Unit I – Introduction to taxation

Direct tax and Indirect tax

 Direct tax
Direct tax is paid by an individual directly to the government. A taxpayer cannot transfer this
liability to another entity or person. The Central Board of Direct Taxes (CBDT), which is
governed by the Department of Revenue, administers direct taxes in India. CBDT also contributes
to the planning stages concerning the implementation of direct taxes.
 Indirect tax
An individual pays indirect tax to the government but through an intermediary. This intermediary
then passes it on to the government. The Central Board of Indirect Taxes and Customs (CBIC) is
responsible for administering indirect taxes in India. The Department of Revenue governs the
CBIC as well.
Difference between Direct tax and Indirect tax
The fundamental categorisation of taxes is premised upon who collects the taxes from taxpayers.
An overview of direct tax and indirect tax difference is given below –
Context of
Direct tax Indirect tax
differentiation

An indirect tax is levied on goods

It is levied on the income or
Imposition of tax and services rather than on income
profit of a taxpayer.
or profits.

Taxpayers pay it directly to Taxpayers pay it to the government

Course of payment
the government. through an intermediary.

Paying entity Individuals and businesses End-consumers

Rate of tax
Based on income and profits Same for all taxpayers
payment

Transferability of
Cannot be transferred. Transferable
payment

Progressive tax, i.e., its rate

Regressive tax, i.e., its rate
Nature of tax increases with taxpayer’s
decreases with increase in income.
income.

Types of Direct Tax and Indirect Tax in India

There are several types of these taxes, which further accentuate the difference between direct tax
and indirect tax. These types are as follows –
Types of direct tax
The following are some common types of direct taxes imposed in India –
 Income tax
An individual pays an annual income tax based on their income in a particular fiscal year. Under
the ITA, the term ‘individual’ also encompasses Co-operative Societies, Trusts, HUFs or Hindu
Undivided Families, and any artificial juridical person.
 Wealth tax
Wealth tax is levied on individuals, HUFs, or companies on the value of their assets in a financial
year. It applies to a variety of asset types such as cash, shares, real estate, fixed assets, bank
deposits, pension plans, etc.
 Corporation tax
It is paid by businesses or companies that operate in India based on their earned income in a
financial year. The rate of taxation varies based on whether an enterprise is incorporated in the
country or anywhere abroad.
 Capital Gains tax
The profits generate on the property sale are taxed under the purview of Capital Gains Tax. The
term ‘property’ includes residential property, stocks, bonds, precious metals, etc.
Types of Indirect Tax
Prior to the introduction of GST in India, there existed the following types of indirect taxes –
 Sales tax
The government levied sales tax on the sale of movable goods.
 Service tax
 All service providers are required to pay this tax to the government except those covered under the
negative list of services.
 Value Added Tax
It was a consumption tax placed on a product, which was added at each stage of its manufacture or
distribution.
The government introduced the GST regime intending to streamline the taxation proceedings in
India.
Benefits of Direct Tax and Indirect Tax
These are some key benefits of direct taxes-
 Curbs inflation: When the economy is faced with monetary inflation, the government
subsequently raises tax rates. This increase pulls down the demand for goods and services,
thereby condensing inflation.
 Social and economic balance: There are well-defined tax slabs and exemptions in place, which
helps to balance out income inequalities. Therefore, individuals with lower income pay lower
taxes and vice versa.
The benefits of indirect taxes are-
 Equal contribution: Indirect taxes ensure that every individual pays some amount, however
little, to the state. It also reaches people in lower-income groups, who are exempted from direct
taxes.
 Non-evadable: These taxes exist within the price of a commodity. So, an individual can only
evade an indirect tax if he/she does not consume the taxed item.
Drawbacks of Direct and Indirect Tax
Direct taxes are accompanied by some drawbacks, which are as follows-
 Tax evasion: Although stringent laws are at place, individuals use fraudulent practices to evade
taxes completely or pay lower amounts than they should.
 Burdensome: Direct taxes are paid in a single lump sum every year. As a result, they are often
considered a burden. Additionally, the documentation is extensive and time-consuming, which
adds on to the inconvenience.
Few downsides of indirect taxes include –
 Regressive: Since indirect taxes are the same for all economic classes, it can be deemed as
unfair for those with lower incomes.
 Increased product price: An indirect tax is added to the cost of goods and services in the
country, which makes these commodities more expensive.
Taxes are one of the deciding parameters for economic growth in a country. Although direct tax
and indirect tax have their benefits and downsides, they contribute significantly to revenue
generation for the government. It is through their collection that the government takes steps
towards development and progress.
Residential Status for Income Tax – Individuals & Residents
It is important for the Income Tax Department to determine the residential status of a tax paying
individual or company. It becomes particularly relevant during the tax filing season. In fact, this is one
of the factors based on which a person’s taxability is decided.
Meaning and importance of residential status
The taxability of an individual in India depends upon his residential status in India for any particular
financial year. The term residential status has been coined under the income tax laws of India and
must not be confused with an individual’s citizenship in India. An individual may be a citizen of India
but may end up being a non-resident for a particular year. Similarly, a foreign citizen may end up
being a resident of India for income tax purposes for a particular year. Also to note that the residential
status of different types of persons viz an individual, a firm, a company etc is determined differently.
In this article, we have discussed about how the residential status of an individual taxpayer can be
determined for any particular financial year
How to determine residential status?

For the purpose of income tax in India, the income tax laws in India classifies taxable persons as:
1. A resident
2. A resident not ordinarily resident (RNOR)
3. A non-resident (NR)
The taxability differs for each of the above categories of taxpayers. Before we get into taxability, let
us first understand how a taxpayer becomes a resident, an RNOR or an NR.
Resident
A taxpayer would qualify as a resident of India if he satisfies one of the following 2 conditions :

1. Stay in India for a year is 182 days or more or

2. Stay in India for the immediately 4 preceding years is 365 days or more and 60 days or more
m in the
relevant financial year

In the event an individual who is a citizen of India or person of Indian origin leaves India for
employment during an FY, he will qualify as a resident of India only if he stays in India for 182 days
or more. Such individuals
uals are allowed a longer time greater than 60 days and less than 182 days to
stay in India. However, from the financial year 2020
2020-21,
21, the period is reduced to 120 days or
more for such an individual whose total income (other than foreign sources) exceeds Rs 15 lakh.

In another significant amendment from FY 2020 2020-21,

21, an individual who is a citizen of India who is not
liable to tax in any other country will be deemed to be a resident in India. The condition for deemed
residential status applies only if the to
total
tal income (other than foreign sources) exceeds Rs 15 lakh and
nil tax liability in other countries or territories by reason of his domicile or residence or any other
criteria of similar nature.

The amendment can be further simplified as below

below-

Resident Not Ordinarily Resident

If an individual qualifies as a resident, the next step is to determine if he/she is a Resident ordinarily
resident (ROR) or an RNOR. He will be a ROR if he meets both of the following conditions:

1. Has been a resident of India in at least 2 out of 10 years immediately previous years and

2. Has stayed in India for at least 730 days in 7 immediately preceding years

Therefore, if any individual fails to satisfy even one of the above conditions, he would be an RNOR.

From FY 2020-21, a citizen of India or a person of Indian origin who leaves India for employment
outside India during the year will be a resident and ordinarily resident if he stays in India for an
aggregate period of 182 days or more. However, this condition will apply only if his total income
(other than foreign sources) exceeds Rs 15 lakh. Also, a citizen of India who is deemed to be a
resident in India (w.e.f FY 2020--21)
21) will be a resident and ordinarily resident in India.

NOTE: Income from foreign sources means income wh which

ich accrues or arises outside India (except
income derived from a business controlled in India or profession set up in India).
Non-resident
An individual satisfying neither of the conditions stated in (a) or (b) above would be an NR for the
year.
Taxability

Resident: A resident will be charged to tax in India on his global income i.e. income earned in India
as well as income earned outside India.

NR and RNOR: Their tax liability in India is restricted to the income they earn in India. They need
not pay any tax in India on their foreign income. Also note that in a case of double taxation of income
where the same income is getting taxed in India as well as abroad, one may resort to the Double
Taxation Avoidance Agreement (DTAA) that India would have entered into with the other country in
order to eliminate the possibility of paying taxes twice.
List of Exempted Incomes (Tax-Free) Under Section-10

1. Agriculture Income [Section 10(1)]

As per section 10(1), agricultural income earned by the taxpayer in India is exempt from tax.
Agricultural income is defined under section 2(1A) of the Income-tax Act. As per section
2(1A), agricultural income generally means:

a. Any rent or revenue derived from land which is situated in India and is used for
agricultural purposes.
b. Any income derived from such land by agriculture operations including processing of
agricultural produce so as to render it fit for the market or sale of such produce.
c. Any income attributable to a farm house subject to satisfaction of certain conditions
specified in this regard in section 2(1A). Any income derived from saplings or
seedlings grown in a nursery shall be deemed to be agricultural income.

2. Any sum received by a Co-parcener from Hindu Undivided Family (H.U.F.) [Section 10(2)]

As per section 10(2), amount received out of family income, or in case of impartible estate,
amount received out of income of family estate by any member of such HUF is exempt from
tax.

3. Share of Income from the Firm [Section 10(2A)]

As per section 10(2A), share of profit received by a partner from a firm is exempt from tax in
the hands of the partner. Further, share of profit received by a partner of LLP from the LLP
will be exempt from tax in the hands of such partner. This exemption is limited only to share
of profit and does not apply to interest on capital and remuneration received by the partner
from the firm/LLP.
4. Interest paid to Non-Resident [Section 10(4)(i)]
As per section 10(4)(i), in the case of a non-resident any income by way of interest on certain
notified securities or bonds (including income by way of premium on the redemption of such
bonds) is exempt from tax.
5. Interest to Non-Resident on Non-Resident (External) Account [Section 10(4)(ii)]
Any income by way of interest on moneys standing to his credit in a Non-Resident (External)
Account in any bank in India shall be exempt from tax in case of an individual who is a
person resident outside India or is a person who has been permitted by the RBI to maintain
the aforesaid account.

6. Interest paid to a person of Indian Origin and who is Non-Resident [Section 10(4 B)]
In case of an individual, being a citizen of India or a person of Indian origin, who is
nonresident, any income from interest on such savings certificates issued by the Central
Government, as Government may specify in this behalf by notification in the Official Gazette,
shall be fully exempt. The exemption under this section shall not be allowed on bonds or
securities issued on or after 1-6-2002.
7. Leave Travel Concession or Assistance (LTC/LTA) to an Indian Citizen Employee [Section
10(5)]
The employee is entitled to exemption under section 10(5) in respect of the value of travel
concession or assistance received by or due to him from his employer or former employer
for himself and his family, in connection with his proceeding—
8. Remuneration or Salary received by an individual who is not a citizen of India [Section
10(6)]
The following incomes are exempt when received by an individual who is not a citizen of
India:
(i) Remuneration [U/s 10(6)(ii)].
a. The remuneration received by an ambassador or other officials of the
Embassy, High Commission or Legation of a foreign State in India.
Tax paid by Government or Indian concern on Income of a Foreign Company [Section
10(6A), (6B), (6BB) and (6C)]
(6A) :

1. Where a foreign company renders technical services to Government of India or to a

State Government or to an Indian enterprise and for such services a foreign company
is paid income by way of royalty or fees.

10. Perquisites and Allowances paid by Government to its Employees serving outside India
[Section 10(7)]
Any allowances or perquisites paid or allowed, as such, outside India by the Government to a
citizen of India, for rendering services outside India, are exempt.

The following conditions have to be satisfied before such income is treated as deemed to
accrue or arise in India:
i. Income should be chargeable under the head 'Salaries';
11. Employees of Foreign Countries working in India under Cooperative Technical Assistance
Programme [Section 10(8)]
The persons who are working in India under co-operative technical assistance programmes
in accordance with an agreement entered into by the Central Government and the
Government of a foreign State, the following incomes of such individuals shall be exempt
provided the terms of agreements provide for such exemption

12. Income of a Consultant [Section 10(8A)]

Any remuneration or fee received by a consultant from an international organisation who
derives its fund under technical assistance grant agreement between such organisation and
the Foreign Government, and any other income accruing or arising to him outside India
(which is not deemed to accrue or arise in India) and which is subject to income-tax or social
security tax in foreign country, shall be fully exempted. The agreement of the service of
consultant must be approved by the competent authority.

13. Income of Employees of Consultant [Section 10(8B)]

In case of an individual who is assigned duties in India under technical assistance
programme—

1. the remuneration received by him directly or indirectly from any consultant as

referred u/s 10 (8A) above and
2. any other income accruing or arising to him outside India (which is not deemed to
accrue or arise in India) and which is subject to income-tax or social security tax in
foreign country. shall be fully exempted provided
14. Income of any member of the family of individuals working in India under co-operative
technical assistance programmes [Section 10(9)]
As per section 10(9), the income of any member of the family of any such individual as is
referred to in section 10(8)/(8A)/(8B) accompanying him to India, which accrues or arises
outside India and is not deemed to accrue or arise in India, in respect of which such member
is required to pay any income or social security tax to the Government of that foreign State
or country of origin of such member, as the case may be, is exempt from tax.
15. Gratuity [Section 10(10)]
Gratuity is a payment made by the employer to an employee in appreciation of the past
services rendered by the employee. Gratuity can either be received by:
 What is considered as Agricultural Income?
Section 2 (1A) of the Income tax Act details out the conditions wherein sources can be considered to
be generating agricultural income. The section’s definitions basically point out the following as the
sources for agricultural income –
1. Revenue generated through rent or lease of a land in India that is used for agricultural purposes
2. Revenue generated through the commercial sale of produce gained from an agricultural land
3. Revenue generated through the renting or leasing of buildings in and around the agricultural land
subject to the following conditions
1. The cultivator or farmer should have occupied the building, either through rent or revenue
2. The building is used as a residential place, storeroom or outhouse
3. The agricultural land or the land where the building is located, is being assessed for land revenue
or subject to a local rate assessed
A few exclusions to this income will be as follows –
1. Revenue from sale of processed produce of agricultural nature without actual agricultural activity
2. Revenue from extremely processed produce
3. Revenue from trees that have been sold as timber
Key points to remember while considering if an income is actually a valid agricultural income –
1. Income should be from an existent piece of land
2. Income should be from a piece of land that is used for agricultural operations
3. Income should stem from produce achieved after cultivation of the land
4. Income can be from a land that is not under the assessee’s ownership
Is Agricultural Income Taxable?
By default, agricultural income is exempted from taxation and not included under total income. The
Central Government can’t impose or levy tax on agricultural income. The exemption clause is
mentioned under Section 10 (1) of the Income Tax Act of India.
However, state governments can charge agricultural tax. As of the latest amendment, income from
agriculture, if within INR 5000 in a financial year, will not be accounted for tax purposes. Anything
above that will be taxable as per the applicable rates. As per the finance act, the total tax liability for a
person would include the agriculture income added to the non-agricultural portion.
Though being exempted from tax through Section 10 (1), tax on agricultural income still persists in
the state level if the mentioned income exceeds INR 5000 per year and if the total income excluding
agricultural income is more than the basic exemption limit. For firms, non-individuals and companies
it is easier to pay the associated tax as the tax is charged at a flat rate on the chargeable income. For
salaried individuals, it might increase the tax they need to pay because of the aggregation of income.
Calculation of Tax taking Agricultural Income into Account
In case the agricultural land is not falling under the scope of the aforementioned section, one would
need to do a separate evaluation just for that aspect of tax. If the agricultural income is well within
INR 5000, the returns need to be filed through ITR 1, else ITR 2 needs to be used wherein there is a
separate column for declaring the details of the income.
The tax calculation done here is in accordance with the fact that the income from agricultural sources
is falling under Section 2 (1A) of the IT Act.
For all other normal purposes, the tax calculation will involve the following steps:
1. Including the Agricultural Income – Considering B is the base income of the individual and A is
the agricultural income, tax first needs to be computed on the amount of B+A. Let’s call this tax as
T(B+A)
2. Adding the basic tax slab benefit – Depending upon changes in the Income Tax rules, the
basic tax slab might change, but for clarity’s sake, let’s consider that as S. That needs to be added to
the agricultural income and another tax is be calculated on the amount. Let’s call this tax as T(S+A)
3. Income Tax liability – This is the tax that is subject to deductions. Thus IT = T(B+A) – T(S+A)
One should always remember to aggregate the agricultural income while calculating tax since that can
allow one to avoid unnecessary extra taxes or interest on taxes.
Five main Income tax heads

 Income from Salary

 Income from House Property
 Income from Profits and Gains of Profession or Business
 Income from Capital Gains
 Income from Other Sources
Income from Salary
The first head of Income Tax heads is income from salary whichThis clause essentially assimilates
any remuneration, which is received by an individual in terms of services provided by him based on a
contract of employment. This amount qualifies to be considered for income tax only if there is an
employer-employee relationship between the payer and the payee respectively. Salary also should
include the basic wages or salary, advance salary, pension, commission, gratuity, perquisites as well
as the annual bonus.
Allowances: An allowance is a fixed monetary amount paid by the employer to the employee for
expenses related to office work. Allowances are generally included in the salary and taxed unless
there are exemptions available.
Specific tax exemptions are allowances allowed by employers as part of the salary. Some of them are.

 Conveyance Allowance: Up to Rs 800/- a month is exempt from tax.

 House Rent Allowance (HRA): Salaried individuals can claim House Rent Allowance or
HRA to lower taxes who live in a rented house. This can be partially or completely exempt
from taxes.
The deduction available is the minimum of the following amounts:

1. Actual HRA received

2. 50% of [Basic salary + DA] for those living in metro cities (40% for non-metros)
3. Actual rent paid less 10% of salary

 Leave Travel Allowance (LTA): LTA accounts for expenses for travel when you and your
family go on leave. While this is paid to you, it is tax-free twice in a block of 4 years.
 Medical Allowance: Medical expenses to the extent of Rs 15,000/– per annum is tax-free.
The bills can be incurred by you or your family.
 Perquisites: Section 17 of Income Tax Act deals with perquisites which are basically
benefits in addition to normal salary to which an employee has a right by way of his
employment. Examples of these are rent free accommodation or car loan. There are some
perquisites that are taxable in the hands of all categories of employees, some which are
taxable when the employee belongs to a specific group and some that are tax-free
Income from House Property
The second head of Income Tax heads is Income from house property, According to the Income Tax
Act 1961, Sections 22 to 27 is dedicated to the provisions for the computation of the total standard
income of a person from the house property or land that he or she owns. An interesting aspect is that
the charge is derived out of the property or land and not on the amount of rent received. However, if
the property is utilized for letting out the normal course of business, then the income from the rent
will be considered.
Income from Profits of Business
The third head of Income Tax heads isIncome from Profits of Business in which the computation of
the total income will be attributed from the income earned from the profits of business or
profession. The difference between the expenses and revenue earned will be chargeable. Here is a list
of the income chargeable under the head:

 Profits earned by the assessee during the assessment year

 Profits on income by an organization
 Profits on sale of a certain license
 Cash received by an individual on export under a government scheme
 Profit, salary or bonus received as a result of a partnership in a firm
 Benefits received in a business
Income from Capital Gains
Capital Gains are the profits or gains earned by an assessee by selling or transferring a capital asset,
which was held as an investment. Any property, which is held by an assessee for business or
profession, is termed as capital gains.
Income from other sources
Any other form of income, which is not categorized in the above-mentioned clauses, can be sorted in
this category. Interest income from bank deposits, lottery awards, card games, gambling or other
sports awards are included in this category. These incomes are attributed in Section 56(2) of the
Income Tax Act and are chargeable for income tax.
For any help on ITR Filing feel free to consult the tax experts at LegalRaasta. You can file ITR
yourself via our ITR software or get CA’s help on filing income tax return. You can also use the
option of Business Return, Bulk Return or Revised Return Filing.
Assessee and Its types

1. Normal Assessee:
 A normal Assessee is an individual who is liable to pay taxes for the income earned by him for a
particular financial year. Each and every Individual who has paid taxes in preceding years against the
income earned or losses incurred by him is liable to make payments to the government in the form of
tax. Any individual who is supposed to make payments to the government in the form of interest or
penalty or anybody who is entitled to tax refund under the IT Act is an Assessee. All such individuals
are grouped under the category of Normal Assessee.

2. Representative Assessee:

Many times, it so happens that an individual is liable to pay taxes for income or losses incurred not
only by him, but also for income or losses incurred by a third party. Such an individual is known as
Representative Assessee. Basically, he acts as a representative for people who themselves are not in a
position to file and pay their taxes themselves. Generally, the people who need representatives are
non-residents, minors or lunatics. And the people representing them are either their agents or
guardians. Such people are deemed to be Representative Assesses

3. Deemed Assessee:

Deemed Assessee is an individual who is put in a position to pay taxes for some other person by the
legal authorities. Generally, the individuals who are treated as Deemed Assesses are:

 The executors or the legal heir of the property of a deceased person, who in written has
passed on his property to the executor, is treated as a Deemed Assessee.
 The eldest son or any other legal heir of a deceased individual (who has expired without
writing his will) is treated as a Deemed Assessee.
 The guardian of a minor, a lunatic or an idiot is treated as a Deemed Assessee.
 The agent of a Non-Resident Indian (having Income Sources in India) is treated as a deemed
Assessee.

4. Assessee-in-default:

An Assessee-in-default is an individual who has failed to fulfill his legal duty of paying tax to the
government. An employer is deemed to be an Assessee in default if he fails to submit the TDS
deducted by him to the government. An employer is supposed to disburse salary to his employees
after deducting TDS from their salary and submit the same to the government. However, if he fails to
do so then he is treated as an Assessee-in-default.

BASIS FOR
PREVIOUS YEAR ASSESSMENT YEAR
COMPARISON

Meaning Previous Year is the Assessment Year is the financial year,

financial year, in which in which the income of the assessee
the assessee earns earned during the previous year is
income. evaluated and taxed.

What is it? The year to which The year in which income tax liability
income belongs. for the previous year arises.

Term Its term is 12 months or Its term is 12 months.

less.
GST
GST is known as the Goods and Services Tax. It is an indirect tax which has replaced many indirect
taxes in India such as the excise duty, VAT, services tax, etc. The Goods and Service Tax Act was
passed in the Parliament on 29th March 2017 and came into effect on 1st July 2017.
In other words,Goods and Service Tax (GST) is levied on the supply of goods and services. Goods
and Services Tax Law in India is a comprehensive, multi-stage, destination-based tax that is levied
on every value addition. GST is a single domestic indirect tax law for the entire country.
Types of GST and its Explanation
As per the newly implemented tax system, there are 4 different types of GST:
1. Integrated Goods and Services Tax (IGST)
2. State Goods and Services Tax (SGST)
3. Central Goods and Services Tax (CGST)
4. Union Territory Goods and Services Tax (UTGST)
Additionally, the government has fixed different taxation rates under each, which will be applicable to
the payment of tax for goods and/or services rendered.
1. Integrated Goods and Services Tax or IGST
The Integrated Goods and Services Tax or IGST is a tax under the GST regime that is applied on the
interstate (between 2 states) supply of goods and/or services as well as on imports and exports. The
IGST is governed by the IGST Act. Under IGST, the body responsible for collecting the taxes is the
Central Government. After the collection of taxes, it is further divided among the respective states by
the Central Government. For instance, if a trader from West Bengal has sold goods to a customer in
Karnataka worth Rs.5,000, then IGST will be applicable as the transaction is an interstate transaction.
If the rate of GST charged on the goods is 18%, the trader will charge Rs.5,900 for the goods. The
IGST collected is Rs.900, which will be going to the Central Government.
2. State Goods and Services Tax or SGST
The State Goods and Services Tax or SGST is a tax under the GST regime that is applicable on
intrastate (within the same state) transactions. In the case of an intrastate supply of goods and/or
services, both State GST and Central GST are levied. However, the State GST or SGST is levied by
the state on the goods and/or services that are purchased or sold within the state. It is governed by the
SGST Act. The revenue earned through SGST is solely claimed by the respective state government.
3. Central Goods and Services Tax or CGST
Just like State GST, the Central Goods and Services Tax of CGST is a tax under the GST regime that
is applicable on intrastate (within the same state) transactions. The CGST is governed by the CGST
Act. The revenue earned from CGST is collected by the Central Government. As mentioned in the
above instance, if a trader from West Bengal has sold goods to a customer in West Bengal worth
Rs.5,000, then the GST applicable on the transaction will be partly CGST and partly SGST. If the rate
of GST charged is 18%, it will be divided equally in the form of 9% CGST and 9% SGST. The total
amount to be charged by the trader, in this case, will be Rs.5,900. Out of the revenue earned from
GST under the head of CGST, i.e. Rs.450, will go to the Central Government in the form of CGST.
4. Union Territory Goods and Services Tax or UTGST
The Union Territory Goods and Services Tax or UTGST is the counterpart of State Goods and
Services Tax (SGST) which is levied on the supply of goods and/or services in the Union Territories
(UTs) of India. The UTGST is applicable on the supply of goods and/or services in Andaman and
Nicobar Islands, Chandigarh, Daman Diu, Dadra, and Nagar Haveli, and Lakshadweep. The UTGST
is governed by the UTGST Act. The revenue earned from UTGST is collected by the Union Territory
government. The UTGST is a replacement for the SGST in Union Territories. Thus, the UTGST will
be levied in addition to the CGST in Union Territories.
erson [Section 2(31)] : Definition under I.Tax
Person includes :

1. an Individual;
2. a Hindu Undivided Family (HUF) ;
3. a Company;
4. a Firm
5. an association of persons or a body of individuals, whether incorporated or not;
6. a local authority; and
7. every artificial juridical person not falling within any of the preceding sub-clauses.
8. Association of Persons or Body of Individuals or a Local authority or Artificial Juridical
Persons shall be deemed to be a person whether or not, such persons are formed or
established or incorporated with the object of deriving profits or gains or income.

The word person is a very wide term and embraces in itself the following :

1. Individual. It refers to a natural human being whether male or female, minor or

major.
2. Hindu Undivided Family. It is a relationship created due to operation of Hindu Law.
The manager of HUF is called “Karta” and its members are called ‘Coparceners’.
3. Company. It is an artificial person registered under Indian Companies Act 1956 or
any other law.
4. Firm. It is an entity which comes into existence as a result of partnership agreement
 between persons to share profits of the business carried on by all or any one of them.
Though, a partnership firm does not have a separate legal entity, yet it has been
regarded as a separate entity under Income Tax Act. Under Income Tax Act, 1961, a
partnership firm can be of the following two types
1. a firm which fulfil the conditions prescribed u/s 184.
2. A firm which does not fulfil the conditions prescribed u/s 184.
5. Association of Persons or Body of Individuals.: Co-operative societies, MARKFED,
NAFED etc. are the examples of such persons. When persons combine togather to
carry on a joint enterprise and they do not constitute partnership under the ambit of
law, they are assessable as an association of persons. Receiving income jointly is not
the only feature of an association of persons. There must be common purpose, and
common action to achieve common purpose i.e. to earn income. An AOP. can have
firms, companies, associations and individuals as its members.

6. Local Authority. Municipality, Panchayat, Cantonment Board, Port Trust etc. are called
local authorities.

7. Artificial Juridical Person. A public corporation established under special Act of

legislature and a body having juristic personality of its own are known to be Artificial Juridical
Persons. Universities are an important example of this category.

Assessment Year (A.Y.)

The year in which your income is assessed is known as assessment year. The period for
assessment year starts from 1st April and ends on 31st March of the next year.
In other words, it is the year immediately following the financial year i.e. the year in which
you have earned your income.
For instance, for F.Y. 2017-18, the A.Y. would be from 1st April 2018 till 31st March 2019.

Previous Year (P.Y.)

As per the Income Tax law the income earned in current year is taxable in the next year. The
year in which income is earned is known as the previous year.
In layman language the current financial year is known as the previous year. The financial
year starts from 1st April and end on 31st March of the next year.
For Instance, for the salary income earned from 1 April 2017 - 31st March 2018 .The
previous year would be 2017-18.
All the assessee’s are required to follow the financial year( April 1 to March 31) as previous
year for all types of incomes. Incase, of a newly set-up business/profession or first job then
your first previous year will be less than 12 months. Though from subsequent years your
previous year will always be your financial year.

Unit –II Income from Salary

What is salary ? explain Important Points / Characteristics for Computing Salary Income
For any payment to be made taxable under the head ‘Salaries’ it must fulfill the following
characteristics. In case any receipt is not covered under any of these features it will not come under
this head.
1. Relationship of Employer and Employee
For a payment to fall under the head ‘Salaries’ the relationship of employer and emplqyee must exist
between payee and the receiver of the salary. The employer may be a Government,\. a Local
authority, a company or any other public body or an Association or H.U.F. or even an individual.
Every kind of payment to every kind of servant, public or private, however high or low placed he may
be, is covered under the provisions of this Act. Even the remuneration payable to an employee of a
foreign Govt. falls within this section. Even servant is an employee, but an agent may or may not be
employee. A detailing agent of a selling concern is its employee whereas the person holding an
agency to sell the goods of such a concern will not be employee.
2. Salary from more than one Employer
Any amount of salary received or due from one or more than one employer/source shall be taxable
under this head. Such situation may arise when an employee is working with two employers
simultaneously or has worked with one employer and later on serves with another employer after
leaving service with, first employer, salary from both the employers shall be taxable under this head.
3. Salary from Present, Past or Prospective Employer
Salary received or due from present, past or future employer is also taxable under this head.
4. Tax Free Salary
Sometimes, the employer allows an employee to draw tax-free salary, e.g., the employer pays full
salary to the employee and also pays tax on this directly to the department. The employee’s
assessment is to be made not on the amount of salary he is drawing but on gross amount i.e., salary
drawn plus the tax paid by the employer.
5. Salary Received as Member of Parliament
Salary received by a member of Parliament is not taxable under the head ‘Salaries’. It is taxable as
income from other sources’. Any allowance received by them is fully exempted from tax.
6. Receipts from Persons other than Employer
Perquisites or benefits or any other remuneration received from persons other than the employer,
would be taxable not under the head ‘Salaries’ but under the head ‘income from other sources’ even if
they accrue to the employee by reason of his employment or while he was discharging his normal
duties, e.g., amount received by a professor of a college for acting as an examiner in a university.
For example, Dr. Dhir is an employee of a leading physician of Delhi. In one case, the patient’s life
was saved because of the hard work and intelligence of Dr. Dhir. The patient, therefore, gives 5,000 to
Dr. Dhir in appreciation of his services. The amount in this case is not chargeable as ‘salary’ but
constitutes income from other sources.
7. Place of Accrual of Salary Income
Salary accrues at that place where the services are rendered. If the services are rendered in India, the
salary accrues in India and if the services are rendered outside India, the salary accrues outside India.
Thus, if a person employed in India goes on leave to England and gets his leave salary there, the
salary is said to accrue in India and not in England, because it is paid for services rendered in India.
Pension paid in a foreign country for services rendered in India, will be Indian income, as it is paid for
the services rendered in India although in the past. On the other hand, if any person is employed in
India and transferred to its branch in England, the salary received by him in England is not Indian
income, but it is income arising in England as the service is rendered in England. Followings are the
two exceptions to this rule
8. Deductions made by the Employer
If, an employer makes certain deductions out of the salary payable to an employee, amount so
deducted is deemed to be received by the employee and the amount so deducted is also taken as
application of income by the employee. Some important types of deductions made by the employer
are as follows :
1. Deductions made to recover the loan advanced by the employer.
2. Employee’s contribution towards the provident fund, income-tax and profession tax.
3. Deduction made to pay the premium on life insurance policy of the employee.
4. Any other deduction for which the employee has authorised the employer.
In case an employee receives his salary after certain deductions made by employer on account of
profession tax, contribution to provident fund, tax deducted at source, the ‘salary’ will not be the net
amount received, rather it will be the gross salary due to the employee.
9. Salary or Pension received by UNO Employees
It is fully exempted as per circular No. 293 Dt. 10-2-81.
10. Salary received by a teacherlresearcher from a SAARC member State
Exempted upto 2 years.
11. Salary as Partner
Any salary, commission or remuneration received by a working partner from a firm assessed as firm
shall not be taxable under the head ‘Salaries’. It is taxable under the head Profits & Gains.
12. Payments received by Legal Heirs of a Deceased Employee
Any ex-gratia payment or compensation given to widow or legal heirs of an employee who dies
during service is not taxable as salary income but family pension received is taxable under ‘other
sources’.
13. Payment made after Cessation of Employment
Payment made by an employer to his employee after the cessation of his employment is also taxable
under the head ‘Salaries’. It is taxable under this head because it represents remuneration for services
rendered in the past.
14. Voluntary foregoing : Application of Salary
Voluntary foregoing of salary by an employee is simply an application of income by him and,
therefore, any voluntary foregoing of salary is taxable when it is due, whether paid or not (Section
15). The salary which is voluntarily foregone must be actually due in the name of the employee.
Voluntary foregoing is different from voluntary surrender of salaries which is exempted from tax.
15. Previous year for Salaries
The previous year for the income under the head ‘Salaries’ shall always be financial year of the
Government of India (i.e., April to March).
16. Taxability of salary on due or receipt, whichever is earlier basis
U/s 15(a) salary is taxable on due basis whether received or not. Salary becomes due after doing work
and in India it is due on monthly basis. Every employee gets salary on completion of a month. As per
our financial system the year starts on 1St April and ends on 31st March. As such first salary for the
month of April becomes due on 1st day of next month. But in some cases salary becomes due on the
last day of the month and salary for the month of April shall be due on 30th April. This results into
following two situations :
If salary is due on 1 st. day of the month, during the financial year 2013-14 first salary shall be due on
1st April 2013 and it shall be for the month of March 2013 and last salary shall be due on 1st March
2014 for the month of February 2014.
If salary is due on the last day of the month, during the financial year 2013-14 first salary shall be due
on 30th April 2013 and it shall be for the month of April 2013 and last salary shall be due on 31st
March 2014 for the month of March 2014.
17. Salary Grade / Pay Scale
In some organisations like Government offices, Banks, Post Offices, Railways, Universities, Colleges
etc. salary to employees is paid as per pay scales or salary grades. The pay sc,les fixes the starting
salary of an employee and also the annual increment in future years of employment.

18. Advance salary received

In case an assessee receives some salary in advance in a previous year which was actually not due in
that year, it shall be taxable in the year of receipt. In case, any loan or advance is taken it is not treated
as advance salary.
19. Arrears of salary received
Any amount of salary received from present or past employer during relevant previous year and which
relates to some earlier previous years, is treated as arrears of salary. It is taxable in the year in which
received and not the year to which it belongs. [C.I.T. v. Gajapathy Naidu (1964) 58 I.T.R., 114
(S.C.)]. In case assessee has to pay tax at a rate higher than that at which he would have paid, had
these arrears been received in the year to which they belong, assessee can apply to Income-tax Officer
for relief u/s 89(1) (Refer to Chapter 2 of part III of this book).
20. Salary in Lieu of notice
To terminate the services of an employee it is essential to serve a notice as per service agreement. In
case it is desired to relieve the employee immediately, he is given salary in lieu of such notice period.
Such amount is fully taxable under the head ‘salaries’ on receipt basis.

What is salary ? explain its elements

In general, salary means any payment received by an employee for physical and mental work from
the employer for a definite time or work. It is a structure of payment from an employer to an
employee, which may be specified in an employment contract. In Income Tax Ordinance (ITO), 1984
an inclusive definition is given where it used that salary includes any wages;

(a) Any annuity, pension, or gratuity;

(b) Only fees, commission, allowances, perquisites or profit in lieu of or in addition to salary and
wages.

(c) Any advance salary.

Elements of salary: Based on the above definition and practical situation elements of salary can be
identified as follows –

(a) Basic Salary: It means to paid or payable monthly or otherwise.

(b) Bonus: It means the payment of extra salary based on monthly basic salary or otherwise.
 (c) Dearness Allowance: It means the payment made by the employer to the employee for inflation
which is general is a percentage of basic salary.

(d) Commission: It means the payment in lieu of salary or in addition to salary for service rendered.

(e) Annuity: It means the annual grant paid by an employer to the employee for a definite year of life.

(f) Pension: It is a reward for past services usually paid by the employer, voluntarily or under a
contract of obligation.

(g) Gratuity: Its means a lump sum payment which is made at the time of leaving the job as a reward
for past service.

(h) Leave Encashment: It means the payment received by an employee for his uninjured earned
leave during his femur of service.

(i) Compensation for loss of service: If an employee receives an amount of termination of service or
for exchange condition of service it will be treated as salary.

(j) Contribution to recognized provident fund: Both employer and employees contribute to a
recognized provident fund. It is treated as salary.

What is an Allowance?
An allowance is a financial benefit given to the employee by the employer over and above the regular
salary. These benefits are provided to cover expenses that may be incurred to facilitate the discharge
of service for example Conveyance Allowance is paid to foot expenses incurred for commuting to the
workplace. Some of these allowances are taxable under the head Salaries. A few of them again could
be partly taxable and few others are non-taxable or fully exempt from taxes.
Taxable Allowances
1. Dearness Allowance: Dearness Allowance (DA) is an allowance paid to employees as a cost of
living adjustment allowance paid to the employees to cope with inflation. DA paid to employees is
fully taxable with salary. The Income Tax Act mandates that tax liability for DA along with salary
must be declared in the filed return.
2. Entertainment Allowance: Employees are allowed the lowest of the declared amount one-fifth
of basic salary, actual amount received as allowance or Rs. 5,000. This is an allowance provided to
employees to reimburse the expenses incurred on the hospitality of customers. However,
Government employees can claim exemption in the manner provided in section 16 (ii). All other
employees have to pay tax on it.
3. Overtime Allowance: Employers may provide an overtime allowance to employees working over
and above the regular work hours. This is called overtime and any allowance received for this is
fully taxable.
4. City Compensatory Allowance: City Compensatory Allowance is paid to employees in an urban
centre which may be highly expensive and to cope with the inflated living costs in the cities. This
allowance is fully taxable.
5. Interim Allowance: When an employer gives any Interim Allowance in lieu of final allowance,
this becomes fully taxable.
6. Project Allowance: When an employer provides an allowance to employees to meet project
expenses, this is also fully taxable.
7. Tiffin/Meals Allowance: Sometimes employers may provide Tiffin/Meals Allowance to the
employees. This is fully taxable.
8. Cash Allowance: When the employer provides a cash allowance like marriage allowance,
bereavement allowance or holiday allowance, it becomes fully taxable.
9. Non-Practicing Allowance: When physicians are attached to Clinical Centers of the various
Laboratories/Institutes, any non-practicing allowance paid to them become fully taxable.
10. Warden Allowance: When an employer pays an allowance to an employee working as a Warden
i.e. Keeper in an educational Institute, the allowance received is fully taxable.
11. Servant Allowance: When an employer pays an employee to engage services of a servant, such an
allowance is taxable.
Income Tax Calculator

Partly Taxable Allowances

1. House Rent Allowance (HRA): When an employer pays an allowance for the employees
accommodation it is called House Rent Allowance. Tax exemption under section 10 (13A) can be
claimed on whichever amount is lower of the three:
HRA as per actuals received by the employee
1. Rent paid as per actuals less 10% of Basic Salary
2. In Metros i.e Delhi, Mumbai, Chennai or Kolkata, as much as 50% of basic salary or else 40% of
it if the accommodation is in a non-metro.
Any amount of House Rent Allowance received after claiming such deduction is taxable.
2. Fixed Medical Allowance: This is an allowance paid by the employer when the employee or any of
his family members fall sick for the cost incurred on their treatment. If any such reimbursement
exceeds Rs.15,000 per year; the same is taxable.
3. Special Allowance: A special allowance paid to employees is covered under section 14(i) and does
not fall within the purview of a perquisite. It is essentially for performance of a duty is partly
taxable.
Non-Taxable Allowances
Some of the allowances, usually paid to Government servants, judges and employees of UNO are not
taxable. These are:
1. Allowances paid to Govt. servants abroad: When servants of Government of India are paid an
allowance while serving abroad, such income is fully exempt from taxes.
2. Sumptuary allowances: Sumptuary allowances paid to judges of HC and SC are not taxed.
3. Allowance paid by UNO: Allowances received by employees of UNO are fully exempt from tax.
4. Compensatory allowance paid to judges: When a judge receives compensatory allowance, it is
not taxable.

What is Perquisites?

Perquisite is defined as a privileged gain or profit incidental to regular salary. Perquisites are both
taxable and exempt. Perquisites can be simple as company car, fuel reimbursement etc. or may also
include interest-free loan, medical facilities, credit cards, accommodation sponsored by the company,
etc.

“Perquisite” is defined in the section 17(2) of the Income-tax Act as including:

1. Value of rent-free/concessional rent accommodation provided by the employer.

2. Any sum paid by the employer in respect of an obligation which was actually payable by the
assessee.
3. Value of any benefit/amenity granted free or at concessional rate to specified employees etc.
4. The value of any specified security or sweat equity shares allotted or transferred, directly or
indirectly, by the employer, or former employer, free of cost or at concessional rate to the
assessee.
5. The amount of any contribution to an approved superannuation fund by the employer in
respect of the assessee, to the extent it exceeds one lakh rupees; and
6. The value of any other fringe benefit or amenity as may be prescribed.

ALLOWANCES PERQUISITES

A fixed amount of money given periodically in Small benefits or perks offered by the employers
addition to the salary is called allowance in addition to the normal salary at free of cost

It is taxable on due/accrued basis whether it is

It is taxable in the hand of employees
paid in addition to the salary or in lieu thereon

Examples: transportation allowance, phone Examples: Rent-free accommodation, free

allowance etc. electricity etc.

Depending upon the tax that is levied on perquisites these can be classified into the following three
heads.
1. Taxable Perquisites

Some of the perquisites that are taxable in nature include rent-free accommodation, supply of gas,
water and electricity, professional tax of employee, reimbursement of medical expense, and salary of
servant employed by employee. Taxable perquisites also include any other fringe benefit provided by
the employer to employees like free meals, gifts exceeding Rs.5,000, club and gym facilities etc.

2. Exempted Perquisites

allowance, computer or laptop provided by the company for official use, refreshment provided by
employer during office hours, provision of medical aid, use of health club, sports club, telephone
lines, interest free salary loan provided by employer to employees, contribution to provident fund by
employers, free medical and recreational facilities and so on.

3. Perquisites taxable only by employees

This type includes cars owned by companies but used by employees, education facilities for children,
service of domestic servants etc.

What are tax-free perquisites?

Tax-free perquisites include:

 Leave travel concessions subject to conditions and the only actual amount spent
 Medical Facilities & Reimbursements
 Computer / Laptop for official / personal use
 Initial fees paid for corporate membership
 Refreshment provided during working hours in office premises
 Payment of annual premium on personal accident policy
 Subscription to periodicals and journals required for the discharge of work
 Provision of Medical Facilities
 Gifts not exceeding Rs. 5000 per annum etc.

Fringe benefit,
any nonwage payment or benefit (e.g., pension plans, profit-sharing programs, vacation pay, and
company-paid life, health, and unemployment insurance programs) granted to employees by
employers. It may be required by law, granted unilaterally by employers, or obtained
through collective bargaining. Employers’ payments for fringe benefits are included in employee-
compensation costs and therefore are not usually liable to corporate income tax. If the cost of fringe
benefits were paid directly as wages, workers would pay personal income tax on this
amount and therefore have less to spend on such benefits as they might elect to furnish for
themselves. Thus, with the same amount of money, employers can obtain more benefits for employees
and can also take advantage of lower group rates for
insurance.
 Unit –III Income from House property

Annual Value of Property

The annual value of a property is the sum for which a property is reasonably expected to be let from
year to year. Hence, the annual value of a property is the amount of notional rent which could have
been derived, had the property been let. The annual value of a property plays an important role
in Income Tax return filing. In this article, we mention the procedure for calculating the annual
value of a property.
Factors Determining Annual Value of Property
The following four factors play an important role in determining the annual value of a property:
Actual Rent Received
Actual rent received or receivable is an important factor in determining the annual value of a property.
The actual rent received could be dependent on various considerations. If the owner of the property
agrees to bear certain obligations like water or electricity bill, the rent will be calculated by reducing
the rent received by the amount spent by the owner on meeting such obligatory expenses. On the other
hand, if the obligatory expenses to be borne by the owner is met by the tenant, then the rent will be
computed by increasing the rent paid by the amount spent by the tenant on meeting the obligations of
the owner.
Municipal Value
Municipal value is determined by the municipal authorities for levying municipal taxes on house
property. Municipal authorities normally charge house tax/municipal taxes on the basis of annual
letting value of such house property, which is determined by it based upon many considerations.
Fair Rent
Fair rent is the rent which is a similar property can fetch in the same or similar locality if it is let for a
year. Fair rent can be easily ascertained for apartments based on prevailing rentals.
Standard Rent
Standard rent is fixed under the Rent Control Act. If the standard rent has been fixed for any property
under the Rent Control Act, the owner cannot be expected to get a rent higher than the standard rent
fixed under the Rent Control Act. Therefore, standard rent plays an important factor in determining
the annual value of the property.
Procedure for Calculating Annual Value of Property
The following are the steps involved in calculating the Net Annual Value of house property:
A = Actual Rent Received: For let out property, actual rent received is as per agreement between the
owner and the tenant. Any payment by the tenant on behalf of the owner is also included under Actual
Rent Received.
B = Fair Rent: It means how much rental income a similar property in the vicinity can fetch with
similar facilities and amenities.
C = Standard Rent = Rent fixed under the Rent Control Act: States like Tamilnadu have Rent
control act, under which rent specified under the Rent Control Act is fixed even if is a meagre
amount.
D = Municipal Value: It is similar to circle rate or guidance value. Rental value is fixed by a local
municipal corporation or municipal committee.
After calculating the above-mentioned values, Notional Rental Income from House Property can be
calculated as per following formula as mentioned in the income tax act:
Z = Higher of B or D i.e. Higher of Fair Rent Value or Municipal Value.
Y = Expected Rent = Lower of Z or C
Gross Annual Value of Property = Higher of Expected Rent or Actual Rent Received = Higher
of Y or A
In most of the cases, Actual rent received will be the Gross Annual Value of Property for the purpose
of calculation of Income from House Property.
Net Annual Value is Gross Annual Value minus Municipal taxes like property tax, sewerage tax
and so on.

Unit IV Income from business and Profession

Profits and Gains of Business or Profession – Income Tax

“Profit and gains of business or profession” is one of the heads of income under the Income Tax Act.
For the purpose of ascertaining the tax liability of a taxpayer, the Income Tax Act divides the taxable
income of an assessee into five categories or heads of income. Business profits is the third head of
income under the Act, after salaries and house property income. This head is used to classify or
aggregate income which the taxpayer generates through business or professional activities. While
filing an income tax return, the taxpayer must declare the amount of profits and gains of business or
profession in case the assessee is having any such income. In this article, we mention the procedure
for calculating Profits and Gains of Business or Profession.

List of Incomes Classified under Profits and Gains of Business or Profession

The following incomes will be chargeable to income tax under the head “Profits and gains of business
or profession”:

1. Protis and gains of any business which was carried on by the assessee at any time during the
financial year
2. Any compensation or other payment due to or received by:
o Any person in connection with termination/modification of an agreement for
managing the whole or substantially the whole of affairs of an Indian company or any
other company.
o Any person 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 or modification
of the terms of the agency.
o Any person for or in connection with the vesting in the Government, or in any
corporation owned by or controlled by the Government, under any law for the time
being imposed, of the management of any property or business.
3. Income derived by trade, professional or similar association from specific services performed
for its members. This is an exception to the general principle that a surplus arising to a mutual
association cannot be regarded as income chargeable to tax.
4. Export incentives which include:
o Profits on sales of import licenses granted under Imports (Control) Order on account
of exports.
o Cash assistance, by whatever name called, received or receivable against export.
o Duty drawbacks of Customs and Central Excise duties.
o Any profit on the transfer of the Duty Entitlement Pass Book Scheme.
o Any profit on the transfer of the Duty Free Replenishment Certificate.
5. Value of any benefit or perquisite, whether convertible into money or not, arising during the
course of the carrying on of any business or profession.
6. Any interest, salary, bonus, commission or remuneration due to or received by a Partner of a
Firm from the firm in which he is a partner.
7. Any sum received or receivable in cash or in kind under an agreement for:
o Not carrying out activity in relation to any business or profession.
o Not sharing any know-how, patent, copyright, trademark, license, 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 services.
8. Any sum received under a Keyman Insurance Policy including the sum allocated by way of
bonus on such policy.
9. Any sum whether received or receivable, in cash or kind, on account of any capital asset
being demolished, destroyed, discarded or transferred, if the whole of the expenditure on such
capital asset has been allowed as a deduction under Section 35AD.

Classifying Income Under Profits and Gains of Business or Profession

In case the taxpayer is not able to find a type of income under the list above, the following conditions
can be used to verify if an income would fall under Profits and gains of business or profession.
According to Section 28, the following are the main clause that requires an income to be charged
under profits and gains of business or profession:

1. There should be a business or profession.

2. The business or profession should have been carried on by the assessee.
3. The business or profession should be carried on for some time during the financial year.
4. The charge is in respect of the profits and gains of the financial year of the business or
profession.
5. The charge extends to any business or profession carried on by the assessee whether under the
taxpayer’s own name or otherwise.

Under Section 28, one of the main aspects on determining if an income must be classified under
profits and gains of business or profession is that if a business was carried on by the assessee at any
 time during the financial year. It is, however, not necessary that the business is carried out throughout
the financial year or till the end of the financial year.

Other Income Classified as Profits and Gains of Business

There are certain exceptions to the above rules. The following incomes must be classified under
Profits and Gains of Business, even if a business was not carried on by the assessee during the
previous year.

 Recovery against any loss, expenditure or trading liability earlier allowed as a deduction.
 Balancing charge in case of electricity companies.
 Sale of a capital asset which was used for scientific research.
 Recovery against bad debts.
 Any amount which is withdrawn from a Special Reserve.
 Receipt of discontinued business in the case of assessees who are making use of a cash
system of accounting.

What is Depreciation?

The concept of depreciation is used for the purpose of writing off the cost of an asset over its useful
life. Depreciation is a mandatory deduction in the profit and loss statements of an entity and the Act
allows deduction either in Straight-Line method or Written Down Value (WDV) method.

The calculation for depreciation under the WDV method is widely used except for undertaking
engaged in generation or generation and distribution of power. The Act also allows a deduction for
additional depreciation in the year of purchase in certain circumstances. To read about additional
depreciation visit Additional Depreciation Under the Income Tax Act.

Block Of Assets- Concept

Depreciation is calculated on the WDV of a Block of assets. Block of assets is a group of assets
falling within a class of assets comprising of:

 Tangible assets, being building, machinery, plant or furniture,

 Intangible assets, being know how, patents, copyrights, trade-marks, licenses, franchises or any
other business or commercial rights of similar nature

The block of assets is classified further depending on the similar use, life of the asset and nature of the
asset.

Conditions For Claiming Depreciation

 The assets must be owned, wholly or partly, by the assessee.

 The assets must be in use for the business or profession of the taxpayer. If the assets are not used
exclusively for the business, but for other purposes as well, depreciation allowable would be
proportionate to the use of business purpose. The Income Tax Officer also has the right to
determine the proportionate part of the depreciation under Section 38 of the Act.
 Co-owners can claim depreciation to the extent of the value of the assets owned by each co-
owner.
 You cannot claim depreciation on the cost of land.
 Depreciation is mandatory from A.Y. 2002-03 and shall be allowed or deemed to have been
allowed as a deduction irrespective of a claim made by a taxpayer in the profit & loss account.

Written Down Value- Meaning

 As per Section 32(1) of the IT Act depreciation should be computed at the prescribed percentage on
the WDV of the asset, which in turn is calculated with reference to the actual cost of the assets. In the
context of computing depreciation, it is important to understand the meaning of the term ‘WDV’ &
‘Actual Cost’.

WDV under the Income Tax Act means:

 Where the asset is acquired in the previous year, the actual cost of the asset shall be treated as
WDV.
 Where the asset is acquired in an earlier year, the WDV shall be equal to the actual cost incurred
less depreciation actually allowed under the Act.

Depreciation Allowed

The allowance for depreciation is calculated under the WDV method except for undertaking engaged
in generation or generation and distribution of power. The depreciation rates are given in Appendix 1.

In the case of undertakings engaged in generation or generation and distribution of power, such
undertaking has an option to claim depreciation on WDV method at the rates provided in New
Appendix I – if such option is exercised before the due date of filing the return.

In the case of amalgamation or demerger, the aggregate depreciation allowance shall be apportioned
between the amalgamating and the amalgamated company, or the demerged and the resulting
company. The aggregate depreciation would be computed as if the amalgamation or demerger had not
taken place. It shall be apportioned based on the number of days the assets were used by such
companies.

In case of a finance lease transaction, the lessee has to capitalise the assets in its books under AS-19 –
the Accounting standard on leases. In such cases, the lessee can exercise the rights of the owner in his
own right and hence the allowance for depreciation is available to the lessee.

Unit V Income from Capital Gains and Income from other sources

Capital Gains
Capital Gains – Types, Calculation and Tax Exemption on Capital Gains
Capital gain is denoted as the net profit that an investor makes after selling a capital asset
exceeding the price of purchase. The entire value earned from selling a capital asset is considered
as taxable income. To be eligible for taxation during a financial year, the transfer of a capital asset
should take place in the previous fiscal year.
Financial gains against a sale of an asset are not applicable to inherited property. It is considered
only in case of transfer of ownership. According to The Income Tax Act, assets received as gifts or
by inheritance are exempted in the calculation of income for an individual.
Buildings, lands, houses, vehicles, Mutual Funds, and jewelry are a few examples of capital assets.
Also, the rights of management or legal rights over any company can be considered as capital
assets.
The following are not included under capital assets –
 Any stock, consumables or raw materials that are held for the purpose of business or profession.
 Goods such as clothes or furniture that are held for personal use.
 Land for agriculture in any part of rural India.
 Special bearer bonds that were issued in 1991.
 Gold bonuses issued by the Central Government such as the 6.5% gold bonus of 1977, 7% gold
bonus of 1980 and defense gold bonus of 1980.
 Gold deposit bonds that were issued under the gold deposit scheme (1999) or the deposit
certificates that were issued under the Gold Monetisation Scheme (2015).
Types of Capital Gain
Depending on the tenure of holding an asset, gains against an investment can be broadly divided
into the following types –
 Short term capital gain
 If an asset is sold within 36 months of acquisition, then the profits earned from it is known as short
term capital gains. For instance, if a property is sold within 27 months of purchase, it will come
under short term capital gains.
However, tenure varies in the case of different assets. For Mutual Funds and listed shares, Long
term capital gain happens if an asset is sold after holding back for 1 year.
 Long term capital gain
The profit earned by selling an asset that is in holding for more than 36 months is known as long-
term capital gains. After 31st March 2017, a holding period for non-moveable properties was
changed to 24 months. However, it is not applicable in case of movable assets such as jewelry,
debt-oriented Mutual Funds, etc.
urthermore, a few assets are considered as short-term capital assets if the holding period is less
than 12 months. Here is a list of assets that are considered according to the rule mentioned above –

 Equity shares of any organization listed on a recognized Indian stock exchange.

 Securities like bonds, debentures, etc. that are listed on any Indian stock exchange.
 UTI units, regardless of being quoted or unquoted.
 Capital gain on Mutual Funds that are equity-oriented, whether they are quoted or not.
 Zero-coupon bonds.
All the assets mentioned above are considered as long-term capital assets if they are held for 12
months or more. In case of any asset acquired by inheritance or gift, then the period for which an
asset is owned by a previous owner is considered. Furthermore, in the case of bonus shares or right
shares, the period of holding is considered from the date of allotment.
Here is a duration chart on an income generated against the sale of assets –
Type of asset Short term duration Long term duration

Immovable assets (e.g. real estate) Less than 2 years More than 2 years

Moveable property(e.g. Gold) Less than 3 years More than 3 years

Listed Shares Less than 1 year More than 1 year

Equity Oriented Mutual Funds Less than 1 year More than 1 year

Debt Oriented Mutual Funds Less than 3 years More than 3 years
Calculation of Capital Gains
The calculations of capital gains are dependent on the type of assets and their holding period. A
few terms that an individual must know before calculating gains against their capital investments
are here as follows –
 Full value consideration –
It is the consideration that is received by a seller in return for a capital asset.
 Cost of acquisition –
The cost of acquisition is the value of an asset when a seller acquires it.
 Cost of improvement –
The cost of improvement is the amount of expenses incurred by a seller in making any additions or
alterations to a capital asset.
To calculate the value of short term capital gain, the full amount of consideration is required to be
determined at first. From the obtained value, cost of acquisition, cost of improvement and the total
expenditure incurred concerning the transfer of ownership has to be deducted. This resultant value
will be the capital gain on investments.
Indexed Cost of Acquisition
The cost of acquisition is calculated on the present terms by applying the CII (Cost Inflation
Index). It is done to adjust the values by taking into account the inflation that takes place over the
years while holding the asset.
The indexed cost of acquisition can be estimated as the ratio of the Cost Inflation Index (CII) of
the year when an asset was sold by a seller and that of the year when the property was acquired or
the financial year 2001-2002, whichever is later multiplied by the Cost of acquisition.
Suppose, a person acquired an asset at Rs. 50 Lakh in the financial year 2004-2005 and she
decided to transfer the property in the fiscal year 2018-19. The CII of the financial year 2004-05
and 2018-19 were 113 and 280 respectively.
Therefore, the indexed cost of acquisition will be 50 X 280 / 113 = Rs. 123.89 Lakh.
Indexed Cost of Improvement
 The indexed cost of the improvement is calculated by multiplying the associated cost of
improvement that was required to the CII of the year divided by the CII of the year in which the
improvement took place.
Tax Exemptions on Capital Gains
Tax exemptions can be claimed under the following sections on the profit earned against assets –
1. Section 54 –
If an amount earned by selling a residential property is invested to purchase another property, then
the capital gains earned by transferring the ownership of a property is tax exempted. However,
deductions can be claimed only if the following conditions are met –
 Individuals are required to purchase a second property within 2 years of sale or 1 year before
transferring the ownership.
 In the case of an under-construction property, the purchase of a second property should be
completed within 3 years of transferring the ownership of the first property.
 Newly acquired property cannot be sold within 3 years of purchase.
 The newly acquired property is required to be located in India.
2. Section 54F –
Exemptions under Section 54F can be claimed when there are capital gains earned from a long-
term asset other than a residential property. However, the exemption stands invalid if you sell the
new asset within 3 years after purchasing or construction.
The purchase of a new property should be made within 2 years of earning the capital. Also, in the
case of construction, it has to be completed within 3 years from the date of sale.
3. Section 54EC –
Individuals can claim tax exemptions under Section 54EC if the capital gains statements are
submitted for investments into specific bonds with the amount earned by selling a property.
The invested amount can be redeemed after 3 years from the date of sale, but the bonds cannot be
sold within the period. This period has been increased to 5 years with effect from the financial
year 2018-19. Individuals are required to invest in these special bonds within 6 months of a
property sale.
Earing capital gains is much convenient with various beneficial investment options in the market.
Also, if reinvested correctly, tax incurred on capital gains can be reduced ensuring higher savings.
WHAT IS TRANSFER;
SECTION 2(47) “TRANSFER “IN RELATION TO A CAPITAL ASSET, INCLUDES, —
(i) the sale, exchange or relinquishment of the asset; or
(ii) the extinguishment of any rights therein; or
(iii) the compulsory acquisition thereof under any law; or
(iv) in a case where the asset is converted by the owner thereof into, or is treated by him as, stock-in-
trade of a business carried on by him, such conversion or treatment; or
(v) the maturity or redemption of a zero-coupon bond; or
(vi) any transaction involving the allowing of the possession of 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; or
(vii) any transaction (whether by way of 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 whatsoever) which has the effect of transferring, or enabling the enjoyment of,
any immovable property.
Explanation 2- has been inserted to nullify decision of Supreme Court judgement in case of
Vodafone Case, which states that “ Transfer” includes and shall be deemed to have always included
disposing of or parting with an asset or any interest therein, or creating any interest in any asset in an
manner whatsoever , directly or indirectly ,absolutely or conditionally ,voluntarily or involuntarily ,
by way of an agreement ( whether 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.
Note: in Vodafone case it was held that foreign holding company’s off-shore, cannot result in an
extinguishment of holding company right of control of Indian company nor can it be stated that
same constitutes extinguishment and transfer of an asset /management and control of property
situated in India.
Note: for the purpose of Clauses (vi) and (vii) Immovable Property has same meeting as in Section
269UA(d) of the Income Tax Act, 1961.
” immovable property” means-
(i) any land or any building or part of a building, and includes, where any land or any building or part
of a building is to be transferred together with any machinery, plant, furniture, fittings or other things,
such machinery, plant, furniture, fittings or other things also.
Explanation. – For the purposes of this sub- clause,” land, building, part of a building, machinery,
plant, furniture, fittings and other things” include any rights therein;
(ii) any rights in or with respect to any land or any building or a part of a building (whether or not
including any machinery, plant, furniture, fittings or other things, therein) which has been constructed
or which is to be constructed, accruing or arising from any transaction (whether by way of 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 of whatever nature), not being a transaction by way of
sale, exchange or lease of such land, building or part of a building;
Note:
1. To constitute transfer, registration of immovable property in the name of buyer is not necessary;
2. As in case of a Co-operative societies and Companies a member can transfer the rights to use and
enjoy the property by changing membership of Co-operative Society or Transferring Shares of
Company;
3. The definition of transfer under section 2(47) is applicable in case of a Capital Asset. If the asset
transferred is not a Capital Asset, it will not be regarded as transfer for Capital gain purposes.
TRANSACTIONS NOT REGARDED AS TRANSFER [ SECTIONS 46 and 47]
SECTION 47 provides that: Nothing contained in section 45 shall apply to the following transfers: —
(i) any distribution of capital assets on the total or partial partition of a Hindu undivided
family;
(ii) [***]
(iii) any transfer of a capital asset under a gift or will or an irrevocable trust:
Provided that this clause shall not apply to transfer under a gift or an irrevocable trust of a capital
asset being shares, debentures or warrants allotted by a company directly or indirectly to its
employees under any Employees’ Stock Option Plan or Scheme of the company offered to such
employees in accordance with the guidelines issued by the Central Government in this behalf;
(iv) any transfer of a capital asset by a company to its subsidiary company, if—
(a) the parent company or its nominees hold the whole of the share capital of the subsidiary company,
and
(b) the subsidiary company is an Indian company;
(v) any transfer of a capital asset by a subsidiary company to the holding company, if—
(a) the whole of the share capital of the subsidiary company is held by the holding company, and
(b) the holding company is an Indian company:
Provided that nothing contained in clause (iv) or clause (v) shall apply to the transfer of a capital asset
made after the 29th day of February, 1988, as stock-in-trade;
Note:
1. The exemption under Clauses (vi) & (v) shall be subject to the provisions of Section 47A. in these
two cases if transfer of capital asset is made after 29.02.1988 as Stock in Trade the same will be
regarded as transfer and subject to Capital Gain;
2. CIT Vs. Coats of India Ltd. (2009)176 Taxman 438(Kolkata); where a holding company
transfers entire packing coating unit to wholly owned subsidiary company and consideration was not
determined with reference to individual assets but with reference to capitalised value of such business.
It was held that such transaction will not be considered as transfer as per Section 2(47) of the Income
Tax Act, 1961.
(vi) any transfer, in a scheme of amalgamation, of a capital asset by the amalgamating company
to the amalgamated company if the amalgamated company is an Indian company;
(via) any transfer, in a scheme of amalgamation, of a capital asset being a share or shares held in an
Indian company, by the amalgamating foreign company to the amalgamated foreign company, if—
(a) at least twenty-five per cent of the shareholders of the amalgamating foreign company continue to
remain shareholders of the amalgamated foreign company, and
(b) such transfer does not attract tax on capital gains in the country, in which the amalgamating
company is incorporated;
(viaa) any transfer, in a scheme of amalgamation of a banking company with a banking institution
sanctioned and brought into force by the Central Government under sub-section (7) of section 45 of
the Banking Regulation Act, 1949 (10 of 1949), of a capital asset by the banking company to the
banking institution.
Explanation. —
For the purposes of this clause,— (i) “banking company” shall have the same meaning assigned to it
in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949); (ii) “banking institution”
shall have the same meaning assigned to it in sub-section (15) of section 45 of the Banking Regulation
Act, 1949 (10 of 1949);
(viab) any transfer, in a scheme of amalgamation, of a capital asset, being a share of a foreign
company, referred to in the Explanation 5 to clause (i) of sub-section (1) of section 9, which derives,
directly or indirectly, its value substantially from the share or shares of an Indian company, held by
the amalgamating foreign company to the amalgamated foreign company, if—
(A) at least twenty-five per cent of the shareholders of the amalgamating foreign company continue to
remain shareholders of the amalgamated foreign company; and
(B) such transfer does not attract tax on capital gains in the country in which the amalgamating
company is incorporated;
(vib) any transfer, in a demerger, of a capital asset by the demerged company to the resulting
company, if the resulting company is an Indian company;
(vic) any transfer in a demerger, of a capital asset, being a share or shares held in an Indian company,
by the demerged foreign company to the resulting foreign company, if—
(a) the shareholders holding not less than three-fourths in value of the shares of the demerged foreign
company continue to remain shareholders of the resulting foreign company; and
(b) such transfer does not attract tax on capital gains in the country, in which the demerged foreign
company is incorporated.
Provided that the provisions of sections 391 to 39463 of the Companies Act, 1956 (1 of 1956) shall
not apply in case of demergers referred to in this clause;
(vica) any transfer in a business reorganisation, of a capital asset by the predecessor co-operative bank
to the successor co-operative bank;
Income from other sources, which is the last among the five heads of income sketched out in the
Income Tax Act, is essentially a head of income that includes all receipts that cannot otherwise be
classified under any of the other heads of income.
According to section 56 of the Income Tax Act, the following three conditions need to be satisfied for
a receipt to be categorized as income from other sources.
1. There is an income.
2. Such income is not exempted under any other provisions of the Income Tax Act.
3. Such income cannot be charged as salary, income from house property, profits and
gains from business or profession, or capital gains.

What does this head of income include?

Here’s a list of the receipts that fall under the category of income from other sources.
1. Dividends: Dividends are taxable as income from other sources depending on the
residential status of the company that paid them out.
o Dividend from an Indian company: If the company has paid Dividend Distribution
Tax on this receipt, the dividend is exempted from tax. However, under section
115BBDA of the income tax act, if a resident individual/HUF/firm received dividends
in excess of ₹ 10 lakhs from Indian companies, then the amount exceeding ₹ 10
lakhs is taxable at 10%.
o Dividend from a foreign company: Dividend received from foreign companies is
subject to tax as income from other sources.
 2. One-time income: One-time incomes like winnings from lotteries, crossword
puzzles, horse races, card games and other games of any sort, or gambling or
betting of any form or nature are covered under income from other sources.
3. Interest on compensation: Interest received by an assessee (tax payer) on the
amount of compensation or reimbursement given in situations like compulsory
acquisition is taxable under this head of income.
4. Gifts: Gifts such as any sum of money and movable or immovable property that’s
received without consideration are also taxable.
The following receipts are classified as income from other sources only if they’re not chargeable as
“profits and gains of business or profession.”
1. Employees’ contribution to welfare schemes
2. Interest on securities like government bonds or debentures
3. Rental income from letting out plant, machinery, or furniture owned by the assessee
4. Rental income from letting out plant, machinery, or furniture, along with a building,
where these two cases of letting out are inseparable
5. Receipts under Keyman Insurance Policy

Examples of other receipts chargeable as income from other sources

Here are some examples of other receipts that automatically fall under this category.
1. Income from subletting of a house property by a tenant
2. Casual income
3. Insurance commissions received by the assessee
4. Family pension payments received by the legal heirs of dead employees
5. Interest on bank deposits and deposits with companies
6. Interest on loans given
7. Remuneration received by Members of Parliament
8. Rent earned from a vacant plot of land
9. Agricultural income from agricultural land situated outside India
10. Interest paid by the Government on excess payment of advance tax