tax collection and therefore, it is necessary to understand terminolo-
gies used under this head.
Business: It refers to any economic activity that is carried out
to earn profits. According to Section 2(13), business includes any
trade, commerce or manufacture or any adventure or concern in the

n o t e s
nature of trade, commerce or manufacture. Business is a continu-

ous activity. However, profit from a single venture would also be
assessable if the venture had come to an end after the entire cost
had been recovered.
Profession: According to Section 2(36), profession includes voca-
tion. Profession can be defined as any job requiring some thought,
skill and expert knowledge. For example, lawyer, doctor, engineer,
architect, etc. are professionals who earn their livelihood through
expert skill sets. Therefore, profession denotes to any activity
which requires special skills to be performed.
Profits and gains: The words ‘profits and gains’ are defined as
the surplus by which the receipts from the business or profession
exceed the expenditure necessary for the purpose of earning those
receipts. These words should be understood to include losses also,
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so that in one sense ‘profits and gains’ represent plus income while
‘losses’ represent minus income. Profit is recognised in terms of
money or money’s worth like cash etc. When profit is realised in
any other form of money other than cash, the cash equivalent must
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be taken as the value of income received in kind on the date of
receipt.
1. ______________can be defined as any job requiring some

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thought, skill and expert knowledge.

2. Profit is recognised in terms of money or money’s worth.
(True/False)
3. When profit is realised in any other form of money than cash,
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the cash equivalent must be taken as the value of __________

received in kind on the date of receipt.
Activity
Using the Internet, find out the share contributed by businesses/

professions towards the national income of India. Include only the
latest relevant data.
PROFITS AND GAINS OF BUSINESS OR

5.3
PROFESSION (SECTION 28)
The income under the head profits and gains of business or profession
are covered under Section 28 of the Income Tax Act, 1961. According-
ly, the following income shall be chargeable to income tax under the
head ‘Profits and Gains of Business or Profession’:
(i) The profits and gains of any business or profession which was
carried on by the assessee at any time during the previous year.

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(ii) Any compensation or other payment due to or received by:

(a) Any person, by whatever name called, managing the whole or
substantially the whole of the affairs of an Indian company, at
or in connection with the termination of his management or
the modification of the terms and conditions relating thereto
(b) Any person, by whatever name called, managing the whole
or substantially the whole of the of any other company, at
or in connection with the termination of his office or the
modification of the terms and conditions relating thereto
(c) Any person, by whatever name called, holding an agency in
India for any part of the activities relating to the business of
any other person, at or in connection with the termination of
the agency or the modification of the terms and conditions
relating thereto
(d) Any person, for or in connection with the vesting in the
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Government, or in any corporation owned or controlled by
the Government, under any law for the time being in force, of
the management of any property or business
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(iii) Income derived by a trade, professional or similar association
from specific services performed for its members:
(iiia) Profits on sale of a licence granted under the Imports (Control)
Order, 1955, made under the Imports and Exports (Control) Act,
1947 (18 of 1947)
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(iiib)
Cash assistance (by whatever name called) received or
receivable by any person against exports under any scheme of
the Government of India
(iiic) Any duty of customs or excise re-paid or re-payable as drawback
to any person against exports under the Customs and Central
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Excise Duties Drawback Rules, 1971

(iiid) Any profit on the transfer of the Duty Entitlement Pass Book
Scheme, being the Duty Remission Scheme under the export
and import policy formulated and announced under Section 5 of
the Foreign Trade (Development and Regulation) Act, 1992 (22 of
1992)
(iiie) Any profit on the transfer of the Duty Free Replenishment

Certificate, being the Duty Remission Scheme under the export
and import policy formulated and announced under Section 5 of
the Foreign Trade (Development and Regulation) Act, 1992 (22 of
1992)
(iv) The value of any benefit or perquisite, whether convertible into
money or not, arising from business or the exercise of a profession
(v) Any interest, salary, bonus, commission or remuneration, by
whatever name called, due to, or received by, a partner of a firm
from such firm provided that where any interest, salary, bonus,
commission or remuneration, by whatever name called, or any

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part thereof has not been allowed to be deducted under clause

(b) of Section 40, the income under this clause shall be adjusted
to the extent of the amount not so allowed to be deducted
(va) Any sum, whether received or receivable, in cash or kind, under
an agreement for
(a) Not carrying out any activity in relation to any business; or
(b) Not sharing any know-how, patent, copyright, trade-mark,
licence, franchise or any other business or commercial right
of similar nature or information or technique likely to assist
in the manufacture or processing of goods or provision for
services:
Provided that Sub-clause (a) shall not apply to
Any sum, whether received or receivable, in cash or
(i)
kind, on account of transfer of the right to manufacture,
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produce or process any article or thing or right to carry
on any business, which is chargeable under the head
“Capital gains”;
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(ii) Any sum received as compensation, from the multilateral
fund of the Montreal Protocol on Substances that Deplete
the Ozone layer under the United Nations Environment
Programme, in accordance with the terms of agreement
entered into with the Government of India.
Explanation: For the purposes of this clause,
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(i) “Agreement” includes any arrangement or understanding or

action in concert:
(A) Whether or not such arrangement, understanding or
action is formal or in writing or
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(B) Whether or not such arrangement, understanding or

action is intended to be enforceable by legal proceedings
(ii) “Service” means service of any description which is made
available to potential users and includes the provision of
services in connection with business of any industrial
or commercial nature such as accounting, banking,
communication, conveying of news or information,
advertising, entertainment, amusement, education, financing,
insurance, chit funds, real estate, construction, transport,
storage, processing, supply of electrical or other energy,
boarding and lodging;
(vi) Any sum received under a Keyman Insurance Policy including
the sum allocated by the way of bonus on such policy
Explanation: For the purposes of this clause, the expression
“Keyman Insurance Policy” shall have the meaning assigned to
it in clause (10D) of Section 10
(vii) Any sum, whether received or receivable, in cash or kind, on
account of any capital asset (other than land or goodwill or
financial instrument) being demolished, destroyed, discarded or

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transferred, if the whole of the expenditure on such capital asset

has been allowed as a deduction under Section 35AD.
Explanation 1: [Omitted by the Direct Tax Laws (Amendment)
Act, 1987, w.e.f. 1-4-1989.]
Explanation 2: Where speculative transactions carried on by
an assesse are of such a nature as to constitute a business, the
business (hereinafter referred to as “speculation business”) shall
be deemed to be distinct and separate from any other business.
Section 43, Definitions of certain terms relevant to income from

profits and gains of business or profession: In sections 28 to 41 and
in this section, unless the context otherwise requires:
(1) “Actual cost” means the actual cost of the assets to the assessee,
reduced by that portion of the cost thereof, if any, as has been
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met directly or indirectly by any other person or authority
(2) “Paid” means actually paid or incurred according to the method
of accounting upon the basis of which the profits or gains are
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computed under the head “Profits and gains of business or
profession”
(3) “Plant” includes ships, vehicles, books, scientific apparatus
and surgical equipment used for the purposes of the business
or profession but does not include tea bushes or livestock or
buildings or furniture and fittings
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(4)
(i) “Scientific research” means any activities for the extension of
knowledge in the fields of natural or applied science including
agriculture, animal husbandry or fisheries
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(ii) References to expenditure incurred on scientific research

include all expenditure incurred for the prosecution, or
the provision of facilities for the prosecution, of scientific
research, but do not include any expenditure incurred in the
acquisition of rights in, or arising out of, scientific research
(iii)References to scientific research related to a business or class
of business include:
(a) Any scientific research which may lead to or facilitate
an extension of that business or, as the case may be, all
businesses of that class
(b) Any scientific research of a medical nature which has a
special relation to the welfare of workers employed in
that business or, as the case may be, all businesses of
that class
(5) “Speculative transaction” means a transaction in which a contract
for the purchase or sale of any commodity, including stocks and
shares, is periodically or ultimately settled otherwise than by the
actual delivery or transfer of the commodity or scraps.

n o t e s
(6) “Written down value” means:

(a) In the case of assets acquired in the previous year, the actual
cost to the assessee
(b) In the case of assets acquired before the previous year, the
actual cost to the assessee less all depreciation actually
allowed to him under this Act, or under the Indian Income
Tax Act, 1922 (11 of 1922), or any Act repealed by that Act, or
under any executive orders issued when the Indian Income
Tax Act, 1886 (2 of 1886), was in force.
4. _____________means the cost of the assets to the assessee,

met directly or indirectly by any other person or authority.
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5. “Plant” includes ships, vehicles, books, scientific apparatus
and surgical equipment. (True/False)
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Activity
Meet three people from different professions and list down their
various sources of incomes which are taxable under law.
COMPUTATION OF INCOME FROM

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5.4 PROFITS & GAINS OF BUSINESS AND

PROFESSION (SECTION 29)
According to Section 29, the income referred to in Section 28 shall
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be computed in accordance with the provisions contained in Sections

30 to 43D of the Income Tax Act, 1961. As per the accounting method
adopted by the assessee under Section 145(1) of the Income Tax Act
w.e.f. Assessment Year 1997–98, income chargeable under the head
“Profits and Gains of Business or Profession” or “Income from Other
Sources” shall be computed as per the accounting method adopted by
the assessee either by the mercantile system or cash system and that
system should be in accordance with accounting standards which the
Central Government may notify from time to time.
By notification number 9949 dated 25.1.96 the Central Government

has since notified Accounting Standard-1 relating to the disclosure
of accounting policies and Accounting Standard- 2 to relating to dis-
closure of the prior period and extraordinary items and changes in
accounting policies. Once a method of accounting is followed by the
assessee in computing income from ‘Business or Profession’, it cannot
be changed unless the change is for bona fide reasons and not a casual
departure from the regular method.

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In computing income under the head “Profits and Gains of Business

or Profession” apart from complying with the provisions of Section
145, an assessee needs to comply with the provisions of Section 145A
w.e.f. assessment year 1999–2000 in respect of valuation of purchase
and sale of goods and inventory. In computing income from Business
or Profession, revenue expenses paid or incurred for the purpose of
business are allowed as per the provisions of the Income Tax Act un-
less there is any specific provision to allow capital expenditure.
While computing income under the head ‘Profit and Gains of Busi-
ness or Profession’, certain important principles should be kept in
mind, which are:
Business carried on by the assessee: As per Section 28, the per-
son who is in charge of running the business is always charged.
Therefore, it is not of much importance whether the assessee is
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doing the business or through some of his employees, agents or
managers. The important point is that the business should have
been carried by the assessee at any time during the previous year,
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but not necessarily throughout the year or in the assessment year.
The assessee must have the right to carry on the business.
Tax is levied on aggregate income from all business professions
carried out by the assessee during the previous year: The net
outcome of any business or profession carried out by an assessee
is calculated separately. However, when tax is imposed, outcomes
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of all businesses are combined together and on that income, tax is

levied.
Speculation business: The speculation business of an assessee is
kept separate. If there is profit, it will be taxed with other business
income. On the other hand, if there is loss, it can be set of against
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the profit of speculation business and not with other business’s

profit.
Profit on sale of assets on the winding up of a business: After
winding up a business, the profit arising from some asset is not
taxable; however, the profit on the sale of stock-in-trade is taxable.
If the entire business is sold and the assets include stock-in-trade,
the profit on the sale of stock-in-trade is not separable. In such a
case, the entire profit on sale of business shall not be taxable under
this head.
Tax on real owner: Under Section 28, the legal ownership needs
to be considered with beneficial ownership. The income is taxable
to a person to whom it actually accrues.
Tax on real earned profits: Tax is imposed only on the previous
year’s real earned profits. If there is no expectation of profit, tax
cannot be levied only on notional basis or assumption. Therefore,
profit can be taxed only if it actually occurs.

n o t e s
Business/profession may be legal or illegal: The income from le-

gal as well as illegal business is taxable under this head.
Business/profession income to be computed for each previous
year: The profits and gains must be taxed in relation to the previ-
ous year.
Negative income from business/profession: As per the prescribed
rules, negative income or loss from business/profession can be set-
off against other incomes.
As per Section 29, the profits and gains of a business or profession are
computed in accordance with the provisions contained in sections 30
to 43D. Apart from specific allowances and deductions stated in sec-
tions 30 to 36, the act also permits the allowance of items of expens-
es under the residuary section 37(1) (which extends the allowance to
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items of business expenditure not covered by sections 30 to 36).

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6. After winding up a business, the profit arising from some asset
is not taxable; however, the profit on the sale of stock-in-trade
is taxable. (True/False)
7. Tax is imposed only on the _____________ year’s real earned
profits.
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Activity
Using the Internet, find out the provisions of Section 145 A.

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DEDUCTIONS EXPRESSLY ALLOWABLE

5.5
U/S 30 – 43D
According to Section 29 of the Act, the income from profits and gains
of business and profession is calculated as per the provisions of Sec-
tions 30 – 43D. Let us now study the provisions of Sections 30 – 43D in
the upcoming text.
5.5.1 DEDUCTION FOR RENT, RATES, REPAIRS AND

INSURANCE OF BUILDING (SECTION 30)
Section 30 of the Act relates to the deductions in respect of rent, rates,

taxes, repairs and insurance for buildings used for the purposes of the
business or profession. As per this section, the following deductions
are allowed:
where the premises are occupied by the assessee—
as a tenant, the rent paid for such premises; and further if he
has undertaken to bear the cost of repairs to the premises, the

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amount paid on account of such repairs. It means that if an as-

sessee is living in a premises as a tenant; then, rent paid by him
plus the cost of repairs borne by him are deductible.
otherwise than as a tenant, the amount paid by him on account
of current repairs to the premises. It means that as an owner,
the expense incurred towards repairs is deductible. No notion-
al rent can be claimed. In case a partner in a business rents
out his own property for the use of business; then, the rent in-
curred would be deductible in the hands of the business.
any sums (tax, cess, fees, etc.) paid on account of land revenue,
local rates or municipal taxes are deductible if they are paid on or
before the date of filing the return.
insurance premium (against risk of damage or destruction of the
premises) paid in respect of a property is deductible.
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any amount paid on account of the cost of repairs referred to in
sub-clause (i), and the amount paid on account of current repairs
referred to in sub-clause (ii), of clause (a), shall not include any
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expenditure in the nature of capital expenditure. In other words,
repair expenditure in the nature of capital is not allowed as deduc-
tion. However, depreciation is allowed as per Section 32 of the Act.
5.5.2 DEDUCTION FOR REPAIRS AND INSURANCE OF

MACHINERY, PLANT AND FURNITURE (SECTION 31)
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Section 31 of the Act relates to the deductions in respect of expenses

incurred on the repairs and insurance of machinery, plant and furni-
ture. As per this section, the following deductions are allowed:
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amount spent on current repairs

amount spent on premium paid with respect to insurance against
risk of damage or destruction
amount paid on the account of current repairs shall not include
any expenditure in the nature of capital expenditure
note
If the plant, machinery and furniture are hired, the rent pay-
able is not deductible under section 31 but is deductible under
Section 37 (1).
5.5.3 DEDUCTION FOR DEPRECIATION INCLUDING

CONCEPT OF BLOCK OF ASSETS (SECTION 32)
Section 32 of the Act relates to the deductions in respect of deprecia-

tion or diminution or exhaustion in the value of certain capital assets.
Depreciation refers to a decrease in the value of an asset as a result of

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normal wear and tear or due to obsolescence. In other words, depre-

ciation means depletion in real value of assets over a period of time. It
can also be said as loss of value of an asset by wear and tear, consump-
tion or obsolescence. The depreciable amount of an asset is less than
its original cost. This original cost gets written off over the useful life
of the depreciable asset and is charged to profit of business. Section
32 of Income Tax Act, 1961 reveals the Income Tax Depreciation Pro-
visions related to depreciation.
One of the important accounting principle relates to matching princi-

ple. As per this principle, all expenses incurred directly or indirectly
are considred for calculating profits. In this context, it must be re-
membered that depreciation is an indirect and non-cash expense and
it does not incur as such but is provided in order to arrive at the cor-
rect profits.
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As per the act, there are two methods for calculating the value of
depreciation. They are Straight Line Methods (SLM) and the Written
Down Value (WDV) method.
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Depreciation can be charged as a percentage of the value of asset by
either of the above two methods. The WDV method is used for depre-
ciation calculations under the income tax barring the power genera-
tion and distribution companies which use the SL method.
Depreciation u/s 32(1) is mandatory. It means that even if the assesse

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does not claim deduction in respect of depreciation, it will still be al-

lowed while calculating the total income of the assessee. In such a
case, the assessing officer must allow depreciation as per the law.
note
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A special deduction u/s 32AD may also be allowed in cases where

investment is done in new plant and machinery in notified back-
ward areas in certain specified states.
For a thorough understanding of the depreciation and its computa-

tion, you must be aware of the following concepts:
(A) Conditions for claiming depreciation
(B) Block of assets (Sec. 2(11))
(C) Actual cost (Sec. 43(1))
(D) Written Down Value (WDV) (Sec. 43(6))
(E) Rates of depreciation (Appendix I (Rule 5))
(F) Types of depreciation
(G) Unabsorbed depreciation (Sec. 32(2))

n o t e s
Let us now discuss these concepts in detail:
(A) Conditions for claiming depreciation
For claiming deduction in respect of depreciation, the following con-

ditions must be met:
Assesse must be the owner of the asset. Fractional ownership of
the asset is also recognised. In other words, the asset must be
owned by the assessee who wants to claim depreciation. However,
co-owners can also claim depreciation according to their owner-
ship.
There are certain exceptions to this condition as follows:
In case an assessee is occupying a space as a tenant for the pur-
pose of carrying business or profession, any capital expendi-
S
ture incurred by the assessee for the purposes of the business
or profession on the construction of any structure or doing of
any work in or in relation to, and by the way of renovation or
extension of, or improvement to, the building, then, the provi-
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sions of this clause shall apply as if the said structure or work
is a building owned by the assessee.
Legal ownership is not mandatory for claiming deduction.
Beneficial ownership is sufficient.
For hire purchase contracts, depreciation can be claimed by
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capitalising the value equivalent to cash price of the asset.

Assesse must use the asset for the purpose of carrying on the busi-
ness or profession. The asset must be used for the purpose of busi-
ness or profession of assessee. In case where the asset is used for
both professional and personal purposes, then the portion being
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used for the business purpose may be allowed for depreciation.

The use here refers to active use, passive use and potential use.
Asset must be used during the relevant previous year. If an asset is
used for less than 180 days in a year, only 50% of depreciation can
be claimed. Also, if a factory or plant is closed down for a whole
year, no depreciation can be claimed.
No depreciation can be claimed on land.
Asset must fall under the eligible class of assets which includes:
Tangible assets such as buildings, machinery, plant and furni-
ture.
Intangible assets such as know-how, patents, copyrights, trade-
marks, licences, franchises or any other business or commer-
cial rights of similar nature, being intangible assets acquired
on or after the 1st day of April, 1998.
Illustration 1: Mirabai Pvt. Ltd. manufactures the fuel injection sys-

tems. The company has constructed restrooms and a gym for its em-

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ployees. Can the restrooms and gym be considered for claiming de-
preciation?
Solution: Yes, Mirabai Pvt. Ltd. can claim deduction with respect to
depreciation of restrooms and gym under Section 32 because any as-
set (irrespective of whether it is earning income or not) that helps in
business or profession can be claimed for deduction.
(B) Block of assets
As per the Income tax Act, depreciation is allowed to block of assets

and not against individual assets. The term block of assets refers to
a group of tangible assets or a group of intangible assets in respect
which the same percentage of depreciation is prescribed. Block of
assets has been defined in clause (11) of Section 2. Tangible assets
include buildings, machinery, plant or furniture. Intangible assets in-
S
cludes know-how, patents, copyrights, trademarks, licences, franchis-
es or any other business or commercial rights of similar nature, in
respect of which the same percentage of depreciation is prescribed.
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Know-how refers to any information or technique that may assist in
the manufacture or processing of goods or in the working of a mine,
oil-well or other sources of mineral deposits. Each block is differenti-
ated as consisting of tangible and intangible assets on the basis of its
unique rate of depreciation.
In case of an assesse carrying out business or profession wants to

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claim deduction in respect of assets; the assets must first be divided

into two categories viz. tangible assets and intangible assets. Thereaf-
ter, tangible assets must be divided into three sub-categories namely
building, machinery and plant or furniture. After all the assets have
been divided into these four categories, assets under each category
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need to be grouped together on the basis of depreciation rate in accor-

dance with the income tax rules. Each such group of assets is called a
block of assets.
If two assets have the same rate of depreciation but belong to different
classes, they cannot be grouped together. For example, even if if build-
ings depreciate at 10% and furniture also depreciates at 10%; they
cannot be classified under the same group.
For classifying various assets into different groups for the purpose of
charging deduction, it must be remembered that:
Buildings include roads, bridges, culverts, wells and tube wells
Assets that do not qualify for depreciation (such as land and per-
sonal assets) will not form a part of any block.
Furniture includes furniture assests used for decoration and con-
venience.
Machinery is any asset that is involved or used for the production,
manufacturing and processing of products or articles.

n o t e s
Plant includes ships, vehicles, book, scientific apparatus 3 etc.

Ponds are treated as plants.
Motor vans/motor lorries/motor buses are treated as cars.
Any asset which qualifies as a tool of business for the assessee
(functional test), is considered as a plant.
Know-how means any information or technique that assits in man-
ufacture or processing of goods or in working of mines, oil-wells,
etc.
When an assesse takes over a business as a result of amalgamation,
the difference between the consideration paid and the net worth of
the amalgamated company is called goodwill and is considered as
an intangible asset and depreciation is claimed against it.
Illustration 2: Sundar Electricals Pvt. Ltd. owns the following assets:
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10 buildings, 60 machineries, 20 cars and 250 items of furniture. 7 out
of 10 buildings are factories depreciable at 15% whereas 3 out of 10
buildings are residential quarters depreciable at 10%. Machineries
IM
are subject to 10% depreciation. All cars are subject to 12% depre-
ciation. And, all the furniture items are subject to 15% depreciation.
Group these assets into a block of assets.
Solution:
Tangible Assets:
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1. Buildings
Block 1: 7 buildings; depreciation @ 15%
Block 2: 3 buildings; depreciation @ 10%
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2. Machinery
Block 3: 60 machineries; depreciation @ 10%
3. Plant or furniture
Block 4: 20 cars; depreciation @ 12%
Block 5: 250 items of furniture; depreciation @ 15%
Therefore, there are five blocks of assets.
(C) Actual cost (Sec. 43(1))
Section 43 of the Act defines actual cost. Actual cost means the actual
cost of the assets to the assessee, reduced by that portion of the cost
(if any) as has been met directly or indirectly by any other person or
authority.
With effect from 1st April 2018 (AY 2019-20), if any assessee incurs any
expenditure for the acquisition of any asset, the payment of which has
been done by modes other than by cheque or bank draft or electronic

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clearing system and such payment exceeds `10,000 in a day, then such
expenditure will be ignored for determining the actual cost.
Computation of actual cost of any asset acquired during the previ-

ous year is significant because the WDV of the relevant block of asset
would be enhanced by such amount.
(D) Written Down Value (WDV) (Sec. 43(6))
The percentage of depreciation as prescribed for each block of assets

is applied on WDV computed at the end of the previous year relevant
to the assessment year. The WDV can be calculated by following cer-
tain steps as shown in Table 5.1:
TABLE 5.1: CALCULATION OF WRITTEN DOWN

VALUE OF AN ASSET
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Opening value of the block of assets at the beginning of XXX
previous year
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Add: Actual Cost of assets (P&M) acquired during the pre- XXX
vious year and belonging to the same block of assets
Total XXX
Less: Monies payable to the assessee with respect to any
asset in the block which is sold, discarded, demolished,
destroyed, together with scrap value (if any)
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WDV (for purpose of depreciation) XXX

Depreciation at the prescribed percentage – actually XXX
allowed [Depreciation for the year, i.e. depreciation on
opening block and depreciation on additional P&M]
Closing Value of block XXX
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A taxpayer may have various different blocks of assets. Depreciation

is allowed for one block of assets. A block of assets can contain differ-
ent types of assets that are charged under the same percentage rate
for depreciation. For a block of assets, there is little or no depreciation
in the following cases:
If a block exists, and the written down value for the block is zero. A
block value below zero implies short-term capital gain.
Ifa block ceases to exist, but the written down value still exists.
The block value is considered to be a short-term capital loss.
Ifthe asset was used for less than 180 days in the year when it was
acquired; it will be charged at 50% of normal rate for depreciation
and deprecation rate will be normal, if the asset is then used in the
subsequent year.
(E) Rates of depreciation (Appendix I (Rule 5))
For the Assessment Year 2018-19, the maximum ceiling of deprecia-

tion eligible for claim on assets has been restricted to 40% of the WDV.

n o t e s
The block of assets and depreciation rates applicable for them are
shown in Table 5.2:
TABLE 5.2: RATES OF DEPRECIATION APPLICABLE FOR

VARIOUS ASSETS
A. TANGIBLE ASSETS
Asset Class Asset Type Depreciation
Rate
1. Buildings Residential buildings except hotels and 5%
boarding houses
Hotels and boarding houses 10%
Purely temporary erections such as 40%
wooden structures
2. Furniture and Furniture – Any furniture / fittings 10%
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fittings including electrical fittings and air
conditioners
3. Plant and Motor car, motor cycle, bike, scooter 15%
machinery other than those used in a business of
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running them on hire, Mobile phone
Motor buses/taxies/lorries used in a 30%
business of running them on hire
Computers, Laptops, computer soft- 60%
ware, Printer, Scanner, UPS and other
peripheral devices
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Books owned by assessee, carrying on 100%

profession being annual publications
profession not being annual publica-
tions
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business in running lending libraries
Energy saving devices, water treat- 40%
ment plant, etc.
B. INTANGIBLE ASSETS
Intangible assets Know how, patents, copyright, trade- 25%
mark, license, franchise or any other
business or commercial rights of simi-
lar nature
note
To derive the income tax depreciation, simply multiply the WDV

value of the block of asset with depreciation. This depreciation is
deducted from the asset and also charged to the P&L account.
Illustration 3: An assessee determines the WDV of a particular trade-

mark as `2,00,000. Find the amount of depreciation charged, using the
depreciation rate as applicable.

n o t e s
Solution: The rate of depreciation for intangible assets is 25%. There-

fore, the depreciation charged is equal to 25% of WDV of trademark,
i.e. 25% of `2,00,000 which comes down to `50,000.
Illustration 4: The written down value of plant and machinery of IDD

Ltd. on 1st April, 2017 is `40 crores. IDD purchases new plant and
machinery worth `6 crores on 25th April, 2017. The purchase includes
purchasing second-hand machinery equipment from USA amounting
to `2 crores. The company wants to increase its capacity from 1200
tons per annum to 1500 tons per annum. The new machinery com-
menced production from 1st Dec 2017. Calculate the amount of depre-
ciation allowed for A.Y. 2018-19.
Solution:
COMPUTATION OF ALLOWABLE DEPRECIATION
S
Opening WDV 40,00,00,000
Add: Actual cost of assets (P&M) ac- 6,00,00,000
IM
quired during the previous year and
belonging to the same block of assets
Total 46,00,00,000
Less: Depreciation of the year
a. Depreciation on opening block a. 6,00,00,000
M
@ 15% of 40,00,00,000
b. Depreciation on additional P&M
(Period of usage less than 180 days i.e. b. 45,00,000
from 1st Dec 2017 till 31st March 2018)
@ 15% of 50% of 6,00,00,000
N
Total 6,45,00,000
Closing WDV 39,55,00,000
Please note that the second-hand machinery equipment purchased

from USA amounting to `2 crores is not an eligible asset for the pur-
pose of Additional Depreciation computation. Therefore, the cost of
eligible assets = `4 crores. And the additional depreciation on eligible
assets @10% = `40 lakhs.
(F) Types of depreciation
Two types of depreciation allowance that are allowed under the In-
come Tax Act are as follows:
1. Normal depreciation for block of assets: The usual depreciation
that is allowed according to normal provisions of the income tax
act every year as per the prescribed rates.
2. Additional depreciation: Even after providing for the normal
depreciation, an additional depreciation of 20% of the actual

n o t e s
cost shall be allowed for new plant and machinery acquired and
installed by an assessee who is engaged in:
i. manufacture or production of article or things; or
ii. in the business of generation or generation, transmission and
distribution of power.
note
The SLM and the WDV methods are used for allowing normal de-
preciation. In the case of block of assets system, normal deprecia-
tion using the WDV method is allowed. In the case of power genera-
tion or power generation and distribution companies, depreciation
is allowed using SLM on each and every asset separately. An ad-
ditional depreciation of 20%/35% of the cost of eligible plant and
machinery acquired and installed in the previous year is allowed
S
only in the first year in which asset is acquired and installed. Such
depreciation is deductible while calculating the WDV for the next
year.
IM
However, under certain special conditions, an additional depreciation
of 35% (instead of 20%) of the actual cost shall be allowed in the fol-
lowing cases:
i. An assessee is setting up a new undertaking/enterprise/
manufacture or production of any article or thing on or after 1st
M
April 2015.
ii. The concerned undertaking is set up in a notified backward
areas of Andhra Pradesh, Bihar, Telangana and West Bengal.
iii. Acquisition and installation of new plant and machinery shall be
N
made between 1st April 2015 and 31st March 2020.
CASES WHERE ADDITIONAL DEPRECIATION IS NOT ALLOWED

Ships and aircrafts
Second hand machinery ( machinery used earlier by other persons
within or outside India)
Any machinery installed in office or residence including the guest
house
Any office appliances or road transport vehicles
Any plant or machinery over which 100% depreciation is allowed
CASES WHERE ASSETS ARE PUT TO USE FOR LESS THAN 180
DAYS IN THE RELEVANT PREVIOUS YEAR
In cases where a newly acquired asset is put to use for less than 180
days in a year, then, the assessee can claim only 50% of the total de-
preciation as deduction. Also, this restriction is also applicable in the

n o t e s
case of additional depreciation of 20% or 35% as the case may be. In

the case of additional depreciation being charged at half of the rate,
the rest half will be charged in the successive assessment year.
Illustration 5: ABC India Pvt. Ltd. is an engineering procurement
construction company and manufactures equipment for the power
sector. Calculate the admissible depreciation for A.Y. 2018-19 if you
are given the following information regarding ABC as on 31st March
2018:
WDV of P&M as on 1st April 2017 = 35 crores
Additions to P&M during 2017-18 = 5 crores
Out of total assets added, assets put to use for more than 180 days =
3.75 crores
S
Solution:

Depreciation on opening value of WDV of
IM
P&M as on 1st April 2017 (@15% of open- 5,25,00,000
ing value = 15% of 35 crores)
Add: Normal Depreciation
- put to use for 180 days or more (3.75 56,25,000 65,62,500
crores × 15%) 9,37,500
- put to use for less than 180 days (1.25
M
crores × 7.5%)
Add: Normal Depreciation
- put to use for 180 days or more (3.75 75,00,000 87,50,000
crores × 20%) 12,50,000
N
- put to use for less than 180 days (1.25

crores × 10%)
Total Admissible Depreciation for A.Y. 6,78,12500

2018-19
(G) Unabsorbed depreciation (Sec. 32(2))
If owing to depreciation, there is a loss under business and profession;

then, it is called unabsorbed deprecation and it shall be allowed to be
carried forward.
Such unabsorbed depreciation shall be carried forward even if the

business/profession to which it relates is not in existence. It is not
mandatory to file a return of loss for carrying forward unabsorbed
depreciation.
In the case of unabsorbed losses, the assesse should set off the brought
forward losses as follows:
1. Adjust all the current year depreciations.

n o t e s
2. Now, set off the brought forward business losses (speculative or

non-speculative).
3. Unabsorbed depreciation will now be set off against the business
income.
4. Unabsorbed depreciation can be carried forward for any number
of years without any restriction.
5. Unabsorbed depreciation can be set off against any income from
any head except from the income from salary and capital gains.
Illustration 6: Calculate unabsorbed depreciation if you are given the
following information:
Profit from business before depreciation = `7,00,000
Depreciation = `12,00,000
S
Solution:
IM
Unabsorbed depreciation = `5,00,000
M
Profit from business before depreciation = `7,00,000; Income from

house property = `2,00,000 and Depreciation = `12,00,000
Solution:
N
Income from house property = `2,00,000
Profit from business before depreciation = `7,00,000; Income from
capital gains = `2,00,000 and Depreciation = `12,00,000
Solution:
Income from capital gains = `2,00,000 (cannot be adjusted against un-
absorbed depreciation)

n o t e s

Loss from business before depreciation = `10,00,000; Income from

house property = `2,00,000 and Depreciation = `2,00,000
Solution:
Loss from business before depreciation = `10,00,000
Income from house property = `2,00,000
Carried forward business loss = `8,00,000
S
5.5.4 EXPENDITURE ON SCIENTIFIC RESEARCH
(SECTION 35)
IM
Scientific research may be carried on:
(a) by the assessee, pertaining to his business;
(b) by making payment to outside agencies engaged in scientific
research work
M
In-house scientific research
The expenses incurred on in-house research i.e. research carried out

by the assesse are allowed as a deduction, only where the research
work relates to the business of the assessee. An assessee can claim the
N
following expenditure as a deduction:

(a) revenue expenses
(b) capital expenses
Revenue Expenditure, Section 35(I)(i): All revenue expenses laid out

or expanded on scientific research during the previous year are fully
allowed as a deduction.
It has been further provided that the following revenue expenses, ex-
pended or laid out during three years immediately preceding the com-
mencement of the business, shall be deemed to be the expenditure of
the previous year in which the business commences. Therefore, these
revenue expenses shall be allowable in that year to the extent these
are certified by the prescribed authority:
(a) payment of salary to employees engaged in scientific research;
(b) purchase of material used in scientific research.
Capital expenditure, Section 35(I) (iv) read with section 35(2): All
capital expenses (excepting expenditure on the acquisition of land)

n o t e s
incurred on scientific research related to the business of assessee shall

be allowed as a deduction in the year in which they are incurred.
Moreover, capital expenditure incurred during three years immedi-

ately preceding the commencement of business shall be deemed to
be expenses of the previous year of commencement of business and
allowed in that year. Capital expenses may be incurred on acquisition
of plant and machinery, construction of buildings, acquisition of vehi-
cles, etc. for the purpose of scientific research.
Sale of an asset used for scientific research

(a) Sale of an asset which has been used for other purposes
[Section 41(3)]: Generally, profit arising from the transfer of a
capital asset is taxable under the head capital gain but where the
scientific research asset is sold off without having been used for
S
other purposes, then:
(i) the net sale price of the assets; or
(ii) the cost of the asset, which was earlier allowed as deduction
IM
under section 35, whichever is less,
Shall be treated as business income of the previous year in which
such asset is sold. Any excess of sale price over original cost of
the asset shall be subject to provisions of capital gains. This shall
apply even if the business does not exist in that previous year.
(b) Sold after having been used for business: Where the scientific
M
research asset is used in the business after cessation of its use

for scientific research, the actual cost of such asset included in
the relevant block of asset shall be taken as nil. This is done so
because the full amount has been allowed as deduction under
N
section 35. If this asset is altered on sold, the money payable shall
be deductible from the block in which such asset was earlier
included.
5.5.5 OTHER DEDUCTIONS (SECTION 36) (BONUS OR

COMMISSION PAID TO EMPLOYEE; INTEREST ON
BORROWED CAPITAL; BAD DEBTS; CONTRIBUTION
TO PENSION SCHEME; CONTRIBUTION TO
APPROVED GRATUITY FUND; CONTRIBUTION
RECEIVED FROM EMPLOYEES; EXPENDITURE ON
ADVERTISEMENT)
The deductions under the head ‘other deductions’ are covered under
Section 36(1) of the Income Tax Act, 1961. Let us discuss this in detail.
SECTION 36(1), OTHER DEDUCTIONS
While calculating the income from profits and gains of business or

profession several deductions have been allowed.

n o t e s
According to the provision of Section 36 (1), the following deductions

are available to an assessee:
A. Insurance (Section 36 (1) (i))
The amount of insurance premium paid with respect to insur-
ance against risk of damage to stocks or stores used for the
purpose of business or profession.
The amount of insurance premium paid by federal milk co-op-
erative society for insurance on the life of cattle owned by a
member of the primary co-operative society.
The amount of insurance premium paid by any mode other
than cash, by the employer for insuring the health of employ-
ees under an approved insurance scheme.
B. Bonus or Commission (Section 36 (1) (ii))
S
Bonus or commission paid to employees for services rendered
by them is allowed as deduction where the said amount would
not have been payable as profits or dividends to such employ-
IM
ees.
C. Interest on Borrowed Capital (Section 36 (1) (iii))
Interestpaid in lieu of capital borrowed for the purpose of
business or profession is deductible.
Ifcapital is borrowed by an assessee for purchasing or acquir-
M
ing an asset, then interest paid on such capital is not allowed as

deduction from the date capital was borrowed till the date, the
asset is first put to use.
D. Contribution towards a Pension Scheme (Section 36 (1) (iva))
N
Contribution towards an RPF by an employer under a pension

scheme as referred to in Sec. 80CCD on account of an employee to
the extent it does not exceed 10% of the salary of the employee is
deductible. Here, salary means basic salary plus Dearness Allow-
ance.
E. Contribution (Section 36 (1) (v))
Contribution made by an employer towards an approved gratuity
fund created by him for the benefit of his or her employees under
an irrevocable fund is allowed as deduction.
F. Employee’s Contribution towards Staff Welfare Schemes (Section
36 (1) (va))
Under this sub-section, any amount received by the employer from
his employees as their contribution to any provident fund, super-
annuation fund, or any other pension fund meant for the welfare
of such employees shall be treated as the income of the assessee
and shall be credited to the P&L A/C of the assesee for the year.

n o t e s
The employer assessee can debit his P&L A/C of the contribu-
tion of employees towards provident fund, superannuation fund,
or other fund created for the welfare of employees and claim de-
duction for the same. However, the deduction will be allowed only
if such amount is credited to the employee’s account in relevant
fund on or before due date. Due date means the date by which as-
sessee is required to credit such contribution in the relevant fund
as prescribed under respective fund.
G. Bad Debts (Section 36 (1) (vii) and 36 (2))
The amount of bad debts written off as irrecoverable in the ac-
counts of the assesse for the previous year is deductible subject to
certain conditions:
Debt should be incidental to the business.
S
It should have been taken into account in computing the in-
come of the assessee or it should represent money lent in ordi-
nary course of banking or money lending business.
IM
It should be written off in the books of account.
According to section 36 (2), in making any deduction for a bad debt or

part thereof, the following provisions shall apply—
(i) no such deduction shall be allowed unless such debt or part
thereof has been taken into account in computing the income
of the assessee of the previous year in which the amount of such
M
debt or part thereof is written off or of an earlier previous year,

or represents money lent in the ordinary course of the business
of banking or money-lending which is carried on by the assessee;
(ii) if the amount ultimately recovered on any such debt or part of
N
debt is less than the difference between the debt or part and the
amount so deducted, the deficiency shall be deductible in the
previous year in which the ultimate recovery is made;
(iii) any such debt or part of debt may be deducted if it has already
been written off as irrecoverable in the accounts of an earlier
previous year (being a previous year relevant to the assessment
year commencing on the 1st day of April, 1988, or any earlier
assessment year), but the Assessing Officer had not allowed it
to be deducted on the ground that it had not been established to
have become a bad debt in that year;
(iv) where any such debt or part of debt is written off as irrecoverable
in the accounts of the previous year (being a previous year
relevant to the assessment year commencing on the 1st day of
April, 1988, or any earlier assessment year) and the Assessing
Officer is satisfied that such debt or part became a bad debt in any
earlier previous year not falling beyond a period of four previous
years immediately preceding the previous year in which such
debt or part is written off, the provisions of sub-section (6) of
section 155 shall apply;

n o t e s
(v) where such debt or part of debt relates to advances made by an

assessee to which clause (viia) of sub-section (1) applies, no such
deduction shall be allowed unless the assessee has debited the
amount of such debt or part of debt in that previous year to the
provision for bad and doubtful debts account made under that
clause.
5.5.6 GENERAL EXPENDITURE FOR PURPOSE OF

BUSINESS AND PROFESSION (SECTION 37)
To claim deduction under Section 37(1), the following conditions

should be satisfied:
Expenditure should not be of the nature described under sections
30 to 36.
S
Expenditure should not be capital expenditure.
Expenditure should not be assessee’s personal expenditure.
Expenditure should have been incurred in the previous year.
IM
Expenditure must have been incurred in respect of business of an
assessee.
Expenditure must not have been incurred on any illegal or prohib-
ited activity
Expenditure incurred by an assessee on the activities relating to
M
corporate social responsibility referred to in section 135 of the

Companies Act, 2013 (18 of 2013) shall not be deemed to be an ex-
penditure incurred by the assessee for the purposes of the busi-
ness or profession.
N
5.5.7 EXPENDITURE ALLOWABLE FOR ADVERTISEMENT

(SECTION 37 (2B))
According to Section 37 (2B), no allowance shall be made in respect of

expenditure incurred by an assessee on advertisement in any souve-
nir, brochure, tract, pamphlet or the like published by a political party.
8. _______________ means depletion in real value of assets over a

period of time.
9. The term ______________ means a group of assets falling in
category of tangible as well as intangible assets.
10. ___________ of the Act relates to the deductions in respect of
expenses incurred on the repairs and insurance of machinery,
plant and furniture.

n o t e s
11. If a particular expenditure is of nature as described under

sections 36; then, deduction can be claimed under Section
37(1). (True/False)
12. Deductions u/s 36(1) includes the amount of any __________
paid in respect of insurance against risk of damage or
destruction of stocks or stores used for the purposes of the
business or profession.
13. Bonus or commission paid to employees would be allowed as
deduction subject to section ________.
Activity
Visit any manufacturing unit and discuss depreciation method ad-
S
opted by them for their assets.
5.6 AMOUNTS NOT DEDUCTIBLE U/S 40

IM
Under Section 40, the provisions for Amounts not deductible are
mentioned below:
Notwithstanding anything to the contrary in Sections 30 to 38, the

following amounts shall not be deducted in computing the income
chargeable under the head “Profits and Gains of Business or Profes-
M
sion”,
(a) In the case of any assessee
(i) Any interest, royalty, fees for technical services or other sum
chargeable under this Act, which is payable to,—
N
(A) Any person outside India; or

(B) In India to a non-resident, not being a company or to a
foreign company, in which tax is deductible at source
under Chapter XVII-B and such tax has not been
deducted or, after deduction, has not been paid during
the previous year, or in the subsequent year before the
expiry of the time prescribed under Sub-section (1) of
Section 200.
(ia) Any interest, commission or brokerage, rent, royalty, fees
for professional services or fees for technical services
payable to a resident, or amounts payable to a contractor or
Sub-contractor, being resident, for carrying out any work
(including supply of labour for carrying out any work), on
which tax is deductible at source under Chapter XVII-B and
such tax has not been deducted or, after deduction, has not
been paid on or before the due date specified in Sub-section
(1) of Section 139provided that where in respect of any such
sum, tax has been deducted in any subsequent year, or has
been deducted during the previous year but paid after the
due date specified in Sub-section (1) of Section 139, such sum

n o t e s
shall be allowed as a deduction in computing the income of

the previous year in which such tax has been paid.
(ib) any consideration paid or payable to a non-resident for a
specified service on which equalisation levy is deductible
under the provisions of Chapter VIII of the Finance Act, 2016,
and such levy has not been deducted or after deduction, has
not been paid on or before the due date specified in sub-
section (1) of section 139 :
Provided that where in respect of any such consideration, the
equalisation levy has been deducted in any subsequent year
or has been deducted during the previous year but paid after
the due date specified in sub-section (1) of section 139, such
sum shall be allowed as a deduction in computing the income
of the previous year in which such levy has been paid;]
(ic) Any sum paid on account of fringe benefit tax under Chapter
S
XIIH
(ii) Any sum paid on account of any rate or tax levied on the
profits or gains of any business or profession or assessed at a
IM
proportion of, or otherwise on the basis of, any such profits or
gains
Explanation 1.—For the removal of doubts, it is hereby
declared that for the purposes of this sub-clause, any sum
paid on account of any rate or tax levied includes and shall
be deemed always to have included any sum eligible for relief
of tax under section 90 or, as the case may be, deduction from
M
the Indian income-tax payable under section 91.

declared that for the purposes of this sub-clause, any sum
paid on account of any rate or tax levied includes any sum
eligible for relief of tax under section 90A;
N
(iia) Any sum paid on account of wealth-tax

(iib) Any amount:
Paid by the way of royalty, licence fee, service fee,
(A)
privilege fee, service charge or any other fee or charge,
by whatever name called, which is levied exclusively on
or
(B) Which is appropriated, directly or indirectly, from a State
Government undertaking by the State Government
(iii) Any payment which is chargeable under the head “Salaries”,
if it is payable:
(A) Outside India or
(B) To a non-resident, and if the tax has not been paid
thereon nor deducted there from under Chapter XVII-B
(iv) Any payment to a provident or other fund established for
the benefit of employees of the assessee, unless the assessee
has made effective arrangements to secure that tax shall be

n o t e s
deducted at source from any payments made from the fund

which are chargeable to tax under the head “Salaries”
(v) Any tax actually paid by an employer referred to in clause
(10CC) of Section 10
(b) In the case of any firm assessable as such:
(i) Any payment of salary, bonus, commission or remuneration,
by whatever name called (hereinafter referred to as
“remuneration”) to any partner who is not a working partner;
or
(ii) Any payment of remuneration to any partner who is a
working partner, or of interest to any partner, which, in
either case, is not authorised by, or is not in accordance with,
the terms of the partnership deed; or
(iii) Any payment of remuneration to any partner who is a
S
working partner, or of interest to any partner, which, in either
case, is authorised by, and is in accordance with, the terms of
the partnership deed, but which relates to any period (falling
prior to the date of such partnership deed) for which such
IM
payment was not authorised by, or is not in accordance with,
any earlier partnership deed, so, however, that the period of
authorisation for such payment by any earlier partnership
deed does not cover any period prior to the date of such
earlier partnership deed; or
(iv) Any payment of interest to any partner which is authorised
M
by, and is in accordance with, the terms of the partnership

deed and relates to any period falling after the date of such
partnership deed in so far as such amount exceeds the
amount calculated at the rate of twelve per cent simple
interest per annum; or
N
(v) Any payment of remuneration to any partner who is a

working partner, which is authorised by, and is in accordance
with, the terms of the partnership deed and relates to any
period falling after the date of such partnership deed in so
far as the amount of such payment to all the partners during
the previous year exceeds the aggregate amount computed
as under:
(a) On the first `3,00,000 of the book-profit or in case of a
loss `1,50,000 or at the rate of 90 per cent of the book-
profit, whichever is more
(b) On the balance of the book-profit at the rate of 60 per
cent provided that in relation to any payment under this
clause to the partner during the previous year relevant
to the assessment year commencing on the 1st day of
April, 1993, the terms of the partnership deed may, at
any time during the said previous year, provide for such
payment.
Provided that in relation to any payment under this clause
to the partner during the previous year relevant to the
assessment year commencing on the 1st day of April, 1993,

n o t e s
the terms of the partnership deed may, at any time during the
said previous year, provide for such payment.
Explanation 1: In cases, when an individual is a partner
in a company, acting on behalf of or for the benefit of any
other person, he is referred to as “partner in a representative
capacity”. Moreover, the person he represents is referred to
as “person so represented”.
(i) Interest paid by company to individuals other than
“partner in a representative capacity” shall not be taken
into account for the purposes of this clause
(ii) Interest paid by the firm to partners in a representative
capacity to the persons so represented shall be taken
into account for the purposes of this clause
Explanation 2: The interest paid by the company to an
individual who is a partner in the company (excluding partner
S
in a representative capacity) shall not be taken into account, if
the interest received by him is on behalf of or for the benefit,
of any other person.
IM
Explanation 3: With respect to this clause, “book-profit”
refers to net profit computed as shown in the profit and loss
account for the relevant previous year. The computation must
be in accordance to as stated in Chapter IV-D.
Explanation 4: With respect to this clause, “working
partner” of a company means an individual who is engaged
M
in conducting the affairs of the business or profession of the

company.
(ba) In the case of Association of Persons or body of individual

following amounts shall not be deducted in computing the
income from AOP/BOI
N
As per this Section, any payment in form of interest, salary,

commission, bonus or remuneration made by an AOP or BOI to
its members will not be allowed as a deduction in computing the
taxable income of the AOP/BOI. There are three Explanations to
this Section:
Explanation 1 - Where interest is paid by an AOP or BOI to a
member who has paid interest to the AOP/BOI, the amount of
interest to be disallowed under clause (ba) shall be limited to the
net amount of interest paid by AOP/BOI to the partner.
Explanation 2 - Where an individual is a member in an AOP/
BOI on behalf of another person, interest paid by AOP/BOI shall
not be taken into account for the purposes of clause (ba). But,
interest paid to or received from each person in his representative
capacity shall be taken into account.
Explanation 3 - Where an individual is a member in his individual
capacity, interest paid to him in his representative capacity shall
not be taken into account.

n o t e s
(c) Omitted by the Direct Tax Laws (Amendment) Act, 1987, w.e.f.
1-4-1989.
(d) Omitted by the Finance Act, 1988, w.e.f. 1-4-1989.
5.6.1 SECTION 40(A), SECTION 40A (2) (B), AND

SECTION 43(B)
Section 40A, Expenses or payments not deductible in certain cir-

cumstances
The provisions of this Section shall have effect relating to the com-
putation of income under the head “Profits and Gains of Business or
Profession”.
(i) Where the assessee is an individual who is a relative of the
S
assessee.
(ii) Where the assessee is a company, any director of the firm,
association of persons or company, partner of the Hindu
undivided family firm, or member of the association, or any
IM
relative of such director, partner or member.
Section 40A(2) (b), Expenses or payments not deductible in certain

circumstances
(b) The persons referred to in clause (a) are the following:
M
(i) Where the assessee is an individual any relative of the assessee

(ii) Where the assessee is a company, any director of the firm,
association of persons or company, partner of the Hindu
undivided family firm, of member if the association or family, or
N
family, or any relative of such director, partner or member

(iii) Any individual who has a substantial interest in the business or
profession of the assessee, or any relative of such individual
(iv) A company, firm, association of persons or Hindu undivided
family having a substantial interest in the business or profession
of the assessee or any director, partner or member of such
company, firm, association or family, or any relative of such
director, partner or member
(v) A company, firm, association of persons or Hindu undivided
family of which a director, partner or member, as the case may
be, has a substantial interest in the business or profession of the
assessee; or any director, partner or member of such company,
firm, association or family or any relative of such director, partner
or member
(vi) Any person who carries out a business or profession:
(A) Where the assessee being an individual, or any relative of
such assessee, has a substantial interest in the business or
profession of that person

n o t e s
(B) Where the assessee being a company, firm, association of

persons or Hindu undivided family, or any director of such
company, partner of such firm or member of the association
or family, or any relative of such director, partner or member,
has a substantial interest in the business or profession of that
person
Explanation: For the purposes of this sub-section, a person
shall be deemed to have a substantial interest in a business or
profession if:
(a) in a case where the business or profession is carried on by
a company, such person is, at any time during the previous
year, the beneficial owner of shares (not being shares entitled
to a fixed rate of dividend whether with or without a right to
participate in profits) carrying not less than twenty per cent
S
of the voting power.
(b) In any other case, such person is, at any time during the
previous year, beneficially entitled to not less than twenty per
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cent of the profits of such business or profession.
Section 40A (3), Disallowance of 100% of expenditure if payment is

made by any mode other than account payee cheque or draft
The provisions of this section shall have the following effect on modes
of expenditure:
M
(a) Where the assessee incurs any expenditure with respect to a

payment or aggregate of payments made to a person in a day, or
by an account payee cheque drawn on a bank or account payee
bank draft, exceeds `20,000 (now, `10,000), no deduction shall be
N
allowed with respect to such expenditure.
Situation where the payment is made in the subsequent year al-

though deduction for the expense was already allowed in an earlier
year
(a) Where an allowance has been made in the assessment for any
year with respect to any liability incurred by the assessee for
any expenditure by an account payee cheque drawn on a bank
or account payee bank draft. This payment shall be deemed to
be the profits and gains of business or profession and shall be
chargeable to income tax as the income of the subsequent year if
the amount of payment exceeds `20,000.
However, in the above two cases, where payment is made for playing,
hiring or leasing goods carriages, the payment would need to be made
by account payee cheque or account payee draft, if the amount of pay-
ment exceeds `35,000 instead of `20,000 as applicable in the above
mentioned cases.

n o t e s
Rule 6DD [Exception to Section 40A(3)]; cases and circumstances in

which a payment or aggregate of payments exceeding twenty thou-
sand rupees may be made to a person in a day, otherwise than by an
account payee cheque drawn on a bank or account payee bank draft.
In the following cases, no disallowance shall be made under section

40A (3):
(a) where the payment is made to—
(i) the Reserve Bank of India or any banking company62 as
defined in clause (c) of section 5 of the Banking Regulation
Act, 1949 (10 of 1949);
(ii) the State Bank of India or any subsidiary bank63 as defined
in section 2 of the State Bank of India (Subsidiary Banks) Act,
1959 (38 of 1959);
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(iii) any co-operative bank or land mortgage bank;
(iv) any primary agricultural credit society or any primary credit
society as defined under section 56 of the Banking Regulation
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Act, 1949 (10 of 1949);
(v) the Life Insurance Corporation of India established under
section 3 of the Life Insurance Corporation Act, 1956 (31 of
1956);
(b) where the payment is made to the Government and, under the
M
rules framed by it, such payment is required to be made in legal

tender64a;
(c) where the payment is made by—
(i) any letter of credit arrangements through a bank;
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(ii) a mail or telegraphic transfer through a bank;

(iii) a book adjustment from any account in a bank to any other
account in that or any other bank;
(iv) a bill of exchange made payable only to a bank;
(v) the use of electronic clearing system through a bank account;
(vi) a credit card;
(vii) a debit card.
Explanation.—For the purposes of this clause and clause (g),
the term “bank” means any bank, banking company or society
referred to in sub-clauses (i) to (iv) of clause (a) and includes any
bank [not being a banking company65 as defined in clause (c)
of section 5 of the Banking Regulation Act, 1949 (10 of 1949)],
whether incorporated or not, which is established outside India;
(d) where the payment is made by the way of adjustment against
the amount of any liability incurred by the payee for any goods
supplied or services rendered by the assessee to such payee;

n o t e s
(e) where the payment is made for the purchase of—

(i) agricultural or forest produce; or
(ii) the produce of animal husbandry (including livestock, meat,
hides and skins) or dairy or poultry farming; or
(iii) fish or fish products68; or
(iv) the products of horticulture or apiculture, to the cultivator,
grower or producer of such articles, produce or products;
(f) where the payment is made for the purchase of the products
manufactured or processed without the aid of power in a cottage
industry, to the producer of such products;
(g) where the payment is made in a village or town, which on the
date of such payment is not served by any bank, to any person
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who ordinarily resides, or is carrying on any business, profession
or vocation, in any such village or town;
(h) where any payment is made to an employee of the assessee or
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the heir of any such employee, on or in connection with the
retirement, retrenchment, resignation, discharge or death of such
employee, on account of gratuity, retrenchment compensation or
similar terminal benefit and the aggregate of such sums payable
to the employee or his heir does not exceed fifty thousand rupees;
(i) where the payment is made by an assessee by the way of salary
M
to his employee after deducting the income-tax from salary in

accordance with the provisions of section 192 of the Act, and
when such employee—
(i) is temporarily posted for a continuous period of 15 days or
more in a place other than his normal place of duty or on a
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ship; and
(ii) does not maintain any account in any bank at such place or
ship;
(j) where the payment was required to be made on a day on which
the banks were closed either on account of holiday or strike;
(k) where the payment is made by any person to his agent71 who is
required to make payment in cash for goods or services on behalf
of such person;
(l) where the payment is made by an authorised dealer or a money
changer against the purchase of foreign currency or travellers
cheques in the normal course of his business.
Explanation.—For the purposes of this clause, the expressions “au-

thorised dealer” or “money changer” means a person authorised as an
authorised dealer or a money changer to deal in foreign currency or
foreign exchange under any law for the time being in force.

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Section 43B, Certain Deductions to be Only on Actual Payment
The deductions allowable only on Actual Payment are:

(a) Any sum payable by the assessee by way of tax, duty, cess or fee,
under any law for the time being in force, or
(b) Any sum payable by the assessee as an employer by the way of
contribution to any provident fund or superannuation fund or
gratuity fund or any other fund for the welfare of employees, or
(c) Any sum referred to in clause (ii) of Sub-section (1) of Section 36,
or
(d) Any sum payable by the assessee as interest on any loan or
borrowing from any public financial institution or a State financial
corporation or a State industrial investment corporation, in
accordance with the terms and conditions of the agreement
S
governing such loan or borrowing, or
(e) Any sum payable by the assessee as interest on any loan or
advances from a scheduled bank in accordance with the terms
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and conditions of the agreement governing such loan or advances,
or
(f) Any sum payable by the assessee as an employer in lieu of any
leave at the credit of his employee, shall be allowed (irrespective
of the previous year in which the liability to pay such sum was
incurred by the assessee according to the method of accounting
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regularly employed by him) only in computing the income

referred to in Section 28 of that previous year in which such sum
is actually paid by him provided that nothing contained in this
Section shall apply in relation to any sum which is actually paid
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by the assessee on or before the due date applicable in his case for
furnishing the return of income under Sub-section (1) of Section
139 in respect of the previous year in which the liability to pay
such sum was incurred as aforesaid and the evidence of such
payment is furnished by the assessee along with such return.
Explanation 1: Where a deduction in respect of any sum referred to

in clause (a) or clause (b) is allowed, the assessee shall not be entitled
to any deduction while computing the income of the previous year in
which the sum is actually paid by the assessee.
Explanation 2: “Any sum payable” means a sum for which the assesse
has incurred liability in the previous year even though such sum may
not have been payable within that year under the relevant law.
Explanation 3: Where a deduction in respect of any sum referred to

in clause (c) or clause (d) is allowed, the assessee shall not be entitled
to any deduction while computing the income of the previous year in
which the sum is actually paid by the assessee.

n o t e s
Explanation 3A: Where a deduction in respect of any sum referred to

in clause (e) is allowed, the assesse shall not be entitled to any deduc-
tion with respect to such sum in computing the income of the previous
year in which the sum is actually paid by him.
Explanation 3B: Where a deduction in respect of any sum referred to

in clause (f) is allowed, the assessee shall not be entitled to any deduc-
tion with respect to such sum in computing the income of the previous
year in which the sum is actually paid by him.
Explanation 3C: Where a deduction of any sum, being interest pay-

able under clause (d) shall be allowed if such interest has been actual-
ly paid. Moreover, any interest which has been converted into a loan
or borrowing shall not be deemed to have been actually paid.
Explanation 3D: Where a deduction of any sum, being interest pay-
S
able under clause (e) shall be allowed if such interest has been actually
paid. Furthermore, any interest which has been converted into a loan
or advance shall not be deemed to have been actually paid.
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14. ___________ refers to net profit computed as shown in the

profit and loss account for the relevant previous year.
15. List any two deductions that become eligible only on the
actual payment of amount.
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Activity
Using various sources, find more information on the taxation sys-

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tem for the non-resident of India.
SET-OFF OF BUSINESS LOSS

5.7
(SECTION 72)
Section 72 of the Act relates to Carry forward and set off of business
losses. The provisions of section 72 are as follows:
(1) Where for any assessment year, the net result of the computation
under the head "Profits and gains of business or profession" is a
loss to the assessee, not being a loss sustained in a speculation
business, and such loss cannot be or is not wholly set off against
income under any head of income in accordance with the
provisions of section 71, so much of the loss as has not been so
set off or, where he has no income under any other head, the
whole loss shall, subject to the other provisions of this Chapter,
be carried forward to the following assessment year, and—

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(i) it shall be set off against the profits and gains, if any, of any
business or profession carried on by him and assessable for
that assessment year ;
(ii) if the loss cannot be wholly so set off, the amount of loss not
so set off shall be carried forward to the following assessment
year and so on :
Provided that where the whole or any part of such loss is sustained
in any such business as is referred to in section 33B which is
discontinued in the circumstances specified in that section, and,
thereafter, at any time before the expiry of the period of three
years referred to in that section, such business is re-established,
reconstructed or revived by the assessee, so much of the loss
as is attributable to such business shall be carried forward to
the assessment year relevant to the previous year in which the
business is so re-established, reconstructed or revived, and—
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(a) it shall be set off against the profits and gains, if any, of
that business or any other business carried on by him and
assessable for that assessment year; and
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(b) if the loss cannot be wholly so set off, the amount of loss
not so set off shall, in case the business so re-established,
reconstructed or revived continues to be carried on by the
assessee, be carried forward to the following assessment year
and so on for seven assessment years immediately succeeding.
(2) Where any allowance or part thereof is, under sub-section (2) of
section 32 or sub-section (4) of section 35, to be carried forward,
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effect shall first be given to the provisions of this section.

(3) No loss (other than the loss referred to in the proviso to sub-
section (1) of this section) shall be carried forward under this
section for more than eight assessment years immediately
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succeeding the assessment year for which the loss was first
computed.
As per the provisions of Section 72 of the Act, the assesse has the right
to carry forward loss from business and profession to the next assess-
ment year if the whole amount of loss cannot be set off against the
total of profits of all the other four heads of income. The loss carried
forward to the next assessment year can be set off against the profits
of the subsequent assessment years.
The assesse has the full right to carry forward and set off of business
losses under this section. However, it is subject to the following con-
ditions:
Loss must have incurred in assessee’s business, profession or vo-
cation.
Source of loss should not be speculation business.
Loss may be carried forward and set-off against the income from
business or profession though not necessarily against the profits
and gains of the same business or profession in which the loss was
incurred.

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Once a business loss has been carried forward, it cannot be set-off

against the income from any other head of income except the prof-
its of business or profession.
An assessor who incurs loss may only carry forward the losses and
if in case a successor is appointed, he is not allowed to carry for-
ward the losses. However, carry forward would be allowed in cases
of succession by inheritance.
The carry forward of business loss is allowed only for maximum
eight assessment years immediately succeeding the assessment
year in which loss incurred.
Assessee must have filed a return of loss under Section 139(3) for
carrying forward or set-off of loss. If this return of loss is not filed,
the assesse cannot carry forward the loss. The return must also be
filed within the defined time limit.
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Let us now understand the concept of set-off and carry forward with
the help of an example.
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Illustration 10: Mr. Ambani is a resident individual and lives in Orissa.
He furnishes the following particulars for the A.Y. 2018-19 as follows:

Income from salary (net) 65,000
Income from house property (35,000)
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Income from business (non-speculative) (27,000)

Income from business (speculative) (9,000)
Short-term capital losses (26,000)
Long-term capital gains 20,000
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Solution:
Total income of Mr. Ambani for A.Y. 2018-19

Income from salary (net) 65,000
Income from house property (35,000) 30,000
Profits and gains of business and profes-
sion
*Business loss to be carried forward (27,000)
**Speculative loss to be carried forward (9,000)
Capital Gains
Long term capital gain 20,000
Short term capital loss (26,000)
***Short term capital loss to be carried (6,000)
forward
Taxable Income 30,000

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* Since the business loss cannot be set-off against salary income; loss
of `27,000 from the non-speculative business cannot be set off against
the income from salaries. Therefore, this loss will be carried forward
to the next year for set-off against business profits (if any).
** Loss of `9,000 from the speculative business can be set off only
against the income from the speculative business. Therefore, such
loss needs to be carried forward to the next A.Y.
*** Short-term capital loss can be set off against short-term capital
gains as well as long-term capital gains. Therefore, short-term capital
loss of `26,000 can be set off against long-term capital gains to the ex-
tent of `20,000. The balance short-term capital loss of `6,000 cannot be
set-off against any other income and has to be carried forward to the
next year for set-off against capital gains, if any.
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16. The loss incurred by an assessee from a speculation business

IM can be set off against the profits of non-speculative business.
(True/False)
17. As per the provisions of which section of the Income Tax Act,
the assesse has the right to carry forward loss from business
and profession to the next assessment year if the whole
amount of loss cannot be set off against the total of profits of
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all the other four heads of income?
Activity
Prepare a case study on the carrying forward of business loss in

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case a business also has some amount of unabsorbed depreciation.

You may assume that the assesse has certain amount of income
from salary.
5.8 SUMMARY
Profit and gains of business or profession are an important part of
the total income of an assessee.
Some of the general terminologies used under the head of “Prof-
it and gains of business” include business, profession and profits
and gains.
The income under head profits and gains of business or profession
are covered under Section 28 of the Income Tax Act, 1961.
Incomes chargeable to income tax under the head ‘Profits and
Gains of Business or Profession’ include profits and gains of any
business or profession; any compensation or other payment due

n o t e s
to or received; income derived by a trade, professional or similar

association; etc.
Definitions of certain terms relevant to income from profits and
gains of business or profession:
“Actual cost” means the actual cost of the assets to the assessee,
met directly or indirectly by any other person or authority.
“Paid means actually paid or incurred according to the meth-
od of accounting upon the basis of which the profits or gains
are computed under the head “Profits and gains of business or
profession.”
“Plant” includes ships, vehicles, books, scientific apparatus
and surgical equipment used for the purposes of the business
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or profession but does not include tea bushes or livestock or
buildings or furniture and fittings.
“Scientificresearch” means any activities for the extension of
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knowledge in the fields of natural or applied science including
agriculture, animal husbandry or fisheries.
“Speculative transaction” means a transaction in which a
contract for the purchase or sale of any commodity, including
stocks and shares, is periodically or ultimately settled other-
wise than by the actual delivery or transfer of the commodity
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or scraps:
According to Section 29, the income referred to in Section 28 shall
be computed in accordance with the provisions contained in Sec-
tions 30 to 43D of the Income Tax Act, 1961.
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While computing income under the head ‘Profit and Gains of Busi-
ness or Profession’, certain important principles should be kept in
mind, which are: business carried on by the assesse; tax is levied
on aggregate income from all business professions carried out by
the assessee during the previous year; profit on sale of assets on
the winding up of a business; tax on real owner; business/profes-
sion income to be computed for each previous year, etc.
Provisions of Sections 30 – 43D:
Deduction for Rent, Rates, Repairs and Insurance of Building
(Section 30)
Deduction for Repairs and Insurance of Machinery, Plant and
Furniture (Section 31)
Deduction for Depreciation including concept of Block of As-
sets (Section 32)
Expenditure on Scientific Research (Section 35)
OtherDeductions (Section 36) (Bonus or Commission Paid to
Employee; Interest on Borrowed Capital; Bad Debts; Contri-

n o t e s
bution to Pension Scheme; Contribution to Approved Gratuity

Fund; Contribution Received from Employees; Expenditure on
Advertisement)
General Expenditure for Purpose of Business and Profession
(Section 37)
Expenditure Allowable for Advertisement (Section 37 (2B))
Amounts not Deductible u/s 40 include:
In case of any assesse: any interest, royalty, fees for technical
services or other sum chargeable; any interest, commission or
brokerage, rent, royalty, fees for professional services or fees
for technical services payable to a resident, or amounts pay-
able to a contractor or Sub-contractor; etc.
In the case of any firm assessable as such: any payment of sal-
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ary, bonus, commission or remuneration, etc.
Section 72 of the Act relates to Carry forward and set off of busi-
ness losses.
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Where for any assessment year, the net result of the computation
under the head "Profits and gains of business or profession" is a
loss to the assessee, not being a loss sustained in a speculation
business, and such loss cannot be or is not wholly set off against in-
come under any head of income in accordance with the provisions
of section 71, so much of the loss as has not been so set off or, where
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he has no income under any other head, the whole loss shall, sub-
ject to the other provisions of this Chapter, be carried forward to
the following assessment year, and—
it shall be set off against the profits and gains, if any, of any
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business or profession carried on by him and assessable for

that assessment year ;
if the loss cannot be wholly so set off, the amount of loss not
so set off shall be carried forward to the following assessment
year and so on
key words
Brokerage: A fee or commission charged by a middleman (bro-

ker) for getting something done.
Financial instrument: A document or contract that is usually
traded in market and which serves as an asset to one party as a
liability to the other party.
Goodwill: An established reputation of a business that is qual-
itative in nature; however, it can be quantified and is usually
calculated as part of its value when it is sold.

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Royalty: An amount that is paid to a patent holder for using the

patented item or work; or the amount paid to an author for each
copy of a book sold.
Speculation: An investment made by an investor or individual
without having any specific knowledge regarding the concerned
investment sector only in the expectation of gaining.

1. List and describe the general principles of business and
profession.
2. As per Section 43 of the Act, describe the following terms:
a. Actual cost
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b. Paid
c. Plant
d. Scientific research
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e. Speculative transaction
f. Written down value
3. Explain the principles that should be kept in mind while
computing income under the head of ‘Profit and Gains of
Business or Profession’.
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4. Explain tax provisions related to Section 32 (deduction for

depreciation). Also explain in detail the concept of block of assets.
5. Explain in detail two types of depreciation with the help of an
illustration.
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6. Describe various amounts that are not deductible under section

40 of the Act.
7. Explain the provisions for set-off and carry forward of business
losses.
Topic Q. No. Answer

General Principles of Business and 1. Profession
Profession
2. True
3. Income
Incomes under the Head Profits 4. Actual cost
and Gains of Business or Profession
(Section 28)

n o t e s
Topic Q. No. Answer

5. True
Computation of Income from Profits 6. True
& Gains of Business and Profession
(Section 29)
7. Previous
Deductions Expressly Allowable u/s 8. Depreciation
30 – 43D
9. Block of assets
10. Section 31
11. False
12. Premium
13. 43B
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Amounts not Deductible u/s 40 14. Book-profit
15. Any sum payable by the

IM assessee as an employer
in lieu of any leave at the
credit of his employee;
any sum payable by the
assessee as interest on
any loan.
Set-off of Business Loss (Section 72) 16. False
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17. Section 72

1. Some of the general principles of business and profession include:
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business, profession, and profits and gains. Refer to Section 5.2

General Principles of Business and Profession.
2. Section 43 relates to definitions of certain terms relevant to
income from profits and gains of business or profession. Actual
cost means the actual cost of the assets to the assessee, reduced
by that portion of the cost thereof, if any, as has been met directly
or indirectly by any other person or authority. Refer to Section
5.3 Incomes under the Head Profits and Gains of Business or
Profession (Section 28).
3. Principles that should be kept in mind while computing income
under the head of ‘Profit and Gains of Business or Profession’
include: business must be carried on by the assesse; tax is levied
on aggregate income from all business professions carried out by
the assessee during the previous year; speculation business of an
assessee is kept separate; etc. Refer to Section 5.4 Computation
of Income from Profits & Gains of Business and Profession
(Section 29).

n o t e s
4. Section 32 of the Act relates to the deductions in respect of

depreciation or diminution or exhaustion in the value of certain
capital assets. Depreciation refers to a decrease in the value of an
asset as a result of normal wear and tear or due to obsolescence.
As per the act, there are two methods for calculating the value
of depreciation. They are Straight Line Methods (SLM) and
the Written Down Value (WDV) method. Refer to Section 5.5
Deductions Expressly Allowable u/s 30 – 43D.
5. Two types of depreciation allowance that are allowed under the
Income Tax Act include: normal depreciation for block of assets
and additional depreciation. Refer to Section 5.5 Deductions
Expressly Allowable u/s 30 – 43D.
6. Under Section 40, certain amounts that are not deducted in
computing the income chargeable under the head “Profits and
S
Gains of Business or Profession” include: any interest, royalty,
fees for technical services or other sum chargeable; any interest,
commission or brokerage, rent, royalty, fees for professional; any
consideration paid or payable to a non-resident for a specified
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service on which equalisation levy is deductible; etc. Refer to
Section 5.6 Amounts not Deductible u/s 40.
7. Section 72 of the Act relates to Carry forward and set off of
business losses. The provisions of section 72 are as follows: if for
any assessment year, the net result of the computation under the
head "Profits and gains of business or profession" is a loss to the
M
assessee (not being a loss sustained in a speculation business)

and such loss cannot be or is not wholly set off against income
under any head of income in accordance with the provisions
of section 71; the loss that has not been set off shall be carried
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forward to the following assessment year. Refer to Section 5.7

Set-off of Business Loss (Section 72).
SUGGESTED READINGS
Singhania, Vinod, K., & Singhania, Monica, Students’ Guide to In-
come Tax. New Delhi: Taxmann Publications Pvt. Ltd.
Chandra, Mahesh, Goyal, S.P., & D.C. Shukla, D.C., Income Tax
Law and Practice. Delhi: Pragati Prakashan.
Lal, B.B., Income Tax Law and Practice. New Delhi: Konark Pub-
lications.
Manoharan, T., & Hari, G. (2018). Student's Handbook on Taxa-
tion (31st ed.). Mumbai: Snow White Publications Pvt. Ltd.

n o t e s
E-REFERENCES
(2018). Retrieved from https://resource.cdn.icai.org/46438bosin-
ter-p4-seca-cp4-u3.pdf
Income Tax deduction under section 80C, 80CCD, 80CCC.
(2018). Cleartax.in. Retrieved 11 April 2018, from https://cleartax.
in/s/80c-80-deductions
Section 80C Deductions - Income Tax Deductions for FY 2018-19 &
AY 2019-20. (2018). Bankbazaar.com. Retrieved 11 April 2018, from
https://www.bankbazaar.com/tax/income-tax-deductions-under-
section-80c-to-80u.html
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Ch a
6 pt e r
INCOME FROM CAPITAL GAINS
CONTENTS
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6.1 Introduction
6.2 Basis of Charge
IM
Activity
6.3 Capital Asset u/s 2(14)
Activity
6.4 Capital Assets and its Types
6.4.1 Short-term Assets & Long-term Assets
M

Activity
6.5 Period of Holding
Activity
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6.6 Capital Gains (Section 45)

Activity
6.7 Transfer as Defined u/s 2(47)
Activity
6.8 Computation of Capital Gain (Sections 48 and 50)
Activity
6.9 Full Value of Consideration
Activity
6.10 Cost of Acquisition
Activity
6.11 Cost of Transfer
Activity

CONTENTS
6.12 Cost of Improvement

Activity
6.13 Capital Gain on Transfer of Securities
Activity
6.14 Capital Gain on Transfer of Capital Assets (other than Securities)
Activity
6.15 Indexation
Activity
6.16 Cost of Inflation Index
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Activity
6.17 Short Term Capital Gain
IM
Activity
6.18 Long Term Capital Gain
Activity
6.19 Set off & Carry Forward of Capital Loss
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Activity
6.20 Exemptions/Deductions under Capital Gains (u/s 54, 54B, 54D, 54EC,
54F, 54G, 54GA)
N
Activity
6.21 Deemed Full Value Consideration (DFVC): Special Cases
Activity
6.22 Summary

INCOME FROM CAPITAL GAINS 231
n o t e s
CAPITAL GAIN ON COMPULSORY ACQUISTION OF

LAND AND BUILDINGS OF AN INDUSTRIAL
UNDERTAKING U/S 54 D
In certain scenarios, the capital gain that arises from the transfer
of land or buildings through compulsory acquisition under any
law, forms a part of capital gain from the industrial undertaking,
wherein the assessee is provided the following conditions are met:
The transfer is by way of compulsory acquisition of the asset.
The transferred asset is a land or building that belongs to the
assesse and forms a part of the industrial undertaking.
These transferred assets were being used by the assessee for a
period of at least two years prior to the date of transfer.
S
On transferring land or building, there can either be a short-
or long-term gain. However, since the building is under use
and it being a depreciable asset, any gain made on its trans-
IM
fer would be deemed as a short-term capital gain even if the
building was held for a period of more than 3 years.
The assessee purchases new land and buildings within a pe-
riod of three years either for the purpose of re-establishment
of the said undertaking or setting up a new industrial under-
taking.
M
Quantum of Deduction
If the amount of capital gain is equal to or less than the cost of the
new asset, the entire capital gain shall be.
N
If the amount of capital gain is greater than the cost of the new
asset, the cost of the new asset shall be allowed as an exemption.
Scheme of Deposit in Capital Gains Account Scheme, 1988:

This scheme is applicable to eligible taxpayers who wish to claim
exemption u/s 54 for capital gain. In this situation, the assessee
needs to purchase either new land or building or/and deposit
the said amount under the Capital Gain Accounts Scheme. This
amount needs to be deposited before the due date of furnishing
the return of income. The deposited amount shall be treated such
that it was used for the said purpose provided that the amount is
deposited before the due date of furnishing the return.
The proof of such a deposit shall be attached with the return. In

this scenario, the amount that has been utilised by the assesse for
the purchase or development of the new building/land along with
the deposited amount shall be deemed as the cost of the new asset
and will be eligible for exemption.

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Consequences where the amount deposited in the scheme is not

utilised for the purchase or the construction of land/building
for the industrial undertaking within the specified period: The
amount, that has not been utilised, will be charged under the head
of capital gains of the previous year in which the period of 3 years
from the date of transfer of the original asset expires. It will be
termed as short-term or long-term capital gain depending upon
whether the capital gain at that time fell under the purview of
short-term or long-term capital gain. The assessee shall be eligi-
ble to withdraw the amount from the scheme under this scenario.
Consequences where the new asset is transferred within a period

of 3 years of its purchase or construction: In this scenario, the cap-
ital gain which was earlier exempted shall be deducted from the
cost of the new asset for the purpose of calculation of capital gain
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with respect to the transfer of the new asset.
Mr. X needs compensation for the property which was compulso-

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rily acquired by the government. He would like to invest the com-
pensation amount. For that purpose, he can get exemption under
the capital gained. The tax consultant of Mr X. explained Section
54 D for the ensuing scenario as follows:
Mr X. invested in the Capital Gains Scheme u/s 54 D to earn profit

from the same.
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Making use of the scheme u/s 54 D, Mr. X was able to gain a fair
compensation which he was able to utilise for the purchase of a
new land within 15 months of receiving the compensation amount,
thereby using the same for investment purposes.
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learning objectives

>> Discuss capital asset u/s 2(14) of Income Tax Act, 1961
>> Explain transfer as defined u/s 2(47) of Income Tax Act, 1961
>> Discuss the different types of capital asset and capital gains
>> Explain period of holding
>> Describe full value of consideration
>> Explain the cost of acquisition of capital assets
>> Discuss cost of improvement and transfer
>> Describe capital gain on transfer of securities
>> Discuss capital gains on transfer of capital assets (other than
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securities)
>> Explain indexation
>> Describe the cost of inflation index
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>> Discuss the exemptions based on certain investments (u/s
54, 54B, 54D, 54EC, 54F, 54G, 54GA)
>> Explain Deemed Full Value Consideration (DFVC): special
cases
>> Discuss the special exemption u/s 10(37)
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6.1 INTRODUCTION
In the previous chapter, you studied about the profits and gains of
business and profession and its related tax treatment. Capital gain
N
means any profit arising from the transfer of a capital asset (affected
in the previous year) shall be chargeable to income tax. Moreover, it
shall be deemed as the income of the previous year in which the trans-
fer took place. Capital gain takes place only when a capital asset is
transferred. However, if the asset, that has been transferred, is not a
capital asset, then the amount will not be considered as capital gain.
There are certain conditions that should be met for taxing capital gains
which are namely, there must be a capital asset; transfer of the capi-
tal asset must have taken place; either profit or loss must have taken
place on the transfer of the said capital asset. There are two kinds
of capital gains that take place, namely, short-term capital gain and
long-term capital gain. Short-term capital gain occurs when the profit
gained, arises out of a transfer of a short-term capital asset. Likewise,
long-term capital gain occurs when the profit gained, arises out of a
transfer of a long-term capital asset.

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Figure 6.1 depicts the different kinds of capital gain below.
Capital Gain
Short-term Long-term
Capital Gain Capital Gain
Figure 6.1: Kinds of Capital Gain
This chapter discusses capital assets u/s 2 (14) and defines transfer u/s
2(47). It also explains the different types of capital asset and capital
gains as well as the period of holding. Further, the chapter describes
full value of consideration, cost of acquisition and cost of improve-
S
ment and transfer. Capital gain on transfer of securities and transfer
of capital assets is also discussed. Indexation, cost of inflation index
and exemptions based on certain investments (u/s 54, 54B, 54D, 54EC,
54F, 54G, 54GA) are also described. Finally, Deemed Full Value Con-
IM
sideration (DFVC): Special case and special exemption u/s 10(37) are
discussed.
6.2 BASIS OF CHARGE

‘Income from Capital Gains’ is the fourth head of taxable income as
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specified in section 14 of the Income Tax Act, 1961. This income was
made taxable for the first time in 1947 and contained the transfer of
capital assets made up to and on 31st March 1948. Later, on April 1,
1948, the tax of this income was removed and was once again revived
from the Assessment Year 1957-58. Income accruing from all transfer
N
of capital assets effected after 31st March 1956 was charged to tax un-
der this head.
Under sec 45(1) of the Income Tax Act, any profits or gains arising
from the transfer of a capital asset effected in the previous year unless
otherwise provided in section 54, will be taxable under the head ‘Cap-
ital Gains’ and shall be deemed to be the income of the previous year
in which the transfer took place.
Capital gains shall be taxable if following conditions are met with:

a. There should be a capital asset which means that the asset
transferred should be a capital asset on the date of transfer.
b. The capital asset should be transferred by the taxpayer during
the previous year.
c. There should be profits or gain arising from the transfer.

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1. For the purpose of tax on capital gains, the capital asset should
be transferred by the taxpayer during the previous year. (True/
False)
Activity
List the exemptions stated u/s 54.
6.3 CAPITAL ASSET U/S 2(14)

According to section 2(14) of the Income Tax Act, 1961, unless the con-
text otherwise requires, the term “capital asset” refers to:
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(a) Property of any kind held by an assessee, whether or not
connected with his business or profession;
(b) Any securities held by a Foreign Institutional Investor (FII)
IM
which has invested in such securities in accordance with the
regulations made under the Securities and Exchange Board of
India (SEBI) Act, 1992;
However, capital asset does not include the following:

(i) Any stock-in-trade, other than the securities referred to in sub-
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clause (b), consumable stores or raw materials held for the

purposes of his business or profession;
(ii) Personal effects, such as, movable property (including apparel
and furniture) held for personal use by the taxpayer or any
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member of his family dependent on him/her, but excludes the

following:
jewellery
archaeological collections
drawings
paintings
sculptures
any work of art

Explanation 1: As per Sec 2(14), for the purpose of this sub-
clause, “jewellery” includes:
ornaments made of gold, silver, platinum or any other pre-
cious metal or any alloy containing one or more of such
precious metals, whether or not containing any precious or
semi-precious stone, and whether or not worked or sewn into
any wearing apparel;

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precious or semi-precious stones, whether or not set in any

furniture, utensil or other article or worked or sewn into any
wearing apparel.
(iii) agricultural land in India, which excluded any land situated:
(a) in an area which is comprised within the jurisdiction of a
municipality (whether known as a municipality, municipal
corporation, notified area committee, town area committee,
town committee, etc.) or a cantonment board and with a
population of not less than ten thousand;
(b) any area within the distance, measured aerially:
1. not being more than two kilometres, from the local limits
of any municipality or cantonment board referred to in
item (a) and which has a population of more than ten
thousand but not exceeding one lakh; or
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2. not being more than six kilometres, from the local limits
of any municipality or cantonment board referred to in
item (a) and which has a population of more than one
lakh but not exceeding ten lakh; or
IM
not being more than eight kilometres, from the local
3.
limits of any municipality or cantonment board referred
to in item (a) and which has a population of more than ten
lakh.
Explanation: For the purposes of this sub-clause, “population”
would include the population as per the last census of which
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the relevant figures have been published before the first day
of the previous year.
(iv) 6½ per cent Gold Bonds, 1977, or 7 per cent Gold Bonds, 1980,
or National Defence Gold Bonds, 1980, issued by the Central
N
Government.
(v) Special Bearer Bonds, 1991, issued by the Central Government.
(vi) Gold Deposit Bonds issued under the Gold Deposit Scheme,
1999 or deposit certificates issued under the Gold Monetisation
Scheme, 2015 notified by the Central Government.
Explanation: For the purposes of the sub-clause, “property”
includes and shall be deemed to have always included any rights
in or in relation to an Indian organisation, including rights of
management or control or any other rights whatsoever.
Therefore, it can be concluded that the definition of capital asset as

per the Income Tax Act mainly distinguishes the business assets from
other assets for the purpose of taxation of Capital Gains.
Activity
Make a list of capital assets that are exempted under the head of
‘personal effects’ for an individual.

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6.4 CAPITAL ASSETS AND ITS TYPES

There are two types of capital assets, long-term and short-term capi-
tal assets. The basis of differentiation depends on the time period for
which the asset was held by the taxpayer before its transfer. In case,
the asset is acquired as inheritance, gift or succession, the period for
which the asset was held by its preceding owner would also be includ-
ed while classifying the asset as a short term or a long-term asset.
note
Income that accrues as a result of transfer of long-term asset is

long-term capital gains whereas the income that accrues as a result
of transfer of short-term asset is short-term capital gain.
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6.4.1 SHORT-TERM ASSETS & LONG-TERM ASSETS
A long-term asset is one that is held for more than 36 months. How-
IM
ever, from FY 2017-18, this criterion has been revised to 24 months
in the case of immovable property such as land, building and house
property.
For example, Mr. A sells his house property after holding it for a pe-
riod of 24 months. In this case, any income arising will be treated as
long-term capital gain.
M
This reduced period is, however, not applicable to movable property

such as jewellery, debt oriented mutual funds, etc. These items will
be classified as long-term capital assets only if they are held for more
than 36 months.
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Capital assets are considered short-term in case they are held for a
period less than 36 months from the date of transfer. This rule applies
to assets transferred after 10th July, 2014 regardless of the date of pur-
chase. However, the period of holding should be less than 12 months
in case of shares (equity and preference). For example, short-term as-
sets include the following:
Equity or preference shares in a company listed on a recognised
stock exchange in India
Securities listed on a recognised stock exchange in India
Units of UTI, whether quoted or not
Units of equity oriented mutual funds, whether quoted or not
Zero coupon bonds, whether quoted or not
It should be noted that in case these assets are held for a period above
12 months, they will be considered as long-term capital assets.

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Let us look at a few examples to understand the difference clearly:
Example 1: Consider Mr. X is a salaried employee. In the month of

April, 2014; he purchased land property and disposed the same in De-
cember, 2015. In this case, land is a capital asset for Mr. X. He pur-
chased the piece of land in April, 2014 and disposed it off in Decem-
ber, 2015. In this case, the period of holding was less than 36 months.
Therefore, the land will be considered as short-term capital asset.
Example 2: Consider Mr. Y is a salaried employee. In the month of

April, 2015 he purchased equity shares of an Indian company listed
at the NSE and sold the same in December, 2017. In this case, equity
shares are capital assets for Mr. Y. He purchased shares in April, 2015
and sold them in December, 2017. The period of holding in this case is
more than 12 months. Therefore, the equity shares will be considered
as long-term capital assets.
S
IM
2. ____________ asset is one that is held for more than 36 months.
Activity
List a few examples of short and long-term assets.

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6.5 PERIOD OF HOLDING

For proper tax computation, it is important for a taxpayer to under-
stand the concept of period of holding of a capital asset. This is be-
N
cause the tax treatment of capital gains and losses on short and long-
term capital assets is different. Period of holding refers to the time
during which an assessee holds on to a given capital asset. It is the
elapsed time between the initial date of purchase of a capital asset and
the date on which it was sold. The calculations of the period of holding
in the following situations are as follows:
Right to subscribe to shares or any other securities subscribed to
by the assessee based on the right to subscribe to such financial
assets; the period shall be calculated from the date of allotment of
such financial asset.
Right to subscribe to shares or any other securities acquired by
the person in whose favour the right has been transferred by the
actual holder; the period shall be calculated from the date of allot-
ment of such financial asset.
Period of holding of the right to the financial asset by a person who
has transferred the right; the period would be calculated from the
date of offer of such financial asset to the date of renouncement
which in such circumstances would be short-term.

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Period of holding a financial asset which has been allotted without

making any payment and on the basis of some other financial as-
set such as bonus shares; the period would be calculated from the
date of allotment of such financial asset.
Example 3: Mr. A purchased a security on January 1, 2009 and sold

the same on June 30, 2009. The holding period for the security would
be six months. Hence, it would be treated as a short-term asset.
To compute the holding period of a capital asset, counting begins on

the day after the date of purchase (acquisition) and ends on the day
of sale of that capital asset. The first day after purchase is used as a
benchmark for each succeeding month till the sale date of the asset to
determine the period of holding for the given capital asset.
Example 4: Divya purchased 100 shares of a stock on January 1, 2010.
S
To determine her holding period, she will begin counting from Janu-
ary 2, 2010 onwards. The second day of each month afterward would
be considered as the start of a new month, irrespective of the number
IM
of days in the month. In case, she sells the stock on January 1, 2011,
her holding period comes out to be less than a year, and the stocks will
be treated as short-term assets. In case, she sells the stocks on January
2, 2011, her period of holding will be one year plus one day. Therefore,
the stock will be treated as long-term capital asset.
Activity
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Describe in brief how the period of holding classifies the type of

asset.
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6.6 CAPITAL GAINS (SECTION 45)

Section 45 of Income Tax Act, 1961 explains about capital gains. Any
profits or gains arising from the transfer of a capital asset effected in
the previous year unless otherwise provided in sections 54, 54B, 54D,
54E, 54EA, 54EB, 54F, 54G and 54H, will be taxable under the head
“capital gains”, and shall be considered as the income of the previous
year in which the transfer of the capital asset took place.
(1A) Notwithstanding anything enclosed in sub-section (1), where

any individual receives at any time during any previous year,
any sum of money or other assets under an insurance from an
insurer on account of damage to, or destruction of, any capital
asset, as a result of the following:
flood, typhoon, hurricane, cyclone, earthquake or other con-
vulsion of nature
riot or civil disturbance
accidental fire or explosion

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action by an enemy or action taken in contending an enemy

(with or without a declaration of war)
Then, profits or gains from receipt of such money or other assets
would be charged for income tax under the head “Capital Gains”
and the income would be treated as the income of such individual
of the previous year in which the money or other asset was
received. For the purposes of section 48, the fair market value of
the capital asset on the date of sale/transfer shall be considered
to be the full value of the amount received or accruing as a result
of the transfer of the capital asset.
Explanation: For the purposes of this sub-section, the term
“insurer” would have the meaning given to it in clause (9) of
section 2 of the Insurance Act, 1938.
(2) Notwithstanding anything enclosed in sub-section (1), the profits
S
or gains realised from the transfer of a capital asset, by ways
of conversion by the assessee, or its treatment by him/her as
“stock-in-trade” of his/her business would be charged to income
IM tax as income of the previous year in which the given stock-in-
trade was sold or transferred. For the purposes of section 48, the
fair market value of the capital asset on the date of sale/transfer
shall be considered to be the full value of the amount received or
accruing as a result of the transfer of the capital asset.
(2A) In case, where an individual has received at any time during
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previous year, any beneficial interest on any securities, then,

profits or gains realised from the transfer made by the depository
or recipient of such beneficial interest against the securities
shall be chargeable to income tax as the income of the beneficial
owner of the previous year in which such transfer took place and
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would not be considered as the income of the depository deemed

to be the registered owner of securities by virtue of sub-section
(1) of section 10 of the Depositories Act, 1996.
“beneficial owner”, “depository” and “security” shall have the
meanings respectively given to them in clauses (a), (e) and (l) of
sub-section (1) of section 2 of the Depositories Act, 1996.
(3) Any profits or gains realising from the transfer of a capital asset
by an individual to a firm or other association of persons or body
of individuals (not being a company or a co-operative society)
where the individual becomes a partner or member, by way of
contributing capital or otherwise, would be charged to income
tax as his/her income of the previous year in which such transfer
took place. For the purposes of section 48, the sum of money
recorded in the books of account of the firm, association or body
as the value of the capital asset would be considered to be the

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full value received or accruing as a result of the transfer of the

capital asset.
(4) Any profits or gains realised from the transfer of a capital asset
owing to the distribution of capital assets as a result of dissolution
of a firm or other association of persons or body of individuals (not
being a company or a co-operative society) or otherwise, shall be
charged to income tax as the income of the firm, association or
body, of the previous year in which the transfer took place. For
the purposes of section 48, the sum of money recorded in the
books of account of the firm, association or body as the value of
the capital asset would be considered to be the full value received
or accruing as a result of the transfer of the capital asset.
(5) Notwithstanding anything enclosed in sub-section (1), where
the capital gain is realised by way of transfer of a capital asset,
S
either due to compulsory acquisition under any law, or transfer
due to the consideration which was determined or approved
by the Central Government or the Reserve Bank of India, and
the reimbursement or the amount received for such transfer is
IM
increased or further improved by any court, Tribunal or other
authority, then, the capital gain shall be treated in the following
manner:
(a) the capital gain computed with respect to the compensation
given in the first instance or, as the case may be, the amount
determined or approved in the first instance by the Central
M
Government or the Reserve Bank of India would be charged

as income under the head “Capital gains” of the previous year
in which the compensation or part thereof, or such amount or
part thereof, was first received.
(b) the amount by which the compensation is increased or further
N
enhanced by the court, Tribunal or other authority would be

deemed to be income chargeable under the head “Capital
gains” of the previous year in which such amount is realised
by the taxpayer.
Provided that any sum of compensation received in
undertaking an interim order of a court, Tribunal or other
authority would be considered as income chargeable under
the head “Capital gains” of the previous year in which the
final order of such court, Tribunal or other authority is made.
(c) in case, where during the assessment for any year, the capital
gain arising from the transfer of a capital asset is calculated
by including the compensation or consideration referred to
in clause (a) or, as the case may be, increased compensation
or consideration referred to in clause (b), and later such
compensation or consideration is reduced by any court,
Tribunal or other authority, the computed capital gain of that
year would be recalculated by taking the compensation or
consideration as so reduced by such court, Tribunal or other
authority as the full value of the consideration.

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Explanation: For the purposes of this sub-section,

(i) with reference to the amount referred to in clause (b),
the acquisition cost and improvement cost is zero.
(ii) the provisions of this sub-section shall also apply in a
case where the transfer took place prior to the 1st day of
April, 1988;
(iii) where owing to reasons such as death of the individual
who made the transfer, or for any other reason, the
increased compensation or consideration is realised by
any other individual, the amount referred to in clause
(b) would be considered as the income, chargeable to
income tax under the head “Capital gains” of the other
individual.
Following sub-section (5A) shall be inserted after sub-section (5) of
S
section 45 by the Finance Act, 2017, with effect from April 1, 2018:
(5A) Notwithstanding anything enclosed in sub-section (1), where the
capital gain arises to a taxpayer, being an individual or a Hindu
IM
Undivided Family (HUF), from the transfer of a capital asset, being
land or building or both, under a specified agreement, the capital
gains are deemed to be chargeable to income tax as income of
the previous year in which the certificate of completion is given
by the concerned authority for whole or part completion of the
given project. For the purposes of section 48, the stamp duty, on
the date of issue of the completion certificate, of the individual’s
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share, being land or building or both in the project, as increased

by the consideration received in cash, if any, is regarded to be the
full value of the consideration received or accruing as a result of
the transfer of the capital asset.
N
Provided that the specifications of this sub-section shall not

apply in case the taxpayer transfers his/her share in the project
on or before the issue of completion certificate and the capital
gains would be considered as the income of the previous year
in which the transfer took place and the provisions of this Act,
other than the provisions of this subsection, shall apply for the
purpose of computing the full value of consideration received or
accruing as a result of such transfer.
Explanation: For the purposes of this sub-section, the term:
(i) “competent authority” refers to the authority entitled to
approve the building plan by or under any law in force for
the time being.
(ii) “specified agreement” refers to a registered agreement in
which an individual possessing a land or building or both,
agrees to allow another individual to develop a real estate
project on such land or building or both, in lieu of a share,

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being land or building or both in such project, with or without

payment of part of the share in cash.
(iii) “stamp duty” refers to the value determined by any authority
of Government for the purpose of payment of stamp duty
with reference to an immovable property being land or
building or both.
(6) Notwithstanding anything enclosed in sub-section (1), the
difference between the repurchase amount of the units referred
to in sub-section (2) of section 80CCB and the capital value of
such units would be considered as capital gains arising to the
taxpayer in the previous year in which the said repurchase took
place or the plan referred to in that section is concluded and
would be taxed accordingly.
S
“capital value of such units” refers to any amount invested by
the taxpayer in the units referred to in sub-section (2) of section
80CCB.
IM
3. In case goodwill of a profession, which is self-generated is

transferred, which of these is correct?
a. There will be a capital gain
b. There will be no capital gain
M
c. There will be a short term capital gain

d. Cannot be said
N
Activity
Using the Internet, find out when an assessee can claim deductions
under section 80C to 80U in the case of income from capital gain.
6.7 TRANSFER AS DEFINED U/S 2(47)

According to the section 2(47) of Income Tax Act, 1961, unless other-
wise specified, the term “transfer”, with reference to any capital asset,
shall refer to the following:
(i) the sale, exchange or relinquishment of the asset
(ii) the extinguishment of any rights therein
(iii) the compulsory acquisition thereof under any law
(iv) in case, where the capital asset is converted by the owner thereof
into, or is treated by him/her as, stock-in-trade of a business
owned by him/her, such conversion or treatment

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(v) the maturity or redemption of a zero coupon bond

(vi) any transaction containing the consent to possess any immovable
property to be taken or retained in part performance of a
contract of the nature referred to in section 53A of the Transfer
of Property Act, 1882
(vii) any transaction involving becoming a member of, or acquiring
shares in, a co-operative society, company or other association
of persons or by way of any agreement or any arrangement or in
any other manner, which results in transferring, or enabling the
enjoyment of, any immovable property.
Explanations:
1. For the purposes of sub-clauses (v) and (vi), the term
“immovable property” would bear the same meaning as
enclosed in clause (d) of section 269UA.
S
2. The term “transfer” would involve and shall be deemed to have
always involved selling or parting with an asset or any interest
therein, or creating any interest in any asset in any manner
IM
whatsoever, directly or indirectly, absolutely or conditionally,
voluntarily or involuntarily, by way of an agreement (entered
into in India or outside India) or otherwise, notwithstanding
that such transfer of rights has been characterised as being
effected or dependent upon or flowing from the transfer of
a share or shares of a company registered or incorporated
outside India.
M
From above definition, it can be concluded that the term ‘Transfer’

under the Income Tax is important to understand to compute the tax
liability arising under the head ‘income from capital gains’ arising
from the transfer of a capital asset.
N
Activity
Make a list of items mentioned in Section 2(47) of the Act, which

cannot be considered as transfers.
COMPUTATION OF CAPITAL GAIN

6.8
(SECTIONS 48 AND 50)
Computation of capital gain is done to assess the tax liability of a tax-
payer under the head “income from Capital gains”. The computation
is based on the nature of the capital asset transferred during the previ-
ous year, which means whether the capital asset is short-term capital
asset or long-term capital asset. Profits or gains arising from transfer
of short-term capital asset is considered as short-term capital gain,
while the profits or gains arising or accruing due to transfer of long-
term capital asset is long-term capital gain.

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The capital gain on transfer of capital asset is computed as follows:
Short-term capital assets (Section 48) Long-term capital assets (Section 48)
Full value of consideration Full value of consideration
Less: Cost of acquisition of asset Less: Indexed Cost of acquisition
Less: Cost of improvement Less: Indexed Cost of Improvement
Less: Expenditure incurred wholly and Less: Expenditure incurred wholly
exclusively in connection with such and exclusively in connection with
transfer such transfer
Less: exemptions provided under
sections 54, 54EC, 54F, and 54B
Resulting figure is short term capital Resulting figure is long term capital
gain gain
With effect from the FY 2018-19, long term capital gains on sale of eq-
uity shares/units of equity oriented fund, in case the realised amount
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is more than `1 lakh shall be chargeable to income tax at the rate of 10
percent without the benefit of indexation. Until 31st March 2018, inves-
tors are allowed a relief to exempt amount of capital gains received till
IM
31st January, 2018. The amount of capital gains received after this time
period shall be deemed taxable accordingly.
For example, Mr. X purchased shares worth `1000 on September 30,

2017 and disposed them of on December 31, 2018 for `1200. The stock
value as on January 31, 2018 was `1100 as on 31st January 2018. Out of
the capital gains realised by Mr. X, `200 (1200-1000), `100 (1100–1000)
M
is not taxable. The remainder of the capital gain of `100 would be

taxed at the rate of 10 percent without the benefit of indexation.
Sec 50 of the Income Tax Act gives the provisions for computation of
capital gains arising from depreciable assets. Accordingly, in case a
N
taxpayer has transferred a capital asset forming part of block of as-

sets (building, machinery etc.) on which the depreciation has been
allowed under Income Tax Act, the income arising from such capital
asset shall be considered as short term capital gain. Short-term capital
gain or loss from sale of depreciable asset shall be realised only in the
following two conditions:
a. When on last day of the previous year, Written Down Value
(WDV) of the block of asset is zero.
b. When on last day of the previous year, block ceases to exist.
Computation of capital gains on transfer of

depreciable asset (sec 50)
WDV of block of asset at the beginning of previous year
Add: Actual cost of assets falling within that block acquired during the
year
Less: Full value of consideration of assets transferred during the year
Less: Expenditure incurred wholly and exclusively in connection with
such transfer

n o t e s
The base year for computation of capital gains has been revised from
year 1981 to 2001 with effect from assessment year 2018-19. Therefore,
if any capital asset (acquired before April 1, 2001) is transferred, then
the taxpayer has the alternative to take its cost of acquisition either as
fair market value as on April 1, 2001 or its actual cost.
4. Mr. R is entitled to a salary of `10,000/month. He took an

advance of `20,000 against the salary in the month of March,
2016. His gross salary of for assessment year 2017–18 shall be:
a. `1,40,000
b. `1,20,000
c. Not enough information for computation
S
d. It will be decided by the assessing office
Activity
IM
Using the Internet, find the changes proposed by the Ministry of
Finance in computation of capital gains over the last ten financial
years.
6.9 FULL VALUE OF CONSIDERATION

M
Full value of consideration refers to the amount received/receivable

by the transferor with respect to the transfer of a capital asset, which
may be received in cash or kind. However, some points to be noted
here are as follows:
N
Adequacy or inadequacy of consideration is not a relevant factor

for the purpose of determining the full value of consideration.
It does not make any difference whether full value of consideration
is received in totality or, in instalments during the previous year,
since in both cases full value of consideration due will be taken for
the purpose of calculation of computing capital gains.
In case of exchange, the full value of consideration will be the mar-
ket value of the property transferred.
5. _______________ refers to the amount received/receivable by

the transferor in respect of a capital asset being transferred.
Activity
Using the Internet, explain fair market value and full market value
of a capital asset.

n o t e s
6.10 COST OF ACQUISITION

Cost of acquisition refers to the cost that is paid by the assessee to-
wards the acquisition of the capital asset. Expenses incurred for com-
pleting the title of the asset constitute a part of the cost of acquisition.
However, the following points should be considered:

Ground rent cannot be taken as expenditure incurred by the as-
sesse for the acquisition of the capital asset.
Interest
paid on the capital taken on loan to purchase an asset is
supplemented in the total cost of the asset.
Estate duty remunerated with respect to the inherited property
cannot be considered as the cost of enhancement or should form a
part of the acquisition.
S
DEEMED COST OF ACQUISITION
IM
Where the capital asset becomes the property of the assessee in any of
the below-mentioned cases, then the cost to the previous owner shall
be the deemed to be the cost of acquisition for the purpose of compu-
tation of capital gains:
On distribution of assets on total/partial partition of Hindu Undi-
vided Family (HUF)
M
Under a Gift/Will
By succession, inheritance or devolution
On distribution of assets on liquidation of the firm
N
Under a transfer to a revocable or irrevocable trust

On transfer by a wholly-owned subsidiary firm to its holding firm
or vice-versa
On conversion of self-acquired property of a member of an HUF to
the Joint Family property
On any transfer in a scheme of amalgamation of two Indian com-
panies subject to conditions specified u/s 47(vi)
On any transfer in a scheme of amalgamation of two foreign com-
panies subject to certain conditions
On any transfer of a capital asset by the banking company to the
banking institution in a scheme of amalgamation
Cost of acquisition in case of shares/debentures acquired on conver-

sion of debentures [Section 49(2A)]:
The cost of acquisition of the shares/debentures on such conver-
sion shall be deemed to include that part of the cost of the share/

n o t e s
debenture stock/deposit certificate, in relation to which such an

asset is acquired by the assesse.
For example, A subscribed to 15 partly convertible debentures
worth `100 each of XYZ Ltd. in 2008. On December 10, 2009, A re-
ceived 5 shares worth `10 each in lieu of each debenture. Thus, the
cost of 5 shares received will be the cost of 5 debentures converted
into shares of `50.
The period of holding of such converted shares/debentures will be
from the date of conversion of such debenture bonds into shares/
debentures till the actual date of transfer.
Stock or shares becoming property of the assessee on consolidation,

conversion etc.:
Deemed acquisition cost is the cost of such stock or shares from
S
which asset is derived.
Illustration 1: Calculate the cost of acquisition of the following assets

as on 31st March, 2014.
IM
(a) Cost of acquisition of goodwill of business. Market value of the
business as on 31st March, 2014 is `30 lakh and it commenced in
1968.
(b) Cost of acquisition of tenancy rights, if they were originally
purchased for `15,000 in 1968. Fair market value on 1st April, 1981
M
is `2,50,000 and the market value on 31st March, 2014 is `8,00,000.
Solution:
(a) Nil (because the cost of acquisition of self-generated goodwill is
nil) (b) 15,000 – When both cost of acquisition and fair market
N
value is known then we consider whichever of the two is lesser,

which in this case is the cost of acquisition.
Illustration 2: Mr. Sharma acquired 600 shares of `200 each of Infi-Si-

fi Ltd. He acquired them at a premium of 50 percent on 1st August,
2007. In September 2012, InfiSifi divided each share of `200 into 20
shares of `10 each. On January 1, 2013, Mr. Sharma gets 600 × 20 =
12000 shares. Find the cost of acquisition of these shares.
Solution:
= Cost of acquisition of 600 shares/number of sub-divided shares
= (600 × 300)/12000
= `15 per share
Illustration 3: Mr. Sharma subscribed to 300 debentures which are

partly convertible. The face value of debentures is `100 each. One-

n o t e s
third of the debentures are convertible. A debenture may be convert-

ed into 2 equity shares of `10 each and at a premium of `5 per share.
Mr. Sharma writes to the debenture issuing authority to convert his
1/3rd debentures into equity shares. Calculate the cost of acquisition
of the shares.
Solution: Cost of Acquisition = Cost of unconvertible debentures to

be converted into shares / no. of shares to be issued after conversion
= (100 × 100) / (2 × 10 × 5)
= `100 per share
6. Ground rent can be considered as expenditure incurred by
S
the assessee for the acquisition of the capital asset. (True/
False)
IM
Activity
Using the Internet, prepare a list of considerations that should be

kept in mind while computing the cost of acquisition of a capital
asset.
6.11 COST OF TRANSFER

M
When an assessee transfers or sells a capital asset, he/she may incur

certain costs that are wholly and directly related to the sale or transfer
of that capital asset. These costs are unavoidable and hence, neces-
N
sary for the transfer to take place. While computing the tax on capital
gains for any assessee, these costs referred to as cost of transfer are
permissible for deduction from sale proceeds. For example, in case of
sale of a house property, the following costs may be incurred by the
assessee to carry out the transfer:
Brokerage or commission paid for securing a buyer
Cost of stamp papers
Travelling expenses in connection with transfer
Where property has been inherited, expense related to procedures
associated with the will and inheritance, obtaining succession cer-
tificate, costs of executor, etc.
In case of sale of shares, a taxpayer may be allowed to deduct broker’s

commission for shares sold. Similarly, in case of sale of jewellery, ex-
pense on broker’s services for securing a buyer can be deducted to
compute tax on capital gains.

n o t e s
7. While computing the tax on capital gains for any assessee,

________ are permissible for deduction from sale proceeds.
Activity
Using the Internet, prepare a list of costs of transfers for different

transactions relating to capital assets.
6.12 COST OF IMPROVEMENT

After acquiring or purchasing any capital asset, he/she may add value
to the asset by way of improvement or addition to the asset. The cap-
S
ital expenditure incurred by an assessee in carrying out these addi-
tions and improvements in the capital asset is referred to as the cost of
improvement. It also includes any cost incurred in protecting or cur-
ing the title. Therefore, it can be concluded that cost of improvement
IM
includes all those expenditures, incurred by a taxpayer in increasing
the value of the capital asset.
However, the cost which is deductible in computing the income of the

assessee under the heads Income from House Property, Profits and
Gains from Business or Profession or Income from Other Sources (In-
M
terest on Securities) would not be considered as cost of improvement.

Cost of improvement, does not include normal repairs.
Cost of improvement with reference to the following shall be consid-

ered to be nil.
N
i. Goodwill
ii. Right to manufacture, produce or process any article or thing
iii. Right to carry on any business
iv. Any other capital asset
Until now, the base year for purposes of tax computation was 1981.
However, this has been revised to year 2001 with effect from of FY
2017-18.
For computing cost of improvement:

In case, the capital asset was acquired before 01/04/2001, cost of
improvement incurred since 01/04/2001 either by previous owner
or assessee shall be considered.
In case, the capital asset was acquired after 01/04/2001, all cost in-
curred by previous owner and assessee shall be considered.

n o t e s
Illustration 4: Mr. A purchased a house property constructed up to the

ground floor only on 1.12.2007 for ` 5,00,000. Later on, by 31.03.2008,
he elevated the sidewalls which were 5 feet tall to 7 feet. The expen-
diture incurred in the process was `30,000. After a while, he began
constructing the first floor of the house as per the plan incurring an
expenditure of `40,500 by 31.3.2010. The finishing took place between
1.4.2010 to 28.06.2010 which cost him another `80,500. He sold the
house on 01.03.2011. Find the cost of improvement and total indexed
cost.
Solution: Indexed cost of Acquisition (1) = 5,00,000 × (CII 2010–11)/

CII 2007–08)
= 5,00,000 × (167/129)
Indexed cost of Improvement (2) = 30,000 × (CII 2010–11)/CII 2007–
S
08) + 40,500 × (CII 2010–11)/CII 2009–10) + 80,500 × (CII 2010–11)/CII
2010–11)
Total indexed cost =1+2

IM
8. ___________ includes all those expenditures, incurred by a

taxpayer in increasing the value of the capital asset.
M
Activity
Using the Internet, prepare a list of costs of improvement for differ-

ent transactions relating to capital assets.
N
CAPITAL GAIN ON TRANSFER OF

6.13
SECURITIES
Capital gain on the transfer of securities is to be paid at the rate of
15 percent, in case they are sold within 1 year of the purchase and
at a rate of 20 percent if they are sold after 1 year of purchase. Fur-
ther, it is important to note that an assessee is not required to pay
any capital gain on shares if the shares are sold through a recognised
stock exchange and Securities Transaction Tax (STT) has been paid
for their transfer. STT is a tax levied on all transactions (excluding
transactions related to commodities and currency) undertaken by the
stock exchange. It is levied on both the buyer and the seller. As taxes
have already been paid by the buyer and seller, capital gain tax is not
chargeable on transactions where STT is paid. In the case of unlisted
securities, Long-Term Capital Gain (LTCG) is applicable at a rate of 20
percent after taking indexation into account. However, if the asset is
of short term in nature, then Short-Term Capital Gain (STCG) on list-

n o t e s
ed securities (on which STT is paid) is taxable at a rate of 15 percent,

while on unlisted securities, the tax payable is as per the slab rate
applicable to the taxpayer.
9. _________ is a tax paid for the transactions undertaken by the

stock exchange.
Activity
Discuss why taxes on capital gains are not charged if STT has al-
ready been paid by an assessee.
CAPITAL GAIN ON TRANSFER OF
S
6.14 CAPITAL ASSETS (OTHER THAN
SECURITIES)
IM
The capital gains arising on the transfer of capital assets other than
securities are as follows:
(A) Capital Gains on Depreciable Assets u/s 50: The provisions of

Section 50 are applicable in case a depreciable asset is being trans-
ferred. Computation of capital gains can be made in the following two
M
situations:
i. On the last day of the previous year, Written Down Value of the
block of assets is equal to zero. [Sec 50(1)]; Table 6.1 lists the
steps that need to be followed:
N
TABLE 6.1: CALCULATION OF CAPITAL GAINS ON

DEPRECIABLE ASSETS U/S 50 (1)
Step Description
1 Calculate full value of sale of the depreciable assets, which have

been transferred during the previous year and fall within the same
block of assets.
2 Calculate the total of the following: Expenditure incurred whol-

ly & exclusively in connection with such transfer(s)
The Written Down Value of the block of assets at the beginning
of the previous year
The actual cost of any asset(s) falling within the block of assets
acquired at any time during the previous year
3 If the value in Step 1 is greater than that of in Step 2, the difference

is chargeable as short-term capital gains. Otherwise, Sec 50(1) is not
applicable and there is no taxable capital gain.

n o t e s
When the block of assets is blank on the last day of the previous year,
[Sec 50(2)]; Table 6.2 lists the steps that need to be followed:
TABLE 6.2: CALCULATION OF CAPITAL GAINS ON

DEPRECIABLE ASSETS U/S 50 (2)
Step Description
1 Calculate the Written Down Value of the block of assets at the
beginning of the previous year.
2 Add: Actual cost of any asset falling within that block of assets
acquired by the assessee during the previous year
3 From the full value of sale of depreciable assets transferred and
falling within the same block of assets, deduct the following:
Total of Steps 1 and 2, which is the total cost of acquisi-

tion
S
Expenditure incidental to transfer
4 Resultant value would be the short-term capital gains
IM
Important points to consider are as follows:
The capital gain arising in the above-mentioned two situations is
always a short-term capital gain.
In case of transfer of two or more depreciable assets, capital gains
are calculated for the entire block of assets together.
M
It is not necessary that depreciation is allowed in the year of trans-

fer alone. In case, it is allowed in previous years, capital gains shall
be calculated as per Section 50 only.
(B) Capital Gains on Transfer of Land and Building: The following

N
conditions should be satisfied:

Transfer of land or building or both should take place.
The sale consideration should be less than the value approved by
the Stamp Valuation Authority of any State Government.
The asset may be a long-term or short-term capital asset.
The asset may be a depreciable or non-depreciable asset.
If these conditions are met, the value approved by the Stamp Valua-
tion Authority shall be taken as full value of consideration for comput-
ing capital gains.
The different situations for determining full value of consideration are

as follows:
Where the assessee accepts the value approved by the Stamp Val-
uation Authority
Where the assessee disputes the value approved by the Stamp Val-
uation Authority, the stamp duty valuation as finally accepted is
considered

n o t e s
Where the assessee claims that the value approved by the Stamp
Duty Authority is higher than the fair market value, but does not
dispute the same, then consider the fair market value as deter-
mined by the Valuation Officer or stamp duty valuation, whichever
is less
(C) Capital Gains on Transfer of Self-Generated Assets: These refer

to assets that bear no date or cost of acquisition to the assessee in re-
lation to their acquisition or creation.
The computation of capital assets in case of self-generated assets is

done as follows:
Self-generated asset Treatment

Goodwill of a business Full value of consideration will be
taken on actual basis.
S
Right to manufacture, produce or Cost of acquisition and/ or improve-
process any article or thing or right ment will be taken as nil. Expenses
to carry on any business. on transfer will be deductible on
IM
actual basis.
Tenancy rights Full value of consideration will be

taken on actual basis.
Route permits Cost of acquisition will be taken as

nil.
M
Loom hours Cost of improvement will be taken

on actual basis.
Trademarks and brand name asso- Expenses on transfer will be de-

ciated with the business ductible on actual basis
N
Illustration 5: Mrs. Shikha purchased a flat in Gurgaon for `25 lakhs

on 10th May, 2016 from her colleague Mr. Raj. The stamp duty as de-
termined by the Stamp Duty Authority amounted to `2 lakhs with the
deemed consideration being `27 lakhs. Mr. Raj had initially purchased
the flat on 21st May, 2011 for `12 lakhs. On 10th Nov. 2016, Mrs. Shikha
sold the flat for `32 lakhs. Determine the effect of the above transac-
tions on the assessments of Mrs. Shikha and Mr. Raj for the assess-
ment year 2016–17. (Assume that the value for stamp duty purpose in
case of the second sale was not more than the sale consideration.)
Solution: Computation of capital gain for Mr. Raj:

Deemed Consideration u/s 50C 27,00,000
Less: Cost of Acquisition 12,00,000
STCG 15,00,000

n o t e s
Computation of capital gain for Mrs. Shikha:

Sale Price 32,00,000
Less: Cost of Acquisition 25,00,000
STCG 7,00,000
Illustration 6: Ramesh acquired a piece of land in 1977-78 for `

2,00,000 and gifted it to his major daughter Rekha on 1st June, 1980.
At that time, the market value of the land was `1,50,000. The FMV
of the land on 1st April, 1981 was ` 3,00,000. Rekha sold the land on
15th September, 2015 for `40,00,000. Compute the capital gain for the
assessment year 2016-17 assuming that the expenses incurred on the
transfer were `2,00,000.
S
Solution: When the land is gifted on 1st June, 1980
Particulars Amount (in `) Amount(in `)

Sale Consideration
IM 40,00,000
Less: Expenses on Transfer 2,00,000
Indexed Cost of Acquisition 32,43,000 34,43,000
Long-term Capital Gain 5,57,000
Indexed cost of acquisition has been calculated as under:

M
Cost or fair market value as on 1st April, 1981 whichever is more
i.e. `3,00,000 × (CII of the year of transfer/CII of 1981–82)
`3,00,000 × (1081/100) = `32,43,000

N
Activity
List down a few examples of self-generated assets.
6.15 INDEXATION
The value of money at present will not be the same for tomorrow. The
prices keep increasing due to inflation. Indexation is a technique to
adjust income payments by means of a Price Index to maintain the
purchasing power of the public in inflation. The actual prices should
not be used while computing the capital gains; rather, these prices
should be indexed in line with the inflation in a country so that people
could obtain the real value from sale of their assets. For computing
capital gains using indexation, the numerator is the index value of
the year in which the asset is sold, while the denominator is the index
value of the year when the asset was purchased. The index value is
derived from the index known as ‘Cost of Inflation Index’.

n o t e s
Activity
State the steps for computation of indexed cost of an asset.
6.16 COST OF INFLATION INDEX

The Cost Inflation Index (CII) is a means to measure inflation used in
the computation of long-term capital gains. Cost inflation takes into
account the Consumer Price Index (CPI) for a given year for urban
non-manual employees (mainly requiring mental efforts) for the pre-
ceding year. As the price of a capital asset is likely to increase between
the purchase and its sale, selling the asset would provide the own-
er a profit which is chargeable to tax. In order to avoid paying huge
amounts of tax, the sale price of the capital asset is indexed to provide
S
the asset’s value as per its current value, taking inflation into consid-
eration. Thus, indexation helps in arriving at the actual value of the
asset at current market rates, taking into consideration, the erosion
IM
of value due to inflation. The CII for a particular year is decided by
the government and announced before the accounting year ends. The
Central Board of Direct Taxes (CBDT) has notified the “Cost Infla-
tion Index” Applicable from FY 2017-18 (AY 2018-19) onwards, with
Base Year shifted to 2001–02, in line with the amendments made in
Budget 2017. Cost Inflation Index as per amended provisions has been
fixed as 272 for FY 2017–18/ AY 2018–19, with cost inflation index for
M
base year (FY 2001–02) at 100.
The list of ‘Cost Inflation Index’ (CII) is as follows:
Financial Year Index Financial Year Index

N
1981-82 100 1999-00 389

1982-83 109 2000-01 406
1983-84 116 2001-02 426
1984-85 125 2002-03 447
1985-86 133 2003-04 463
1986-87 140 2004-05 480
1987-88 150 2005-06 497
1988-89 161 2006-07 519
1989-90 172 2007-08 551
1990-91 182 2008-09 582
1991-92 199 2009-10 632
1992-93 223 2010-11 711
1993-94 244 2011-12 758
1994-95 259 2012-13 852
1995-96 281 2013-14 939

n o t e s
Financial Year Index Financial Year Index

1996-97 305 2014-15 1024
1997-98 331 2015-16 1081

1998-99 351 2016–17 1125
How to calculate the cost inflation index:
Cost Inflation Index (CII) = (CII for the year the asset was transferred
or sold / CII for the year the asset was acquired or purchased)
Illustration 7: Ms. Priya purchased an apartment for `20 lakhs in Jan-

uary 2000 and sold it for `35 lakhs in January 2009. The profit or capi-
tal gain is `15 lakhs. Compute the tax liability on capital gain.
S
Solution: The CII for the year the apartment was purchased is 406.
The CII for the year the apartment was sold in is 632.
Then, the cost inflation index is 632/406 = 1.56

IM
To find the indexed cost of acquisition, CII is multiplied with the pur-
chase price. This is the actual cost of the asset.
Therefore, the indexed cost of acquisition = 20,00,000 × 1.56 =

`31,20,000
M
The long term capital gain = sale value of the asset – indexed cost of
acquisition
35,00,000 – 31,20,000 = `3,80,000
The tax liability for long term capital gains is charged at 20 percent:
N
Tax liability will be 20 percent of 3,80,000 = `76,000
10. ________ is a means to measure inflation used in the

computation of long-term capital gains.
Activity
Find the effect on calculation of tax on capital gains using CII and
without using CII.
6.17 SHORT TERM CAPITAL GAIN

The taxability of capital gains is based on the nature of the capital
gain, whether short-term or long-term. Therefore, in order to assess

n o t e s
the taxability, capital gains are classified into short-term and long-
term. In other words, the rates at which capital gain is taxed are dif-
ferent for long-term capital gain and short-term capital gain. The gain
arising or accruing from the transfer of a short-term capital asset is
called short-term capital gain. The gain on a depreciable asset is al-
ways considered as short term capital gain. Short-term capital gains
are calculated as follows:
1. Take the full value of consideration
2. Deduct the following from the above:
Expenditure incurred wholly and exclusively in connection
with such transfer
Cost of acquisition
Cost of improvement
S
3. The resultant figure is the short-term capital gain. Such gain
is charged to tax at 15 percent (plus surcharge and cess as
applicable).
IM
Full value of consideration (i.e., Sales value of the asset) XXXXX
Less: Expenditure incurred wholly and exclusively in (XXXXX)

connection with transfer of capital asset (E.g., broker-
M
age, commission, etc.)
XXXXX
Net Sale Consideration
N
(XXXXX)
Less: Cost of acquisition (i.e., the purchase price of the
capital asset)
Less: Cost of improvement (i.e., post purchases capital (XXXXX)

expenses on improvement of capital asset)
Short-Term Capital Gains XXXXX
Let us understand the computation process with the help of a few il-
lustrations:
Illustration 8: Mr Dheeraj is a salaried employee. He purchased gold

worth `9,00,000 in the month of December, 2016 and sold the same in
August, 2017 for `9,60,000. At the time of the sale, he paid brokerage
worth `12,000. Determine the amount of taxable capital gain.
Solution: Mr. Dheeraj purchased gold in December, 2016 and sold

the same in August, 2017. Thus, the period of holding is less than 36

n o t e s
months. The gain will be short-term capital gain and will be computed
as follows:

Full value of consideration (i.e., Sales value of the asset) 9,60,000
Less: Expenditure incurred wholly and exclusively in 12,000

age, commission, etc.)
9,48,000
9,00,000
Less: Cost of acquisition (i.e., the purchase price of the
capital asset)
S
Less: Cost of improvement (i.e., post purchases capital Nil
expenses on improvement of capital asset )
IM
Short-Term Capital Gains (STCG) 48,000
The same is not applicable to stocks and bonds which are faster-mov-
ing assets compared to real estate or jewellery. In this case, if stocks
and bonds are held for 12 months or less before sale, then the prof-
M
its or gains arising from them are considered to be short-term capital

gains. However, this rule is valid only to securities listed and traded
on a recognised stock exchange. Section 111A is applicable in case of
STCG arising on transfer of equity shares, units of equity oriented
mutual-funds, or units of business trust, transferred on or after 1–10–
N
2004 through a recognised stock exchange and the transaction shall

be liable to securities transaction tax (STT). Such gain is charged to
tax at 15 percent (plus surcharge and cess as applicable).
With effect from Assessment Year 2017–18, benefit of concessional tax

rate of 15 percent shall be available even where STT is not paid, if the
following conditions are satisfied:
transaction is undertaken on a recognised stock exchange located
in any International Financial Service Centre.
consideration is paid or payable in foreign currency.
Illustration 9: Ms. Kavya (Indian resident aged 39 years) is a salaried

employee. In December, 2017, she purchased 10,000 equity shares of
XYZ Ltd. at `100 per share and sold the same in April, 2018 at `125 per
share (she paid a brokerage of `1 per share). The shares were traded
through BSE and STT was paid by Ms. Kavya. Determine the tax lia-
bility on STCG in this case.

n o t e s
Solution: The computation of STCG:

Full value of consideration (i.e., ` 125 × 10,000 shares) 12,50,000
Less: Expenditure incurred wholly and exclusively in 10,000

connection with transfer of capital asset (E.g., brokerage,
commission, etc.)
12,40,000
10,00,000
Less: Cost of acquisition (i.e., the purchase price ` 100 ×
10,000 shares)
S
Less: Cost of improvement (i.e., post purchases capital Nil
expenses on improvement of capital asset )
IM
Short-Term Capital Gains (STCG) 2,40,000
11. Exemptions permitted by Income Tax Act, 1961 on income

from capital gains can be applied on short term capital gains.
M
(True/False)
Activity
List five examples where an individual earns short term capital

N
gains for a given financial year.
6.18 LONG TERM CAPITAL GAIN

As per the Income Tax Act, immovable property held by an assessee
for more than 36 months before sale, shall be considered as long-
term capital asset. Profits or gains arising/accruing thereof, shall be
deemed to be long term capital gains (LTCG). For stocks, shares and
bonds, this period is more than 12 months instead of 36 months. Un-
listed securities, on the other hand, will be considered as long-term
capital gains only if sold after 36 months. Such gain is charged to tax
at 20 percent (plus surcharge and cess as applicable).
Let us understand the computation of LTCG:

1. Take the full value of consideration
2. From the above, deduct the following:
Expenditure incurred wholly and exclusively in connection
with such transfer

n o t e s
Indexed cost of acquisition

Indexed cost of improvement
3. From the resulting number, deduct exemptions provided under
sections 54, 54EC, 54F, and 54B
4. The resulting figure is long-term capital gain
Full value of consideration (i.e., Sales value of the asset) XXXXX
Less: Expenditure incurred wholly and exclusively in

age, commission, etc.) (XXXXX)
S
Net Sale Consideration XXXXX
IM
Less: Indexed cost of acquisition (i.e., the purchase (XXXXX)
price of the capital asset)
Less: Indexed cost of improvement (i.e., post purchases (XXXXX)

capital expenses on improvement of capital asset )
M
Less: Exemptions provided under sections 54, 54EC, (XXXXX)

54F, and 54B
Long-Term Capital Gains (LTCG) XXXXX
N
Let us understand the computation process with the help of a few il-
lustrations:
Illustration 10: Ms. Manya bought 250 shares of a company listed in

Bombay Stock Exchange in November, 2014 at a cost of `145/ share,
paying a total sum of `36,250. She sold the shares at `192/share in
March 2016, after 16 months, receiving a sum of `48,000. She paid bro-
kerage at 0.5%. Calculate the LTCG.
Solution: In this case, to calculate LTCG, let us first compute the in-
dexed purchase price of the asset:
Indexed purchase price of the shares = 36,250 × (CII of 2016/ CII of

2014)
= 36,250 × 1081/1024 = 38,268

n o t e s
Long-term capital gains will be based on the following numbers:

Full value of consideration (i.e., Sales value of the asset) 48,000

commission, etc.) 240
Net Sale Consideration 47,760
Less: Indexed cost of acquisition (i.e., the purchase price

of the capital asset) 38,268
S
Less: Indexed cost of improvement (i.e., post purchases
capital expenses on improvement of capital asset ) Nil
IM
Less: Exemptions provided under sections 54, 54EC, 54F,
and 54B Nil
Long-Term Capital Gains (LTCG) 9,492
For FY 2018–19, in case long term capital gains on sale of equity shares/
units of equity oriented mutual fund is more than `1 lakh, the same
M
will be taxed at 10 percent without the benefit of indexation. Till 31st

March 2018, taxpayers were offered relief to exempt capital gains real-
ised up to 31st January, 2018. The capital gains arising beyond this time
period will be taxed at the given rate.
N
Debt-oriented mutual funds and preference shares, however, are

subject to general long-term capital gains tax rules. They will be sub-
jected to a tax liability at the rate of 20 percent for no-equity assets
after inflation indexation and 10 percent without indexation. Index-
ation increases the purchase price and thus, the capital gain decreases
accordingly. The taxpayer may apply indexation on acquisition and
calculate tax at 20%, or compute tax at 10% tax without indexation.
Thereafter, he/she may choose the tax slab which is lower of the two.
Illustration 11: Mr. Kapoor bought debt mutual shares in May, 2012 at
a cost of `1.5 lakh. He sold the same in March, 2016 for `3.3 lakh. He
paid brokerage at 0.5%. Compute tax liability at 20% with indexation
or 10% without indexation.
Solution: Capital gain without indexation = Full sales consideration

– (Brokerage at 0.5% + Purchase price) = 3,30,000 – (16,500 + 1,50,000)
= `1,63,500

n o t e s
Purchase price after indexation = 1,50,000 x 1081/852 (i.e. CII of 2016/

CII of 2012)
= `1,90,317
Capital gains calculation is as follows:

Full value of consideration (i.e., Sales value of the asset) 3,33,000

commission, etc.) 16,500
Net Sale Consideration 3,16,500
S
Less: Indexed cost of acquisition (i.e., the purchase price
of the capital asset) 1,90,317
IM
Less: Indexed cost of improvement (i.e., post purchases
capital expenses on improvement of capital asset ) Nil
Less: Exemptions provided under sections 54, 54EC, 54F,

and 54B Nil
M
Long-Term Capital Gains (LTCG) 1,23,183
Let us compare the long-term capital gains tax with and without in-
dexation:
N
LTCG tax at 20% with indexation = 20% of ` 1,23,183 = `24,636.6
LTCG tax at 10% without indexation = 10% of ` 1,63,500 = `16,350
In this case, LTCG tax without indexation is lower than that computed
with indexation. Therefore, Mr. Kapoor can choose to pay the tax at
10% without indexation.
12. For stocks, shares and bonds, the period of holding with
reference to LTCG is more than 12 months. (True/False)
Activity
List five examples where an individual earns short term capital

gains for a given financial year.

n o t e s
SET OFF & CARRY FORWARD OF

6.19
CAPITAL LOSS
According to the Income Tax Act, 1961, an individual taxpayer may
set off and carry forward the income losses incurred by him/her to the
coming years. This is helpful as it plays an important role in the finan-
cial condition of the individual having incurred such losses. The pro-
visions of set-off and carry forward of income losses has been made so
as to divide the tax burden of assessee in the case of losses. However, if
income from a particular income source is exempted from tax, the loss
incurred from such source cannot be set off against any other income
head which is taxable.
It is important to note that an assessee cannot set off losses from the
income exempted from tax against profit from any taxable income
S
source, and losses from casual income such as crossword puzzles,
winning from lotteries, races, card games, betting etc. cannot be set
off or carry forward.
IM
Let us understand the meaning of set off and carry forward off losses:
Set off of losses refers to the adjustment of losses incurred by an asses-

see against the profit of that financial year. Losses can be carried for-
ward to subsequent Assessment Years in case there are no adequate
profits in the given financial year.
M
INCOME LOSSES INTRA–HEAD SET OFF
As per section 70 of Income Tax Act, 1961, if the assessee taxpayer has
incurred losses under a certain income head, then he/she is permitted
N
to adjust these losses from any other income source under the same
head. This is referred to as intra-head adjustment. Taxpayer is not al-
lowed to carry out intra-head adjustment of loss in the following cases:
Speculative business losses: Speculative business losses are not
allowed to be set off against any income other than income from
the speculative business. However, non-speculative business loss
can be set off against income from the speculative business.
Long-term capital loss: Such losses cannot be set off against any
income other than income from long-term capital gain. However,
short-term capital loss can be set off against long-term or short-
term capital gain.
Income losses from owning and maintaining race horses: Loss
incurred from the business of owning and maintaining race horses
is not allowed to be set off against any income other than income
from the business of owning and maintaining race horses.
Income losses of specified business: Section 35 AD specifies that
income losses of specified business are not permissible to be set off
against any other income except income from the specified busi-

n o t e s
ness. However, loss from other business can be set off against the
profit of the specified business in a given financial year.
INCOME LOSSES INTER-HEAD SET OFF
The other method of carrying forward or set off of losses is through

inter-head adjustment. As per section 71 of Income Tax Act, 1961 if an
assessee incurs loss under one head of income and has earned any in-
come under other heads of income, he/she is allowed to adjust the loss
from one head against income from other head. Some examples are:
House property income losses: House property income losses can
be set off against profits from other heads. Such loss can be adjust-
ed against salary income, business income, income from capital
gain, and income from other sources except for casual income.
S
Non-speculative business losses: Non-speculative business losses
can be set off under any other head except income from salary.
The losses incurred in the following cases cannot be set off under
inter-head adjustments:
IM
Speculative business loss
Specified business loss
Capital gain income loss
Loss from owning and maintaining race horses
M
Income losses carried forward

Even after the taxpayer has made intra-head or inter-head adjust-
ments, it may be the case that the income losses continue to re-
main unadjusted. Such unadjusted loss can be carried forward to
N
the subsequent year for adjustment against the income from that
subsequent year. The Act lays down different provisions for carry-
ing forward of loss under different heads of income, which are as
follows:
House property income losses: As per Section 71(B) of Income
Tax Act, 1961, an assessee can carry forward income losses in-
curred under the head house property up to a period of 8 years
immediately succeeding the Assessment Year in which the loss has
incurred. It can be adjusted only against house property income
loss. In this case, the assessee can file the deferred return.
Non-speculative business losses: As per Section 72 of Income Tax
Act, 1961, an assessee can carry forward non-speculative business
loss up to a period of 8 years immediately succeeding the Assess-
ment Year in which the loss has incurred. He/she must file Income
Tax Return (ITR) within the due date prescribed under section
139 (1) of Income Tax Act 1961. The loss can be set off only against
business income.

n o t e s
Speculative business losses: Section 73 of the Act specifies that

income losses in speculative businesses can be carried forward up
to a period of 4 years immediately succeeding the Assessment Year
in which the loss has incurred. An assessee must file the ITR with-
in due date prescribed to carry forward the losses from specula-
tive business. Such loss can be adjusted only against income from
speculation business.
Specified business loss: According to Section 73A of Income Tax
Act, 1961, income losses in specified business loss can be Carrie
forward subject to the following conditions:
Income loss in respect of any specified business referred to
in section 35AD shall not be set off except against profits and
gains, if any, of any other specified business.
Income loss in specified business has not been wholly set off, so
S
much of the loss as is not so set off or the whole loss where the
assessee has no income from any other specified business shall
be carried forward to the following assessment year.
IM
99 It shall be set off against profits and gains, if any, of any
specified business, carried on by him assessable for that as-
sessment year; and
99 If the loss cannot be wholly so set off, the amount of loss not
so set off shall be carried forward to the following assess-
ment year and so on.
M
Capital gain income losses: If a taxpayer is unable to set off the

capital loss in the given financial year, both long-term loss and
short term loss can be carried forward immediately for eight
assessment years.
N
Brought forward income losses: Brought forward income loss-

es or unabsorbed depreciation in case where a company suffers
a loss before claiming depreciation, then the entire amount of de-
preciation is unabsorbed depreciation. However, if the company
suffers a loss as a result of depreciation amount, then the business
loss would be considered as nil and the balance of depreciation
amount will be unabsorbed depreciation. Table 6.3 shows set off
and carry forward of losses:
TABLE 6.3: PROVISION FOR SET OFF AND CARRY

FORWARD OF LOSSES
Head of income under Whether loss can Whether losses can Time limit
which loss is incurred be set off within be carried forward for carry for-
the same year and set off in sub- ward and set
sequent years. off of losses
Under Under Under Under
the any the any oth-
same other same er Head
head Head head
1. Income from Salaries NA NA NA NA NA

n o t e s
Head of income under Whether loss can Whether Losses Time limit
which loss is incurred be set off within can be carried for- for carry for-
the same year ward and set off in ward and set
subsequent years. off of losses
2. Income from House Yes Yes Yes No 8 years
Property
3. Profit and gain from
Business or Professions.
a. Non-speculation Yes Yes Yes No 8 years
Business
b. Speculation Business Yes No Yes No 8 years
c. Unabsorbed Depre- Yes Yes Yes No N.A.
ciation
d. Unabsorbed Invest- Yes Yes Yes Yes 8 years
ment or Development
allowance.
S
4. Capital Gain (Short- Yes No Yes No 8 years
Term)
5. Capital Gain (Long Yes No Yes No 8 years
-Term)
IM
6. Income from Other
Sources:
a. Lotteries, Crossword, Yes No No No NIL
Puzzle, Card Games,
Gambling, or betting of
any form.
M
b. Loss from activity of Yes No Yes No 4 years

owning and maintaining
Race Horses
c. Other Income Yes Yes No No NIL
N
Illustration 12: Mr. Mukherjee submits the following particulars of his

income for the AY 2017-2018. Find his gross total income setting off
and carrying forward losses.

Income from the let out house (Computed) 12,000
Loss from self occupied house 14,000
Profit of business of publication of books 45,600
Speculation income 8,000
Short-term capital gains 26,000
Long-term capital gains 4,000
Dividend from Indian company 4,000
Winnings in card game 8,000

n o t e s
The items brought forward for set–off:
Loss from Sugar Mill of AY 2008-2009 which is discontinued 13,000

Loss from publication business of AY 2013-2014 9,000
Loss in card game of AY 2014-2015 4,000
Speculation loss of AY 2008-2009 24,000
Short-term capital loss of AY 2016-2017 12,000
Long term capital loss of AY 2016-2017 14,000
Solution: Computation of gross total income of Mr. Mukherjee:
Income from House Property

(12,000 – 14,000, being loss from self-occupied house) (2,000)
Income from Business and Profession:
S
(i) General Business (Publication business profit ` 45,600 – B/F 23,600
Loss of sugar mill ` 13,000 – B/F Loss of publication business
` 9,000)
IM
(ii) Speculation business (Profit ` 8,000 – B/F ` 24,000).
NIL
(Balance Loss of ` 16,000 shall be carried forward)
Capital gains (STCG ` 26,000 + LTCG ` 4,000 – B/F short term
capital loss ` 12,000) (B/F long-term capital loss cannot be set
off, on account of expiry of time limit of 8 years)
18,000
M
Income from other sources (winnings in card game, B/F loss 8,000
cannot be set off)
Gross Total Income 47,600
N
Illustration 13: From the following particulars regarding income,

compute the total income of Ms. Mehak for the AY 2017-2018:
Salary `9,000 p.m.
House A (let out) `40,000; House B (Let out) ` (20,000); House C
(Self-occupied) ` (50,000)
Business A `2,00,000; Business B ` (2,50,000), Business C (shares
speculation) `30,000; Business D (commodity speculation) `
(40,000)
STCG `30,000; short-term capital loss `40,000
LTCG ` 1,00,000
Profits from card games (gross) ` 50,000; Loss from horse races `
30,000
Winnings from lottery (net of TDS) ` 70,000

n o t e s
Solution: Computation of gross total income of Ms. Mehak for AY

2017-2018:

Salary 1,08,000
Income from house property (40,000 – 20,000 – 50,000) (30,000)
Profits and gains of Business or profession :
(i) General Business (2,00,000 – 2,50,000) (50,000)
(ii) Speculation Business (30,000 – 40,000) – Balance loss
of `10,000 to be carry forward
Capital gains :
(i) Short-term capital gains (`30,000 – `40,000) (10,000)
(ii) Long-term capital gains 90,000
1,00,000
S
Income from other sources : [`50,000 + {70,000 x 100 ÷ 1,50,000
(100 – 30)}]
Total income 2,68,000
IM
13. Loss from a speculation business of a particular assessment

year can be set off in the same assessment year from which of
the following:
M
a. Profit and gains from any business

b. Profit and gains from any business other than speculation
business
c. Income of speculation business
N
d. Income of any business
Activity
Prepare a list of losses incurred by an assessee which cannot be set

off under inter-head adjustments.
EXEMPTIONS/DEDUCTIONS UNDER
6.20 CAPITAL GAINS (U/S 54, 54B, 54D, 54EC,
54F, 54G, 54GA)
Exemptions under Section 54: Section 54 states that any long-
term capital gain arising from the transfer of the residential house
property shall be exempted from the capital gain tax if another
residential property is purchased within one year before transfer
or two years after transfer. In case the house is being constructed,
such construction should be completed within 3 years of transfer
of such property.

n o t e s
Exemptions under Section 54 B: Section 54B deals with the trans-

fer of agricultural land. It states that if any sale of agricultural land
takes place, the capital gain arising out of that shall be exempt-
ed to the extent that new agricultural land is purchased within 2
years of the transfer or two years prior to the transfer.
Illustration 14: Ravi had purchased certain agricultural land in
1990-91 for ` 1,00,000. The land was being used for agricultural pur-
pose by him. This land was later sold by him in 2015 for `15,00,000.
Compute taxable capital gains for assessment year 2016-17 if the
agricultural land, which was sold, is rural agricultural land.
Solution: There is no capital gain since rural agricultural land is
not a capital asset.
Exemptions under Section 54 D: Section 54D is applicable to any
assessee who holds an industrial undertaking. To claim an exemp-
S
tion under this section, the asset must have been used for 2 years
immediately preceding the date of the transfer for the purpose of
the business undertaking. Alternatively, the assessee must have
IM
constructed or purchased a land or building within a period of 3
years after the date of compulsory acquisition.
Illustration 15: Aditya purchased an industrial undertaking on
1.5.2005 for `2,00,000, which he employed for business purpose. He
later sold it for `8,00,000 on 10.9.2009. Is he exempt from payment
of tax on capital gain or not?
M
Solution: Aditya shall be exempt from the payment of capital gain

on the sale of the industrial undertaking since he used it for a pe-
riod of 4 years and 5 months before the sale of the asset.
Exemptions under Section 54EC: Exemption under Section 54EC
N
is applicable to all gains arising from the transfer of any long-term

capital asset. The maximum quantum of the exemption amount is
`50,00,000 and the proceeds should be invested within the period
of 6 months in bonds issued by NHAI or RECL.
Illustration 16: Mukesh acquired shares of Genesis Ltd. on
10.10.1998 for `2,00,000. He later sold these shares on 1.7.2015 for
`10,00,000. He invests `1,00,000 in the bonds of Rural Electrifica-
tion Corporation Ltd. on 1.10.2015. What will be the consequences
if Mukesh takes a loan against the security of such bonds?
Solution: If any loan is taken against the security of such bonds, it
will be treated as if it is converted into money as such capital gain
which was exempt earlier on such bonds shall be treated as long-
term capital gain of the previous year, in which such loan is taken
against the security of such bonds.
Exemptions under Section 54F: Section 54F is applicable when an
assessee constructs a residential property within 3 years of sales

n o t e s
or purchases a residential property within 1 year before sale or 2

years after sale of the asset. This is only available to individuals
and HUF. The assessee claiming this exemption should not have
more than 1 residential property. Furthermore, the asset sold may
be any asset, but the asset acquired must be a residential property.
Exemptions under Section 54G: Section 54G is only applicable to
industrial undertakings. The exemption is granted for capital gain
arising from the transfer of capital assets in the case of shifting
of industrial undertaking from an urban area. This exemption is
available for purchases made within 1 year before the transfer or 3
years after the transfer.
Exemptions under Section 54GA: Section 54GA is only applica-
ble to capital gains arising from the transfer of assets in cases of
shifting of an industrial undertaking to any special economic zone
S
(SEZ) whether it is developed in an urban area or any other area.
This exemption is available for purchases made within 1 year be-
fore the transfer or 3 years after the transfer.
IM
14. For claiming exemption under section 54B the assessee should
purchase:
a. Urban agricultural land
b. Rural agricultural land
M
c. Any agricultural land

d. House property
N
Activity
Find out ways through which an assessee can claim exemptions

under section 54, 54B, and 54 D against income from capital gains.
DEEMED FULL VALUE CONSIDERATION

6.21
(DFVC): SPECIAL CASES
Deemed full value consideration (DFVC) comes under the purview of
Section 50C of the Income Tax Act, 1961. Under this Act, if the state
government or the Stamp Duty Authority has assessed a higher val-
ue for the purpose of payment of stamp duty, then in that case, the
amount assessed for the payment of stamp duty shall be deemed as
full value consideration. Whereas, if the sale proceeds are higher than
the amount assessed for stamp duty purpose, the sales proceeds shall
be considered. Table 6.4 shows incidences where instead of actual

n o t e s
consideration, full value of consideration shall be the deemed value

as specified:
TABLE 6.4: INCIDENCES WHERE DEEMED VALUE OF

FULL CONSIDERATION IS TAKEN
S. No. Section Mode of Transfer Deemed Value of Full
Consideration
1. 45(1A) Money/asset received from Value of money received
an insurer on account of and/or full market value
damage/ destruction of of asset on the receipt
capital asset date
2. 45(2) Conversion of or treatment Full market value of
of capital asset into stock- asset on the date of its
in-trade conversion or treatment
3. 45(3) Introduction of capital in Amount recorded in
S
kind into a firm by a part- the books of accounts of
ner/member the firm as the value of
capital asset
4.
IM 45(4) Distribution of capital asset Full market value of
in kind on dissolution of assets on the date of
firm distribution
5. 46(2) Shareholders receiving as- Market value of the as-
sets from liquidator on the sets on the date of distri-
liquidation of a company bution less the amount
assessed as deemed
M
dividend u/s 2(22)(e)

6. 48(4) Gift etc. of shares/deben- Market value on the
tures allotted under em- date of gift
ployee stock ownership
plan (ESOP)
N
7. 50C Transfer of land and/or Value declared by the

building assessee or value as
assessed by the Stamp
Valuation Authority,
whichever is higher
Activity
List the main points of Section 50C of the Income Tax Act, 1961.
6.22 SUMMARY
Income from ‘Capital Gains’ is the fourth head of income charge-
able to tax as specified in section 14 of the Income Tax Act, 1961.
Under sec 45(1) of the Income Tax Act, any profits or gains arising
from the transfer of a capital asset effected in the previous year un-
less otherwise provided in section 54, will be chargeable to income
tax under the head ‘Capital Gains’ and shall be deemed to be the
income of the previous year in which the transfer took place.

n o t e s
A capital asset is defined to include property of any kind held by

an assessee, whether connected with their business or profession
or not connected with their business or profession.
There are two types of capital assets, long-term and short-term
capital gains.
Capital assets are considered as short-term in case they are held
for a period of not more than 36 months from the date of transfer.
However, the period of holding should be less than 12 months in
the case of shares (equity and preference).
A long-term asset is one that is held for more than 36 months.
However, from FY 2017-18, this criterion has been revised to 24
months in the case of immovable property such as land, building,
and house property.
The period of holding refers to the time during which an assessee
S
holds on to a given capital asset.
Any profits or gains arising from the transfer of a capital asset ef-
fected in the previous year unless otherwise provided in sections
IM
54, 54B, 54D, 54E, 54EA, 54EB, 54F, 54G and 54H, will be charge-
able to income tax under the head “capital gains”, and shall be
considered as the income of the previous year in which the trans-
fer of the capital asset took place.
Full value of consideration refers to the amount received/receiv-
able by the transferor with respect to the transfer of a capital asset,
M
which may be received in cash or kind.

Costof acquisition refers to the cost that is paid by the assessee
towards the acquisition of the capital asset.
When an assessee transfers or sells a capital asset, he/she may in-
N
cur certain transfer costs that are wholly and directly related to

the sale or transfer of that capital asset.
The capital expenditure incurred by an assessee in carrying out
these additions and improvements in the capital asset is referred
to as the cost of improvement.
The Cost Inflation Index (CII) is a means to measure inflation used
in the computation of long-term capital gains.
key words
Equity oriented mutual fund: A category of mutual fund spec-

ified under section 10 (23D) of the Income Tax Act wherein 65
percent of the investible funds, out of total proceeds, are invest-
ed in equity shares of domestic companies.
Foreign institutional investor: An institution registered as FIIs
under Section 2 (f) of the SEBI (FII) Regulations 1995, incor-
porated outside India which offers investment in securities in
India.

n o t e s
Speculative business: A transaction defined in section 43(5) of

Income Tax Act, 1961 in which a contract for the purchase or
sale of any commodity, including stocks and shares, is periodi-
cally settled other than by the actual delivery or transfer of the
commodity.
Stock-in-trade: The tools, merchandise or supplies that an or-
ganisation or professionals use to carry out their business.
Written down value: The value of an asset derived after ac-
counting for depreciation. It is also called book value or net
book value of the asset under consideration.

1. Explain a capital asset as defined u/s 2(14) of the Income Tax Act,
S
1961.
2. What are different types of capital gains?
IM
3. What is meant by full value of consideration?
4. Explain the concept of Cost Inflation Index (CII) and the benefits
of indexing.
5. Mr. Rai is a salaried employee. He purchased gold worth ` 8,00,000
in the month of December, 2016 and sold the same in August,
2017 for ` 8,40,000. At the time of the sale, he paid brokerage
M
worth `10,000. Determine the amount of taxable capital gain.

6. Discuss the concept of set off and carry forward of loss.
7. Explain exemptions on income from capital gains under section
N
54 B with the help of an example.
Topic Q. No. Answer

Basis of Charge 1. True
Capital Assets and its Types 2. Long-term capital asset
Capital Gains (Section 45) 3. b. Not be any capital gain
Computation of Capital Gain 4. a.
` 1, 40,000
(Sections 48 and 50)
Full Value of Consideration 5. Full value of consideration
Cost of Acquisition 6. False
Cost of Transfer 7. Cost of transfer
Cost of Improvement 8. Cost of improvement
Capital Gain on Transfer of 9. Securities Transaction Tax
Securities

n o t e s
Topic Q. No. Answer

Cost of Inflation Index 10. Cost Inflation Index
Short Term Capital Gain 11. False
Long Term Capital Gain 12. True
Set off & Carry Forward of Capi- 13. c. Income of speculation
tal Loss business
Exemptions/Deductions under 14. c. Any agricultural land
Capital Gains (u/s 54, 54B, 54D,
54EC, 54F, 54G, 54GA)

1. A capital asset refers to an asset of any kind held by the assessee,
which includes real estate, equity shares, bonds, jewellery or
S
paintings. Refer to Section 6.3 Capital Asset U/S 2(14).
2. There are basically two types of assets that determine the
computation of capital gains: short-term assets and long-term
IM
assets. Refer to Section 6.4 Capital Assets and its Types.
3. Full value of consideration refers to the amount received/
receivable by the transferor in respect of a capital asset being
transferred, which may be received in cash or kind. Refer to
Section 6.9 Full Value of Consideration.
4. The cost inflation index (CII) is a means to measure inflation
M
used in the computation of long-term capital gains. Refer to

Section 6.16 Cost of Inflation Index.
5. Classify the capital gain as short-term or long-term based on
the period of holding. Compute the gain accordingly. Refer to
N
Section 6.17 Short Term Capital Gain.

6. According to the Income Tax Act, 1961, an individual taxpayer
may set off and carry forward the income losses incurred by him/
her to the coming years. Refer to Section 6.19 Set off & Carry
Forward of Capital Loss.
7. Section 54B deals with the transfer of agricultural land. Refer to
Section 6.20 Exemptions/Deductions under Capital Gains (u/s
54, 54B, 54D, 54EC, 54F, 54G, 54GA).
SUGGESTED READINGS
Niyogi, J. (1929). The evolution of the Indian income tax. London:
P.S. King.
Patwa, C. (2018). INCOME TAX CALCULATION OF PARTNER-
SHIP FIRMS & LLPs FOR F. Y. 2018-19 - RITUL PATWA & CO,
Chartered Accountants. RITUL PATWA & CO, Chartered Accoun-

n o t e s
tants. Retrieved 5 April 2018, from http://blog.ritulpatwa.com/in-

come-tax-calculation-of-partnership-firms-llps-for-f-y-2018-19/
Singhania, V., & Singhania, K. (2004). Taxmann’s direct taxes. New
Delhi: Taxmann Publications.
Aiyar A. (1963). The Income Tax Act, 1961. Madras (India): Co.
Law Institute of India.
Lal B. (1979). Income-tax law and practice. Sahibabad: Vikas.
Sampath Iyengar A., Rajaratnam, S. (2005). The law of income tax.
New Delhi: Bharat Law House.
E-REFERENCES
Capital Gains Tax - Long Term Capital Gains & Short Term Capi-
tal Gains. (2018). Cleartax.in. Retrieved 12 April 2018, from https://
S
cleartax.in/s/capital-gains-income
Cost Inflation Index in India - Check Calculation for FY 2016-17 &
AY 2017-18. (2018).Bankbazaar.com. Retrieved 12 April 2018, from
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https://www.bankbazaar.com/tax/cost-inflation-index.html
Home - Central Board of Direct Taxes, Government of India.
(2018). Incometaxindia.gov.in. Retrieved 12 April 2018, from https://
www.incometaxindia.gov.in/Pages/default.aspx
How to calculate Capital Gains Tax on Shares - LTCG & STCG.
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(2018). Bankbazaar.com. Retrieved 12 April 2018, from https://

www.bankbazaar.com/tax/how-to-calculate-capital-gains-tax-on-
shares.html
Satapathy, S. (2018). Set Off and Carry Forward of Losses : [Com-
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putation of GTI ] :.Incometaxmanagement.com. Retrieved 12 April

2018, from http://incometaxmanagement.com/Pages/Gross-To-
tal-Income/Set-Off-Carry-Forward-Losses/Set-Off-and-Carry-For-
ward-of-Losses.html

Ch a
7 pt e r
INCOME FROM OTHER SOURCES
CONTENTS
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7.1 Introduction
7.2 Taxable Income (Section 56)
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Activity
7.3 Deductions (Section 57)
Activity
7.4 Amounts not Deductible (Section 58)
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Activity
7.5 Taxable Profit (Section 59)
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Activity
7.6 Summary

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DEDUCTION UNDER SECTION 57(III) AVAILABLE ONLY IF

EXPENSES WERE INCURRED TO EARN ‘OTHER INCOME’
An interesting case regarding a tax dispute was admitted with the

Income Tax Appellate Tribunal ‘A’ bench of Bangalore. The case
relates to ITA no. 1991/Bang/2016 for A.Y. 2012-13. The case was
concluded and the final order was pronounced on 20th April 2018.
The appellant was Shri M.J. Aravind and Joint Commissioner of
Income Tax, Range 2 (3), Bangalore was the respondent.
The dispute arose because the Joint Commissioner of Income

Tax, Range 2 (3) allegedly erred in not recognising various expen-
ditures namely PMS charges, professional fees, and salary were
not recognised as integral to investment activity undertaken by
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him. The appellant had claimed deduction under Section 57 for
the given expenses.
After battling out in the court, the I/T department won the case
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and pronounced that no deduction was allowable u/s 57 (iii) of the
Income Tax Act, 1961. Various observations of the court were as
follows:
As per the Section 57(iii) of the Income Tax Act, 1961 the asses-
see has to establish that the expenditure has been exclusively
expended wholly and exclusively for the purpose of making
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or earning such income taxable under the head ‘income from

other sources’
M.J. Aravind had claimed deduction under Section 57(iii) of
the Income Tax Act, 1961 on expenses incurred by the way of
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PMS charges, professional fees, and salary. He claimed that

these expenses were integral to the investment activity under-
taken by him and to earn income returned in the return of
income for the previous year.
Assessing Officer (AO) rejected the assessee’s stand.
IT department’s counsel argued that as per the provisions of
section 57(iii) of IT Act, the expenditure is allowable only in re-
spect of those expenditure for which it is proved that amount
has been spent for exclusive purpose of making or earning in-
terest and dividend admitted by the assesse.
Assessee was provided several opportunities to produce the
details of expenses exclusively incurred or the purpose of
earning taxable interest and dividend but he failed to produce
any such evidence.
Assessee’s counsel claimed that 0.5% of the investments have
to be disallowed and the balance has to be allowed as per sec-
tion 14A of IT Act. The assessee computed the disallowance

INCOME FROM OTHER SOURCES 279
n o t e s
in the same manner. Assessee claimed the balance amount as

the deduction.
Assessee’s counsel also claimed that the respondent had erred
in not accepting the contentions of the assessee that various
expenses incurred by the assessee viz., PMS charges, profes-
sional fees, salary is integral to the investment activity under-
taken by him and to earn the income returned in the return of
income for the previous year.
The bench of judges comprised Judicial Member N.V. Vasudevan

and Accountant Member Arun Kumar Garodia. The bench pro-
nounced the following order:
“We observe that section 14A comes into picture in respect of
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those expenses which are otherwise allowable and therefore, the
assessee has to first establish this that the expenses claimed by
the assessee is allowable under any provisions of the law. For that,
the assessee has to show that the claim of the assessee is allowable
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u/s. 57 of IT Act because the expenses are incurred in the earning
of income from other sources.”
The bench further observed that the permissibility of deduction

under Section 57(iii) has to be established by the assesse. In other
words, the assesse has to ensure and prove that the expenditure
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has been exclusively expended for the purpose of earning income

taxable under the head ‘income from other sources. However, the
respondent has produced his order and in para no. 6.2 of his order
it has been explicitly mentioned that no such detail was furnished
by the assessee.
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The bench further said that the assessee had made general argu-
ments and had submitted general details before us. Therefore,
no deduction should be allowed u/s 57 (iii) of the Income Tax
Act, 1961.
Source: http://www.taxscan.in/deduction-expenses-incurred-income-itat/22820/

n o t e s
learning objectives

>> Explain the meaning of income from other sources
>> Describe taxable income as per Section 56
>> Discuss deductions as per Section 57
>> Outline amounts not deductible as per Section 58
>> Explain taxable profits as per Section 59
7.1 INTRODUCTION
In the previous chapter, you about income from capital gains. How-
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ever, there are sources of income, which do not fall specifically under
other income heads like income from house property, salary and prof-
its and gains from business or profession or capital gains. Such sourc-
es of income are brought under the head ‘income from other sources’
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under Section 56. To put it in other words, any residual income sourc-
es that are not applicable to specific heads come under this head.
It is important to comprehend the type of incomes that are taxable

and fall under the ‘income from other sources’ head. It is also import-
ant to understand the types of expenses that are allowed. Once an
income is assessed under other source; then, the ability to allow ex-
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penditure is dependent on Section 57. No deductions can be made

under section 30 to 43. In addition, there is no provision for carrying
forward the losses from other sources to the next year as they lapse in
the same year.
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Incomes that are taxable under this head include royalty, income from
interest on bank loans and deposits, ground rent, directors fees, exam-
ination fee obtained by a teacher, agricultural income from outside In-
dia, insurance commission, rent of a plot of land, mining royalties and
rent, casual income exceeding `5000 (which is `2500 in case of races),
winnings from crossword puzzles, winnings from lotteries, winnings
from card games, etc., furniture, machinery or plant on hire and inter-
est on securities.
In this chapter, you will study about income from other sources in de-
tail. You will learn about taxable incomes as per Section 56, deduc-
tions applicable as per Section 57 and amounts that are not deductible
as per Section 58. In addition, you will learn about taxable profits as
per Section 59.
7.2 TAXABLE INCOME (SECTION 56)

Section 56 of Income Tax Act relates to the provisions of “Income from
Other Sources”. Under Section 56 (1) of the Act, income of every kind

n o t e s
which is not to be excluded from the total income shall be chargeable

to income tax under the head ‘Income from Other Sources’, if it is not
charged to income tax under any other head of income which includes
incomes from salaries, house property, capital gains, and business and
profession. Income from other sources is a residuary head of income,
i.e. income which is not taxable under any other head will be taxable
under this particular head.
Section 56 (2) states that specifically and without prejudice to the pro-
visions of generality sub-section (1), the following incomes are taxable
under the head ‘Income from Other Sources’:
Dividends, which include:
income referred to in sub-clause (viii) of clause (24) of section
2; Omitted by the Finance Act, 1988, w.e.f. 1-4-1988. Original sub-
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clause (viii) was inserted by the Finance Act, 1964, w.e.f. 1-4-1964;
Income which is referred to in sub-clause (ix) of clause (24) of sec-
tion 2: any winnings that have been derived from crossword puz-
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zles, lotteries, races which include horse races, card games and
other games of all sorts or from betting or gambling of all forms or
natures whatsoever. To this sub-clause:
"card games and other games of all sort" comprise all game
shows, entertainment programmes on electronic mode or tele-
vision, which include people competing with one another for
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winning prizes or all other similar games

"lotteries"
include winnings that have been derived from priz-
es that have been awarded to any person by chance or by the
draw of lots or all other manners whatsoever, under any ar-
rangement or scheme by whatever name it is called
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Income referred to in sub-clause (x) of clause (24) of section 2, if

such income is not taxable under the head "Profits and gains of
business or profession"; any amount received from his employees
by the assessee in the form of a contribution to any superannu-
ation fund or provident fund or all funds that have been set up
under the the Employees' State Insurance Act, 1948 (34 of 1948)
provisions, or all other funds for such employees’ welfare
Income by way of interest on securities, if the income is not taxable
under the head "Profits and gains of business or profession"; if the
income is not taxable under the head "Profits and gains of business
or profession, income which has been earned by way of securities
interest
If it is not a taxable income under the head "Profits and gains of
business or profession", incomes derived in which an assessee
rents on hire plant, machinery or furniture that belongs to him/
her and also buildings, and the buildings renting is attached from
the said plant, machinery or furniture renting,

n o t e s
If an income is not taxable under the head "Salaries" or "Profits and

gains of business or profession", income referred to in sub-clause
(xi) of clause (24) of section 2: any amount that is received under
a Keyman insurance policy that includes the amount allocated by
ways of bonuses on such policy. For the purpose of this clause:
The "Keyman insurance policy" expression shall have the
meaning allocated to it in the Explanation to clause (10D) of
section 10
Incomes in which any amount of money that exceeds 25,000 is ob-
tained without any consideration by a Hindu Undivided Family
or an individual or from any other person on or after the Septem-
ber 01, 2004 but before April 01, 2006, the whole of such amount.
This is applicable provided that this clause shall not apply to any
amount received:
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On the occasion of the individual’s marriage, or
From any relative. For the purpose of this clause, “relative”
means:
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i. Individual’s spouse
ii. Individual’s brother or sister
iii. Brother or sister of individual’s spouse
iv. Brother or sister of either of individual’s parents
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v. Individual’s any lineal descendant or ascendant

vi. Any lineal descendant or ascendant of individual’s spouse
vii. spouse of the person referred to any of the above except (i)
In contemplation of death of the payer; or
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By the way of inheritance or under a will; or

From a local authority as defined in the Explanation to clause
(20) of section 10: For the clause’s purposes, "local authority"
means:
99 Municipality as referred to in clause (e) of article 243P of
the Constitution; or
99 Panchayat as referred to in clause (d) of article 243 of the
Constitution; or
99 Cantonment Board as defined in section 3 of the Canton-
ments Act, 1924 (2 of 1924); or
99 Municipal Committee and District Board, entrusted by the
Government with, or legally entitled to, the management or
control of a local fund or Municipal
From any institution or trust registered under section 12AA; or
From any foundation or any fund or university or other edu-

cational institutions or any trust or institution referred to in

n o t e s
clause (23C) of section 10: the Prime Minister's Fund (Promo-

tion of Folk Art); the Prime Minister's National Relief Fund;
the National Foundation for Communal Harmony; the Prime
Minister's Aid to Students Fund
Incomes in which any amount of money, the aggregate of which is
more than 50,000 rupees, is obtained without consideration, by a
Hindu Undivided Family or an individual, from any person or per-
sons in any previous year on or after April 01, 2006 but before Oc-
tober 01, 2009, the whole of the cumulative value of such amount.
This is applicable provided that this clause shall not apply to any
amount received:
On the occasion of the individual’s marriage, or
From any relative. For the purpose of this clause, “relative”
means:
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i. Individual’s spouse
ii. Individual’s brother or sister
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iii. Brother or sister of individual’s spouse
iv. Brother or sister of either of individual’s parents
v. Individual’s any lineal descendant or ascendant
vi. Any lineal descendant or ascendant of individual’s spouse
vii. Spouse of the person referred to any of the above except (i)
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From a local authority as defined in the Explanation to clause
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(20) of section 10: For the clause’s purposes, "local authority"

means:
99 Municipality as referred to in clause (e) of article 243P of
the Constitution; or
99 Panchayat as referred to in clause (d) of article 243 of the
Constitution; or
99 Cantonment Board as defined in section 3 of the Canton-
ments Act, 1924 (2 of 1924); or
99 Municipal Committee and District Board, entrusted by the
Government with, or legally entitled to, the management or
control of a local fund or Municipal
From any institution or trust registered under section 12AA; or
From any foundation or any fund or university or other edu-

cational institutions or any trust or institution referred to in
clause (23C) of section 10: the Prime Minister's Fund (Promo-
tion of Folk Art); the Prime Minister's National Relief Fund;
the National Foundation for Communal Harmony; the Prime

n o t e s
Incomes which, in a previous year, a Hindu Undivided Family or

an individual gets from a person or multiple persons on or after
Oct 01, 2009 but before April 01, 2017:
Without consideration, any amount with the aggregate exceed-
ing Rs. 50,000, the whole of the aggregate value of such amount
Any property that is immovable:
99 For a consideration which is less than the property’s stamp
duty value by an amount that exceeds Rs. 50,000, such
property’s stamp duty value as exceeds such consideration
zz Provided that the registration date and the agreement
date on which the amount of consideration is fixed for
transferring immovable property are not the same, for
this sub-clause purposes, the stamp duty value on the
agreement date may be taken
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zz Provided further that the said proviso is only applicable
when the consideration amount that has been referred
to therein, or a part thereof, has not been paid by cash
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for transferring such immovable property;
99 Whose stamp duty value is exceeding Rs. 50,000, without
consideration, such property’s stamp duty value;
Any property that is other than immovable:
99 For a consideration that is less than the property’s aggre-
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gate fair market value by a sum of money that exceeds Rs.

50, 000, such property’s aggregate fair market value as ex-
ceeding such consideration”
zz Provided in which the immovable property’s stamp
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duty value as mentioned in sub-clause (b) is disputed

by the assessee on the basis of section 50C’s sub-section
(2), such property’s valuation may be referred by the
Assessing Officer to a Valuation Officer, and the section
50C’s provisions and section 155’s sub-section (15) shall,
as far as may be, applicable with respect to such prop-
erty’s stamp duty value for the sub-clause (b)’s purpose
as they are applicable for capital asset valuation under
those sections
zz Provided further that this clause shall not be applicable
to or any property or amount received:
Form a relative, where the relative is defined as ear-
lier and in the case of a Hindu Undivided Family,
any member thereof
On the occasion of individual’s marriage
From a local authority as defined in the Explanation
to clause (20) of section 10, as explained earlier

n o t e s
From any institution or trust registered under sec-

tion 12AA;
From any foundation or any fund or university or
other educational institutions or any trust or insti-
tution referred to in clause (23C) of section 10: the
Prime Minister's Fund (Promotion of Folk Art); the
Prime Minister's National Relief Fund; the Nation-
al Foundation for Communal Harmony; the Prime
By transaction way not regarded as transfer under
Section 47’s clauses (vicb), (vid) and (vii).
For this clause:
Other than an immovable property, a property’s fair
market value implies the value that is determined as
per the method as may be prescribed.
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The meaning of assessable shall be assigned to it in
the Explanation 2 to Section 50 C’s sub-section (2).
The
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meaning of jewellery shall be assigned to it
in the Explanation to Section 2’s sub-clause (ii) of
clause (14).
The meaning of property implies the below asses-
see’s capital asset, which include shares and securi-
ties, immovable property being building or land or
both, jewellery, paintings, drawings, archaeological
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collections, any work of art, sculptures or bullion.

The meaning of stamp duty value is the value assess-
able or assessed or adopted by any State Govern-
ment or Central Government authority for paying
stamp duty with respect of an immovable property.
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Where a company or firm is not a company that has substantial

public interests gets from a person or multiple persons in a pre-
vious year, on or after June 01, 2010 but before April 01, 2017, a
property, being company’s shares that is not a company that has
substantial public interests:
Without consideration, the combined fair market value of
which exceeding Rs. 50,000, the entire such property’s com-
bined fair market value;
For a consideration that is less than the combined fair market
value of such properties by a sum of money that exceeds Rs.
50,000, combined fair market value of such properties exceed-
ing such consideration
This clause is not applicable to property that is received
through a transaction that is not regarded as transfer under
Section 47’s clause (via), (vic), (vicb), (vid) or (vii) of section 47.
For this clause, the fair market value of a property being the
shares of a company (a company is what does not have sub-

n o t e s
stantial public interests) will have its meaning assigned to it in

the Explanation to clause (vii).
Where a company is not a company that has substantial public in-
terests gets from a person who is a resident in an earlier year, any
consideration for shares issue exceeding such shares’ face value,
the combined consideration obtained for such shares exceeding
the fair market value of shares
Provided that this clause is not applicable in which the consider-
ation for shares’ issue is obtained:
By a company from a class/classes of persons as might be noti-
fied on behalf of the Central Government
By a venture capital that is undertaken by a venture capital
fund or venture capital company
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For this clause:
The fair market value of shares will be the value that as might
be determined as per such method as might be prescribed, OR
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as might be authenticated by the company to the Assessing Of-
ficer satisfaction, on the basis of the value, on the issue date of
shares, of its assets, which include intangible assets which are
know-how, goodwill, copyrights, patents, licences, trademarks,
franchises or any other commercial rights or business of simi-
lar nature, whichever is higher among the two.
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"Venture capital fund", “venture capital company" and "venture

capital undertaking" will have their respective meanings as-
signed as per Section 10’s clause (b), (a), and (c) of Explanation
to clause (23FB).
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Incomes obtained through interests on enhanced compensation or

compensation as defined in clause (b) of Section 145A.
Any amount that is obtained in the form of an advance or other-
wise during negotiations of transferring a capital asset, if the result
of the negotiations is not transferring such capital assets and such
amount is forfeited.
Incomes which a person, in an earlier year, gets from a person or
multiple persons on or after April 01, 2017:
Without consideration, any amount, the combined value of
which exceeding Rs. 50,000, the aggregate value of entire such
amount
Any immovable property:
99 For a consideration that is less than the stamp duty value
of the property by a sum of money that exceeds Rs. 50,000,
stamp duty value of such property exceeding such consid-
eration

n o t e s
99 Without consideration, whose stamp duty value exceeding

Rs. 50,000, stamp duty value of such property
Provided that where the registration date and the agreement
date on which the consideration money has been fixed for
transferring immovable property are not the same; for this
clause, on the agreement date, the stamp duty value might be
taken
Provided also that in a case in which stamp duty value of an
immovable property is under dispute by the assessee on the
basis that is mentioned in Section 50 C’s sub-section (2), valu-
ation of such property might be referred by the Assessing Of-
ficer to a Valuation Officer, and the provisions of Section 50 C
and sub-section (15) of section 155 shall, as far as may be, ap-
plicable with respect to stamp duty value of such property for
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this sub-clause as they are applicable to the valuation of capital
asset under those sections.
Provided further that the provisions of first proviso will be ap-
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plicable to only those cases in which the consideration sum of
money that is referred to therein, or a part thereof, the pay-
ment of which has been processed through an account payee
cheque, use of electronic clearing system of a bank account or
an account payee bank draft or by on or before the agreement
date for transferring such immovable property.
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Any property that is other than immovable one:

99 For a consideration that is less than the aggregate fair mar-
ket value of property by a sum of money that exceeds Rs.
50, 000, the aggregate fair market value of such property
exceeding such consideration. This is applicable provided
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that this clause shall not apply to any amount received:

zz On the occasion of the marriage of an individual
zz From any relative, as explained earlier
zz In contemplation of death of the payer
zz By the way of inheritance or under a will
zz From a local authority as defined in the Explanation to
clause (20) of section 10, as explained earlier
zz From any institution or trust registered under section
12AA or 12A
zz From a foundation, fund, university or other education-
al institutions or any trust or institution referred to in
clause (23C) of section 10, as explained earlier
zz Through a transaction that is not regarded as transfer
under Section 47’s clause (i), (vi), (via), (viaa), (vib), (vic),
(vica), (vicb) or (vid) or clause (vii)

n o t e s
zz Through a trust, fund, university, institution or an or

other educational institution or any hospital or oth-
er medical institution referred to in Section 10’s sub-
clause (iv), (v), (vi) or (via) of clause (23C)
zz From a trust or an individual established or created just
for the individual’s relative benefit
99 The aggregate fair market value of which, without consid-
eration, exceeding Rs. 50, 000, the combined fair market
value of the entire such property
1. Which of the following sections of the Income Tax Act talks

about the provisions of the “Income from Other Sources”?
a. Section 55
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b. Section 56
c. Section 57
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d. Section 58
2. The “_________ insurance policy” expression shall have the
meaning allocated to it in the Explanation to clause (10D) of
section 10.
3. As per Section 56, what is the aggregate amount of money
received after April 01, 2006 by a Hindu Undivided Family or
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an individual above which the money is taxable?

a. `15,000
b. `25,000
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c. ` 50,000
d. ` 60,000
4. Any amount that is obtained in the form of an advance or
otherwise during negotiations of transferring a capital asset is
taxable. True or False?
Activity
Search the Internet and go through Section 56 of Income Tax of the

current financial year and make a report on the changes that have
taken place with respect to the last 10 financial years.
7.3 DEDUCTIONS (SECTION 57)

The following deductions are available to the assesse in obtaining the
taxable amount:
In case of taxable dividend income and interest from securities,
any reasonable sum paid in the form of remuneration or commis-

n o t e s
sion for the purpose of realising such dividend or interest on as-

sessee’s behalf:
In the case of taxable income of the below nature that is tax-
able under the head "Income from other sources", deductions,
as per the provisions of clause (va) of sub-section (1) of section
36, as per which such sum should be equal to that of in the em-
ployee's account in the relevant fund on or before the due date
(due date is defined as the date by the employer must credit
contribution of the employee to the account of the employee
in the relevant fund under any rule, Act, notification or order
issued thereunder or under any standing award, order or con-
tract of service
99 Any amount of money that is received from his/her em-
ployees by the assessee as superannuation fund, provident
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fund contributions or any fund set up under the Employ-
ees' State Insurance Act, 1948 (34 of 1948) provisions or all
other funds for such employees welfare
In the case of income from plant, machinery or furniture given out
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on hire, the following expenses will be allowed as deduction:
Current repairs to building
Current repairs to machinery, plant or furniture
Insurance premium paid for insuring the plant, machinery,
building or furniture
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Depreciation on building, machinery, plant or furniture

In the case of any expenditure other than capital, which has been
incurred solely, necessarily and exclusively for earning income
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like revenue expenditure will be allowed as a deduction.

In the case of income received through interest on compensation
or enhanced compensation, a deduction of 50% of such income
will be applicable and no other deduction will be applicable under
this section.
5. In the case of income received through interest on

compensation or enhanced compensation, a deduction
of ______ of such income will be applicable and no other
deduction will be applicable under this section.
Activity
Take a few examples of tax payers by searching on the Internet

and determine the applicability of Section 57 when computing net
payable income tax.

n o t e s
AMOUNTS NOT DEDUCTIBLE

7.4
(SECTION 58)
The following amounts are not deductible under Section 58 of the In-
come Tax Act while computing the taxable amount:
Personal expenses of the assesse
Any interest which is payable outside India on which income tax
has not been paid or deducted at source
Any payment that is taxable under the head “Salaries” which is
payable outside India on which income tax has not been paid or
deducted at source
Any amount paid respective to wealth tax
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Any expenditure respective to royalty and technical fees that has
been received by a foreign company
Expenditure respective to winning from lotteries etc. If an asses-
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see receives income from crossword puzzles, lotteries, card games,
races including horse races, and other sorts of games or any bet-
ting form or nature whatsoever or from gambling, the assessee will
not be allowed for any deduction respective to any allowance or
expenditure connected to such incomes

M
6. Any expenditure respective to Royalty and Technical Fees

that has been received by a foreign company is deductible.
(True/False)
N
Activity
Go through the official Income Tax website and study various claus-
es and sub-clauses applicable to Section 58. Create a report on this
subject.
7.5 TAXABLE PROFITS (SECTION 59)

Under appropriate circumstances, the following incomes will be treat-
ed as incomes under the head “Income from Other Sources”, like they
are treated as business income when computing “Profits and gains of
business or profession”:
Cessation or remission of trade liabilities
Cessation or remission of trade liabilities of discontinued business
A business successor getting any benefit with respect to the de-
duction availed by the predecessor

n o t e s
Bad debt that has been written off and allowed and subsequently
recovered is considered to be the previous year income in which
the sale took place
7. Bad debt that has been written off and allowed and
subsequently recovered is considered as the _______ year
income in which the sale took place is considered to be income.
Activity
Go through the official Income Tax website and study various claus-
es and sub-clauses applicable to Section 59. Create a report on this
subject.
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7.6 SUMMARY
Section
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56 the Income Tax Act talks about the provisions of “In-
come from Other Sources”.
Specificallyand without prejudice to the provisions of generality
sub-section (1), the following incomes are taxable under the head
‘Income from Other Sources’:
Dividends
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Incomes from renting plant, machinery or furniture

Incomes received under a Keyman insurance policy
Specific incomes by a Hindu Undivided Family or an individual
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Incomes obtained through interests on enhanced compensa-

tion or compensation
Any amount that is obtained in the form of an advance or oth-
erwise during negotiations of transferring a capital asset
Incomes which a person, in an earlier year, gets from a person
or multiple persons
As per Section 57, the following deductions are available:
Income and interest from securities
Certain income from plant, machinery or furniture given out
on hire
Any expenditure other than capital
Certain income received through interest on compensation or
enhanced compensation
As per Section 58, the following amounts are not deductible:
Personal expenses

n o t e s
Any interest or payment which is payable outside India

Wealth tax amount
Royalty and technical fees
Winning from lotteries etc.
As per section 59, the following incomes will be treated as incomes:
Certain incomes related to cessation or remission of trade lia-

bilities
A business successor getting any benefit
Certain recovered bad debts
key words
S
Assessee: An individual who is liable to pay taxes for himself/
herself or on behalf of somebody else.
Dividends: An amount of money paid on a regular basis by a
IMcompany to its shareholders out of its profits.
Fair market value: An estimate of the market value of a prop-
erty on the basis of a willing, knowledgeable and unpressured
buyer.
Hindu Undivided Family (HUF): A family including all peo-
ple lineally descended from a common ancestor, which includes
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wives and unmarried daughters.

Immovable property: An immovable object or an item of prop-
erty that cannot be moved without altering or destroying it.
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Royalty and technical fees: While royalty is related with IPR,

technical services fees are generally related to rendering tech-
nical, managerial or consultancy services.

1. Write a note and summarise Section 56 of the Income Tax Act.
2. Explain the provisions of Section 57 when computing taxable
income.
3. Discuss Section 58 and Section 59 and their applicability.
Topic Q. No. Answer

Taxable Income (Section 56) 1. b. Section 56
2. Keyman

n o t e s
Topic Q. No. Answer

3. c. `50,000
4. True
Deductions (Section 57) 5. 50%
Amounts not deductible (Section 58) 6. False
Taxable Profits (Section 59) 7. previous

1. Section 56 of the Income Tax Act talks about the provisions
of “Income from Other Sources”. Under the Income Tax Act,
income of every kind which is not to be excluded from the total
income shall be taxable under the head ‘Income from Other
Sources’, provided that it is not taxable under any other heads of
S
income such as income from house property, capital gains, etc,
specified in section 14, items A to E. Refer to Section 7.2 Taxable
income (Section 56).
IM
2. As per Section 57, the following deductions are available:
income and interest from securities, certain income from plant,
machinery or furniture given out on hire, any expenditure
other than capital, certain income received through interest on
compensation or enhanced compensation. Refer to Section 7.3
Deductions (Section 57).
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3. As per Section 58, the following amounts are not deductible:

personal expenses, any interest or payment which is payable
outside India, wealth tax amount, Royalty and Technical Fees,
Winning from lotteries etc. As per section 59, the following
incomes will be treated as incomes: Certain incomes related to
N
cessation or remission of trade liabilities, a business successor

getting any benefit, certain recovered bad debts. Refer to Sections
7.4 Amounts not deductible (Section 58) and 7.5 Taxable profits
(Section 59).
SUGGESTED READINGS
Uma Pat Rai, Ejaz Ahmad. Commentary on the Income Tax Act,
1961 (Act no. 43 of 1961) together with Finance Act, 1962-1963 and
rules
India, K. K. Malik. The Income tax act, 1961. Eastern Book Co., 1964
E-REFERENCES
etaxindia.gov.in. Retrieved 3 April 2018, from https://www.incom-

n o t e s
(2018). Taxmann.com.Retrieved 3 April 2018, from https://www.

taxmann.com/budget-2015-16/file/samd307/earlier-section.aspx
Team, T., & Kanoi, C. (2018). Section 56. Taxguru.in. Retrieved 3
April 2018, from https://taxguru.in/tag/section-56/
Government, C. (2018). Income Tax Act 1961 Section 56 - Citation
23220 - Bare Act | Legal Crystal. Legalcrystal.com. Retrieved 3 April
2018, from https://www.legalcrystal.com/act/23220/income-tax-act-
1961-section-56
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Ch a
8 pt e r
DEDUCTIONS TO BE MADE IN
COMPUTING TOTAL INCOME
CONTENTS
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8.1 Introduction
8.2 Deduction v/s Exemption
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Activity
8.3 Deductions to be made in Computing Total Income (Section 80A)
Activity
8.4 Deductions in respect of Life Insurance Premium, Deferred Annuity,
Contribution to Provident Fund, Subscription to Certain Equity Shares or
M
Debentures, etc. (Section 80C)

Activity
8.5 Deduction in respect of Contribution to Pension Fund (Section 80CCC)
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Activity
8.6 Limit of Deduction u/s 80C, 80CCC, 80CCD (Section 80CCE)
Activity
8.7 Deduction in respect of Health Insurance Premia (Section 80D)
Activity
8.8 Deduction in respect of Maintenance including Medical Treatment of a
Dependent who is a Person with Disability (Section 80DD)
Activity
8.9 Deduction in respect of Loan taken for Higher Education (Section 80E)
Activity
8.10 Deduction in respect of Interest on Deposits in Savings Account (Section
80TTA)
Activity

CONTENTS
8.11 Deduction in the Case of Person with Disability

(Section 80U)
Activity
8.12 Summary
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IM
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DEDUCTIONS TO BE MADE IN COMPUTING TOTAL INCOME 297
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DEDUCTIONS AND TAX PLANNING
Mr. Ghai is an employee of M/s Nestle India Ltd. The gross pack-
age of Mr. Ghai is about ` 20 lakh per annum, in which he receives
around `2 lakh as HRA apart from a few other allowances.
The company deducts a heavy amount of TDS on the salary being

paid to Mr. Ghai. He was too worried about the deduction. He
S
goes to a financial advisor to find some measures to save his tax.
The financial advisor suggests him to get a life insurance cover of
around `80 to 90 lakhs and invest his savings into the PPF account
IM
and national savings certificate. He also suggests Mr. Ghai to buy
mutual funds and medical insurance for his wife and children.
All these investments are eligible for deduction under Section

80C of the Income Tax Act, 1961. Thus, by applying all these mea-
sures, Mr. Ghai was successful in saving a substantial part of his
tax and reducing his overall tax burden.
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learning objectives

>> Differentiate between deductions and exemptions
>> Explain deductions to be made in computing total income as
per Sections 80A, 80C and 80CCC
per Sections 80C
per Sections 80CCC
>> Outline the limit of deductions under sections 80C, 80CCC,
80CCD as prescribed in Section 80CCE
>> List the deductions in respect of Health Insurance Premia as
S
per Section 80D
>> List deductions in respect of maintenance including medical
treatment of a dependent who is a person with disability as
IM per Section 80DD
>> List deductions in respect of Loan taken for Higher Educa-
tion as per Section 80E
>> List the deductions in respect of interest on deposits in sav-
ings account as per Section 80TTA
>> Describe deductions in the case of person with disability as
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per Section 80U
8.1 INTRODUCTION
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In the previous chapter, you studied the tax treatment of income from
other sources as per the Income Tax Act. You studied about related de-
ductions (Section 57), amounts not deductible (Section 58) and profits
chargeable to tax (Section 59). In this chapter, you will study about
deductions to be made in calculating the total income.
In a previous financial year, whatever income you earn under five in-
come heads is summed up to Gross Taxable Income, which is charge-
able for income tax. However, to compute the net taxable income of
an assessee, certain deductions are applicable, on which income tax is
not chargeable.
This chapter will list all deductions defined under the Income Tax Act
available for tax payers. It covers Sections that define deductions to
be made in computing the total income (Section 80A); deductions in
respect of life insurance premium, deferred annuity, contribution to
provident fund, subscription to certain equity shares or debentures
etc. (Section 80C); and deductions in respect to Contribution to Pen-
sion Fund (Section 80CCC). It also outlines Section 80CCE that defines
the limit of deduction under sections 80C, 80CCC and 80CCD. Further,

n o t e s
it lists deduction in respect of Health Insurance Premia (Section 80D),

deduction in respect of maintenance including the medical treatment
of a dependent who is a person with disability (Section 80DD), deduc-
tion in respect of loan taken for higher education (Section 80E), de-
duction in respect of interest on deposits in savings account (Section
80TTA) and deduction in the case of person with disability (Section
80U).
8.2 DEDUCTION V/S. EXEMPTION

Before we discuss various deduction clauses, let’s have a clear idea of
differences between deductions and exemption.
Every citizen of India is liable to pay income tax based on his/her age,
paying capacity and gender. However, the government provides some
S
relief in the form of provisions for deduction and exemptions, which
results in an overall decrease of overall tax liability. In the case of de-
ductions, the sum of money is first included in the taxpayer’s income
and then deductions are allowed according to rules. On the other
IM
hand, exemptions are incomes that are not at all chargeable.
Deductions are part of the Total Gross Income and anyone can lever-
age its benefits on the basis of application. On the other hand, exemp-
tions are not part of the Total Gross Income.
Table 8.1 below shows differences between the two:

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TABLE 8.1: DIFFERENCES BETWEEN DEDUCTION AND

EXEMPTION
Basis Deduction Exemption
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Definition Subtractions; sum of money Exclusions; if a specific

that can be reduced from income is exempt from tax,
the taxable income it would not contribute to a
person’s total income
Concept To get the net income, the For the taxpayer, the entire
deduction amount is first amount is an exemption.
included in the total gross The exempted income is
income and then deducted not considerable under the
from it. total income.
What is it? It is concession. It is relaxation.
Objective Promoting investments and Boosting that specific sec-
savings of people tion in which tax has been
exempted
Income is Tax deductible Tax free
Allowable to Specific people Everyone
Applicable Section 80 C to 80 U Section 10
Sections
Is it condi- Yes No
tional?

n o t e s
As mentioned earlier, deductions are dealt in Sections 80C to 80U of

Chapter-VI of the Income Tax Act, 1961. According to the Act, these
are investments or payments that are reduced from the total gross
income for calculating the taxable income. If the total gross income is
NIL, no deductions are allowed or the deduction amount cannot ex-
ceed the total gross income. In other words, deduction is allowed only
to the extent of the total gross income.
Taxpayers can leverage the benefits of deductions only if he/she claims

them for investments made in specific instruments. In this manner,
such incomes become part of the taxpayer’s total gross income and
then deductions can be used to calculate the total income. There are
three categories of deductions:
Deduction regarding certain payments: Some examples include
medical insurance premium, life insurance premium paid and do-
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nations to charitable institutions.
Deduction regarding certain incomes: Some examples include
royalty on patents and specific incomes from cooperative societies.
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Other deductions
The term “exemption” has been derived from the word “exempt”,
which implies a sum of money that is not liable to anything. These
are those incomes that are not considerable when computing the total
income. Therefore, such income source is not included from taxable
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income or chargeable to tax.
Some incomes are entirely exempt from tax, which include agricul-
tural income. However, some incomes are partly exempted and the
exemption is provided only to a specific limit. In this case, the exceed-
N
ing part of the income is subject to tax and hence considerable when
calculating the total gross income.
The government uses deductions primarily for promoting savings and

increasing investments in some areas, for which the assessee’s income
is reducible to that extent. In a similar way, exemptions are used for
helping the society’s weaker sections.
Activity
Make a list of deductions regarding certain payments and deduc-

tions regarding certain incomes.
DEDUCTIONS TO BE MADE IN
8.3 COMPUTING TOTAL INCOME
(SECTION 80A)
Gross Total Income (GTI) of an assessee is the total of what the asses-
see earns in any previous year under five different heads of income as

n o t e s
specified under Section 14 of the Income Tax Act, 1961. However, GTI
as defined u/s 80B (5) is not the income on which tax is to be paid by
the taxpayer in the assessment year. Therefore, for the computation
of actual taxable income of an assessee, certain general deductions
are allowed, which are covered by chapter VIA of the Income Tax Act,
1961. Chapter VIA of the Income Tax Act covers section 80 and the de-
ductions are covered by section 80C to 80U. According to section 80A,
deductions specified under sections 80C to 80U covered by Chapter
VIA shall be allowed while computing the total income of the assessee
from his/her GTI. Chapter VIA of Income Tax Act, 1961 is given as
follows:
Chapter VIA
A.—General
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Deductions to be made in computing the total income:
80A. (1) In computing the total income of an assessee, deductions shall

be allowed from his gross total income, in accordance with and subject
IM
to the provisions of this chapter, as specified in sections 80C to 80U.
(2) The aggregate amount of the deductions under this Chapter shall
not, in any case, exceed the gross total income of the assessee.
(3) While computing the total income of an association of persons or a

body of individuals, any deduction is admissible under the following
M
sections:
Section 80G or
Section 80GGA or
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Section 80GGC or
Section 80HH or
Section 80HHA or
Section 80HHB or
Section 80HHC or
Section 80HHD or
Section 80-I or
Section 80-IA or
Section 80-IB or
Section 80-IC or
Section 80-ID or
Section 80-IE or
Section 80J or
Section 80JJ

n o t e s
No deduction under the same section shall be made while computing

the total income of a member of association of persons or body of in-
dividuals in relation to the share of such member in the income of the
association of persons or body of individuals.
(4) Notwithstanding anything to the contrary contained in section 10A

or section 10AA or section 10B or section 10BA or in any provisions
of this Chapter under the heading “C.—Deductions in respect of cer-
tain incomes”, where, in the case of an assessee, any amount of profits
and gains of an undertaking or unit or enterprise or eligible business
is claimed and allowed as a deduction under any of those provisions
for any assessment year, deduction in respect of, and to the extent of,
such profits and gains shall not be allowed under any other provisions
of this Act for such assessment year and shall in no case exceed the
profits and gains of such undertaking or unit or enterprise or eligible
S
business, as the case may be.
(5) Where the assessee fails to make a claim in his return of income for
any deduction under Section 10A or Section 10AA or Section 10B or
IM
Section 10BA or under any provision of this Chapter under the head-
ing ‘C.—Deductions in respect of certain incomes’, no deduction shall
be allowed to him thereunder.
(6) Notwithstanding anything to the contrary contained in section 10A

or section 10AA or section 10B or section 10BA or in any provisions of
this Chapter under the heading “C.—Deductions in respect of certain
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incomes”, where any goods or services held for the purposes of the
undertaking or unit or enterprise or eligible business are transferred
to any other business carried on by the assessee or where any goods
or services held for the purpose of any other business carried on by
N
the assessee are transferred to the undertaking or unit or enterprise

or eligible business and, the consideration, if any, for such transfer
as recorded in the accounts of the undertaking or unit or enterprise
or eligible business does not correspond to the market value of such
goods or services as on the date of the transfer, then, for the purposes
of any deduction under this Chapter, the profits and gains of such un-
dertaking or unit or enterprise or eligible business shall be computed
as if the transfer, in either case, had been made at the market value of
such goods or services as on that date.
Explanation—for the purposes of this sub-section, the expression

‘market value’,—
(i) In relation to any goods or services sold or supplied, means the
price that such goods or services would fetch if these were sold
by the undertaking or unit or enterprise or eligible business in
the open market, subject to statutory or regulatory restrictions,
if any;
(ii) In relation to any goods or services acquired, means the price
that such goods or services would cost if these were acquired by

n o t e s
the undertaking or unit or enterprise or eligible business from

the open market, subject to statutory or regulatory restrictions,
if any;
(iii) In relation to any goods or services sold, supplied or acquired
means the arm’s length price as defined in clause (ii) of Section
92F of such goods or services, if it is a specified domestic
transaction referred to in Section 92BA.
(7) Where a deduction under any provision of this Chapter under the
heading “C.—Deductions in respect of certain incomes” is claimed
and allowed in respect of profits of any of the specified business re-
ferred to in clause (c) of sub-section (8) of section 35AD for any as-
sessment year, no deduction shall be allowed under the provisions of
section 35AD in relation to such specified business for the same or any
other assessment year.
S
Following is the list of deductions available for certain payments
made by taxpayers. These deductions are allowed while calculating
an assessee’s taxable income under the Income Tax Act, 1961.
IM
Section 80C (Individual/HUF): This section allows deduction of up
to ` 1,50,000 in respect of Life Insurance Premium (LIC) for policy,
Deferred Annuity, contributions to provident fund (PF), unit-linked
insurance plan of the LIC Mutual Fund, subscription to certain equity
shares or debentures, term deposits, etc.
M
Section 80CCC (Individual): This section allows deduction of up to

`1, 50,000 for contributing in certain pension funds of LIC or other
insurer.
Section 80CCD (Individual): This section allows deduction of up to

N
10% of GTI subject to `50,000 with respect to contributing in the pen-

sion scheme notified by the central government. The amount received
by the nominee on the death of the assessee in certain circumstances
shall not deemed to be the income of the nominee. (Amended by the
Finance Act, 2016).
Section 80CCF (Individual/HUF): This section allows deduction of

up to `20,000 for subscribing long-term infrastructure bonds notified
by the Central Government.
Section 80CCG (Resident Individual): This section allows deduction

of up to `25,000 for resident individuals who make investment under
an equity saving scheme notified by the Central Government.
Section 80D (Individual/HUF): This section allows deduction of up

to `30,000 for contributing to Central Government Health Scheme or
LIC or other insurer to keep in force insurance on the health of the
specified person.

n o t e s
Section 80DD (Resident Individual/HUF): This section allows de-

duction of up to `75,000 (`1, 25,000 in case of severe disability) for med-
ical treatment of a dependable person with disability.
Section 80DDB (Resident Individual/HUF): This section allows

deduction of up to `40,000 (`60,000 in the case of senior citizen and
` 80,000 for super senior citizen) for medical treatment of specified
diseases.
Section 80E (Individual): This section allows 100% deduction of the

amount paid by the way of payment of interest on loan taken from
financial institution for pursuing higher education.
Section 80EE (Individual): This section allows deduction of up to

`50,000 of interest payable on loan taken from any financial institu-
tion for acquiring a residential property. However, the maximum loan
S
amount must not exceed `35, 00, 000 and the value of the residential
property should not exceed `50, 00,000.
Section 80G (All Assessees): This section allows deduction of up to

IM
50% or 100% for donations to certain approved funds, trust, charitable
institutions for renovation or repairs of notified temples, etc.
Section 80GG (Individual): This section allows deduction of 25% of

the total income incurred or `2, 000 per month with respect to any
furnished/unfurnished accommodation occupied by the assessee for
M
his own residence.
Section 80GGA (All Assessee): This section allows 100% deduction on

any amount paid by the assessee for scientific or social research, rural
development program, National Urban Poverty Eradication Fund or
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for the conservation of natural resources.
Section 80GGB (Indian Company): This section allows 100% deduc-

tion for any amount paid by an Indian company to a political party or
electoral trust.
Section 80GGC (Individual/HUF/Firm/Company/AOP/BOI): This

section allows 100% deduction for any amount paid to a political party
or electoral trust by any person except Local Authority and Artificial
Juridical Person.
Section 80-IA (All Assessees): This section allows up to 100% deduc-

tion for profits and gains from industrial undertakings involved in in-
frastructure facility, telecommunication services, industrial park, de-
velopment of Special Economic Zone, power undertakings, etc. for 10
consecutive assessment years (AYs).
Section 80-IAB (Developer): This section allows up to 100% deduc-

tion for profits and gains to a developer (Undertaking/Enterprise) on
any business of developing a Special Economic Zone (SEZ) for 10 con-
secutive AYs out of 15 years.

n o t e s
Section 80-IAC (Eligible Start-up): This section allows up to 100%

deduction on profits and gains generated by companies engaged in
eligible business start-ups and established between 1st April, 2016 and
1st April, 2019 for three consecutive AYs.
Section 80-IB (Undertaking): This section allows up to 100% deduc-

tion on profits and gains generated by any industrial undertaking oth-
er than infrastructure development undertaking engaged in eligible
business for 10 to 12 consecutive AYs in case it fulfils all specified con-
ditions.
Section 80-IBA (Housing Projects): This section allows 100% deduc-

tion on profits and gains generated by any business of developing and
building approved housing projects between 1st June, 2016 and 31st
March, 2019. (Newly Inserted by the Finance Act, 2016).
S
Section 80-IC (All Assessees): This section allows 100% deduction on
profits and gains generated by any business in certain special catego-
ry for 5 to 10 AYs.
IM
Section 80-ID (All Assessees): This section allows 100% deduction on
profits and gains for 5 consecutive AYs if the GTI of an assessee in-
cludes any profit and gains generated by an undertaking from eligible
business.
Section 80-IE (All Assessees): This section allows 100% deduction on

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profits and gains for certain undertakings in north-eastern states.
Section 80JJA (All Assessees): This section allows 100% deduction

on profits and gains for five consecutive AYs to businesses indulged in
collecting and processing or treating of bio-pesticides or other biolog-
N
ical agents, producing bio-gas, making pellets or briquettes for fuel or

organic manure.
Section 80JJAA (Indian Company): This section allows 30% deduc-

tion on additional employee cost occurred for new regular workmen
employed by any Indian company for 3 AYs. (Amended by the Finance
Act, 2016)
Section 80LA (Banking Company): This section allows 100% deduc-

tion on certain income of scheduled banks or banks operating outside
India and having offshore banking units in a Special Economic Zone
or units of International Financial Services Centre.
Section 80P (Co-operative Society): This section allows 100% deduc-

tion on profits and gains of certain businesses of any co-operative so-
ciety.
Section 80QQB (Resident Individual): This section allows deduction

of up to `3, 00,000 on royalty income or copyright fees of an author of
a certain specified book category.

n o t e s
Section 80RRB (Resident Individual): This section allows deduction

of up to `3,00,000 on receipt of any royalty income in respect of a pat-
ent registered on or after 1st April, 2003.
Section 80TTA (Individual/HUF): This section allows the deduction

of up to `10,000 on any income by the way of interest on deposits in a
savings account with a banking company, co-operative society or post
office.
Section 80U (Resident Individual): This section allows the deduction

of up to `75,000 (` 1, 25,000 for person with severe disability) to a resi-
dent individual, certified by the medical authority to be a person with
disability.
Limit on Deductions under section 80C, 80CCC and 80CCD [Section

80CCE]: The aggregate amount of deduction under section 80C, sec-
S
tion 80CCC and section 80CCD (1) [excluding employer‘s contribution
to the pension scheme or contribution made by the assessee under
section 80CCD (1B)] shall not, in any case, exceed `1,50,000.
IM
Illustration 1: Mahesh who is currently self-employed earns a gross
total income of `6, 00,000. He made a deposit of `1, 25,000 in public
provident fund and 80,000 in a Central Government approved pension
scheme. Compute his taxable income.
Solution:
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Computation of Taxable Income

Gross Total Income 6,00,000
Less: Deductions
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u/s 80C 1,25,000

u/s 80CCD (1) equal to `80,000 but lim- 60,000
ited to 10
5 of gross total income of `6,00,000
Total deductions 1,85,000
But limited to `1,50,000 as per Section 1,50,000
80CCE
Additional deduction u/s 80CCD (1B) 50,000 2,00,000
Total Income 4,00,000
1. As per Section 80CCD, what is the percentage of GTI deduction

allowed?

a.
5% b.
10%

c.
15% d.
20%

n o t e s
Activity
Interview a tax payer in your neighbourhood and calculate his/her

applicable deductions as per Section 80A for the current assess-
ment year.
DEDUCTIONS IN RESPECT OF LIFE

INSURANCE PREMIUM, DEFERRED
ANNUITY, CONTRIBUTION TO
8.4
PROVIDENT FUND, SUBSCRIPTION
TO CERTAIN EQUITY SHARES OR
DEBENTURES ETC. (SECTION 80C)
S
These deductions are applicable to an individual and a Hindu Undi-
vided Family. The list of eligible investments and contributions under
this clause are described below:
IM
(1) In computing the total income of an assessee, being an individu-
al or a Hindu undivided family, there shall be deducted, in accor-
dance with and subject to the provisions of this section, the whole
of the amount paid or deposited in the previous year, being the
aggregate of the sums referred to in sub-section (2), as does not
exceed `1,50,000.
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(2) The sums referred to in sub-section (1) shall be any sums paid or
deposited in the previous year by the assessee—
(i) to effect or to keep in force an insurance on the life of per-
sons specified in sub-section (4);
N
(ii) to effect or to keep in force a contract for a deferred annu-

ity, not being an annuity plan referred to in clause (xii), on
the life of persons specified in sub-section (4): Provided that
such contract does not contain a provision for the exercise by
the insured of an option to receive a cash payment in lieu of
the payment of the annuity;
(iii) by the way of deduction from the salary payable by or on
behalf of the Government to any individual being a sum de-
ducted in accordance with the conditions of his service, for
the purpose of securing to him a deferred annuity or making
provision for his spouse or children, in so far as the sum so
deducted does not exceed 1/5th of the salary;
(iv) as a contribution by an individual to any provident fund to
which the Provident Funds Act, 1925 (19 of 1925) applies;
(v) as a contribution to any provident fund set up by the Central
Government and notified by it in this behalf in the Official
Gazette, where such contribution is to an account standing
in the name of any person specified in sub-section (4);

n o t e s
(vi) as a contribution by an employee to a recognised provident

fund;
(vii) as a contribution by an employee to an approved superannu-
ation fund;
(viii) [as subscription, in the name of any person specified in
sub-section (4), to] any such security of the Central Govern-
ment or any such deposit scheme as that Government may,
by notification in the Official Gazette, specify in this behalf;
(ix) as subscription to any such savings certificate as defined in
clause (c) of section 2 of the Government Savings Certificates
Act, 1959 (46 of 1959), as the Central Government may, by
notification in the Official Gazette, specify in this behalf;
(x) as a contribution, in the name of any person specified in
S
sub-section (4), for participation in the Unit-linked Insur-
ance Plan, 1971 (hereafter in this section referred to as the
Unit-linked Insurance Plan) specified in Schedule II of the
Unit Trust of India (Transfer of Undertaking and Repeal)
IM
Act, 2002 (58 of 2002);
(xi) as a contribution in the name of any person specified in
sub-section (4) for participation in any such unit-linked in-
surance plan of the LIC Mutual Fund referred to in clause
(23D) of section 10, as the Central Government may, by noti-
fication in the Official Gazette, specify in this behalf;
M
(xii) to effect or to keep in force a contract for such annuity plan

of the Life Insurance Corporation or any other insurer as the
Central Government may, by notification in the Official Ga-
zette, specify;
N
(xiii) as subscription to any units of any Mutual Fund referred to

in clause (23D) of section 10 or from the Administrator or the
specified company under any plan formulated in accordance
with such scheme as the Central Government may, by notifi-
cation in the Official Gazette, specify in this behalf;
(xiv) as a contribution by an individual to any pension fund set
up by any Mutual Fund referred to in clause (23D) of section
10 or by the Administrator or the specified company, as the
Central Government may, by notification in the Official Ga-
zette, specify in this behalf;
(xv) as subscription to any such deposit scheme of, or as a con-
tribution to any such pension fund set up by, the National
Housing Bank established under section 3 of the National
Housing Bank Act, 1987 (53 of 1987) (hereafter in this sec-
tion referred to as the National Housing Bank), as the Cen-
tral Government may, by notification in the Official Gazette,
specify in this behalf;

n o t e s
(xvi) as subscription to any such deposit scheme of—

(a) a public sector company which is engaged in providing
long-term finance for the construction or purchase of
houses in India for residential purposes; or
(b) any authority constituted in India by or under any law
enacted either for the purpose of dealing with and satis-
fying the need for housing accommodation or for the pur-
pose of planning, development or improvement of cities,
towns and villages, or for both, as the Central Govern-
ment may, by notification in the Official Gazette, specify
in this behalf;
(xvii) as tuition fees (excluding any payment towards any develop-
ment fees or donation or payment of similar nature), wheth-
er at the time of admission or thereafter,—
S
(a) to any university, college, school or other educational in-
stitution situated within India;
(b) for the purpose of full-time education of any of the per-
IM
sons specified in sub-section (4);
(xviii) for the purposes of purchase or construction of a residen-
tial house property the income from which is chargeable to
tax under the head “Income from house property” (or which
would, if it had not been used for the assessee’s own resi-
dence, have been chargeable to tax under that head), where
M
such payments are made towards or by the way of—

(a) any instalment or part payment of the amount due under
any self-financing or other scheme of any development
authority, housing board or other authority engaged in
N
the construction and sale of house property on owner-

ship basis; or
(b) any instalment or part payment of the amount due to any
company or co-operative society of which the assessee is
a shareholder or member towards the cost of the house
property allotted to him; or
(c) repayment of the amount borrowed by the assessee from
(1) the Central Government or any State Government, or
(2) any bank, including a co-operative bank, or
(3) the Life Insurance Corporation, or
(4) the National Housing Bank, or
(5) any public company formed and registered in India
with the main objective of carrying on the business
of providing long-term finance for construction or
purchase of houses in India for residential purposes

n o t e s
which is eligible for deduction under clause (viii) of

sub-section (1) of section 36, or
(6) any company in which the public are substantially in-
terested or any co-operative society, where such com-
pany or co-operative society is engaged in the busi-
ness of financing the construction of houses, or
(7) the assessee’s employer where such employer is an
authority or a board or a corporation or any other
body established or constituted under a Central or
State Act, or
(8) the assessee’s employer where such employer is a
public company or a public sector company or a uni-
versity established by law or a college affiliated to
such university or a local authority or a co-operative
S
society; or
(d) stamp duty, registration fee and other expenses for the
purpose of transfer of such house property to the asses-
IM see, but shall not include any payment towards or by way
of—
(A) the admission fee, cost of share and initial deposit
which a shareholder of a company or a member of
a co-operative society has to pay for becoming such
shareholder or member; or
M
(B) the cost of any addition or alteration to, or renovation

or repair of, the house property which is carried out
after the issue of the completion certificate in respect
of the house property by the authority competent to
N
issue such certificate or after the house property or

any part thereof has either been occupied by the as-
sessee or any other person on his behalf or been let
out; or
(C) any expenditure in respect of which deduction is al-
lowable under the provisions of section 24;
(xix) as subscription to equity shares or debentures forming part
of any eligible issue of capital approved by the Board on an
application made by a public company or as subscription to
any eligible issue of capital by any public financial institution
in the prescribed form.
For the purposes of this clause,
(i) “eligible issue of capital” means an issue made by a pub-
lic company formed and registered in India or a public
financial institution and the entire proceeds of the is-
sue are utilised wholly and exclusively for the purposes

n o t e s
of any business referred to in sub-section (4) of section

80-IA;
(ii) “public company” shall have the meaning assigned to it
in section 3 of the Companies Act, 1956 (1 of 1956);
(iii) “public financial institution” shall have the meaning as-
signed to it in section 4A of the Companies Act, 1956 (1 of
1956);
(xx) as subscription to any units of any mutual fund referred to
in clause (23D) of section 10 and approved by the Board on
an application made by such mutual fund in the prescribed
form:
Provided that this clause shall apply if the amount of sub-
scription to such units is subscribed only in the eligible issue
S
of capital of any company.
For the purposes of this clause “eligible issue of capital”
means an issue referred to in clause (i) of the Explanation to
IM
clause (xix) of sub-section (2);
(xxi) as term deposit
(a) for a fixed period of not less than five years with a sched-
uled bank; and
(b) which is in accordance with a scheme framed and noti-
M
fied, by the Central Government, in the Official Gazette

for the purposes of this clause.
For the purposes of this clause, “scheduled bank” means the
State Bank of India constituted under the State Bank of In-
N
dia Act, 1955 (23 of 1955), or a subsidiary bank as defined in

the State Bank of India (Subsidiary Banks) Act, 1959 (38 of
1959), or a corresponding new bank constituted under sec-
tion 3 of the Banking Companies (Acquisition and Transfer
of Undertakings) Act, 1970 (5 of 1970), or under section 3 of
the Banking Companies (Acquisition and Transfer of Under-
takings) Act, 1980 (40 of 1980), or any other bank, being a
bank included in the Second Schedule to the Reserve Bank
of India Act, 1934 (2 of 1934);
(xxii) as subscription to such bonds issued by the National Bank
for Agriculture and Rural Development, as the Central Gov-
ernment may, by notification in the Official Gazette, specify
in this behalf;
(xxiii) in an account under the Senior Citizens Savings Scheme
Rules, 2004;
(xxiv) as five year time deposit in an account under the Post Office
Time Deposit Rules, 1981.

n o t e s
(3) The provisions of sub-section (2) shall apply only to so much of

any premium or other payment made on an insurance policy, oth-
er than a contract for a deferred annuity, issued on or before the
31st day of March, 2012, as is not in excess of 20 per cent of the
actual capital sum assured.
Explanation.—In calculating any such actual capital sum as-
sured, no account shall be taken
(i) of the value of any premiums agreed to be returned, or
(ii) of any benefit by the way of bonus or otherwise over and
above the sum actually assured, which is to be or may be re-
ceived under the policy by any person.
(3A) The provisions of sub-section (2) shall apply only to so much of
any premium or other payment made on an insurance policy, oth-
S
er than a contract for a deferred annuity, issued on or after the 1st
day of April, 2012 as is not in excess of 10 per cent of the actual
capital sum assured:

IMProvided that where the policy, issued on or after the 1st day of
April, 2013, is for insurance on life of any person, who is
(a) a person with disability or a person with severe disability as
referred to in section 80U, or
(b) suffering from disease or ailment as specified in the rules
made under section 80DDB, the provisions of this sub-section
M
shall have effect as if for the words “ten per cent”, the words
“fifteen per cent” had been substituted.
For the purposes of this sub-section, “actual capital sum as-
sured” in relation to a life insurance policy shall mean the
N
minimum amount assured under the policy on happening of

the insured event at any time during the term of the policy,
not taking into account
(i) the value of any premium agreed to be returned; or
(ii) any benefit by the way of bonus or otherwise over and
above the sum actually assured, which is to be or may be
received under the policy by any person.
(4) The persons referred to in sub-section (2) shall be the following,
namely:
(a) for the purposes of clauses (i), (v), (x) and (xi) of that sub-sec-
tion,
(i) in the case of an individual, the individual, the wife or hus-
band and any child of such individual, and
(ii) in the case of a Hindu undivided family, any member there-
of;

n o t e s
(b) for the purposes of clause (ii) of that sub-section, in the case
of an individual, the individual, the wife or husband and any
child of such individual;
(ba) for the purposes of clause (viii) of that sub-section, in the
case of an individual, the individual or any girl child of that
individual, or any girl child for whom such person is the legal
guardian, if the scheme so specifies;
(c) for the purposes of clause (xvii) of that sub-section, in the case
of an individual, any two children of such individual.
(5) Where, in any previous year, an assessee
(i) terminates his contract of insurance referred to in clause (i) of
sub-section (2), by notice to that effect or where the contract
ceases to be in force by reason of failure to pay any premium,
S
by not reviving the contract of insurance,
(a) in the case of any single premium policy, within two years
after the date of commencement of insurance; or
IM
(b) in any other case, before premiums have been paid for two
years; or
(ii) terminates his participation in any unit-linked insurance plan
referred to in clause (x) or clause (xi) of sub-section (2), by no-
tice to that effect or where he ceases to participate by reason
of failure to pay any contribution, by not reviving his participa-
M
tion, before contributions in respect of such participation have

been paid for five years; or
(iii) transfers the house property referred to in clause (xviii) of
sub-section (2) before the expiry of five years from the end of
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the financial year in which possession of such property is ob-

tained by him, or receives back, whether by the way of refund
or otherwise, any sum specified in that clause, then:
(a) no deduction shall be allowed to the assessee under
sub-section (1) with reference to any of the sums, referred
to in clauses (i), (x), (xi) and (xviii) of sub-section (2), paid in
such previous year; and
(b) the aggregate amount of deductions of income so allowed
in respect of the previous year or years preceding such pre-
vious year, shall be deemed to be the income of the assessee
of such previous year and shall be liable to tax in the assess-
ment year relevant to such previous year.
(6) If any equity shares or debentures, with reference to the cost of
which a deduction is allowed under sub-section (1), are sold or
otherwise transferred by the assessee to any person at any time
within a period of three years from the date of their acquisition,
the aggregate amount of deductions of income so allowed in re-

n o t e s
spect of such equity shares or debentures in the previous year or

years preceding the previous year in which such sale or transfer
has taken place shall deemed to be the income of the assessee of
such previous year and shall be liable to tax in the assessment
year relevant to such previous year.
Explanation.—A person shall be treated as having acquired any
shares or debentures on the date on which his name is entered
in relation to those shares or debentures in the register of
members or of debenture-holders, as the case may be, of the
public company.
(6A) If any amount, including interest accrued thereon, is withdrawn
by the assessee from his account referred to in clause (xxiii) or
clause (xxiv) of sub-section (2), before the expiry of the period of
five years from the date of its deposit, the amount so withdrawn
S
shall deemed to be the income of the assessee of the previous
year in which the amount is withdrawn and shall be liable to tax
in the assessment year relevant to such previous year:
IM
Provided that the amount liable to tax shall not include the fol-
lowing amounts, namely:—
(i) any amount of interest, relating to deposits referred to in
clause (xxiii) or clause (xxiv) of sub-section (2), which has
been included in the total income of the assessee of the previ-
ous year or years preceding such previous year; and
M
(ii) any amount received by the nominee or legal heir of the as-
sessee, on the death of such assessee, other than interest, if
any, accrued thereon, which was not included in the total in-
come of the assessee for the previous year or years preceding
N
such previous year.

(7) For the purposes of this section,
(a) the insurance, deferred annuity, provident fund and superan-
nuation fund referred to in clauses (i) to (vii);
(b) unit-linked insurance plan and annuity plan referred to in
clauses (xii) to (xiiia);
(c) pension fund and subscription to deposit scheme referred to in
clauses (xiiic) to (xiva);
(d) amount borrowed for purchase or construction of a residential
house referred to in clause (xv), of sub-section (2) of section 88
shall be eligible for deduction under the corresponding pro-
visions of this section and the deduction shall be allowed in
accordance with the provisions of this section.
(8) In this section,
(i) “Administrator” means the Administrator as referred to in
clause (a) of section 2 of the Unit Trust of India (Transfer of
Undertaking and Repeal) Act, 2002 (58 of 2002);

n o t e s
(ii) “contribution” to any fund shall not include any sums in re-
payment of loan;
(iii) “insurance” shall include
(a) a policy of insurance on the life of an individual or the
spouse or the child of such individual or a member of a
Hindu undivided family securing the payment of speci-
fied sum on the stipulated date of maturity, if such person
is alive on such date notwithstanding that the policy of
insurance provides only for the return of premiums paid
(with or without any interest thereon) in the event of such
person dying before the said stipulated date;
(b) a policy of insurance effected by an individual or a mem-
ber of a Hindu undivided family for the benefit of a mi-
nor with the object of enabling the minor, after he has
S
attained majority to secure insurance on his own life by
adopting the policy and on his being alive on a date (after
such adoption) specified in the policy in this behalf;
(iv) “Life Insurance Corporation” means the Life Insurance Cor-
IM
poration of India established under the Life Insurance Cor-
poration Act, 1956 (31 of 1956);
(v) “public company” shall have the same meaning as in section
3 of the Companies Act, 1956 (1 of 1956);
(vi) “security” means a Government security as defined in clause
M
(2) of section 2 of the Public Debt Act, 1944 (18 of 1944);

(vii) “specified company” means a company as referred to in
clause (h) of section 2 of the Unit Trust of India (Transfer of
N
(viii) “transfer” shall be deemed to include also the transactions

referred to in clause (f) of section 269UA.
Example: Let’s now calculate the total eligible deduction as per Sec-
tion 80C for Mr. Saurabh Pandey for Assessment Year 2018-19 with
respect to the premium paid of life insurance during Financial Year
2017-18. Table 8.2 below summarises its details.
Policy Issue In the Name of Capital Sum Insurance Pre-

Date Assured mium Paid in
Financial Year
2017-18
May 01, 2015 Spouse `1,50,000 `20,000
Mar 31, 2012 Self ` 2,00,000 `50,000
June 01, 2015 Daughter with a ` 3,00,000 `60,000
disease defined under
Section 80DDB
Jan 01, 2013 Son with a disease `2,00,000 `40,000
defined under Section
80DDB

n o t e s
Policy Issue In the Name of Capital Sum Insurance Pre-

Date Assured mium Paid in
Financial Year
2017-18
May 01, 2015 Parents `5,00,000 `75,000
Table 8.3 below depicts the calculation of eligible deduction for Mr.
Saurabh Pandey:
Policy In the Capital Sum % Restric- Insurance Deduction

Issue Date Name of Assured tion of Premium applicable
assured Paid in under Sec-
sum Financial tion 80C
Year 2017-
18
May 01, Spouse `1,50,000 10% `20,000 `15,000
S
2015
Mar 31, Self `2,00,000 20% `50,000 `40,000
2012
June 01, Daughter `3,00,000 15% `60,000 `45,000
IM
2015 with a dis-
ease defined
under Sec-
tion 80DDB
Jan 01, Son with `2,00,000 10% `40,000 `20,000
2013 a disease
defined un-
M
der Section
80DDB
May 01, Parents `5,00,000 10% `75,000 __
2015
Total `2,45,000 `1,20,000
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It should be noted that that life insurance premium paid in the name
of parents is not accountable for deduction. The reason is that parents
do no come under the definition of “specified person.
2. The provisions of sub-section (2) shall apply only to so much

of any premium or other payment made on an insurance
policy, other than a contract for a deferred annuity, issued on
or before the 31st day of March, _____, as is not in excess of 20
per cent of the actual capital sum assured.
Activity

applicable deductions as per Section 80C for the current assess-
ment year.

n o t e s
DEDUCTION IN RESPECT TO
8.5 CONTRIBUTION TO PENSION FUND
(SECTION 80CCC)
The eligible assessee for deduction is individuals. The below contri-
butions are qualified only when the payments are made out from the
taxable income:
(1) Where an assessee, being an individual, has in the previous year
paid or deposited any amount out of his taxable income to effect
or keep in force a contract for any annuity plan of Life Insurance
Corporation of India or any other insurer for receiving pension
from the fund referred to in clause (23AAB) of section 10, he shall,
in accordance with, and subject to, the provisions of this section,
S
be allowed a deduction in the computation of his total income, of
the whole of the amount paid or deposited (excluding interest or
bonus accrued or credited to the assessee’s account, if any) as does
not exceed the amount of ` 1,50,000 rupees in the previous year.
IM
(2) Where any amount standing to the credit of the assessee in a fund,
referred to in sub-section (1) in respect of which a deduction has
been allowed under sub-section (1), together with the interest or
bonus accrued or credited to the assessee’s account, if any, is re-
ceived by the assessee or his nominee
M
(a) on account of the surrender of the annuity plan whether in

whole or in part, in any previous year, or
(b) as pension received from the annuity plan,
an amount equal to the whole of the amount referred to in
N
clause (a) or clause (b) shall be deemed to be the income of the

assessee or his nominee, as the case may be, in that previous
year in which such withdrawal is made or, as the case may be,
pension is received, and shall accordingly be taxable as income
of that previous year.
(3) Where any amount paid or deposited by the assessee has been tak-
en into account for the purposes of this section,
(a) a rebate with reference to such amount shall not be allowed
under section 88 for any assessment year ending before the 1st
day of April, 2006;
(b) a deduction with reference to such amount shall not be allowed
under section 80C for any assessment year beginning on or af-
ter the 1st day of April, 2006.

n o t e s
Activity

applicable deductions as per Section 80CCC for the current assess-
ment year.
LIMIT OF DEDUCTION U/S 80C, 80CCC,

8.6
80CCD (SECTION 80CCE)
The aggregate amount of deductions under section 80C, section
80CCC and sub-section (1) of section 80CCD shall not, in any case,
exceed `1,50,000.
Table 8.4 lists this limit of deductions:
S
TABLE 8.4: LIMITS OF DEDUCTIONS
Section Maximum Collective
deductions under maximum
IM
relevant Section deduction
80C – Contributions to invest- `1,50,000
ments specified
80CCC – Contributions to `1,50,000
specific pension funds Overall deduction
80CCC (1) – Contributions to a 10% of Salary is restricted to
M
notified pension scheme (a) by `1,50,000

an employee
(b) by any other assessee 20% of Gross Total
Income
80CCD (1B) – Additional de- `50,000 No limit
N
ductions towards contribution

in a notified pension scheme
by an assessee (whether em-
ployed or not)
80CCD (2) – Contribution of 10% of Salary No limit
employer towards a notified
pension scheme
Example:
Let’s determine deductions available as per Section 80CCD for Mrs.

Nikky who does not derive salary income. She has made a contribu-
tion of `2,20,000 towards a notified pension scheme by the Central
Government. The Gross Total Income of Mrs. Nikky for the Assess-
ment Year 2018-19 is `9,00,000.
Now, as per Section 80CCC (1), 20% of the Gross Total Income, which
is `1,80,000 is deductible. However, as per Section 80CCE, the limit of
deduction applicable to Section 80C, 80CCC, 80CCC (1) is `1,50,000.

n o t e s
Therefore, the deduction amount that can be claimed is `1,50,000.

With respect to the balance of `70,000, Mrs. Nikky becomes eligible
for additional deduction under Section CCD(1B) to the maximum of
`50,000. Therefore, the total deduction under Section 80CCD (1) and
80CCD(1B) will be `2,00,000.
1. What is the limit to the collective maximum deduction as per

Section 80CCC – Contributions to specific pension funds?
a. `1,50,000 b. 10% of Salary

c.
No Limit d.
`2,50,000
Activity
S
applicable deductions as per Section 80CCE for the current assess-
ment year.
IM
DEDUCTION IN RESPECT OF HEALTH
8.7
INSURANCE PREMIA (SECTION 80D)
For this section, the eligible assessee is an individual or a Hindu Undi-
vided Family. Here the family means assessee’s spouse and dependant
M
children. A Hindu Undivided Family means any member of the Hindu

Undivided Family.
(1) In computing the total income of an assessee, being an individual
or a Hindu Undivided Family, there shall be deducted such sum, as
N
specified in sub-section (2) or sub-section (3), payment of which is

made by any mode as specified in sub-section (2B), in the previous
year out of his taxable income.
(2) Where the assessee is an individual, the sum referred to in sub-sec-
tion (1) shall be the aggregate of the following, namely:
(a) the whole of the amount paid to effect or to keep in force an
insurance on the health of the assessee or his family or any
contribution made to the Central Government Health Scheme
or such other scheme as may be notified by the Central Gov-
ernment in this behalf or any payment made on account of pre-
ventive health check-up of the assessee or his family as does
not exceed in the aggregate `25,000; and
(b) the whole of the amount paid to effect or to keep in force an
insurance on the health of the parent or parents of the assessee
or any payment made on account of preventive health check-
up of the parent or parents of the assessee as does not exceed
in the aggregate `25,000;

n o t e s
(c) the whole of the amount paid on account of medical expendi-

ture incurred on the health of the assessee or any member of
his family as does not exceed in the aggregate `30,000; and
(d) the whole of the amount paid on account of medical expendi-
ture incurred on the health of any parent of the assessee, as
does not exceed in the aggregate `30,000:
provided that the amount referred to in clause (c) or clause (d)
is paid in respect of a very senior citizen and no amount has
been paid to effect or to keep in force insurance on the health
of such person:
provided further that the aggregate of the sum specified un-
der clause (a) and clause (c) or the aggregate of the sum spec-
ified under clause (b) and clause (d) shall not exceed `30,000.
S
Explanation—For the purposes of clause (a), “family” means
the spouse and dependant children of the assessee.
(2A) where the amounts referred to in clauses (a) and (b) of sub-sec-
IM tion (2) are paid on account of preventive health check-up, the
deduction for such amounts shall be allowed to the extent it
does not exceed in the aggregate `5,000.
(2B) for the purposes of deduction under sub-section (1), the pay-
ment shall be made by
(i) any mode, including cash, in respect of any sum paid on
M
account of preventive health check-up;

(ii) any mode other than cash in all other cases not falling un-
der clause (i).
(3) Where the assessee is a Hindu Undivided Family, the sum re-
N
ferred to in sub-section (1), shall be the aggregate of the following,

namely:
(a) whole of the amount paid to effect or to keep in force an insur-
ance on the health of any member of that Hindu Undivided
Family as does not exceed in the aggregate `25,000; and
(b) the whole of the amount paid on account of medical expendi-
ture incurred on the health of any member of the Hindu Undi-
vided Family as does not exceed in the aggregate `30,000:
provided that the amount referred to in clause (b) is paid in
respect of a very senior citizen and no amount has been paid to
effect or to keep in force insurance on the health of such per-
son:
provided further that the aggregate of the sum specified under
clause (a) and clause (b) shall not exceed `30,000.]

n o t e s
(4) Where the sum specified in clause (a) or clause (b) of sub-section
(2) [or clause (a) of sub-section (3)] is paid to effect or keep in force
an insurance on the health of any person specified therein, and
who is a senior citizen, [or a very senior citizen,] the provisions
of this section shall have effect as if for the words “[twenty-five]
thousand rupees”, the words “[thirty] thousand rupees” had been
substituted.
(5) The insurance referred to in this section shall be in accordance
with a scheme made in this behalf by
(a) the General Insurance Corporation of India formed under sec-
tion 9 of the General Insurance Business (Nationalisation) Act,
1972 (57 of 1972) and approved by the Central Government in
this behalf; or
(b) any other insurer and approved by the Insurance Regulatory
S
and Development Authority established under sub-section (1)
of section 3 of the Insurance Regulatory and Development Au-
thority Act, 1999 (41 of 1999).
IM
[Explanation.—For the purposes of this section,
(i) “senior citizen” means an individual resident in India who
is of the age of sixty years or more at any time during the
relevant previous year;
(ii) “very senior citizen” means an individual resident in India
M
who is of the age of eighty years or more at any time during

the relevant previous year.]
Example: Let us determine deduction under Section 80D for Mr. Sha-
shank who is 50 years old and provides the below information related
N
to Mediclaim policy premium paid for the year ending Mar 31, 2018 by
cheque.
(a) For self: `10,000
(b) For spouse who is 48 years old: `9,000
(c) For dependant mother who is 70 years old: `7,000
(d) For dependant mother-in-law who is 62 years old: `5,000
(e) For preventive health check-up of self and spouse in cash: `6,000
(f) Dependant father’s medical expenditure who is 82 years old:
`30,000
In case the premium has been paid in cash, would the answer differ?

n o t e s
The calculation of deduction under Section 80D for Mr. Shashank is

shown as follows:
Particulars Amount Eligibility Deduction

Paid Allowed
a) For individual and his
family
Self – Mediclaim pre- ` 10,000 Yes ` 10,000
mium
Spouse – Mediclaim ` 9,000 Yes ` 9,000
premium
Self and Spouse – Pre- ` 6,000 Yes, but restricted to ` 5,000
ventive Health Check- ` 5,000
up
Total ` 25,000 ` 24,000
S
b) For Parents
Dependant mother – ` 7,000 Yes ` 7,000
Mediclaim Premium
IM
Father – Medical Ex- ` 30,000 Yes, but restricted to ` ` 23,000
penditure 23,000
Total ` 37,000 ` 30,000
It should be noted that `5,000 that has been paid for mother-in-law is
not allowed for deduction, because it is not included in the definition
M
of “family”.
As per Section 80D, the health insurance premium payment by any

mode other than cash is allowed. If any payment has been made
through cash, it cannot be availed as deduction. However, preventive
N
health check-up of self and spouse in cash of ` 5,000 is allowed.
Activity

applicable deductions as per Section 80D for the current assess-
ment year.
DEDUCTION IN RESPECT OF
MAINTENANCE INCLUDING MEDICAL
8.8 TREATMENT OF A DEPENDANT WHO IS
A PERSON WITH DISABILITY (SECTION
80DD)
The eligible assessee for this section is a resident individual or Hindu
Undivided Family.
(1) Where an assessee, being an individual or a Hindu Undivided
Family, who is a resident of India, has, during the previous year,—

n o t e s
(a) incurred any expenditure for the medical treatment (including

nursing), training and rehabilitation of a dependant, being a
person with disability; or
(b) paid or deposited any amount under a scheme framed in this
behalf by the Life Insurance Corporation or any other insurer
or the Administrator or the specified company subject to the
conditions specified in sub-section (2) and approved by the
Board in this behalf for the maintenance of a dependant, being
a person with disability,
the assessee shall, in accordance with and subject to the provi-
sions of this section, be allowed a deduction of a sum of `75,000
from his Gross Total Income in respect of the previous year:
provided that where such dependant is a person with severe
disability, the provisions of this sub-section shall have effect
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as if for the words “seventy-five thousand rupees”, the words
“one hundred and twenty-five thousand rupees” had been sub-
stituted.]
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(2) The deduction under clause (b) of sub-section (1) shall be allowed
only if the following conditions are fulfilled, namely:
(a) the scheme referred to in clause (b) of sub-section (1) provides
for payment of annuity or lump sum amount for the benefit of
a dependant, being a person with disability, in the event of the
death of the individual or the member of the Hindu Undivided
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Family in whose name subscription to the scheme has been

made;
(b) the assessee nominates either the dependant, being a person
with disability, or any other person or a trust to receive the
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payment on his behalf, for the benefit of the dependant, being

a person with disability.
(3) If the dependant, being a person with disability, predeceases the
individual or the member of the Hindu Undivided Family referred
to in sub-section (2), an amount equal to the amount paid or depos-
ited under clause (b) of sub-section (1) shall be deemed to be the
income of the assessee of the previous year in which such amount
is received by the assessee and shall accordingly be taxable as the
income of that previous year.
(4) The assessee, claiming a deduction under this section, shall fur-
nish a copy of the certificate issued by the medical authority in
the prescribed form and manner, along with the return of income
under section 139, in respect of the assessment year for which the
deduction is claimed:
Provided that where the condition of disability requires reassess-
ment of its extent after a period stipulated in the aforesaid cer-
tificate, no deduction under this section shall be allowed for any
assessment year relating to any previous year beginning after the

n o t e s
expiry of the previous year during which the aforesaid certificate

of disability had expired, unless a new certificate is obtained from
the medical authority in the form and manner, as may be pre-
scribed, and a copy thereof is furnished along with the return of
income.
Explanation.—For the purposes of this section,
(a) “administrator” means the Administrator as referred to in
clause (a) of section 2 of the Unit Trust of India (Transfer of
(b) “dependant” means
(i) in the case of an individual, the spouse, children, parents,
brothers and sisters of the individual or any of them;
(ii) in the case of a Hindu Undivided Family, a member of the
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Hindu Undivided Family,
dependant wholly or mainly on such individual or Hindu
Undivided Family for his support and maintenance, and
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who has not claimed any deduction under section 80U in
computing his total income for the assessment year relat-
ing to the previous year;
(c) “disability” shall have the meaning assigned to it in clause (i) of
section 2 of the Persons with Disabilities (Equal Opportunities,
Protection of Rights and Full Participation) Act, 1995 (1 of 1996)
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and includes “autism”, “cerebral palsy” and “multiple disabil-

ity” referred to in clauses (a), (c) and (h) of section 2 of the Na-
tional Trust for Welfare of Persons with Autism, Cerebral Palsy,
Mental Retardation and Multiple Disabilities Act, 1999 (44 of
1999);
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(d) “Life Insurance Corporation” shall have the same meaning as

in clause (iii) of sub-section (8) of section 88;
(e) “medical authority” means the medical authority as referred to
in clause (p) of section 2 of the Persons with Disabilities (Equal
Opportunities, Protection of Rights and Full Participation) Act,
1995 (1 of 1996) or such other medical authority as may, by no-
tification, be specified by the Central Government for certify-
ing “autism”, “cerebral palsy”, “multiple disabilities”, “person
with disability” and “severe disability” referred to in clauses
(a), (c), (h), (j) and (o) of section 2 of the National Trust for Wel-
fare of Persons with Autism, Cerebral Palsy, Mental Retarda-
tion and Multiple Disabilities Act, 1999 (44 of 1999);
(f) “person with disability” means a person as referred to in clause
(t) of section 2 of the Persons with Disabilities (Equal Opportu-
nities, Protection of Rights and Full Participation) Act, 1995 (1
of 1996) or clause (j) of section 2 of the National Trust for Wel-

n o t e s

(g) “person with severe disability” means
(i) a person with eighty per cent or more of one or more dis-
abilities, as referred to in sub-section (4) of section 56 of the
Persons with Disabilities (Equal Opportunities, Protection
of Rights and Full Participation) Act, 1995 (1 of 1996); or
(ii) a person with severe disability referred to in clause (o) of
section 2 of the National Trust for Welfare of Persons with
Autism, Cerebral Palsy, Mental Retardation and Multiple
Disabilities Act, 1999 (44 of 1999);
(h) “specified company” means a company as referred to in clause
(h) of section 2 of the Unit Trust of India (Transfer of Undertak-
ing and Repeal) Act, 2002 (58 of 2002).
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2. Who of the following is not a dependant?

a.
Spouse b.
Children
c. Brothers and sisters d. Parents in law
Activity
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applicable deductions as per Section 80DD for the current assess-
ment year.
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DEDUCTION IN RESPECT OF LOAN

8.9 TAKEN FOR HIGHER EDUCATION
(SECTION 80E)
The eligible assessee for this section is an individual.
(1) In computing the total income of an assessee, being an individu-
al, there shall be deducted, in accordance with and subject to the
provisions of this section, any amount paid by him in the previous
year, out of his taxable income, by the way of interest on loan taken
by him from any financial institution or any approved charitable
institution for the purpose of pursuing his higher education or for
the purpose of higher education of his relative.
(2) The deduction specified in sub-section (1) shall be allowed in com-
puting the total income in respect of the initial assessment year
and seven assessment years immediately succeeding the initial as-
sessment year or until the interest referred to in sub-section (1) is
paid by the assessee in full, whichever is earlier.

n o t e s
(3) For the purposes of this section,

(a) “approved charitable institution” means an institution speci-
fied in, or, as the case may be, an institution established for
charitable purposes and approved by the prescribed authority
under clause (23C) of section 10 or an institution referred to in
clause (a) of sub-section (2) of section 80G;
(b) “financial institution” means a banking company to which the
Banking Regulation Act, 1949 (10 of 1949) applies (including
any bank or banking institution referred to in section 51 of that
Act); or any other financial institution which the Central Gov-
ernment may, by notification in the Official Gazette, specify in
this behalf;
(c) “higher education” means any course of study pursued after
passing the Senior Secondary Examination or its equivalent
from any school, board or university recognised by the Central
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Government or State Government or local authority or by any
other authority authorised by the Central Government or State
Government or local authority to do so;
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(d) “initial assessment year” means the assessment year relevant
to the previous year, in which the assessee starts paying the
interest on the loan;
(e) “relative”, in relation to an individual, means the spouse and
children of that individual or the student for whom the individ-
ual is the legal guardian.
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3. “Financial institution” means a banking company to

which the Banking Regulation Act, 1949 (10 of 1949)
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applies (including any bank or banking institution

referred to in section 51 of that Act). True or False?
Activity

applicable deductions as per Section 80E for the current assess-
ment year.
DEDUCTION IN RESPECT OF INTEREST

8.10 ON DEPOSITS IN SAVINGS ACCOUNT
(SECTION 80TTA)
The eligible assessee for this section is an individual or a Hindu Undi-
vided Family.
(1) Where the Gross Total Income of an assessee, being an individual
or a Hindu Undivided Family, includes any income by way of inter-
est on deposits (not being time deposits) in a savings account with

n o t e s
(a) a banking company to which the Banking Regulation Act, 1949

(10 of 1949), applies (including any bank or banking institution
referred to in section 51 of that Act);
(b) a co-operative society engaged in carrying on the business of
banking (including a co-operative land mortgage bank or a
co-operative land development bank); or
(c) a Post Office as defined in clause (k) of section 2 of the Indi-
an Post Office Act, 1898 (6 of 1898), there shall, in accordance
with and subject to the provisions of this section, be allowed,
in computing the total income of the assessee a deduction as
specified hereunder, namely:
(i) in a case where the amount of such income does not exceed
in the aggregate ten thousand rupees, the whole of such
amount; and
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(ii) in any other case, ten thousand rupees.
(2) Where the income referred to in this section is derived from any
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deposit in a savings account held by, or on behalf of, a firm, an as-
sociation of persons or a body of individuals, no deduction shall be
allowed under this section in respect of such income in computing
the total income of any partner of the firm or any member of the
association or any individual of the body.
Explanation.—For the purposes of this section, “time deposits”
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means the deposits repayable on expiry of fixed periods.
4. Which of the following means deposits repayable on expiry of

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fixed periods?
a. Mutual funds b. Term deposits
c. Time deposits d. Insurance
Activity

applicable deductions as per Section 80TTA for the current assess-
ment year.
DEDUCTION IN THE CASE OF PERSON

8.11
WITH DISABILITY (SECTION 80U)
This eligible section for this section is a resident individual, who is
certified by a Medical Authority to be a person with disability at any
time during the previous year.
(1) In computing the total income of an individual, being a resident,
who, at any time during the previous year, is certified by the med-

n o t e s
ical authority to be a person with disability, there shall be allowed

a deduction of a sum of `75,000:
provided that where such individual is a person with severe dis-
ability, the provisions of this sub-section shall have effect as if for
the words “seventy-five thousand rupees”, the words “one hun-
dred and twenty-five thousand rupees” had been substituted.
(2) Every individual claiming a deduction under this section shall fur-
nish a copy of the certificate issued by the medical authority in the
form and manner, as may be prescribed, along with the return of
income under section 139, in respect of the assessment year for
which the deduction is claimed:
provided that where the condition of disability requires reassess-
ment of its extent after a period stipulated in the aforesaid cer-
tificate, no deduction under this section shall be allowed for any
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assessment year relating to any previous year beginning after the
expiry of the previous year during which the aforesaid certificate
of disability had expired, unless a new certificate is obtained from
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the medical authority in the form and manner, as may be pre-
scribed, and a copy thereof is furnished along with the return of
income under section 139.
Explanation.—For the purposes of this section,
(a) “disability” shall have the meaning assigned to it in clause (i)
of section 2 of the Persons with Disabilities (Equal Opportuni-
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ties, Protection of Rights and Full Participation) Act, 1995 (1 of

1996), and includes “autism”, “cerebral palsy” and “multiple
disabilities” referred to in clauses (a), (c) and (h) of section 2
of the National Trust for Welfare of Persons with Autism, Ce-
N
rebral Palsy, Mental Retardation and Multiple Disabilities Act,

1999 (44 of 1999);
(b) “medical authority” means the medical authority as referred to
in clause (p) of section 2 of the Persons with Disabilities (Equal
Opportunities, Protection of Rights and Full Participation) Act,
1995 (1 of 1996), or such other medical authority as may, by no-
tification, be specified by the Central Government for certify-
ing “autism”, “cerebral palsy”, “multiple disabilities”, “person
with disability” and “severe disability” referred to in clauses
(a), (c), (h), (j) and (o) of section 2 of the National Trust for Wel-
(c) “person with disability” means a person referred to in clause
(t) of section 2 of the Persons with Disabilities (Equal Oppor-
tunities, Protection of Rights and Full Participation) Act, 1995
(1 of 1996), or clause (j) of section 2 of the National Trust for
Welfare of Persons with Autism, Cerebral Palsy, Mental Retar-
dation and Multiple Disabilities Act, 1999 (44 of 1999);

n o t e s
(d) “person with severe disability” means

(i) a person with eighty per cent or more of one or more dis-
abilities, as referred to in sub-section (4) of section 56 of the
Persons with Disabilities (Equal Opportunities, Protection
of Rights and Full Participation) Act, 1995 (1 of 1996); or
(ii) a person with severe disability referred to in clause (o) of
section 2 of the National Trust for Welfare of Persons with
Autism, Cerebral Palsy, Mental Retardation and Multiple
Disabilities Act, 1999 (44 of 1999).
5. Person with severe disability means (i) a person with ______ per
cent or more of one or more disabilities, as referred to in sub-
section (4) of section 56 of the Persons with Disabilities (Equal
S
Opportunities, Protection of Rights and Full Participation)
Act, 1995 (1 of 1996);
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Activity

applicable deductions as per Section 80U for the current assess-
ment year.
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8.12 SUMMARY
Deductions are part of the Gross Total Income and anyone can
leverage its benefits on the basis of application. On the other hand,
exemptions are not a part of the Gross Total Income.
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Chapter VIA of the Income Tax Act covers section 80 and the de-
ductions are covered by section 80C to 80U.
According to section 80A, the deductions specified under sections
80C to 80U covered by Chapter VIA shall be allowed while comput-
ing the total income of the assessee from his/her GTI.
Section 80C (Individual/HUF) allows deduction of up to `1,50,000
in respect of Life Insurance Premium (LIC) for policy, Deferred
Annuity, contributions to provident fund (PF), unit-linked insur-
ance plan of the LIC Mutual Fund, subscription to certain equity
shares or debentures, Term Deposits, etc.
Section 80CCC (Individual) allows deduction of up to `1,50,000 for
contributing in certain pension funds of LIC or other insurer.
Limit on Deductions under section 80C, 80CCC and 80CCD [Sec-
tion 80CCE]; the aggregate amount of deduction under section
80C, section 80CCC and section 80CCD(1) [excluding employer‘s
contribution to pension scheme or contribution made by the as-
sessee under section 80CCD(1B)] shall not, in any case, exceed

n o t e s
`1,50,000.
Section 80D (Individual/HUF) allows deduction of up to `30,000
for contributing to Central Government Health Scheme or LIC or
other insurer to keep in force insurance on the health of the spec-
ified person.
Section 80DD (Resident Individual/HUF) allows deduction of up
to ` 75,000 (`1, 25, 000 in case of severe disability) for medical treat-
ment of a dependant person with disability.
Section 80E (Individual) allows 100% deduction of the amount
paid by way of payment of interest on loan taken from financial
institution for pursuing higher education.
Section 80TTA (Individual/HUF) allows deduction of up to `10,000
on any income by way of interest on deposits in a savings account
with a banking company, co-operative society or post office.
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Section 80U (Resident Individual) allows deduction of up to `75,000
(` 1,25,000 for person with severe disability) to a resident individu-
al, certified by the medical authority to be a person with disability.
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key words
AOP/BOI: An Association of Persons (AOP) or a Body of Indi-

viduals (BOI), whether incorporated or not
Assessee: An individual that is liable to pay taxes for himself/
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herself or on behalf of somebody else

Gross Total Income (GTI): An individual’s total pay before ac-
counting for taxes or other deductions
Resident Individual: Every individual who is domiciled in this
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state, even though absent for temporary or transitory purpos-

es, and every individual who for an aggregate of more than six
months both maintains a permanent place of abode within this
state and who is present in this state

1. Write an explained note on Section 80A.
2. Explain deductions applicable as per Sections 80C and 80CCC?
3. Describe Section 80DD, 80E and 80U.
Topic Q. No. Answer

Deductions to be made in Computing 1. b. 10%
Total Income (Section 80A)

n o t e s
Topic Q. No. Answer

Deductions in respect of Life Insurance 2. 2012
Premium, Deferred Annuity, Contribu-
tion to Provident Fund, Subscription to
Certain Equity Shares or Debentures etc.
(Section 80C)
Limit of Deduction u/s 80C, 80CCC, 3. a. ` 1,50,000
80CCD (Section 80CCE)
Deduction in respect of Maintenance 4. d. Parents-in-law
including Medical Treatment of a De-
pendant who is a Person with Disability
(Section 80DD)
Deduction in respect of Loan taken for 5. True
Higher Education (Section 80E)
Deduction in respect of Interest on 6. c. Time deposits
S
Deposits in Savings Account (Section
80TTA)
Deduction in the Case of Person with 7. Eighty
Disability (Section 80U)
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1. Chapter VIA of the Income Tax Act covers section 80 and the
deductions are covered by section 80C to 80U. According to
section 80A, the deductions specified under sections 80C to 80U
M
covered by Chapter VIA shall be allowed while computing the

total income of the assessee from his/her GTI. Refer to Section
8.3 Deductions to be Made in Computing Total Income (Section
80A).
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2. Section 80 C deductions are applicable to an individual and a

Hindu Undivided Family. The eligible assessee for deduction of
Section 80CCC is individuals. Refer to Sections 8.4 Deductions
in Respect of Life Insurance Premium, Deferred Annuity,
Contribution to Provident Fund, Subscription to Certain Equity
Shares or Debentures etc. (section 80C) and 8.5 Deduction in
Respect to Contribution To Pension Fund (Section 80CCC).
3. For Section 80DD, the eligible assessee is an individual or a
Hindu Undivided Family. Here the family means assessee’s
spouse and dependant children. The eligible assessee for Section
80E is an individual. This eligible section for Section 80 U is a
resident individual, who is certified by a Medical Authority to
be a person with disability at any time during the previous year.
Refer to Sections 8.7 Deduction in respect of Health Insurance
Premia (Section 80D), 8.9 Deduction in respect of Loan taken
for Higher Education (Section 80E) and 8.11 Deduction in the
Case of Person with Disability (Section 80U).

n o t e s
SUGGESTED READINGS
rules
E-REFERENCES
(2018). Retrieved 9 April 2018, from https://www.incometaxindia.
gov.in/pages/acts/income-tax-act.aspx
Income Tax deduction under section 80C, 80CCD, 80CCC. (2018).
S
Cleartax.in. Retrieved 9 April 2018, from https://cleartax.in-
/s/80c-80-deductions
List of Income Tax Exemptions for FY 2017-2018 and AY 2018-2019
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| Primo Payroll India. (2018). Primo Payroll India. Retrieved 9 April
2018, from https://primopayroll.co.in/blog/2017/07/list-income-tax-
exemptions-fy-2017-2018-ay-2018-2019/
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Ch a
9 pt e r
EXEMPTIONS & REBATES
CONTENTS
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9.1 Introduction
9.2 Incomes not included in Total Income (Exemptions u/s 10)
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9.2.1 Agricultural Income [Section 10(1)]
9.2.2 Receipts from HUF [Section 10(2)]
9.2.3 Partners Share in the Income of the Firm [Section 10(2A)]
9.2.4 Gratuity [Section 10(10)]
9.2.5 Commutation of Pension [Section 10(10A)]
9.2.6 Leave Salary [Section 10(10AA)]
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9.2.7 Leave Travel Concession [Section 10(5)]

9.2.8 Amount Received under a Life Insurance Policy [Section 10(10D)]
9.2.9 Payment from Provident Fund [Section 10(11)]
9.2.10 House Rent Allowance [Section 10(13A)]
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9.2.11 Scholarship [Section 10(16)]

9.2.12 Awards [Section 10(17A) and 10(18)]
9.2.13 Clubbed Income of a Minor Child [Section 10(32)]
9.2.14 Family Pension [Section 10(18) and 10(19)]
9.2.15 Income by Way of Interest, Dividend, Premium on Redemption or
other Payment from Securities (Bonds, Mutual Funds, Shares etc.)
[Section 10(15)]
Activity
9.3 Rebates of Income Tax
Activity
9.4 Summary

n o t e s
RENT PAID TO PARENTS
Sowmya is working with an MNC situated in Bangalore. Her or-

ganisation provides her the benefits of House Rent Allowance
(HRA). However, she lives with her parents and not in a rented
accommodation.
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HRA is the tax benefit that is available only to salaried individu-
als who have an HRA component as part of their salary structure
and are staying in a rented accommodation. It is calculated as the
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minimum of the following:
The actual HRA the employee has received
50% of salary if the employee is living in metro cities, or 40%
of salary if living in non-metro cities
Excess of the amount of rent paid per year over 10% of the
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annual salary
Sowmya is living in a metro city but she cannot use this allowance
for attaining any tax benefit. However, if she wants to, she can pay
the rent to her parents and claim this allowance, provided that the
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parents own that place. For this, she would need to enter into a
rental agreement with her parents and give them the rent money
each month. This will not only help her save taxes, but it would
also be a nice gesture by financially assisting her parents.
However, it must be noted that her parents will have to show the
rent received from Sowmya in their income which would become
subject to tax.

EXEMPTIONS & REBATES 335
n o t e s
learning objectives

>> Explain incomes not included in the total income, i.e., ex-
emptions u/s 10 of the Act
>> Describe various rebates of income tax
9.1 INTRODUCTION
In the previous chapter, you studied the difference between deduc-
tions and exemptions. You also studied deductions to be made in com-
puting the total income as per Section 80A. In addition, you got famil-
iar with various deductions u/s 80C, 80CCC, 80CCE, 80D, 80DD, 80E,
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80TTA and 80 U.
However, there are various incomes which are either not at all taxable
or are taxable partially. You will study such incomes in this chapter.
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Various income items that have been defined in various clauses of
Section 10 are excluded from the total income of an assessee. These
incomes are termed as exempted incomes. Consequently, such in-
comes are not considered while computing the taxable income of an
assessee.
In this chapter, you will learn about various categories of exempted

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incomes under Section 10 of the Act. In addition, you will also learn
about rebates of income tax, which are items that are allowed to be
claimed from the total payable tax.
INCOMES NOT INCLUDED IN TOTAL

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9.2
INCOME (EXEMPTIONS U/S 10)
Section 10 covers the income that does not form the part of taxable
income. These are those incomes on which income tax is exempted. In
other words, no tax is applied on these incomes. Some of the exemp-
tions under Section 10 of Income Tax Act, 1961 are discussed in the
next sections.
9.2.1 AGRICULTURAL INCOME [SECTION 10(1)]
As per Section 10(1), Agricultural Income; the earnings from agricul-

ture are totally exempted if it falls within the definition of agricultural
income given u/s 2(1A). The reason for totally exempting agricultural
income is that under the Constitution, the Parliament has no power
to levy a tax on agricultural income. However, tax can be levied on
agricultural income in an indirect way, which is known as partial inte-
gration of taxes. It is applicable to the following:
Individuals
Hindu Undivided Family (HUF)

n o t e s
Unregistered firms
Association of Persons (AOP)
Body of Individuals (BOI)
Artificial persons
Under section 2(1A), agricultural income is defined as:

(a) Any revenue or rent that has been derived from land situated in
India and is utilised for agricultural purposes.
(b) Any income derived from such land by agriculture operations
which include agricultural produce processing for rendering it
fit for the market or sale of such produce.
(c) Any income that is attributable to a farm house subject to
satisfaction of specific conditions that have been specified in
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section 2(1A).
Any income that has been derived from seedlings or saplings or grown
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in a nursery shall deemed to be agricultural income.
For example, if an income is made by a seller of standing crops, who

has invested labour and skill to make the crop sprout out of the land
is agricultural income. However, if someone buys a standing crop, and
generates profits out of it, that income will not be considered as agri-
cultural income.
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9.2.2 RECEIPTS FROM HUF [SECTION 10(2)]
As per Section 10(2), Amounts Received by a Member from the Income

of the Hindu Undivided Family (HUF); an HUF is a separate legal iden-
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tity and any income earned by the HUF is taxable in the hands of HUF
only. Subject to the provisions of sub-section (2) of Section 64, any sum
received by an individual as a member of a Hindu Undivided Family,
where such sum has been paid out of the income of the family, or, in the
case of any impartible estate, where such sum has been paid out of the
income of the estate belonging to the family, is exempt from tax;
For example, let’s say an HUF earns `5,00,000 in the last year and has
already paid tax on his/her income. Mr. X, which is a co-parcener in
the HUF and earns ` 20,000 per month as his salary. In the last year,
Mr. X also received `1,00,000 from HUF. In this case, Mr. X will pay tax
on his taxable salary income but not on the sum he received from his
HUF. This money is not chargeable to tax.
9.2.3 PARTNERS SHARE IN THE INCOME OF THE FIRM

[SECTION 10(2A)]
As per Section 10(2A), Share Income of Partner; in the case of a per-

son being a partner of a firm which is separately assessed as such, his

n o t e s
share in the total income of the firm will be exempt from tax. In other
words, the share of the partner in the firm’s total income determined
in accordance with the profit sharing ratio will be exempted from tax.
For example, if you are a partner of a firm, any amount of money that
you have as a share in the firm’s total income is exempted from in-
come tax.
9.2.4 GRATUITY [SECTION 10(10)]
As per Section 10 (10), Gratuity; Tax exemption is available with

respect to gratuity as follows:
(i) Any death-cum-retirement gratuity received under the revised
Pension Rules of the Central Government or, as the case may
be, the Central Civil Services (Pension) Rules, 1972, or under
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any similar scheme applicable to the members of civil services of
the Union or holders of posts connected with defence or of civil
posts under the Union (such members or holders being persons
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not governed by the said Rules) or to the members of the All-
India services or to the members of the civil services of a State or
holders of civil posts under a State or to the employees of a local
authority or any payment of retiring gratuity received under the
Pension Code or Regulations applicable to the members of the
defence services;
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(ii) any gratuity received under the Payment of Gratuity Act, 1972
(39 of 1972), to the extent that it does not exceed an amount
calculated in accordance with the provisions of sub-sections (2)
and (3) of Section 4 of that Act;
(iii) any other gratuity received by an employee on his retirement
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or on his becoming incapacitated prior to such retirement or

on termination of his employment, or any gratuity received by
his widow, children or dependants on his death, to the extent it
does not, in either case, exceed one-half month’s salary for each
year of completed service, calculated on the basis of the average
salary for 10 months immediately preceding the month in which
any such event occurs, subject to such limit as the Central
Government may, by notification in the Official Gazette, specify
in this behalf having regard to the limit applicable in this behalf
to the employees of that Government:
Provided that where any gratuities referred to in this clause are re-
ceived by an employee from more than one employer in the same
previous year, the aggregate amount exempt from income-tax un-
der this clause shall not exceed the limit so specified:
Provided further that where any such gratuity or gratuities was or
were received in any one or more earlier previous years also and
the whole or any part of the amount of such gratuity or gratuities
was not included in the total income of the assessee of such pre-

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vious year or years, the amount exempt from income-tax under

this clause shall not exceed the limit so specified as reduced by the
amount or, as the case may be, the aggregate amount not included
in the total income of any such previous year or years.
For example, consider Mr. X who is covered by the Payment of Gratu-

ity Act, 1972 retires on 15.6.2017 after completing 26 years 8 months of
service and receives gratuity of `60,000. Based on the statutory limit
(`10,00,000) or his 15 days salary based on the last drawn salary for
each completed year of service or part thereof in excess of 6 months
(` 1,24,615), whichever is less, the taxable gratuity comes out to be
`4,75,385. However, if he is a government employee, the taxable gra-
tuity will be Nil.
9.2.5 COMMUTATION OF PENSION [SECTION 10(10A)]
S
As per Section 10 (10A), Payment in Commutation of Pension; Ex-
emption is available in respect of commuted pension, i.e. accumulated
pension in lieu of monthly pension received by a government employ-
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ee, as follows:
(i) any payment in the commutation of pension received under the
Civil Pensions (Commutation) Rules of the Central Government
or under any similar scheme applicable to the members of the civil
services of the Union or holders of posts connected with defence
or of civil posts under the Union (such members or holders being
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persons not governed by the said Rules) or to the members of the

all-India services or to the members of the defence services or
to the members of the civil services of a State or holders of civil
posts under a State or to the employees of a local authority or a
corporation established by a Central, State or Provincial Act;
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(ii) any payment in the commutation of pension received under

any scheme of any other employer, to the extent that it does not
exceed—
(a) in a case where the employee receives any gratuity, the
commuted value of one-third of the pension which he is
normally entitled to receive; and
(b) in any other case, the commuted value of one-half of such
pension; such commuted value being determined having
regard to the age of the recipient, the state of his health, the
rate of interest and officially recognised tables of mortality;
(iii) any payment in the commutation of pension received from a
fund under clause (23AAB).
For example, let’s say Mr. Mohan retired on 1.10.2017 and receives
` 5,000 per month as his pension. On 1.2.2018, he commutes 60% of
his pension and received `3,00,000 as commuted pension. In this case,
if he is a government employee, his taxable pension would be NIL.
This is because uncommuted pension received between October and

n o t e s
March will be `24,000 (5,000 *4 months + 40% of 5,000 * 2 months) and

per exempt u/s 10(10A) will be `3,00,000. If he is a non-government
employee receiving `5,00,000 as gratuity, his taxable pension would
be `1,57,333 (as the exempt in this case would be 1/3 * 3,00,000/60%
*100%).
9.2.6 LEAVE SALARY [SECTION 10(10AA)]
As per Section 10 (10AA), Exemption of Amount Received by the

Way of Encashment of Unutilised Earned Leave on Retirement; leave
encashment by a Government employee at the time of retirement is
exempted from tax as follows:
(i) any payment received by an employee of the Central Government
or a State Government as the cash equivalent of the leave salary
in respect of the period of earned leave at his credit at the time of
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his retirement whether on superannuation or otherwise;
(ii) any payment of the nature referred to in sub-clause (i) received by
an employee, other than an employee of the Central Government
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or a State Government, in respect of so much of the period of
earned leave at his credit at the time of his retirement whether
on superannuation or otherwise as does not exceed 10 months,
calculated on the basis of the average salary drawn by the
employee during the period of 10 months immediately preceding
his retirement whether on superannuation or otherwise, subject
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to such limit as the Central Government may, by notification in the

Official Gazette, specify in this behalf having regard to the limit
applicable in this behalf to the employees of that Government:
Provided that where any such payments are received by an em-
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ployee from more than one employer in the same previous year,
the aggregate amount exempt from income-tax under this sub-
clause shall not exceed the limit so specified:
Provided further that where any such payment or payments was
or were received in any one or more earlier previous years also and
the whole or any part of the amount of such payment or payments
was or were not included in the total income of the assessee of
such previous year or years, the amount exempt from income-tax
under this sub-clause shall not exceed the limit so specified, as re-
duced by the amount or, as the case may be, the aggregate amount
not included in the total income of any such previous year or years.
For example, Mr. Pandey retires on 1.12.2017 after 20 years and 10

months of service, receiving leave salary of `5,00,000. He was entitled
to 30 days of leaves each year. In this case, if he is a government em-
ployee, his taxable leave salary will be Nil as per exempt under section
10(10AA), while if he is a non-government employee, his exempt will
be ` 26,400 (considering his 10 months salary is `66,000 and his leave
balance is 120 days) and hence taxable leave salary will be `4,73,600.

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9.2.7 LEAVE TRAVEL CONCESSION [SECTION 10(5)]
As per Section 10 (5), Leave Travel Concession; an employee can claim

exemption under this section for the value of any travel concession or
assistance received by, or due to, him,—
(a) from his employer for himself and his family, in connection with
his proceeding on leave to any place in India ;
(b) from his employer or former employer for himself and his family,
in connection with his proceeding to any place in India after
retirement from service or after the termination of his service,
subject to such conditions as may be prescribed (including
conditions as to number of journeys and the amount which shall
be exempt per head) having regard to the travel concession or
assistance granted to the employees of the Central Government:
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Provided that the amount exempted under this clause shall in
no case exceed the amount of expenses actually incurred for the
purpose of such travel.
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Explanation: For the purposes of this clause, ‘family’, in relation
to an individual, means-
(i) the spouse and children of the individual; and
(ii) the parents, brothers and sisters of the individual or any of
them, wholly or mainly dependent on the individual;
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For example, let’s say Mr. Saurabh goes on a holiday on 25.12.2017

to Pondicherry with his wife and three children. He has one son who
is aged 5 years and twin daughters aged 2 years each. They went by
economy class flights and `60,000 was reimbursed by his employer
(` 45,000 for him and his wife and rest for children). In this case, the
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entire reimbursement met by the employer is entirely exempted be-

cause the age of the son is more than the twin daughters. He can avail
exemption for all his children as the restriction of two children is not
applicable to multiple births after one child.
9.2.8 AMOUNT RECEIVED UNDER A LIFE INSURANCE

POLICY [SECTION 10(10D)]
As per Section 10 (10D), Receipts from LIC; tax exemption is available

on any sum received under a life insurance policy, including the sum
allocated by the way of bonus on such policy, other than—
(a) any sum received under sub-section (3) of Section 80DD or
subsection (3) of Section 80DDA; or
(b) any sum received under a Keyman Insurance Policy; or
(c) any sum received under an insurance policy issued on or after
the 1st day of April, 2003 but on or before the 31st day of March,
2012 in respect of which the premium payable for any of the

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years during the term of the policy exceeds 20% of the actual
capital sum assured; or
(d) any sum received under an insurance policy issued on or after the
1st day of April, 2012 in respect of which the premium payable
for any of the years during the term of the policy exceeds 10% of
the actual capital sum assured:
Provided that the provisions of sub-clauses (c) and (d) shall not
apply to any sum received on the death of a person:
Provided further that for the purpose of calculating the actual
capital sum assured under sub-clause (c), effect shall be given
to the Explanation to sub-section (3) of section 80C or the
Explanation to sub-section (2A) of section 88, as the case may be:
Provided also that where the policy, issued on or after the 1st day
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of April, 2013, is for insurance on life of any person, who is—
(i) a person with disability or a person with severe disability as
referred to in section 80U; or
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(ii) suffering from disease or ailment as specified in the rules
made under section 80DDB, the provisions of this sub-clause
shall have effect as if for the words “ten per cent”, the words
“fifteen per cent” had been substituted.
Explanation 1.—For the purposes of this clause, “Keyman
insurance policy” means a life insurance policy taken by a person
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on the life of another person who is or was the employee of the

first-mentioned person or is or was connected in any manner
whatsoever with the business of the first-mentioned person
and includes such policy which has been assigned to a person,
at any time during the term of the policy, with or without any
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consideration;
Explanation 2.—For the purposes of sub-clause (d), the
expression “actual capital sum assured” shall have the meaning
assigned to it in the Explanation to sub-section (3A) of section
80C;
Let’s say Sam, who is an actor, avails a life insurance policy for ` 1
crore. He pays `50 lakhs, ` 20 lakhs, ` 20 lakhs and `10 lakhs as pre-
miums. He receives `1.10 crore during 2016-17 at the time of maturity
of the policy from the insurance company. In this case, u/s 10(10D)
exemption will not be available to Sam as the premium paid in one of
the years exceeds 20% (now 10%) of the life insurance sum assured.
Therefore, the income amount accrued on such policy, not including

the amount of premium paid shall be subject to tax. In this particular,
`10 lakhs being `1.10 crore less `1 crore shall be subjected to tax un-
der section 10(10D).

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9.2.9 PAYMENT FROM PROVIDENT FUND [SECTION 10(11)]
As per Section 10 (11), Payment from Provident Funds; any payment

from a provident fund to which the Provident Funds Act, 1925 (19 of
1925), applies or from any other provident fund set up by the Central
Government and notified by it in this behalf in the Official Gazette,
will be exempt from tax.
For example, if your basic salary is not more than `15,000, you need
to contribute 12% of the basic component of your salary every month
towards PF. This amount will be deducted from your income and will
be exempted from tax. You also earn some interest (8.65%) on a yearly
basis, which will also be exempted from tax.
9.2.10 HOUSE RENT ALLOWANCE [SECTION 10(13A)]
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As per Section 10 (13A), House Rent Allowance (HRA); tax exemp-
tion is available on any special allowance specifically granted to an
assesse by his employer to meet expenditure actually incurred on the
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payment of rent (by whatever name called) in respect of residential
accommodation occupied by the assessee, to such extent as may be
prescribed having regard to the area or place in which such accommo-
dation is situated and other relevant considerations.
Explanation. For enhanced clarity, it is hereby declared that nothing

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contained in this clause shall apply in a case where—

(a) the residential accommodation occupied by the assessee is
owned by him; or
(b) the assessee has not actually incurred expenditure on the
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payment of rent (by whatever name called) in respect of the

residential accommodation occupied by him;
Let’s say Mr. Kapoor receives `3,000 as the basic pay and `600 as the
dearness allowance. His HRA allowance is `900 per month, while he
pays `1,000 per month as his accommodation in Kanpur. In this case,
the actual HRA received by him is `10,800 (900 *12). The excess of the
actual rent paid by him over 10% of his salary comes out to be `7,680.
His taxable HRA will be `3,120 (10,800–7,680).
9.2.11 SCHOLARSHIP [SECTION 10(16)]
As per Section 10 (16), Education Scholarships; tax is exempt on schol-

arships granted to meet the cost of education.
For example, if a student receives `1,00,000 as the scholarship amount

from his/university, that amount will be exempted from tax.

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9.2.12 AWARDS [SECTION 10(17A) AND 10(18)]
The following will be exempted from tax:
(17A) any payment made, whether in cash or in kind,—

(i) in pursuance of any award instituted in the public interest by the
Central Government or any State Government or instituted by
any other body and approved by the Central Government in this
behalf; or
(ii) as a reward by the Central Government or any State Government
for such purposes as may be approved by the Central Government
in this behalf in the public interest;
(18) any income by the way of
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(i) pension received by an individual who has been in the service
of the Central Government or State Government and has been
awarded “Param Vir Chakra” or “Maha Vir Chakra” or “Vir
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Chakra” or such other gallantry award as the Central Government
may, by notification in the Official Gazette, specify in this behalf;
(ii) family pension received by any member of the family of an
individual referred to in sub-clause (i).
Explanation.—For the purposes of this clause, the expression
“family” shall have the meaning assigned to it in the Explanation
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to clause (5);
For example, the money acquired by PV Sindhu and Sakshi Malik as

the rewards for winning medals in Rio Olympics (2016) from various
government sources is not taxable.
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9.2.13 CLUBBED INCOME OF A MINOR CHILD

[SECTION 10(32)]
As per Section 10(32), Income of Minor; in the case of an assessee re-

ferred to in sub-section (1A) of section 64, any income includible in his
total income under that sub-section, to the extent such income does
not exceed `1,500 in respect of each minor child whose income is so
includible;
For example, let’s say Mr. Shrivastava has a salary of `3,00,000. His
minor daughter has earned `5,000 as an interest income from a bank
FD and his minor son has earned `1,000 as interest income on NSC. In
this case, as per Section 10(32), the exempt will be `3,500 (5,000–1500)
for the daughter and NIL for his son, whose income does not exceed
`1,000.

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9.2.14 FAMILY PENSION [SECTION 10(18) AND 10(19)]
The following incomes will be exempted:
As mentioned in Section (18) of the Act. Refer the previous Section

9.2.13. And,
(19) family pension received by the widow or children or nominated

heirs, as the case may be, of a member of the armed forces (including
para-military forces) of the Union, where the death of such member
has occurred in the course of operational duties, in such circumstanc-
es and subject to such conditions, as may be prescribed;
For example, if Mr. X receives Ashok Chakra as a gallantry award and

receives a pension amount of `10,000. This amount will be entirely
exempted from tax.
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9.2.15 INCOME BY the WAY OF INTEREST, DIVIDEND,
PREMIUM ON REDEMPTION OR OTHER PAYMENT
IM FROM SECURITIES (BONDS, MUTUAL FUNDS,
SHARES ETC.) [SECTION 10(15)]
The following income will be exempted from tax:

(i) income by the way of interest, premium on redemption or other
payment on such securities, bonds, annuity certificates, savings
certificates, other certificates issued by the Central Government
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and deposits as the Central Government may, by notification

in the Official Gazette, specify in this behalf, subject to such
conditions and limits as may be specified in the said notification;
(iib) in the case of an individual or a Hindu undivided family, interest
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on such Capital Investment Bonds as the Central Government

may, by notification in the Official Gazette, specify in this behalf:
Provided that the Central Government shall not specify, for the
purposes of this sub-clause, such Capital Investment Bonds on
or after the 1st day of June, 2002;
(iic) in the case of an individual or a Hindu undivided family, interest
on such Relief Bonds as the Central Government may, by
notification in the Official Gazette, specify in this behalf;
(iid) interest on such bonds, as the Central Government may, by

notification in the Official Gazette, specify, arising to—
(a) a non-resident Indian, being an individual owning the bonds;
or
(b) any individual owning the bonds by the virtue of being a
nominee or survivor of the non-resident Indian; or
(c) any individual to whom the bonds have been gifted by the
non-resident Indian:

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Provided that the aforesaid bonds are purchased by a non-resident

Indian in foreign exchange and the interest and principal received
in respect of such bonds, whether on their maturity or otherwise,
is not allowable to be taken out of India:
Provided further that where an individual, who is a non-resident
Indian in any previous year in which the bonds are acquired, be-
comes a resident in India in any subsequent year, the provisions
of this sub-clause shall continue to apply in relation to such indi-
vidual:
Provided also that in a case where the bonds are encashed in a
previous year prior to their maturity by an individual who is so
entitled, the provisions of this sub-clause shall not apply to such
individual in relation to the assessment year relevant to such pre-
vious year:
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Provided also that the Central Government shall not specify, for
the purposes of this sub-clause, such bonds on or after the 1st day
of June, 2002.
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Explanation.—For the purposes of this sub-clause, the expression
“non-resident Indian” shall have the meaning assigned to it in
clause (e) of section 115C;
(iii) interest on securities held by the Issue Department of the Central
Bank of Ceylon constituted under the Ceylon Monetary Law Act,
1949;
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(iiia) interest payable to any bank incorporated in a country outside

India and authorised to perform central banking functions in
that country on any deposits made by it, with the approval of the
Reserve Bank of India, with any scheduled bank.
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Explanation.—For the purposes of this sub-clause, “scheduled

bank” shall have the meaning assigned to it in clause (ii) of the
Explanation to clause (viia) of sub-section (1) of section 36;
(iiib) interest payable to the Nordic Investment Bank, being a

multilateral financial institution constituted by the Governments
of Denmark, Finland, Iceland, Norway and Sweden, on a loan
advanced by it to a project approved by the Central Government
in terms of the Memorandum of Understanding entered into
by the Central Government with that Bank on the 25th day of
November, 1986;
(iiic) interest payable to the European Investment Bank, on a loan
granted by it in the pursuance of the framework-agreement for a
financial co-operation entered into on the 25th day of November,
1993 by the Central Government with that Bank;
(iv) interest payable—
(a) by Government or a local authority on moneys borrowed by
it before the 1st day of June, 2001 from, or debts owed by it
before the 1st day of June, 2001 to, sources outside India;

n o t e s
(b) by an industrial undertaking in India on moneys borrowed

by it under a loan agreement entered into before the 1st day
of June, 2001 with any such financial institution in a foreign
country as may be approved in this behalf by the Central
Government by general or special order;
(c) by an industrial undertaking in India on any moneys
borrowed or debt incurred by it before the 1st day of June,
2001 in a foreign country in respect of the purchase outside
India of raw materials or components or capital plant and
machinery, to the extent to which such interest does not
exceed the amount of interest calculated at the rate approved
by the Central Government in this behalf, having regard to
the terms of the loan or debt and its repayment.
Explanation 1.—For the purposes of this item, “purchase of
capital plant and machinery” includes the purchase of such
capital plant and machinery under a hire-purchase agreement
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or a lease agreement with an option to purchase such plant
and machinery.
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declared that the usance interest payable outside India by
an undertaking engaged in the business of ship-breaking in
respect of purchase of a ship from outside India shall deemed
to be the interest payable on a debt incurred in a foreign
country in respect of the purchase outside India;
(d) by the Industrial Finance Corporation of India established by
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the Industrial Finance Corporation Act, 1948 (15 of 1948), or

the Industrial Development Bank of India established under
the Industrial Development Bank of India Act, 1964 (18 of
1964), or the Export-Import Bank of India established under
the Export-Import Bank of India Act, 1981 (28 of 1981), or the
National Housing Bank established under section 3 of the
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National Housing Bank Act, 1987 (53 of 1987), or the Small

Industries Development Bank of India established under
section 3 of the Small Industries Development Bank of India
Act, 1989 (39 of 1989), or the Industrial Credit and Investment
Corporation of India [a company formed and registered under
the Indian Companies Act, 1913 (7 of 1913)], on any moneys
borrowed by it from sources outside India before the 1st day
of June, 2001, to the extent to which such interest does not
exceed the amount of interest calculated at the rate approved
by the Central Government in this behalf, having regard to
the terms of the loan and its repayment;
(e) by any other financial institution established in India or a
banking company to which the Banking Regulation Act,
1949 (10 of 1949), applies (including any bank or banking
institution referred to in section 51 of that Act), on any
moneys borrowed by it from sources outside India before the
1st day of June, 2001 under a loan agreement approved by the
Central Government where the moneys are borrowed either
for the purpose of advancing loans to industrial undertakings
in India for purchase outside India of raw materials or capital

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plant and machinery or for the purpose of importing any

goods which the Central Government may consider necessary
to import in the public interest, to the extent to which such
interest does not exceed the amount of interest calculated at
the rate approved by the Central Government in this behalf,
having regard to the terms of the loan and its repayment;
(f) by an industrial undertaking in India on any moneys borrowed
by it in foreign currency from sources outside India under
a loan agreement approved by the Central Government
before the 1st day of June, 2001 having regard to the need for
industrial development in India, to the extent to which such
interest does not exceed the amount of interest calculated at
the rate approved by the Central Government in this behalf,
having regard to the terms of the loan and its repayment;
(fa)by a scheduled bank to a non-resident or to a person who
is not ordinarily resident within the meaning of sub-section
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(6) of section 6 on deposits in foreign currency where the
acceptance of such deposits by the bank is approved by the
Reserve Bank of India.
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Explanation.—For the purposes of this item, the expression
“scheduled bank” means the State Bank of India constituted
under the State Bank of India Act, 1955 (23 of 1955), a subsidiary
bank as defined in the State Bank of India (Subsidiary Banks)
Act, 1959 (38 of 1959), a corresponding new bank constituted
under section 3 of the Banking Companies (Acquisition and
Transfer of Undertakings) Act, 1970 (5 of 1970), or under
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section 3 of the Banking Companies (Acquisition and Transfer

of Undertakings) Act, 1980 (40 of 1980), or any other bank
being a bank included in the Second Schedule to the Reserve
Bank of India Act, 1934 (2 of 1934), but does not include a co-
operative bank;
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(g) by a public company formed and registered in India with

the main object of carrying on the business of providing
long-term finance for construction or purchase of houses in
India for residential purposes, being a company eligible for
deduction under clause (viii) of sub-section (1) of section
36 on any moneys borrowed by it in foreign currency from
sources outside India under a loan agreement approved by
the Central Government before the 1st day of June, 2003, to
the extent to which such interest does not exceed the amount
of interest calculated at the rate approved by the Central
Government in this behalf, having regard to the terms of the
loan and its repayment.
Explanation.—For the purposes of items (f), (fa) and (g),
the expression “foreign currency” shall have the meaning
assigned to it in the Foreign Exchange Management Act, 1999
(42 of 1999);
(h) by any public sector company in respect of such bonds
or debentures and subject to such conditions, including
the condition that the holder of such bonds or debentures

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registers his name and the holding with that company, as

the Central Government may, by notification in the Official
Gazette, specify in this behalf;
(i) by Government on deposits made by an employee of
the Central Government or a State Government or a
public sector company, in accordance with such scheme
as the Central Government may, by notification in the
Official Gazette, frame in this behalf, out of the moneys
due to him on account of his retirement, whether on
superannuation or otherwise.
Explanation 1.—For the purposes of this sub-clause,
the expression “industrial undertaking” means any
undertaking which is engaged in—
(a) the manufacture or processing of goods; or
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the manufacture of computer software or
(aa)
recording of programme on any disc, tape,
perforated media or other information device; or
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(b) the business of generation or distribution of
electricity or any other form of power; or
the business of providing telecommunication
(ba)
services; or
(c) mining; or
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(d) the construction of ships; or

(da) the business of ship-breaking; or
(e) the operation of ships or aircrafts or construction
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or operation of rail systems.

Explanation 1A.—For the purposes of this
sub-clause, the expression “interest” shall not
include interest paid on delayed payment of loan
or on default if it is in excess of two per cent per
annum over the rate of interest payable in terms
of such loan.
Explanation 2.—For the purposes of this clause,
the expression “interest” includes hedging
transaction charges on account of currency
fluctuation;
(v) interest on—
(a) securities held by the Welfare Commissioner, Bhopal Gas
Victims, Bhopal, in the Reserve Bank’s SGL Account No. SL/
DH 048;
(b) deposits for the benefit of the victims of the Bhopal gas leak
disaster held in such account, with the Reserve Bank of India

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or with a public sector bank, as the Central Government

may, by notification in the Official Gazette, specify, whether
prospectively or retrospectively but in no case earlier than
the 1st day of April, 1994 in this behalf.
Explanation.—For the purposes of this sub-clause, the
expression “public sector bank” shall have the meaning
assigned to it in the Explanation to clause (23D);
(vi) interest on Gold Deposit Bonds issued under the Gold Deposit
Scheme, 1999 or deposit certificates issued under the Gold
Monetisation Scheme, 2015 notified by the Central Government;
(vii) interest on bonds—
(a) issued by a local authority or by a State Pooled Finance
Entity; and
(b) specified by the Central Government by notification in the
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Official Gazette.
Explanation.—For the purposes of this sub-clause, the
expression “State Pooled Finance Entity” shall mean such
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entity which is set up in accordance with the guidelines for
the Pooled Finance Development Scheme notified by the
Central Government in the Ministry of Urban Development;
(viii) any income by the way of interest received by a non-resident
or a person who is not ordinarily resident, in India on a deposit
made on or after the 1st day of April, 2005, in an Offshore Banking
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Unit referred to in clause (u) of section 2 of the Special Economic

Zones Act, 2005;

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1. Any income that has been derived from seedlings or saplings

or grown in a nursery is:
a. Business income
b. Income from other sources
c. Agricultural income
d. Casual income
2. HRA is:
a. Partly taxable
b. Fully exempted
c. Actual rent paid alone is taxable
d. Fully taxable
3. In the case of a person being a partner of a firm which is
separately assessed as such, his share in the total income of
the firm will be exempt from tax. True or False?

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4. As per Section 10AA, leave encashment is exempt from tax for

money received by an employee, other than an employee of
the Central Government or a State Government, in respect of
so much of the period of earned leave at his credit at the time
of his retirement whether on superannuation or otherwise as
does not exceed ____ months.
5. Is leave travel concession applicable if an employee travels
outside India?
Activity
Interview two or three members in your society or home, and find

out exemptions they are eligible for in the last year. Calculate their
total income tax payable.
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9.3 REBATES OF INCOME TAX
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Tax rebates are another form of deduction or relief available to tax-
payers. Tax rebates are available to those individuals whose income
falls within the income-tax slab that are modified every year as per the
government’s directions. All information regarding the rebate struc-
ture is announced in the union budget of the respective year. Various
rebates provided as per the Income Tax Act, 1961, shown in Table 9.1
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are as follows:
TABLE 9.1: REBATES OF INCOME TAX

Tax Rebate Particulars
Section 87, (1) In computing, the amount of income-tax on the total income
N
Rebate to be of an assessee with which he is chargeable for any assessment

Allowed in Com- year, there shall be allowed from the amount of income-tax (as
puting Income computed before allowing the deductions under this Chapter),
Tax in accordance with and subject to the provisions of sections
87A, 88, 88A, 88B, 88C, 88D and 88E, the deductions specified in
those sections.
(2) The aggregate amount of deductions under section 87A
or section 88 or section 88A or section 88B or section 88C or
section 88D or section 88E shall not, in any case, exceed the
amount of income-tax (as computed before allowing the deduc-
tions under this Chapter) on the total income of the assessee
with which he is chargeable for any assessment year.
Section 87A, Re- An assessee, being an individual resident in India, whose total
bate of Income income does not exceed [three hundred fifty thousand] rupees,
Tax in Case of shall be entitled to a deduction, from the amount of income-tax
Certain Individ- (as computed before allowing the deductions under this Chap-
uals. ter) on his total income with which he is chargeable for any as-
sessment year, of an amount equal to hundred per cent of such
income-tax or an amount of [two thousand and five hundred]
rupees, whichever is less.
For example, if Mr. Rakesh is a resident individual and earning
net taxable income of `3,00,000, he can get rebate u/s 87A. This
rebate will be lower of the income tax before the rebate or `2500.

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Section 88, Re- (1) Subject to the provisions of this section, an assessee, being
bate on Life In- an individual, or a Hindu undivided family, shall be entitled
surance Premia, to a deduction, from the amount of income-tax (as computed
Contribution to before allowing the deductions under this Chapter) on his total
Provident Fund, income with which he is chargeable for any assessment year, of
etc. an amount equal to—
(i) in the case of an individual or a Hindu undivided family,
whose gross total income before giving effect to deductions
under Chapter VI-A, is one lakh fifty thousand rupees or less,
twenty per cent of the aggregate of the sums referred to in
sub-section (2)
(ii) in the case of an individual or a Hindu undivided family,
whose gross total income before giving effect to deductions un-
der Chapter VI-A, is more than one lakh fifty thousand rupees
but does not exceed five lakh rupees, 15 per cent of the aggre-
gate of the sums referred to in sub-section (2);
S
(iii) in the case of an individual or a Hindu undivided family,
whose gross total income before giving effect to deductions
under Chapter VI-A, exceeds five lakh rupees, nil.
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For example, under this section, a rebate can be claimed for any
amount paid by an assessee out of his income chargeable to tax
to effect, or to keep in force a life insurance.
Section 88E, Re- (1) Where the total income of an assessee in a previous year
bate in Respect includes any income, chargeable under the head "Profits and
of Securities gains of business or profession", arising from taxable securi-
Transaction Tax ties transactions, he shall be entitled to a deduction, from the
amount of income-tax on such income arising from such trans-
M
actions, computed in the manner provided in sub-section (2), of

an amount equal to the securities transaction tax paid by him
in respect of the taxable securities transactions entered into the
course of his business during that previous year:
Provided that no deduction under this sub-section shall be
N
allowed unless the assessee furnishes along with the return of

income, evidence of payment of securities transaction tax in the
prescribed form:
Provided further that the amount of deduction under this
sub-section shall not exceed the amount of income-tax on such
income computed in the manner provided in sub-section (2).
(2) For the purposes of sub-section (1), the amount of in-
come-tax on the income arising from taxable securities trans-
actions, referred to in that sub-section, shall be equal to the
amount calculated by applying the average rate of income-tax
on such income.
(3) No deduction under this section shall be allowed in, or after,
the assessment year beginning on the 1st day of April, 2009.
Explanation.—For the purposes of this section, the expressions,
"taxable securities transaction" and "securities transaction tax"
shall have the same meanings respectively assigned to them
under Chapter VII of the Finance (No. 2) Act, 2004.
For example, when the total income of an assessee comprises
of business profits arising from securities transactions, he/she
shall be entitled to a rebate from the tax liability arising from
such transactions.

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Section 89, Re- Where an assessee is in receipt of a sum in the nature of salary,
lief when Salary, being paid in arrears or in advance or is in receipt, in any
etc., is paid in one financial year, of salary for more than twelve months or
Arrears or in a payment which under the provisions of clause (3) of section
Advance 17 is a profit in lieu of salary, or is in receipt of a sum in the
nature of family pension as defined in the Explanation to clause
(iia) of section 57, being paid in arrears, due to which his total
income is assessed at a rate higher than that at which it would
otherwise have been assessed, the Assessing Officer shall, on an
application made to him in this behalf, grant such relief as may
be prescribed:
Provided that no such relief shall be granted in respect of any
amount received or receivable by an assessee on his volun-
tary retirement or termination of his service, in accordance
with any scheme or schemes of voluntary retirement or in the
case of a public sector company referred to in sub-clause (i) of
clause (10C) of section 10, a scheme of voluntary separation, if
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an exemption in respect of any amount received or receivable
on such voluntary retirement or termination of his service or
voluntary separation has been claimed by the assessee under
clause (10C) of section 10 in respect of such, or any other, as-
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sessment year.
For example, at times, you as an employee receive advanced
salary or in arrears. When the salary is received in arrears, the
tax rate is higher. As a result, you need to pay higher taxes. To
get rid of this condition, tax laws have given relief to salaried
persons in the form of section 89 (1).
M
6. Which of the following sections mentions rebates as “An

assessee, being an individual resident in India, whose total
income does not exceed [three hundred fifty thousand] rupees,
N
shall be entitled to a deduction, from the amount of income-

tax (as computed before allowing the deductions under this
Chapter) on his total income with which he is chargeable for
any assessment year, of an amount equal to hundred per cent
of such income-tax or an amount of [two thousand and five
hundred] rupees, whichever is less.”?

a.
87A b.
88

c.
88E d.
89
7. Where an assessee is in receipt of a sum in the nature of salary,
being paid in arrears or in advance or is in receipt, in any one
financial year, of salary for more than ________ months.
Activity
Interview two or three members in your society or home, and find

out rebates they are eligible for in the last year. Calculate their total
taxable income.

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9.4 SUMMARY
Section 10 covers the income that does not form the part of taxable
income. These are those incomes on which income tax is exempt-
ed. In other words, no tax is applied on these incomes.
Some of the exemptions under Section 10 of Income Tax Act, 1961
are:
Agricultural Income [Section 10(1)]
Receipts from HUF [Section 10(2)]
Partners share in the income of the firm [Section 10(2A)]
Gratuity [Section 10(10)]
Commutation of Pension [Section 10(10A)]
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Leave Salary [Section 10(10AA)]
Leave Travel Concession [Section 10(5)]
Amount received under a Life Insurance Policy [Section
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10(10D)]
Payment from Provident Fund [Section 10(11)]
House Rent Allowance [Section 10(13A)]
Scholarship [Section 10(16)]
Awards [Section 10(17A) and 10(18)]
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Clubbed income of a minor child [Section 10(32)]

Family Pension [Section 10(18) and 10(19)]
Income by the way of interest, dividend, premium on redemp-
tion or other payment from securities (bonds, mutual funds,
N
shares etc.) [Section 10(15)]

Tax rebates are another form of deduction or relief available to
taxpayers. Tax rebates are available to those individuals whose in-
come falls within the income-tax slab that are modified every year
as per the government’s directions.
Various rebates provided as per the Income Tax Act, 1961 are:
Section 87, Rebate to be Allowed in Computing Income Tax
Section 87A, Rebate of Income Tax in Case of Certain Individ-
uals.
Section 88, Rebate on Life Insurance Premia, Contribution to
Provident Fund, etc.
Section 88E, Rebate in Respect of Securities Transaction Tax
Section 89, Relief when Salary, etc., is paid in Arrears or in
Advance

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key words
Assessee: An individual that is liable to pay taxes for himself/

herself or on behalf of somebody else
Gross Taxable Income (GTI): An individual’s total income be-
fore accounting for deductions and taxes.
Resident individual: Every individual who is domiciled in this
state, even though absent for temporary or transitory purpos-
es, and every individual who for an aggregate of more than six
months both maintains a permanent place of abode within this
state and who is present in this state
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1. Summarise the incomes not included in Total Income
(Exemptions u/s 10).
2. Explain exemptions of income by the way of interest, dividend,
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premium on redemption or other payment from securities
(bonds, mutual funds, shares etc.) [Section 10(15)].
3. Summarise the rebates of income tax available under various
sections.

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Topic Q. No. Answer

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Incomes not included in Total 1. c. Agricultural income

Income (Exemptions u/s 10)
2. a. Partly taxable
3. True
4. Ten
5. No
Rebates of Income Tax 6. a. 87A
7. Twelve

1. Section 10 covers the income that does not form the part of
taxable income. These are those incomes on which income tax
is exempted. In other words, no tax is applied on these incomes.
Refer to Section 9.2 Incomes not included in Total Income

n o t e s
2. This section explains the exempts available for incomes received

by the way of interest, dividend, premium on redemption or
other payment from securities (bonds, mutual funds, shares
etc.). Refer to Section 9.2 Incomes not included in Total Income
3. Tax rebates are another form of deduction or relief available
to taxpayers. Tax rebates are available to those individuals
whose income falls within the income-tax slab that are modified
every year as per the government’s directions. All information
regarding the rebate structure is announced in the union budget
of the respective year. Refer to Section 9.3 Rebates of Income
Tax.
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SUGGESTED READINGS
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rules
E-REFERENCES
Money, Y. (2018). How to avail tax benefits under Section 10. NDTV.
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com. Retrieved 11 April 2018, from https://www.ndtv.com/business/

how-to-avail-tax-benefits-under-section-10-377826
Satapathy, S. (2018). List of Exempted Incomes (Tax-Free) Under
Section-10. Incometaxmanagement.com. Retrieved 11 April 2018,
N
from http://incometaxmanagement.com/Pages/Tax-Ready-Reck-
oner/Exempted-Incomes/Exempted-Incomes-Under-Section-10.
html
etaxindia.gov.in. Retrieved 11 April 2018, from https://www.incom-
Tax Rebate Under Section 87A. (2018). Cleartax.in. Retrieved 11
April 2018, from https://cleartax.in/s/income-tax-rebate-us-87a

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Ch
10 a pt e r
COMPUTATION OF TOTAL INCOME
CONTENTS
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10.1 Introduction
10.2 Computation of Income Tax
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Activity
10.3 Income Tax Slab Rates
10.3.1 Income Tax Rates for Individuals
10.3.2 Income Tax Rates for Senior Citizens
10.3.3 Income Tax Rates for Super-senior Citizens
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10.3.4 Income Tax Rates for Partnership Firms

10.3.5 Income Tax Rates for Local Authority
10.3.6 Income Tax Rates for Co-operative Society
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Activity
10.4 Summary

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BUDGET 2018 BRINGS REDUCTION IN EXISTING TAX RATES
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Source: olivegreens.co.in
India’s Finance Minister, Arun Jaitley in his Budget 2017 speech,

introduced a reduction in the existing rate of taxation for indi-
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vidual assessees. Those individuals with an income between `2.5
lakh and `5 lakh would now pay income tax at a rate of 5 per
cent instead of the earlier rate of 10 percent. In addition to this,
the existing rebate under Section 87A of the Income-tax Act, 1961
(which was earlier given to people with an income up to ` 5 lakh)
has been lowered to ` 2,500 from the previous ` 5,000 for those
M
with an income between `2.5 lakh and ` 3.5 lakh. This implies
that the combined effect of the new income rate slabs and the
new rebate, there is nil tax for individuals with an income of up
to ` 3 lakh, and for the tax would be ` 2500 for individuals with an
annual income between ` 3 lakh and ` 3.5 lakh.
N
The Finance Minister Arun Jaitley in his Budget 2018 speech,

also proposed a standard deduction of ` 40,000 on income from
salary, which initially came as a major relief for individuals but
his simultaneous announcement to curb deductions on annual
transport allowance of ` 19,200 p.a. (or `1600 p.m.) and medical
reimbursement of ` 15,000 soon put an end to people’s joys. The
whole proposal means that tax exempted income after setting
off the gain and loss leaves individuals with a meagre benefit of
` 5,800. With the levy of 1% additional cess (from 3% to 4%), this
amount would be further reduced, which leaves people to wonder
about whether to rejoice about the tax rate reduction or worry
about the termination of the said deductions.

COMPUTATION OF TOTAL INCOME 359
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learning objectives

>> Explain the meaning of total income
>> Identify the income earned in different capacities by an in-
dividual that are considered while computing his/her total
income
>> Explain the steps involved in the computation of total in-
come and tax liability of an individual
>> Discuss income tax slab rates for individuals, senior citizens,
super-senior citizens, partnership firms, local authority and
co-operative society
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10.1 INTRODUCTION
Taxes in India are levied by central government, state government
and local authorities. The Constitution of India states that ‘No tax
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shall be levied or collected except by the authority of law’.
In this chapter, you will study in detail about the concept of income
tax and its computation. Income tax is a direct tax levied by the Cen-
tral Government. The Department of Revenue, Ministry of Finance
formed under the Central Board of Revenue Act, 1924, is the main
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body responsible for administering taxes. The Central Board of Direct

Taxes (CBDT) along with Income Tax Department (ITD) is responsi-
ble for collecting and administering Income Tax Laws and other di-
rect tax statutes for the Government of India.
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10.2 COMPUTATION OF INCOME TAX

While computing the taxable income and the tax liability of an asses-
see, it has been observed that individuals tend to misunderstand the
terms Gross Taxable Income (GTI) and Net Taxable Income or simple
Taxable Income (NTI) and use these alternatively. However, these two
are entirely different things. In order to understand the computation
of total income and deriving the income tax liability, it is important to
have a clear understanding of both these terms.
Section–80B (5) of the Income Tax Act, 1961 provides that for the pur-
pose of income tax assessment and total income, all incomes shall be
classified under five heads of income as follows:
Income under the head “Salaries”
Income under the head “House Property”
Income under the head “Profits and gains of Business or Profes-
sion”

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Income under the head “Capital Gains”

Income under the head “Other Sources”
When income from all five heads is clubbed together and the losses
incurred are adjusted against income; the resultant figure is referred
to as GTI. Therefore,
G.T.I = A – B
Where,
A (Clubbing of Income) = Salary Income + House Property In-

come + Business or Profession Income + Income from Capital
Gains + Other Sources Income +
B = Sum of all losses that are to be set-off
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Section 80A of the Chapter VI-A of the Act allows certain deductions
from the GTI of an income tax assesse specified under Section 80C to
80U. Tax deductions help in reducing the tax liability of an assessee in
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the given financial year. These deductions have been discussed in de-
tail in Chapter 8 of this book. A summary of these deductions is given
in Table 10.1 and Table 10.2:
TABLE 10.1: PERMISSIBLE TAX DEDUCTIONS

Section Investments Maximum Eligible
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Permissible Limit Claimants

80 C Insurance policies, Prov- ` 1.5 lakh (aggre- Individuals/
ident funds, tuition fees, gate of 80C, 80CCC HUFs
purchase of residential and 80CCD)
property, fixed deposits
N
> 5 years
80 CCC Pension funds ` 1.5 lakh (aggre- Individuals
gate of 80C, 80CCC
and 80CCD)
80 CCD Pension schemes notified ` 1.5 lakh (aggre- Individuals
by the Central Govern- gate of 80C, 80CCC
ment, contributions and 80CCD)
made by an individual
and his/her employer
80 CCF Long-term infrastructure `20,000 Individuals/
bond HUFs
80 CCG Equity savings schemes ` 50,000 for senior Individuals/
notified by the govern- citizens HUFs
ment ` 25,000 for other
individuals
80 D Health insurance policy ` 20,000 Individuals/
HUFs

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Section Investments Maximum Eligible

Permissible Limit Claimants
80 DD Normal disability ` 75,000 for general Resident Indi-
Severe disability disability viduals/HUFs
` 1.25 lakh for se- Families
vere disability
80 DDB Expenditure on the med- ` 1 lakh for senior Resident
ical treatment of certain citizens Individuals/
diseases ` 40,000 for others HUFs
80 E Interest repayment of No limit mentioned Individuals
loan for higher education
80 EE interest repayment of a ` 3 lakh Individuals
loan to purchase residen-
tial property
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80 G Donations to charitable Different limits All assessees
institutions based on donation
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TABLE 10.2: PERMISSIBLE TAX DEDUCTIONS
Section Maximum Permissible Eligible Claimants
Limit
80 GG ` 2,000 per month Individuals who do not get HRA
80 GGA Depends on the quantum of All assessees who do not have
donation income from profit or gains from
a business/profession
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80 GGB Depends on the quantum of Indian companies

donation
80 GGC Depends on the quantum of All assessees apart from local/
donation artificial judicial authorities who
N
are funded by the government

80 IA No maximum limit defined All assessees
80 IAB No maximum limit defined All assessees who are SEZ devel-
opers
80 IB No maximum limit defined All assessees
80 IC No maximum limit defined All assessees
80 ID No maximum limit defined All assessees
80 IE No maximum limit defined All assessees
80 JJA All profits earned for first 5 All assessees
years
80 JJAA 30% of increased wages Indian companies which have
income from profit/gains
80 LA Portion of their income Scheduled banks, IFSCs, banks
established outside India
80 P Portion of their income Cooperative societies
80 QQB ` 3 lakh Authors – resident individuals
80 RRB ` 3 lakh Resident individuals

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Section Maximum Permissible Eligible Claimants

Limit
80 TTA ` 10,000 per year Individuals/Hindu Undivided
Families
80 U ` 75,000 for people with Resident individuals
disabilities
` 1.25 lakh for people with
severe disabilities
When the GTI is adjusted against the above deductions, the resulting
figure is referred to as the Net Taxable Income (TI). Figure 10.1 ex-
plains the concept of GTI and NTI:
Gross Taxable Income/Total Income Funnel

Residential Status → Determine Scope of Income
S
Exclusions: Exempt Incomes (Agriculture Income)
Computation of total income under five heads:
(a) Salaries
(b) House Properties
IM (c) Profit & Gains of Business and
Professions
(d) Capital Gains, and
(e) Income from Other Sources
Clubbing of Income
Aggregation of Income,
Set Off and Carry
forward of Losses
M
↓
Gross Taxable Income
↓
Minus Deductions
↓
N
Net Taxable Income
Figure 10.1: Difference between GTI and TI
Source: http://abcaus.in/articles/income-tax/gross-total-income.html
The computation of net taxable income of an individual is important

as income tax is levied on the net taxable income of the previous year
of an assessee. The steps involved in the computation of net taxable
income, are as follows:
Step 1 – Determination of individual’s residential status: In the
case of an individual, the duration of his/her stay in India during
the relevant previous year/or the earlier previous years determines
the residential status. Based on the time spent by the individual,
he/she may be (a) resident and ordinarily resident, (b) resident but
not ordinarily resident, or (c) non-resident. The residential status
of a person determines the tax liability of the income. For example,
income which accrues outside India and is received outside India
is taxable in the case of a resident and ordinarily resident but is
not taxable in the hands of a non-resident.

n o t e s
Step 2 – Classification of income under different heads: The In-

come Tax Act divides income under five different heads described
earlier in the chapter, considering all possible sources of income
that can be accrued or received by an individual.
Step 3 – Exclusion of income not chargeable to tax: Certain in-
come such as agriculture income, income from dividend received,
etc. which do not form part of total income are completely exempt
from tax. Some other incomes are partially excluded from total in-
come including house rent allowance, educational allowance, etc.
In such cases, only the remaining amount after excluding exemp-
tion is considered under total income.
Step 4 – Computation of income under each head: The Income
Tax Act, 1961 lays down the provisions for charging tax under each
income head. Similarly, the Act also sets out provisions for deduc-
S
tions under each income head. The income under each head is
thus computed in accordance with the provisions governing a par-
ticular head of income. For example, while computing the income
from house property, municipal taxes and interest on repayment
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of loan are allowed as deduction. The limits of such deductions
are specified in the Act. The remaining figure after computation is
called the net taxable income from that income head.
Step 5 – Clubbing of income of spouse, minor child etc.: Income
tax charged from an individual is based on a slab system on the
total income of the individual. This system of charging of tax is
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progressive in nature, which implies that as the income of an in-

dividual increases, the applicable rate of tax increases. To reduce
the taxable amount, some individuals in the higher income brack-
et tend to divert a part of their income to their spouse, minor child
N
etc. For example, an individual may make a fixed deposit in the

name of his/her minor child so that the income from the fixed de-
posit would accrue to the child and hence, avoid payment of tax
from this income. This practice of avoiding tax payment is mitigat-
ed by including this step in the process of computation of taxable
income. Under the Act, income arising to certain persons such as
spouse, minor child, etc. is included in the income of the individual
for the purpose of computing his/her tax liability.
Step 6 – Set-off or carry forward and set-off of losses: There can
be several sources of income under a single income head. An in-
dividual may gain from a certain source of income while suffer a
loss from another income source under the same income head. For
example, an individual may gain from his/her leased out property
while incur losses from the property occupied by him/her. In such
cases the losses can be set-off against the profit from that income
source in order to arrive at a net income from that income source.
Alternatively, an individual may make profits under a certain in-
come head while incurring losses from another head of income.
For example, an individual may gain profits under the head “in-

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come from house property” while incurring losses under a differ-

ent income head “profits and gains of business and profession”.
The Income Tax Act, 1961 has set out provisions for allowing in-
ter-head adjustments in such cases. In addition to these, the Act
allows for carrying forward the losses suffered in the current year
to subsequent years to ease the tax burden of assessees.
Step 7 – Computation of Gross Taxable Income: The final figures
of profits/losses under each income head, after allowing for deduc-
tions and other adjustments (setting off and carry forward of loss-
es), are combined to arrive at an individual’s gross taxable income.
Step 8 – Deductions from Gross Taxable Income: The Income
Tax Act, 1961 allows for certain deductions to be made from an
individual’s gross total income to arrive at the total income. These
deductions contained in Chapter VI-A can be classified as shown
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in Table 10.3 and 10.4:
TABLE 10.3: DEDUCTIONS CONTAINED IN

CHAPTER VI-A
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Section Nature of Payment/Deposit
80C Payment of life insurance premium, tuition fees of chil-
dren, deposit in public provident fund, repayment of hous-
ing loan etc.
80D Medical insurance premium paid by an individual/HUF for
the specified persons/ contribution to CGHS etc.
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80E Payment of interest on educational loan taken for self or

relative.
TABLE 10.4: DEDUCTION IN RESPECT

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OF CERTAIN INCOMES
Section Nature of Income
80QQB Royalty income of authors of certain books other than text
books.
80RRB Royalty on patents.
80TTA Interest on savings account with a bank, co-operative soci-
ety and post office.
Step 9 – Total income: After claiming the above deductions, the

resulting figure gives the computed total income of an individual
chargeable to income tax.
Step 10 – Application of the income tax slab rates on the total in-
come of an individual: Once the total income has been computed,
the rates of tax for different classes of assessees (as prescribed in
the Annual Financial Statement under the Union Budget) needs
to be determined. There are various categories of assessee as per
the Act, for whom income tax slab rates are specified for a given

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financial year. The income tax slab rates for different categories
are shown in Figure 10.2:
Income Tax Rates for Individuals
Income Tax Rates for Senior Citizens
Income Tax Rates for Super-senior Citizens
Income Tax Rates for Partnership Firms
Income Tax Rates for Local Authority
Income Tax Rates for Co-operative Society
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Figure 10.2: Different Categories of Income Tax Slab Rates
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Each of these categories have been discussed in the detail the upcom-
ing sections of the chapter.
1. Income tax is a form of direct tax levied by state government.

(True/False)
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2. According to the Income Tax Act, the incidence of taxation

depends on which of the following factors?
a. The citizenship of taxpayer
N
b. The age of taxpayer

c. The residential status of taxpayer
d. The gender of taxpayer
3. The residential status of taxpayer is determined for which of
the following time periods?
a. Accounting year
b. Financial year
c. Assessment year
d. Previous year
4. There are six categories of income heads for computation
purposes. (True/False)
Activity
Study various provisions for clubbing together of incomes and pre-

pare a report for the same.

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10.3 INCOME TAX SLAB RATES

According to the Indian Tax System, every income earned or accrued
is charged by the government for an annual tax, the proceedings of
which as used for the development or betterment of infrastructure
and other public facilities. Tax on an individual’s total income is lev-
ied according to a pre-decided percentage on the net taxable income
which needs to be deposited at the end of a financial year. In order to
maintain parity among different income groups based on age, residen-
tial status, earnings, etc. an income tax slab is issued with different
rates of taxation for different income groups and categories of assess-
es by the government in the union budget of each year. The rates of
income tax slabs vary from 0 per cent or NIL taxation up to 30 percent
taxation on net taxable income of an individual. Although, we have
introduced the concept of tax slabs and the rates of tax in Chapter 1
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of this book, let us now discuss these different income tax rates for
different income groups in detail.
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10.3.1 INCOME TAX RATES FOR INDIVIDUALS
The income tax slab rate for individuals is the rate at which individ-
uals have to pay a tax on their annual income to the government. For
the Assessment Year 2018-19 (Financial Year or Previous Year 2017-
18), the tax rate for an individual (resident or non-resident) who is
below 60 years of age on the last day of the relevant previous year has
M
to pay taxes in accordance with the following rates:
Taxable Income Tax Rate

Up to `2,50,000 Nil
N
`2,50,000 to `5,00,000 5 percent

`5,00,000 to `10,00,000 20 percent
Above `10,00,000 30 percent
The following deductions and additional taxes would also apply ac-
cordingly:
Less: A standard deduction of ` 40,000 has been introduced for all

salaried individuals. These deductions have replaced the deductions
on annual transport allowance of ` 19,200 and medical reimbursement
of ` 15,000 until the FY 2017-18, which have now been terminated.
Add: A surcharge at the rate of 15 per cent would be applicable if the
income is above ` 1 crore. However, surcharge is subject to marginal
relief if an individual’s income exceeds ` 1 crore. In this case, the ap-
plicable tax including surcharge should not be more than the part of
income which is in excess to ` 1 crore.
Add: Education cess and Secondary and Higher Education cess

(SHEC), which was charged until the year 2017-18, would now be re-

n o t e s
placed with “Health and Education Cess” at the rate of 4 per cent, on
the amount of tax computed, including surcharge.
note
Financial year (FY) is the period between 1 April and 31 March in

which income is earned. Assessment year (AY) is the subsequent
year in which the income earned in the FY is assessed and taxed.
Let us understand the computation of an individual’s tax liability with

the help of a few examples:
Example 1: Consider that the breakup of annual income of Ms. Pragya

for Financial Year 2017-18 is as follows.
S
Nature Amount (in `) Exemption/ Taxable
Deduction
Basic Salary 6,00,000 - 6,00,000
HRA 3,00,000 1,80,000 1,20,000
IM
Transport Allowance 96,000 - 96,000
Special Allowance 60,000 - 60,000
LTA 20,000 12,000 (bills 8,000
submitted)
Medical Allowance 15,000 - 15,000
M
Gross Total Income from 8,99,000

Salary
Additional information: Ms. Pragya earned ` 8,400 as interest from

a savings account and ` 10,000 as interest from a fixed deposit during
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the FY. She made the following investments to save income tax:
Public Provident Fund (PPF) investment of ` 50,000.
Mutual funds purchased worth ` 20,000.
Insurance premium of ` 8,000.
Medical insurance premium worth ` 12,000.
Accordingly, Ms. Pragya can claim the following deductions:
Nature Deduction Investments/expenses Amount

permissible claimed
Section 80C `1,50,000 PPF deposit ` 50,000, ELSS `1,50,000
investment ` 20,000, LIC pre-
mium ` 8,000. EPF deducted
by the employer (Pragya’s
contribution) = ` 50,000 ×
12% × 12 = 72,000
Section 80TTA 10,000 Savings account interest 8,400 `8,400

n o t e s
Nature Deduction Investments/expenses Amount

permissible claimed
Standard deductions 40,000 `40,000
(in lieu of transport
and medical allowance)
Pragya’s gross taxable income:
Nature Amount Total

Income from Other Sources 18,000
Deductions
80C 1,50,000
S
80D 12,000
80TTA 8,400
Standard deductions 40,000 2,10,400
IM
Gross Taxable Income 7,06,600
Let us calculate her tax liability for Assessment Year 2019-20:
Income Tax rate Amount

Up to ` 2,50,000 Nil tax 0
`2,50,000 to ` 10% (10% of ` 5,00,000 less ` 2,50,000) 25,000
M
5,00,000
` 5,00,000 to 20% ( 20% of `7,06,600 less ` 5,00,000) 41,320
`10,00,000
More than `10,00,000 30% (nil) 0
N
Cess 4% of total tax (4% of `25,000 + 2,652.80

` 41,320)
Total Income Tax ` 25,000 + ` 41,320 + 2,652.80 ` 68,972.80
Thus, Pragya’s income tax liability for AY 2019-20 would be rounded

off to ` 68,980.
Example 2: Compute the total tax liability for Arun, aged 45 years, for
AY 2019-20 whose monthly gross salary is ` 80,450:
Basic 50000
HRA 20000
Travel allowance 1000
Child’s educational allowance 200
Medical allowance 1250
Other allowance 8000
Annual gross income = 80,450 × 12 = ` 9, 65,400

n o t e s
Less: Child education allowance (200×12 = 2400) = (9, 65,400 – 2400

= 9, 63,000)
Less: Standard deduction ` 40,000 = (9, 63,000 – 40,000 = 9, 23,000)
Arun declares loss worth `1, 00,000 on House Property for interest
against home loan. Gross total income (9, 23,000-1, 00,000) is 8, 23,000.
He also announces ` 1,00,000 as investment under Section 80C and

`25,000 under Section 80D, the total taxable income will be ` 6,98,000
(8,23,000-1,25,000). This is the net taxable income of Arun.
Let us calculate Arun’s total tax liability:
Income Tax rate Amount

Up to `2,50,000 Nil tax 0
S
` 2,50,000 to ` 5,00,000 10% (10% of `5,00,000 less 25,000
`2,50,000)
` 5,00,000 to `10,00,000 20% ( 20% of ` 6,98,000 less 39,600
` 5,00,000)
IM
More than `10,00,000 30% (nil) 0
Cess 4% of total tax (4% of `25,000 + 2,584
` 39,600)
Total Income Tax ` 25,000 + ` 39,600 + 2,584 ` 67,184
Thus, Arun’s income tax liability for AY 2019-20 would be rounded off
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to ` 67,190.
10.3.2 INCOME TAX RATES FOR SENIOR CITIZENS

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The rate at which senior citizens aged 60 years or more but below 80
years pay income tax to the government is as follows:
Taxable income Tax Rate

Up to `3,00,000 Nil
`3,00,000 to `5,00,000 5 percent
`5,00,000 to ` 10,00,000 20 percent
Above `10,00,000 30 percent
Add a surcharge of 10 per cent for senior citizens with an annual in-
come above ` 50 lakh up to `1 crore.
Add a surcharge of 15 per cent for senior citizens with a total income
above ` 1 crore.
Add a “Health and Education cess” at the rate of 4 per cent, on the
amount of tax computed, including surcharge.

n o t e s
Exemptions allowed to senior citizens:

In addition to non-taxable amount up to `3, 00, 000, senior citizens
are allowed benefits under Section 80C, 80D, and 80DDB.
Addition tax exemption of up to ` 30,000 against medical insur-
ance. They can also avail benefits of amount between ` 60,000 and
` 80,000 for medical purposes.
No service tax to be paid on the premium amount. Gift objects are
exempted from tax.
Short-term capital gains are exempted up to a limit of 15%.
Exemption on interest payment up to ` 12,000.
Tax exemption from payment on earned interest.
Tax exemption from advanced tax in case senior citizens have no
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income from own business.
Let us take a simple example to understand computation:

IM
Example 3: 62 year old Mr. Amit has an annual income of ` 8, 00,000
considering income from all sources less deductions under Section
80C, 80D and 80DDB. Compute his tax liability.
Income Slab Tax rate Tax computation

Income up to ` 3, 00,000 Nil
M
Income between ` 3, 00, 000 5 % (5, 00,000 – 3, 00,000) ` 10,000

– ` 5, 00,000
Income between ` 5, 00, 000 20% (8, 00,000 – 5, 00,000) ` 60,000
– `10, 00,000
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Income above ` 10, 00,000 30% Nil

Tax ` 70,000
Health and Education cess 4% of `70,000 `2,800
Total tax for FY (2018-19) ` 72,800
Example 4: Mr. Mani will retire on 31 July, 2018. Till then he would
have earned `2, 50,000. Thereafter, he would be receiving a pension of
` 18,700 per month. He would also receive an interest of ` 1,15,000 on
his fixed deposit scheme. He has invested ` 2, 00,000 in a senior citi-
zens scheme. Calculate his tax liability for FY 2018-19.
Let us first calculate the total income of Mr. Mani for FY 2018-19:
Income from salary (April-July, 2018) = ` 2, 50,000
Income from pension (August, 2018 – March, 2019) = ` 18,700 × 08 =

`1, 49,600

n o t e s
Income from interest on fixed deposit = ` 1, 15,000
Total income = ` 5, 14,600
Head Amount Remarks

Income from salary (` 2, 50,000 + ` 1, Pension and salary
49,600) = come under income
` 3, 99,600 from salary
Income from other ` 1, 15,000 Interest from fixed

sources deposit
Total income ` 5, 14,600
Deduction ` 1,50,000 Deduction allowed on
SCSS u/s 80C
Taxable income ` 3, 64,600 Total income less
S
deduction
Tax exemption limit `3, 00,000
Net taxable income ` 64,600 Taxable income less
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tax exemption
Tax rate at 5% `3,230
Health and education `129.2
cess at 4%
Income tax liability ` 3359.2 rounded off to
` 3360
M
10.3.3 INCOME TAX RATES FOR SUPER-SENIOR CITIZENS
Super-senior citizens include individuals who are above 80 years old.

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These individuals have a slightly different rate of income tax charged

by the government, which is as follows:
Taxable income Tax Rate

Up to `5,00,000 Nil
`5,00,000 to `10,00,000 20 per cent
Above `10,00,000 30 per cent
Add a surcharge of 10 per cent for senior citizens with an annual in-
come above ` 50 lakh up to ` 1 crore.
Add a surcharge of 15 per cent for senior citizens with a total income
above ` 1 crore.
Add a “Health and Education cess” at the rate of 4 per cent, on the
amount of tax computed, including surcharge.

n o t e s
Let us consider a few examples to understand the tax computation of

super senior citizens:
Example 5: Mrs. Mukherjee, aged 83 years, submitted the details of

her income and investment for financial year 2017-18, as under:

Rental income from house property 8, 50,000
House tax 50,000
Interest from fixed deposits scheme 2, 50,000
Interest from saving bank account 10,000
Interest from Public Provident Fund Account (PPF) 1, 20,000
Deposit in Public Provident Fund Account 60,000
Life Insurance Premium 20,000
S
Medical Insurance Premium 10,000
Calculate her income tax liability for Assessment Year 2018-19.

IM
Income tax liability of Mrs. Mukherjee for Assessment Year 2018-19 is
as follows:
Head Amount (in `) Amount (in `)

Income from House Property
Rent received 8, 50,000
M
Less: House tax paid 50,000

Net Annual Value 8, 00,000
Less: Standard Deduction for House Re- 2, 40,000
pairs at 30%
N
Net income from House Property 5, 60,000

Income from other sources
Interest from fixed deposits 2, 50,000
Interest from saving bank account 20,000
Interest from Public Provident Fund Not taxable
Account
Total income from other sources 2, 70,000
Gross Taxable Income (5, 60,000 + 2,
70,000) = 8,
30,000
Less: Permitted Deductions
Deposit in PPF 60,000
Premium for Life Insurance Policy 20,000
Premium for Medical Insurance 10,000
Interest from saving bank accounts 10,000 1, 00,000
Net Taxable Income (8,30,000 - 1,
00,000) = 7,
30,000

n o t e s
Head Amount (in `) Amount (in `)

Tax exemption limit 5, 00,000
Net taxable income 2, 30,000 (7, 30,000 – 5,

00,000)
Tax payable at 20% 46,000
Education cess at 2% 920
Secondary & higher education cess at 3% 1,380
Total tax liability 48,300
note
For FY 2017-18, higher education and secondary cess was at 3 per-

cent of the Income Tax.
S
Therefore, Mrs. Mukherjee’s tax liability for FY 2017-18 was ` 48,300.
IM
Example 6: Following are the details of income and investments for
financial year 2017-18 (Assessment Year 2019-20). What would be the
tax liability for an individual aged 81 years?

Income from house property less house tax and repairs 3, 00,000
Income from business 9, 00,000
M
Income from other sources 1, 00,000

Deductions Under Chapter VI-A 1, 00,000
Let us calculate the total taxable income for the individual:

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Income from house property 3, 00,000
Income from business 9, 00,000
Income from other sources 1, 00,000
Gross Total Income 13, 00,000
Total deductions under Chapter VI-A 1, 00,000
Taxable Income 12, 00,000
Tax exemption for FY 2017-18 5, 00,000
Net taxable income 7, 00,000
Tax Payable at 20% (10, 00,000 – 5, 00, 000) 1, 00,000
Tax Payable at 30% (12, 00,000 – 10, 00, 000) 60,000
Total tax payable 1, 60,000
Health and Education Cess at 4% of income tax 6,400
Total Tax Liability 1, 66,400

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10.3.4 INCOME TAX RATES FOR PARTNERSHIP FIRMS
Partnership firms are the most prevalent business entities in India.

They are governed under the Indian Partnership Act, 1932. The Act
lays down provisions related to the formation of partnership firm, the
rights and responsibilities of member partners and dissolution of part-
nership if applied for. According to the Act, “partnership is a relation-
ship between persons who have agreed to share the profits of business
carried on by all or any of them acting for all”. The definition implies
that there are three minimum requirements to form a partnership:
An agreement entered into orally or in writing by people who want
to constitute a partnership.
The object of the agreement should be to share profits of business.
The business must be carried on by all partners or by a partner
S
representing the remaining partners.
Income tax slab for partnership firms for FY 2018-19 are as follows:
IM
Income tax rate: 30 per cent of total income
Rate of surcharge: No surcharge in case the total income is up to
` 1 crore. 12 per cent surcharge in case the total in come is greater
than `1 crore
Health & Education Cess: 4 per cent of the Income Tax and Sur-
charge
M
Expenses can be claimed for deduction only if mentioned in the

Partnership Deed of the Firm.
The working partners are entitled to remuneration by the way of sal-

N
ary, commission, bonus, etc. The firm can agree upon any amount as
remuneration to the partners which can be booked in the profit and
loss account. However, for the purpose of income tax computation, the
Act, restrictions on remuneration are as follows:
Book Profit (BP) of the Firm Remuneration Allowed

In case of loss before booking `1, 50,000
the partner’s remuneration
For the first ` 3, 00,000 of Book ` 1,50,000 or 90 per cent of book profit
Profit whichever is higher
On the balance of book profit 60 per cent of book profit
The interest amount paid to partners on their capital may differ and
can be booked as business expenditure but according to the Indian
Income Tax Act, interest is allowed only at the rate of 12 per cent per
annum. This implies that if interest rate is higher than 12 per cent, the
additional payment will not be considered for deduction while com-
puting the income of the partnership firm.

n o t e s
Let us understand the computation of tax liability of a partnership

firm with the help of an example:
Example 7: Mr. A and Mr. B are the partners of M/s AB Enterprises.

The credit balance of their capital on 01.04.18 was ` 3, 00,000. The in-
terest on capital paid to them for the financial year was 18 per cent.
The net income of M/s AB Enterprises after paying interest on the
capital of partners was `2, 60,000. Calculate the taxable income and
tax liability for FY 2018-19 for the firm.
Taxable income and tax liability for FY 2018-19 for the firm is:
Interest paid on capital (` 3, 00,000 × 18%) = `54000
Interest allowed as per income tax act at 12% (` 3, 00,000 × 12%)

= `36000
S
Non-permissible interest (`54,000 – `36,000) = `18,000
This would mean that the additional interest of `18,000 shall be added
IM
back to the partnership’s income for the purpose of income tax calcu-
lation.
Therefore the taxable income of the firm during financial year

2018-19:
(`2, 60,000 + ` 18,000) = ` 2, 78,000

M
Income tax liability at 30% of the taxable income (30% of ` 2, 78,000)

= `83,400
Health and Education Cess at 4% (4% of ` 2, 78,000) = ` 11,120

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Total tax = (` 83,400 + ` 11,120) = ` 94,520
Example 8: For FY 2018-19, the profit and loss account of M/s PQR
Enterprises shows a net profit of `1, 00,000 after booking the remuner-
ation to partners for ` 4, 00,000. The firm paid an interest on capital
in excess of the permissible rate of 12%. The additional interest given
was ` 50,000. Calculate the net taxable income of the partnership firm.
Net taxable income of the partnership firm is as follows:
a) Calculation of Book Profit
Net Profit of Firm after booking the remuneration of ` 1, 00,000

partners
Add: Remuneration to partners `4, 00,000
Add: Interest on capital paid in excess of 12% ` 50,000
Book Profit ` 5, 50,000

n o t e s
b) Calculation of Remuneration Allowed to Partners
Remuneration allowed on first ` 3,00,000 at 90% of book ` 2, 70,000

profit
Remuneration allowed on balance ` 2, 50,000 at 60% of BP ` 1, 50,000
Total remuneration allowed ` 4, 20,000
c) Calculation of Taxable Income of Partnership Firm
Book Profit of the firm ` 5, 50,000

Less: Remuneration allowed to partners ` 4, 20,000
Net Taxable income of the firm ` 1, 30,000
Income tax at 30% (30% of ` 1, 30,000) = ` 39,000
S
Health and Education cess at 4% (4% of ` 1, 30,000) = ` 5,200
Total tax payable by M/s PQR Enterprises = ` 44,200

IM
10.3.5 INCOME TAX RATES FOR LOCAL AUTHORITY
A local authority includes a municipal committee, district board, body

of port commissioners and other authorities, which are lawfully enti-
tled to, or entrusted by the government with the control or manage-
ment of a municipal or local fund. Income Tax Slab Rate for Local
Authority is as follows:
M
Income tax rate: 30 per cent of the Total Income

Rate of surcharge: No surcharge in case total income is up to ` 1
crore. 12 per cent surcharge in case total income is greater than `1
N
crore
Health & education cess: 4 per cent of the income tax and sur-
charge
Let us understand the computation of tax for a local authority by the

way of following examples:
Example 9: Delhi Municipal Corporation furnishes the following de-

tails. Determine its net income for the AY 2019-20:
Revenue from cess: ` 1, 00,000
Disposal of material in stores: ` 60,000
Sale of scrap: ` 40,000
Water and electricity supply: `1, 70,000
Income from other sources: ` 50,000
Repairs and depreciation: ` 40,000

n o t e s
Computation of taxable income

Income from revenue 4,00,000
Business income:
Disposal of material in stores 60,000
Sale of scrap 40,000
5,00,000
Less: Deductions in respect of income 1, 70,000
from
Water and electricity supply 50,000
Income from other sources
S
IM
2, 20,000
Less Repairs and depreciation (at 50%) 20, 000
Computation of tax for Delhi Municipal Corp. at 30% = 60,000

M
Adding health and education cess at 4% = 8,000
Total tax liability = ` 68,000

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10.3.6 INCOME TAX RATES FOR CO-OPERATIVE SOCIETY
A co-operative is an autonomous association of persons who volun-

tarily associate to meet their common economic, social and cultural
objectives through a jointly-owned enterprise. Co-operative society
refers to a society registered under the Cooperative Societies Act,
1912, or under any other law for the time being in force for the regis-
tration of co-operative societies. For instance, a regional rural bank
is deemed as co-operative society. A co-operative society may mainly
have the following types of income:
Interest on securities
Income from house property
Capital gains income
Income from business

n o t e s
Current Deductions to Co-operatives
Section 80P of the Income Tax Act, 1961, allows the deduction of prof-
its under the following conditions:
if it carries out the business of banking or providing credit facili-
ties to its members,
if it is a cottage industry,
if it markets agricultural produce grown by its members,
if it purchases agricultural implements, seeds, livestock or other
articles intended for agriculture for the purpose of supplying them
to its members,
ifit processes, without the aid of power, agricultural produce of its
members,
S
in the case of a collective disposal of labour of its members,
if it carries out the business of fishing or allied activities,
IM
if they are engaged in the business of procuring milk, oilseeds,
fruits or vegetables raised or grown by its members and supplying
them to federal societies, government or local authority.
In the case of a co-operative society engaged in activities other
than those specified above such that its profits and gains attrib-
utable to these activities do not exceed, ` 1, 00,000, where such a
M
co-operative society is a consumers’ co-operative society. In any

other case ` 50,000.
Income tax slab for co-operative society for FY 2018-19 are as follows:
N
Income Slabs Tax Rates

Where the taxable income does not 10% of the income
exceed ` 10,000
Where the taxable income exceeds 20% of income in excess of
` 10,000 but does not exceed ` 20,000 ` 10,000
Where the taxable income exceeds 30% of the amount by which the
` 20,000 taxable income exceeds 20,000
In case the taxable income is more than ` 1 crore, a surcharge of 12
per cent would be applicable. However, the applicable tax includ-
ing surcharge should not be more than the part of income which is
in excess to ` 1 crore.
Health and education cess at the rate of 4% of the total of income
tax and surcharge.
Every society is required to have PAN as it is mandatory to quote
PAN on all correspondence with income tax authority.
Advance Tax: For cooperatives whose tax liability is ` 10, 000 or more,
it is mandatory to pay advance tax in 3 instalments in the relevant FY

n o t e s
itself. The ceiling amount of ` 10, 000 is computed after deducting Tax
Deducted at Source (TDS), if any paid by the society.
Time limit Advance tax Payable

On or before September 15 of the previous up to 30% of the tax payable
year
On or before December 15 of the previous up to 60% of the tax payable
year
On or before March 15 of the previous year up to 100% of the tax payable
In the case of cooperatives that do not comply with advance tax pay-
ment, penalty is charged as interest under Sections 234B and 234C at
the rate of 1% of tax per month. However, penal interest is not charged
if 90% of the total tax has been paid as advance in due time.
S
Let us look at a few examples of tax computation for cooperative so-
cieties:
Example 10: AB, a co-operative society engaged in the processing of

IM
agricultural products. Determine its net income for the FY 2018-19 if
it furnishes the following details :
Income from processing of agricultural products: ` 27,000
Income from marketing agricultural produce: ` 6,000
Dividends from another co-operative society: ` 40,000
Income from letting of godowns: ` 17,000
M
Income from agency business: ` 68,000
Computation of net taxable income:

N

Income from letting of godowns 17,000
Business income:
From processing 27,000
From marketing 6,000
From agency 68,000 1, 01,000
Dividend income 40,000
Gross Taxable Income 1, 58,000
Less: Deductions in respect of income from:
Processing of agricultural produce
(sec.80P(2)(a)(v)) 27,000
Marketing of agricultural produce(sec.80P(2)
(a)(iii))
6,000
Agency business(sec.80P(2)(c))
Dividend (sec.80P(2)(d))
50,000
Letting of godowns (sec.80P(2)(e))
40,000
17,000 1, 40,000
Net taxable income 18,000

n o t e s
Income tax computation:
Where the taxable income exceeds ` 20% of income in excess of `

10,000 but does not exceed ` 20,000 10,000
Tax liability of AB co-operative society = (10% of 10,000) + (20% of `

8000) = ` 1,700
Add: Health and Education cess at 4% = (4% of ` 8000) = ` 320
Therefore, total tax to be paid in AY 2019-20 would be `2,020.
Example 11: MN Co-operative Society derives total income from the

following sources:
Income from processing with the aid of power = ` 80,000
S
Income from collective disposal of labour of the members
= ` 35,000
Interest from another co-operative society = ` 70,000
IM
Income from house property = ` 96,000
Income from other business = ` 58,000
Determine the tax liability for FY 2018-19.
The computation of net taxable income is as follows:

M

Income from house property 96,000
Business income:
From processing with the aid of power 80,000
N
From collective disposal of labour 35,000

From other business 58,000 1, 73,000
Interest received 70,000
Gross Taxable Income 3, 39,000
Less: Deductions in respect of:
Interest (sec.80P(2)(d)) 70,000
Collective disposal of labour (sec.80P(2) 35,000
(a)(vi))
Other business (sec.80P(2)(c)) 50,000 1, 55,000
Computation of tax liability:
Where the taxable income exceeds `3,000 + 30% of the amount by which
` 20,000 the taxable income exceeds 20,000
Tax liability of MN Co-operative Society = `3, 000 + (30% of 1, 64,000)

= ` 52,200

n o t e s
Adding health and education cess at 4% (4% of ` 1, 64,000) = ` 6,560
Total tax liability for FY 2018-19 is ` 58,760.
5. For FY 2018-19, a partnership firm is taxable at the rate of

a. 20 per cent of taxable income
b. 30 per cent of taxable income
c. 10 per cent if income exceeds ` 10,000
d. 30 percent if income exceeds ` 20,000
6. Income received by the way of rent from agricultural land
falls under which of these income heads?
S
a. Income from “House Property”
b. Income from “Profits and gains of Business or Profession”
c. Agricultural Income
IM
d. Income from “Other Sources”.
7. Salary received by the manager of an agricultural farm is
income from ____________.
Activity
M
Using the Internet, list down the income tax slab rates for individ-
uals, senior citizens, HUF, partnership firms, local authority, etc.
for the last five financial years and note major changes and their
impact on tax liability.
N
10.4 SUMMARY
The Central Board of Direct Taxes (CBDT) along with the Income
Tax Department (ITD) is responsible for collecting and adminis-
tering the Income Tax Laws and other direct tax statutes for the
Government of India.
All incomes shall be classified under five income heads:
Income under the head “Salaries”.
Income under the head “House Property”.
Income under the head “Profits and gains of Business or Pro-
fession”.
Income under the head “Capital Gains”.
Income under the head “Other Sources”.

n o t e s
When income from all five heads is clubbed up, losses incurred
are adjusted against income; the remaining figure is referred to as
“Gross Total Income” (GTI).
Section 80A of the Chapter VI-A of the Act allows certain deduc-
tions from the ‘Gross Total Income’ of an income tax assesse spec-
ified under Section 80C to 80U.
When the GTI is adjusted against the permissible deductions, the
resulting figure is referred to as the Total Income (TI).
Tax on an individual’s total income is levied according to a pre-de-
cided percentage on the net taxable income which needs to be de-
posited at the end of a financial year.
Income tax slab rate for individuals is the rate at which individuals
have to pay a tax on their annual income to the government.
S
According to the Income Tax Act, “partnership is a relationship
between persons who have agreed to share the profits of business
carried on by all or any of them acting for all”.
IM
A local authority includes a municipal committee, district board,
body of port commissioners, and other authority, which are lawful-
ly entitled to, or entrusted by the Government with, the control or
management of a municipal or local fund.
A co-operative is an autonomous association of persons who vol-
untarily associate to meet their common economic, social and cul-
M
tural objectives through a jointly-owned enterprise.
key words
Health and education cess: An additional levy on the basic tax

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liability of individuals and firms, HUFs, co-operative society,

etc. The present rate of Health and Education Cess is 4 percent
on taxable income.
Leave Travel Allowance (LTA): An allowance granted to em-
ployees by their employers, which can be applied when employ-
ees avail vacations.
Public Provident Fund: A long-term savings scheme backed
by the Government of India which is a minimum risk invest-
ment offering decent interest rates and returns that are fully
exempted from income tax.
Tax Deduction at Source (TDS): The tax deducted at source by
a company or individual making a payment in case the payment
exceeds certain prescribed limits. TDS is deducted at the rates
approved by the tax department.

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1. Describe the Income Tax rates for individuals below 60 years of
age. Mr. A, aged 42 years, submitted the following details of his
income and investment for financial year 2017-18, as under:
Particulars Amount (In `)
Income from salary 3, 00,000
Interest from fixed deposits with bank 15,000
Interest from personal loans 5,000
Interest from Public Provident Fund Account (PPF) 25,000
Deposit in Public Provident Fund Account (PPF) 1, 50,000
Calculate his income tax liability for AY 2018-19.
2. Describe the tax liability of partnership firms. Mr. A and Mr. B are
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the partners of M/s AB Enterprises. The credit balance of their
capital on 01.04.18 was ` 5, 00,000. The interest on capital paid to
them for financial year was 20 per cent. The net income of M/s
IM
AB Enterprises after paying interest on the capital of partners
was `3, 60,000. Calculate the taxable income and tax liability for
FY 2018-19 for the firm.
3. Explain the computation of income tax for a co-operative society.

M
Topic Q. No. Answer

N
Computation of Income Tax 1. False

2. c. The residential status of
taxpayer
3. d. Previous year
4. False
Income Tax Slab Rates 5. b. 30 percent of taxable income
6. d. Income from “Other Sourc-
es”.
7. “Profits and gains of Business or
Profession”

1. Income tax slab rate for individuals is the rate at which individuals
have to pay a tax on their annual income to the government.
Refer to Section 10.3 Income Tax Slab Rates.

n o t e s
2. Income tax slab for Partnership Firms for FY 2018-19 is 30 per

cent of total income. Refer to Section 10.3 Income Tax Slab
Rates.
3. Compute the taxable income from different income heads
adjusting for losses and permissible deductions. Compute tax
liability as per the income tax slab specified for the given financial
year less surcharge and cess. Refer to Section 10.3 Income Tax
Slab Rates.
SUGGESTED READINGS
Niyogi, J. (1929). The evolution of the Indian income tax. London:
P.S. King.
S
Patwa, C. (2018). INCOME TAX CALCULATION OF PARTNER-
SHIP FIRMS & LLPs FOR F. Y. 2018-19 - RITUL PATWA & CO,
Chartered Accountants. RITUL PATWA & CO, Chartered Accoun-
IM
tants. Retrieved 5 April 2018, from http://blog.ritulpatwa.com/in-
come-tax-calculation-of-partnership-firms-llps-for-f-y-2018-19/
Singhania, V., & Singhania, K. (2004). Taxmann’s direct taxes. New
Delhi: Taxmann Publications.
E-REFERENCES
M
Income Tax Slab Rates in India for AY 2017-18 and 2018-19 | H&R
Block. (2018). H&R Block India. Retrieved 5 April 2018, from
https://www.hrblock.in/guides/income-tax-slab-rates/
N
Lohani, C. (2018). Gross Total Income-Total Income meaning un-

der Income Tax Act 1961. Abcaus.in. Retrieved 5 April 2018, from
http://abcaus.in/articles/income-tax/gross-total-income.html
TDS-RATES CHART FY 2017-18 AY 2018-19 TDS DEPOSIT-RE-
TURN-DUE DATES INTEREST PENALTY. (2018). SIMPLE TAX
INDIA. Retrieved 5 April 2018, from https://www.simpletaxindia.
net/2017/04/tds-rates-chart-fy-2017-18-ay-18-19-tds-deposit-tds-re-
turn-due-dates-interest-penalty.html

Ch
11 a pt e r
INDIRECT TAXATION – GOODS AND SERVICES TAX
CONTENTS
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11.1 Introduction
11.2 What is GST?
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11.2.1 Importance of GST
Activity
11.3 Need & Evolution of GST
Activity
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11.4 Levy and Collection of GST (Charging Section)

Activity
11.5 Objectives and Salient Features of the Indian GST System
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Activity
11.6 Applicability and Mechanism of GST
Activity
11.7 Tax Rates under GST
Activity
11.8 Advantages of GST
Activity
11.9 Impact of GST on Various Sectors
Activity
11.10 Transitional Provisions
Activity

CONTENTS
11.11 Summary
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M
N

INDIRECT TAXATION – GOODS AND SERVICES TAX 387
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NESTLE FINED FOR FAILING TO PASS ON GST

CUT BENEFIT
Implementation of Goods and Service Tax (GST) has not been

easy. The need for the overhauling of the entire excise structure
was proposed in 1986 by the then Finance Minister Vishwanath
Pratap Singh. Thereafter, the concept of GST was formally intro-
duced by Prime Minister Atal Bihari Vajpyee in year 2000. Since
then it was proposed time and again but could not be implement-
ed. Finally, the GST bill was passed in 2017 and the GST as a tax
became operational since 1st July 2017.
S
IM
M
N
Source: https://www.dsij.in; https://economictimes.indiatimes.com
After its implementation, different business owners are trying to

learn and conduct the business in accordance with GST rules. It
was announced by the government that it will take a lenient ap-
proach while implementing the new GST so that businesses can
adapt themselves to the new system. The government changed
its stance and after about 6 months of implementation, the de-
partment started taking strong measures. This can be supported
by the fact that business owners have been receiving notices for
mismatch or discrepancies in the GST filed by them in GSTR-1
and GSTR-3B forms for amounts as low as `0.77999999999883585.
The government has been ensuring that businesses pay what they
have to and the customers receive the benefit that is due to them.
In April-May 2018, companies such as Nestle India and Hindu-

stan Unilever have been pulled up by the tax department for fail-
ing to pass on the benefit of the GST rate cut on to the customers.

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In November 2017, the government had cut the GST rate on 178
daily use products including chocolates and cocoa-based products
from 28% to 18%. The government had then asked businesses to
ensure that the prices of all the products were reduced in line
with the price benefit received by them and the benefit should
be passed on to the end-consumer. Thereafter, Nestle India start-
ed the process of depositing a transition amount in the consumer
welfare fund as a result of not immediately passing on the benefits
to the consumer under the GST.
The notice to Nestle was issued by the Directorate General of Safe-

guards and the National Anti-Profiteering Authority (NAA) had
been keeping watch on prices after the rate cut was announced
by the GST council in November 2017. It was announced that in
case companies are unable to pass on the rate cut to consumer on
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account of stocks having entered the retail supply chain with the
older, higher MRP tags, companies had to deposit the difference
in the central fund.
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The NAA had advised Nestle to deposit the amount computed by
Nestle in the consumer welfare fund to be constituted under the
GST and then deposit necessary documents to the authority. The
spokesperson for Nestle India had said that they did not receive
any formal notice from NAA but they were in the process of taking
the next steps to pass on the benefits to consumers. The spokes-
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person also mentioned that they had a discussion with National

Anti-profiteering Authority which was constructive and they had
decided to deposit the set amount suo moto.
Source: https://economictimes.indiatimes.com/industry/cons-products/fmcg/nestle-to-
N
pay-up-for-failing-to-pass-on-gst-cut-benefit/articleshow/64071876.cms
https://economictimes.indiatimes.com/news/economy/policy/you-dont-even-have-0-
77999999999883585-chance-to-escape-gst-scrutiny/articleshow/64091907.cms

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learning objectives

>> Explain the concept of GST
>> Describe the need and evolution of GST
>> List the clauses for levy and collection of GST
>> Explain the objectives and salient features of the Indian
GST system
>> Explain the applicability and mechanism of GST
>> Outline tax rates of GST for different items
>> Discuss the advantages of GST
>> Discuss the impact of GST on various sectors
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>> Outline transitional provisions of GST
11.1 INTRODUCTION
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In the previous chapter, you studied about the computation of total
income for individuals, senior citizens, super-senior citizens, partner-
ship firms, local authority and co-operative society. You studied tax
slab rates applicable for each of these categories. When it comes to
sale and purchase of goods and services, a new tax structure called
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Goods and Services Tax (GST) has been introduced from year 2017. In
this chapter, you will study GST in detail.
Goods and Services Tax (GST) is an exhaustive indirect tax that is

levied on the production, sales and consumption of goods and ser-
N
vices throughout India. It has replaced other taxes levied by the cen-
tral and state governments. Arun Jaitley introduced the GST Bill in
Lok Sabha on 19th December, 2014. It was passed by the Parliament in
August, 2016.
In this chapter, you will study about the importance, benefits and evo-
lution of GST. You will also be familiarised with various clauses ap-
plicable to GST, along with the applicability and mechanism of GST.
Further, you will learn about tax rates under GST and its impact on
various sectors. At the end, you will understand transitional provi-
sions applicable to GST.
11.2 WHAT IS GST?

GST is an integral indirect tax which has been implemented through-
out India from July 01, 2017. GST is the biggest tax reform in the histo-
ry of the Indian economy and it was introduced as 101st Constitution-
al Amendment Act (122nd Amendment Bill) which was enforced from
July 01, 2017. GST is a consumption-based tax imposed on goods and
services. It is a single uniform tax which has eliminated and absorbed

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multiple taxes under the previous indirect tax regime that included
Value Added Tax (VAT), Service Tax, Excise Duty, Central Sales Tax
(CST), Entry Tax, Local Body Tax (LBT), etc.
GST is applicable on all goods and services, manufactured or supplied

inside India; however, there are three products which are exempted
from GST, i.e. alcohol for human consumption, petroleum products
and electricity.
Components of GST are as follows:

Central Goods and Services Tax (CGST): As per the CGST Act
2016, CGST is the part of GST and it has absorbed various taxes
that were collected by the Central Government, such as CST, Cen-
tral Excise Duty, Service Tax, Additional Customs Duty, Education
Cess, Surcharge, etc. CGST is applicable when transaction is done
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within state boundaries or at the intrastate level.
State Goods and Services Tax (SGST): SGST is collected by the
state government and it has absorbed various taxes that were col-
IM
lected by state governments, such as VAT, state sales tax, Octroi
and entry tax, luxury tax, taxes on lottery, taxes on betting and
gambling, etc. Like CGST, SGST is applicable when transaction is
done within state boundaries or at the intrastate level.
Integrated Goods and Services Tax (IGST): IGST is collected by
the Central Government and it is applicable when commodities or
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services move within two or more states. In other words, IGST is

applicable on interstate transaction.
Union territory Goods and Services Tax (UTGST): UTGST is
collected by both central and UT Administrative bodies in the ra-
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tio of 1:1. It is applicable when transaction is done within the UT.

However, IGST is applicable in the case of inter UT transfer and
UT – State transfer.
UTGST is applicable in Daman and Diu, Dadra and Nagar Haveli,

Andaman and Nicobar, Lakshadweep and Chandigarh. However, it is
not applicable in Pondicherry and Delhi, as they have their own legis-
lative assembly and chief minister.
11.2.1 IMPORTANCE OF GST
The key importance of GST is it abolishes all indirect taxes wherever

possible. Therefore, it makes the entire taxation system simpler.
In 2011, the last government got a bill in the Lok Sabha, but could not
succeed in getting it passed. In December 2015, the NDA government
altered the bill a little and then brought in Lok Sabha and succeeded
in getting it cleared on May 06, 2016.
In India, the indirect taxes structure was quite complicated and used
to vary depending on the state. People had to pay entertainment tax

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to watch a movie and VAT to buy goods and services. On top of that,
there were various other taxes such as luxury tax, excise duties, cen-
tral sales tax, import duties and service tax. However, with the intro-
duction of GST, a uniformity was introduced, which further reduced
the cascading effect of these taxes because of input tax credit. Various
indirect and central taxes are included in GST, which makes efficient
production, as producers can now claim credits for taxes that have
been paid on all inputs. Moreover, it reduces the cost for a consumer.
GTS tends to enable the “Make in India” movement. The earlier tax
structure used to unmake India as it used to fragment the Indian
market across states. The past tax structure had three features that
caused distortions: various intra-State taxes, CST on inter-State sales
of goods and the widespread nature of countervailing duty exemp-
tions favouring imports over domestic production. With just one shot,
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GST rectified all these problems, as it completely eliminated the CST
and included most of the other taxes. GST is applicable on imports.
Therefore, it resulted in eliminating disfavouring domestic manufac-
turing and negative protection favouring imports.
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GST improved tax governance in two ways:
The first one is related to the self-policing incentive inherent to
a VAT. For claiming input tax credit, dealers have an incentive of
requesting documents from other dealers situated behind him in
the VAT chain. With wide-ranging exemptions, provided the chain
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has not been broken, this feature of self-policing worked quite suc-
cessfully in GST.
The second one is related to the GST’s dual monitoring structure,
one by the Centre and one by the States. The dual structure has
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been viewed by taxpayers and critics with some worry, with a fear
that two sources of interface would be involved. However, this
structure should also be considered from a point of view of creat-
ing the desired tax competition and coordination between central
and state authorities. In this case, if one set of tax authorities fails
in detecting evasion, the possibility is the other would not.
To conclude, GST made the tax structure simple and lean. It has made
the entire Indian market unified, resulting into lower business costs. It
also enables smooth goods movement across states and lowers down
business transaction costs. It is not applicable for goods and services
exported from India and therefore, it is good for businesses oriented
to export. As the time passes, it will translate into low prices of con-
sumer goods. Manufacturers, suppliers, retailers and wholesalers can
recover the GST that has been incurred as tax credits on input costs.
This lowers down the cost of running a business, which allows fair
costs for consumers. It brings better compliance and more transpar-
ency. Corruption will be reduced too, as number of tax departments
are reduced. The tax base will widen up as more business entities will

n o t e s
fall under the tax system. This will result into more tax collections.
Unorganised sector companies also fall under the tax regime.
1. Which of the following GST components includes Luxury

Tax?
a. CGST
b. SGST
c. IGST
d. UTGST
2. GST complicated the existing tax structure. (True/False)
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Activity
Search the Internet and read about GST in detail on various web-
sites. Prepare a brief report on the same.
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11.3 NEED & EVOLUTION OF GST
As discussed in the last section, the rates of VAT used to vary from
state to state. It was also observed that states used to often slash these
rates to attract more investors. The outcome was the loss of revenue
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for both state and central governments.
However, with the introduction of GST, a uniformity in tax laws was

brought in across all states, spanning across different industries. The
idea was to divide taxes between central and state governments on
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the basis of a pre-approved and predefined formula. Additionally, it

simplified the process of offering goods and services uniformly across
India because of no additional taxes from states.
Due to various disagreements between multiple states, the GST roll-

out missed several deadlines. The entire timeline of GST and how it
has evolved over time is presented in Table 11.1:
TABLE 11.1: GST TIMELINE

Year Event
2000 Committee was set up to draft the GST Law

2005 Kelkar Committee recommends to roll out GST by 12th
Finance Commission
2006 GST proposed in the Parliament by the then Finance Min-
ister and set a deadline of April 01, 2010 to implement it

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Year Event
2009 The then finance minister presents a basic structure for
GST and retains deadline
2010 Computerisation of commercial taxes in states
2011 Constitution Amendment bill for GST was presented in
Lok Sabha
2012 New deadline (i.e. December 31, 2012) was set up by the
then Finance Minister
2014 In the budget speech, the then Finance Minister announc-
es a compensation of `9000 crore for states.
2014 The GST bill cleared by standing lapses as the Government
changes
December The Finance Minister introduces bill in the Lok Sabha
2014
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February New deadline (i.e. April 01, 2016) was set up
2016
January 2017 New deadline to roll out GST was set up (i.e. July 01, 2017)
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March 2017 Four key bills (CGST, IGST, SGST and UTGST) are passed
in both houses
May 2017 Four slab rates (i.e. 5%, 12%, 18% and 28%) are unveiled by
the GST council
July 01, 2017 GST rolled out
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3. When was Constitution Amendment bill for GST was

presented in Lok Sabha?
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a. 2009
b. 2010
c. 2011
d. 2012
4. When was GST rolled out?
a. July 01, 2017
b. July 01, 2018
c. April 01, 2017
d. Dec 01, 2017
Activity
Search the Internet and read more about the history of GST: how
it came into existence and whose ideas were running behind it etc.

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LEVY AND COLLECTION OF GST

11.4
(CHARGING SECTION)
Section 9 is the charging section with respect to the supply of goods
and services under GST.
(1) Subject to the provisions of sub-section (2), there shall be levied
a tax called the central goods and services tax on all intra-state
supplies of goods or services or both, except on the supply of
alcoholic liquor for human consumption, on the value determined
under section 15 and at such rates not exceeding 20 per cent, as
may be notified by the Government on the recommendations of
the Council and collected in such a manner as may be prescribed
and shall be paid by the taxable person.
(2) The central tax on the supply of petroleum crude, high speed
S
diesel, motor spirit (commonly known as petrol), natural gas and
aviation turbine fuel shall be levied with effect from such date as
may be notified by the Government on the recommendations of
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the Council.
(3) The Government may, on the recommendations of the Council,
by notification, specify categories of supply of goods or services
or both, the tax on which shall be paid on a reverse charge basis
by the recipient of such goods or services or both and all the
provisions of this Act shall apply to such recipient as if he is the
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person liable for paying the tax in relation to the supply of such
goods or services or both.
(4) The central tax in respect of the supply of taxable goods or
services or both by a supplier, who is not registered, to a registered
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person shall be paid by such person on a reverse charge basis as

the recipient and all the provisions of this Act shall apply to such
recipient as if he is the person liable for paying the tax in relation
to the supply of such goods or services or both.
(5) The Government may, on the recommendations of the Council,
by notification, specify categories of services the tax on intra-
State supplies of which shall be paid by the electronic commerce
operator if such services are supplied through it and all the
provisions of this Act shall apply to such electronic commerce
operator as if he is the supplier liable for paying the tax in relation
to the supply of such services:
(6) Provided that where an electronic commerce operator does not
have a physical presence in the taxable territory, any person
representing such electronic commerce operator for any purpose
in the taxable territory shall be liable to pay tax:
(7) Provided further that where an electronic commerce operator
does not have a physical presence in the taxable territory and

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also he does not have a representative in the said territory, such

electronic commerce operator shall appoint a person in the
taxable territory for the purpose of paying tax and such person
shall be liable to pay tax.
5. Subject to the provisions of sub-section (2), there shall be

levied a tax called the central goods and services tax on all
intra-State supplies of goods or services or both, except on the
supply of ___________for human consumption.
Activity
Search the Internet and read the whole section about levy and col-
S
lection of GST on the government’s website. Prepare a report on
the same.
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OBJECTIVES AND SALIENT FEATURES
11.5
OF THE INDIAN GST SYSTEM
The objectives and key features of the Indian GST system are listed
below:
GST is imposed on (levied on) the supply and movement of goods
M
and services within the Indian Territory.

Import of goods into India is considered to be interstate supply
and IGST is imposed along with Basic Customs Duty (BCD).
All
transactions under GST are only made through the electronic
N
mode and tax can be deposited by the mode of net banking, NEFT,
RTGS, debit card, credit card or over the counter.
Registration required only in the case of turnover of more than `20
lakh and there is an option for voluntary registration.
Input tax credit available on taxes paid on procurement and it is
provided only if the invoice is matched.
Taxpayers need to file quarterly returns.
GST Suvidha Providers are appointed under GSTN (GST Net-
work) to provide technology-based assistance.
Separate ledgers to be maintained for cash and credit in electronic
form.
Concept of Tax Collected at Source (TCS) in the case of
e-commerce companies and Tax Deducted at Source in the case of
government department.

n o t e s
Refund to be granted and directly credited to bank accounts with-

in 60 days, and interest to be payable if not granted within this
limit.
6. What does BCD stand for?

a. Basic Customs Duty
b. Basic Cultural Duty
c. Basic Common Duty
d. None of these
Activity
S
Search the Internet and read about the objectives and salient fea-
tures of the Indian GST System. Prepare a brief report on the same.
IM
APPLICABILITY and MECHANISM
11.6
OF GST
GST is implemented and regulated by the GST Council. GST council
consists of the Finance Minister of India as its Chairman, the Union
Minister of state in charge for Finance, Taxation or Revenue as mem-
M
ber and the minister in charge for Finance, Revenue, Taxation or any
other Minister nominated by state governments as member. The Vice
Chairperson of GST council will be chosen among the members from
various states.
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Important decisions related to the GST council are as follows:

Under the GST council, minimum 50% members are required to
attend the meeting to make it valid. In other words, Quorum is
50% of the total members.
75% majority is required for decision making.
council is responsible to make recommendations related to laws,
rules and rates under GST.
Minimum limit (Threshold limit) for exemption is ` 20 lakhs; how-
ever, it is `10 lakhs in the special category state.
There are four tax slabs (i.e. 5%, 12%, 18% and 28%) under GST.
GST payers with turnover of less than ` 1.5 crore are divided
among Union Tax Administration and State Tax Administration
in the ratio of 1:9.
GST payers with a turnover of more than ` 1.5 crore are divided
among Union Tax Administration and State Tax Administration in
the ratio of 1:1.

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7. Which of the following is not a tax slab rate under GST?

a. 5%
b. 12%
c. 15%
d. 18%
8. In the GST council, how much majority is required for decision
making?
a. 50%
b. 75%
c. 100%
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d. None of these
Activity
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Search the Internet and read about the formation of the GST coun-
cil. Prepare a brief report on the same.
11.7 TAX RATES UNDER GST

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Table 11.2 below lists items under GST slabs:
S. No. Tax Rates Products

1. 0% Milk Kajal
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2. Eggs Educations Services

3. Curd Health Services
4. Lassi Children’s Drawing & Col-
ouring Books
5. Unpacked Food- Unbranded Atta
grains
6. Unpacked Paneer Unbranded Maida
7. Gur Besan
8. Unbranded Natu- Prasad
ral Honey
9. Fresh Vegetables Palmyra Jaggery
10. Salt Phool Bhari Jhadoo

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S. No. Tax Rates Products

11. 5% Sugar Packed Paneer
12. Tea Coal
13. Edible Oils Raisin
14. Domestic LPG Roasted Coffee Beans
15. PDS Kerosene Skimmed Milk Powder
16. Cashew Nuts Footwear (< Rs.500)
17. Milk Food for Apparels (< Rs.1000)
Babies
18. Fabric Coir Mats, Matting & Floor
Covering
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19. Spices Agarbatti
20. Coal Mishti/Mithai (Indian Sweets)
21. Life-saving drugs Coffee (except instant)
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22. 12% Butter Computers
23. Ghee Processed food
24. Almonds Mobiles
25. Fruit Juice Preparations of Vegetables,
Fruits, Nuts or other parts of
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Plants including Pickle Mu-

rabba, Chutney, Jam, Jelly
26. Packed Coconut Umbrella
Water
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27. 18% Hair Oil Capital goods

28. Toothpaste Industrial Intermediaries
29. Soap Ice-cream
30. Pasta Toiletries
31. Corn Flakes Computers
32. Soups Printers
33. 28% Small cars High-end motorcycles
34. Consumer dura- Beedis are NOT included
bles such as AC here
and fridge
Taxation of alcoholic drinks and petroleum products is done separate-

ly by individual state governments. A special rate of 0.25% exists for
rough precious and semi-precious stones and 3% on gold. Addition-
ally, a cess of 22% or other rates on top of 28% GST is applicable on a
few items such as luxury cars, aerated drinks and tobacco products.

n o t e s
9. What is the applicable GST tax rate on milk?

a. 0%
b. 5%
c. 12%
d. 18%
10. What is the applicable GST tax rate on ghee?
a. 0%
b. 5%
c. 12%
d. 18%
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Activity
IM
Search the Internet about GST tax slab rates changes in Financial
Year 2018-19, with respect to the last year. Prepare a brief report.
11.8 ADVANTAGES OF GST

The advantages of GST are listed below:
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Simple life: GST has replaced 17 indirect taxes and eliminates

compliance costs.
Boost in revenue: Evasion has been dropped. Suppliers are en-
couraged to pay taxes because of input tax credit. A dual oversight
N
is available for state and central governments. There has been a

decline in various tax-exempt goods.
Uniformity in market: The past fragmented market across state
lines has now been unified, with major drops in costs.
Boost in investment: Input tax credit is not available for various
capital goods. Under GST, full input tax credit would mean a drop
of 12-14% in the capital goods cost. It is expected to have 6% rise in
investment of capital goods.
Make in India: GST eliminates the cascading effect of tax, logis-
tics costs, inter-state tax and ununified market. As a result, manu-
facturing is expected to become more competitive. GST offers an
apt countervailing duty and therefore, there is increased protec-
tion from imports.
Underdeveloped states get a boost: The earlier 2% inter-state
taxes meant production used to be kept within states. Under the
national market of GST, it is possible to disperse it and create op-
portunities for others.

n o t e s
Overall drop in prices: Manufactured goods have become cheap-

er with lower tax and logistics costs.
GDP growth: It has been estimated that over 3-5 years, there can
be seen 80 basis point rise in GDP.
Freeing up online: Levies and state restrictions had made
e-commerce complicated. A few sellers did not even ship to some
states. GST is expected to end this.
11. How many indirect tax has GST replaced?

a. 15
b. 16
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c. 17
d. 18
12. With GST, it is expected to have ___________ rise in investment
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of capital goods.
Activity
Talk to your neighbours, colleagues and friends about various ben-

efits of GST they have experienced. Prepare a brief report on their
M
experiences.
11.9 IMPACT OF GST ON VARIOUS SECTORS

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GST has affected various sectors, such as:
FAST MOVING CONSUMER GOODS (FMCG)
This sector will benefit because of the existing and big unorganised
market. Prices of GST for products such as soaps, hair oil and tooth-
paste have been lowered, as compared to earlier. Organisation such as
HUL, Colgate-Palmolive and Britannia are expected to be benefitted
from this move.
PHARMA AND HEALTHCARE
The products of this sector have experienced a raise as compared to

earlier rate of 10%. It is believed that organisations will be able to pass
on this affect to patients. The sector of healthcare will be exempted
from GST, but the healthcare sector inputs will be taxed at 18%, which
leads to an increase in operating costs. Organisations such as Dr Lal
Pathlabs will be benefitted.

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CONSUMER DURABLES
Earlier, the taxation rate for white good players was 27%, which in-
cluded 13.5% of VAT. Now the GST rate is 28%. Some increase in the
most consumer durable items prices is expected. Margins of the con-
sumer durable companies do not bear any significant impact. Organi-
sations like Whirlpool, Crompton, Symphony will be impacted.
AIRLINES
The business class has become expensive because of an increase of

tax rates from 9% to 12%. The economy class on the other hand has
become cheaper with tax rates declining from 6% to 5%. The indirect
tax structure will continue to exist for Aviation Turbine Fuel. There-
fore, aviation organisations will have to bear two tax sets: GST and
indirect taxes.
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Under GST, tax input credit is available only on input services of econ-
omy class. Companies like Jet Airways, Spicejet, InterGlobe etc. will
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be positively impacted due to low economy travel rates.
BROKERS AND EQUITY INVESTMENTS
The financial services GST rates changed from 15% to 18% as the ser-
vice tax was included in the overall GST. It has been estimated that
on a 1% round brokerage, the overall cost is about 0.03% or 3 basis
M
points, which is not much from the standpoint of an investor of the

long term. However, from the perspective of short-term investors, this
additional cost change can impact the economics to churn their funds
in the equity markets.
N
Shares of organisations such as Edelweiss Financial, Motilal Oswal

Financial Services etc. will be impacted.
CEMENT
For the cement industry, GST implementation is predicted to be neu-

tral. In the past, VAT rates were between 12.5-15.5% and the tax rates
for cement were 12.5%. With the implementation of GST, the tax rates
are 28%, which is almost the same as earlier.
Lower rates of coal will further benefit the cement industry. Organi-
sations such as Birla Corporation, UltraTech Cement, Deccan Cement
and India Cement, JK Lakshmi Cement, etc. will be affected.
TELECOM
Due to the introduction of GST, the services from the telecom indus-
try are being taxed at 18% as compared to earlier 15%. Any further
price increase will worsen the situation. Companies like Idea Cellular,
Bharti Airtel, Relliance Communication etc. are impacted.

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AUTOMOBILE AND AUTO ANCILLARIES
For the auto sector, the impact of GST is expected to remain neutral,
barring hybrid cars which will be taxed at the 28% GST in addition to
15% cess.
For tractor companies, on the other hand, tax rates are 12% against
earlier 6-7%. Companies like Minda Industries, Exide Industries,
Amara Raja Batteries etc. will get impacted.
REAL ESTATE
For under-construction real estate projects, the effective GST rate is

just 12%. Companies like Brigade Enterprises, Sobha, Sunteck etc.
will be impacted.
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13. What was the earlier taxation rate for white good players?
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a. 20%
b. 25%
c. 27%
d. 30%
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Activity
Talk to any member of your family or friend who is running a busi-

ness. Identify the industry they belong to. Analyse the impact of
GST on their industry. Prepare a brief report.
N
11.10 TRANSITIONAL PROVISIONS
TAX OR DUTY CREDIT CARRIED FORWARD UNDER ANY

EXISTING LAW OR ON GOODS
Held in Stock on the Appointed Day
(1) Every registered person entitled to take credit of input tax under
section 140 shall, within 90 days of the appointed day, submit a dec-
laration electronically in FORM GST TRAN-1, duly signed, on the
common portal specifying therein, separately, the amount of input
tax credit of eligible duties and taxes, as defined in Explanation 2 to
section 140, to which he is entitled under the provisions of the said
section:
Provided that the Commissioner may, on the recommendations of the

Council, extend the period of 90 days by a further period not exceed-
ing 90 days.

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Provided further that where the inputs have been received from an
Export Oriented Unit or a unit located in Electronic Hardware Tech-
nology Park, the credit shall be allowed to the extent as provided in
sub-rule (7) of rule 3 of the CENVAT Credit Rules, 2004.
(2) Every declaration under sub-rule (1) shall-

(a) in the case of a claim under sub-section (2) of section 140, specify
separately the following particulars in respect of every item of
capital goods as on the appointed day-
(i) the amount of tax or duty availed or utilized by the way
of input tax credit under each of the existing laws till the
appointed day; and
(ii) the amount of tax or duty yet to be availed or utilized by the
way of input tax credit under each of the existing laws till the
appointed day;
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(b) in the case of a claim under sub-section (3) or clause (b) of sub-
section (4) or subsection (6) or sub-section (8) of section 140,
specify separately the details of stock held on the appointed day;
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(c) in the case of a claim under sub-section (5) of section 140, furnish
the following details, namely:—
(i) the name of the supplier, serial number and date of issue of
the invoice by the supplier or any document on the basis of
which credit of input tax was admissible under the existing
law;
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(ii) the description and value of goods or services;

(iii) the quantity in the case of goods and the unit or unit quantity
code thereof;
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(iv) the amount of eligible taxes and duties or, as the case may
be, the value added tax [or entry tax] charged by the supplier
in respect of the goods or services; and
(v) the date on which the receipt of goods or services is entered
in the books of account of the recipient.
(3) The amount of credit specified in the application in FORM GST

TRAN-1 shall be credited to the electronic credit ledger of the appli-
cant maintained in FORM GST PMT-2 on the common portal.
(4) (a) (i) A registered person who was not registered under the ex-
isting law shall, in accordance with the proviso to sub-section (3) of
section 140, be allowed to avail of input tax credit on goods (on which
the duty of central excise or, as the case may be, additional duties of
customs under sub-section (1) of section 3 of the Customs Tariff Act,
1975, is leviable) held in stock on the appointed day in respect of which
he is not in possession of any document evidencing the payment of
central excise duty.

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(ii) The input tax credit referred to in sub-clause (i) shall be allowed
at the rate of sixty per cent. on such goods which attract central tax at
the rate of nine per cent. or more and forty per cent for other goods of
the central tax applicable on supply of such goods after the appointed
date and shall be credited after the central tax payable on such supply
has been paid:
Provided that where integrated tax is paid on such goods, the amount
of credit shall be allowed at the rate of thirty per cent. and twenty per
cent respectively of the said tax;
(iii) The scheme shall be available for six tax periods from the appoint-
ed date.
(b) The credit of central tax shall be availed subject to satisfying the
following conditions, namely:-
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such goods were not unconditionally exempt from the whole of the
duty of excise specified in the First Schedule to the Central Excise
Tariff Act, 1985 or were not nil rated in the said Schedule;
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the document for the procurement of such goods is available with
the registered person;
the registered person availing of this scheme and having furnished
the details of stock held by him in accordance with the provisions
of clause (b) of sub-rule (2), submits a statement in FORM GST
TRAN 2 at the end of each of the six tax periods during which the
M
scheme is in operation indicating therein, the details of supplies of

such goods effected during the tax period;
the amount of credit allowed shall be credited to the electronic
credit ledger of the applicant maintained in FORM GST PMT-2 on
N
the common portal; and

the stock of goods on which the credit is availed is so stored that it
can be easily identified by the registered person.
DECLARATION TO BE MADE UNDER CLAUSE (C) OF SUB-

SECTION (11) OF SECTION 142
Every person to whom the provision of clause (c) of sub-section (11) of

section 142 applies, shall within a period of ninety days of the appoint-
ed day, submit a declaration electronically in FORM GST TRAN-1 fur-
nishing the proportion of supply on which Value Added Tax or service
tax has been paid before the appointed day but the supply is made
after the appointed day, and the Input Tax Credit admissible thereon.
DECLARATION OF STOCK HELD BY A PRINCIPAL AND JOB-

WORKER
Every person to whom the provisions of section 141 apply shall, within
ninety days of the appointed day, submit a declaration electronically

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in FORM GST TRAN-1, specifying therein, the stock of the inputs,

semi-finished goods or finished goods, as applicable, held by him on
the appointed day.
DETAILS OF GOODS SENT ON APPROVAL BASIS
Every person having sent goods on approval under the existing law
and to whom sub-section (12) of section 142 applies shall, within nine-
ty days of the appointed day, submit details of such goods sent on ap-
proval in FORM GST TRAN-1.
RECOVERY OF CREDIT WRONGLY AVAILED
The amount credited under sub-rule (3) of rule 117 may be verified
and proceedings under section 73 or, as the case may be, section 74
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shall be initiated in respect of any credit wrongly availed, whether
wholly or partly.

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14. The input tax credit referred to in sub-clause (i) shall be
allowed at the rate of sixty per cent. True or False?
Activity
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Search the Internet and read more about GST transitional provi-
sions. Prepare a brief report.
11.11 SUMMARY
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Goods and Services Tax (GST) would be an exhaustive indirect tax

that would be levied on the production, sales and consumption of
goods and services throughout India.
GST is an integral indirect tax which was implemented through-
out India from July 01, 2017.
Components of GST are CGST, SGST, IGST and UTGST.
The key importance of GST is it abolishes all indirect taxes when
applicable.
Section 9 is the charging section with respect to the supply of
goods and services under GST.
GST is implemented and regulated by the GST Council.
There are four tax slabs (i.e. 5%, 12%, 18% and 28%) under GST.
The advantages of GST are simple life, boost in revenue, etc.
GST affected various factors, such as fast moving consumer goods
(FMCG), pharma and healthcare, consumer durables and more.

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Transitional provisions include Tax or Duty Credit Carried For-

ward Under Any Existing Law or on Goods, Declaration to be
Made Under Clause (c) of Sub-Section (11) of Section 142, Declara-
tion of Stock Held by a Principal, Job-Worker and Details of Goods
Sent on Approval Basis and Recovery of Credit Wrongly Availed.
key words
Amendment bill: A motion forwarded by the Legislature to

amend the constitution of India through Article 368
Basic customs duty: A tax imposed on imports and exports of
goods
Electronic commerce operator: A person who, directly or indi-
rectly, owns, operates or manages an electronic platform which
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is engaged in facilitating the supply of any goods and/or services
Indirect tax: A tax levied on goods and services rather than on
income or profits.
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Tax slabs: Income tax slabs are followed by the Indian Income
Tax System to levy the tax on the income of an individual or
non-individual

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1. Explain GST and its importance.

2. Discuss the clauses for levy and collection of GST.
3. Describe the applicability and mechanism of GST.
4. What are the advantages of GST?
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5. Explain the impact of GST on various sectors.

6. Outline the transitional provisions of GST.
Topic Q. No. Answer

What is GST? 1. b. SGST
2. False
Need & Evolution of GST 3. c. 2011
4. a. July 01, 2017
Levy and Collection of GST (Charging 5. alcoholic liquor
Section)

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Topic Q. No. Answer

Objectives and Salient Features of the 6. a. Basic Customs
Indian GST System Duty
Applicability & Mechanism of GST 7. c. 15%
8. b. 75%
Tax Rates Under GST 9. a. 0%
10. c. 12%
Advantages of GST 11. c. 17
12. 6%
Impact of GST On Various Sectors 13. c. 27%
Transitional Provisions 14. True
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1. GST is an integral indirect tax which was implemented
throughout India from July 01, 2017. GST is the biggest tax
reform in the history of the Indian economy and was introduced
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as 101st Constitutional Amendment Act (122nd Amendment Bill)
which was enforced from July 01, 2017. Refer to Section 11.2
What is GST?
2. Section 9 is the charging section with respect to supply of
goods and services under GST. Refer to Section 11.4 Levy and
Collection of GST (Charging Section).
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3. GST is implemented and regulated by the GST Council, which

consists of the Finance Minister of India as its Chairman, the
Union Minister of state in charge for finance, taxation or revenue
as member and the minister in charge for finance, revenue,
N
taxation or any other minister nominated by state governments

as member. Refer to Section 11.6 Applicability and Mechanism
of GST.
4. The advantages of GST are simple life, boost in revenue, etc.
Refer to Section 11.8 Advantages of GST.
5. GST affected various factors, such as fast moving consumer
goods (FMCG), pharma and healthcare, consumer durables and
more. Refer to Section 11.9 Impact of GST on Various Sectors.
6. GST includes tax or duty credit carried forward under any
existing law or on goods, Declaration to be Made Under Clause (c)
of Sub-Section (11) of Section 142, Declaration of Stock Held by
a Principal, Job-Worker and Details of Goods Sent on Approval
Basis and Recovery of Credit Wrongly Availed. Refer to Section
11.10 Transitional Provisions.

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SUGGESTED READINGS &

11.14
REFERENCES
SUGGESTED READINGS
Nitya Tax Associates. Basics of GST
V.S. Datey. GST Ready Reckoner
Vashishtha Chaudhary Ashu. GST - A Practical Approach
E-REFERENCES
(2018). Retrieved 13 April 2018, from https://services.gst.gov.in/ser-
vices/gstlaw/gstlawlist
What is GST in India? Goods & Services Tax Bill Explained.
S
(2018). Cleartax.in. Retrieved 13 April 2018, from https://cleartax.
in/s/gst-law-goods-and-services-tax
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Ch
12 a pt e r
INTERNATIONAL TAXATION
CONTENTS
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12.1 Introduction
12.2 Concept of International Taxation
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12.2.1 Objectives of International Taxation
12.2.2 Central Principles of International Taxation
Activity
12.3 Double Taxation
12.3.1 Relief From Double Taxation
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12.3.2 Double Taxation Avoidance Agreement (DTAA)

Activity
12.4 Implication of Section 195
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Activity
12.5 Summary

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DOUBLE TAXATION AVOIDANCE AGREEMENT
ABC Ltd. Company engages in the business of providing services

globally to different countries. It receives payments from various
countries. A business entity in US which receives services from
ABC Ltd. argues that tax shall be deducted while making pay-
ment for technical services provided by ABC Ltd.
A chartered accountant who balances the books of accounts of the

company suggests that the company should consult the Double
Taxation Avoidance Agreement (DTAA) made with the US Gov-
ernment by the Indian government.
The agreement states that the tax will be collected by the Indian
government only rather than by the US government. Thus, the
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US companies will not deduct any tax on the payment made to
ABC Ltd. The DTAA agreement saves companies like ABC Ltd.
from paying tax twice.
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INTERNATIONAL TAXATION 411
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learning objectives

>> Discuss the concept of international taxation
>> Describe the concept of double taxation
>> Recognise the implications of Section 195 of the Income Tax
Act
12.1 INTRODUCTION
In the previous chapter, you have studied about various indirect taxes
such as customs duty, central excise duty, value added tax, service tax,
etc.
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Due to the movement of goods on an international scale, each move-
ment may be subject to tax jurisdictions in both the countries. Export
of a good or service from one country is, by its very definition, import
IM
for another country. Thus, the possibility of double taxation can occur.
For example, if the home country deducts tax on foreign income of its
home residents and the foreign country deducts tax on the income of
its non-residents originating in its country, then such income is said to
be subject to double taxation.
In order to counteract double taxation, India has entered into DTAA

M
with several countries so that Indian business owner’s income can be

protected from being double taxed.
This chapter discusses the concept of international taxation, concept

of double taxation and implications of Section 195 of the Income Tax
N
Act.
CONCEPT OF INTERNATIONAL
12.2
TAXATION
The system of taxation varies from country to country. These systems
are applicable to the persons or the business entity residing in that
country. However, when income is earned or remitted from any oth-
er country to another country, the concept of international taxation
comes into purview.
International taxation involves rules with respect to the taxation of an

entity which operates in more than one country.
International taxation is an important aspect of financial decision mak-

ing for an individual or an organisation operating in an international
environment. Every country has its own policies and rules regarding
taxation on the income of an individual or an organisation. Therefore,
whenever an individual or an organisation decides to conduct trade

n o t e s
in different countries, he should be aware of taxation policies of the

concerned countries.
12.2.1 OBJECTIVES OF INTERNATIONAL TAXATION
The objectives of international taxation are as follows:

To avoid double taxation: International taxation aims to avoid
double taxation on the assessee.
To prevent tax evasion: Due to variations in tax laws between two
countries, some companies may try to avoid taxes from both the
countries. International taxation aims to prevent such malicious
evasion of tax.
To allocate tax jurisdiction: International taxation aims to help
in finding out the jurisdiction area for the assessee where he has
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to pay tax and be assessed. For example, if the rules of interna-
tional taxation allow a country to tax an individual in which he
has earned the income, then the assessee shall be assessed in that
IM
country only and will pay tax to that country only.
To exchange information: International taxation aims to promote
exchange taxation information relating to assesses between the
concerned countries. It also helps in gathering knowledge about
illegal activities conducted by the assessees, if any.
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12.2.2 CENTRAL PRINCIPLES OF INTERNATIONAL

TAXATION
Some of the central principles of international taxation are as follows:

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Jurisdictional rights: It states that no country can force any other

country or restrict the other country in levying the taxes or to fol-
low the principles of the taxation laws on the assessee of their own
jurisdiction.
All the countries have to follow international laws so that double
taxation can be avoided and for applying those rules on their as-
sessees.
Source versus residency — Principle of Taxation Rights: The
source country for an individual is the country in which he earns
the income. The residency country is the country in which the
assessee resides. The central principles of international taxation
make rules in the international market to clear the jurisdictional
rights of the assessee. These principles state which country should
tax an individual according to the decided jurisdiction.
1. _______________taxation involves rules with respect to the

taxation of an entity operating in more than one country.

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2. International taxation aims to avoid double taxation on the

assessee. (True/False)
3. ____________________ state that no country can force any
other country or restrict the other country in levying the taxes
or to follow the principles of the taxation laws on the assessee
of their own jurisdiction.
4. The source country for an individual is that country in which
he earns the income. (True/False)
5. List two objectives of international taxation.
6. International taxation aims to promote exchange taxation
information and helps in gathering knowledge about illegal
activities conducted by the assessees. (True/False)
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Activity
Using various resources, study the concept of international taxa-

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tion with respect to India and prepare a report.
12.3 DOUBLE TAXATION

In the present era of world economy, a country should consider the ef-
fect of taxation on its business, trade and commerce. Double taxation
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occurs because companies are considered to be separate entities from

their employees. Double taxation arises from two rules, namely:
Source rule
Residence rule
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The source rule states that the income has to be taxed in the country
in which it is generated irrespective of whether the person is residing
in the source country or in any other country.
The residence rule states that the income has to be taxed in the coun-
try in which the individual resides irrespective of whether the income
is earned in the same country or not.
12.3.1 RELIEF FROM DOUBLE TAXATION
There are two ways in which relief can be granted from double
taxation.
BILATERAL RELIEF
Under this method, a double taxation avoidance agreement is estab-

lished between two countries in order to avoid double taxation on the
generation of income of the individual. India has entered into DTAA
with 88 countries out of which 85 have been already enforced. The re-

n o t e s
lief under the bilateral method is provided under two methods:

It is agreed between the countries involved that the income will be
taxed only by one of the countries The other country will not tax
the income of the assessee.
Both the countries will tax the income as per their taxation rules,
but the tax paid by the assessee in one country can be claimed as a
input in relief while paying the tax in the other country.
UNILATERAL RELIEF
Under this method, relief is provided by the home country in the cas-
es where there is no bilateral agreement with the other country. In
this case, the residency country does not charge taxes on the income
earned in the other country.
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Section 90 and section 91 of the Income Tax Act covers the relief for
the double taxation of the income between the countries. Section 90
of the Income Tax Act covers the bilateral relief agreement between
various countries. The section provides that the Central Government
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can enter into an agreement with any other country or countries of the
world in order to:
Grant relief with respect to the income which has been earned in
some other country and has been taxed in that particular country
as well as in India
M
Grant relief from tax laws and provisions so as to promote the eco-
nomic relations through trade and commerce with other countries
Avoid double taxation on the income
Section 91 of the Income Tax Act covers the provision of unilateral

N
agreements in which no agreement has been established between two

countries. In case no agreement exists between the countries, relief
would be provided by the country on the fulfilment of the following
conditions:
The assessee who is under the tax jurisdiction must be a resident
in India during the previous years in which the income has been
earned.
The income should have been earned by him outside India.
The income is not deemed to be earned by the assessee in India.
The assessee has paid taxes on the income earned in the
foreign country as per the rules of taxation of that country.
No DTAA has been established between India and that country in
which the assessee has earned the income.
If all the above conditions have been fulfilled by the assessee who has
earned the income and wants a tax relief in India, then such person is
entitled to have the tax relief under the Act.

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12.3.2 DOUBLE TAXATION AVOIDANCE AGREEMENT

(DTAA)
It refers to a bilateral agreement to avoid or eliminate double taxation

on the income in two countries. It is also known as tax treaty.
DOCUMENTS REQUIRED FOR CLAIMING RELIEF UNDER DTAA
A non-resident Indian (NRI) can claim the benefit of DTAA on pro-

ducing the following documents:
Tax Residency Certificate (TRC)
PAN card copy duly self-attested
Self-declaration cum indemnity form
Passport and Visa copy duly attested
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CONCEPT OF PERMANENT ESTABLISHMENT
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In order to determine the jurisdiction and the taxability of an asses-
see, the concept of permanent establishment (PE) must be known. As
per article 5 of the DTAA, permanent establishment means any fixed
place of business in India through which any foreign company is oper-
ating its business wholly or partially. PE includes:
A place of management
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A branch office
A factory
A workshop
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A sales outlet
FEATURES OF PERMANENT ESTABLISHMENT
The features of permanent establishment are as follows:

Permanent establishment is a fixed place anywhere in India from
where business can be conducted exclusively or partially.
PE is handled by the clauses of the DTAA and every DTAA has a
clause for the PE in India.
An NRI will not be taxed in India until he/she has a permanent
establishment in India.
7. Double taxation occurs because companies are considered to

be separate entities from their employees. (True/False)
8. The _______ rule of double taxation states that the income has
to be taxed in the country in which it is generated.

n o t e s
9. __________ of the Income Tax Act covers the bilateral relief

agreement between various countries.
10. Section 90 covers the provision of unilateral agreements in
which no agreement has been established between the two
countries. (True/False)
11. The basic objective of the DTAA is to provide relief from
________________ to the assessee who earns income from one
country and is a resident in another country.
Activity
Using the Internet, study how double taxation relief is provided in

countries other than India. Prepare a report on it.
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12.4 IMPLICATION OF SECTION 195
According to section 195 of the Income Tax Act, 1961, any person re-
IM
sponsible for the payment of interest to a non-resident or foreign com-
pany or any other taxable amount in India, not being salaries, shall
deduct tax at the rates in force at the time of payment.
Tax shall be deducted at the time of payment of income or at the time

of its credit to the account of the NRI, whichever is earlier. However,
M
when interest is to be paid within the meaning of clause 23D of section

10 to the Government or a public sector bank or a public financial in-
stitution, thereby, deduction of tax would be made only at the time of
payment either in cash or by cheque or by draft.
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LIABILITY FOR DEDUCTION
Any individual, who is paying taxable income to an NRI, is liable for

deducting the tax. If the payer is a company, then the company itself is
liable to recover tax and pay it to the central government. In any other
case also, the payer has to deduct the tax from the income to be re-
mitted to the non-resident and to pay the same to the tax department.
NO DEDUCTION IN CERTAIN CASES
In the following cases, no tax shall be deducted u/s 195:

No deduction has to be made if the income does not involve any
credit of the payment.
Section 172 of the Income Tax Act is applicable, wherein it con-
cerns the levy or recovery of tax in the case of any ship that be-
longs to a non-resident and is carrying passengers, livestock, mail
or goods to a port in India, then section 195 does not apply.

n o t e s
No deduction shall be made in case tax on income of the Foreign

Institutional Investors (FII) arising from transfer of securities or
capital gains under the section 115AD.
REQUIREMENT OF 15CA AND 15CB FOR THE REMITTANCE OF

PAYMENT TO A NON-RESIDENT
Any person should fill the Form 15CA and 15CB before making pay-
ments to any non-resident individual. Figure 12.1 shows the proce-
dure for Furnishing Form 15CA:
Remitter
Obtains the certificate of account (From 15CB).
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This form is available at the website
www.tin-nsdl.com
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Accesses the above
website
Electronically uploads the remittance

details in form 15CA
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Takes the printout of filled undertaking

from (15CA) with the system-generated
acknowledgment number.
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Printout of the undertaking from

(15CA) is signed)
Submits the signed paper

undertaking from to the
RBI/Authorised dealer along with the
certificate of an accountant in duplicate.
RBI/Authorised dealer remits the

amount
A copy of undertaking (From 15CA)

& certificate of Accountant (From 15CB)
forwarder to the Assessing Officer
Figure 12.1: Procedure for Furnishing Form 15CA

(Source: http://www.charteredclub.com/wp-content/uploads/2012/04/Form-15CA.png)

n o t e s
The form 15CB is a certificate for making remittance payment, issued

by a chartered accountant that certifies details of the payment along
with TDS rate and TDS deduction according to section 195 of the In-
come Tax Act before uploading Form 15CA. Generally, bankers in In-
dia are responsible for making payments to non-residents and they
require Form 15CA and 15CB before effecting such payments.
PROCEDURE FOR MAKING PAYMENT
The procedure for making payment is described as follows:

1. The person responsible for making a payment has to obtain a
certificate in Form 15CB from a certified chartered accountant.
2. He has to furnish information with respect to payment in Form
15CA.
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3. Form 15CA has to be uploaded electronically to the income tax
website.
4. A printout of the uploaded form needs to be taken out by
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an NRI for signature and submission to the bank to get the
acknowledgement generated. An acknowledgment is generated
on the website which has to be deposited to the bank along with
the certificate of the chartered accountant.
5. The bank will remit the amount to the payee.
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GUIDELINES FOR FURNISHING FORM 15CA
The guidelines for furnishing Form 15 CA are as follows:

The income tax PAN and the TAN must be written in the form.
N
TAN is to be quoted only when:

Tax has been deducted by the person responsible for paying
the payment.
The payer has obtained an order of payment under section 195
(2) of the Income Tax Act from the assessing officer.
In case the PAN and the TAN quoted are wrong, the form will not
be generated and the correction needs to be made in the form.
No value shall be fed in the ward number and area code. It will be
self-generated by the department site.
12. Any individual, who is paying taxable income to an NRI, is

liable for deducting the tax. (True/False)
13. The form _________ is a certificate which is issued by a
chartered accountant to the person making the remittance
payment.

n o t e s
14. The person responsible for making a payment has to obtain a

certificate in Form 15CB from a certified chartered accountant.
After this, the individual has to furnish information with
respect to payment in the form ______.
Activity
Using the Internet, identify and list drawbacks of section 195 of In-
come Tax Act.
12.5 SUMMARY
International taxation is the study of tax laws applicable on in-
dividuals or business enterprises subject to tax laws of different
S
countries.
The objectives of international taxation are to avoid double taxa-
tion, prevent tax evasion, allocate tax jurisdiction and exchange
information.
IM
The central principles of international taxation are jurisdictional
rights and source versus residency, i.e. principle of taxation rights.
Double taxation refers to a principle of taxation wherein income
taxes are paid twice on the same source of earned income.
Double taxation arises from two rules – source rule and residence
M
rule.
There are two means in which the relief can be granted from dou-
ble taxation. These are termed as bilateral relief and unilateral re-
lief.
N
Under the bilateral relief, a double taxation avoidance agreement

is established between the countries.
Under unilateral relief method, relief would be provided by the
home country in the cases where there is no bilateral agreement.
DTAA refers to a bilateral agreement, according to which, they
have decided whether to avoid or eliminate double taxation on the
same income in two countries.
According to section 195 of the Income Tax Act, 1961, any person
responsible for paying to a non-resident or foreign company any
interest or any other taxable amount in India, not being salaries,
shall at the time of payment, deduct tax at the rates in force.
Any individual who is paying any income, which is subject to tax,
to a non-resident, is liable for deduction of tax.
15CA and 15CB are the forms that are required to be filed, before
making payments to any NRI, by the person who is making the
payment.

n o t e s
key words
Bilateral relief: Under this method, a double taxation avoid-

ance agreement is established between two countries in order
to avoid double taxation on the generation of income of the in-
dividual.
Double taxation: It refers to a principle of taxation wherein
income taxes are paid twice on the same source of the earned
income.
Double Taxation Avoidance Agreement (DTAA): It refers to a
bilateral agreement between two countries according to which
they have decided whether to avoid or eliminate double taxa-
tion on the same income in two countries.
S
International taxation: It is the study of those tax laws that are
applicable on individuals or business enterprises subject to the
laws of different other countries.
Unilateral relief: Under this method, relief has been provided
IM
by the home country in case where there is no agreement en-
tered by that country with the other country.

1. Explain the concept of international taxation.
M
2. List the objectives of international taxation.

3. Discuss the concept of double taxation and double taxation relief.
4. Describe Double Taxation Avoidance Agreement (DTAA) in
N
detail.
5. Discuss the implication of section 195 of Income Tax Act.
6. Explain the central principles of international taxation.
Topic Q. No. Answers

Concept of International 1. International
Taxation
2. True
3. Jurisdictional rights
4. True
5. To avoid double taxation; To
allocate tax jurisdiction

n o t e s
Topic Q. No. Answers

6. True
Double Taxation 7. True
8. Source
9. Section 90
10. False
11. Double taxation
Implication of Section 195 12. True
13. 15 CB
14. 15CA
S
1. International taxation is the study of those tax laws which are
applicable on individuals or business enterprises subject to tax
laws of different countries. Refer to Section 12.2 Concept of
International Taxation.
IM
2. The objectives of international taxation are avoid double taxation,
prevent tax evasion, allocate tax jurisdiction, and exchange of
information. Refer to Section 12.2 Concept of International
Taxation.
3. Double taxation refers to a principle of taxation wherein income
M
taxes are paid twice on the same source of the earned income.
Refer to Section 12.3 Double Taxation.
4. Double Taxation Avoidance Agreement (DTAA) refers to a
bilateral agreement between two countries according to which
they have decided whether to avoid or eliminate double taxation
N
on the same income in two countries. Refer to Section 12.3

Double Taxation.
5. According to section 195 of the Income Tax Act, 1961 any person
responsible for paying to a non-resident or foreign company any
interest or any other sum chargeable to income-tax in India, not
being salaries, shall at the time of payment, deduct tax at the
rates in force. Refer to Section 12.4 Implication of Section 195.
6. Some of the central principles of international taxation include:
Jurisdictional Rights and Source versus Residency – Principle of
Taxation Rights. Refer to Section 12.2 Concept of International
Taxation.
12.8 SUGGESTED READING FOR REFERENCE
SUGGESTED READINGS
Mishra, M. (1999). Freedom of Trade and Commerce and Taxation
in India. Mohan Garden, New Delhi: Mittal Publications.

n o t e s
Isenbergh, J. (2005). International Taxation. Foundation Press.

Lymer, A. and Hasseldine, J. (2002). The International Taxation
System. Springer Science+Business Idea, New York.
E-REFERENCES
International Taxation. Retrieved from http://www.incometaxin-
dia.gov.in/pages/international-taxation.aspx.
Basic aspects of international Taxation and DTAA. Retrieved from
http://taxguru.in/income-tax/basic-aspects-international-taxa-
tion-dtaa.html.
Agarwal, R. (2013). What is Double Taxation Avoidance Agree-
ment (DTAA)?. goodreturns.in. Retrieved 30 April 2016, from
http://www.goodreturns.in/classroom/2013/07/what-is-double-tax-
S
ation-avoidance-agreementdtaa-193501.html
Double Taxation System in India. (2016). Business.mapsofindia.
com. Retrieved 30 April 2016, from http://business.mapsofindia.
IM
com/india-tax/double-taxation-india.html
M
N

Ch
13 a pt e r
CASE STUDIES
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CONTENTS
Case Study 1 The Advent of GST

Case Study 2 Determination of Residential Status of an HUF
IM
Case Study 3 Determining Taxable Income and Taxable Salary of Mr. Marwah
Case Study 4 Tax Issues Related to Income From House Property
Case Study 5 Determining Taxable Income of ABC Ltd.
Case Study 6 Capital Gains of JPS Manufacturers
Case Study 7 ITR Form-1 (SAHAJ) for Salaried Individuals
Case Study 8 Deductions in Income
M
Case Study 9 Tax Applicable on Family Pension

Case Study 10 Computation of Total Income for Mr. Prabhu
Case Study 11 Excise Duty Default by Fiat India
Case Study 12 International Taxation at Arpa Corporation
N

Case study 1
n o t e s
THE ADVENT OF GST IN INDIA
This Case Study discusses the Goods and Service Tax (GST) the new
Indirect Tax regime in India. It is with respect to Chapter 1 of the
book.
Tax is a good source of revenue for the Indian Government. Indi-

rect tax was levied in the form of octroi, central sales tax, state-lev-
el sales tax, excise duty, service tax and Value-Added Tax (VAT).
There were always debates about the abolition of indirect taxes
in India.
In 2016, Girish Vanvari, former Co-head of Tax, KPMG India said

that tax abolition may reduce corruption and collusion with gov-
ernment agencies. It may remove the tax burden from individuals
S
as well as corporate taxpayers. The taxpayers will also not indulge
into practices like falsification of accounts, money laundering and
other illegal ways of tax evasion.
IM
However, it was argued that from the revenue-generation per-
spective, abolishing indirect tax would be against the system of
revenue collection. There are various suggestions for implement-
ing alternatives for indirect taxes. The major alternative has been
applied in India is the implementation of Goods and Service Tax
(GST). GST has replaced almost all indirect taxes levied on goods
M
and services.
Based on the input tax credit method, GST is imposed and collect-
ed at each stage of the sale or purchase of goods or services. Tax-
able goods and services are taxed at a single rate in a supply chain
N
till they reach the consumer. In this way, the consumer bears the
GST charged by the last supplier in the supply chain. The major
aim of implementing GST is to facilitate a common national mar-
ket where taxable goods and services are not distinguished from
one another and are taxed at the common rate. GST simplifies
the overall tax structure in India leading to easier administration
and enforcement of indirect taxes. It also helps the consumer by
reducing the overall tax burden.
In 2016, a report by the National Council of Applied Economic

Research stated that GST would increase economic growth by be-
tween 0.9 per cent and 1.7 per cent. Exports would increase between
3.2 per cent and 6.3 per cent, while imports would rise by 2.4-4.7 per
cent.
According to Rahul Bajaj, Chairman of the Bajaj Group stated

that GST is the most important reform for India, whether it is for
our group, for India generally, or for most businesses, will be the
goods and services tax. It will add about two percentage points ...

Case study 1: THE ADVENT OF GST IN INDIA 425
Case study 1
n o t e s
to India’s GDP growth. Implementation of GST will prove to be a

milestone in the economic reform process of India. It will be con-
sidered as the modern replacement of the existing tax laws.
Before the implementation of GST, it was expected that it would

help in promoting employment, facilitating investment and spur-
ring the country’s growth after a brief period of slowdown.
Prior to budget 2018, the government was highly concerned re-

garding the collection of tax after the implementation of GST
during the past year (2017). It was measured that for the period
of July-December 2017, GST collections fell steadily which led to
widening of fiscal deficit.
Let us now evaluate the performance of GST as on January 2018:
S
GST tax compliance stood at 64%
Difficult and rough transition to GST
Better
IM
technological preparedness forwords the adoption of
the new tax system
Over 5,000 cases of GST cheating and tax evasion are under
investigation
questions
M
1. Why is abolition of tax in India not feasible?

(Hint: Abolishing indirect tax would be against the system
of revenue collection, therefore abolition of tax in India is
not feasible.)
N
2. Explain how the GST implementation would help Indian

economy?
(Hint: It was expected that GST would help in promoting
employment, facilitating investment and spurring the
country’s growth.)

Case study 2
n o t e s
Determination of Residential Status of an HUF
This Case Study discusses the concept of residential status of an

HUF. This is with respect to Chapter 2 of the book.
Mr. X opened up a business in the form of HUF for providing fi-

nancial services in year 2010. Since then the HUF was being part-
ly controlled from India. During the previous year 2016-2017, X
and Sons HUF was also partly controlled from India by its Karta
X, who is the citizen of India.
Initially, the business was not doing well. X has been regularly vis-
iting India to manage the business in a better way. X has been vis-
iting India for 50 days every year from 2001 to 2006. The business
reached at break-even in 2006. To make it profitable, he decided
S
to stay in India for some more days. And since 2006, he started to
stay in India for 100 days in each year. Gradually, business start-
ed facing cut-throat competition as more players emerged in the
IM
industry.
To face competition, it was further decided that two sons of Mr. X

would also make frequent business trips to India. The elder son
of Mr. X has been visiting India for 50 days every year for the last
10 years and the younger son of Mr. X has been visiting India for
80 days every year.
M
The elder son of Mr. X was performing decently and he started

taking important decisions of the HUF under the mentorship of
his father.
N
questions
1. What is the residential status of the HUF in the previous

year 2015-2016?
(Hint: The HUF would be resident but not ordinary
resident.)
2. What would be the residential status of the HUF if Mr. X
has been visiting India for the last 12 years? During the
immediately preceding 4 previous years, he was in India
for 50 days every year and for 200 days every year prior to
that.
(Hint: The HUF would have been an ordinary resident.)

Case study 3
n o t e s
DETERMINING TAXABLE INCOME AND TAXABLE

SALARY OF MR. MARWAH
This Case Study discusses taxable income and taxable salary of Mr.
Marwah. It is with respect to Chapter 3 of the book.
Mr. Marwah works as a relationship manager in a co-operative

bank in New Delhi. His basic salary for the previous year was
`6,750 per month. Apart from this, he gets a dearness allowance
of `500 per month (30% of which forms part of the salary for the
computation of retirement benefit). He also receives `700 per
month as a bonus and `200 per month as Medical Allowance. His
employer contributes `11286 per annum to a Recognised Provi-
dent Fund (RPF). He also borrowed a home loan of `95000 for 8
years from SBI at an annual interest rate of 10.75%. Besides, he
S
receives `12,47,660 per annum as interest on deposits from ABC
Private Limited.
The calculation of his salary is given as follows:

IM
Basic + DA (for retirement benefit only, i.e. 30% of DA) =
`6,750 + (30% × `500) = `6,900 per month
For a year, 6,900 × 12 = `82,800 (This is the Annual Salary for
RPF calculation.)
Employer’s contribution cannot exceed 12% of the salary.
M
Therefore, it will be 12% of `82,800 = `9,936 per annum.

In this case, RPF contribution by the employer exceeds the
minimum by `1350 [11286 – 9936]
N
Employee’s contribution to the RPF is considered as a saving.

Therefore, `11286 per annum contributed by Mr. Marwah is
saved for the future.
(This is considered as saving along with other savings under
Section 80C.)
Total of all savings under Section 80C cannot exceed `1,50,000.
Hence, taxable income and tax liability of Mr. Marwah for the as-
sessment year 2018–19 will be as follows:
Computation of Taxable Income of Mr. Marwah for the

Assessment Year 2018–19 (`)
Basic Salary (` 6,750 × 12) ` 81,000
Dearness Allowance (` 500 × 12) ` 6,000
Bonus (` 700 × 12) ` 8,400
Medical Allowance (Fixed) (` 200 × 12) ` 2,400

Case study 3
n o t e s
Computation of Taxable Income of Mr. Marwah for the

Assessment Year 2018–19 (`)
Excess of contribution to RPF by Employer ` 1,350
Interest on SBI home loan (` 95000 × 10.75%) ` 10,213

NET SALARY ` 1,09,363
Add: Income from other sources ` 12,47,660
TOTAL INCOME ` 13, 57,660

Less: Deduction under Section 80C ` 11,286
TAXABLE SALARY ` 13,46,374
Rounding off to the closest multiple of ` 10 ` 13,46,370
S
Tax slabs for the Assessment Year 2018–19 for individuals below
60 years of age is as follows:
IM
Table: Income Tax Applicable for
Individuals (resident or non-resident)
Aged Below 60 Years/ HUF/AOP/BOI/AJP for
Assessment Year 2018-19
S. Tax Slab/Taxable Tax Rate
No. Income
M
1. Upto `2,50,000 Nil

2. `2,50,000 to 5% of the amount by which the total
`5,00,000 income exceeds
`2,50,000;
N
3. `5,00,000 to `12,500 plus 20% of the amount

`10,00,000 by which the total income exceeds
`5,00,000;
4. `10,00,000 and `1,12,500 plus 30 % of the amount
above by which the total income exceeds
`10,00,000.
Less: Rebate as per Sec- The rebate is available to a resident
tion 87(A) individual if his total income does not
exceed `3,50,000. The amount of rebate
shall be 100% of income-tax or `2,500,
whichever is less.
Add: Surcharge 10% of Income Tax, where the total in-
come exceeds `50 lakhs upto `1 crore.
15% of the Income Tax, where the total
Surcharge amount of 10% or 15% as
applicable, shall not exceed the amount
of income that exceeds `50 lakhs or `1
crore, as applicable.

Case study 3: DETERMINING TAXABLE INCOME AND TAXABLE SALARY OF MR. MARWAH 429
Case study 3
n o t e s
S. Tax Slab/Taxable Tax Rate

No. Income
Health Cess
questions
1. Explain the definition and components of salary as per

the Income Tax Act.
(Hint: Some components of salary include wages, annuity
or pension, gratuity, fees, commission, perquisites
or profits in lieu of salary, advance of salary, leave
encashment, etc.)
S
2. Calculate the Tax Liability on Mr. Marwah’s taxable
income.
(Hint: Tax Liability on Mr. Marwah’s taxable income can
IM
be computed as follows:
Net Taxable Income = `13,46,370
Income exceeds `10,00,000 by `3,46,370
30% of `3,46,370 = `1,03,911
Therefore, tax liability = ` 1,03,911 + ` 1,12,500 = `2,16,411
M
Surcharge = NIL
Education cess at 3% of `2,16,411= `6,492.33
Adding education cess to tax liability = `2,16,411+
N
`6,492.33 = `2,22,903.33
Rounding off to the closest multiple of `10 = `2,22,900
Thus, tax liability on Mr. Marwah for the Assessment Year
2018–19 is `2,22,900)

Case study 4
n o t e s
TAX ISSUES RELATED TO INCOME FROM

HOUSE PROPERTY
This Case Study discusses the tax issues related to income from
house property of an assessee Swapnil. It is with respect to Chapter
4 of the book.
Mr. Swapnil, a Delhi-based IT professional, owns a flat in South

Delhi. He is planning to purchase another property in North Del-
hi. He is considering the following options:
Let it out on rent
Use it as a residence for himself or his family
Keep it vacant/unoccupied
S
Use it as a holiday home
Each of these alternatives has its own tax implications. Therefore,

it becomes important for Swapnil to understand tax implication
IM
for each option in accordance with the Income Tax Act, 1961 be-
fore deciding what he should do with his new property. The tax
implications for the above alternatives are as follows:
If the new property is let out on rent: In this situation, the
rent received from the property will be taxed. For example, if
Swapnil is getting a rent of `10,000 per month from his prop-
M
erty, he will have to pay tax for his annual rental income, i.e.
`1,20,000 after tax deductions including municipal taxes, stan-
dard deductions and interest (if any).
If the new property is used as a residence for his family: In
N
this situation, Swapnil will have the alternative to select any

one property for living purpose. The other property will be
deemed to be rented out and the estimated annual rent will be
considered as taxable.
If the new property remains vacant: In this case, the proper-
ty will be deemed to be rented out. The estimated annual rent
will be considered as the taxable value.
If the new property is used as a holiday home: The advan-
tage of the self-occupied home will not be applied in this case.
So, the estimated annual rent will be considered as the tax-
able value.
The following conditions also influence the chargeability of the

income of house property:
The assesse should be the owner of the house property. It also
includes deemed owner u/s 27(1).

Case study 4: TAX ISSUES RELATED TO INCOME FROM HOUSE PROPERTY 431
Case study 4
n o t e s
The property should consist of buildings and lands appurte-

nant there to.
The property should not be used by the owner for the purpose
of any business or profession carried on by him.
The following house properties are not chargeable to tax:

House property used for own business or profession carried
on by the assessee.
Rental income of a vacant plot (not appurtenant to building)
is not chargeable to tax under the head “Income from House
Property” but either under profits of business or profession or
“Income from Other Sources”.
Residential quarters built for employees by the employer.
S
Thus, it can be observed that Swapnil cannot generate income
from both the properties as he has to consider one of them as
rented or self-occupied.
IM
questions
1. List the deductions that will have to be borne by Swapnil

from the rental income of his property.
(Hint: Municipal taxes, standard deductions and interest,
M
etc.)
2. Explain the computation of income from the ‘self-occupied
property’ as per the provisions of the Income Tax Act.
N
(Hint: When the property is in the occupation of the owner

and not let-out during any part of the previous year, the
annual value will be taken as nil. When the assessee holds
more than one house as owner and uses it for residential
purpose, then only one residence value, at the owner’s
choice, will be taken as nil. Other properties or houses
will be taxable and the tax is computed as though the
property is let out.)

Case study 5
n o t e s
DETERMINING TAXABLE INCOME OF ABC LTD.
This Case Study discusses how a business calculates the tax-

able income. It is with respect to Chapter 5 of the book.
ABC Ltd. is engaged in the manufacturing of chemical goods.

The total value of the plant and machinery owned by ABC
is `55,00,000. The company’s profit and loss account for the
financial year 2017–2018 is depicted in the following table:
P&L account of ABC Ltd. for Financial Year 2017–18

Sales proceeds of goods (domestic sale) 22,23,900
S
Sales proceeds of goods (export sale) 5,76,100
Other receipts 2,00,000

Total 30,00,000
IM
Less: Expenses
Depreciation 4,16,000
Salary and Wages 2,10,000
Entertainment expenditure 15,000

M
Travelling expenditure 36,000
Income tax 3,50,000
Outstanding customs duty 17,500

N
Provision for unascertained liabilities 70,000
Proposed dividend 60,000
Loss of subsidiary company 30,000
Consultation fees paid to tax experts 21,000
Salary and perquisites of manager and director 1,80,000
Total Expenses 14,05,500

Net Profit 15,94,500
For tax purposes, the company has to claim the following:
Deduction under Section 80HHC (in respect of profits retained

for export business) = `2,40,812
Excise Duty pertaining to 2014–2015 paid during 2017–2018
(amount actually paid = `75,500)

Case study 5: DETERMINING TAXABLE INCOME OF ABC LTD. 433
Case study 5
n o t e s
note
Deduction under Section 80HHC (Foreign Exchange Remit-

tance): Under the provisions of Section 80HHC of the Income
Tax Act 1961, 100 per cent deduction is allowed to exporters in
respect of profits derived from export of goods or merchandise.
As a measure to provide incentives to supporting manufacturers,
selling goods or merchandise to an Export House/Trading House
for export, the benefit of deduction under Section 80HHC was
extended with effect from 1.4.1989 to such supporting manufac-
turers.
The company wants to set off the following losses/allowanc-

es, as shown in the following table:
S
Particulars For Tax For Accounting
Purposes (in `) Purposes (in `)
IM
Brought forward loss of 2016-17 11,80,000 9,10,000
Unabsorbed depreciation profit 2,45,000
under Section 115JB
Net Profit and Loss 15,86,500
Add:
Income tax 3,50,000
M
Provision for unascertained 70,000

Liability
Loss of subsidiary company 30,000
Proposed dividend 60,000 5,10,000
N
20,96,500
Less:
Amount of deduction under 2,40,812
Section 80HHC 2,45,000 4,85,812
16,10,688
Computation of Taxable Income 15,86,500
Net profit as per profit
And loss account
Add :
Income tax 3,50,000
Outstanding custom duty 17,500
Provisions for unascertained 70,000
Liability
Proposed dividend 60,000
Loss of subsidiary company 30,000 5,27,500
21,14,000

Case study 5
n o t e s
Particulars For Tax For Accounting

Purposes (in `) Purposes (in `)
Less: 1,20,000 1,95,500
Depreciation 75,500
Excise duty of 2012-2013
Balance 19,18,500
Less:
Brought forward business loss 11,80,000
Less: Deductions
Under Section 80HHC 2,40,812
Net Income (round off) (Book 5,05,688
S
Profit)
Computation of tax liability net 1,76,990
income
IM
Computation of tax under normal 3,540
provisions
Tax on net income (35% of 1,80,530
Rs.5,05,688)
Surcharge (2% of Rs.1,76,990) 2,18,456
Tax liability 4,369
M
Computation of tax under Section 2,22,825

115JB
7.5% of book profit
Surcharge
Tax liability
N
Tax payable as computed under normal provisions is lower

than the amount determined as tax payable under Section
115JB. Therefore, Section 115JB is applicable.
questions
1. Discuss the process of computation of taxation in ABC

Ltd.
(Hint: Calculation of profit and loss followed by the
calculation of taxable income.)
2. What are the methods for calculating depreciation as per
the Income-tax Act, 1961?
(Hint: Written Down Value (WDV) method and Straight
Line (SL) method.)

Case study 6
n o t e s
CAPITAL GAINS OF JPS MANUFACTURERS
This Case Study discusses the capital gains of an organisation. It is

with respect to Chapter 6 of the book.
Mr. Ishaan is the owner of a factory named JPS Manufacturers Ltd.

The factory is located in an urban area and is engaged in the man-
ufacturing of spare parts of automobiles. The factory was earning
good revenues in its initial years. However, the main drawback
of the factory was that it was located near the residential area,
which created the problem of pollution in that area. Apart from
this, the development of various industrial hubs led several facto-
ries to relocate to that area. With increased market concentration
in the area, JPS Manufacturers started facing difficulty in procur-
S
ing raw material. Thus, Mr. Ishaan planned to shift the factory to
a rural area. However, it was difficult to shift machines to such a
rural location. In addition, some machines were depreciated and
were driven by old technologies. Thus, it was decided to sell off
IM
machines. The land and building were also sold. The details are
given in the following table:
Asset Plant and Land Building

Machinery
Acquired in 1988 1984-1985 1986
M
Sale proceeds (`) 15,00,000 9,50,000 13,00,000

Written Down Value 5,00,000 7,32,500
(WDV) on 01-04-2014 (`)
Cost of acquisition 7,50,000 1,60,000 10,00,000
N
Amount invested on 30-06- 6,00,000 2,15,000 4,00,000

2015 due to shifting (`)
Mr. Ishaan calculated taxable capital gains of land and building

as follows:
Asset Land Building

Sale proceeds (`) 9,50,000 13,00,000
Less: Written Down 7,32,500
Value (WDV)
Indexed cost of ac- 13,10,720
quisition (as per the
given index) (160000 *
1024/125) (`)
Long-term capital Short-term capital
gain = ` 3,60,720 gain = ` 5,67,500

Case study 6
n o t e s
Indexed cost of acquisition is calculated by taking the help of the

following table:
Financial Year Cost of Inflation Index (CII)
1981 - 82 100
1982 - 83 109
1983 - 84 116
1984 - 85 125
1985 - 86 133
1986 - 87 140
1987 - 88 150
1988 - 89 161
1989 - 90 172
S
1990 - 91 182
1991 - 92 199
1992 - 93 223
IM
1993 - 94 244
1994 - 95 259
1995 - 96 281
1996 - 97 305
1997 - 98 331
M
1998 - 99 351
1999 - 00 389
2000 - 01 406
2001 - 02 426
N
2002 - 03 447
2003 - 04 463
2004 - 05 480
2005 - 06 497
2006 - 07 519
2007 - 08 551
2008 - 09 582
2009 - 10 632
2010 - 11 711
2011 - 12 785
2012 - 13 852
2013 - 14 939
2014-15 1024

Case study 6: CAPITAL GAINS OF JPS MANUFACTURERS 437
Case study 6
n o t e s
questions
1. Compute the capital gain on plant and machinery. Also,

determine whether it is long-term capital gain or short-
term capital gain.
(Hint: It will be short-term capital gain amounting to
` 10,00,000.)
2. Explain the concepts of long-term capital gain and short-
term capital gain.
(Hint: A long-term asset is one that is held for more than
36 months. However, from FY 2017-18, this criterion
has been revised to 24 months in the case of immovable
S
property such as land, building, and house property.
Capital assets are considered to be short-term in case
they are held for a period less than 36 months from the
date of transfer.)
IM
M
N

Case study 7
n o t e s
ITR FORM-1 (SAHAJ) FOR SALARIED INDIVIDUALS
This Case Study discusses differences between the previous Income

Tax Return form and the new Income Tax Return form, FORM-1
(SAHAJ). It is with respect to Chapter 7 of the book.
In April 2011, the Central Board of Direct Taxes (CBDT) has noti-
fied a new income tax return form (ITR) for assessment year (AY)
2018–19. Amendments have been made in ITR Form -1 (Sahaj).
Previously, salaried individuals had to fill-in only the details of

income from salary. However, with the new ITR Form 1 (SAHAJ),
now salaried individuals would require filling-in a detailed break-
up of income from each source.
S
The earlier ITR Form -1 (Sahaj) notified by the IT department for
A.Y. 2017-18 was a single page form used by individuals with an
annual income up to `50 lakh where the primary source of income
is salary or pension. Apart from this, individuals were required
IM
to provide details of income from one house property and other
income like interest from bank deposits. This previous version of
Sahaj form required filling-in of only details such as income from
salary or pension along with income from one house property and
other incomes. The newly notified Sahaj form requires a break-up
of income from each source.
M
In the new form, income from salary head has been divided into
six columns. first column requires details regarding the amount
of salary received, excluding all allowances, perquisites and profit
in lieu of salary. The second column requires providing details of
N
allowances not exempt from tax. The third column requires pro-
viding details of perquisites such as accommodation, car or driver
provided by the employer. The fourth column requires filling in
the amount related to profit in lieu of salary. The fifth column re-
quires filling-in deductions claimed under section 16 of the Act.
Deductions include standard deduction, professional tax and en-
tertainment allowance. The sixth column contains the amount
that is summed up from five columns.
In the new form, you will need to mention whether you own a
house or not and whether the property you own is self-occupied
or is let-out. A break-up of gross rent received from property must
be provided in the first column if the property was let-out. Tax
paid to local authorities must be mentioned in the second col-
umn. The annual value of property must be filled in the third col-
umn. In the fourth column, standard deduction of 30% of annual
value should be mentioned. In the fifth column, interest paid on
borrowed capital (home loan) should be mentioned. In the sixth
column, the annual value after reducing the amount of standard

Case study 7: ITR FORM-1 (SAHAJ) FOR SALARIED INDIVIDUALS 439
Case study 7
n o t e s
deduction and interest on home loan from it (Income chargeable

under the head ‘House Property) must be mentioned.
Income from other sources such as interest earned from bank de-
posits must be mentioned in the new form. Here, it is important
to note that income of up to `10,000 from bank accounts is ex-
empt from tax under section 80TTA. Therefore, it advised that
a salaried assessee declares the interest earned and claims the
exemption. For example, if Mr. A gets an income of `50,000 as rent
by letting a building, where such letting is inseparable and is not
taxable under the head ‘Profits and Gains of Business or Profes-
sion’, it will be included under income from other taxes and Mr. A
will have to file the same in the new Sahaj form.
(Source: https://www.livemint.com/Money/Tb7yynNGtx3NPQr1Tab6LN/Decod-
ing-ITR-Form1-Sahaj-meant-for-salaried-individuals.html)
S
questions
1. Mr. Anand has an annual income of `52 lakhs. Which ITR-

IM
form should Anand use?
(Hint: ITR form – 2.)
2. Mrs. Zeenat earns an interest of `7,000 from her bank. She
has annual pension income of `3.6 lakhs. What should be
the tax treatment of bank interest received by Zeenat?
M
(Hint: Bank interest received by Zeenat will not be

included in her income. )
N

Case study 8
n o t e s
DEDUCTIONS IN INCOME
This Case Study discusses deductions allowed on an individual’s

income. It is with respect to Chapter 8 of the book.
Ravina Sharma joined a multinational company in 2017. She

needed to pay taxes for the assessment year 2018-19. As Ravina
had never paid tax earlier, she visited a tax consultant to seek
guidance on the payment of taxes. The tax consultant asked for
complete details of her income and expenditure for the previous
year. The following table shows particulars of her income and ex-
penditure for the year 2017-18:
Table: Ravina’s Income Details
S
Particulars Amount in `
Business income 1,10,000
Long-term capital gain 2,00,000
IM
Short-term capital gain on the sale of shares taxable 10,000
u/s 111A
Other short-term capital gain 5,000
Donation to the Prime Minister’s National Relief 11,000
Fund (PMNRF)
Donation to the Government of India for the promo- 3,000
M
tion of family planning

Donation to an approved institution 12,000
Payment of medical insurance premium on own life 5,000
N
note
Under the provisions of Section 111A, tax on short-term capital

gains, “in the case of equity shares in a company or units of
an equity-oriented fund on which Securities Transaction Tax
(STT) has been paid, is levied at the rate of 15% .”
As per the Income Tax Act, Tax on short-term capital gains in

certain cases:
(1) Where the total income of an assessee includes any income
chargeable under the head “Capital Gains”, arising from
the transfer of a short-term capital asset, being an equity
share in a company or a unit of an equity oriented fund
and:
(a) The transaction of sale of such equity share or unit is
entered into on or after the date on which Chapter VII
of the Finance (No. 2) Act, 2004 comes into force; and

Case study 8: DEDUCTIONS IN INCOME 441
Case study 8
n o t e s
(b) Such transaction is chargeable to securities transaction

tax under that Chapter, the tax payable by the assessee
on the total income shall be the aggregate of:
(i)
The amount of income tax calculated on such
short-term capital gains at the rate of 15 per cent;
and
(ii) The amount of income tax payable on the balance
amount of the total income as if such balance
amount were the total income of the assessee:
Provided that in the case of an individual or a Hindu
Undivided Family, being a resident, where the total income
as reduced by such short-term capital gains is below the
maximum amount which is not chargeable to income tax,
then, such short-term capital gains shall be reduced by
S
the amount by which the total income as so reduced falls
short of the maximum amount which is not chargeable to
income-tax and the tax on the balance of such short-term
IM
capital gains shall be computed at the rate of 10 per cent.
(2) Where the gross total income of an assessee includes any
short-term capital gains referred to in sub-section (1), the
deduction under Chapter VI-A shall be allowed from the
gross total income as reduced by such capital gains.
(3) Where the total income of an assessee includes any short-
M
term capital gains referred to in Sub-section (1), the

rebate under Section 88 shall be allowed from the income
tax on the total income as reduced by such capital gains.
Explanation: For the purpose of this section, the expression
“equity oriented fund” shall have the meaning assigned to
N
it in the Explanation to clause (38) of Section 10.
The taxable income of Ravina for the assessment year 2016-17

with respect to deductions allowed on her Gross Total Income has
been estimated as follows:
Table: Computation of Net Income after Deductions

Particulars Amount in `
Business Income 1,10,000
Capital gain: Long-term 2,00,000
Short-term u/s 111A 10,000
Other short-term gains 5,000
Less: Deduction u/s 80D 5,000
Less: Deduction: u/s 80G 18,000
Total Income 3,02,000

Case study 8
n o t e s
questions
1. Assume that you are the tax consultant. Compute

deductions allowed to Ravina.
(Hint: Deduction u/s 80G, deduction on donation for
family planning, deduction on other donations, and total
allowable deductions
(A) Deduction u/s 80 G is computed as under:
Donation to PMNRF fully qualifies for deduction
The rate of deduction is 100% (Charitable funds
under Section 80G) = ` 11,000
The qualifying amount of donations for family
S
planning and approved institution cannot exceed
10% of the Adjusted Gross Total Income
Adjusted Gross Total Income = ` 3,25,000
IM Less ` 2, 00,000 (Long-term capital gains)
Less ` 10,000 (Short-term capital gains)
Less ` 5,000 (Other short-term capital gains)
` 1,10,000
10 % of ` 1,10,000 = ` 11,000
M
(B) Deduction on donation for family planning on ` 3,000

at the rate of 100 per cent is ` 3,000
(C) Deduction on other donations of ` 8, 000 at the rate of
50 per cent is ` 4,000
N
Thus, total allowable deductions on Ravina’s income

under Section 80G is ` 11,000 + ` 3,000 + ` 4,000 =
`18,000
(D) Total allowable deductions on Ravina’s income under
Section 80D = ` 5,000
2. Discuss deductions that could be allowable on Ravina’s
income if her business income is drawn from a foreign
source.
(Hint: Deductions are allowed on professional income
from foreign sources in certain cases)

Case study 9
n o t e s
TAX APPLICABLE ON FAMILY PENSION
This Case Study discusses the applicability of tax on family pen-

sion. It is with respect to Chapter 9 of the book.
A retirement benefit that an employee gets after retirement is

called pension. In various cases, after the death of the employee,
such benefit is passed on to dependent family members. In such
cases, it is called family pension. In other words, family pension
is received by a dependent family member of the retired individ-
ual (after his/her death). Family pension is also considered to be,
‘income from other sources’. Dependent family members may in-
clude the following:
Spouse
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Children below the age of 25 years
Unmarried daughter
IM
Dependent parents (in certain cases)
Commuted pension received by family members is exempted

from tax. However, in the case of uncommuted pension received
by family members, a sum equal to 33.33% of such income or
`15,000, whichever is less, is exempted from tax. So, if a widow
receives a pension of `20,000 a month or `2.4 lakh a year, she can
M
claim exemption of `15,000, which is lower of `80,000 (33.33% of

`2.4 lakh) or `15,000. The remaining amount of `2.25 lakh (`2.4
lakh minus `15,000) becomes taxable, and gets taxed as per the
tax slab applicable to her. There are certain cases, like family pen-
N
sion received by family members of the armed forces, the amount

is entirely exempt from tax.
TAX DEDUCTION AT SOURCE
If pension is received through a nationalised bank, TDS provi-

sions are applicable as is the case with salary income. However,
TDS is not deducted on family pension as it does not come under
the ambit of section 192 of the Income Tax Act.
(Source: https://www.livemint.com/Money/wE4nhRE75zJ1yRZL1mYECJ/How-much-tax-
is applicable-on-pension-and-family-pension.html)
questions
1. Under which head of income is family pension categorised?

(Hint: Family pension is considered to be, ‘income from
other sources’.)

Case study 9
n o t e s
2. Mrs. Devika is a widow and receives a family pension of

`33,000 p.m. How much amount of this total amount is
exempted from being taxed?
(Hint: Exempted income is equal to the lesser of 1/3rd of
( `33,000 × 12) = `1,32,000 and `15,000; which is equal to
`15,000).
S
IM
M
N

Case study 10
n o t e s
COMPUTATION OF TOTAL INCOME FOR MR. PRABHU
This Case Study discusses the process of computation of total in-

come for Mr. Prabhu. It is with respect to chapter 10 of the book.
As per Section 14 of the Income Tax Act, 1961, all the incomes
of any assesse are divided into five heads namely: income from
salary; income from house property; profits and gains of business
or profession; income from capital gains and income from other
sources.
When the incomes under all these heads is clubbed together after
applying the clubbing provisions and making adjustments for set-
off and carry forward of losses, is known as Gross total Income
S
(GTI).
Mr. Prabhu is a resident Indian and is also a private sector employ-

ee. He works in an off-set printing unit. For A.Y. 2018-19, we are
IM
given that his basic salary plus commission amounts to `4,00,000
p.a. He earns a total of `50,000 p.a. in allowances and `30,000 p.a.
out of these are taxable. He also earns perquisites amounting to
`50,000 and 100% of these are taxable. He claims deductions of
`1,50,000 under Section 16.
In his income tax returns, he shows that the net annual value of
M
his property is `1,80,000 and he has paid `50,000 in municipal tax-

es. He has no income from any business or profession. He sold a
piece of land owned by him and his income from capital gains was
`4,00,000 for the given A.Y. His only source of income from other
sources is interest from Fixed Deposits and his bank deducts the
N
TDS on the Fixed Deposit himself. Let us now calculate the total
taxable income of Mr. Prabhu if a deduction of `10,000 is available
to him as per Chapter VI-A.
For the purpose of taxation, the total income of Mr. Prabhu for
A.Y. 2018-19 is determined as follows:
1. Determine the residential status of Mr. Prabhu so that we
can assess what income is to be included in the computation
of total income and which income is to be left out. It is given
that Mr. Prabhu is a resident Indian.
2. Computation of the total income:
Particulars Amount Amount Amount
(`) (`) (`)
A) INCOME FROM SALARIES
Salary/Bonus/Commission 4,00,000
Taxable allowances 30,000
Value of Taxable Perquisites 50,000

Case study 10
n o t e s
Particulars Amount Amount Amount

(`) (`) (`)
Less: Deductions under Section 16 1,50,000
Net Taxable Income from Salary 3,30,000
B) INCOME FROM SALARIES
Net Annual Value of House Property 1,80,000
Less: deduction under Section 24 50,000
Income from House Property 1,30,000
C) PROFITS AND GAINS OF BUSINESS OR PROFESSION
Net Profit as per P&L Account -----
Less/Add: Adjustments required to be -----
made to the profit as per provisions of
S
the Income Tax Act
Net Profits/Gains of business or pro- -----
fession
D) CAPITAL GAINS
IM
Capital gains as computed -----
Less: Exemptions -----
Income from capital Gains 4,00,000
E) INCOME FROM OTHER SOURCES
Gross income from other sources -----
M
Less: Deductions -----

Net Income from other sources -----
GROSS TOTAL INCOME (A + B + 8,60,000
C + D + E)
Less: Deductions as per chapter VIA 10,000
N
TOTAL INCOME 8,50,000
questions
1. Consider the total income of Mr. Prabhu. In what tax xlab

does he fall?
(Hint: Since the total income of Mr. Prabhu is between
`5,00,000 and `10,00,000; he falls in the second tax slab
wherein tax is calculated as: `12,500 plus 20% of the
amount by which the total income exceeds `5,00,000)
2. Mrs. Prabhu earns an yearly salary of `3,00,000 p.a. Mr.
Prabhu died during the previous year and his posthumous
income of `2,10,000 was added to her income during
the A.Y. What would be the effect of this event in Mrs.
Prabhu’s taxability?
(Hint: After the death of Mr. Prabhu, the total income of
Mrs. Prabhu would be `5,10,000 and her tax slab would
be changed from 5% to 205 catergory.)

Case study 11
n o t e s
EXCISE DUTY DEFAULT BY FIAT INDIA
This Case Study discusses the central excise duty levied on the Uno
cars manufactured by Fiat India. It is with respect to Chapter 11 of
the book.
Fiat India, a well-known name in the automobile sector, is a sub-

sidiary of Fiat Group Automobiles of Italy. The company lost al-
most a decade old battle with the excise department which had
charged ` 432 crores from the company for Uno cars sold below
the cost price between 1996 and 2001.
Fiat was importing Completely Knocked Down (CKD) kits for its
popular Uno hatchback cars and selling them in the market much
below its cost price. Between 1996 and 2001, the tax authority had
S
levied excise duty on the cost of manufacturing Uno hatchbacks
in India. The excise department stated that the company was im-
porting car kits in completely knocked down and semi-knocked
IM
down conditions. The cost of production of a single car was
` 3,80,883 for a completely knocked down case and ` 3,98,585 for
semi-knocked down case, respectively against the assessable val-
ue of `1,85,400.
The Italian car maker and its Indian joint venture partner chal-
lenged this by arguing that the selling price was lower than the
M
cost price; therefore, tax to be paid should be lower than the as-
sessed value. However, the tax authority demanded that the com-
pany sold cars at a lower price than its cost price with an aim of
penetrating into the market.
N
It was also revealed by the tax authority that the wholesale price
declared by the company is much less than the cost of produc-
tion. Therefore, the price declared by the company could not be
treated as a normal price for the purpose of the quantification of
assessable value. Therefore, excise duty had to be paid on a cost
basis and not on the sales price. The decision has provided clarity
on valuation under the central excise law, which lays down that
the central excise duty is chargeable on the manufacturing or pro-
duction of goods and not on sale.
note
After the introduction of Goods and Services Tax (GST) in 2017,

the Excise Duty of customs has been subsumed under the Cen-
tral Goods and Services Tax (CGST).

Case study 11
n o t e s
questions
1. Discuss whether the assessment procedure is justified in

the above mentioned case.
(Hint: The wholesale price declared by the company
could not be treated as a normal price for the purpose of
the quantification of assessable value. Therefore, central
excise duty must be calculated on the manufacturing of
goods.)
2. Under what conditions, the central excise duty can be
levied?
(Hint: The duty is applicable only on goods that come
under the definition of goods as specified under the
S
definition in Central Excise Act, 1944.)
IM
M
N

Case study 12
n o t e s
INTERNATIONAL TAXATION AT ARPA CORPORATION
This Case Study discusses how to reduce the burden of international

taxation. It is with respect to Chapter 12 of the book.
ARPA Corporation is a US-based company that operates manu-

facturing facilities across the globe. The company’s foreign facil-
ities were under the control of consolidated US entities, thereby
developing a flat corporate structure. In 2004, there was an in-
crease in the company’s market share with the acquisition of a
major European business line. This resulted in a substantial in-
crease in worldwide sales. The company also witnessed the gen-
eration of maximum global revenue and income from non-US
manufactured products. The company financed its acquisition of
S
European business line through third-party debt by the US enti-
ties. This resulted in the misalignment of third-party debt and in-
come. Moreover, the company has the following objectives behind
the acquisition:
IM
To source debt in the jurisdiction(s) with the largest cash flows
To eliminate the need for repatriating European earnings to

the US
To reduce overall third-party debt
M
To take advantage of low-tax income to service newly-aligned

third party debt
To manage the increased tax burden arising from its non-US
operations
N
ARPA approached BizCrux Business Solutions to seek guidance

on achieving the above objectives. BizCrux assisted the compa-
ny in developing a new structure wherein the European entity
was assigned a responsibility of manufacturing, development and
distribution in all non-US countries. This resulted in the elimina-
tion of redundant functions performed by both legacy entities and
the acquired company. BizCrux also suggested an arrangement
wherein manufacturing and R&D entities received a fee, based
on costs incurred through contract manufacturing arrangement.
This arrangement was to be supported by transfer pricing studies
between various foreign entities and in accordance with the local
law. ARPA also adopted a dividend reinvestment plan that helped
the company to use its other available cash to repay third-party
debt.
ARPA also reorganised its European operations to raise debt

without parental guarantees from the US by creating a partner-
ship under the European law. This helped the company in selling
the relevant entities to the principal European entity in exchange

Case study 12
n o t e s
for a note which created interest deduction. Consequently, the

taxable income of the principal European entity was significantly
reduced.
questions
1. Discuss the outcome of the reorganisation that took place

at ARPA.
(Hint: The new structure significantly decreased the tax
burden of the company.)
2. Discuss measures that are generally adopted by an
organisation to save itself from the burden of international
taxation.
S
(Hint: Cautious structuring and financing of investment,
careful transactions between related parties located in
different countries, etc.)
IM
M
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NMIMS Global Access - School for Continuing Education

CHAPTER NO. CHAPTER NAME PAGE NO.

3 Income from Salaries 93

5 Profits and Gains of Business or Profession 181

7 Income from Other Sources 277

8 Deductions to be Made in Computing Total Income 295

9 Exemptions & Rebates 333

10 Computation of Total Income 357

11 Indirect Taxation – Goods and Services Tax 385

12 International Taxation 409

13 Case Studies 423

NMIMS Global Access - School for Continuing Education

Taxat i o n - Dir e ct a nd In dir e ct

Residential Status: Residential Status of Different Kinds of Assessees; Residential Status of an

of Income from Salaries.

NMIMS Global Access - School for Continuing Education

International Taxation: Concept of International Taxation; Objectives of International Taxation;

NMIMS Global Access - School for Continuing Education

1.3 Types of Taxes

1.4 Terms Related to Income Tax (Sections 2 and 3)

NMIMS Global Access - School for Continuing Education

TAX PLANNING FOR SALARIED CLASS

In the first case, when a salaried employee wants to claim tax-free

is staying in a rented accommodation and submits the rent

NMIMS Global Access - School for Continuing Education

 Employee’s contribution in the employee provident fund is

Please note that insurance and mediclaim are primarily the

NMIMS Global Access - School for Continuing Education

After studying this chapter, you will be able to:

may vary. In country like Indias, this disparity is widespread. It is the

a taxation and subsidy system must be established.

Taxation in India dates back to historic times. It existed in one form or

NMIMS Global Access - School for Continuing Education

Primarily, there are two kinds of taxes imposed by the government,

1.2 Meaning and Nature of Taxes

NMIMS Global Access - School for Continuing Education

various public expenditures such as providing subsidies, carrying out

Figure 1.1 shows the hierarchy of bodies related to taxation.

Department of Central Board of

Figure 1.1: Hierarchy of Bodies Related to Taxation

On February 4, 2018, the Finance Minister Arun Jaitley in his bud-

NMIMS Global Access - School for Continuing Education

1.2.1 Vital Attributes of Tax

Vital attributes or characteristics of a tax are as follows:

As stated earlier, taxes are an instrument of social and economic poli-

country. This section comprises mainly business people and those

 Redistribution of wealth (Redistribution objective): The taxes

NMIMS Global Access - School for Continuing Education

the employment level of the particular area as well as the entire

1.2.3 What is Income Tax?

Before we understand the concept of income tax; it is important to un-

Old Tax Structure Central Tax Service Tax

State Tax Miscellaneous

Figure 1.2: Old Tax Structure of India

The new tax structure of India post introduction of GST is shown in

Indirect Tax=GST SGST (State)

Intra-state IGST (Central

Figure 1.3: New Tax Structure of India

NMIMS Global Access - School for Continuing Education

Employee’s contribution in the employee provident fund is

Redistribution of wealth (Redistribution objective): The taxes

GST focuses on destination-based consumption instead of origin-

GST seeks to regulate the unorganised sector.